Shepter v. Johns Hopkins University

RODOWSKY, Judge. This case concerns the Maryland Uniform Estate Tax Apportionment Act, Maryland Code (1988, 1993 Cum.Supp.), § 7-308 of the Tax General Article (TG). We granted certiorari on our own motion to decide whether TG § 7-308 confers exclusive jurisdiction on the orphans’ courts over estate tax apportionment liability determinations. 331 Md. 284 , 627 A.2d 1063 . As we explain below, TG § 7-308 is an application to liability for the payment of estate taxes of the equitable doctrine of contribution.

Consequently, we hold that there is concurrent subject matter jurisdiction between the circuit courts and the orphans’ courts over claims for apportionment of estate taxes. The subject claim for apportionment was asserted in a circuit court by the appellee, Johns Hopkins University (JHU), against the appellants. JHU is the trustee and the ⁸⁶ owner of the remainder interest under an inter vivos trust created in 1983 by Edward F. Shepter (Edward) and Elsie R. Shepter (Elsie), husband and wife. The trust provides for fixed, annuity payments totaling $100,000 per year.

Appellants (the Shepters) are children, spouses of children, and certain grandchildren of Edward and Elsie. Edward, Elsie, and the Shepters had and have lifetime interests in the annuity. Elsie survived Edward and died in 1986. The annuity was valued in her federal estate tax estate, resulting in estate taxes that were many times the total value of her probate estate.

Those federal taxes, with interest, were collected from JHU by the Internal Revenue Service (IRS). In this action JHU seeks to minimize its losses by claims against the Shepters. Those claims include apportionment under TG § 7-308 to certain jointly held bank accounts and to Elsie’s gift of her home during her lifetime. More specifically, the facts are these.

Edward was a retired certified public accountant. He and Elsie were residents of Baltimore County. In November 1982, when Edward was age seventy-six and Elsie was age seventy-eight, Edward telephoned the JHU Institutions Development Office. That contact ultimately resulted in the preparation for, and execution by, Edward, Elsie and JHU of a “Charitable Remainder Annuity Trust,” dated December 1, 1983.

The trust was funded by securities transferred by the donors that were valued at $1,281,330.85. Initial beneficiaries of the trust were Edward and Elsie. During their joint lifetimes JHU undertook to “pay to them jointly an annuity amount of $100,000 in each calendar year of the trust____” “The annuity amount shall be paid in equal monthly installments from income and, to the extent that income is not sufficient, from principal or other assets of Hopkins.” Upon the death of either Edward or Elsie, JHU would pay the survivor “an annuity amount of $100,000 in each calendar year.... ” Upon the death of the survivor, the trust assets were to be divided into four equal shares, one for the benefit of each of the four children of Edward and Elsie and, as to the three married children, their named spouses as well. Each child would receive an annuity ⁸⁷ amount of $25,000 “payable from income and, to the extent income is insufficient, from principal or other assets of Hopkins.” The $25,000 shares of the annual annuity of two of the married children were to be paid, respectively, to a named grandchild of Edward and Elsie upon the death of the surviving parent of that grandchild.

Upon the death of the last surviving person for whose benefit a trust share was held, the share was to be “irrevocably transferred outright and free from trust to [JHU] to be used for its general purposes.” The instrument declared the intention of the donors and of JHU “to create a charitable remainder annuity trust within the meaning of Section 664 of the” Internal Revenue Code (IRC). JHU paid, and continues to pay, annuities as provided in the trust. Edward died in March 1985. In November 1985, Elsie executed a power of attorney appointing a daughter, Ann C. Shepter (Ann), as attorney-in-fact.

Elsie, acting through her attorney-in-fact, in January 1986 conveyed her home to a son, George R. Shepter (George), for no consideration. Elsie’s 1986 federal gift tax return valued that gift at $153,000. When Elsie’s federal estate tax was ultimately resolved, the $153,000 gift to George was included as an “adjusted taxable gift.” IRC § 2001(b)(1)(B). At Elsie’s death she owned, jointly with Ann, two bank accounts totaling $17,770.36.

When Elsie’s federal estate tax was ultimately resolved, the value of those joint accounts was included in Elsie’s “taxable estate.” IRC § 2001(b)(1)(A). Elsie died in November 1986. Administration of her probate estate was undertaken before the Orphans’ Court for Baltimore County. Her original federal estate tax return, filed by Ann as her personal representative, was prepared by Elsie’s former personal attorney.

It reported as due a federal estate tax of $320,094. Elsie’s inventoried probate estate totaled less than $22,000. The federal estate tax was not paid with the return. In April 1990, the IRS served a notice on Elsie’s estate claiming tax, late payment penalty, and interest amounting to nearly $458,000. ⁸⁸ It was the JHU annuity, passing to Elsie’s children on her death, that made Elsie’s estate taxable under the federal estate tax.

On the estate’s federal return, as originally filed, that annuity was valued at $1,000,000 by capitalizing it at ten percent, apparently as required by IRS regulations. Ultimately the IRS turned its collection efforts in JHU’s direction, in reliance on IRC § 6324(a)(2) which provides in relevant part: “If the estate tax ... is not paid when due, then the spouse, transferee, trustee ... or beneficiary, who receives ... property included in the gross estate ... to the extent of the value, at the time of the decedent’s death, of such property, shall be personally liable for such tax.” JHU submitted an offer in compromise to the IRS. In January 1992, JHU paid the IRS federal estate taxes of $226,072 and interest of $139,128, thereby settling all IRS claims against any and all persons for estate taxes, interest, and penalty arising out of Elsie’s estate. JHU filed its complaint against the Shepters in the Circuit Court for Baltimore City in October 1990.

The Shepters made no threshold objections to jurisdiction or venue. After certain defense motions, now irrelevant, were overruled, the Shepters answered on the merits and filed a counterclaim and third-party complaint. 1 The Shepters claim that JHU owed a duty to them that was breached because the trust was subjected to significant tax assessments. JHU moved to dismiss the Shepters’ counterclaim. As plaintiff, JHU also sought partial summary judgment against George for the portion of the estate tax and interest attributable to the gift to him of the house, and sought partial ⁸⁹ summary judgment against Ann for the portion of the estate tax and interest attributable to the transfer to her by survivorship of the monies in the joint bank accounts.

Among the arguments raised by the Shepters in opposing those motions was the contention that exclusive subject matter jurisdiction over apportionment was vested by TG § 7-308 in the orphans’ courts. The Circuit Court for Baltimore City overruled the jurisdictional objection. We shall consider the jurisdictional issue in Part I of this opinion. JHU’s motion to dismiss the Shepters’ counterclaim was granted, and the circuit court entered that judgment as final under Maryland Rule 2-602.

We consider the Shepters’ appeal from that judgment in Part II of this opinion. The circuit court also granted JHU’s motions for summary judgment against Ann and George, and certified those judgments as final. The merits of the partial summary judgments are the subject of Part III. I TG § 7-308 states the rule that “[t]he tax shall be apportioned among all persons interested in the estate.” § 7-308(b).

In § 7-308, “ ‘[t]ax’ means the federal estate tax and the Maryland estate tax and interest and penalties imposed in addition to the taxes.” § 7-308(a)(5). “ ‘Person interested in the estate’ means any person who is entitled to receive or has received, from a decedent while alive or by reason of the death of a decedent, any property or interest in property included in the taxable estate of the decedent.” § 7-308(a)(4). Employing the values used to determine the tax, apportionment is made “in the proportion that the value of the interest of each person interested in the estate bears to the total value of the interests of all persons interested in the estate.” § 7-308(b). 2 ⁹⁰ The Shepters’ jurisdictional argument relies specifically on § 7-308(c)(l) and TG § 7-101 (b). The former reads: “The court shall determine the apportionment of the tax. If there are no administration proceedings, the court of the county where the decedent was domiciled at death shall determine the apportionment of the tax on the application of the person required to pay the tax.” “Court” is not defined in § 7-308.

TG § 7-101 (a), however, provides that in Title 7, “Death Taxes,” of the Tax-General Article, the “following words have the meanings indicated.” The first of the following words is “Court.” Per TG § 7-101(b), “ ‘[cjourt’ means: “(1) The Orphans’ Court of a county; or “(2) A court of the State that exercises the jurisdiction of an Orphans’ Court.” The Shepters’ argument also recognizes TG § 7-308(c)(5), which reads: “In any suit or judicial proceeding to recover from any person interested in the estate the amount of the tax apportioned to the person in accordance with this section, the determination of the court is prima facie correct.” Thus, the Shepters submit that an orphans’ court must make the initial determination of whether there is liability on the part of an interested person for apportionment of estate tax and, if so, the initial determination of the amount of that liability. Under the Shepters’ construction § 7-308(c)(5) deals only with collection of the amount of tax apportioned by an orphans’ court to an interested person in the event suit is necessary to collect. For example, where a personal representative has paid the tax but does not hold property, distributable to an interested person who is liable for apportionment, from which the apportionment might be collected under TG ⁹¹ § 7-308(d)(l), it might be necessary for the personal representative to sue in a circuit court in order to collect. Reinforcing their construction, the Shepters point to TG § 7 — 308(i) which states that “[t]he provisions of [§ 7-308] that are uniform with statutes enacted in other states shall be construed to make uniform the laws of those states that enact the uniform provisions.” The Court of Appeals of Michigan in Detroit Bank & Trust Co. v. Grunewald, 26 Mich.App. 495 , 182 N.W.2d 628 (1970), construed the Michigan version of the Uniform Estate Tax Apportionment Act to confer exclusive jurisdiction on the probate courts of that state.

JHU, on the other hand, primarily points to the history of apportionment legislation in Maryland. JHU notes that earlier apportionment legislation expressly vested exclusive jurisdiction in the circuit courts, whereas the current statutes do not in terms make jurisdiction exclusive in the orphans’ courts. The result, JHU submits, is concurrent jurisdiction. Maryland’s first estate tax apportionment statute, enacted by Chapter 546 of the Acts of 1937, made no reference to any court.

The 1937 act was repealed, and a new statute was enacted, by Chapter 156 of the Acts of 1947. The 1947 legislation, codified as Md.Code (1939, 1947 Cum.Supp.), Art. 81, § 126, provided in subsection (8) that “[t]he courts of equity of this State shall have exclusive jurisdiction of all actions under this section to enforce contribution or apportionment with respect to estate taxes.” In 1965, by Chapter 907 of the Acts of that year, the General Assembly repealed the 1947 enactment and adopted, with modifications, the 1964 revised version of the Uniform Estate Tax Apportionment Act (the Uniform Act). See 8A Uniform Laws Annotated 331 et seq. (1993).

As codified in Md.Code (1957, 1965 Repl.Vol.), Art. 81, § 162, the 1965 enactment provided in § 162(3)(a) as follows: “The orphans’ court having jurisdiction over the administration of the estate of a decedent shall determine the apportionment of the tax. If there are no administration proceedings, the orphans’ court of the county (or the City of ⁹² Baltimore), wherein the decedent was domiciled at death shall determine the apportionment of the tax upon the application of the person required to pay the tax.” Section 162(3)(e) of the 1965 statute, from which TG § 7-308(c)(5) is derived, provided that “[i]n any suit or judicial proceeding to recover ... the amount of the tax apportioned ... the determination of the orphans’ court in respect thereto is prima facie correct.” The Maryland Uniform Estate Tax Apportionment Act was moved at the recommendation of the Henderson Commission from § 162 of Art. 81 to revised Art. 93, “Decedents’ Estates.” See Second Report of the Governor’s Commission to Review and Revise the Testamentary Law of Maryland 155-59 (1968); Chapter 3 of the Acts of 1969; Md.Code (1957, 1969 Repl. Vol.), Art. 93, § 11-109. The comment by the Henderson Commission to former Art. 93, § 11-109 is that the statute was removed “verbatim ” from Art. 81.

See Report of the Governor’s Commission, supra, at 159; comment following former Art. 93, § 11-109. Actually, former Art. 81, § 162(3)(a) was modified by deleting the words appearing in brackets, as follows: “The [orphans’] court [having jurisdiction over the administration of the estate of a decedent] shall determine the apportionment of the tax.” It is clear that “orphans’ ” was deleted when enacting § 11— 109(c)(1) because § 2-101 of the revised Decedents’ Estates Article created the same definition of “court,” throughout that article, as is currently found in TG § 7-101(b). Further, we infer that the deletion of the words, “having jurisdiction over the administration of the estate of a decedent,” was intended only to eliminate apparently unnecessary verbiage, and not to effect a change of substance. The immediately following sentence addresses apportionment by an orphans’ court “[i]f there are no administration proceedings,” and, implicitly, the first sentence addresses apportionment by an orphans’ court when there are administration proceedings.

The question here is whether those two sentences exhaust the universe of court ordered apportionment. ⁹³ With the enactment of the Estates and Trusts Article as part of the Code Revision Project, former Art. 93, § 11-109 was enacted by Chapter 11 of the Acts of 1974 as Md.Code (1974), § 11-109 of the Estates & Trusts Article. No changes were made except in style. See Revisor’s Note following § 11-109. Former § 11-109 of the Estates and Trusts Article was transferred by Chapter 2 of the Acts of 1988 to TG § 7-308, without change to any portion of the statute relevant to the jurisdictional issue before us.

See Revisor’s Note following TG § 7-308. Thus, our inquiry focuses on the legislative intent in 1965 when the General Assembly deleted the statement that “[t]he courts of equity of this State shall have exclusive jurisdiction of all actions under this section to enforce contribution or apportionment with respect to estate taxes,” and adopted language reading, “the Orphans’ Court having jurisdiction over the administration of the estate of a decedent shall determine the apportionment of the tax.” For the reasons that follow we hold that the change was not intended to oust the circuit courts of historic equity jurisdiction, and that the purpose of the change was to cure any possible lack of orphans’ court jurisdiction. The result is concurrent jurisdiction between the two types of courts. A Long before the federal estate tax was enacted in 1916, 39 Stat. 756 , ch. 463, courts exercising general equity jurisdiction were determining and enforcing contribution among joint debtors.

In 2 Pomeroy, Equity Jurisprudence § 407 (5th ed. 1941), the author observes that equity “will apply the maxim [‘equality is equity’] either directly, by apportioning the burden ratably among all the individuals upon whom the common liability rests, or indirectly, by giving a right of contribution to the member of the class from whom a payment of the whole demand has been obtained, and enabling him to recover contributory shares of the amount from the other members of the class, by which ⁹⁴ means the entire burden is finally adjusted upon and among them all.” See also H. McClintock, Principles of Equity § 204 (2d ed. 1948); R.E. Megary & P.V. Baker, Snell’s Principles of Equity 456 (27th ed. 1973); H. Ginsburg, Equity Jurisprudence and Procedure in Maryland 124 (1928). Contribution between joint obligors is part of the common law of this State. See Jackson v. Cupples, 239 Md. 637 , 212 A.2d 273 (1965) (contribution between co-endorsers); Sheeler v. Holt, 161 Md. 366 , 157 A. 195 (1931) (co-endorsers); Hogan v. McMahon, 115 Md. 195 , 80 A. 695 (1911) (contribution between tenants in common for liens and encumbrances paid by one); Hooper v. Hooper, 81 Md. 155 , 31 A. 508 (1895) (co-guarantors of principal debtor’s account with creditor); Young v. Lyons, 8 Gill 162 (1849) (co-sureties); Craig v. Ankeney, 4 Gill 225 (1846) (co-sureties, by separate writings, of the same debt). Recently we applied equitable contribution on behalf of a person who had paid a joint tax obligation.

For failing to withhold income taxes, the Maryland income tax statutes impose personal liability on any corporate officer who exercises direct control over a corporate taxpayer’s fiscal management. See TG § 10 — 906(d). Lyon v. Campbell, 324 Md. 178 , 596 A.2d 1012 (1991), involved a bankrupt corporation which, prior to bankruptcy, had failed to pay over to the Comptroller $415,000 in withholding taxes. The plaintiff and the defendant were the sole shareholders of the bankrupt and allegedly exercised direct control over its fiscal affairs.

The plaintiff paid $150,000 to the Comptroller in full satisfaction.of tax liens filed by the Comptroller, and then the plaintiff sought contribution from the defendant. Id. at 180 , 596 A.2d at 1013 . No statute recognized contribution under the circumstances presented in Lyon . Nevertheless, applying principles that originated in equity, we held that the plaintiff was “entitled to contribution of [the defendant’s] pro rata share of the amount [the plaintiff] paid to satisfy their joint obligation.” Id. at 184 , 596 A.2d at 1015 . ⁹⁵ Courts in other states have recognized that apportionment of estate taxes is an application of equitable contribution.

Those courts either apply the equitable doctrine to effect apportionment in the absence of a statute, or identify the equitable doctrine as the principle underlying an apportionment statute. Illustrative is Wilmington Trust Co. v. Copeland, 33 Del.Ch. 399 , 94 A.2d 703 (1953), which arose out of the following background. Prior to 1942 two lines of decisions had developed on whether federal estate taxes could be apportioned in the absence of a statute or direction in the instrument. See W. Sutter, Apportionment of the Federal Estate Tax in the Absence of Statute or an Expression of Intention, 51 Mich.

L.Rev. 53 (1952). One line of cases, reasoning from the language of the federal estate tax statutes, concluded that federal estate tax liability fell exclusively on the residuary estate. Id. at 54-58. The other line of cases, relying on equitable principles, permitted apportionment.

Id. at 58. When New York adopted an apportionment statute, its constitutionality was challenged under the supremacy clause. Riggs v. Del Drago, 317 U.S. 95 , 63 S.Ct. 109 , 87 L.Ed. 106 (1942), held that the federal estate tax statutes did not preclude apportionment under state law. In 1947 Delaware enacted an apportionment statute patterned on the New York statute, and, in Equitable Trust Co. v. Richards, 31 Del.Ch. 564 , 73 A.2d 437 (1950), application of the new statute to estates of decedents dying before its enactment was held to be unconstitutional.

The Richards decision reasoned that the apportionment act effected a change in the law by imposing a liability which previously did not exist. Wilmington Trust Co. v. Copeland, an appeal from an orphans’ court order denying apportionment in reliance on Richards, reexamined that holding and overruled it. 94 A.2d at 710 . The Wilmington Trust court said that the rule of law embodied in the statute “is nothing more than the doctrine of equitable contribution . ..,” id. at 708, and that “it makes no difference to equity that the common charge is that of a tax ⁹⁶ lien imposed by the federal government,” id. at 709. With respect to the purpose of the Delaware statute, the court said: “The apportionment act did not change the law; it declared as law a principle theretofore firmly embedded in our jurisprudence.

In so doing, the General Assembly may have been moved to resolve the doubt created by the opinion of many members of the bar that the rule of the earlier state decisions was the law of Delaware; perhaps the legislative intent was merely to provide a simple formula for apportionment and an expeditious remedy. Whatever the reason, it is clear to us that the effect of the statute is to declare the law as it existed, provide such a formula, and confer ample equitable jurisdiction upon the Orphans’ Court to administer the statute. That concurrent jurisdiction exists in the Court of Chancery is no bar to the legislative will.” Id. For other decisions expressly recognizing that the apportionment of estate taxes is an application of equitable contribution, see Pearcy v. Citizens Bank & Trust Co., 121 Ind.App. 136 , 96 N.E.2d 918 (1951); Succession of Ratcliff, 212 La. 563 , 33 So.2d 114 (1947); Bragdon v. Worthley, 155 Me. 284 , 153 A.2d 627 (1959); In re Mellon’s Estate, 347 Pa. 520 , 32 A.2d 749 (1943); In re Jones’ Estate, 54 Pa.D. & C. 364 (Orphans’ Ct., Montgomery Co., 1945); and United States v. Goodson, 253 F.2d 900, 906 (8th Cir.1958) (dicta).

For cases apportioning estate taxes without any statutory foundation for apportionment, see Regents of Univ. Sys. of Georgia v. Trust Co. of Georgia, 194 Ga. 255 , 21 S.E.2d 691 (1942); McDougall v. Central Nat’l Bank of Cleveland, 157 Ohio St. 45 , 104 N.E.2d 441 (1952); and Industrial Trust Co. v. Budlong, 77 R.I. 428 , 76 A.2d 600 (1950). Further, “it is well settled that the jurisdiction of equity is not ousted by a statute which gives a court of law power over the same subject.” Schroeder v. Loeber, 75 Md. 195, 204 , 24 A. 226 , 227 (1892). See also Barnes v. Crain, 8 Gill