Siegel v. Comptroller of Maryland

MEREDITH, J. In this case, the appellants—co-personal representatives of the estate of the late Dr. Edwin M. Cohn—challenge the Maryland Tax Court’s ruling that upheld the imposition of inheritance taxes upon several gifts made by Dr. Cohn during the two years preceding his death. The controlling question is whether the Tax Court correctly interpreted and applied the statute that extends the Maryland inheritance tax to inter vivos gifts which were “made in contemplation of death.” We shall hold that there is substantial evidence in the record to support the Tax Court’s finding that the gifts made by Dr. Cohn were made in contemplation of death. Accordingly, we will affirm the judgment of the Circuit Court for Montgomery County, which affirmed the ruling of the Tax Court. Key Statutory Provisions Section 7-202 of Md.Code (1988, 2004 Repl.

Vol.), Tax-General Article (“TG”), establishes an inheritance tax, and provides that, subject to certain exemptions that have no application to the present case, “a tax is imposed on the privilege of receiving property that passes from a decedent and has a taxable situs in the State.” The phrase “property that passes from a decedent” is defined in TG § 7-201(d)(l)(iii) to include donative transfers “made in contemplation of death” as follows: ⁴¹⁴ (d) Property that passes from a decedent.—(1) “Property that passes from a decedent” includes: ❖ ❖ ❖ (iii) except for a bona fide sale for an adequate and full consideration in money or money’s worth, property that passes by an inter vivos transfer by a decedent, in trust or otherwise, if: 1. the transfer is made in contemplation of death; [or] 2. the transfer of a material part of the property of the decedent in the nature of a final disposition or distribution is made by the decedent within 2 years before death and is not shown to not have been made in contemplation of death;.... (Emphasis added.) Facts and Procedural Background Following the death of Dr. Cohn, the Register of Wills for Montgomery County concluded that certain gifts made by the doctor during the last two years of his life were subject to the inheritance tax because those gifts were within the ambit of TG § 7-201(d)(l)(iii). Following a de novo hearing, the Tax Court upheld the ruling of the register of wills. The gifts that are the subject of this dispute were made on two separate dates.

On August 1, 2002, at the age of 87, Dr. Cohn transferred to his two nephews án ownership interest in a limited partnership that was an investment holding company that owned primarily municipal bonds. The total value of the interest given to the two nephews on the date of the transfer was $861,668, such that the value of each gift to a nephew was $430,834. On January 15, 2003, Dr. Cohn made a gift of $55,000 to each of his seven great-nieces and great-nephews by establishing tuition savings accounts known as “529 Plans” to fund the children’s education. The total amount of these seven gifts was $385,000. . ⁴¹⁵ Shortly after undergoing surgery for an incarcerated hernia in November 2003, Dr. Cohn suffered a heart attack and died on November 22, 2003, at the age of 88.

His two nephews, David Siegel and Robert Siegel, were appointed co-personal representatives of Dr. Cohn’s estate. In connection with the administration of the estate, the nephews filed with the Register of Wills for Montgomery County an information report that required an answer to the following question: Except for a bona fide sale or transfer to a person exempted from inheritance tax pursuant to [Maryland] Code, Tax General Article, [Section] 7-203, within two years before death did the decedent make any transfer of any material part of the decedent’s pr[o]perty in the nature of a final disposition or distribution, including any transfer that resulted in joint ownership of property? The nephews answered “Yes” to the question, and listed the two gifts of limited partnership interests made August 1, 2002, as well as the seven gifts made to establish the 529 Plans on January 15, 2003. But the co-personal representatives also attached to the information report a memorandum in which they argued to the register of wills that no inheritance tax should be assessed on account of these gifts.

They pointed out that their uncle, the decedent, “despite being 87 at the time of the gifts (he was 88 at the time of death in November, 2003) was in good health. There was no suggestion that his time of death was approaching.” Further, they noted that he did not need the assets he gave away; “it is expected that the total value [of the estate] will exceed $2 million, more than sufficient to meet his personal financial obligations.” Their argument continued: “Considering the decedent’s overall net worth and taking each gift separately, none can be considered to be a gift of a material portion of the decedent’s estate.” Further, they pointed out, “[e]ven if’ any of the gifts could be “considered ‘material,’ the inheritance tax can only be assessed against the transfers if they were made by the decedent in contemplation of his death.” The establishment of the seven college savings plans was based upon a desire to enable ⁴¹⁶ the contributions to grow income tax free, they said, and “[b]y taking advantage of this provision of the federal tax law, the decedent was able to set aside additional funds for the anticipated college education costs of his family members.” And even though the two gifts to the decedent’s nephews were more substantial in amount, “[t]aken separately[,] each gift [of a limited partnership interest] represented a transfer of less than approximately 18% of the decedent’s net worth at the time of the gift.” Moreover, the memorandum stated, “it can be established that neither gift was made with any apprehension of an impending death. The decedent passed away from a sudden heart attack at the age of 88,” but “[p]rior to his death the decedent enjoyed an active life....” There was a life purpose for Dr. Cohn to make the gifts, the nephews asserted: “The motivation of the gifts was to share with his family some of the financial success that the decedent had accumulated during his life. [Making t]he gifts during his lifetime allowed the decedent the opportunity to enjoy these family members’ financial security provided in part by his generosity.” The register of wills rejected the arguments made by the co-personal representatives, and, pursuant to TG § 7-214, sent them an invoice for inheritance taxes due at the rate of 11.1111% of the value of the gifts that had been listed on the information report. On July 22, 2004, the estate paid $95,740.79 on account of the transfers of the limited partnership interests, and $42,777.74 on account of the transfers to the 529 Plans.

The co-personal representatives then filed a claim for a refund of the $188,518.53 in taxes they claimed to have “erroneously paid,” arguing to the register of wills once again that the transfers were not subject to the inheritance tax. The register denied the refund claim, stating “we believe that the tax was properly assessed.” At that point, the co-personal representatives appealed to the Maryland Tax Court, seeking a reversal of the register’s ruling. See TG § 13-510(a)(3) (an aggrieved party “may ⁴¹⁷ appeal to the Tax Court from ... an inheritance tax determination by a register”). Despite its name, the Tax Court is not part of the Maryland judicial branch, but is an administrative agency that is part of the executive branch.

See TG §§ 3-101 et seq. In Comptroller of the Treasury v. Johns Hopkins Univ., 186 Md.App. 169, 179-81 , 973 A.2d 256 (2009), Judge Deborah S. Eyler outlined in detail the procedures governing appeals to the Tax Court and judicial review of that agency’s decisions. One distinctive aspect of appeals to the Tax Court is the limitation on its powers to alter the order that is the subject of its review, as set forth in TG § 13-528, which provides: § 13-528. Disposition of cases.

(a) Potvers.—(1) The Tax Court shall have full power to hear, try, determine, or remand any matter before it. (2) In exercising these powers, the Tax Court may reassess or reclassify, abate, modify, change or alter any valuation, assessment, classification, tax or final order appealed to the Tax Court. (b) Limitation on potvers.—Absent affirmative evidence in support of the relief being sought or an error apparent on the face of the proceeding from which the appeal is taken, the decision, determination, or order from which the appeal is taken shall be affirmed. During the course of the de novo hearing before the Tax Court, the co-personal representatives offered evidence that Dr. Cohn was not contemplating his imminent death at the time he made either of the inter vivos transfers that had been taxed by the register.

They offered testimony from his financial advisor and from his primary care physician. At the conclusion of the evidentiary hearing, the judge delivered an oral opinion affirming the ruling of the register that the gifts were taxable. The Tax Court judge explained: [WJe’ll start with the statute: It says, at least in terms of what I need to determine, was this a material gift? Was it done within two years of his passing?

And was it done in contemplation of death? Well, some parts of that are easy. ⁴¹⁸ It was done within two years of his passing. That was the easy part. Was it material?

Well, if you add all of the gifts to the great-nieces and nephews, together with the gift of the Partnership shares to the two nephews, we are looking at a total of approximately a Million Dollars. At the time that these gifts were put together, it appears that Doctor Cohn’s estate—well, I won’t say estate—his total assets, at that point, were something just over Two Million Dollars. So, yes, this is a material gift. By the time he passed away, his remaining assets seem to have been almost Two Million Dollars, I’m assuming.

Didn’t have testimony at all that his remaining assets appreciated somewhat during those last two years of his life. But, yes, in my mind, that’s more than sufficient for it to be a material gift. The most significant issue, and what we talked about most of the time today, is whether or not this was done in contemplation of death. A very hard standard to try to deal •with.

Knowing what someone’s motivations are when you can’t talk to them is a difficult process. It certainly can be. The only way one can go to look at it is from circumstantial evidence from what the person was doing at the time, and what he had done in the past. And then we’ve had some discussion as to whether or not this was part of a lifetime of giving.

Whether Doctor Cohn spent his entire life making donations or gifts to his family. And we had testimony that he made substantial—though we didn’t find exact amounts—substantial gifts to both of his nephews for their college and graduate school educations. And we don’t have a lot of gift giving happening, except for family events when people got married, until his eighties when there was some discussion about the donation of an interest in some sort of a Partnership that occurred more than two years prior to his death, so I don’t get any information on it. But I am surmising that he was in his eighties at some point when that occurred.

And then the gifts that were subject to today’s hearing. I have a couple of things to say: The issue is contemplation of ⁴¹⁹ death, not contemplation of imminent death. In spite of the fact that Doctor Cohn was in his eighties, I don’t think he was contemplating imminent death. I don’t believe that his doctors were contemplating imminent death, nor his family.

That this heart attack was a bit of a surprise. And the other thing that I can say is that it appears that the—well, clearly, there can be more than one motivation for any event. One of his motivations is that he wanted the education of his great-nieces and nephews assisted. I don’t believe that Fifty-five Thousand Dollars will cover fully the cost of a four year education anymore, but at least he was doing his part to assist with this thing.

Likewise, the donations of the Partnership shares to his nephews was because he wanted them to have the money. There’s no other reason for making the donation, while the other reason, possibly. But that, clearly, was one of the reasons is he wanted them to have Four Hundred and Thirty Thousand Dollars worth of assets, more or less, for each of them. Continuing, the statute puts the burden of proof on the Petitioners, if the gift is made within two years.

Based on a couple of other facts about his life that I can tell, at the time these things occurred, he was more than eighty years old, he was suffering from increasing levels of dementia, but, according to the Doctor, he was able to function. In some ways, he was able to function quite well. He was highly interactive with members of the family and in the Assisted Care Facility. That he had a number of medical issues, but none of them were life threatening, and that family members had consulted with tax people and had determined that there were significant tax savings possibly made by making donations.

That would, at least, prove to me that he knew that there was some possible tax savings to be made, not necessarily that was his prime motivation. And it also appears that he intended these dispositions to be final, that they were substituting in some part for doing it by way of a Will. That these were dispositions of funds that he did not ⁴²⁰ need. (INAUDIBLE) adequately took care of him financially through some other ways.

But this appears to be not part of a longstanding regular program of gifts. That this was a fairly late arriving plan to dispose of his assets. And if there was any doubt in my mind, the burden of proof being on Petitioners would seal the deal that they had not met their burden of convincing me that these distributions were not part of—were not in contemplation of death, at least as far as the statute’s concerned. So I will be denying your request for a refund.

At this point in the proceedings, counsel for the nephews requested clarification on one issue, and the following colloquy took place: [APPELLANTS’ COUNSEL]: Your Honor, may I just ask you one thing for the record? [THE JUDGE]: Sure. [APPELLANTS’ COUNSEL]: The request for refund dealt with two specific taxable events: one for the 529 Plans, and one for the Limited Partnership interest. I recognize that during the course of today, we talked about gifts in the aggregate, but there’s certainly evidence of the distinction and the separation. Is your finding ... [THE JUDGE]: It’s on both. [APPELLANTS’ COUNSEL]: ... that the 529—of materiality on the 529 Plans in their own right as to each of the seven children, that each individual gift is a material gift? [THE JUDGE]: My determination is that the seven gifts to the seven great-nieces and nephews were to be considered as a group. [APPELLANTS’ COUNSEL]: And that that group is material, separate and ... [THE JUDGE]: And Three Hundred and Eighty-five Thousand Dollars in total for that group was material even for Doctor Cohn’s financial status. The Tax Court’s ultimate conclusion was that the gifts were transfers made in contemplation of death, even though that ⁴²¹ finding was stated in an indirect manner: the co-personal representatives had not succeeded in “convincing [the judge] that these distributions were not ... in contemplation of death.” The co-personal representatives filed a petition for judicial review in the Circuit Court for Montgomery County.

After that court affirmed the ruling of the Tax Court, the co-personal representatives appealed to this Court, as permitted by Md. Code (1984, 2004 Repl. Vol.), State Government Article, § 10-223(b). The standard of review applicable to such cases was described by Judge Eyler as follows in Comptroller v. Johns Hopkins Univ., supra, 186 Md.App. at 181-82 , 973 A.2d 256 : Because the Tax Court is an administrative agency, its decisions are reviewed under the same appellate standards generally applied to agency decisions. SDAT v. Consolidation Coal Sales Co., 382 Md. 439, 453 [ 855 A.2d 1197 ] (2004).

We review the decision of the Tax Court, not the ruling of the circuit court on judicial review. Comptroller v. Clise Coal, Inc., 173 Md.App.