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Treasury v. Taylor

Court of Special Appeals of Maryland

July 25, 2018

COMPTROLLER OF THE TREASURY
v.
RICHARD REEVES TAYLOR

          Circuit Court for Washington County Case No. 21-C-15-55059 AA

          Wright, Leahy, Shaw Geter, JJ.

          OPINION

          SHAW GETER, J.

         This case arises from a judicial review of the assessment of estate taxes owed by the Estate of Margaret Beale Taylor in the Circuit Court for Washington County. Appellee Richard Reeves Taylor, the estate's personal representative, in determining the amount of tax due, subtracted the value of Mrs. Taylor's interest in a marital trust created by her husband from the total value of her Maryland estate tax valuation. The Comptroller of the Treasury, appellant, disallowed the exclusion, resulting in an increase in the Estate's tax liability. The Comptroller also imposed penalties for the interest accrued and late filing.

         Appellee petitioned the Tax Court, seeking reversal and an abatement of the assessments. The Tax Court affirmed the Comptroller's inclusion of the value of the interest in the marital trust and the assessments of interest, but waived and abated the late payment penalty. Appellee filed a timely petition for judicial review in the circuit court, and appellant filed a cross-petition. After a hearing, the circuit court reversed the Tax Court's assessment of taxes and interest against the estate.

         We have consolidated appellant's questions presented[1] as follows:

1. Does Maryland have the statutory or constitutional authority to include the value of Margaret Beale Taylor's interest in the trust transferred to her under her predeceased husband's will - the "QTIP" trust - in her Maryland estate, and therefore subject the trust to Maryland estate tax?
2. Did the Tax Court improperly waive a late-filing penalty based upon the conclusion that the taxpayer "demonstrated with affirmative evidence that reasonable cause exists" for waiver of the penalty?

         For the reasons set forth below, we shall affirm the judgment of the circuit court.

         BACKGROUND

         The trust in question was created by the will of John Wilson Taylor, Margaret Beale Taylor's husband, who predeceased her on December 1, 1989. At the time of Mr. Taylor's death, the Taylors were residents of Wayne County, Michigan. Mr. Taylor died with a valid will, which directed the creation of a "residuary marital trust," valued on his date of death at $2, 299, 893.20. His will further directed that all of the net income from the residuary marital trust be paid to Mrs. Taylor at least annually for and during her lifetime.

         Upon his death, Mr. Taylor's Estate filed a timely federal tax return with the Internal Revenue Service, in which his estate claimed a deduction for the marital trust, known as a qualified terminable interest property ("QTIP") election. Election of the QTIP deduction enables a married couple to defer payment of any estate tax on the QTIP until the death of the surviving spouse. The marital deduction is allowed for the entire value of the QTIP.

         Following Mr. Taylor's death, Mrs. Taylor continued to reside in Michigan until 1993, when she moved to Washington County, Maryland. She died testate on January 15, 2013.

         Appellee, the personal representative of Mrs. Taylor's Estate (the "Estate" or "appellee"), Richard Reeves Taylor, filed a federal Estate (and Generation-Skipping Transfer) Tax Return with the Internal Revenue Service, which included Mrs. Taylor's terminable life interest in the marital trust. On the federal estate tax return, appellee reported an estate value of $5, 582, 245. Appellee also filed a Maryland estate tax return, in which the personal representative excluded the value of the marital trust, decreasing the reported value of Mrs. Taylor's federal gross estate by $4, 108, 048.02.

         Appellee explained his deduction of Mrs. Taylor's interest in the marital trust in a statement attached to the Maryland return. It stated:

In reliance on Section 7-309(b)(6)(i) of the Maryland Tax-General Code Annotated, the marital trust created under the Last Will and Testament of decedent's deceased spouse, John Wilson Taylor, in which decedent had an income interest for life and which is reported on Schedule F of decedent's Federal Estate Tax Return, Form 706, has been excluded from the federal gross estate (line 1, federal Form 706) reported on line 1 of Section IV of the MET-1. John Wilson Taylor died on December 1, 1989, and was a resident of the State of Michigan on the date of his death. No Maryland estate tax return was filed for Mr. Taylor, and thus no "marital ...

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