Argued: April 8, 2019
Circuit Court for Washington County Case No. 21-C-15-055059
Barbera, C.J., [*] Greene, McDonald, Watts, Hotten,
Getty, Raker, Irma S. (Senior Judge, Specially Assigned) JJ.
case arises from the Comptroller of the Treasury's
("Comptroller") assessment of estate tax and
penalties against a Maryland estate that included the value
of a particular type of marital trust. The marital trust,
which was created in Michigan, consisted of qualified
terminable interest property or "QTIP" that was
reported on the decedent's federal estate tax return, but
was omitted from the Estate's corresponding Maryland
estate tax return.
reported opinion, Comptroller of the Treasury v.
Taylor, 238 Md.App. 139, 152, 189 A.3d 799, 807 (2018),
the Court of Special Appeals held that "the Comptroller
lack[ed] the authority to tax the [trust assets] as part of
[the] Maryland estate." The Court also held that
"[g]iven no tax was authorized under the statute, no
penalty could be properly charged against the Estate."
appeal, the Comptroller presents the following questions for
1. Is the value of a surviving spouse's interest in a
QTIP trust created in another state properly included in the
surviving spouse's Maryland estate, and therefore subject
to the Maryland estate tax?
2. Did the Tax Court improperly waive a late-filing penalty
when waiver must be supported by affirmative evidence and the
only basis cited for the waiver was the personal
representative's erroneous interpretation of the tax
personal representative filed a cross-petition with the
1. Is [the Comptroller's] taxation of the QTIP trust in
the [E]state unconstitutional?
2. Is the fact that an issue was raised before the Tax Court,
but not expressly decided by that agency, sufficient to
permit review of that issue on appeal from the agency ruling?
reasons discussed infra, we reverse the judgment of
the Court of Special Appeals on the first issue. We conclude
that, upon the death of decedent's surviving spouse,
Margaret Beale Taylor ("Ms. Taylor"), the QTIP
trust assets were deemed to be transferred upon her death and
that transfer was taxable by Maryland. As to issue two, we
answer in the negative, concluding that the Tax Court
properly waived the late-filing penalty.
respect to the cross-petition, we consider the second issue
first, concluding that this Court's review is limited to
the Tax Court's findings and to the reasons for those
findings. Because the Tax Court did not expressly address a
constitutionality argument in its written opinion, we decline
to review the personal representative's first issue in
instant tax dispute arose from events that were triggered by
the death of Ms. Taylor's husband, John Wilson Taylor
("Mr. Taylor"). Mr. Taylor predeceased Ms. Taylor
on December 1, 1989. At the time of Mr. Taylor's death,
Mr. and Ms. Taylor were residents of Wayne County, Michigan.
Taylor died with a valid Will dated September 1, 1982. The
Will directed the creation of a "residuary marital
trust," consisting of a portfolio of eleven different
parcels of stocks and bonds valued on Mr. Taylor's date
of death at $2, 299, 893.20. Mr. Taylor's Will directed
that the net income from the residuary marital trust be paid
to Ms. Taylor at least annually for and during her lifetime
and that upon Ms. Taylor's death, the trust assets would
be dispersed to the trust beneficiaries, Mr. Taylor's son
the death of Mr. Taylor, the personal representative for his
estate filed a timely federal tax return with the Internal
Revenue Service in which the 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 transfer of the QTIP until the death of the
surviving spouse. The marital deduction is allowed for the
entire value of the QTIP. See 26 U.S.C. §§
2044(a), (c); 2056(b)(7)(B).
Mr. Taylor's death, Ms. Taylor continued to reside in
Michigan until 1993, when she moved to Washington County,
Maryland. She died testate on January 15, 2013.
personal representative filed a federal Estate (and
Generation-Skipping Transfer) Tax Return with the Internal
Revenue Service, which included the value of the property in
the marital trust. On the federal estate tax return, the
personal representative reported an Estate value of $5, 582,
245. The personal representative also filed a Maryland estate
tax return, in which he excluded the value of the marital
trust, decreasing the reported value of Ms. Taylor's
federal gross estate by $4, 108, 048.02.
personal representative explained his deduction of Ms.
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 deduction
qualified terminable interest property election was made for
the decedent's predeceased spouse on a timely filed
Maryland estate tax return."
examining the Maryland estate tax return, the Comptroller
disallowed the claimed exclusion of Ms. Taylor's interest
in the marital trust, adding back the value to the federal
gross estate and the corresponding Maryland estate. The
Comptroller then sent the personal representative a
Deficiency Notice, which added interest, a 10% late penalty,
and imposed a 25% penalty "due on underpayment
attributable to substantial estate tax valuation."
letter to the Comptroller dated January 20, 2014, the
personal representative protested the Deficiency Notice and
objected to the Comptroller's demands. The personal
representative asserted that Maryland had no taxable interest
in the trust assets, citing to Maryland Code, Tax-General
("Tax-Gen.") §§ 7-309(b)(6)(i), 7-302,
and 26 U.S.C § 2044, discussed infra.
28, 2014, the Comptroller sent a revised Deficiency Notice,
waiving the 25% penalty, but retaining the 10% late penalty.
On June 24, 2014, the personal representative filed a
Petition of Appeal.
Maryland Tax Court Proceeding
Court held a hearing on May 6, 2015, followed by a written
opinion, Taylor v. Comptroller of the Treasury,
Maryland Tax Court, Case No. 14-EL-OO-0691, Memorandum and
Order of the Court dated Sept. 2, 2015 ("Tax Court
Proceeding"), which affirmed the estate tax
assessed on the trust assets, as well as the assessed
interest. In an amendment to the memorandum and order, the
Court waived and abated the 10% late penalty fee, citing
Tax-Gen. §13-714 and Frey v. Comptroller, 422
Md. 111, 29 A.3d 475 (2011), as relevant
Court found that, at the time of Ms. Taylor's death, she
possessed a federal gross estate, consisting entirely of
personal property, valued at $5, 582, 245. In considering
this State's authority to tax the trust's assets, the
Tax Court concluded that:
[T]he Maryland estate tax is directly linked to the federal
estate tax, and completely integrated with it. The linkage
and integration is accomplished by adopting, at the outset,
the federal definition of "gross estate." Tax-Gen.
§ 7-301(b). (The term "'estate' means the
federal gross estate of the decedent as determined by
Subtitle B of the Internal Revenue Code . . ."). . . .
Thus, the Maryland estate means the federal gross estate - as
increased by any property not otherwise included in
the federal gross estate that is deemed to be included
pursuant to § 7-309(b)(6) of this subtitle. Tax-Gen.
Ms. Taylor's [E]state was properly reported by [the
personal representative] on the Estate's federal estate
tax return as $5, 582, 245 on her date of death. This value,
pursuant to 26 U.S.C § 2044(a), included the value of
the property in which Ms. Taylor had "a qualifying
income interest for life[, ]" which was Ms. Taylor's
QTIP property. There is no statute or statutory provision
that authorizes [the personal representative] to subtract the
value of Ms. Taylor's QTIP property from her federal
gross estate for Maryland [e]state tax purposes.
Tax Court Proceeding at 4-5. The personal
representative filed an appeal with the Circuit Court for
Washington County on September 17, 2015. The Comptroller
filed a cross-petition for review of the Tax Court's
decision to abate the late penalty payment.
Circuit Court Proceeding
circuit court reversed the Tax Court's assessment of
taxes and interest against the Estate. In the Matter of
Richard Reeves Taylor, Case No. 21-C-15-055059;
Memorandum Opinion of the Court dated Nov. 23, 2016.
circuit court indicated that the Tax Court erred in
concluding that Ms. Taylor's federal gross estate
consisted entirely of personal property, because the trust
assets "were not and never were" the property of
Ms. Taylor. According to the circuit court, Ms. Taylor never
had legal title to the trust assets because legal title was
transferred to the trust beneficiaries. That property right
vested in the beneficiaries at the time of Mr. Taylor's
death in 1989.
circuit court held that the federal QTIP election simply
enabled the trust assets to be taxable as part of the federal
estate; the election did not convert the trust assets into
Ms. Taylor's personal property which could be subjected
to Maryland estate tax.
circuit court explained that, because the trust assets were
not the property of Ms. Taylor, the only way for the State to
impose taxes on the assets would be through statutory
authority. After conducting a statutory analysis of Tax-Gen.
§§ 7-301(b) and (d), 7-302, and 7-309(b)(5) and
(b)(6), the circuit court concluded that the Tax Court had
erred in assessing the estate tax on the trust assets.
circuit court also held that imposition of a Maryland estate
tax on the trust assets violated the Fourteenth Amendment to
the U.S. Constitution and the Maryland Declaration of Rights,
because the State had taxed property outside its jurisdiction
and taxed an item from which this State had received no
Court of Special Appeals Proceeding
Court of Special Appeals affirmed the decision of the circuit
court. The Court held that "the Tax Court's decision
was premised upon an erroneous conclusion of law, and the
Comptroller lacks the authority to tax the [trust assets] as
part of Ms. Taylor's Maryland estate."
Taylor, 238 Md.App. at 152, 189 A.3d at 807. The
Court of Special Appeals based this holding on its statutory
analysis, which mirrored the circuit court's analysis.
Court also held that "[g]iven no tax was authorized
under the statute, no penalty could be properly charged
against the Estate." Id.
Court of Special Appeals did not address the circuit
court's decision regarding the Fourteenth Amendment and
the Maryland Declaration of Rights, "as it was not
decided by the Tax Court." Id.
[D]ecisions of the Tax Court receive the same judicial review
as other administrative agencies. In this context [. . . we]
evaluate[ ] the decision of the agency. A court's role in
reviewing an administrative agency
adjudicatory decision is narrow; it is limited to determining
if there is substantial evidence in the record as a whole to
support the agency's findings and conclusions, and to
determine if the administrative decision is premised upon an
erroneous conclusion of law. We cannot uphold the Tax
Court's decision on grounds other than the findings and
reasons set forth by the Tax Court.
Taylor, 238 Md.App. at 145, 189 A.3d at 803
(internal citations and quotations omitted).
The value of the property contained in Ms. Taylor's
Maryland estate includes the value of her QTIP, and the
transfer of such property at death is subject to the Maryland
Ms. Taylor was deemed to have a property interest in the
marital trust that transferred upon her death, such that the
entire value of the marital trust is included in her federal
personal representative contends that Ms. Taylor did not own,
control, or have any interest in the assets of the QTIP
trust, nor was there a transfer of trust property at her
death. The personal representative asserts that:
[O]n Mr. Taylor's death, legal title to the QTIP property
transferred to the trustees of the trust and equitable title
transferred to Mr. Taylor's son and grandchildren, the
remainder beneficiaries of the trust. Accordingly, the
transfer of the QTIP property occurred in Michigan in 1989
under Mr. Taylor's [W]ill, not in Maryland in 2013 when
Ms. Taylor died.
the personal representative fails to adequately consider the
estate tax scheme and the creation of QTIP trusts. Ms.
Taylor's property interest in the marital trust was
deemed to have transferred upon Ms. Taylor's
death. We review the general estate tax scheme and creation
of QTIP trusts to explain our conclusion. Estate Taxes
and QTIP Trusts
estate tax applies on the transfer of assets from an estate
upon one's death. The federal code, however, provides an
exception for married couples through the marital deduction,
codified in 26 U.S.C. §2056(a). The marital deduction
generally shields the outright transfer of property, from the
first-to-die spouse to the surviving spouse, from estate
taxes. This marital "exemption is premised on the
expectation that the property will be subject to estate tax
on the death of the second spouse (unless consumed during her
life or transferred by gift and thus subject to gift
tax)." Estate of Sommers v. Commissioner of Internal
Revenue, 149 T.C. 209, 223 (2017). Pursuant to 26 U.S.C.
§2056(b)(1), transfers of 'terminable' property
interests are not generally eligible for the marital
deduction because they are not included in the surviving
spouse's estate. This is known as the "terminable
interest rule." Estate of Smith v. Commissioner of
Internal Revenue, 565 F.2d 455, 459 (7th Cir. 1977).
instant matter, Ms. Taylor had a terminable property interest
because she had a qualifying terminable income interest for
life, paid annually, through operation of the QTIP trust.
See 26 U.S.C. § 2056(b)(7)(B)(i)(II). However,
the terminable interest rule has an exception for QTIP assets
to enable application of the marital deduction.
The QTIP rules provide an election under which a qualifying
terminable interest can be covered by the marital deduction
at the death of the first spouse with the proviso that the
underlying property be included in the estate of the second
spouse upon death. See secs. 2056(b)(7), 2044. In
effect, the rules employ a fiction that
treats the second spouse as owning the
subject property outright, rather than owning merely a life
or other terminable interest.
Estate of Sommers, 149 T.C. at 223 (emphasis added).
The provisions creating the QTIP option, codified in 26 USC
§§ 2044 and 2056, create two fictional legal
transfers so that the full value of the QTIP assets is
captured by the estate tax upon the surviving spouse's
death. The first fictional transfer occurs upon the death of
the first-to-die spouse, when QTIP assets "shall be
treated as" passing from the first-to-die spouse to the
surviving spouse. See §§ 2056(b)(7)(A)(i),
(b)(7)(B)(i)(I). The second fictional transfer occurs when
the surviving spouse dies and the QTIP assets "shall be
treated as property passing from" the surviving spouse
under §2044(c). This second fictional transfer triggers
the estate tax, and the entire value of the QTIP assets is
included in the surviving spouse's federal gross estate
review of the federal estate tax scheme and QTIP trusts
reveals that the entire value of the marital trust was
deemed to have transferred upon Ms. Taylor's
death See supra; see also In re Estate of Bracken,
175 Wash.2d 549, 577-78, 290 P.3d 99, 112 (2012) (Madsen, CJ,
concurring/dissenting), overturned by statute
("[U]nder federal law there are two relevant transfers
where QTIP property is concerned. . . . When the surviving
spouse dies, a second transfer of the entire property is
deemed to occur-the transfer of the property from the
surviving spouse to the third party remainder
beneficiaries."); see 2006 Leg. Sess., Fiscal
and Policy Note, Senate Bill 2 ("SB 2") (stating
that "[t]he value of the QTIP that qualifies for the
marital deduction as a result of the election is included in
the surviving spouse's estate when the
surviving spouse dies." (emphasis added)).
Comptroller did not seek to tax Mr. Taylor's property or
the transfer of his property, but rather sought to tax the
deemed transfer of the QTIP property upon Ms. Taylor's
death as a Maryland resident.
The value of Ms. Taylor's Maryland estate is the same
as the value of her federal gross estate.
"Maryland estate" is defined as "the part of
an estate that this State has the power to
subject to the Maryland estate tax." See
Tax-Gen. § 7-301(d) (emphasis added). Furthermore, an
"estate" is defined as "the federal
gross estate of a decedent, as determined by . . .
the Internal Revenue Code, as increased by
any property not otherwise included in the federal gross
estate that is deemed to be included pursuant to §
7-309(b)(6) of this subtitle." See Tax-Gen.
§ 7-301(b) (emphasis added). Putting these definitions
together results in two parts to a Maryland decedent's
estate: (1) the federal gross estate as determined by the
Internal Revenue Code, plus (2) any property
not otherwise in the federal gross estate that is included in
Tax-Gen. § 7-309(b)(6).
the first part of the Estate, the personal representative
properly reported a value of $5, 582, 245 for Ms.
Taylor's federal gross estate. As to the second part of
the Estate, we must consider the statutory language of
Tax-Gen. § 7-309(b) in the context of the definition for
an "estate." Accordingly, Tax-Gen. §
7-309(b)(6) serves to increase the value of the
Estate (an estate is the federal gross estate, as
increased by property pursuant to ...