Pfeufer v. Cyphers, Personal Representative of the Estate of James Russell Hoffman (Ct. of Appeals)

Filed March 19, 2007 -- Opinion by Judge Robert Bell

Issue: Whether a will directing the P.R. to pay estate taxes "without apportionment" required the P.R. to deduct the estate taxes prior to distribution where some legatees were to be taxed and others were exempt.

Held: The P.R. must deduct the taxes prior to distribution, effectively splitting the taxes among all legatees even though some were tax-exempt. Interestingly, the Court found that there are no cases expressly stating the standard of review for legal determinations of an Orphans' Court. In this matter, the Court of Appeals saw "no need to deviate from the standard of review that we have applied to interpretations and conclusions of law by courts of general jurisdiction."

Facts: James Russell Hoffman ("Decedent") died leaving a will instructing the P.R. to pay all estate taxes from the estate without apportionment. This is in contrast to Md. Code Ann. Tax-General 7-203(b), which exempts certain family members of the decedent from inheritance tax. In this case, three of the four legatees were family members exempt from taxation. The P.R. initially paid the inheritance taxes owed by the fourth legatee from the entire estate, so that, effectively, each legatee paid 1/4 of the taxes due by the one non-exempt legatee. Subsequently, the P.R. reversed herself and deducted the entire tax due from the share of the one non-exempt legatee. The Orphans' Court for Montgomery County affirmed the decision of the P.R.

The Court of Appeals reversed, holding that a will is to be construed to effectuate the intent of the testator. In this case, the Court found, the will was clear and should be effectuated by not apportioning the estate tax.

The full opinion is available in PDF.

Comptroller v. Colonial Farm Credit, ACA (Ct. of Special Appeals)

Filed March 12, 2007--Opinion by Judge James A. Kenney, III.

The taxpayer is an "Agricultural Credit Association" (an "ACA") established under Federal law to provide credit to farms. Often, ACAs are the result of the merger of two other types of farm credit entities, Federal Land Bank Associations ("FLBAs") and Production Credit Associations ("PCAs").

After the creation of ACAs by Congress, disputes arose between ACAs and the IRS regarding whether lending activities that would have previously been conducted by FLBAs remained tax exempt after the merger of an FLBA into an ACA. In United States v. Farm Credit Servs. of Fargo, ACA, 89 A.F.T.R.2d (R.I.A.) 2002-334-36 (1998), the United States District Court for the District of North Dakota considered one such dispute. The court concluded that the lending services at issue were exempt. This lead to a number of "closing agreements" between the IRS and other ACAs, including Colonial.

Specifically, IRS entered into two closing agreements with Colonial, one of which entitled Colonial to a refund of 60% of its "long-term taxable income" for the years 1991 and 1993-1999, and a second to the same effect for the year 2000. The Comptroller refused to be bound by these closing agreements and denied Colonial tax refunds for the years in question.

The Court of Special Appeals noted that there are two methods by which a taxpayer may enter into a binding agreement with the IRS on a disputed issue: (1) a closing agreement under 26 U.S.C.A. §7121, or (2) a compromise under 26 U.S.C.A. §7122. The Court of Special Appeals drew on this distinction and said:

A settlement agreement between a taxpayer and the IRS does not necessarily alter the taxpayer's legally required federal taxable income, and a compromise generally would not create an income figure that is binding on Maryland. A closing agreement, on the other hand, can have the effect of altering a taxpayer’s federal taxable income. When it does, as in the case before us, the taxable income figure established by the closing agreement is binding as the basis for Maryland income tax.

Thus, the Court of Special Appeals rejected the Comptroller's position, a position that had been accepted by the Maryland Tax Court, to the effect that the closing agreement was a compromise as to the tax due and that the Maryland taxing authorities could reach a different conclusion and result. Rather, it affirmed the Circuit Court, which had reversed the Tax Court, and interpreted the closing agreement as an agreement that altered the amount of taxable income reported by the taxpayer in the years in question, making that determination binding on the State of Maryland.

A copy of the opinion is available in PDF.