Shaffer v. Comm'r of Revenue

485 Mass. 198

148 N.E.3d 1197

M. Christine SHAFFER, executrix,¹

v.COMMISSIONER OF REVENUE.

SJC-12812

Supreme Judicial Court of Massachusetts, Suffolk..

Argued February 10, 2020.

Decided July 10, 2020.

Leo J. Cushing, (Jenna R. Wolinetz, Waltham, also present) for the taxpayer.

Celine E. de la Foscade-Condon (John J. Connors, Jr., Boston, also present) for Commissioner of Revenue.

Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

CYPHER, J.

This case concerns whether the intangible assets in a qualified terminable interest property (QTIP) trust, which was created by the predeceasing spouse in New York, are subject to the Massachusetts estate tax, G. L. c. 65C, § 2A (a ), when the surviving spouse died domiciled in Massachusetts. Adelaide P. Chuckrow (decedent), the lifetime income beneficiary of the QTIP trust created in New York by her late husband Robert Chuckrow (Robert), died domiciled in Massachusetts in 2011. The decedent's estate (estate) included the value of the QTIP trust assets in computing her Federal estate tax return, but not in computing her Massachusetts estate tax return. The Commissioner of Revenue (commissioner) selected the estate's Massachusetts return for audit and assessed an additional Massachusetts estate tax of $1,809,141.88, based on the value of the QTIP assets. The Appellate Tax Board (board) upheld the assessment. The key issue before us is whether the intangible assets in a QTIP trust created by the predeceasing spouse when he was domiciled in a different State are includable in the gross estate of the Massachusetts domiciliary decedent for purposes of calculating the Massachusetts estate tax under § 2A (a ). We affirm the decision of the board that there is not a constitutional or a statutory barrier to the assessment of Massachusetts estate tax, on the value of the QTIP assets.

Background. 1. Statutory framework. We begin with an overview of the statutory framework, in order to provide context to the following discussion.

a. Federal estate tax and Massachusetts estate tax. An estate tax is a tax on the privilege of transferring property at death. See Knowlton v. Moore, 178 U.S. 41, 56, 20 S.Ct. 747, 44 L.Ed. 969 (1900). Internal Revenue Code § 2001(a) sets forth the Federal estate tax: "A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." 26 U.S.C. § 2001(a). General Laws c. 65C, § 2A (a ), sets forth the Massachusetts estate tax. Following various versions of the Massachusetts estate tax in response to the changes in the Internal Revenue Code, in 2002, the Legislature amended § 2A to use a "sponge tax" calculation² based upon the Federal credit for State death taxes that would have been allowable to a decedent's estate in 2000. See G. L. c. 65C, § 2A (a ) ; St. 2002, c. 186, §§ 28, 34; St. 2002, c. 364, §§ 10, 23. See also Department of Revenue, Technical Information Release 02-18 (Nov. 6, 2002) ("reference point Massachusetts uses to tie itself to the [Internal Revenue] Code for sponge tax purposes is a fixed date instead of a reference point that automatically incorporates any federal changes. Thus, due to the decoupling legislation, the Massachusetts sponge tax is now tied to the [Internal Revenue] Code as in effect on December 31, 2000"). The Massachusetts estate tax imposes a tax "upon the transfer of the estate of each person dying on or after January 1, 1997 who, at the time of death, was a resident of the commonwealth." G. L. c. 65C, § 2A (a ).

b. Marital deduction. The marital deduction allows an estate to deduct from the value of the taxable estate certain property that passes or has passed from a decedent to the decedent's surviving spouse. 26 U.S.C. § 2056(a). In general, a marital deduction defers the estate tax on the property subject to the marital deduction until the death of the surviving spouse; it does not eliminate the tax liability altogether. See Estate of Sommers v. Commissioner of Internal Revenue, 149 T.C. 209, 223 (2017).

c. QTIP trust. An estate generally may not make use of the marital deduction when conveying terminable interest property (terminable interest rule). 26 U.S.C. § 2056(b)(1). However, 26 U.S.C. § 2056(b)(7) provides an exception to the terminable interest rule for QTIP. To become QTIP, (1) the property must pass from the predeceasing spouse, (2) the surviving spouse must have a qualifying income interest for life³ in the property, and (3) the executor of the estate of the predeceasing spouse must elect to designate the property as QTIP. 26 U.S.C. § 2056(b)(7)(B). Using a QTIP trust allows for the deferral of the Federal estate tax on the assets used to create the QTIP trust until the surviving spouse dies.⁴ See 26 U.S.C. § 2044. See also Estate of Clayton v. Commissioner of Internal Revenue, 976 F.2d 1486, 1491-1493 (5th Cir. 1992) (explaining history of marital deduction and QTIP).

2. Robert's creation of the QTIP trust. Robert died in July 1993, while domiciled in New York.⁵ His last will and testament established a trust for the decedent's benefit. The trust qualified for a QTIP trust election under 26 U.S.C. § 2056(b)(7) and under New York law. At the time of Robert's death, the trust assets totaled $844,101.27, and consisted wholly of intangible property, including shares in various companies and a fifty percent limited partnership interest in Chuckrow Smith Associates, L.P.

The trustees of the trust were the two adult daughters of the decedent and Robert. The decedent did not hold general or limited powers of appointment over the trust assets. The trustees were entitled to the remainder interest of the trust upon the decedent's death.

After Robert's death, his estate filed Federal and New York tax returns.⁶ In both returns, the estate reported no tax due, claiming the marital deduction in the full amount of the QTIP assets.

3. Prior proceedings. The decedent died in August 2011, while domiciled in Massachusetts. The estate filed a Massachusetts estate tax return, reporting a tax due of $100,997 and including a payment in that amount. The value of the QTIP assets was not included in the Massachusetts estate tax return, but it was included in the estate's Federal tax return.⁷ The estate did not file a New York estate tax return, nor did it pay any New York estate tax.

The commissioner selected the estate's Massachusetts estate tax return for an audit. The commissioner sent the estate a notice of intention to assess and a notice of intention to assess work papers, showing the commissioner proposed an additional Massachusetts tax assessment of $1,809,141.88. The additional tax assessment was based on the total gross estate reported on the Federal estate tax return. The commissioner assessed the tax as proposed, and sent the estate a notice of assessment, which included the $1,809,141.88 plus interest. The estate paid the amount assessed.

The estate then filed an abatement application, which the commissioner denied. The estate appealed to the board from the denial of the abatement application. The parties submitted an agreed statement of facts along with their arguments in briefs and oral arguments, and no evidentiary hearing was held.

4. The board's decision. The board issued a decision in favor of the commissioner and subsequently promulgated its findings of fact and report. One of the board's commissioners dissented.

The board ruled that the QTIP assets were subject to tax under G. L. c. 65C, § 2A (a ). It disagreed with the two primary arguments raised by the estate: (1) that there was only one transfer of the QTIP assets, which took place when Robert died in New York, and therefore the Massachusetts assessment violates the Fourteenth Amendment to the United States Constitution and art. 10 of the Massachusetts Declaration of Rights; and (2) that the QTIP assets were not includable in the decedent's estate because "the definition of 'Massachusetts gross estate' in [ G. L. c. 65C, § 1 (f ),] excludes QTIP property for which a Federal, but not a Massachusetts, QTIP election was made."

In addressing the estate's constitutional argument and interpreting the term "transfer," the board relied on case law analogous to the present matter, in which courts gave the term a broad construction. See Fernandez v. Wiener, 326 U.S. 340, 352, 66 S.Ct. 178, 90 L.Ed. 116 (1945) ; Estate of Brooks v. Commissioner of Revenue Servs., 325 Conn. 705, 733, 159 A.3d 1149 (2017), cert. denied, ––– U.S. ––––, 138 S. Ct. 1181, 200 L.Ed.2d 314 (2018). The board also noted that 26 U.S.C. § 2044(c) provides, in part, that QTIP property "shall be treated as property passing from" the surviving spouse, and that other sections of the Internal Revenue Code treat the surviving spouse as the transferor of the full value of the QTIP property. See 26 U.S.C. §§ 2044(c), 2519, 2652(a). The board accordingly determined that for estate tax purposes, there are two transfers of QTIP assets. The first is "a transfer from the estate of the first-to-die spouse to the surviving spouse when the QTIP election is made," and the second is "a transfer from the estate of the surviving spouse to the designated beneficiaries when the surviving spouse dies." Applying that reasoning to the QTIP assets at issue, the board ruled that constitutional principles were not violated because the second transfer of the QTIP assets occurred in Massachusetts.

In addressing the estate's statutory argument, the board stated that the "fatal flaw" with the estate's analysis that G. L. c. 65C, § 1 (f ), "provides that only those QTIP assets for which a Massachusetts deduction was allowed in the estate of the first-to-die spouse are includable in the Massachusetts gross estate of the surviving spouse" was that § 1 (f ) defines "Massachusetts gross estate," which is a term "not found in the operative taxing statute, [G. L. c. 65C,] § 2A." The board looked to the Legislature's enactment of § 1 (f ), as well as to its ...