Shaffer v. Commissioner of Revenue

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SJC-12812
M. CHRISTINE SHAFFER, executrix,1 vs. COMMISSIONER OF REVENUE.
Suffolk. February 10, 2020. - July 10, 2020.
Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher,
& Kafker, JJ.
Taxation, Estate tax, Trust. Trust, Taxation. Due Process of
Law, Taxation. Words, "Transfer," "Massachusetts gross
estate."
Appeal from a decision of the Appellate Tax Board.
The Supreme Judicial Court granted an application for
direct appellate review.
Leo J. Cushing (Jenna R. Wolinetz also present) for the
taxpayer.
Celine E. de la Foscade-Condon (John J. Connors, Jr., also
present) for Commissioner of Revenue.
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
1 Of the estate of Adelaide P. Chuckrow.
2
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.
3
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 (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,
2Under a "sponge tax," the State tax liability is
determined based on the Federal estate death tax credit. See
Ward v. Commissioner of Corps. & Taxation, 369 Mass. 3, 4
(1975).
4
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
3 "The surviving spouse has a qualifying income interest for
life if . . . (I) the surviving spouse is entitled to all the
income from the property, payable annually or at more frequent
intervals, or has a usufruct interest for life in the property,
and (II) no person has a power to appoint any part of the
5
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.
property to any person other than the surviving spouse." 26
U.S.C. § 2056(b)(7)(B)(ii).
4 Although not relevant to this appeal, the assets in a QTIP
trust would be subject to tax before the surviving spouse's
death if the surviving spouse disposed of all or part of the
qualifying income interest before his or her death. 26 U.S.C.
§ 2519.
5 At the time of Robert's death, the decedent was also
domiciled in New York.
6
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
6 Robert's estate did not file a Massachusetts tax return.
7 The estate's Massachusetts return reported a total gross
estate of $2,382,148, and the estate's Federal return reported a
total gross estate of $15,633,617, the difference being the
value of the QTIP assets.
7
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
8
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
(1945); Estate of Brooks v. Commissioner of Revenue Servs., 325
Conn. 705, 733 (2017), cert. denied, 138 S. Ct. 1181 (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.
9
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 enactment of G. L. c. 65C, § 3A, which addresses the
Massachusetts election of QTIP treatment, and determined that
the § 1 (f), definition of Massachusetts gross estate applies
only when the predeceasing spouse makes a Massachusetts QTIP
election under § 3A. It therefore concluded that because Robert
did not make a Massachusetts QTIP election and there was not any
Massachusetts QTIP property (as defined in § 3A), §§ 1 (f) and
3A do not pertain to the estate's Massachusetts estate tax
obligation under § 2A (a).8
8 The board also rejected the estate's argument regarding
potential double taxation and G. L. c. 65C, § 1 (f), concluding,
"The [estate] offered no reasoned basis to interpret a statute
that prevents double taxation of Massachusetts QTIP property
under limited circumstances in a manner that prevents taxation
of the QTIP assets where no double taxation is possible and the
assets are explicitly and exclusively taxable under [G. L. c.
65C,] § 2A."
10
The board therefore ruled that the decedent's estate "is
taxable under the unambiguous terms of [§ 2A (a)]." The
dissenting commissioner concluded that the only transfer of the
QTIP assets occurred at the time of Robert's death, and that
therefore the commissioner's assessment violated constitutional
principles.
The estate filed a timely notice of appeal from the board's
decision, and we granted its motion for direct appellate review.
Discussion. 1. Standard of review. In reviewing
decisions of the board, "[w]e review conclusions of law,
including questions of statutory construction, de novo." Shrine
of Our Lady of La Salette Inc. v. Assessors of Attleboro, 476
Mass. 690, 696 (2017), quoting New England Forestry Found., Inc.
v. Assessors of Hawley, 468 Mass. 138, 149 (2014). "However,
because the board is an agency charged with administering the
tax law and has expertise in tax matters, we give weight to its
interpretation of tax statutes . . ." (quotation and citation
omitted). AA Transp. Co. v. Commissioner of Revenue, 454 Mass.
114, 119 (2009). See Boston Professional Hockey Ass'n v.
Commissioner of Revenue, 443 Mass. 276, 285 (2005) ("We will not
modify or reverse a decision of the board if the decision is
based on both substantial evidence and a correct application of
the law").
11
2. Constitutionality of the Massachusetts estate tax. We
first address whether the Massachusetts estate tax, G. L.
c. 65C, § 2A (a), violates the due process clause of the
Fourteenth Amendment and art. 10. The estate argues that the
Massachusetts estate tax violates constitutional principles
because it includes property wherever situated. The estate
further contends that the board erred in finding that a transfer
occurred upon the death of the decedent, and that therefore
Massachusetts did not have a constitutional basis to tax the
QTIP trust assets. The commissioner argues that the
Massachusetts estate tax does not violate constitutional
principles and that a transfer occurred upon the death of the
decedent and, therefore, the decedent's domicil in Massachusetts
provided the constitutional basis for Massachusetts to tax the
trust assets. We agree with the board that the Massachusetts
estate tax does not violate constitutional principles and that a
transfer occurred upon the death of the decedent.
States may only impose an estate tax on tangible property,
such as real estate, located within the State's jurisdiction.
See Frick v. Pennsylvania, 268 U.S. 473, 488-492 (1925). The
analysis, however, differs for a State's imposition of an estate
tax on intangible property, such as the QTIP assets here, with
the decedent's domicil in the State at death forming the
requisite nexus for the State to impose the estate tax. See
12
Curry v. McCanless, 307 U.S. 357, 366 (1939); Page v.
Commissioner of Revenue, 389 Mass. 388, 395 (1983). See also
Graves v. Schmidlapp, 315 U.S. 657, 660 (1942) ("Intangibles,
which are legal relationships between persons and which in fact
have no geographical location, are so associated with the owner
that they and their transfer at death are taxable at the place
of his domicile . . .").
In addition, "the estate tax as originally devised and
constitutionally supported was a tax upon transfers."
Fernandez, 326 U.S. at 352. See G. L. c. 65C, § 2A (a) ("A tax
is hereby imposed 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"). See generally Knowlton, 178
U.S. at 56. Therefore, because in the present case the QTIP
trust consisted completely of intangible assets, and the
decedent was domiciled in Massachusetts at the time of her death
in 2011 and was therefore subject to the provisions of § 2A (a),
the question presented herein is what constitutes a "transfer"
for estate tax purposes.
As the board did in interpreting "transfer," we look to
case law analogous to the issue at hand. In Fernandez, 326 U.S.
at 342, 352, 355, the United States Supreme Court addressed the
scope of what constitutes a transfer in the context of an estate
tax levied on the termination of marital community property and
13
noted that the decedent's death enabled the surviving spouse to
have greater rights in the subject property. The Court stated
that an estate tax is not limited to literal transfers at death,
but "extends to the creation, exercise, acquisition, or
relinquishment of any power or legal privilege which is incident
to the ownership of property." Id. at 352. In Estate of
Brooks, 325 Conn. at 733, the Connecticut Supreme Court used the
broad interpretation of the term "transfer" from Fernandez in
addressing the issue of Connecticut's ability to tax the value
of assets in a QTIP trust. As in the case at hand, in Estate of
Brooks, the trust at issue was created by the predeceasing
spouse while he was a domiciliary of another State, and then the
surviving spouse died as a domiciliary of Connecticut. Id. at
707-708. The estate of the surviving spouse challenged the
constitutionality of Connecticut's imposition of an estate tax
on the QTIP assets, arguing, in part, that the only transfer of
the QTIP assets took place in the other State. Id. at 726. The
Connecticut Supreme Court determined that a second transfer of
the QTIP assets occurred upon the death of the surviving spouse.
Id. at 730-731. In reaching this conclusion, the court stated
that "a sovereign may tax the transmutation of legal rights in
property occasioned by death." Id. at 729, citing Fernandez,
supra at 358. The Connecticut Supreme Court noted that the
Fernandez Court's practical approach "looked not to whether
14
death was the generating source of 'rights,' but rather whether
death was the generating source of 'changes in the legal and
economic relationships to the property taxed.'" Estate of
Brooks, supra at 733, quoting Fernandez, supra at 356-357.
In addition, the Federal QTIP rules create fictional
transfers. Although the surviving spouse receives only a
lifetime income interest from the predeceasing spouse, the
Internal Revenue Code QTIP rules treat property subject to a
QTIP election as passing in full from the predeceasing spouse to
the surviving spouse, with the property then passing from the
surviving spouse. See 26 U.S.C. §§ 2044(c), 2056(b)(7)(A),
2519(a); Estate of Morgens v. Commissioner of Internal Revenue,
678 F.3d 769, 771 (9th Cir. 2012) ("underlying premise of the
QTIP regime is that the surviving spouse is deemed to receive
and then give the entire QTIP property, rather than just the
income interest. The purpose of the QTIP regime is to treat the
two spouses as a single economic unit with respect to the QTIP
property while still allowing the first-to-die spouse to control
the eventual disposition of the property").
In the present case, the decedent's death created a change
in the legal relationship among the QTIP assets, the decedent,
and the beneficiaries. See Fernandez, 326 U.S. at 355; Estate
of Brooks, 325 Conn. at 733. Before her death, the decedent had
a lifetime interest in the QTIP assets. See 26 U.S.C.
15
§ 2056(b)(7)(B). After her death, her daughters, as the
beneficiaries, received a present interest in the QTIP assets.
It is this change in legal relationship that occurred upon the
death of the decedent that constitutes a transfer for estate tax
purposes and brings the QTIP assets within the Massachusetts
taxable estate. See Fernandez, supra at 355; Estate of Brooks,
supra at 729, 733.
We therefore agree with the board that two transfers of
QTIP property occur for estate tax purposes, with the first
occurring when the predeceasing spouse makes the QTIP election
and the second occurring upon the death of the surviving spouse.
Therefore, the decedent's domicil in Massachusetts at the time
of her death, and therefore at the time of the second transfer,
provided the connection to the Commonwealth to allow
Massachusetts to impose an estate tax on the QTIP assets.
3. Applicability of definition of "Massachusetts gross
estate" in G. L. c. 65C, § 1 (f). We next address whether the
board correctly determined that G. L. c. 65C, §§ 1 (f) and 3A,
do not bear upon the estate's Massachusetts estate tax
obligation. The estate argues that the definition of
"Massachusetts gross estate" in § 1 (f) should apply to the
Massachusetts estate tax, and that therefore the value of the
QTIP assets should not be included in the estate. The
commissioner responds that § 1 (f) is not applicable to G. L. c.
16
65C, § 2A, and that the board correctly interpreted and applied
the unambiguous language of § 2A, which requires the inclusion
of all assets reported in the Federal gross estate. We agree
with the board that § 1 (f) does not apply to the estate's
Massachusetts estate tax obligation under § 2A.
We look first to the plain meaning of the statute. See
Thurdin v. SEI Boston, LLC, 452 Mass. 436, 444 (2008) ("where
the language of a statute is plain and unambiguous, it is
conclusive as to legislative intent"). General Laws c. 65C,
§ 1 (f), defines "Massachusetts gross estate."9 See G. L.
c. 65C, § 1 ("When used in this chapter the following words or
terms shall have, unless the context clearly indicated
otherwise, the following meanings . . .").
The term "Massachusetts gross estate," however, is not used
in G. L. c. 65C, § 2A, which is the statute the estate was
subject to because the decedent died on or after January 1,
1997. Instead of referring to "Massachusetts gross estate," §
9 "[T]he federal gross estate . . . plus the value of any
property (i) in which the decedent had at death a qualifying
income interest for life described in [G. L. c. 65C, § 3A (c),]
. . . and (ii) for which a deduction was allowed for
Massachusetts estate tax purposes with respect to the transfer
of such property to the decedent . . . . The Massachusetts
gross estate shall not include the value of any property in
which the decedent had a qualifying income interest for life
which is not otherwise includible in the Massachusetts gross
estate under the first sentence of this paragraph . . . ."
G. L. c. 65C, § 1 (f).
17
2A provides for an estate tax equal to the State tax credit
"that would have been allowable to a decedent's estate as
computed under Code section 2011, as in effect on December 31,
2000." G. L. c. 65C, § 2A (a). See G. L. c. 65C, § 2A (e)
("all references and provisions in this chapter to the Internal
Revenue Code or Code, unless the context clearly indicates
otherwise, shall be to the Code as in effect on December 31,
2000").
General Laws c. 65C, § 3A, which covers the Massachusetts
QTIP election by the predeceasing spouse, and is not at issue
here, does utilize the term "Massachusetts gross estate." G. L.
c. 65C, § 3A (b) (providing requirements to qualify as QTIP for
Massachusetts estate tax purposes, including that subject
property must be "included in the Massachusetts gross estate" of
predeceasing spouse). The Legislature enacted § 3A in 1985, at
the same time that it amended G. L. c. 65C, § 1 (f), to address
a decedent's qualifying income interest and to refer to § 3A.
See St. 1985, c. 711, §§ 6, 12. While § 3A provides
requirements for the predeceasing spouse to make a QTIP
election, § 1 (f), in turn, provides that when the surviving
spouse who had a qualifying income interest for life, as
described in § 3A (c), dies, then only property for which the
predeceasing spouse was allowed a Massachusetts deduction will
be included in the taxable estate of the surviving spouse. In
18
other words, the definition of "Massachusetts gross estate" in
§ 1 (f) applies only where the predeceasing spouse makes a
Massachusetts QTIP election for property that is included in the
Massachusetts gross estate of the predeceasing spouse under
§ 3A.
Because Robert's estate did not make a Massachusetts QTIP
election, nor was there otherwise any Massachusetts QTIP
property as defined in G. L. c. 65C, § 3A, the board did not err
in determining that G. L. c. 65C, §§ 1 (f) and 3A, do not bear
upon the estate's Massachusetts estate tax obligation under
G. L. c. 65C, § 2A. Therefore, we look to the plain meaning of
§ 2A, which requires the inclusion of all assets that the estate
reported in the Federal gross estate.10 Therefore, the QTIP
assets were includable in the estate for purposes of the
Massachusetts estate tax.
For the foregoing reasons, we affirm the decision of the
board.
So ordered.
10In addition, the estate's contention that the current
Massachusetts estate tax does not eliminate the potential of
double taxation is without merit under the present
circumstances. The estate is not subject to double taxation, as
the QTIP assets in Robert's estate were not subject to
Massachusetts or New York tax before the decedent's death.