When Maryland raised the interest rate on unpaid estate taxes in 1982, did the higher rate apply to deferred payments on estates of people who died before the law took effect?

Plain-English summary

The Comptroller's office asked the Attorney General to sort out an interest-rate puzzle involving Maryland's estate tax. Before July 1, 1982, an estate that qualified to defer part of its tax (because a large share of the estate was tied up in a closely held business) paid a reduced four percent interest rate on the deferred amount, tracking a lower federal rate. Chapter 615 of the Laws of Maryland 1982, effective July 1, 1982, overhauled the state's tax interest rates and repealed the provision letting the rate track that reduced federal figure. A legislative audit found 13 estates where the Comptroller's office kept charging the old, lower four percent rate on deferred payments made after the new law took effect, and asked whether that was correct across three groups: people who died and had estate tax returns due before July 1, 1982; people who died before but had returns due after that date; and people who died on or after that date.

The Attorney General concluded the new, higher rate should have applied to all deferred payments actually due on or after July 1, 1982, no matter which of the three groups the estate fell into. The opinion reasoned that a statute changing an interest rate applies prospectively based on the period the interest actually accrues, not based on when the underlying obligation (here, the decedent's death or the tax return's due date) arose, relying on Maryland court decisions holding that changing an interest rate to compensate someone for the ongoing loss of use of money is not "retroactive" just because it reaches obligations that existed before the rate changed; what matters is the date the interest accrues. On a second, related question, the opinion concluded the Comptroller had broad discretion under TG §13-606 to waive some or all of the higher interest for "reasonable cause," considering all the facts of each estate, including whether the estate had reasonably relied on the Comptroller's own earlier (incorrect) guidance about which rate applied.

Currency note

This opinion was issued in 1992, addressing a 1982 statutory change. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here, including the current text of the Tax-General Article's interest and waiver provisions.

Common questions

If Maryland raised the interest rate on unpaid estate taxes, did the higher rate apply to estates where the person died before the rate change? Yes, according to this opinion, as long as the tax payment was still outstanding and interest was still accruing on or after the new rate's effective date. The opinion concluded the relevant date was when the payment was due and interest was accruing, not when the decedent died or when the original tax return was due.

Is applying a new, higher interest rate to old debts considered an improper "retroactive" law? Not according to this opinion. It concluded that applying a new interest rate only to interest accruing after the law's effective date is a prospective application, even if the underlying debt existed before the law changed, because the old rate still governs interest that accrued before the change and only the post-effective-date interest uses the new rate.

Could the Comptroller's office have waived the extra interest owed because of its own earlier mistake? Possibly. The opinion concluded the Comptroller had broad discretion under TG §13-606 to waive interest for "reasonable cause" and could consider all relevant facts about each estate, including a taxpayer's good-faith reliance on the Comptroller's own prior (incorrect) advice about the applicable rate, though the opinion did not decide whether any particular estate deserved a waiver.

Why does it matter whether a new interest rate is applied "prospectively" or "retroactively"? Because Maryland law presumes new statutes apply only prospectively unless the legislature clearly says otherwise. The opinion explained that a change is prospective, not retroactive, when it only affects interest accruing after the effective date, even on debts that predate the law, since the debtor isn't charged the new rate for periods before the change.

Background and statutory framework

Before July 1, 1982, Maryland's estate tax law, former Article 62A, generally charged nine percent interest on unpaid tax but reduced that rate to match a lower federal interest rate for estates that qualified under federal law, 26 U.S.C. §6166, to defer part of their tax because a large share of the estate was a closely held business; the corresponding federal deferral rate was four percent under 26 U.S.C. §6601(j), so Maryland's rate on those deferred payments was likewise four percent rather than the general nine percent. Chapter 615 of the Laws of Maryland 1982 overhauled this system, tying most tax interest rates, including the estate tax rate, to a variable federally determined rate instead of a fixed one, and repealing the old provision that reduced the Maryland rate to match the lower federal deferral rate. A legislative audit identified 13 estates where the Comptroller's office kept applying the old four percent rate to deferred payments made after Chapter 615 took effect, prompting the Comptroller's own counsel to conclude in an earlier internal memorandum that the new rate applied only to estates of people who died on or after July 1, 1982, not the other 11 estates.

The Attorney General agreed that Chapter 615 applied only prospectively, since nothing in the law showed the General Assembly intended retroactive application, the default rule under Maryland law. But the opinion concluded the internal memo drew the prospective/retroactive line in the wrong place. Relying on City of Baltimore v. Kelso Corp., where the Court of Appeals held that a new, higher interest rate on judgments applied to all outstanding judgments (not just ones entered after the rate changed) because doing so was still a prospective application, since only interest accruing after the new rate's effective date used the new figure, the opinion concluded the same logic controlled estate tax interest: what mattered was whether interest was accruing on or after July 1, 1982, not when the decedent died or the return was originally due. The Court of Special Appeals had applied identical reasoning to a tax refund interest-rate change in Ocean City v. Purnell-Jarvis, Ltd., reasoning that an interest rate serves to fairly compensate a party for the ongoing loss of the use of money, so a rate change appropriately governs money owed after the change takes effect, regardless of when the underlying obligation arose. Applying this to all three groups the Comptroller had asked about, the opinion concluded the four percent rate applied only through June 30, 1982, and Chapter 615's new rate applied to all deferred estate tax payments due starting July 1, 1982, for every one of the 13 estates. On the follow-up waiver question, the opinion read TG §13-606 as giving the Comptroller broad discretion to weigh reasonable-cause factors case by case, including a taxpayer's reasonable reliance on the Comptroller's own earlier guidance, while declining to prejudge how that discretion should be exercised for any specific estate.

Citations and references

Statutes:

• Chapter 615 of the Laws of Maryland 1982, the estate tax interest rate reform at issue
• TG §13-606 (Tax-General Article), the Comptroller's authority to waive interest for reasonable cause
• Former Article 62A, §3 and §5 of the Maryland Code, the pre-1982 estate tax interest provisions
• 26 U.S.C. §6166, the federal provision allowing deferred estate tax payment for closely held business interests
• 26 U.S.C. §6601(j), setting the reduced federal interest rate on deferred estate tax payments
• TG §7-307, the current codification of the Maryland deferred-payment practice
• Former Article 81, §204, tying the Maryland interest rate to the federal rate under 26 U.S.C. §6621
• TG §13-604, the current provision corresponding to former Article 81, §204
• 26 U.S.C. §6621, the federal statute setting the periodically adjusted interest rate

Cases:

• Washington Suburban Sanitary Comm'n v. Riverdale Vol. Fire Co., 308 Md. 556, 520 A.2d 1319 (1987), cited for the presumption that statutes apply only prospectively absent clear legislative intent otherwise
• City of Baltimore v. Kelso Corp., 294 Md. 267, 449 A.2d 406 (1982), cited for the holding that a new interest rate applies prospectively to all outstanding judgments once the new rate's effective date arrives
• Ocean City v. Purnell-Jarvis, Ltd., 86 Md. App. 390, 586 A.2d 816 (1991), cited for applying the same prospective-application reasoning to a tax refund interest rate change
• Manning v. Seeley Tube and Box Co., 338 U.S. 561 (1950), cited for the purpose of interest on unpaid taxes as compensation for loss of use of funds
• United States v. Childs, 266 U.S. 304 (1924), cited for the same principle
• United States v. Goldstein, 189 F.2d 752 (1st Cir. 1951), cited for the same principle
• Owens v. Commissioner, 125 F.2d 210 (10th Cir. 1942), cited for the same principle
• Hessman v. Campbell, 134 F. Supp. 416 (D. Ind. 1955), cited regarding reasonable-cause considerations for interest waiver
• Fort Flowers Found., Inc. v. Commissioner of Int. Rev., 72 T.C. 399 (1979), cited regarding reasonable-cause considerations for interest waiver

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1992/Volume77_1992.pdf (this opinion appears at printed page 201 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

TAXATION

Estate Taxes - Comptroller - Statutes - Retroactivity - Applicability of Statute Increasing Interest Rate on Unpaid Taxes

February 5, 1992

Mr. J. Basil Wisner
Chief Deputy Comptroller

You have requested our opinion whether a statute imposing an increased rate of interest should have been applied to certain deferred estate tax payments. The statute in question, Chapter 615 of the Laws of Maryland 1982, became effective on July 1, 1982 and substituted a variable rate of interest for the lower fixed rate set by prior law. You ask whether the Comptroller's Office was correct in charging an interest rate lower than that specified by Chapter 615 in the following three circumstances:

1. On estates of individuals who died prior to July 1, 1982 and whose estate tax returns were also due prior to July 1, 1982;

2. On estates of individuals who died prior to July 1, 1982 but whose estate tax returns were due on or after July 1, 1982; and

3. On estates of individuals who died on or after July 1, 1982.

For the reasons stated below, we conclude that the Comptroller's Office should have applied the new rate established by Chapter 615 to all deferred estate tax payments due on or after July 1, 1982, regardless of the decedent's date of death or the date on which the estate tax return was due.

You also asked a second question contingent on our answer to the first: If the Comptroller's Office should have charged the higher rate of interest, is the office now permitted to waive such interest in accordance with §13-606 of the Tax-General Article ("TG" Article)? In our opinion, the Comptroller has broad discretion to determine "reasonable cause" for waiver under TG §13-606 and may consider all pertinent facts about the estates in question in making that determination.

I

Background

Prior to July 1, 1982, the estate tax law generally provided for an interest rate of nine percent "from the due date to the date of payment." Former Article 62A, §3 of the Maryland Code. See also Article 62A, §5 (interest applicable to increases in State tax resulting from liability for additional federal tax). The "due date" prescribed by §3 was "15 months after [the decedent's] date of death . .." The law at the time also stated that the generally applicable nine percent rate "shall be reduced to agree with a reduced federal interest rate." Former Article 62A, §§3 and 5.

Under federal law and corresponding Maryland practice, if at least 35 percent of the adjusted gross estate was attributable to an interest in a closely held business, the estate was permitted to defer payment of a portion of the estate tax over a number of years. See 26 U.S.C. §6166.1 The federal interest rate on the deferral was (and remains) four percent. See 26 U.S.C. §6601(j). Hence, the corresponding Maryland interest rate applied to such deferred payments was not nine percent, the generally applicable rate, but four percent, the "reduced federal interest rate."

Chapter 615 of the Laws of Maryland 1982 was an overall reform of Maryland law on interest rates applicable to unpaid taxes. Instead of specifying fixed rates, Chapter 615 tied virtually all tax interest rates, including the estate tax interest rate, to a variable, federally determined interest rate.2 Chapter 615 also repealed the provision in former Article 62A, §§3 and 5 directing the Comptroller to reduce the Maryland rate to "agree with a reduced federal interest rate." Chapter 615 was effective on July 1, 1982.

The Legislative Auditor identified 13 estates for which the Comptroller's Office continued to charge the reduced four percent rate after July 1, 1982 on deferred estate tax payments. Seven were estates of individuals who had died prior to July 1, 1982 and whose Maryland estate tax returns were also due prior to that date. Another four involved individuals who died prior to July 1, 1982, but whose estate tax returns were due after that date. Finally, two estates involved individuals who died after July 1, 1982. The Legislative Auditor questioned this application of the reduced interest rate in light of the repeal by Chapter 615 of the provision in former Article 62A, §§3 and 5 granting the reduction.

In an advice memorandum on the subject, the counsel to the Comptroller concluded that the new, higher rate of interest should have been charged on the two estates of persons who died after July 1, 1982 but that the Comptroller's application of the lower rate to the other eleven estates was correct. Memorandum from Assistant Attorney General Gerald I. Langbaum to Chief Deputy Comptroller J. Basil Wisner (February 16, 1989). In essence, the advice memorandum concluded that Chapter 615 was to be applied prospectively and that, thus applied, it did not reach the estate of a person who had died prior to July 1, 1982.

II

Applicability of Chapter 615

We concur in the advice that Chapter 615 applied prospectively only.
The general rule is that a statute is to be applied prospectively unless the General Assembly manifests a clear intent that it be applied retroactively. See, e.g., Washington Suburban Sanitary Comm'n v. Riverdale Vol. Fire Co., 308 Md. 556, 568, 520 A.2d 1319 (1987). No such manifestation of legislative intent exists with regard to Chapter 615.

This conclusion does not end the analysis, however. In our view, Chapter 615, given its proper prospective application, nonetheless applies to all estate tax obligations payable after July 1, 1982.

We base this conclusion primarily on the reasoning of the Court of Appeals in City of Baltimore v. Kelso Corp., 294 Md. 267, 449 A.2d 406 (1982). In Kelso, the City of Baltimore had used its "quick-take" condemnation authority to condemn some of Kelso's property. When the matter was tried, Kelso was awarded a judgment higher than the amount that the City had previously deposited. Under the governing rule, Kelso was entitled to "the legal rate" of interest on the amount of the judgment (less the City's deposit) from the date of the judgment until payment. See former Rule 642. When the judgment was entered against the City, the legal rate of interest was six percent. A later statute, effective July 1, 1980, changed the legal rate of interest to ten percent. The City argued that it was not obliged to pay the higher rate on the unpaid judgment, because the statute charging the interest rate should be applied only to judgments entered after July 1, 1980. Applying the new interest rate to all outstanding judgments, whenever they were entered, "would result in a retroactive application of the law," the City contended. 294 Md. at 273.

The Court of Appeals rejected the City's contention and held that the new interest rate applied to all outstanding judgments. The Court pointed out that, contrary to the City's argument, it was not applying the statute retroactively: "A retroactive application would not only apply the 10 percent interest rate to all outstanding judgments, but the 10 percent rate would run from the date of the judgment, even if it was entered before July 1, 1980. Ours is a prospective application of the new rate, i.e., the new rate applies after July 1, 1980, to all outstanding judgments. Before that date interest will accrue at the old rate." 294 Md. at 276 (emphasis in original).

The Court of Appeals observed that this application of the statute would best serve the legislative purpose. The new statute "compensates the judgment creditor at a rate of return deemed fair by the legislature on the monies owed to him. Applying the statute only to those judgments entered after its effective date fails to accomplish the legislative purpose.... Those whose judgments were entered before that date would not be fairly compensated for the loss, after July 1, 1980, of the use of the monies owed to them, and those judgment debtors would receive an unfair windfall." 294 Md. at 273-74. In sum, the Court held, "[s]hould the legislature deem it wise to change the interest rate from time to time in order to fairly compensate judgment creditors for the damages they sustain because of the non-payment of judgments, the new rate will apply from the effective date of the change to all outstanding judgments." 294 Md. at 275-76.

Kelso was recently found dispositive by the Court of Special Appeals in a case involving interest on taxes. In Ocean City v. Purnell-Jarvis, Ltd., 86 Md. App. 390, 586 A.2d 816 (1991), Purnell-Jarvis sought a refund of certain fees. Under the law in effect at the time that the fees were paid, Ocean City would have owed a six percent interest rate on the refund. But under a statute effective on July 1, 1987, the interest rate was increased and made variable, much as the General Assembly had done in Chapter 615 of the Laws of Maryland 1982.

The Court of Special Appeals held that the six percent interest rate applied to any refund due from the date that the taxes were paid until July 1, 1987, but that the new interest rate applied from July 1, 1987 until the refund was paid. 86 Md. App. at 412-13. The court agreed that the statute raising the interest rate was to be applied prospectively.3 But that holding, the Court went on, "does not end our analysis":

The purpose of providing interest on tax refunds, like the purpose of prejudgment or postjudgment interest, is to "compensate the aggrieved party for the loss of the use of the principal liquidated sum found due it and the loss of income from such funds." ... The rate of interest on tax refunds provided by statute represents a legislative determination of what constitutes fair compensation.... A change in that interest represents a legislative recognition that the old rate no longer fairly compensates the taxpayer.

86 Md. App. 413-14 (quoting Kelso, 294 Md. at 272) (other citations omitted).

These interpretive principles should apply as well to interest owed to the State on unpaid taxes. Mirroring the purpose of interest on unpaid refunds discussed in Purnell-Jarvis, the purpose of interest on unpaid taxes is to compensate the government for the loss of the use of funds. See Manning v. Seeley Tube and Box Co., 338 U.S. 561 (1950); United States v. Childs, 266 U.S. 304 (1924); United States v. Goldstein, 189 F.2d 752, 755 (1st Cir. 1951); Owens v. Commissioner, 125 F.2d 210, 213 (10th Cir. 1942).

Thus, in our view, the determinative issue regarding the application of Chapter 615 is not when the decedent died or when the estate tax return was due. Rather, it is whether estate tax was owed to the State on which interest was chargeable. If a payment obligation was outstanding prior to July 1, 1982 for any of the estates in question, the interest rate properly chargeable was four percent through June 30, 1982. Effective July 1, 1982, the applicable interest rate was that prescribed by Chapter 615.

III

Waiver

TG §13-606 authorizes the Comptroller to waive interest on unpaid tax "[f]or reasonable cause." In making this judgment, the Comptroller is free to consider all relevant facts about the particular cases, including the current status of the estates and the practicability of collecting the interest.

Because we do not have the facts concerning the 13 estates in question, and because in any event we could not appropriately substitute our judgment for that of the Comptroller where the discretion is his, we offer no opinion about the grant of a waiver. We observe, however, that a taxpayer's good-faith reliance on the views of the Comptroller's Office about the amount of interest owed would be a relevant factor in a "reasonable cause" determination. Cf. Gilmore v. United States, 443 F. Supp. 91 (D. Md. \91iy; Hessman v. Campbell, 134 F. Supp. 416 (D. Ind. 1955); Fort Flowers Found., Inc. v. Commissioner of Int. Rev., 72 T.C. 399 (1979).

IV

Conclusion

In summary, it is our opinion that the rate of interest prescribed in Chapter 615 of the Laws of Maryland 1982 should have been charged on all deferred estate tax payments due on or after July 1, 1982.

J. Joseph Curran, Jr.
Attorney General

Jack Schwartz
Chief Counsel
Opinions & Advice

1
The Maryland practice is now codified at TG §7-307.

2
After amendment, former Article 62A, §3 read as follows: "The 'Maryland estate tax' shall be payable 15 months after date of death of the 'decedent' and shall bear interest thereon at the rate determined under Section 204 of Article 81 of the Code from the due date to the date of payment." Former Article 81, §204, in turn, tied the interest rate to a rate established periodically by the Secretary of the Treasury under 26 U.S.C. §6621, but "not in excess of 1.25 percent nor less than 1 percent" per month. For the current provision, see TG §13-604.

3
"[A]pplying the new interest rate in this case to the entire time period in which interest would accrue would require a retroactive application of the statute. As noted previously, the Legislature did not indicate that the statute should be applied retroactively and so the statute requires a prospective application." 86 Md. App. at 415.