Case Title: Shaffer v. Commissioner of Revenue

Citation: 

Docket Number: SJC-12812

State: massachusetts

Court: Massachusetts Supreme Court

Date: 2020-07-10T00:00:00Z

Document:
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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, 
                     
2 Under 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. 
                     
10 In 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.