By: Kayla Hoffmaster   

The Supreme Court of Maryland held that when courts review the Maryland Tax Court’s alleged error of law, the courts should defer to the Comptroller’s statutory interpretation when the interpretation deals with an area the Comptroller regularly addresses.  Comptroller of Md. v. FC-GEN Operations Inv., LLC, 482 Md. 343, 379, 287 A.3d. 271, 292(2022). Here, the court reviewed the Maryland Comptroller’s statutory interpretation of tax law and ruled that pass-through entities may receive refunds for erroneous tax payments.  Id.

FC-GEN Operations Investments (“FC-GEN”) is a limited liability company incorporated in Delaware.  As an out-of-state company with subsidiaries that provide services in Maryland, FC-GEN qualifies as a “pass-through entity” under state tax law.  A pass-through entity is a business enterprise not independently subject to taxation since it consists of shareholders, partners, and other members who may live in-state or out-of-state.  Thus, income, losses, deductions, and credits from a pass-through entity flow through its members, who are then subject to taxation on that income.  Taxes that flow through a pass-through entity’s members qualify as taxes paid on behalf of non-resident members.

In 2012, FC-GEN paid taxes based on its projected yearly income.  While preparing its annual tax return, FC-GEN calculated a $598,131 annual loss and subsequently applied for a refund of this amount by submitting a Composite Return.  Pursuant to the Comptroller of Maryland’s (“Comptroller”) regulations, Composite Returns allow business entities to submit income tax returns on behalf of themselves and any non-resident members who do not receive other forms of income in Maryland.  Out of the 2012 tax year’s twenty-eight FC-GEN members, two non-resident individuals informed FC-GEN that they were eligible for inclusion on the Composite Return.

After including the two non-resident members on the Composite Return and timely filing, FC-GEN still had not received a refund, and contacted the Comptroller of Maryland for an update.  The Comptroller informed FC-GEN that its refund was in process and scheduled for payment.  After several years of back and forth, in 2017, the Comptroller denied FC-GEN’s refund request and claimed that the statute of limitations for FC-GEN’s refund had expired.  FC-GEN appealed this decision to the Comptroller’s Office of Hearing and Appeals.

At the hearing, the Comptroller abandoned its statute of limitations argument and instead claimed that the Office should deny FC-GEN’s refund because two non-resident FC-GEN members were ineligible despite FC-GEN’s timely Composite Return.  Here, the Comptroller claimed that FC-GEN’s Composite Return should not have included its two non-resident members because the non-residents received alternate sources of Maryland income.  In a Notice of Final Determination, the Office denied FC-GEN’s refund request and deemed FC-GEN’s Composite Return regulatorily improper.

After the hearing, FC-GEN appealed to the Maryland Tax Court.  Ruling in FC-GEN’s favor, the Tax Court ordered the Comptroller to refund FC-GEN due to FC-GEN’s compliance with applicable tax law in its original refund request.  The Comptroller then petitioned for judicial review to the Circuit Court for Anne Arundel County.  The Circuit Court affirmed the Tax Court’s order.

Subsequently, the Comptroller appealed to the Appellate Court of Maryland, which considered deferring to the Tax Court’s interpretation of regulations and factual findings as necessary.  As a result, the Appellate Court upheld the Tax Court’s decision that FC-GEN appropriately filed the Composite Return according to regulations.  The Comptroller then petitioned the Supreme Court of Maryland for a writ of certiorari, specifically to address questions of agency deference, the Tax Court’s role in addressing alleged errors of law, and FC-GEN’s statutory entitlement to a refund for erroneous taxes paid in 2012.

In addressing administrative deference, the court noted that Maryland applies either “no deference” or “some deference” to the state agency.  Comptroller, 482 Md. at 360, 287 A.3d. at 281.  The court explained that Maryland utilizes a ‘sliding-scale approach’ in contrast with a highly deferential standard like the Chevron doctrine.  Id. at 362, 287 A.3d. at 282.  Maryland, instead, gives weight to agency interpretation only in matters that the agency frequently handles.  Id.  In considering circumstantial factors, the sliding-scale standard led the court to give more weight to an agency’s interpretation “when (1) the interpretation resulted from a process of ‘reasoned elaboration’ by the agency;” (2) the agency “applied the interpretation consistently over time;” or (3) “adversarial proceedings or formal rule making” produced the agency’s statutory interpretation.  Id. at 363, 287 A.3d. at 283.

Under Maryland’s approach, the court held that, in questions of interpretation and application of tax law, reviewing courts owe deference to the Comptroller.  Comptroller, 482 Md. at 364, 287 A.3d at 283.  In support of its holding, the court reviewed the legislative power granted to the Comptroller and Tax Court, the functions of both agencies, and Maryland case law addressing tax issues and agency deference.  Id. at 365-68, 287 A.3d at 284-86.  While analyzing the role of the Tax Court, the court noted that Maryland courts apply the substantial evidence standard during judicial review.  Id. at 359, 287 A.3d at 280.  The substantial evidence standard assesses whether a rational mind could reasonably arrive at the same factual conclusions as the agency.  Id.  Under this test, the reviewing court grants deference to an agency’s fact-finding, inferences, and the agency’s application of law to facts.  Comptroller, 482 Md. at 364, 287 A.3d at 283.  The court also highlighted that the Maryland Constitution does not grant the General Assembly the authority to create new judicial powers.  Id. at 368-69, 287 A.3d at 286-87.  Thus, the Tax Court functions as a quasi-judicial agency limited to addressing matters prescribed by the General Assembly, including determinations of factual disputes.  Id. at 377-78, 287 A.3d at 291-92.

Conversely, the court referred to the Maryland Constitution and statutory language to show that the General Assembly entrusted the Comptroller to adopt reasonable regulations and administer tax laws.  Comptroller, 482 Md. at 366, 287 A.3d at 284.  Still, the court stressed that the court retains the ability to undermine the Comptroller’s authority should the Comptroller present unreasonable statutory interpretations or enact unreasonable administrative regulations.  Id. at 380-81, 287 A.3d. at 293-94.

After establishing the Comptroller’s administrative authority and the judicial branch’s exclusive role in review of de novo matters, the court addressed FC-GEN’s legal entitlement to a refund for the erroneous taxes it paid in 2012.  Comptroller, 482 Md. at 379, 287 A.3d at 292.  In ruling in favor of FC-GEN, the court disagreed with the Comptroller’s interpretation of Maryland tax law, as the Comptroller based its argument on its own unreasonable regulations to assert FC-GEN as an improper claimant.  Id.  Additionally, the court noted that the Comptroller made its argument without consulting the state’s refund provision.  Id. at 388-89, 287 A.3d. at 297-98 (citing Md. Code. Ann., Tax-Gen. § 13-901(a)(1) (West 1988)).

The Supreme Court of Maryland first found that the Comptroller’s analysis forced entities with losses to distribute refunds to members without distributable cash flow, contradicting the statutory tax law’s intent.  Comptroller, 482 Md. at 392-93, 287 A.3d. at 300.  The Court also ruled that the term “claimant” had no clear-cut statutory definition.  Id. at 393, 287 A.3d at 301.  Using the legislative history of § 13-901 as support for a broad definition, the court ruled that “claimant” refers to the “one” who filed taxes and is “therefore entitled to file a claim for a refund under the plain language of § 13-901.”  Id. at 390-91, 287 A.3d at 299-300 (citing Md. Code. Ann., Tax-Gen. § 13-901).  As the entity that filed taxes, the court ultimately affirmed FC-GEN’s right to its $598,131 refund erroneous 2012 tax payments.  Id. at 394, 287 A.3d. at 301.  Judge Friedman’s prior concurring opinion provided a historical perspective on this matter, pointing out that the Maryland General Assembly and Maryland Judiciary had historically delegated to the Comptroller’s interpretation of tax statutes it administered.  Id. At 356, 287 A.3d. at 278-79 (citing Comptroller of Md. V. FC-Gen Operations Investments, LLC, 2022 WL 325940, at *7 (Md. App. Ct, Feb. 3, 2022) (Friedman, J., concurring)).

The Supreme Court of Maryland’s decision in Comptroller marks a significant departure from a trend in recent Maryland case law, which predominantly supported statutory deference to the Tax Court rather than the Comptroller.  The Comptroller decision carries important implications for attorneys even if their primary practice area does not relate to tax law.  This implication is particularly pertinent as both federal and state judiciaries reevaluate the extent of deference they afford to administrative agencies and their duties.

Kayla Hoffmaster is a second-year student at the University of Baltimore School of Law and serves as a first-year staff editor for the Law Forum. She graduated from Youngstown State University with a Bachelor’s degree in Political Science and a Master’s degree in Criminal Justice and Criminology. After graduation, Kayla plans to pursue a career in employment and labor law.