Eric v. Warnquist v. State Tax Assessor
201 A.3d 602, 2019 ME 19 (2019)
Rule of Law:
A resident individual's income tax credit for taxes paid to a foreign jurisdiction is limited to the portion of Maine tax otherwise due that is proportional to the taxpayer's Maine adjusted gross income derived from foreign sources, meaning income after Maine-allowed deductions, and penalties for miscalculation will not be abated without reasonable cause such as reliance on erroneous information or substantial authority for an alternative interpretation.
Facts:
- Eric V. Warnquist and Rosamond C. Warnquist (the Warnquists) are residents of Cape Neddick, Maine.
- The Warnquists own two rental properties, a single-family home and an industrial complex, in the county of Rogaland, Norway.
- In 2013, the single-family home in Norway was taken by "expropriation," Norway's equivalent of eminent domain.
- The Warnquists paid income taxes to Rogaland on the gross rental income from both properties and on the income from the expropriation, totaling $208,860 in 2012 and $238,374 in 2013, with these taxes based on gross income without any deductions for expenses related to the properties.
- On their 2012 and 2013 federal tax returns, the Warnquists reported their Norwegian income, along with Maine-sourced income, and deducted certain expenses allowed by federal tax code, including those associated with the properties, to establish their federal adjusted gross income (AGI), which they then imported to their Maine tax returns.
- The Warnquists claimed a tax credit on their 2012 and 2013 Maine returns, pursuant to 36 M.R.S. § 5217-A, for the full amount of the income taxes they paid to Rogaland, which resulted in them paying no Maine income taxes because the claimed credit exceeded their Maine income tax obligations.
Procedural Posture:
- The State Tax Assessor (Assessor) audited the Warnquists' 2012 and 2013 tax returns, determined they claimed an excessive credit under § 5217-A, recalculated their credits, and issued assessments for tax, interest, and penalties.
- The Warnquists timely petitioned the Assessor for reconsideration of its decision, which the Assessor denied.
- The Warnquists then appealed the Assessor's decision to the Board of Tax Appeals (Board).
- The Board reduced the tax assessed for 2012 by $66 due to an understatement of the Warnquists' allowable standard deduction, but otherwise upheld the assessments.
- The Warnquists sought reconsideration of the Board's decision, which the Board denied.
- The Warnquists filed a petition for review in the Superior Court (York County), seeking relief from the assessed tax, penalties, and interest.
- The State Tax Assessor filed a motion for summary judgment.
- The Superior Court granted the Assessor's motion for summary judgment, upholding the tax, penalties, and interest assessed against the Warnquists.
- The Warnquists then timely appealed the Superior Court's judgment to the Maine Supreme Judicial Court (appellants).
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Issue:
1. Does 36 M.R.S. § 5217-A allow a Maine resident individual to claim a tax credit for the full amount of income tax paid to a foreign jurisdiction, even if that credit exceeds the amount of Maine tax due on the foreign income calculated after deductions, or is the credit limited to taxes paid on income "subject to tax" in Maine, meaning income after Maine-allowed deductions? 2. Did the Superior Court err in declining to abate penalties and interest assessed against the Warnquists for their miscalculation of the foreign tax credit under 36 M.R.S. §§ 186, 187-B(7)?
Opinions:
Majority - Humphrey, J.
Yes, 36 M.R.S. § 5217-A limits a Maine resident individual's income tax credit for taxes paid to a foreign jurisdiction to the portion of Maine tax otherwise due that is proportional to the taxpayer's Maine adjusted gross income derived from foreign sources, meaning income after Maine-allowed deductions. No, the Superior Court did not err in declining to abate penalties and interest assessed against the Warnquists. The court affirmed the Superior Court's interpretation of § 5217-A, reasoning that tax credit statutes must be narrowly construed to give effect to legislative intent. The plain language of § 5217-A, particularly the phrases "income subject to tax under this Part" and the proportionality cap, requires taxpayers to calculate their foreign income using Maine's adjusted gross income (AGI) methodology (which includes deductions, analogous to 36 M.R.S. § 5142), rather than the foreign jurisdiction's gross income taxation. The statute presumes that the foreign jurisdiction defines taxable income in a manner analogous to Maine's AGI, and if the foreign jurisdiction defines taxable income differently, the taxpayer seeking a credit must recalculate their foreign income by adjusting it for any deductions or expenses provided for under Maine law. This adjustment ensures the credit reflects taxes paid only on the portion of foreign income that would be taxable if earned in Maine, preventing foreign tax credits from shielding Maine-sourced income that was never taxed by the foreign jurisdiction. The court concluded that allowing the Warnquists' claimed credits, which were based on gross foreign income and exceeded their Maine tax liability, would result in an "absurd and illogical taxation scheme" unintended by the Legislature. Regarding penalties and interest, the court found no basis for abatement because the Warnquists failed to demonstrate reliance on erroneous information provided by Maine Revenue Services (MRS) or that there was substantial authority for their alternative interpretation. The court noted that MRS worksheets accurately reflected the statute's limits, and the Warnquists had received prior notices and instructions regarding similar miscalculations in previous tax years.
Analysis:
This case clarifies the stringent interpretation of tax credit statutes, emphasizing that such credits are intended to prevent genuine double taxation on the same taxable income as defined by the domestic jurisdiction's (Maine's) tax principles, not to broadly reduce domestic tax liability using foreign tax treatment. The ruling establishes a precedent for how Maine residents with foreign income must calculate their foreign tax credits, mandating the use of Maine's adjusted gross income methodology for foreign-sourced income, irrespective of the foreign jurisdiction's gross income taxation approach. This case also reinforces the high burden on taxpayers to demonstrate reasonable cause for the abatement of penalties and interest, particularly when clear guidance exists, and the taxpayer has a history of similar errors. This ensures consistency in tax enforcement and discourages repeated misinterpretations of complex tax provisions.
