May Massachusetts Impose an Estate Tax on Out-Of-State Real Property?

William Delaney, EA
Westwood, MA

The United States Supreme Court has long held that states cannot tax out-of-state real property since doing so would violate the due process clause of the constitution.  See, for example, Union Refrigerator Transit Co. V. Kentucky, 199 U.S. 194 (11/13/1905) wherein the Court said, in syllabus, “The power of taxation is exercised upon the assumption of an equivalent rendered in the protection of the property and person of the taxpayer, and if such equivalent cannot possibly be rendered because the property taxed is wholly beyond the jurisdiction of the taxing power, the taxation thereof within the domicil(e) of the owner amounts to a taking of property without due process of law.” (emphasis added)

Now comes the Estate of Anita D. Curtis, and its personal representative, F. Davis Dassori, who argue that the Curtis estate was unlawfully taxed by Massachusetts on the value of real property located in France.  See F. Davis Dassori v. Commissioner of Revenue, Middlesex County (MA) Probate and Family Court, Docket No. M114E0042GC (6/30/2016).  During her lifetime, Anita Curtis owned real property (an apartment) located in France titled in the name of an societe civile immobiliere (referred to as the SCI).  The SCI was found to be the MA equivalent of a nominee trust (“A nominee trust is a form of ownership of real estate which is in considerable use in Massachusetts as a title-holding device” – footnote #2, page 4 of the decision).

Not long after her death, the SCI sold the property.  Anita’s heirs paid a French inheritance tax on the transaction of approximately 300,000 (pounds) or $400,000 (U.S.).  Under French law, this was a sale of real property.

The Curtis estate filed a MA estate tax return, included the value of the French property in the gross estate, and paid an estate tax of $204,218 on an estate valued at $3,465,841.  Subsequently, the estate filed an abatement request for $176,881 which represented the proportionate estate tax on the real property located in France.  The abatement was denied by the Commonwealth.  Concurrent with the abatement request, the estate also prepared and filed an amended MA estate tax return which valued the French real estate at -0- for estate tax purposes and attached a statement – “The said property should not be subject to Massachusetts estate tax.”

Dassori, as personal representative of the Curtis estate, then filed in the Middlesex County Probate and Family Court a Motion for Summary Judgment contesting the imposition of “estate taxes on real property with a situs outside the state.”

Initially, the Commonwealth responded by pointing to the pro-forma Federal Form 706 which is attached to and made part of the MA estate tax return and argued that the Internal Revenue Code as of December 31, 2000 (which is used by piggy-back states such as MA in the computation of the state tax on estates) “…taxes the entire gross estate of an American citizen wherever situated.”  “Taxes paid to foreign countries are not included on line 3 of part 2 of the M-706.”   However, the Commonwealth subsequently abandoned that argument, for reasons not provided in the memorandum of decision, by conceding that out-of-state real property is not subject to MA estate tax (thereby accepting the Plaintiff’s argument based on the due process clause of the U.S. constitution) by arguing “that Anita’s estate held an interest in intangible personal property, not real estate.”   (emphasis added) [See Discussion, page 3].

The Court looked to whether there was a genuine issue of material fact (especially the issue of personal property v. real property).  The Commonwealth offered an affidavit which consisted of the U.S. – France Estate Tax Treaty and its Protocol, including a U.S. Treasury explanation.  The Court, however, found nothing in these documents to support a finding that the French real property was actually personal property under either French or U.S. law.  “Based on this Court’s review, the Court find(s) that there is no conflict under Massachusetts or French law.  Under Massachusetts law, the Apartment within the SCI is real estate.  While the SCI that holds the Apartment is not recognized in Massachusetts, it is similar to a nominee trust, which is recognized.  Nominee trusts are used to hold legal title to real estate.”

The Court, therefore, found for the Curtis estate and allowed the abatement request in full.

What to take from this decision?  It appears that MA has conceded that out-of-state real property cannot be reached and taxed on a MA estate tax return (whether or not it is subject to tax in another state).  The Commonwealth shifted gears and argued that this was personal property (which is subject to tax) because of the SCI ownership (i.e., we can’t reach it as real property but we can reach it if it is personal property).

The Court concluded that an SCI is the mirror image of a nominee trust in MA (which is recognized as formed to hold title to real property, not personal property). How would it now be possible for the Commonwealth to reverse itself and reassert that the estate tax does reach out-of-state real property.  It has already abandoned that argument. The fact that this is a decision rendered by a single Associate Justice of the Court would not seem to be critical because it was not jammed down the Commonwealth’s throat by the Court; the Commonwealth lost on the issue of whether or not an SCI should effectively be a disregarded entity for estate tax purposes.
What to do when preparing a MA estate tax return?  The pro-forma Federal 706 will include the out-of-state property value; federal law allows taxation on worldwide income/assets.  On the MA return, I would recommend preparing a statement for Part 1, line 1 (total gross estate) to remove out-of-state real property.  Likewise, on line 2 the credit for state death taxes should be recalculated after removing out-of-state real property.  Ignore Part 2 and carry the recalculated Mass. Estate tax to Part 4, line 1.

Issue:  Should the Part 1, line 2 recalculation be based on a pro-forma federal 706 after deleting the out-of-state real property or should there be a proportionate recalculation based on a ratio.  The proportionate method favors the Commonwealth.  My preference would be the result which favors the taxpayer.

At the bottom of page 2 of the M-706, I recommend inserting this statement:

Prepared in accordance with the Dassori decision – MA Probate and Family Court,      Middlesex Division, Docket #M114E0042GC (6/30/2016).