MAINE SUPREME JUDICIAL COURT Reporter of Decisions
Decision: 2019 ME 19
Docket: Yor-18-115
Argued: November 6, 2018
Decided: January 29, 2019
Panel: SAUFLEY, C.J., and ALEXANDER, MEAD, GORMAN, JABAR, HJELM, and HUMPHREY, JJ.
ERIC V. WARNQUIST et al.
v.
STATE TAX ASSESSOR
HUMPHREY, J.
[¶1] Eric V. Warnquist and Rosamond C. Warnquist appeal from a
summary judgment entered by the Superior Court (York County, O’Neil, J.) in
favor of the State Tax Assessor (the Assessor) on the Warnquists’ appeal from
the assessment of tax on certain foreign income. See M.R. Civ. P. 80C; 5 M.R.S.
§ 11001 (2017).
[¶2] The Warnquists claim that the court misinterpreted and misapplied
36 M.R.S. § 5217-A (2017) regarding the income tax credit available to them for
income taxes paid to a foreign jurisdiction. They also challenge the court’s
determination that the penalties and interest assessed against them for the
2012 and 2013 tax years were appropriate. See 36 M.R.S. §§ 186, 187-B(7)
(2017). We affirm the court’s judgment.
2
I. BACKGROUND
[¶3] The following facts are drawn from the properly formed portions of
the parties’ statements of material facts and their stipulated exhibits. See
BCN Telecom, Inc. v. State Tax Assessor, 2016 ME 165, ¶ 3, 151 A.3d 497.
[¶4] The Warnquists are residents of Cape Neddick, Maine, and own two
rental properties in the county of Rogaland, in the country of Norway. One of
the properties is a single-family home and the other is an industrial complex.
In 2013, the home was taken by “expropriation,” the Norwegian equivalent of
eminent domain. The Warnquists paid income taxes to Rogaland on the rental
income from both properties and on the income from the expropriation—
$208,860 in 2012 and $238,374 in 2013. The Rogaland taxes were based on
the Warnquists’ gross income and did not include any deductions for expenses
related to the properties.
[¶5] On their 2012 and 2013 federal tax returns, the Warnquists
reported their Norwegian income, as well as income from interest, dividends,
and pensions sourced in Maine, and deducted from this income certain
expenses allowed by the federal tax code, including expenses associated with
the properties, to establish their federal adjusted gross income (AGI).
3
The Warnquists then imported their federal AGI to their Maine tax returns.
36 M.R.S. § 5102(1-C)(A) (2017).
[¶6] To avoid what they viewed as double taxation on the income from
the properties, 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 was based on the gross income from the
properties. For each tax year, the Warnquists used a “Worksheet for Credit for
Income Tax Paid to Other Jurisdiction,” issued by Maine Revenue Services
(MRS), to calculate the section 5217-A credit. Instructions on the worksheet
guide taxpayers through each step of the credit calculation. Because the credit
the Warnquists claimed in both years exceeded the amount of their Maine
income tax obligations, they paid no Maine income taxes.
[¶7] In 2014, the Assessor1 audited the Warnquists’ 2012 and 2013 tax
returns. The Assessor increased the Warnquists’ standard deduction for 2012,
but also determined that the Warnquists had claimed a larger credit than is
allowed under section 5127-A because they overstated the income that was
1 The Assessor is the executive director of MRS. See Leadership, Dep’t of Admin. & Fin. Servs.,
https://www1.maine.gov/dafs/about/leadership (last visited Jan. 23, 2019); see also Dep’t of Admin.
& Fin. Servs., Bureau of the Budget, Maine State Government Annual Report 2017-2018 (2018),
https://www.maine.gov/budget/sites/maine.gov.budget/files/inline-files/2018%20Annual%20Re
port_1.pdf.
4
taxed by both Rogaland and the State of Maine.2 The Assessor calculated the
portion of the Warnquists’ Rogaland income that was subject to tax in Maine
and, based on that calculation, adjusted the Warnquists’ section 5217-A credits
for both tax years and issued assessments for tax, interest, and penalties.
[¶8] After receiving notice of the recalculations, adjusted credits, and
assessments from the Assessor, together with an explanation of how to
properly calculate the section 5127-A credit,3 the Warnquists timely petitioned
the Assessor for reconsideration of its decision pursuant to 36 M.R.S. § 151(1)
(2017). The Assessor denied the petition.
[¶9] The Warnquists then appealed to the Board of Tax Appeals (the
Board). 36 M.R.S. § 151(2)(F)(1) (2017). The Board reduced the tax assessed
for 2012 by $66 because the Warnquists understated their allowable standard
deduction, but otherwise upheld the assessments in a decision dated
July 21, 2016. The Warnquists sought reconsideration of the Board’s decision;
2 In Maine, income is taxed after deductions for expenses (net income), while in Norway, income
is taxed without any deductions (gross income). See 36 M.R.S. §§ 5121, 5142 (2017).
3 This was not the first time the Assessor explained to the Warnquists how to calculate the section
5217-A credit. The Assessor imposed substantial understatement penalties on the Warnquists in
2008, 2009, 2010, and 2011 for similar section 5217-A miscalculations and issued letters explaining
how to properly assess the credits they were entitled to in these years.
5
the Board denied that request on August 18, 2016. See 4 C.M.R. 18 674 100-9
§ 305(1), (2) (2017).
[¶10] On October 18, 2016, the Warnquists filed a petition for review
pursuant to M.R. Civ. P. 80C and 5 M.R.S. § 11001 requesting that the Superior
Court grant them relief from the tax, penalties, and interest imposed against
them.4 36 M.R.S. § 151-D(10)(I) (2017). They argued that under section
5217-A, they were entitled to a credit for all of the taxes paid to Norway—even
though that credit was greater than the amount of taxes otherwise due to Maine
on that same income—and further asserted that the court should abate the
penalties and interest assessed against them pursuant to 36 M.R.S. §§ 186,
187-B(7). In response, the Assessor filed a motion for summary judgment on
September 19, 2017.
[¶11] On March 7, 2018, the Superior Court (York, O’Neil, J.) granted the
Assessor’s motion for summary judgment, upholding the tax, penalties, and
interest assessed against the Warnquists. The court held that there was no
4 Because a determination by the Assessor or the Board is not considered “an adjudicatory
proceeding within the meaning of that term in the Maine Administrative Procedure Act,” the Superior
Court reviews the assessment of taxes de novo. 36 M.R.S. §§ 151(2)(D), 151-D(10)(I)(4) (2017); see
also BCN Telecom, Inc. v. State Tax Assessor, 2016 ME 165, ¶ 2, 151 A.3d 497. “The court shall make
its own determination as to all questions of fact or law, regardless of whether the questions of fact or
law were raised before the division within the bureau making the original determination [the
Assessor] or before the board.” 36 M.R.S. § 151-D(10)(I).
6
genuine issue of material fact pursuant to M.R. Civ. P. 56(c) and interpreted
section 5217-A to limit the credit available to a taxpayer to an amount no larger
“in relation to the total amount of taxes owed than the proportion that the
taxpayer’s adjusted gross income from the foreign jurisdiction bears to the
taxpayer’s entire Maine adjusted gross income.” After noting that the
Warnquists had not been “double taxed,” the court held that the Warnquists
had failed to establish reasonable cause for a waiver or abatement of the
assessed penalties and failed to satisfy the court that they were entitled to an
abatement of the assessed interest. See 36 M.R.S. §§ 186, 187-B(7). The
Warnquists then timely appealed. See M.R. App. P. 2B(c).
II. DISCUSSION
[¶12] In considering an appeal from a summary judgment, we review
de novo whether there was no genuine issue of material fact and whether either
party was entitled to judgment as a matter of law. See M.R. Civ. P. 56(c); Blue
Yonder, LLC v. State Tax Assessor, 2011 ME 49, ¶ 7, 17 A.3d 667. Because, in an
appeal from the Maine Board of Tax Appeals, the Superior Court is authorized
to rule on legal matters de novo, see 36 M.R.S. § 151-D(10)(I), we review the
court’s interpretation of the law directly and do not defer to the interpretive
ruling of the Assessor or the Board. See Blue Yonder, 2011 ME 49, ¶¶ 6-7,
7
17 A.3d 667; see also BCN Telecom, 2016 ME 165, ¶ 2, 151 A.3d 497. On appeal,
the Warnquists challenge the Superior Court’s interpretation of 36 M.R.S.
§ 5217-A and its denial of their request to abate the penalties and interest
assessed against them.
A. Section 5217-A
[¶13] The Warnquists contend that section 5217-A permits them to
claim a credit against their Maine income tax obligation for all of the income tax
they paid to Rogaland. The Assessor argues that section 5217-A allows a credit
only for the tax the Warnquists paid to Rogaland on income that is taxed by
both Maine and Rogaland.
[¶14] We review de novo the Warnquists’ challenge to the court’s
interpretation of section 5217-A. See Sears, Roebuck & Co. v. State Tax Assessor,
2012 ME 110, ¶ 8, 52 A.3d 941. Section 5217-A provides:
A resident individual is allowed a credit against the tax
otherwise due under this Part . . . for the amount of income tax
imposed on that individual for the taxable year by . . . any political
subdivision of a foreign country that is analogous to a state of the
United States with respect to income subject to tax under this Part
that is derived from sources in that taxing jurisdiction. In
determining whether income is derived from sources in another
jurisdiction, the assessor may not employ the law of the other
jurisdiction but shall assume that a statute equivalent to section
5142 applies in that jurisdiction. The credit, for any of the specified
taxing jurisdictions, may not exceed the proportion of the tax
otherwise due under this Part, excluding the tax imposed by
8
section 5203-C, that the amount of the taxpayer’s Maine adjusted
gross income derived from sources in that taxing jurisdiction bears
to the taxpayer’s entire Maine adjusted gross income . . . .
(emphasis added).5
[¶15] “In interpreting a tax statute, we look first to its plain meaning to
give effect to the Legislature’s intent.” State Tax Assessor v. MCI Commc’s. Servs.,
2017 ME 119, ¶ 7, 164 A.3d 952. When a tax statute provides a credit, it must
be narrowly construed. Goggin v. State Tax Assessor, 2018 ME 111, ¶ 14,
191 A.3d 341; see also Foster v. State Tax Assessor, 1998 ME 205, ¶ 8,
716 A.2d 1012 (it is well settled that “taxation is the rule and tax exemption is
the exception”). The taxpayer seeking the credit “must show that it is
unmistakably within the spirit and intent of the statute.” DaimlerChrysler Servs.,
N. Am., LLC v. State Tax Assessor, 2003 ME 27, ¶ 7, 817 A.2d 862 (quotation
marks omitted); see also 36 M.R.S. § 151-D(10)(I) (“The burden of proof is on
taxpayer.”).
5
Title 36 M.R.S. § 5142, which deals with computation of taxable income of nonresident
individuals, provides in relevant part:
1. General. The Maine adjusted gross income of a nonresident individual derived
from or connected with sources in this State is the sum of the following amounts:
A. The net amount of items of income, gain, loss, and deduction entering into
the nonresident individual's federal adjusted gross income that are derived
from or connected with sources in this State . . . .
9
[¶16] Because the section 5217-A credit reduces a resident individual
taxpayer’s Maine income tax obligation, we first determine what that tax
obligation is. The process begins with an identification of the taxpayer’s Maine
taxable net income, which is the person’s reported federal AGI adjusted by any
modifications, deductions, and exemptions required or allowed under Maine
law. See 36 M.R.S. §§ 5121, 5122 (2017). The taxpayer’s Maine income tax
obligation is then calculated based on that taxable net income. 36 M.R.S. § 5121.
Next, Maine law authorizes several credits against the taxable net income,6
including a credit for income taxes paid to another jurisdiction—the credit at
issue in this case. 36 M.R.S. § 5217-A. The result of these calculations is the
individual’s Maine income tax obligation.
[¶17] Section 5217-A is complicated, but not ambiguous. The plain
language of the statute makes clear (1) who is eligible to receive the tax credit,
(2) what income forms the basis of the credit, and (3) at what amount the credit
is capped.
[¶18] A Maine resident taxpayer is eligible for a credit under section
5217-A if the taxpayer paid income tax to a qualified foreign jurisdiction for
6 “A tax credit reduces tax liability in contrast to a deduction[,] which reduces income subject to
tax.” Tax Credit, West's Tax Law Dictionary § T330, Westlaw (March 2018).
10
income “derived from sources in that taxing jurisdiction.” A qualified foreign
jurisdiction includes “a political subdivision of a foreign country that is
analogous to a state of the United States.” 36 M.R.S. § 5217-A. In this case, the
qualified foreign jurisdiction is Rogaland, Norway, as neither party disputes.
[¶19] In order to receive a credit for income tax paid to a qualified
foreign jurisdiction, the foreign income on which the tax was based must be
“subject to tax” in Maine. Section 5217-A assumes that the qualified foreign
jurisdiction calculates taxable income using AGI with a provision analogous to
36 M.R.S. § 5142.7 If a qualified foreign jurisdiction defines taxable income in
some other manner, any taxpayer seeking a credit under section 5217-A for
taxes paid to that foreign jurisdiction must recalculate his foreign income by
“adjusting” that income for any deductions or expenses provided for in Maine
law. See 36 M.R.S. § 5142. This adjustment ensures that the credit reflects taxes
paid only on the portion of the income earned in the foreign jurisdiction that
would be taxable if it had been earned in Maine. Section 5217-A does not
permit taxpayers to claim a tax credit for tax paid on income that is not subject
to taxation in the State of Maine (i.e., the expenses and deductions “removed”
7 Section 5217-A provides, “In determining whether income is derived from sources in another
jurisdiction, the assessor may not employ the law of the other jurisdiction but shall instead assume
that a statute equivalent to section 5214 applies in that jurisdiction.”
11
from the taxpayer’s gross income). In essence, taxpayers seeking tax credits for
income taxes paid to foreign jurisdictions that define taxable income as
something other than adjusted gross income must calculate their “foreign AGI”
before they can properly calculate the maximum credit available to them under
section 5217-A.
[¶20] The maximum credit allowed under section 5217-A may not
exceed “the proportion of the tax otherwise due under this Part . . . that the
amount of the taxpayer’s Maine adjusted gross income derived from sources in
that taxing jurisdiction bears to the taxpayer’s entire Maine adjusted gross
income.” The language is complicated, but the application is—for taxes—
relatively simple in practice. First, a taxpayer must calculate what percentage
of his or her total Maine AGI is derived from sources in the qualified foreign
jurisdiction. To explain how to perform the necessary calculations, MRS
provides taxpayers with a worksheet. The worksheet contains both
instructions and a box with a space for actual calculations. At line one of the
box, a taxpayer is to record his or her Maine AGI, which includes all income—
foreign and in-state—reduced by any applicable deductions and modifications
provided by Maine law. At line two, the taxpayer records the income earned in
the foreign taxing jurisdiction. The instructions accompanying the worksheet
12
make clear that, in recording the foreign income, the taxpayer must record the
foreign AGI. The instructions state that the income included in line two “must
be determined in the same way that a Maine nonresident calculates
Maine-source income” and that “[i]ncome considered taxed by another
jurisdiction is income, after deductions, that is analogous to Maine adjusted
gross income (federal adjusted gross income plus or minus income
modifications).”8
[¶21] Lines three and four of the worksheet guide taxpayers through the
calculations necessary to determine the proportional cap on the credit for
foreign income tax paid. The resulting percentage is the maximum percentage
of the taxpayer’s overall Maine tax liability that may be satisfied using a section
5217-A credit. For example, if a taxpayer’s foreign AGI represents seventy-five
percent of his total Maine AGI, he may claim a credit under this section in an
amount up to seventy-five percent of his overall Maine tax liability, and no
more. In its entirety, the worksheet reflects the complexities of section 5217-A,
but it does not contradict the statute, nor is it susceptible to multiple
interpretations.
8 Moreover, the worksheet specifically cites to section 5142.
13
[¶22] In this case, the Warnquists miscalculated their section 5217-A
credit because they failed to account for the differences in the Maine and
Rogaland tax systems. When using the worksheet, they did not record their
income from the Rogaland properties according to the definition of AGI
provided in 36 M.R.S. § 5142.9 The Warnquists’ failure to properly account for
the expenses attributable to the properties in the calculation of their foreign
AGI resulted in a credit that exceeded their Maine tax liability on the income
derived from Rogaland and effectively shielded them from tax liability on
income that was never subject to tax in Rogaland—i.e., the interest, dividends,
and pensions they received while they were Maine residents and that was
included in their Maine AGI.
[¶23] The court recognized the Warnquists’ error and correctly
concluded that section 5217-A may not be used to shield income sourced to the
State of Maine using untaxed portions of foreign revenue. Allowing the
Warnquists the benefit of the credits they claimed would result in an absurd
and illogical taxation scheme that the Legislature did not intend. See Eagle
9 As discussed above, see supra at ¶ 19, section 5217-A presumes that every foreign taxing
jurisdiction has a provision identical to section 5142 through which it calculates the taxable income
of nonresidents using the taxpayer’s AGI. Therefore, although the Warnquists are residents of Maine,
section 5142 is specifically applicable to their Norwegian income through section 5217-A. See
36 M.R.S. §§ 5142, 5217-A.
14
Rental, Inc. v. State Tax Assessor, 2013 ME 48, ¶ 11, 65 A.3d 1278. The court
properly upheld the decision limiting the credit available under section 5217-A
to the tax that otherwise would be due on the same income in Maine, calculated
after deductions for expenses. See 36 M.R.S. §§ 5142, 5217-A.
B. Abatement of Penalties and Interest
[¶24] The Warnquists also argue that the Superior Court erred by
declining to waive or abate the penalties and interest assessed against them for
the 2012 and 2013 tax years. See 36 M.R.S. §§ 186, 187-B. We disagree.
Reviewing the record before us de novo, we can identify no basis on which to
abate or reduce the penalties and interest. See Victor Bravo Aviation, LLC v.
State Tax Assessor, 2011 ME 50, ¶ 24, 17 A.3d 1237. The Warnquists have failed
to demonstrate that they relied on erroneous information provided to them by
MRS or that there is substantial authority for their alternative interpretation of
section 5217-A. See 36 M.R.S. §§ 186, 187-B; see also John Swenson Granite, Inc.
v. State Tax Assessor, 685 A.2d 425, 429 (Me. 1996). The worksheets that the
Warnquists used to calculate their taxes accurately reflected the limits of
section 5217-A by clearly defining the amount of the foreign income tax paid
15
for which taxpayers may a receive credit.10 Moreover, this is not the first time
the Warnquists miscalculated their credit under this section. They received
notice of their repeated errors and were given instructions by the Assessor
regarding the proper calculation of the credit in prior years. Therefore, the
Superior Court did not err in its decision to uphold in full the assessment of
penalties and interest against the Warnquists. See 36 M.R.S. §§ 186, 187-B(7).
The entry is:
Judgment affirmed.
Gregory J. Orso, Esq. (orally), Orso Law, P.A., York, for appellant Eric V. and
Rosamond C. Warnquist
Janet T. Mills, Attorney General, and Kimberly L. Patwardhan, Asst. Atty. Gen.
(orally), Office of the Attorney General, Augusta, for appellee State Tax Assessor
York County Superior Court docket number AP-2016-39
FOR CLERK REFERENCE ONLY
10 Specifically, the worksheets instructed taxpayers regarding the proportionality language of the
statute and clearly defined the foreign income tax paid for which a taxpayer may receive a credit. See
supra at ¶¶ 20-21.