Recent Cases:

Request for Compensatory and Punitive Damages Against Division of Taxation for Failure to Audit in a Timely Manner is Denied

Estate of Sadie Wishnick, et al. v. Division of Taxation, 2012 N.J. Super. Unpub. ____ (Docket No.: 000185-2011) (Tax Court 2012).

The Executor of the Estate filed a motion seeking to impose compensatory and punitive damages against the Division of Taxation for taking an unreasonable amount of time to determine the estate tax owed by the Estate. The Division of Taxation cross-moved for summary judgment requesting acceptance of its final notice of assessment against the Estate.

Decedent died testate on October 23, 2007. Plaintiff, Decedent’s daughter, was appointed as Executrix of the Estate. On May 19, 2008, the Executor filed a resident decedent estate tax return but failed to pay the tax. Starting in September of 2008 and continuing through 2010, several letters of inquiry were sent to Decedent’s son requesting additional information. The initial letters went unanswered.

The Executor then hired counsel, made a payment on account of taxes, but failed to provide the additional information.

Adjustments were made, and a notice of assessment was mailed in September of 2010 to the Executor. The Notice of Assessment was amended a few more times with the final notice of Assessment being mailed on November 16, 2010. The tax was paid, penalties and interest were assessed, and also paid.

Plaintiff, as Executor, then filed a Complaint seeking to impose compensatory and punitive damages against the Division of Taxation claiming the Estate was “penalized and taxed in an excessive manner” and that the Division employees “took their sweet time in coming to a settlement.” Plaintiff admitted that she was not challenging the actual assessment made, rather she was contesting the length of time it took to complete the audit.

On October 6, 2011 Plaintiff moved for summary judgment, and the Division cross-moved for summary judgment and dismissal of the Complaint.

Under the applicable statute, the Division is given a period of four years after the filing of the initial return to review the tax returns and assess additional tax, interest and penalties. In this case, the return was filed on May 19, 2008, and the final Notice of Assessment was issued on November 16, 2010, well within the four year period for making additional assessments. In light of the statute, and the fact that the Estate accepted the final assessment issued by the Division, the Division’s motion for summary judgment was granted and Plaintiff’s Complaint dismissed with prejudice.

Retroactive Application of New Jersey Estate Tax Held Constitutional Where Decedent Did Not Rely on Previous Statute in Drafting Estate Plan

Estate of Stanley Kosakowski v. Director, Division of Taxation, 2012 N.J. Super. Unpub. ____ (Docket No.: A-4499-10T2) (App. Div. 2012). On appeal from the Tax Court of New Jersey. Before Judges Payne, Simonelli and Accurso.

The Estate appeals from the Tax Court’s grant of summary judgment in favor of the Division of Taxation which upheld the retroactive application of the provisions of the New Jersey Estate Tax to this Estate because Decedent did not rely, to his detriment, on prior existing law in drafting his estate plan.

Decedent died on March 22, 2002. On April 3, 2002, Decedent’s Will was admitted to probate. The Will, executed on May 24, 1997, was a simple will and contained no devices to avoid estate taxes. His taxable estate was valued at $5,394,851, with $438,182 in New Jersey Estate tax, which was paid on December 23, 2002.

Significant legislative changes effected the amount of NJ estate taxes due from the Estate. In 2001, Congress raised the federal exclusion amount, with NJ subsequently decoupling the NJ estate tax from these increases in July of 2002. The NJ law was given retroactive effect to January 1, 2002, thereby causing the Decedent’s Estate additional taxes.

Successful challenges to the retroactive application of the NJ estate tax were made by other Estates wherein the Decedents had engaged in tax planning in reliance on state and federal law which had existed on January 1, 2002. These individuals died during the period of January 1, 2002 and July 1, 2002 and their estates were adversely effected by the retroactive application of the decoupling of the NJ estate tax. In those cases, the Tax Court held that retroactive application to these estates, although constitutional, would effect a manifest injustice. Summary judgment was therefore granted in favor of the Estate in those actions. These decisions were reversed on appeal to the Appellate Division, and reinstated by the Supreme Court, which held that the doctrine of manifest injustice offers an equitable remedy in the circumstances presented and determined that the Estates’ interest in preserving Decedents’ careful plans to legally avoid estate taxes outweighed the public’s interest in preserving tax revenues.

In this case, Decedent Kosakowski did not engage in any tax planning and could not demonstrate reliance on the prior state of the law to support an equitable claim for relief premised on manifest injustice, and therefore the Tax Court’s denial of the Estate’s claim for refund was proper under the circumstances.

NJ Inheritance

Estate of Alvina Taylor v. Division of Taxation, 2011 N.J. Super. Unpub. ____ (Docket No.: A-3501-09T3) (App. Div. 2011).  On appeal from the Tax Court of New Jersey.  Before Judges A. A. Rodriguez, C.L. Miniman and LeWinn.

The estate appeals from the trial court’s grant of summary judgment in favor of the Division of Taxation dismissing the estate’s request for a refund of inheritance taxes.

Decedent died on 11/30/02 leaving a gross estate of $675,000.  The inheritance tax return was due no later than 7/31/03.  Eight days after the deadline passed, the estate made a $75,000 estimated payment of inheritance taxes and filed form IT-EP (1995).  This form stated that the amount remitted “was an estimated payment to be applied” towards the inheritance tax, and stated that “any overpayment will be refunded after determination of the actual liability.”  On 12/3/03, the estate paid an additional $75,000 on account along with form IT-EP (1999).  This revised form did not contain the refund language. 

On 8/6/04, the Division of Taxation requested the overdue inheritance tax return.  The estate failed to file.  The Division then made an arbitrary assessment of $300,000, and demanded the balance of $250,000.  The Division agrees that this amount is incorrect as it did not include the $75,000 paid by the estate in 12/03.  The Notice of Assessment only reflected a payment of the initial $75,000.  The estate took no action at the time.  After the time for appeal expired, the Division filed a certificate of debt from $239,000.

Five years after the return was due the estate finally filed the inheritance tax return showing a total tax of $108,092.  According to the return, this left a balance of $49,873 which was paid with the return.

On 1/1/09 the Division issued a Notice of Assessment with respect to the return, accepting the reported amounts and determining the estate was due a refund of $90,000.  However, when the estate requested the refund, the Division denied the request because “the application for refund was made more than three years from the date that the tax was paid.”  The statute requires all requests for refunds to be made within three years of payment of the tax.

The estate appealed claiming that the judge erred in failing to preclude the Division under the Square Corners Doctrine from asserting the Statute of Limitations in light of the language in Form IT-EP (1995) which stated that an overpayment would be refunded.  The Appellate Division cited the fact that the statute pertaining to refund claims have been in existence for 55 years, and that the estate was not misled or confused by the language in Form IT-EP (1995).  The Square Corners Doctrine does not apply, and a claim for refund was required to be made within three years of payment.  Affirmed.

NJ Estate Tax Refund

Estate of Frank J. Ehringer v. Director, Division of Taxation, 990 A.2d 678, 2010 N.J. Super. LEXIS 41 (App. Div. 2010).  On appeal from the Tax Court of New Jersey.  Before Judges Reisner, Yannotti and Chambers.

This matter involved an appeal of a decision by the Division of Taxation to deny a claim for refund by the estate which was made over three years after payment and beyond the statue of limitations of N.J.S.A. 54:38-3?

Factually, the Division extended the time to file the estate’s tax returns for four months.  Although the estate timely paid the anticipated estate taxes, it was unable to file a return as it was involved in ongoing litigation.  The taxpayer estate notified the Division of the litigation in writing of this issue.

Two years later, the estate tax return was prepared and filed.  A Notice of Assessment was issued detailing a refund due the estate, which was paid.  Two years later, the estate received a final closing letter from the IRS on the filing of its federal estate tax return, detailing a further reduction in the gross estate due to ongoing litigation costs incurred by the estate. 

Upon receiving the IRS closing letter, the estate sought a refund from the Division of Taxation.  The claim for refund was denied as it was made more than 3 years after the State of New Jersey issued its Notice of Assessment.

The taxpayer appealed and the Division’s analysis was upheld by the Tax Court, and affirmed on appeal.  The Court held that although the statute of limitations for refund claims may be equitably tolled based on factors outside of the estate’s control, the within facts were not sufficient to toll the statute.

NJ Inheritance Taxes – Request for Refund

Estate of Alvina Taylor v. Director, Division of Taxation, 2010 N.J. Tax. LEXIS 2 (Tax Ct. 2010).  Before the New Jersey Tax Court, Judge Narayanan.

Taxpayer appeals the decision by the Division of Taxation denying a refund claim of inheritance taxes that was made more than 3 years after payment of the tax proper.

Decedent died on 11/30/02.  The NJ inheritance tax return was due on 7/31/03.  On 8/7/03 a $75,000 estimated payment of inheritance taxes was made by the estate.  This payment was accompanied by Form IT-EP.  On 12/3/03, an additional estimated inheritance tax payment of $75,000 was made.  This was also accompanied by Form IT-EP.

In 2004, the Division sent notices requesting the filing of a return.  Having received none, the Division made an arbitrary assessment of $300,000 on 8/6/04.  The estate did not appeal the arbitrary assessment.

The estate filed the return on 8/19/08, over 5 years after it was due, reporting a total tax due of $109,092, with a balance due of $49,873, which was paid with the return.  No evidence was provided that extensions were sought to file the return beyond 7/31/03.

On 1/1/09, the Division issued a Notice of Assessment with respect to the return, accepting the return as filed and indicating a refund due of $90,411.  ($199,873 (total tax paid) less (108,062) (amount reported as due)).  The Division refunded an amount of $49,873 but denied refunding the balance ($40,538.10), because the application for refund involving that amount was made more than 3 years from the date the tax was paid.  

The estate argued that the statute does not apply to estimated payments.  The court disagreed, and upheld the Division’s denial of the refund request as an application must be made within 3 years of payment of the tax.  In refusing to apply an equitable tolling of the statute, the Court noted that the estate gave no indication that any refund would be requested.

Taxation –Homestead Rebate

Estate of OliveM.Hornich v. New Jersey Division of Taxation, 2010 N.J. Super. Unpub. (Docket No. A-1350-08T1) (App. Div. 2010).  On appeal from the Tax Court of New Jersey.  Before Judges Wefing, Messano and LeWinn.

The Estate appealed the Division of Taxation’s denial of the Homestead Rebate.The homestead rebate is sought for 2005.  Decedent died in February of 2006 owning a home in Piscataway, New Jersey.

A homestead rebate application was mailed by the Division to Decedent’s last known address.  Decedent’s executor was appointed in March of 2006 and claimed to have called the Division on 3 separate occasions to file the application by phone.  The Division had no record of any application having been filed, and denied the rebate for 2005.  The tax court agreed; and its decision was upheld on appeal.  There is no evidence that the Division did not comply with its procedures.

Estate Taxes – NJ – Request for Refund

Estate of Frank J. Ehringer v. Director, Division of Taxation, 24 N.J. Tax 599 (Tax Ct. 2009).  Before Judge Patrick DeAlmeida, J.T.C.

Issue:    Was the estate’s request for a refund of estate taxes timely in light of the fact that it was not made until after the conclusion of a Will contest and after the expiration of the three year statute of limitations governing such requests?

Holding:  No.  The Court upheld the Division’s ruling denying the refund request as it was made more than three years from the date that the tax was paid and no protective claim was made.  N.J.A.C. 18:26-3.9(a).

Statutes of limitations in tax statutes are strictly construed in order to provide finality and predictability of revenue to state and local government, and this strict application of the limitations period applies to claims for the refund of tax.

In this matter, an estimated payment of New Jersey estate taxes was made nine months after the Decedent’s death.  A refund request was made after final federal audit of the federal estate tax return, which was over three years since the payment of New Jersey estate taxes.  The Estate claimed that it could not determine with certainty the amount of the expenses that would be permitted by the IRS until after the conclusion of the Will contest and final audit by the IRS.  The Court refused to set aside the Division’s denial of the refund request based on these facts.  Refund claims are frequently filed dependent on future events such as the result of future federal audits or the results of litigation.  A protective claim should have been filed to toll the statute of limitations since the facts were still in flux.  No protective claim was filed, and the three year statute of limitations had run.  The Division therefore properly denied the refund request.

The refund request was made as the result of the conclusion of the federal estate tax audit on the Estate allowing additional expenses.  However, it was not made within the three year statute of limitations and was therefore properly denied by the Division. 

Estate Taxes – NJ – Retroactive Application

Estate of Stella Kosakowski v. Director, Division of Taxation, 2009 N.J. Super. Unpub. LEXIS 3003 (Docket No.: A-2400-08T2) (App. Div. 2009).  Before Judges Parrillo and Lihotz.

Issue:  Is the retroactive application of the New Jersey estate tax to Decedent’s dying during the retroactivity period manifestly unjust?

Holding:  No, the Tax Court’s dismissal of Plaintiff’s Complaint was upheld and the Court found that the imposition of New Jersey estate taxes based on a decoupling from federal law to Decedent’s dying during the retroactivity period was proper.

Decedent died on 2/9/02 leaving her entire estate of approximately $1,750,000 to her husband, if then surviving, otherwise, to her daughter.  Decedent’s husband died 45 days after the Decedent.  The executor of Decedent’s husband’s estate disclaimed $1,000,000 of Decedent’s estate, and Decedent’s daughter, the remainder beneficiary, disclaimed $1,000,000 in the same assets, thereby passing same to her children. An estate tax was paid to New Jersey on Decedent’s Estate based on the newly enacted NJ estate tax statute which decoupled the federal exemption for measuring the taxable estate from the ever increasing federal exemption.  The New Jersey decoupling statute was retroactively applied.  Decedent died during the retroactivity period.

Two years later, a request for a refund was filed based on the Oberhand case.  In Oberhand, which was upheld by the Supreme Court, the Tax Court found that plaintiff’s reasonable reliance on the prior law when preparing her estate plan outweighed the public’s interest in maintaining revenue from the retroactive application of amendments to the estate tax, such that application would be manifestly unjust.

In this matter, the Court upheld the retroactive application of the decoupling of the New Jersey estate tax from federal law to this estate, finding that Decedent did not engage in any estate planning that was controlled by the existing estate tax law, as was present in the Oberland case.  In this matter, the executor of Decedent’s husband’s estate had the knowledge of the existence of the New Jersey estate tax and instead of disclaiming an amount that actually triggered the tax, the executor could have engaged in tax planning, which did not occur.  Retroactive application was therefore upheld. 

Estate Taxes – NJ – Standing

Joanne LaBarbera,, an Aggrieved Person as beneficiary of the Santo LaBarbera QTIP Trust v. Director, Division of Taxation, 24 N.J. Tax 377 (Tax Ct. 2009).  Before Judge Patrick DeAlmeida, J.T.C.

Issue:  Does a residuary beneficiary of a Qualified Terminable Interest Property (“QTIP) Trust have standing to maintain a challenge against the Division of Taxation’s estate tax assessment against the estate of her stepmother, the income beneficiary of the QTIP Trust, in light of the required reimbursement from the Trust to the stepmother’s estate for payment of New Jersey estate taxes?

Holding:  Yes, Plaintiff, as residuary beneficiary of the QTIP Trust has a sufficient stake in the outcome of this matter as a “person…liable for the payment of” a portion of the estate tax (N.J.S.A. 54:38-10a) to maintain a challenge against the Division of Taxation’s estate tax assessment against the estate of her stepmother.