Estate of Lillian Garris Booth v. Director, Division of Taxation

NOT FOR PUBLICATION WITHOUT APPROVAL OF

THE TAX COURT COMMITTEE ON OPINIONS

TAX COURT OF NEW JERSEY

Mala Sundar R.J. Hughes Justice Complex

JUDGE P.O. Box 975

25 Market Street

Trenton, New Jersey 08625

Telephone (609) 943-4761

TeleFax: (609) 984-0805

taxcourttrenton2@judiciary.state.nj.us

April 15, 2014

BY ELECTRONIC MAIL

Angela C. Titus McEwan, Esq.

Archer & Greiner, P.C.

One Centennial Square, P.O. Box 1000

Haddonfield, New Jersey 08033-2121

Heather Lynn Anderson

Deputy Attorney General

RJ Hughes Justice Complex, P.O. Box 106

Trenton, New Jersey 08625

Re: Estate of Lillian Garris Booth v. Director, Division of Taxation

Dkt No. 015173-2012

Dear Counsel:

This letter constitutes the court s opinion as to the defendant s motion for reconsideration and plaintiff s motion for attorney fees. For the reasons stated below, both motions are denied.

By its opinion dated February 11, 2014, this court concluded that Defendant ( Taxation ) had properly disregarded the federally allowed marital deduction of $9.9 million in the computation of plaintiff s New Jersey estate tax liability, but had incorrectly denied deduction of a portion of the executors commissions by applying an inheritance tax regulation which limited the same to real property actually sold when neither federal law nor New Jersey law governing administration of decedents estates provided such limitation. The court did not rule on Taxation s administratively disallowed maintenance expenses of real property located at Duck Pond Road ( Duck Pond ) because Taxation had decided not to pursue this issue in this litigation (but without conceding or making any admissions that the disallowance was legally improper or incorrect). The opinion also noted that Plaintiff ( Estate ) reserved its right to move for attorney fees, including, as to the Duck Pond maintenance expenses.

(A) Reconsideration

Taxation argues that precedent, which is controlling upon this court, has held that N.J.A.C. 18:26-7.10(d) governing the allowance of executors commissions was a valid exercise of Taxation s authority and a reasonable interpretation of the taxing statute. Taxation maintains that this court s ruling has expressly or impliedly invalidated the regulation in contravention of controlling precedent therefore it should reconsider its opinion in this regard.

A motion for reconsideration is governed by R. 4:49-2. See also R. 8:10 (R. 4:49-2 applies to the Tax Court matters). That rule requires such motion be served not later than 20 days after service of the judgment or order, and state with specificity the basis on which it is made, including a statement of the matters or controlling decisions which counsel believes the court has overlooked or as to which it has erred. Ibid.

A reconsideration motion will be granted only for those cases which fall into that narrow corridor in which either the Court has expressed its decision based upon a palpably incorrect or irrational basis, or it is obvious that the Court either did not consider, or failed to appreciate the significance of probative, competent evidence . . . . D Atria v. D Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990). The movant must initially show that the trial court acted in an arbitrary, capricious, or unreasonable manner, before the Court should engage in the actual reconsideration process. Ibid.

Taxation s timely motion contends this court ignored the controlling decisions of In re Estate of Talakowitsh, 127 N.J. Super. 290 (App. Div. 1974) and In re Estate of Widenmeyer, 70 N.J. 458 (1976), which expressly upheld the validity of N.J.A.C. 18:26-7.10(d).

The court is not persuaded. Those cases dealt with inheritance tax assessments. In Talakowitsh, the court held:

This is an inheritance tax case. The executrix is the sole beneficiary of the estate. There is but one question: what are ordinary fees which under N.J.S.A. 54:34-5(c) may be deducted for inheritance tax purposes? The Director s regulation determines what such ordinary fees are. We hold that the promulgation of N.J.A.C. 18:26-7.10 is a reasonable regulation to prevent evasion of taxes on the value of property which the executrix inherited and was well within the authority of the Director to promulgate.

[127 N.J. Super. at 293] (emphasis added)

In Widenmeyer the Court noted that the narrow issue before it was the validity of N.J.A.C. 18:26-7.10(d), the regulation concerning the deductibility of executors or administrators commissions under the Transfer Inheritance Tax Act, in the absence of a judicial determination as to the amount of commissions to be allowed. 70 N.J. at 460 (emphasis added). The Court reasoned that upon the donor s death, title to real property specifically devised goes directly to the devisee, thus, an executor has no power or right therein. Id. at 461. Therefore, Taxation s exclusionary provision in N.J.A.C. 18:26-7.10(d)(1) was proper.1 However, when such property is sold to satisfy the estate s debts, then it comes into the executor s hands as contemplated by the probate law, and thus, the regulation s exception to the exclusion was also correct. 70 N.J. at 462.

Taxation agrees that the inheritance tax is a separate and distinct tax from the New Jersey estate tax. The New Jersey estate tax is imposed in addition to the inheritance tax. N.J.A.C. 18:26-3 A. 1 (estate tax is imposed in addition to the inheritance tax ). The incidence of each tax is distinct. See Gould v. Director, Div. of Taxation, 2 N.J. Tax 316, 319-320 (Tax 1981) (inheritance tax is imposed upon the rightof succession to . . . property transferred by a decedent . . . . The tax is levied upon the transferee, and the amount thereof depends upon the value of the property transferred and the transferee s relationship to decedent ); N.J.S.A. 54:38-1(a) (estate tax is imposed upon the transfer of the estate of a resident decedent, which estate is also subject to the federal estate tax as of December 31, 2001). The estate tax is computed with reference to the amount of the federally allowed state death tax credit (which is computed after allowance of estate s allowable expenses). Ibid. The inheritance tax however is computed independently of the federal estate tax scheme, and thus, provides for its own exemptions and deductions. See N.J.S.A. 54:34-4 et seq.; 54:34-5 et seq.

The instant case addresses only the validity of Taxation s estate tax assessment. Thus, it does not implicate or require the application of N.J.A.C. 18:26-7.10(d). Indeed, the Estate conceded that it was not challenging any aspect of Taxation s inheritance tax assessment. Consequently, the court did not need to apply the above higher court cases. Therefore, this court did not arbitrarily disregard or unreasonably misapply controlling law.2

Taxation argues that regardless, N.J.A.C. 18:26-7.10 applies to either or both the estate and the inheritance tax. It notes that this is a reasonable conclusion because (i) nowhere in the body of N.J.A.C. 18:26-7.10 is there any indication that the regulation applies only to inheritance tax; (ii) the regulation s heading addresses both taxes; (iii) if Taxation intended for a regulation to apply only to one or the other tax, it stated so specifically in the body of the regulation. For instance, N.J.A.C. 18:26-3 A. 1 states that an estate tax is imposed . . . whereas N.J.A.C. 18:26-5.1 states that certain transfers are subject to the transfer inheritance tax. Since the body of N.J.A.C. 18:26-7.10 does not reference either tax, Taxation argues that it applies to either tax.

These arguments are also unpersuasive. Each tax is dealt with in a separate chapter of Title 54 (Taxation). While Subtitle 5 under of Title 54 is titled Transfer Inheritance and Estate Taxes, Part 1 of the same (Chapters 33 to 37) contains only inheritance tax provisions. Part 2 (Chapter 38) addresses only estate tax provisions. Part 3 (Chapter 38A, Compromises ) addresses both inheritance and estate tax.

Taxation s regulations also follow the statutory scheme. Title 18 contains regulations addressing Taxation. Chapter 26 of the Title deals Transfer Inheritance and Estate Tax. However, Subchapter 2 of Chapter 26 contains provisions dealing only with the inheritance tax (the body of N.J.A.C. 18:26-2.1, Nature of tax referencing N.J.S.A. 54:34-1, or Chapter 34 of Title 54, which is the inheritance tax statute). Subchapters 3 and 3A address only estate tax provisions. Subchapter 4 (titled Compromises ) addresses both taxes.

Although Subchapter 7 which is titled Deduction does not specify any tax in the title or in the body of the regulations contained within that subchapter, there is no question that those regulations address/interpret the inheritance tax statutes. Thus, the general provision for deductions titled Deductions Generally Permitted, provides as follows:

The New Jersey Transfer Inheritance Tax is imposed upon the transfer of property based upon the clear market value of such property. Clear market value is ascertained by deducting from the market value of any property, the debts, expenses and taxes which constitute an encumbrance upon the property of a decedent. No deductions are allowed, however, against any property which is exempt or not subject to the New Jersey Inheritance Tax.

[N.J.A.C. 18:26-7.1] (emphasis added)

The section dealing with the executors commissions, N.J.A.C. 18:26-7.10, is contained within Subchapter 7 and follows the general provisions of N.J.A.C. 18:26-7.1. Thus, N.J.A.C. 18:26-7.10 also addresses/interprets only the inheritance tax statute. Indeed, the regulation cites its source of authority as N.J.S.A. 54:34-5(c), an inheritance tax statute, which specifically addresses executors commissions.3 This statute follows the general provision for deductions provided in N.J.S.A. 54:34-5, and reads that [t]axes imposed by chapters 33 to 36 of [Title 54] . . . shall be computed upon the clear market value of the property transferred. In determining the clear market value of the property the following deductions and no others shall be allowed. As noted above, Chapters 33 to 36 of Title 54 pertain only to the inheritance tax.

Thus, the structure and scheme of its regulations do not support Taxation s argument that they are applicable to either the estate or inheritance tax, and each tax is interchangeable with the other in this regard. While it may be practical or convenient for Taxation to view the inheritance tax and the estate tax in a joint or combined fashion, (which it clearly has not as evidenced by the ordering of its regulations), its regulations cannot go beyond and subvert the statutory intent and purpose of each tax which are separately provided for by the Legislature under Chapter 34 and Chapter 38 respectively. Thus, the fact that both the estate and the inheritance tax rely upon State probate law (N.J.S.A. 3B:18-14) as to allowable executors commissions, does not mean that N.J.A.C. 18:26-7.10(d) should automatically apply to estate tax assessments.

In sum, the court is not persuaded that its ruling in the present estate tax matter has invalidated N.J.A.C. 18:26-7.10(d). Therefore, reconsideration is unwarranted.

(B) Attorney Fees

The Estate argues that since this court ruled in its favor as to the executors commissions (of about $300,000), and further because Taxation s denial of about $11,000 maintenance expenses for the Duck Pond property is baseless, it is a prevailing taxpayer entitled to $15,000 in attorney fees.

N.J.S.A. 54:51A-22 permits the award of litigation costs to a prevailing taxpayer in an amount not to exceed $15,000 (with attorney fees not to exceed $75 per hour). A prevailing taxpayer is one whom the court determines has establishe[d] that the position of the State was without reasonable basis in fact or law. N.J.S.A. 54:51A-22(e).

(1) Executors Commissions

The court finds that Taxation s denial of a portion of the executors commissions, which was based on its application of N.J.A.C. 18:26-7.10(d) was not lacking in factual or legal basis. That regulation, as noted above, has been upheld valid by our Supreme Court. Further, the regulation incorporated New Jersey s probate law. Federal estate tax law and regulations defer fully to State law for the amount of deductible executors commissions. These factors thus, do not render Taxation s disallowance arbitrary or unreasonable, i.e., baseless.

This is so even if the general provisions in the federal estate tax regulation (as opposed to federal tax statute) explaining the allowable deductions notes that State law means probate law and does not mean amounts allowable as deductions under a law which imposes a State death tax. Treas. Reg. 20.2053-1(a)(1). Until the instant matter, no other case in this State has interpreted the above particular federal regulation vis- -vis the New Jersey estate tax. Moreover, Taxation s reliance upon State law was upheld by this court in the context of the marital deduction, a federally allowed estate tax deduction but based upon State law, and as to which this court upheld Taxation s disagreement with the federal allowance. Therefore, it was not unreasonable for Taxation to disregard the general limitation in Treas. Reg. 20.2053-1(a)(1) (as opposed to the federal regulation dealing specifically with executors commissions, Treas. Reg. 20.2053-3), when it applied N.J.A.C. 18:26-7.10(d) in this case. That this court disagreed with Taxation s legal basis for the disallowance does not render Taxation s determination as one lacking basis in law or fact.

(2) Maintenance Expenses

The Estate s basis for seeking litigation costs with respect to Taxation s disallowance of the Duck Pond maintenance expenses is the same as for the executors commissions, namely, that Taxation relied upon an inheritance tax regulation in determining an estate tax assessment. It notes that Taxation s defense that the Estate never protested the initial disallowance, and had it done so, would have received the deduction, establishes that Taxation s disallowance had no basis in fact and law. It notes that its protest contained lengthy arguments of how the federal estate tax scheme controlled every aspect of the determination of the New Jersey estate tax such that Taxation must follow any decision of the Internal Revenue Service ( I.R.S. ) in this regard, therefore argues that the Estate s concession of the disallowance was irrelevant especially because it was only for inheritance tax purposes.

Taxation reiterates its argument that its regulation (here, N.J.A.C. 18:26-7.13(b) which disallows deduction for expenses incurred for the preservation, maintenance or upkeep of real estate of which a decedent dies seized ) applies to both State death taxes and notes that Treas. Reg. 20.2053-3 supports its disallowance. It also notes that because of this, it reasonably relied upon the Estate s failure to protest the disallowance as being an acceptance of the same, since by New Jersey law, failure to timely protest an issue is its waiver.

The court finds Taxation s arguments persuasive. Indeed, the federal estate tax regulation s allowance for deduction of costs for maintaining property of the estate is not limitless. It is allowed provided (i) it is impossible to effect immediate distribution to the beneficiaries; (ii) the expenses are not for additions or improvements; and (iii) the expenses are not incurred for a longer period than the executor is reasonably required to retain the property. Treas. Reg. 20.2053-3(d). It is not established here that any of these factors were examined and found to have been met by the I.R.S. The Estate s arguments that Taxation cannot question an allowed federal deduction (thus, inquiry into whether these factors were met is irrelevant or improper) is not necessarily correct as held by this court in the marital deduction context.4 That Taxation chose not to pursue this issue during litigation does not automatically mean that it had no basis in law or fact for the initial disallowance. As noted above, until now, there were no prior cases ruling that the inheritance tax regulations do not automatically extend to New Jersey estate tax assessments simply because both taxes are triggered by the death of a person and that death creates one estate for purposes of determining both taxes when the incidence and purpose of the each tax is distinct.5

In sum, the court is not persuaded that Taxation s disallowance of a portion of the executors commissions, and its initial audit determination of a disallowance of the Duck Pond maintenance expenses, were so lacking in factual or legal support as to warrant awarding the Estate $15,000 in litigation costs.

CONCLUSION

For the aforementioned reasons, both parties motions are denied. An Order and Judgment in accordance with this opinion will be issued.

Very truly yours,

Mala Sundar, J.T.C.

1 When both Talakowitsh and Widenmeyer were decided, N.J.A.C. 18:26-7.10(d) was different from its current version and read as follows:

In addition, executor s or administrator s commissions are not allowed on:

1. Real estate specifically devised, except where the personal estate is not sufficient to pay the debts and costs of administration of the estate;

2. Real estate not specifically devised, except where the personal estate is not sufficient to pay the debts and costs of the administration of the estate, or to pay pecuniary legacies.

The current version of N.J.A.C. 18:26-7.10(d) provides:

Executor s or administrator s commissions are allowed on real estate that is actually sold by the executor or administrator or which is expressly directed to be sold by the terms of the decedent s will. The real estate must be sold by the representative and not by the beneficiary(s) in order to qualify.

2 Moreover, as the Estate correctly points out, those cases interpreted the regulation in context of the then probate law, N.J.S.A. 3A:10-3. That statute stated that if real property which came into possession of a fiduciary was not sold during the estate s administration, then the reasonable value of the same may be considered as corpus for purpose of computing commissions. The plain language of that statute does not per se bar commissions on real property not sold. When N.J.S.A. 3A:10-3 was amended and replaced by the current statute in 1981, it was because, among others, title to real property forming a part of a trust estate vests in the trustee by operation of law rendering N.J.S.A. 3A:10-3 redundant. In re Reutlinger, 140 N.J. 231, 238-39 (1995). See also N.J.S.A. 3B:10-30 (until terminated, a personal representative has the same power over the title to property of the estate that an absolute owner would have, in trust however, for the benefit of the creditors and others interested in the estate which may be exercised without notice, hearing, or order of court. ); 3B:14-23(e) (executor empowered to exercise various powers as to property . . . owned by an estate . . . , including any real property belonging to the fiduciary s decedent at death, except where the property or any interest therein is specifically disposed of. ). Thus, the permissive allowance of commissions in N.J.S.A. 3A:10-3 was replaced by a mandatory allowance of the same (unless objected to) by N.J.S.A. 3B:18-14.

3 N.J.S.A. 54:34-5(c) provides: Administration expenses; fees of executors and attorneys. c. The ordinary expenses of administration, including the ordinary fees allowed executors and administrators and the ordinary fees of their attorneys.

4 Taxation disallowed the federally allowed marital deduction of $9.9 million. The court ruled that this disallowance was supportable factually and by law. The Estate s arguments were premised on the sole legal contention that the New Jersey estate tax scheme does not permit Taxation to deviate from any federally allowed deduction for any reason. Thus, had Taxation s limiting regulations at issue been contained in a separate estate tax regulation, i.e. under N.J.A.C. 18:26-3A et seq., the Estate s arguments would likely have been the same, and the court would still have to decide whether Taxation was bound to follow a federally allowed deduction.

5 See supra, this court s discussion that Talakowitsh and Widenmeyer do not support an extension of N.J.A.C. 18:26-7.10(d) to New Jersey estate tax assessments.

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