On appeal from the Tax Court of New Jersey, 004150-03 and 006267-03.
The opinion of the court was delivered by: Coburn, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 12, 2006
Before Judges Coburn, Axelrad and R.B. Coleman.
In June 2001, the United States Congress increased the amount of property that could pass free of federal estate taxation and eliminated the state death tax credit. To preserve revenue that would otherwise be lost because of the changes in federal law, the New Jersey Legislature amended its estate tax law in July 2002, making the changes retroactive to January 1, 2002. Consequently, the estates with which we are concerned became obliged to pay estate taxes that would not have been due if the Legislature had not made the amendment retroactive. The issues to be resolved are the meaning and validity of the retroactive aspect of the New Jersey law.
These cases were decided by the Tax Court on cross-motions for summary judgment, and there are no issues of fact. Eugene M. Seidner and Cynthia Oberhand executed their wills in the 1990's. Seidner died on January 25, 2002, leaving a taxable estate of $744,251.89, and Oberhand died on March 28, 2002, leaving a taxable estate of $864,905.98. To avoid federal and state estate taxes, both wills contained two legal and widely-used provisions: a marital trust and a family trust. In essence, the family trust was to be funded with the maximum sum not subject to federal estate tax, and the marital trust would receive the rest, with the result that no taxes would be due to either government. The funding is expressed, not in dollar amounts, but in somewhat complex formulas that we need not detail.
In 2003, the Director of the Division of Taxation issued timely estate tax assessments of $25,915.49 against the estate of Cynthia Oberhand and $90,000 against the estate of Eugene M. Seidner. The estates filed complaints challenging the assessments. The Tax Court held in each case that the Legislature intended the law to apply retroactively to the estate, that its retroactive application did not violate substantive due process, but that the assessments had to be vacated because they were manifestly unjust. Oberhand v. Dir., Div. of Taxation, 22 N.J. Tax 55 (Tax 2005). Seidner was decided by a short letter opinion relying on Oberhand.
The Director filed appeals, which we now consolidate for purposes of this opinion, seeking reinstatement of the assessments. He argues that the equitable doctrine of manifest injustice is inapplicable to tax statutes. Alternatively, he argues that the estates have not shown that injustice would result from retroactive application of the statute.
The estates contend that the Tax Court erred in its interpretation of the retroactive aspect of the statute. While admitting that the statute is retroactive in general, they say it does not apply to estates that would have paid no tax if the death had occurred on or before December 31, 2001. Alternatively, they rely on the doctrine of manifest injustice, claiming that it is applicable in tax cases and warrants relief here. Although we agree with the Tax Court's construction of the statute and its rejection of the constitutional challenge, we reverse the judgments because we do not believe that the doctrine of manifest injustice is applicable in tax cases.
On June 7, 2001, the Congress enacted sweeping changes in the federal estate tax laws, which included increasing the amount that could be transferred free of federal tax under 26 U.S.C.A. § 2010(c) from $675,000 in 2001 to $1 million for decedents dying in 2002 and 2003, with further increases in subsequent years, Pub. L. No. 107-16, § 521(a), 115 Stat. 38, 71 (2001), and a phase-out over four years beginning in 2002 of the state death tax credit contained in 26 U.S.C.A. § 2011(b), Pub. L. No. 107-16, § 531(a)(3), 115 Stat. 38, 72-73 (2001).
The Tax Court noted that "[a]s a result of these changes in the federal estate tax law, concern arose in New Jersey as to the potential loss of estate tax revenue." Oberhand, supra, 22 N.J. Tax at 60. Legislation was introduced on March 25, 2002, and the statute was enacted on July 1, 2002. L. 2002, c. 31, § 1. This law imposed an estate or transfer taX
[u]pon the transfer of the estate of every resident decedent dying after December 31, 2001 which would have been subject to an estate tax payable to the United States under the provisions of the federal Internal Revenue Code of 1986 . . . in effect on December 31, 2001 . . . . [N.J.S.A. 54:38-1(a)(2)(a).]
The Tax Court quoted the Legislature's reasons for adopting this statute as set forth in Statements to the bills in both houses. Oberhand, supra, 22 N.J. Tax at 60, 61-62. In short, the purpose was to preserve the New Jersey estate tax as it existed just before the changes in federal law took effect. Id. at 60. The Legislature adopted that course, in part, because without the change the State faced losing revenues estimated to be $60 million in fiscal ...