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Oberhand v. Director

February 27, 2008

ROBERT OBERHAND, AS EXECUTOR OF THE ESTATE OF CYNTHIA A. OBERHAND, PLAINTIFF-APPELLANT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
HARRIET SEIDNER, AS EXECUTRIX OF THE ESTATE OF EUGENE M. SEIDNER, PLAINTIFF-APPELLANT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 388 N.J. Super. 239 (2006).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Supreme Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issues in this appeal are whether the July 2002 amendment to N.J.S.A. 54:38-1, which was made retroactive to January 1, 2002, applies to impose New Jersey estate taxes on the estates of decedents, who died after December 31, 2001, but prior to the adoption of the amendment; and if so, whether the doctrine of manifest injustice bars imposition of the tax under the circumstances presented.

In April 1998, Cynthia Oberhand executed her Will. She named her husband Robert Oberhand executor and trustee, and established a Marital Trust and a Family Trust. The Will provided that the maximum amount that could pass free of federal estate tax would be distributed to the Family Trust. The balance of her estate would be distributed to the Marital Trust. The formula was designed to limit the amount of federal and state estate taxes. Mrs. Oberhand died on March 28, 2002, leaving an estate valued at about $865,000. The estate filed a State Estate Tax Return, together with a copy of the federal estate tax return, showing no taxes due.

In 1999, Eugene Seidner executed his Will, which provided for a Marital Trust and a Family Trust with distributions formulas similar to those used by Mrs. Oberhand. Mr. Seidner died on January 25, 2002, survived by his wife, Harriet Seidner. He left an estate valued at about $744,000. The estate filed a State Estate Tax Return, together with a copy of the federal estate tax return, showing no taxes due.

Effective January 1, 2002, Congress amended the federal estate tax law, in part to increase the value of assets that could pass free of federal estate tax under the unified credit provision from $675,000 to $1,000,000. That change directly impacted the revenue that New Jersey would receive because the New Jersey estate tax was integrated with the federal estate tax. To avoid a loss of revenue, the New Jersey Legislature, in July 2002, amended the New Jersey estate tax law, N.J.S.A. 54:38-1 (the Amendment). The Amendment provided that the New Jersey estate tax would not follow the federal amendments, but would continued to be computed in accordance with the federal estate tax credit in effect on December 31, 2001. The Amendment was made retroactive to the estate of any resident dying after December 31, 2001.

Thus, on the dates that Mrs. Oberhand and Mr. Seidner executed their respective Wills and on the dates of their deaths, neither federal nor New Jersey estate taxes would have been due from the estates. If Mrs. Oberhand had died in 2001, when the federal estate tax credit was $675,000, then her estate would have been divided as follows: $675,000 (the then-maximum federal estate tax exclusion) into the Family Trust and the remaining amount into the Marital Trust, which qualified for the federal marital deduction, which would have resulted in no federal or state taxes due. Because of the changes in the federal estate tax law that established an estate credit of $1,000,000 beginning January 1, 2002, after Mrs. Oberhand's death in March 2002, the formula in her Will required the entire estate to pass to the Family Trust. Similarly, if Mr. Seidner had died in 2001, then his estate would have passed as follows: $675,000 into the Family Trust, and the remaining amount into that Marital Trust, with no federal or state taxes due. Again, as a result of the increase in the federal estate tax credit, the formula in his Will required the entire estate to pass to the Family Trust.

Because the Amendment was made retroactive to estates arising after December 31, 2001, the Director of the New Jersey Division of Taxation (Director) concluded that the Amendment applied to the two estates. As a result, as to each estate, the Director imposed a tax on the amount that exceeded the $675,000 estate credit that passed to the Family Trust. Mr. Oberhand and Mrs. Seidner, as Executor and Executrix of their respective spouse's estates, filed separate complaints in the Tax Court contesting the Director's assessment. In both matters, the TaX Court determined that the Amendment applied to the estates and was constitutional, but that retroactive application was barred because it resulted in a manifest injustice.

The Director appealed and the cases were consolidated. The Appellate Division reversed the judgments of the Tax Court, agreeing that the Amendment applied retroactively and was constitutional, but disagreeing that the doctrine of manifest injustice should apply in the "judicial evaluation of retroactive tax laws." 388 N.J. Super. 239, 240, 242 (2006).

The Supreme Court granted plaintiffs' petition for certification. 190 N.J. 255 (2007).

HELD: The July 2002 Amendment to N.J.S.A. 54:38-1 applies to the estates, but under the circumstances presented, the doctrine of manifest injustice bars retroactive application of the Amendment to plaintiffs.

1. Both the plaintiffs' and the Director's interpretations of the Amendment are reasonable. The Court defers to and accepts the Director's interpretation, which is consistent with a plain reading of the Amendment. The Amendment requires the Director to determine distributions of estate assets under the law in effect on the date of death, and to apply to those distributions the federal estate tax law in effect on December 31, 2001. (pp. 11-14)

2. The Amendment was made retroactive for a six-month period to the estates of all decedents dying after December 31, 2001. Although prospective application of a statute is favored over retroactive application, a statute should be applied retroactively if the Legislature expresses an intent that it be so applied. However, the Court will not apply a statute retroactively if retroactive application would be unconstitutional (an argument that plaintiffs have abandoned) or would result in manifest injustice. The Court applies the manifest injustice doctrine sparingly. (pp. 14-16).

3. The doctrine of manifest injustice is designed to prevent unfair results that do not necessarily violate any constitutional provision. In its analysis, the Court looks to matters of unfairness and inequity to determine whether to apply the doctrine to avoid the retroactive application of a statute. In the weighing process, the Court considers the public interest in retroactive application of the statute, as well as the extent to which the decedents were not able to change their Wills in reliance on existing law or had their reasonable expectations defeated by the change in the law. (pp. 16-18)

4. An important public policy behind the Amendment is preventing a significant loss of revenue to the State under the then-existing statute due to changes in the federal estate tax structure. However, the Legislature's lost revenue estimates begin with Fiscal Year 2003. There is no evidence that the public interest in preserving revenue for outlying years is as strong for the six-month retroactive period of the Amendment as it is for the period after adoption of the Amendment in July 2002. In short, the record does not reveal that denying retroactive application of the Amendment to plaintiffs' estates would seriously impact the State's revenues. Conversely, the decedents reasonably relied on the previous law. When they executed their Wills and at the time that each died, the trust formulae were framed in such a fashion that no federal or state taxes would be due; if they had died on or before December 31, 2001, no taxes would have been due. It was solely due to the retroactive application of the Amendment, coupled with the federal tax changes and the trust formulae, that the Director imposed State estate tax assessments for the estates. Clearly, the decedents did not have an opportunity to amend their estate plans to avoid the adverse estate tax consequences. (pp. 18-20)

5. In weighing the public policy of the State in the retroactive application of the Amendment against plaintiffs' reasonable reliance on prior law and the detriment they would suffer, it would be harsh and unfair to apply the Amendment retroactively to the estates. (p. 20)

The judgment of the Appellate Division is AFFIRMED IN PART and REVERSED IN PART, andthe matter is REMANDED to the Tax Court for further proceedings consistent with the Court's opinion.

JUSTICE ALBIN has filed a separate CONCURRING opinion, expressing the view that using judicially-crafted equitable principles to invalidate a duly-enacted statute violates the constitutional separation of powers mandate; retroactive application of the Amendment cannot stand in this case, not based on the doctrine of manifest injustice, but because retroactive application of the Amendment to the estates violates Article I, Paragraph 1, of the State Constitution, which guarantees fundamental fairness and due process of law.

JUSTICE LONG has filed a separate DISSENTING opinion, in which JUSTICE HOENS joins, expressing the view that the manifest injustice doctrine can apply only to the interpretation of an ambiguous statute; where a clear statute requires retroactivity, the only available disposition, aside from a declaration of unconstitutionality, is that the statute be applied as written.

JUSTICES LaVECCHIA and RIVERA-SOTO join in JUSTICE WALLACE's opinion. JUSTICE ALBIN has filed a separate concurring opinion. JUSTICE LONG has filed a separate dissenting opinion, in which JUSTICE HOENS joins. CHIEF JUSTICE RABNER did not participate.

The opinion of the court was delivered by: Justice Wallace, Jr.

Argued October 9, 2007

Congress amended the federal estate tax law effective January 1, 2002, in part, to increase the value of assets that could pass free of federal estate tax under the unified credit provision and to phase out the state death tax credit, the source of New Jersey estate tax revenue. To avoid the loss of revenue due to the federal changes, in July 2002, the Legislature amended N.J.S.A. 54:38-1 to provide that the New Jersey estate tax would not follow the federal amendments, but would continue to be computed in accordance with the federal state tax credit in effect on December 31, 2001. The statute was made retroactive to January 1, 2002.

In the two estates in this appeal, both decedents died after January 1, 2002, and prior to the adoption of the amendments to N.J.S.A. 54:38-1 in July 2002. Each estate administrator filed a State estate tax return reflecting that no taxes were due. The Director of the New Jersey Division of Taxation (Director) imposed estate taxes under N.J.S.A. 54:38-1 on both estates. Plaintiffs filed separate actions in the Tax Court contending that the estates should not be subject to the retroactive tax law because the statute was not intended to impose a tax on estates that would not have paid taxes under the law in effect on December 31, 2001. Alternatively, plaintiffs urged that the doctrine of manifest injustice should be applied to eliminate the retroactive aspect of the amendment. The Tax Court held that N.J.S.A. 54:38-1 was applicable to the two estates, but that the doctrine of manifest injustice applied to eliminate the retroactive effect of the statute. The Director appealed. The Appellate Division reversed, concluding that the amendment applied to decedents' estates, but that it was error to apply the doctrine of manifest injustice to a tax statute. We granted plaintiffs' petition for certification. We now hold that, although the amendment to N.J.S.A. 54:38-1 applies to the estates, under the circumstances presented, the Tax Court properly considered the doctrine of manifest injustice to bar the retroactive application of the statute to plaintiffs.

I.

The essential facts are not disputed. On April 3, 1998, Cynthia Oberhand (Mrs. Oberhand) executed her Will. She named her husband Robert Oberhand (Mr. Oberhand) executor and trustee, and established two trusts, a Marital Trust and a Family Trust. The Will provided that the maximum amount that could pass free of federal estate tax (essentially, the federal exclusion amount, 26 U.S.C.A. § 2010(c)), would be distributed to the Family Trust, and the balance of the residuary estate would be distributed to the Marital Trust.*fn1 The formula of the trusts was designed to avoid or limit the amount of federal and state estate taxes. Mr. Oberhand was to receive the net income from the Marital Trust for his life, with discretionary distributions of principal. Under the terms of the Family Trust, Mr. Oberhand was entitled to receive discretionary distributions of income and principal, but could not receive any principal from the Family Trust until the Marital Trust was exhausted. Upon Mr. Oberhand's death, the remainder of both trusts was to be distributed equally to the decedent's and Mr. Oberhand's surviving children. Mrs. Oberhand died on March 28, 2002, leaving an estate valued at $864,905.98. On January 6, 2003, the estate filed a State Estate Tax Return, together with a copy of the federal estate tax return, showing no taxes were due.

Eugene Seidner (Mr. Seidner) executed his Will in 1999. Similar to Mrs. Oberhand's Will, Mr. Seidner's Will provided for a Marital Trust and a Family Trust with appropriate formulas. Mr. Seidner died on January 25, 2002, survived by his wife, Harriet Seiner (Mrs. Seidner). He left an estate of approximately $744,251.89. On January 15, 2003, the estate filed a State Estate Tax Return, together with a copy of the federal estate return, showing that no taxes were due.

Effective January 1, 2002, Congress amended the federal estate tax laws. Pertinent to this appeal, the amendment included an increase in the amount of property that could pass free of federal estate tax under the unified credit provision (I.R.C. § 2011) from $675,000 to $1,000,000. Those changes had a direct impact on the revenue that New Jersey would receive because the New Jersey estate tax was integrated with the federal estate tax. In an effort to counter the loss of revenue due to the federal changes, the Legislature acted to decouple the New Jersey estate tax from the federal estate tax by amending its estate tax law, N.J.S.A. 54:38-1a(2)(a) (the Amendment).

On March 25, 2002, the Senate proposed Senate Bill 1378 to address this concern. The statement to the bill provided in part that the New Jersey estate tax . . . be computed as though the terms of the federal estate tax, including those governing liability for that tax and allowance of the state [death] tax credit, continued to apply to the estates of resident decedents dying after December 31, 2001, as they did to that of a residential decedent dying on that date. [S.B. 1378, 2002 Leg. 210th Sess. (N.J. 2002).]

A similar bill was introduced in the Assembly as Bill No. 2302 on May 9, 2002. A statement identical to that of the Senate bill was appended to the Assembly bill and echoed the concern of the loss of revenue due to changes in the federal estate tax laws. Eventually, the Assembly bill was substituted for the Senate bill and signed into law on July 1, 2002. The Amendment was effective immediately and was made applicable to ...


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