December 9, 2009
ESTATE OF STELLA KOSAKOWSKI, PLAINTIFF-APPELLANT,
DIRECTOR, NEW JERSEY DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from the Tax Court of New Jersey, Docket No. 4619-2005.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued November 4, 2009
Before Judges Parrillo and Lihotz.
Plaintiff, the Estate of Stella Kosakowski, appeals from entry of final judgment after determinations of cross-motions for summary judgment. The Tax Court denied plaintiff's motion, granted the motion filed by defendant the Director, Division of Taxation, and dismissed plaintiff's complaint, which sought a refund of previously paid estate taxes. On appeal, plaintiff asserts the Tax Court erred in denying its request, arguing the retroactive imposition of estate tax was manifestly unjust. See Oberhand v. Dir., Div. of Tax'n, 193 N.J. 558 (2008) (finding plaintiffs' 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).
Following our review, we reject plaintiff's claim of manifest injustice in the imposition of an estate tax based upon the statute, as amended after decedent's death. N.J.S.A. 54:38-1a. We affirm substantially for the reasons set forth by Judge Bianco in his comprehensive written opinion, dated December 12, 2008. R. 2:11-3(e)(1)(A).
Stella Kosakowski (decedent) died on February 9, 2002. Her simple will provided an outright devise of her entire estate, which totaled $1,747,974.65, to Stanley Kosakowski, her surviving spouse, otherwise to her daughter Joan Ciaglia. Stanley died on March 22, 2002. On Stanley's behalf, Ciaglia, as his executor, disclaimed $1,000,000 of the devise received from plaintiff. Ciaglia then disclaimed her interest in the same assets so that the $1,000,000 passed to Ciaglia's sons, decedent's intestate issue. N.J.S.A. 3B:5-2, -4.
Plaintiff filed a New Jersey estate tax return and paid the computed $32,528 tax. The Division of Taxation issued a notice of assessment for an additional tax of $1,234.80, which was also paid. Over two years thereafter, the estate submitted a refund claim relying on the Tax Court's trial determination, ultimately upheld by the Supreme Court in Oberhand.
The amount of estate tax plaintiff paid was calculated, pursuant to the amendments to New Jersey's estate tax statute, N.J.S.A. 54:38-1 to -16. Specifically, on July 1, 2002, the Legislature adopted amendments to N.J.S.A. 54:38-1a, L. 2002, c. 31, § 1, designed to recoup taxes on any transfers by New Jersey decedents in excess of $675,000. The amendments were prompted by a modification of the federal estate tax provisions. The federal changes, known as the Economic Growth and Tax Relief Reconciliation Act of 2001, raised the amount of assets transferable without imposition of estate tax from $675,000 to $1,000,000, 26 U.S.C.A. 2010(c), and phased out the allowable credit for state death taxes paid, 26 U.S.C.A. 2011(b). See Pub.L. No. 107-16, 115 Stat. 38 (2001). Prior to the federal amendments, New Jersey imposed no tax on estates valued at less than $675,000. N.J.S.A. 54:38-1a(2)(a). Because the state statute was integrated with its federal counterpart, an increase in the federal exemption and elimination of the state tax credit would decrease the estate tax receipts collected by the New Jersey treasury.*fn1 Absent amendment, the New Jersey estate tax, measured by the amount of the maximum federal estate tax credit for state death taxes paid on estates between $675,000 to $1,000,000, would significantly decrease. To avoid this loss of revenue, the amendments "decoupled" the state estate tax scheme from the federal estate provisions, and the amendments were made retroactive to January 1, 2002. Decedents who died within the retroactivity period -- after December 31, 2001 but prior to the actual passage of the amendments six months later on July 1, 2002 -- were subject to be taxed as if the federal law had not changed.
Challenges to the retroactive application of N.J.S.A. 54:38-1a, as amended, were reviewed by the Tax Court. As discussed in Judge Bianco's opinion, two decisions were reported on the same day: Oberhand v. Dir., Div. of Tax'n, 22 N.J. Tax 55, 60 (Tax 2005), rev'd, 388 N.J. Super. 239 (App. Div. 2006), rev'd in part, aff'd in part, 193 N.J. 558 (2008), and Rappeport v. Dir., Div. of Tax'n, 22 N.J. Tax 422 (Tax 2005).
In Oberhand, supra, the Supreme Court affirmed the TaX Court and declined to retroactively apply the amended statute to the plaintiff because that "application would result in 'manifest injustice.'" 193 N.J. at 571 (quoting Nobrega v. Edison Glen Assocs., 167 N.J. 520, 537 (2001)). In Rappeport, supra, the Tax Court rejected the application of manifest injustice and imposed estate tax in an amount based upon the amendments. 22 N.J. Tax at 428. The determinations turned on the specific facts surrounding the decedent's estate plan. Oberhand, supra, 193 N.J. at 573-74; Rappeport, supra, 22 N.J. Tax at 426-28.
Concisely, Mrs. Oberland designed the funding of her testamentary trusts to eliminate all federal and state death taxes. Oberhand, supra, 193 N.J. at 563. She died after the federal estate tax was amended, but before it was known that New Jersey would adopt amendments retaining the $675,000 exemption to its estate tax. Ibid. Therefore, the language of the will required the federal credit trust to be funded with up to $1,000,000. Id. at 565. This transfer triggered New Jersey estate tax on the sums in excess of $675,000. Id. at 566.
Mrs. Rappeport, like plaintiff here, devised her estate to her surviving spouse, who disclaimed $904,000 on June 3, 2002. Rappeport, supra, 22 N.J. Tax at 423-24. Based on the New Jersey amendments, an estate tax was imposed on the disclaimed transfer that exceeded $675,000. Id. at 425. The Tax Court denied the claim of manifest injustice because, at the time of the disclaimer, the proposed modifications to New Jersey's estate tax were published, and Mr. Rappeport could have engaged in estate planning to limit his disclaimed sum to coincide with the New Jersey exemption. Id. at 426. The choice not to do so, despite knowledge of the taxable event, triggered the tax. Ibid.
We concur with Judge Bianco's analysis that the facts presented in this matter align with those of Rappeport, rather than those of Oberhand. Judge Bianco framed the issue this way:
At the time of the disclaimer, the amendment was not merely under consideration... but was already enacted. [Stanley] could have chosen to accept some or all of the money tax-free under I.R.C. § 2056 [the 'marital deduction' provision]. The excess (up to $675,000) then would have passed to her grandchildren free of tax under the amended version of N.J.S.A. 54:38-1a(2).
Unlike both Mrs. Oberhand and Mrs. Rappeport, Mrs. Kosakowski's Will did not contain language expressing an intent to have her dispositions tied to their tax consequences.... [Oberhand and Rappeport] distinguish a situation in which a non-decedent party disclaimed a bequest that resulted in taxation even though the party should have been aware of the enactment of the amendment and one in which the decedent's pre-amendment estate plan was frustrated because of a post-death amendment. [Stanley's] disclaimer... falls into the former category.... Furthermore, Mrs. Kosakowski did not expressly rely on N.J.S.A. 54:38-1a when drafting her Will.
Under the statute, as amended, it is undisputed that had Stanley received and retained the $1,000,000 from plaintiff, no estate tax would be due. The decedent clearly sought to utilize the unlimited marital deduction, 26 U.S.C.A. § 2056, giving all assets to Stanley and triggering no tax liability. See Phillips v. Curiale, 128 N.J. 608, 625 (1992)(stating that in reviewing a claim of manifest injustice, the court must determine whether the affected party relied, to his or her prejudice, on the law that is now to be changed as a result of the retroactive application of the statute). No additional planning was necessary to accomplish the non-taxable transfers expressed by decedent. Stanley's disclaimer, however, altered both decedent's intentions and plaintiff's resultant tax obligations. Had Stanley limited his disclaimer to $675,000, rather than $1,000,000, no estate tax would have been imposed. The taxable event results solely from the transfer in excess of $675,000, which was completed with full knowledge of the amendments to N.J.S.A. 54:38-1a, not the implementation of decedent's estate plan.
To assert, as does plaintiff, that decedent had no opportunity to alter her estate plan to account for the amended version of N.J.S.A. 54:38-1a, misses the mark. No tax was imposed as a result of the estate plan incorporated in decedent's will. However, the estate planning devised after Stanley's death -- disclaiming $1,000,000 of Stanley's devise accompanied by a disclaimer by Ciaglia in the same amount --resulted in a transfer in excess of the exemption, triggering tax consequences. N.J.A.C. 18:26-2.12(a), -3A:1. As noted above, the use of a disclaimer as an estate planning device occurred with the knowledge that an estate tax would be triggered. Under these circumstances, we, like Judge Bianco, conclude no manifest injustice resulted from the imposition of the retroactive estate tax amendments.