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In re Estate of Sommers

May 25, 2010

IN THE MATTER OF THE ESTATE OF SHELDON SOMMERS, A/K/A SHELDON CHARLES SOMMERS. DECEASED.


On appeal from the Superior Court of New Jersey, Chancery Division, Probate Part, Bergen County, Docket No. P-175-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued April 12, 2010

Before Judges Rodriguez, Reisner and Yannotti.

The Estate of Sheldon Sommers (estate) appeals from a February 4, 2009 final judgment entered in favor of the defendants, Mary Lee, Julie, and Wendy Sommers (the nieces). The nieces cross-appeal from a portion of the order dismissing count one of the estate's complaint without prejudice instead of with prejudice. We affirm, substantially for the reasons stated in Judge Contillo's comprehensive written opinion issued on January 22, 2009.

I.

The facts and procedural history are addressed at length in Judge Contillo's opinion, and need not be repeated here. To summarize, this appeal concerns a long-running dispute between decedent Sheldon Sommers' second wife Bernice, and his nieces, over his art collection. Sheldon divorced Bernice in 1999. During the divorce proceedings, he moved to Indiana where two of the nieces lived. The other niece lived in Illinois. The nieces were his closest living relatives, and he gifted his art collection to them.

With the advice of tax counsel, Sheldon made the gift to his nieces through a complicated process undertaken to minimize the tax consequences of the gift. An arbitration proceeding in Indiana, confirmed by that State's highest court, determined that Sheldon made a valid irrevocable transfer of the art to a limited liability corporation (LLC) in December 2001, and thereafter, in December 2001 and January 2002, he made valid gifts to his nieces of his capital shares in the LLC.

At the time he made the gifts, the nieces were the primary beneficiaries of Sheldon's estate plan. That changed after he reconciled with Bernice. On June 23, 2002, four months before his death at age eighty-six, Sheldon remarried Bernice while he was hospitalized in Indiana; he also made a new will in April 2002 naming her as his executrix. He then sued the nieces in Indiana seeking the return of the artwork. After he died, his estate, through Bernice as executrix, continued the lawsuit. The litigation proceeded through arbitration, as required by the documents that created the LLC.

After losing in the Indiana arbitration, the estate, through Bernice, filed this lawsuit in New Jersey. The suit did not allege that the gift resulted from undue influence or fraud, issues decided adversely to the estate in the Indiana arbitration. Instead, the estate sought to require the nieces to pay more than $500,000 in federal taxes which the Internal Revenue Service (IRS) had assessed against the estate based on the gift of the art. In the alternative, the estate argued that if the nieces were unwilling to pay the taxes, the gift should be rescinded due to alleged mutual mistake or unilateral mistake. Finally, the estate contended that the gift should be reformed so that the interest gifted would equal only the amount that would not require the estate to pay federal gift tax, and that the remaining interests should pass to Bernice under Sheldon's will.*fn1

In his opinion, Judge Contillo concluded that the estate had a full and fair opportunity to litigate the reformation, rescission, and other tax-related issues in the Indiana arbitration, and those issues were res judicata. However, for completeness, he also addressed the merits of those claims and rejected them. Based on his assessment of the evidence, including witness credibility, Judge Contillo concluded that Sheldon knew exactly what he was doing in giving his nieces the artwork, and wanted them to have the artwork regardless of the possible tax consequences. He found that the only promise the nieces made to Sheldon was that they would pay any gift taxes due on the 2002 portion of the gift. He therefore found no basis to rescind or reform the gift.

In addressing count one of the complaint, seeking apportionment of estate tax liability between the nieces and the estate, the judge declined to apportion the taxes as the estate urged, because the IRS had "determined that the artwork is not part of the gross estate," and therefore it was not subject to apportionment under N.J.S.A. 3B:24-2. He also considered his own determination that "Dr. Sommers['] gift of the artwork was complete and irrevocable in December 2001 and January 2002." However, the judge concluded that under N.J.S.A. 3B:24-1(a), an apportionment claim is not ripe until the estate taxes are quantified, and the Tax Court had not finally determined the amount of tax "due and payable by the fiduciary." He therefore dismissed count one without prejudice.

II.

On this appeal, the estate claims that the tax issues are not res judicata, because they could not have been litigated in the arbitration. The estate also argues that the trial court's decision ...


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