On appeal from the Tax Court of New Jersey, Docket No. 004620-2005, whose opinion is reported at 26 N.J. Tax 21 (Tax 2011).
The opinion of the court was delivered by: Payne, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Payne, Simonelli and Accurso.
The opinion of the court was delivered by PAYNE, P.J.A.D.
Plaintiff, the Estate of Stanley Kosakowski, appeals from an order of summary judgment, entered by Tax Court Judge Vito Bianco in favor of the defendant Director, Division of Taxation, upholding as constitutional, under State and Federal due process and equal protection analysis, the retroactive application of amendments to N.J.S.A. 54:38-1 to the Estate, thereby increasing its tax liability and holding that the doctrine of manifest injustice should not be applied to bar the retroactive application of N.J.S.A. 54:38-1 to the Estate because decedent did not rely, to his detriment, on prior existing law.
The matter arose in the following fashion. Stanley Kosakowski died on March 22, 2002. On April 3, 2002, Kosakowski's will was admitted to probate, and his estate was administered pursuant to the terms of a simple will, executed on May 24, 1997, that contained no devices to avoid taxes. At the time of his death, Kosakowski's taxable estate was valued at $5,394,851, with $438,182 due in New Jersey estate tax, which was paid on December 23, 2002.
Significant legislative changes affected the amount of the estate tax paid to the State. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001. See Pub. L. No. 107-16, 115 Stat. 38 (2001). That act increased the amount that could be transferred at death, free of federal taX under 26 U.S.C.A. § 2010(c) as a unified tax credit against estate taxes, by raising the federal estate tax exclusion amount from $675,000 to $1,000,000, effective January 1, 2002 - an amount that would be gradually increased to $3,500,000 by 2009 - and introduced a gradual phase-out of the state death tax credit contained in 26 U.S.C.A. § 2011(b). Because New Jersey coupled its estate tax to the federal tax, the effect of the federal act was to decrease State estate tax revenue. Therefore, in July 2002, the State Legislature passed, and the Governor signed into law, amendments to N.J.S.A. 54:38-1 that decoupled the New Jersey estate tax from its federal counterpart and provided that State taxes would be computed in accordance with the federal state tax credit in effect on December 31, 2001, which was $675,000. See N.J.S.A. 54:38-1a(2). The statute was made retroactive to January 1, 2002.
Challenges to the retroactive application of the amended N.J.S.A. 54:38-1 were instituted in the Tax Court by the Estates of Cynthia A. Oberhand and Eugene M. Seidner, both of whom had engaged in tax planning in reliance on State and Federal law as it existed up to January 1, 2002 in order to avoid the payment of estate taxes. Both individuals died during the period between January 1, 2002 and July 1, 2002, and their estates were adversely affected by the retroactive application of N.J.S.A. 54:38-1. In a published opinion, Oberhand v. Director, Division of Taxation, 22 N.J. Tax 55 (Tax. Ct. 2005), Judge Kuskin found the Legislature's determination to apply the amendments to the estate tax statute retroactively did not render the statute unconstitutional under substantive due process standards, when measured under a rational basis test. Id. at 65-67. Nonetheless, Judge Kuskin found that the retroactive application of the amendments to Oberhand's estate would result in a manifest injustice that was not outweighed by the public's interest in avoiding a diminution of tax revenues. Id. at 68-70, 72. The court held:
Mrs. Oberhand reasonably relied on existing federal and New Jersey estate tax law in preparing the Will and in not amending it before her death. New Jersey's fiscal concerns are insufficient to outweigh that reliance, and it would be unfair to apply the Amendments retroactively to impose on the Estate a tax she specifically and expressly sought to avoid by crafting her estate plan in accordance with existing law. [Id. at 76.]
Summary judgment was thus granted in the Estate's favor on its claim that no tax was due. Ibid.
On appeal of Oberhand, as well as a similar judgment in favor of the Estate of Seidner,*fn1 we affirmed Judge Kuskin's conclusion that the amendments did not violate substantive due process. Oberhand v. Dir., Div. of Taxation, 388 N.J. Super. 239, 245 (App. Div. 2006). However, we disagreed with his application of the doctrine of manifest injustice in a retroactive taxation context. Id. at 245-48. We held:
We believe the overarching principle governing this litigation is this: once the concerns of substantive due process have been met by retroactive tax legislation, "'judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches. . . .'" [Id. at 247 (quoting U.S. v. Carlton, ...