Opinion
Docket No. 000014-2012
04-02-2013
Re: Estate of Edward Shinn v. Director, Division of Taxation
John M. Loalbo, Esq. Weiner Lesniak, L.L.P. Heather Lynn Anderson Deputy Attorney General R.J. Hughes Justice Complex
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Mala Sundar
JUDGE
BY ELECTRONIC MAIL John M. Loalbo, Esq.
Weiner Lesniak, L.L.P.
Heather Lynn Anderson
Deputy Attorney General
R.J. Hughes Justice Complex
Dear Counsel:
In this estate tax matter, the Defendant ("Director" or "Division") moved for summary judgment on grounds plaintiff's refund claim is statutorily time-barred. Plaintiff ("Estate") cross-moved for summary judgment on grounds that its recitation on its federal Estate Tax return, of litigation involving the marital deduction amount, put the Director on notice of its protective claim for refund and tolled the running of the 3-year period for the refund claim.
The court finds that the Estate's notice of litigation sufficed as notice of a potential refund claim because it adequately apprised the Director of the litigated issue and of the Estate's undertaking to supplement its federal Estate Tax return upon resolution of the litigation. It is undisputed that the litigation was finally resolved in July 2009, after the expiration of the 3-year limitations period. There is nothing in the record to show that the Estate had sufficiently final information to compute the marital deduction amount and file an amended Estate Tax return on or prior to the end of the 3-year period.
Our Legislature has explicitly required a liberal construction of the New Jersey Estate Tax statute because the revenue from such tax is wholly dependent on the allowance of the federal credit, and thus is at the expense of the federal government. Given the deference afforded to the Director's knowledge and expertise in the area of taxation, the Director is presumed to be aware that a change in the marital deduction amount can alter the federal estate tax liability, which in turn, can impact the federal credit for State death taxes, which credit is the foundation for an assessment or refund of the New Jersey estate tax.
Based on these principles and the facts of this case, the Estate's March 2010 amended New Jersey Estate Tax return was not untimely. Its provision of the consequent April 2011 federal change of credit for State death tax to the Director was similarly not untimely. Therefore, the Director's denial of the Estate's refund request as untimely is incorrect. FACTS
Edward Shinn, a New Jersey resident, died testate on May 19, 1998. On February 17, 1999, the Estate mailed a check for $521,643 to the Division as an estimated estate tax payment.
On June 11, 1999, the Division requested that the Estate file a New Jersey Estate Tax return. The letter also asked for (a) a copy of the federal Estate Tax return ("Form 706") as filed with the Internal Revenue Service ("I.R.S."); (b) a copy of any closing letter or other notice showing the amount of federal estate tax and credit for allowable State death taxes, with any "list of changes" made by the I.R.S.; and (c) a copy of the decedent's Will.
Within four days, the Estate responded that it had yet to file Form 706 (but would do so by August 1999), and thus, did not have closing letters from the I.R.S. The Estate also attached a copy of the Will.
On December 27, 1999, the Division sought the same data it had in its June 11, 1999 letter. By letter of January 10, 2000, the Estate advised the Division that the "Form 706 was filed under correspondence dated August 19, 1999 . . . . Copies of said correspondence with the enclosures to which the letters refer, are enclosed herewith." The letter also stated that the Estate had not yet received a closing letter from the I.R.S. The attachments sent to the Division included the August 19, 1999 cover letter addressed to the I.R.S.; Form 706 with schedules; and statements to those schedules. One such statement signed by the Executor and dated August 19, 1999, recited as follows:
The Estate is currently in litigation regarding the amount of the decedent's spouse, Stacy Shinn's, marital deduction. See attached pleadings. Upon the resolution of the proper marital deduction, the decedent's 706 will be supplemented by the Estate. The amount of $450,000.00, which is not subject to litigation, has not been listed on Schedule M as a marital deduction.
The decedent's business interests . . . are presently being valued by a professional valuation company. At such time as the valuation is completed, the decedent's [Form] 706 will be supplemented by the Estate. For purposes of timely filing the return, a good faith, informed estimate of the values based in [I.R.S.] guidance . . . has been used. The estimated amounts should approximate the valuation as finally determined.
Certain Forms 712 were not available at the time of filing and upon receipt, the dededent's (sic) [Form] 706 will be supplemented by the Estate.
By letter of January 13, 2000, the Division acknowledged receipt of the Estate's letter of January 10, 2000, "with enclosures." It reiterated its request that the Estate "complete in detail" and file the New Jersey Estate Tax return.
During oral argument, the Director conceded that for purposes of his summary judgment motion he received the attachment to the federal Estate Tax return containing the Executor's statement.
In response, the Estate filed its New Jersey Estate Tax return with a cover letter dated February 17, 2000. It requested that a refund amount of $190,282 as reflected in the return be remitted with interest. The cover letter did not reference any litigation in connection with the Estate or pending issues with the I.R.S., nor did it mention any protective or potential future refund claim.
The refund was the difference between the estimated tax paid to the Division ($521,643) and the credit for State death taxes allowable by the I.R.S. ($331,361).
In June and August 2000, the Estate requested a status of its refund claim with interest. It included prior correspondence and portions of the tax returns in this connection. However, it did not reference any litigation in connection with the Estate, pending issues with the I.R.S., or a protective or potential future refund claim.
By letter of November 27, 2000 the Division advised the Estate that its "request for a partial pre-assessment refund of NJ Estate Tax" of $190,282 would be granted, however, payment of the refund did "not imply that a final assessment in the . . . decedent's estate has been made." The Division required a closing letter or other final determination of the Estate's federal estate tax liability so that the "New Jersey Estate Tax proceedings [can] be completed" and reminded the Estate that "[s]hould the state death tax credit ultimately be increased," additional estate tax plus interest would be due. (emphasis in original). The Estate received the refund by two checks, one in December 2000 and the second in March 2001.
On May 1, 2003, the Director issued a Notice of Assessment of estate tax. The Notice stated that "it [was] based upon an audit of the return filed and reflects any audit adjustments made by the Division." The total tax due (i.e., the allowable credit for State death tax for purposes of the federal estate tax) was shown as $442,441.36 as opposed to the originally reported amount of $331,361 by the Estate, which reduced the allowable refund. After adding interest and amnesty penalty, the Director demanded a payment of $163,835.92 from the Estate. The Notice included the Estate's appeal rights. No protest or appeal was filed.
One year later, the Estate responded to the Division's demand for payment. It challenged the interest imposed on grounds its 1999 estimated payment of $521,643 more than covered the $442,441 of "tax owed, pursuant to the Federal Estate Tax Closing Letter." The Estate further noted that the Division's refund of $190,282 was premature since, by law, refunds should not be made until there was "any corrected assessment or redetermination by the Federal Government." (quoting N.J.S.A. 54:38-3). Nonetheless, the Estate promptly paid the Division $111,080 representing the excess refund. The letter did not discuss the pending litigation and consequent potential future refund claims.
The Estate's May 24, 2004 letter asserted that it had attempted to resolve the estate tax matter since April 2003, but other than its letter of May 23, 2003, the Division had been completely unresponsive. The Division's May 2003 letter simply itemized amounts due from the Estate, namely, the tax due (i.e., the State death tax credit) of $442,441.36 and the various payments (estimated tax, refunds). The letter erroneously indicated the 1999 estimated payment as $522,377.40.
Neither party provided a copy of this letter but it was undisputed that the amount was determined by the I.R.S.
This represents the difference between the $190,282 refund paid by the Division and $79,202 (the estimated estate tax payment of $521,643 less federally allowed State death tax credit of $442,441).
The Director then issued another Notice of Assessment on April 21, 2005 to account for the Estate's payment of $111,080. This Notice also stated that "it [was] based upon an audit of the return filed and reflects any audit adjustments made by the Division." It imposed additional interest, reduced the amnesty penalty by an inconsequential amount, and demanded payment of $68,600. The Notice included the Estate's appeal rights. No appeal was filed.
Five months later, on September 16, 2005, the Division issued yet another Notice of Assessment. This Notice stated that "it [was] based upon the return filed and reflects any adjustments made by the Division." It corrected the federally allowed State death tax credit amount from $442,441.36 to $422,441.36, which in turn, reduced the amnesty penalty and interest. After credits for taxes paid by the Estate, the Division demanded an amount of $16,106.48. The Notice included the Estate's appeal rights. No protest or appeal was filed.
A month later, the Estate paid the amount demanded, plus interest for the month from the date of the September 2005 Notice to the payment date. The cover letter to this payment did not address any issues as to litigation or I.R.S. review or of future refund claims.
The Division then issued its fourth Notice of Assessment on January 10, 2006 showing a zero balance. The Notice stated that "it [was] based upon the return filed and any processing corrections made by the Division. If the return has been selected for audit, and the audit has been completed, it also reflects any audit adjustments made by the Division."
Four years later, by its cover letter of March 18, 2010, the Estate filed an amended New Jersey Estate Tax return. That return reported a reduction of New Jersey estate tax (i.e., the allowable credit for State death tax for purposes of the federal estate tax) to $257,402 and sought a refund of $165,039. The Estate enclosed a copy of the papers filed with the I.R.S. on the same date. The cover letter to the I.R.S. enclosed (1) a Supplemental Form 706 (which amended Schedules J, K and M); (2) the original Form 706 "with Protective Claim, filed August 19, 1999;" (3) Estate Tax Closing Letter dated June 6, 2002; (4) Form 1273, report of Estate Tax Examination Changes; and (5) judgment dated July 9, 2009 "setting forth elective share amount."
This pertained to the litigation which was referenced in the Executor's statement attached to the original Form 706.
On May 19, 2010, the Director acknowledged receipt of the Estate's request for "partial refund" but denied the same as untimely. The Director noted that refund claims had to be made within three years of the tax payments, which in the Estate's case was between February 19, 1999 and October 24, 2005. Since the Estate had failed to file "any protective claim within the said period" nor was there any communication from the Estate since the January 10, 2006 Notice of Assessment, the Director denied refund claim. Further correspondence between the Estate and the Division did not resolve the issue.
One year later, by letter of May 18, 2011, the Estate sent a letter to the Division enclosing the "final Estate Tax Closing Letter" with attachments from the I.R.S. The I.R.S. cover letter of April 13, 2011 attached an "Estate Tax Closing Document" of the same date (neither document used the term "final"), and noted that the I.R.S. would not "reopen or examine" Form 706 unless, among others, it was notified of "changes to the return." The attached Form 1273 ("Report of Estate Tax Examination Changes") showed $422,441.36 in the column titled "Shown on the Return" for State death tax credit, but $242,058.63 in the second column titled "As Corrected." The Estate requested the Division issue a refund of $217,222.95 plus interest. It maintained that the refund was payable pursuant to the Director's regulations and the Estate's "protective claim" which was filed with Form 706 and forwarded to the Division in August 1999.
Although the I.R.S. indicated that $422,441.36 was the amount of State death tax credit "Shown on Return," the Estate's original Form 706 filed with the I.R.S. in August 1999 claimed $331,361 as credit for State death taxes. Given that the Form 1273 issued by the I.R.S. in April 2011 also inserted the words "previously adjusted" in parenthesis above Column 1, it is evident that since the August 1999 filing of the Form 706 and the April 2011 I.R.S. Estate Tax Closing document, the I.R.S. had corrected or re-determined the amount of the federal estate tax, and thus, the State death tax credit. This likely occurred in 2002 since the Estate's amended New Jersey Estate Tax return filed in March 2010 included an "Estate Tax Closing Letter dated June 6, 2002" and "Form 1273, report of Estate Tax Examination Changes." It should be noted that this "previously adjusted" State death tax credit amount of $422,441.36 was the basis for the Director's May 1, 2003 additional assessment of New Jersey estate tax (except he incorrectly noted the amount as $442,441.36) in the amount of $163,835.92, which the Estate paid in 2004. See supra n.5.
On October 13, 2011, the Director issued a final determination denying the refund request on grounds (1) the Director never received the Executor's statement attached to Form 706; (2) the Estate failed to reference the statement or litigation in its February 17, 2000 refund request contained in the New Jersey Estate Tax return; and (3) the Estate failed to reference this statement or litigation at any time until its second refund request in March 2010 contained in the amended New Jersey Estate Tax return. The Director also stated that he "does not deem a statement buried in [Form 706] which is not brought to the Division's attention to be a valid protective refund claim." This complaint followed. FINDINGS
For deaths occurring before January 1, 2002, New Jersey imposes an estate tax "[u]pon the transfer of the estate" of a resident decedent, which estate is also subject to the federal estate tax. N.J.S.A. 54:38-1(a). The amount of the tax is the difference between the amount of state taxes allowed as a credit against the federal estate tax and the amount of state death taxes actually paid to the state for property owned by the decedent. Ibid. The "intent and purpose" of imposing the New Jersey estate tax is "to obtain . . . the benefit of the credit allowed" by the federal estate tax laws, thus, the legislature required the New Jersey estate tax provisions be "interpreted and construed liberally." N.J.S.A. 54:38-13.
"The federal credit provides an estate with a dollar-for-dollar reduction in its federal estate tax liability for inheritance and estate taxes paid to states." Forbes v. Director, Div. of Taxation, 14 N.J. Tax 257, 263 (Tax 1994). Because the tax "is intended only to 'soak up' the unused federal credit for which an estate receives a corresponding federal estate tax reduction," New Jersey's revenue is "at the expense of the federal government" and a "taxpayer thus pays no additional tax." Ibid.
Prior to its repeal, N.J.S.A. 54:38-9 provided that if there is a change in the federal estate tax credit, then the New Jersey estate tax "shall be so assessed as will be necessary to absorb the full amount of such changed credit." The court could not find any regulations interpreting this statute.
N.J.S.A. 54:38-9 was repealed by L 2002, c. 31, § 4, effective July 1, 2002. Since decedent here died in 1998, the repeal is inapplicable.
Since the New Jersey estate tax is tied to and is dependent upon the amount of the allowable federal estate tax credit, the Legislature also provided for situations where the amount of the credit changes due to "corrected assessments or redeterminations" of federal estate tax by the I.R.S. Thus, N.J.S.A. 54:38-2 provides that if the federal estate tax is increased due to a "redetermination, or additional or corrected assessment" by the I.R.S. impacting the federal estate tax credit, then additional New Jersey estate tax shall be assessed by the Division. On the other hand, if the federal estate tax is reduced, resulting in reduced federal estate tax credit, then the taxpayer is entitled to a refund of New Jersey estate tax already paid, upon satisfactory proof of the federal reduction. N.J.S.A. 54:38-3. However, refund applications must be "filed" with the Division "within three years from the date of payment." Ibid. The Division's regulations provide similarly. See N.J.A.C. 18:26-3.9 ("applications for the refund of estate taxes claimed to have been excessively . . . paid must be filed with the Director within three years from the date of payment").
In connection with the I.R.S. determinations, the Division's regulations, as applicable here, provides as follows:
(b) If subsequent to a determination of the estate tax due this State, the amount of the Federal estate tax shall be decreased and the amount allowed as a credit for inheritance, succession or legacy taxes paid to any state . . . correspondingly reduced, the estate tax due this State shall be reduced accordingly upon submitting satisfactory proof to the Director.
(c) The amount of the estate tax due New Jersey, if any, cannot be determined in any case until the Federal Government has definitively determined the amount of Federal estate tax chargeable on final assessment.
1. Notice to the estate of final assessment usually takes the form of a letter from the District Director, [I.R.S.], indicating the amount of Federal estate tax chargeable, and the amount of the allowable credit.[N.J.A.C. 18:26-3.4(b); (c)]
2. If any adjustments have been made, this letter is accompanied by a detailed statement of the changes made in . . . the Federal estate tax return. If an appeal from the Director's findings is taken, the final notice will be the order of the appellate court in this respect.
3. The [Division] requires a . . . copy of all determinations, final and intermediate, of the [I.R.S.], with all supporting statements.
Neither the statute, N.J.S.A. 54:38-3, nor the regulations, N.J.A.C. 18:26-3.4; 26-3.9, provide for the tolling of the 3-year statute of limitations for the refund claims in situations of federal estate tax changes. This issue was addressed in Forbes, supra, where the court noted that "[r]efund claims are frequently filed dependent on future events such as the results of future federal audits or . . . litigation." 14 N.J. Tax at 264. A reconciliation of the statute of limitations for refunds and refunds arising after such period due to future events is achieved if taxpayers file protective refund claims within the limitations period. Id. at 265.
In Estate of Ehringer v. Director, Div. of Taxation, 24 N.J. Tax 599, 621 (Tax 2009), aff'd, 412 N.J. Super. 316 (App. Div. 2010), the court was faced with the issue of adequate and timely notice of pending litigation giving rise to potential estate tax refund claims. There, as here, the Estate was involved in litigation soon after the decedent's death. Id. at 605. It requested an extension of time from the Division to file the New Jersey Estate Tax return, and remitted estimated taxes with the request, but did not provide any "reason" for the extension request. Ibid. Six months after the extended deadline, the Division received its "first notice" of the "ongoing litigation" when the Estate responded to the Division's inquiry for the status of the return. Id. at 606. Six months later, and in response to the Division's inquiry for the status of the return filing, the Estate reiterated the pending litigation as an obstacle to the filing, but "[o]nce a settlement has been reached" it would file the return. Ibid. This time, the Estate also alerted the Director of a potential "overpayment once the[] returns are filed." Ibid.
Three months later and in response to another reminder from the Division, the Estate stated that a return would be filed soon, and such return was filed two months later. Ibid. The return did not "indicate" that the litigation was "resolved," nor did it "request a further extension for reporting additional expenses related to that litigation" or "indicate that the estate's federal tax liability had not been finally determined." Id. at 607.
The Director issued a refund based upon the claim in the filed return. Ibid. Twenty-two months later, the Estate filed an amended return seeking an additional refund due to a recently completed I.R.S. audit allowing the litigation expenses although the Estate was aware of such expenses within the 3-year limitations period. Id. at 607-08. The Director denied the request as untimely. The court upheld the determination finding that once the Estate filed its return without any indication of pending litigation, "it was entirely reasonable for the Division to conclude at that point that plaintiff's estate tax liability had been fully resolved and satisfied." Id. at 612-13. The court held that under the facts, namely, that because the Estate had sufficient information as to the amount of the deductible litigation expenses prior to the expiration of the 3-year limitations period, it could have filed a protective refund claim. Id. at 615-16 (relying upon Forbes, supra). For the same reason, the limitations period could not be extended on equitable grounds. Id. at 617. The Appellate Division affirmed. 412 N.J. Super. at 318 (dismissing as meritless the Estate's contentions that the Division had sufficient notice of a future amended return containing a refund claim, therefore, it had no obligation to "take further steps" and the limitations period should, in any event, be tolled on equitable grounds).
Here, the litigation pertaining to the marital deduction (and the spousal elective share) ended July 9, 2009. By this time, the 3-year limitations period ending February 2002 (from the February 1999 payment date) had already expired. The court was not provided any information that as in Ehringer, supra, the Estate here had sufficient information prior to February 2002 of the correct or estimated correct marital deduction amount, the consequent federal estate tax liability, and thus, the allowable federal credit for State death taxes.
Even if the October 2005 date (the last date of the New Jersey estate tax payment) triggered the limitations period, the 3-year period ended before the July 2009 litigation end date. While the settlement agreement notes that the court provided the computation methodology of the spousal elective share by a September 2008 Order, that Order was subsequently modified in January of 2009, agreed to by the parties in July 2009, and then, approved by the court by its Order of July 2009. Thus, the facts which weighed most heavily against the taxpayer in Ehringer, namely, possession of legally cognizable and sufficient information to file an amended return seeking further refund before the limitations period expired, are not present here.
Additionally, in Ehringer, supra, the court deemed as reasonable the Director's reliance that the New Jersey Estate Tax return had been filed after resolution of all litigation. This is because the taxpayer had previously conveyed to the Director that the New Jersey Estate Tax return would be filed upon settlement of the litigation, and did not indicate otherwise when such return was subsequently filed. Here, however, the Estate did not, at any point prior to the final settlement in July 2009, assure the Director that it would file a New Jersey Estate Tax return upon settlement of the litigation.
The Director points out that unlike Ehringer, supra, the Estate never once asserted that the pending litigation as to the marital deduction amount could result in a potential refund of New Jersey estate taxes. He argues that language to that effect was not present in the Executor's statement attached to Form 706, in the Estate's New Jersey Estate Tax return filed in 2000, or in any of the Estate's several communications during the entire ten year period (from the 2000 filing of the New Jersey Estate Tax return until the March 2010 amended New Jersey Estate Tax return). The Estate argues that once having provided the notice of pending litigation in Form 706 in January 2000, it is under no statutory or regulatory obligation to continually remind the Director of the Estate's refund claim on an ongoing basis.
The Director's insistence upon explicit language to the effect that pending litigation may result in a tax refund claim elevates form over substance. The Director is acknowledged as having expertise in tax matters. Thus, his audits or final determinations are entitled to a presumption of validity, and his reasonable interpretations of tax statutes are accorded "great respect." Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984). The Director's knowledge and expertise should be juxtaposed with the fact that the New Jersey estate tax liability is wholly dependent upon the final determination of the federally determined State death tax credit. See Forbes, supra, 14 N.J. Tax at 264 ("implicit in the New Jersey estate tax is the incorporation of the provisions of the federal estate tax including exemptions and deductions").
Here, the Director received the Form 706 with the accompanying Executor's statement in January 2000 alerting the Director of pending litigation as to the amount of the correct marital deduction. The Executor's statement also indicated that upon resolution of the litigation, the Form 706 would be supplemented. In each one of his several Notices of Assessment, the Director based his conclusion therein either upon "the return filed" or "an audit of the return filed." The Estate is then given to understand that the Director has knowledge of the contents of the filed return and its attachments, including the previously provided Form 706, and is conversant with the legal ramifications of the impact of the amount of marital deduction on the estate tax liability, which in turn, impacts the amount of federal credit for State death taxes. This expectation is reasonable because of the Director's acknowledged expertise in the area of tax laws, which obviously includes his review, scrutiny and examination of tax returns and any documents filed in connection/support thereof. Such expectation is also reasonable because the Director's very first letter of November 27, 2000 to the Estate specifically noted that the Division's payment of the refund did "not imply that a final assessment in the . . . decedent's estate has been made," that until the Estate provided information as to the final determination of the Estate's federal estate tax liability the "New Jersey Estate Tax proceedings [cannot] be completed," and that "[s]hould the state death tax credit ultimately be increased" additional estate tax plus interest would be due (emphasis in original).
These facts and principles require a rejection of the Director's argument that the Estate's February 2000 New Jersey Estate Tax return and subsequent correspondence should be considered in a vacuum, i.e., without context to the filed Form 706; that he has no notice of a protective refund claim unless there is specific language in some document that the litigation can generate a potential refund; or that he is not on notice of a refund claim unless regularly reminded of the litigation and further reminded that such litigation could engender tax refund claims. The court's conclusion is buttressed by the fact that taxpayers had no guidance from the Division as to what it deemed an acceptable form of a protective refund request/notification until May 2009 when the Division incorporated the principle of a protective refund claim explicated in Forbes, supra, see 41 N.J.R. 2051(a) (May 4, 2009), and then only for estates created by deaths occurring after December 31, 2011. See N.J.A.C. 18:26-3A.12 (e). Under these circumstances, the court finds that the Executor's statement provided to the Division in January 2000 was sufficient to notify the Director of a potential refund claim upon resolution of the pending litigation identified therein.
The Director stated that the regulations
are intended to alert estate administrators that they may file a so-called "protective" claim for refund of . . . estate tax, in anticipation of reasonably anticipated events, such as reasonably anticipated future estate administration expenses. The proposed amendments should make estate administration easier and more equitable for estate administrators and beneficiaries of estates by allowing estate administrators to file protective claims for refund of . . . estate tax where the final tax liability could be affected by reasonably anticipated events. In particular, the proposed amendments provide a new procedure for estate administrators to file a protective claim for refund when the amount of the tax liability could be affected by pending court litigation. The proposed amendments will bring Division procedures for protective claims for refunds of inheritance and estate tax into conformity with the holding of Forbes v. Director, Division of Taxation, 14 N.J. Tax 257 (1994).
[ 41 N.J.R. 390(a) (January 20, 2009)]
Lengthy passage of time does not automatically render timely-made refund claims stale. This is because, (i) "protracted litigation" such as here, can result in refund claims beyond the statute of limitations, see Forbes, supra, 14 N.J. Tax at 265, n.1; (ii) the Director's regulations recognize that the I.R.S. can issue "final and intermediate" determinations of the federal estate tax and credit for State death taxes, but provide that the New Jersey estate tax is determinable only after the I.R.S. has "definitively determined" the federal estate tax "chargeable on final assessment," see N.J.A.C. 18:26-3.4(c); (iii) the New Jersey estate tax liability, as a sponge tax, is fully dependent upon a final federal determination of the State death tax credit; and, (iv) the legislative intent clearly requires a liberal interpretation of the statute so as to obtain the full benefit of the federal tax credit at the expense of the federal government without requiring the taxpayer to pay additional New Jersey estate tax. N.J.S.A. 54:38-13; Forbes, supra, 14 N.J. Tax at 263.
The Director next contends that even if the protective refund claim was provided to him in January 2000, thus, suspending the 3-year statute of limitations, that limitations period ended in January 2006 when he issued his fourth Notice of Assessment showing a zero balance of New Jersey estate tax due (which was based upon the I.R.S. determined federal estate tax credit of $422,441.36), which was not appealed. Implicit in this argument is the Director's contention that he reasonably relied on these facts, i.e., the federally changed credit amount and the lack of appeal of his Notice of Assessment, as indicative of the finality of the New Jersey Estate Tax return. See Ehringer, supra, 24 N.J. Tax at 612-13.
The problem with this argument is that there is nothing in the record to show that the Estate notified the Director of a final I.R.S. re-determination of the federally allowed credit for State death taxes until May 2011. See N.J.A.C. 18:26-3.4(c)(3) (taxpayer is obligated to provide the Director with a "copy" of all federal determinations of the federal estate tax liability). While it is undisputed that there was a change in the federally allowed credit sometime in 2002 or 2003, it is not clear why or how this occurred. Regardless, in opposition to the Director's 2003 demand for interest on his assessment (generated due to the 2002 change in the federal credit), the Estate specifically pointed out that the Director cannot finalize a refund or assessment until federal corrected assessments or determinations are completed pursuant to N.J.S.A. 54:38-3. Thus, although it is undisputed that the Estate paid the Director's 2003 assessment of $111,080 and 2005 assessment of $16,106.48, it is difficult to conclude that the Estate provided the Director with the impression, explicit or implicit, that its estate tax proceedings, federal or state, was fixed and finalized, and that the Director's reliance upon such impression was reliable.
The fact that the Estate did not file a protest or appeal from the Director's 2003 and 2005 Notices of Assessment does not preclude the Estate from claiming a refund provided it complies with the statute of limitations in this regard or files a protective refund claim within the limitations period. This is because neither the language nor intent of the statutes, N.J.S.A 54:38-3; 54:38-9, or the regulations, N.J.A.C. 18:26-3.4; 18:26-3.9, prohibits a refund claim due to an un-appealed Notice of Assessment.
The Director posits that the Estate's March 2010 amended Estate tax returns should not be allowed to trigger a new 3-year limitations period, otherwise taxpayers can continually file amended returns and defeat the strict construction afforded to statute of limitations. See M.J. Ocean, Inc. v. Director, Div. of Taxation, 23 N.J. Tax 646, 651 (Tax 2008) (statutes of limitations applicable to refund claims are narrowly construed), aff'd, 2009 N.J. Tax LEXIS 2 (App. Div.), certif. denied, 198 N.J. 473 (2009). The argument has merit if the taxpayer had initially done nothing to notify the Director of pending litigation that would require an amendment to the federal estate tax liability, which is the basis for the New Jersey estate tax liability. This is not the case here. The court also notes that the Director's regulations at N.J.A.C. 18:26-3.4, while rightfully not extending the statute of limitations, nonetheless, clearly recognize that federal changes, intermediate or final, can occur, generating possible amended New Jersey Estate Tax returns.
In sum, the court finds that the Executor's statement in the August 1999 Form 706 (provided to the Division in January 2000) of pending litigation involving the determination of the correct amount of marital deduction and of its undertaking to supplement Form 706 upon completion of the litigation, sufficed to qualify as a protective refund claim for purposes of N.J.S.A. 54:38-3, N.J.S.A. 54:38-9, N.J.A.C. 18:26-3.4, and N.J.A.C. 18:26-3.9. Since it is undisputed that the litigation was finally resolved in July 2009, the Estate was able to file amended Estate Tax returns reflecting the legally authorized amount of marital deduction/spousal elective share, and thus, the properly allowable federal estate tax credit for State death taxes, only after the 3-year limitations period from the date of the first payment (February 1999) or the last payment (October 2005). Because the New Jersey Estate Tax is inextricably dependent on the I.R.S. determination and allowance of the credit for State death tax; because New Jersey's revenue is at the expense of the federal government not the taxpayer; and further because there was no guidance from the Division as to the form of protective refund claims to be filed for death occurring before December 2011, the court finds that the Estate was not required to continually remind the Division of the Executor's statement in Form 706 and specifically use the words "protective refund claim" in order to qualify the statement as such. Therefore, the Director's final determination disallowing the refund claim as untimely is not upheld under the facts and circumstances of this matter. CONCLUSION
For the aforementioned reasons, the court denies the Director's summary judgment motion, and grants the Estate's cross-motion for the same relief. An Order reflecting this Opinion will be issued simultaneously.
Very Truly Yours
Mala Sundar, J.T.C.