NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
______________________________ : ESTATE OF JOAN LEE JOHNSTON, : TAX COURT OF NEW JERSEY : DOCKET NO: 010286-2015 Plaintiff, : : vs. : : DIRECTOR, DIVISION OF : TAXATION, : : Defendant. : ______________________________:
Decided: June 15, 2018
William J. Kaufmann for Plaintiff (Cafiero & Kaufmann attorneys).
Heather Lynn Anderson for Defendant (Gurbir S. Grewal, Attorney General of New Jersey, attorney).
CIMINO, J.T.C.
I. INTRODUCTION
Plaintiff taxpayer, Estate of Joan Lee Johnston, through its
administrator, James Johnston, Jr. (James Jr.) seeks a refund of
transfer inheritance tax paid. James Jr. alleges that the clear
market value of the estate is reduced, and thus the tax obligation
is reduced, because the estate has to pay to James Jr. and his
children for waste damages which Joan Lee Johnston (Joan Lee)
caused to real property she occupied during her lifetime. The
-1- Director has disallowed this deduction and the corresponding
refund.
Our Supreme Court has indicated that summary judgment
provides a prompt, business-like and appropriate method of
disposing of litigation in which material facts are not in dispute.
Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 530 (1995).
Additionally, cross-motions for summary judgment demonstrate to
the court the ripeness of the matter for adjudication. Spring
Creek Holding Co. v. Shinnihon U.S.A. Co., 399 N.J. Super. 158,
177 (App. Div. 2008).
Both parties have moved for summary judgment and this matter
is ripe for summary judgment. For the reasons set forth in greater
length below, this Court rejects the arguments of taxpayer and
grants Summary Judgment in the Director’s favor.
II. STATEMENT OF FACTS
The Johnston Family owned a modest home located at 221 Gilford
Avenue, Haddon Township in Camden County. In addition, they had
acquired a home at 202 West 22nd Avenue, North Wildwood in Cape May
County. North Wildwood is located on a barrier island which abuts
the Atlantic Ocean. The family consisted of the father, James J.
Johnston, Sr. born in 1903, the mother, Aulien Q. Johnston born in
1903 and two children, Joan Lee Johnston born in 1936 and James
Johnston, Jr.
-2- Aulien Johnston passed on May 23, 1988. Upon the death of
Aulien Johnston, all the marital assets became vested with James
Johnston, Sr. Shortly thereafter, James Johnston, Sr. passed on
September 16, 1988. Upon the death of James Johnston, Sr., the
disposition of assets was governed by a will he executed on May
14, 1988.
The will provided that Joan Lee could continue to live in the
Haddon Township property for as long as she desired. It is
undisputed that since her birth in 1936, Joan Lee had always lived
in the residence of her parents. The will also provided that she
would be responsible for all costs relative to the property. Upon
the death of Joan Lee, the property was to be sold and the proceeds
divided between James Jr. and any grandchildren equally, share and
share alike, per capita and not per stirpes. 1 The will also
provided that the North Wildwood property would also go to Joan
Lee. The alleged reason for giving the property to Joan Lee was
to provide additional financial security for her. Finally, all
the rest, residue and remainder of the estate was to be divided
equally between James Jr. and Joan Lee.
Joan Lee passed on March 31, 2011. In accordance with the
terms of James Johnston, Sr.’s will, the life estate expired and
1 The exact phrase appeared in an earlier will and due to a scrivener’s error was unintentionally omitted. However, the Probate Court entered an order recognizing this error and correcting same. -3- the remainder interest in the Haddon Township property went in
equal shares to James Jr. and the two grandchildren of James Sr.
(who are also James Jr.’s children), Anna Lynn Caroline Johnston
LeMaster and James J. Johnston, III.
It should be made clear that the disposition of the Haddon
Township property was not a part of Joan Lee’s estate since any
interest she had in the Haddon Township property expired with her
death in accordance with the terms of the life estate created by
James Johnston Sr.’s will. On death, Joan Lee’s estate consisted
primarily of the North Wildwood property and an investment
portfolio.
It is alleged that over the course of twenty-three years,
from 1988 through 2011, in which Joan Lee lived at the house alone,
she did not allow her brother, James Jr., to enter the property.
Upon entering the property after the death of Joan Lee, James,
Jr. discovered that the place was an utter mess and that Joan Lee
was not merely a hoarder of bric-a-brac, but someone who did not
throw away things such as empty food containers. Photographs taken
by James Jr. reveal items piled up on the floor everywhere.
Practically every square inch of table space and counter space was
stacked with trash including empty food containers, dirty dishes
and other debris. Things were piled everywhere leaving narrow
pathways to walk. It must be emphasized that the home was not
merely cluttered, but dirty and unsanitary as evidenced by the
-4- photographs of the kitchen and bathroom. This was not someone who
was merely accumulating items such as books, magazines or
memorabilia, but was also not cleaning the bathroom, kitchen or
other areas for many years. James Jr. alleges that as a result of
Joan Lee’s hoarding, the house suffered damage, including mold and
plumbing issues. The Director allowed a deduction of the expenses
of $1,500 to remove debris and $1,814 for plumbing.
James Jr. alleges that the actions of Joan Lee constitute
waste in the legal sense and that he and his children should be
compensated from Joan Lee’s estate. Since Joan Lee died intestate,
the estate would be going to James Jr. in any event. Said transfer
of assets would be subject to a tax in the amount of 11%. The
upshot of James Jr.’s waste claim is that damages for waste would
be deducted from Joan Lee’s estate and thus not subject to transfer
inheritance tax.
James, Jr. is the duly appointed Administrator of Joan Lee’s
estate. The Director and James Jr. agree that the value of the
Haddon Township home is $160,000. 2 While the value of the property
2 Previously the Director had taken the position that absent correction of the scrivener’s error, the Haddon Township property became part of the residual estate of James Sr. which would then be divided between Joan Lee and James Jr. evenly. Upon the death of Joan Lee, her share would have become part of her estate. Resultantly, the Director wanted to add half the value of the Haddon Township property, $80,000.00 to the assets of Joan Lee’s estate. As indicated in the previous footnote, the scrivener’s error has been corrected by the order of the Probate Court. -5- in its deteriorated condition has been accepted by the parties,
the value of the property in undeteriorated condition is somewhat
unclear. James Jr. opines that the fair market value of the
property is $230,000 based on a similar property located two doors
away. Thus, the claimed diminution in value is $70,000.
Under New Jersey’s waste statute, James Jr. and his children
initially alleged that they were entitled to treble damages against
Joan Lee for the total amount of $210,000. It was asserted that
this alleged debt of the estate would escape the transfer
inheritance tax. The waste claim would be a claim against her
estate which consists of the Wildwood property worth $167,033,
other personal property amounting to $180,869 and an insurance
policy in the amount of $9,868 for a gross estate of $357,770.
From this, the Director allowed deductions of $39,838 reducing the
estate to $317,932. Deducting the waste damages of $210,000 would
result in a clear market value of the estate of $107,932.
Later, James Jr. and his children abandoned trebling the
damages and only sought the base $70,000 waste claim. This would
result in an estate with a clear market value of $317,932 less the
$70,000, or $247,932.
-6- III. CONLUSIONS OF LAW
A. Transfer Inheritance Tax
The New Jersey Inheritance Tax Act is a tax on the transfer
of assets where the “property . . . is transferred by deed, grant,
bargain, sale or gift . . . intended to take effect in possession
or enjoyment at or after . . . death.” N.J.S.A. 54:34-1(c). The
tax imposed by the Inheritance Tax Act is upon the clear market
value of the property transferred. N.J.S.A. 54:34-5. In
determining the clear market of the property, certain “deductions”
are allowed. Ibid. One of those deductions is the “debts of
decedent owing at the date of death . . .” N.J.S.A. 54:34-5(a).
The issue in this case is whether the statutory tort claim of waste
pursued by James Jr. personally (not as administrator) and his
children is a debt of Joan Lee owing at the date of death that
would reduce the clear market value of the estate.
James Jr. is the sole beneficiary whose distribution is
subject to an 11% transfer inheritance tax. N.J.S.A. 54:34-
2(c)(2). However, if the suit for waste is successful, the portion
of the estate constituting payment of the waste claim would not
pass to him as a beneficiary, but instead be paid to him and his
two children as creditors of the estate. The amount paid to James
Jr. and the children as creditors would not be subject to transfer
inheritance tax. However as creditors, the payment may be taxable
as income or capital gains for federal income tax purposes and
-7- income for state gross income tax purposes. Generally, the income
tax due and owing would be greater than the transfer inheritance
tax. 3 However, the specific tax and financial circumstances of
James, Jr. and his children are unknown.
B. Deductibility of Tort Claims
Before proceeding further, it has to be determined if there
is a valid basis for the deduction. The New Jersey Courts have
not squarely dealt with the deductibility of tort claims. This is
not a situation where the individual making the tort claim is an
independent third party who does not have an interest in the
estate. Rather, the claim is being made by the administrator of
the estate in his individual capacity along with his two children.
The practical effect, if successful on the claim, would be to shift
a portion of Joan Lee’s estate to satisfy a claim for damages.
Over the years, there have been various iterations of the
theme dealing with the distribution of estate assets that are not
exactly in accordance with the terms of the will. A guiding
principle is that “[o]ur courts have long taken the position that
the substance of the transaction controls over the mere form of
creation, and that technical tools within the law of conveyancing
3 Taxpayer abandoned the trebling of damages from $70,000 to $210,000. Ostensibly, this was done since the treble damages of $140,000 ($210,000 less $70,000) are exemplary damages subject to federal and state income tax which is potentially more than the transfer inheritance tax rate. See I.R.C. 104(a), (c); N.J.S.A. 54A:5-1(l). -8- are not to thwart the purpose and the intent of the statute. The
range of the statute should not be so restricted as to frustrate
its evident purpose.” Newberry v. Walsh, 20 N.J. 484, 493
(1956)(citations omitted).
A common theme which runs through many inheritance tax cases
is the shifting of estate distributions from an individual in one
class to an individual in another class of beneficiary, resulting
in a decrease of taxes. 4 This generally occurs as a result of will
contests which are resolved, or an allegation that the monies paid
are not part of the estate, but constitute a deductible debt of
the estate.
There are few recent cases dealing with shifting of
distributions and the last time the New Jersey Supreme Court dealt
with this issue was in 1976. See In re Estate of Lingle, 72 N.J.
87 (1976). This is probably due in part to the fact that in the
1980s the Legislature eliminated the transfer inheritance tax for
transfers between spouses, parents, grandparents, and issue, thus
reducing the potential for tax implications. N.J.S.A. 54:34-2(a),
(c).
4For example, for transfers over $25,000 to Class C beneficiaries, which include siblings, are taxed at progressive rates of eleven through sixteen percent. N.J.S.A. 54:34-2(c). On the other hand, transfers to Class A beneficiaries such as spouses, parents, grandparents and issue are not taxed. N.J.S.A. 54:34- 2(a). Shifting a distribution can have significant tax consequences.
-9- Moreover, the last reported decision to squarely deal with
the issue of debt deductions was by the Appellate Division in 1950.
See Sullivan v. Margetts, 9 N.J. Super. 189 (App. Div. 1950). This
may be due to the fact that while the transaction may escape
transfer inheritance taxation, the recipient of the monies may
still be subject to federal income tax and New Jersey gross income
tax.
The basic rule is that the Director does not look at how the
property was actually distributed, but rather, what were the terms
of the will or other document controlling disposition. Lingle, 72
N.J. at 97; De Rosa v. Dir., Div. of Tax’n, 29 N.J. Tax 482, 486
(App. Div. 2016); Donovan v. Dir., Div. of Tax’n, 10 N.J. Tax 224,
229 (Tax 1988). This basic rule was grounded in the statutory
provision that provides that the transfer inheritance tax is a tax
on the transfer by will or by the intestate laws of the estate.
N.J.S.A. 54:34-1(a).
The decisions dealing with the taxation of shifting estate
distributions and debt deductions are hard to synthesize into a
common body of law. However, what can be gleaned from reading
these decisions as a whole is that there are two requirements that
are necessary for a debt to be a valid deduction from the estate.
The first requirement is that the debt, or more appropriately the
money the estate intends to pay for the debt, must be supported by
consideration or damages. See Lingle, 72 N.J. at 97. Otherwise,
-10- the payment constitutes what is merely a donative distribution of
the estate. The second requirement is that the decision to pay
the debt must have been entered at arm’s length. See Id. at 92-
93. This is not to suggest full-blown litigation, but rather a
process in which the parties dealt with each other at arm’s length
and without collusive effect.
1. The need for consideration or damages
The first requirement of consideration or damages is
addressed in Lingle in which the decedent left his entire estate
to his second wife, despite a separation agreement between a
decedent and his first wife in which he promised to leave one-half
of his estate to his daughters by the first marriage. Id. at 91.
The Director calculated and assessed the tax in accordance with
the terms of the will taking no account of the marital settlement
agreement. Ibid. The Appellate Division reversed indicating that
the payments to the daughters should be considered as debts, and
hence, fully deductible. Ibid. While the Supreme Court
acknowledged that debts constitute a valid deduction in
determining the clear market value to be taxed, the Supreme Court
differed from the Appellate Division and held that a promise to
make a disposition was not intended by the Legislature to be
included as a deduction in the calculation of the transfer
inheritance tax. Id. at 92-93. However, the transfer would not
be taxable since the Supreme Court recognized that the Legislature
-11- intends to only tax transfers of a donative nature. Id. at 97.
“[A] transfer made pursuant to a contract will not be subjected to
an inheritance tax where the estate has received a full and
adequate consideration in money or money’s worth.” Ibid.
The instant case does not involve a contract claim, but rather
a tort claim. The rough corollary to consideration for a tort
claim is damages. Just like in a contract claim where you can
have a meeting of the minds, but no contract without consideration,
the liability for a tort claim does not have a real impact on an
estate unless there are corresponding damages.
Overall, there must be a real tort claim. Here, waste is the
tort alleged, an ancient doctrine of law which was a rarity even
in Blackstone’s day. Kenlee Corp. v. Isolantite, Inc., 137 N.J.
Eq. 459, 461 (Ch. 1946).
a. The waste claim
On March 17, 1795, New Jersey adopted an Act for the
prevention of waste. L. 1794, C. 547, §1 through §8. The Statute
essentially followed two earlier English statutes, the Statute of
Marlbridge enacted in 1267 and the Statute of Gloucester enacted
in 1278. Camden Trust Co. v. Handle, 132 N.J. Eq. 97, 99 (E. & A.
1942). The Statute of Marlbridge broadened the common law
concerning waste to include tenants-for-life and for a term of
years. Ibid. The Statute of Gloucester adopted nine years later
established the punishment for waste as forfeiture of the thing or
-12- place wasted and treble damages. Ibid. The statute is currently
codified in Chapter 65 of Title 2A. N.J.S.A. 2A:65-1 through -
10.
The statute provides in pertinent part:
No tenant . . . for life . . . shall, during the term, make or suffer any waste, sale or destruction of any property belonging to the tenements demise, without special license in writing.
[N.J.S.A. 2A:65-2]
A civil action may be maintained in the superior court against the tenant, and upon finding that waste has been committed, treble damages shall be assessed or granted, and the defendant shall lose the thing or place wasted.
[N.J.S.A. 2A:65-3]
New Jersey Courts have recognized two main varieties of waste,
voluntary and permissive. 5 Voluntary waste, which is sometimes
also referred to as active waste, is an affirmative wrong act by
a tenant. This would include such acts a pulling down buildings
or chopping down trees during the tenancy.
On the other hand, permissive waste is the failure to act to
protect the property. For example, allowing a roof to leak and
5 There is also a third variety called ameliorative waste in which the tenant destroys something, but as a result makes the property more valuable. Thomas w. Merrill, Melms v. Pabst Brewing Company and the Doctrine of Waste in American Property Law, 94 Marq. Law Rev. 1055, 1056 (2011). Needless to say, New Jersey courts have not addressed this type of waste. -13- doing nothing, leading to interior water damage, could be
considered permissive waste. “A tenant for life is bound to repair
only to the extent of preventing permissive or actual waste. In
fulfillment of this duty, it is said that he must keep the premises
in as good repair as when his estate began, not excepting ordinary
wear or tear. If, in the course of time, a new roof is needed he
should put it on; if paint wears off, he is bound to repaint. But
he is under no obligation in respect to the loss of economic value
of a building which normally occurs.” In re Estate of Roth, 139
N.J. Eq. 588, 596 (Prerog. Ct. 1947). It is settled law that an
action for permissive waste will lie under the statute of waste.
Newman v. Sanders, 89 N.J.L. 120, 121 (Sup. Ct. 1916). However,
it has been seriously questioned whether the “filthy condition” of
the premises may amount to a remedy for waste since there must be
permanent damage. Miller v. Foreman, 37 N.J.L. 55, 59 (Sup. Ct.
1874).
The parties have stipulated that the house is only worth
$160,000.00 in its current state. No proofs have been presented
as to what the property would be worth but for its filthy
condition. James Jr., as administrator, presents one comparable
sale from two doors down as to what the property would be worth in
unfilthy condition, but does not provide any proof as to how this
property is comparable in size, age or condition save the filth.
Moreover, James Jr. does not make any adjustments for differences
-14- in age, size or condition between the subject property and the
property two doors down.
The difference in value due to the filth and such may not
rise to an actual claim. The law provides that normal depreciation
is not subject to a waste action. In re Estate of Roth, 139 N.J.
Eq. at 596. It is beyond doubt that this property is in somewhat
rough condition and is littered with filth and debris. However,
there has not been any showing what effect this has on value. For
example, the cost to clean up and repair the premises might only
be a fraction of the alleged loss of value. In other words, a
small investment in repair and clean-up may reap a much larger
increase in value. According to the estate returns, the Director
allowed a deduction for $1,500 in cleanup and $1,814 in plumbing.
The law of waste is more concerned with permanent damages such as
the removal of minerals or the cutting of trees which are not
easily replaceable. See, e.g., Moorehouse v. Cotheal, 22 N.J.L.
521, 523 (Sup. Ct. 1850)(lumber); Gaines v. Green Pond Iron Mining
Co., 33 N.J. Eq. 603, 607-08 (E. & A. 1881)(minerals). The
doctrine does not fit squarely into property that has suffered
permissive waste since many times the damage is reversible.
There is also the issue of remediation stigma which has been
described by the example of a house with an intact roof that may
be slightly more valuable to a buyer than a house with a roof that
has been properly repaired because of fear of further leaks and
-15- possible hidden damage in the house. Hous. Auth. v. Suydam
Investors, LLC, 177 N.J. 2, 21 n. 4 (2003). However, this is not
to suggest that a dollar-for-dollar reduction would be
appropriate. Inmar Assoc., Inc. v. Borough of Carlstadt, 112 N.J.
593, 605 (1988).
There has not been any presentation of the cost to remediate
the property. All we have are pictures of what appear to be a
hoarder’s residence. Sure it may be true that the rugs are ruined,
but even with normal wear and tear, rugs may need to be replaced
after twenty years.
The same holds true for the walls. Even if Joan Lee was a
better housekeeper, the walls may need to be repainted, wallpaper
removed and paneling removed, if not for any reason but to update
the colors and style. The kitchen and bathroom appear to be dated
as well. Even if not in deplorable conditions, these may need to
be remodeled as well. At this juncture, there is simply
insufficient evidence to establish waste that resulted in damages.
2. Adversarial process free of collusion
The second requirement in establishing a valid debt is that
the decision to pay the debt must be have been entered as part of
an arm’s length transaction. This is not to suggest a full-blown
trial is necessary, but rather a process in which the parties dealt
with each other at arms’ length and without collusive effect.
-16- In De Rosa, the matter did not involve a debt, but rather a
will contest, in which a portion of the estate distribution was
shifted from a taxable Class C beneficiary to a nontaxable Class
A beneficiary. De Rosa, 28 N.J. Tax at 75-76. Both the Appellate
Division and the Tax Court expressed concern when the executor is
also a beneficiary. De Rosa, 29 N.J. Tax at 486, 28 N.J. Tax at
80. The Tax Court suggested that “[i]f an independent executor
settles a will contest to best effectuate the terms of the will,
then perhaps it would be proper to consider the agreement when
assessing a transfer inheritance tax.” De Rosa, 28 N.J. Tax at
80. The court did not reach that issue because the executor was
also a beneficiary. Id. at 80-81. The court determined the
agreement appeared to be more similar to an agreement between
beneficiaries to redistribute estate assets. Thus, the Director
was required to calculate the inheritance tax under the terms of
the will, not pursuant to the terms of the settlement agreement.
Ibid.
Likewise, in Sullivan, the nurse and housekeeper of a decedent
claims she was promised his whole estate, or sufficient property
to reasonably compensate her for her services. Sullivan, 9 N.J.
Tax at 191. A probate action was filed, and settled, but a
deduction for the payment of services rendered was rejected by the
Director. Id. at 191-92. The matter was remanded by the Appellate
Division because it was uncertain whether the Director
-17- investigated the facts on which the appellant’s claim against the
estate was based and then satisfied himself that the settlement
was fair. Id. at 195.
In this case, James Jr., in his personal capacity, is
asserting a claim against himself as the administrator of Joan
Lee’s estate. “The distinction between a person in his personal
capacity and in his capacity as a representative, or as an
executor, is so clearly drawn that the two characters or capacities
are separate and independent – they are different persons or
entities. . .” Bd. of Ed. v. Davenport, 2 N.J. Misc. 564, 565
(Ch. 1924). “It is clear that a man cannot, in his individual
capacity, sue himself in his capacity as executor.” Shippee v.
Shippee, 122 N.J. Eq. 570 (Ch. 1937)(citing Black v. Shreeve, 7
N.J. Eq. 440, 457 (Ch. 1848)). As explained long ago,
“[f]undamental principles forbid that he should be trusted to
conduct both sides of a litigation, or even allowed to occupy a
position where he would be entitled to know, in advance, by what
means it was expected the claim against him could be established,
and also what evidence would be offered in disproof of his defence
[sic].” Executors of Ransom v. Geer, 30 N.J. Eq. 249, 251 (Ch.
1878). Obviously, there are situations in which an administrator
can satisfy debts owing to himself without a full-blown adversarial
proceeding. A perfect example of this is the reimbursement of
-18- reasonable funeral expenses paid from the administrator’s personal
funds.
While this Court can review a disputed debt and evaluate
whether the resolution of a debt was reached through an arm’s
length transaction, the Tax Court is not in a position to conduct
the adversarial proceeding necessary to establish an arm’s length
process. A will contest is best left to the determination of the
Probate Part of the Chancery Division of the Superior Court, and
a waste claim is best left to the Law Division of the Superior
Court.
In this case, James Jr. is both the individual bringing the
waste claim as well as the administrator defending against the
claim. He is hopeful that he can merely file his action in Superior
Court and have a default judgment. Even if the court were to
require a proof hearing, this is not truly an adversarial
proceeding. James Jr. argues that the Director and the Tax Court,
would have to blindly accept this adjudicative process, a process
in which the same individual is on both sides has a certain germ
of mischief.
The binding effect of adjudications which negatively and
collaterally impact a third party have been addressed by the courts
in New Jersey in a number of instances involving the liability of
insurers to pay claims for which the insurers were not involved in
directing the defense. In these types of cases, the courts have
-19- held that the settlement between the insured and third party may
be enforceable against an insurer only if it is a reasonable amount
and entered into in good faith. Griggs v. Bertram, 88 N.J. 347,
368 (1982). The concern of the Court was to discourage collusive
or overreaching impositions upon insurance carriers. Id. at 367-
368. While the Court recognized that it was the insurer that
caused the situation by its unfair dealing in refusing to provide
a defense, over-reaching by the insured was not the remedy to
unfair dealing. 6 Ibid.
In the later Appellate Division decision of Fireman’s Fund
Ins. Co. v. Imbesi, 361 N.J. Super. 539 (App. Div. 2003), the court
noted that a negotiated settlement “becomes collusive when the
purpose is to injure the interests of an absent or nonparticipating
party. . .” Id. at 577.
Unlike an insurance case in which the burden can be shifted
to the insurer once a prima facie case has been established, the
Director did not engage in unfair dealing and the burden of proof
remains with the estate which asserts the claim. See Lingle, 72
N.J. at 97. See also Sullivan, 9 N.J. Super. at 195 (concerned
that the Director was satisfied that settlement was fair).
6 As a result of the insurer’s unfair dealing, once the prima facie case was established, the burden of proof shifted to the insured. Griggs, 88 N.J. at 367-68. -20- The Tax Court is not to adjudicate the underlying claim but
to examine whether it was conducted or negotiated at arm’s length.
From the body of the case law examined, there are a number of
factors that may be indicative as to whether a debt of the decedent
arose in an adversarial context through an arm’s length process.
These factors include:
• the relationship, either familial or otherwise between the executor and the person asserting the debt;
• if the parties are indeed related, the quality of their relationship (i.e., ex-spouse, siblings who do not get along); whether the same parties are on both sides of the proceeding or directing the proceedings (i.e. individual who is both an executor and a claimant or beneficiary);
• the value of a claim as determined by a qualified appraiser, or the overall quality of the valuation of the claim;
• whether a full hearing was held in the matter instead of the entry of a default judgment or consent judgment;
• whether the debt or the damages had some relationship to adequate consideration or properly reflect damages;
• whether there are proofs that exist prior to death that establish a claim;
• whether an action to collect a debt was instituted prior to the death of the decedent;
• whether the payment of the claim results in a reduction of tax obligations, while at the same time not leading to diminution of actual monies received by a beneficiary of the estate or the beneficiary’s family;
• whether the debt actually has the effect of transferring the state distribution from one family member to another, and;
-21- • whether each side of the dispute is represented by separate counsel.
In this case, the same person, James Jr., is asserting the
debt and is the administrator. The value of the debt has not been
established. There have not been any hearings to determine the
validity of the claim or the amount. The claim was not instituted
prior to the death of Joan Lee. The claim, if successful, will
result in a reduction of transfer inheritance taxes. If the claim
is paid, it would be paid to the administrator, as well as his two
children. All of these factors weigh in favor of rejecting the
claim as a debt of the estate.
C. Future Refund Claim.
Although James, Jr., as administrator, has not established
that a portion of the estate is deductible on the basis of the
waste claim, that does not mean that the estate cannot seek a
refund in the future. A request for a refund must typically be
made within three years of the date of payment. N.J.S.A. 54:35-
10. Prior to 1956, the section provided in pertinent part:
all applications for repayment of such tax shall be made within 3 years from the date of such payment.
[Ibid.]
In 1956, an amendment changed the law as follows:
all applications for repayment of such tax shall be made within 3 years from the date of such payment, or from the date of the final determination of a court of competent
-22- jurisdiction which establishes the fact that the decedent had no legal or equitable interest in the property on which the tax was assessed and erroneously paid, whichever is later; provided, however, no refund shall be made where such final determination occurs more than 20 years after the date of death of the decedent.
Stated succinctly, the law was amended in 1956 to expand the
refund period to be 3 years of determination by a court, so long
as the determination is within 20 years. Id.
In the case at hand, there has not been a final determination
of a court of competent jurisdiction that establishes the waste
claim. The evidence presented thus far is insufficient to
establish a claim. The estate has to determine whether it is worth
pursuing an action. In light of the foregoing, James Jr. and the
estate have to determine both the necessity and the potential cost
of a substitute administrator to cure the conflict of James Jr. as
administrator and creditor, separate counsel for both the
substitute administrator and James Jr., and expert appraisal
reports. Upon final determination of a court of competent
jurisdiction, a timely refund claim will need to be made. The
Director, and ultimately this court on appeal if necessary, can
then evaluate the claim considering the factors and concerns
mentioned in this opinion.
-23- IV. CONCLUSION
For the foregoing reasons, summary judgment is granted in
favor of the Director and the matter is dismissed.
-24-