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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE
ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 012907-93
LEONARD MEYERSON, Executor of the *
Estate of Emily Ellen, *
*
Plaintiff, *
*
-v- *
*
DIRECTOR, DIVISION OF TAXATION, *
*
Defendant. *
Decided September 29, 1995
Otto J. Scerbo, for plaintiff (Miller, Meyerson, Schwartz
& Corbo, attorneys).
Joseph P. Horan, II, for defendant (Deborah T. Poritz,
Attorney General of New Jersey, attorney).
CRABTREE, J.T.C.
This is a transfer inheritance tax case wherein plaintiff
seeks review of a deficiency assessment made by defendant in the
amount of $109,757.41, including interest calculated to October 20,
1993. The deficiency arises from two audit adjustments:
1. Three inter vivos transfers in trust made by the decedent,
Emily Ellen, on September 2, 1989, in the aggregate amount of
$612,656, which defendant determined were made in contemplation of
death within the purview of N.J.S.A. 54:34-1(c);
2. An increase in the date-of-death value of decedent's
residence from $165,000, as reported, to $182,800.
In addition, plaintiff alleges that the estate is entitled to
a credit for inheritance tax paid by the estate of decedent's
brother, Max Pentel, who died testate on May 15, 1989, two and one-half years prior to the decedent, leaving his entire estate to her.
Emily Ellen died testate at the age of 93, on November 25,
1991, a resident of West New York, New Jersey. Her gross estate,
including the disputed inter vivos transfers, was valued at
$2,044,881. The date-of-death value of the assets involved in the
disputed inter vivos transfers was $612,656, or 29.96" of
decedent's gross estate.
The subject of the transfers was publicly traded securities,
and the objects of decedent's benefactions were her niece, Phyllis
Charny, and her grandnieces, Anna and Rena Charny, Phyllis's twin
daughters. The transfers were all in the form of trust agreements.
The Phyllis Charny Trust called for the payment of income to
Phyllis for her life, with the remainder to Anna and Rena in equal
shares. The term of each trust for the grandnieces was four years
and one month, with income payable to the beneficiary (Anna or
Rena) and the remainder to the Phyllis Charny Trust. The values of
the assets transferred to the trusts were as follows:
Phyllis Charny Trust - $504,728
Anna Charny Trust - $48,254
Rena Charny Trust - $59,674
Decedent's will, also executed on September 2, 1989, left her
entire residuary estate in trust, with the entire net income
therefrom payable to Phyllis, with the corpus distributable upon
the latter's death to Anna and Rena in equal shares.
Emily Ellen maintained close and loving relationships with her
family. Her sister, Harriet, had lived next door to Emily for many
years. Phyllis was Harriet's daughter; Anna and Rena were
Phyllis's daughters, as stated above. Because Emily married
relatively late in life and had no children of her own, she
regarded Phyllis as a daughter and Anna and Rena as granddaughters.
Phyllis, who lived from birth at 6100 Highland Place, West New
York, New Jersey, next door to her aunt, Emily, moved to Israel
after attending the University of Rochester. Emily visited Phyllis
and the twins in Israel three or four times between 1973 and 1984.
Anna and Rena served in the Israeli army in 1983 and 1984,
following which, they came to the United States to pursue their
formal educations, Anna at the University of Pennsylvania and Rena
at Bryn Mawr. At that juncture, Phyllis was separated from her
husband and was the sole support of her daughters. Phyllis's
annual income was no more than $19,000. The total tuition, room
and board for the girls was about $30,000 per year. Phyllis and her
daughters relied heavily upon scholarships, government loans and
financial support from Emily.
Emily frequently expressed concern for her grandnieces, of
whom she was not only fond but also proud.
Emily created the trusts for Anna and Rena in 1989 to assist
them in pursuing graduate studies. Anna graduated from the
University of Pennsylvania and currently matriculates at Hebrew
University in Jerusalem, where she also works as a teaching
assistant in biology. Rena also returned to Israel, after
graduating from Bryn Mawr, and attended law school at Tel Aviv
University. She is now an attorney.
The twins' postgraduate matriculations were financed by the
trusts Emily created for them on September 2, 1989.
According to the testimony of plaintiff's witnesses, Emily
appeared to be in robust health, remarkably so for a person of her
advanced years. She did her own grocery shopping and her own
cleaning; she declined household help. According to Phyllis, Emily
was completely independent, insisting that she do everything for
herself, even when she was 90-years old. Phyllis also testified
that to her knowledge, Emily was not hospitalized during the last
four years of her life, except for her last illness, which lasted
five or six days.
Emily's death certificate recites the immediate cause of death
as cardiopulmonary arrest and the underlying cause as
atherosclerotic heart disease, a condition which existed for five
years prior to her demise, on November 25, 1991, according to the
death certificate.
The assets for the three trusts Emily created on September 2,
1989 came directly from the estate of her brother, Max Pentel. The
assets were transferred to the trusts from trading accounts
maintained in Max's name.
The relevant statute, N.J.S.A. 54:34-1, provides, in pertinent
part:
Except as provided in Section 54:34-4 of this
Title, a tax shall be and is hereby imposed...upon
the transfer of property, real or personal, of the
value of $500.00 or over, or of any interest there-
in or income therefrom, in trust or otherwise, to
or for the use of any transferee, distributee or
beneficiary in the following cases:
....
c. Where real or tangible personal property
within this State of a resident of this State or
intangible personal property wherever situate of a
resident of this State or real or tangible per-
sonal property within this State of a non-resident,
is transferred by deed, grant, bargain, sale or
gift made in contemplation of the death of the
grantor, vendor or donor, or intended to take
effect in possession or enjoyment at or after
such death.
A transfer by deed, grant, bargain, sale or
gift made without adequate valuable considera-
tion and within 3 years prior to the death of
the grantor, vendor or donor of a material part
of his estate or in the nature of a final disposi-
tion or distribution thereof, shall, in the absence
of proof to the contrary, be deemed to have been
made in contemplation of death within the meaning
of paragraph "c" of this section; but no such transfer
made prior to such 3-year period shall be deemed to
have been made in contemplation of death.
The statute creates a presumption that a gift made within
three years of the donor's death of a material part of his estate
is a transfer in contemplation of death. To rebut this
presumption, the taxpayer must prove by a preponderance of the
evidence that the gift was not so made. Swain v. Neeld,
28 N.J. 60
(1958); In re Estate of Anne Boyd Lichtenstein,
52 N.J. 553 (1968).
Irrespective of the existence of any life-associated motives, it is
sufficient to create a gift in contemplation of death if an
impelling motive exists to make a present disposition in lieu of a
testamentary disposition. Id., at 569. Whether a donative transfer
is a testamentary substitute depends upon the donor's subjective
state of mind at the time of the transfer, and that state of mind
is a question of fact as to which the taxpayer has the burden of
persuasion, to be ascertained by reconstruction by means of
objective indicia. Id., at 569.
Relevant factors to be considered include the age and general
condition of health of the donor at the time of the gift; the time
interval between the inter vivos transfer and death; whether or not
the inter vivos transfer was part of a testamentary scheme or plan;
and whether or not the gift was made to the natural objects of the
donor's bounty. Swain v. Neeld, supra, at 70. A purpose to avoid
death taxes, while perhaps relevant, is not a sine qua non of
taxability. Id., at 69. By the same token, the thought of
imminent death, or the absence of such thought, is not material;
what matters is whether the transfer was a substitute for
testamentary disposition. In re Estate of Anne Boyd Lichtenstein,
supra, at 567-568.
In this case, the inter vivos transfers to Phyllis and the
grandnieces constituted nearly 30" of Emily's gross estate, which,
under the decided cases, represents a material part of her estate.
Maguire Estate v. Taxation Div. Director,
9 N.J.Tax 437 (Tax 1987).
Moreover, all three transfers are aggregated in determining whether
they constitute a material part of the estate. Id., at 443.
In applying the tests of Swain to the facts of this case,
the evidence clearly shows that the decedent was within two weeks
of her 91st birthday when the three trusts were created; she was
afflicted with a serious heart condition at that time,
notwithstanding the testimony of plaintiff's witnesses as to her
good health. Emily died a little more than two years after the
gifts. The gifts were part of a testamentary plan, as evidenced by
the fact that the inter vivos dispositions were identical to the
dispositions made in her will, and the gifts in trust were made to
the natural objects of her bounty, as demonstrated not only by the
proofs of the close and loving relationships between the decedent
and her niece and grandnieces, but by the terms of her will as
well.
Plaintiff argues that the trusts for the grandnieces were
clearly life-motivated as they were of short duration and were
intended to assist the income beneficiaries with their educations.
The governing law, however, as reflected in both Swain and
Lichtenstein, is that irrespective of any life-associated motives,
it is sufficient to create a gift in contemplation of death if an
impelling motive exists to make a present disposition in lieu of a
testamentary disposition.
In this connection, the Lichtenstein case is instructive.
There, the decedent, in an effort to save her daughter's marriage,
created a trust with income payable to her son-in-law for life,
with the principal payable at his death to the settlor's daughter's
issue then living, in equal shares. The son-in-law was permitted
to borrow up to $100,000 from the trust corpus in any one calendar
year.
The disparity in income between the son-in-law and decedent's
daughter had led to marital discord, and the trust was designed to
reduce that disparity and ameliorate the discord. The son-in-law
had sought an outright gift of income-producing securities, but the
decedent chose the trust instead.
In holding that the trust corpus was taxable as a transfer in
contemplation of death, the court said:
In this evidentiary complex, we seek, as
the court did in Swain v. Neeld, supra (
28 N.J 60),
the dispositive fact or facts determinative of
whether an impelling post mortem motive or intent
existed in the settlor's mind with respect to the
transfer which was made. Had it taken the form of
the outright gift first sought, the case would be
a much more difficult one for taxability from the
contemplation of death standpoint for the emphasis
would have primarily been on the life associated
motive of making a large amount of capital immedi-
ately and fully available for the use of the trans-
feree, as well as furnishing income both presently
and in the future.
While the taxability of the transfer as it
eventuated is not so obvious as to be beyond
all debate, there are sufficient indicia to
hold it to be so. The deliberate choice of
the particular trust format and terms used,
for whatever reason the attorney may have
advised, changed not only the quality and
scope of the gift, but substantially shifted
the emphasis to post mortem aspects. The
primary donee's interest was sharply curtailed.
Especially, use of the principal was closely
confined (his first borrowing therefrom was not
accomplished until 1961 and then only to the
extent of $4,500) and it was required to be
preserved for ultimate distribution to the
transferor's grandchildren, most probably not
to occur until long after the transferor's
demise. While the income interest was retained
in the son-in-law, no longer was the amount
thereof within his sole control through choice
of investments because of the trustees' obliga-
tion to safeguard the remainder interest. All
of this smacks essentially of an inter vivos
substitute for a testamentary disposition by
a settlor close to the end of her days seeking
to preserve her daughter's marriage indefinitely.
Under all the circumstances, it was the kind of
disposition which, except for income for the
balance of the settlor's life, could as well
have been made by will or codicil. So it cannot
be said with assurance that the after death pur-
pose was not at least one of the impelling motives
in her mind for the form the transfer took. It
is enough for taxability that the distinct
probability of such an actuating motive reasonably
persists.... [at 574-575]
In the case sub judice, the decedent's grandnieces were the
income beneficiaries of trusts created to assist them with their
education, a life-associated motive. However, upon the termination
of the trusts, the principal thereof was payable to the trust
created for the benefit of the decedent's niece, a disposition with
a palpable post mortem aspect. Like the trust for the son-in-law
in Lichtenstein, such disposition smacked essentially of an inter
vivos substitute for a testamentary disposition by a settlor close
to the end of her days seeking to benefit those who would long
outlive her.
In view of the foregoing, the court concludes that the
transfers in trust for the benefit of the decedent's niece and
grandnieces were transfers in contemplation of death within the
purview of N.J.S.A. 54:34-1(c).
The decedent's residence, at 6102 Highland Place, in West New
York, New Jersey, was valued by plaintiff for inheritance tax
purposes at $165,000; defendant determined the value to be
$182,800. At the trial, however, defendant's valuation expert
testified to a value of $175,000.
Plaintiff's valuation expert testified to a value of $165,000,
a conclusion which he supported with three sales of allegedly
comparable properties, all in close proximity to the subject. Those
properties all sold in August 1991, three months prior to the
decedent's death, for $150,000, $173,000 and $175,000. The sale
properties were all two-family brick residences, as was the
subject. The sale properties were all about 60 years old; the
subject was about 75 years old at the decedent's death.
Plaintiff's valuation expert inspected the subject, and from
his inspection, he concluded that the property suffered from
deferred maintenance. Evidence introduced at the trial showed that
the cost of restoring the property to a reasonable condition was
approximately $6,000. Plaintiff's expert took these costs into
account in his adjustments for the comparable properties and
arrived at a value estimate of $165,000.
Defendant's valuation expert, in developing his value estimate
of $175,000, relied upon three sales of allegedly comparable
properties, two of which were also utilized by plaintiff's expert.
The third comparable relied upon by defendant's expert involved
property at 6039 Highland Place, in West New York, which sold on
April 8, 1992, for $190,000.
Defendant's expert did not inspect the interior of the subject
property.
The principal difference between the experts is attributable
to deferred maintenance. Plaintiff's expert inspected the property
and saw the need for repairs, for which he made an adjustment in
the sale prices of the comparables. Defendant's expert did not
inspect the property, and therefore, made no adjustment for its
condition.
Inspection of the subject is indispensable when the sales
comparison approach is used. WCI-Westinghouse, Inc. v. Edison Tp.,
7 N.J. Tax 610, 623 (Tax 1985), aff'd o.b. per curiam
9 N.J. Tax 80 (App.Div. 1986). For this reason alone, the opinion of
plaintiff's expert is more probative. The evidentiary utility of
an expert's opinion depends upon the facts and reasoning offered in
support of it. Dworman v. Tinton Falls,
1 N.J. Tax 445 (1980),
aff'd o.b. per curiam
3 N.J. Tax 1 (App. Div. 1981).
Accordingly, I find that the fair market value of the
decedent's residence, on the date of her death, was $165,000.
Finally, plaintiff argues that a credit should have been
allowed for the tax attributable to the assets transferred from the
estate of Max Pentel to fund the three trusts created by the
decedent within three years of her death and which this court has
found to be taxable as transfers in contemplation of death within
the purview of N.J.S.A. 54:34-1(c), as it is "unfair" to tax the
same assets twice within some two and one-half years (the interval
between the deaths of Max Pentel and the decedent).See footnote 1
The simple answer to plaintiff's argument is that New Jersey
law, unlike federal law, does not permit a credit for property
previously taxed. The death tax structures of the United States
and New Jersey are just not comparable. The federal estate tax
imposed upon the estate of Max Pentel was probably around $400,000
after the unified credit but before the credit for state death
taxes. The New Jersey transfer inheritance tax, on the other hand,
was less than $200,000. The alleged inequity of failing to allow
a credit for property previously taxed must be viewed in this
light.
The parties will submit a computation pursuant to R. 8:9-3,
following which, judgment will be entered.
Footnote: 1Plaintiff claims that, as a matter of equity, the estate is
entitled to the same credit for property previously taxed that is
available under the federal estate tax law. That law provides, in
Section 2013 of the Internal Revenue Code, that property previously
taxed is entitled to a credit when the second decedent dies within
ten years after the death of the first decedent. The credit ranges
from 20" to 80%, depending upon the number of years elapsed between
the first and second deaths.
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