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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE
TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 001138-93
Malcolm S. Forbes, Jr., Executor :
of the Estate of Malcolm S.
Forbes, :
Plaintiff, :
v. :
Director, Division of Taxation, :
State of New Jersey,
:
Defendant, :
Decided: August 24, 1994
John Kandravy and Bryan E. Bloom for plaintiff
(Shanley & Fisher, attorneys).
Joseph Fogelson for defendant (Deborah T.
Poritz, Attorney General of New Jersey,
attorney).
LASSER, J.T.C.
This case involves the New Jersey estate tax, a tax imposed in
addition to the transfer inheritance tax, on the estates of
resident decedents where the State inheritance taxes paid are not
sufficient to fully absorb the federal state death tax credit
(federal credit) allowed under §2011 of the Internal Revenue Code
(IRC). The federal credit reduces the federal estate tax by a
percentage of the adjusted taxable estate upon proof of payment of
state death taxes to any state or the District of Columbia in an
amount equal to the allowed percentage.
*
At issue is the determination of New Jersey estate tax
liability where the executor has elected to pay a portion of the
federal estate tax in installments, with interest, pursuant to an
IRC §6166 election (the §6166 election). Deduction of installment
interest payments on the federal estate tax return will reduce the
federal credit.
Malcolm S. Forbes, Jr., Executor of the Estate of Malcolm S.
Forbes (the Estate), seeks (1) to reduce the New Jersey estate tax
assessment made by the Director, (2) to set aside the final
determination of the Director denying claims of the Estate for
refund of New Jersey estate taxes paid and (3) declaratory relief
with regard to the Estate's right to future New Jersey estate tax
refunds based on future reductions in the federal credit.
Under the §6166 election, the Estate may pay that portion of
the federal estate tax attributable to decedent's interest in a
closely held business by paying interest only for a period of four
years and principal and interest payments for a period of 10 years,
until the federal estate tax attributable to this asset is fully
paid. As installment interest payments are made, they may be
deducted on the federal estate tax return resulting in reduction of
the federal estate tax and, to the extent that the federal estate
tax is thereby reduced, the credit for New Jersey estate tax
provided for in IRC §2011 is also reduced. The payment of interest
pursuant to the §6166 election is deductible under IRC §2053 in
calculating the taxable estate of a decedent. See Bahr Estate v.
Commissioner
68 T.C 74 (U.S. Tax Ct. 1977), acq., 1978-
2 C.B 1,
acq. 1978-
1 C.B 1; Rev. Proc. 81-27, 1981-
1 C.B 548.
On October 28, 1992 the Estate paid to New Jersey an amount,
which when added to the transfer inheritance tax paid, equalled the
then allowable federal credit as reduced by a 1991 installment
interest payment made pursuant to §6166. Director, on November 9,
1992, issued a final determination letter assessing the Estate an
additional New Jersey estate tax based on the federal credit before
deduction of the 1991 §6166 interest payment. Director now
concedes that the Estate is entitled to a refund resulting from the
recalculation of the federal estate tax and the consequent
reduction of the federal credit occurring within three years of the
original payment of the New Jersey estate tax. However, Director
contends that the statute of limitations bars refund claims based
on reductions in the federal credit occurring after three years
from the date of payment of the New Jersey estate tax. N.J.S.A.
54:30-3. The issue in this case is thus limited to whether the
three-year limitations period within which to claim a refund under
N.J.S.A. 54:38-3 bars a protective claim made within the three-year
period for refunds which accrue after three years from the date of
the payment of the New Jersey estate tax. This issue was submitted
to the Court on briefs and oral argument pursuant to R. 8:8-1.
The following are the stipulated facts. Malcolm S. Forbes
died on February 24, 1990, a resident of Bedminster Township,
Somerset County, New Jersey. The Estate timely filed its federal
and New Jersey inheritance and estate tax returns. The federal
estate tax return contained an election under IRC §6166 to pay a
portion of the federal estate tax due in installments with
interest. If the §6166 Election remains in effect for the full 14
years, the Estate will make interest payments on or about November
24th of each year through 1994, and principal and interest payments
on or about November 24th of each year from 1995 to 2004. Each
year that the §6166 Election is in effect, the IRS will send the
Estate a statement setting forth the amount of the federal estate
tax installment due. The statement will set forth the amount of
interest and principal. The interest figure will depend primarily
on the interest rate for short-term federal obligations during the
year prior to the payment. The interest rate will be three
percentage points greater than the federal short term rate
determined under IRC §1274(d). After each payment is made, the IRS
will recalculate the federal estate tax liability reflecting the
fact that interest is allowed as a deductible administrative
expense of the Estate, thus reducing the taxable estate and the
federal credit. The §6166 election will not remain in effect for
14 years if the Estate chooses to prepay future installments or if
the Estate defaults in a payment causing the entire balance to
become due and payable. The federal credit will not be reduced if
the Estate elects to deduct §6166 installment interest payments on
the Estate income tax return instead of the estate tax return.
The Estate's first interest payment was made on November 24,
1991. A second interest payment was made in November 1992. A
third payment of interest was made in November 1993. These
payments resulted in reductions in the federal estate tax and the
federal credit. On May 26, 1993, the Estate filed a claim for
refund of New Jersey estate tax as a result of the reduction in the
federal credit by reason of the November, 1992 interest payment.
Included in this refund application is a request for a New Jersey
estate tax refund equal in amount to each future reduction in the
federal credit, as calculated by the Internal Revenue Service
(IRS), that will occur if the §6166 election remains in effect and
the Estate makes the payments required thereunder. The Executor
states that the Estate intends to maintain the §6166 election and
to continue making annual payments on November 24th of each year
through 2004. If the §6166 Election remains in effect and the
Estate makes the anticipated payments thereunder, deducting them on
the federal estate tax return, the annual interest payments will
continue to annually reduce the taxable estate for federal estate
tax purposes and reduce the federal credit.
I
Estate contends that the New Jersey estate tax is limited to
the federal credit as finally determined by the IRS; that the
federal credit decreases as the federal estate decreases due to
interest deductions over the 14 years following the death of the
decedent and that the New Jersey estate tax must, as a consequence,
be reduced as the federal credit declines.
Director contends that there is no provision in the statute or
regulations for continuous refunds over the 14 year period, as
§6166 interest is paid, and that the three-year statute of
limitations contained in N.J.S.A. 54:38-3 bars any refund claim
made after October 28, 1995. Director argues that after three
years, the amount of the tax should be fixed and the State should
be able to rely on this revenue. The purpose of limitation periods
in tax statutes, Director argues, is to provide certainty of tax
collections. Director contends that it is impossible to predict
the amount of the tax because future interest rates will vary and
the estate may prepay installments or deduct the interest on the
estate income tax return instead of the federal estate tax return
resulting in no reduction in the federal credit.
Director argues that refund claims must be based on actual
occurrences, not possible future occurrences. Director gives as an
example §2054 of the Internal Revenue Code which permits casualty
losses to be deducted from the Federal estate tax return subsequent
to the filing of the return. Director contends that if an executor
files a refund claim contending that it may be possible that a
tangible asset of the estate might be destroyed in the future, such
a protective refund claim would not be allowed. The Director takes
the position that protective refund applications will be allowed
only if all events have occurred and the application is filed
within three years after the original payment of tax. Director
also notes that the estate made no effort to extend the time to pay
the New Jersey estate tax.
II
New Jersey imposes two forms of death taxes: a transfer
inheritance tax, N.J.S.A. 54:33-1 et seq. and an estate tax,
N.J.S.A. 54:38-1 et seq. The New Jersey transfer inheritance tax
is imposed on the market value of property transferred. N.J.S.A.
54:34-5. The New Jersey estate tax is in addition to the transfer
inheritance tax and is imposed on every resident decedent who is
subject to the federal estate tax. The New Jersey estate tax has
become more significant due to the elimination of surviving spouse
and children from taxation under the transfer inheritance tax.
The amount of the New Jersey estate tax is the sum by which
...the maximum credit allowable against any
federal estate tax payable to the United
States...on account of taxes paid to any state
or territory of the United States...shall
exceed the aggregate amount of all estate,
inheritance, succession or legacy taxes
actually paid to any state or territory of the
United States...including inheritance,
succession or legacy taxes actually paid this
state....N.J.S.A. 54:38-1.
N.J.S.A. 54:38-13 explains that
It is the intent and purpose of this chapter
to obtain for this state the benefit of the
credit allowed under the provisions...of the
federal revenue act [§2011]...The provisions
of this chapter shall be interpreted and
construed liberally in order to accomplish the
purpose thereof....
N.J.S.A. 54:38-9 provides that if there is a change in the federal
estate tax credit, "the tax imposed hereby shall be so assessed as
will be necessary to absorb the full amount of such changed
credit."
N.J.S.A. 54:38-2 provides that if there is a subsequent
determination increasing the federal estate tax, then an additional
estate tax shall be due. Section 3 provides that if the federal
estate tax is decreased the estate tax shall be reduced upon
satisfactory proof submitted to the Director. If the tax due has
been paid, the excess amount shall be refunded. Section 3 also
provides that applications for refund of taxes claimed to have been
excessively or erroneously paid must be filed within three years
from the date of payment. Apparently the State can seek an
increase of estate tax at any time. However, Director contends
that a taxpayer electing §6166 installment treatment may not obtain
an equivalent reduction after three years even if a timely claim
for refund is filed.
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. The New Jersey estate tax is intended
only to "soak up" the unused federal credit for which an estate
receives a corresponding federal estate tax reduction. The
taxpayer thus pays no additional tax. The State adds to its revenue
solely at the expense of the federal government. The amount of the
New Jersey estate tax is dependent on the federal credit.
There is no question but that the purpose of the estate tax is
to assure that the total of the death taxes imposed by New Jersey
is large enough to absorb the full federal credit, without
increasing the tax liability to the estate. If the Director's
position is correct, the Estate will be required to pay New Jersey
estate and inheritance taxes in excess of the federal credit
ultimately allowed. The question is, which governs the amount of
New Jersey estate tax, the federal credit ultimately allowed, or
only the federal credit allowed during the three-year period
following the death of the decedent?
The amount of the New Jersey estate tax is the maximum credit
allowable against any federal estate tax. The legislative intent,
as indicated in N.J.S.A. 54:38-13, is to liberally construe the
statute to obtain for the State the benefit of the "credit allowed"
under the Internal Revenue Code. The statute does not indicate any
intent to impose an estate tax in excess of the federal credit.
Therefore, implicit in the New Jersey estate tax is the
incorporation of the provisions of the federal estate tax including
exemptions and deductions and in particular §6166.
The Estate has filed a refund claim within the three-year
period based on its §6166 election and its intent to continue to
pay the federal estate tax in installments. Director's contention
that claims for refund must be limited to liquidated claims not
dependent on future events is misplaced. This contention is based
on the need for certainty of revenue collections. The Estate filed
the protective claim for refund because they had made the §6166
election and anticipated that the tax would be excessive. This
claim put the State on notice that there had been and would be
further reductions in the federal credit. The State could have
estimated the maximum credit to which taxpayer could become
entitled based on an interest rate of six percent as the State does
in the valuation of life estates pursuant to N.J.S.A. 54:36-2.
Refund claims are frequently filed dependent on future events
such as the result of future federal audits or the results of
litigation.See footnote 1 Unlike Director's protective refund example based on
a possible future casualty loss deduction, the subject claim for
refund is not based on a possible §6166 election, but an actual
election which gives the Estate the right to pay federal tax in
installments.
There are numerous examples of protective refund claims in New
Jersey. Cases which include protective refund claims are:
Futurevision Cable Enters. v. Taxation Div. Director 6 N.J. Tax
149, 155-56 (Tax Ct. 1983); Tuition Plan of New Hampshire v.
Taxation Div. Director 4 N.J. Tax. 470, 483-84 (Tax Ct. 1982); CIT
Financial Services, etc. v. Taxation, Div. Director 4 N.J. Tax 568,
579 (Tax Ct. 1982). Decisions in other states have permitted
refunds of estate taxes based on a recalculated federal credit even
where the claim for refund has not been filed within the statutory
period. See In re Estate of Nelle M. Allyn v. State of Illinois
139 Ill. App. 3d 38,
487 N.E.2d 28 (Ill. App. Ct. 1985) (statute of
limitations tolled for purpose of recomputing Illinois estate tax
during period of federal litigation); Henley v. Boswell,
316 So.2d 342, 55 Ala. App. 414, (Ala. Civ. App. 1975) (limiting refund to
three-year statute of limitations would result in estate paying
more to Alabama than federal credit).
Director suggests that the Estate could have asked for an
extension of time in which to pay the estate tax or withheld
payment of tax until the final §6166 payment when it would know the
federal credit as finally determined and be able to pay the exact
amount of the New Jersey estate tax. Director also suggests that
the taxpayer might have estimated what the proper estate tax would
be, assuming that §6166 installment interest payments were made
until the year 2004. A more practical approach is to require
payment of estate tax and then allow refunds on proof of change of
federal credit. This would immediately put the tax revenue in the
hands of the State and would not subject the Estate to substantial
interest payments. However, the possible existence of these
alternatives does not preclude the Estate from paying the New
Jersey estate tax based on the federal credit at the time of
payment as required under the statute and filing a protective
refund claim to adjust for subsequent reductions in the federal
credit.
I conclude that it is the intention of the legislature to
limit the New Jersey estate tax to the amount of the federal credit
and therefore by implication to include the terms governing the
calculation of the federal credit including the §6166 election and
the §2053 interest deduction, that the estate properly filed a
protective refund claim within the three-year limitation period and
that upon timely proof of changes in the federal credit, the Estate
is entitled to refund of New Jersey estate tax payments to the
extent that New Jersey death taxes exceed the federal credit.
Judgment will be entered providing for refund of excess New
Jersey estate tax upon satisfactory proof submitted to the
Director, Division of Taxation, if the federal estate tax shall be
decreased and the federal credit correspondingly reduced by reason
of a redetermination due to deduction on the federal estate tax
return of installment interest payments made pursuant to the
election of the Estate to pay federal estate tax in installments
under IRC §6166.
Footnote: 1There are other reasons why the federal credit may be reduced at a time
beyond the three-year refund statute. For instance, protracted litigation may
result in a reduction in federal estate tax as would an increase in the New
Jersey transfer inheritance tax more than three years after payment of the New
Jersey estate tax.
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