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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE
ON OPINIONS
SAL LA GRECA, EXECUTOR OF THE * TAX COURT OF NEW JERSEY
ESTATE OF ELAINE H. BLOUNT, * DOCKET NO. 001142-93
*
Plaintiff, *
*
v. *
*
DIRECTOR, DIVISION OF TAXATION, *
STATE OF NEW JERSEY, *
*
Defendant. *
Decided January 10, 1995
William A. Amann for plaintiff (Hallock & Amann, attorneys).
Joseph Fogelson for defendant (Deborah T. Poritz, Attorney
General of New Jersey).
CRABTREE, J.T.C.
This is a transfer inheritance tax case wherein plaintiff
seeks review of defendant's determination of a deficiency in tax
due with respect to the estate of Elaine H. Blount, who died
testate on March 19, 1990. The deficiency is attributable to
defendant's redetermination of the value of decedent's vested
remainder interests in three trusts and to a disallowance of a
deduction for fees paid to counsel for the beneficiaries of
decedent's estate.
At her death, decedent owned vested remainder interests in
three trusts: the trust under the will of Paul E. Heller, the
Arnaud G. Heller Insurance Trust and the Arthur E. C. Heller
Insurance Trust (collectively referred to hereafter as the
"trusts"). The trusts all provided for distribution of principal
to the decedent upon the death of the last to die of two
individuals, both of whom survived the decedent, namely, Ruth
Heller Lowe and Gladys Heller Fenlin, who, on the date of
decedent's death, were 86 and 81 years old, respectively.
The clear market value of the aggregate remainder interests in
the trusts on the date of decedent's death is not in dispute. At
issue, in this regard, is the value of the intervening life estates
of Ruth Heller Lowe and Gladys Heller Fenlin, which must be
subtracted from the date of death value of the principal of the
trusts, in order to determine the value of the decedent's remainder
interests therein for transfer inheritance tax purposes.
Plaintiff valued the intervening joint life estates by resort
to the current valuation table promulgated by the Internal Revenue
Service (IRS) as set forth in IRS Publication 1457, issued August
1989. The interest rate was 10.2%, 120" of the so-called federal
midterm rate for March 1990. The factor taken from IRS Publication
1457 for two lives, using an interest rate assumption of 10.2%, was
44.773%. IRS Publication 1457 was, in turn, based upon U.S.
Decennial Life Tables for 1979-1981, Vol. 1, No. 1, United States
Life Tables, Dept. of Health and Human Services Public Health
Service Publication No. (PHS) 85-1150-
1 August 1985. The factor of
44.773" came from Table 1 of PHS 85-1150-1, Life Table for the
Total Population (i.e., a gender-neutral table).
Plaintiff's methodology produced a total value for decedent's
remainder interests, after deducting the value of the intervening
life estates, of $1,507,387.
Defendant increased the value of the remainder interests to
$2,232,245, using the factors set forth in IRS Publication 723A
(December 1970), entitled "Actuarial Values II: Factors at 6
percent Involving One and Two Lives." The data set forth in IRS
Publication 723A is in turn derived from United States Life Tables
1959-1961, published by the Department of Health, Education and
Welfare as Public Health Service Publication No. 1252, issued
December 1964. Table LT6 of IRS Publication 723A, using a 6" interest rate assumption, shows a factor of 66.006" for two females
aged 86 and 81 years. Defendant applied the latter percentage to
the decedent's remainder interests in arriving at its determination
of value.
After the complaint was filed, plaintiff revalued the
remainder interests using Table 3 of PHS 85-1150-1, Life Table for
Females (a gender-specific table), from which he derived a factor
of 42.272%, using the same interest rate assumption of 10.2%. This
calculation reduced the taxable value of the remainder interests
from $1,507,387 to $1,423,185. Plaintiff computed the tax
attributable to the difference at $13,472 and claimed a refund of
that amount.
Plaintiff's principal witness at the trial was Daniel M.
Arnold, a consulting actuary, who qualified as an expert in the
field of actuarial science.
He testified that the Department of Health, Education and
Welfare (now the Department of Health and Human Services) has
produced United States life tables every ten years, starting with
the 1900-02 period. The tables are based on the decennial census
for the middle year, i.e., the tables for the years 1959-1961 are
derived from census data compiled for 1960. The tables used death
registrations from the several states for the decennial bracket of
three years. The function of the data, Arnold declared, is to
indicate probabilities of death. The deaths in the three bracketed
years (the year before the census, the year of the census and the
year after the census) are aggregated and the total divided by
three to arrive at an average number of deaths for each age group.
The tables are further refined by gender, by age group and total
population. The data thus compiled, combined with interest rate
assumptions, are used by the IRS to determine life estate and
remainder factors in connection with federal estate and gift taxes.
When the tables are adjusted every decade, the witness went
on, they reflect the changes in mortality which have occurred since
the previous census.
Since May 1, 1989, Arnold continued, the IRS has valued life
estate and remainder interests in accordance with §7520 of the
Internal Revenue Code of 1986. That statute requires that the most
recent mortality experience available be utilized and that the
mortality tables shall be revised at least once every decade. In
addition, §7520 requires an interest rate equal to 120" of the
federal midterm interest rate in effect for the month in which the
valuation date falls. The federal midterm interest rate for March
1990, the month in which decedent died, was 8.52%, and 120" of that
rate was 10.27%.
The latest mortality tables available for valuation of the
remainder interests in question were the U.S. Decennial Life Tables
for 1979-81, PHS 85-1150-1, incorporated in IRS Publication 1457,
issued in August 1989. Arnold utilized those tables (first the
gender-neutral table, later the female table) with the applicable
interest rate of 10.2%, and, utilizing his actuarial expertise,
calculated the remainder factor following the death of the survivor
of two life beneficiaries aged 86 and 81 years, to be, first,
44.773" (Table 1-Total Population), then 42.272" (Table 3-Total
Females). Using the same 1979-81 Tables, but with a 6" interest
rate, the expert calculated the remainder factor to be, first,
60.362" (Table 1 - Total Population), then 58.238" (Table 3 - Total
Females).
The tables used by defendant to arrive at an actuarial factor
of 66.006" for the remainder interests in question are, as stated
above, found in IRS Publication 723A, which is based on deaths in
the three-year period 1959-61 and the U.S. Life Tables produced
from the 1960 census. None of that data has been adjusted to
account for post-1960 changes.
Defendant also disallowed a claimed deduction of $52,000 for
counsel fees paid to the law firm of Shanley & Fisher, which
represented beneficiaries of the estate. Defendant determined that
the fees were not a legal obligation of the estate and were thus
not allowable in fixing clear market value under N.J.S.A. 54:34-5.
N.J.S.A. 54:36-1 provides, pertinently:
When a person shall bequeath or devise, convey,
grant, sell or give any property or interest
therein, or income therefrom, to a person or
corporation for life or for a term of years, and
a vested interest in the remainder or corpus of
such property to a person or to a body politic
or corporate, the whole of the property so
transferred shall be appraised immediately at
its clear market value. The value of the life
estate or estate for a term of years shall be
fixed in the manner provided in §54:36-2 of
this title. The value of the remainder in
the property so limited shall be ascertained
by deducting the value of the life estate or
estate for a term of years from the appraised
market value of the property so limited....
N.J.S.A. 54:36-2 provides:
In determining the value of a life estate,
annuity, or estate for a term of years, the
United States Life Tables, after December 31,
1970, Single Life Male 6" and Single Life
Female 6%, published by the United States
Department of Health, Education and Welfare,
Public Health Service, with interest at the
rate of 6" per annum, shall be used and shall
be effective with respect to estates of dece-
dents dying on or after January 1, 1978.
The tables referred to in the statute do not exist, a fact
which defendant acknowledges and has acknowledged in prior
litigation. See Estate of Darrin v. Director, Div. of Taxation,
232 N.J. Super. 437 (App. Div. 1989), reversing and remanding
9 N.J. Tax 419 (Tax 1987), on remand
11 N.J.Tax 482 (Tax 1991). As
a substitute for the non-existent tables, defendant utilized what
he felt to be the nearest equivalent, namely, IRS Publication 723A,
a derivative of the U.S. Decennial Life Tables for 1959-61.
Plaintiff argues at some length in his brief that N.J.S.A.
54:36-2 is void for vagueness in view of the nonexistence of the
very tables whose use is mandated therein for the valuation of life
estates and remainder interests.
Defendant responds that, even though the tables referred to in
N.J.S.A. 54:36-2 do not exist, the Legislature has indicated
clearly that a 6" interest rate assumption be used and that
defendant's use of valuation factors set forth in IRS Publication
723A is an appropriate exercise of the discretion granted to
defendant by N.J.S.A. 54:50-1.
Apart from the interest rate, which the Legislature has
plainly indicated is 6%, the overriding consideration governing
defendant's value determination in inheritance tax cases is the
duty under N.J.S.A. 54:34-5 to ascertain the clear market value of
property subject to tax. Bassett v. Neeld,
23 N.J. 551 (1957);
Tracy v. Alexander,
17 N.J. 397 (1955); Rosenthal v. Kingsley,
97 N.J. Super. 286 (App.Div. 1967). Indeed, defendant's own
regulation requires valuation according to clear market value.
N.J.A.C. 18:26-8.10(a). As the Supreme Court observed in the
Bassett case, defendant "is obliged to consider all relevant
criteria in establishing a valuation." 23 N.J. at 557. In Tracy,
the Supreme Court said:
The bureau's duty under R.S. 54:34-5 is to
determine the 'clear market value' of the
property subject to the tax.... Determination
of value is often difficult...but, however
difficult the discovery of such market value,
the statutory standard is the one by which the
bureau's determinations of value are and must
be controlled.... [
17 N.J. at 401.]
The Darrin litigation involved a challenge to the
constitutionality of gender-based mortality tables in valuing a
life estate for transfer inheritance tax purposes. The taxpayer in
that case contended that the use of female mortality tables, as
compared to gender-neutral tables, discriminated against females,
as the factor for a female aged 58 (the life beneficiary's age at
the date of decedent's death) was higher than the factor for a male
of the same age. The higher factor resulted in a higher value of
the life estate for death tax purposes. The Tax Court held that
the Director had not established that the use of gender-based
tables was substantially related to the achievement of the
governmental objective of accuracy in the valuation of life estates
and that accordingly, equal protection principles required the use
of gender-neutral mortality tables. 9 N.J. Tax at 435. The
Appellate Division reversed on the ground that the issue should not
be decided merely on the affidavits of experts, and remanded the
case for "a plenary hearing with testimony by actuarians,
statisticians or other experts in the discipline at issue." 232
N.J. Super. at 443. On remand, the Tax Court, after hearing expert
testimony from both parties, concluded that no equal protection
violation existed where the "Legislature, in pursuance of increased
accuracy in the life estate valuation process, has chosen to use
gender-based mortality tables for inheritance tax purposes." 11
N.J. Tax at 496.
The leitmotif coursing throughout the Darrin litigation was
the paramount importance of accuracy in determining the value of
life estates for inheritance tax purposes. Defendant in that case
argued for acceptance of the gender-related tables as an aid to
increased accuracy in the valuation of life estates.
In that case, the accuracy goal centered around the choice of
gender-related tables in preference to gender-neutral mortality
tables. In the instant case, that choice is not in issue; rather,
the question of accuracy turns on the selection of the most recent
mortality tables available, vis-a-vis mortality tables promulgated
approximately 30 years before the valuation date.
The Legislative goal of accuracy in valuation undergirds the
statutory command of N.J.S.A. 54:34-5, that property be valued
according to its clear market value.
I conclude from the credible evidence that accuracy in valuing
the life estates in this case -- and correspondingly, the remainder
interests to be valued for inheritance tax purposes -- require use
of the most recent mortality tables available on the valuation
date.See footnote 1 Those tables were incorporated in PHS 85-1150-1 and IRS
Publication 1457 and were derived from U.S. Decennial Life Tables
for 1979-81. Furthermore, in light of this court's decision on
remand in the Darrin case, the factors set forth in Table 3, Life
Table for Females, with an interest rate assumption of 6" will be
applied to the undisputed date of death value of decedent's share
of trust principal (prior to reduction for the intervening life
estates).
Thus, the value of decedent's remainder interests in the
trusts, taking into account the value of the intervening life
estates, is $1,962,308.
Plaintiff, in his brief, points to the significant
contribution of the law firm of Shanley & Fisher to the
administration of the decedent's estate, including, but not limited
to, the firm's assistance in ascertaining the income tax basis of
all the assets in the portfolios of the trusts, the firm's ability
to develop a consensus among their clients, the beneficiaries, and
the resolution of issues arising in the course of estate
administration such as fiduciary commissions and the executor's
accounting of the estate.
The relevant statute is N.J.S.A. 54:34-5, which provides, in
pertinent part:
In determining the clear market value of the
property, the following deductions and no
others shall be allowed....
c. The ordinary expenses of administration,
including the ordinary fees allowed executors
and administrators and the ordinary fees of
their attorneys. (emphasis supplied)
The language of the statute is clear and unequivocal. The
deduction for attorneys' fees is limited to the attorneys for the
executor or administrator. The statute specifically limits
deductions to the categories of debts and expenses expressly set
forth. Thus, no matter how helpful the firm of Shanley & Fisher
may have been in the administration of the estate, the fact remains
that the firm represented the beneficiaries, not the executor.
Defendant's disallowance of the deduction for counsel fees
paid (or payable) to Shanley & Fisher will be sustained.See footnote 2
Plaintiff may submit his application for the deduction of
expenses attributable to this proceeding. Immediately following
the court's ruling on that application, the parties will submit
computations pursuant to R. 8:9-3. Thereafter, judgment will be
entered.
Footnote: 1The mortality tables for the years 1989-91, the period
closest to the valuation date, were not available at time of trial.
Footnote: 2It appears from papers filed with the court in the instant
proceeding that Shanley & Fisher served as co-counsel in the
prosecution of this tax case. That being so, the court will
entertain an application from plaintiff for the deduction of
additional counsel fees attributable to this litigation to include
services performed by Shanley & Fisher as such co-counsel.
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