Marital Deduction in New Jersey Estate Tax
Estate of Booth v. Dir., Div. of Taxation, No. 015173-2012, 2014 N.J. Tax LEXIS 4 (Tax Ct. Feb. 11, 2014)
This case dealt with whether defendant’s, the New Jersey Division of Taxation, disallowance of the federally allowed marital deduction in computing the New Jersey estate tax is proper. Lillian Garis Booth, decedent, died testate in 2007 as a New Jersey resident. Id. at *4. Michael/Misha Dabich, also a New Jersey resident, was decedent’s companion for over 51 years. Decedent’s 1958 Will and 1991 Codicil did not make any provision for Dabich. Id.
Dabich filed a complaint against the Estate, alleging that the he had cohabitated with decedent for 36 years in New Jersey and they had held themselves out as married in both New Jersey as well as Pennsylvania, in Dabich’s hometown. Id. at *4-5. “[T]he complaint sought recognition of a common-law marriage between decedent and Dabich under the laws of Pennsylvania and for a share (either elective or entire) in, and of, the decedent’s estate under New Jersey laws.” Id. at *5. Dabich then filed a complaint in Pennsylvania seeking a declaration that there was a common-law marriage prior to 2005 between decedent and Dabich. Id. at *5-6.
The New Jersey complaint referenced a September 23, 2008 settlement agreement between Dabich and the Estate of decedent. Id. at *5. The agreement recognized that “Dabich’s claims were ‘bona fide and substantial,’ and that payments to him were to be allocated to his claims for an ‘elective share of the surviving spouse’ under N.J.S.A. 3B:8-1 and ‘the rights of an omitted spouse’ under N.J.S.A. 3B:5-15.” Id. at *7. Sometime in February 2009, Dabich filed a pleading to set aside the settlement agreement. Id. at *8. The parties then entered into an Amended Settlement Agreement on March 16, 2009, which included $5 million paid into a trust for Dabich’s benefit. Id.
In February 2009, the Estate filed a federal tax return, claiming the Dabich’s trust as a property interest passing to a surviving spouse. Id. at *10. In October 2009, the Estate filed a supplement to their federal tax return, listing decedent as married and the amount passing to Dabich as $9.9 million. On February 2010, the Internal Revenue Service (“IRS”) issued a letter that included an allowance of $9.9 million as a “marital deduction.” Id. at *13.
In July 2008, the Estate filed a resident Inheritance Tax Return that did not report any Class “A” beneficiary, i.e., a spouse or civil partner. Id. at *14-15. In February 2009, the Estate filed a resident Estate tax return that included a claim for a “refund of some or all of the inheritance and estate taxes paid” to Dabich. Id. at *15. In February and March 2010, the Estate amended its state returns, seeking a deduction for the $9.9 million paid to Dabich as a Class “A” transferee. Id. at *16.
In April 2011, the Division of Taxation issued a Notice of Assessment that denied the $9.9 million deduction. Id. The Estate filed a timely administrative protest in July 2011. The Division of Taxation issued a final determination, reiterating that there was no allowable deduction for the $9.9 million paid to Dabich. Id. at *18. The Division of Taxation found “that there was no evidence of a common-law marriage other than ‘circumstantial evidence,’ and that the IRS’ determination that Dabich was a common-law spouse was similarly not adequately supported.” Id. The Estate then filed the current complaint. Id. at *19.
The Estate moved for partial summary judgment, contending that “the New Jersey estate tax is dependent upon the federally calculated and allowed State death tax credit, therefore, [the Division of Taxation] is bound by the federal estate tax determinations of, and by, the Internal Revenue Service (“IRS”).” Id. at *1. The Division of Taxation cross-moved for partial summary judgment, arguing that “since the decedent was not married, and since New Jersey does not recognize common-law marriages, Taxation is not bound by the federally allowed marital deduction in computing the New Jersey estate tax.” Id. at *1-2.
The Tax Court held that although the de-coupled New Jersey estate tax is still computed with reference to the federal credit for state death taxes effective as of Dec. 31, 2001, the Division of Taxation is not barred from examining federally allowed estate tax deductions to ensure the same are in accord with the federal law as of that date. Id. at *33-34. Since the amount of the federal state death tax credit is impacted by the amount of the federally allowed marital deduction; the marital deduction is only allowed to a “spouse”; and determination of a “spouse” is controlled only by state law, the Division of Taxation is not automatically bound by the Internal Revenue Service’s (IRS) determination that a New Jersey resident decedent had a common-law marriage with another person who was paid by the decedent’s estate in settlement of probate litigation.
The Tax Court recognized that the Division of Taxation would be bound by an IRS’s determination if it was based on a court’s finding or recognition, on the merits, of a common-law marriage status, or on the IRS’s analysis or application of state law. However, because the finding that there was a common-law marriage between decedent and Dabich was the result of a settlement agreement, neither of these two elements was present. Id. at *45-46. Therefore, the Division of Taxation’s disallowance of the federally allowed marital deduction is proper. Id. at *43.
Further, the Tax Court found that the Division of Taxation improperly disallowed a portion of the executors’ commission expenses by relying on the Inheritance Tax regulations. Therefore, Plaintiff’s motion for partial summary judgment is denied in part, and defendant’s cross-motion for partial summary judgment is granted in part.