July 13, 2012 by MDOPKIN
The recent decision of the New Jersey Tax Court in the Estate of Theodore Warshaw v. Director, Division of Taxation, No. 4000-2009, may be a significant pro taxpayer decision.
At issue in the Warshaw was the value of an IRA as of May 27, 2006, the date of his death. The IRA was originally reported in the estate tax return at $1,463,373. That amount was based on the monthly statements provided by Bernie Madoff. The IRA had been invested with Madoff and was supposedly funded with investments he managed. An estimated estate tax payment of $90,000 was made. Following Madoff’s arrest in December 2008, the Estate representatives learned the IRA was worthless and the monthly statements were fictitious. The worthless IRA reduced the taxable value of the estate from $1,847,893 to $384,520, which was below the New Jersey taxable threshold of $675,000. The Estate filed for a refund which the Division denied and this case followed.
Warshaw may prove to be a significant for the following reasons:
- It has been approved for publication in the New Jersey Tax Court Reports, so it has precedential value.
- It dealt with a refund claim by the Estate of an estimated New Jersey Estate Tax payment.
- It involved a loss of value based on a fictitious account value rather than a distribution of fictitious profits to an investor.
- Judge Andresini distinguished the case from the long-standing Ithaca Trust Rule that subsequent events may not be considered to determine the date of death value of assets in a taxable estate. The Judge reasoned that Madoff’s arrest and the revelation of the scam were not subsequent events that caused a decline of value in the IRA, but were subsequent events that provided evidence of the value on the date of death.
The case may be appealed by the Division, but it currently stands as a significant decision to prevent the Division from benefiting from financial schemes and fraud victims, and to expand the type of post-death evidence used when determining value in the face of the Ithaca Trust Rule.
In New Jersey and Pennsylvania, individuals with questions regarding tax law, or requiring assistance with business planning, entity selection or business organization, including corporate organization, are invited to contact the Dopkin Law Firm to consult with a skilled business planning attorney and tax lawyer. Please call us at 215-519-4269 or fill out our intake form online.