Estate of Joan Lee Johnston v. Director, Division of Taxation

NOT FOR PUBLICATION WITHOUT APPROVAL OF

THE TAX COURT COMMITTEE ON OPINIONS

______________________________

:

ESTATE OF JOAN LEE JOHNSTON, : TAX COURT OF NEW JERSEY

: DOCKET NO: 010286-2015

Plaintiff, :

:

vs. :

:

DIRECTOR, DIVISION OF :

TAXATION, :

:

Defendant. :

______________________________:

Decided: June 15, 2018

William J. Kaufmann for Plaintiff (Cafiero & Kaufmann

attorneys).

Heather Lynn Anderson for Defendant (Gurbir S. Grewal,

Attorney General of New Jersey, attorney).

CIMINO, J.T.C.

I. INTRODUCTION

Plaintiff taxpayer, Estate of Joan Lee Johnston, through its

administrator, James Johnston, Jr. (James Jr.) seeks a refund of

transfer inheritance tax paid. James Jr. alleges that the clear

market value of the estate is reduced, and thus the tax obligation

is reduced, because the estate has to pay to James Jr. and his

children for waste damages which Joan Lee Johnston (Joan Lee)

caused to real property she occupied during her lifetime. The

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Director has disallowed this deduction and the corresponding

refund.

Our Supreme Court has indicated that summary judgment

provides a prompt, business-like and appropriate method of

disposing of litigation in which material facts are not in dispute.

Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 530 (1995).

Additionally, cross-motions for summary judgment demonstrate to

the court the ripeness of the matter for adjudication. Spring

Creek Holding Co. v. Shinnihon U.S.A. Co., 399 N.J. Super. 158,

177 (App. Div. 2008).

Both parties have moved for summary judgment and this matter

is ripe for summary judgment. For the reasons set forth in greater

length below, this Court rejects the arguments of taxpayer and

grants Summary Judgment in the Director’s favor.

II. STATEMENT OF FACTS

The Johnston Family owned a modest home located at 221 Gilford

Avenue, Haddon Township in Camden County. In addition, they had

acquired a home at 202 West 22nd Avenue, North Wildwood in Cape May

County. North Wildwood is located on a barrier island which abuts

the Atlantic Ocean. The family consisted of the father, James J.

Johnston, Sr. born in 1903, the mother, Aulien Q. Johnston born in

1903 and two children, Joan Lee Johnston born in 1936 and James

Johnston, Jr.

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Aulien Johnston passed on May 23, 1988. Upon the death of

Aulien Johnston, all the marital assets became vested with James

Johnston, Sr. Shortly thereafter, James Johnston, Sr. passed on

September 16, 1988. Upon the death of James Johnston, Sr., the

disposition of assets was governed by a will he executed on May

14, 1988.

The will provided that Joan Lee could continue to live in the

Haddon Township property for as long as she desired. It is

undisputed that since her birth in 1936, Joan Lee had always lived

in the residence of her parents. The will also provided that she

would be responsible for all costs relative to the property. Upon

the death of Joan Lee, the property was to be sold and the proceeds

divided between James Jr. and any grandchildren equally, share and

share alike, per capita and not per stirpes. 1 The will also

provided that the North Wildwood property would also go to Joan

Lee. The alleged reason for giving the property to Joan Lee was

to provide additional financial security for her. Finally, all

the rest, residue and remainder of the estate was to be divided

equally between James Jr. and Joan Lee.

Joan Lee passed on March 31, 2011. In accordance with the

terms of James Johnston, Sr.’s will, the life estate expired and

1 The exact phrase appeared in an earlier will and due to a

scrivener’s error was unintentionally omitted. However, the

Probate Court entered an order recognizing this error and

correcting same.

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the remainder interest in the Haddon Township property went in

equal shares to James Jr. and the two grandchildren of James Sr.

(who are also James Jr.’s children), Anna Lynn Caroline Johnston

LeMaster and James J. Johnston, III.

It should be made clear that the disposition of the Haddon

Township property was not a part of Joan Lee’s estate since any

interest she had in the Haddon Township property expired with her

death in accordance with the terms of the life estate created by

James Johnston Sr.’s will. On death, Joan Lee’s estate consisted

primarily of the North Wildwood property and an investment

portfolio.

It is alleged that over the course of twenty-three years,

from 1988 through 2011, in which Joan Lee lived at the house alone,

she did not allow her brother, James Jr., to enter the property.

Upon entering the property after the death of Joan Lee, James,

Jr. discovered that the place was an utter mess and that Joan Lee

was not merely a hoarder of bric-a-brac, but someone who did not

throw away things such as empty food containers. Photographs taken

by James Jr. reveal items piled up on the floor everywhere.

Practically every square inch of table space and counter space was

stacked with trash including empty food containers, dirty dishes

and other debris. Things were piled everywhere leaving narrow

pathways to walk. It must be emphasized that the home was not

merely cluttered, but dirty and unsanitary as evidenced by the

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photographs of the kitchen and bathroom. This was not someone who

was merely accumulating items such as books, magazines or

memorabilia, but was also not cleaning the bathroom, kitchen or

other areas for many years. James Jr. alleges that as a result of

Joan Lee’s hoarding, the house suffered damage, including mold and

plumbing issues. The Director allowed a deduction of the expenses

of $1,500 to remove debris and $1,814 for plumbing.

James Jr. alleges that the actions of Joan Lee constitute

waste in the legal sense and that he and his children should be

compensated from Joan Lee’s estate. Since Joan Lee died intestate,

the estate would be going to James Jr. in any event. Said transfer

of assets would be subject to a tax in the amount of 11%. The

upshot of James Jr.’s waste claim is that damages for waste would

be deducted from Joan Lee’s estate and thus not subject to transfer

inheritance tax.

James, Jr. is the duly appointed Administrator of Joan Lee’s

estate. The Director and James Jr. agree that the value of the

Haddon Township home is $160,000. 2 While the value of the property

2 Previously the Director had taken the position that absent

correction of the scrivener’s error, the Haddon Township property

became part of the residual estate of James Sr. which would then

be divided between Joan Lee and James Jr. evenly. Upon the death

of Joan Lee, her share would have become part of her estate.

Resultantly, the Director wanted to add half the value of the

Haddon Township property, $80,000.00 to the assets of Joan Lee’s

estate. As indicated in the previous footnote, the scrivener’s

error has been corrected by the order of the Probate Court.

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in its deteriorated condition has been accepted by the parties,

the value of the property in undeteriorated condition is somewhat

unclear. James Jr. opines that the fair market value of the

property is $230,000 based on a similar property located two doors

away. Thus, the claimed diminution in value is $70,000.

Under New Jersey’s waste statute, James Jr. and his children

initially alleged that they were entitled to treble damages against

Joan Lee for the total amount of $210,000. It was asserted that

this alleged debt of the estate would escape the transfer

inheritance tax. The waste claim would be a claim against her

estate which consists of the Wildwood property worth $167,033,

other personal property amounting to $180,869 and an insurance

policy in the amount of $9,868 for a gross estate of $357,770.

From this, the Director allowed deductions of $39,838 reducing the

estate to $317,932. Deducting the waste damages of $210,000 would

result in a clear market value of the estate of $107,932.

Later, James Jr. and his children abandoned trebling the

damages and only sought the base $70,000 waste claim. This would

result in an estate with a clear market value of $317,932 less the

$70,000, or $247,932.

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III. CONLUSIONS OF LAW

A. Transfer Inheritance Tax

The New Jersey Inheritance Tax Act is a tax on the transfer

of assets where the “property . . . is transferred by deed, grant,

bargain, sale or gift . . . intended to take effect in possession

or enjoyment at or after . . . death.” N.J.S.A. 54:34-1(c). The

tax imposed by the Inheritance Tax Act is upon the clear market

value of the property transferred. N.J.S.A. 54:34-5. In

determining the clear market of the property, certain “deductions”

are allowed. Ibid. One of those deductions is the “debts of

decedent owing at the date of death . . .” N.J.S.A. 54:34-5(a).

The issue in this case is whether the statutory tort claim of waste

pursued by James Jr. personally (not as administrator) and his

children is a debt of Joan Lee owing at the date of death that

would reduce the clear market value of the estate.

James Jr. is the sole beneficiary whose distribution is

subject to an 11% transfer inheritance tax. N.J.S.A. 54:34-

2(c)(2). However, if the suit for waste is successful, the portion

of the estate constituting payment of the waste claim would not

pass to him as a beneficiary, but instead be paid to him and his

two children as creditors of the estate. The amount paid to James

Jr. and the children as creditors would not be subject to transfer

inheritance tax. However as creditors, the payment may be taxable

as income or capital gains for federal income tax purposes and

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income for state gross income tax purposes. Generally, the income

tax due and owing would be greater than the transfer inheritance

tax. 3 However, the specific tax and financial circumstances of

James, Jr. and his children are unknown.

B. Deductibility of Tort Claims

Before proceeding further, it has to be determined if there

is a valid basis for the deduction. The New Jersey Courts have

not squarely dealt with the deductibility of tort claims. This is

not a situation where the individual making the tort claim is an

independent third party who does not have an interest in the

estate. Rather, the claim is being made by the administrator of

the estate in his individual capacity along with his two children.

The practical effect, if successful on the claim, would be to shift

a portion of Joan Lee’s estate to satisfy a claim for damages.

Over the years, there have been various iterations of the

theme dealing with the distribution of estate assets that are not

exactly in accordance with the terms of the will. A guiding

principle is that “[o]ur courts have long taken the position that

the substance of the transaction controls over the mere form of

creation, and that technical tools within the law of conveyancing

3

Taxpayer abandoned the trebling of damages from $70,000 to

$210,000. Ostensibly, this was done since the treble damages of

$140,000 ($210,000 less $70,000) are exemplary damages subject to

federal and state income tax which is potentially more than the

transfer inheritance tax rate. See I.R.C. 104(a), (c); N.J.S.A.

54A:5-1(l).

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are not to thwart the purpose and the intent of the statute. The

range of the statute should not be so restricted as to frustrate

its evident purpose.” Newberry v. Walsh, 20 N.J. 484, 493

(1956)(citations omitted).

A common theme which runs through many inheritance tax cases

is the shifting of estate distributions from an individual in one

class to an individual in another class of beneficiary, resulting

in a decrease of taxes. 4 This generally occurs as a result of will

contests which are resolved, or an allegation that the monies paid

are not part of the estate, but constitute a deductible debt of

the estate.

There are few recent cases dealing with shifting of

distributions and the last time the New Jersey Supreme Court dealt

with this issue was in 1976. See In re Estate of Lingle, 72 N.J.

87 (1976). This is probably due in part to the fact that in the

1980s the Legislature eliminated the transfer inheritance tax for

transfers between spouses, parents, grandparents, and issue, thus

reducing the potential for tax implications. N.J.S.A. 54:34-2(a),

(c).

4For example, for transfers over $25,000 to Class C

beneficiaries, which include siblings, are taxed at progressive

rates of eleven through sixteen percent. N.J.S.A. 54:34-2(c). On

the other hand, transfers to Class A beneficiaries such as spouses,

parents, grandparents and issue are not taxed. N.J.S.A. 54:34-

2(a). Shifting a distribution can have significant tax

consequences.

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Moreover, the last reported decision to squarely deal with

the issue of debt deductions was by the Appellate Division in 1950.

See Sullivan v. Margetts, 9 N.J. Super. 189 (App. Div. 1950). This

may be due to the fact that while the transaction may escape

transfer inheritance taxation, the recipient of the monies may

still be subject to federal income tax and New Jersey gross income

tax.

The basic rule is that the Director does not look at how the

property was actually distributed, but rather, what were the terms

of the will or other document controlling disposition. Lingle, 72

N.J. at 97; De Rosa v. Dir., Div. of Tax’n, 29 N.J. Tax 482, 486

(App. Div. 2016); Donovan v. Dir., Div. of Tax’n, 10 N.J. Tax 224,

229 (Tax 1988). This basic rule was grounded in the statutory

provision that provides that the transfer inheritance tax is a tax

on the transfer by will or by the intestate laws of the estate.

N.J.S.A. 54:34-1(a).

The decisions dealing with the taxation of shifting estate

distributions and debt deductions are hard to synthesize into a

common body of law. However, what can be gleaned from reading

these decisions as a whole is that there are two requirements that

are necessary for a debt to be a valid deduction from the estate.

The first requirement is that the debt, or more appropriately the

money the estate intends to pay for the debt, must be supported by

consideration or damages. See Lingle, 72 N.J. at 97. Otherwise,

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the payment constitutes what is merely a donative distribution of

the estate. The second requirement is that the decision to pay

the debt must have been entered at arm’s length. See Id. at 92-

93. This is not to suggest full-blown litigation, but rather a

process in which the parties dealt with each other at arm’s length

and without collusive effect.

1. The need for consideration or damages

The first requirement of consideration or damages is

addressed in Lingle in which the decedent left his entire estate

to his second wife, despite a separation agreement between a

decedent and his first wife in which he promised to leave one-half

of his estate to his daughters by the first marriage. Id. at 91.

The Director calculated and assessed the tax in accordance with

the terms of the will taking no account of the marital settlement

agreement. Ibid. The Appellate Division reversed indicating that

the payments to the daughters should be considered as debts, and

hence, fully deductible. Ibid. While the Supreme Court

acknowledged that debts constitute a valid deduction in

determining the clear market value to be taxed, the Supreme Court

differed from the Appellate Division and held that a promise to

make a disposition was not intended by the Legislature to be

included as a deduction in the calculation of the transfer

inheritance tax. Id. at 92-93. However, the transfer would not

be taxable since the Supreme Court recognized that the Legislature

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intends to only tax transfers of a donative nature. Id. at 97.

“[A] transfer made pursuant to a contract will not be subjected to

an inheritance tax where the estate has received a full and

adequate consideration in money or money’s worth.” Ibid.

The instant case does not involve a contract claim, but rather

a tort claim. The rough corollary to consideration for a tort

claim is damages. Just like in a contract claim where you can

have a meeting of the minds, but no contract without consideration,

the liability for a tort claim does not have a real impact on an

estate unless there are corresponding damages.

Overall, there must be a real tort claim. Here, waste is the

tort alleged, an ancient doctrine of law which was a rarity even

in Blackstone’s day. Kenlee Corp. v. Isolantite, Inc., 137 N.J.

Eq. 459, 461 (Ch. 1946).

a. The waste claim

On March 17, 1795, New Jersey adopted an Act for the

prevention of waste. L. 1794, C. 547, §1 through §8. The Statute

essentially followed two earlier English statutes, the Statute of

Marlbridge enacted in 1267 and the Statute of Gloucester enacted

in 1278. Camden Trust Co. v. Handle, 132 N.J. Eq. 97, 99 (E. & A.

1942). The Statute of Marlbridge broadened the common law

concerning waste to include tenants-for-life and for a term of

years. Ibid. The Statute of Gloucester adopted nine years later

established the punishment for waste as forfeiture of the thing or

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place wasted and treble damages. Ibid. The statute is currently

codified in Chapter 65 of Title 2A. N.J.S.A. 2A:65-1 through -

10.

The statute provides in pertinent part:

No tenant . . . for life . . . shall, during

the term, make or suffer any waste, sale or

destruction of any property belonging to the

tenements demise, without special license in

writing.

[N.J.S.A. 2A:65-2]

A civil action may be maintained in the

superior court against the tenant, and upon

finding that waste has been committed,

treble damages shall be assessed or granted,

and the defendant shall lose the thing or

place wasted.

[N.J.S.A. 2A:65-3]

New Jersey Courts have recognized two main varieties of waste,

voluntary and permissive. 5 Voluntary waste, which is sometimes

also referred to as active waste, is an affirmative wrong act by

a tenant. This would include such acts a pulling down buildings

or chopping down trees during the tenancy.

On the other hand, permissive waste is the failure to act to

protect the property. For example, allowing a roof to leak and

5 There is also a third variety called ameliorative waste in which

the tenant destroys something, but as a result makes the property

more valuable. Thomas w. Merrill, Melms v. Pabst Brewing Company

and the Doctrine of Waste in American Property Law, 94 Marq. Law

Rev. 1055, 1056 (2011). Needless to say, New Jersey courts have

not addressed this type of waste.

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doing nothing, leading to interior water damage, could be

considered permissive waste. “A tenant for life is bound to repair

only to the extent of preventing permissive or actual waste. In

fulfillment of this duty, it is said that he must keep the premises

in as good repair as when his estate began, not excepting ordinary

wear or tear. If, in the course of time, a new roof is needed he

should put it on; if paint wears off, he is bound to repaint. But

he is under no obligation in respect to the loss of economic value

of a building which normally occurs.” In re Estate of Roth, 139

N.J. Eq. 588, 596 (Prerog. Ct. 1947). It is settled law that an

action for permissive waste will lie under the statute of waste.

Newman v. Sanders, 89 N.J.L. 120, 121 (Sup. Ct. 1916). However,

it has been seriously questioned whether the “filthy condition” of

the premises may amount to a remedy for waste since there must be

permanent damage. Miller v. Foreman, 37 N.J.L. 55, 59 (Sup. Ct.

1874).

The parties have stipulated that the house is only worth

$160,000.00 in its current state. No proofs have been presented

as to what the property would be worth but for its filthy

condition. James Jr., as administrator, presents one comparable

sale from two doors down as to what the property would be worth in

unfilthy condition, but does not provide any proof as to how this

property is comparable in size, age or condition save the filth.

Moreover, James Jr. does not make any adjustments for differences

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in age, size or condition between the subject property and the

property two doors down.

The difference in value due to the filth and such may not

rise to an actual claim. The law provides that normal depreciation

is not subject to a waste action. In re Estate of Roth, 139 N.J.

Eq. at 596. It is beyond doubt that this property is in somewhat

rough condition and is littered with filth and debris. However,

there has not been any showing what effect this has on value. For

example, the cost to clean up and repair the premises might only

be a fraction of the alleged loss of value. In other words, a

small investment in repair and clean-up may reap a much larger

increase in value. According to the estate returns, the Director

allowed a deduction for $1,500 in cleanup and $1,814 in plumbing.

The law of waste is more concerned with permanent damages such as

the removal of minerals or the cutting of trees which are not

easily replaceable. See, e.g., Moorehouse v. Cotheal, 22 N.J.L.

521, 523 (Sup. Ct. 1850)(lumber); Gaines v. Green Pond Iron Mining

Co., 33 N.J. Eq. 603, 607-08 (E. & A. 1881)(minerals). The

doctrine does not fit squarely into property that has suffered

permissive waste since many times the damage is reversible.

There is also the issue of remediation stigma which has been

described by the example of a house with an intact roof that may

be slightly more valuable to a buyer than a house with a roof that

has been properly repaired because of fear of further leaks and

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possible hidden damage in the house. Hous. Auth. v. Suydam

Investors, LLC, 177 N.J. 2, 21 n. 4 (2003). However, this is not

to suggest that a dollar-for-dollar reduction would be

appropriate. Inmar Assoc., Inc. v. Borough of Carlstadt, 112 N.J.

593, 605 (1988).

There has not been any presentation of the cost to remediate

the property. All we have are pictures of what appear to be a

hoarder’s residence. Sure it may be true that the rugs are ruined,

but even with normal wear and tear, rugs may need to be replaced

after twenty years.

The same holds true for the walls. Even if Joan Lee was a

better housekeeper, the walls may need to be repainted, wallpaper

removed and paneling removed, if not for any reason but to update

the colors and style. The kitchen and bathroom appear to be dated

as well. Even if not in deplorable conditions, these may need to

be remodeled as well. At this juncture, there is simply

insufficient evidence to establish waste that resulted in damages.

2. Adversarial process free of collusion

The second requirement in establishing a valid debt is that

the decision to pay the debt must be have been entered as part of

an arm’s length transaction. This is not to suggest a full-blown

trial is necessary, but rather a process in which the parties dealt

with each other at arms’ length and without collusive effect.

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In De Rosa, the matter did not involve a debt, but rather a

will contest, in which a portion of the estate distribution was

shifted from a taxable Class C beneficiary to a nontaxable Class

A beneficiary. De Rosa, 28 N.J. Tax at 75-76. Both the Appellate

Division and the Tax Court expressed concern when the executor is

also a beneficiary. De Rosa, 29 N.J. Tax at 486, 28 N.J. Tax at

80. The Tax Court suggested that “[i]f an independent executor

settles a will contest to best effectuate the terms of the will,

then perhaps it would be proper to consider the agreement when

assessing a transfer inheritance tax.” De Rosa, 28 N.J. Tax at

80. The court did not reach that issue because the executor was

also a beneficiary. Id. at 80-81. The court determined the

agreement appeared to be more similar to an agreement between

beneficiaries to redistribute estate assets. Thus, the Director

was required to calculate the inheritance tax under the terms of

the will, not pursuant to the terms of the settlement agreement.

Ibid.

Likewise, in Sullivan, the nurse and housekeeper of a decedent

claims she was promised his whole estate, or sufficient property

to reasonably compensate her for her services. Sullivan, 9 N.J.

Tax at 191. A probate action was filed, and settled, but a

deduction for the payment of services rendered was rejected by the

Director. Id. at 191-92. The matter was remanded by the Appellate

Division because it was uncertain whether the Director

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investigated the facts on which the appellant’s claim against the

estate was based and then satisfied himself that the settlement

was fair. Id. at 195.

In this case, James Jr., in his personal capacity, is

asserting a claim against himself as the administrator of Joan

Lee’s estate. “The distinction between a person in his personal

capacity and in his capacity as a representative, or as an

executor, is so clearly drawn that the two characters or capacities

are separate and independent – they are different persons or

entities. . .” Bd. of Ed. v. Davenport, 2 N.J. Misc. 564, 565

(Ch. 1924). “It is clear that a man cannot, in his individual

capacity, sue himself in his capacity as executor.” Shippee v.

Shippee, 122 N.J. Eq. 570 (Ch. 1937)(citing Black v. Shreeve, 7

N.J. Eq. 440, 457 (Ch. 1848)). As explained long ago,

“[f]undamental principles forbid that he should be trusted to

conduct both sides of a litigation, or even allowed to occupy a

position where he would be entitled to know, in advance, by what

means it was expected the claim against him could be established,

and also what evidence would be offered in disproof of his defence

[sic].” Executors of Ransom v. Geer, 30 N.J. Eq. 249, 251 (Ch.

1878). Obviously, there are situations in which an administrator

can satisfy debts owing to himself without a full-blown adversarial

proceeding. A perfect example of this is the reimbursement of

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reasonable funeral expenses paid from the administrator’s personal

funds.

While this Court can review a disputed debt and evaluate

whether the resolution of a debt was reached through an arm’s

length transaction, the Tax Court is not in a position to conduct

the adversarial proceeding necessary to establish an arm’s length

process. A will contest is best left to the determination of the

Probate Part of the Chancery Division of the Superior Court, and

a waste claim is best left to the Law Division of the Superior

Court.

In this case, James Jr. is both the individual bringing the

waste claim as well as the administrator defending against the

claim. He is hopeful that he can merely file his action in Superior

Court and have a default judgment. Even if the court were to

require a proof hearing, this is not truly an adversarial

proceeding. James Jr. argues that the Director and the Tax Court,

would have to blindly accept this adjudicative process, a process

in which the same individual is on both sides has a certain germ

of mischief.

The binding effect of adjudications which negatively and

collaterally impact a third party have been addressed by the courts

in New Jersey in a number of instances involving the liability of

insurers to pay claims for which the insurers were not involved in

directing the defense. In these types of cases, the courts have

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held that the settlement between the insured and third party may

be enforceable against an insurer only if it is a reasonable amount

and entered into in good faith. Griggs v. Bertram, 88 N.J. 347,

368 (1982). The concern of the Court was to discourage collusive

or overreaching impositions upon insurance carriers. Id. at 367-

368. While the Court recognized that it was the insurer that

caused the situation by its unfair dealing in refusing to provide

a defense, over-reaching by the insured was not the remedy to

unfair dealing. 6 Ibid.

In the later Appellate Division decision of Fireman’s Fund

Ins. Co. v. Imbesi, 361 N.J. Super. 539 (App. Div. 2003), the court

noted that a negotiated settlement “becomes collusive when the

purpose is to injure the interests of an absent or nonparticipating

party. . .” Id. at 577.

Unlike an insurance case in which the burden can be shifted

to the insurer once a prima facie case has been established, the

Director did not engage in unfair dealing and the burden of proof

remains with the estate which asserts the claim. See Lingle, 72

N.J. at 97. See also Sullivan, 9 N.J. Super. at 195 (concerned

that the Director was satisfied that settlement was fair).

6 As a result of the insurer’s unfair dealing, once the prima facie

case was established, the burden of proof shifted to the insured.

Griggs, 88 N.J. at 367-68.

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The Tax Court is not to adjudicate the underlying claim but

to examine whether it was conducted or negotiated at arm’s length.

From the body of the case law examined, there are a number of

factors that may be indicative as to whether a debt of the decedent

arose in an adversarial context through an arm’s length process.

These factors include:

• the relationship, either familial or otherwise between the

executor and the person asserting the debt;

• if the parties are indeed related, the quality of their

relationship (i.e., ex-spouse, siblings who do not get

along); whether the same parties are on both sides of the

proceeding or directing the proceedings (i.e. individual

who is both an executor and a claimant or beneficiary);

• the value of a claim as determined by a qualified

appraiser, or the overall quality of the valuation of the

claim;

• whether a full hearing was held in the matter instead of

the entry of a default judgment or consent judgment;

• whether the debt or the damages had some relationship to

adequate consideration or properly reflect damages;

• whether there are proofs that exist prior to death that

establish a claim;

• whether an action to collect a debt was instituted prior

to the death of the decedent;

• whether the payment of the claim results in a reduction of

tax obligations, while at the same time not leading to

diminution of actual monies received by a beneficiary of

the estate or the beneficiary’s family;

• whether the debt actually has the effect of transferring

the state distribution from one family member to another,

and;

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• whether each side of the dispute is represented by separate

counsel.

In this case, the same person, James Jr., is asserting the

debt and is the administrator. The value of the debt has not been

established. There have not been any hearings to determine the

validity of the claim or the amount. The claim was not instituted

prior to the death of Joan Lee. The claim, if successful, will

result in a reduction of transfer inheritance taxes. If the claim

is paid, it would be paid to the administrator, as well as his two

children. All of these factors weigh in favor of rejecting the

claim as a debt of the estate.

C. Future Refund Claim.

Although James, Jr., as administrator, has not established

that a portion of the estate is deductible on the basis of the

waste claim, that does not mean that the estate cannot seek a

refund in the future. A request for a refund must typically be

made within three years of the date of payment. N.J.S.A. 54:35-

10. Prior to 1956, the section provided in pertinent part:

all applications for repayment of such tax

shall be made within 3 years from the date of

such payment.

[Ibid.]

In 1956, an amendment changed the law as follows:

all applications for repayment of such tax

shall be made within 3 years from the date of

such payment, or from the date of the final

determination of a court of competent

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jurisdiction which establishes the fact that

the decedent had no legal or equitable

interest in the property on which the tax was

assessed and erroneously paid, whichever is

later; provided, however, no refund shall be

made where such final determination occurs

more than 20 years after the date of death of

the decedent.

[Ibid.]

Stated succinctly, the law was amended in 1956 to expand the

refund period to be 3 years of determination by a court, so long

as the determination is within 20 years. Id.

In the case at hand, there has not been a final determination

of a court of competent jurisdiction that establishes the waste

claim. The evidence presented thus far is insufficient to

establish a claim. The estate has to determine whether it is worth

pursuing an action. In light of the foregoing, James Jr. and the

estate have to determine both the necessity and the potential cost

of a substitute administrator to cure the conflict of James Jr. as

administrator and creditor, separate counsel for both the

substitute administrator and James Jr., and expert appraisal

reports. Upon final determination of a court of competent

jurisdiction, a timely refund claim will need to be made. The

Director, and ultimately this court on appeal if necessary, can

then evaluate the claim considering the factors and concerns

mentioned in this opinion.

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IV. CONCLUSION

For the foregoing reasons, summary judgment is granted in

favor of the Director and the matter is dismissed.

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