New Jersey Allows Subsequent Discovery to Retroactively Modify Estate Valuation

In an unpublished June 2012 decision, (Estate of Theodore Warshaw v. Director, Division of Taxation, N.J. Tax Ct., Dkt. No. 004000-2009, 06/28/2012 (not for publication)), the New Jersey Tax Court granted a taxpayer's refund of estate taxes paid on the valuation of an estate that had a (then valuable) Madoff investment.

Estates that have been taxed in the past few years based upon valuations of investments that turned out to be fraudulent should take heed.

Theodore Warshaw died in May 2006, and left an estate valued at $1,848,293. Included in that amount was an IRA account that held securities worth $1,463,733. In late 2008, it was discovered that Bernie Madoff was, in fact, running a Ponzi scheme. As a result, Mr. Warshaw’s executors (representing his estate) sought a refund of estate taxes paid based on the fact that the account balances reported by Madoff's management company and thus used in the estate’s initial valuation were incorrect and fraudulent. If the value of the accounts invested in Madoff’s funds were properly valued as zero, then Mr. Warshaw’s estate would be worth less than the estate tax threshold (which in New Jersey is $675,000).
The Tax Court acknowledged the general rule that events that occur subsequent to the decedent’s death are not considered to determine the date of death value of the decedent’s gross estate (referred to as the “Ithaca Trust Rule”). However, the Court also ruled that although subsequent events may not affect value, subsequent events may be used when determining what the actual value of an estate was at the time of death.
As per the Court: “Subsequent events may be considered to show evidence of value of the estate on the date of death. In the instant matter, approximately 30 months passed from decedent’s death to the arrest of Madoff for his role in the Ponzi scheme. I find this to be a reasonable amount of time. Accordingly, I conclude that the subsequent information regarding the Madoff Ponzi scheme is relevant to the determination of the fair market value of the IRA.”  

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