James F. McDonough
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The Madoff scandal is no longer the lead story on the evening news; however, the ripple effect of the scandal remains with us even today.
In Estate of Warshaw v. Director, the Superior Court of New Jersey Appellate Division (“Appellate Division”) reversed the decision of the Tax Court of New Jersey that granted the estate a tax refund. The descendent died in 2006 and his executors filed a New Jersey Estate Tax Return in July 2007 paying tax on the value of an IRA that was managed by Bernard L. Madoff Securities LLC. The value of the IRA was provided to the estate by the custodian, an entity controlled by Mr. Bernard Madoff. You may recall that Mr. Madoff was arrested in December 2008 and he pled guilty to various charges on March 12, 2009.
In January 2009, the estate filed a claim for refund of estate taxes because the IRA was always worthless, even before death. The Division of Taxation (the “Division”) denied the refund claim and the estate sued in Tax Court. The Tax Court decision ordered the Division to pay the refund. The Division appealed and won a reversal in the Appellate Division. The Appellate Division held that no one had knowledge of the Ponzi scheme at the date of death; therefore, the value of the IRA for New Jersey estate tax purposes was the overstated value reported by the custodian.
The Warshaw case is an example of when and to what extent post-death events are considered in valuing assets for estate tax purposes. This area is unsettled and taxpayers may not find consistency between state and federal decisions.
- Practices: Tax and Trusts & Estates, Estate & Trust Litigation, Real Property Tax Strategies, Sophisticated Estate Planning & Wealth Preservation
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
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