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Posts Tagged ‘New Jersey Tax Court’

Retroactivity of Marriage Rights Continues to Occupy Courts

Posted on: May 17th, 2016 by Art Leonard No Comments

In two recent decisions courts have had to deal with the question whether marriage rights for same-sex couples, declared by the U.S. Supreme Court on June 26, 2015, should be projected backwards in time in particular cases involving the death of gay men and the rights of their surviving partners. In one, the surviving partner received the spousal benefit he sought, proceeds from a wrongful death lawsuit, although the court ended up not ruling directly on the retroactivity claim.  In the other, the surviving partner was unsuccessful because his partner died seven months after same-sex marriage became available in their state, New Jersey, but just days before they were scheduled to marry.

First, the hard-luck timing story from New Jersey: Rucksapol Jiwungkul and Maurice R. Connolly, Jr., began their relationship in 1983 and it continued until Connolly’s death on June 2, 2014.  On July 10, 2004, the date that New Jersey’s Domestic Partnership Law went into effect, the men registered as domestic partners.  At that time a lawsuit was pending in the New Jersey courts seeking marriage equality, but the plaintiffs in that case had suffered an initial setback before the Superior Court and the case was on appeal.

On October 25, 2006, the New Jersey Supreme Court ruled in Lewis v. Harris that same-sex couples were entitled to have some form of legal recognition from the state that would provide all the rights and benefits of marriage, but that the state could meet this constitutional requirement by enacting a civil union law if the legislature was not inclined to simply amend the marriage law to let same-sex couples marry. The legislature took the civil union route, and that statute went into effect on February 19, 2007.

Jiwungkul and Connolly decided not to register as civil union partners, and they were very public about their decision. Connolly was quoted in an article in The Philadelphia Inquirer on December 8, 2006, shortly after the legislature passed the Civil Union Law, describing himself as “furious” that the legislature did not opt for marriage, and explaining that they decided not to enter into a civil union because it “was not equivalent to marriage.”

After the U.S. Supreme Court ruled on June 26, 2013, in United States v. Windsor, that the Defense of Marriage Act was unconstitutional, a lawsuit previously filed by Garden State Equality seeking to reopen the marriage equality question in New Jersey suddenly sprang to life. Within months the court had ruled that in light of Windsor, same-sex couples in New Jersey should be entitled to marry. When the New Jersey Supreme Court upheld the trial judge’s refusal to stay her ruling, Governor Chris Christie dropped the state’s appeal and the ruling went into effect on October 21, 2013.

Jiwungkul and Connolly sprang into action, starting to make arrangement for a June wedding. In anticipation of the wedding, they applied for a marriage license on May 27, 2014.  Their application stated that the wedding would take place on June 8, and the license was issued.  Tragically, Connolly died suddenly and unexpectedly on June 2, leaving Jiwungkul as his surviving domestic partner and executor and principal beneficiary of his estate.

Connolly’s bequests to Jiwungkul were not subject to the New Jersey transfer inheritance tax, because the Domestic Partnership Law specifically exempts surviving domestic partners from having to pay a tax on an inheritance from their domestic partner. But Connolly’s estate was required to pay New Jersey estate tax of $101,041.00.  Jiwungkul filed the appropriate estate tax return but then filed an amended return claiming the spousal deduction, requesting a refund of the entire $101,041.00.

The New Jersey Department of Taxation rejected his refund claim, pointing out that the Domestic Partnership Law did not provide the marital deduction for estate tax purposes for domestic partners. Had the men registered for a state civil union, the marital deduction would have been available, since the New Jersey Supreme Court’s decision in Lewis v. Harris required that state civil unions provide the same rights as marriage.  And, of course, had the men married promptly after the Garden State Equality decision went into effect, as many N.J. domestic partners and civil union partners did, Jiwungkul would have been a surviving spouse, so the estate could claim the spousal deduction, which would have wipe out any obligation to pay state estate tax.

Jiwungkul filed suit in the New Jersey Tax Court, challenging the denial of his refund, claiming that as a result of the developments in judicial decisions, it would be appropriate to treat him as a surviving spouse and allow the marital deduction to the estate. The Presiding Judge of the Tax Court, Patrick DeAlmeida, denied his claim.  Jiwungkul v. Director, Division of Taxation, 2016 N.J. Tax Unpub. LEXIS 28 (May 11, 2016).

DeAlmeida pointed out that the men could have entered into a Civil Union, qualifying their estates for the spousal deduction, as early as February 2007, but they made a conscious choice not to do so. Furthermore, they could have married beginning on October 21, 2013.  “There is longstanding policy in this State,” he wrote, “of not according statutory rights to couples who have not fulfilled the statutory requirements for a government-sanctioned relationship.  He rejected the argument that because the right to marry has the status of a constitutional right, the Domestic Partnership Law of 2004 should be retroactively interpreted to provide the spousal deduction for estates of same-sex partners whose only legally recognized status at the time of death was being domestic partners.

This couple, however, delayed marrying. “They are, of course, free to order their affairs in any manner they see fit,” wrote the judge.  “They must, however, accept the legal consequences, including the ramifications of the tax laws, of their decisions.  Had they entered into a civil union during the many years it was available to them, or married sooner after the decision in Garden State Equality, decedent’s unexpected passing would not have resulted in the tax liability contested in this case.  Plaintiff and decedent suffered from a tragic turn of events, the tax consequences of which could have been avoided.”

This ruling can be appealed to the Appellate Division of the Superior Court. Jiwungkul, as executor of Connolly’s estate, is represented by Robyne D. LaGrotta of Parsippany.

The other case, from Alabama, turned out more favorably for the surviving partner. Paul Hard and David Fancher, Alabama residents, went to Massachusetts to marry on May 20, 2011.  At the time, Alabama did not recognize their marriage. Shortly after they returned home, Fancher died when the car he was driving on the interstate collided with a United Parcel Service Tractor Trailor.  Because Alabama did not recognize the marriage, the death certificate stated that he was “never married” and Hard was not listed as his surviving spouse.  The court appointed an administrator for Fancher’s estate, who filed a wrongful death lawsuit against United Parcel.  Under Alabama law, estates have to distribute the proceeds from wrongful death actions to the legal heirs of the decedent, according to the intestate succession statute.  If a person is survived by a spouse but no children, but there is at least one surviving parent, the surviving spouse receives the first $100,000 plus one half of the balance, the other half of the balance going to surviving parents.  If there is no surviving spouse but there are surviving parents, the proceeds go to the surviving parents.  Fancher was survived by his mother, Pat Fancher.

While the wrongful death case was pending, Hard filed a lawsuit against Alabama officials and the administrator of Fancher’s estate. He sought three things: a declaration that Alabama’s refusal to recognize his marriage to Fancher violated the constitution, an injunction requiring Alabama to issue a new death certificate taking account of the marriage, and an injunction ordering the estate to distribute to him the spousal share of any recovering in the wrongful death suit.  Pat Fancher filed a motion to intervene in the case, arguing that she was entitled to the full proceeds of any wrongful death action because Alabama did not recognizing the marriage so there was no “surviving spouse” as far as Alabama was concerned.  Chief U.S. District Judge William Keith Watkins let her intervene.  The administrator of Fancher’s estate agreed to set aside the spousal share of any amount that would be recovered until such time as this lawsuit was resolved.

A settlement was reached with United Parcel several months later, and the estate administrator paid Pat Fancher the portion of the proceeds that she would be entitled to receive even if the marriage was recognized (half the balance over $100,000), putting the rest, about half a million dollars, in a trust account pending the resolution of Hard’s case. Meanwhile, litigation was proceeding separately challenging Alabama’s refusal to recognize same-sex marriages, and U.S. District Judge Callie Granade ruled in the Searcy case on January 23, 2015, that the ban was unconstitutional.  When she refused to stay her ruling, the Alabama State Registrar of Vital Statistics issued a new death certificate recognizing the Held-Fancher marriage, and the judge in Held’s case allowed the administrator of the state to intervene to pay over the balance of the trust money into the court’s registry.  Judge Watkins then stayed the case, pending the U.S. Supreme Court’s decision in Obergefell v. Hodges, which was expected by the end of June.

When the Supreme Court ruled, Hard moved to lift the stay and disburse the remaining money to him. At the same time, Alabama Attorney General moved to have the case dismissed as moot, arguing that because he was required to recognize the marriage under Judge Granade’s injunction, the Supreme Court had struck down the ban on same-sex marriage, and Hard had obtained the substitute death certificate, there was nothing left for the court to decide and the case was moot.  The court granted Hard’s motion to release the funds to him and dismissed the case on July 15.

Pat Fancher quickly filed a motion to set aside the dismissal order and block payment of the funds to Hard. She argued that unless the Obergefell case applied retroactively, the amended death certificate was invalid, because at the time her son died he was not legally married to Hard under the Alabama law then in effect.  The district court denied the motion and ordered the clerk court to distribute the money, about $500,000, to Hard.  Pat Fancher appealed.

The 11th Circuit Court of Appeals denied her appeal on April 20, in Hard v. Attorney General, 2016 WL 1579015.  The court pointedly refrained from deciding whether Obergefell applies retroactively.  Rather, it focused on the failure of Fancher’s motion to argue that the case was not moot, which would be the only valid ground to challenge the trial court’s decision to dismiss the case.  The 11th Circuit pointed out that as Hard had obtained all the relief he was seeking, there was no “live controversy” before the district court.

As to Fancher’s challenge to the district court’s order to the clerk to pay the remaining money to Hard, the court said, “We conclude there was no abuse of discretion because the district court properly applied Alabama law of intestate succession pertaining to surviving spouses. Simply put, once the State of Alabama recognized Hard as the surviving spouse and the district court dismissed the case as moot, the court committed no abuse of discretion by disbursing the funds accordingly.”

Held is represented by Montgomery attorneys David Dinielli, Scott Daniel McCoy and Samuel Eugene Wolfe. Pat Fancher is represented by Matthew Thomas Kidd, also of Montgomery.   The 11th Circuit opinion was issued “per curiam” by a panel consisting of Judges Adalberto Jordan, Julie Carnes and Jill Pryor.

Cautionary Tale: Same-Sex Couples That Own Property Need to Take Steps to Protect Each Other

Posted on: June 10th, 2014 by Art Leonard No Comments

The Tax Court of New Jersey issued a ruling on June 5 in Estate of Frappolli v. Director, Division of Taxation, 2014 Westlaw 2567138, with a strong cautionary note for same-sex couples who jointly own their homes. Formalize your status if you can!

Marie Frappolli and Dorothea Angelou became partners as students and considered themselves partners for many decades until Frappolli died in 2009. Frappolli bought a house in Avalon, NJ, in her own name in 1966. Although the women were already a couple then, Angelou lived with her father until his death in 1980. Then she moved into Frappolli’s house. In 1993, in a little burst of legal action, Frappolli executed a document conveying a half interest in the house to Angelou, “each undivided fifty percent interest being held as joint tenants with rights of survivorship and not as tenants in common.” She didn’t ask Angelou to pay her anything for the half interest, but the new deed to the property listed “consideration” for the transaction as $1.00.

In 2004, New Jersey passed a domestic partnership statute for same-sex couples. Registered domestic partners would be exempted from inheritance taxes on property transfers. But Frappolli and Angelou did not register as domestic partners. In 2007, responding to the New Jersey Supreme Court’s decision in Lewis v. Harris, the state passed a civil union law, which similarly would exempt civil union partners from inheritance taxes, but Frappolli and Angelou did not register as civil union partners. Today same-sex couples can marry in New Jersey, and can benefit from the marital exemption from inheritance taxes. Unfortunately, when Frappolli died in 2009, the women had no legal relationship with each other.

After Frappolli died, her estate submitted a tax return claiming the benefit of the domestic partnership inheritance tax exemption, and apportioning the ownership interest in the estimated value of the house at 50% for each of the women. The return claimed that the estate owed no tax, since it was all being inherited by Angelou, who was characterized as Frappolli’s domestic partner.

But when state tax auditors looked into this and discovered that the women had never filed an affidavit of domestic partnership or civil union, the Tax Division decided to treat Angelou as a legal stranger and to tax the estate for the value of the inheritance. Indeed, noting that Angelou had never paid for her share of the house, which was thus a gift, the Tax Division levied the tax on the complete estimated value of the house. The Director’s final determination, taking account of some money that Angelou had paid in during the course of the proceedings and accumulated interest on what was deemed due to the state, was that transfer inheritance tax liability of the Estate was $179,787.84. The Estate sued the Division of Taxation, seeking to avoid this liability.

Presiding Judge Patrick De Lameida of the Tax Court upheld the Division’s position in all respects.

Angelou had argued that since the women met all the requirements to be domestic partners, the Division should treat them as such and exempt her inheritance from taxation, but the court rejected this argument. After noting the passage of the Domestic Partnership Act and the Civil Union Act, Judge De Lameida wrote, “Under either statute, the couple could have entered into government-sanctioned relationships that would have insulated Ms. Angelou’s inheritance from transfer inheritance tax. The couple elected not to take advantage of the benefits offered by those statutes.” He also noted that they could have married out of state or formed a civil union or domestic partnership out of state and enjoyed this tax benefit as well, since New Jersey has recognized out-of-state legal unions for these purposes since 2004.

The Tax Court found that the requirement to formalize the relationship through filing an affidavit was clear, and it was not enough that the evidence showed that the women had lived as partners and merged their finances for decades. The exemption from tax is a matter of statute, and the statute requires that the relationship have been formalized.

The statute was equally clear on the matter of putting a value on the inheritance. Angelou argued that because she had a 50% ownership, her inheritance should be valued at the 50% that she inherited from Frappolli, but the Court found that this would be inconsistent with the statute, which provides that a surviving joint tenant’s inheritance shall “be deemed a transfer taxable in the same manner as though such property had belonged absolutely to the deceased joint tenant and had been devised or bequeathed by his will to the surviving joint tenant excepting therefrom such part of the property as such survivor or survivors may prove to the satisfaction of the Director of Taxation to have originally belonged to him or them and never to have belonged to the decedent.” According to the Director and the Tax Court, this meant that since the entire property originally belonged to Frappelli, the estate would be taxed on the entire value of the property. Had the two women bought the property together at the outset, with Angelou contributing half, perhaps it would have come out differently.

Same-sex couples who jointly own property should be sure to take whatever legal steps are necessary to protect the interest of whoever survives. Getting married, domestically partnered or civilly unionized may result in other legal obligations, perhaps even higher annual income taxes as a result of the feared “marriage penalty,” but could be an important step to avoiding the situation faced by Angelou. Consulting a lawyer and an accountant would be prudent if significant amounts of money are at stake.