The New York State Tax Department has apparently decided not to appeal a Manhattan surrogate court judge’s 2018 QTIP ruling.
On October 9, 2018, Manhattan Surrogate Court Judge Rita M. Mella ruled that a marital trust known as a QTIP (qualified terminable interest property) was not subject to New York estate taxation if the surviving spouse was pre-deceased by a spouse who died in 2010.
State officials had until November 16th, 30 days from the date the estate counsel served them with a copy of the order and notice of settlement, to appeal the ruling, but did not file an action to do so, according to court records.
The upshot is the ruling will have wide-ranging implications for estates as large as that of the late George Steinbrenner, long-time principal owner of the New York Yankees. Although the mogul's estate was 95 percent leveraged to construct the team's new baseball stadium, it was valued at $1.1 billion when Steinbrenner died in 2010.
Steinbrenner’s widow, Joan, the surviving beneficiary of the couple’s QTIP, died earlier this month at age 83.
The Boss’ will stipulated that an undisclosed portion of his estimated $1.1 billion sports, shipping, and racehorse-breeding fortune would go into a trust for his widow.
And it assigned Steinbrenner’s lawyer, Robert Banker, to decide whether the trust would pay federal estate tax for 2010, or not until after Joan Steinbrenner's death.
Based on Mella’s October 2018 ruling, as well as the state's subsequent decision not to appeal by the required deadline, it looks like Joan Steinbrenner's estate won't pay a QTIP tax at all.
That’s good news for the Steinbrenner estate heirs, as well as for beneficiaries of the less-well-known Seiden estate, which paved the way for the legal ruling.
Sabino Biondi, a partner with the Manhattan law firm Wilk Auslander LLP, who represented Jules and Evelyn Seiden for years, said he had received an Assessments Receivable Overpayment Notice from the New York State Department of Taxation and Finance on December 13.
The notice reported that the estate would be receiving a refund check in the amount of $557,519.13, consisting of the New York State estate tax refund of $529,342.86 plus interest of $28,176.27.
“Naturally, this was great news for Sara Jane Hogan,” Biondi said.
Hogan is the married daughter of Jules Seiden, a New York architect who died in 2010 at age 94, and his wife Evelyn, the couple’s surviving QTIP beneficiary, who died in 2014 at age 89.
Hogan is executrix of her late mother’s estate.
In 2014, New York State’s Department of Taxation and Finance made a determination of tax deficiency in the estate of Evelyn Seiden, whose husband made her a wealthy woman through the marital trust known as a QTIP.
A QTIP trust qualifies for the marital deduction in the estate of the first spouse to die.
According to court documents, based on the repeal of the federal estate tax for the year 2010, the estate of Jules Seiden was not required to file a federal estate tax return—and it did not.
The estate's New York tax return designated the trust as a QTIP and took a marital deduction for the trust property. The state issued a closing letter in 2012, accepting the estate's tax return.
In preparing the New York state tax return for Evelyn Seiden’s estate, former counsel Sabino Biondi said he excluded the value of the marital trust property based on New York law.
New York law defines gross estate by referencing the federal gross estate. Since the estate of Jules Seiden’s state tax return reported the QTIP trust in 2010, but did not file a federal estate tax return, Biondi said he prepared the New York tax return for the estate of Evelyn Seiden in 2014 by reporting the trust, but excluding its value from the taxable gross estate.
Biondi said that because he anticipated the state would challenge the action, he prepared the framework for the argument to appeal the eventual notice of deficiency,based on the law as it existed in 2010 and in 2014.
New York state tax officials responded exactly as Biondi anticipated they would by issuing a determination of tax deficiency. Taxes due: $462,546.18, plus interest, totaling about $530,000, based solely on the value of the QTIP Biondi had excluded from the 2014 estate tax return.
Biondi instructed Hogan to pay the tax bill, based on his legal opinion that the 2014 QTIP assessment could be challenged.
Wiggin and Dana LLP law firm partners Robert Benjamin and Helen Heintz, representing the estate of Evelyn Seiden in October 2018, filed an application to vacate the notice of tax deficiency. The attorneys argued that since the trust property was not subject to federal taxation in 2010, it should not be subject to state taxation upon the death of the surviving spouse in 2014.
Legal papers report that attorney John Miller, representing the New York State Department of Taxation and Finance, argued that any reference to the federal Internal Revenue Code should be the United States Internal Revenue Code of 1986, with all amendments enacted on or before July 22,1998.
Mella, the surrogate’s court judge, sided with Benjamin and Heintz, finding for the estate.
“The Tax Department analysis is incorrect,” the judge wrote in her ruling.
Mella ordered that the New York state notice of deficiency imposed against the estate be vacated and that the state issue a refund.
One day after Biondi received the state notification that the estate would receive the court-ordered tax refund, he received it in the mail on December 14.
Biondi said that in his opinion, New York legislators were to blame for not taking legislative action in response to the 2010 federal estate tax repeal as it affects state-only QTIPs, or anytime a federal estate tax return is not required to be filed and a New York return is, which happens whenever the federal estate tax exemption threshold is higher than the state's.
According to Biondi, the law cannot now be corrected retroactive to 2010. Instead, New York tax department officials addressed the 2010 change by issuing a memorandum, which Biondi said had no legal effect.
Wiggin and Dana attorney Robert Benjamin agreed.
“Our client’s position [is] that the courts must apply the laws as written,” Benjamin said. “Both Seiden estates followed the law that was in effect at the time. [That] ruling could have implications for all other QTIPs created in the state during 2010, regardless of size.”
A big question is on what legal grounds the New York State Department of Taxation and Finance could appeal the decision, if it chose to do so.
“They could appeal … on the ground that the surrogate did not apply the law correctly to the facts of this case, [but] the facts were undisputed,” the law firm said through its public relations representative.
James Gazzale, assistant public information officer for the New York State Department of Taxation and Finance, declined to comment.
