Aggrieved New York taxpayers heading to the polls next week may have a bone to pick with Congress.

No, not the Congress of 2017, which passed a tax reform package last year reducing the amount of their property tax deduction in a state with notoriously high property taxes.

It is the Congress of 2001 that may draw voter ire for their passage of a 10-year tax cut package permitting wealthy New York estates to pay zero tax dollars in 2010.

The congressional action of two decades ago is coming back to haunt taxpayers in 2018.

Bad news for some New York taxpayers could be good news for others, thanks to a landmark court ruling handed down on October 9, 2018 by Manhattan Surrogate’s Court judge Rita M. Mella.

Mella ruled that a marital trust known as a QTIP (qualified terminable interest property) is not subject to federal or New York estate taxation if the surviving spouse is pre-deceased by a spouse who died in 2010.

The ruling could ultimately have wide-ranging implications for estates as large as that of the late George Steinbrenner, who owned the New York Yankees. Although the baseball mogul's estate was 95 percent leveraged to construct the team's new baseball stadium, it was valued at $1 billion in 2010, when Steinbrenner died.

The ruling has already had a profound impact on the beneficiaries of the less-well-known Seiden estate. 

In 2014, New York state’s Department of Taxation and Finance made a determination of tax deficiency in the estate of Evelyn Seiden, the 89-year-old widow of Jules Seiden, who died in 2010 at age 94. Jules, a German immigrant formerly employed as an architect for a construction firm, left his wife 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 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.

Surviving spouse Evelyn Seiden died two years later, in 2014. The Seidens' only child, married daughter Sara Jane Hogan, is the executrix of her late mother's estate.

In preparing the New York state tax return for Evelyn Seiden’s estate, former counsel Sabino Biondi, a partner with the Manhattan law firm Wilk Auslander LLP, 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, 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. He told Financial Advisor that he anticipated the state would challenge the action, which it did.

New York state tax officials responded by issuing a determination of tax deficiency in the amount of $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. To add insult to injury, Biondi said, the state will not only have to refund the $530,000 in estate taxes it took from the Seiden estate, it also will have to pay four percent interest on the funds it improperly taxed from the date it appropriated them as a tax deficiency.

Biondi said that the ruling could have legal ramifications far beyond New York's borders. He said that estate beneficiaries in any state that assessed estate taxes in 2010 and "piggybacked" on the federal estate tax code could decide to challenge taxation of a QTIP using the New York decision for guidance.

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 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 threshhold 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.”

Financial Advisor asked the law firm 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.

Financial Advisor also asked New York’s Tax Department to respond for comment.

James Gazzale, assistant public information officer for the New York State Department of Taxation and Finance, declined comment.