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Surrogate’s Court refused to vacate a notice of deficiency issued by the NY Department of Taxation. In re the Estate of Cleary, 44 Misc. 3d 211 (N.Y. Sur. Ct. 2014)


In this case the Surrogate’s Court was asked to determine the proper valuation of an asset that was part of a decedent’s estate for purposes of determining the amount tax owed to New York State. The executor of the estate, Sylvester Cleary, paid the amount that the Department of Taxation said that was owed. However, Cleary now seeks a refund of the payment.

The decedent died on June 11, 2009 and letters testamentary were issued to the petitioner, Sylvester Cleary on August 31, 2009. The total value of the probate estate was $1,328,044.20. Included in the estate is a condominium, located in Westhampton Beach, New York, with a listed value of $600,000 and shares in a Forest Hills, New York cooperative apartment with a listed value of $350,000. According to the inventory submitted by Cleary, both of the properties were subject to life estates which, at the time the inventory was submitted, had not been valued. The owner of the life estates was a friend of the decedent, Ann Elizabeth DePuy. An agreement was executed between the decedent and DePuy granting her a life estate. The properties remained deeded to the decedent at the time of this death.

Cleary made a $40,000 payment “under protest” to the New York State Department of Taxation and Finance. He then filed a New York State estate tax return in which he claimed a tax overpayment of $24,714.67. He reasoned that because both properties were subject to life estates, the values of the property were diminished. He claimed the value of the condominium to be $480,000 (not $600,000) and the cooperative to be $280,000 (not $350,000). Therefore, the tax owed was less than $40,000.  The Department of Taxation and Finance issued the estate a refund check of $24,714.67

However, the Department of Taxation later adjusted the values of the two properties back to the original $600,000 and $350,000 respectively and assessed the estate with a deficiency of $38,997.18- including interest and penalties. In a special proceeding, the petitioner asks the Surrogate’s Court to make a determination as to the proper value of the properties given that they are subject to life estates

Cleary bases his argument of the lower valuation on the definitions in the Internal Revenue Code and the Department of the Treasury Regulations that states that the proper valuation of real property is “the price which the property would change hands between a willing buyer and a willing seller,” “at the time of the decedent’s death.” 26 USC § 2031 and 26 CFR § 20.2031-1. Cleary argues that because the property was encumbered by a life estate at the moment of the decedent’s passing, any willing buyer would have to take the property subject to the life estate and would be unwilling to pay what would otherwise be the full market value.

The Surrogate’s Court agreed with Cleary’s understanding of how property subject to a life estate is to be valued. However, the court stated that Cleary misunderstood when the valuation must be applied.  The Surrogate’s Court reasoned that if the life estate had been granted to DePuy during the decedent’s life time, Clearly would be correct. However, the life estate was granted as part of the decedent’s testamentary scheme created by his will. The agreement that was signed by the decedent specifically stated that “after his death” he wanted DePuy to have use and occupancy of the cooperative. The condominium is not addressed by the agreement at all.

Thus, the decedent’s grant of a life estate does not affect the valuation of the disputed property since these assets must be assessed “as (they) exist(ed) in the hands of the estate” and not as “fortuitously balkanized through a chain of post-death transactions” Curry’s Estate v United States, 706 F2d 1424, 1427 (7th Cir 1983).



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