During the 2007-2008 term, the Supreme Court of New Jersey confronted a variety of issues relating to tax law, including determining the legality of a retroactive Estate Tax Amendment and upholding a township’s belated attempt to accept a public land use dedication against an intervening tax-sale certificate foreclosure holder.

Estate Tax

In Oberhand v. Director, New Jersey Division of Taxation, 193 N.J. 558, (2008), a divided Supreme Court held that the doctrine of manifest injustice barred the retroactive application of an amendment to New Jersey estate tax law which lowered the value of an estate’s assets that could pass free of the tax.

A review of the majority, concurring and dissent opinions rendered in the case reveal sharp differences in judicial philosophy.

By way of background, Congress amended the federal estate tax law effective January 1, 2002, to increase from $675,000 to $1,000,000 for the value of assets that could pass free of federal estate tax under the unified credit provision and to phase out the state tax credit, the source of New Jersey estate tax revenue since that tax was integrated with the federal estate tax. To avoid the loss of revenue, in July 2002, the legislature amended N.J.S.A. 54:38-1 to provide that New Jersey’s estate tax would continue to be computed in accordance with the federal state tax credit in effect on December 31, 2001. The statute was explicitly made retroactive to January 1, 2002.

As to the case’s procedural history, the Supreme Court granted a petition for certiorari to review the underlying Tax Court decision, which had been reversed by the Appellate Division and involved the application of the Doctrine of Manifest Injustice to eliminate the retroactive aspect of the amendment.

In affirming the New Jersey Tax Court decision, the Supreme Court in a majority opinion written by John Wallace Jr. agreed that the taxpayers’ reasonable reliance on prior law outweighed the public’s interest in retroactive application of the amendment and that it would be manifestly unjust to apply the amendment retroactively to the estates. All the Justices (Chief Justice Stuart Rabner did not participate in the case) agreed after reviewing its legislative history that the law was clear and that the legislature intended to tax the estates of the two decedents involved who died in January and March, 2002. The majority held that if the legislature expresses an intent that a statute is to be retroactive, it should be so applied, unless retroactive application would be unconstitutional or would result in manifest injustice.

In the case at bar, the majority found that the decedents’ reliance on the prior law in drafting their wills was patently reasonable. When they executed their wills and when each died, the trust formulas employed were designed so that no federal or state estate taxes would be due.

The dissenting opinion by Justice Long appeared to subscribe to the strict constructionist judicial philosophy, rather than a liberal activist one, stating that “if the Court declares the statute to unambiguously require retroactive application there is no room for interpretation and the statute must be applied as written” and that New Jersey courts had come “to misunderstand the rule of manifest injustice as one empowering them to rewrite clear legislative enactments regarding retroactivity.” A view apparently shared by Justice Albin, who concurred with the majority’s conclusion that the amendment should not be applied retroactively but based the result on due process and constitutional considerations – not the Doctrine of Manifest Injustice, since it allows a judge’s sense of the unfairness or injustice of the statute “the basis for upending a law duly enacted by the legislature . . . and is a violation of our constitutionally-mandated separation of powers.”

Real Property

In Township of Middletown v. Simon, et al., 193 N.J. 228 (2008), the Supreme Court resolved an ownership dispute between intervening tax-sale certificate holders and the Township of Middletown arising from the township’s attempt to accept a park lot as dedicated property 78 years after it was originally offered as such by the owner.

In affirming the Appellate Division’s decision, the Supreme Court held that under New Jersey law of dedication of property for public use, the lot at issue was dedicated land and the sales of tax-sale certificates and their subsequent foreclosure did not prevent the township from now belatedly accepting the dedication.

In 1929, the original owner of the property dedicated a park lot for public use when it filed a subdivision map and then conveyed other lots with reference to that map. Many years later, the park lot was assessed as a separate lot for tax purposes. Taxes on the lot were not paid and the township sold several tax-sale certificates on the lot to the defendants in the case who then successfully filed a tax foreclosure action, obtained title and contracted to sell it.

The township filed a complaint against the tax-sale certificate holders, asserting that the park lot was dedicated to the township for public use and that conversion of the parcel to private use would violate the rights of the public in the property.

The trial court concluded that the township did not have a dedicated interest in the property.

The Appellate Division reversed, holding that under the law of dedication, once a landowner makes an offer of dedication by filing a subdivision map and subsequently sells lots with reference to the map, that offer is complete and irrevocable and remains in place until the municipality accepts or rejects it.

The Supreme Court agreed with the Appellate Division’s law of dedication reasoning and found that although the issuance of a tax-sale certificate on the land with its eventual foreclosure changed the party who was responsible for paying the taxes on the lot, it did not adversely affect the township’s ability to belatedly accept the dedication. In that regard, however, the court went on to hold that the acceptance of the park lot as dedicated property by the township without a corresponding reimbursement to the foreclosed tax-sale certificate holders would be an unfair and harsh result that would unjustly enrich the township. Therefore, it remanded to have the trial court fix the amount of reimbursement.

Next, in Hunterdon Medical Center v. Township of Readington, 195 N.J. 549, (2008), the Supreme Court addressed the scope of the “hospital purpose” real property tax statutory exemption under N.J.S.A. 54:4-36.

In reversing the lower courts’ restrictive reading of the statute, and sustaining the Hunterdon Medical Center’s tax exemption claim for its off-site building that houses its Health and Wellness Center, the Supreme Court held that a fair definition of core “hospital purposes” must include the variety of inpatient and outpatient activities that a modern hospital can be expected to perform. Thus, the court held that any medical service that a hospital patient may require pre-admission, during a hospital stay (whether it is less than a day, or for one or more days) or post-admission, constitutes presumptive core hospital services under 54:4-36.

Furthermore, Judge LaVecchia opined that whether a hospital delivers such services in its main facility, in another facility on its main campus, or in an off-site hospital-owned building makes no difference in the statutory exemption analysis, except that with respect to off-site facilities, the court required an examination for functional integration and supervision by hospital personnel.

Lastly and most recently, in McMahon et al. v. City of Newark, et al, 195 N.J. 526, (2008), the Supreme Court reversed both the Appellate Division and the Tax Court by upholding a forum-selection agreement entered into between a taxpayer and the City of Newark which divested the Tax Court of jurisdiction.

The underlying procedural facts entailed a written agreement between the taxpayer and the municipality which was entered into to encourage a significant urban removal project and provided that the taxpayer would be exempt from real estate taxes in return for paying a defined annual service charge and that any dispute between them would be heard either in the Superior Court or in arbitration. Subsequently, the municipality took the position that the taxpayer had lost its exemption and the municipal tax assessor issued an added/omitted tax assessment for the property. Instead of filing a tax appeal to the Tax Court within the time period allowed by law, the taxpayer filed an action in the Superior Court pursuant to the agreement seeking declaratory and injunctive relief. The case was transferred to the Tax Court, which held that the proper procedural avenue plaintiff should have pursued was a tax appeal, and that since the complaint was filed more than a year past the real property tax appeal deadline, a fatal jurisdictional defect resulted, leaving the taxpayer bound by the assessment. On appeal, the Appellate Division affirmed.

The Supreme Court, in an opinion by Judge Rivera-Soto, at the outset acknowledged the general rule that the timely filing of a tax appeal is jurisdictional and that an untimely tax appeal is not cognizable and the tardy taxpayer is bound by the assessment. However, the court went on to hold that when a taxpayer and a municipality have agreed in writing that their dispute is to be resolved in a different forum – the forum selection agreement takes precedence and its terms must be honored.

In reaching his decision, Judge Rivera-Soto found critical the point that had the taxpayer’s complaint addressed the amount or methodology applied in arriving at the real property tax assessment, it would have fallen within the type of case subject to the statutory property tax appeal process and would have been time-barred. However, since the complaint addressed the municipality’s unilateral determination that, by transferring the project from the entity to a trust, the financial agreement between the entity and the city had been breached, thereby wrongfully triggering the forfeiture of the contractually agreed on tax abatement, the nature of the taxpayer’s challenge did not speak to the issues cognizable within the statutory real property tax appeal process. Instead, the controversy constituted a breach of the financial agreement and the parties should be bound by the covenants entered into. Furthermore, if the municipality’s acts constituted an actionable breach, then the tax assessment was void and the taxpayer was entitled to reinstatements of its tax abatements under the terms of the financial agreement. If not, however, the taxpayer, having elected to forego a tax appeal, and now being time barred from bringing one, would be bound by the tax assessment. ¦

Alter represents taxpayers in civil and criminal tax controversies with the IRS and State taxing authorities and is a tax partner with Sills Cummis & Gross in Newark. Alter is also the Chair of the New Jersey State Bar Association Section of Taxation.