Madoff’s Victims Receive Tax Refund

Theodore Warshaw left his estate in trust to his widow, which included an IRA. The entire value of the IRA was determined to be about $1.8 million; the vast majority of this wealth was based upon securities worth a little less than $1.5 million. Based upon the value of IRA, the estate incurred a New Jersey estate tax in the amount of $88,677. Shortly following this, the news of Bernie Madoff was revealed to the public, and the owner of the IRA learned that the entire account was fake. The executors of the estate reasoned that the estate should receive a refund because there was actually nothing in the account. 

The New Jersey Division of Taxation disagreed and argued that events that happen after the death of the decedent “are not considered to determine the date of death value of decedent’s gross estate.” This is known as the Ithaca Trust Rule. However, the Tax Court of New Jersey decided differently and determined that Warshaw’s Estate should receive a tax refund after the state compelled his estate to pay taxes on an IRA that had nothing in the account. Specifically, the court determined that events that occur after the testator dies can be used to determine the value of the estate on the date of that person’s death. Furthermore, the court determined that a reasonable amount of time has passed; thus, the Madoff Ponzi scheme was relevant information for the court to take into their determination. Finally, the court noted that any information that could have been used to determine that the IRA was worthless was only discovered after the decedent’s death. 

See Peter J. Reilly, New Jersey Tax Court Cuts A Break to Madoff Victim, Forbes, Aug. 27, 2012.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.