New Jersey’s Appellate Division has overturned a Tax Court decision and held that the estate of a Madoff victim who died in 2006 may not claim a tax refund for an alleged worthless IRA investment that came to light after Madoff’s Ponzi scheme was revealed in December 2008. Estate of Theodore Warshaw v. Director, Division of Taxation (A-884-12 (June 10, 2013).

In 2007, the Estate had paid $88,677 in estate taxes on the total estate, including the IRA, but it sought a refund of that amount after Madoff’s fraud came to light. After the State Division of Taxation denied the refund, the Estate filed a complaint in Tax Court, alleging that the purportedly worthless IRA reduced the value of the Estate below the New Jersey estate tax exemption threshold. The Tax Court considered the post-date of death circumstances relevant to the value of the IRA on the date of death and found that the Estate was entitled to a refund based on a mistake of fact about the investment assets.

The appeals court reversed, finding that the Tax Court judge had misapplied the law and made unsupported factual determinations. The Appellate Division held that there was no basis to question the date of death value of the IRA, concluding that there was no evidence to suggest that anyone had knowledge of Madoff’s Ponzi scheme in May 2006. Furthermore, the decedent had received over $600,000 in distributions from the IRA prior to his death and his wife had received over $275,000 in distributions in the 2007 and 2008 tax years. Thus, the factual record showed that the IRA had substantial value as of the date of death.

The Warshaw case is strong confirmation of the principle that an estate is to be valued at the death of the decedent based on only those facts that could reasonably have been known or were foreseeable at that time.