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IN RE ESTATE TAX UNDER ARTICLE 26 OF THE TAX LAW U

February 28, 1978

In the Matter of the Application to Determine the Estate Tax under Article 26 of the Tax Law upon the Estate of WILLIAM NOVOTNY, Deceased.


The opinion of the court was delivered by: TENNEY

TENNEY, J.

This proceeding concerns a dispute arising between the Veterans Administration of the United States (sometimes hereinafter referred to as the "Government") and the New York State Tax Commission(sometimes hereinafter referred to as the "State") over the application of New York State's estate tax to funds escheating from the hands of a Committee of a deceased incompetent veteran, William Novotny, to the Veterans Administration pursuant to 38 U.S.C. § 3202(e).

 By its motion for summary judgment, the Government asks the Court to declare that such funds are not subject to estate taxation by the State. In response, the State seeks to have this Court decline jurisdiction pursuant to 28 U.S.C.§ 1341, arguing that there is a plain, speedy and efficient remedy available to the Government in the Surrogate's Court of New York State. In the alternative, the State moves for an order imposing the estate tax on such funds pursuant to Section 952 of the New York State Tax Law. For the reasons hereinafter set forth the Government's motion for summary judgment is granted, and the State's motions are in all respects denied.

 William Novotny, a resident of New York, served in the armed forces of the United States during World War I and was found incompetent by order of the New York State Supreme Court dated October 28, 1918. By order dated December 27, 1920, the veteran's father, William Novotny, Sr., was appointed as Committee of the estate of his incompetent son after the veteran's wife, Anna Novotny, had declined to serve as his Committee under a prior order of appointment dated October 28, 1919. At the time of the appointment of the Committee, it was stated that the veteran had no assets other than a claim for "War Risk Compensation."

 The accountings filed by the Committee and various successor Committees of the veteran indicate that his estate consisted of benefits he received from the Veterans Bureau and its successor agency, the United States Veterans Administration, and income which had accrued on the investment of these benefits.The accountings note only two exceptions, the first a bonus received from New York State of $48.67, reflected in the Committee's accounting dated January 20, 1926, and the second, Social Security Benefits which were paid to the Committee beginning in 1967 at a rate of between approximately $35.20 and $40.20 per month.

 Novotny died after an 18-day illness at the age of 82 years on February 25, 1972 in the Boston City Hospital, Boston, Massachusetts, having been transferred out of the Veterans Administration Hospital in Boston some six or eight months prior thereto and after having resided in said facility since around the date of his incompetency determination in 1918. This transfer had been made as part of the Veterans Administration program to remove patients with no medical expectation of improvement out of Veterans Administration hospital facilities and into nursing homes. Proceedings were thereafter conducted in Supreme Court, New York County, New York to wind up the affairs and settle the final accounting of his Committee.

 During the course of that accounting proceeding, the Veterans Administration claimed the estate as an escheat pursuant to 38 U.S.C. § 3202(e), and the state court directed that it be so distributed, but the bank which held certain funds of the estate on deposit indicated that it would refuse to release these funds unless it received a waiver of liability for estate taxes under Section 249-cc of the New York State Tax Law from the New York State Tax Commission. The New York State Tax Commission refused to issue a waiver of liability which the bank required, asserting that New York State estate taxes were required to be paid on funds escheating to the Veterans Administration under 38 U.S.C. § 3202(e). For its part, the Veterans Administration refused to pay or to permit to be paid state estate taxes on the escheating estate, asserting that such taxes were inapplicable to funds escheating pursuant to section 3202(e).

 In order to permit the Court to finally settle the affairs of the Committee, the United States, the New York State Tax Commission and the Seamen's Bank for Savings entered into a stipulation whereby the Seamen's Bank would hold $3,000.00 of the estate funds to abide the outcome of a proceeding to be commenced by the State Tax Commission to determine the amount of New York State estate tax due, if any. The remainder of the estate was to be delivered to the Veterans Administration. By order dated March 29, 1974, the Supreme Court, New York County, entered a "Consent Order Amending Resettled Order," which conformed to the stipulation described above and finally settled the account of the Committee.

 Thereafter, by petition dated June 28, 1974, the New York State Tax Commission commenced a proceeding in Surrogate's Court, New York County, to determine the estate tax, if any, to be imposed upon the estate of William Novotny pursuant to Article 26 of the New York State Tax Law. The petition asserted a tax liability in the amount of $523.80. A copy of this petition was served upon the United States Attorney for the Southern District of New York on July 2, 1974.

 By petition filed in the United States District Court for the Southern District of New York on July 11, 1974, the United States removed the proceeding to this Court pursuant to 28 U.S.C. §§ 1441, 1444 and 1446(b) for the stated purpose of "deciding a question of federal law, namely, whether the State of New York is entitled to tax property escheating to the United States pursuant to 38 U.S.C. § 3202(e) and formerly possessed by William Novotny." Petition for Removal P6.

 Jurisdiction and Abstention

 The State asks that this Court decline to exercise jurisdiction in favor of the state courts which are said to be more competent to determine this controversy. The Court is not persuaded by this argument.

 First, it is clear that the federal district court can exercise jurisdiction over a case in which the application of a state tax statute is contested where the United States is a party. Indeed, the State does not deny such jurisdiction. In re Levy, 74 Civ. 2229 (S.D.N.Y. July 20, 1977) (Canella, J.); see Department of Employment v. United States, 385 U.S. 355, 17 L. Ed. 2d 414, 87 S. Ct. 464 (1966); United States v. Woodworth, 170 F.2d 1019, 1020 (2d Cir. 1948); 28 U.S.C. § 1341.

 Second, as will be shown hereinafter, the central question at issue here involves not an interpretation of state law but of federal law, a task to which the federal court is well suited. Finally, any possible ambiguities in the state statute were resolved by the highest court in New York which interpreted that statute in such a way as to make a constitutional dispute unavoidable.In re Estate of O'Brine, 37 N.Y.2d 81, 371 N.Y.S.2d 453, 332 N.E.2d 326 (1975). In these ...


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