The Estate of Omar Walid Baghdadi

[2018] NSWSC 554

Supreme Court

New South Wales

Medium Neutral Citation:	The Estate of Omar Walid Baghdadi [2018] NSWSC 554
Hearing dates:	20 April 2018
Date of orders:	20 April 2018
Decision date:	20 April 2018
Jurisdiction:	Equity - Duty List
Before:	Parker J
Decision:	Administrator of the deceased’s (his son’s) estate to retain $7 million to meet the potential US tax liabilities of the estate.  Consent of the deceased’s mother required for the administrator to pay out these moneys to beneficiaries of the estate.
Catchwords:	CIVIL PROCEDURE – administration of estate – Uniform Civil Procedure Rules 2005 (NSW), r 54.3 – potential US tax liabilities of deceased estate – whether deceased estate is liable to pay US income tax, estate tax, and tax on superannuation benefits – where there is expert evidence that the estate has potential US tax liabilities – consideration of amount of moneys that should be retained by the estate to meet its potential tax liabilities – consideration of amount of moneys that should be distributed to estate beneficiaries
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW), r 54.3
Category:	Procedural and other rulings
Parties:	Judith Cohen (Applicant) Sami Kouri (Respondent)
Representation:	Counsel: D Price (Applicant)   Solicitors: Glass Goodwin (Applicant) Tony Gye (Respondent)
File Number(s):	2017/371801
Publication restriction:	Nil

Judgment – EX TEMPORE

Revised and issued 1 May 2018

1. These proceedings concern the estate of Omar Walid Baghdadi, who died in November 2017. The background circumstances are tragic. The deceased was only 37 when he died. In 2002, aged only 21 or 22, he suffered a catastrophic brain injury as a result of an accident at work. For the last 15 years of his life he was quadriplegic, with significant cognitive impairments, only a limited ability to communicate, and a need for 24-hour care.

2. The deceased was born in the United States and remained a US citizen at the time he died. His parents separated when he was seven and thereafter he lived with his mother in the United States. In 1998, when the deceased was 17 or 18, he and his father came to live in Australia. After the deceased's accident his father remained in Australia. The deceased's mother remains living in the United States.

3. The deceased died intestate. His estate passes to his father and his mother. Letters of Administration were granted to the deceased's father, on his application, in March 2018. The application was consented to by the deceased's mother. The deceased's estate is substantial as a result of compensation he received for his injury. For the purposes of the application for Letters of Administration, the estate was estimated to have a value of $14.6 million.

4. The application with which I am concerned is one by the deceased's mother for orders concerning administration of the estate pursuant to the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), r 54.3. A specific issue of concern is the potential US tax liabilities of the estate. The deceased's death was foreseen, and it appears that the deceased's mother retained US tax attorneys some time ago to advise her on the extent of the estate's potential tax liabilities. In evidence in these proceedings are a number of memoranda from the deceased's mother's US tax adviser, a Mr Frank Macgill of Savannah, Georgia. According to one of those memoranda, Mr Macgill practises in the area of probate, estates, trusts and fiduciary law, as well as US federal income and estate taxation.

5. Mr Macgill has identified three potential areas of liability. The first is US income tax which may be levied on income the deceased received from his investments during his lifetime. It appears that during the deceased's lifetime no US tax returns were lodged. There is therefore the possibility not only of the estate being required to pay income tax over a period of 10 years or more, but also of further amounts being levied by way of penalty and interest. Mr Macgill has made some estimates of the potential liability which range between $1.02 million and $1.35 million (all figures in this judgment are given in Australian dollars). This includes a range of possible penalties between $170,000 and $500,000. The amount at the lower end of this range would be the penalty applicable if the Internal Revenue Service ("IRS") of the United States were to conclude that penalties should be imposed on the basis of negligent failure to comply with US tax requirements; the higher figure would be applicable to a fraudulent failure to comply.

6. The second area of potential liability relates to a sum of $5.8 million received by the estate by way of superannuation benefits. It appears that a substantial portion of the deceased's compensation was invested during his lifetime in superannuation, no doubt because of the favourable Australian tax consequences of such investment. According to Mr Macgill, treatment in US law of superannuation payouts is particularly complex and unsettled. He expresses the opinion that the potential liability could be as high as $5.8 million if the full amount is subject to taxation at the highest applicable rate.

7. The third area of potential liability is US estate tax which is imposed on the estates of deceased US citizens. Mr Macgill has estimated the potential tax at approximately $3.1 million. However, this involves an element of double-counting. It is based on an assumed net value of the estate (that is, realisations less what is described as an “administrative deduction”, which I assume represents testamentary expenses and the costs of the administration of the estate) of approximately $14.95 million. As Mr Macgill notes, any income tax liabilities of the estate would be deducted from this figure, and on his estimated range of figures for those income tax liabilities there will be a reduction in the net estate of between $410,000 and $540,000. Mr Macgill has not, however, referred to the potential for double counting with respect to superannuation liabilities. The rate of estate tax is 40% and, accordingly, if the estate were to be required to pay the maximum amount of tax on the superannuation benefit of $5.8 million, on the face of it there would appear to be a further reduction in estate tax of $2.32 million.

8. All of these calculations are based on the assumptions that the deceased during his lifetime remained subject to a liability to pay US income tax, that his estate is liable for US estate tax, and that there are no double tax arrangements between the United States and Australia which would exempt the estate from US tax law. One of the questions which might arise is whether the deceased (who apparently obtained Australian citizenship in 2009) had renounced his US citizenship. These are all matters which cannot be finally determined at this stage, but it is sufficient to say that there appears to be a real possibility that the deceased was during his lifetime subject to US income tax and that his estate is indeed subject to US estate tax, despite the fact that he lived the last 15 years of his life in Australia and that all of the relevant assets are located in Australia.

9. Ordinarily of course, payment of estate tax would purely be a matter as between the administrator and the US tax authorities. It is not suggested that the deceased's mother herself has any direct liability for US income tax or estate tax liabilities of the deceased. But it appears that under US tax law, if the deceased's mother receives any distribution from the estate, then any unsatisfied tax liabilities of the estate may be pursued against her to the extent of that receipt. That this is at least potentially the case is confirmed in Mr Macgill's most recent memorandum. As a result, the deceased's mother is in the position that if insufficient monies are retained within the estate to satisfy its US tax liabilities, there is a possibility of her being made personally responsible for the payment of some of those tax liabilities from her half-share of the estate. In that event it would be necessary for her to make a claim against the deceased's father, either in his capacity as the administrator or as the other beneficiary, for contribution towards any amounts she was required to pay to the US tax authorities.

10. The matter initially came before me in the Duty List on the application of George John Mallos. Mr Mallos is a solicitor who previously acted for both the deceased's father and the deceased's mother in connection with the deceased's affairs. A question arose after the deceased's death as to who was to apply for administration. Ultimately the application was made in the name of the deceased's father alone and, as I have mentioned, the deceased's mother consented to that application. It appears to have been contemplated, at least by Mr Mallos and the deceased's mother, that although the deceased's mother would not formally be an administrator, she would be a joint signatory on the administration bank account and to that extent would be in a position to control the distribution of the proceeds of the estate. Shortly before Mr Mallos’ application was made the deceased's father opened a new bank account with Westpac, to which he alone was the signatory. The establishment of the Westpac account appears to have been intended as a precursor to the making of a distribution of a substantial amount of money to the deceased's parents on account of their ultimate entitlements from the estate. Mr Mallos then made the application in his own name, obtaining urgent interim injunctions to prevent the moneys in the estate being distributed. Mr Mallos's application gave time for the present application to be made by the deceased's mother. Mr Mallos then in effect withdrew from the proceedings. His motion was formally dismissed, but the interim injunctions were continued on the application of the deceased's mother. The costs of Mr Mallos' application remain to be dealt with.

11. The matter has now been before me on a number of occasions. It is now accepted on behalf of the deceased's father that it is necessary for the estate to obtain professional advice on the estate's US tax liabilities. The deceased's father is prepared to submit to an order which would require him to retain professional advisers to assist him in complying with the estate's US tax obligations. It is clearly in the interests of the estate as a whole that this should happen. Accordingly, I will make an order in due course to that effect.

12. Apart from costs, which I intend to deal with at a later point, at the same time as any costs application is made in connection with Mr Mallos' Notice of Motion, the remaining issues are twofold. First, while it is accepted by the deceased's father that moneys should be retained within the estate to cover potential US tax liabilities, there is a dispute about how much should be retained. The second question is whether the deceased's father should be required to retain those moneys in an account to which either the deceased's mother or her Australian lawyers will be signatory. The deceased's mother presses for such an order, but that is resisted by the deceased's father.

13. Mr Macgill has presented a number of figures in his memoranda for what the appropriate retention would be on account of US tax liabilities. In his memorandum of 30 March he suggested an immediate distribution of $6 million to the estate beneficiaries, which implies a retention of approximately $8.6 million. On 2 April he suggested a distribution of $7 million, implying a retention of $7.6 million. In his memorandum of 11 April he calculated the maximum tax liability as $9.73 million. This is the amount which the deceased's mother now says should be retained. It would leave, on my calculations, $4.9 million to be distributed immediately to the estate beneficiaries.

14. Through his solicitor, the deceased's father vigorously criticised the material put forward in Mr Macgill's memoranda. But there was no evidence of an equivalent character from the deceased's father. It appears he is being assisted by Mr Mahmoud (known as Mo) Baghdadi, his nephew and the deceased's cousin, in administering the estate. Mr Baghdadi has had a number of meetings with one of the “big four” accounting firms concerning the issues raised in this application. It appears that the relevant firm either has been, or will be, retained for the purposes of assisting the estate, but the position is unclear. There is no written evidence before the Court as to the terms of the retainer, if one currently exists. No report or other written advice from the firm was presented on this application. Instead, at the last minute, evidence was led orally from the deceased's father, and then from Mr Baghdadi, about meetings with the accountants. This evidence had not even been reduced to affidavit form before the application, and it was quite unsatisfactory for the purposes of an application such as this. It was unclear to me from Mr Baghdadi's evidence whether the firm had been retained to provide forensic advice in connection with this particular application or to assist in the administration of the estate generally, or both. Mr Baghdadi gave evidence of discussions which he had with a partner of the firm the day before yesterday, from which it emerged that some of the assumptions made by Mr Macgill were in dispute. But, as I have said, the evidence was presented in a quite unsatisfactory form and is an insufficient basis for rejecting the evidence which has been put before the Court from Mr Macgill.

15. In submissions it was said that Mr Macgill made a number of debatable assumptions, and it was suggested in particular that it was very unlikely that penalties would be charged on the estate's US income tax liabilities. But while it is to be hoped that penalties will not be imposed, and if they are, that they will be imposed at the lower end of the scale, the evidence presented on behalf of the deceased's father falls far short of displacing Mr Macgill's evidence that there is a possibility of penalties being imposed. I was left with the clear impression, from the evidence and the way it came out, that the deceased's father has delegated dealing with the question of the deceased's US tax liabilities to Mr Baghdadi and that it is only in very recent times, if at all, that proper consideration has been given to discharging what, after all, is the deceased's father's obligation as administrator, namely to ascertain the deceased's tax liabilities and satisfy them. In my view, the only credible evidence before the Court concerning the potential extent of such liabilities is the evidence of Mr Macgill, and I consider the criticisms made of his memoranda and of him personally to be quite unwarranted.

16. As I have mentioned, Mr Macgill's calculation for potential tax liabilities is approximately $9.73 million. But it is not possible to calculate a precise figure for the maximum potential liability. Mr Macgill's figures are based on an assumption of an exchange rate of AUD $1.00 to USD $0.77, but obviously this may fluctuate. There is also the possibility, as further time elapses, of further interest and penalties being incurred before any liability is ultimately settled. On the other hand, I do think that some allowance should be made which will eliminate any double-counting between the income tax and superannuation liabilities on the one hand and the estate tax liability on the other. Since Mr Macgill's calculations are based on the worst case so far as income tax liabilities and penalties are concerned, the double-counting reduction should be his highest (ie worst-case) figure, that is, $540,000. I think, although Mr Macgill has not referred to it, there should also be a reduction on account of the potential superannuation liability, which I have calculated at $2.32 million. Allowing for some adverse fluctuation in the exchange rate and the potential for further interest and penalties, I have concluded that the appropriate amount which should be retained is $7 million.

17. As to the question of whether the amount retained should be held in a joint account, counsel for the deceased's mother pointed out, with some justification, that the evidence disclosed in the course of this application raised questions as to whether the administration was being properly and responsibly undertaken by the deceased's father. But it remains the deceased's father as administrator who has sole responsibility for administering the estate. Counsel for the deceased's mother foreshadowed the possibility of an application being made for his removal, but no application has been made at this point. As I have mentioned, the deceased's mother consented to his appointment as the sole administrator.

18. I propose in my order to require the deceased's father as administrator to retain the sum of $7 million for the purpose of meeting the estate's US tax liabilities. Hopefully, the liabilities will be less than this, and it may be that as the administration proceeds it will be safe to reduce this figure and to make further interim distributions to the beneficiaries of the estate. Rather than require a fresh application to be made whenever this is thought necessary, I propose to frame the order in such a way that the prohibition on paying out the $7 million will be a prohibition on doing so without the consent of the deceased's mother. This will enable the parties, should they agree that the amount of the retention can be reduced, to give effect to that agreement without the necessity of coming back to Court. In my view, this provides sufficient protection of the deceased's mother's interest at this stage and it is unnecessary to go further and order that the moneys be held in a joint bank account. If the administrator pays out moneys without the deceased’s mother’s consent, it would be a contempt of Court, for which he could be severely punished. The administrator is represented by responsible solicitors and the questions which the evidence in this application have raised as to his past conduct are not, in my view, such as to require that, going forward, he should be subjected to a further restriction on the exercise of his powers to make necessary payments out of the assets of the estate. Accordingly, I will not make an order that would require the deceased's mother or lawyers acting for her to be a signatory on any of the estate bank accounts.

19. I will now hear the parties on the precise form of the order.

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Decision last updated: 01 May 2018