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Matter of McCormac, 64 Haw. 258, 640 P.2d 282

Facts

The appellants, who were non-residents of Hawaii, were beneficiaries of a trust established by Hawaiian Guardian, Ltd. with Bishop Trust Company as the trustee. The trust agreement granted Bishop Trust complete discretion over the trust's investments and management. After the dissolution of Hawaiian Guardian, the appellants received distributions from the trust, which included income from investments made by Bishop Trust. The Director of Taxation assessed net income taxes on these distributions, leading to the appeal.

This is an appeal brought by Taxpayers-Appellants, Scott McCormac, Vari McKinley and Maytor H. McKinley, Jr., (hereinafter collectively referred to as “appellants”), from a decision and order of the Tax Appeal Court affirming the assessment by the Director of Taxation of net income taxes on amounts disbursed to appellants as beneficiaries of a trust agreement. For the reasons set out below, we affirm.

Issue

Whether a nonresident beneficiary of a resident trust may be taxed on trust income derived from intangible trust property.

The issue before this Court is whether a nonresident beneficiary of a resident trust may be taxed on trust income derived from intangible trust property.

Rule

The Director of Taxation for the State of Hawaii may assess net income taxes to a trust beneficiary on any trust income received if such income would be taxable under HRS Chapter 235 if received directly by him.

1. The Director of Taxation for the State of Hawaii may assess net income taxes to a trust beneficiary on any trust income received if such income would be taxable under HRS Chapter 235 if received directly by him. HRS s 235-4(e) (2).

Analysis

The court analyzed the applicability of the business situs exception to the taxation of the trust income. It determined that since Bishop Trust exclusively held, controlled, and administered the trust property in Hawaii, the intangible property generating the income acquired a business situs in Hawaii. Therefore, the income was deemed to be sourced from within the state, making it taxable to the non-resident beneficiaries.

Here, as we recognized, Bishop Trust exclusively held, controlled, and administered the corpus of the trust. It possessed virtually unlimited discretion in the investment of the trust principal and accumulations and, further, was responsible for the collection and disbursement of any income generated under the trust. Under these facts, we believe the intangible property generating the income sought to be taxed acquired a business situs in Hawaii and therefore was property owned in this State, within the meaning of Art. 68, Regs. 58-10 and HRS s 235-4(b).

Conclusion

The court affirmed the decision of the Tax Appeal Court, concluding that the income received by the appellants from the trust was taxable under Hawaii law.

Consequently, having determined the source of the trust income to be in Hawaii, the Director of Taxation may properly assess net income taxes to appellants on the income received pursuant to HRS s 235-4(b) and s 235-4(e) (2). Accordingly, the judgment of the Tax Appeal Court is affirmed.

Who won?

The Director of Taxation prevailed in the case because the court found that the income derived from the trust property was taxable in Hawaii, as the trust was administered there.

The Director of Taxation, by notices of assessments, assessed to appellants net income taxes on the amounts received.

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