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precedentmotionsummary judgmenttrustcorporationdue processmotion for summary judgment
motionsummary judgmenttrustcorporationdue processmotion for summary judgment

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Residuary Trust A v. Director, Div. of Taxation, 27 N.J.Tax 68

Facts

Fred E. Kassner, a New Jersey domiciliary, created Trust A for his descendants upon his death in 1998. The Trustee, a resident of New York, managed the trust entirely outside of New Jersey. In 2006, Trust A reported significant income from S corporations, some of which was allocated to New Jersey, but did not distribute any income to beneficiaries. Following an audit, the Division of Taxation issued a deficiency assessment for unpaid income tax on the undistributed income, including income allocated outside New Jersey.

During 2006, Trust A owned cash, bonds and stock. The stock included stock of four corporations which elected to be treated as S corporations.

Issue

Whether New Jersey may impose an income tax on the undistributed income of a testamentary trust and whether ownership of stock in a New Jersey S corporation constitutes ownership of New Jersey assets.

At issue is (1) whether New Jersey may properly tax the undistributed income of a testamentary trust; and (2) whether ownership of stock in a New Jersey S corporation constitutes ownership of New Jersey assets.

Rule

The New Jersey Tax Court has held that due process bars the state from taxing the undistributed income of a trust if the trustee, assets, and beneficiaries are located outside New Jersey.

The New Jersey Tax Court has held that the due process requirement of U.S. Const., Amend. XIV bars New Jersey from taxing the undistributed income of a trust if the trustee, assets and beneficiaries are located outside New Jersey.

Analysis

The court applied the precedent set in previous cases, determining that Trust A did not have sufficient contacts with New Jersey to justify the imposition of income tax. The Trustee was not a resident of New Jersey, and the trust assets were managed outside the state. The court rejected the Director's argument that the trust's ownership of stock in S corporations conducting business in New Jersey created a taxable nexus, emphasizing that ownership of stock does not equate to ownership of the underlying assets.

The court finds the Director incorrectly conflates pass-through taxation with ownership of underlying assets.

Conclusion

The court granted the Trustee's motion for summary judgment, concluding that Trust A owed no taxes on its undistributed income, including interest income earned in 2006.

For the reasons set forth hereinabove the Trustee's motion for summary judgment is granted and the Director's motion for summary judgment is denied.

Who won?

Trustee prevailed because the court found that Trust A lacked sufficient contacts with New Jersey to impose state income tax on its undistributed income.

Trustee's motion granted and Division's motion denied.

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