1. Residuary Trust A U/W/O Kassner v.
Dir., Div. of Taxation, App. Div:
An Overview of the Residuary Trust
Landscape
Presented By:
Michael L. Salad
2. Facts
• Fred E. Kassner, a New Jersey resident and
domiciliary, died in 1998
• His will created a resident testamentary trust
(Trust A)
• Trustee was a New York resident and
administered Trust A outside of New Jersey
• Trust A owned S-Corporation stock
3. Facts
• Trust A filed a 2006 Form NJ-1041
• Trust A paid tax on:
– The net pro rata share of S-Corporation income
allocated to New Jersey
• No distribution made to beneficiaries in 2006
4. Facts
• N.J. audit assessed a deficiency in tax liability
• The New Jersey Division of Taxation
determined 100% of undistributed income
was taxable, including income outside of New
Jersey
5. Issues:
• May N.J. properly tax undistributed income
derived from a testamentary trust?
• Does ownership of stock in a N.J. S-Corp
constitute ownership of N.J. assets?
6. Applicable N.J. Laws
• The Act imposes taxes on the New Jersey
gross income of all individuals, estates or
trusts. N.J.S.A. 54A:2–1.
• N.J.S.A. 54A:5–1(h) includes in New Jersey
gross income the “net gains or income derived
through estates or trusts.”
• N.J.S.A. 54A:5–3 taxes “income or gains of the
estate or trust ... which has not been
distributed or credited to its beneficiaries.”
7. Argument #1
• Director contended that 100% of the
undistributed income of Trust A was taxable
pursuant to the New Jersey Gross Income Tax
Act
• Director cited District of Columbia v. Chase
Manhattan Bank and Chase Manhattan Bank
v. Gavin
8. Ruling 1
• Tax court cited Potter v. Taxation Div. Dir. And
Pennoyer v. Dir. Div. Taxation
• New Jersey is barred from jurisdiction when
there is a lack of sufficient contacts in the
state
• Trust was not administered in N.J.
9. Argument #2
• Director believes that Trust A must report New
Jersey pro rata share of S Corporation income
as New Jersey income
• Director cited N.J.S.A. 54A:5-10 and N.J.A.C.
18:35-1.5(d)(5)(i) through (ii)
10. Ruling
• Tax court cited 26 U.S.C.A.§1361(a)(1) and
the Pennoyer ruling
• Final ruling held that the Director incorrectly
conflated taxation with ownership of assets
11. Ruling
• An S-Corporation elects to pass its income
through to its shareholders who are subject to
taxation thereon
• No mention of transfer of ownership of assets
from the corporation to the shareholder
• The owner of the stock in an S-Corporation
does not own or hold title to the assets
12. Appellate Ruling
• Affirmed the ruling by the Tax Court
• Cited Division’s Official Guidance
• Refused to hear new arguments
13. Planning Techniques
• Unconstitutional to tax a trust based solely on
the settlor’s residency
• Increasingly more common for trustees,
beneficiaries and assets to be mobile
• Importance in considering new or additional
state income tax rulings and changes in
residency of trustees, beneficiaries, and
location of assets