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Kassner Case Presentation (ms)

Residuary Trust Case of Fred. Kassner - 1998.

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Kassner Case Presentation (ms)

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 12. Appellate Ruling • Affirmed the ruling by the Tax Court • Cited Division’s Official Guidance • Refused to hear new arguments
  13. 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