Residuary Trust v. Director, Division of Taxation
28 N.J. Tax 541
N.J. Super. Ct. App. Div.2015Background
- Division appeals a Tax Court decision granting the Trust relief from a 2009 notice of deficiency for 2006 undistributed income.
- Trust created by Kassner’s will; in 2006 the Trust had no New Jersey assets and was administered outside New Jersey by a New York trustee.
- Trust owned stock in four New Jersey S corporations; Trust paid NJ tax on NJ-allocated income, but not on out-of-state income or about $98,000 of interest.
- Division’s deficiency theory was that any undistributed income must be reported as New Jersey income due to NJ assets in the Trust.
- Tax Court held NJ could not tax undistributed non-NJ income where trustee, assets, and beneficiaries were outside NJ; relied on Pennoyer and Potter.
- Division argued assets in NJ via S-corp ownership and, alternatively, the Trust domicile; Tax Court rejected both.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can NJ tax undistributed trust income when trustee/assets are outside NJ? | Kassner Trust—no NJ assets, no tax; no minimum contacts. | Division—NJ assets exist via S-corp stock and distributions; tax possible. | No; square corners barred taxation of out-of-state undistributed income. |
| Does ownership of NJ S-corp stock constitute NJ assets for tax purposes? | Trust owner of S-corp stock does not own underlying NJ assets. | Trust’s NJ S-corp stock reflects NJ assets and income. | Ownership of stock does not equal ownership of underlying assets. |
| May Division apply a new taxation standard retroactively via 2011 guidance? | Square corners doctrine prevents retroactive policy shift during appeal. | Division’s 2011 guidance clarifies tax policy and should apply. | No retroactive application; square corners doctrine bars the new standard. |
Key Cases Cited
- Pennoyer v. Dir., Div. of Taxation, 5 N.J.Tax 386 (Tax 1983) (minimum contacts and nexus in tax taxation)
- Potter v. Dir., Div. of Taxation, 5 N.J.Tax 399 (Tax 1983) (trust taxation principles under NJ law)
- Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313 (1994) (square corners doctrine and agency policy changes)
- Gastime, Inc. v. Dir., Div. Taxation, 20 N.J.Tax 158 (Tax 2002) (policy changes in taxation and due process in tax admin)
- CBS Outdoor, Inc. v. Bor. of Lebanon Planning Bd., 414 N.J.Super. 563 (App.Div.2010) (square corners; government must deal fairly and cannot surprise litigants)
- Toys 'R' Us v. Dir., Div. of Taxation, 300 N.J.Super. 163 (App.Div.1997) (official publication recognized; tax guidance relied upon)
- F.M.C. Stores Co. v. Bor. of Morris Plains, 100 N.J.Tax 418 (Tax 1985) (turn square corners doctrine applied in taxation)
- Randolph Town Ctr., L.P. v. Cnty. of Morris, 186 N.J. 78 (2006) (policy and administrative considerations in taxation)