In a case just decided by the New Jersey Appellate Division, Lowenstein Sandler helped a client successfully defeat New Jersey’s aggressive attempt to tax income a trust earned in other states. The Court ruled that New Jersey could not tax a trust’s out-of- state income even though the trust was created by a New Jersey resident.

A Little Background

Lowenstein Sandler represented the trustee of a trust created under the will of Fred Kassner, a co-founder of Liberty Travel. Because Mr. Kassner resided in New Jersey when he died, the trust is a “resident trust” under New Jersey tax law. The bad news is that New Jersey’s tax law states that a resident trust is taxable on all of its income, regardless of where that income is earned, for as long as the trust exists. The good news is that New Jersey courts long ago held it was unconstitutional to tax a trust’s income merely because a New Jersey resident created the trust, and the Division of Taxation informed taxpayers years ago in an official publication that it would not tax a resident trust’s income as long as the trust had no New Jersey trustee and no New Jersey property.

New Jersey said the current case was different, however, and that it could tax the trust on all of the trust’s income, because the trust earned some income in New Jersey (the trust paid tax on its New Jersey source income). New Jersey argued that prior law and its previous guidance did not shield the trust from tax on its out-of-state income, both because of changes in constitutional law and because New Jersey had notified taxpayers in 2011 that a resident trust that earns even a dollar of New Jersey source income is taxable on all of its income. One slight problem: New Jersey’s notification was issued five years after the tax year in question, and after Lowenstein Sandler had filed its Tax Court complaint challenging the tax assessment.