In a closely-watched decision, the U.S. Supreme Court unanimously ruled that a beneficiary’s residence within a state alone does not subject a trust to such state’s income tax.  In North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457 (U.S. Jun. 21, 2019), North Carolina attempted to tax the income of the Kimberley Rice Kaestner 1992 Family Trust because the trust’s beneficiaries were all North Carolina residents, even though the grantor was a New York resident, the trust was governed by New York law and there was no requirement that the trustee distribute the trust’s income to the beneficiaries.

In an opinion authored by Justice Sonia Sotomayor, the Supreme Court held that North Carolina’s attempt to tax the trust’s income violated the due process clause of the 14th Amendment to the U.S. Constitution because North Carolina (1) lacked the minimum connection between the taxpayer (i.e. the trust) and the state, and (2) there was no rational relationship between the income and North Carolina.  The court’s opinion hinged on a determination as to whether a beneficiary’s presence in a state alone would be sufficient to meet the requisite minimum connection.  The court determined that since no trust income was distributed to the in-state beneficiaries, and such beneficiaries had no right to demand any income, such beneficiaries lacked the requisite control or possession of the trust’s assets to establish a connection to North Carolina.

In addition, in its opinion, the Supreme Court indicated that this test could be applied to any “position” in a trust, stating:

“In sum, when assessing a state tax premised on the in-state residency of a constituent of a trust – whether beneficiary, settlor, or trustee – the Due Process Clause demands attention to the particular relationship between the resident and the trust assets that the State seeks to tax.  Because each individual fulfills different functions in the creation and continuation of the trust, the specific features of that relationship sufficient to sustain a tax may vary depending on whether the resident is a settlor, beneficiary, or trustee.”

Although the Supreme Court attempted to keep the scope of the ruling narrow, Kaestner could pave the way for future attempts to challenge the taxation of trusts by states.  In fact, many states tax trust income based on the grantor’s residence when creating the trust, the location of the beneficiaries and/or the location of the trustees.

New Jersey taxes both non-exempt resident trusts and the New Jersey source income of non-resident trusts.  In New Jersey, an irrevocable trust created by a New Jersey domiciliary or under the Will of a New Jersey domiciliary will be considered a New Jersey resident trust for income tax purposes.  See NJSA 54A:1-2(o)(2).  However, New Jersey case law provides that a New Jersey resident non-grantor trust is exempt from New Jersey tax if it (i) does not have tangible assets in New Jersey, and (ii) does not have any trustees who are residents of New Jersey.  See Pennoyer  v. Director, 5 NJ Tax 386 (Tax 1983), Potter v. Director, 5 NJ Tax 399 (Tax 1983), and Kassner Residuary Trust A v. Director, 27 NJ Tax 68 (Tax 2013).

Similarly, New York taxes both non-exempt resident trusts and New York source income of non-resident trusts.  In New York, an irrevocable trust created by a New York domiciliary or under the Will of a New York domiciliary will be considered a New York resident trust for income tax purposes.  See New York Tax Law 605(b)(3).  Under New York tax law, a resident non-grantor trust can become exempt from New York income tax if the following conditions are met: (i) all of the trustees are domiciled outside of New York, (ii) all of the property held in the trust is located outside of New York, and (iii) the trust cannot receive any New York source income.  See New York Tax Law 605(b)(3)(D)(i).

Note that with “incomplete gift non-grantor trusts,” New York will tax the trust as if it were a grantor trust.  See New York Tax Law 612(b)(41).

The Kaestner ruling, as well as New Jersey’s case law and New York’s statute, demonstrates the importance of consulting with practitioners when establishing trusts or changing trust fiduciaries.  A careful analysis of the laws of different jurisdictions should be made to ensure that the trust’s income does not incur unexpected state taxes.

Reprinted with permission from the 3/28/19 edition of the New Jersey Law Journal© 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or

In light of ever-present budget shortfalls in most states’ coffers, a go-to revenue generating technique affecting all business owners is a “nexus” audit. The U.S. Supreme Court decision last summer in South Dakota v. Wayfair, 138 S.Ct. 2080 (2018), overturning the longstanding precedent in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), has lengthened the states’ reach to audit an out-of-state business without regard to whether the business ever physically crossed the state’s borders.

In the “post-Wayfair” nexus landscape, many small and mid-size businesses are learning for the first time about their income and sales tax obligations from business activities (nexus) inquiries sent by taxing authorities invigorated by the changes in the law. The business can be blindsided by the substantial assessments over a period of six to eight years, including interest and penalties and potential personal liabilities for the owners.

This article analyzes what it means for a business to have physical and/or economic nexus through, respectively, its activities and receipts generated in another state. In addition, we discuss the importance of a prophylactic nexus study and tax savings that can be achieved with a proper allocation analysis.

Pre-’Wayfair’ Definition of Physical Nexus

Since the 1992 Supreme Court ruling in Quill, an out-of-state (also known as “foreign”) business with significant physical presence in another state is deemed to have nexus with that state. The Quill case specifically addressed a state’s ability to impose sales tax, but stands broadly for the “physical presence” nexus test in the income tax arena as well.

A business with physical contacts in a state is considered to avail itself of that state’s benefits and privileges (this assumption is automatic for domestic businesses). In turn, the state is considered to have jurisdiction to impose taxes on the nonresident business.

Physical contacts, beyond outright ownership or leasing of property, may include, among other things, in-state deliveries (other than by common carrier) and banking activities in the state. For sales tax purposes, such contacts also include solicitation of sales, whether by employees, independent contractors or other agents.

State income tax is generally imposed on an out-of-state business on income sourced within the state. Federal protection is provided under 15 USC §381 (commonly known as “P.L. 86-272”), for businesses whose only activity in the state is solicitation. However, it does not protect a business from the obligation to collect sales and use tax. It also does not protect against non-income franchise tax. For this reason, states have enacted statutes that calculate tax based on gross receipts, apportioned capital, net worth and other non-income measures, such as the Washington Business and Occupancy Tax, Michigan Business Tax, Texas Margin Tax, and Ohio Commercial Activities Tax.

Over the past decade, states have pushed the boundary to assert nexus based on tenuous contacts in the state, such as licensing a trademark (Lanco v. Div. of Taxation, 188 N.J. 380 (S.Ct. 2006)), or storing website “cookies” on local computers (Mass. Regs. Code 830 CMR §64H.1.7(2). In addition, under “Amazon laws,” states created a rebuttable presumption of nexus when a business entered into referral agreements with residents. New York’s highest court upheld such a statute against constitutional challenge in v. N.Y.S. Dept. of Tax’n & Fin., 20 N.Y.3d 586 (Ct. of App. 2013), a ’g v. Dept. of Tax’n and Fin., 913 NYS2d 129 (App. Div. 2010).

States have also asserted claims of physical nexus when a business enrolls in the Fulfillment By Amazon (FBA) program. This is a logistics service offered by Amazon to e-commerce businesses. The FBA directs a business to send inventory to a warehouse in a particular state, and subsequently, unbeknownst to the seller, may redistribute it to a warehouse in another state. That second state will often claim that inventory stored there creates nexus. The quantity of inventory or length of time the inventory spends in the warehouse seemingly does not make a difference.

Since states continued to insist that nexus was created through tenuous physical contacts and tortured interpretations of case law under Quill, it was only a matter of time before the Supreme Court would be asked to bless “economic nexus” rules, which do not require any physical presence at all.

Economic Nexus under ‘Wayfair’

In at least the second half of the past quarter-century since Quill was decided, pressure has been mounting to overturn this precedent because of perceived unfairness to
brick-and-mortar businesses. States also began to feel the pinch from not being able to collect tax from the elusive and sometimes anonymous online marketplace. This culminated in several state campaigns to “Kill Quill.”

To provoke a constitutional challenge, South Dakota passed a sales tax law creating nexus if an out-of-state business generated over a certain dollar threshold of revenue ($100,000) from the state, or conducted a certain number of transactions (200) in the state. This new “economic nexus” law did not require physical presence in the state. South Dakota then proceeded to sue the largest out of-state vendors, including Wayfair and Overstock. Losing in the state courts that considered themselves duty-bound to follow Quill, South Dakota appealed to the U.S. Supreme Court and won.

Post-’Wayfair’ Legislation

New York passed a sales tax economic nexus statute decades before South Dakota did, but waited patiently for almost 30 years for constitutional approval to begin to enforce it. N.Y. Tax Law §1101(b)(8)(iv), and regulations under NYCRR 20 §526.10, require a vendor to remit sales tax if it conducts more than $300,000 of sales and more than 100 sales of tangible personal property in the state. Now, post-Wayfair, New York issued guidance in Notice N-19-1, in January 2019, that it will start enforcing this existing statute immediately.

New Jersey was the first state to pass an economic nexus statute after Wayfair was decided. The New Jersey thresholds exactly mimic the requirements of the South Dakota statute. In addition, in the case of remote sales, New Jersey has imposed a direct obligation for the marketplace “facilitator” to collect sales tax, as long as such middleman has access to the necessary information from the seller. We anticipate that New Jersey and other states will further develop audit programs that seek to aggressively enforce the new economic nexus laws.

Importantly, other middlemen, such as out-of-state wholesalers and distributors that do not sell goods to end users, generally do not need to register to collect sales tax, regardless of nexus to a state, because their sales are considered to be sales-for-resale. However, in light of the new laws implicating marketplace facilitators, under the more aggressive post-Wayfair audit programs, if such wholesalers and distributors cannot present valid resale exemption certificates to the taxing authorities, they may be held jointly liable for sales tax with the retail sellers.

Finally, note that the post-Wayfair legislation is intended to supplement and not replace the physical nexus test, which continues to apply to a business falling below the economic nexus thresholds. For such states, and for states that have not passed economic nexus legislation, inventory stored, employees located, orders taken, and affiliate contracts made in the state, along with many other physical contacts, continue to be relevant factors for determining nexus.

Income Allocation

An important aspect of the nexus analysis is to determine allocation of receipts in multiple states and whether income and/or sales tax returns need to be led in those states.

In the area of income or receipts-based tax reporting, states including New Jersey and New York utilize a single-factor sales receipts formula to allocate income of domestic and foreign businesses. This is a simplified method from previous statutes that also weighed property and payroll in a three-factor allocation formula. The calculation currently is a ratio of receipts derived from the state as numerator over the denominator of all receipts derived from all other jurisdictions. New Jersey used to “throw out” from the denominator receipts not subject to income tax in any jurisdiction, thus capturing this otherwise untaxed income, but in 2010 abolished this requirement to encourage businesses to come to New Jersey. N.J.S.A. §54:10A-6(B); N.J.A.C. §18:7-8.7(d).

A nexus analysis can ensure that income generated from states where the company may have no nexus is excluded from the total income allocated among states where the company does have nexus. This could be because the business does not have physical contacts with the state, falls below economic nexus thresholds and/or the state has not passed economic nexus legislation. If properly allocated, income (or other type of tax base) from states where the business does not have nexus can potentially completely escape tax in any state at the entity-level.


In light of potential pitfalls facing a multi-state business with regular ties to several states (direct or indirect, and now, under Wayfair, purely economic), as well as potential tax savings from proper income allocation, it is every Controller’s or Chief Financial Officer’s fiscal obligation to have a confidential (and, if conducted by attorneys, attorney-client privileged) state-by-state nexus study conducted of its business’ multi-state operations. If the business has exposure, it can apply for a voluntary disclosure program, or develop another compliance strategy to limit the look-back period, obtain a waiver of penalties and prevent personal liability to the owners that may not be dischargeable in bankruptcy.

Finally, income/receipts allocation for closely-held pass-through entities, such as S corporations and LLCs treated as partnerships, has tax implications for individual partners or shareholders. While outside the scope of this article, the individual tax consequences can be mitigated and even eliminated with proper residency planning.

In a recent unpublished opinion, the New Jersey Appellate Division summarized the factors a trial court must consider when awarding attorneys’ fees in Will contests.  In Matter of the Estate of Fornaro, 2019 WL 2172791, the decedent executed a Will in 2011 leaving the bulk of his estate to his son.  In an earlier 1999 Will, however, the decedent had divided his estate equally between his son and daughter.

The decedent died in 2012 and the daughter thereafter filed an action contesting the 2011 Will on the grounds of undue influence and lack of testamentary capacity. Based on the evidence, the trial court had “no difficulty concluding that [decedent] was a very strong-willed man and capable of exercising his own free will well into 2012.”  The trial court ultimately determined that the Will was not the product of undue influence and that the decedent had sufficient mental capacity to create the 2011 Will.

The trial court subsequently awarded counsel fees to both children pursuant to New Jersey Court Rule 4:42-9(a)(3), which authorizes payment from the estate of the legal fees incurred by both the winner and loser of a Will contest so long as “reasonable cause” for the challenge existed.  The Appellate Division agreed that there was reasonable cause for the challenge, but held that the trial court had not properly calculated the fee award.  It found that the trial court should have considered the factors in New Jersey Rule of Professional Conduct 1.5(a) to gauge the reasonableness of the fee awards, which include the following: 

 (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.

In addition, it found that the trial court should have also considered the below factors articulated in In re Bloomer’s Estate, 37 N.J. Super, 85, 94 (App. Div. 1955):

(1) the amount of the estate and the amount thereof in dispute or jeopardy as to which professional services were made necessary; (2) the nature and extent of the jeopardy or risk involved or incurred; (3) the nature, extent and difficulty of the services rendered; (4) the experience and legal knowledge required, and the skill, diligence, ability and judgment shown; (5) the time necessarily spent by the attorney in the performance of his services; (6) the results obtained; (7) the benefits or advantages resulting to the estate, and their importance; (8) any special circumstances, including the standing of the attorney for integrity and skill; and (9) the overhead expense to which the attorney has been put.

The Appellate Division noted that “[b]ecause we cannot discern from the court’s opinion whether or how it applied the subject factors, we are constrained to reverse the . . . orders, and remand the issue of counsel fees and costs for further fact finding.”

In sum, the opinion highlights that “a court must expressly state its findings of fact and conclusions of law” regarding the relevant factors when awarding attorney’s fees in probate cases.

Many people familiar with litigation probably think of pretrial discovery in the context of traditional and often heated litigation—perhaps a contentious divorce, a complex contractual or real estate dispute or a contested personal injury or medical malpractice lawsuit.  While pretrial discovery in Florida is certainly very common in these types of cases, the Florida Probate Rules allow for discovery even in non-contested, routine estate administrations where there are no adverse parties or claims, i.e., matters where no one is suing anyone else.

Rule 5.080 the Florida Probate Rules provides as follows:

(a)     Adoption of Civil Rules. The following Florida Rules of Civil Procedure shall apply in all probate and guardianship proceedings:

(1)     Rule 1.280, general provisions governing discovery.

(2)     Rule 1.290, depositions before action or pending appeal.

(3)     Rule 1.300, persons before whom depositions may be taken.

(4)     Rule 1.310, depositions upon oral examination.

(5)     Rule 1.320, depositions upon written questions.

(6)     Rule 1.330, use of depositions in court proceedings.

(7)     Rule 1.340, interrogatories to parties.

(8)     Rule 1.350, production of documents and things and entry upon land for inspection and other purposes.

(9)     Rule 1.351, production of documents and things without deposition.

(10)   Rule 1.360, examination of persons.

(11)   Rule 1.370, requests for admission.

(12)   Rule 1.380, failure to make discovery; sanctions.

(13)   Rule 1.390, depositions of expert witnesses.

(14)   Rule 1.410, subpoena.

(15)   Rule 1.451, taking testimony.

All of the regular tools for discovery—interrogatories, requests for production of documents, depositions, requests for admissions and subpoenas—that are available in conventional and contested litigation is, pursuant to the above rule, also available in ordinary estate administration matters, as well as adversarial probate and guardianship cases.  A beneficiary of an estate, for example, who has not filed any type of adversary proceeding in probate but who wants more information with respect to transfers of property or money made by a decedent in the three years before he passed away is entitled to serve interrogatories and a request for production of documents on the personal representative of the estate and can even set the deposition of that personal representative if that beneficiary believes that a deposition is necessary.

The 2017 Tax Act added a new tax on US shareholders of controlled foreign corporations (“CFCs”), the tax on Global Intangible Low-Taxed Income (“GILTI”).  GILTI often includes active business income and thus has a widespread impact.

For US C corporations, the regular 21% tax is reduced by a 50% deduction, which lowers the tax rate on GILTI to 10.5%.  Corporations also can claim a foreign tax credit (“FTC”) for 80% of the foreign taxes paid by the CFC, which further reduces or eliminates the GILTI tax.  By contrast, US individuals (including shareholders of S corporations) received no similar tax breaks, and must pay tax at regular rates (maximum 37% rate).

The IRS recently released proposed regulations that open up a planning option for individuals to similarly reduce the tax rate on GILTI by making a Code §962 election.

Code §962 allows a US individual shareholder of a CFC to make an annual election to pay tax on its related Subpart F income at corporate rates.  This section has been a longstanding part of the Code, but was largely ignored until adoption of the 2017 Tax Act.  The 2017 Tax Act reduced corporate tax rates to be significantly below individual tax rates.  The 2017 Tax Act left unanswered whether this election can yield the same tax benefits as a C corporation gets for GILTI.

The IRS proposed regulations state that an individual making the Section 962 election is subject to the 21% corporate tax rate and can get the special 50% deduction for GILTI income, which lowers its tax on GILTI to 10.5%.  The IRS has not yet specifically confirmed that an individual can get a FTC for 80% of foreign taxes paid by the CFC although the IRS’s recent announcement bodes well for confirmation of such position.

The §962 election is made on a year-by-year basis with the tax return filed for that year.  As a result, US individual shareholders facing a significant tax on GILTI may wish to consider making this election to lower the taxes due.  However, an individual making this election will also be subject to US tax when it receives a dividend from the CFC.  If the individual paid tax on GILTI without making this election, then no tax would be imposed on the dividend.

Dividends from a foreign corporation are generally taxed at regular tax rates unless the dividend is from a “qualified foreign corporation” which is taxed at the long term capital gains tax rate of 20%.  A qualified dividend is a dividend from a foreign corporation that is eligible for benefits under an income tax treaty between the US and their home country.  The US has income tax treaties with many nations (e.g., England, France, Germany), but not with all nations.  The US does not have income tax treaties with most “tax haven” countries (eg, BVI, Cayman Islands).

In brief, the ability to make a Code §962 election to reduce the GILTI tax rate is a planning option that individual taxpayers should consider.