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A Win for the Tax Collector
State prevails in ‘landmark' court
decision re trusts
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Business New Haven
5/31/1999
By: BNH
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The state's right to tax income from resident trusts was upheld May 26 in a decision by the state Supreme Court.
The plaintiff, Chase Manhattan Bank of New York, had brought suit against the state's Department of Revenue Services (DRS). The action charged that the state income tax imposed on the undistributed income of resident trusts violated the due process and commercial clauses of the U.S. Constitution. The case was an appeal of a denial by the DRS of a request for refund of 1993 income taxes.
The case involved five trusts created by the wills of now-deceased Connecticut residents. It has been closely followed by other non-Connecticut trustees and is expected to be a landmark decision for future state tax policy regarding taxation of resident trusts.
“This is a tremendous win not only for Connecticut, but for tax administrators across the nation,” said state Tax Commissioner Gene Gavin. “We are aware of 11 different trustees located in New York who administer over 1,500 Connecticut domicilliary trusts with an annual combined tax liability of more than $1.5 million. This translates to may millions of dollars in future state revenues that have been preserved.”
In the case, the state Supreme Court held that there were sufficient fiscal contacts between the trusts and the state to permit the state to tax their undistributed income without violating constitutionally guaranteed due process. For example, the decision pointed out that in the case of testamentary trusts, the state's probate courts have extensive responsibilities for administrative and legal oversight of the trusts which benefit both beneficiaries and trustees.
Chase Bank maintained that Connecticut taxation of the income of resident trusts had the effect of promoting the appointment of in-state trustees due to the risk of double taxation of the income if the jurisdiction of the trustees also assesses a tax. The court rejected this argument
Gavin noted that the decision ensures a level playing field regarding income-tax treatment for all resident trusts, regardless of the location of the trustee.
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