Hofstra Law Review Volume 30 | Issue 4 Article 2 2002 An Extended Presence, Interstate Style: First Notes on a Theme from Saenz Bernard E. Jacob Maurice A. Deane School of Law at Hofstra University Follow this and additional works at: https://scholarlycommons.law.hofstra.edu/hlr Part of the Law Commons Recommended Citation Jacob, Bernard E. (2002) "An Extended Presence, Interstate Style: First Notes on a Theme from Saenz," Hofstra Law Review: Vol. 30 : Iss. 4 , Article 2. Available at: https://scholarlycommons.law.hofstra.edu/hlr/vol30/iss4/2 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Jacob: An Extended Presence, Interstate Style: First Notes on a Theme fr AN EXTENDED PRESENCE, INTERSTATE STYLE: FIRST NOTES ON A THEME FROM SAENZ Bernard E. Jacob* "[Piroperty will [not] be subjected to double or treble taxation. Each state will tax only the capitalreally employed in it.... CONTENTS I. FOUNDER-STATE TRUSTS .......................................................1134 II. AT THE INCEPTION ..................................................................1143 A. Income Taxation in the United States.............................. 1144 B. Legislative History ..........................................................1151 C. What Founder-State Trusts Mean ...................................1153 1. The Theme of Legality ..............................................1157 2. The Theme of Evading Evasion ................................1161 3. The Theme of the Founder's Forfeit ..........................1165 4. A New York Brew .....................................................1169 D. Residence and Domicile: Double Taxation..................... 1171 I. DuE PROCESS AND THE SITUS OF TAx ...................................1179 A. Situs and Domicile ..........................................................1180 B. Tangible Personalty........................................................ 1184 C. Double TaxationAffirmed ...............................................1187 D. The Cases Allocating Intangibles.................................... 1191 * Alexander M. Bickel Distinguished Professor of Communications Law, Hofstra University School of Law. I want to acknowledge the assistance of my research assistants, Charles- Christophe Carter and Felix Shipkevich. Thanks also to Hofstra librarians, Connie Lenz, Lisa Spar and Linda Russo. Readers should not hold the Editors of the Hofstra Law Review responsible for deviations from THE BLUEBOOK: A UNIFORM SYSTEM OF CITATION (Columbia Law Review Ass'n et al., eds., 17th ed. 2000) on which I have insisted. I. Daniel Webster, making a losing argument for the State of Maryland in McCulloch v. Maryland, 17 U.S. 316, 348 (1819). The Court, famously, did not rely on his assurance. Published by Scholarly Commons at Hofstra Law, 2002 1 Hofstra Law Review, Vol. 30, Iss. 4 [2002], Art. 2 HOFSTRA LAW REVIEW [Vol. 30:1133 E. The Double D omicile ....................................................... 1199 F. Double Taxation Denied ................................................. 1202 IV. INTERLUDE: THE OTHER HALF NOT HERE CONSIDERED ....... 1207 V. THE FOURTEENTH AMENDMENT AND AN INDIVIDUAL'S M OBILITY ........................................................ 1212 A. The Supreme Court and State Taxation .......................... 1212 B. At Home in the "States" ................................................. 1217 C. The Colgate Case ............................................................ 1231 D. Founder-StateTrusts ....................................................... 1235 A PPEND IX ............................................................................... 124 1 I. FOUNDER-STATE TRUSTS New York has imposed a tax on the net income of resident and nonresident individuals, trusts and estates for more than eighty years.2 During all of that time, the scheme for the taxation of trusts has centered on a distinction between resident trusts and nonresident trusts. The same distinction is important for all taxpayers, not just trusts. A resident individual, for example, is taxed on his or her global income, that is, income from any and all sources whatever, just as in the case of a resident trust, while a nonresident pays taxes only on income that has its source in New York. Most states impose taxes on income of both residents and nonresidents, so that where an out-of-state taxpayer receives income from a source within a state there is a potential for double taxation.! To take the example of someone who is a resident of New York, but owns a goldmine in California, that taxpayer would report and pay a tax on all her income to New York, including the net income from the California goldmine. She would, as a nonresident under California law, report and pay a tax to California, but California would tax only her goldmine income. The taxation of the goldmine income by both California and New York is surely double taxation of that income;5 but this double taxation 2. See JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION 20.01 (3d ed. 2002). 3. See N.Y. TAX LAW § 605 (McKinney 2002). 4. See HELLERSTEIN & HELLERSTEIN, supra note 2, 20.04[2]. 5. For a discussion of double (or multiple) taxation, see infra notes 379-83 and accompanying text. https://scholarlycommons.law.hofstra.edu/hlr/vol30/iss4/2 2 Jacob: An Extended Presence, Interstate Style: First Notes on a Theme fr 2002] A THEME FROM SAENZ has always been seen as comporting with the United States Constitution.6 As a result, the imposition of these two state income taxes on the same income by New York and California depends solely on the tax laws of the two states. The good news is that New York, as almost any American State that has a general state income tax, will permit a resident taxpayer to credit the tax paid elsewhere as a nonresident taxpayer against the tax due the state of residence.7 In New York, however, I also find another aspect of the income tax law applicable to trusts that is even stranger than the potential for double taxation that New York's tax credit has, generally, transformed into the stately dance of cooperation described above. I mean, here, New York's definition of a New York resident trust. A New York resident trust is one whose settlor or settlors were New York residents at the time the trust became effective and irrevocable. s Every testamentary trust whose settlor died a resident of New York is a resident trust; and every inter vivos trust is a resident trust if the settlor was a resident of New York at the time the trust became irrevocable.9 All such trusts are New York resident trusts without any regard to the current residence of living settlors or the current or past residence of trustees or beneficiaries of the trust, the place of "administration" of the trust in the sense of the carrying on of its regular operations,"0 whether or not any of the income 6. The principle has always been clear. See Lawrence v. State Tax Comm'n of Miss., 286 U.S. 276, 280-81 (1932) (stating resident taxable on out-of-state income); Shaffer v. Carter, 252 U.S. 37, 52 (1920) (explaining nonresident taxable on income from in-state property). Actually, the passive receipt of income from realty, as from a goldmine, presented some special problem. In Senior v. Braden, 295 U.S. 422, 433 (1935), the Court struck down a state property tax imposed on a beneficiary's income interest in an out-of-state trust whose assets were out-of-state realty, and many felt that the Court was insisting on looking through the trust to the underlying realty; but New York ex rel. Cohn v Graves, 300 U.S. 308, 311 (1937), put to rest the issue of barring a tax on a resident's income from out-of-state realty. At issue was a New York tax on a New Yorker's income from rents from a New Jersey property. Upholding the New York tax, then-Justice Stone said: "It would be pressing the protection which the due process clause throws around the taxpayer too far to say that because a state is prohibited from taxing land which it neither protects nor controls, it is likewise prohibited from taxing the receipt and command of income from the land .... Id at 314. 7. See HELLERSTEIN & HELLERSTEIN, supra note 2, 20.04, 20.10; Warren Freedman, PracticalAspects of Multiple State Taxation of Intangibles of Nonresident Decedents Since the Aldrich Case, 24 NOTRE DAME LAw. 41, 1 (1948-1949). 8. See N.Y. TAX LAw § 605 (McKinney 2002). 9. See id. 10. In most states, the court which had jurisdiction over the administration of the estate will "retain" jurisdiction over any trust created by the will. In some states, trustees will have to account periodically before that court. In others, the court will continue to represent a possible forum for litigation affecting the trust or the trustees. This has been identified as an appropriate nexus for imposing a tax. See Chase Manhattan Bank v. Gavin, 733 A.2d 782, 790 (Conn.), cert. denied, 528 U.S. 965 (1999); District of Columbia v. Chase Manhattan Bank, 689 A.2d 539, 543 (D.C. 1997); Published by Scholarly Commons at Hofstra Law, 2002 3 Hofstra Law Review, Vol. 30, Iss. 4 [2002], Art. 2 HOFSTRA LAW REVIEW [Vol. 30:1133 of the trust has its source in New York or how long a time has elapsed without any contact with New York by any of the beneficiaries, trustees, or settlors." I call a trust that fits this definition of residence,