The U.S. Supreme Court case Central Hanover Bank & Trust Co. et al. v. Kelly, State Tax Commissioner (1942) revolved around the constitutionality of a New York state law that imposed an inheritance tax on trust funds held by out-of-state beneficiaries from in-state decedents' estates managed by New York trustees. The plaintiffs argued that this violated the Due Process Clause of the Fourteenth Amendment as it was taxing property outside its jurisdiction and without sufficient connection to provide a basis for taxation. However, the court upheld the constitutionality of such taxes, ruling 5-4 in favor of Kelly, State Tax Commissioner. It reasoned that since New York provided protection and benefits to these trusts through its laws and courts system - including supervision over fiduciaries - it had enough contact with them to justify imposing a transfer tax upon their distribution to non-resident beneficiaries.

In the dissenting opinion for Central Hanover Bank & Trust Co. v. Kelly, Justice Frank Murphy argued that the majority's decision was a departure from established principles of due process and taxation law. He contended that New York State had no jurisdiction to tax trust income generated outside its borders by non-resident beneficiaries, as it violated constitutional protections against extraterritorial taxation without representation or benefit. Furthermore, he disagreed with the majority's view that trusts were akin to corporations in terms of their taxable status; instead, he believed they should be treated more like partnerships or individual taxpayers given their unique legal nature and structure. In his view, this mischaracterization led to an unjust result where out-of-state beneficiaries bore an unfair tax burden despite having no meaningful connection with New York State beyond the incidental location of a trustee bank there.