U.S. Supreme Court hears oral arguments in N.C. case.

Byline: David Donovan

The U.S. Supreme Court heard oral arguments April 16 in a North Carolina case in which the justices will be asked to decide whether the U.S. Constitution prohibits states from taxing a trust located in another state based on the in-state residency of a beneficiary.

The case, North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, involves a trust created in 1992 in New York and governed by its laws. The trustee lived in Connecticut, and in 2005 the only beneficiary moved to North Carolina. For the next several years, the trust paid tax on undistributed income earned by the trust pursuant to North Carolina law, which says that income tax on an estate or trust "is computed on the amount of the taxable income of the estate or trust that is for the benefit of a resident of this State."

In 2008, the trust requested a refund for the roughly $1.3 million paid in taxes, which was denied. The trust then sued the NCDOR, arguing that the statute at issue is unconstitutional as applied because it violates the Due Process Clause. A North Carolina Business Court judge granted summary judgment in favor of the trust, a ruling affirmed by both the state's Court of Appeals and its Supreme Court, which prompted the NCDOR to seek review by the nation's highest court.

The justices were game for the debate, based on a transcript of the oral argument. North Carolina's Solicitor General, Matthew Sawchak, arguing on behalf of the state, barely had a chance to clear his throat before Justice Ruth Bader Ginsburg jumped in with the first question of many directed to the attorneys for each side. Many of the questions suggested that some of the justices were perhaps skeptical of the state's argument.

Justice Stephen Breyer noted that if the beneficiary is still living in North Carolina when she receives distributions from the trust, the state would unquestionably be free to tax those distributions at that time.

"But that isn't what you...