U.S. Supreme Court Finds North Carolina’s Taxation of a Beneficiary’s Undistributed Share of a Trust to Violate The Due Process Clause, 1219 RIBJ, RIBJ, 68 RI Bar J., No. 3, Pg. 21

Author:Marc J. Soss, Esq. Licensed in FL, RI and CT
Position:Vol. 68 3 Pg. 21
 
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U.S. Supreme Court Finds North Carolina’s Taxation of a Beneficiary’s Undistributed Share of a Trust to Violate The Due Process Clause

Vol. 68 No. 3 Pg. 21

Rhode Island Bar Journal

December, 2019

November, 2019

Marc J. Soss, Esq. Licensed in FL, RI and CT

On June 21, 2019, a unanimous United States Supreme Court issued its opinion in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. The court found that the Kaestner Trust beneficiaries did not have the requisite relationship with the Trust property to justify the North Carolina’s state tax. The Court did not specifically address the “degree of possession, control, or enjoyment would be sufficient to support taxation.”

Background

Joseph Lee Rice III formed a New York trust (the “Trust”) for the benefit of his children and appointed a New York resident as the trustee. The Trust agreement granted the trustee “absolute discretion” to distribute the Trust’s assets to the beneficiaries. The trustee subsequently divided the Trust into separate subtrusts for each child. The Trust agreement provided that the subtrusts would terminate when each child turned age 40, after the time period relevant here. The state of North Carolina sought to tax the subtrust created for the child then living within the state under a law authorizing the state to tax any trust income that “is for the benefit of” a state resident.[1] North Carolina ultimately assessed a tax of more than $1.3 million for tax years 2005 through 2008. The tax was assessed notwithstanding the fact that the child living in North Carolina had no right to, and did not receive, any Trust distributions. Of additional note is the fact that the trustee (i) kept the Trust documents and records in New York, (ii) the Trust asset custodians were located in Massachusetts; (iii) the Trust maintained no physical presence in North Carolina; and (iv) the Trust made no direct investments in the state and held no real property there. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax violated the Fourteenth Amendment’s Due Process Clause.

State Court Argument

In...

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