N.C. Dep't of Revenue v. Kimberley Rice Kaestner 1992 Family Tr. - 139 S. Ct. 2213 (2019)

Rule:

The U.S. Supreme Court applies a two-step analysis to decide if a state tax abides by the Due Process Clause. First, there must be some definite link, some minimum connection, between a State and the person, property or transaction it seeks to tax. Second, the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State.

Facts:

Joseph Lee Rice III formed a trust for the benefit of his children in his home State of New York and appointed a fellow New York resident as the trustee. The trust agreement granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee later divided Rice's initial trust into three separate subtrusts, and North Carolina sought to tax the Kimberly Rice Kaestner 1992 Family Trust (Trust)--formed for the benefit of Kaestner and her three children--under a law authorizing the State to tax any trust income that was for the benefit of a state resident, N. C. Gen. Stat. Ann. §105-160.2. The State assessed a tax of more than $1.3 million for tax years 2005 through 2008. During that period, Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the State. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax as applied to the Trust violated the Fourteenth Amendment’s Due Process Clause. The state courts agreed, holding that the Kaestners' in-state residence was too tenuous a link between the State and the Trust to support the tax.

Issue:

Was the assessed tax, as applied to the Trust, violative of the Fourteenth Amendment’s Due Process Clause? 

Answer:

Yes.

Conclusion:

The court held that when assessing a state tax premised on the in-state residency of a constituent of a trust, whether beneficiary, settlor, or trustee, the Due Process Clause demanded attention to the particular relationship between the resident and the trust assets that the State sought to tax. According to the court, when a tax was premised on the in-state residence of a beneficiary, the Clause required that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State could tax the asset. The court averred that the residence of the trust beneficiaries in North Carolina alone did not supply the minimum connection necessary to sustain the State’s income tax under N.C. Gen. Stat. Ann. § 105-160.2 (2017) where the beneficiaries received no income from the trust, had no right to demand trust income, and could not count on receiving any income in the future. Accordingly, the judgment was affirmed.