Term: 2018
Docket: 18-457
North Carolina Department Of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust
- Pro
18-457 NORTH CAROLINA DEPT. OF REVENUE V. KAESTNER FAMILY TRUST DECISION BELOW: 814 SE.2d 43 CERT. GRANTED 1/11/2019 QUESTION PRESENTED: More than $120 billion of our nation's income flows through trusts. That income is a vital source of tax revenue for the states. Eleven states, including North Carolina, tax trust income when a trust's beneficiaries are state residents. For the last ninety years, however, this Court has been silent on whether these taxes comport with due process. The Court's last words on the subject come from the Pennoyer era of due-process analysis. Pennoyer v. Neff, 95 U.S. 714 (1878). As a result, lower courts and state taxing authorities have been searching in vain for modern guidance. There is now a direct split spanning nine states. Four state courts have held that the Due Process Clause allows states to tax trusts based on trust beneficiaries' in-state residency. Five state courts, including two state supreme courts this year, have concluded that the Due Process Clause forbids these taxes. The Due Process Clause should not have different meanings in different states- particularly when billions of dollars of state-tax revenue hang in the balance. The question presented to this Court is: Does the Due Process Clause prohibit states from taxing trusts based on trust beneficiaries' in-state residency? LOWER COURT CASE NUMBER: 307PA15-2
The case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, revolved around the issue of taxation on trusts and the limits imposed by due process. In this case, North Carolina attempted to tax a trust based solely on the fact that a beneficiary resided in their state. However, no income was distributed to this beneficiary during relevant years nor did she have any right to demand it from the trust property; hence there were no minimum contacts between her and North Carolina related to administration or control over assets within the trust. The Supreme Court unanimously ruled in favor of Kaestner Trust stating that under these circumstances, taxing such a trust violates Due Process Clause as per Fourteenth Amendment because it lacks necessary connection with benefits provided by State for imposing tax liability.
In the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, Justice Alito, joined by Justices Thomas and Gorsuch, dissented from the majority opinion. They argued that the court's decision was too narrow and failed to provide clear guidance for future cases involving state taxation on trusts. According to them, it should be enough for a trust beneficiary to reside in a state for that state to tax trust income because beneficiaries are essentially owners of the trust property. They also expressed concern about potential manipulation where trusts could avoid taxes simply by appointing out-of-state trustees or relocating beneficiaries temporarily during distribution years.
