SUPREME COURT TRUST TAX CASE
July 31, 2019 - Douglas Myser
Supreme Court trust tax case. In our ongoing coverage of cases related to Tax Court, this case highlights revolving around a North Caroline trust tax case. North Carolina cannot tax a trust when the trust's only connection to the state is the residency of a beneficiary, the U.S. Supreme Court held in a unanimous decision (North Carolina Dept of Rev. v. Kimberly Rice Kaestner: 1992 Family Trust, No. 18-457 (U.S. 6/21/19). The court's opinion, written by Justice Sonia Sotomayor, held that such a tax would violate the Due Process Clause of the 14th Amendment because the trust lacked minimum contacts with the state. Supreme Court trust tax case.
The North Carolina statute at issue in the case (N.C. Gen. Stat. Section 105-160.2) allows a trust to be taxed solely because it has a North Carolina beneficiary. The statute was held to be unconstitutional by the North Carolina Supreme Court during the earlier stages of litigation. The trust involved in the case had no connections to North Carolina other than the beneficiary's residence, and the trustee had absolute discretion over distributions to the beneficiary. Nonetheless, North Carolina assessed a tax of more than $1.3 million on income earned by assets in the trust for tax years 2005 thru 2008---a period during which the beneficiary had no right to, and did not receive any distributions. The trustee paid tax under protest and then filed suit in state court arguing that the tax violated due process.
In holding that the North Carolina tax violated due process, the Supreme Court explained that the beneficiary "received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year and could not count on ever receiving income from the trust". The Court agreed with the North Carolina courts that the assertion of tax in these circumstances violated due process. The Supreme Court used a two step process in its determination of whether due process had been violated. If you have had a bad experience with a IRS Revenue Agent and want to explore your options in Tax Court, call us for a preliminary analysis of your case, prior to committing to a large hourly contract. You might be glad as you might be able to save significant sums of money. This 35 year old Seasoned Tax Resolution Company, can explore your options for Tax Debt Reduction in many ways thru Tax Resolution options, not just thru Tax Court Representation.