IN THE SUPREME COURT OF NORTH CAROLINA
No. 307PA15-2
Filed 8 June 2018
THE KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST
v.
NORTH CAROLINA DEPARTMENT OF REVENUE
On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision
of the Court of Appeals, ___ N.C. App. ___, 789 S.E.2d 645 (2016), affirming an opinion
and order of summary judgment dated 23 April 2015 entered by Judge Gregory P.
McGuire, Special Superior Court Judge for Complex Business Cases appointed by the
Chief Justice pursuant to N.C.G.S. § 7A-45.4, in Superior Court, Wake County.
Heard in the Supreme Court on 11 October 2017.
Moore & Van Allen PLLC, by Thomas D. Myrick, Neil T. Bloomfield, Jonathan
M. Watkins, and Kara N. Bitar, for plaintiff-appellee.
Joshua H. Stein, Attorney General, by Matthew W. Sawchak, Solicitor General,
Tenisha S. Jacobs, Special Deputy Attorney General, and James W. Doggett,
Deputy Solicitor General; and Law Office of Robert F. Orr, by Robert F. Orr, for
defendant-appellant.
JACKSON, Justice.
In this case we consider whether defendant North Carolina Department of
Revenue could tax the income of plaintiff The Kimberly Rice Kaestner 1992 Family
Trust pursuant to N.C.G.S. § 105-160.2 solely based on the North Carolina residence
of the beneficiaries during tax years 2005 through 2008. Because we determine that
KAESTNER 1992 FAMILY TR. V. N.C. DEP’T OF REVENUE
Opinion of the Court
plaintiff did not have sufficient minimum contacts with the State of North Carolina
to satisfy due process requirements of the Fourteenth Amendment to the United
States Constitution and Article I, Section 19 of the Constitution of North Carolina,
we conclude that the taxes at issue were collected unconstitutionally and, therefore,
affirm the decision of the Court of Appeals affirming the North Carolina Business
Court’s 23 April 2015 Opinion and Order on Motions for Summary Judgment in favor
of plaintiff.
As the Business Court noted, the underlying, material facts of this case as
established by the evidence in the record are not in dispute. The Joseph Lee Rice, III
Family 1992 Trust was created in New York in 1992 for the benefit of the children of
the settlor Joseph Lee Rice, III pursuant to a trust agreement between Rice and the
initial trustee, William B. Matteson. In 2005 Matteson was replaced as trustee by
David Bernstein, who was a resident of Connecticut. Bernstein remained in the
position of trustee and remained a Connecticut resident during the entire period of
time relevant to this case. The trust was and is governed by the laws of the State of
New York, of which Rice was a resident. No party to the trust resided in North
Carolina until Rice’s daughter and a primary beneficiary of the trust, Kimberly Rice
Kaestner, moved to North Carolina in 1997.
On 30 December 2002, the trust was divided into three share sub-trusts one
each for the benefit of Rice’s three children, including Kaestner. The sub-trusts were
divided into three separate trusts in 2006 by Bernstein for administrative
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convenience. Plaintiff is the separate share trust formed for the benefit of Kaestner
and her three children, all of whom resided in North Carolina during the tax years at
issue.
During the tax years at issue, the assets held by plaintiff consisted of various
financial investments, and the custodians of those assets were located in Boston,
Massachusetts. Documents related to plaintiff such as ownership documents,
financial books and records, and legal records were all kept in New York. All of
plaintiff’s tax returns and accountings were prepared in New York.
None of the beneficiaries of plaintiff had an absolute right to any of plaintiff’s
assets or income because distributions could only be made at the discretion of
Bernstein, who had broad authority to manage the property held by plaintiff. No
distributions were made to beneficiaries in North Carolina, including Kaestner,
during the tax years at issue; however, in January 2009, plaintiff loaned $250,000 to
Kaestner at Bernstein’s discretion to enable her to pursue an investment opportunity.
This loan was repaid.
The terms of the original trust provided that the trustee was to distribute the
trust assets to Kaestner when she reached the age of forty. Before her fortieth
birthday on 2 June 2009, Kaestner had conversations with her father and Bernstein
about whether she wished to receive the trust assets on that date. Ultimately, she
requested to extend the trust, and accordingly, Bernstein transferred the assets of
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plaintiff into a new trust, the KER Family Trust, in 2009. That transfer occurred
after the tax years at issue, and KER Family Trust is not a party to this case.
In managing plaintiff, Bernstein provided Kaestner with accountings of trust
assets, and she received legal advice regarding plaintiff from Bernstein and his firm.
Kaestner and her husband also met with Bernstein in New York to discuss
investment opportunities for the trust and whether Kaestner desired to receive
income distribution as set forth in the original trust agreement.
During tax years 2005 through 2008, defendant taxed plaintiff on income
accumulated each year, regardless of whether any of that income was distributed to
any of the North Carolina beneficiaries. Plaintiff sought a refund of those taxes
totaling more than $1.3 million, including $79,634.00 paid for 2005, $106,637.00 paid
for 2006, $1,099,660.00 paid for 2007, and $17,241.00 paid for 2008. Defendant
denied the refund request on 11 February 2011.
On 21 June 2012, plaintiff filed a complaint in Superior Court, Wake County,
alleging that defendant wrongfully denied plaintiff’s request for a refund because
N.C.G.S. § 105-160.2 is both unconstitutional on its face and as applied to collect
income taxes from plaintiff during those tax years. Plaintiff claimed that the taxes
collected pursuant to section 105-160.2 violate the Due Process Clause because
plaintiff did not have sufficient minimum contacts with the State of North Carolina.
Plaintiff also claimed that the taxes violate the Commerce Clause on several grounds,
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including that the tax was not applied to an activity with a substantial nexus to the
taxing state. Plaintiff claimed that consequently, the tax also violated Article I,
Section 19 of the state constitution. Based on these claims, plaintiff requested a
declaration that section 105-160.2 is unconstitutional and an order from the court
requiring defendant to refund any taxes, penalties, and interest paid by plaintiff for
tax years 2005 through 2008, and enjoining defendant from enforcing any future
assessments against plaintiff pursuant to section 105-160.2. Subsequent evidence
indicated that penalties were assessed against plaintiff for tax years 2005 and 2006.
These penalties were not paid by plaintiff and were ultimately waived at plaintiff’s
request, rendering moot that specific portion of plaintiff’s claim for relief.
In accord with N.C.G.S. § 7A-45.4(b), this case was designated as a mandatory
complex business case by the Chief Justice on 19 July 2012. On 11 February 2013,
the Business Court issued an Opinion and Order on Defendant’s Motion to Dismiss
in which it granted the motion as to plaintiff’s claim for injunctive relief, but denied
the motion as to plaintiff’s constitutional claims.
Relevant to this appeal, plaintiff filed a motion for summary judgment on its
constitutional claims on 8 July 2014, and defendant filed its own motion for summary
judgment on 4 September 2014. In its Opinion and Order on Motions for Summary
Judgment, the Business Court observed that when a taxed entity such as plaintiff is
not physically present in the taxing state, the taxed entity must “purposefully avail[ ]
itself of the benefits of an economic market in the forum state” for the tax to satisfy
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due process requirements. Kimberley Rice Kaestner 1992 Family Trust v. N.C. Dep’t
of Revenue, No. 12 CVS 8740, 2015 WL 1880607, at *4 (N.C. Super. Ct. Wake County
(Bus. Ct.) Apr. 23, 2015), aff’d, ___, N.C. App. ___, 789 S.E.2d 645 (2016) (quoting
Quill Corp. v. North Dakota, 504 U.S. 298, 307, 112 S. Ct. 1904, 1910 (1992)).
Determining that plaintiff did not purposefully avail itself of the benefits of the taxing
state based solely on the beneficiaries’ residence in North Carolina, the Business
Court concluded that the provision of section 105-160.2 allowing taxation of trust
income “that is for the benefit of a resident of this State,” N.C.G.S. § 105-160.2 (2005),
violated both the Due Process Clause and Article I, Section 19 of the state constitution
as applied to plaintiff. Applying the four-pronged analysis for determining the
constitutionality of a tax pursuant to the Commerce Clause as set forth by the United
States Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97
S. Ct. 1076, 1079 (1977), the Business Court also determined that the same provision
of section 105-160.2 violated the Commerce Clause as applied to plaintiff. Therefore,
the Business Court denied defendant’s motion for summary judgment, granted
plaintiff’s motion for summary judgment, and ordered that any taxes and penalties
paid by plaintiff pursuant to section 105-160.2 be refunded with interest.
Defendant noticed its appeal to the Court of Appeals on 22 May 2015. Before
that court, defendant challenged the substantive conclusions of the Business Court
that taxation of the trust based solely on the residency of the beneficiaries violated
both the Due Process and Commerce Clauses as applied to plaintiff. Kaestner 1992
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Family Tr. v. N.C. Dep’t of Revenue, ___ N.C. App. ___, ___, 789 S.E.2d 645, 647-48
(2016). Like the Business Court, the Court of Appeals also reasoned from the United
States Supreme Court’s guidance that “[t]he Due Process Clause requires [(1)] some
definite link, some minimum connection, between a state and the person, property or
transaction it seeks to tax, and [(2)] that the income attributed to the State for tax
purposes must be rationally related to values connected with the taxing State.” Id.
at ___, 789 S.E.2d at 649 (second and third alterations in original) (quoting Quill, 504
U.S. at 306, 112 S. Ct. at 1909-10 (citations and internal quotation marks omitted)).
Noting that a trust has a separate legal existence for the purpose of income taxes
pursuant to Anderson v. Wilson, 289 U.S. 20, 27, 53 S. Ct. 417, 420 (1933), Kaestner
1992 Family Tr., ___ N.C. App. at ___, 789 S.E.2d at 650, the Court of Appeals held
that the connection between North Carolina and the trust based solely on the
residence of the beneficiaries was insufficient to satisfy due process requirements, id.
at ___, 789 S.E.2d at 651. Consequently, the Court of Appeals affirmed the Business
Court’s order granting summary judgment for plaintiff. Id. at ___, 789 S.E.2d at 651.
The Court of Appeals chose not to address whether taxation of plaintiff also violated
the Commerce Clause. Id. at ___, 789 S.E.2d at 651.
On appeal to this Court from the decision of the Court of Appeals, defendant
continues to argue that plaintiff had minimum contacts with the State of North
Carolina sufficient to satisfy due process based on the presence of the beneficiaries in
the state. Defendant also argues that plaintiff had sufficient minimum contacts with
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North Carolina through certain acts of the trustee whereby plaintiff benefitted from
“the ordered society maintained by taxation in North Carolina.” We disagree.
“Our standard of review of an appeal from summary judgment is de novo.” In
re Will of Jones, 362 N.C. 569, 573, 669 S.E.2d 572, 576 (2008) (citing Forbis v. Neal,
361 N.C. 519, 523-24, 649 S.E.2d 382, 385 (2007)). “Under the de novo standard of
review, the [Court] ‘consider[s] the matter anew[ ] and freely [substitutes] its own
judgment for’ [that of the lower court].” Midrex Techs., Inc. v. N.C. Dep’t of Revenue,
369 N.C. 250, 257, 794 S.E.2d 785, 791 (2016) (first and fifth alterations in original)
(quoting N.C. Dep't of Env't & Nat. Res. v. Carroll, 358 N.C. 649, 660, 599 S.E.2d 888,
895 (2004) (second and third alterations in original)). On a motion for summary
judgment, “[t]he judgment sought shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that
any party is entitled to a judgment as a matter of law.” N.C.G.S. § 1A-1, Rule 56(c)
(2017).
The relevant provision of section 105-160.2 has remained substantively
unchanged since the tax years at issue and states 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.” Id. § 105-160.2 (2017). In its complaint
and motion for summary judgment, plaintiff maintained that this section is both
unconstitutional on its face and as applied to plaintiff. We presume “that any act
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passed by the legislature is constitutional, and [we] will not strike it down if [it] can
be upheld on any reasonable ground.” State v. Bryant, 359 N.C. 554, 564, 614 S.E.2d
479, 486 (2005) (quoting State v. Thompson, 349 N.C. 483, 491, 508 S.E.2d 277, 281-82
(1998) (second alteration in original)). Consequently, “[a]n individual challenging the
facial constitutionality of a legislative act ‘must establish that no set of circumstances
exists under which the [a]ct would be valid.’ ” Thompson, 349 N.C. at 491, 508 S.E.2d
at 282 (second alteration in original) (quoting United States v. Salerno, 481 U.S. 739,
745, 107 S. Ct. 2095, 2100 (1987)). Given this exacting standard and that the
allegations and evidence appear relevant solely to whether defendant
unconstitutionally collected income taxes from plaintiff for tax years 2005 through
2008, we consider only whether section 105-160.2 is unconstitutional as applied to
plaintiff to collect the taxes at issue.
In considering an as-applied challenge to the constitutionality of a statute, we
look to whether the statute is constitutional in the limited context of the facts of the
case before us. Then, as with any constitutional challenge, “[i]f there is a conflict
between a statute and the Constitution, this Court must determine the rights and
liabilities or duties of the litigants before it in accordance with the Constitution,
because the Constitution is the superior rule of law in that situation.” Adams v. N.C.
Dep’t of Nat. & Econ. Res., 295 N.C. 683, 690, 249 S.E.2d 402, 406 (1978) (quoting
Nicholson v. State Educ. Assistance Auth., 275 N.C. 439, 447, 168 S.E.2d 401, 406
(1969)).
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The Fourteenth Amendment directs that no State shall “deprive any person of
life, liberty, or property, without due process of law.” U.S. Const. amend XIV.
Similarly, our state constitution declares that “[n]o person shall be . . . in any manner
deprived of his life, liberty, or property, but by the law of the land.” N.C. Const. art. I,
§ 19. Indeed, we have determined that “[t]he term ‘law of the land’ as used in Article
I, Section 19, of the Constitution of North Carolina, is synonymous with ‘due process
of law’ as used in the Fourteenth Amendment to the Federal Constitution.” Rhyne v.
K-Mart Corp., 358 N.C. 160, 180, 594 S.E.2d 1, 15 (2004) (quoting In re Moore, 289
N.C. 95, 98, 221 S.E.2d 307, 309 (1976)). Accordingly, our analysis of plaintiff’s due
process challenge below also applies to plaintiff’s state constitutional claim.
When applied to taxation, “[t]he Due Process Clause ‘requires some definite
link, some minimum connection, between a state and the person, property or
transaction it seeks to tax.’ ” Quill, 504 U.S. at 306, 112 S. Ct. at 1909 (quoting Miller
Bros. Co. v. Maryland, 347 U.S. 340, 344-45, 74 S. Ct. 535, 539 (1954)). Due process
also requires that “the ‘income attributed to the State for tax purposes must be
rationally related to values connected with the taxing State,’ ” id. at 306, 112 S. Ct.
at 1909-10 (internal quotation marks omitted) (quoting Moorman Mfg. Co. v. Bair,
437 U.S. 267, 273, 98 S. Ct. 2340, 2344 (1978)); however, in this case we are concerned
only with the first requirement. This “minimum connection,” which is more
commonly referred to as “minimum contacts,” see id. at 307, 112 S. Ct. at 1910 (citing
Int’l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158 (1945)), exists when
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the taxed entity “purposefully avails itself of the benefits of an economic market” in
the taxing state “even if it has no physical presence in the State,” id. at 307, 112 S. Ct.
at 1910 (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476, 105 S. Ct. 2174,
2184 (1985)). The Court in Quill Corporation therefore declared: “[T]o the extent that
our decisions have indicated that the Due Process Clause requires physical presence
in a State” for imposition and collection of a tax, “we overrule those holdings as
superseded by developments in the law of due process.” Id. at 308, 112 S. Ct. at 1911.
Applying that standard, the Court went on to hold that the plaintiff in Quill
Corporation “purposefully directed its activities at North Dakota residents, that the
magnitude of those contacts [was] more than sufficient for due process purposes, and
that the use tax [was] related to the benefits Quill receive[d] from access to the State,”
id. at 308, 112 S. Ct. at 1911, when the plaintiff generated revenue of almost
$1 million annually from selling office equipment and supplies to approximately
3,000 customers in North Dakota even though all merchandise was delivered from
out of state by mail or common carriers, id. at 302, 112 S. Ct. at 1907-08.
We have similarly determined that a finding of minimum contacts sufficient to
satisfy due process “will vary with the quality and nature of the [party’s] activity, but
it is essential in each case that there be some act by which the [party] purposefully
avails itself of the privilege of conducting activities within the forum State, thus
invoking the benefits and protections of its laws.” Skinner v. Preferred Credit, 361
N.C. 114, 123, 638 S.E.2d 203, 210-11 (2006) (quoting Chadbourn, Inc. v. Katz, 285
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N.C. 700, 705, 208 S.E.2d 676, 679 (1974)). In light of Quill Corporation and our
understanding of minimum contacts analysis, we therefore consider defendant’s first
argument in terms of whether plaintiff can be said to have minimum contacts with
North Carolina based on the presence of its beneficiaries in our State.
The Supreme Court has observed that even though a “trust is an abstraction
. . . . the law has seen fit to deal with this abstraction for income tax purposes as a
separate existence, making its own return under the hand of the fiduciary and
claiming and receiving its own appropriate deductions.” Anderson, 289 U.S. at 27, 53
S. Ct. at 420. The Internal Revenue Code imposes a separate tax on the income of
trusts, see 26 U.S.C. § 1(e) (2012), implicitly recognizing, at least for tax purposes,
that a trust is a separate entity to which income is separately attributed. Any tax on
that income is physically paid by the fiduciary or trustee, with the amount of the tax
being “computed in the same manner as in the case of an individual.” Id. § 641(a)-(b).
In North Carolina “[t]he taxable income of an estate or trust is the same as taxable
income for such an estate or trust under the provisions of the Code.” N.C.G.S.
§ 105-160.2. Neither the Code nor Chapter 105 conflates the income of the trust with
the income of a beneficiary.
In Brooke v. City of Norfolk the Supreme Court considered whether the City of
Norfolk and Commonwealth of Virginia had violated the Due Process Clause by
taxing the body of a Maryland trust when none of the property held by the trust had
ever been present in Virginia. 277 U.S. 27, 28, 48 S. Ct. 422, 422 (1928). Although
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the Supreme Court applied presence-focused due process analysis that has since been
supplanted by the minimum contacts test, see Quill, 504 U.S. at 308, 112 S. Ct. at
1911, the Court also recognized that a trust and its beneficiary are legally
independent entities when it observed that the property held by the trust “is not
within the State, does not belong to the [beneficiary] and is not within her possession
or control. The assessment is a bare proposition to make the [beneficiary] pay upon
an interest to which she is a stranger,” Brooke, 277 U.S. at 29, 48 S. Ct. at 422.
That plaintiff and its North Carolina beneficiaries have legally separate,
taxable existences is critical to the outcome here because a taxed entity’s minimum
contacts with the taxing state cannot be established by a third party’s minimum
contacts with the taxing state. See Walden v. Fiore, ___ U.S. ___, ___, 134 S. Ct. 1115,
1122 (2014) (stating that “unilateral activity of another party or a third person is not
an appropriate consideration when determining whether a defendant has sufficient
contacts with a forum State” (quoting Helicopteros Nacionales de Colombia, S.A. v.
Hall, 466 U.S. 408, 417, 104 S. Ct. 1868, 1873 (1984))); Hanson v. Denckla, 357 U.S.
235, 253, 78 S. Ct. 1228, 1239-40 (1958) (“The unilateral activity of those who claim
some relationship with a nonresident [party] cannot satisfy the requirement of
contact with the forum State.”). Here it was plaintiff’s beneficiaries, not plaintiff,
who reaped the benefits and protections of North Carolina’s laws by residing here.
Because plaintiff and plaintiff’s beneficiaries are separate legal entities, due process
was not satisfied solely from the beneficiaries’ contacts with North Carolina.
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Defendant challenges this conclusion by citing to two decisions in which foreign
jurisdictions allegedly reached the opposite result. The Supreme Court of
Connecticut held that taxation of an inter vivos trust did not violate due process
because the beneficiary of the trust was a Connecticut domiciliary. Chase Manhattan
Bank v. Gavin, 249 Conn. 172, 204, 733 A.2d 782, 802, cert. denied, 528 U.S. 965, 120
S. Ct. 401 (1999). Describing the domicile of the beneficiary as the “critical link,” the
Court in Gavin went on to reason that the beneficiary “enjoyed all of the protections
and benefits afforded to other domiciliaries. Her right to the eventual receipt and
enjoyment of the accumulated income was, and so long as she is such a domiciliary
will continue to be, protected by the laws of the state.” Id. at 204, 733 A.2d at 802.
Therefore, the Court concluded in Gavin:
[J]ust as the state may tax the undistributed income of a
trust based on the presence of the trustee in the state
because it gives the trustee the protection and benefits of
its laws; it may tax the same income based on the domicile
of the sole noncontingent beneficiary because it gives her
the same protections and benefits.
Id. at 205, 733 A.2d at 802 (internal citation omitted). Defendant also cites to a
decision of the Supreme Court of California for the similar proposition that a
“beneficiary's state of residence may properly tax the trust on income which is
payable in the future to the beneficiary, although it is actually retained by the trust,
since that state renders to the beneficiary that protection incident to his eventual
enjoyment of such accumulated income.” McCulloch v. Franchise Tax Bd., 61 Cal. 2d
186, 196, 390 P.2d 412, 419 (1964) (emphasis omitted).
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We do not find either Gavin or McCulloch persuasive in deciding the present
case. The Court in Gavin erroneously failed to consider that a trust has a legal
existence apart from the beneficiary and that, consequently, for taxation to satisfy
due process pursuant to Quill, the trust itself must have “some definite link, some
minimum connection” with the taxing state by “purposefully avail[ing] itself of the
benefits of an economic market” in that state. Quill, 504 U.S. at 306-07, 112 S. Ct. at
1909-10. Furthermore, both the Court in Gavin and defendant, in its arguments
before this Court, misconstrue a trust’s existence as “a fiduciary relationship with
respect to property, subjecting the person by whom the property is held to equitable
duties to deal with the property for the benefit of another person,” Wescott v. First &
Citizens Nat’l Bank of Elizabeth City, 227 N.C. 39, 42, 40 S.E.2d 461, 462-63 (1946)
(quoting Restatement (First) of Trusts § 2 (Am. Law Inst. 1935)), to mean that any
possible benefit received by the beneficiary may be imputed to the trust. That
conclusion simply does not follow.
In contrast to Gavin, several other jurisdictions have applied reasoning similar
to our analysis here in the context of deciding whether taxation of a given trust
violated due process. See Linn v. Dep’t of Revenue, 2013 IL App (4th) 121055, ¶ 33,
2 N.E.3d 1203, 1211 (2013) (applying Quill and holding that there was insufficient
contact between Illinois and the taxed trust to satisfy due process when the trust,
inter alia, “had nothing in and sought nothing from Illinois” and conducted all of its
business in Texas), appeal dismissed, 387 Ill. Dec. 512, 22 N.E.3d 1165 (2014);
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Fielding v. Comm’r of Revenue, File Nos. 8911–R, 8912–R, 8913–R, 8914–R, 2017 WL
2484593, at *19-20 (Minn. T.C. May 31, 2017) (deciding that taxation of an inter vivos
trust based solely on the in-state domicile of the grantor at the time the trust became
irrevocable violated due process); Residuary Tr. A v. Director, Div. of Taxation, 27
N.J. Tax 68, 72-73, 78 (2013) (holding that neither the New Jersey domicile of a
deceased testator nor the New Jersey business interests of several corporations in
which the testamentary trust held stock justified New Jersey’s taxation of
“undistributed income from sources outside New Jersey” pursuant to the due process
minimum contacts standard), aff’d per curiam, 28 N.J. Tax 541 (2015); T. Ryan Legg
Irrevocable Tr. v. Testa, 149 Ohio St. 3d 376, 2016-Ohio-8418, 75 N.E.3d 184, at ¶ 68
(2016) (applying Quill and holding that a tax assessment by Ohio against a Delaware
trust did not violate due process when the trust was created by an Ohio resident to
dispose of his interest in a corporation that “conducted business in significant part in
Ohio” and the settlor’s “Ohio contacts [were] still material for constitutional
purposes”), cert. denied, ___ U.S. ___, 138 S. Ct. 222 (2017).
McCulloch, on the other hand, was decided before Quill Corporation, and
therefore has a limited ability to inform our application of the Court’s due process
analysis in Quill. Moreover, we find McCulloch to be factually distinguished from
the present case because the taxed entity in that case was both a beneficiary and a
trustee of the trust and also resided in the taxing jurisdiction. Indeed, in holding that
the taxes at issue did not violate due process, the Court in McCulloch particularly
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relied on the fact that the trustee was a domiciliary of the taxing jurisdiction. See
McCulloch, 61 Cal. 2d at 194, 390 P.2d at 418. However, that circumstance is not
present in this case.
As an alternative to its argument that due process was satisfied based on the
North Carolina residence of the beneficiaries, defendant also presents the theory that
taxation satisfied due process here because plaintiff “reached out to North Carolina
by purposefully taking on a long-term relationship with the trust’s beneficiaries, even
though the trustees . . . never entered the state.” In support, defendant notes that
Bernstein restructured the original trust for Kaestner’s benefit, regularly
communicated with her about management of plaintiff, and directed a loan to
Kaestner from plaintiff’s assets—all actions that, according to defendant, indicated
that plaintiff would have a continuing relationship with Kaestner while she was in
North Carolina.
This argument stems from misapprehension of both the facts and law relevant
to this case. The undisputed evidence in the record shows that contact between
Bernstein and Kaestner regarding administration of the trust was infrequent—
consisting of only two meetings during the tax years in question, both of which
occurred in New York. Any connection between plaintiff and North Carolina based
on the loan is also irrelevant given that the loan was issued in January 2009, after
the tax years at issue. Additionally, the United States Supreme Court has directed
that “ ‘minimum contacts’ analysis looks to the defendant's contacts with the forum
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State itself, not the defendant's contacts with persons who reside there.” Walden, ___
U.S. at ___, 134 S. Ct. at 1122 (citations omitted). As we have already stated, for due
process purposes plaintiff, as a separate legal entity in the context of taxation, would
have needed to purposefully avail itself of the benefits and protections offered by the
State. See Quill, 504 U.S. at 306-07, 112 S. Ct. at 1909-10. Mere contact with a North
Carolina beneficiary does not suffice.
For taxation of a foreign trust to satisfy the due process guarantee of the
Fourteenth Amendment and the similar pledge in Article I, Section 19 of our state
constitution, the trust must have some minimum contacts with the State of North
Carolina such that the trust enjoys the benefits and protections of the State. When,
as here, the income of a foreign trust is subject to taxation solely based on its
beneficiaries’ availing themselves of the benefits of our economy and the protections
afforded by our laws, those guarantees are violated. Therefore, we hold that N.C.G.S.
§ 105-160.2 is unconstitutional as applied to collect income taxes from plaintiff for tax
years 2005 through 2008. Accordingly, we affirm the decision of the Court of Appeals
that affirmed the Business Court’s order granting summary judgment for plaintiff
and directed that defendant refund to plaintiff any taxes paid by plaintiff pursuant
to section 105-160.2 for tax years 2005 through 2008.
AFFIRMED.
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Ervin, J., dissenting
Justice ERVIN dissenting.
As the majority correctly indicates, the proper resolution of this case hinges
upon the extent, if any, to which the taxpayer had sufficient minimum contacts with
North Carolina to satisfy federal due process requirements. Although we are
required to make what I believe to be a close call in this case, I feel compelled to
conclude, after careful scrutiny of the record in light of the applicable relevant legal
standard, that taxpayer “purposefully avail[ed] itself of the benefits of an economic
market” in North Carolina despite having “no physical presence in the State.” Quill
Corp. v. North Dakota, 504 U.S. 298, 307, 112 S. Ct. 1904, 1910, 119 L. Ed. 2d 91,
102-03 (1992) (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476, 105 S. Ct.
2174, 2184, 85 L. Ed. 2d 528, 543 (1985)). As a result, I respectfully dissent from my
colleagues’ decision.
According to the undisputed facts contained in the record as identified by the
trial court, Joseph Lee Rice, III, established the Rice Family 1992 Trust for the
benefit of his children in 1992. The Family Trust was created in New York, with the
trust instrument providing that the Family Trust was to be governed by New York
law. In 2005, David Bernstein, a resident of Connecticut, was appointed trustee of
the Family Trust and continued to act in that capacity throughout the time period at
issue in this case. In 2006, Mr. Bernstein, physically divided the Family Trust into
three trusts, one of which, plaintiff Kimberly Rice Kaestner 1992 Family Trust, was
intended to benefit Kimberly Rice Kaestner and her three children, “all of whom were
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Ervin, J., dissenting
residents and domiciliaries of North Carolina in the tax years at issue.” Mr.
Bernstein served as the trustee of the Kaestner Trust following the division of the
Family Trust into its three constituent parts.
Throughout the entire interval from 2005 through 2008, which are the tax
years at issue in this case, the documents related to the Kaestner Trust were kept in
New York, while the custodian of the Kaestner Trust’s assets was located in Boston,
Massachusetts. No distributions were made to any beneficiary of the Kaestner Trust
during the 2005 through 2008 tax years. During the period from 2005 through 2008,
Mr. Bernstein communicated with Ms. Kaestner regarding the Kaestner Trust and
provided her with accountings relating to the Kaestner Trust covering the periods
from 22 December 2005 through 31 December 2006 and 23 June 2006 through 8
October 2009. In addition, Mr. Bernstein and the law firm with which he was
affiliated provided Ms. Kaestner with legal advice regarding matters relating to the
Kaestner Trust.
As the entire Court appears to agree, the resolution of this case hinges upon a
proper understanding of the decision of the United States Supreme Court in Quill,
which involved a Delaware corporation that sold office equipment and had physical
offices and warehouses in Illinois, California, and Georgia. Quill, 504 U.S. at 302,
112 S. Ct. at 1907, 119 L. Ed. at 100. Quill solicited business by using catalogs, flyers,
and telephone calls and placing advertisements in national periodicals. Id. at 302,
112 S. Ct. at 1907, 119 L. Ed. at 100. As a result of its business activities, Quill had
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Ervin, J., dissenting
about 3,000 customers and made $1 million in sales in North Dakota during the
relevant period. Id. at 302, 112 S. Ct. at 1908, 119 L. Ed. at 100. A North Dakota
statute provided that retailers, including mail-order companies, were subject to a use
tax “even if they maintain no property or personnel in North Dakota.” Id. at 303, 112
S. Ct. at 1908, 119 L. Ed. at 100. The State argued that, despite Quill’s lack of a
physical presence within North Dakota, the State “had created ‘an economic climate
that fosters demand for’ Quill’s products, maintained a legal infrastructure that
protected that market, and disposed of 24 tons of catalogs and flyers mailed by Quill
into the State every year.” Id. at 304, 112 S. Ct. at 1908-09, 119 L. Ed. at 101.
According to the United States Supreme Court, “[t]he Due Process Clause
‘requires some definite link, some minimum connection, between a state and the
person, property or transaction it seeks to tax’ and that the ‘income attributed to the
State for tax purposes must be rationally related to values connected with the taxing
State.’ ”1 Id. at 306, 112 S. Ct. at 1909-10, 119 L. Ed. 2d at 102 (first quoting Miller
Bros. Co. v. Maryland, 347 U.S. 340, 344-45, 74 S. Ct. 535, 539, 98 L. Ed. 744 (1954);
then quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273, 98 S. Ct. 2340, 2344, 57
L. Ed. 2d 197 (1978)). As the United States Supreme Court noted, it has “abandoned
more formalistic tests that focused on [an entity’s] ‘presence’ within a State in favor
of a more flexible inquiry into . . . [an entity’s] contacts with the forum.” Id. at 307,
1The extent to which the second prong of the due process analysis has been satisfied
does not appear to be before us in this case at this time.
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Ervin, J., dissenting
112 S. Ct. at 1910, 119 L. Ed. 2d at 102 (citing, inter alia, Int’l Shoe Co. v. Washington,
326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95 (1945)). “Applying these principles, we have
held that if a foreign [entity] purposefully avails itself of the benefits of an economic
market in the forum State, it may subject itself to the State’s” collection of taxes “even
if it has no physical presence in the State.” Id. at 307, 112 S. Ct. at 1910, 119 L. Ed.
2d at 103 (citing Burger King Corp., 471 U.S. 462, 105 S. Ct. 2174, 85 L. Ed. 2d 528).
As a result, given that Quill had “purposefully directed its activities at North Dakota
residents,” its contacts with North Dakota were “more than sufficient for due process
purposes.” Id. at 308, 112 S. Ct. at 1911, 119 L. Ed. 2d at 104.
The parties have spent considerable time and effort debating the extent, if any,
to which the fact that the beneficiaries of the Kaestner Trust resided in North
Carolina during the relevant tax years has any bearing on the required due process
analysis. In reaching the conclusion that the residence of the beneficiaries has no
bearing upon the proper resolution of this case, my colleagues have deemed Chase
Manhattan Bank v. Gavin, 249 Conn. 172, 733 A.2d 782, cert. denied, 528 U.S. 965,
120 S. Ct. 401, 145 L. Ed. 2d 312 (1999), and McCulloch v. Franchise Tax Board, 61
Cal. 2d 186, 390 P.2d 412 (1964), to be essentially irrelevant. I am not inclined to
completely disregard either of those decisions, which, to the best of my knowledge,
appear to be the only cases decided by state courts of last resort to address the
question that is before us in this case, while recognizing that there are distinguishing
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Ervin, J., dissenting
features which may serve to render them somewhat less persuasive than they might
otherwise be.
Admittedly, the assertion of taxing authority over the inter vivos trust at issue
in Gavin arose from a situation in which “the settlor of the trust was a Connecticut
domiciliary when the trust was established and the beneficiary is a Connecticut
domiciliary.” Gavin, 249 Conn. at 183, 733 A.2d at 790. However, in upholding the
taxability of the undistributed income held in an inter vivos trust, the Connecticut
Supreme Court specifically stated that, “just as the state may tax the undistributed
income of a trust based on the presence of the trustee in the state because it gives the
trustee the protection and benefits of its laws,” “it may tax the same income based on
the domicile of the sole noncontingent beneficiary because it gives her the same
protections and benefits.” Id. at 205, 733 A.2d at 802. As a result, the Connecticut
Supreme Court’s decision with respect to the taxability of the undistributed income
held in the inter vivos trust appears to me to hinge upon the residence of the
beneficiary rather than the fact that the settlor had been a resident of Connecticut at
the time that the inter vivos trust had been created.
I am loath to completely disregard McCulloch for similar reasons. Although
the beneficiary of the trust at issue in McCulloch also served as one of the trustees,
the California Supreme Court’s analysis in that case clearly relies upon the status of
the person in question as a beneficiary rather than upon his status as a trustee, with
this fact being evidenced by the California Supreme Court’s statement that “the
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Ervin, J., dissenting
beneficiary’s state of residence may properly tax the trust on income which is payable
in the future to the beneficiary, although it is actually retained by the trust, since
that state renders to the beneficiary that protection incident to his eventual
enjoyment of such accumulated income.” McCulloch, 61 Cal. 2d at 196, 390 P.2d at
419 (emphasis omitted). Similarly, while McCulloch antedates Quill and Burger
King, the logic utilized by the California Supreme Court appears to me to rest upon
the same considerations that underlie the United States Supreme Court’s modern
due process jurisprudence. For example, the California Supreme Court states that
“[t]he tax imposed by California upon the beneficiary is constitutionally supported by
a sufficient connection with, and protection afforded to, plaintiff as such beneficiary.”
Id. at 196, 390 P.2d at 419. As a result, I am unable to agree with my colleagues’
determination that neither Gavin nor McCulloch has any bearing upon the proper
resolution of this case and am inclined to be persuaded by their logic to believe that,
while not dispositive, the presence of the beneficiaries of the Kaestner Trust in North
Carolina has some bearing on the proper performance of the required due process
analysis.
I also cannot concur in the argument adopted by the Court of Appeals to the
effect that the United States Supreme Court has already made our decision for us in
Brooke v. City of Norfolk, 277 U.S. 27, 48 S. Ct. 422, 72 L. Ed. 767 (1928). Although
Brooke has not been overruled, it antedates Quill and Burger King and rests upon
the sort of formalistic, presence-focused approach that the United States Supreme
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Ervin, J., dissenting
Court rejected in those cases in favor of a less rigid “minimum connections” approach.
See Quill, 504 U.S. 298, 112 S. Ct. 1904, 119 L. Ed. 2d 91; Burger King, 471 U.S. 462,
105 S. Ct. 2174, 85 L. Ed. 2d 528. In addition, Brooke involved an attempt by one
state to tax a trust corpus held in another state, which is a very different undertaking
than an attempt to tax the undistributed income of a non-North Carolina trust that
is held for the benefit of a North Carolina resident.2 The same logic renders the
Kaestner Trust’s reliance upon the decision of the United States Supreme Court in
Safe Deposit & Trust Co. of Baltimore v. Commonwealth of Virginia, 280 U.S. 83, 50
S. Ct. 59, 74 L. Ed. 180 (1929), which involved an attempt to tax the corpus, rather
than the undistributed income, of a non-jurisdictional trust based upon the existence
of a resident beneficiary that the Court rejected on the basis of a pre-Quill method of
analysis, unpersuasive. As a result, neither of these cases supports, much less
compels, a decision in the Kaestner Trust’s favor. Instead, my review of the decisions
cited by both parties compels me to conclude that the only way to properly resolve
this case involves reliance upon a very fact-specific analysis of the extent, if any, to
which the Kaestner Trust “purposefully avail[ed] itself of the benefits of an economic
market in the forum State,” see Quill, 504 U.S. at 307, 112 S. Ct. at 1910, 119 L. Ed.
2 Admittedly, this Court has not adopted the Court of Appeals’ treatment of Brooke
as dispositive in its opinion. Instead, the Court simply cites Brooke for the unexceptionable
proposition that “a trust and its beneficiary are legally independent entities.” For the reasons
set forth in the text of this dissenting opinion, I believe that a proper due process analysis
focused upon the activities of the Kaestner Trust in light of Ms. Kaestner’s residence suffices
to establish sufficient “minimum contacts” to support the Department of Revenue’s attempt
to tax the undistributed income applicable to Ms. Kaestner.
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Ervin, J., dissenting
2d at 103, with this analysis deeming the presence of the beneficiary in North
Carolina to be relevant, but not dispositive.
As the Supreme Court explained in Burger King,
it is an inescapable fact of modern commercial life that a
substantial amount of business is transacted solely by mail
and wire communications across state lines, thus obviating
the need for physical presence within a State in which
business is conducted. So long as a commercial actor’s
efforts are ‘purposefully directed’ toward residents of
another State, we have consistently rejected the notion
that an absence of physical contact can defeat personal
jurisdiction there.
471 U.S. at 476, 105 S. Ct. at 2184, 85 L. Ed. 2d at 544 (citations omitted). Although
the assets contained in the Kaestner Trust were held in Boston, and the relevant
documents were held in New York and although the trustee worked in New York and
resided in Connecticut during the tax years at issue in this case, “business [was]
transacted . . . by mail and wire communications across state lines,” including those
of North Carolina. See id. at 476, 105 S. Ct. at 2184, 85 L. Ed. 2d at 544. Among
other things, Ms. Kaestner was known to be a resident of North Carolina at the time
that the Kaestner Trust was created for her benefit. In addition, the trustee
transmitted information to Ms. Kaestner, provided advice to Ms. Kaestner, and
communicated with Ms. Kaestner in other ways with full knowledge of the fact that
she resided in North Carolina. The Kaestner Trust could not have successfully
carried out these functions in the absence of the benefits that North Carolina
provided to Ms. Kaestner during the time that she lived here. As a result, I am unable
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Ervin, J., dissenting
to conclude, given the applicable standard of review, that the Kaestner Trust lacked
sufficient contacts with North Carolina to permit the State to tax the undistributed
income held by the Kaestner Trust for Ms. Kaestner’s benefit. Therefore, I see no due
process violation. As a result, for all of these reasons, I respectfully dissent from my
colleagues’ decision to affirm the Court of Appeals’ decision.
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