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 a n opinion and order of summary judgment dated 2 3 April 201 5 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. Bloo mfield, 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 L aw 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 thatK AESTNER 1992 F AMILY T R
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Opinion of the Court

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- plaintiff did not have sufficient minimum contact s with the State of North Carolina to satisfy due process requirements of the Fourteenth Amendment to the United States Constitution and A rticl e I, S ection 19 of the Constitution of North Carolina , we conclude that the taxes at issue were collected unconstitutionally and, therefore, affirm the decisi on of the Court of Appeals affirming the North Carolina Business Court’s 23 April 2015 Opinion and Order on Motion s 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, W illiam B. Matteson. In 2005 Matteson was replaced as tr ustee 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 Carolin a 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 d ivided into three separate trusts in 2006 by Bernstein for administrativeK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 v arious financial investments, and the custodian s of those assets were located in Boston, Massachusetts. D ocuments 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 distribution s 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; h owever, in January 200 9 , 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, Kaes tner 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 accordin gly, Bernstein transferred the assets ofK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 accounting s of trust assets, and she received legal advice regarding plaintiff from Bernstein and his firm. Ka estner and her husband also met with Bern stein 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 taxe d plaintiff on income accumulated each year, regardless of whether any of that income was distributed to any of the N orth 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 r equest on 11 February 2011.

On 21 June 2012, plaintiff filed a complaint in Superior Court, Wake County, alleging that defend ant 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 pursua nt to section 105

- 160.2 violate the Due Process Clause because plaintiff did not have sufficient minimum contacts with the State of Nor th Carolina. Plaintiff also claimed that the taxes violate the Commerce Clause on several grounds,K AESTNER 1992 F AMILY T R
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Opinion of the Court

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- including that the tax was not applied to an activity with a substantial nexus to the taxing state. P laintiff claimed that consequently, the tax also viola ted Article I, S ection 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 p laintiff 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 20 06. 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) , t his 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 a s to plai ntiff’ s constitutional claims.

Relevant to this appeal, plaintiff filed a motion for summary judgment on its constitutional clai ms on 8 July 2014 , and defendant filed its own motion for summary judgment on 4 September 2014. In its Opinion and O rder on M otions 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 for um state” for the tax to satisfyK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 its elf of the benefits of the taxing state b ased 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 f

or the benefit of a resident of this State,” N.C.G.S. § 105

- 160.2 (2005 ), violated both the Due Process Clause an d Article I, S ect ion 19 of the state constitution as applied to plaintiff

. Applying the four

- prong ed 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 T ransit, 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 m otion for summary judgment, granted plaintiff’s motion for summary judgment, and ordered that any taxes and penalties paid by plaintiff pursuant to section 105

- 16 0.2 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

. Kaes tner 1992K AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 i t 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 Fami ly 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 s atisfy 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 withK AESTNER 1992 F AMILY T R
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Opinion of the Court

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- North Carolina thro ugh 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 th e de novo standard of

re view, the [ Court ] ‘ consider [ s ] the matter anew [ ] and freely [substitut es ] its own judgment for ’ [ that of the lower court ] .” Midrex Tech s., 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 rend ered 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 th e 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 actK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 collecte d 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 consider ing an as

- applied challenge to the constitutionality of a sta tute, 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 conf lict 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)).K AESTNER 1992 F AMILY T R
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Opinion of the Court

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- T he Fourteenth Amendment directs that no S tate 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 Amen dment 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 constitution al 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 Bro s . 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 (citin g Int ’ l Shoe Co. v. Washington , 326 U.S. 310, 316, 66 S. Ct. 154, 158 (1945)), exists whenK AESTNER 1992 F AMILY T R
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Opinion of the Court

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- the taxed entity “purposefully avails itself of the benefits of an economic ma rket” in the taxing state “even if it has no physical presence in the State,” i d. at 30 7, 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 phys ical 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 ho ld 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 be ne fits 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 s tate by mail or common carriers, i d. at 302, 112 S. Ct. at 190 7

- 08

.
We have similarly determined that a finding of minimum contact s 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 o f 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 , 285K AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 contact s 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 Rev enue 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 incom e is separately attributed. Any tax on that income is phys ically 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 conflate s the income o f the trust with the income of a benefi ciary.

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). AlthoughK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 Co urt also recognized that a trust and its beneficiary are legally independent entities when it observed that th e p roperty held by the trust “is not within the State, does not belon g to the [beneficiary] and is not within her possessio n

o r control. The asse ssment is a bare pr oposition to make the [beneficiary] pay upon an intere st to which she is a strange r, ” Brooke , 277 U.S. at 29, 48 S. Ct. at 422

. That plaintiff and its North Caro lina beneficiaries have legally separate , taxable existences is critical to the outcome here because a taxed entity’s minimum
contact s with the taxing state can not 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 plain tiff and plaintiff’s beneficiaries are separate legal entities, due process

was not satisfied solely from the benefi ciaries’ co ntacts with North Carolina.K AESTNER 1992 F AMILY T R
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Opinion of the Court

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- Defendant challenges this conclusion by citing to two decisions in which foreign jurisdictions allegedly reached the opposite result

. T he Supreme Court of Connecticut held that t axation of an inter vivos trust did not violate due p rocess because the beneficiary of the trust was a Connecticut domiciliar y . 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). Descr ibing the domicile of the beneficiary as the “critical link,” t he 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 ac cumulated 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

. The refore, 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 be nefits. Id. at 205, 733 A.2d at 802 (internal citation omitted)

. D efendant 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 payab le 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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Opinion of the Court

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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 an d 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 st ate. 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 her e in the context of deciding whether ta xation of a given trust violated due process

. See Linn v. Dep’t of Revenue , 20 13 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) ;K AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 proce ss); Residuary Tr. A v. Director, Div. of Taxation , 27 N.J. Tax 68, 72

- 73, 78 (2013) (holding that ne ither 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

“ undistribute d income from sources outside New Jersey ” pursuant to the due process minimum c ontacts 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 no t 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”) , cer t. 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 inf orm 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 , t he Court in McCulloch particularlyK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 Carol ina 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 lo ng - term relationship with the trust’s beneficiaries, even though the tru stees .

. . never entered the s tate.” In support, defendant notes that Bernstein restructured the original trust for Kaestner’s benefit, regularly communicated with her about manageme nt 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 wh ile she was in North Carolina.
This argument stems from misap prehension 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 i n 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 forumK AESTNER 1992 F AMILY T R
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Opinion of the Court

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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 p laintiff, as a separate legal entity in the context of taxation , would have needed to purposefully avail itself of the benefits and protections offered by th e S tate. See Quill , 504 U.S. at 306

- 07 , 112 S. Ct. at 1909

- 10

. Mere contact wit h 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 pledg e in A rticle I, S ection 19 of our state constitution , th e trust must have some minimum contact s with the State of North Carolina such that the trust enjoys the benefits and protections of the S tate. When, as here, the income of a foreign trust is subject to taxation solely based on its beneficiaries’ availing themselves of the benefit s of our economy and the protection s 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 throug h 2008. Accordingly, we affirm the decision of the Court of Appeals that affirmed the Business Court’s order granting summary judg ment 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.K AESTNER 1992 F AMILY T R
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Ervin, J., dissenting

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- 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 t o 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 fro m 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 Ne w 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 w hom wereK AESTNER 1992 F AMILY T R
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- 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 2 005 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 phys ical 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 hadK AESTNER 1992 F AMILY T R
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- 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 Nort h 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 30 3 , 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, propert y or transaction it seeks to tax’ and that the ‘income attributed to the State for tax purposes must be rationall y 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

. C o. 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,

1 The 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.K AESTNER 1992 F AMILY T R
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- 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 10 3 (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
pu rposes.” 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 ta x 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 decisi ons, 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 distinguishingK AESTNER 1992 F AMILY T R
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- features which may serve to render them some what 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 establi shed 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 b eneficiary 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, wit h this fact being evidenced by the California Supreme Court’s statement that “theK AESTNER 1992 F AMILY T R
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- 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 Calif ornia 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 ne ither 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 bear ing 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 , 2 77 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 SupremeK AESTNER 1992 F AMILY T R
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- 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 on e 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 support s , much less compel s , 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 wh ich 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.K AESTNER 1992 F AMILY T R
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- 2d at 103, with this analysis deeming the presence of the beneficiary in North Carol ina 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 line s , 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 phys ical 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 a nd 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 No rth Carolina provided to Ms. Kaestner during the time that she lived here. As a result, I am unableK AESTNER 1992 F AMILY T R
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- 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.