Source: https://supreme.justia.com/cases/federal/us/588/18-457/
Timestamp: 2019-10-21 04:42:22
Document Index: 619760258

Matched Legal Cases: ['§1', '§1', '§1', '§1', '§1', '§5', '§1', '§10', '§17742', '§17742', 'art, 338', '§105']

North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust :: 588 U.S. ___ (2019) :: Justia US Supreme Court Center
Justia › US Law › US Case Law › US Supreme Court › Volume 588 › North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust
North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. ___ (2019)
Rice formed a trust for the benefit of his children in his home state, New York, and appointed a New York resident as the trustee. The trustee has “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kaestner, moved to North Carolina. The trustee later divided Rice’s initial trust into three subtrusts. North Carolina assessed a tax of $1.3 million for tax years 2005-2008 on the Kaestner Trust under a law authorizing the state to tax any trust income that “is for the benefit of” a state resident. During that period, Kaestner had no right to and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in North Carolina. The trustee paid the tax under protest and then sued, citing the Due Process Clause.
A unanimous Supreme Court affirmed state court decisions in favor of the trustee. The presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. The Due Process Clause limits the states to imposing only taxes that “bea[r] fiscal relation to protection, opportunities and benefits given by the state.” When a state seeks to base its tax on the in-state residence of a trust beneficiary, due process demands a pragmatic inquiry into what the beneficiary controls or possesses and how that interest relates to the object of the tax. The residence of the beneficiaries in North Carolina alone does not supply the minimum connection necessary to sustain the tax.
North Carolina is prohibited, under the Due Process Clause, from imposing a tax on trust income where the beneficiary had no right to and did not receive, any distributions; the trust had no physical presence, made no direct investments, and held no real property in North Carolina.
(a) The Due Process Clause limits States to imposing only taxes that “bea[r] fiscal relation to protection, opportunities and benefits given by the state.” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444. Compliance with the Clause’s demands “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 . . . be rationally related to “values connected with the taxing State,” ’ ” Quill Corp. v. North Dakota, 504 U.S. 298, 306. That “minimum connection” inquiry is “flexible” and focuses on the reasonableness of the government’s action. Id., at 307. Pp. 5–6.
(b) In the trust beneficiary context, the Court’s due process analysis of state trust taxes focuses on the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets. Cases such as Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83; Brooke v. Norfolk, 277 U.S. 27; and Maguire v. Trefry, 253 U.S. 12, reflect a common principle: When a State seeks to base its tax on the in-state residence of a trust beneficiary, the Due Process Clause demands a pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax. Safe Deposit, 280 U. S., at 91. Similar analysis also appears in the context of taxes premised on the in-state residency of settlors and trustees. See, e.g., Curry v. McCanless, 307 U.S. 357. Pp. 6–10.
In its simplest form, a trust is created when one person (a “settlor” or “grantor”) transfers property to a third party (a “trustee”) to administer for the benefit of another (a “beneficiary”). A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees §1, pp. 8–10 (3d ed. 2007). As traditionally understood, the arrangement that results is not a “distinct legal entity, but a ‘fiduciary relationship’ between multiple people.” Americold Realty Trust v. ConAgra Foods, Inc., 577 U. S. ___, ___ (2016) (slip op., at 5). The trust comprises the separate interests of the beneficiary, who has an “equitable interest” in the trust property, and the trustee, who has a “legal interest” in that property. Greenough v. Tax Assessors of Newport, 331 U.S. 486, 494 (1947). In some contexts, however, trusts can be treated as if the trust itself has “a separate existence” from its constituent parts. Id., at 493.[1]
The trust that challenges North Carolina’s tax had its first incarnation nearly 30 years ago, when New Yorker Joseph Lee Rice III formed a trust for the benefit of his children. Rice decided that the trust would be governed by the law of his home State, New York, and he appointed a fellow New York resident as the trustee.[2] The trust agreement provided that the trustee would have “absolute discretion” to distribute the trust’s assets to the beneficiaries “in such amounts and proportions” as the trustee might “from time to time” decide. Art. I, §1.2(a), App. 46–47.
North Carolina explained in the state-court proceedings that the State’s only connection to the Trust in the relevant tax years was the in-state residence of the Trust’s beneficiaries. App. to Pet. for Cert. 54a. From 2005 through 2008, the trustee chose not to distribute any of the income that the Trust accumulated to Kaestner or her children, and the trustee’s contacts with Kaestner were “infrequent.”[3] 371 N. C. 133, 143, 814 S.E.2d 43, 50 (2018). The Trust was subject to New York law, Art. X, App. 69, the grantor was a New York resident, App. 44, and no trustee lived in North Carolina, 371 N. C., at 134, 814 S. E. 2d, at 45. The trustee kept the Trust documents and records in New York, and the Trust asset custodians were located in Massachusetts. Ibid. The Trust also maintained no physical presence in North Carolina, made no direct investments in the State, and held no real property there. App. to Pet. for Cert. 52a–53a.
The trial court decided that the Kaestners’ residence in North Carolina was too tenuous a link between the State and the Trust to support the tax and held that the State’s taxation of the Trust violated the Due Process Clause. App. to Pet. for Cert. 62a.[4] The North Carolina Court of Appeals affirmed, as did the North Carolina Supreme Court. A majority of the State Supreme Court reasoned that the Kaestner Trust and its beneficiaries “have legally separate, taxable existences” and thus that the contacts between the Kaestner family and their home State cannot establish a connection between the Trust “itself” and the State. 371 N. C., at 140–142, 814 S. E. 2d, at 49.
The Due Process Clause provides that “[n]o State shall . . . deprive any person of life, liberty, or property, without due process of law.” Amdt. 14, §1. The Clause “centrally concerns the fundamental fairness of governmental activ- ity.” Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992), overruled on other grounds, South Dakota v. Wayfair, Inc., 585 U. S. ___, ___ (2018) (slip op., at 10).
In the context of state taxation, the Due Process Clause limits States to imposing only taxes that “bea[r] fiscal relation to protection, opportunities and benefits given by the state.” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 (1940). The power to tax is, of course, “essential to the very existence of government,” McCulloch v. Maryland, 4 Wheat. 316, 428 (1819), but the legitimacy of that power requires drawing a line between taxation and mere unjustified “confiscation.” Miller Brothers Co. v. Maryland, 347 U.S. 340, 342 (1954). That boundary turns on the “[t]he simple but controlling question . . . whether the state has given anything for which it can ask return.” Wisconsin, 311 U. S., at 444.
The Court applies a two-step analysis to decide if a state tax abides by the Due Process Clause. First, and most relevant here, there must be “ ‘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. Second, “the ‘income attributed to the State for tax purposes must be rationally related to “values connected with the taxing State.” ’ ” Ibid.[5]
To determine whether a State has the requisite “minimum connection” with the object of its tax, this Court borrows from the familiar test of International Shoe Co. v. Washington, 326 U.S. 310 (1945). Quill, 504 U. S., at 307. A State has the power to impose a tax only when the taxed entity has “certain minimum contacts” with the State such that the tax “does not offend ‘traditional notions of fair play and substantial justice.’ ” International Shoe Co., 326 U. S., at 316; see Quill, 504 U. S., at 308. The “minimum contacts” inquiry is “flexible” and focuses on the reason- ableness of the government’s action. Quill, 504 U. S., at 307. Ultimately, only those who derive “benefits and protection” from associating with a State should have obligations to the State in question. International Shoe, 326 U. S., at 319.
One can imagine many contacts with a trust or its constituents that a State might treat, alone or in combination, as providing a “minimum connection” that justifies a tax on trust assets. The Court has already held that a tax on trust income distributed to an in-state resident passes muster under the Due Process Clause. Maguire v. Trefry, 253 U.S. 12, 16–17 (1920). So does a tax based on a trustee’s in-state residence. Greenough, 331 U. S., at 498. The Court’s cases also suggest that a tax based on the site of trust administration is constitutional. See Hanson v. Denckla, 357 U.S. 235, 251 (1958); Curry v. McCanless, 307 U.S. 357, 370 (1939).
The Court’s emphasis on these factors emerged in two early cases, Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83 (1929), and Brooke v. Norfolk, 277 U.S. 27 (1928), both of which invalidated state taxes premised on the in-state residency of beneficiaries. In each case the challenged tax fell on the entirety of a trust’s property, rather than on only the share of trust assets to which the beneficiaries were entitled. Safe Deposit, 280 U. S., at 90, 92; Brooke, 277 U. S., at 28. In Safe Deposit, the Court rejected Virginia’s attempt to tax a trustee on the “whole corpus of the trust estate,” 280 U. S., at 90; see id., at 93, explaining that “nobody within Virginia ha[d] present right to [the trust property’s] control or possession, or to receive income therefrom,” id., at 91. In Brooke, the Court rejected a tax on the entirety of a trust fund assessed against a resident beneficiary because the trust property “[wa]s not within the State, d[id] not belong to the [beneficiary] and [wa]s not within her possession or control.” 277 U. S., at 29.[6]
On the other hand, the same elements of possession, control, and enjoyment of trust property led the Court to uphold state taxes based on the in-state residency of beneficiaries who did have close ties to the taxed trust assets. The Court has decided that States may tax trust income that is actually distributed to an in-state beneficiary. In those circumstances, the beneficiary “own[s] and enjoy[s]” an interest in the trust property, and the State can exact a tax in exchange for offering the beneficiary protection. Maguire, 253 U. S., at 17; see also Guaranty Trust Co. v. Virginia, 305 U.S. 19, 21–23 (1938).
Although the Court’s resident-beneficiary cases are most relevant here, similar analysis also appears in the context of taxes premised on the in-state residency of settlors and trustees. In Curry, for instance, the Court upheld a Tennessee trust tax because the settlor was a Tennessee resident who retained “power to dispose of” the property, which amounted to “a potential source of wealth which was property in her hands.” 307 U. S., at 370. That practical control over the trust assets obliged the settlor “to contribute to the support of the government whose protection she enjoyed.” Id., at 371; see also Graves v. Elliott, 307 U.S. 383, 387 (1939) (a settlor’s “right to revoke [a] trust and to demand the transmission to her of the intangibles . . . was a potential source of wealth” subject to tax by her State of residence).[7]
In sum, when assessing a state tax premised on the in-state residency of a constituent of a trust—whether beneficiary, settlor, or trustee—the Due Process Clause demands attention to the particular relationship between the resident and the trust assets that the State seeks to tax. Because each individual fulfills different functions in the creation and continuation of the trust, the specific features of that relationship sufficient to sustain a tax may vary depending on whether the resident is a settlor, beneficiary, or trustee. When a tax is premised on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset. Cf. Safe Deposit, 280 U. S., at 91–92.[8] Otherwise, the State’s relationship to the object of its tax is too attenuated to create the “minimum connection” that the Constitution requires. See Quill, 504 U. S., at 306.
Second, the beneficiaries had no right to demand trust income or otherwise control, possess, or enjoy the trust assets in the tax years at issue. The decision of when, whether, and to whom the trustee would distribute the trust’s assets was left to the trustee’s “absolute discretion.” Art. I, §1.2(a), App. 46–47. In fact, the Trust agreement explicitly authorized the trustee to distribute funds to one beneficiary to “the exclusion of other[s],” with the effect of cutting one or more beneficiaries out of the Trust. Art. I, §1.4, id., at 50. The agreement also authorized the trustee, not the beneficiaries, to make investment decisions regarding Trust property. Art. V, §5.2, id., at 55–60. The Trust agreement prohibited the beneficiaries from assigning to another person any right they might have to the Trust property, Art. XII, id., at 70–71, thus making the beneficiaries’ interest less like “a potential source of wealth [that] was property in [their] hands.” Curry, 307 U. S., at 370–371.[9]
Third, not only were Kaestner and her children unable to demand distributions in the tax years at issue, but they also could not count on necessarily receiving any specific amount of income from the Trust in the future. Although the Trust agreement provided for the Trust to terminate in 2009 (on Kaestner’s 40th birthday) and to distribute assets to Kaestner, Art. I, §1.2(c)(1), App. 47, New York law allowed the trustee to roll over the trust assets into a new trust rather than terminating it. N. Y. Est., Powers & Trusts §10–6.6(b). Here, the trustee did just that. 371 N. C., at 135, 814 S. E. 2d, at 45.[10]
Like the beneficiaries in Safe Deposit, then, Kaestner and her children had no right to “control or posses[s]” the trust assets “or to receive income therefrom.” 280 U. S., at 91. The beneficiaries received no income from the Trust, had no right to demand income from the Trust, and had no assurance that they would eventually receive a specific share of Trust income. Given these features of the Trust, the beneficiaries’ residence cannot, consistent with due process, serve as the sole basis for North Carolina’s tax on trust income.[11]
First, the State interprets Greenough as standing for the broad proposition that “a trust and its constituents” are always “inextricably intertwined.” Brief for Petitioner 26. Because trustee residence supports state taxation, the State contends, so too must beneficiary residence. The State emphasizes that beneficiaries are essential to a trust and have an “equitable interest” in its assets. Greenough, 331 U. S., at 494. In Stone v. White, 301 U.S. 532 (1937), the State notes, the Court refused to “shut its eyes to the fact” that a suit to recover taxes from a trust was in reality a suit regarding “the beneficiary’s money.” Id., at 535. The State also argues that its tax is at least as fair as the tax in Greenough because the Trust benefits from North Carolina law by way of the beneficiaries, who enjoy secure banks to facilitate asset transfers and also partake of services (such as subsidized public education) that obviate the need to make distributions (for example, to fund beneficiaries’ educations). Brief for Petitioner 30–33.
Second, the State argues that ruling in favor of the Trust will undermine numerous state taxation regimes. Tr. of Oral Arg. 8, 68; Brief for Petitioner 6, and n. 1. Today’s ruling will have no such sweeping effect. North Carolina is one of a small handful of States that rely on beneficiary residency as a sole basis for trust taxation, and one of an even smaller number that will rely on the residency of beneficiaries regardless of whether the beneficiary is certain to receive trust assets.[12] Today’s decision does not address state laws that consider the in-state residency of a beneficiary as one of a combination of factors, that turn on the residency of a settlor, or that rely only on the residency of noncontingent beneficiaries, see, e.g., Cal. Rev. & Tax. Code Ann. §17742(a).[13] We express no opinion on the validity of such taxes.
1 Most notably, trusts are treated as distinct entities for federal taxation purposes. Greenough, 331 U. S., at 493; see Anderson v. Wilson, 289 U.S. 20, 26–27 (1933).
3 The state court identified only two meetings between Kaestner and the trustee in those years, both of which took place in New York. 371 N. C. 133, 143, 814 S.E.2d 43, 50 (2018). The trustee also gave Kaestner accountings of trust assets and legal advice concerning the Trust. Id., at 135, 814 S. E. 2d, at 45.
6 The State contends that Safe Deposit is no longer good law under the more flexible approach in International Shoe Co. v. Washington, 326 U.S. 310 (1945), and also because it was premised on the view, later disregarded in Curry v. McCanless, 307 U.S. 357, 363 (1939), that the Due Process Clause forbids “double taxation.” Brief for Petitioner 27–28, and n. 12. We disagree. The aspects of the case noted here are consistent with the pragmatic approach reflected in International Shoe, and Curry distinguished Safe Deposit not because the earlier case incorrectly relied on concerns of double taxation but because the beneficiaries there had “[n]o comparable right or power” to that of the settlor in Curry. 307 U. S., at 371, n. 6.
7 Though the Court did not have occasion in Curry or Graves to explore whether a lesser degree of control by a settlor also could sustain a tax by the settlor’s domicile (and we do not today address that possibility), these cases nevertheless reinforce the logic employed by Safe Deposit, Brooke v. Norfolk, 277 U.S. 27 (1928), Maguire v. Trefry, 253 U.S. 12 (1920), and Guaranty Trust Co. v. Virginia, 305 U.S. 19 (1938), in the beneficiary context.
10 In light of these features, one might characterize the interests of the beneficiaries as “contingent” on the exercise of the trustee’s discretion. See Fondren v. Commissioner, 324 U.S. 18, 21 (1945) (describing “the exercise of the trustee’s discretion” as an example of a contin-gency); see also United States v. O’Malley, 383 U.S. 627, 631 (1966) (de-scribing a grantor’s power to add income to the trust principal instead of distributing it and “thereby den[y] to the beneficiaries the privilege of immediate enjoyment and conditio[n] their eventual enjoyment upon surviving the termination of the trust”); Commissioner v. Estate of Holmes, 326 U.S. 480, 487 (1946) (the termination of a contingency changes “the mere prospect or possibility, even the probability, that one may have [enjoyment of property] at some uncertain future time or perhaps not at all” into a “present substantial benefit”). We have no occasion to address, and thus reserve for another day, whether a different result would follow if the beneficiaries were certain to receive funds in the future. See, e.g., Cal. Rev. & Tax. Code Ann. §17742(a) (West 2019); Commonwealth v. Stewart, 338 Pa. 9, 16–19, 12 A.2d 444, 448–449 (1940) (upholding a tax on the equitable interest of a beneficiary who had “a right to the income from [a] trust for life”), aff’d, 312 U.S. 649 (1941).
11 Because the reasoning above resolves this case in the Trust’s favor, it is unnecessary to reach the Trust’s broader argument that the trustee’s contacts alone determine the State’s power over the Trust. Brief for Respondent 23–30. The Trust relies for this proposition on Hanson v. Denckla, 357 U.S. 235 (1958), which held that a Florida court lacked jurisdiction to adjudicate the validity of a trust agreement even though the trust settlor and most of the trust beneficiaries were domiciled in Florida. Id., at 254. The problem was that Florida law made the trustee “an indispensable party over whom the court [had to] acquire jurisdiction” before resolving a trust’s validity, and the trustee was a nonresident. Ibid. In deciding that the Florida courts lacked jurisdiction over the proceeding, the Court rejected the relevance of the trust beneficiaries’ residence and focused instead on the “acts of the trustee” himself, which the Court found insufficient to support jurisdiction. Ibid. The State counters that Hanson is inapposite because the State’s tax applies to the trust rather than to the trustee and because Hanson arose in the context of adjudicative jurisdiction rather than tax jurisdiction. Brief for Petitioner 21, n. 9; Reply Brief 16–17. There is no need to resolve the parties’ dueling interpretations of Hanson. Even if beneficiary contacts—such as residence—could be sufficient in some circumstances to support North Carolina’s power to impose this tax, the residence alone of the Kaestner Trust beneficiaries cannot do so for the reasons given above.
States have broad discretion to structure their tax systems. But, in a few narrow areas, the Federal Constitution imposes limits on that power. See, e.g., McCulloch v. Maryland, 4 Wheat. 316 (1819); Comptroller of Treasury of Md. v. Wynne, 575 U. S. ___ (2015). The Due Process Clause creates one such limit. It imposes restrictions on the persons and property that a State can subject to its taxation authority. “The Due Process Clause ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ ” Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992) (quoting Miller Brothers Co. v. Maryland, 347 U.S. 340, 344–345 (1954)), overruled in part on other grounds by South Dakota v. Wayfair, Inc., 585 U. S. ___ (2018). North Carolina assesses this tax against the trustee and calculates the tax based on the income earned by the trust. N. C. Gen. Stat. Ann. §105–160.2 (2017). Therefore we must look at the connections between the assets held in trust and the State.
It is easy to identify a State’s connection with tangible assets. A tangible asset has a connection with the State in which it is located, and generally speaking, only that State has power to tax the asset. Curry v. McCanless, 307 U.S. 357, 364–365 (1939). Intangible assets—stocks, bonds, or other securities, for example—present a more difficult question.
In the case of intangible assets held in trust, we have previously asked whether a resident of the State imposing the tax has control, possession, or the enjoyment of the asset. See Greenough v. Tax Assessors of Newport, 331 U.S. 486, 493–495 (1947); Curry, supra, at 370–371; Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83, 93–94 (1929); Brooke v. Norfolk, 277 U.S. 27, 28–29 (1928). Because a trustee is the legal owner of the trust assets and possesses the powers that accompany that status—power to manage the investments, to make and enforce contracts respecting the assets, to litigate on behalf of the trust, etc.—the trustee’s State of residence can tax the trust’s intangible assets. Greenough, supra, at 494, 498. Here, we are asked whether the connection between a beneficiary and a trust is sufficient to allow the beneficiary’s State of residence to tax the trust assets and the income they earn while the assets and income remain in the trust in another State. Two cases provide a clear answer.
In Safe Deposit, Virginia again attempted to assess taxes on the intangible assets held in a trust whose trustee resided in Maryland. The beneficiaries were children who lived in Virginia. Under the terms of the trust, each child was entitled to one half of the trust’s assets (both the original principal and the income earned over time) when the child reached the age of 25. Despite their entitlement to the entire corpus of the trust, the Court held that the beneficiaries’ residence did not allow Virginia to tax the assets while they remained in trust. “[N]obody within Virginia has present right to [the assets’] control or possession, or to receive income therefrom, or to cause them to be brought physically within her borders.” 280 U. S., at 91.[1]* The beneficiaries’ equitable ownership of the trust did not sufficiently connect the undistributed assets to Virginia as to allow taxation of the trust. The beneficiaries’ equitable ownership yielded to the “established fact of legal ownership, actual presence and control elsewhere.” Id., at 92.
1 *Although the Court noted that no Virginian had a present right “to receive income therefrom,” Brooke—where the beneficiary was entitled to and received income from the trust—suggests that even if the children had such a right, it would not, alone, justify taxing the trust corpus.