Jul 11, 2016
From KPMG TaxWatch
Recently, a North Carolina appeals court held that the Department of Revenue could not tax an out-of-state trust solely on the basis that one of the beneficiaries resided in the state. The trust at issue was formed under the laws of New York. The trust never owned property in North Carolina or held North Carolina investments. No records were kept in North Carolina and the trust was, at all times, administered from out-of-state. For the tax years at issue, one of the named beneficiaries was a resident of North Carolina; however, there were no distributions made to this beneficiary during the relevant tax years. The trust paid taxes on income accumulated by the trust, but not distributed to the North Carolina beneficiary. Later, the trust filed amended returns requesting a refund of tax paid. The refund was denied and, after the trial court ruled that the imposition of the tax was unconstitutional, the Department appealed.
Before the appeals court, the Department argued that because the residence of the beneficiary was in North Carolina, this was sufficient to satisfy the minimum contacts criteria of the Due Process Clause. Representatives of the trust, on the other hand, asserted that the Department's position conflated what the law recognizes as separate legal entities—the trust and the beneficiary, and the imposition of tax on the out-of-state trust offended due process. The court determined that the issue before it was governed by a controlling 1928 U.S. Supreme Court case in which the court held that the subjecting the corpus of a trust to Virginia taxes when the trust property was at all times out-of-state violated the Fourteenth Amendment. Based on this holding, the court concluded that the connection between North Carolina and the trust was insufficient to satisfy the requirements of due process. Please contact Nikki Emanuel at 704.335.5344 with questions on Kimberly Rice Kaestner 1992 Family Trust v. Dep't of Revenue.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.