Supremes Nix NC Tax on Out-of-Stater’s Trust

The Supreme Court is seen in Washington on June 17, 2019. (AP Photo/J. Scott Applewhite)

WASHINGTON (CN) – The Supreme Court was unanimous Friday in finding it would violate due process for North Carolina to tax a trust set up in New York for the benefit of a woman living in North Carolina.

Kimberley Kaestner is the beneficiary of a family trust her father, Joseph Kee Rice III, established in New York in 1992. Kaestner lives in North Carolina and did not receive discretionary distributions from the trust.

North Carolina still taxed Kaestner’s income from the trust, hitting it with a $1.3 million tax bill. North Carolina state courts ruled the state did not have a close enough connection with the trust to tax it.

Writing for the court Friday, Justice Sonia Sotomayor explained that a North Carolina law allowing the state to tax trust income that “is for the benefit” of any state resident cannot allow for the taxation of a trust like Kaestner’s.

“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,” Sotomayor wrote. “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.”

Sotomayor was careful, however, to note that the decision is specific to the facts of Kaestner’s case. If Kaestner had drawn income from the trust, for example, Sotomayor said the state would have been able to tax it.

Other state regimes that consider the residency of a trust’s beneficiaries as a factor, rather than the sole basis, in the taxing decision will not be disturbed by the court’s decision, the justice added.

Debevoise & Plimpton partner David O’Neil, who argued for Kaestner’s trust at the Supreme Court, hailed the decision.

“The ruling emphasizes the Constitution’s most profound guarantee: The government cannot order a citizen to do something that is fundamentally unfair and that includes forcing someone who has nothing to do with a state to pay taxes for services they didn’t use,” O’Neil said in a statement Friday.

In a short concurring opinion joined by Chief Justice John Roberts and Justice Neil Gorsuch, Justice Samuel Alito clarified that the decision Friday did nothing to alter the court’s precedent on the issue of the taxation of trusts.

The North Carolina Attorney General’s Office did not immediately return a request for comment on the decision.

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