Tomorrow the Supreme Court hears oral arguments in the case of North Carolina Dep't of Revenue v. Kaestner Family Trust (No. 18-457). The question presented is whether the Due Process Clause prohibits states from taxing trusts based on trust beneficiaries' in-state residency. Michelle Simon (Pace) and I think the answer is yes, the Due Process Clause does prohibit taxation, where the state's only connection to the trust is the residence of a discretionary trust beneficiary (i.e., someone who is eligible but not entitled to receive distributions of trust income and/or principal), and where the discretionary trust beneficiary has not in fact received any distributions from the trust.
We have a short essay in the UCLA Law Review Discourse that explains the background to the Kaestner Family Trust case and argues why taxation is unconstitutional in this case. Here is the abstract to our essay, The Supreme Court, Due Process and the State Income Taxation of Trusts:
What are the constitutional limits on a state’s power to tax a trust with no connection to the state, other than the accident that a potential beneficiary lives there? The Supreme Court of the United States will take up this question this term in the context of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. The case involves North Carolina’s income taxation of a trust with a contingent beneficiary, meaning someone who is eligible, but not certain, to receive a distribution or benefit from the trust, who resides in that state. Part I of this Article explains the background of Kaestner Trust and frames the constitutional questions that will be before the Court at oral arguments on April 16, 2019. Part II examines how and why due process applies in the state income taxation context, with a particular emphasis on how familiar concepts of general and specific jurisdiction apply uneasily to donative trusts. Part III articulates the reasons that the Court should hold that a state has no constitutional authority to impose a tax on trust income where the trust’s only connection with the forum state is the residence of a contingent beneficiary. Kaestner Trust is the most important due process case involving trusts that the Court has decided in over sixty years; it bears directly on the fundamental meaning of due process.
The full essay is here.
Image : Arthur Rothstein, The Supreme Court Building, Washington, D.C., 1936, Farm Security Administration and Picture Collection, NYPL Digital Collections (here)
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