Reed Smith Client Alerts

On January 11, 2019, the United States Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust (“Kaestner”). The question raised by Kaestner is whether the Due Process Clause prohibits a state from taxing the income of a trust when the trust’s only connection with the state is a beneficiary residing in the state. In addition to having a direct impact on trusts nationwide, this case will be the first Supreme Court case to consider nexus after Wayfair.

Auteurs: Michael I. Lurie Mike Shaikh Megan Q. Miller

Background

On June 8, 2018, the North Carolina Supreme Court issued its opinion in Kaestner.1 The decision addressed whether the North Carolina Department of Revenue properly taxed the income of the plaintiff trust under North Carolina General Statute section 105-160.2, solely on the basis of a beneficiary’s residency in North Carolina during the tax years at issue. The North Carolina Supreme Court applied the International Shoe minimum contacts test, and found that that section 105-160.2, as applied to the trust, violated the Due Process Clause.

On October 9, 2018, North Carolina filed a petition for writ of certiorari to the United States Supreme Court seeking a determination that state taxation of trust income based on a beneficiary’s residence in the state does not violate Due Process. In its petition, North Carolina noted that state courts that had addressed this issue were split: courts in California, Missouri, and Connecticut have allowed trust income to be taxed under identical fact patterns, while courts in New York, New Jersey, Minnesota, and North Carolina courts have found that taxing trust income on the basis of a beneficiary resident in the state would violate Due Process.

On January 11, 2019, the United States Supreme Court granted certiorari.