Supreme Court ruled on Trust State Taxation Issues
Supreme Court ruled on Trust State Taxation Issues
February 18, 2020

n June of 2019, the Supreme Court heard arguments in a case where the State of North Carolina levied an income tax on a trust beneficiary. The trust had no connection to the State of North Carolina except for the residence of a beneficiary. The beneficiary was not the trustee and had no power over the distributions. Distributions were made at the discretion of the trustee. (North Carolina Dep’t of Rev. v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457, U.S. 6/21/19)

This case resulted in a unanimous decision against the State of North Carolina. Justice Sonia Sotomayor wrote the opinion which held that such a tax would violate the due process clause of the 14th Amendment. The Supreme Court applied a two-step analysis to determine whether a state is entitled to tax the income of a trust.

The first step was “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” The court stated that a state has the power of taxation over an entity when a certain number of contacts are made within a state so as not to violate the notion of fairness.

The second step in the analysis was whether the income being taxed was attributed to the state. Are the values connected to the state levying the tax? The residence of a beneficiary alone is not sufficient to tax the income of the trust where the beneficiary has no right to demand the income.



Treasury Circular 230 Disclosure

Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.

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