ROCHESTER, N.Y. (PRWEB) July 11, 2019
The American College of Tax Counsel (the “College”) filed two amicus briefs in state and federal tax cases considered by the United States Supreme Court during the 2019 term. In North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust (No. 18-457), the College urged the Court to affirm the decision of the North Carolina Supreme Court holding that the State could not exercise tax jurisdiction over a trust based solely on the in-state presence of a contingent beneficiary. In Rodriquez v. FDIC (No.18-1269), the College supported a certiorari petition filed on behalf of a bank holding company’s bankruptcy trustee to determine the ownership of a tax refund arising from the losses of a subsidiary that was a member of a consolidated group.
Kaestner. In a unanimous decision, the U. S. Supreme Court on June 21, 2019, reaffirmed that the Due Process Clause prevents a State from taxing accumulated but undistributed income of a trust based solely on the in-state residence of a contingent beneficiary of that trust. The Court’s opinion in Kaestner, written by Justice Sotomayor, extended the Court’s Due Process Clause precedents in tax cases, including Quill Corp. and Wisconsin v. J.C. Penney Co., to the trust context.
The Court found that the Due Process Clause analysis in a trust beneficiary context focuses “on the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets.” The Court held that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” Carefully limiting its holding to the facts of the case, the Court expressed no opinion on trust taxation based on beneficiaries’ residence whose relationship to the trust differs from that presented in Kaestner.
The Court held that when a State seeks to base its taxation of a trust’s income on the in-state residence of a trust beneficiary, the Due Process Clause requires a “pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax.” To conduct this inquiry, the Court instructed that “the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset. Otherwise, the State’s relationship to the object of its tax is too attenuated to create the ‘minimum connection’ that the Constitution requires.” Because the beneficiaries of the Kaestner Trust 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, the Court held that the beneficiaries’ residence could not “serve as the sole basis for North Carolina’s tax on trust income.”
A concurring opinion by Justice Alito, joined by Chief Justice Roberts and Justice Gorsuch, emphasized that the Court’s 1920s-era precedents of Safe Deposit & Trust Co. of Baltimore v. Virginia and Brooke v. Norfolk were still reliable guideposts because those cases turned on whether a resident trust beneficiary had control or possession of intangible assets in a trust or enjoyed use of the trust assets, similar to the analysis undertaken in the principal Kaestner opinion. Four states, North Carolina, Tennessee, Georgia, and California impose a tax on trusts based on the residence of a beneficiary in the state. Of these states, only two, North Carolina and Tennessee, impose the tax based upon the residence of contingent beneficiaries.
Rodriquez. On June 28, 2019, the Court granted certiorari in the Rodriquez case, as urged by the College. In its petition for certiorari, the petitioner contended that there is an underlying split in the circuits over who is entitled to the tax refund as between the parent holding company and the subsidiary that sustained the losses giving rise to the tax refund. The divide in the Courts of Appeals pertains to the recognition of the Bob Richards rule, which provides a default rule that the refund received by the parent of a consolidated group is held in trust for the subsidiary that generated the refund, absent a tax sharing agreement that unambiguously departs from the rule. In its amicus brief in support of the petitioner’s position, the College noted that the sheer number of companies that file consolidated returns (over 35,000 in 2013) supports the argument that the Court should review this case to resolve the split in the circuits. The case will be heard by the Court during the Fall 2019 term.
About Amicus Briefs
A brief by Amicus Curiae (“friend of the court”), or an amicus brief, allows a person or organization with a strong interest in or important views on the subject matter of a case to file a brief explaining those views and urging the court to rule in a manner consistent with those views. Amicus briefs are often filed in cases of broad public interest and are filed with the permission of the court and typically, as in this instance, with the consent of all the parties in the case.
About the American College of Tax Counsel
The American College of Tax Counsel is a nonprofit association of tax lawyers in private practice, in law school teaching positions, and in government, who are recognized for their excellence in tax practice and for their substantial contributions and commitment to the profession. One of the chief purposes of the College is to provide a mechanism for input by tax attorneys into the development of U.S. tax laws and policy. The College’s amicus briefs were submitted by its governing Board of Regents, represented in Kaestner by attorneys C. Wells Hall, III, Charles H. Mercer, Jr., and Reed J. Hollander of Nelson Mullins Riley & Scarborough, LLP of Charlotte and Raleigh, North Carolina, and represented in Rodriquez by attorneys Peter J. Connors, Thomas M. Bondy and Stephen C. Lessard of Orrick, Herrington & Sutcliffe LLP of New York and Washington, D.C.