Petition for Writ of Certiorari — Cynthia Bauerly, Commissioner, Minnesota Department of Revenue, Petitioner v. William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. MacDonald, et al.

Supreme Court briefNov 15, 2018

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NO.

In the Supreme Court of the United States

CYNTHIA BAUERLY, COMMISSIONER OF THE

MINNESOTA DEPARTMENT OF REVENUE,

Petitioner,

WILLIAM FIELDING, TRUSTEE, ET AL.,

Respondents.

On Petition for Writ of Certiorari to the

Minnesota Supreme Court

PETITION FOR WRIT OF CERTIORARI

JOHN M. O’MAHONEY

Counsel of Record

Assistant Attorney General

Office of the Minnesota Attorney General

445 Minnesota Street, Suite 900

St. Paul, Minnesota 55101-2128

(651) 757-1216

john.omahoney@ag.state.mn.us

Counsel for Petitioner

Commissioner of Revenue

November 15, 2018

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

QUESTION PRESENTED

Twenty-two states and the District of Columbia

classify trusts as residents throughout their existence

if the grantor was domiciled in-state at the time the

trust became irrevocable. A resident trust in these

jurisdictions is subject to income taxation on capital

gains and other income from intangibles such as

interest and dividends.

Deepening a conflict among the state high courts,

however, the Minnesota Supreme Court held that the

Due Process Clause prohibits Minnesota from applying

its income tax to resident trusts that are administered

by an out-of-state trustee. That is so, ruled the court,

even though the trusts were funded by stock in a

closely held family business headquartered in

Minnesota; the capital gains being taxed resulted from

the sale of stock in that Minnesota business; the trust

documents were drafted and signed in Minnesota; the

trust agreements incorporate Minnesota law; and one

of the beneficiaries resides in Minnesota.

The question presented is:

Does the Due Process Clause prohibit states from

imposing incomes taxes on statutory “resident trusts”

that have significant additional contacts with the state,

but are administered by an out-of-state trustee?

PARTIES TO THE PROCEEDINGS

The Petitioner is the Commissioner of the

Minnesota Department of Revenue, Cynthia Bauerly.

The Respondent is William Fielding, Trustee of four

individual trusts founded by Reid and Ann MacDonald.

The four trusts are Irrevocable GST Trust for

Catherine Gray Macdonald, Maria V. MacDonald,

Laura Reid MacDonald, and Vandever R. MacDonald.

iii

TABLE OF CONTENTS

QUESTION PRESENTED . . . . . . . . . . . . . . . . . . . . i

PARTIES TO THE PROCEEDINGS . . . . . . . . . . . . ii

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . vi

PETITION FOR WRIT OF CERTIORARI . . . . . . . . 1

OPINIONS BELOW . . . . . . . . . . . . . . . . . . . . . . . . . 1

JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

GRANTOR MACDONALD FUNDED FOUR TRUSTS

WITH STOCK IN FARIBAULT FOODS, A CLOSELYHELD MINNESOTA CORPORATION . . . . . . . . . . 3

II.

THE TRUSTS FILED TAX RETURNS AS

MINNESOTA RESIDENT TRUSTS . . . . . . . . . . . . 5

III.

THE TRUSTS REALIZED A GAIN ON THE SALE

OF FARIBAULT FOODS AND SOUGHT INCOME

TAX REFUNDS . . . . . . . . . . . . . . . . . . . . . . . . . 6

IV.

THE MINNESOTA SUPREME COURT RULED IN

FAVOR OF THE TRUSTS . . . . . . . . . . . . . . . . . . 6

REASONS FOR GRANTING THE WRIT . . . . . . . . 8

THE MINNESOTA SUPREME COURT’S DECISION

D EEPENS A C ONFLICT AMONG S TATE

APPELLATE COURTS ON THE LIMITS THE DUE

PROCESS CLAUSE PLACES ON STATE TAXATION

OF TRUSTS ADMINISTERED OUT OF STATE . . . 10

A. This Court’s Due Process Jurisprudence

Concerning States’ Taxation of Trusts

Points in Different Directions . . . . . . . . . 10

B. Four Jurisdictions Have — In Conflict

with the Minnesota Supreme Court —

Applied Curry and Greenough to Allow an

Income Tax on Intangible Property

Held by Trusts Administered in Other

States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

C. Several Other Appellate Courts Join the

Minnesota Supreme Court in Requiring

that the Trustee be Located In-State . . . 15

II.

THIS CASE IS A GOOD VEHICLE TO RESOLVE A

SIGNIFICANT ISSUE OF FEDERAL LAW . . . . . . 17

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

APPENDIX

Appendix A Opinion in the Minnesota Supreme

Court

(July 18, 2018) . . . . . . . . . . . . . . . App. 1

Appendix B Order on Cross-Motions for Summary

Judgment in the Tax Court for the

State of Minnesota County of Ramsey

(May 31, 2017) . . . . . . . . . . . . . . App. 31

Appendix C Statutory Provisions . . . . . . . . . App. 82

Minn. Stat. § 290.01 . . . . . . . . . . App. 82

Minn. Stat. § 290.03 . . . . . . . . . . App. 83

Minn. Stat. § 290.17 . . . . . . . . . . App. 84

TABLE OF AUTHORITIES

CASES

Blue v. Dep’t of Treasury,

462 N.W.2d 762 (Mich. Ct. App. 1990) . . . . . . . 16

Chase Manhattan Bank v. Gavin,

733 A.2d 782 (Conn. 1997) . . . . . . . . . . . 13, 14, 17

Chase Manhattan v. District of Columbia,

689 A.2d 539 (D.C. 1997) . . . . . . . . . . . . . . . . . . 13

Curry v. McCanless,

307 U.S. 357 (1939) . . . . . . . . 9, 11, 12, 14, 15, 16

Greenough v. Newport,

331 U.S. 486 (1947) . . . . . . . . . . . . . . . . . . . . 9, 12

Linn v. Dep’t of Revenue,

2 N.E.3d 1203 (Ill. Ct. App. 2013) . . . . . . . . . . . 16

Mercantile-Safe Deposit & Trust Company v.

Murphy, 19 A.D.2d 765 (N.Y. App. Div. 1963),

aff’d, 203 N.E.2d 490 (N.Y. 1964) . . . . . . . . . . . 16

North Carolina Department of Revenue v.

The Kimberley Rice Kaestner 1992 Family

Trust, Supreme Court Case No. 18-457 . . . . . . . 9

Pennoyer v. Taxation Div. Director,

5 N.J. Tax 386 (1983) . . . . . . . . . . . . . . . . . . . . . 17

Potter v. Taxation Div. Director,

5 N.J. Tax 399 (1983) . . . . . . . . . . . . . . . . . . . . . 17

Quill v. N. Dakota,

504 U.S. 298, 112 S. Ct. 1904 (1992) . . . . . . . . . 16

vii

Residuary Trust A v. Director Division of Taxation,

28 N.J. Tax 541 (N.J. Super. Ct. App. Div.

2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 17

Safe Deposit & Trust Co. of Baltimore, Maryland

v. Commonwealth of Virginia,

280 U.S. 83 (1929) . . . . . . . . . . . . . . . . . . . passim

S. Dakota v. Wayfair, Inc.,

138 S. Ct. 2080 (2018) . . . . . . . . . . . . . . . . . 16, 19

In re Swift,

727 S.W.2d 880 (Mo. 1987) . . . . . . . . . . . . . . . . 14

T. Ryan Legg Irrevocable Tr. v. Testa,

75 N.E.3d 184 (Ohio 2016), cert. denied,

138 S. Ct. 222 (2017) . . . . . . . . . . . . . . . 14, 15, 17

Westfall v. Dir. of Revenue,

812 S.W.2d 513 (Mo. 1991) . . . . . . . . . . . . . . . . 14

CONSTITUTION AND STATUTES

U.S. Const. amend. XIV, § 1 . . . . . . . . . . . . . . passim

28 U.S.C. § 1257(a) . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I.R.C. §§ 671-678 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

I.R.C. § 1361(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Conn. Gen. Stat. § 12-701 (2018) . . . . . . . . . . . . . . . 8

Del. Code Ann. tit. 30 § 1601 (2018) . . . . . . . . . . . . . 8

D.C. Code § 47-1809.01 (2018) . . . . . . . . . . . . . . . . . 8

35 Ill. Comp. Stat. 5/201 (2018) . . . . . . . . . . . . . . . . 8

Iowa Admin. Code § 701-89.3 (2018) . . . . . . . . . . . . 8

viii

La. Stat. Ann. § 47:300.10 (2018) . . . . . . . . . . . . . . . 8

Me. Rev. Stat. Ann. tit. 36, § 5102(4) (2018) . . . . . . 8

Md. Code Ann., Tax-Gen. § 10-101 (2018) . . . . . . . . 8

Mich. Comp. Laws § 206.18 (2018) . . . . . . . . . . . . . . 8

Minn. Stat. § 290.01 (2014) . . . . . . . . . . . . . . . . . . . . 5

Minn. Stat. § 290.01 (2018) . . . . . . . . . . . . . . . . . . . . 8

Minn. Stat. § 290.06 (2014) . . . . . . . . . . . . . . . . . . 6, 9

Minn. Stat. § 290.17 (2014) . . . . . . . . . . . . . . . . . . . . 5

Mo. Rev. Stat. § 143.331 (2018) . . . . . . . . . . . . . . . . 8

Mont. Admin. R. 42.30.101 (2018) . . . . . . . . . . . . . . 8

N.J. Stat. Ann. § 54A:1-2 (2018) . . . . . . . . . . . . . . . . 8

N.Y. Tax Law § 605 (2018) . . . . . . . . . . . . . . . . . . . . 8

Neb. Rev. Stat. Ann. § 77-2714.01 (2018) . . . . . . . . . 8

Okla. Stat. tit. 68, § 2353 (2018) . . . . . . . . . . . . . . . . 8

72 Pa. Cons. Stat. § 7301 (2018) . . . . . . . . . . . . . . . . 8

1956 R.I. Gen. Laws § 44-30-5 (2018) . . . . . . . . . . . 8

Utah Code Ann. § 59-10-201 (West 2018) . . . . . . . . 8

Vt. Stat. Ann. tit. 32, § 5811 . . . . . . . . . . . . . . . . . . . 8

Va. Code Ann. § 58.1-302 (2018) . . . . . . . . . . . . . . . . 8

W. Va. Code R. 110-21-7 (West 2018) . . . . . . . . . . . . 8

Wis. Stat. § 71.14(3) (2018) . . . . . . . . . . . . . . . . . . . . 8

OTHER AUTHORITIES

Hellerstein, Hellerstein, & Swain, State Taxation

(3d ed. 2018) . . . . . . . . . . . . . . . . . . . . . . . 5, 10, 12

Internal

Revenue

Service,

SOI

Tax

Stats—Fiduciary Returns—Sources of Income,

Deductions, and Tax Liability— Type of Entity:

2014, available at https://www.irs.gov/statistics/

soi-tax-stats-fiduciary-returns-sources-ofincomedeductions-and-tax-liability-by-type-ofentity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

PETITION FOR A WRIT OF CERTIORARI

The Commissioner of the Minnesota Department of

Revenue respectfully petitions this Court for a writ of

certiorari to review the judgment of the Minnesota

Supreme Court.

OPINIONS BELOW

The opinion of the Minnesota Supreme Court is

reported at 916 N.W.2d 323 (Minn. 2018).

The

decision is also reprinted in Appendix A, hereto (“App.”)

at 1. The opinion and order of the Minnesota Tax Court

are unreported, but are also reprinted and provided in

Appendix B. App. at 31.

JURISDICTION

The Minnesota Supreme Court issued its decision

on July 18, 2018. App. at 1. On October 4, 2018,

Justice Gorsuch extended the time for filing this

petition up to and including November 15, 2018. This

Court has jurisdiction under 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The Due Process Clause of the Fourteenth

Amendment to the United States Constitution

provides:

[N]or shall any State deprive any person of life,

liberty, or property, without due process of

law. . .

U.S. Const. amend. XIV, § 1.

The Minnesota statutory provisions that authorize

the fiduciary income tax, delineate the definition of

“resident trust,” and provide for the calculation of

income related thereto are reproduced in Appendix C.

App. 82-89.

INTRODUCTION

This case presents an important and recurring

federal question that is in need of resolution by this

Court: Can a state, consistent with the Due Process

Clause of the Fourteenth Amendment, classify a trust

administered outside its borders as a resident for

income tax purposes? This Court has not spoken on

the issue in decades, and its precedents point in

opposite directions. As a consequence, state appellate

courts are deeply divided on the correct answer.

Some state appellate courts have held that a state

may impose an income tax on a trust even when the

trustee resides out-of-state, so long as the grantor

resided in-state when the trust became irrevocable.

Other courts have required, on top of grantor residence,

that the trust have some additional contacts with the

state during the tax year. One other state high court

has held that a state may tax a trust as a resident if a

beneficiary of the trust resided in the state during the

tax year. Under any of those rules, Minnesota could

have taxed the trusts at issue here. Other state

appellate courts, however, have focused on the

residence of the trustee and held that the Due Process

Clause bars states from taxing resident trusts

administered out-of-state despite significant in-state

contacts. The Minnesota Supreme Court’s decision

here deepens that conflict.

This Court’s intervention is warranted not only

because the Due Process Clause should not mean

different things in different states. Resolution is also

needed because the flawed and outdated interpretation

of the Clause adopted by the Minnesota Supreme Court

and other courts is depriving states of significant

revenues. Their rulings allow individuals to avoid taxes

altogether on significant accumulations of wealth,

merely by placing their assets in trusts and retaining

trustees who reside in no-income-tax states. Whether

such tax loopholes should exist might be an interesting

policy question. But they are not compelled by the

Constitution.

STATEMENT

GRANTOR MACDONALD FUNDED FOUR TRUSTS

WITH STOCK IN FARIBAULT FOODS, A CLOSELYHELD MINNESOTA CORPORATION.

The grantor of the trusts at issue, Reid MacDonald

(“Grantor MacDonald”), is a lifelong resident of

Minnesota. From 1980 to 2014, Mr. MacDonald was

president and chief executive officer of a closely held

Minnesota corporation, Faribault Foods, Inc.

(“Faribault Foods”).

Faribault Foods is a food

processing company founded in Faribault, Minnesota

in 1895. It manufactured various products for sale to

retailers, including vegetables, beans, pasta, specialty

sauces, soups, chili, and beverages. Faribault Foods

was a corporation organized under the laws of

Minnesota, and it elected to be taxed as a small

business corporation or “S corporation” under the

Internal Revenue Code, making it a “pass-through” for

income tax purposes. See I.R.C. § 1361(b). Faribault

Foods established dual corporate offices in Minneapolis

and Faribault, Minnesota. Additionally, Faribault

Foods leased manufacturing plants and warehouses in

three Minnesota communities.

In 2009, Grantor MacDonald created irrevocable

trusts (the “Trusts”) for his four children: Maria V.

MacDonald, Catherine Gray MacDonald, Laura Reid

MacDonald, and Vandever R. MacDonald. The trust

documents were drafted by Laura Carlson, a Minnesota

attorney and partner at the Minneapolis office of the

law firm Faegre & Benson LLP. The trust agreements

provide that questions of law arising under the trusts

were to be governed by the laws of Minnesota. The

agreements incorporate Minnesota law in other ways,

for example by requiring the Trustee to follow the rules

of the Minnesota Revised Uniform Principal and

Income Act. From the time of the Trusts’ creation until

September 19, 2014, the original signed trust

agreements were maintained in Minnesota by Ms.

Carlson. Additionally, Vandever MacDonald, who was

a Minnesota resident at all times before and during

2014, was the primary beneficiary of one of the Trusts

and a contingent beneficiary of the other three.

The trust agreements also explicitly authorize the

trustee to acquire and retain additional stock in

Faribault Foods. By 2014, each Trust owned 22,244

shares of stock in Faribault Foods, meaning each trust

owned 4.226% of all the shares outstanding. The only

other property the Trusts possessed prior to the sale of

Faribault Foods stock in 2014 was nominal amounts of

cash.

II.

THE TRUSTS FILED TAX RETURNS

MINNESOTA RESIDENT TRUSTS.

Most states impose a fiduciary income tax, which is

generally a tax on trust income that is accumulated

and not distributed to a beneficiary. See Hellerstein,

Hellerstein, & Swain, State Taxation, ¶ 20.09 (3d ed.

2018). Minnesota, like most states, imposes this tax on

income from intangible property when the trust in

question is a “resident trust.” Minn. Stat. § 290.17,

subdivisions 1, 2, and 6 (2014). And Minnesota

considers a trust to be a resident trust if the grantor of

the trust was domiciled in-state when the trust became

irrevocable. Minn. Stat. 290.01, subdivision 7b (2014).

From June 25, 2009 to December 31, 2011, Grantor

MacDonald retained control over the Trusts’ assets.

The Trusts were, therefore, considered “grantor type

trusts.” Minn. Stat. § 290.01, subdivision (7b)(a) (2014);

and I.R.C. §§ 671-678. As a result, the Trusts were not

required to file income tax returns during this period.

Id. Instead, their income or losses each year were

reported on the grantor’s individual income tax return.

Id. On December 31, 2011, Grantor MacDonald

relinquished control and the Trusts became irrevocable

trusts under Minnesota law.

Because Grantor

MacDonald was a resident at that time, the Trusts

were Minnesota resident trusts under Minnesota

Statutes section 290.01, subd. (7b)(a)(2) (2014). The

Trusts filed Minnesota fiduciary income tax returns as

Minnesota resident trusts for 2012 and 2013. On their

2012 fiduciary income tax returns, the Trusts claimed

tax credits which were only available to Minnesota

residents: each trust claimed a credit of $4,685 for

income tax paid to other states. See Minn. Stat.

§ 290.06, subd. 22 (2014).

III.

THE TRUSTS REALIZED A GAIN ON THE SALE OF

FARIBAULT FOODS AND SOUGHT INCOME TAX

REFUNDS.

The Trusts had trustees in California and Colorado

until hiring William Fielding, a Texas resident, on July

24, 2014. On the same day, Mr. Fielding participated in

a phone call with Grantor MacDonald and other

shareholders of Faribault Foods to discuss the possible

sale of the company’s stock to La Costeña USA, Inc.

Eight days later, all shareholders of Faribault Foods,

including Grantor MacDonald and the Trusts, sold

their shares of Faribault Foods to La Costeña USA, Inc.

On their 2014 fiduciary income tax returns, the trusts

collectively reported capital gains in the amount of

$11,260,688.

IV.

THE MINNESOTA SUPREME COURT RULED IN

FAVOR OF THE TRUSTS.

The Trusts filed Minnesota fiduciary income tax

returns for 2014 under protest, paying income taxes as

resident trusts of Minnesota totaling $258,745 each on

their more than $11 million capital gain. App. at 5.

The Trusts later filed amended 2014 Minnesota

fiduciary income tax returns seeking refunds of the

taxes paid on the capital gain, claiming that they

violated the Commerce and Due Process Clauses. The

Commissioner of Revenue denied the Trusts’ refund

claims.

The Trusts appealed to the Minnesota Tax Court,

challenging the taxes under both the Due Process and

Commerce Clauses. App. at 7. The cases were

consolidated, and submitted for decision on stipulated

facts and cross motions for summary judgment. App.

at 6 The Tax Court denied the Commissioner’s motion

and granted the Trusts’ motion on due process grounds,

without reaching the Commerce Clause issue. App. at

21.

The Minnesota Supreme Court affirmed, holding

that the Trusts’ contacts with Minnesota were either

“irrelevant or too attenuated” for due process purposes.

App. at 13. First, the court held that instead of

considering Grantor MacDonald’s lifelong Minnesota

residency, it would consider the Texas residency of Mr.

Fielding, the trustee who was appointed on the day of

the shareholder conference call to discuss the sale of

Faribault Foods. App. at 16. The court also ruled that

the trustee’s legal ownership of the Trusts rendered the

Trusts’ ownership of the Minnesota pass-through

corporation, Faribault Foods, irrelevant. Id. The court

ruled further that beneficiary Vandever MacDonald’s

choice to remain a Minnesota resident in 2014 was not

relevant because Vandever’s Trust had a separate

existence from Vandever. App. at 14. Finally, the

court found the other contacts with Minnesota —

including that the Trusts were created in Minnesota

and incorporate Minnesota law — insufficient for due

process purposes. App. at 21.

Two justices dissented, noting that Minnesota

resident Grantor MacDonald chose to create the trust,

chose to fund it with stock in his Minnesota passthrough corporation, and chose to make the Trusts

irrevocable knowing that doing so would make the

Trusts statutory residents of Minnesota. “Minnesota

can properly require the Trusts to contribute to the

State for costs associated with providing these benefits,

services and protections to the Trusts, the trustee, and

the beneficiaries.” App. at 26. The dissenting justices

also found that the tax was consistent with the

Commerce Clause and would have granted judgment

for the Commissioner. App. at 29-30.

The Commissioner now brings this petition for

certiorari.

REASONS FOR GRANTING THE WRIT

All but seven states in the United States impose

some form of income tax. Of the remaining 44 states,1

a majority (23) have statutes that classify trusts as

resident taxpayers throughout the term of their

existence if the grantor of the trust was domiciled instate at the time that the instrument became

irrevocable (“grantor-domicile statutes”).2 Minnesota

is not the first state using such a statutory regime to

For purposes of this discussion, the term “states” includes the

District of Columbia.

See Conn. Gen. Stat. § 12-701 (2018); Del. Code Ann. tit. 30

§ 1601 (2018); D.C. Code § 47-1809.01 (2018); 35 Ill. Comp. Stat.

5/201 (2018); Iowa Admin. Code § 701-89.3 (2018); La. Stat. Ann.

§ 47:300.10 (2018); Me. Rev. Stat. Ann. tit. 36, § 5102(4) (2018);

Md. Code Ann., Tax-Gen. § 10-101 (2018); Mich. Comp. Laws

§ 206.18 (2018); Minn. Stat. § 290.01 (2018); Mo. Rev. Stat.

§ 143.331 (2018); Mont. Admin. R. 42.30.101 (2018); Neb. Rev.

Stat. Ann. § 77-2714.01 (2018); N.J. Stat. Ann. § 54A:1-2 (2018);

N.Y. Tax Law § 605 (2018); Okla. Stat. tit. 68, § 2353 (2018); 72

Pa. Cons. Stat. § 7301 (2018); 1956 R.I. Gen. Laws § 44-30-5

(2018); Utah Code Ann. § 59-10-201 (West 2018); Vt. Stat. Ann. tit.

32, § 5811; Va. Code Ann. § 58.1-302 (2018); W. Va. Code R. 11021-7 (West 2018) ; Wis. Stat. § 71.14(3) (2018).

face a Due Process challenge. Eight other states have

adjudicated due process challenges to grantor-domicile

statutes. see infra sections I.B and I.C. And three

other states have faced due process challenges to

similar statutes. Id. Among those three is North

Carolina, which is also currently petitioning this Court

for review in North Carolina Department of Revenue v.

The Kimberley Rice Kaestner 1992 Family Trust,

Supreme Court Case No. 18-457.

More concerning than the increasing litigation,

however, is the inconsistent nature of the resulting

decisions of the various state appellate courts that have

considered the issue. Four state courts, consistent with

this Court’s decisions in Curry v. McCanless, 307 U.S.

357 (1939) and Greenough v. Newport, 331 U.S. 486

(1947), have recognized that states have broad

authority to impose income taxes on trusts with due

process contacts to the state.3 See infra Section I.B.

Five other states, however, including Minnesota, have

determined, based primarily on Safe Deposit & Trust

Co. of Baltimore, Maryland v. Commonwealth of

Virginia, 280 U.S. 83 (1929), that the state is barred

from taxing the accumulated intangible income4 of a

The Minnesota Supreme Court cited both Curry and Greenough

as authority for its decision; however, neither Curry nor

Greenough, found that the Due Process Clause restricted situs for

taxation to a single jurisdiction. In fact, the opposite is true.

Accordingly, while the Minnesota Supreme Court relied on those

rulings, its holding is not consistent with them.

It is worth observing that the dispute in this case (and in other

cases raising analogous issues) focuses exclusively on accumulated

income from intangibles, which is taxable in full by the state of

trust’s residence, however, defined and is not taxed in other states

trust administered outside its borders. See infra

Section I.C. The result is that the Due Process Clause

means different things in different states – a result

that cannot be constitutionally correct. The Court

should resolve this split in authority. The decisions of

the state courts’ abrogating jurisdiction also unfairly

endanger an important revenue stream, and allow

residents to use the Due Process Clause to create an

income tax loophole.

THE MINNESOTA SUPREME COURT’S DECISION

D EEPENS A C ONFLICT AMONG S TATE

APPELLATE COURTS ON THE LIMITS THE DUE

PROCESS CLAUSE PLACES ON STATE TAXATION

OF TRUSTS ADMINISTERED OUT OF STATE.

A. This Court’s Due Process Jurisprudence

Concerning States’ Taxation of Trusts

Points in Different Directions.

State appellate courts that have sustained

challenges to grantor-domicile statutes commonly cite

Safe Deposit & Trust Co. v. Virginia, 280 U.S. 83

(1929). In Safe Deposit, an individual domiciled in

Virginia established a trust in Maryland for the benefit

on the basis of the “source” of such income. As explained in

Hellerstein, Hellerstein, & Swain, State Taxation (2018) ¶ 20.09[2]:

When a trust accumulates income, and therefore is taxable

on such income under federal law and the law in most

states, the state statutory schemes generally provide for

the taxation of all such income by the state where the trust

is a resident; for taxation of such portion of the income

derived from sources within the state where the trust is

not a resident; and for a credit in the state of residence for

taxes imposed by other states on a source basis.

of his two young children who were also domiciled in

Virginia. Id. at 89-90. He died shortly thereafter, and

the property remained in the Maryland trust pending

the 25th birthdays of the two children. Id. At the time,

Virginia’s property tax statutes required that the

beneficiaries be classified as the owners of the

property, which meant that the corpus of the trust was

subject to its annual property tax. Id. at 91. This Court

held that the Due Process Clause forbade Virginia from

so taxing the trust’s property because the property

(securities) was located in, and subjected to taxation

by, Maryland. Id. at 93. The Court wrote that “[t]he

adoption of a contrary rule would ‘involve possibilities

of an extremely serious character’ by permitting double

taxation, both unjust and oppressive.” Id. at 93

(emphasis added).

Ten years later, this Court abandoned this central

premise of Safe Deposit in Curry v. McCanless, 307

U.S. 357 (1939). There, the Court recognized that two

states can have coextensive taxing jurisdiction over

intangible property held in a trust. Id. at 366-367. The

Curry case arose from a dispute between two states,

each claiming the authority to impose an inheritance

tax on intangibles in a trust. Id. at 360–61. The trust

was administered in Alabama, but the grantor and all

of the beneficiaries were domiciled in Tennessee. Id.

The Court held that, as far as the Due Process Clause

was concerned, both states could impose a tax. Id. at

372–74. The Court ruled that a state’s power to tax

with regard to intangible property is “made effective

only through control over and protection afforded to

those persons whose relationships are the origin of the

rights.” Id. at 366. “Shares of corporate stock may be

taxed at the domicile of the shareholder and also at

that of the corporation which the taxing state has

created and controls.” Id. at 368. This is because the

“[p]rotection, benefit, and power over the subject

matter are not confined to either state.” Id.

The Court reaffirmed Curry in Greenough v. Tax

Assessors of City of Newport, 331 U.S. 486 (1947). In

Greenough, the Court held that the Due Process Clause

permitted Rhode Island to tax a New York trust

holding stock in a New York corporation because there

was a Rhode Island trustee. Rhode Island, the Court

said, “does offer benefit and protection through its law

to the resident trustee,” a connection that is sufficient

to establish taxing authority for due process purposes.

Id. at 496–97. Curry and Greenough thus grant broad

authority to states to tax intangible property held in

trust where there is a contemporaneous connection

between the trust and the state. See Hellerstein,

Hellerstein, & Swain, State Taxation (2018)

¶ 20.09[2][b] (stating that Safe Deposit is inconsistent

with the Court’s “modern Due Process jurisprudence”).

The courts that have upheld grantor-domicile

statutes have relied on Curry and Greenough. Other

courts, however, persist in relying on Safe Deposit.

B. Four Jurisdictions Have — In Conflict

with the Minnesota Supreme Court —

Applied Curry and Greenough to Allow

an Income Tax on Intangible Property

Held by Trusts Administered in Other

States.

Based on Curry and Greenough, three states and

the District of Columbia, all of which have a statutory

grantor-domicile rule, have upheld the broad authority

of their legislatures to impose income taxes on trusts’

income from intangibles when the trusts maintain

contacts with the states. In Chase Manhattan v.

District of Columbia, the district’s highest court held

that the district may tax a testamentary trust

throughout the term of its existence even if the only

connection between the trust and the district is that

the testator was domiciled there at the time of death.

689 A.2d 539, 547 (D.C. 1997). The court recognized

that the District “created the legal environment which

permitted the trust to come into existence, established

the trust when [grantor’s] will was probated, and has

provided access to its courts to all parties with an

interest (or potential interest) in the trust.” Id. at 545.

The court rejected the theory that the statutory

residency rule violated due process requirements

because the trustee was located out of State. Id. 54447. The court in Chase Manhattan also observed that

because New York, like the District and a majority of

other income tax states, employed a statutory grantordomicile rule that the trust’s income would not be taxed

twice. Id. at 546. Similarly, in this case, the Trusts are

not subject to multiple taxes because Minnesota

employs a grantor-domicile statute and Texas does not

have an income tax.

The Connecticut Supreme Court applied “the same

fundamental reasoning” in considering that state’s

authority to impose an income tax on an inter vivos

trust where the beneficiary was a resident of the state

during the tax year. Chase Manhattan Bank v. Gavin,

733 A.2d 782, 801 (Conn. 1997). The necessary due

process connection between the trust and the state was

established even though the trustee was a domiciliary

of New York, did not maintain a presence in

Connecticut, and no trust asset was located in

Connecticut. Id. at 786–87.

Missouri courts consider six points of contact in

evaluating the constitutionality of the application of its

grantor- domicile statute:

(1) the domicile of the settlor, (2) the state in

which the trust is created, (3) the location of

trust property, (4) the domicile of the

beneficiaries, (5) the domicile of the trustees,

and (6) the location of the administration of the

trust.

In re Swift, 727 S.W.2d 880, 882 (Mo. 1987). If the first

two contacts in the list are established, the trust is a

resident trust under Missouri statute. Id. In Swift,

The Missouri Supreme Court ruled that a testamentary

trust left by a Missouri resident could not be classified

as a “resident trust” when it was administered in

Illinois and when none of the other contacts

contemplated in the list of six was present. Id. at 883.

However, the Missouri Supreme Court has gone on to

rule that if any of the other contacts in the list is

present, including by the presence of a contingent

beneficiary, that the application of the statute passes

muster under the Due Process Clause. Westfall v. Dir.

of Revenue, 812 S.W.2d 513, 514 (Mo. 1991). Once

again, Minnesota would have prevailed under that test

for it has contacts (1), (2), (3), and (4).

Most recently, the Ohio Supreme Court affirmed the

constitutionality of an income tax applied to a

Delaware trust set up by an Ohio resident to hold the

stock of an Ohio business. T. Ryan Legg Irrevocable Tr.

v. Testa, 75 N.E.3d 184 (Ohio 2016), cert. denied, 138

S. Ct. 222 (2017). Quoting Curry, the Legg court

reasoned that the “power to dispose of the intangibles

was a potential source of wealth which was property in

[his] hands from which [he] was under the highest

obligation, in common with [his] fellow citizens of

[Ohio], to contribute to the support of the government

whose protection [he] enjoyed.” Id. at 198 (quoting

Curry, 307 U.S at 370-71) (alterations in original).

Here, too, Minnesota’s contacts with the Trusts are

more than sufficient under the Ohio Supreme Court’s

approach.

These four state high courts held that state taxes on

trusts satisfied the Due Process Clause, even though

the trustees administered them out of state. The

District of Columbia Court of Appeals held that the

grantor-domicile rule is constitutionally valid per se

when applied to trusts created by in-state

domiciliaries; the Connecticut Supreme Court held that

a state tax on a trust is constitutionally valid per se

when a beneficiary is an in-state resident; and the Ohio

and Missouri Supreme Courts required contacts — on

top of the grantor’s domicile — that Minnesota easily

satisfied here.

C. Several Other Appellate Courts Join the

Minnesota Supreme Court in Requiring

that the Trustee be Located In-State.

Five state appellate courts, including Minnesota’s,

have declared that application of grantor-domicile

statutes violates the Due Process Clause where the

trustee is located out of state. Four of them, including

Minnesota, have done so on the basis of this Court’s

ruling in Safe Deposit.5 The first such case was

Mercantile-Safe Deposit & Trust Company v. Murphy,

19 A.D.2d 765 (N.Y. App. Div. 1963), aff'd, 203 N.E.2d

490 (N.Y. 1964). In Mercantile the grantor of the trust

was domiciled in New York and the trustee was located

in Maryland. Id. After the settlor’s death the trust

was maintained for the benefit of the grantor’s widow,

who also remained domiciled in New York after his

death, in the same way that the beneficiaries in Curry

remained domiciled in Tennessee. Id. Nevertheless,

the New York Appellate Division found the imposition

of the resident income tax unconstitutional under Safe

Deposit. Id. at 766.

In Blue v. Dep’t of Treasury, 462 N.W.2d 762 (Mich.

Ct. App. 1990), the Michigan Court of Appeals ruled

that Michigan’s statute classifying a testamentary

trust as a resident violated the Due Process Clause

even though the trust owned real property in Michigan.

The court ruled that Safe Deposit controlled the

outcome, and that the trusts’ remaining connections to

Michigan were too attenuated to support taxing

jurisdiction under the Due Process Clause. Id. at 764.

In Residuary Trust A v. Director Division of

Taxation, the New Jersey Tax Court held that the

state’s statute imposing a grantor-domicile rule

deprived a New York trustee of property without due

process with respect to a testamentary trust

The other decision was Linn v. Dep’t of Revenue, 2 N.E.3d 1203

(Ill. Ct. App. 2013), which held that application of the grantordomicile rule was unconstitutional under the physical presence

test in Quill v. N. Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992),

overruled S. Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

administered in New York. 27 N.J. Tax 68 (2013), aff'd

on other grounds Residuary Trust A v. Director

Division of Taxation, 28 N.J. Tax 541 (N.J. Super. Ct.

App. Div. 2015). In so ruling, the New Jersey Tax

Court relied primarily on two of its own precedents:

Pennoyer v. Taxation Div. Director, 5 N.J. Tax 386

(1983), and Potter v. Taxation Div. Director, 5 N.J. Tax

399 (1983). The earlier Pennoyer and Potter cases dealt

with inter vivos trusts administered outside New

Jersey and based their due process rulings primarily on

this Court’s ruling in Safe Deposit.

The Minnesota Supreme Court’s decision deepened

the split between the states. Citing Safe Deposit, the

court determined that the stock in a Minnesota

corporation and the presence of a Minnesota

beneficiary were irrelevant due process connections to

tax the Trusts’ income. App. at 13, and 16. Rather, the

court emphasized that the trustee was a Texas resident

who was barely present in Minnesota during the tax

year and performed all trust activities outside of the

state. App. at 4, and16. The dissent, by contrast, took

an appropriately broad view of the State’s taxing

authority, and recognized that the Safe Deposit rule

had been long ago been abandoned. App. 24-28. (citing

Legg and Chase Manhattan as well as leading

scholars).

II.

THIS CASE IS A GOOD VEHICLE TO RESOLVE A

SIGNIFICANT ISSUE OF FEDERAL LAW.

As the discussion above shows, the outcome of this

case turns on which precedent controls. The amount of

state tax revenue potentially affected by these cases is

significant. According to data compiled by the Internal

Revenue Service, more than 2.7 million trusts filed

income tax returns in 2014, and paid more than $120

billion dollars in income taxes.6 States imposing

income taxes rely on trusts to contribute a significant

portion of their annual tax revenues. In 2016 alone,

Minnesota collected $117.1 million in fiduciary income

taxes. This revenue stream is imperiled in the future

under the Minnesota Supreme Court’s ruling, and the

State is already facing more than 300 claims for refund

based on the outcome of this case.

Additionally, the case provides a clear planning

opportunity for individuals to avoid significant

amounts of the states’ income tax.

Under the

Minnesota Supreme Court’s decision, individuals

owning any form of intangible property can completely

avoid the State’s individual income tax on capital gains

by contributing the property to a trust and then

engaging an out-of-state trustee to sell the property.

The grantor and beneficiary can both remain domiciled

in Minnesota, and under the court’s decision they are

entitled to use the Due Process Clause as a shield to

their home-state’s income tax.

See Internal Revenue Service, SOI Tax Stats—Fiduciary

Returns—Sources of Income, Deductions, and Tax Liability— Type

of Entity: 2014, available at https://www.irs.gov/statistics/soi-taxstats-fiduciary-returns-sources-of-incomedeductions-and-taxliability-by-type-of-entity.

CONCLUSION

Just last Term, this Court rejected a “judicially

created tax shelter” that constituted “an extraordinary

imposition by the Judiciary on States’ authority to

collect taxes and perform critical public functions.”

Wayfair, 138 S. Ct. 2080, at 2095. The Minnesota

Supreme Court and many other state courts have

created another tax shelter not mandated by the

Constitution. This Court’s intervention is again

needed. The petition for a writ of certiorari should be

granted.

Respectfully Submitted,