Respondents Brief — 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 briefJan 22, 2019
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No. 18-664
================================================================
In The
Supreme Court of the United States
-----------------------------------------------------------------CYNTHIA BAUERLY, Commissioner
of the Minnesota Department of Revenue,
Petitioner,
v.
WILLIAM FIELDING, TRUSTEE, et al.,
Respondents.
-----------------------------------------------------------------On Petition For Writ Of Certiorari
To The Minnesota Supreme Court
-----------------------------------------------------------------BRIEF IN OPPOSITION TO CERTIORARI
-----------------------------------------------------------------WALTER A. PICKHARDT
Counsel of Record
LAURA S. CARLSON
CAITLIN E. ABRAM
NICHOLAS J. NELSON
FAEGRE BAKER DANIELS LLP
2200 Wells Fargo Ctr.
90 S. Seventh St.
Minneapolis, MN 55402
(612) 766-8622
walter.pickhardt@faegrebd.com
January 22, 2019
Counsel for Respondents
================================================================
COCKLE LEGAL BRIEFS (800) 225-6964
WWW.COCKLELEGALBRIEFS.COM
i
QUESTION PRESENTED
Minnesota defines a “resident trust” to include an
inter vivos trust whose grantor was domiciled in Minnesota at the time the trust became irrevocable. The
four trusts that are Respondents in this case became
irrevocable in 2011, when the grantor was domiciled in
Minnesota. For the 2014 tax year at issue, Minnesota
taxed the Trusts as residents on their worldwide income, even though the grantor had no power over or
interest in the Trusts. Because the residency classification is permanent (the trusts cannot change residency), Minnesota will continue to tax the trusts as
residents for as long as they exist.
The question presented is whether the Minnesota
Supreme Court correctly held that this violates the
Due Process Clause as applied to the four trusts.
ii
TABLE OF CONTENTS
Page
QUESTION PRESENTED .....................................
i
TABLE OF CONTENTS ........................................
ii
TABLE OF AUTHORITIES ...................................
iii
INTRODUCTION ...................................................
1
STATEMENT OF THE CASE ................................
6
REASONS FOR DENYING THE PETITION .......
12
I. The Decision Below Is in Accord With This
Court’s Due-Process Decisions .................... 12
A. The Trusts Had No Minimum Contacts
with Minnesota ...................................... 12
B. The 100-Percent Portion of the Income
that Minnesota Would Tax Is Not Rationally Related to “Values Connected
with the Taxing State” .......................... 15
II. Petitioner’s Asserted Split Among State
Courts Is Illusory ......................................... 19
A. State Courts Have Unanimously Struck
Down Grantor-Domicile Rules for Irrevocable Inter Vivos Trusts ...................... 19
B. The Cases Cited by Petitioner Do Not
Create a Split ......................................... 23
III.
The Question Petitioner Seeks To Present
Is Irrelevant Because Petitioner Also Loses
Under the Commerce Clause ...................... 27
IV. The Correct Due-Process Test Need Not Result in Tax Avoidance ................................... 29
CONCLUSION .......................................................
31
iii
TABLE OF AUTHORITIES
Page
CASES
Blue v. Dep’t of Treasury, 462 N.W.2d 762 (Mich.
Ct. App. 1990) .................................................... 19, 20
Chase Manhattan Bank v. Gavin, 733 A.2d 782
(Conn. 1999) ............................................ 3, 24, 25, 26
Comm’r v. Court Holding Co., 324 U.S. 331
(1945) .......................................................................29
Complete Auto Transit, Inc. v. Brady, 430 U.S.
274 (1977) ................................................................27
Comptroller of Treasury of Md. v. Wynne, 135
S. Ct. 1787 (2015) ....................................................28
Curry v. McCanless, 307 U.S. 357 (1939) ...................22
District of Columbia v. Chase Manhattan Bank,
689 A.2d 539 (D.C. App. 1997) ................ 4, 23, 24, 25
Greenough v. Tax Assessors of Newport, 331 U.S.
486 (1947) ................................................................14
Hanson v. Denckla, 357 U.S. 235 (1958)......... 13, 14, 18
In re Swift, 727 S.W.2d 880 (Mo. 1987) ......................24
Kaestner 1992 Family Trust v. North Carolina
Department of Revenue, 814 S.E.2d 43 (N.C.
2018), cert. granted, No. 18-457, 2019 WL
166876 (U.S. Jan. 11, 2019) ............................. passim
Lawrence v. State Tax Comm’n, 286 U.S. 276
(1932) ................................................................... 1, 16
Linn v. Dep’t of Rev., 2 N.E.3d 1203 (Ill. App.
2013) ........................................................ 4, 19, 21, 22
iv
TABLE OF AUTHORITIES – Continued
Page
Mercantile-Safe Deposit & Trust Co. v. Murphy,
203 N.E.2d 490 (N.Y. 1964) ........................... 3, 19, 20
Mobil Oil Corp. v. Comm’r of Taxes of Vt., 445
U.S. 425 (1980) ..........................................................5
Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978)...... 5, 12
New York ex rel. Cohn v. Graves, 300 U.S. 308
(1937) .........................................................................1
Potter v. Taxation Div., 5 N.J. Tax 399 (N.J. Tax
1983) ............................................................ 19, 21, 22
Quill Corp. v. North Dakota, 504 U.S. 298
(1992) ............................................................. 5, 12, 13
Safe Deposit and Trust Co. of Baltimore v. Virginia, 280 U.S. 83 (1929) .........................................21
Shaffer v. Carter, 252 U.S. 37 (1920) ........................ 1, 5
Shaffer v. Heitner, 433 U.S. 186 (1977).......................18
South Dakota v. Wayfair, Inc., 138 S. Ct. 2080
(2018) .......................................................................27
T. Ryan Legg Irrevocable Trust v. Testa, 75 N.E.3d
184 (Ohio 2016), cert. denied, 138 S. Ct. 222
(2017) ................................................................. 26, 30
Walden v. Fiore, 134 S. Ct. 1115 (2013)......................13
Westfall v. Director of Revenue, 812 S.W.2d 513
(Mo. 1991) ................................................................24
v
TABLE OF AUTHORITIES – Continued
Page
STATUTES
1994 Minn. Laws ch. 416, art. 2, sec. 4................... 9, 17
Cal. Rev. & Tax. Code § 17745 ....................................30
Iowa Admin. Code § 701-89.3 (422) (2018) ..................2
Minn. Stat. § 290.01, subd. 7b(a) (2014) ........ 6, 7, 9, 16
Minn. Stat. § 290.06, subd. 22(d) (2014) ....................29
Minn. Stat. § 290.9726..................................................8
OTHER AUTHORITIES
https://mn.gov/mmb-stat/debt-management/bonding/
official-statements/2018/MNState01a-FIN.pdf .........30
Nenno, Tax Management Portfolio, State Income
Taxation of Trusts, No. 869 .......................................2
1
INTRODUCTION
The Due Process Clause allows a state to tax a
nonresident on income having a source within the
state. Shaffer v. Carter, 252 U.S. 37 (1920). By contrast,
a state may tax its own residents on income they earn
from anywhere in the world. New York ex rel. Cohn v.
Graves, 300 U.S. 308 (1937); Lawrence v. State Tax
Comm’n, 286 U.S. 276 (1932).
The Respondents are four inter vivos trusts (the
“Trusts”) whose grantor (“Grantor MacDonald”) was a
Minnesota resident in 2011, when the trusts became
irrevocable. The tax year is 2014, during which Grantor MacDonald had no interest in or power over the
Trusts. Nonetheless, Minnesota taxed the Trusts as
residents (on their worldwide income) because Minnesota law defined a trust as a resident if the grantor of
the trust was domiciled in Minnesota at the time the
trust became irrevocable (a “grantor-domicile rule”).
Minn. Stat. § 290.01, subd. 7b(a) (2014). The Minnesota Supreme Court held that Minnesota’s grantordomicile rule, as applied to the Trusts which had only
“extremely tenuous” contacts with Minnesota, App. 18,
was unconstitutional under the Due Process Clause.
The court stated: “The relevant connections are Minnesota’s connection to the trustee, not the connection
to the grantor who established the trust years earlier.”
App. 13.
This Court recently granted North Carolina’s petition for certiorari in Kaestner 1992 Family Trust v.
North Carolina Department of Revenue, 814 S.E.2d 43
2
(N.C. 2018), cert. granted, No. 18-457, 2019 WL 166876
(U.S. Jan. 11, 2019). Although Kaestner involves the income taxation of a trust as a state resident, the issue
in Kaestner is quite different. North Carolina law taxes
a trust as a resident if a beneficiary resides in the
state—it has a “beneficiary-domicile rule.” Minnesota
employs a grantor-domicile rule.1
Although both states rely on the connections of a
third party rather than the connections of the trust itself, there are much more serious due process infirmities presented by Minnesota’s grantor-domicile rule
than by North Carolina’s beneficiary-domicile rule.
One difference is that while North Carolina relies on
the beneficiary’s presence during the taxable year to
establish residency, Minnesota relies on a single historical connection: to wit, Grantor MacDonald’s connection to the trust ended in 2011, but the tax year in
question is 2014, when he had no interest in or power
over the Trusts.
A second distinction is that, under North Carolina’s statute, if a beneficiary relocated out of North
Carolina, the trust would no longer be a resident.
1
The Minnesota Commissioner asserts incorrectly that 23
states have grantor-domicile rules. Pet. 8, n. 2. She includes states
whose statutes do not implicate grantor domicile, such as Iowa.
Iowa law says that the residency determination is made based on
“relevant facts,” but the domicile of the grantor “is not a controlling factor . . . unless the person is also a trustee.” Iowa Admin.
Code § 701-89.3 (422) (2018). In actuality, there are 12 states that
“tax an inter vivos trust solely because the [grantor] resided in
the state.” Nenno, Tax Management Portfolio, State Income Taxation of Trusts, No. 869, at II.D.
3
Under Minnesota’s statute, the grantor’s residence
when the trust became irrevocable results in a permanent classification of the trust as a resident. Minnesota
makes residency an immutable characteristic. Because
Grantor MacDonald was a Minnesota resident in 2011,
the Trusts would be Minnesota residents for decades.
Once a resident, always a resident.
Yet another difference between Kaestner and this
case is that although there arguably is a split in state
court decisions addressing beneficiary-domicile rules,2
there is no split in state court decisions addressing
grantor-domicile rules as applied to inter vivos trusts.
The Minnesota Supreme Court’s decision is consistent
with the unanimous view of every other state court
(four of them) to consider the question. Furthermore,
contrary to Petitioner’s claim, neither the Minnesota
Supreme Court nor any of the other state courts has
said that the due process problem was double taxation.
Pet. 10-12. As New York’s highest court, in holding a
grantor-domicile statute unconstitutional, said: “The
lack of power of New York State to tax in this instance
stems not from the possibility of double taxation but
from the inability of a State to levy taxes beyond its
border.” Mercantile-Safe Deposit & Trust Co. v. Murphy, 203 N.E.2d 490 (N.Y. 1964).
Petitioner tries to fabricate a split by citing very
different cases involving testamentary trusts—that is,
2
North Carolina’s Kaestner decision may split with Chase
Manhattan Bank v. Gavin, 733 A.2d 782 (Conn. 1999), discussed
below, although there are factual differences.
4
trusts created through the probate of the grantor’s
will. Some states (including Minnesota) classify testamentary trusts as residents if the grantor’s will is probated in the state. Petitioner cites cases holding that
this connection satisfies due process to establish a purported split. However, the cases are distinguishable because testamentary trusts owe their existence and
supervision to state probate courts. There is a nexus
with the state that simply does not exist for an inter
vivos trust, and the cases recognize the distinction. See,
e.g., Linn v. Dep’t of Rev., 2 N.E.3d 1203, 1210 (Ill. App.
2013) (“[A]n irrevocable inter vivos trust does not owe
its existence to the laws and courts of the state of the
grantor in the same way a testamentary trust does and
thus does not have the same permanent tie.”); and D.
C. v. Chase Manhattan Bank, 689 A.2d 539, 547, n. 11
(D.C. App. 1997) (An inter vivos trust “does not owe its
existence to the laws and courts of the District in the
same way that the testamentary trust . . . does, and
thus it does not have the same permanent tie to” the
taxing state.).
Every court to consider grantor-domicile rules as
applied to inter vivos trusts has agreed that due process does not allow states to tax a trust as a resident
based on the grantor’s historical domicile.
Petitioner addresses the minimum connection requirement (called nexus), but she says nothing about
the additional due process requirement that there be
“a ‘rational relationship’ between the income the state
seeks to tax and the protections and benefits conferred
5
by the state.” App. 11.3 A minimum connection (nexus)
permits a state to tax a nonresident on income having
a source within the state, but taxing a person on unapportioned worldwide income requires more than a
mere minimum connection.4
This is yet another distinction between Kaestner
and the instant case. The North Carolina Supreme
Court addressed only the minimum connection requirement. 814 S.E.2d at 48, and at 52, n. 1 (recognizing the
rationally-related requirement, but stating the court
was concerned only with the minimum-connection requirement). The Minnesota Supreme Court addressed
both requirements.
Regarding the minimum-connection test, the court
held that Grantor MacDonald’s 2011 domicile in Minnesota did not create the necessary minimum connection for the 2014 tax year. App. 12-13. That would
have been sufficient for the Trusts to prevail, but the
court went on to consider whether the income being
taxed (100 percent of worldwide income) had a rational
3
The two-part due process test for an income tax was set forth
in Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273 (1978). See also
Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992); and Mobil
Oil Corp. v. Comm’r of Taxes of Vt., 445 U.S. 425, 436-437 (1980).
4
For example, in Shaffer v. Carter, 252 U.S. 37, 57 (1920),
the taxpayer was an Illinois resident who conducted an extensive
oil and gas business in Oklahoma. He had much more than a
minimum connection, but he was not taxed by Oklahoma on his
worldwide income. This Court upheld Oklahoma’s taxation of his
income from Oklahoma sources only.
6
relationship to the protections and benefits provided
by Minnesota. App. 12-19.
The court’s analysis of the rational-relationship
test was fact-specific. After reviewing the facts, the
court determined that the Trusts’ contacts with Minnesota were “extremely tenuous” during the tax year.
App. 18. It said: “[T]he Trusts had almost no contact
with the State during the tax year at issue.” Id. The
court held that “[a]ttributing all income, regardless of
source, to Minnesota for tax purposes would not bear a
rational relationship with the limited benefits received
by the Trusts from Minnesota during the tax year at
issue.” Id. at 21.
This alternative basis for decision was clearly correct; it is also fact-bound and is not deserving of review
by this Court.
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STATEMENT OF THE CASE
The respondent is William Fielding (the “Trustee”), a Texas resident, who is the trustee of four Trusts
created in 2009 by a Minnesota resident, Grantor MacDonald.
Grantor MacDonald established the Trusts in
2009 by entering into trust agreements with Edmund
MacDonald, as trustee, who was a California resident.
Through 2011, the Trusts were grantor trusts whose
income was taxed to Grantor MacDonald. Minn. Stat.
§ 290.01, subd. 7b(a) (2014). On December 31, 2011,
7
Grantor MacDonald signed a release of the power to
substitute assets. As a result, the Trusts ceased being
grantor trusts and Trust income became taxable to the
Trusts.5 Grantor MacDonald retained no interest in or
powers over the Trusts.
The Trusts had only one trustee at any given time,
who was the same trustee for each of the Trusts. At no
time was any trustee domiciled in Minnesota. During
the 2014 tax year at issue, Katherine Boone was the
sole trustee until July 24, 2014, and then William
Fielding became the sole trustee (a position he still
holds). Ms. Boone was a Colorado resident; Mr. Fielding was (and is) a Texas resident. Neither Ms. Boone
nor Mr. Fielding performed any duties as trustee in
Minnesota.
The primary beneficiary of each separate Trust
is a child of Grantor MacDonald: Maria, Catherine,
Laura and Vandever. The only child who was a resident
of Minnesota was Vandever. He was attending college
in New York in 2014, but filed a Minnesota resident
income tax return.
5
Pursuant to Article 2.1 of the trust agreements, the Trusts
were always irrevocable under nontax law, as Grantor MacDonald’s only retained power was to replace trust assets with assets
of equal value, which he relinquished in 2011. The Commissioner
characterizes that power as “control,” Pet. 18, but in fact it was a
very limited power, albeit a power sufficient to make the Trusts
grantor trusts for income tax purposes. Under the Minnesota residency statute, they were deemed “irrevocable” when they ceased
to be grantor trusts. Minn. Stat. § 290.01, subd. 7b(a).
8
The beneficiaries have no right to any distributions from the Trusts at any time. Distributions are
entirely within the discretion of the Trustee. Each beneficiary is, therefore, a discretionary beneficiary of his
or her own Trust.
Each child is a contingent beneficiary of the Trusts
for his siblings. Vandever, for example, is a contingent
beneficiary of the Trusts for his sisters. If a sister predeceased him without leaving surviving issue, a portion of the assets in her trust would be paid to
Vandever’s Trust, and another portion to the Trusts of
the other surviving siblings or their issue.
Prior to August 1, 2014, each of the Trusts owned
nonvoting common stock in Faribault Foods, Inc. (“FFI”),
an S corporation engaged in the manufacture and sale
of food products. FFI was based in Minnesota (where it
was incorporated) but had activities in other states.
Under Minnesota’s tax apportionment statutes, the
following percentages of FFI’s net income were attributed to Minnesota: 11.228 percent for its fiscal year
ended March 31, 2014; and 7.499 percent for its short
year ended July 31, 2014. On their Minnesota income
tax returns for 2014, the Trusts reported their pro rata
share of FFI’s income apportioned to Minnesota.6
6
An S corporation’s income passes through to its shareholders
under Minnesota law, as under federal law. Minn. Stat. § 290.9726.
Because all shareholders must elect to be taxed individually, in lieu
of the corporation being taxed, the Trusts conceded that Minnesota
could tax their share of FFI income. However, capital gain realized
by a nonresident from selling S corporation stock has not been
9
On August 1, 2014, each of the shareholders of FFI
sold all of his, her or its stock to La Costeña USA, Inc.
At the time of the sale, each Trust owned nonvoting
common stock representing 4.226 percent of all outstanding shares. Mr. Fielding, as trustee and while in
Texas, investigated the proposed terms of the sale and
exercised his discretion to sell the stock. He then invested the proceeds with an investment advisor located
in San Francisco, California. Through the Californiamanaged investment accounts, the Trusts owned diversified investment funds in 2014, from which they
received interest and dividends.
Because Minnesota law defined an irrevocable inter vivos trust to be a resident if the grantor of the
trust was domiciled in Minnesota at the time the trust
became irrevocable, Minn. Stat. § 290.01, subd. 7b(a),
and because Grantor MacDonald was domiciled in Minnesota when the trusts became irrevocable in 2011, the
Trustee filed the Trusts’ 2014 Minnesota income tax
returns as resident trust returns under protest, reporting their worldwide income as taxable.7 The Trusts
then filed refund claims reporting only their Minnesotasource income as taxable.8
taxable by Minnesota since 1994. 1994 Minn. Laws ch. 416, art. 2,
sec. 4.
7
The Trustee also filed state income tax returns in Arizona,
California, Colorado, and Illinois.
8
The Minnesota-source income for each Trust consisted of its
pro rata share (4.226 percent) of the pass-through income of FFI,
as apportioned to Minnesota.
10
After the claims were denied, the Trusts appealed
to the Minnesota Tax Court, which held that Minnesota’s definition of “resident trust” violated the Due
Process Clause as applied to the Trusts:
[the statute] reaches back through time to a
discrete historical moment [when the trust
became irrevocable], and purports to rely on
state protections extended (to the grantor) at
that moment. But . . . due process does not
permit this resort to protections provided exclusively in previous tax years. . . . In addition, because the domicile of the grantor at the
moment an inter vivos trust became irrevocable is a matter of historical fact, it is—as to
the trust—an immutable characteristic. Consequently, residency under this factor will be
perpetual, and the due process problem associated with reaching back through time will
worsen with each passing year.
Second, the grantor-domicile method of asserting taxing jurisdiction over a trust reaches
across persons. Rather than relying on connections with the trust itself, it relies instead
on connections with the trust’s grantor. . . . [A]
connection with the grantor at the time the
trust became irrevocable does not entail any
connection with the trust at that same moment.
App. 77-78.
The Minnesota Supreme Court affirmed. It noted
that, for tax purposes, a trust is a legal entity separate from its grantor. Therefore, Grantor MacDonald’s
11
Minnesota connections were not “relevant to the relationship between the Trusts’ income that Minnesota
seeks to tax and the protection and benefits Minnesota
provided to the Trusts’ activities that generated the
income.” App. 13. The court also rejected the Commissioner’s position because the statute “looked back, several years in some cases, to find contacts by persons
other than the Trust and the trustees.” App. 14, n. 6.
The court next considered whether the contacts
between the Trusts and Minnesota meant that there
was a rational relationship between the Minnesota
benefits received by the Trusts and the taxation of 100
percent of the Trusts’ worldwide income. Petitioner
claimed there was a rational relationship and pointed
to the following contacts: the use of a Minnesota law
firm to draft the trust agreements and to litigate the
tax case; the presence of the original trust agreement
in a Minnesota lawyer’s office for part of 2014; the ownership of a minority interest in a Minnesota corporation (FFI); a choice of law provision in the trust
agreement referring to Minnesota law; and the Minnesota domicile of one beneficiary (Vandever). The court
determined that the contacts with Minnesota were “extremely tenuous,” App. 18, and held that “[a]ttributing
all income, regardless of source, to Minnesota for tax
purposes would not bear a rational relationship with
the limited benefits received by the Trusts from Minnesota during the tax year at issue.” Id. at 21.
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12
REASONS FOR DENYING THE PETITION
I.
The Decision Below Is in Accord With This
Court’s Due-Process Decisions.
This Court has explained that the Due Process
Clause places two restrictions on a state’s power to tax
income. First, a state may not tax income unless it has
some minimum connection with the taxpayer and its
income-generating activity. Second, even where a minimum connection exists, the State may tax only so
much of the income as is rationally related to “values
connected with the taxing State.” Moorman Mfg. Co. v.
Bair, 437 U.S. 267, 272-273 (1978).
If a tax fails either of these standards, it violates
the Due Process Clause. Here, the Minnesota Supreme
Court held that taxing the Trusts as residents violated
both standards.
A. The Trusts Had No Minimum Contacts
with Minnesota.
Due process does not allow a state to tax a person
at all unless the person has a minimum connection
(nexus) with the state. This Court has held that state
tax nexus is closely related to the due-process standard
for specific personal jurisdiction. Quill Corp. v. North
Dakota, 504 U.S. 298, 308 (1992). Quill observed: “[I]f
a foreign corporation purposefully avails itself of the
benefits of an economic market in the forum State, it
may subject itself to the State’s in personam jurisdiction even if it has no physical presence in the State.”
Id. at 307-308. The same purposeful availment also
13
creates a nexus with the state for tax purposes. Id. at
308.
In the personal-jurisdiction context, this Court
has made clear that a trust’s contacts with a state cannot be conflated with the contacts of the trust’s grantor
or beneficiaries. In Hanson v. Denckla, 357 U.S. 235
(1958), this Court held that Florida lacked personal jurisdiction to determine the validity of a trust, even
though the trust’s grantor lived there until her death,
and most of its beneficiaries also lived there. Rather,
personal jurisdiction over the trust arose in Delaware,
where the trustee was located. More recently, in Walden v. Fiore, 134 S. Ct. 1115 (2013), this Court emphasized that personal jurisdiction must arise out of the
defendant’s own contacts and not those of a third party.
Describing Hanson, the Court stated that “[w]e have
. . . rejected a plaintiff ’s argument that a Florida court
could exercise personal jurisdiction over a trustee in
Delaware based solely on the contacts of the trust’s settlor, who was domiciled in Florida and had executed
powers of appointment there.” Id. at 1121.
The Minnesota Supreme Court applied a similar
analysis in holding that the relevant connection was
with the Trustee. The court noted that a “trust is its
own legal entity, with a legal existence that is separate
from the grantor or the beneficiary.” App. 14. It held:
[T]he grantor’s connections to Minnesota—
the Minnesota residency of Reid MacDonald
in 2009, when the Trusts were established; in
2011, when the Trusts were made irrevocable;
and in 2014, when the Trusts sold the FFI
14
stock—are not relevant. . . . The relevant connections are Minnesota’s connection to the
trustee, not the connection to the grantor who
established the trust years earlier.
App. 13.
Minnesota law contains a grantor-domicile rule,
not a beneficiary-domicile rule. Nonetheless, the court
addressed the Minnesota residency of one beneficiary,
Vandever MacDonald. Because a trust is an entity
“with a legal existence that is separate from . . . the
beneficiary,” “the Minnesota residency of beneficiary
Vandever MacDonald does not establish the necessary
minimum connection to justify taxing the Trusts’ income.” Id. 12-14. The court’s holding is entirely consistent with Hanson.9
Although Kaestner presents the question of whether
North Carolina’s beneficiary-domicile rule is constitutional, the Minnesota Supreme Court’s statement regarding Vandever’s residency should be regarded as
dictum because beneficiary residency is irrelevant under the applicable Minnesota statute.
But even if it is not dictum, Vandever’s beneficial
interest in the Trusts is much more attenuated than
the interest of the Kaestner beneficiary. Kaestner involved the 2008 year; although distributions were within
the discretion of the trustee in 2008, the beneficiary
9
It is also consistent with Greenough v. Tax Assessors of Newport, 331 U.S. 486, 495-496 (1947) (“The citizenship of the trustee
and not the seat of the trust or the residence of the beneficiary is
the controlling factor.”).
15
was entitled to a complete distribution of trust assets
in June 2009, when she turned 40. 814 S.E. 2d at 45.
By contrast, regarding the Trust for which Vandever
was the primary discretionary beneficiary (his own
trust), Vandever was not entitled to any distributions
at any time. Distributions were always discretionary
with the Trustee. Although his Trust had Minnesota
taxable net income of $2,661,597 in 2014, the Trustee
distributed just $7,200 to Vandever. (Vandever paid
Minnesota income tax on that distribution.)
Vandever had a discretionary interest in his own
Trust; his interest in the Trusts for his sisters (who
were not Minnesota residents) was contingent.
Vandever’s Trust might receive distributions from a
sister’s Trust only if a sister pre-deceased him without
issue. (Two of his sisters have had issue since this case
commenced.) The Minnesota Supreme Court properly
dismissed Petitioner’s argument that the sisters’
Trusts could be taxed because of Vandever’s contingent
interest. App. 14, n. 6.
B. The 100-Percent Portion of the Income
that Minnesota Would Tax Is Not Rationally Related to “Values Connected with
the Taxing State.”
As an alternative basis for its conclusion that the
Trusts could not be taxed as residents consistent with
due process, the Minnesota Supreme Court held that
the tax was not rationally related to what Minnesota
provided in terms of legal protections and services.
16
When a state seeks to tax 100 percent of a person’s
worldwide income by treating him as a resident, the
required connection to the state must be substantial.
Domicile (where a person makes his home) traditionally provides the basis for taxing an individual as a
resident because “[e]njoyment of the privileges of residence within the state, and the attendant right to invoke the protection of its laws, are inseparable from
the responsibility for sharing the costs of government.”
Lawrence, 286 U.S. at 278.
Minnesota (like some other states) treats a nondomiciled individual as a resident if the individual has
an abode in Minnesota and spends more than one-half
the year physically present in the state. Minn. Stat.
§ 290.01, subd. 7(b) (2014). Again, the connection is
substantial—state protections and services are provided for more than half the year.
By contrast, Minnesota’s statutory residency definition for irrevocable inter vivos trusts requires no contact at all between the trust and the state. It relies on
the state’s historical connection to a separate person—
the grantor. It permanently brands a trust a resident
based on that historical connection, making it impossible for the trust to change its residency.
In a fact-bound analysis, the Minnesota Supreme
Court considered other “contacts” asserted by Petitioner for why the rationally-related test was purportedly met: Vandever’s residency in Minnesota; the
ownership of a minority stock interest in a Minnesota
corporation (FFI); a choice of law provision in the trust
17
agreement referring to Minnesota law; the use of a
Minnesota law firm (by the grantor) to draft the trust
agreements and (by the Trustee) to litigate the tax
case; and the presence of the original trust agreement
in a Minnesota lawyer’s office for part of 2014. App. 1821. The Minnesota Supreme Court determined that
these “contacts” were “extremely tenuous,” and held
that “[a]ttributing all income, regardless of source, to
Minnesota for tax purposes would not bear a rational
relationship with the limited benefits received by the
Trusts from Minnesota during the tax year at issue.”
Id. at 21.
Vandever’s beneficial interest has been addressed
above. He had only a discretionary interest in his own
Trust because he had no right to any of the Trust’s income, and only a contingent discretionary interest in
his sisters’ Trusts.
The dissenting opinion in the Minnesota Supreme
Court stated that the Trusts’ ownership of stock in a
Minnesota corporation (FFI) provided a rational
relationship, but that conflates the corporation (which
received state benefits) with the Trusts (which did
not). App. 25. The fact that the capital gain from selling
FFI stock was not taxed troubled the dissent, but that
was the result of a deliberate legislative choice. Minnesota formerly taxed an apportioned share of a nonresident’s capital gain from selling stock in an S
Corporation, but it repealed that tax in 1994. 1994
Minn. Laws ch. 416, art. 2, sec. 4.
18
We know of no case holding that owning stock in
an in-state corporation means that the shareholder
can be taxed as a state resident. By analogy, owning
such stock does not give a state personal jurisdiction.
Shaffer v. Heitner, 433 U.S. 186, 211 (1977) (ownership
of stock in a Delaware corporation did not “provide contacts with Delaware sufficient to support the jurisdiction of that State’s courts over” the shareholder).
The Minnesota choice of law provision was simply
an agreement as to which state’s laws governed the
trust agreements. The provision did not mean that
trust disputes would be litigated in Minnesota courts,
as the Minnesota Supreme Court recognized. App. 18.
Cf. Shaffer, 433 U.S. at 215 (“[W]e have rejected the argument that if a State’s law can properly be applied to
a dispute, its courts necessarily have jurisdiction over
the parties to that dispute.”). Indeed, under Hanson,
Minnesota courts would not have jurisdiction given
that the Trustee was a Texas resident who performed
all trust duties outside Minnesota.
The Minnesota Supreme Court’s holding that
there was no rational relationship between the income
Minnesota sought to tax (worldwide income) and the
protections and benefits provided by Minnesota meant
that even if the Trusts had nexus with Minnesota, the
state could not tax all of their worldwide income, which
included income earned on investments managed in
California that had no conceivable connection to Minnesota.
19
Kaestner did not reach this issue. 814 S.E.2d at 48.
If it had, most likely the court would have held that the
rational-relationship test was not met. However, in
Kaestner, ownership of the trust assets was on the cusp
of vesting in the discretionary beneficiary, which distinguishes the case from the instant case, where none
of the beneficiaries would ever vest under the trust
agreements (unless the Trustee made a discretionary
distribution).
The Minnesota Supreme Court’s holding is manifestly correct. It is also based on the specific facts of
this case. For these reasons, certiorari should not be
granted.
II.
Petitioner’s Asserted Split Among State Courts
Is Illusory.
A. State Courts Have Unanimously Struck
Down Grantor-Domicile Rules for Irrevocable Inter Vivos Trusts.
The Minnesota Supreme Court’s holding that
Minnesota’s grantor-domicile rule is invalid as applied
under the Due Process Clause is consistent with the
holdings of all state courts that have addressed a
similar statute where the taxpayer has been, like
the Trusts here, an irrevocable inter vivos trust. See
Mercantile-Safe Deposit & Trust Co. v. Murphy, 203
N.E.2d 490 (N.Y. 1964); Blue v. Dep’t of Treasury, 462
N.W.2d 762 (Mich. Ct. App. 1990); Linn v. Dept. of Rev.,
2 N.E.3d 1203 (Ill. App. 2013); Potter v. Taxation Div., 5
N.J. Tax 399 (N.J. Tax 1983).
20
In Mercantile-Safe Deposit, the trust’s grantor and
beneficiaries lived in New York, but the trustee lived
in Maryland and held and managed the trust’s assets
there. New York law would have treated the trust as a
New York resident based on the grantor’s domicile at
the time the trust became irrevocable, but the New
York Court of Appeals held that due process forbids
this. The court’s rationale was extraterritoriality, not
double taxation: “The lack of power of New York State
to tax in this instance stems not from the possibility of
double taxation but from the inability of a State to levy
taxes beyond its border.” 203 N.E.2d at 490.
Blue involved a trust with a Michigan grantor but
a Florida trustee and beneficiary. Based on the grantor’s domicile in 1962, when the trust became irrevocable, a Michigan statute would have treated the trust as
residing in Michigan in tax years 1982-1987. The Michigan Supreme Court held that violates due process,
because Michigan “provided no present benefits or protections to the subject trust,” 462 N.W.2d at 763-764. It
noted:
We analogize the present case to a hypothetical statute authorizing that any person born
in Michigan to resident parents is deemed a
resident and taxable as such, no matter where
they reside or earn their income. We believe
this would be clearly outside of the state’s
power to impose taxes.
Id. at 764-765.
21
The trustee in Linn lived in Texas and the trust
had no connection to Illinois for the tax year at issue,
but Illinois law would have treated the trust as a resident based on the grantor’s historical residence there.
The court found that this violated due process because
there was not even a “minimum connection” between
the trust and Illinois.
In Potter, a New Jersey court held that the state’s
grantor-domicile rule violated the Due Process Clause
for an irrevocable inter vivos trust with a New Jersey
grantor but an out-of-state trustee. The court said:
The ability of the State of New Jersey to tax
the undistributed income of this inter vivos
trust depends on the existence of sufficient
contacts and benefits to comply with constitutional due process requirements. The domicile
of the settlor at the time of the creation of the
irrevocable inter vivos trust is not in itself a
sufficient contact to support taxation by New
Jersey.
5 N.J. Tax at 404. Contingent beneficiaries resided in
New Jersey, but the court said: “The fact that contingent beneficiaries are domiciled in New Jersey does
not constitute a contact sufficient to empower New Jersey to tax undistributed trust income where the contingent beneficiaries have no right to the undistributed
trust income.” Id. at 405.
Petitioner claims that these decisions “commonly
cite Safe Deposit and Trust Co. of Baltimore v. Virginia,
280 U.S. 83 (1929).” She infers from this that the courts
22
must have been concerned about double taxation.10
They were wrong, she says, because this Court in Curry
v. McCanless, 307 U.S. 357 (1939), held that more than
one state may tax the same property. Pet. 10-11.
Petitioner is incorrect. Five state courts have held
that a grantor-domicile rule violates due process for inter vivos trusts. Some of these have cited Safe Deposit,
but none has rested its decision on concerns about double taxation. When New York’s highest court cited Safe
Deposit, it expressly stated that the due-process concern was not double taxation but “the inability of a
State to levy taxes beyond its border.” 203 N.E.2d at
490. The Michigan court in Blue summarized the holding of Safe Deposit as: “A state statute which attempts
to tax things wholly beyond the state’s jurisdiction or
control conflicts with the Fourteenth Amendment.” 462
N.W.2d at 763-764. The court did not discuss double
taxation. Similarly here, although the Minnesota Supreme Court cited Safe Deposit, it said nothing about
double taxation. App. 13, 16. The courts in Linn and
Potter did not cite Safe Deposit and did not discuss double taxation. None of the five cases is inconsistent with
Curry.
10
Safe Deposit involved a trust with a Virginia grantor and
beneficiaries, but whose trustee and property were in Maryland.
This Court held that the Due Process Clause precluded Virginia
from taxing the trust corpus. Although the Court alluded to double taxation, its holding did not rest on that ground, but rather
rested on the basis that trustee and the corpus were outside the
state’s jurisdiction. 280 U.S. at 92.
23
B. The Cases Cited by Petitioner Do Not
Create a Split.
Petitioner’s assertion that there is a split of authorities relies heavily on cases involving testamentary trusts. These are readily distinguishable from
inter vivos trust cases like this one.
A testamentary trust—one created by the grantor’s will—owes its existence to the laws and probate
courts of the state where the grantor was domiciled at
death. State probate courts also exercise continuing jurisdiction to resolve trust disputes and other matters.
Inter vivos trusts, by contrast, are agreements between
private persons (the grantor and the trustee). They do
not arise from the exercise of a state court’s jurisdiction. Courts of the state where the grantor is or was
domiciled do not, by reason of that connection, have
jurisdiction over trust disputes, as Hanson makes
clear.
These distinctions were recognized in District
of Columbia v. Chase Manhattan Bank, 689 A.2d 539
(D.C. App. 1997). There a testamentary trust was created when the grantor died in the District, and the estate was probated in a District court. On those facts,
the court held that “the District’s ties to the trust itself
justify both the District’s continuing, supervisory jurisdiction over the entire trust . . . and the District’s taxation of the entire net income of the trust. . . .” Id. at
544. The court distinguished grantor-domicile rules
from inter vivos trusts because an inter vivos trust
“does not owe its existence to the laws and courts of the
24
District in the same way that the testamentary trust
at issue in the present case does, and thus it does not
have the same permanent tie to the District.” Id. at
547, n. 11.
The two Missouri cases cited by Petitioner (see Pet.
14) also involved testamentary trusts. In In re Swift
the Missouri Supreme Court actually rejected the argument “that the administration of Swift’s estate by a
Missouri probate court, together with Swift’s Missouri
domicile at death and the creation of the subject trusts
by a ‘Missouri’ will, provide a sufficient nexus to justify
the imposition of income tax.” 727 S.W.2d 880, 882 (Mo.
1987). And in Westfall v. Director of Revenue, the court
simply held that Missouri nevertheless can have jurisdiction to tax a testamentary trust if there are Missouri contacts added to probate-court administration
and the grantor’s domicile at death. 812 S.W.2d 513,
515 (Mo. 1991). The Missouri cases do not split with
cases holding that a grantor-domicile rule for inter vivos trusts violates due process.
In Chase Manhattan Bank v. Gavin, 733 A.2d 782
(Conn. 1999), the Connecticut Supreme Court held
that the state could treat three testamentary trusts as
residents based on the grantor’s residence there at
death. The court reasoned that:
The [state’s] unquestioned power to resolve
disputes over the trust and to order accountings to protect the trust corpus and beneficiaries from potential malfeasance by the
trustee reflects the [state’s] justifiable, though
25
not necessarily exclusive, jurisdiction over the
trust itself.
Id. at 800 (quoting Chase, 689 A.2d at 544). These considerations do not apply to inter vivos trusts.
Gavin additionally involved one inter vivos trust.
Connecticut’s statute taxed the trust as a resident if
both the grantor and a noncontingent beneficiary lived
in the state. The Connecticut Supreme Court held that
the grantor’s historical Connecticut domicile alone did
not support taxing the trust as a resident:
[T]he due process test [requires] that the benefits afforded by the state to a domiciliary . . .
justifying the taxation of its income, must
generally span the time period during which
the income was earned, and not solely antedate that time period without any continuing
effect.
Id. at 801. On this point, Gavin is in accord with the
five state courts (including Minnesota’s) that have invalidated grantor-domicile rules.
However, Gavin went on to hold that the trust
could be taxed as a resident because it provided protections and benefits to its noncontingent beneficiary.
Id. at 802. A noncontingent beneficiary was defined as
a “beneficiary whose interest is not subject to a condition precedent.” Id. at 787, n. 6. The beneficiary in
Gavin (1) was entitled to receive mandatory distributions of all income; and (2) was entitled to receive all
assets when she reached the age of 48. Id. at 788.
26
Vandever is only a discretionary beneficiary of his
own Trust and a contingent discretionary beneficiary
of his sisters’ Trusts. He has no right to receive distributions at any time from any of the Trusts. If Connecticut’s statute were applicable, he would not qualify as
a noncontingent beneficiary, meaning that the Trust
would not be taxed as a resident.
Gavin does not split with the instant case because
Minnesota law, unlike Connecticut law, contains no
beneficiary-domicile rule. In addition, the Trusts do
not have a noncontingent beneficiary resident in Minnesota.
Also, Gavin (like Kaestner) addressed only the
minimum-connection test and not the rationalrelationship test. 733 A.2d at 791-792; 814 S.E.2d at
48. In this case, the Minnesota Supreme Court did address the rational-relationship test and held that there
was no rational relationship justifying a tax on 100
percent of the Trusts’ worldwide income. App. 18-21.
Finally, Petitioner discusses T. Ryan Legg Irrevocable Trust v. Testa, 75 N.E.3d 184 (Ohio 2016), cert.
denied, 138 S. Ct. 222 (2017), which involved an entirely different issue. The court there decided that the
taxpayer was a nonresident trust. Id. at 197. It then
held that, under certain conditions stipulated in Ohio
law, the state could tax a nonresident trust on a portion
of the gains from selling stock in a corporation that did
business in Ohio. That holding does not implicate the
grantor-domicile rule at all, let alone conflict with
other decisions on that issue.
27
III. The Question Petitioner Seeks To Present Is
Irrelevant Because Petitioner Also Loses
Under the Commerce Clause.
A tax is valid under the Commerce Clause only if
it “is applied to an activity with a substantial nexus
with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly
related to the services provided by the State.” Complete
Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
The Commerce Clause substantial-nexus requirement is closely related to the due process minimumconnection requirement. South Dakota v. Wayfair, Inc.,
138 S. Ct. 2080, 2093 (2018). The Trusts did not have
substantial nexus because their contacts with Minnesota were “extremely tenuous.” App. 18.
The fair apportionment requirement is not satisfied because Minnesota seeks to tax 100 percent of the
capital gain from selling FFI stock, even though FFI’s
apportionment percentage was less than 12 percent.
Similarly, Minnesota seeks to tax 100 percent of the
investment income from a portfolio managed in California, and that tax would not be fairly related to the
services provided by Minnesota to the Trusts—there
were no such services.
In addition, to be fairly apportioned, and to not
discriminate against interstate commerce, a tax must
be internally consistent. The internal consistency test
posits the hypothetical that Minnesota and all other
states have the identical tax. If that would result in
multiple taxation, the test is violated. Comptroller of
28
Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1802-1803
(2015).11
Petitioner’s position is that the Trusts for Vandever’s sisters should be taxed as Minnesota residents
because Vandever was a contingent beneficiary of
those trusts. App. 14, n. 6. That position clearly violates internal consistency. Each of Grantor MacDonald’s children was a contingent beneficiary of the
Trusts for all of the other siblings. Two sisters were
residents of New York; the third was a resident of California. If those states applied the same rule that Petitioner says should apply here (even though the rule is
not in Minnesota Statutes), then each of the four
Trusts would be treated as a resident of Minnesota,
New York and California, because there would be contingent beneficiaries in all of those states. Those three
states could tax all of the income of the four Trusts. The
internal consistency violation is obvious, and will only
get worse. As Grantor MacDonald’s children have their
own children, which has already occurred, the grandchildren will be contingent beneficiaries of the Trusts.
As they mature and move to other states, those states
would be entitled to tax the Trusts as residents under
11
Actual double taxation is not a requirement of the internal
consistency test. However, in this case the Trust for Maria was
double taxed (by Minnesota and California) on some of the capital
gain. Minnesota did not allow a credit. The Minnesota Commissioner’s statement that the Trusts had no double taxation is incorrect. Pet. 13.
29
Petitioner’s theory. The entire income of the Trusts
would be taxed many times over.12
The Minnesota Supreme Court’s decision is correct under the Due Process Clause. It would have
reached the same result if it had addressed the Commerce Clause.
IV. The Correct Due-Process Test Need Not Result in Tax Avoidance.
Petitioner misreads the Minnesota Supreme Court’s
opinion to mean that taxation is restricted to the single
jurisdiction where the trustee is domiciled. Pet. 9, n. 3.
The court never adopted that as a general rule.
Petitioner envisions a “planning opportunity” for
Minnesota residents who intend to sell stock: They can
put it in a non-grantor trust for a Minnesota beneficiary with a non-Minnesota trustee who would sell the
stock. App. 19. Judicial doctrines such as assignment
of income and substance over form can be used to prevent such income shifting. See, e.g., Comm’r v. Court
Holding Co., 324 U.S. 331 (1945). There are also statutory solutions.
12
A credit for taxes paid to other states could alleviate multiple taxation, but Minnesota’s credit is not available for taxes imposed by another state on the intangible income of a Minnesota
resident. Minn. Stat. § 290.06, subd. 22(d) (2014).
30
Petitioner’s “planning opportunity” is factually similar to what happened in Ohio’s Legg case. Ohio law
foreclosed the income shifting by taxing a nonresident
trust on an apportioned share of capital gain from
selling S corporation stock. Minnesota could adopt a
similar statute, and actually had such a statute before
1994.
California takes another approach. If a trust with
a resident beneficiary does not pay California tax, California taxes the resident beneficiary as a transferee of
the trust when she receives a distribution of the untaxed income. Cal. Rev. & Tax. Code § 17745.
Contrary to the Petition, fiscal Armageddon is not
at hand.13 Moreover, the Minnesota Legislature has
the ability to solve any perceived problem.
------------------------------------------------------------------
13
Minnesota identified litigation that could have a material
adverse effect exceeding $15 million in a bond prospectus dated
August 7, 2018. It listed two other tax cases but not this case. See
https://mn.gov/mmb-stat/debt-management/bonding/official-statements/
2018/MNState01a-FIN.pdf.
31
CONCLUSION
The petition should be denied.
Respectfully submitted,
WALTER A. PICKHARDT
Counsel of Record
LAURA S. CARLSON
CAITLIN E. ABRAM
NICHOLAS J. NELSON
FAEGRE BAKER DANIELS LLP
2200 Wells Fargo Ctr.
90 S. Seventh St.
Minneapolis, MN 55402
walter.pickhardt@faegrebd.com
Counsel for Respondents
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.