Amicus Curiae Brief — Chase Manhattan Bank v. Gavin

(4

‘) Supreme Court, OL

FILED

No. 99-366 ‘ SEP <£@ 1999

re HE CLERK

IN THE

Supreme Court of the United States

THE CHASE MANHATTAN BANK, et al.,

¥ Petitioners,

GENE GAVIN,

Commissioner of Revenue Services

of the State of Connecticut,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Connecticut

BRIEF FOR AMICI CURIAE AMERICAN BANKERS

ASSOCIATION, CALIFORNIA BANKERS

ASSOCIATION, ILLINOIS BANKERS ASSOCIATION,

MASSACHUSETTS BANKERS ASSOCIATION,

MICHIGAN BANKERS ASSOCIATION, MISSOURI

BANKERS ASSOCIATION, NEW YORK BANKERS

ASSOCIATION, AND PENNSYLVANIA BANKERS

ASSOCIATION IN SUPPORT OF PETITIONERS

MARK L. EVANS WALTER HELLERSTEIN *

HENK BRANDS University of Georgia

KELLOGG, HUBER, HANSEN, Law School

Topp & EVANS, P.L.L.C. Herty Drive

1801 K Street, N.W. Athens, Georgia 30602

Suite 1000 West (706) 542-5175

Washington, D.C. 20005

(202) 326-7900

September 27, 1999 * Counsel of Record

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RS RRL. A ELON AL SERB SILANE NENT LL OE LLLE TLL REEL E SELL LE IPE LEME DEED A DEA LIER ENA POOLE OE AEB AE AIS ALE RE A

WILSON-EprEs PRINTING Co., Inc. - (202) 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

ARGUMENT:

I,

II.

THIS COURT’S GUIDANCE IS NECESSARY

TO RESOLVE THE CONFLICT AMONG

STATE COURTS REGARDING THE CIR-

CUMSTANCES UNDER WHICH TRUSTS

ARE SUBJECT TO STATE INCOME TAXA-

Ren act bel ha ite baientet tek Canes as ial

REGIMES LIKE CONNECTICUT’S—UNDER

WHICH A STATE TAXES THE ENTIRETY

OF A TRUST’S INCOME EVEN WHEN,

AS IN THIS CASE, OTHER STATES HAVE

A LEGITIMATE CLAIM TO TAXATION OF

THE SAME INCOME—DIRECTLY CHAL-

LENGE SETTLED COMMERCE CLAUSE

PI setinnicnenvaisinimataniapiticed dion oka.

COREA inland tent eo et

ii

TABLE OF AUTHORITIES

CASES Page

American Trucking Ass’ns, Inc. v, Scheiner, 488

RO, BOG CRI y ictaecncitiincchedetiientitetttonieseiaenictint 4

Blue v. Department of Treasury, 462 N.W.2d 762

Cas, CB, Si Te Sentncitcttctcternipmersicnattictintinsen 6

Boston Stock Exchange v. State Tax Comm'n, 429

Or SR I i ce 15

District of Columbia v. Chase Manhattan Bank,

ee, ae ee eee 5, 7

First Nat'l Bank of Boston v. Harvey, 16 A.2d 184

to Raps plone Riss cites React oder ns) aaa 5

Greenough v. Tax Assessors of Newport, 331 U.S.

GD CGE wisn a renoearcctesaceccboananncel ain tas 8,12

Guaranty Trust Co. v. Virginia, 805 U.S. 19

CIO0G) Ci. i Ee ide 8

Gwin, White & Prince, Inc. v. Henneford, 305 U.S.

606: C2008) 522... a Ss. 14

J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307

(160) 2. JES Oe A 14

Japan Line, Ltd. v. County of Los Angeles, 441

th 7 el ,, | enemas en eh Ee ind 15

Mallinckrodt, In re, DTA No. 807558, [1991-92

Transfer Binder] N.Y. State Tax Rep. (CCH)

q 400-670 (N.Y. Tax Appeals Tribunal Nov. 12,

SD siicteteneiediclsmncbeichaaiaith ictus tAi ea ne ea ll

McCulloch v. Franchise Tax Bd., 890 P.2d 412

(Cal.), appeal dismissed, 879 U.S. 188 (1964)... 7

Mercantile-Safe Deposit & Trust Co. v. Murphy,

, pe ef F Ss fee |; RREemenenuecinnnem 6

Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S.

, Bi BAS er ee 15

New York ex rel. Cohn v. Graves, 800 U.S. 808

b} SPRRPRESR ASSES C DE Mite ar oeeeot i ae oo 9

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

886 (1988) 6

Potter v. Taxation Div. Director, 5 N.J. Tax 399

(1983) 6

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

(1929) sctoisaiaiasaiiliadaide 6,8

Shaffer v. Carter, 252 U.S. 87 (1920) 9

iia

ij

TABLE OF AUTHORITIES—Continued

Page

South Central Bell Tel. Co. v. Alabama, 119 S. Ct.

hd EROS ES he Se ee ee 15

Standard Oil Co. v. Peck, 342 U.S. 382 (1952)... 14,15

Swift v. Director of Revenue, 727 8.W.2d 880 (Mo.

a) ee EE ee 5 Se ee 5, 6

Taylor v. State Tax Comm'n, 445 N.Y.S.2d 648

A I I cniaeeR 6

Tyler Pipe Indus., Inc. v. Washington Dep't of

Revenue, 488 U.S, 232 (1987) 14

CONSTITUTION AND STATUTES:

U.S. Const. :

Art. I, § 8, Cl. 3 (Commerce Clause) .............. passim

Amend. XIV, § 1 (Due Process Clause) ............ 8

Ariz. Rev. Stat. Ann.:

§ 48-1071.A.1 (West 1998 Supp.) ................ 10

§ 48-1812 (West 1980) 12

Game CUPONS ODO) ccc eee es 12

Ark. Code Ann. (Michie 1997) :

SESE EAE ae ea 12

Sy 5 neta nanan iin a 10

Cal. Rev. & Tax. Code (West 1994) :

§ 17742 Se Se «SEL Se Se Be 12

DS ae eae ey aera 13

§ 18001 (a) (1) ...... 10

Colo. Rev. Stat. Ann.:

§ 39-22-103(10) (West 1998 Supp.) .............. 12

§ 39-22-108 (West 1990) oa 10

Conn. Gen. Stat. Ann. (West 1999 Supp.) :

Pawan ene CO iat) Oro dk ad sho cor 13

§ 12-704 (a) 5 10

Del. Code Ann. tit. 30 (1997) :

§ 1111 (a) 10

Pear ene aa ee SoS FOSS 2 al. teic 12

§ 1140 (a) 12

D.C. Code Ann. § 47-1806.4(a) (1997)... 10

iv

TABLE OF AUTHORITIES—Continued

Idaho Code § 68-3029(1) (1998 Supp.) .....................

La. Rev. Stat. Ann. § 47:33 (West 1999 Supp.) -......

Me. Rev. Stat. Ann. tit. 836, §5217-A (West 1998

8 Be eas as Eee

Md. Code Ann., Tax-Gen. :

§ 10-101 (h) (1) (iii) (1997) .«............................

§ 10-207(0) (1998 Supp.) ................2.....ecccceeeeeees

Mass. Gen, Laws Ann. ch. 62 (West 1999 Supp.) :

iF TUITE «cas sueiistnscinvregundennsienndaeedatiniptiaiaeniuieansieaunngienes

2 aa a us

Mo. Ann. Stat. § 143.081 (West 1996) . seit

Mont. Code Ann. § 15-80-124 (1997) .........................

Neb. Rev. Stat. Ann. § 77-2730(1) (Michie 1995)..

N.J. Stat. Ann. § 54A:1-2m (West 1986) .................

N.Y. Banking Law § 100 (McKinney 1990) .............

N.Y. Tax Law (McKinney 1987) :

§ 605 (b) (1) (B) ...................... ,

| PERC IS A Stee Hic FEE

N.C. Gen. Stat. (1997) :

OB Sekai ete Ge eecteeie ino

§ 105-160.2 tte

St AREER Se RS Re SOLS EL

N.D. Cent. Code § 57-38-04.2.a (1999 Supp.) ...........

Okla. Stat. Ann. tit. 68, § 2857(B) (1) (West 1999

Supp.)

Or. Rev. Stat. § 316.082 (1998 Supp.)

S.C. Code Ann. (1998 Supp.) :

BS | RRR cE RRs De

§ 12-6-3400 ..

Tenn. Code Ann. § 67-2-110 (1998) ...

Utah Code Ann.:

§ 59-10-106 (1) (1996) ..............--ccscsescceseceoneeee du

§ 59-10-201 (1999 Supp.) ....................c-cccssecseseees

Vt. Stat. Ann. tit. 32, § 5825 (1998 Supp.) ..............

Page

10

10

10

12

12

12

12

v

TABLE OF AUTHORITIES—Continued

Page

Va. Code Ann. (Michie 1997) :

CS ERI OEE SS OS > Sn ae 12

REGRET. ae nea linc Seo Pa ICE ee EN ETON 10

W. Va. Code § 11-21-20(a) (1995) 0... 10

OTHER MATERIALS

American Law Institute, Federal Income Taz

Project: International Aspects of United States

SUGTING TEIN CAIIG P cisncithcnnintesticnenitntebticrinsionitnnes 8

Federal Financial Institutions Examination Coun-

cil, Trust Assets of Financial Institutions

COIDGFE D wsaiiuihitiehdesmontatieosicteinaeaiiaeiniabichanaedeateimdiiaiits tials 2

Max Gutierrez, Oops! The State Income Taxation

of Multi-Jurisdictional Trusts, 25th Annual

Philip E. Heckerling Institute on Estate Plan-

SO ED intial a 13

Jerome R. Hellerstein & Walter Hellerstein, State

Taxation (3d ed. 1998):

gn REG UE RE PRS Ne tN ETO eee NETIC 15

Vol. 2 .. EIS IER OAT EGE SOS ST OEE 9,10, 11

M. Read Moore & Amy L. Sullivan, State Income

Texation of Trusts: New Case Creates Uncer-

tainty, 24 Estate Planning 200 (June 1997)... 7

In THE

Supreme Court of the United States

No. 99-366

THE CHASE MANHATTAN BANK, et al.,

¥. Petitioners,

GENE GAVIN,

Commissioner of Revenue Services

of the State of Connecticut,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Connecticut

BRIEF FOR AMICI CURIAE AMERICAN BANKERS

ASSOCIATION, CALIFORNIA BANKERS

ASSOCIATION, ILLINOIS BANKERS ASSOCIATION,

MASSACHUSETTS BANKERS ASSOCIATION,

MICHIGAN BANKERS ASSOCIATION, MISSOURI

BANKERS ASSOCIATION, NEW YORK BANKERS

ASSOCIATION, AND PENNSYLVANIA BANKERS

ASSOCIATION IN SUPPORT OF PETITIONERS

INTEREST OF AMICI CURIAE1

The American Bankers Association is the principal na-

tional trade association of the banking industry in the

United States. Its membership includes community, re-

1 No counsel for any party had any role in authoring this brief,

and no person other than amici curiae made any monetary contri-

bution to its preparation or submission. Written consents of the

petitioners and respondent have been obtained and filed with the

Clerk of the Court.

2

gional, and money-center banks and holding companies,

as well as savings associations, trust companies, and sav-

ings banks. These institutions, located in each of the 50

States and the District of Columbia, account for approxi-

mately 90 percent of assets in the domestic banking and

thrift industry. In 1997, banks, thrifts, and trust com-

panies administered more than a billion trust and estate

accounts containing nearly $1.1 trillion of assets.?

The California Bankers Association is a non-profit

trade association incorporated under the laws of Cali-

fornia. The California Bankers Association represents

virtually all of the more than 300 commercial banks and

trust companies in California.

The Illinois Bankers Association represents more than

700 commercial and savings banks in Illinois, which to-

gether account for more than 90 percent of the banking

assets in the State. A significant number (more than

200) of Illinois’s commercial and savings banks engage

in trust and fiduciary activities, and the Illinois Bankers

Association maintains a strong commitment to represent-

ing them in legislative, regulatory, and judicial proceed-

ings regarding matters of interest to them, including state

and federal taxation.

The Massachusetts Bankers Association is comprised

of more than 200 commercial, savings, and cooperative

banks and savings and loan associations throughout the

Commonwealth of Massachusetts, including all state and

national banks with trust powers located in Massachu-

setts.

The Michigan Bankers Association is comprised of re-

gional, community, and money-center banks located in

2 Sea Federal Financial Institutions Examination Council, Trust

Assets of Financial Institutions, at Table A-2 (1997).

3

Michigan, including all banks with trust powers in the

State. |

The Missouri Bankers Association represents commu-

nity commercial banks and thrifts, regional banks, and

money-center banks located in Missouri, some of which

have trust powers.

The New York Bankers Association is the principal

trade association of the banking industry in New York

State. It has more than 140 resident and nonresident

member banks, consisting of both national and state-

chartered banks and trust companies and including com-

munity, regional, and money-center banks. The New

York Bankers Association’s members include every com-

mercial banking institution in New York State that has

fiduciary powers pursuant to New York banking law. See

N.Y. Banking Law § 100 (McKinney 1990).

The Pennsylvania Bankers Association is the statewide

trade association representing commercial and savings in-

stitutions as well as trust companies. A significant num-

ber of the Pennsylvania Bankers Association’s members

maintain fiduciary authority and offer trust services to

clients.

* * * BS

The decision of the Supreme Court of Connecticut in

this case raises two issues of profound concern to amici.

First, it exacerbates the uncertainty and confusion regard-

ing the contacts a State must have with a trust before it

may constitutionally tax undistributed income of the trust.

Amici’s members have fiduciary responsibility for admin-

istering millions of trusts throughout the country, many

of which have contacts with more than one State. Clarifi-

cation of the scope of a State’s power to tax trust income

is of utmost importance to the proper fulfillment of

amici’s members’ fiduciary duties.

4

Uncertainty regarding the scope of a State’s power to

tax trust income presents amici’s members with a Hobson’s

choice. Their fiduciary obligations require them to pay

only taxes that are lawfully imposed on the trusts that

they administer. Consequently, amici’s members must

either (1) pay a tax of questionable constitutionality and

potentially face personal liability for such payment if the

tax is later struck down, or (2) refuse to pay the tax (or

even file a return) and potentially face personal liability

for interest and penalties if the tax is later sustained. This

Court’s guidance is needed to extricate banks, trust com-

panies, and individual trustees from the untenable position

in which the disagreement among state courts places them.

Wholly apart from the conflict that the Connecticut

decision has sharpened over their obligation to file state

tax returns, amici are disturbed by a second aspect of the

Connecticut court’s decision: under its holding, a State

may tax 100 percent of a resident trust’s investment in-

come from intangibles, without apportionment or credits

for taxes paid to other States. Because trusts often are

considered to be “resident” in several States simultaneously

for state tax purposes (e.g., where the trustee resides, where

the beneficiaries reside, where the trust assets are located),

the Connecticut ruling exposes multistate trusts to a sub-

stantial risk of multiple taxation, by permitting each of

the States that can legitimately claim to be the trust’s

residence to tax all of the trust’s intangible investment

income without apportionment or credits. As a conse-

quence, the Connecticut court’s holding “exerts an in-

exorable hydraulic pressure” (American Trucking Ass’ns,

Inc. v. Scheiner, 483 U.S. 266, 286 (1987)) on those

who create and administer trusts to escape multiple taxa-

tion by confining their activities to a single State—in di-

rect contradiction of first principles of this Court’s Com-

merce Clause jurisprudence.

———————————————eE~

I. THIS COURT'S GUIDANCE IS NECESSARY TO

RESOLVE THE CONFLICT AMONG STATE

COURTS REGARDING THE CIRCUMSTANCES

UNDER WHICH TRUSTS ARE SUBJECT TO

STATE INCOME TAXATION.

The Connecticut Supreme Court’s decision implicates

two common and recurring fact patterns in which con-

flicting state-court rulings place trustees like amici’s mem-

bers on the horns of a dilemma. The first problematic

fact pattern arises when States like Connecticut claim an

entitlement to tax undistributed income of testamentary

trusts on the strength of no more than the testator’s resi-

dence at the time of death. See generally Pet. 16 n.15

(“Twelve states and the District of Columbia have income

tax statutes that tax trusts in a manner similar to Con-

necticut’s.”) (citing statutes). According to the Connecti-

cut decision, trustees must file a tax return in such States

and pay tax upon the trust’s undistributed income—even

if the trustee, the trust assets, and the trust administration

are located outside the State, and all income subject to

taxation is derived from sources outside the State. See

Pet. App. 30a-33a; accord District of Columbia v. Chase

Manhattan Bank, 689 A.2d 539 (D.C. 1997); First Nat'l

Bank of Boston v. Harvey, 16 A.2d 184 (Vt. 1940).

But a trustee that follows the teachings of the courts

of Connecticut, the District of Columbia, and Vermont

will be paying a tax that courts in Missouri, New Jersey,

and New York have said may not constitutionally be im-

posed. For example, the Supreme Court of Missouri has

held that Missouri may not constitutionally tax the un-

distributed income of a trust created by a Missouri resi-

dent decedent when the trustees, the beneficiaries, the

trust property, and the trust administration were in Ili-

nois. See Swift v. Director of Revenue, 727 S.W.2d 880

(Mo. 1987). In the Missouri court’s view, “[a]n income

tax is justified only when contemporary benefits and pro-

tections are provided the subject property or entity during

the reievant taxing period.” Id. at 882; accord Pennoyer

v. Taxation Div. Director, 5 N.J. Tax 386 (1983);

Taylor v. State Tax Comm'n, 445 N.Y.S.2d 648 (App.

Div. 1981).

The second problematic fact pattern arises when an

inter vivos trust is created by a resident of State A, one

or more of the trust’s beneficiaries reside in State A, but

the trust is administered in State B, where the trustee and

the trust’s assets are located. This was the fact pattern in

Safe Deposit & Trust Co. v. Virginia, 280 US. 83

(1929), where this Court held that Virginia could not

constitutionally impose a tax on the intangible property

of an inter vivos trust, even though it was created by a

Virginia resident and had a Virginia beneficiary, when

the trustee and trust property were located in Maryland.

Some state courts have therefore concluded that, even if

the trust was created by a resident settlor and there are

resident beneficiaries, a State may not impose a tax on

an inter vivos trust’s undistributed income. See Mercantile-

Safe Deposit & Trust Co. v. Murphy, 203 N.E.2d 490

(N.Y. 1964); see also Blue v. Department of Treasury,

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

not tax undistributed income of irrevocable inter vivos

trust created by a Michigan resident, when the trust is

administered in Florida where the beneficiary, the trustee,

and the income-producing trust assets are located); Potter

v. Taxation Div. Director, 5 N.J. Tax 399 (1983) (New

Jersey may not tax undistributed income of irrevocable

inter vivos trust created by New Jersey domiciliary where

trustee, beneficiaries, and assets are all located outside

New Jersey).

One might think, then, that, on the strength of Safe

Deposit and its progeny, amici’s members could safely

decline to file income-tax returns for inter vivos trusts in

7

States of the settlor’s or beneficiaries’ residence, so long

as the trustee and the trust property are located in other

States. But members that do so act at their peril. The

Connecticut Supreme Court has now declared that it is

“not persuaded that . . . [Safe Deposit] . . . is still good

law,” Pet. App. 36a, and that it “disagree[s] . . . with

the reasoning of those cases . . . in which courts have

found the domicile of a beneficiary of an inter vivos trust

insufficient for due process purposes,” id. at 36a n.25.

Moreover, the California Supreme Court has held that

the presence of a beneficiary in California justified taxa-

tion of the undistributed income of even a trust created

by a nonresident. See McCulloch v. Franchise Tax Bd.,

390 P.2d 412 (Cal.) (en banc), appeal dismissed, 379

US. 133 (1964).

In short, the law in this area is uncertain at best and

chaotic at worst. See, e.g., M. Read Moore & Amy L.

Sullivan, State Income Taxation of Trusts: New Case

Creates Uncertainty, 24 Estate Planning 200 (June 1997)

(discussing District of Columbia v. Chase Manhattan

Bank, supra). Uncertainty in the law is particularly

troublesome in this field: amici’s members are compelled

to speculate about their obligation to file tax returns,

knowing that a wrong guess may expose them to liability

either for remitting taxes the trust was not required to pay

or for failing to pay taxes that were properly due.* This

Court alone can resolve the conflict among state courts,

clarify the circumstances under which a State may compel

a trust to pay tax on undistributed income, and permit

trustees faithfully to discharge their fiduciary obligations.

3 Because most States’ statutes of limitations do not begin to

run until a taxpayer files a return, trustees’ exposure to unpaid

taxes, interest, and penalties could, in theory, be staggering.

8

II. REGIMES LIKE CONNECTICUT’S—UNDER WHICH

A STATE TAXES THE ENTIRETY OF A TRUST'S

INCOME EVEN WHEN, AS IN THIS CASE, OTHER

STATES HAVE A LEGITIMATE CLAIM TO TAXA-

TION OF THE SAME INCOME—DIRECTLY CHAL-

LENGE SETTLED COMMERCE CLAUSE PRIN-

CIPLES.

Whether or not Connecticut may tax the undistributed

trust income at issue in this case, no one would doubt

that New York (where the trustees resided, where the

trust property was located, and where the trusts were

administered) may do so. See, e.g., Greenough v. Tax

Assessors of Newport, 331 U.S. 486 (1947); Guaranty

Trust Co. v. Virginia, 305 U.S. 19 (1938); Safe Deposit

& Trust Co. v. Virginia, supra. Accordingly, if this Court

leaves undisturbed the Connecticut Supreme Court’s de-

termination that the Due Process Clause is no obstacle to

Connecticut’s taxing the undistributed income of one or

more of the trusts at issue here, a second question of

abiding concern to amici is presented. The concern stems

from Connecticut’s failure to make any accommodation

for the fact that other States have an equal or greater

entitlement to tax the trusts’ intangible investment income.

As a consequence, Connecticut’s taxing scheme creates a

substantial risk of multiple taxation of trusts that have

contacts with more than one State. It thereby undermines

our national common market, in direct contradiction of

fundamental Commerce Clause principles.

To appreciate the nature and magnitude of the problem

created by Connecticut’s regime for taxing income of

trusts, one may usefully compare it with state income

taxation of individuals. States have traditionally used two

alternative predicates to tax income (whether of individ-

uals or trusts): residence and source. See, e.g., American

Law Institute, Federal Income Tax Project: International

Aspects of United States Income Taxation 6 (1987).

9

Neither predicate offends due process. With respect to

residence-based taxation, this Court has declared: “That

the receipt of income by a resident of the territory of a

taxing sovereignty is a taxable event is universally recog-

nized. Domicil itself affords a basis for such taxation.”

New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-13

(1937). With respect to source-based taxation, the Court

has stated:

That the state, from whose laws property and busi-

ness and industry derive the protection and security

without which production and gainful occupation

would be impossible, is debarred from exacting a

share of those gains in the form of income taxes for

the support of the government, is a proposition so

wholly inconsistent with fundamental principles as to

be refuted by its mere statement.

Shaffer v. Carter, 252 U.S. 37, 50-51 (1920). Accord-

ingly, States generally tax residents (whether individuals

or trusts) on all income wherever earned, see 2 Jerome

R. Hellerstein & Walter Hellerstein, State Taxation

qq 20.04[2], 20.09[1] (3d ed. 1998), while taxing non-

residents on income from sources within the State, see id.

qq 20.05[2], 20.09[ 1].

In the case of income earned outside a taxpayer’s State

of residence, the confluence of the two alternative predi-

cates for taxation may lead to multiple taxation—i.e., the

same income may be subjected to source-based taxation

by one State and residence-based taxation by another

State. Without more, multiple taxation would plainly in-

hibit interstate commerce, thereby raising grave Commerce

Clause problems. See infra, pp. 13-15. But States have

generally recognized and addressed this problem. When

both the State of residence and the State of source have a

legitimate claim to tax income, the State of residence

(implicitly acknowledging its inferior entitlement to tax)

10

ordinarily yields to the State of source to avoid double

taxation. It does so by providing credits against income

taxes for taxes paid to the State of source. Indeed, every

State with a broad-based personal income tax provides

a credit for taxes that their resident individuals and trusts

pay to other States. See 2 Hellerstein & Hellerstein, supra,

qq 20.04{2], 20.09[1], 20.10.

But the credit statutes of many of these States (includ-

ing Connecticut) limit the credit to taxes paid on “income

derived from sources” in other States. Conn. Gen. Stat.

Ann. § 12-704(a) (West 1999 Supp.).* And, for pur-

poses of these statutes, investment income from intangi-

bles is usually deemed not to have a “source” in other

States; thus, States with credit statutes like Connecticut's

will deny a resident a credit for taxes paid to other States

4In addition to Connecticut, these States include Arizona (Ariz.

Rev. Stat. Ann. § 43-1071.A.1 (West 1998 Supp.)); Arkansas (Ark.

Code Ann. § 26-51-504(a)(1) (Michie 1997) ); California (Cal. Rev.

& Tax. Code §18001(a)(1) (West 1994)); Colorado (Colo. Rev.

Stat. Ann. § 39-22-108 (West 1990)); Delaware (Del. Code Ann.

tit. 30, §1111(a) (1997)); District of Columbia (D.C. Code Ann.

§ 47-1806.4(a) (1997)); Idaho (Idaho Code § 63-3029(1) (1998

Supp.)); Louisiana (La. Rev. Stat. Ann. § 47:33 (West 1999

Supp.)); Maine (Me. Rev. Stat. Ann. tit. 36, §5217-A (West 1998

Supp.)); Missouri (Mo. Ann. Stat. § 143.081 (West 1996)); Mon-

tana (Mont. Code Ann. § 15-30-124 (1997)); Nebraska (Neb. Rev.

Stat. Ann. § 77-2730(1) (Michie 1995)); New York (N.Y. Tax

Law § 620(a) (McKinney 1987)); North Carolina (N.C. Gen. Stat.

§§ 105-151, 105-160.3 (1997)); North Dakota (N.D. Cent. Code

§ 57-38-04.2.a (1999 Supp.)); Oklahoma (Okla. Stat. Ann. tit. 68,

§ 2357(B)(1) (West 1999 Supp.) ) ; Oregon (Or. Rev. Stat. § 316.082

(1998 Supp.)); South Carolina (S.C. Code Ann. § 12-6-8400 (1998

Supp.)); Utah (Utah Code Ann. §§ 59-10-106(1) (1996), 59-10-201

(1999 Supp.)); Vermont (Vt. Stat. Ann. tit. 82, §5825 (1998

Supp.)); and West Virginia (W. Va. Code § 11-21-20(a) (1995)).

See also Va. Code Ann. § 58.1-832 (Michie 1997) (limiting resident

credit to “earned or business income,” which would disallow a credit

for income from intangibles). Because Tennessee’s income tax is

limited to investment income, it does not provide for a credit for

taxes paid to other States on such income.

“Il

on investment income derived from intangibles. See Pet.

App. 39a-40a; see also In re Mallinckrodt, DTA No.

807553, [1991-92 Transfer Binder] N.Y. State Tax Rep.

(CCH) 4 400-670 (N.Y. Tax Appeals Tribunal Nov. 12,

1992) (denying New York resident credit for Missouri

taxes imposed on intangible investment income received

from Missouri trust because not “derived” from Missouri

source within meaning of New York’s credit statute).

In the context of income taxation of individuals, this

refusal to grant a credit may be tolerable. States tax non-

residents only on income from sources within the State,

and States generally do not consider intangible investment

income earned by a nonresident as being derived from

sources within the State. See 2 Hellerstein & Hellerstein,

supra, ¥ 20.05[6]. Consequently, a State’s failure to grant

its individual residents a credit for taxes paid on intangible

investment income to other States usually imposes no

hardship on such taxpayers, because other States have not

taxed such income. It is only in those rare instances in

which an individual is deemed to be a resident of more

than one State simultaneously—e.g., because she has a

domicile in one State while maintaining a substantial

presence in another *—that the individual would face even

the possibility of double taxation of her intangible invest-

ment income. And, at any rate, intangible investment in-

come comprises a relatively modest portion of the earn-

ings of most individuals.

Where income taxation of trusts is concerned, however,

more serious problems arise. Whereas individual taxpay-

5 For example, if a taxpayer has her principal residence in New

Jersey but commutes to New York, where she maintains a per-

manent place of abode, the taxpayer would be a resident of New

Jersey, based on her domicile, see N.J. Stat. Ann. § 54A:1-2m

(West 1986), and a resident of New York, based on the mainte-

nance of a permanent place of abode in the State coupled with her

presence in New York for more than 183 days, see N.Y. Tax Law

§ 605(b)(1)(B) (McKinney 1987).

12

ers almost invariably are considered to be resident in only

one State at any given time, trusts frequently are con-

sidered to be resident in several States simultaneously:

they may be considered to be resident where the trustee

resides,® where the beneficiaries reside,” where the trust’s

assets are located,* or where a combination of these factors

applies.° These States’ claim to the residence of the trust

may be equal to or greater than Connecticut’s claim based

on the domicile of the settlor or the testator. See, e.g.,

Greenough, supra. Moreover, because each of these

States, like Connecticut, will be taxing the trust’s income

on a “residence” basis, they will subject the trust’s un-

distributed investment income to tax regardless of its

source. And they will often provide no credit for other

States’ taxes on such income: the income (being invest-

ment income from intangibles) was not “derived from

sources” within those States. See supra, p. 10 n.4.

The resulting problem is obvious. For example, Con-

necticut’s claim of an entitlement to tax 100 percent of a

resident trust’s undistributed investment income gives rise

to double or triple or even quadruple taxation if other

States likewise assert an entitlement to tax such income

without providing a credit for taxes paid to other States

or some form of apportionment. If a Connecticut resident

6 See, e.g., Ariz. Rev. Stat. Ann. §§ 43-1312, 43-1313 (West 1980) ;

Ark. Code Ann. § 26-51-2083 (Michie 1997); Cal. Rev. & Tax. Code

§ 17742 (West 1994).

7 See, e.g., Ga. Code Ann. § 48-7-22(a)(1)(C) (1995); N.C. Gen.

Stat. § 105-160.2 (1997); Tenn. Code Ann. § 67-2-110 (1998).

8 See, e.g., Colo. Rev. Stat. Ann. § 39-22-103(10) (West 1998

Supp.); S.C. Code Ann. § 12-6-30(5) (1998 Supp.); Va. Code Ann.

§ 58.1-302 (Michie 1997).

9 See, e.g., Del. Code Ann. tit. 30, §§ 1186(a), 1140(a) (1997);

Md. Code Ann., Tax-Gen. §§ 10-101(h)(1) (iii) (1997), 10-207(0)

(1998 Supp.) ; Mass. Gen. Laws Ann. ch. 62, § 10(a) and (c) (West

1999 Supp.).

13

decedent established a testamentary trust with an Arizona

resident trustee, who arranged for the trust to be admin-

istered in Virginia for the benefit of the trust’s California

resident beneficiaries, Connecticut, Arizona, Virginia, and

California each would tax the trust on its undistributed

investment income. See supra, p. 12 nn.6-9. Yet none

of these States would provide a credit for the taxes paid

on the same investment income to the other States. See

supra, p. 10 n.4.1°

These conflicting claims have a direct and pernicious

impact on interstate commerce. Testators, settlors, and

their advisers are induced to confine trust-related activities

to a single jurisdiction in order to avoid the untoward tax

consequences of crossing state lines. This balkanizing ef-

fect is illustrated by the advice offered by sophisticated

trust-and-estate counsel, who urge that “the settlor must

be advised of the tax consequences of selecting a person

or trust company residing or situated out of state to serve

as trustee of the proposed trust.” Max Gutierrez, Oops!

The State Income Taxation of Multi-Jurisdictional Trusts,

25th Annual Philip E. Heckerling Institute on Estate

Planning 4 1204.1, at 12-19 (1991). Indeed, the court

below agreed with petitioners’ contention that, under the

Connecticut statute, “testators will have an incentive to

appoint only Connecticut trustees because appointing a

trustee in another state ‘necessarily subjects the testamen-

10 Connecticut does provide some relief: where it taxes a trust’s

undistributed investment income on the basis of a beneficiary’s

residence, it prorates the tax base by reference to the proportion

of the beneficiaries that are state residents. See Conn. Gen. Stat.

Ann. § 12-701(a)(4) (West 1999 Supp.) Some States that tax on

the basis of the trustee’s residence provide analogous relief by

prorating the tax base by reference to the proportion of the trustees

that are state residents. See, e.g., Cal. Rev. & Tax Code § 17743

(West 1994). But such relief measures are limited in scope and

inapplicable in the instant case.

14

tary trust to the risk of a second income tax in that

State.’” Pet. App. 4la-42a.

Despite this risk of multiple taxation and its balkaniz-

ing effect, the Connecticut decision denies the existence

of a Commerce Clause problem. See id. at 42a-44a. It

thereby flies in the face of settled Commerce Clause doc-

trine: this Court has repeatedly and abundantly made

clear that no State may tax 100 percent of a tax base to

which other States may lay some legitimate claim. The

logical underpinning for this rule is irrefutable: if a tax-

payer is subject to tax in more than one State, permitting

either State to tax the entire base without apportionment

or a credit for taxes imposed by other States would expose

the taxpayer to multiple taxation, which the Court has

long condemned under the Commerce Clause. See, ¢.g.,

Tyler Pipe Indus., Inc. v. Washington Dep’t of Revenue,

483 U.S. 232, 248 (1987) (invalidating tax that exposed

taxpayer to “multiple burden”); Gwin, White & Prince,

Inc. v. Henneford, 305 U.S. 434, 439 (1939) (invalidat-

ing tax because it imposed “the risk of a multiple burden

to which local commerce is not exposed”); J.D. Adams

Mfg. Co. v. Storen, 304 U.S. 307, 311 (1938) (invalidat-

ing tax that subjected interstate commerce “to the risk of

a double tax burden to which intrastate commerce is not

exposed, and which the commerce clause forbids”).

Thus, in Standard Oil Co. v. Peck, 342 U.S. 382

(1952), the Court rejected Ohio’s contention—analogous

to Connecticut’s here-—that, as Standard Oil’s domicile, it

was entitled to tax 100 percent of Standard Oil’s personal

property, even though other States had authority to tax

at least a portion of such property:

The rule which permits‘taxation by two or more

states on an apportionment basis precludes taxation

of all the property by the state of the domicile.

Otherwise there would be multiple taxation of inter-

15

state operations and the tax would have no relation

to the opportunities, benefits, or protection which

the taxing state gives those operations.

Id. at 384-85 (internal citation omitted). The Court has

reiterated this principle, rejecting claims that domiciliary

States may tax 100 percent of a taxpayer’s income or

property when other States have a right to tax such in-

come or property. See Mobil Oil Corp. v. Commissioner

of Taxes, 445 U.S. 425, 444 (1980) (“{t]axation by ap-

portionment and taxation by allocation to a single situs

are theoretically incommensurate”); Japan Line, Ltd. v.

County of Los Angeles, 441 U.S. 434, 447 (1979) (“The

corollary of the apportionment principle, of course, is that

no jurisdiction may tax the instrumentality in full.”).

In short, the multiple tax burden to which Connecti-

cut’s taxing scheme exposes multistate trusts plainly of-

fends the teachings of this Court’s Commerce Clause

cases: it “forecloses tax-neutral decisions,” Boston Stock

Exchange v. State Tax Comm'n, 429 U.S. 318, 331

(1977), and creates a competitive advantage for local

over out-of-state trustees, cf. South Central Bell Tel. Co.

v. Alabama, 119 S. Ct. 1180 (1999) (invalidating state

tax favoring local over out-of-state corporations). This

Court’s review of the Connecticut decision is essential to

reaffirm the fundamental Commerce Clause principle that,

“if a taxpayer located in State A can demonstrate that it

is taxable in State B, the taxpayer has a constitutional

right to insist that State A attribute at least a portion of

the taxpayer’s overall tax base—whether it be property,

income, or receipts—to State B.” 1 Hellerstein & Heller-

stein, supra, ¥ 8.02[1] at 8-10.

16

CONCLUSION

The petition for a writ of certiorari should be granted.

MARK L. EVANS

HENK BRANDS

KELLOGG, HUBER, HANSEN,

Topp & Evans, P.L.L.C.

1301 K Street, N.W.

Suite 1000 West

Washington, D.C. 20005

(202) 826-7900

September 27, 1999

Respectfully submitted,

WALTER HELLERSTEIN *

University of Georgia

Law School

Herty Drive

Athens, Georgia 30602

(706) 542-5175

* Counsel of Record