On January 11, 2019, the United States Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust (“Kaestner”). The question raised by Kaestner is whether the Due Process Clause prohibits a state from taxing the income of a trust when the trust’s only connection with the state is a beneficiary residing in the state. In addition to having a direct impact on trusts nationwide, this case will be the first Supreme Court case to consider nexus after Wayfair.
On June 8, 2018, the North Carolina Supreme Court issued its opinion in Kaestner.1 The decision addressed whether the North Carolina Department of Revenue properly taxed the income of the plaintiff trust under North Carolina General Statute section 105-160.2, solely on the basis of a beneficiary’s residency in North Carolina during the tax years at issue. The North Carolina Supreme Court applied the International Shoe minimum contacts test, and found that that section 105-160.2, as applied to the trust, violated the Due Process Clause.
On October 9, 2018, North Carolina filed a petition for writ of certiorari to the United States Supreme Court seeking a determination that state taxation of trust income based on a beneficiary’s residence in the state does not violate Due Process. In its petition, North Carolina noted that state courts that had addressed this issue were split: courts in California, Missouri, and Connecticut have allowed trust income to be taxed under identical fact patterns, while courts in New York, New Jersey, Minnesota, and North Carolina courts have found that taxing trust income on the basis of a beneficiary resident in the state would violate Due Process.
On January 11, 2019, the United States Supreme Court granted certiorari.
Why Kaestner matters
Kaestner has implications beyond North Carolina’s taxation of trust income, because it raises a constitutional issue involving a statute that that is similar to the statutes of many other states. As a result, the impact of the decision will not be limited to trusts with beneficiaries in North Carolina. Trusts with similar fact patterns that have been paying tax to any state based purely on the resident status of the beneficiaries may be entitled to relief if the Court affirms, while trusts that have not been paying tax could have exposure if the Court reverses.
Kaestner may also have implications beyond the taxation of trusts. Notably, last year’s Wayfair decision left an open question regarding how much of a connection a person or entity must have with a state in order for that state to impose tax on that person or entity. In Wayfair, the Court summarily observed that “a business need not have a physical presence in a State to satisfy the demands of due process.”2 At most, that observation shows what is not necessary for nexus, but not what is sufficient for nexus. Kaestner provides the Court an opportunity to provide guidance on this question.