Kimberley Rice Kaestner 1992 Family Trust v. N.C. Dep't of Revenue

Decision Date05 July 2016
Docket NumberNo. COA15–896.,COA15–896.
CourtNorth Carolina Court of Appeals
Parties The KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST, Plaintiff, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Defendant.

Attorney General, Roy Cooper, by Assistant Attorney General, Peggy S. Vincent, for the State.

Moore & Van Allen, PLLC, Charlotte, by Thomas D. Myrick, Neil T. Bloomfield and Kara N. Bitar, for plaintiff-appellee.

BRYANT, Judge.

Where North Carolina did not demonstrate the minimum contacts necessary to satisfy the principles of due process required to tax an out-of-state trust, we affirm the lower court's grant of summary judgment in favor of the trust and uphold the order directing the Department of Revenue to refund taxes and penalties paid by the trust.

On 21 June 2012, representatives of plaintiff The Kimberley Rice Kaestner 1992 Family Trust (the Trust) filed a complaint against the North Carolina Department of Revenue (the Department) after the Department denied a request to refund taxes the Trust paid during tax years 2005 through 2008. The claims brought forth alleged that taxes imposed upon the Trust pursuant to N.C. Gen.Stat. § 105–160.2 were imposed in violation of due process, the Commerce Clause, and the North Carolina Constitution. Pursuant to section 105–160.2, taxes are "computed on the amount of taxable income of the estate or trust that is for the benefit of a resident of this State[.]"

In 1992, an inter vivos trust (original trust) was established by settlor Joseph Lee Rice III, with William B. Matteson as trustee. The situs, or location, of the original trust was New York. The primary beneficiaries of the original trust were the settlor's descendants (none of whom lived in North Carolina at the time of the trust's creation). In 2002, the original trust was divided into three separate trusts: one for each of the settlor's children (Kimberley Rice Kaestner, Daniel Rice, and Lee Rice). At that time in 2002, Kimberley Rice Kaestner, the beneficiary of plaintiff Kimberley Rice Kaestner 1992 Family Trust, was a resident and domiciliary of North Carolina. On 21 December 2005, William B. Matteson resigned as trustee for the three separate trusts. The settlor then appointed a successor trustee, who resided in Connecticut. Tax returns were filed in North Carolina on behalf of the Kimberley Rice Kaestner 1992 Family Trust for tax years ending in 2005, 2006, 2007, and 2008 for income accumulated by the Trust but not distributed to a North Carolina beneficiary. In 2009, representatives of the Trust filed a claim for a refund of taxes paid to the Department amounting to $1,303,172.00, for tax years 2005, 2006, 2007, and 2008. The claim was denied. Trust representatives commenced a contested case action in the Office of Administrative Hearings (OAH). However, the OAH dismissed the contested case for lack of jurisdiction: the sole issue was the constitutionality of the enabling statute, G.S. § 105–160.2. The current action commenced in Wake County Superior Court and, thereafter, was designated as a mandatory complex business case.

On 11 February 2013, the Honorable John R. Jolly, Jr., Chief Special Superior Court Judge for Complex Business Cases, entered an order ruling on a motion to dismiss filed by the Department.1 Based on the Court's order, the Department asserted Rules 12(b)(1), (2), and (6) as a basis for dismissal of the constitutional claims and the injunctive relief. Judge Jolly found that "[N.C. Gen.Stat. § ] 105–241.19 set out exclusive remedies for disputing the denial of a requested refund and expressly prohibit[ed] actions for injunctive relief to prevent the collection of a tax." Judge Jolly granted the Department's motion to dismiss the Trust's claim for injunctive relief which sought a refund of all taxes paid. However, Judge Jolly denied the Department's motion to dismiss the Trust's constitutional claims, concluding "there is at least a colorable argument that North Carolina's imposition of a tax on a foreign trust based solely on the presence of a beneficiary in the state does not conform with the Due Process Clause, the Commerce Clause or Section 19 [of Article I of the North Carolina Constitution]."

On 8 July 2014, the Trust moved for summary judgment, alleging there were no genuine issues of material fact: the Trust had paid the State of North Carolina over $1.3 million in taxes for tax years 2005 through 2008; the Trust was established by a non-resident settlor, governed by laws outside of North Carolina, operated by a non-resident trustee, and did not make any distributions to a beneficiary residing in North Carolina during the pertinent period. The Trust requested that the court declare General Statutes, section 105–160.2 unconstitutional and order a refund of all taxes and penalties paid by the Trust.

The Department also filed a motion for summary judgment. In it, the Department acknowledged that all of the Trust assets were intangibles, and that during the pertinent years, the Trust beneficiaries received no distributions from the Trust. However, quoting a case from the State of Connecticut, Chase Manhattan Bank v. Gavin, 249 Conn. 172, 204–05, 733 A.2d 782, 802 (1999), the Department stated:

[J]ust as the state may tax the undistributed income of a trust based on the presence of the trustee in the state because it gives the trustee the protection and benefits of its laws; it may tax the same income based on the domicile of the sole noncontingent beneficiary because it gives her the same protections and benefits.

(emphasis added).

A summary judgment hearing was held in Wake County Superior Court before the Honorable Gregory P. McGuire, Special Superior Court Judge for Complex Business Cases. In an order entered 23 April 2015, Judge McGuire granted the motion for summary judgment filed on behalf of the Trust and denied the Department's motion. Judge McGuire concluded that N.C. Gen.Stat. § 105–160.2 was unconstitutional as applied and ordered the Department to refund any taxes and penalties paid pursuant to that statute. The Department appeals.

_________________________

On appeal, the Department argues that the Trust cannot meet its burden to prove it is entitled to a refund of state taxes paid on its accumulated income. Specifically, the Department contends that the Business Court erred when it concluded that taxation of the Trust based on the residence of the beneficiary violated (A) due process under both the federal and state constitutions, as well as (B) the Commerce Clause of the federal constitution. We disagree.

Standard of Review

When assessing a challenge to the constitutionality of legislation, this Court's duty is to determine whether the General Assembly has complied with the constitution.... In performing our task, we begin with a presumption that the laws duly enacted by the General Assembly are valid. Baker v. Martin, 330 N.C. 331, 334, 410 S.E.2d 887, 889 (1991). North Carolina courts have the authority and responsibility to declare a law unconstitutional, but only when the violation is plain and clear. State ex rel. Martin v. Preston, 325 N.C. 438, 449, 385 S.E.2d 473, 478 (1989). Stated differently, a law will be declared invalid only if its unconstitutionality is demonstrated beyond reasonable doubt. Baker, 330 N.C. at 334–35, 410 S.E.2d at 889.

Hart v. State, 368 N.C. 122, 126, 774 S.E.2d 281, 284 (2015).

Due Process

The Department contends that the trial court erred when it concluded that taxation of the Trust based solely on the residence of the beneficiaries violated due process under both the federal and state constitutions.

"The Fourteenth Amendment to the United States Constitution provides that [n]o State shall ... deprive any person of life, liberty, or property, without due process of law[.] U.S. Const. amend. XIV." Johnston v. State, 224 N.C.App. 282, 304, 735 S.E.2d 859, 875 (2012) (alteration in original), writ allowed, review on additional issues denied, 366 N.C. 562, 738 S.E.2d 360, aff'd, 367 N.C. 164, 749 S.E.2d 278 (2013). "No person shall be ... in any manner deprived of his life, liberty, or property, but by the law of the land." N.C. Const. art. I, § 19. " ‘The term "law of the land" as used in Article I, Section 19, of the Constitution of North Carolina, is synonymous with "due process of law" as used in the Fourteenth Amendment to the Federal Constitution.’ " Rhyne v. K–Mart Corp., 358 N.C. 160, 180, 594 S.E.2d 1, 15 (2004) (quoting In re Moore, 289 N.C. 95, 98, 221 S.E.2d 307, 309 (1976) ). "For purposes of taxation, ‘the requirements of ... "due process" are, for all practical purposes, the same under both the State and Federal Constitutions.’ " In re appeal of Blue Ridge Hous. of Bakersville LLC,

226 N.C.App. 42, 58, 738 S.E.2d 802, 813 (2013) (citation omitted) (quoting Leonard v. Maxwell, 216 N.C. 89, 93, 3 S.E.2d 316, 320 (1939) ).

In analyzing federal constitutional questions, we look to decisions of the United States Supreme Court. We also look for guidance to the decisions of the North Carolina Supreme Court construing federal constitutional and State constitutional provisions, and we are bound by those interpretations. State v. Elliott, 360 N.C. 400, 421, 628 S.E.2d 735, 749, (2006) ("The Supreme Court of the United States is the final authority on federal constitutional questions.")[.] We are also bound by prior decisions of this Court construing those provisions, which are not inconsistent with the holdings of the United States Supreme Court and the North Carolina Supreme Court. In the Matter of Appeal from Civil Penalty, 324 N.C. 373, 379 S.E.2d 30 (1989).

Johnston, 224 N.C.App. at 288, 735 S.E.2d at 865.

The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State's power to tax out-of-state activities. See Quill Corp. v. North Dakota, 504 U.S. 298, 305–306, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992).... The "broad inquiry" subsumed in both constitutional requirements is whether the taxing power
...

To continue reading

Request your trial
2 cases
  • Kimberley Rice Kaestner 1992 Family Trust v. N.C. Dep't of Revenue
    • United States
    • United States State Supreme Court of North Carolina
    • June 8, 2018
    ...of Revenue , No. 12 CVS 8740, 2015 WL 1880607, at *4 (N.C. Super. Ct. Wake County (Bus. Ct.) Apr. 23, 2015), aff'd , ––– N.C. App. ––––, 789 S.E.2d 645 (2016) (quoting Quill Corp. v. North Dakota , 504 U.S. 298, 307, 112 S.Ct. 1904, 1910, 119 L.Ed.2d 91 (1992) ). Determining that plaintiff ......
  • Fielding v. Commissioner of Revenue
    • United States
    • Tax Court of Minnesota
    • May 31, 2017
    ...... the Reid and Ann MacDonald Irrevocable GST Trust for Maria v. MacDonald, et al., Appellants, v. ... of material fact. Am. Family Mut. Ins. Co. v. Thiem, . 503 N.W.2d 789, ...of Taxation, 504 U.S. 768, 778 (1992). ("The constitutional question in a case ... See also. Kimberley Rice Kaestner 1992 Family Trust v. North ......
1 books & journal articles
  • Practical advice on current issues.
    • United States
    • The Tax Adviser Vol. 52 No. 5, May 2021
    • May 1, 2021
    ...any trust income nor exercised control over trust income or assets (139 S. Ct. 2213 (2019), aff'g 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 2015 NCBC 36 (N.C. Sup. Ct. (Bus.) 2015)). Along with court challenges that scrutinize the taxation of a trust based ......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT