789 S.E.2d 645 (N.C.App. 2016), COA15-896, Kaestner v. North Carolina Department of Revenue

Docket Nº:COA15-896
Citation:789 S.E.2d 645
Opinion Judge:BRYANT, Judge.
Party Name:THE KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST, Plaintiff, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Defendant
Attorney:Attorney General Roy Cooper, by Assistant Attorney General Peggy S. Vincent, for the State. Moore & Van Allen, PLLC, by Thomas D. Myrick, Neil T. Bloomfield and Kara N. Bitar, for plaintiff-appellee.
Judge Panel:BRYANT, Judge. Judges STEPHENS and McCULLOUGH concur. Judges STEPHENS and McCULLOUGH concur.
Case Date:July 05, 2016
Court:Court of Appeals of North Carolina

Page 645

789 S.E.2d 645 (N.C.App. 2016)

THE KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST, Plaintiff,

v.

NORTH CAROLINA DEPARTMENT OF REVENUE, Defendant

No. COA15-896

Court of Appeals of North Carolina

July 5, 2016

Heard in the Court of Appeals 23 February 2016.

AFFIRMED.

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

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

BRYANT, Judge. Judges STEPHENS and McCULLOUGH concur.

OPINION

Page 646

Appeal by defendant from order entered 23 April 2015 by Judge Gregory P. McGuire in Wake County Superior Court. No. 12 CVS 8740.

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

Page 647

  1. 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

Page 648

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...

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4 practice notes
  • Recent developments in estate planning.
    • United States
    • The Tax Adviser Vol. 50 Nbr. 10, October 2019
    • October 1, 2019
    ...(U.S. 6/21/19). (2.) The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Dep't of Rev., 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 12 CVS 8740 (N.C. Sup. Ct. (Bus.) (3.) Quill Corp. v. North Dakota. 504 U.S. 298 (1992). (4.) Id. at 312. (5.) Fiel......
  • Supreme Court holds North Carolina cannot tax trust lacking minimum contact.
    • United States
    • Journal of Accountancy Vol. 228 Nbr. 3, September 2019
    • September 1, 2019
    ...the trust to support the tax (Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Dep't of Rev., 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 12 CVS 8740 (N.C. Sup. Ct., Wake Cty. Issues: N.C. Gen. Stat. Section 105-160.2 taxes any trust income that &q......
  • 814 S.E.2d 43 (N.C. 2018), 307PA15-2, Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue
    • United States
    • North Carolina Supreme Court of North Carolina
    • June 8, 2018
    ...On discretionary review pursuant to N.C.G.S. § 7A - 31 of a unanimous decision of the Court of Appeals, ___ N.C. App. ___, 789 S.E.2d 645 (2016), affirming a n opinion and order of summary judgment dated 2 3 April 201 5 entered by Judge Gregory P. McGuire , Special ......
  • The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, 060818 NCSC, 307PA15-2
    • United States
    • North Carolina Supreme Court of North Carolina
    • June 8, 2018
    ...On discretionary review pursuant to N.C. G.S. § 7A-31 of a unanimous decision of the Court of Appeals, ___ N.C.App. ___, 789 S.E.2d 645 (2016), affirming an opinion and order of summary judgment dated 23 April 2015 entered by Judge Gregory P. McGuire, Special Superi......
2 cases
2 books & journal articles
  • Recent developments in estate planning.
    • United States
    • The Tax Adviser Vol. 50 Nbr. 10, October 2019
    • October 1, 2019
    ...(U.S. 6/21/19). (2.) The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Dep't of Rev., 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 12 CVS 8740 (N.C. Sup. Ct. (Bus.) (3.) Quill Corp. v. North Dakota. 504 U.S. 298 (1992). (4.) Id. at 312. (5.) Fiel......
  • Supreme Court holds North Carolina cannot tax trust lacking minimum contact.
    • United States
    • Journal of Accountancy Vol. 228 Nbr. 3, September 2019
    • September 1, 2019
    ...the trust to support the tax (Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Dep't of Rev., 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 12 CVS 8740 (N.C. Sup. Ct., Wake Cty. Issues: N.C. Gen. Stat. Section 105-160.2 taxes any trust income that &q......