Blue v. Department of Treasury, Docket No. 116666
| Decision Date | 06 November 1990 |
| Docket Number | Docket No. 116666 |
| Citation | 462 N.W.2d 762,185 Mich.App. 406 |
| Parties | Donald L. BLUE, Trustee with Laura C. Perry, Deceased, Plaintiff-Appellee, v. DEPARTMENT OF TREASURY, Defendant-Appellant. |
| Court | Court of Appeal of Michigan — District of US |
John P. Siler, Flint, for plaintiff-appellee.
Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., and Richard R. Roesch and Russell E. Prins, Asst. Attys. Gen., for defendant-appellant.
Before WAHLS, P.J., and J.H. GILLIS and JANSEN, JJ.
In a judgment entered April 3, 1989, the trial court held M.C.L. Sec. 206.18; M.S.A. Sec. 7.557(118) to be unconstitutional as applied to the present case. Section 18 defines any trust created by, or consisting of property of, a person domiciled in Michigan at the time the trust becomes irrevocable as a "resident trust" subject to Michigan income taxation. The trial court found insufficient contacts with Michigan in this case to justify imposition of the tax on the trust. Defendant appeals as of right. We affirm.
In 1961, Laura C. Perry, a Michigan resident, executed a revocable living trust. One year later Perry died while residing in Michigan, at which time the trust became irrevocable. The income beneficiary of the trust is decedent's daughter, who has been a Florida resident since December, 1978. There are also six residuary beneficiaries whose rights are created upon the death of the income beneficiary. Plaintiff is trustee of the trust and has lived in Florida since September, 1977. All of the trust's assets and other indicia of ownership are located in Florida, with the exception of one nonincome-producing parcel of real estate located in Michigan. Further, all brokerage accounts and bank accounts are held and administered in Florida. Likewise, on October 15, 1974, the trust was recorded in the State of Florida. Between the years 1982 and 1987, plaintiff filed State of Michigan tax returns and declared net annual income which was accumulated in the trust and was not distributed to any beneficiaries. Plaintiff brought the present action to recover amounts paid as taxes on the income which was accumulated by the trust.
Defendant imposed the tax on the basis that it viewed the present trust as a resident trust under M.C.L. Sec. 206.18; M.S.A. Sec. 7.557(118), which defines a resident trust as one created by a person domiciled in Michigan at the time the trust becomes irrevocable. The resident trust is subject to taxation from "receiving, earning or otherwise acquiring income from any source whatsoever." M.C.L. Sec. 206.51; M.S.A. Sec. 7.557(151). Plaintiff objected to the imposition of the tax on the grounds that the imposition of the tax violated the equal protection and due process guarantees of both federal and state constitutions by attempting to tax activities and assets beyond the boundaries and control of the state, that the imposition of the tax poses a threat of double taxation, that the tax imposes a burden on interstate commerce, and that the imposition of the tax abridges the privilege of a citizen to travel. The trial court ruled that the tax was a violation of defendant's due process rights under the Fourteenth Amendment. A state statute which attempts to tax things wholly beyond the state's jurisdiction or control conflicts with the Fourteenth Amendment. Safe Deposit & Trust Co. v. Virginia, 280 U.S. 83, 50 S.Ct. 59, 74 L.Ed. 180 (1929).
On appeal, defendant alleges that residency provides a sufficient nexus between the imposition of the tax and the subject taxed, and that the court erred in holding that Sec. 18 is unconstitutional as applied to the present case. Specifically, defendant argues that the continuing residency of the trust within Michigan and the benefits and protection of laws of this state extended to the trust established the requisite nexus and jurisdiction to impose a tax. We disagree.
The Missouri Supreme Court in In re Swift, 727 S.W.2d 880, 882 (1987), analyzed a situation very similar to the present case and summarized:
An income tax is justified only when contemporary benefits and protections are provided the subject property or entity during the relevant taxing period. In determining whether this state has a sufficient nexus to support the imposition of an income tax on trust income, we consider six points of contact: (1) the domicile of the settlor, (2) the state in which the trust is created, (3) the location of the trust property, (4) the domicile of the beneficiaries, (5) the domicile of the trustees, and (6) the location of the administration of the trust. For purposes of supporting an income tax, the first two of these factors require the ongoing protection or benefits of state law only to the extent that one or more of the other...
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