District of Columbia v. Chase Manhattan

• Decision Date: 30 January 1997
• Docket Number: No. 95-TX-1599.,95-TX-1599.
• Citation: 689 A.2d 539
• Parties: DISTRICT OF COLUMBIA, Appellant, v. The CHASE MANHATTAN BANK, Appellee.
• Court: D.C. Court of Appeals

689 A.2d 539

DISTRICT OF COLUMBIA, Appellant, v. The CHASE MANHATTAN BANK, Appellee.

No. 95-TX-1599.

District of Columbia Court of Appeals.

Argued December 13, 1996.

Decided January 30, 1997.

Lutz Alexander Prager, Assistant Deputy Corporation Counsel, with whom Charles F.C. Ruff, Corporation Counsel, and Charles L. Reischel, Deputy Corporation Counsel, were on the brief, for appellant.

John J. McAvoy, with whom Anne D. Smith and Ellen S. Moore were on the brief, Washington, for appellee.

Before FERREN, FARRELL and REID, Associate Judges.

FERREN, Associate Judge:

This case presents an issue of first impression in this court: can the District of Columbia, consistent with the Due Process Clause, tax the annual net income of a testamentary trust created by the will of an individual who died while domiciled in the District, when the trustee, trust assets, and trust beneficiaries are all presently located outside the District. We hold that the Due Process Clause does not prevent the District from imposing such a tax, given the continuing supervisory relationship which the District's courts have with respect to administration of such a trust, and in so doing we reject several decisions in other states holding that due process requires a greater connection between the trust and the taxing jurisdiction than the residence of the settlor. We therefore reverse the trial court's order granting summary judgment in favor of the trustee and denying the District's motion for summary judgment.

I.

A.

The facts are not in dispute and can be summarized briefly. William A. Lalor was a resident of the District of Columbia when he died in 1934. His will placed most of his wealth in a trust and appointed as co-trustees John Nichols, a resident of New Jersey, and what is now The Chase Manhattan Bank, of New York.¹ Dr. Charles Lalor Burdick, a Delaware resident, replaced Nichols in 1939 and served as co-trustee until 1989. Chase Manhattan is now the sole trustee.

The will directed the trustees to pay annuities to certain relatives and friends of Lalor until twenty-one years after the last to die of two of his nieces, Esther Lalor Guth² and Ruth Lalor Olson.³ At the end of this period, the remaining funds will be distributed to the lawful issue of Lalor's five nieces and nephews. The will further instructed the trustees to invest the trust assets and accumulate all income not needed to pay the annuities or compensate the trustees. The trustees were only permitted to invest in "stocks and bonds of the character permissible for trust investments under the laws of the District of Columbia."

Lalor's will was admitted to probate in 1935. Shortly thereafter, the trustees sought a construction of the will to determine the validity of the accumulation of trust income for a period of lives in being plus twenty-one years in light of a challenge under the rule against perpetuities. See Gertman v. Burdick, 75 U.S.App.D.C. 48, 50, 123 F.2d 924, 926 (1941). A more detailed account of this litigation is unnecessary; it suffices to point out that the court ultimately upheld the validity of the accumulation, see id. at 57-58, 123 F.2d at 933-34.

The courts of the District of Columbia have exercised continuing supervisory jurisdiction over the trust since its inception. In addition to annual accountings the trustees were required to file, the courts have handled litigation in 1977 and again in 1992 concerning claims by several individuals to beneficiary status. In 1968, the U.S. District Court for the District of Columbia, which exercised local jurisdiction over the trust until 1981, authorized the trustees to maintain the trust assets outside the District of Columbia. In 1990, the Superior Court waived the requirement that the remaining trustee file an annual accounting of the activities of the trust with the court and disavowed any "continuing supervision" over the trust. The Superior Court also set a new compensation schedule for the trustee in 1990.

Chase Manhattan, the sole trustee, is located in New York; all the trust's assets are held in accounts at that bank. Neither the current beneficiaries of the trust nor any of the potential remainderpersons have resided in the District of Columbia during the time period at issue in this litigation.

The trust's income has far outstripped its annual obligations. The trust was worth approximately $2 million at its inception and has been recently valued at $17.8 million. Between 1987 and 1991, the trust paid taxes to the District on the income earned during each year. After an unsuccessful attempt to obtain a refund from the D.C. Department of Finance and Revenue, Chase Manhattan initiated the present lawsuit in Superior Court, demanding a refund of income taxes paid on behalf of the trust in the 1987-1991 tax years. Chase Manhattan asserted that the District's taxation of the trust income violated due process because the trustee, trust assets, and trust beneficiaries were located outside the District of Columbia during the years in question. Chase Manhattan and the District stipulated to the facts and filed cross-motions for summary judgment. The trial court granted Chase Manhattan's motion for summary judgment as to all but one of the years in question⁴ and ordered the District to issue a tax refund in the amount of $324,315.24, plus interest. The District filed the present appeal.

B.

The District of Columbia taxes the income of "resident trusts" in the same manner it taxes resident individuals. See D.C.Code § 47-1809.3 (1990 Repl.). Under the statute, a testamentary trust is a resident trust "if the decedent was at the time of his or her death domiciled within the District." Id. § 47-1809.1. Conversely, a testamentary trust is nonresident if the decedent was not a domiciliary of the District at the time of death. See id. To ensure an absolute clarity of definition, the statute further provides that "the residence or situs of the fiduciary shall not control the classification of estates and trusts as resident or nonresident under the provisions of § 47-1809.1." Id. § 47-1809.2.

The statute permits the trust to deduct from its net taxable income all income distributed to beneficiaries during the same tax year. Id. § 47-1809.5(1). The trust also may claim a tax credit equal to the amount paid in income taxes to any state. Id. § 47-1807.5, -1806.4(a).⁵ This tax credit eliminates any possibility that the income of the trust could be subject to double taxation.

There is no dispute, then, that the Lalor trust is a resident trust subject to taxation under the laws of the District of Columbia. The only dispute is whether this taxation is prohibited by the Constitution.

C.

The Due Process Clause⁶ "requires some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax." Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45, 74 S.Ct. 535, 539, 98 L.Ed. 744 (1954). The Supreme Court recently has equated this analysis with the determination of whether a state has in personam jurisdiction over a given entity. See Quill Corp. v. North Dakota, 504 U.S. 298, 307-08, 112 S.Ct. 1904, 1910-11, 119 L.Ed.2d 91 (1992). In Quill, the Court rejected the notion that a corporation's "lack of physical presence in the taxing State" rendered unconstitutional any attempt by the state to tax the corporation's activities with respect to the state. Id. at 308, 112 S.Ct. at 1910. More specifically, the Court rejected a mail-order company's due process challenge to a North Dakota law requiring all corporations that regularly solicit business in the state to collect a use tax on property purchased for storage, use, or consumption within North Dakota, even if the corporation merely used the mails and had no physical presence within the state. See id. at 302-03, 308, 112 S.Ct. at 1907-08, 1910.

The Quill Court noted that in the personal jurisdiction context it had "abandoned more formalistic tests that focused on a defendant's `presence' within a State for a more flexible inquiry into whether a defendant's contacts with the forum made it reasonable" for the state to exercise jurisdiction. Id. at 307, 112 S.Ct. at 1910. The constitutionality of a state's assertion of personal jurisdiction thus depends on whether the party has "minimum contacts with the jurisdiction `such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.'" Id. (quoting International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945)) (additional internal quotation marks omitted).

The Quill Court proceeded to apply "comparable reasoning" in analyzing North Dakota's use tax and concluded that Quill's ongoing solicitation of business in the state was more than enough to subject the company to the state's taxing jurisdiction. Id. at 308, 112 S.Ct. at 1910. While the Court's previous decisions had suggested that a state could not tax a corporation unless it had some physical presence within the state — such as sales personnel or local retail stores — these decisions had been preempted by general developments in the Court's due process jurisprudence. See id. at 306-08, 112 S.Ct. at 1909-11. The Court overruled these decisions, noting that "it matters little that such solicitation of business is accompanied by a deluge of catalogs rather than a phalanx of drummers. The requirements of due process are met irrespective of a corporation's lack of physical presence in the taxing State." Id. at 308, 112 S.Ct. at 1911.⁷

The Supreme Court has long recognized that a state may tax the entire income of an individual residing in that state, regardless of the source of the income: "Domicile itself affords a basis for such taxation. Enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government." New York ex rel....