Fielding v. Commissioner of Revenue
| Decision Date | 31 May 2017 |
| Docket Number | 8911-R,8914-R,8912-R,8913-R |
| Parties | William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria v. MacDonald, et al., Appellants, v. Commissioner of Revenue, Appellee. |
| Court | Tax Court of Minnesota |
These matters came before The Honorable Bradford S. Delapena, Judge of the Minnesota Tax Court, on the parties' cross-motions for summary judgment.
Walter A. Pickhardt and Caitlin E. Abram, Faegre Baker Daniels LLP represent appellants, William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V MacDonald, et al.
Kyle W. Wislocky, Assistant Minnesota Attorney General, represents appellee Commissioner of Revenue.
ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
Each appellant Trust appeals an order of the Minnesota Commissioner of Revenue denying an income tax refund claim.[1] As relevant here, Minnesota law defines "resident trust" in part as "an irrevocable trust, the grantor of which was domiciled in this state at the time it became irrevocable." Minn. Stat. § 290.01, subd 7b(a)(2) (2016). Under this provision, once an inter vivos trust becomes irrevocable, it is forever treated as a "resident trust" based on the single circumstance that its grantor "was domiciled in this state at the time the trust became irrevocable." No other connection with Minnesota is then, or ever, required or even relevant.
Residency generally authorizes a state to tax a taxpayer's worldwide income regardless of source. Accordingly, if a trust qualifies as a Minnesota resident trust, "[i]ncome or gains from intangible personal property not employed in the business of the recipient" are "assigned to"-and thus taxed by-Minnesota. Minn. Stat. § 290.17, subd. 2(c) (2016) (emphasis added). In contrast, such income and gains earned by a nonresident trust are not assigned to Minnesota. Minn. Stat. § 290.17, subd. 2(e) (2016). Thus, by defining a trust as a "resident trust, " Minnesota asserts authority to tax trust income and gains from all sources-including income and gains from intangible assets having no relation to Minnesota.
Each Trust filed a 2014 Minnesota income tax return treating itself as a "resident trust" and paid tax (under protest) on income and gains from intangible personal property the Trust asserted had no relation to Minnesota.[2] Each Trust then filed an amended return treating itself as a nonresident trust, computing its tax liability by excluding income and gains from intangible personal property not related to Minnesota, and requesting a refund. Applying section 290.01, subdivision 7b(a)(2), which defines each Trust as a "resident trust, " the Commissioner denied the Trusts' refund claims. The Trusts timely appealed to this court.
The Trusts do not dispute that they qualify as "resident trusts" under section 290.01, subdivision 7b(a)(2). Instead, they contend that-as applied to them-the statute violates the due process provisions of the Minnesota and United States constitutions and the Commerce Clause of the Federal Constitution. The parties have filed cross-motions for summary judgment on the Trusts' constitutional claims. We grant the Trusts' motions for summary judgment and deny the Commissioner's motions.
The court, upon all the files, records, and proceedings herein, now makes the following:
ORDERIT IS SO ORDERED.
THIS IS A FINAL ORDER. LET JUDGMENT BE ENTERED ACCORDINGLY.
MEMORANDUMThe issue in these consolidated cases is whether Minnesota may lawfully tax capital gains that appellant Trusts realized during 2014 from the sale of certain stock, along with other income from intangible personal property located outside of Minnesota. In conjunction with their cross-motions for summary judgment, the parties filed an extensive stipulation of facts concerning the creation and funding of the Trusts; the trustees and beneficiaries; the Trusts' income and gains during 2014; and the history of the parties' tax dispute.
William Fielding is the current trustee of the four appellant Trusts. Each was created by an irrevocable agreement ("Trust Agreements") dated June 25, 2009, between Reid V. MacDonald ("Grantor") and Edmund B. MacDonald, Jr., as trustee.[3] Laura Carlson, a Minneapolis attorney, represented Grantor in drafting the Trust Agreements.[4] Grantor was domiciled in Minnesota during 2009, when the Trusts were created, and at all times since 2009.[5] The Trusts' current mailing address is that of Mr. Fielding, in Johnson City, Texas.[6]
Approximately two weeks after creating the Trusts, by means of a stock-transfer certificate dated July 9, 2009, Grantor funded each trust with 6, 021 shares of nonvoting common stock in Faribault Foods, Inc. ("FFI"), a Minnesota Subchapter S corporation.[7] FFI recorded the stock transfer as effective August 1, 2009.[8] Edmund MacDonald, in his capacity as trustee, thus acquired possession and legal title of trust assets, which passed to his successor trustees.[9]
From June 25, 2009, through December 31, 2011, the Trusts were "grantor type trusts" for Minnesota income tax purposes, because Grantor retained a power to exchange personal assets for Trust assets of equivalent value.[10] For this period, trust income was treated as income to Grantor, and was taxable as such. On December 31, 2011, however, Grantor signed for each Trust a release of his power to exchange assets.[11] The Trusts thus became "resident trusts" under Minnesota law, [12] and were thereafter treated as entities themselves subject to state income tax.
The Trusts had only one trustee at any time, who was the same for each Trust.[13] At no time was any trustee domiciled in Minnesota.[14] Edmund MacDonald, a California domiciliary, was the initial trustee, serving from August 1, 2009, through December 31, 2011.[15]
Katherine A. Boone was trustee between January 1, 2012, and July 24, 2014.[16] She was a Colorado domiciliary for the entire period, and never traveled to Minnesota.[17] During 2014, Boone made all discretionary decisions concerning distributions to beneficiaries and investment of trust assets while in Colorado.[18]
Ms. Boone resigned and appointed Mr. Fielding trustee, effective July 24, 2014.[19] He continues to serve as trustee of the Trusts, and has been a Texas domiciliary throughout his service.[20] Fielding has never travelled to Minnesota on trust-related business.[21] During 2014, Fielding made all discretionary decisions concerning distributions to beneficiaries and investment of trust assets while in Texas.[22]
During 2014, Ms. Boone and Mr. Fielding maintained records of trust assets and income.[23]Boone "kept bank account statements and income tax returns in Colorado";[24] Fielding "kept bank account statements, investment information and account statements, income tax returns and information about the proposed sale of FFI in Texas." [25] Although attorney Carlson initially maintained the original Trust Agreements in Minnesota, she mailed them to Fielding on September 19, 2014.[26] In their capacity as trustees of the Trusts, the trustees "have not been plaintiffs or defendants in any legal action filed in the courts of Minnesota or of any other state, except for the instant cases pending in the Minnesota Tax Court." [27]
The primary beneficiary of the Maria Trust is Grantor's daughter, Maria V. MacDonald. Maria was born in Minnesota in 1985. She was domiciled in California during 2014, and remains a California domiciliary. Maria filed a California resident income tax return for 2014. She did not maintain a place of abode in Minnesota at any time during 2014.[28]
The primary beneficiary of the Catherine Trust is Grantor's daughter, Catherine Gray MacDonald. Catherine was born in Minnesota in 1986. She was domiciled in New York during 2014. Catherine moved to California in 2015, and remains a California domiciliary. Catherine filed a New York resident income tax return for 2014. She did not maintain a place of abode in Minnesota at any time during 2014.[29]
The primary beneficiary of the Laura Trust is Grantor's daughter, Laura Reid MacDonald. Laura was born in Minnesota in 1988. She was domiciled in New York during 2014. Laura moved to California in 2015, and remains a California domiciliary. Laura filed a New York resident income tax return for 2014. She did not maintain a place of abode in Minnesota at any time during 2014.[30]
The primary beneficiary of the Vandever Trust is Grantor's son, Vandever R. MacDonald. Vandever was born in Minnesota in 1993. He was domiciled in Minnesota during 2014, but attended college in New York. Vandever filed a Minnesota resident income tax return for 2014.[31]
During 2011, each Trust acquired 16, 223 additional shares of nonvoting common stock in FFI.[32] Consequently, between December 31, 2011, and August 1, 2014, when the stock was sold, each Trust owned 22, 244 shares in FFI.[33] The only other asset in each Trust, prior to sale of the FFI stock, was cash held in a Wells Fargo checking account.[34]
Each Trust Agreement recited that Grantor assigned, transferred and delivered to the trustee certain properties, and provided that "[t]he legal title to the trust property shall be and remain vested in the Trustee and any successor ...."[35] The trustee of each Trust has the power "[t]o sell... any or all of the properties of the Trust Estate at such prices, on such...
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