Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue
| Decision Date | 23 April 2015 |
| Docket Number | 12 CVS 8740 |
| Citation | 2015 NCBC 36 |
| Court | Superior Court of North Carolina |
| Parties | THE KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST, Plaintiff v. NORTH CAROLINA DEPARTMENT OF REVENUE, Defendant |
Moore & Van Allen PLLC by Thomas D. Myrick, Esq., Neil T. Bloomfield, Esq., and Kara N. Bitar, Esq. for Plaintiff The Kimberley Rice Kaestner 1992 Family Trust.
North Carolina Department of Justice by Peggy S. Vincent, Esq. for Defendant North Carolina Department of Revenue.
THIS CAUSE, designated a mandatory complex business case by Order of the Chief Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-45.4(b), and assigned to the undersigned Special Superior Court Judge for Complex Business Cases, comes before the Court, pursuant to Rule 56 of the North Carolina Rules of Civil Procedure ("Rule(s)"), upon Plaintiff The Kimberley Rice Kaestner 1992 Family Trust's ("Plaintiff" or "Trust") Motion for Summary Judgment ("Plaintiff's Motion") and Defendant North Carolina Department of Revenue's ("Defendant") Motion for Summary Judgment ("Defendant's Motion") (together with Plaintiff's Motion, "Motions"). On February 24, 2015, the Court held a hearing on the Motions.
THE COURT, after reviewing the Motions, briefs in support of and in opposition to the Motions, arguments of counsel, and the evidence and other appropriate matters of record, CONCLUDES that Plaintiff's Motion should be GRANTED and Defendant's Motion should be DENIED for the reasons stated herein.
1. Plaintiff filed this action on June 30, 2012, seeking a determination that, as it was applied to Plaintiff, North Carolina General Statute § 105-160.2 () violates the Due Process Clause and the Commerce Clause of the United States Constitution and Section 19 of the North Carolina Constitution. Plaintiff seeks a refund of all taxes, penalties, and interest paid by it pursuant to G.S. § 105.160.2 for the tax years 2005 through 2008. In its Complaint, Plaintiff also sought to enjoin Defendant from enforcing any assessments issued pursuant to G.S. § 105-160.2 and from issuing future assessments against Plaintiff based on the same provision.
2. On February 11, 2013, the Court granted, in part, Defendant's Motion to Dismiss pursuant to Rule 12(b)(6). In its Order on Motion to Dismiss, the Court dismissed Plaintiff's claim for injunctive relief, but denied the Motion to Dismiss as to the constitutional challenges to the statute.
3. On July 2, 2014, Plaintiff filed its Motion for Summary Judgment. On September 2, 2014, Defendant filed its Motion for Summary Judgment. Both Motions have been fully briefed and, on February 24, 2015, the Court held a hearing on both Motions.
4. Both Motions seek summary judgment in the parties' respective favors on the constitutionality of G.S. § 105-160.2. Therefore, for the purpose of this Opinion and Order, the Court will address the Motions together.
5. A court does not make findings of fact in ruling upon a motion for summary judgment. However, the court may summarize material facts that do not appear to be at issue and which justify the judgment. Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C.App. 138, 142 (1975). There is very little dispute as to any of the facts in this action, and the dispositive facts are undisputed.
6. In 1992, the Joseph Lee Rice, III Family 1992 Trust ("Family Trust") was created for the benefit of the children of Joseph Lee Rice, III ("Settlor") under a trust agreement between Settlor and the initial trustee, William B. Matteson.[1] In 2005, Matteson resigned as trustee of the Family Trust, and David Bernstein ("Bernstein"), a Connecticut resident and domiciliary, was appointed trustee.[2] Bernstein was the trustee of the Family Trust at all times relevant to this action.
7. The Family Trust was created in New York and is governed by New York Law.[3] At the time the Family Trust was created, Settlor and the initial trustee were residents and domiciliaries of New York.[4] At the time of its creation, no primary or contingent beneficiary was a resident or domiciliary of North Carolina.[5] In 1997, Kimberley Rice Kaestner ("Kaestner"), a daughter of the Settlor and a primary beneficiary of the Family Trust, relocated to North Carolina.[6]
8. On December 30, 2002, by operation of the trust agreement, the Family Trust was divided into separate share trusts for each of the Settlor's three children, including Kaestner.[7] In 2006, Bernstein "physically divided" the share trusts into three trusts.[8] Plaintiff is the separate share trust formed for the benefit of Kaestner.[9] The current beneficiaries of Plaintiff are Kaestner and her three children, all of whom were residents and domiciliaries of North Carolina in the tax years at issue.[10] The contingent remainder beneficiaries of Plaintiff are the Settlor's remaining children, the Settlor's spouse, and the Settlor's sister, none of whom are, or were, residents or domiciliaries of North Carolina.[11]
9. The Family Trust, which includes Plaintiff, is an irrevocable inter vivos trust.[12] The terms of the Family Trust provided that when Kaestner turned 40 years of age, the Trustee was to distribute the trust assets to Kaestner. Kaestner turned 40 on June 2, 2009. Prior to turning 40, Ms. Kaestner had conversations with her father and Bernstein as to whether she wished to receive the trust assets at her 40th birthday.[13] Kaestner determined she preferred to extend the Trust.[14] Accordingly, in 2009, prior to Kaestner's 40th birthday, Bernstein transferred the assets of the Trust into a new trust, the KER Family Trust. It is undisputed that the transfer of assets occurred after the tax years at issue in this case, and the KER Family Trust is not a party to this action.
10. During the tax years at issue in this case, the assets held by Plaintiff consisted of various financial investments including equities, mutual funds, and investments in partnerships. The custodian of Plaintiff s assets was located in Boston, Massachusetts. Other documents related to the Trust, including ownership documents of some assets of Plaintiff, financial books and records, and legal records, were all kept in New York.[15] Additionally, all tax returns and Trust accountings have been prepared in New York.[16]
11. Under the terms of the Trust, the beneficiaries, including Kaestner, had no absolute right to any of the assets or income of the Plaintiff, as the distributions of assets or income are made at the sole discretion of the trustee, Bernstein.[17] Furthermore, under the terms of the Trust, Bernstein had broad authority to manage the property held by the Trust "as if the absolute owner thereof."[18] During the years in question no distributions were made to a beneficiary in North Carolina.[19]
12. Notwithstanding the discretionary nature of the Trust and the broad authority granted to the trustee, it is undisputed that two loans were made from the Trust for the benefit of Kaestner or other beneficiaries. In 2007 or 2008, Plaintiff loaned $250, 000.00 directly to Kaestner in order to allow her to pursue an investment in vanilla.[20] In 2008 or 2009, a loan was made from Plaintiff to a related trust, the Special Asset Trust, to enable the Special Asset Trust to make a capital call on a limited partnership interest that it held.[21] Both loans were made at the lowest interest rate allowable by the Internal Revenue Service and both loans were ultimately repaid.[22]
13. Bernstein occasionally communicated with Kaestner regarding Plaintiff. Kaestner was provided an accounting of the Trust, [23] and received legal advice regarding the Trust from Bernstein and his firm.[24] Additionally, Bernstein met with Kaestner and her husband in New York to discuss the Trust, whether the Kaestners desired to receive income distributions, and certain investments the Trust held.[25]
14. During the tax years at issue, 2005 to 2008, Defendant taxed Plaintiff on the income accumulated in the Trust during each year, although no income was distributed to a North Carolina beneficiary.[26] Plaintiff seeks refunds totaling in excess of $1.3 million, including $79, 634.00 paid for the year 2005; $106, 637.00 paid for 2006; $1, 099, 660.00 paid for 2007; and $17, 241.00 paid for 2008.[27] Plaintiff's request for a refund was denied on February 11, 2011.[28] Although Plaintiff's Complaint seeks return of penalties paid on these amounts, no penalties were paid to the State of North Carolina after Plaintiff received a complete waiver of these fees.[29]
15. In this lawsuit, Plaintiff challenges the Department's authority to impose income taxes on the Trust during the years 2005–2008 pursuant to G.S. § 105-160.2. For purposes of context, G.S. § 105-160.2 provides, in pertinent part, as follows:
The tax imposed by this part applies to the taxable income of estates and trusts as determined under the provisions of the Code . . . . The tax is computed on the amount of the taxable income of the estate or trust that is for the benefit of a resident of this State, or for the benefit of a nonresident to the extent that the income (i) is derived from North Carolina sources and is attributable to the ownership of any interest in real or tangible personal property in this State or (ii) is derived from a business, trade, profession, or occupation carried on in this State . . . . The fiduciary responsible for administering the estate or trust shall pay the tax computed under the provisions of this Part.
16. In actuality, the only part of G.S. § 105-160.2 that is at issue in this action is the clause of the above-quoted language that provides for a trust to pay taxes on income "that is for the benefit of a resident of this State."[30]
17. Plaintiff alleges that Section 105-160.2 is...
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