In an unanimous decision, the Supreme Court held that the mere presence of trust beneficiaries in North Carolina was not sufficient for the state to tax trust income. The decision was premised on the due process clause of the constitution. In order for a state to impose a tax, there must be some minimum connection between the state and the taxpayer.
In the case before the court it was noted that although the beneficiary resided in North Carolina, no income was paid during the years in question. The trust assets were in Massachusetts and the trustee was in New York. The beneficiary had no right to demand a distribution. The trustee had the sole discretion over distributions and, in fact, accumulated income during the four tax years in question. The accumulated income, however, was substantial as the income tax was $1.3 million.
The holding was narrow and limited to the facts of the case.
Source: North Carolina Dept. of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust, June 21, 2019.
