916 N.W.2d 323
Minn.2018Background
- Four irrevocable inter vivos trusts (the Trusts) were created in 2009 by Reid MacDonald (Minnesota domiciliary) and initially funded with nonvoting stock in Faribault Foods, Inc. (FFI), a Minnesota S corporation.
- The Trusts were grantor-type trusts until December 31, 2011, when Reid relinquished substitution powers and the trusts became irrevocable; Reid was domiciled in Minnesota at that time.
- Under Minn. Stat. § 290.01, subd. 7b(a)(2), the Trusts were classified as Minnesota "resident trusts" (because the grantor was domiciled in Minnesota when the trusts became irrevocable).
- In 2014 the Trusts (now irrevocable) sold their FFI shares and had substantial investment income; they filed 2014 Minnesota returns under protest and sought refunds, arguing the resident-trust classification was unconstitutional as applied.
- The Minnesota Tax Court ruled for the Trusts, holding the statute as applied violated the federal and state Due Process Clauses; the Minnesota Supreme Court affirmed, finding the Trusts lacked sufficient contacts with Minnesota in 2014 to justify taxation of all income as residents.
Issues
| Issue | Plaintiff's Argument (Trusts) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether Minn. Stat. § 290.01, subd. 7b(a)(2) may be applied to tax the Trusts as Minnesota residents for 2014 consistent with Due Process | Grantor's Minnesota domicile when trusts became irrevocable is the statutory residency criterion; applying it to tax all trust income violates due process because the Trusts lacked sufficient contacts with Minnesota in 2014 | The court should assess all contacts between Minnesota and the Trusts (historical and current); grantor domicile, creation in Minnesota, Minnesota law choice, and trust funding justify resident taxation | Held: As applied the statute is unconstitutional; the Trusts lacked minimum contacts and a rational relationship between taxed income and benefits provided by Minnesota in 2014 |
| Whether historical contacts (pre-2014) may supply the necessary Due Process nexus for taxing trust worldwide income in 2014 | Historical connections (creation, funding, grantor domicile) are not dispositive for the tax year at issue; focus must be on contacts in the tax year | Historical connections and the trust’s incorporation of Minnesota law are relevant and support nexus | Held: Court focused on contacts during the tax year; historical contacts were too attenuated to support resident taxation |
| Whether the situs/character of intangible assets (FFI stock) supports Minnesota taxation of the Trusts’ worldwide income | Intangibles were held and controlled outside Minnesota by non-Minnesota trustees; situs follows trustee, so Minnesota lacks connection to intangibles producing income | Trusts’ funding with Minnesota S-corp stock and corporate protections provided by Minnesota law link income to the State | Held: Intangible assets and income were not sufficiently connected to Minnesota for purposes of taxing all income as resident trust |
| Whether the Commerce Clause claim needed resolution after Due Process ruling | Trusts raised a dormant Commerce Clause challenge | Commissioner argued taxation was permissible and did not unduly burden interstate commerce | Court did not reach Commerce Clause because it resolved case on Due Process grounds |
Key Cases Cited
- Luther v. Comm'r of Revenue, 588 N.W.2d 502 (Minn. 1999) (due-process framework for state income taxation: minimum connection and rational relationship to benefits)
- Greenough v. Tax Assessors of Newport, 331 U.S. 486 (1947) (trust is separate legal entity; trustee citizenship relevant to certain legal analyses)
- Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83 (1929) (limits on state taxation of intangibles located and controlled outside the state)
- Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992) (due-process requires nexus between taxed activity and benefits conferred)
- New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937) (residence as basis for taxing income received by resident)
- T. Ryan Legg Irrevocable Trust v. Testa, 75 N.E.3d 184 (Ohio 2016) (contrasting authority holding grantor domicile and beneficiary residency can support state taxation of trust income)