Linn v. The Deparrtment of Revenue
2 N.E.3d 1203
Ill. App. Ct.2014Background
- A.N. Pritzker (Illinois resident) created a family trust system in 1961 that included an Illinois choice-of-law clause; later powers of appointment permitted creation of successor trusts.
- In January 2002 assets were appointed from the Linda Trust into Autonomy Trust 3; the 2002 trust instrument designated Texas law to govern (with a narrow earlier reference to Illinois law for certain terms), and the Texas probate court reformed the trust in 2005 to delete the Illinois-law language (effectiveness tied to an IRS ruling).
- By tax year 2006 the Autonomy Trust 3 was administered in Texas: trustee, protector, and primary beneficiary resided outside Illinois, trust assets were not located in Illinois, and the trust conducted its business in Texas.
- The Illinois Department of Revenue treated the Autonomy Trust 3 as an Illinois resident trust because the original grantor (A.N.) was domiciled in Illinois when the irrevocable trust interest was created, assessed tax for 2006, and the trustee paid $2,729 under protest.
- Trustee Lewis Linn sued for declaratory and injunctive relief claiming Illinois’s income tax on the trust violated the Due Process and Commerce Clauses; the trial court granted defendants’ summary judgment, and Linn appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the March 1961 Illinois choice-of-law provision bind Autonomy Trust 3? | The 2002 trust and Texas probate reformation make Autonomy Trust 3 governed by Texas law, not the 1961 Illinois provision. | The trust rights derive from the original Illinois trust structure, so Illinois law governs. | The court found the 2002 trust was governed by Texas law; historical Illinois provisions did not control for the 2006 tax year. |
| Does Illinois taxation of Autonomy Trust 3 violate the Due Process Clause? | Taxation is unconstitutional: the trust had no contacts with Illinois in 2006 (no trustee, beneficiary, protector, assets, administration, or business in Illinois). | Taxation is constitutional because the trust’s existence and opportunities derive from Illinois (grantor domicile and original trust structure) and Illinois law benefits beneficiaries/trustees. | The court held Illinois lacked sufficient contacts with the trust in 2006; due process prohibits taxing the trust’s income for that year. |
| Does taxation violate the Commerce Clause? | (Claimed) Taxation burdens interstate commerce. | (Defendants) State tax applies under statutory residency rules. | The court did not decide this issue because it resolved the case on due process grounds. |
Key Cases Cited
- Quill Corp. v. North Dakota, 504 U.S. 298 (minimum due-process contact for state tax parallels personal-jurisdiction analysis)
- Chase Manhattan Bank v. Gavin, 733 A.2d 782 (Conn. 1999) (analyzed due process for inter vivos and testamentary trusts; resident beneficiary can supply sufficient contact)
- Greenough v. Tax Assessors, 331 U.S. 486 (state may tax where trustee receives protection and benefits of state law)
- McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964) (state may tax undistributed trust income when a resident beneficiary receives protection under state law)