in the Supreme Court on 11 October 2017.
discretionary review pursuant to N.C. G.S. § 7A-31 of a
unanimous decision of the Court of Appeals, ___ N.C.App. ___,
789 S.E.2d 645 (2016), affirming an opinion and order of
summary judgment dated 23 April 2015 entered by Judge Gregory
P. McGuire, Special Superior Court Judge for Complex Business
Cases appointed by the Chief Justice pursuant to N.C. G.S.
§ 7A-45.4, in Superior Court, Wake County.
& Van Allen PLLC, by Thomas D. Myrick, Neil T.
Bloomfield, Jonathan M. Watkins, and Kara N. Bitar, for
H. Stein, Attorney General, by Matthew W. Sawchak, Solicitor
General, Tenisha S. Jacobs, Special Deputy Attorney General,
and James W. Doggett, Deputy Solicitor General; and Law
Office of Robert F. Orr, by Robert F. Orr, for
case we consider whether defendant North Carolina Department
of Revenue could tax the income of plaintiff The Kimberly
Rice Kaestner 1992 Family Trust pursuant to N.C. G.S. §
105-160.2 solely based on the North Carolina residence of the
beneficiaries during tax years 2005 through 2008. Because we
determine that plaintiff did not have sufficient minimum
contacts with the State of North Carolina to satisfy due
process requirements of the Fourteenth Amendment to the
United States Constitution and Article I, Section 19 of the
Constitution of North Carolina, we conclude that the taxes at
issue were collected unconstitutionally and, therefore,
affirm the decision of the Court of Appeals affirming the
North Carolina Business Court's 23 April 2015 Opinion and
Order on Motions for Summary Judgment in favor of plaintiff.
Business Court noted, the underlying, material facts of this
case as established by the evidence in the record are not in
dispute. The Joseph Lee Rice, III Family 1992 Trust was
created in New York in 1992 for the benefit of the children
of the settlor Joseph Lee Rice, III pursuant to a trust
agreement between Rice and the initial trustee, William B.
Matteson. In 2005 Matteson was replaced as trustee by David
Bernstein, who was a resident of Connecticut. Bernstein
remained in the position of trustee and remained a
Connecticut resident during the entire period of time
relevant to this case. The trust was and is governed by the
laws of the State of New York, of which Rice was a resident.
No party to the trust resided in North Carolina until
Rice's daughter and a primary beneficiary of the trust,
Kimberly Rice Kaestner, moved to North Carolina in 1997.
December 2002, the trust was divided into three share
sub-trusts one each for the benefit of Rice's three
children, including Kaestner. The sub-trusts were divided
into three separate trusts in 2006 by Bernstein for
administrative convenience. Plaintiff is the separate share
trust formed for the benefit of Kaestner and her three
children, all of whom resided in North Carolina during the
tax years at issue.
the tax years at issue, the assets held by plaintiff
consisted of various financial investments, and the
custodians of those assets were located in Boston,
Massachusetts. Documents related to plaintiff such as
ownership documents, financial books and records, and legal
records were all kept in New York. All of plaintiff's tax
returns and accountings were prepared in New York.
the beneficiaries of plaintiff had an absolute right to any
of plaintiff's assets or income because distributions
could only be made at the discretion of Bernstein, who had
broad authority to manage the property held by plaintiff. No
distributions were made to beneficiaries in North Carolina,
including Kaestner, during the tax years at issue; however,
in January 2009, plaintiff loaned $250, 000 to Kaestner at
Bernstein's discretion to enable her to pursue an
investment opportunity. This loan was repaid.
terms of the original trust provided that the trustee was to
distribute the trust assets to Kaestner when she reached the
age of forty. Before her fortieth birthday on 2 June 2009,
Kaestner had conversations with her father and Bernstein
about whether she wished to receive the trust assets on that
date. Ultimately, she requested to extend the trust, and
accordingly, Bernstein transferred the assets of plaintiff
into a new trust, the KER Family Trust, in 2009. That
transfer occurred after the tax years at issue, and KER
Family Trust is not a party to this case.
managing plaintiff, Bernstein provided Kaestner with
accountings of trust assets, and she received legal advice
regarding plaintiff from Bernstein and his firm. Kaestner and
her husband also met with Bernstein in New York to discuss
investment opportunities for the trust and whether Kaestner
desired to receive income distribution as set forth in the
original trust agreement.
tax years 2005 through 2008, defendant taxed plaintiff on
income accumulated each year, regardless of whether any of
that income was distributed to any of the North Carolina
beneficiaries. Plaintiff sought a refund of those taxes
totaling more than $1.3 million, including $79, 634.00 paid
for 2005, $106, 637.00 paid for 2006, $1, 099, 660.00 paid
for 2007, and $17, 241.00 paid for 2008. Defendant denied the
refund request on 11 February 2011.
June 2012, plaintiff filed a complaint in Superior Court,
Wake County, alleging that defendant wrongfully denied
plaintiff's request for a refund because N.C. G.S. §
105-160.2 is both unconstitutional on its face and as applied
to collect income taxes from plaintiff during those tax
years. Plaintiff claimed that the taxes collected pursuant to
section 105-160.2 violate the Due Process Clause because
plaintiff did not have sufficient minimum contacts with the
State of North Carolina. Plaintiff also claimed that the
taxes violate the Commerce Clause on several grounds,
including that the tax was not applied to an activity with a
substantial nexus to the taxing state. Plaintiff claimed that
consequently, the tax also violated Article I, Section 19 of
the state constitution. Based on these claims, plaintiff
requested a declaration that section 105-160.2 is
unconstitutional and an order from the court requiring
defendant to refund any taxes, penalties, and interest paid
by plaintiff for tax years 2005 through 2008, and enjoining
defendant from enforcing any future assessments against
plaintiff pursuant to section 105-160.2. Subsequent evidence
indicated that penalties were assessed against plaintiff for
tax years 2005 and 2006. These penalties were not paid by
plaintiff and were ultimately waived at plaintiff's
request, rendering moot that specific portion of
plaintiff's claim for relief.
accord with N.C. G.S. § 7A-45.4(b), this case was
designated as a mandatory complex business case by the Chief
Justice on 19 July 2012. On 11 February 2013, the Business
Court issued an Opinion and Order on Defendant's Motion
to Dismiss in which it granted the motion as to
plaintiff's claim for injunctive relief, but denied the
motion as to plaintiff's constitutional claims.
to this appeal, plaintiff filed a motion for summary judgment
on its constitutional claims on 8 July 2014, and defendant
filed its own motion for summary judgment on 4 September
2014. In its Opinion and Order on Motions for Summary
Judgment, the Business Court observed that when a taxed
entity such as plaintiff is not physically present in the
taxing state, the taxed entity must "purposefully avail[
] itself of the benefits of an economic market in the forum
state" for the tax to satisfy due process requirements.
Kimberley Rice Kaestner 1992 Family Trust v. N.C.
Dep't of Revenue, No. 12 CVS 8740, 2015 WL 1880607,
at *4 ( N.C. Super. Ct. Wake County (Bus. Ct.) Apr. 23,
2015), aff'd, ___, N.C.App. ___, 789 S.E.2d 645
(2016) (quoting Quill Corp. v. North Dakota, 504
U.S. 298, 307, 112 S.Ct. 1904, 1910 (1992)). Determining that
plaintiff did not purposefully avail itself of the benefits
of the taxing state based solely on the beneficiaries'
residence in North Carolina, the Business Court concluded
that the provision of section 105-160.2 allowing taxation of
trust income "that is for the benefit of a resident of
this State, " N.C. G.S. § 105-160.2 (2005),
violated both the Due Process Clause and Article I, Section
19 of the state constitution as applied to plaintiff.
Applying the four-pronged analysis for determining the
constitutionality of a tax pursuant to the Commerce Clause as
set forth by the United States Supreme Court in Complete
Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct.
1076, 1079 ...