The Minnesota Tax Court recently ruled in Fielding¹ that the Minnesota resident trust statute, as applied to the trusts at issue, violated the due process provisions of the Minnesota and the United States constitutions.

Background

In 2009, Minnesota resident Reid V. MacDonald executed an irrevocable trust document that created and governed four separate, similar trusts. Throughout the course of administration, no trustee of any of the trusts had ever been domiciled in Minnesota. All trust administration activities were carried on outside of Minnesota. Only one of the four primary beneficiaries was domiciled in Minnesota during 2014, the year at issue. The trusts owned shares of stock in a Minnesota S corporation, and an investment account at a bank, administered and held outside of Minnesota. The current trustee sold the S corporation stock on August 1, 2014. Each trust recognized a substantial capital gain upon the sale. The trusts filed resident Minnesota returns for 2014, paid the tax under protest, and subsequently filed amended nonresident returns, claiming a refund. The Commissioner denied the trustee's refund claims and the trustee appealed to the Minnesota Tax Court.

Minnesota asserts authority to tax trust income and gains from all sources for trusts it defines as "resident" trusts.² The Minnesota statute defines a "resident trust" as a trust, other than a grantor trust, that " … is an irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable."³

The trusts in this case were "resident trusts" according to the statute, but the trustee argued that, notwithstanding the grantor's historical connection to Minnesota, the stock in the S corporation and in the investment account were intangible personal property located outside of Minnesota. Thus, the trustee argued Minnesota should have no legal right to tax income or gains attributable to those assets.

Court finds resident trust statute violates due process

The Court examined various state authorities, including the Mercantile-Safe Deposit⁴ case in New York, the Potter⁵ case in New Jersey, the Linn⁶ case in Illinois, and the Blue⁷ case in Michigan, all of which the taxpayers won. The Court said "[i]t is unsurprising that courts have universally rejected state efforts to tax trusts as 'residents' based solely on the domicile of the grantor at the time an inter vivos trust became irrevocable." The Court reasoned that doing so "reaches back through time to a discrete historical moment" and impermissibly resorts to "protections provided exclusively in previous tax years." Further, taxing an inter vivos trust based solely on the domicile of the grantor "reaches across persons" by relying on a connection to the grantor rather than to the trust itself. ⁸

The Court concluded that the "domicile of the grantor at the time a trust became irrevocable — standing alone — is not a sufficient basis to justify the resident tax treatment of an inter vivos trust." The Court distinguished the Gavin⁹ case in Connecticut, which the taxpayers lost.

Implications

This case is noteworthy because it falls in line with a series of constitutional cases rejecting states' attempts to tax a trust as a "resident" based solely on the domicile of the grantor when the trust became irrevocable. Thus, trusts that filed resident Minnesota returns solely on the basis that the grantor was a Minnesota resident may want to consider filing amended returns to claim a refund for those prior years. The statute of limitations for claiming a refund in Minnesota is three and a half years from the due date of the return, plus any extension of time granted for filing the return.¹⁰ This case, however, is a lower court ruling and the Minnesota Commissioner of Revenue may appeal the decision to the Minnesota Supreme Court,¹¹ creating some uncertainty about the final outcome. Given the uncertainty, taxpayers reluctant to request a refund may want to ask the Commissioner to agree to extend the statute of limitations.¹² This agreement would preserve the trust's ability to claim a refund for applicable years, in the event that the courts have not finally resolved the Fielding case before the limitations period would otherwise expire.

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ENDNOTES

¹ Fielding v. Comm'r of Rev., 2017 WL 2484593 (Minn. Tax Ct. May 31, 2017).

² Minn. Stat. Section 290.17, subd. 2(e).

³ Minn. Stat. Section 289A, subd. 7b(a).

⁴ Mercantile-Safe Deposit & Trust Co. v. Murphy, 19 A.D.2d 765 (1963), aff'd, 203 N.E.2d 490 (NY App. Div. 1964).

⁵ Potter v. Director, 5 NJ Tax 399 (Tax 1983).

⁶ Linn v. Dept. of Rev., 2 N.E.3d 1203 (Ill. App. Ct. 2013).

⁷ Blue v. Dept. of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990).

⁸ Fielding v. Comm'r of Rev., 2017 WL 2484593, at 19 (May 31, 2017).

⁹ Chase Manhattan Bank v. Gavin, 733 A.2d 782 (1999)

¹⁰ See Minnesota statutes chapter 289A.40, Subd. 1

¹¹ See Minnesota statutes chapter 271.10

¹² See Minnesota statutes chapter 289A.42; see also: Minnesota Department of Revenue, Statute of Limitations