On July 18, 2018, the Supreme Court of Minnesota in Fielding¹ affirmed the Minnesota Tax Court's decision² 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 MacDonald executed an irrevocable trust document that created and governed four separate, similar trusts. Minnesota asserts authority to tax trust income and gains from all sources for trusts it defines as "resident" trusts.³ 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."⁴ Thus, under the statute, the trusts were considered resident trusts for the year at issue.

In addition to the grantor's connection to Minnesota, one beneficiary lived in Minnesota during the year at issue, and the trusts owned shares of stock in a Minnesota S corporation.

The trustee filed resident Minnesota returns for tax year 2014, paid the tax under protest, and subsequently filed amended nonresident returns, claiming a refund. The Minnesota Commissioner of Revenue (Commissioner) denied the trustee's refund claims, and the trustee appealed to the Minnesota Tax Court, which ruled in favor of the trusts, concluding 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." See Tax Alert 2017-1084 for more detailed background. The Commissioner appealed to the Supreme Court of Minnesota (Court).

When evaluating a due process challenge to the State's taxation of a trust as a resident, the Court emphasized that it must examine all relevant contacts between the trust and the State, not just the contact in the challenged statute — the residence of the grantor.⁵ The Court concluded that "the contacts on which the Commissioner relies are either irrelevant or too attenuated to establish that Minnesota's tax on the Trusts' income from all sources complies with due process requirements." Even considering what the Court describes as tenuous connections, including the fact that a Minnesota law firm drafted and kept physical copies of the trust instruments, the Court maintained that the "State lacks sufficient contacts with the Trusts to support taxation of the Trusts' entire income as residents consistent with due process."

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. More generally, it also reinforces the due process check on states' taxing jurisdiction where there are insufficient contacts with the taxpayer. 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.⁶ Note, however, that Fielding was merely an as-applied challenge to the statute, and relied on a specific set of facts.

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ENDNOTES

¹ Fielding v. Comm'r of Rev., 2018 WL 3447690 (July 18, 2018)

² Fielding v. Comm'r of Rev., 2017 WL 2484593 (May 31, 2017)

³ Minnesota statutes chapter 290.17, subd. 2(e)

⁴ Minnesota statutes chapter 290.01, subd. 7b(a)

⁵ See Luther v. Comm'r of Rev., 588 N.W.2d 502 (1999)

⁶ See Minnesota statutes chapter 289A.40, Subd. 1