This morning, the U.S. Supreme Court held (North Carolina Dept. of Rev. v Kimberley Rice Kaestner 1992 Family Trust) that North Carolina violated the Due Process clause by taxing a New York-based trust with no ties to North Carolina except one resident beneficiary who did not receive, or have a right to demand or a guarantee of receiving, income from the trust. North Carolina taxes any trust income that "is for the benefit of" a North Carolina resident, regardless of whether the resident receives the income. Here, the trust did not have a physical presence, make any direct investments, or hold any real property in North Carolina.

The Court noted that "[t]he presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. In limiting our holding to the specific facts presented, we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here."

A Tax Alert on this development is forthcoming.