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Keywords

jurisdictionappealtrustwilldue process
motionsummary judgmenttrustwillcorporationdue process

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Fielding v. Commissioner of Revenue, 916 N.W.2d 323

Facts

The trusts were created by Reid MacDonald, a Minnesota resident, in 2009 and became irrevocable in 2011. After the trusts were classified as resident trusts, they filed tax returns under protest for the 2014 tax year, claiming refunds based on their non-resident status. The Commissioner of Revenue denied their refund claims, leading to the trusts' appeal to the Minnesota Tax Court, which found that the statutory definition of 'resident trusts' was unconstitutional as applied to them.

Each of the Trusts was created on June 25, 2009, by grantor Reid MacDonald, then a domiciliary of Minnesota, and each trust was initially funded with shares of nonvoting common stock in Faribault Foods, Inc. ('FFI'), a Minnesota S corporation.

Issue

Whether the domicile of the grantor alone is a sufficient connection with Minnesota to justify taxing the trusts as residents for income tax purposes.

Whether, for due process purposes, the domicile of the grantor alone is a sufficient connection with Minnesota to justify taxing the Trusts as residents.

Rule

A tax will satisfy due process if there is a 'minimum connection' between the state and the entity subject to the tax, and a 'rational relationship' between the income subject to the tax and the protections and benefits conferred by the state.

A tax will satisfy due process if (1) there is a 'minimum connection' between the state and the person, property, or transaction subject to the tax, and (2) the income subject to the tax is rationally related to the benefits conferred on the taxpayer by the State.

Analysis

The court determined that the relevant contacts for taxation were those during the tax year at issue, 2014. It found that the grantor's connections to Minnesota were insufficient to establish a minimum connection for taxing the trusts as residents. The court emphasized that the trusts, as separate legal entities, did not have sufficient ties to Minnesota during the tax year to justify the imposition of taxes on their worldwide income.

We conclude 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.

Conclusion

The Minnesota Tax Court's decision was affirmed, holding that the classification of the trusts as 'resident trusts' under Minnesota law was unconstitutional as applied, due to the lack of sufficient contacts with the state during the tax year in question.

We therefore hold that Minn. Stat. § 290.01, subd. 7b(a)(2), is unconstitutional as applied to the Trusts.

Who won?

The trusts prevailed in the case because the court found that Minnesota did not have a sufficient basis to tax them as residents, as the grantor's domicile was not a connection of sufficient substance to support the exercise of taxing jurisdiction.

Based on its conclusion that the statutory definition for a 'resident trust,' as applied to the Trusts, violated the Due Process Clause, the Tax Court held that 'the Commissioner erred in denying the Trusts’ refund claims,' granted the Trusts’ motions for summary judgment, and denied the Commissioner’s motions for summary judgment.

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