In the case of MacDonald Irrevocable GST Trust v. (Minnesota) Commissioner of Revenue, Filed July 18, 2018, A17-1177 __ N.W.2d __ (Minn. 2018), the Minnesota Supreme Court found the Minnesota Resident Trust income tax statute Minn. Stat. § 290.01 Subd. 7b(a)(2) unconstitutional under the Due Process Clause of the United States and Minnesota Constitutions. In this case, the grantor created an irrevocable trust that was a grantor trust because the grantor retained a power of substitution over the trust property. The Trust was created in 2009 with a California Trustee. On January 1, 2012 a Colorado Trustee was appointed and finally on July 24, 2014 a Texas Trustee was appointed. For the first 30 months, the Trust remained a grantor trust subjecting the grantor to tax on all trust income. However, on December 31, 2011 the grantor relinquished his power of substitution and the Trust was no longer a grantor trust. The Trust owned S-Corporation stock of a Minnesota based company. In 2014 the Trust sold the company stock and incurred more than $250,000 in income taxes and invested the sale proceeds at an institution outside of Minnesota. The Trust filed the 2014 income tax return under protest and filed for a refund. The Tax Court found the Minnesota tax unconstitutional and the matter was appealed to the Minnesota Supreme Court.
Minn. Stat. § 290.01 Subd. 7b(a)(2) defines a resident trust as “a trust, except a grantor type trust, which …is an irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable.” This case does not decide the other definition of a resident trust where the trust created by a decedent’s will domiciled in Minnesota at the time of death is a resident trust, but I suspect the reasoning of this Court will apply to that form of resident trust as well. An initial issue for the Court’s constitutional analysis is whether the Court should consider all facts and circumstances regarding the trust or whether the only issue is the grantor’s connection to the trust. While the statutory definition looks to the grantor’s domicile, the constitutional analysis requires the Court to examine all the facts and circumstances surrounding the Trust. The facts and circumstances approach is consistent with prior cases examining the constitutionality of a tax statute.
When turning to the facts and circumstances, due process is satisfied 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. There is no argument that the State can tax Minnesota sourced income. That is not disputed. The question is whether Minnesota can tax all income. The State points to the following facts to justify the tax: the grantor was a Minnesota resident and domiciled here when the trust was created and became irrevocable, the trust owned stock in a Minnesota company, the trust was created by a Minnesota law firm and the original documents were held by the Minnesota law firm, the trust provides that Minnesota law controls the trust and one beneficiary was a Minnesota resident. The taxpayer points to the following facts opposing the residency status: No Trustee has been a Minnesota resident, the Trust is not administered in Minnesota, the records are maintained outside of Minnesota, other Trust income is derived outside of Minnesota, and 3 of 4 beneficiaries live outside of Minnesota. The Court found that the State’s arguments are either irrelevant or too attenuated to satisfy the due process arguments. The State arguments do not look to the party paying the tax. The Trust is paying the tax, not the grantor. The fact that the stock owned by the Trust was in a Minnesota company is irrelevant to the fact that the stock is an intangible asset located outside of Minnesota and there is no connection to the grantor. The Trust owns the stock not the grantor. While a Minnesota law firm created the Trust, the law firm did not represent the Trustees and storing an original document by the Minnesota firm was a convenience to the grantor not the trust. The pre-2014 facts that show a connection to Minnesota are irrelevant to the analysis because the Trust is the taxpayer and what is relevant is the facts in 2014 and thereafter. “The direct link between the activities that generated the income in the year at issue and the protections provided by the State in that same year establishes the necessary rational relationship that justifies the tax.” Historical contacts unrelated to the tax year is not reasonable.
The Court noted that testamentary trusts created by a will probated in Minnesota under the statute may be handled differently and cited to District of Columbia v. Chase Manhattan Bank, 689 A.2d 539, 544 (D.C. 1997)(finding it constitutional to tax a trust from a will probated in that state), and In re Swift, 727 S.W.2d 880, 882 (Mo. 1987)(probating the will in Missouri was not a sufficient nexus to tax the trusts). Thus it seems the taxation issue of a testamentary trust from a will probated in Minnesota is still an open question.