William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. MacDonald, et al., Respondents,
Commissioner of Revenue, Relator.
Court Office of Appellate Courts
A. Pickhardt, Caitlin E. Abram, Faegre Baker Daniels LLP,
Minneapolis, Minnesota, for respondents.
Swanson, Attorney General, Michael P. Goodwin, Assistant
Attorney General, Saint Paul, Minnesota, for relator.
evaluating whether an income tax statute's residency
classification violates the Due Process Clause as applied to
a taxpayer, all relevant contacts between the taxpayer and
the State during the tax year at issue are considered.
Because the taxpayers' relevant contacts with Minnesota
during the tax year at issue are insufficient to permit
Minnesota to tax those taxpayers as "resident
trusts," Minn. Stat. § 290.01, subd. 7b(a)(2)
(2016), is unconstitutional as applied to the taxpayers.
irrevocable inter vivos trusts allege that their
classification as "resident trusts" under Minn.
Stat. § 290.01, subd. 7b (2016), is unconstitutional as
applied to them under the Due Process Clauses of the United
States and Minnesota Constitutions. The Trusts filed their
2014 Minnesota income tax returns under protest, then filed
amended returns requesting refunds for the difference between
taxation as resident trusts and taxation as non-resident
trusts. After the Trusts' income tax refund requests were
denied by the Commissioner of Revenue, the Trusts appealed to
the Minnesota Tax Court. The Tax Court ruled in favor of the
Trusts, holding that the statutory definition of
"resident trusts," see Minn. Stat. §
290.01, subd. 7b(a)(2), violates the Due Process Clauses of
the Minnesota and United States Constitutions as applied to
the Trusts for the tax year at issue. Because we conclude
that the Trusts lack sufficient relevant contacts with
Minnesota during the applicable tax year to be permissibly
taxed, consistent with due process, on all sources of income
as residents, we affirm the decision of the Tax Court.
appeal of a Tax Court decision relates to four trusts
(collectively, the "Trusts"): the Reid and Ann
MacDonald Irrevocable GST Trust for Maria V. MacDonald (the
"Maria Trust"); the Reid and Ann MacDonald
Irrevocable GST Trust for Catherine Gray MacDonald (the
"Catherine Trust"); the Reid and Ann MacDonald
Irrevocable GST Trust for Laura Reid MacDonald (the
"Laura Trust"); and the Reid and Ann MacDonald
Irrevocable GST Trust for Vandever R. MacDonald (the
"Vandever Trust"). Based on the parties'
stipulation, the relevant facts for purposes of this appeal
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. The original trustee for all four trusts was a
California domiciliary, Edmund MacDonald. Initially, grantor
Reid MacDonald retained control over the trust assets. Thus,
for Minnesota income tax purposes, the Trusts were
"grantor type trusts" for the first 30 months of
their existence. During this period, although the grantor
(Reid MacDonald) was required to file Minnesota income tax
returns, the Trusts were not required to do so. See
Minn. Stat. § 290.01, subd. 7b(a) (2016) (explaining
that the "income or gains of . . . [a grantor type]
trust are taxable to the grantor or others treated as
substantial owners" under the Internal Revenue Code).
December 31, 2011, grantor Reid MacDonald relinquished his
power to substitute assets in the Trusts. The Trusts
therefore ceased to be "grantor type trusts" and
became irrevocable on December 31, 2011. See Minn.
Stat § 290.01, subd. 7b(a) ("[A] trust is
considered irrevocable to the extent the grantor is not
treated as the owner [of a trust]."). At the time the
trusts became irrevocable, Reid MacDonald was domiciled in
Minnesota. Based on Reid MacDonald's domicile in
Minnesota when the Trusts became irrevocable, the Trusts were
then classified as "resident trusts" under Minn.
Stat. § 290.01, subd. 7b(a)(2). Katherine Boone, a
domiciliary of Colorado, became the sole Trustee for each of
the Trusts on January 1, 2012.
they ceased to be grantor-type trusts, the Trusts filed
Minnesota income tax returns as resident trusts, without
protest, in 2012 and 2013. On July 24, 2014, William
Fielding, a domiciliary of Texas, became Trustee for the
Trusts. Shortly thereafter, all shareholders of FFI stock,
including the Trusts, sold their shares. Because the Trusts
were defined to be Minnesota residents (as a result of
grantor MacDonald's Minnesota domicile in 2011), they
were subject to tax on the full amount of the gain from the
2014 sale of the FFI stock, as well on the full amount of
income from other investments. See Minn. Stat. §
290.17, subd. 2(c) (2016) (providing that Minnesota taxes
"resident trusts" on all "income or gains from
intangible personal property," including investment
income, "not employed in the business of the recipient
of the income"). Had the Trusts not been deemed
residents of Minnesota, those items of income would have been
assigned to the Trusts' domicile and would not have been
subject to Minnesota income taxation. See Minn.
Stat. § 290.17, subd. 2(e) (2016).
Trusts filed their 2014 Minnesota income tax returns under
protest, asserting that the statute classifying them as
resident trusts, Minn. Stat. § 290.01, subd. 7b(a)(2),
was unconstitutional as applied to them. The Trusts then
filed amended tax returns claiming refunds for the difference
between the taxes owed as resident trusts and the taxes owed
as nonresident trusts-a tax savings of more than $250, 000
for each Trust.
Commissioner of Revenue denied the Trusts' refund claims.
The Trusts then appealed the Commissioner's orders
denying the refund claims to the Minnesota Tax Court,
asserting as-applied constitutional challenges under the
state and federal Due Process Clauses and the federal Commerce
Clause to section 290.01, subdivision 7b(a)(2). Fielding
v. Comm'r of Revenue, Nos. 8911-R, 8912-R, 8913-R,
8914-R, 2017 WL 2484593, at *1-2 (Minn. T.C. May 31, 2017).
the appeals on cross-motions for summary judgment, the Tax
Court framed the issue presented to it as: "Whether, for
due process purposes, the domicile of the grantor alone is a
sufficient connection with Minnesota to justify taxing the
Trusts as residents (that is, on a tax base that
includes intangible personal property not related to
Minnesota)." Id. at *11. The Tax Court then
considered "the proper scope" of the due process
inquiry. Id. at *12. The Trusts argued that the Tax
Court should limit the due process inquiry to the single
factor identified in the statute that defines a resident
trust- "the grantor's domicile at the time the
Trusts became irrevocable." Id. The
Commissioner, in contrast, argued that the court should
consider "all the contacts between Minnesota and the
Trusts" in the due process analysis. Id.
Agreeing with the Commissioner, the Tax Court determined that
all relevant contacts between the taxpayer and Minnesota
should be considered, but concluded that the only relevant
contact was the single factor identified in the statute;
namely, the grantor's residency at the time the Trusts
became irrevocable. Id. at *13.
Court ultimately concluded that "section 290.01,
subdivision 7b(a)(2), as applied to the Trusts for tax year
2014, violates the due process provisions of the Minnesota
and United States constitutions." Id. at *20.
Specifically, the court concluded that "Minnesota did
not have a sufficient basis to tax the Trusts as
'residents'" because the grantor's domicile
at the time the trust becomes irrevocable was not "a
connection of sufficient substance" to support the
exercise of taxing jurisdiction. Id. at *14, 19-20.
According to the Tax Court, "Minnesota did not have
subject matter jurisdiction over gain and income from . . .
items of intangible personal property not located within
Minnesota." Id. at *20. Having decided the case
on due process grounds, the Tax Court did not reach the
Trusts' claims under the Commerce Clause. Id. at
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. Id. at *20. The Commissioner
appeals from the Tax Court's decision.
questions presented by this appeal, which involve
consideration of statutory language and constitutional
challenges, are purely legal and subject to de novo review.
See Luther v. Comm'r of Revenue, 588 N.W.2d 502,
506 (Minn. 1999). We presume that statutes are constitutional
and hold the party asserting otherwise to a high burden to
overcome that presumption. Kimberly-Clark Corp. v.
Comm'r of Revenue, 880 N.W.2d 844, 848 (Minn. 2016).
dispute between the Trusts and the Commissioner implicates
the extent of the Trusts' tax liability to Minnesota. If
the Trusts are residents, Minnesota can tax the Trusts'
worldwide income. See Shaffer v. Carter, 252 U.S.
37, 57 (1920) ("As to residents [the State] may, and
does, exert its taxing power over [the taxpayers'] income
from all sources . . . ."). If the Trusts are not
residents, Minnesota's tax authority is restricted.
See Minn. Stat. § 290.17, subd. 2(c)
(describing the scope of the State's tax authority over a
"resident trust"); see also New York ex rel.
Cohn v. Graves, 300 U.S. 308, 312-13 (1937) (explaining
that residence within a state establishes the state's
authority to tax the receipt of income by the resident).
evaluating whether the Trusts' contacts with Minnesota
were sufficient for taxation as residents consistent with due
process, we must first determine the scope of our inquiry.
The language of Minn. Stat. § 290.01, subd. 7b(a)(2),
defines a "[r]esident trust," in relevant part, 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." No
other factors for determining residency are listed in the
statute. Neither party argues that the statutory language is
ambiguous; in fact, the parties stipulated that the
statute's definition applies to the Trusts and that the
Trusts filed their 2014 Minnesota tax returns (under protest)
Rew v. Bergstrom, 845 N.W.2d 764, 780 (Minn. 2014),
the Commissioner asserts that in an as-applied challenge
based on the Due Process Clause, we must examine all facts
and circumstances underlying the Commissioner's action,
including the "practical operation of the tax residency
statute" in this case and the multiple contacts between
Minnesota and the Trusts. The Trusts argue that although
their due process claim is an as-applied challenge, when
evaluating the constitutionality of the statute, our
consideration is limited to the single factor identified in
the statute for determining residency-namely, the domicile of
the grantor at the time the Trusts became irrevocable. The
Trusts contend that to consider other facts, as the
Commissioner urges, would effectively require that we add
language to the statute.
said that 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. See
Luther, 588 N.W.2d at 508-09. In applying these
requirements in the context of a due process challenge to a
taxpayer's status as a resident for income tax purposes,
we consider factors beyond those in the challenged residency
statute. In Luther, for example, we considered
"the many services, benefits, and protections afforded
[the taxpayer] by Minnesota in her right to receive and enjoy
her income." Id. at 509. Ultimately, after
concluding that the taxpayer had "enjoyed the many
services, benefits, and protections Minnesota provided for
her" for the majority of the tax year, we held that the
taxpayer's total contacts with Minnesota were sufficient
to meet due process requirements for taxing her as a
and other decisions involving due process challenges to
taxing statutes demonstrate that we look beyond the statutory
definition that identifies who is subject to a tax in order
to evaluate the relationship between the income taxed and the
benefits provided by the state. This analysis is not, as the
Trusts claim, a matter of adding language to the statute. We
are not redefining a resident trust; we are simply
evaluating, as we have in other cases, all the relevant facts
when considering whether the application of the statutory
definition would be consistent with due process in this
case. Therefore, in accordance with our past
decisions, we conclude that in the context of a due process
challenge to the State's taxation of a taxpayer as a
resident, we will examine all relevant contacts ...