Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Fielding v. Commissioner of Revenue

Supreme Court of Minnesota

July 18, 2018

William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. MacDonald, et al., Respondents,
v.
Commissioner of Revenue, Relator.

         Tax Court Office of Appellate Courts

          Walter A. Pickhardt, Caitlin E. Abram, Faegre Baker Daniels LLP, Minneapolis, Minnesota, for respondents.

          Lori Swanson, Attorney General, Michael P. Goodwin, Assistant Attorney General, Saint Paul, Minnesota, for relator.

         SYLLABUS

         1. When 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.

         2. 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.

          OPINION

          HUDSON, JUSTICE

         Four 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.

         FACTS

         This 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 are undisputed.

         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. 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).

         On 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).[1] Katherine Boone, a domiciliary of Colorado, became the sole Trustee for each of the Trusts on January 1, 2012.

         After 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.[2] 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).

         The 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.

         The 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[3] 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).

         Deciding 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.

         The Tax 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 *20 n.87.

         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. Id. at *20. The Commissioner appeals from the Tax Court's decision.

         ANALYSIS

         The 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).

         I.

         The 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).

         Before 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) as residents.

         Citing 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.

         We have 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 resident. Id.

         Luther 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.[4] 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.[5] 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 ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.