Death & Taxes: Are Trust Nexus Challenges Next in Line?

The decision of the Supreme Court in South Dakota v Wayfair has changed the landscape in terms of sales taxes, physical presence and jurisdiction. Now states are forming legislation that allows them to follow this decision, earning more sales tax revenue from out-of-state merchants.

But what about the constitutional issues regarding trust income and the physical presence nexus? Recently, the Minnesota Supreme Court found that the trusts lacked sufficient contacts with the state in order to be taxed on all sources of their income as resident trusts during the 2014 tax year at issue, despite meeting the state’s statutory definition of a trust. Under Minnesota statute, an irrevocable trust is a resident trust if the grantor was domiciled in Minnesota when the trust became irrevocable. The trust was sold to a Corporation S, which in 2014 filed their taxes under protest, claiming that Minnesota’s residency definition was unconstitutional, the trusts filed amended returns as nonresident trusts requesting refunds of over $250,000 for each trust, which the Commissioner of Revenue denied.

The Minnesota Tax Court which concluded that the state’s definition of a resident trust violated the due process clause because the grantor’s domicile when the trust becomes irrevocable was not “a connection of sufficient substance,” and the Minnesota Supreme Court affirmed.

See Lauren Colandreo, Death & Taxes: Are Trust Nexus Challenges Next in Line?, Bloomberg Tax, July 24, 2018.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.