Brief of Constitutional Law Scholars in North Carolina v. Kaestner

Abstract

Nominally, this case is about whether North Carolina may tax a trust’s undistributed net income because the trust’s beneficiary resided in North Carolina during the relevant tax years. But the broader problem is that many states seek to tax trust income based on the local residence of various persons or assets connected to the trust. The existence of multiple triggers for taxation raises a problem of overlapping jurisdiction that the Due Process Clause is ill-suited to address. For example, if a settlor in State W designates a trustee in state X, who holds assets in an account in state Y, for a beneficiary in State Z, four different states might seek to tax the trust’s income and might not provide offsetting credits. The Due Process Clause, as opposed to the Dormant Commerce Clause, is a poor fit for sorting out this regulatory overlap for at least three reasons. First, the Court’s due process jurisprudence is designed to identify when a given state may act in isolation, rather than when the overlapping authority of multiple states creates a risk of cumulative burdens. Second, current Dormant Commerce Clause jurisprudence provides robust tools for addressing the problem of cumulative burdens. Third, relying on the Dormant Commerce Clause rather than the Due Process Clause would preserve flexibility for Congress to provide comprehensive solutions if it identifies a problem arising from multistate taxation of trust income. In contrast, a ruling on Due Process grounds that North Carolina may not impose the tax at issue here, or that other states may not tax trusts in other circumstances, would tie Congress’s hands in the face of tax avoidance schemes that may undermine reasonable state interests.