A Major Tax Victory For Business Sellers (USA)
If you’ve transfered ownership of your company into a trust it has, until recently, been a nightmare as to which state would tax you on the proceeds when you sold your business.
It used to be the case that the trust was taxed in the state it which it was “resident”, but over the years various states enacted legislation to tax trusts based on where the business was located, where the beneficiaries lived and using various other tenuous logic to grab a share of the proceeds of such business sales even with trusts located elsewhere.
A good example is Minnesota. If a trust created elsewhere becomes irrevocable while the creator is a resident of Minnesota that trust will, for the rest of its existence, be subject to Minnesota income tax. That applies even if trustee/s and beneficiary all live outside of Minnesota!
North Carolina sought to tax a trust based on nothing more than a beneficiary being a resident of that state. The North Carolina Court of Appeals affirmed the striking down of that law in 2016. In the North Carolina decision, the court used the same insufficient nexus argument that the Minnesota Tax Court used. But, the North Carolina court went a step further. It also stated that the trustee-beneficiary relationship was a form of interstate commerce. And, under the U.S. Constitution, only Congress may regulate interstate commerce.