Author: Morgan Maxwell

As a result of recent amendments to the Internal Revenue Code, fewer taxpayers get a bang for bucks donated to charitable organizations. Except… Buried in the debris of frenzied responses to the scourge of COVID-19, a glimmer of light. Whether or not you itemize, cash gifts of up to $300 (in the aggregate) to qualifying charitable organizations made before December 31, 2020, are deductible in determining your 2020 tax bill, period, end of thought. No less an authority than the IRS has just sent out a reminder. (Do you suppose this means they have a beating heart? Nah.)

The reduction in tax may not change your life, but from the point of view of many smaller charitable organizations, truly every little bit helps. If you are stuck, any of us at SGRV could suggest a worthy recipient of your smallish but still important largesse.

Certainly everyone should try to scrape together $300 to take advantage of this (relatively) tax freebie.

For those one in ten of you who still itemize deductions, there is another tax saving opportunity. Under the CARES Act there is a suspension of the normal rule that charitable contributions for the year may not exceed 60% of adjusted gross income. For 2020 the limitation is 100% of AGI, with (as under prior law) a 5 year carryover for excess gifts. As in the provision above, this higher limit only applies to cash gifts. So, are you a potential donor who might be induced to jump at a larger cash gift this year, wipe out your tax liability and maybe have some carryover to boot? If you otherwise have the disposable cash, it may just be a question of hating the IRS as much as (or more than) you love your favorite charity.

As in all things tax, it is important to get advice on your particular circumstances from your return preparer, CPA, or financial adviser. Morgan Maxwell, our Of Counsel for tax matters, can also be helpful.


In these troubled times, this seems like a not unreasonable statement and it is oft-expressed. Particularly when some heartless retailers charged Pennsylvania sales tax on face masks and other personal protective equipment that INNOCENT and VIRTUOUS CITIZENS acquired to protect THEMSELVES and OTHERS, truly ALL OTHERS, in this pandemic. And so, consistent with the sentiment above, SUE THE BASTARDS!!

Which is what has happened: Garcia v. American Eagle Outfitters Inc. et al., recently filed in the Court of Common Pleas for Allegheny County.

Garcia is not a tax case, strictly speaking. It was brought as a class action under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The claim is that the retail sellers of face masks and other PPE should have known that these items were (or had been declared) exempt from the sales tax (the substantive quality of this premise will be considered below), and thus when they charged sales tax, they engaged in activity prohibited by the UTPCPL. Recoverable damages under the UTPCPL include $100 per violation (which may be trebled in extreme cases) and attorneys’ fees.

The UTPCPL specifies twenty acts defined as unfair trade practices. They all fall in the category of false, deceptive, misleading, or intentionally confusing claims. None of the specified acts can be reasonably be stretched to cover a retailer that overcharges sales tac. However, the UTPCPL has a catch-all prohibition of “any other fraudulent or deceptive conduct which creates likelihood of confusion or of misunderstanding.

At this point, I, a mere tax lawyer, have a little trouble completing a summary of the plaintiff’s claims that would begin “In other words…” I would think that the false, misleading, deceptive or confusing statements, in order to be actionable under the UTPCPL, would have to create some unfair advantage to the seller, to make a sale more likely than would have been the case had the consumer been fully and fairly informed. The argument has to be that the seller, knowing that sales tac was being overcharged, mislead the consumer by concealing this fact and thus made the sale more likely than if the consumer had been aware of the overcharging. But I still have trouble in figuring out what’s in it for the retailor carrying out this deception. I assume that the retailor, having collected the sales tax, simply paid it over to the Department of Revenue in the ordinary course, if not the retailor has a world of trouble with the department, and we would be talking about a run-of—the-mill, grimy sales tax case. Surely, the retailor is marginally better off being truthful if the items are exempt from the sales tac, since the total price to the consumer would be less and thus the sale should be marginally more likely.

What interests me, as a tax lawyer, is looking at it from the point of view of the duties that are imposed upon the “taxpayer” and how the law is administered. In the case of the sales tax, I had to put taxpayer in quotes because the consumer is the taxpayer, but all of his duties are imposed on the retailer. That’s where the action is. The retailor has to collect the tax, account for it and report to the Commonwealth, and pay the collected taxes over to the Department of Revenue. A misstep, mistake. Or intentional malfeasance with respect to any of this results in the retailor (and perhaps its owners and others personally) being responsible for the tax, penalties, interest, possible loss of its sales tax license, banishment to outer darkness.

From the point of view of the consumer, the taxpayer, the sales tac is pretty simple. The consumer may have some vague understanding that certain purchases are sales tax exempt, but in general, the consumer simply has to pay the price for the desired goods.

From the point of view of the retailor, the tax collector, the sales tax can be mindlessly complicated. There are hundreds of published sales tac cases in Pennsylvania law books, and few if any deal with the consumer. They deal with the collector.

The sales tax applies to tens of millions of transactions in Pennsylvania annually. In the vast majority, it is easy to.  Identify the transaction as a “sale at retail” (which is the legal incidence of sales tax) and the only complication is whether only the state-level 6% rate applies, or there is an additional county-level tax. But when we get to exclusions it can get tricky. To navigate this trickiness, we obviously have to delve into what the law (in its grand generality) provides, and we have to determine what we mean by “the law” This may risk getting a little boring at times, you really were not expecting a civics lesson, but stick with me. I will try to keep it interesting, after all, if we are going to concede that the Government can impose duties on its citizens, we ought to be able to determine pretty clearly how, with reference.

Consider: Did the plaintiffs sue the department to recover the sales tax? Nah, $100 per violation, maybe trebled, plus attorneys’ fees, is more than a couple of bucks of sales tac (and good luck trying to get the tax back. From the Department, by the way) Did the plaintiffs sue the Department for failing to issue guidance that it arguably could have done? Nah, Did the plaintiffs sue the Governor for issuing a vague executive order, or failing to issue one at all? Nah.

But I’m just a tax lawyer.


When There Really Isn’t Any There There:  The Supreme Court in  North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust

By Morgan Maxwell

When the Supreme Court speaks we expect some broad pronouncement, a grand statement settling an intractable problem going to the very essence of the function and application of law in an ordered society.  Particularly so in matters of taxation, not only because I am a tax lawyer, but because taxation is where Government and the citizenry interact most frequently, most universally, sometimes most grindingly, and with the most variety.  As much as we (or some of us) might want a select group of Solons to resolve every question and achieve perfect balance, sometimes the courts, even the Supreme Court, is constrained to simply decide the case in front of it, and thus there may be no greater meaning to be imparted except the resolution of the immediate dispute.  This was the case in Kaestner Family Trust, decided by the Court on June 21, 2019.¹

This case starkly demonstrates the dichotomy between a common sense view of how the law should be interpreted and applied, and a hyper-technical legalistic approach.  This was a fairly easy case, from a common sense point of view.²  North Carolina was seeking to tax income of a trust that had almost nothing to do with North Carolina, except for the accident of a beneficiary of the trust moving to North Carolina years after the trust was created.  On the other hand, the Department of Revenue had a fairly straight-forward argument: the North Carolina courts had held that this tax could be imposed if a trust merely had a North Carolina resident as a beneficiary.

The problem with trusts (or is it their glory?) is that one can create one’s own legal universe; the idiosyncratic provisions one might choose are limited only by the settlor’s imagination.³ In Kaestner Family Trust, an idiosyncratic trust met a fairly idiosyncratic law⁴ and produced a result of extremely narrow application.

The original trust was formed nearly 30 years ago by a New York resident for the benefit of his three children, and its trust instrument provided that it was to be governed by New York law.  The initial trustee was a New York resident, succeeded along the way by a Connecticut


¹  South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018)., discussed herein, another tax case, was decided on this same date in 2018.  I cannot wait to see what happens on June 21, 2020.

² I’ve warned you in prior blogs not to be beguiled by common sense when it comes to taxation.

³  Occasionally, a trust provision will be held to violate some greater interest, such as “public policy” or even the Constitution: see The Girard Trust case, Pennsylvania v. Board of Trusts, 353 U.S. 230 (1957).

⁴  Several times in its opinion the Court was at pains to explain that very few if any other states had a taxing scheme anything like North Carolina’s resident.  The trust’s documents and records were maintained in New York, and the custodians of the trust’s property were located in Massachusetts.  The trust instrument granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries “in such amounts and proportions” as the trustee might “from time to time” decide (as quoted by the Court).  In other words, the beneficiaries had no right to receive income or principal, no power to demand any distributions, and no expectation whatsoever as to whether or when any distributions of income or principal would be made by the trustee.⁵

One of the beneficiaries, Kimberley Rice Kaestner, moved to North Carolina with her minor children in 1997, and a few years later, the trustee divided the original trust into three separate trusts, one for each of the original settlor’s children.  One of these trusts was the taxpayer in this case.  Each of the separate trusts had the identical terms of the original trust, most importantly the absolute discretion on the part of the trustee as to amounts and timing of distributions; and the same controlling arrangements, residence of trustee, location of trust papers, location of trust property custodians, and so on.

The relevant North Carolina statute taxes trust income that “is for the benefit of” a North Carolina resident, which the North Carolina courts had interpreted to authorize a tax on a trust on the sole basis that a trust beneficiary resides in the State.  Accordingly, the North Carolina Department of Revenue assessed a tax on the full amount of the Trust’s income for the tax years 2005 through 2008.  The trustee paid the tax under protest and sued for a refund in state court arguing that the tax as applied to the Trust violated the Due Process clause of the 14th Amendment to the U.S. Constitution.

The trial court held in favor of the Trust, concluding that “the Kaestners’ residence in North Carolina was too tenuous a link between the State and the Trust to support the tax…,” under the standards of the Due Process clause.⁶ Both the North Carolina Court of Appeals and the North Carolina Supreme Court affirmed, and the Department of Revenue appealed to the


⁵  This might be regarded as an unusual or even an extraordinary provision until one considers that all of the beneficiary’s share of the trust’s property was to be distributed to the beneficiary when he or she turned 40.  This event was to take place after the tax years at issue, 2005 through 2008. In addition, after the tax years at issue, and before Kaestner turned 40, in accordance with Kaestner’s wishes, the trustee rolled the trust assets over into another trust rather than distribute them to Kaestner.

⁶  The trial court also held that the tax as applied violated the dormant Commerce Clause of the Constitution.  Neither of the North Carolina appellate courts nor the U.S. Supreme Court addressed this issue, but it is a fascinating one, and was central to the recent U.S. Supreme Court case South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).  For those interested in the topic, see my blog The Supreme Court Tackles the Internet – Remote Sellers and the Sales Tax at my website,

U.S. Supreme Court.⁷

The North Carolina Supreme Court decided in favor of the Trust on the principal grounds that the Trust and its beneficiaries had separate legal existences for tax purposes, and the connection between the beneficiaries and North Carolina could not by itself establish a sufficient taxable connection between the Trust and North Carolina.  The U.S. Supreme Court’s take was slightly different.  It saw the question as “whether the Due Process Clause prohibits States from taxing trusts based only on the in-state residency of trust beneficiaries.”

Due process can be a relatively slippery concept, but its provenance is deadly serious: the Fourteenth Amendment to the Constitution provides that “[n]o State shall … deprive any person of life, liberty, or property, without due process of law.”  In the area of taxation, the Court, in a unanimous decision authored by Justice Sotomayor (with a concurring opinion by Justice Alito joined by Chief Justice Roberts and Justice Gorsuch), pointed out that the touchstones of due process are whether there is “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax…,” and whether “the income attributed to the State for tax purposes … [is] rationally related to ‘values connected with the taxing State.’”  Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992).⁸  In other words in other words, in order for a tax to be sustained, the State must have given something for which it can ask return, Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 (1940); and the imposition of the tax must comport with “fundamental fairness.” Quill at 312.

As suggested above, there are a lot of ways in which basically the same idea can be expressed, and in the ensuing pages of the Opinion, the Court employed many of them.  At the end of the day, the Court held in favor of the Trust.  Two extensive quotes from Justice Sotomayor’s opinion clearly explain the Court’s rationale:

“We hold that the presence of in-state beneficiaries alone does not  empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that  income and are uncertain ever to receive it.  In limiting our holding to the specific facts presented, we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.”


⁷  One might wonder why, after being repeatedly rebuffed by the North Carolina courts, the Department of Revenue continued to pursue the matter.  Surely a matter of principle?  Well, the tax involved for the four taxable years amounted to $1.3 million, which at the then-prevailing tax rate means that the Trust was earning nearly $4 million a year.  Certainly dollars worth trying a Hail Mary for.

 ⁸  As noted by the Court, Quill was overruled by Wayfair, the case cited in note 4, but on different grounds.  The Court here noted the second thing it was not addressing: since the North Carolina tax did not meet the “minimum connection” test the tax would fail, and thus the Court saw no need to address the “rational relationship” test.

“When a tax is premised on the in-state residence of a beneficiary, the  Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset.  Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83, 91-92 (1929).  Otherwise, the State’s relationship to the object of the tax is too attenuated to create the ‘minimum connection’ that the Constitution requires.  See Quill, 504 U.S.,  at 306.”

To say that the Court intends this to be a narrowly-construed, fact-specific decision would be putting it mildly indeed.  The Court’s litany of those matters, issues or questions that it was specifically not passing on is almost comical: while the Kaestner beneficiaries did not have the requisite relationship with the Trust property to justify the tax, “[w]e do not decide what degree of possession, control, or enjoyment would be sufficient” to support taxation; after pointing out that the Kaestner beneficiaries had no right to assign their interest in the Trust, the Court declined to address whether the right to assign would afford the beneficiary the requisite control, possession or enjoyment to justify taxation; after pointing out, repeatedly, that the Kaestner beneficiaries received no income, could demand no distributions, and were uncertain of ever receiving any distributions, the Court demurred: ”We have no occasion to address, and thus reserve for another day, whether a different result would follow if the beneficiaries were certain to receive funds in the future;” after noting the Trust’s broader argument that only the trustee’s contacts with the taxing State should determine the State’s power over a trust, including its power to tax the trust’s property or income, the Court said: “Because the reasoning above resolves the case in the Trust’s favor, it is unnecessary to reach the Trust’s broader argumemt….”⁹

It seems that, having been hoisted on the petard of stare decisis in Wayfair¹º, the Court was going to be sure that there would be no reason to accord any stare decisis effect to Kaestner Family Trust.  There will be absolutely no reason to cite the case in any future decision for any substantive point of law except as a reminder of what the Kaestner Family Trust Court told us it was not deciding.  Also, I think, as a reaction to the mess the Court made of stare decisis in Wayfair, Justice Alito in his concurring opinion (joined in by Justice Gorsuch and Chief Justice Roberts), hoped to squelch any supposition that there would be a reason to question the continued vitality of any case relied on:

“I write separately to make clear that the opinion of the Court merely applies our existing precedent and that its decision not to answer questions not presented by the facts of this  case¹¹  does not open for reconsideration any points resolved by our prior decisions.”


⁹  There are at least two additional questions that the Court surely would not have addressed.  First, is affirmatively abjuring a future right to possess, control or enjoy property, as was done when the Trust property was rolled over to another trust, tantamount to possessing, controlling or enjoyment for purposes of taxation and the Due Process clause?  Second, does the kind of enjoyment no doubt experienced by the Kaestner beneficiaries and the trustee at keeping the Trust property out of the clutches of the North Carolina Department of Revenue sufficient to satisfy the Due Process clause?

¹º  See my blog cited in note 6.

It is said that hard cases make bad law, and Kaestner Family Trust seems to prove that an idiosyncratic set of facts piled upon an idiosyncratic trust instrument to which an idiosyncratic taxing scheme is applied, makes … no law.  So why did the Supreme Court feel it had to issue a decision in this case?  It was a unanimous decision, a mere affirmance of the North Carolina Supreme Court would have reached the correct result, take the afternoon off.  The Court must have been sufficiently uncomfortable with the North Carolina Supreme Court’s stated grounds – that “the Trust and its beneficiaries had separate legal existences for tax purposes, and the connection between the beneficiaries and North Carolina could not by itself establish a sufficient taxable connection between the Trust and North Carolina.” (quoting from above)  To the extent that “substance” should be preferred to mere “form” in matters of taxation,¹² the North Carolina Supreme Court’s approach might have felt a little too “form-y” when compared to the more “substance-y” failure to achieve minimum contacts and “rational relation” of the Due Process clause jurisprudence.  Or maybe they just wanted to prove, in these contentious times, that they could reach unanimity on something.


¹¹ There are those who consider that this is what the Supreme Court is always supposed to do.

¹²  A high-sounding doctrine that is often, alas, honored in the breach.  Take as only one example from what may be hundreds, a decision upholding a tax the subject of which was the privilege of doing business in the state and the measure of which was net income, on the basis that the tax was not, after all, a tax on net income.  Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).  The English language can be a dangerous thing in the wrong hands, like a draftsman of a taxing statute or a Department of Revenue.