North Carolina Issues Refund Claim Guidance Related to the U.S. Supreme Court’s Kaestner Trust Decision

On June 21, 2019, the U.S. Supreme Court (Court) issued their unanimous decision in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (Kaestner) upholding a North Carolina Supreme Court ruling that declared a statute automatically subjecting a trust to income tax solely on the basis of the beneficiary’s in-state residency invalid on the grounds the statute violates the Due Process Clause of the Fourteenth Amendment under the U.S. Constitution. The Court noted their decision was limited to the specific facts presented in Kaestner, did not automatically imply approval or disapproval of state trust taxes premised on in-state resident beneficiaries without understanding the beneficiaries’ relationship to the trust assets. DHG has previously issued an alert on the Court’s decision.

In response to the Court’s decision, the North Carolina Department of Revenue (Department) released Important Notice: Decision in the Kaestner Case (July 2, 2019) (Notice) providing guidelines for trusts obtaining refunds of any overpayments in tax attributable to the facts in Kaestner under the following two categories;

  1. Taxpayers Who Have Filed a Notice of Contingent Event (Form NC-14) and
  2. Taxpayers Who Have Not Filed a Notice of Contingent Event.
Taxpayers Who Have Filed a Notice of Contingent Event prior to June 21st, 2019 (Form NC-14)

N.C.G.S. §105.241.6(a) provides that unless an exception applies within the statute, the general statute of limitations is the later of the following: (1) three years after the due date of the return (including extensions), or (2) two years after the payment of tax.

One of the exceptions to the general statute of limitations provided for under statute is in the case of a “contingent event” pursuant to N.C.G.S. §105.241.6(b)(5) involving litigation to where…

“The period to request a refund of an overpayment may be extended as provided in this subdivision if an event or condition prevents the taxpayer from possessing the information necessary to file an accurate and definite request for a refund of an overpayment…”

This provision requires a taxpayer to file Form NC-14, Notice of a Contingent Event or Request to Extend Statute of Limitations, with the Department prior to the expiration of the general statute of limitations cited above for a return or payment in which a “contingent event” prevents a taxpayer from filing a definite request for refund. Such a filing allows for the additional extension of the statute of limitations associated with any refunds subject to a “contingent event” pending the outcome of such event. The Form NC-14 filing requires a description of the “contingent event”, type of tax involved, tax returns or payments impacted by such an event, and the basis for and an estimate of the amount of the overpayment.

This provision also provides that any refund claims filed that is subject to a “contingent event” and such written notice is filed with the Department, the allowable period to request a refund of an overpayment is six months after the contingent event concludes.

For taxpayers that had filed a Form NC-14 to declare written notice of such “contingent event” with regard to any pending refund claims associated with the outcome of the Court’s decision in Kaestner, the Notice declares that the contingent event concluded on June 21, 2019 when the Court issued their ruling. In light of this, such taxpayers must file an amended return with the Department on or before December 21, 2019 (six months from the date of the Court’s ruling).

Taxpayers Who Have Not Filed a Notice of Contingent Event

Taxpayers who believe that they are entitled to a refund under the Kaestner decision and did not previously file a Form NC-14 for a given tax year being claimed may request a refund of an overpayment from the Department by taking one of the following actions within the general statute of limitations cited above for obtaining a refund: (1) filing an amended return reflecting an overpayment due the taxpayer, or (2) filing a claim for refund.

No further time for filing has been added to the statute in this scenario as the general statute of limitations cited above would apply for all open tax periods.

Under either category of amended return refund claims, an amended Form D-407, North Carolina Estates and Income Tax Return, must be filed for each tax year in which a refund is being claimed as a result of the Kaestner decision with the “Amended Return” circle on page 1 of the return filled in. To facilitate the review of the amended return, the Department requests that the amended returns be mailed to the following address:

N.C. Department of Revenue
ATTENTION: Partnership, Gift, Estate, and Fiduciary Unit
P.O. Box 871
Raleigh, North Carolina 27602-0871