North Carolina Revenue Department Sets Deadline to Claim Refunds Under Kaestner

July 9, 2019

On July 2, 2019, the North Carolina Department of Revenue issued a notice setting December 21, 2019, as the deadline for certain taxpayers to file amended returns or tax refund claims based on the U.S. Supreme Court decision in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust.

The Supreme Court’s decision holds that North Carolina’s statute subjecting trusts to state income tax based solely on the residence of a trust beneficiary in North Carolina is unconstitutional as applied to the taxpayer (the Kimberley Rice Kaestner 1992 trust). McGuireWoods previously reported on this case and the Supreme Court’s decision, issued on June 21, 2019. (See “What Kaestner Decision Means for State Income Taxation of Trusts,” “Supreme Court Weighs Constitutionality of State Income Taxation of Trusts” and “U.S. Supreme Court to Weigh N.C. Statute Taxing Trust Income.”)

The general statute of limitations for filing an amended return or filing a claim for refund is the later of three years after the due date of the return or two years after payment of tax. However, as set forth in the July 2 notice, the statute of limitations may be extended in the case of a contingent event, which includes “litigation initiated prior to the expiration of the statute of limitations, which prevents a taxpayer from possessing the information necessary to file an accurate and definite request for refund of an overpayment.”

The Kaestner litigation is such an event. The Business Court Division of the Superior Court of Wake County, North Carolina, issued the first opinion and order in this case on April 23, 2015. According to the Department of Revenue, the statute of limitations for filing an amended return or claim for refund has been, in essence, suspended until December 21, 2019, for trusts that timely filed a notice of contingent event. Trusts that have not filed such a notice are subject to the general statute of limitations.

For trusts filing state income tax returns in North Carolina and paying income tax based solely on the trust having beneficiaries resident in North Carolina, and that have filed a notice of contingent event, trustees should file claims for refund with the Department of Revenue by the deadline set forth in the notice of December 21, 2019. Arguably, if the general statute of limitation for filing the claim expires after the deadline set in the notice, the later date should apply, but the notice issued does not address this situation. For trusts that have not filed a notice of contingent event, the statute of limitations for filing a claim for refund is three years from the filing of the return (or two years from the payment of tax, if later).

The holding in the Kaestner case is complex, as are applications of the various statutes of limitations concerning refunds based on the decision. Please contact a member of McGuireWoods’ private wealth services practice to evaluate whether filing a claim is appropriate and assessing the applicable deadline, as well as for assistance in filing a claim.