LEWIS LINN, as Trustee of the Autonomy Trust 3, Plaintiff-Appellant,
THE DEPARTMENT OF REVENUE; BRIAN HAMER, in His Official Capacity as Director of The Department of Revenue; and DAN RUTHERFORD, in His Official Capacity as Treasurer of the State of Illinois, Defendants-Appellees.
Appeal from Circuit Court of Sangamon County No. 07TX0001/01, Honorable John Schmidt, Judge Presiding.
Justices Knecht and Steigmann concurred in the judgment and opinion.
¶1 In May 2007, plaintiff, Lewis Linn, as trustee of the Autonomy Trust 3, filed a verified complaint for declaratory and injunctive relief against defendants, the Department of Revenue (Department); Brian Hamer, as the Department's director; and Dan Rutherford, as the Illinois Treasurer. Plaintiff's complaint sought the return of an income-tax payment it had made under protest because any income taxation on the Autonomy Trust 3 was unconstitutional as the trust had no connections with Illinois. The parties filed cross-motions for summary judgment. After memoranda and oral arguments, the Sangamon County circuit court granted defendants' motion for summary judgment and denied plaintiff's.
¶2 Plaintiff appeals, arguing the trial court erred in granting summary judgment in defendants' favor because (1) the Illinois choice-of-law provision in the original trust agreement does not apply to the Autonomy Trust 3, and (2) the imposition of Illinois income taxation on the Autonomy Trust 3 is unconstitutional as it violates both the due process and commerce clauses. We reverse and remand with directions.
¶3 I. BACKGROUND
¶4 In March 1961, A.N. Pritzker entered into a trust agreement establishing "P. G. Trusts" with trustee Meyer Goldman, in which 20 separate, irrevocable trusts were created. At the time of the agreement, both A.N. and Goldman were Illinois residents, and the trust assets were deposited in Illinois. Article IX of the March 1961 trust agreement allowed the trustee to distribute the whole or part of the corpus of the trust to a different trustee or trustees to hold in further trust for the exclusive benefit of the beneficiary of each of the 1961 trusts. Article V, section 2(b), also gave the trustee the power, in his discretion, to distribute the whole or part of the trust corpus to its beneficiary after the beneficiary had attained 30 years of age. Further, article XIV of the March 1961 agreement stated the following: "This Agreement shall be construed and administered and the validity of the trusts hereby created shall be determined in accordance with the laws of the State of Illinois." One of the trusts was for the primary benefit of A.N.'s granddaughter Linda Pritzker and was named the "Linda Trust."
¶5 Beginning in 1968, other adult beneficiaries of the P.G. Trusts (not Linda) created a new set of trusts called the A.N.P. Trusts with assets from the P.G. Trusts. In 1975, Goldman filed a complaint, addressing, inter alia, the adult beneficiaries' right to transfer their interests to the A.N.P. Trusts. Goldman v. Pritzker, No.75-CH-4214 (Cir. Ct. Cook Co.). In June 1977, the circuit court entered a lengthy order granting the relief requested in Goldman's complaint, as amended, and thus approving the creation of the A.N.P. trusts. In the written order, the court retained jurisdiction of the cause and parties for the purpose of paying the fees, costs, and expenses of the proceedings and for any further orders necessary to interpret or implement the provisions of the court's order.
¶6 A.N. died in 1986 as an Illinois resident, and his estate was probated in Illinois. At some point, Thomas Pritzker of Illinois, Marshall Eisenberg of Illinois, and Arnold Weber succeeded Goldman as trustees of the Linda Trust and were the trustees of the Linda Trust in 2002. (In 2008, the trustees of the Linda Trust still included two Illinois residents and one nonresident.) On January 2, 2002, the trustees of the Linda Trust exercised their limited power of appointment contained in articles V and IX of the March 1961 trust agreement and irrevocably distributed assets from the Linda Trust to plaintiff, as trustee of the Autonomy Trust 3, for the exclusive benefit of Linda.
¶7 Along with the power of appointment, the trustees of the Linda Trust and plaintiff entered into a trust agreement that created the Autonomy Trust 3. Provision 9 of the January 2002 trust agreement named Jay Robert Pritzker of Illinois as protector of the trusts created hereunder. We note that Jay was replaced as protector of the Autonomy Trust 3 in December 2002 by Basil Zirinis of Connecticut. Moreover, provision 14 of the January 2002 trust agreement contained the perpetuities savings clause and referenced the lives of those named in the March 1961 trust agreement. Last, provision 15 stated the Autonomy Trust 3 was to be construed and regulated under Texas law, "except that the terms 'income, ' 'principal, ' and 'power of appointment' and the provisions relating thereto shall be interpreted under the laws of the state of Illinois."
¶8 In February 2004, plaintiff filed a complaint in the probate court of Harris County, Texas, seeking reformation of provision 15 of the Autonomy Trust 3 and other trusts that applied Illinois law to some of their terms. Plaintiff sought to strike the language referring to Illinois law, leaving the trusts to be construed and regulated by only Texas law. On November 4, 2005, the probate court entered an order, granting the relief plaintiff requested. However, the judgment stated the following: "This Judgment shall become effective as to each of the Trusts as of the date that the Internal Revenue Service issues a favorable ruling holding that the modifications and declarations of this Judgment to the Trust do not result in the loss of such Trust's generation-skipping transfer tax exempt status or otherwise subject such Trust to the generation-skipping transfer tax."
¶9 In 2006, Linda, her children, and the other contingent beneficiaries of the Autonomy Trust 3 were not Illinois residents. Plaintiff resided in Texas, and the Autonomy Trust 3 was administered in Texas. The Autonomy Trust 3 had no assets in Illinois.
¶10 In April 2007, the Autonomy Trust 3 filed a 2006 nonresident Illinois income and replacement tax return, reporting no income from Illinois sources and thus no tax was owed. The Department reclassified the Autonomy Trust 3 as an Illinois resident under section 1501(a)(20)(D) of the Illinois Income Tax Act (Tax Act) (35 ILCS 5/1501(a)(20)(D) (West 2006)), taxed 100% of the trust's reported income, and assessed a deficiency liability of $2, 729. Pursuant to section 2a of the State Officers and Employees Money Disposition Act (30 ILCS 230/2a (West 2006)), the Autonomy Trust 3 paid the $2, 729 in income tax under protest.
¶11 In May 2007, plaintiff filed the verified complaint for declaratory and injunctive relief, asserting Illinois's imposition of income tax on the Autonomy Trust 3 violates the commerce, due process, and equal protection clauses of the United States Constitution (U.S. Const., art. I, § 8, amend. XIV, § 1) and the uniformity clause of the Illinois Constitution of 1970 (Ill. Const. 1970, art. IX, § 2). Former Illinois Treasurer Alexi Giannoulias was originally ...