Brooke v. City of Norfolk

Background

A person received income for life from an $80,000 trust created by the will of a Maryland resident. The will named the Safe Deposit and Trust Company of Baltimore as trustee, gave income to the beneficiary for life, then to her daughters, and finally divided the principal among descendants. The will was proved in Maryland and in 1914 admitted to probate in Norfolk as a foreign will. The trust property stayed in Maryland. The beneficiary challenged two Virginia tax assessments on the trust principal after local and state courts upheld the taxes, and this Court granted review.

Reasoning

The Court considered whether Virginia could treat the income recipient as if she owned the trust principal and tax that principal even though the trust property never left Maryland. The Court noted that rules allowing taxation of tangible property actually located and used in a State do not apply here. Because the corpus was not in Virginia, did not belong to the beneficiary, and was not in her possession or control, the assessment sought to charge her for an interest to which she was a stranger. The Court relied on prior decisions to explain that such an attempt to tax the out-of-state trust principal is not permissible and accordingly reversed the tax judgments.

Real world impact

The ruling prevents Virginia city and state tax collectors from treating an income recipient as the owner of trust principal when the trust assets are located in another State. People who receive income from out-of-state trusts cannot be held personally liable for taxes on the trust corpus under these facts. The decision reverses the lower courts’ judgments and protects trustees and beneficiaries from similar out-of-state principal assessments.