Maximov v. United States

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: CLARK, FRIENDLY, and KAUFMAN, Circuit
• Citation: Maximov v. United States, 299 F.2d 565 (2nd Cir. 1962)
• Decision Date: 14 February 1962
• Docket Number: No. 118,Docket 26984.,118
• Parties: Andre MAXIMOV, as Trustee for the benefit of H. Robbin Fedden u/a dated 10/24/47, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

299 F.2d 565 (1962)

Andre MAXIMOV, as Trustee for the benefit of H. Robbin Fedden u/a dated 10/24/47, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 118, Docket 26984.

United States Court of Appeals Second Circuit.

Argued November 30, 1961.

Decided February 14, 1962.

Richard J. Medalie, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C., and Robert M. Morgenthau, U. S. Atty., S.D.N.Y., New York City, on the brief), for defendant-appellant.

William F. Suglia, of Hill, Betts, Yamaoka, Freehill & Longcope, New York City (John F. Lang, of Hill, Betts, Yamaoka, Freehill & Longcope, New York City, on the brief), for plaintiff-appellee.

Before CLARK, FRIENDLY, and KAUFMAN, Circuit Judges.

CLARK, Circuit Judge.

The taxpayer, Andre Maximov, is the successor trustee of an inter vivos trust created in 1947, under the laws of Connecticut, by H. Robbin Fedden. Under the terms of the trust instrument all income is to be paid to the grantor during his life; on his death the income is payable to his wife if she survives him and is still married to him. On her death if she qualifies for this life estate, or on the grantor's if she does not, the entire principal of the trust is to be paid to the surviving issue of the grantor in equal shares, per stirpes, with limitations not here relevant. At the time the trust was created, and at all times thereafter, the grantor-beneficiary and his wife and children have resided in England.

During its taxable years 1954 and 1955 the trust realized net long-term capital gains from the sale of securities, resulting in tax liabilities of $53.10 and $1,316.32 respectively. Under Connecticut law these gains were retained as corpus.¹ Maximov, as trustee, filed federal fiduciary income tax returns for 1954 and 1955 with the District Director of Internal Revenue for Lower Manhattan reporting these gains, and paid the appropriate tax. Several years later, however, he filed a claim for refund of the tax on these two capital transactions, contending that as the gains were realized by a trust whose beneficiaries reside in the United Kingdom, they are exempt from United States tax under Article XIV of the Income Tax Convention between the United States and the United Kingdom, 60 Stat. (Part 2) 1377.

Under United States tax law the trust is treated as a separate taxable entity. Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634. Income received by the trust and not distributable to the beneficiaries, or not includable in the trust's distributable net income, is taxable to the trust. As the income involved here was neither distributable nor part of the distributable net income of the trust, Internal Revenue Code of 1954, § 643(a) (3), these gains are considered the income of the trust, taxable to it, and are not the income of the life tenant or the remaindermen.

The Convention grants an exemption from United States tax on gains from the sale or exchange of capital assets to residents of the United Kingdom not engaged in a trade or business within the United States. Article XIV, 60 Stat. (Part 2) 1384. Were the trust a "resident" of the United Kingdom, as such a resident is defined in the Convention, or were this income includable in the gross income of the grantor-beneficiary, who is a resident of the United Kingdom and not engaged in a trade or business here, the exemption would be clearly applicable. See T.D. 5569, 1947-2 Cum. Bull. 100, § 7.519(c). The difficulty which this case presents is that the trust is not a United Kingdom resident and the income here is treated in United States law as that of the trust.² Since the exemption of Article XIV explicitly applies only to residents of the United Kingdom, the taxpayer's claim can be sustained only if we disregard the separate tax treatment accorded trusts by United States law.

This is precisely what the taxpayer urges us to do. He asserts that the word "exempt" in Article XIV should be read as signifying a "release from economic burden," and that as the economic burden of the tax falls here on United Kingdom residents — the grantor-beneficiary and his family — the exemption must be read as applying in this case. In support of this contention the taxpayer maintains that one purpose of the tax convention was to achieve reciprocity of tax treatment for the nationals of the contracting parties. Thus, he argues, the aim of Article XIV was to secure for United Kingdom residents realizing capital gains in the United States precisely the same treatment that a United States resident would be given on similar gains realized within the tax jurisdiction of the United Kingdom. Since the United Kingdom does not impose any income tax on profits it considers capital gains, and would not impose any tax on either an English trust or its beneficiaries, whether they were residents of the United States or the United Kingdom, it would, so the argument runs, defeat the manifest purposes of the Convention to deny the exemption here.³ We must, it is therefore urged, ignore the United States rule that the trust is a separate entity, treat trust and beneficiary as one taxpayer, and allow as a deduction from the trust income the exemption granted the beneficiary by the Convention. In essence the contentions are threefold: that Article XIV was designed to achieve equality of tax treatment; that even though the parties did not explicitly provide for an exemption in this situation, the Convention must be read as if they did in order to further the objective of equality; and that this construction must be adopted, regardless of its impact on domestic tax policy.

As we are unable to find any explicit consideration of the issues thus raised in the language or background of the agreement, these contentions require a fundamental evaluation of the purposes and aims of the Convention. The basic aim of treaty interpretation is to ascertain the intent of the parties who have entered into agreement, in order to construe the document in a manner consistent with that intent. Rocca v. Thompson, 223 U.S. 317, 331-332, 32 S.Ct. 207, 56 L.Ed. 453; Restatement, The Foreign Relations Law of the United States § 129 (Tent.Draft No. 3, 1959). And to give the specific words of a treaty a meaning consistent with the genuine shared expectations of the contracting parties, it is necessary to examine not only the language, but the entire context of agreement. We must therefore examine all available evidence of the shared expectations of the parties to this Convention in order to answer the interrelated questions whether Article XIV was designed to achieve equality of tax treatment, and whether alterations of domestic tax law as are here proposed to realize such equality are themselves consistent with the intent of the contracting parties.

An examination of the full text of the Convention and the context of agreement indicates that, while one of the reasons Article XIV was included in the Convention was to achieve "equality" of tax treatment, imposition of a tax in the circumstances of this case would not be inconsistent with this objective. For the "equality" the parties strived for in this Article, as in similar provisions, was a limited one; they struck a rough bargain and were willing to tolerate marginal inequities of the sort involved in this case. While this dilutes the force of the taxpayer's argument, it alone might not require a denial of the exemption. But further principles must be considered. There is strong evidence that in the several Articles whose primary aim was to achieve substantial equality of tax treatment as between nationals of the contracting parties, the mutual concessions made were clearly delimited within the four corners of the instrument. Where it was necessary to make adjustments in domestic provisions in order to achieve the objectives of the Article, these were made explicitly. Thus to sanction freewheeling adjustment of domestic provisions to achieve point-by-point equality would be to risk undoing the bargain reached by the two nations. Finally, the Convention did not aim at achieving "equality" in a vacuum; the adjustments made equalizing tax treatment were made to achieve broader objectives of the treaty. Denial of the exemption here, while admittedly resulting in some inequality of tax treatment, will not affect those primary purposes.

Although Article XIV on its face is a one-way concession by the United States, it was designed to and does render the tax treatment of United Kingdom residents realizing capital gains in the United States substantially equal to that of the United Kingdom. As we have said, it is reciprocal because the United Kingdom does not tax those profits it classifies as capital gains. But it does not achieve complete equality. In some ways the provision is more beneficial to the United States, for it exempts the gains of only those United Kingdom residents who are not engaged in a trade or business in the United States, while as a result of the United Kingdom policy of not taxing capital gains, a United States resident will be free of United Kingdom tax, regardless of whether he engages in a trade or business. On the other hand, the Convention sanctions the imposition of United Kingdom taxes in some instances where, as a result of Article XIV, a United Kingdom resident would be free of United States tax. For in many instances the United Kingdom does impose its standard tax on transactions which are considered to be the sale or exchange of capital assets under United States law, and in some cases this would result in "unequal" treatment.⁴ For these reasons it cannot be said that, by including Article XIV in the Convention, the parties expected to establish wholly congruent tax treatment of capital gains realized by each other's residents.⁵

Scrutiny of the manner in which this and similar Articles were...