Maximov v. United States

• Court: U.S. Supreme Court
• Writing for the Court: GOLDBERG
• Citation: Maximov v. United States, 373 U.S. 49, 83 S.Ct. 1054, 10 L.Ed.2d 184 (1963)
• Decision Date: 29 April 1963
• Docket Number: No. 240,240
• Parties: Andre MAXIMOV, Trustee, Petitioner, v. UNITED STATES

373 U.S. 49

83 S.Ct. 1054

10 L.Ed.2d 184

Andre MAXIMOV, Trustee, Petitioner,

v UNITED STATES.

No. 240.

Argued March 28, 1963.

Decided April 29, 1963.

David A. Lindsay, New York City, for petitioner.

Louis F. Claiborne, New Orleans, La., for respondent.

Mr. Justice GOLDBERG delivered the opinion of the Court.

The question in this case is whether an American trust whose beneficiaries are British subjects and residents and which retains capital gains income realized in this country is exempt from federal income tax on such gains by virtue of a provision of the Income Tax Convention between the United States of America and the United Kingdom, April 16, 1945, 60 Stat. 1377, 1384, which exempts capital gains of a 'resident of the United Kingdom.' Certiorari was granted, 371 U.S. 810, 83 S.Ct. 41, 9 L.Ed.2d 53, to resolve a conflict between the decision of the Court of Appeals for the Second Circuit, 299 F.2d 565, denying the exemption to the domestic trust, the petitioner in this case, and the decision of the Court of Appeals for the Ninth Circuit in American Trust Co. v. Smyth, 247 F.2d 149, granting the exemption to a domestic trust under similar circumstances.

I.

The petitioner, represented here by its successor trustee, Maximov, a citizen and resident of the United States, is a private trust created under Connecticut law in 1947 by an inter vivos deed executed by the grantor, a resident and citizen of the United Kingdom. A lifetime interest in trust income was retained by the grantor, his wife was named contingent successor income beneficiary for her life, and their children were designated as contingent remaindermen. All of the beneficiaries were citizens and residents of the United Kingdom at the times here relevant.

The trust, which is administered in the United States, realized capital gains income upon the sale of certain of its assets during 1954 and 1955. In accordance with controlling Connecticut law, which the trust instrument expressly makes applicable, these gains were treated as accretions to corpus and were not distributed. Pursuant to United States income tax provisions applicable to trusts in general, the gains were reported as part of the trust's income on federal fiduciary tax returns filed by the trustee for the years in question and the appropriate amount of tax paid thereon.

Asserting exemption from United States tax under the Convention, the trustee filed claims for refund which were disallowed by the Internal Revenue Service. The trustee then brought this suit in the Federal District Court seek- ing recovery of the tax attributable to the capital gains. Motions for summary judgment were filed both by the petitioner and by the government. The District Court denied the Government's motion and entered judgment for the petitioner in the full amount of the tax, holding, upon the authority of the Smyth case, supra, that the petitioner was entitled to exemption under the treaty. The Court of Appeals for the Second Circuit reversed and denied the petitioner's claim of exemption under the Convention. In so doing, the Second Circuit expressly rejected the reasoning adopted, and result reached, by the Ninth Circuit in Smyth.

We conclude that the interpretation of the relevant provisions of the Convention adopted by the Second Circuit in this case is the one more consonant with its language, purpose and intent. Accordingly, we affirm the judgment of the Court of Appeals below, denying the exemption.

II.

Under United States tax laws, a trust, like the petitioner trust, is treated as a separate taxable entity, apart from its beneficiaries. §§ 641, 7701(a)(1), (14), Int.Rev.Code of 1954. And, under appropriate provisions of the Internal Revenue Code, trust income neither distributed nor otherwise taxable directly to the beneficiaries is taxable to the trust entity. See §§ 641—668, Int.Rev.Code of 1954. Under these statutory concepts of taxability, the gains here in question are properly includable in, and taxable as, gross income of the petitioner. Whatever basis there may be, therefore, for relieving the trust from tax must be found in the words or implications of the Convention.

In asserting freedom from liability for United States income tax on its realized and retained capital gains, the petitioner trust relies on Article XIV of the Convention, which provides:

'A resident of the United Kingdom not engaged in trade or business in the United States shall be exempt from United States tax on gains from the sale or exchange of capital assets.'

The petitioner itself is a United States trust established in this country, governed by the laws of one of our States and administered here by an American trustee. It is plainly not a 'resident of the United Kingdom,' the class to which exemption under Article XIV is expressly limited. It argues, however, that the purposes and objectives of the treaty require that we disregard its identity as a separate taxable entity and measure the application of the exemptive provision by the economic impact of the tax which would otherwise be imposed. The petitioner thus says that since the real burden of the tax falls upon its beneficiaries, all of whom are residents of the United Kingdom and objects of the treaty protections, the treaty should be read as exempting the trust from the tax asserted by the United States. Mindful that it is a treaty we are construing, and giving the Convention all proper effect, we cannot, and do not, either read its language or conceive its purpose as encompassing, much less compelling, so significant a deviation from normal word use or domestic tax concepts.

The plain language of the Convention does not afford any support to the petitioner's argument in favor of disregarding the trust entity. In fact, the very words of the treaty impel a contrary reading. The exemption provided by Article XIV applies in terms only to a 'resident of the United Kingdom' and Article II(1)(g) defines such a resident as 'any person (other than a citizen of the United States or a United States corporation) who is resident in the United Kingdom for the purposes of United Kingdom tax and not resident in the United States for the purposes of United States tax.' The word 'person' is not defined in the treaty and we are referred by Article II(3) of the Convention, therefore, to the domestic tax law of the country applying the treaty, in this case the United States, to determine its meaning.¹ Under United States tax law, and apparently under British law as well, the term 'person' includes a trust. Int.Rev.Code of 1954, § 7701(a)(1); see Harvard Law School, World Tax Series, Taxation in the United Kingdom, 5/3.4, p. 127 (1957). Thus, it appears quite clearly that, within the meaning of the Convention, the petitioner trust is a separate 'person' and...