Maximov v. United States, 373 U.S. 49 (1963)

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.
2
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.
3
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 seeking 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.
6
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 641668, 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.
10
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 distinct tax entity, apart from its beneficiaries. Since the
petitioner meets neither of the definitional tests of the treaty it is not resident in
the United Kingdom for purposes of that signatory's tax and is a resident in the
United States for purposes of this country's taxit plainly is not a 'resident of
the United Kingdom' exempted from United States tax by the Convention.
11
Apparently recognizing the impediments of the language of the exemptive

provision interpreted in accordance with its terms and pursuant to the standards
set out in the treaty itself, the petitioner asserts that equality of tax treatment
was the objective of the treaty and that furtherance of this objective compels
adoption of its theory that exemption must be accorded whenever the burden of
the tax would diminish such equality. Since, in general terms at least, the
United Kingdom imposes no tax on capital gains, says the petitioner, no similar
tax should be imposed by the United States here.
12
The immediate and compelling answer to this contention is that, as already

noted, the language of the Convention itself not only fails to support the
petitioner's view, but is contrary to it. Moreover, it is particularly inappropriate
for a court to sanction a deviation from the clear import of a solemn treaty
between this Nation and a foreign sovereign, when, as here, there is no
indication that application of the words of the treaty according to their obvious
meaning effects a result inconsistent with the intent or expectations of its
signatories. It appears from the relevant materials instructive as to the intent of
the parties to the Convention that the general purpose of the treaty was not to
assure complete and strict equality of tax treatmenta virtually impossible task
in light of the different tax structures of the two nationsbut rather, as appears
from the preamble to the Convention itself, to facilitate commercial exchange
through elimination of double taxation resulting from both countries levying on
the same transaction or profit; an additional purpose was the prevention of
fiscal evasion.2 Certainly, neither of these purposes requires the granting of
relief in the situation here presented. There is concededly no imposition of a
double tax on the gains of the petitioner, since neither it nor its beneficiaries are
taxed thereon under United Kingdom law. See Harvard Law School, World Tax
Series, Taxation in the United Kingdom, 9/8.1, 10/7.2, pp. 277, 307308.
Moreover, no impairment of, or obstacle to, trade or commercial intercourse is
threatened in the context of this case, and considerations of fiscal evasion are
not here involved.
13
Even to the extent that one purpose of the Convention was to secure a measure
of equality of tax treatment, it is apparent from the face of the treaty itself that
no invariable or inflexible equality was sought or intended. In fact, the treaty
creates some inequalities of treatment. For example, the very exemption
provided by Article XIV, on which the petitioner relies, is limited in its
application to United Kingdom residents who are not 'engaged in trade or
business in the United States.' Thus, not even all United Kingdom residents are
immune from capital gains taxation in this country, though United States
residents doing business or conducting a trade in the United Kingdom would
receive the full benefit of the absence of a general capital gains tax there. It
appears that the treaty did not represent an attempt to equalize all disparities in
tax treatment between its signatories. To the extent that complete equality was
intended, it was specifically provided. We cannot, in such a context, read the
treaty to accord unintended benefits inconsistent with its words and not
compellingly indicated by its implications.3 To say that we should give a broad
and efficacious scope to a treaty does not mean that we must sweep within the
Convention what are legally and traditionally recognized to be domestic
taxpayers not clearly within its protections; we would not expect the United
Kingdom to exempt similarly recognized British taxpayers not lucidly intended
to be freed of its taxes.
14
This, of course, does not mean that the treaty fails to provide bilateral benefits
to residents of both the United States and the United Kingdom. A resident of
the United Kingdom realizing capital gains in this country is appropriately
protected and exempt, and the Congress has adopted provisions fully
implementing the operative dimensions of the treaty. The Internal Revenue
Code contains sections designed to give effect to exemptions of this type and to
assure consistency with tax treaty obligations in general. See, e.g., Int.Rev.Code
of 1954, 894, 7852(d). Our interpretation affords every benefit negotiated
for by the parties to the Convention on behalf of their respective residents and
prevents an unintended tax windfall to a private party. The language and
purposes of the treaty are amply served by adhering to its clear import limiting
exemption to 'residents of the United Kingdom' falling within the exemptive
purview. The petitioner, a resident American trust, is properly subject to United
States income tax on its retained capital gains. Accordingly, the judgment
below is affirmed.
15
Affirmed.
Article II(3) of the Convention provides:

'In the application of the provisions of the present Convention by one of the
Contracting Parties any term not otherwise defined shall, unless the context
otherwise requires, have the meaning which it has under the laws of that
Contracting Party relating to the taxes which are the subject of the present
Convention.'
The preamble recites that the parties desired 'to conclude a Convention for the
avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income.' See also Hearings before a Subcommittee of the
Committee on Foreign Relations, on Conventions With Great Britain and
Northern Ireland Respecting Income and Estate Taxes, S. Exec. Docs. D and E,
79th Cong., 1st Sess. 12.
Treatment of the petitioner trust as a taxable entity for purposes of construing

the treaty exemption and imposition of liability for tax on its undistributed
capital gains is not only mandated by the terms of the treaty itself, the apparent
intention of its signatories, and the context in which negotiated, but is
consistent with long-standing administrative practice and regulations, see T.D.
5569, 19472 Cum.Bull. 100, 7.519(c), and with the administrative
interpretation accorded many other United States tax conventions limiting such
exemptions to items of income distributed or otherwise normally directly
taxable to the trust beneficiaries. See, e.g., Australia, T.D. 6108, 19542
Cum.Bull. 614, 501.10; Belgium, T.D. 6160, 19561 Cum.Bull. 815,
504.119; Switzerland, T.D. 6149, 19552 Cum.Bull. 814, 509.121.

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Maximov v. United States, 373 U.S. 49 (1963)

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373 U.S.

Andre MAXIMOV, Trustee, Petitioner,

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

The petitioner, represented here by its successor trustee, Maximov, a citizen

We conclude that the interpretation of the relevant provisions of the

The petitioner itself is a United States trust established in this country,

Apparently recognizing the impediments of the language of the exemptive

The immediate and compelling answer to this contention is that, as already

Article II(3) of the Convention provides:

Treatment of the petitioner trust as a taxable entity for purposes of construing

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