Estate of Avrom A. Silver, Bonny Fern Silver, Kenneth Kirsh, and Ronald Faust, Executors v. Commissioner , 120 T.C. No. 14 ( 2003 )

120 T.C. No. 14UNITED STATES TAX COURT
ESTATE OF AVROM A. SILVER, DECEASED, BONNY FERN SILVER, KENNETH
KIRSH, AND RONALD FAUST, EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10125-01. Filed May 14, 2003.
D was not a citizen or resident of the United
States. D’s will provided for charitable bequests to
Canadian-registered charities. These bequests were
paid solely out of funds and property located outside
the United States.
Held: A charitable deduction on the estate tax
return larger than that determined by respondent is not
allowed because the convention between the United
States and Canada, as amended by the 1995 Protocol,
requires that the bequests be funded from property
subject to the U.S. estate tax. Revised Protocol
Amending the Convention With Respect to Taxes on Income
and Capital, Mar. 17, 1995, U.S.-Can., S. Treaty Doc.
104-4 (1995).
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Edward C. Northwood, for petitioner.
Kevin M. Murphy, for respondent.
OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$105,3251 in the Federal estate tax of the Estate of Avrom A.
Silver (decedent). The issue for decision is whether the estate
of decedent, who was not a citizen of the United States and did
not reside in the United States, is entitled to a charitable
contribution deduction on the estate tax return (of more than the
amount allowed by respondent) pursuant to the Revised Protocol
Amending the Convention With Respect to Taxes on Income and
Capital, Mar. 17, 1995, U.S.-Can., S. Treaty Doc. 104-4 (1995)
(1995 Protocol).
Background
The parties submitted this case fully stipulated pursuant to
Rule 122.2 The stipulation of facts and the attached exhibits
are incorporated herein by this reference. At the time the
petition was filed, the mailing address for the estate was in
Toronto, Ontario, Canada.
1
Amounts are rounded to the nearest dollar.
2
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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Decedent, a citizen and resident of Canada, died on October
26, 1997. The executors of the estate are Bonny Fern Silver,
Kenneth Kirsh, and Ronald Faust, none of whom resides in the
United States.
Decedent’s will provided for charitable bequests of $312,840
to Canadian-registered charities; these charities are
organizations described in paragraph 1 of article XXI of the
Convention With Respect to Taxes on Income and Capital, Sept. 26,
1980, U.S.-Can., art. XXI, par. 1, T.I.A.S. No. 11087, 1986-2
C.B. 258, 265 (the convention). The bequests were paid solely
out of funds and property located outside the United States.
Decedent’s gross estate in the United States consisted of
252,775 shares of Neuromedical Systems, Inc., valued at $516,268
on the alternate valuation date. See sec. 2104(a). The value of
decedent’s gross estate outside the United States was over $100
million.
Upon decedent’s death, the estate filed a Form 706NA, United
States Estate (and Generation Skipping Transfer) Tax Return (tax
return). The estate claimed a charitable contribution deduction
of $312,840 on the tax return.
In the notice of deficiency, respondent allowed a charitable
contribution deduction of only $1,615. Respondent explained:
The decedent’s will, however, did not direct payment of
the residuary charitable bequests exclusively from the
U.S. assets. As a result, the charitable deduction is
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limited to the proportionate part of the U.S. assets
that passes to the charitable legatees.
Respondent calculated the deduction as follows: ($516,268/$100
million) x $312,840 = $1,615 (i.e., the value of U.S. assets over
the value of worldwide assets multiplied by the amount of
charitable bequests in issue).
Discussion
The estate argues that the value of decedent’s charitable
bequests is deductible in full pursuant to article XXIX B of the
convention, as amended by the 1995 Protocol. Respondent argues
that only a proportional deduction is allowed because there is no
direction in the will regarding which property is to be used to
fund the bequests.
A decedent who is not a resident or citizen of the United
States is subject to a tax on the transfer of the taxable estate
which is situated in the United States at the time of the
decedent’s death (estate tax). Secs. 2101, 2103. Section
2106(a)(2)(A)(ii) allows a deduction from the value of the
decedent’s taxable estate for bequests to a domestic corporation
organized and operated for charitable purposes.3 Further, this
3
This section provides, in relevant part:
SEC. 2106. TAXABLE ESTATE
(a) Definition of Taxable Estate.--For purposes
of the tax imposed by section 2101, the value of the
taxable estate of every decedent nonresident not a
(continued...)
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deduction is limited to “transfers to corporations and
associations created or organized in the United States, and to
trustees for use within the United States”. Sec. 20.2106-
1(a)(2)(i), Estate Tax Regs.; see sec. 2106(a)(2)(A)(ii). This
deduction may not exceed the value of the transferred property
required to be included in the gross estate. Sec. 2106(a)(2)(D).
Decedent did not make a bequest to a corporation or association
created or organized in the United States; decedent made all
relevant bequests to Canadian-registered organizations described
in paragraph 1 of article XXI of the convention.4 We conclude
3
(...continued)
citizen of the United States shall be determined by
deducting from the value of that part of his gross
estate which at the time of his death is situated in
the United States--
* * * * * * *
(2) Transfers for public, charitable, and
religious uses.--
(A) In general.- The amount of all
bequests, legacies, devises, or transfers
* * *
* * * * * * *
(ii) to or for the use of any
domestic corporation organized and
operated exclusively for religious,
charitable, scientific, literary, or
educational purposes, * * *.
4
We note that the estate did not argue that the bequests,
although made to Canadian-registered organizations, were
ultimately used in the United States. Cf. Estate of McAllister
(continued...)
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that the estate is not entitled to a deduction for the charitable
bequests for more than the amount allowed by respondent.5
The 1995 Protocol added to the convention article XXIX B,
paragraph 1,6 which provides:
Where the property of an individual who is a
resident of a Contracting State passes by reason of the
individual’s death to an organization referred to in
paragraph 1 of Article XXI (Exempt Organizations), the
tax consequences in a Contracting State arising out of
the passing of the property shall apply as if the
organization were a resident of that State.
In the instant case, this provision takes precedence over the
statute according to the “last-in-time” rule.7 Whitney v.
4
(...continued)
v. Commissioner, 54 T.C. 1407, 1415-1416 (1970) (bequest to
Canadian foundation to be used for the benefit of Canadian
students attending college in the United States).
5
Further, the regulations direct us to compute the
deduction in the same manner as the one allowed under sec. 2055.
Sec. 20.2106-1(a)(2), Estate Tax Regs. A deduction is allowed
from the gross estate of a decedent under sec. 2055(a) “for the
value of property included in the decedent’s gross estate and
transferred by the decedent during his lifetime or by will”.
Sec. 20.2055-1(a), Estate Tax Regs.
6
We note that Canada does not impose an estate tax. At
death, the capital assets of a decedent are deemed to be disposed
of, and any resulting gains generally are subject to Canadian
income tax. This provision in the 1995 Protocol was intended to
coordinate U.S. estate tax provisions with the relevant
provisions in the Canadian income tax. S. Exec. Rept. 104-9, at
9-10 (1995).
7
The U.S. Supreme Court generally described the “last-in-
time” rule as follows:
By the Constitution a treaty is placed on the same
footing, and made of like obligation, with an act of
(continued...)
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Robertson, 124 U.S. 190, 194 (1888); Square D Co. & Subs. v.
Commissioner, 118 T.C. 299, 313 (2002). The estate argues that
this paragraph in the 1995 Protocol overrides section 2106,
allows the Canadian-registered charities to be treated as U.S.
residents, and allows the estate the full charitable deduction.
Respondent argues that the convention, as amended by the 1995
Protocol, does not change the result from that under section
2106.
With regard to interpreting the 1995 Protocol, we stated in
N.W. Life Assurance Co. of Can. v. Commissioner, 107 T.C. 363,
378-379 (1996):
The goal of convention interpretation is to “give
the specific words of a * * * [convention] a meaning
consistent with the genuine shared expectations of the
contracting parties”. Maximov v. United States, 299
F.2d 565, 568 (2d Cir. 1962), affd. 373 U.S. 49 (1963).
Courts liberally construe treaties to give effect to
their purpose. United States v. Stuart, 489 U.S. 353,
368 (1989); Bacardi Corp. of Am. v. Domenech, 311 U.S.
150, 163 (1940). * * * “Although not conclusive, the
meaning attributed to treaty provisions by the
7
(...continued)
legislation. Both are declared by that instrument to
be the supreme law of the land, and no superior
efficacy is given to either over the other. When the
two relate to the same subject, the courts will always
endeavor to construe them so as to give effect to both,
if that can be done without violating the language of
either; but if the two are inconsistent, the one last
in date will control the other, provided always the
stipulation of the treaty on the subject is self-
executing. * * *
Whitney v. Robertson, 124 U.S. 190, 194 (1888).
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Government agencies charged with their negotiation and
enforcement is given great weight”. United States v.
Stuart, supra at 369 (citing Kolovrat v. Oregon, 366
U.S. 187, 194 (1961)).
* * * It is the role of the judiciary to interpret
international conventions and to enforce domestic
rights arising from them. See Kolovrat v. Oregon, 366
U.S. 187 (1961); Perkins v. Elg, 307 U.S. 325 (1939);
Charlton v. Kelly, 229 U.S. 447 (1913); United States
v. Rauscher, 119 U.S. 407 (1886). Tax treaties are
purposive, and, accordingly, we should consider the
perceived underlying intent or purpose of the treaty
provision. See, e.g., Estate of Burghardt v.
Commissioner, * * * [80 T.C. 705, 717 (1983), affd.
without published opinion 734 F.2d 3 (3d Cir. 1984)]
(treating a reference to a “specific exemption” in a
U.S.-Italy estate tax treaty as not limited to an
exemption as such, but included a subsequently enacted
unified credit having the same function as an
exemption); Smith, “Tax Treaty Interpretation by the
Judiciary”, 49 Tax Law. 845, 858-867 (1996). In
addressing the issues of this case, we shall keep at
the forefront our role in the interpretation of
conventions.
We examine the underlying intent and purpose of the
provision in the 1995 Protocol to clarify whether the relevant
language of article XXIX B overrides section 2106 in this
instance by treating the Canadian-registered charities at issue
as U.S. residents, even though the bequests were funded by
sources outside the United States.
The technical explanation accompanying the 1995 Protocol
states:
Under paragraph 1 of Article XXIX B, a U.S. estate tax
deduction also will be allowed for a bequest by a
Canadian resident (as defined under Article IV
(Residence)) to a qualifying exempt organization that
is a Canadian corporation. However, paragraph 1 does
not allow a deduction for U.S. estate tax purposes with
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respect to any transfer of property that is not subject
to U.S. estate tax. [Emphasis added.]
Treasury Department Technical Explanation of the Protocol
Amending the Convention Between the United States of America and
Canada (June 13, 1995), 4 Roberts & Holland, Legislative History
of United States Tax Conventions 1366, 1403 (1996).8
Further, the Senate report from the Committee on Foreign
Relations states:
The proposed revised protocol obligates Canada and
the United States to treat a decedent’s bequest to a
religious, scientific, literary, educational, or
charitable organization resident in the other country
in the same manner as if the organization were a
resident of the first country. Thus, for U.S. estate
tax purposes, a deduction generally is allowed for a
bequest by a Canadian resident to a qualifying exempt
organization resident in Canada, provided the property
constituting the bequest is subject to U.S. estate tax.
[Emphasis added.]
S. Exec. Rept. 104-9, at 10 (1995).9 These explanations clarify
that, to take advantage of article XXIX B of the 1995 Protocol,
8
The technical explanation is the “official guide to the
Protocol. It explains policies behind particular provisions, as
well as understandings reached during the negotiations with
respect to the interpretation and application of the Protocol.”
Treasury Department Technical Explanation of the Protocol
Amending the Convention Between the United States of America and
Canada (June 13, 1995), 4 Roberts & Holland, Legislative History
of United States Tax Conventions 1366 (1996).
9
We note that the Joint Committee on Taxation explanation
of the 1995 Protocol provides further support that a deduction is
allowed for U.S. estate tax purposes provided the property
constituting the bequest is subject to U.S. estate tax. Joint
Comm. on Taxation, Explanation of Proposed Protocol to the Income
Tax Treaty Between the United States and Canada, at 9 (J. Comm.
Print 1995).
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the bequest must have been made from property that is subject to
the U.S. estate tax.
The parties stipulated that the bequests were paid solely
out of funds and property located outside the United States. The
funds used to pay the bequests were, therefore, not subject to
the estate tax in the United States. Secs. 2101, 2103. We
conclude that the convention, as amended by the 1995 Protocol,
does not change the result from that under section 2106 in this
instance. Accordingly, we sustain respondent’s determination.
In reaching our holding herein, we have considered all
arguments made, and to the extent not mentioned above, we
conclude them to be moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be
entered for respondent.