Maximov v. United States

PETITIONER:Maximov
RESPONDENT:United States
LOCATION:Clauson’s Inn

DOCKET NO.: 240
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 373 US 49 (1963)
ARGUED: Mar 28, 1963
DECIDED: Apr 29, 1963

Facts of the case

Question

Audio Transcription for Oral Argument – March 28, 1963 in Maximov v. United States

Earl Warren:

Number 240, Andre Maximov, petitioner, versus United States.

Mr. Lindsay.

David A. Lindsay:

Mr. Chief Justice, members of the Court, may it please the Court.

This is a treaty case.

It arises under our Income Tax Convention with the United Kingdom and concerns the scope of Article XIV of that Convention which exempts British residents from United States tax on capital gains.

The question presented is whether the exemption in Article XIV embraces capital gains in an American domestic trust, which are retained as corpus and held for future distribution when all the beneficiaries, the income beneficiaries and the remaindermen alike are residents of the United Kingdom.

The facts are simple.

Petitioner is an American trustee of an inter vivos trust.

The trust was created in 1947 by an English grantor.

The English grantor is the life income beneficiary.

His wife is a contingent life income beneficiary.

His children are the remaindermen.

There are certain contingencies with respect to the remainder interest which could shift the interest in the trust corpus and the retained gains among the grantor’s family, particularly between the children of the grantor and the grantor himself.

In 1954 and 1955, the trustee’s sole securities, realized gains, pay the tax, sued for refund under Article XIV, which refunds were allowed by the District Court for the Southern District of New York following American Trust Company v. Smyth in the Ninth Circuit which held favorably for the trustee and the beneficiaries on the issue presented before this Court.

The court below reversed, creating a conflict.

Article XIV may be found on page 2 of petitioner’s brief, also on page 13 of an appendix to the brief which includes the treaty as a whole.

Article XIV befits a treaty provision states simply and broadly that 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.

Respondent concedes that the gains here involved are gains from the sale or exchange of capital assets within the meaning of Article XIV.

And that all the beneficiaries of the trust are residents of the United Kingdom within the meaning of Article XIV.

And respondent has not questioned that the burden of this tax is suffered by the beneficiaries.

The respondent and the adverse opinion of the court below rest on the ground that the trust under our domestic law is the taxpayer, that the English beneficiaries are not the taxpayers and therefore this exemption in this case is outside of the scope of the treaty.

John M. Harlan II:

Does the trustee have an option to distribute?

David A. Lindsay:

There’s no discretion to distribute — distribute, Mr. Justice Harlan.

I should’ve stated that the terms of the trust are governed by Connecticut law and under Connecticut law, the trustee was ret — acquired to accumulate these gains as part of the corpus of the trust, so there was no discretion whatsoever.

John M. Harlan II:

[Inaudible] the beneficiaries that demanded distribution [Inaudible]

David A. Lindsay:

No, they could not.

It belongs to the remaindermen.

Byron R. White:

What — what bore the burden of the tax, corpus?

David A. Lindsay:

The burden of the tax if I understand your question, Mr. Justice White is that —

Byron R. White:

Was the [Inaudible]

David A. Lindsay:

— it depletes the gain which becomes part of the corpus of the trust.

Byron R. White:

So the tax was taken out of the gain that was added to the corpus?

David A. Lindsay:

That’s right and to that extent —

Byron R. White:

And what the (Voice Overlap) —

David A. Lindsay:

— it depleted the interest of the beneficiaries in that gain.

Byron R. White:

It wasn’t — it wasn’t paid out of otherwise distributable income?

David A. Lindsay:

No, Mr. — no, it was paid out of the corpus that with — the capital gain was added to corpus but it was reduced by the amount of the tax.

Byron R. White:

Is that by reason of —

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

Well, in Great Britain, there is no tax whatsoever on gains of this kind, on capital gains.

They regard such gains as corpus and not income or profits.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

Under the same treaty if there was a reverse provision, the method of taxing trusts in the United Kingdom are somewhat different from ours because they have a surtax, which is an individual tax only and has a progression in it.

That doesn’t ever apply to a trust whether the income is distributed or accumulated only to individuals, but there’s a standard tax that does apply to corporations, trusts and individuals but it usually doesn’t double up.

If the standard tax has been paid once on a form of income and somebody else must again pay it, there’s a credit for the first tax.

Byron R. White:

Well, if there’s a trust administered in England and assume in one year, the only — if what we would call income, but which wouldn’t be income there was what we would call a capital gain.

That is necessarily out of the corpus under the English law, is it distributable?

David A. Lindsay:

Well, that’s a question of fiduciary accounting.

I would think it would be.

They regard it as capital gain.

Byron R. White:

But if the account for the trust provided for the distribution of it —

David A. Lindsay:

Perhaps, I would think and I don’t know the answer to your question.

Byron R. White:

But if it were distributed —

David A. Lindsay:

It wouldn’t be taxable even though it was distributed (Voice Overlap).

Byron R. White:

Oh, not in English — not by English law but how about —

David A. Lindsay:

No.

Byron R. White:

How about its receipt?

How about the receipt of that distribution by resident citizens of the United States under U.S. law, tax law?

David A. Lindsay:

Oh, a receipt of that by a United States taxpayer under our law would be considered taxable.

Byron R. White:

As capital gain?

David A. Lindsay:

As a capital gain.

Byron R. White:

Yes.

David A. Lindsay:

Assuming it was currently distributed.

Potter Stewart:

But, perhaps I’ve been lost but under Connecticut law which is here applicable, it was not currently distributable.

David A. Lindsay:

That’s correct.

Potter Stewart:

It should be added to the corpus.

David A. Lindsay:

It had to be added to the corpus, correct.

Now, respondent takes the position that exempt can only mean exempt from the duty of physically paying the tax to the Treasury and it cannot mean relieve the beneficiaries or that somebody else from the burden of the tax.

Now, I would like later to refer to domestic law.

There is precedent under domestic law in applying in an exemption or an exclusion or even a tax to looking at the status of the beneficiaries, including the remaindermen rather than the status of the trust.

But we must first look at the treaty because it is clear that the meaning of the word exempt must be determined within the four corners of the treaty and that if it means what petitioner contends the treaty has then controlling.

Congress has stated this and on page 2 of the brief, you will note two provisions of the code which are the only provisions applicable here of the code and that’s the income of any kind to the extent required by any treaty obligation of the United States shall not be included in gross income and shall be exempt from taxation under this subtitle meaning the provisions of our Income Tax Law.

And further the — no provision of this title shall apply in any case where its application would be contrary to any treaty obligation of the United States in effect from the date of enactment.

Now, Article XIV, as you examine it, appears as a one way street, but it was put into the treaty to match a preexisting exemption, not an exempt — an express exemption of the British, but an exemption that existed by virtue of the fact that the British do not tax gains or the type here involved because they regard them as corpus or capital and not income or profits.

This is true where the gains come from a sale of property owned outright or held in trust.

The exemption, Article XIV was put into the treaty on the insistence of the British, not the United States and in so doing, they rejected language concerning capital gains provisions that existed in all prior treaties at which they were treated.

The language they rejected would’ve provided that the gains would be exempt only if derived from property sold by a British resident.

This language was not accepted.

As a result of the change in language and the broader language used, the respondent has to concede in this case that when there’s a gain derived from property sold by an American trustee is covered under the treaty, but he qualifies that by saying, “if it’s currently distributed, not if it’s retained for future distribution.”

He states that notwithstanding the fact that there’s no — once you admit that a gain from property sold by an American trust is within the treaty exemption, whatever our own law might be, within the treaty exemption, it shouldn’t make any difference at all where the gain is lodged between the date of receipt and the date of distribution.

And it’s particularly irrational in view of the fact that the only reason the gains in this case are retained in the trust at all is because they’re regarded by Connecticut Law as corpus and not income, which agrees with the British principle.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

If the beneficiaries were engaged in trade or business they would not be entitled to any exemption.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

The fact that the trust is here does not mean that they’re engaged in trade or business, and in this case respondent doesn’t make that claim.

Respondent has not claimed, in fact it’s agreed that the beneficiaries qualify as residents of the United Kingdom not engaged to trade or business in United States.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

No, nor does it make the trust engaged in trade or business.

This is admittedly passive income, not income derived from the act of trade or business — of a trade or business by the trust or by the beneficiary.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

That’s right, that’s right.

John M. Harlan II:

It does — it does come in, however, earlier on that question — the scope of the treaty if you looked at [Inaudible]

David A. Lindsay:

No, because that’s what this particular treaty is about.

This treaty, more than any other treaty and unlike most treaties looks to the economic burden of the tax rather than the legal incident of the taxpayer or rather than to the domestic concept of a technical taxpayer and this was done on the insistence of the British.

John M. Harlan II:

What I mean — as I understood the scope of your argument was that the British has no capital gains tax.

David A. Lindsay:

That’s correct.

John M. Harlan II:

The purpose of this treaty is to exempt [Inaudible] the British resident —

David A. Lindsay:

[Inaudible]

John M. Harlan II:

— so far exempt.

David A. Lindsay:

Just as we are exempt from them.

John M. Harlan II:

[Inaudible]

David A. Lindsay:

That’s correct.

John M. Harlan II:

And yet I suppose if the British who are engaged in [Inaudible].

David A. Lindsay:

No, the exception —

John M. Harlan II:

— that no British [Inaudible]

David A. Lindsay:

The exception is only — only relates to a British resident who was engaged in trade or business in the United States which tends to bring them within our jurisdiction and make them more like a resident.

He can be engaged in trade or business in the United Kingdom and he’s perfectly alright.

But if he’s engaged in trade or business over here, he is without the scope of this exemption.

This exemption is for investment income not for business income.

You might say it is further irrational to make a distinction between distributed and undistributed gains when it is realized in either case, the sale is made by the trustee and no one else.

That neither the case, the trustee acts in a fiduciary capacity only, the trustee holds legal title for the property sold.

The beneficiary only has equitable ownership and the beneficiary in either case bears the burden of a tax.

Arthur J. Goldberg:

[Inaudible]

David A. Lindsay:

No, sir.

No, Mr. Justice Goldberg, under our all law, we recognize a corporation even though it’s a holding company and even though it’s a personal holding company unless it’s a sham.

And as a juridical person, separate entity and the treaty so recognizes, the treaty contains definitions which I hope to get to later which includes corporations as entities or juridical persons.

And the shareholder doesn’t have the same kind of interest in the underlying corporate property as the beneficiary does of a trust.

Now, the whole question here is whether Article XIV released these beneficiaries of the burden of the tax when admittedly the beneficiaries are not the taxpayers.

I think the objectives of this treaty are compelling in answering that question.

The British were hard bargainers.

David A. Lindsay:

We started on negotiations on the preliminary basis with the British back in 1937, got three other treaties in the meantime with others, France, Sweden and Canada.

One of the reasons for the long difficult time in getting a treaty with the British was because we were very interested in the problem of fiscal evasion, exchange of information for reciprocal enforcement.

And the British had a long standing policy of fiscal secrecy and they finally only agreed to exchange of information if we would agree with — so insofar as possible to put our two laws within the treaty on a reciprocal basis.

We were also particularly interested in eliminating mere double taxation by the use of mutual tax credits.

The British at first didn’t like the idea of tax credits but agreed to it if we would also agree to, particularly for investment income, mutual exemptions at the source.

And under this treaty, income is exempt even though as a result, is not taxed in either country at all, insofar as the British residents are concerned.

Now — and trying to put the two laws on a reciprocal basis, the British focused on the burden of the tax and not the legal incidence of the tax.

Let me try to give two simple examples.

Article VI of the treaty relates to dividends and practically every other treaty, all we do is fix equal withholding rates on dividends bearing from one country to the other country, not so with the British Convention.

The British Convention has a 15% withholding rate of dividends going in the United Kingdom from here and the United Kingdom dividend is coming over to the United States are merely exempted from the British surtax on individuals.

Because the British weren’t looking at just the — who was the taxpayer, the dividend recipient.

They were looking at the underlying burden of the tax including the corporate tax.

Now, at that time the British standard tax on corporations was 50%, there was an additional defense contributions tax of 55% or 5%, 55% at all — in all and our corporate tax was 40% yet on the 15% withholding, that’s 55%.

So the British arranged for this even though the actual recipients didn’t look on the surface as if they were being treated on the same basis.

Also in accepting the credit for taxes, long time ago this Court, not very long time ago, had held that a recipient was the United States taxpayer.

The dividend from a British corporation couldn’t take as a credit under our credit tax laws, the credit that the British corporation paid to the British Treasury, the tax that the British corporation paid because that dividend recipient was not the taxpayer.

The British corporation was the taxpayer.

But the British insisted that under the treaty when a U.S. resident receives a dividend from a British corporation, he is entitled to use the tax credit, the British standard tax against our tax and the reverse is equally true.

The British residents under the treaty are allowed to take the corporate tax paid here by the United States Corporation as his own credit against the income tax and written from that income.

This is a very large difference and again, they’re looking at the burden of the tax.

Now, they didn’t have any provision like that for trust income because foreign tax credits flow through a trust anyway and they had to make that specific exception if they were going to do it at the corporate level because corporations are recognized in the treaty as a juridical person, as a separate entity.

There was a language rejected by the British even aside from this language in the old capital gain provisions that required that the foreign resident himself make the sale.

One language is called — one provision that was rejected is the Saving Clause which would have given the United States the power, under this treaty if that Saving Clause had gone in, to tax this trust even though the United States agreed and conceded that Article XIV, otherwise applied to these retained gains.

The Saving Clause states in effect in the other treaties and it’s always coupled with a credit, so it never affects the credit that states that the United States reserved as a right to tax its own residents, its own citizens as if — as though this treaty had not come into effect and notwithstanding any other provision of the treaty to the contrary.

Whenever that kind of a clause is combined with a credit, a reciprocal credit provision, all it will permit is the avoidance of double taxation.

It will never permit the mutual reciprocity that the British insisted on in this Convention.

Now, respondent tries to read that rejected Saving Clause back into the treaty and to do that he relies on the definition of a resident of the United Kingdom.

That definition is found in the appendix on page 3 and it provides in effect that a resident of the United Kingdom is any person other than a citizen of the United States, other than the United States corporation, who is a resident in the United Kingdom for purposes of United Kingdom tax and not a resident in the United States for purposes of United States tax.

But it is conceded that these beneficiaries qualify under this definition as residents.

It’s true that the trust is a person and it’s true that the trust is a resident here, but I would like to draw the attention of this Court to Helvering v. Hutchings on page 31 of our brief, which contains in it the commissioner’s argument which is exactly like the argument of respondent here, that when a — where a person appears that that word will control in this kind of an issue.

David A. Lindsay:

In the Hutchings’ case there was a gift tax exemption for any gift to each person, the donor made a gift to a trust, his seven children were beneficiaries of the trust.

The Commissioner argued since a trust is a person, which is the argument here, he only gets one gift tax exemption.

And this Court said, “No, the word person also includes individuals, including the beneficiaries, he gets seven gift tax exclusions.”

Finally, respondent finds that — the treaty states that if a term is not otherwise defined in the treaty unless the context of the treaty requires that it must be determined under the laws of this country when it’s dealing with our taxes.

But the term trust is not a term of the treaty and the term exempt has been found in our domestic laws to apply to a remaindermen of a trust in case law even before Congress did the same thing.

It should be construed in light of the purpose of Article XIV, which is reciprocity in terms of the economic burden of the tax.

This was found by American Trust Company v. Smyth in the Ninth Circuit.

American Trust Company v. Smyth achieves reciprocity, the court below does not and I urge this Court to reverse the decision of the court below.

John M. Harlan II:

What do you do with the Government’s administrative interpretation argument?

David A. Lindsay:

Under the regulations?

The regulations, Mr. Justice Harlan, are quite meaningless to me because they say that when you are dealing with gains in a trust, that they will be within the scope of the Convention if they are part of the distributive share of the trust, if the British recipient is taxable in the United Kingdom on that income.

That same language applies to other provisions in the treaty quite likely because the treaty requires that and that is good language if the whole purpose of this was merely to avoid double tax.

So that we would only tax it so long as the British didn’t and we’d stop taxing it if the British did, but that’s not the purpose of Article XIV and the Treasury admits that.

Also distributive share is an absolutely meaningless term.

It applies in our code for partnership income and doesn’t have anything to do with it’s currently distributed or whether the income is accumulated for the partner, he still pays a tax on it when it’s a distributive share.

We’re dealing with entirely different terms and the statute on trust.

Furthermore, this regulation also borrows from the earlier treaty and say — says somewhat inconsistently with the part I’ve just mentioned that the gains must be derived from the sale by a British resident of the property, which is relied on heavily by respondent in his brief, where he says, “This can’t apply when the sales are derived from gains sold by someone for someone else.”

I do not think that these regulations are helpful at all.

Thank you.

Earl Warren:

Mr. Claiborne.

Louis F. Claiborne:

Mr. Chief Justice, may it please the Court.

At the outset, I’d like to emphasize that we are dealing with an American trust in every sense.

The trust created under the laws of Connecticut which is a resident in the United States, the corpus of the trust is physically located in the United States.

As a matter of American law, it is the taxpayer very clearly on the gains involved in this controversy.

These gains were as a matter of state law retained in the trust and were therefore taxable to the trust as a matter of American law.

Potter Stewart:

As Americ — as on a matter of American law say, if they had been distributable to the beneficiaries as a matter of Connecticut law, then the trust would have had report them but the beneficiaries would’ve paid the tax and there’s some other tricky things about the 90 days or something that’s been (Voice Overlap).

Louis F. Claiborne:

They would have been reported by the trust that they would — the beneficiaries who had received them would not have owed any tax on them because they were non-resident aliens who with respect to capital gains had no temporary presence in the United States.

They would have been further exempted if necessary under Article XIV of this treaty.

Arthur J. Goldberg:

The trust under those circumstances is exempt from tax by operation of our income tax statute, if it were distributed, is that correct?

Can you explain it?

Arthur J. Goldberg:

Is that the finding?

Louis F. Claiborne:

In effect, it’s exempted because it distributes.

Potter Stewart:

It reports it as I remember but this reports the distributions, is that right?

Louis F. Claiborne:

That’s correct.

He obtained —

Potter Stewart:

Kind of like a —

Louis F. Claiborne:

— the deduction which —

Potter Stewart:

Kind of like a partnership return?

Louis F. Claiborne:

Yes, you take it in (Voice Overlap) —

Potter Stewart:

[Inaudible]

Louis F. Claiborne:

— take it out.

Arthur J. Goldberg:

Do you know [Inaudible]

Louis F. Claiborne:

Well, I think the citizenship and residents of the trustee would be relevant and it would be difficult to claim an English trust with a trust — American trustee and property physically located in Connecticut.

I don’t know how that could qualify as a British trust and from my point view of American tax law which governs even under the treaty as to the imposition of American tax we would deem that trust a domestic trust and that being true, the trust would not be subject to the exemption of Article XIV.

Arthur J. Goldberg:

I was really wondering [Inaudible]

Louis F. Claiborne:

Yes, perhaps they could have.

The only question here therefore is whether this rule of American law which would otherwise clearly apply to the gains realized by this trust and retained by this trust is affected by our treaty with Great Britain.

At first blush it would seem strange that a Convention on our part with Great Britain would affect our own taxation of an entity that we recognize as a separate person, taxpayer in the Unites States.

That is the sort of relationship with which treaties normally do not deal, an international treaty.

But getting to the actual language of Article XIV, we notice that it exempts only residents of the United Kingdom and only those not engaged in trade or business in the United States, but as Mr. Lindsay correctly said, we make no allegation regarding engaging in trade or business here.

Now the phrase, “residents of the United Kingdom” is further defined in the treaty itself in Article II (1) (g) which appears on page 3, I believe of the petitioner’s appendix, yes page 3.

We noticed that excluded from the definition of residents of the United Kingdom are first, citizens of the United States.

American citizens though resident in Great Britain are not considered residents of the United Kingdom for the purpose of this provision.

Those who, though residents of the United Kingdom from their point of view or from our point of view, residents to the United States are also not covered by this provision of the treaty.

The only categories covered by Article XIV are those who are solely residents of the United Kingdom and as to whom we claim no residence qualification.

Clearly, the domestic trust involved here doesn’t qualify under those definitions and there’s no real claim that it would.

That — if — nor does the trustee, he being an American citizen in an American resident, very clearly.

Potter Stewart:

But by the same token, there’s no question but that the beneficiaries do qualify, is that —

Louis F. Claiborne:

Quite so, the beneficiaries clearly as British subjects and British residents do qualify.

But it is difficult to see on the face of the provision how this exemption is intended to work in favor of someone who is not the taxpayer, who does not owe the tax, who has no liability with respect to the tax.

Louis F. Claiborne:

The language of the provision itself would seem to say, we are exempting he who owes the tax, not we are exempting he who may one day suffer the ultimate economic burden of the tax, but beyond Article XIV, there are other indications that the taxpayer himself is the one we’re concerned with.

Other indications in the text of the treaty itself referring again to Article II (1) (g) on page 3 of the petitioner’s appendix.

We notice that that article finds the term resident of the United Kingdom as any person who is a resident of the United Kingdom for tax purposes and not a resident of United States for tax purposes.

Any person seems to be a deliberately broad way, seems to be intended to include entities beyond mere corporations and natural persons.

We don’t have to guess about it, however, because the treaty itself tells us that whenever a term is undefined, we should resort to the law of the taxing government.

That provision directing us to resort to the law of the taxing government is Article II (3), which is on page 5 of the petitioner’s appendix.

Of course, as a matter of American law, a trust is a person and that much seems to be conceded.

But as a practical matter, it doesn’t make much difference whether trusts are viewed by the treaty as residents or as persons because if they are not, the result must be that the trust, that the article looks only to the income retained by natural persons.

That might mean that in a trust situation they look to the trustee which is the English custom.

Since this is a treaty with Great Britain, we might assume that that is what was intended.

If we do that of course, again, we find the resident of the United States.

It may even be however, that the treaty does not intend to deal at all with the income retained by trust.

That was simply a problem not thought to be solved by this treaty.

In fact, the legislative history of the ratification of the treaty tends to show that the trust problem was never contemplated.

There is no indication of any specific or expressed adversion to this problem.

But there’s another indication in the language of the treaty that we should look to American law in determining who is exempted.

Again, looking at Article II (1) (g) on page three of the petitioner’s appendix, we notice that it’s not just any person who meets the qualifications who is exempted but it’s any person not resident in the United States for the purposes of United States tax.

In other words, there’s certainly an implication that those who are persons is a question to be determined by reference to United States tax law, if that is true then clearly we look to the taxpayer, the trust under domestic law is the taxpayer.

John M. Harlan II:

Where is that provision found?

Louis F. Claiborne:

Article II (1) (g) on page 3 —

John M. Harlan II:

[Inaudible]

Louis F. Claiborne:

— of the petitioner’s appendix, Mr. Justice Harlan.

John M. Harlan II:

Oh yes, I see.

Thank you.

Louis F. Claiborne:

Now, we’re told that we are being too literal with the language of this treaty and that we must look to the broad purpose of the Convention.

And we are given an economic burden argument.

It’s very difficult to sustain the economic burden argument in view of its rejection under our own laws and the lack of any indication in the ratification of the treaty in this country that anyone imagined that we were changing our whole concept toward the taxation of income that we were no longer looking to the recipient, the immediate recipient, but that we were suddenly turning to a different notion and approaching it from the point of view of the ultimate economic burden.

But outside of that, there would be some practical problems involved if we did use or attempted to use any economic burden approach.

We have — only to visualize the situation where the beneficiaries where some of them residents of the United Kingdom and others residents of the United States.

That might be easy to allocate if you had only two beneficiaries both be a remaindermen but if you have some who are contingent beneficiaries, some who are principal beneficiaries, some who are merely income beneficiaries, it becomes an impossible problem to determine which part of the trust income is allocable to which ultimately in terms of ultimate economic burden.

Louis F. Claiborne:

It easy enough to tell immediately which is the policy of the tax law and presumably a practical policy in the tax law.

All of Mr. Lindsay’s argument for the economic burden test applies equally to our own revenue laws.

And it was made and it has been rejected long ago by this Court and by the Congress.

It has no more persuasive force now with respect to this treaty than it did then with respect to our own approach to the taxation of income.

And also —

Potter Stewart:

Well, it is conceivable isn’t it that regardless of what our American law might be.

And it is specifically in having rejected the economic burden it is certainly conceivable that the — this treaty might have provided that what is exempted so is to be determined by where the economic burden falls.

Louis F. Claiborne:

Certain (Voice Overlap) —

Potter Stewart:

Contrary to the American domestic law.

Louis F. Claiborne:

Certainly, Justice Stewart but it’s hard to read that revolution in approach without some indication in the legislative history, without some express provision in the treaty.

It’s not worthy that when the treaty did intend to change our own law they were very explicit about it.

Mr. Lindsay pointed out Article VI and Article XIII which in effect at least to a limited extent overruled the Biddle case in this Court.

It was thought necessary to do so expressly, and that was the situation where in one sense an economic burden test was accepted, but we certainly cannot assume that it was intended to go beyond the express provisions in the treaty when they thought it was necessary, they did so expressly, we cannot assume they meant to go further.

Now, much is said about the purpose of Article XIV being to achieve reciprocal equality.

I’ve never been quite sure what was intended by that.

On its face, the provision clearly is not reciprocal.

It exempts only British residents.

It does not exempt American residents.

It said that the reason why it only exempts British residents is because the British don’t tax capital gains.

So there was no need to exempt American residents, the residents in the United States.

This is not a full answer as the court below pointed out they are instances in which the British do tax capital gains.

Furthermore, it was not to be supposed that the British never would in the future tax capital gains.

In fact, in 1962, they did begin a serious taxation of capital gains.

If the petitioner’s argument were to be accepted, Article XIV which presumably had to be scrapped on the theory that conditions have changed since it was enacted and therefore — since the contemplation of the parties was no longer realized that the provision could not be applied.

But in any event, I don’t quite see where they pinpoint the equality they’re talking about.

If it’s inequality between all residents of the United Kingdom on the one hand and all residents of the United States on the other hand, the treaty clearly doesn’t achieve this because American residents of the United Kingdom are not exempted and for that matter, other residents of the United Kingdom who have a permanent establishment in the United States are not exempted.

There’s no similar provision with respect to the English tax.

Perhaps, they’re talking about inequality between the British residents of the United Kingdom and the American residents of the United States, a strange thing for a treaty to be concerned about, but the fact is that the provision applies to non-British residents of the United Kingdom as well as British residents but not to American residents of the United Kingdom.

Now finally, it might be thought that the equality sought to be achieved is between British and non-British residents of the United Kingdom.

But here again is an exception because American, non-British residents of the United Kingdom are not covered by the treaty.

Louis F. Claiborne:

The British scheme of taxation is to tax non-residents whether British or not, whether British subjects or not, only on their British source income.

They make no distinction with respect to nationality, any distinction made in the treaty with respect to American nationality defeats the equality.

It does not promote it.

The truth of the matter I think is, I think Mr. Lindsay touched on this, is that Article XIV was a concession we made to the British Government and as he said, the British were most insistent to obtain it.

We agreed — the British were insistent on obtaining it presumably because they wanted to exempt their own residents, except American residents whom we insisted on continuing tax, and because they wanted to encourage others to come to the United Kingdom without being subjected to American tax.

We conceded because actually there was very little change from our then existing tax law with respect to the gains of non-resident aliens.

The only difference was that we now exempted those who — though engaged in trade or business in this country did not have a permanent establishment here.

While under the then existing law, we taxed all those who engaged a trade or business here regardless of whether they have permanent establishment here.

Since that time, we have begun taxing, and since 1950, we began taxing those who were temporarily present here even though not engaged in trade or business.

But at that time, the argument was this doesn’t seriously change the law.

This is our own argument to our own impediment.

Also, we’ve done the same thing with respect to three other countries, Sweden and Canada or in France and we assured the Senate that this provision went no further.

So —

Arthur J. Goldberg:

[Inaudible]

Louis F. Claiborne:

No.

Well, not to my knowledge of this, Your Honor.

Arthur J. Goldberg:

This is prior to the [Inaudible] on the petition itself.

Louis F. Claiborne:

That is correct.

Now finally, our reason for making this concession was that as practical matter, we’d experience big difficulty in collecting this tax anyway, therefore, we were giving up very little when we agreed to extend the exemption a little bit further than it’s usually be done under our laws.

And while we’re talking about equality, there might be some relevance to pointing out that if we were to exempt the capital gains from British residents, beneficiaries of American Trust even though they never received the income, we are differentiating or discriminating against all the other nations with whom we have tax treaties because in those instances we do not grant any exemption unless they actually received the funds.

Our position is that the same rule applies with respect to the British treaty.

As I said, the legislative history in this instance while voluminous is not very enlightening.

There is nothing in the legislative history that bears on the question of the taxation under capital gains of trust, but there is at least this much which certainly militates against any broad reading of Article XIV.

It is the climate of hostility, evident throughout the hearings, evident in the re-committal of the treaty after an initial favorable report in the Senate and hostility toward any extension of the exemption for non-resident aliens.

There is also the assurance given that this treaty went no further than previous treaties.

The argument was that precedent should be followed and that very little actual harm would be done.

But had it been thought that what the petitioner contends for was contemplated by Article XIV certainly, we would expect to find some indication of resistance at least that there is no resistance directed to this particular problem.

Now finally, with respect to the regulations, we frankly confess that the regulations are imperfect.

The explanation for the addition of the phrase, “if subject to tax in the United Kingdom” is that that provision is appropriate to the other items of income enumerated.

It is not appropriate with respect to capital gains and it was obviously an inadvertence to make it seem applicable to all capital gain income.

Louis F. Claiborne:

The phrase “distributive share” is perhaps not quite as clear as distributable share but there seems to be no point in trying to prove that distributive share clearly intends the amount distributed or distributable to the beneficiary.

For these reasons, we think it’s clear that the text of the treaty which does not grant an exemption in this case, should not be extended and the judgment below should be asserted.

John M. Harlan II:

You’re putting a stock on the regulation in (Voice Overlap) —

Louis F. Claiborne:

Excuse me, Your Honor.

John M. Harlan II:

You put any stock on the regulation?

Louis F. Claiborne:

Some — but we don’t —

John M. Harlan II:

I mean, part of the fact that you’ve got a section in your brief about that.

Louis F. Claiborne:

We do rely on the regulation in that it shows a contemporary interpretation.

It has not been objected to.

It apparently was done with the consent of the British Government and it certainly indicates they — our reading of the provision is correct.

The — I might note that the inaccuracy in the regulation does not help the petitioner in any way.

It denies an exemption in a case where we would concede that it should grant on it.

Earl Warren:

Mr. Lindsay.

David A. Lindsay:

May it again please the Court.

The reciprocity in this Convention was the reciprocity the British requested, so that they would be treated on income from the United States in the same way with respect to exemptions that our residents are treated on receiving the same form of so-called income from the United Kingdom and Section 2 of our main brief spells that out in detail.

There is no administrative problem with fixed beneficiaries.

This is the first time this problem has been mentioned.

It has not been mentioned in the briefs or the court below, but we have the same problem exactly when we’re imposing taxes or relieving people from taxes in this country, where mixed beneficiaries, the capital gains attributable to the gains, belonging to the British beneficiaries would be exempted.

Only that part and it’s done on an actuarial basis in an actuarial rules in our statutes and regulations so that each beneficiary gets an exemption if he’s British only in accordance looking at the entire fund of his actuarial interest in that fund.

This is not a problem.

Now, the burden theory is not inconsistent with our way of taxing trusts in this country.

While there has been a rejection in other cases involving corporations cost plus contractors, etcetera, on a rejection of the economic burden test for the use of the word “exempted” has not been when the person that is intended to be exempt is the beneficiary or the remaindermen and the so-called taxpayer is a trust.

And I cite letter of this doctrine on page 34 of our main brief and other cases flowing from that on pages 4 and 5 of our reply brief.

This is a one exception, they don’t use the word economic burden but they come out with the same result.

The idea of the purpose of our domestic rules for taxing trust is to ensure that taxable income and a trust is taxed only once either to the trust or to the beneficiary.

It was never designed to create a tax on income intended to be exempt.

It doesn’t change the character of the income screen through it, the way a corporation does.

It doesn’t tax the income twice the way a corporate does.

It’s entirely different and was never used to destroy an obvious exemption intended for a beneficiary and on the hostility, supposedly against capital gains that related only as the brief shows — the reply brief to refugees physically present in the United States in making gains on the stock exchange.

And that’s why that culminated the new legislation to tax non-resident aliens on capital gains when they were physically present.

David A. Lindsay:

Our — that stated to have no parallel with the British whatsoever and while our own grantor here had visited the United States [Inaudible] in 1958, he is not the target of that legislation.

He is a historic building secretary of the national trust in the United Kingdom.

I thank the Court.

Earl Warren:

Very well.