De Goldschmidt-Rothschild v. Commissioner

        UNITED STATES CIRCUIT COURT OF APPEALS, SECOND CIRCUIT

The taxpayer had transferred in trust certain U.S. Treasury Notes under what the Tax Court held to have been a prearranged plan that they should be sold and the proceeds reinvested in other property having a higher income yield but not of a tax-exempt nature.

The taxpayer was a naturalized citizen of France who was admitted to the United States about October 17, 1940, as a temporary visitor under a certificate of admission setting forth that she was a non -immigrant. She was at no time engaged in business in the United States. When she came here she had assets in this country consisting of about $ 300,000 marketable American securities on deposit with Brown Brothers Harriman & Company, New York City, which she caused to be transferred to a custodian account for herself as the sole owner thereof. At the time of her arrival, Alexander VanMarx, her cousin by marriage, was living in New York City, had been a banker in Holland, had general knowledge of American securities and was relied on by her for advice in her financial affairs. He recommended that she transfer a portion of her assets in this country in trust for the benefit of her two minor children Gilbert and Antoinette who had announced their desire to remain permanently in the United States. He also recommended that the Fiduciary Trust Company of New York be made the trustee of the two trusts each having a corpus of approximately $ 100,000. In October or November 1940 VanMarx introduced her to a trust officer who suggested that if a sufficient amount of her assets were converted into United States Government bonds or treasury notes the principal amount to be transferred to the two trusts would qualify as tax-exempt gifts by a non-resident alien as provided by law.

Between January 14 and January 22, 1941, the Fiduciary Trust Company, pursuant to the last mentioned suggestion, sold securities belong to the taxpayer and with the proceeds purchased at an aggregate principal cost of $ 189,986.58

 $ 100,000                        United States 1% Treasury Notes, and

 Gilbert De Goldschmidt-Rothschild Trust

Subsequent to February 19, 1941 the United States Treasury notes transferred to the two trusts on that date were sold from time to time by the trustee and the proceeds reinvested in domestic stocks and securities including $ 16,000 United States 2 1/2% treasury bonds. Such sales and reinvestments were made in accordance with a policy of the Fiduciary Trust Company of establishing investment diversification for trusts and also to derive more income out of the trust property. Petitioner from time to time received for her approval written recommendations from the trust company with respect to proposed purchases or sales of various securities which she invariably signed and returned to the trust company. The dates and the face amounts of those sales were as follows:

                                                     Face Amount

In asserting the deficiency involver herein the Commissioner determined that at the time the gifts were made, petitioner 'was a resident of the United States, ' and further, 'that the property transferred was not bonds, notes or certificates of indebtedness of the United States within the meaning of Section 86.2 of Regulations 108 relating to the gift tax.' The Commissioner allowed no part of the specific exemption of $ 40,000 provided in Section 1004(a)(1) of the Internal Revenue Code.

The sales of the domestic stocks and bonds for the petitioner's custody account and the use of the proceeds therefrom for the purchase of the aggregate $ 186,900 face amount of United States Treasury notes, during the period from January 14 to 22, 1941, were made with the intention that the petitioner's then contemplated gifts in trust could be made as tax exempt gifts.

The tax Court in its opinion holding that the gifts in trust were not exempt from gift taxes relied upon Pearson v. McGraw, 308 U.S. 313, 60 S.Ct. 211, 84 L.Ed. 293, and VanDyke v. Wisconsin Tax Commission, 235 Wis. 128, 292 N.W. 313, which was affirmed by the Supreme Court in a Per Curiam memorandum reported at 311 U.S. 605, 606, 61 S.Ct. 36, 85 L.Ed. 383, upon the authority of Person v. McGraw. The opinion of the Tax Court in the case before us made the following observations in support of its conclusion that here, as in the Pearson case, the donor had a prearranged program which subjected her securities to taxation:

     '* * * The petitioner never actively managed her financial

The taxpayer's contention that the issue decided by the Tax Court was not sufficiently indicated by the Commissioner's deficiency notice and the pleadings is without basis. We are convinced that she was not surprised as to the Commissioner's contentions and suffered no injustice.

The order of the Tax Court is affirmed.

'Sec. 750. Bonds and certificates of indebtedness beneficially owned by nonresident aliens not engaged in business in the United States exempt from taxation. Notwithstanding the provisions of Sections 745, 747, 752-754(b), 757, 758, 760, 764-766, 769, 771, 773, 774 and 801 of this title, or of any other law, bonds, notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a non-resident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation imposed on July 9, 1918, or thereafter by the United States, any State, or any of the possession of the United States, or by any local taxing authority.'

Regulations 79

'Article 2. Transfers reached. * * * A gift of a bond, note or certificate of indebtedness issued by the Federal Government if made by a non-resident alien, not engaged in business in the United States, is not subject to the tax. * * * ' Article 2 of Regulations 79 (as amended byT.D. 5041, 1941-1 C.B. 438, March 1, 1941):

'Article 2. Transfers reached. * * * However, a gift of a bond, note or certificate of indebtedness, issued by the Federal Government prior to March 1, 1941, if made by a non-resident alien not engaged in business in the United States is not subject to the tax. * * * '

(Section 86.2 of Regulations 108, also relating to the gift tax (promulgated July 30, 1943, superseding Regulations 79), mentioned in respondent's notice of deficiency (App. 5), contains provisions identical with those of Article 2 of Regulations 79 (as amended byT.D. 5041), above-quoted.)