French Art Dealer’s Estate Argues Art Works Aren’t Taxable in U.S.

ESTATE OF DANIEL WILDENSTEIN, DECEASED,
ROYAL BANK OF CANADA TRUST COMPANY (BAHAMAS) LIMITED,
AS SUCCESSOR TRUSTEE OF THE DELTA TRUST,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

PETITIONER'S OPPOSITION TO RESPONDENT'SMOTION FOR PARTIAL SUMMARY JUDGMENT AND CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT

Andrew S. Mason (Bar No. MAO 123)
Basil P. Zirinis (Bar. No. ZB0030)
David M.J. Rein (Bar No. RD0564)
Isaac J. Wheeler (Bar No. WI0058)
Mark A. Popovsky (Bar No. PM0438)
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
Tel.: (212)558-4000

Counsel for Petitioner Royal Bank of Canada Trust Company (Bahamas) Ltd.

July 16, 2019

---

TABLE OF CONTENTS

PRELIMINARY STATEMENT

STATEMENT OF UNDISPUTED FACTS

LEGAL STANDARD

ARGUMENT

I. RESPONDENT'S SUMMARY JUDGMENT MOTION SHOULD BE DENIED BECAUSE IT IS BASED ON FLAWED LEGAL THEORIES AND RAISES DISPUTED ISSUES OF MATERIAL FACT

II. PETITIONER'S CROSS-MOTION FOR SUMMARY JUDGMENT SHOULD BE GRANTED BECAUSE NONE OF THE OVERSEAS ARTWORKS IS TAXABLE BY THE UNITED STATES

CONCLUSION

TABLE OF AUTHORITIES

Cases

Af-Cap Inc. v. Rep. of Congo, 383 F.3d 361 (5th Cir. 2004)

Amaral v. Comm'r, 90 T.C. 802 (1988)

Am. Fin. Corp. v. Comm'r, 72 T.C. 506 (1979)

Bolten v. Comm'r, 95 T.C. 397 (1990)

Bonded Carriers, Inc. v. Hartford Fire Ins. Co., 2009 WL 10676024 (N.D. W. Va. Mar. 20, 2009)

Boonton Handbag Co. v. Homes Ins. Co., 310 A.2d 510 (N.J. Super. Ct. App. Div. 1973)

Burnet v. Brooks, 288 U.S. 378 (1933)

City Fuel Corp. v. Nat 1 Fire Ins. Co. of Hartford, 846 N.E.2d 775 (Mass. 2006)

Dealers Dairy Prods. Co. v. Royal Ins. Co., 164 N.E.2d 745 (Ohio 1960)

Delaney v. Murchie, VH F.2d 444 (1st Cir. 1949)

Espinoza v. Comm I, 78 T.C. 412 (1982)

Estate of Arnaud v. Comm'r, 90 T.C. 649 (1988)

Estate of Morrissette v. Comm'r, 146 T.C. 171 (2016)

Estate of Paquette v. Comm'r, T.C. Mem. 1983-571 (1983)

Evans v. Comm'r, T.C. Mem. 2015-12 (2015)

Hartford Cas. Ins. Co. v. Banker's Note, Inc., 817 F. Supp. 1567 (N.D. Ga. 1993)

Hill-Jackson v. FAF, Inc., 808 F. Supp. 2d 1083 (S.D. Ind. 2011)

Houston v. Lack, 487 U.S. 266 (1988)

Jamieson v. Comm'r, T.C. Mem. 2008-118 (2008)

Jones v. Comm'r, 927 F.2d 849 (5th Cir. 1991)

Kappus v. Comm'r, 337 F.3d 1053 (D.C. Cir. 2003)

Katz v. Goodyear Tire & Rubber Co., 737 F.2d 238 (2d Cir. 1984)

Kaufman v. Comm'r, 55 T.C. 1046 (1971)

Koshland v. Columbia Ins. Co., 130 N.E. 41 (Mass. 1921)

Lariviere v. N.H. Fire Ins. Co., 193 A.2d 13 (N.H. 1963)

Marohnicv. Walker, 800 F.2d 613 (6th Cir. 1986)

Nat'l Ass'n of Mfrs. v. Dep't of Def., 138 S. Ct. 617 (2018)

Onderdonk v. Comm r, T.C. Mem. 1984-241 (1984)

Ore & Chem. Corp. v. Eagle Star Ins. Co., 489 F.2d 455 (2d Cir. 1973)

Pac. Tall Ships Co. v. Kuehne & Nagel, Inc., 76 F. Supp. 2d 886 (ND. Ill. 1999)

Pulvermann v. Comm'r, 30 T.C. 231 (1958)

Richman v. Comm'r, T.C. Mem. 1993-32 (1993)

Riehl v. Travelers Ins. Co., 772 F.2d 19 (3d Cir. 1985)

Salahuddin v. Comm'r, T.C. Mem. 2012-141 (2012)

Smith v. Comm'r, T.C. Mem. 1975-314 (1975)

Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S. 176 (1982)

Sundstrand Corp. & Consol. Subsidiaries v. Comm'r, 98 T.C. 518 (1992)

United States v. Stuart, 489 U.S. 353 (1989)

Vallone v. Comm'r, 88 T.C. 794 (1987)

Whistleblower 21276-13W v. Comm'r, 144 T.C. 290 (2015)

Zhengnan Shi v. Comm'r, T.C. Mem. 2014-173 (2014)

Statutes

Internal Revenue Code:

Revenue Act of 1916, Pub. L. No. 64-271, 39 Stat. 778

Treaties

The Convention between the United States and the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances, and Gifts

General Agreement on Tarriffs and Trade

Rules and Regulations

Fed. R. Civ.P. 56

T.C. Rule 121

Treasury Regulations:

Legislative and Administrative Materials

Rev. Rul. 76-161, 1976-1 C.B. 193

Rev. Rul. 82-115, 1982-1 C.B. 108

S. Exec. Doc. No. 109-7 (2006)

S. Exec. Rep. No. 96-3 (1979)

S. Rep. No. 100-445 (1988)

S. Rep. No. 81-2261 (1950)

Miscelaneous

34A Am. Jur. 2d (Federal Taxation) ¶ 145,655

Chambers Dictionary (13th ed. 2014)

Merriam-Webster's Collegiate Dictionary (10th ed. 1998)

Oxford English Dictionary Online (3d ed. 2019)

Random House Webster's Unabridged Dictionary (2d ed. 2001)

Webster's Third New International Dictionary Unabridged (2002)

---

PRELIMINARY STATEMENT

This case presents the question of whether the clear and unambiguous terms of an estate and gift tax treaty between the United States and France (the “U.S.-France Treaty” or “Treaty”) should be respected.¹ The Treaty has remained in force for the past 40 years but never has been interpreted in the manner that Respondent urges here, which would nullify the plain meaning of its terms.

The Treaty sets ground rules for how the United States and France will tax estates when both countries otherwise might assert overlapping or inconsistent claims. Addressing the fact that both countries' residents sometimes move tangible property across borders, the U.S.-France Treaty provides that “[t]angible movable property . . . may be taxed by a Contracting State if such property is situated in that State. . . .” Art. 7(1) (emphasis added). Therefore, according to the Treaty, the United States may tax tangible property included in a French domiciliary's estate only if the property was situated in the United States. To avoid the uncertainty and inconsistency that might otherwise ensue for property actively en route from one country to another at the time of the owner's death, the Treaty states that “tangible property which is in transit shall be considered situated at the place of destination.” Id. (emphasis added).

The Treaty applies to “estates of decedents whose domicile at death was in France.” Art. 1(1). One such decedent was Daniel Wildenstein, a prominent art dealer and collector, who was born in France and lived as a French citizen in France for at least the 30 years prior to his death in October 2001. Before he died, several thousand artworks that Mr. Wildenstein owned were transferred into a Bahamian trust, now known as the Delta Trust (the “Trust” or the “Delta Trust”).

When Mr. Wildenstein died, nearly all the almost 3,000 artworks in the Delta Trust were physically located outside the United States. Respondent nonetheless argues that 739 of these artworks should be subject to U.S. estate tax.² Respondent concedes that none of these 739 artworks was physically located in the United States at the time of Mr. Wildenstein's death. Instead, Respondent advances two theories for including these artworks in Mr. Wildenstein's U.S. estate. Both theories rest on legally flawed interpretations of the Treaty that have never been accepted by any court, as well as unsupported factual inferences that are contradicted by the evidence:

First, Respondent argues that the term “situated” does not have the plain language meaning of physically located, but rather should be read to require a nebulous (and necessarily subjective) analysis of the property's purported domicile — a concept not mentioned in the Treaty. Based on this theory, Respondent claims that certain artworks physically located overseas at the time of Mr. Wildenstein's death were “situated” in the United States because the artworks had been shipped from the United States to Switzerland (where they were located when he died) and then were later shipped from Switzerland to the United States (in some instances via other countries) after spending, on average, almost five years in a Swiss warehouse.

Respondent's theory is wrong. Respondent bases its theory on a 70-year old case holding that under the Internal Revenue Code (not the Treaty) the United States should not have imposed estate tax on the jewelry of a non-U.S. citizen who happened to die with her jewelry while passing through the United States on the way to her Bahamian domicile. See Delaney v. Murchie, 177 F.2d 444 (1st Cir. 1949). Nothing about Delaney suggests that it vastly expanded the estate taxing power of the United States to assets of non-U.S. domiciliaries located outside the United States. No court has ever interpreted Delaney in this manner and it has only ever been cited twice by any court, in each case for unrelated propositions.

Respondent's attempt to reject the bright-line, location-based test of the Treaty in favor of a vague, novel domicile-of-property test to be applied to each piece of a decedent's movable property would inevitably lead to inconsistent rulings, unmanageable enforcement regimes and overlapping claims of competing taxing authorities, precisely what the Treaty was intended to prevent. Respondent submits no evidence to establish the “domicile” of these artworks, which, even under Respondent's theory, turns on disputed factual issues of intent unsuitable for summary judgment. Instead, Respondent simply relies on its own hindsight-based assumption that, because these particular artworks were sent from Switzerland to the United States — often years after shipment to Switzerland and years after Mr. Wildenstein's death — the United States must always have been their domicile.

Second, Respondent asserts that the 739 artworks subject to its motion were “in transit” the entire time that they were stored in Switzerland — on average, a 4.5-year period. Respondent bases this theory on a printout from the Swiss Federal Customs Authority website describing the “freeports” where the artworks were housed as a place to “temporarily store goods.” (Ex. R-7.)³ Pointing to this website, Respondent's Motion claims that the freeports are not “destinations” and, therefore, that “by definition,” the artworks were “in transit” the entire time that they were stored at Swiss freeports. (Resp.'s Mot. at 17-18.)

Respondent's position regarding freeports is legally and factually wrong. Petitioner has submitted the expert declaration of Marc-Andre Renold (“Renold Deck”), Professor of Law and the UNESCO Chair of International Cultural Heritage Law at the University of Geneva, who explains why Respondent's understanding of the Swiss legal status and practice of freeports is incorrect. Dr. Renold explains that high-value goods are commonly stored in freeports for years, with no restrictions under Swiss law on the duration of storage (or the future destination of stored items). Respondent cites no precedent in support of its theory that property housed in long-term storage must be regarded as “in transit,” and cases interpreting analogous “in transit” provisions reject this interpretation. Nor does Respondent present any evidence that the artworks in fact were “in transit.” Respondent's unsupported assertion is rebutted by declaration testimony from an employee of the gallery that manages the collection explaining that, for practical business reasons, artworks are regularly sent for indefinite long-term storage in Swiss freeports without a decision having been made as to when or where the artworks will be transported next.

Third, even if the Court were to credit Respondent's flawed arguments, summary judgment would still be inappropriate because there are factual disputes about which artworks meet the criteria asserted in Respondent's motion. For example, the 739 artworks Respondent identifies as covered by its motion include artworks that were never shipped from Switzerland to the United States and artworks that were not in a Swiss freeport on the date that Mr. Wildenstein died.

* * *

In short, Respondent asks this Court to agree that artworks that were housed thousands of miles away in Switzerland were “situated in” the United States, and that artworks that had been stationary, on average, for almost half a decade in Switzerland were in fact “in transit.” There is no legal or factual basis to distort the Treaty to reach this illogical and unprecedented result.

Setting aside Respondent's groundless interpretation of the Treaty, this is a straightforward case. The Treaty provides that tangible property of a non-U.S. domiciliary like Mr. Wildenstein, located outside the United States, is not subject to U.S. estate tax. Here, there is no dispute that 892 of the artworks were physically located outside the United States when Mr. Wildenstein died. Accordingly, Petitioner respectfully submits that the Court should apply the Treaty's plain terms and grant Petitioner's Cross-Motion that those 892 artworks are not subject to the U.S. estate tax.⁴

STATEMENT OF UNDISPUTED FACTS

A. Daniel Wildenstein Was a French Domiciliary.

Daniel Wildenstein was bom on September 11, 1917 in Essone, France. (Wildenstein Decl. 3 & Ex. W-1.)⁵ Over the course of his life, he became a prominent art dealer and collector, running galleries in Paris, London, New York, Buenos Aires and Tokyo. Mr. Wildenstein was a French citizen and held a French passport from at least 1988 until his death in October 2001, after which he was buried in France. (Wildenstein Decl. ¶¶ 5, 7-8, 15-16 & Exs. W-1 & W-2.) His principal residence was at 20, avenue Montaigne, in Paris, a home he had owned for more than 30 years prior to his death. (Wildenstein Decl. ¶ 12 & Ex. W-3 at 5, 55.) A report prepared by the French government National Office of Audits of Tax Status (“French Examination Report”) determined Mr. Wildenstein's “[a]ctual domicile” to be his residence in Paris. (Ex. W-3 at 5.) According to the French Examination Report, as of January 1, 1998, this residence was valued at 6,750,000 francs (approximately $1.1 million). (Ex. W-3 at 81.) Mr. Wildenstein also owned three other properties in France with a cumulative value of 16,000,000 francs (approximately $2.7 million) as of January 1, 1998. (Id.)

The French Examination Report further shows that, among other things, Mr. Wildenstein: (i) was registered to vote in France (Ex. W-3 at 80), (ii) maintained bank accounts in France (id.), (iii) paid housing tax in France (id. at 55), and (iv) incurred daily living expenses (such as charges from restaurants, dry cleaners and pharmacies) in France (id. at 70-76). Mr. Wildenstein also belonged to a number of leading French social organizations and supported French charities with substantial donations. (Wildenstein Decl. ¶ 14 & Ex. P-1 ¶¶ 9-10.)

Mr. Wildenstein's principal business activities took place in France; he employed “a chef, two chauffeurs and several maids” in Paris, along with a personal assistant; and he “belonged to many organizations in France.” (Ex. P-1 ¶ 8.)

According to Mr. Wildenstein's son, Guy Wildenstein, Mr. Wildenstein spent 321 days in France in 1999, 321 in 2000, and 256 in 2001. (Wildenstein Decl. ¶ 6.) Revising an incorrect position initially taken, in 2008, Mr. Wildenstein's heirs filed a declaration with the French taxing authority stating that he was a French domiciliary on the date of his death. (Ex. W-4.)⁶

B. Mr. Wildenstein Settles the Delta Trust in December 1999 and Dies in October 2001.

On October 27, 1998, Mr. Wildenstein created a Bahamian trust, initially called the “Daniel Trust” but later renamed the “Delta Trust.” (DeWeever Decl. ¶ 4.) On November 2, 1998, he settled the Trust with a nominal amount of cash, and named the Royal Bank of Scotland (Nassau) Limited (“RBSL”) as the trustee. (Id. ¶¶ 5-6 & Ex. R-2 at 1, 17.) During Mr. Wildenstein's lifetime, the Trust was revocable and discretionary but would become irrevocable and discretionary upon his death. (DeWeever Decl. ¶ 7 & Ex. R-3 at 1-3.) On December 13, 1999, Mr. Wildenstein settled into the Delta Trust a set of artworks from his personal collection. (DeWeever Decl. ¶ 8.)

On October 2, 2001, Mr. Wildenstein revoked the Delta Trust to the extent of the artworks held by the then-acting trustee. (Id. ¶ 10.) On or about October 12 and October 16, 2001, certain of the artworks from Mr. Wildenstein's personal collection were transferred back into the Trust. (Id. ¶ 11.) Mr. Wildenstein died intestate on October 23, 2001 in Paris, France. (Wildenstein Decl. 15 & Ex. W-5.)

C. Of the 970 Disputed Artworks, 892 Were Situated Outside the United States When Mr. Wildenstein Died.

At the time of Mr. Wildenstein's death, the vast majority of the more than 3,000 artworks in the Delta Trust were physically located outside the United States, and there is no dispute that nearly 2,000 of the artworks lacked any nexus to the United States and are not includible in Mr. Wildenstein's U.S. taxable estate. And even among the subset of 970 artworks at issue in this litigation (“Disputed Artworks”) (see infra pp. 10-12), there is no dispute that, on October 23, 2001, 892 of these artworks (“Overseas Artworks”) were physically located outside the United States.

Wildenstein & Co., Inc. (the “Gallery”), an art dealer in New York City, manages the collection of artworks held by the Delta Trust under a management agreement with the Trust, dated March 31, 2005 and subsequently amended. (Godts Decl. ¶ 5.) The Gallery's role includes “arranging for insurance, storage, restoration, framing, and transportation” of the artworks settled into the Trust. (Id. ¶ 6.) The Gallery maintains records, which it commonly refers to as art cards (“Art Cards”) (Exs. G-1through G-7), for each artwork it manages on behalf of the Delta Trust. (Godts Decl. ¶ 7.) Among other things, an Art Card is used to record contemporaneously the movements of an artwork and thus, absent other evidence, generally reflects where a particular artwork was located on a particular date.⁷ (Godts Decl. ¶¶ 8-9, 22.)

Exhibit P-5 lists (by Art Card identification number) each of the 892 Overseas Artworks and shows the undisputed evidence that each was located outside the United States at the time of Mr. Wildenstein's death. This evidence of location includes entries on the Art Card recording the date each artwork was shipped out of the United States. In addition, for 329 of the Overseas Artworks, the evidence includes the New York to Switzerland shipping records issued prior to October 23, 2001 by Welti-Furrer AG (“Welti-Furrer”), a company that transports and stores fine art (Godts Deck ¶ 27).⁸

At the time of Mr. Wildenstein's death, 850 of the 892 Overseas Artworks were stored in specialized warehouses, commonly called “freeports,” located in Switzerland (“Artworks Stored in a Swiss Freeport”). (See Ex. P-6.) Swiss freeports are highly secure warehouses specifically designed for the long-term storage of fine art and other valuable goods. (Renold Decl. ¶¶ 18-20.) They are typically climate- and humidity-controlled and offer low light environments in order to protect delicate works of art. (Id. ¶ 19.) Among other amenities, Swiss freeports offer showrooms equipped to handle displays of artwork, where potential purchasers can view artworks on site. (Id.) Freeports also offer extensive security measures and advanced fire protection features to protect high-value art from theft or damage. (Id.) For example, some freeports have specialized ventilation systems that, in the event of a fire, can quickly replace the oxygen in a room with an inert gas, immediately extinguishing the fire without risk of water damage to delicate artworks. (Id.) The Swiss government does not impose customs or duties on goods transported from overseas directly to a freeport, unless and until the goods exit the freeport and are transported to another destination in Switzerland. (Id. ¶¶ 10, 17, 45, 56.)

For these reasons, among others, it is common for art collectors and dealers to store fine art in freeports indefinitely, or until the owner wishes to move the works to another location, for example to display the works or offer them for sale. (Id. ¶¶ 21, 75.) Consistent with this common practice, the Gallery stored certain of the works of art it managed on behalf of the Delta Trust — as well as other works of art consigned to the Gallery by other owners — in Swiss freeports for indefinite periods. (Godts Decl. ¶ 45.) The Gallery has never displayed more than a fraction of the artworks that it owns or that are consigned to it at any one time. (Id. ¶ 40.) The Gallery stores the remaining artworks in various locations until a potential buyer, who might be located anywhere in the world, wishes to view the artwork or until the Gallery decides to display the artwork, for example as part of a temporary public exhibition or at a private gallery, either of which could be anywhere in the world. (Id. ¶¶ 44-46.) During the time period at issue here, Swiss freeports offered one of the most attractive off-site storage locations for the works of art that the Gallery owned or managed for third parties, and so were frequently used by the Gallery for the indefinite storage of such works. (Id. ¶ 43-44.)

The history of the Artworks Stored in a Swiss Freeport reflects that they typically were stored long-term and that they arrived at the freeport at various times over the course of years. In fact, as reflected in Exhibit P-6, about 58% (492 out of 850) of the Artworks Stored in a Swiss Freeport were delivered to the freeport at least one year prior to Mr. Wildenstein's death, and more than 10% (or 86 of the artworks) were delivered to the freeport at least three years prior to his death. One of these artworks (Art Card No. 32642) was never in the United States prior to Mr. Wildenstein's death (see Ex. G-3 at 1025), and another (Art Card No. 33021) had not been in the United States since 1964 (see Ex. G-2 at 55). Nor were all the artworks delivered to the Swiss freeports from the United States. As shown in Exhibit P-6, some of the artworks were shipped to the Swiss freeports from other countries, including Germany, Japan and the United Kingdom.⁹

Another 42 of the 892 Overseas Artworks were not stored in Swiss freeports at the time of Mr. Wildenstein's death (“Artworks Not Stored in a Swiss Freeport”). Instead, as shown in Section III of Exhibit P-7, on October 23, 2001, they were located in the British Virgin Islands, France, Italy or Japan.

D. In the Years Following Mr. Wildenstein's Death, the ArtworksStored in a Swiss Freeport Followed Varying Paths.

Over the course of more than a decade after Mr. Wildenstein's death, most of the 850 Artworks Stored in a Swiss Freeport were transported, individually or in small groups, from the freeports to multiple countries for differing purposes: (i) some were sold and delivered to new owners directly from a freeport;¹⁰ (ii) some were transported from a freeport to a storage facility in another country;¹¹ (iii) some were transported from a freeport to one or more museums around the world for temporary exhibition;¹² and (iv) some were transported to various countries — including France, the Netherlands and the United States, among others — for restoration or potential sale.¹³ For others, there is no record evidence that the artworks have ever left the Swiss freeport since arriving there prior to Mr. Wildenstein's death nearly 18 years ago.¹⁴

E. RBCTC Takes Over as the Trustee and Later Files an Estate Tax Return Promptly Upon Learning the Estate Had U.S. Tax Liability.

In 2004, more than two years after Mr. Wildenstein's death, Royal Bank of Canada Trust Company (Bahamas) Limited (“RBCTC” or “Petitioner”) was appointed as trustee in place of Coutts (Cayman) Limited, which had replaced Coutts Delta Trust Holdings (Bahamas) Limited, which, in turn, had replaced RBSL as trustee. (DeWeever Decl. ¶¶ 9-14.) Petitioner has continued to serve as trustee through the present. (Id. ¶ 14.)

In connection with proceedings concerning a French inheritance tax filing by Mr. Wildenstein's children, Petitioner conducted a review of the files and documents Petitioner had obtained related to the Delta Trust. (Id. ¶ 15.) During the course of that review, Petitioner learned for the first time that certain Trust assets, previously not thought to have been in the United States at the time of Mr. Wildenstein's death, might have been located in New York at that time. (Id. ¶ 16.) On October 22, 2014 — as soon as practicable after coming to learn that Mr. Wildenstein's estate (the “Estate”) did, in fact, owe U.S. tax and while Petitioner's factual investigation was still ongoing — Petitioner, as successor trustee of the Delta Trust and a statutory executor of the Estate, filed a United States Estate Tax Return for the Estate of a Nonresident Not a Citizen of the United States (IRS Form 706-NA). (DeWeever Decl. ¶ 18 & Ex. R-1.) Thereafter, at a meeting with Respondent on May 25, 2015, Petitioner submitted a revised Schedule A to the Return, containing an updated schedule of artwork (together with the October 22, 2014 filing, the “Original Return”). The Original Return showed a total tax liability of $98,132,545 based on a taxable estate comprised of 424 artworks, preliminarily valued at $248,285,500.¹⁵ (Ex. R-1 at 7.)

In order to rectify quickly the failure to file before RBCTC became trustee of the Delta Trust, Petitioner filed the Original Return on an expedited basis before Petitioner could complete its investigation of which artworks were includible in the U.S. gross estate or obtain date-of-death fair market value appraisals for those artworks. (DeWeever Decl. ¶ 20.) In a cover letter accompanying the filing, Petitioner explained that “RBCTC intended to amend the Form 706-NA . . . if it determine[d] that any of the property reported is not includible in the US gross estate.” (Ex. R-1at 4-5.)

Given the significant factual information Petitioner still needed to gather and analyze, Petitioner took a cautious approach to this first filing and chose not to claim the benefits of the U.S.-France Treaty immediately.¹⁶ Instead, Petitioner waited until the relevant facts were fully developed before determining whether the Treaty applied to the Trust assets. Petitioner notified Respondent of this approach in a letter accompanying the filing, stating that “RBCTC may claim [T]reaty benefits in the future in connection with the assets reported on the enclosed Form 706-NA or any amendment thereto.” (Ex. R-1.)

On April 21, 2017, Petitioner filed an amended Form 706-NA (the “Amended Return”). (Ex. R-8.) In an accompanying letter, Petitioner explained: “When RBCTC filed the [O]riginal [R]eturn, RBCTC did not have the information to conclude whether Mr. Wildenstein was a domiciliary of France on the date of his death.” (Id. at 1.) Following analysis of documents related to Mr. Wildenstein's residency that Petitioner gathered and provided to Respondent, RBCTC concluded, “Mr. Wildenstein was a domiciliary of France as of the date of his death, and therefore the Estate is entitled to the benefits of the [U.S.-France Treaty].” (Id.; DeWeever Decl. ¶¶ 22-23.) Accordingly, the Amended Return claimed Treaty benefits for 384 of the 424 artworks reported on the Original Return. Applying the U.S.-France Treaty, the Amended Return showed that the Estate owed $388,737 in taxes on a taxable estate, consisting of 20 artworks, with date-of-death appraisals totaling $1,255,020. (Ex. R-8 at 2.)

F. Respondent Issues a Notice of Deficiency and Petitioner Brings This Action.

On September 22, 2017, Respondent issued a Notice of Deficiency (the “Original Notice”) to Petitioner, asserting taxes and penalties totaling $190,568,072.¹⁷ The Notice assessed the value of the 424 artworks included in the Original Return at $51,547,750. (Ex. P-3 at 2.) Respondent further claimed that: (i) “561 additional works of art not previously reported on the Form 706-NA [i.e., the Original Return] by the taxpayer having a fair market value of $406,131,104 were situated in the United States and that these works of art are includible in the U.S. gross estate of the decedent”; and (ii) “10 additional works of art were situated in the United States on date of death with a fair market value of $848,750.” (Id.) “In the alternative,” Respondent asserted that “999 works of art having a fair market value of $458,527,604 were situated in the United States as that term is defined in Article 7, paragraph 1 of the that [sic] Convention.”¹⁸ (Id.)

In response, Petitioner brought this action on February 15, 2018, seeking a determination that, among other things, the total U.S. estate tax due, before interest, is $388,737 (as set out in the Amended Return) and that the Estate is not subject to any penalties. The pleadings closed on June 8, 2018.

G. Respondent's Motion for Partial Summary Judgment.

Rather than refer this case to Respondent's Office of Appeals, Respondent moved for partial summary judgment on May 13, 2019, seeking an order that “the works of art [that] were either situated in, or in transit to, the United States on the date of the decedent's death . . . are includible in the decedent's U.S. gross estate.” (Resp.'s Mot. at 21.) Under Section 2103, the United States may tax the property of a non-resident non-citizen, “which at the time of his death is situated in the United States.”¹⁹ But this statutory provision may be superseded by “an applicable death tax convention with a foreign country.” Treas. Reg. § 20.2104-1(c). Here, the United States has a treaty with France, the country of which Mr. Wildenstein was a citizen and domiciliary. That Treaty provides, in relevant part, that “[t]angible movable property other than currency may be taxed by a Contracting State if such property is situated in that State,” and that tangible property “in transit” at the time of death “shall be considered situated at the place of destination.” Treaty Art. 7(1).

Notwithstanding Respondent's concession that the Treaty applies for purposes of its Motion, Respondent argues that Section 2103 applies to the artworks at issue here. Even though the artworks were located outside the United States when Mr. Wildenstein died, Respondent contends that the artworks should nonetheless be deemed “situated” in the United States. Respondent argues that the Court should reach this conclusion because the subset of Disputed Artworks subject to Respondent's Motion were sent to the United States from Switzerland and other foreign locations following Mr. Wildenstein's death at various times over the course of the next decade and beyond. Respondent also argues that, under the Treaty, the artworks subject to Respondent's Motion are taxable by the United States because they were located in Swiss “freeports.” According to Respondent, Swiss freeports are places for temporary storage, notwithstanding that most of the artworks were stored there for multiple years, and the artworks were thus always “in transit” to the United States.

LEGAL STANDARD

Under Tax Court Rule 121, “the Tax Court's analog to Rule 56 of the Federal Rules of Civil Procedure,” the Court may grant summary judgment where “there is no genuine issue of any material fact and a decision may be rendered as a matter of law.” Salahuddin v. Comm'r, T.C. Mem. 2012-141, at *4 (2012). The moving party “bears the burden of proving that no genuine issue exists as to any material fact and that [it] is entitled to judgment on the substantive issues as a matter of law.” Sundstrand Corp. & Consol. Subsidiaries v. Comm'r, 98 T.C. 518, 520 (1992). The Court “construe[s] factual materials and inferences drawn from them

in the light most favorable to the nonmoving party.” Estate of Morrissette v. Comm'r, 146 T.C. 171, 177 (2016) (citing Sundstrand, 98 T.C. at 520). When the non-moving party asserts that a material issue of fact is in dispute, it “must set forth specific facts showing that there is a genuine dispute for trial.” T.C. Rule 121(d). “If there exists any reasonable doubt as to the facts at issue, the motion must be denied.” Sundstrand, 98 T.C. at 520.

ARGUMENT

I. RESPONDENT'S SUMMARY JUDGMENT MOTION SHOULD BE DENIED BECAUSE IT IS BASED ON FLAWED LEGAL THEORIES AND RAISES DISPUTED ISSUES OF MATERIAL FACT.

A. Respondent's Theory That Property Located Outside the U.S. Is “Situated” in the U.S. Is Both Legally Incorrect and Contradicted by the Evidence.

1. Respondent Ignores the Effect of the Treaty.

Respondent's lead argument (Resp.'s Mot. at 9-14) is based on its interpretation of the word “situated” contained in Sections 2103 and 2104(b) of the Code and case law construing those provisions, but Respondent concedes, “for purposes of [Respondent's] [M]otion,” that “[a]t the time of his death, [Mr. Wildenstein] was subject to the U.S.-France Treaty” (Id. at 3 & 3 n.2). Article 7(1) of the Treaty states: “Tangible movable property . . . may be taxed by a Contracting State if such property is situated in that State. . . . For this purpose, tangible property which is in transit shall be considered situated at the place of destination.” Respondent does not explain how the Treaty impacts its argument. To the extent that Respondent might argue that its novel interpretation of “situated” as used in Sections 2103 and 2104(b) of the Code should be imported into the Treaty, Respondent provides no supporting authority. Nor could it. “When a treaty is interpreted, its words are construed according to their ordinary meaning.” Zhengnan Shi v. Comm'r, T.C. Mem. 2014-173, at *3 (2014) (citing Amaral v. Comm'r, 90 T.C. 802, 812 (1988) and Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S. 176, 180 (1982)); see also United States v. Stuart, 489 U.S. 353, 365-66 (1989) (quotations omitted) (“The clear import of treaty language controls unless application of the words of the treaty according to their obvious meaning effects a result inconsistent with the intent or expectations of its signatories.”). Here, the plain meaning of the term “situated” is the place where the artworks were physically “located,”²⁰ and Respondent has provided no evidence that the Treaty signatories had a contrary intent.²¹

And even if the U.S. caselaw gloss on which Respondent relies for its interpretation of the term “situated” as it appears in Sections 2103 and 2104(b) were valid — and it is not (see infra pp. 22-29) — there would then be a conflict between the U.S.-France Treaty and those statutory provisions. The U.S.-France Treaty, however, supersedes Code Sections 2103 and 2104(b) to the extent there is a conflict. Under well-settled principles of statutory construction, “conflicts between a revenue law and a treaty must be resolved by applying the principle that the provision adopted later in time controls.” Jamieson v. Comm'r, T.C. Mem. 2008-118, at *3 (2008); see also Kappus v. Comm'r, 337 F.3d 1053, 1057 (D.C. Cir. 2003) (“When a statute conflicts with a treaty, the later of the two enactments prevails over the earlier.”). The Treaty was ratified by the U.S. Senate on July 9, 1979, and its Article 7(1) superseded Sections 2103 and 2104(b), which had been in existence in substantially identical form since 1916. See Revenue Act of 1916, Pub. L. No. 64-271, 39 Stat. 778. Thus, there is no reason to depart from the Treaty's plain sense meaning of “situated.”

2. Even If the Code Provisions Were Relevant, Respondent's Expansive Interpretation of “Situated” Is Unfounded.

The term “situated” in Sections 2103 and 2104(b) of the Code has been repeatedly interpreted to mean “located.” Indeed, with respect to tangible personal property, such as the artworks here, Respondent's own regulations make clear that the property “is considered to be situated in the United States if it is . . . located in the United States.” Treas. Reg. § 20.2104-1(a)(2) (emphasis added); see also Burnet v. Brooks, 288 U.S. 378, 392-93 (1933) (detailing history of regulations interpreting “situated in the United States” — as used in predecessor statute to Section 2103 — to mean the “actual situs” of the property).

Rather than follow the plain language meaning of “situated,” Respondent argues that the term “does not necessarily mean 'physically located.'” (Resp.'s Mot. at 11.) Respondent does not provide an alternative definition of “situated,” but instead quotes from a 1949 decision that “the situs of a chattel . . . involves some degree of permanence, an established abiding place or home base for the chattel, analogous to the notion of domicil [sic] as applied to the person.” Delaney, 177 F.2d at 448.

Respondent relies almost exclusively on Delaney, which has been cited by other courts only twice in the 70 years since it was decided, and never on the issue before this Court. The case provides no basis on which to vastly expand the estate taxing authority of the United States to the property of non-resident non-citizens located around the world.

In Delaney, a foreign national died while staying in Florida “for a short while” en route from Canada, her country of citizenship, to the Bahamas, her country of permanent residence. Id. at 445-46. Interpreting 26 U.S.C. § 861(a) of the 1939 code (“Section 861(a)”), now codified as Section 2103, the First Circuit ruled that jewelry and other similar personal effects that the decedent carried with her while travelling were not taxable by the United States because it would constitute an “extreme and unusual exercise of [the taxing] power” to tax personal effects that had only a “mere temporary presence” in the United States, “particularly when the nonresident owner [wa]s simply carrying the article with [her] on a journey through” the United States. 177 F.2d at 448-49. Accordingly, the court concluded that “[particularly [ ] as respects articles of jewelry and apparel, appertaining to the person of the owner, usually kept under his personal supervision and often carried about him on his journeys . . . the situs of such property has been regarded as being at the domicil [sic] of the owner,” and does not shift as a result of the “mere temporary presence of the chattel” in the United States. Id. at 448.

Delaney placed a limitation on federal taxing authority under Section 861(a), excluding from federal estate taxation the personal effects of a non-resident non-citizen decedent who dies while, by happenstance, passing through the United States en route from one foreign country to another. Nothing in Delaney suggests it expands federal taxing authority to non-resident non-citizens' tangible property of any kind that has been located outside the United States for years. In the 70 years since it was issued, no decision has ever cited Delaney for this proposition, which, by itself, is strong evidence that Delaney did not herald the expansion in taxing authority that Respondent urges. Tellingly, to Petitioner's knowledge, Respondent also has never taken the position that tangible personal property physically located in the United States for years may properly avoid federal taxing authority based on the subjective domicile-of-property test that it now espouses.

Further, the only two decisions to cite Delaney both cited it in upholding limitations on federal taxing authority. Thus, when ruling that a decedent's property was not taxable by the United States, this Court cited Delaney in a footnote observing that the “record [was] ambiguous as to [an automobile's] property situs” because it was “registered and insured in Canada, [but] was physically located in Florida at the time of decedent's death.” Estate of Paquette v. Comm'r, T.C. Mem. 1983-571 n.8 (1983). And, more than 60 years ago, this Court held that a German citizen and domiciliary's bearer bonds issued by a New Jersey corporation “were not 'property situated in the United States'” because the bonds “were not physically present in the United States at the time of decedent's death.” Pulvermann v. Comm'r 30 T.C. 231, 235-37 (1958).

Respondent also argues that its interpretation is supported by the definition of “situated in the United States” in Treasury Regulation § 20.2104-1(a). (Resp.'s Mot. at 14.) Respondent's theory appears to be that, because the Regulation uses the term “located in the United States” when referring to “real property” and “tangible personal property,” but “physically located in the United States” when referring to “written evidence of intangible personal property,” the term “located” must have a broader meaning than “physically located.” Id. (emphasis added). Respondent cites to nothing in the drafting history for this theory and its interpretation makes no sense. Plainly, real property can only be “located” where it is “physically located,” and the modifier “physically” is similarly superfluous for “tangible physical property.” The provision for “intangible personal property,” however, addresses the more uncertain question of where such property is situated and uses the modifier “physically located” to avoid ambiguity. See Af-Cap Inc. v. Rep. of Congo, 383 F.3d 361, 371 (5th Cir. 2004) (internal quotation marks omitted) (noting “the inherent difficulty of assigning a location to property that by its very definition lacks a physical existence”).

In fact, the Treasury Regulations provide a clear definition of “situated,” confirming that Respondent's interpretation is wrong. Under the Regulation, “tangible personal property,” such as the artworks here, is “considered to be situated in the United States” if it is “located in the United States,” Treas. Reg. § 20.2104-1(a)(2), and is “situated outside the United States” if it is “located outside the United States,” id. § 20.2105-1(a)(2). That is, the Regulations reject the vague, domicile-of-property interpretation of “situated” advanced by Respondent and adopt the plain meaning of the term.

Further, adopting Respondent's theory would render superfluous the exception in Section 2105(c), which provides that works of art are considered to be “situated” outside the United States if they were:

(1) imported into the United States solely for exhibition purposes, (2) loaned for such purposes to a public gallery or museum . . . and (3) at the time of the death of the owner, on exhibition, or en route to or from exhibition, in such public gallery or museum.

See also Treas. Reg. § 20.2105-1(b). If situs were determined based on the personal property's constructive domicile, rather than its physical location, artworks that met the requirements of the exception in Section 2105(c) would not be considered “situated” in the United States in the first place because they were not “domiciled” in the United States. There would be no need for this statutory provision excluding such property from federal estate tax. But Congress understood this exception is necessary because “situated,” as used in Sections 2103-2104(b), means “physically located.” See Nat'l Ass'n of Mfrs. v. Dep't of Def, 138 S. Ct. 617, 632 (2018) (“Absent clear evidence that Congress intended this surplusage, the Court rejects an interpretation of the statute that would render an entire subparagraph meaningless.”); Bolten v. Comm'r, 95 T.C. 397, 413 (1990) (“Generally, a statutory provision must be construed in a manner which does not render other provisions of the statute superfluous.”).

3. Adopting Respondent 's Interpretation Would Result in Inconsistent Tax Rulings and Disrupt Established Expectations Under the U.S.-France Treaty.

Not only is Respondent's theory legally unfounded, but adopting it would broadly expand U.S. taxing authority with serious risks for conflict with foreign taxing authorities. If the United States included in a non-U.S. decedent's taxable estate personal property located outside the United States at the time of death, the order established by international estate tax treaties would be upended. This would also disrupt the settled expectations of individuals with assets located in multiple jurisdictions. Expanding the reach of federal estate taxing authority in contradiction of the plain language of the U.S.-France Treaty, could invite reciprocal steps by foreign taxing authorities. This could ultimately lead to a result whereby property could be subject to estate tax in multiple jurisdictions. Especially given the fact-intensive and subjective nature of a domicile-of-property inquiry, it is likely that courts in different jurisdictions would reach conflicting results about the domicile of the same items of property. This risk of inconsistent rulings and overlapping claims of taxing authority is precisely what the bright-line standards in the U.S.-France Treaty are designed to avoid.²² See, e.g., S. Exec. Doc. No. 109-7, at 1 (2006) (“The principal purpose of the [U.S.-France Treaty] is to reduce or eliminate double taxation in connection with estate, inheritance and gift taxes.”). By way of example, if the Artworks subject to Respondent's Motion were stored in a freeport in France rather than Switzerland, under Respondent's theory, the property of a French citizen and domiciliary, stored in his home country, would be taxable by the United States. Surely, France would also seek to tax the property.

Finally, adopting Respondent's theory that tangible property is subject to estate tax based on its domicile, rather than adhering to the bright-line rule of physical location, will invite increased challenges by taxpayers as to whether their tangible personal property located in the U.S. is subject to federal estate tax. For example, applying Respondent's theory, a non-U.S. citizen with homes in the U.S. and other countries could argue that the decedent's long-term plan was always to take his tangible property located in the U.S. back to his domicile, and that the property was therefore not domiciled in the U.S. and thus is not subject to federal estate tax. Given the item-specific, fact-bound nature of such a domicile inquiry, Respondent's approach would inevitably proliferate complexity, uncertainty and disputes (and surely would not be subject to disposition on summary judgment).

4. Even Assuming Respondent's Incorrect Legal Theory, Adjudicating the Artworks' Domicile Raises Numerous Material Factual Disputes.

Putting aside all the reasons why Respondent's interpretation of “situated” is wrong, even if it were followed by the Court, Respondent's Motion should be denied because determining the domicile of the artworks raises multiple disputed issues of fact that preclude summary judgment.

Respondent urges that the Court determine whether the Disputed Artworks should be included in the taxable estate by applying a standard “analogous to the notion of domicil [sic] as applied to the person.” Delaney, 177 F.2d at 448. Domicile, however, “requires an intent to make a fixed and permanent home.” Evans v. Comm'r, T.C. Mem. 2015-12, at *6 n.2 (quoting Jones v. Comm'r, 927 F.2d 849, 853 (5th Cir. 1991)) (emphasis added); see also Treas. Reg. § 20.0-1 (b)(1) (“Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile.” (emphasis added)). In Delaney, on which Respondent relies, the court found domicile based on the decedent's “intention . . . to carry these personal effects along with her to her home” outside the United States. 177 F.2d at 446 (emphasis added).

This Court has recognized that “[o]rdinarily, summary judgment should not be granted in a case in which intent is an issue.” Espinoza v. Comm'r, 78 T.C. 412, 417 (1982). This is because “evidence of intent must generally be inferred from the surrounding facts and circumstances,” Marohnic v. Walker, 800 F.2d 613, 617 (6th Cir. 1986), and “such inferences of fact are to be drawn only at trial,” Espinoza, 78 T.C. at 417. Accordingly, courts consistently hold that “summary judgment is inappropriate when issues of motive, intent, and other subjective feelings and reactions are material.” Richman v. Comm'r, T.C. Mem. 1993-32, at *4 (1993); see also Vallone v. Comm'r, 88 T.C. 794, 815 (1987) (“Where the inferences which the party seeks to have drawn deal with questions of motive and intent, summary judgment is particularly inappropriate.”). Under this settled standard, summary judgment should be denied here. Respondent has submitted no evidence of Mr. Wildenstein's “intent” that the Disputed Artworks should have a “fixed and permanent home” in the United States. Evans, T.C. Mem. 2015-12, at *6 n.2 (quoting Jones, 927 F.2d at 853). For example, Respondent has submitted no documents or testimony expressing this intent. Nor has Respondent submitted any contracts or agreements showing a pre-formed commitment to ship the artworks to the United States. Instead, Respondent merely tries to create an inference of intent based on the fact that the subset of artworks selected with the benefit of hindsight by Respondent for its Motion were at one point in the United States, were sent to Switzerland in the years before Mr. Wildenstein died, and then were sent to the United States again after Mr. Wildenstein's death, on average, four-and-a-half years later.²³

The inference that Respondent seeks to draw is unwarranted and inconsistent with the evidence. While many of the Disputed Artworks were shipped to the United States over the course of the decade or more after Mr. Wildenstein died, many other similarly situated artworks that had been shipped from the United States to Switzerland were not. Instead, they were sold, transported to other foreign locations for various purposes, or remained in the Swiss freeports. (See supra pp. 13-14.) To credit Respondent's inference at summary judgment, Respondent would need to adduce uncontroverted evidence that Mr. Wildenstein always intended that these specific artworks be housed permanently in the United States. Not only has Respondent failed to provide any such evidence, but Petitioner's evidence clearly shows this to be incorrect.

Claudine Godts, Vice President of the Gallery, has averred that the Gallery generally made recommendations about where, if anywhere, the trustee of the Delta Trust should send artworks only after the artworks were already housed in the freeports. (Godts Decl. ¶¶ 45-46.) In advising the trustee, the Gallery used its judgment to determine, among other things, if it was best to send the artwork to a museum for temporary exhibition, to an art fair or auction anywhere in the world for possible sale, to the Gallery in New York, to another gallery elsewhere in the world or to a service provider, such as a restorer, who may be located anywhere. (Id. 46.) There is no record evidence that decisions of this type about where to send the artworks, which were made by others years after Mr. Wildenstein's death, were made with reference to wishes purportedly expressed by Mr. Wildenstein before he died. (Id. ¶ 45-47.)

In short, Respondent's attempt to establish domicile by inference en masse for its selected group of artworks is contradicted by the evidence and raises disputed issues of fact precluding summary judgment. See Katz Goodyear Tire & Rubber Co., 737 F.2d 238, 244-45 (2d Cir. 1984) (district court erred by “drawing fact inferences [at] summary judgment” where “intent [was] at issue” in the face of disputed evidence concerning domicile); Hill-Jackson v. FAF, Inc., 808 F. Supp. 2d 1083, 1087-88 (S.D. Ind. 2011) (“[T]rying to ascertain . . . [plaintiff's] intent to remain in Indiana” from “his entire course of conduct” was “inappropriate for summary judgment[,] . . . particularly . . . [when] the intention that must be ascertained [was] that of a deceased person.” (emphasis added)).

B. Respondent's Theory That the Artworks Were “In Transit” to the United States Is Legally Incorrect and Inconsistent With the Evidence.

1. Respondent's Contention That the Artworks Were “In Transit” Within the Meaning of the Treaty Misapprehends Swiss Freeports.

The U.S.-France Treaty, Article 7(1), provides that tangible property “in transit” at the time of death “shall be considered situated at the place of destination.” This type of “in transit” provision is common among estate tax treaties and is designed to avoid complicated factual questions about, for example, the location of property given to a common carrier for shipping shortly before a decedent died.²⁴ Respondent seizes upon this provision to argue that the artworks subject to Respondent's Motion were all “in transit” from the United States to Switzerland and then from Switzerland to the United States, in a supposed “transit” that lasted, on average, four-and-a-half years.²⁵

Respondent points to no prior case in which the term “in transit” was construed to cover such extended periods. Instead, Respondent points only to the fact that the artworks subject to Respondent's Motion were supposedly sent from the United States to Swiss “freeports,” and then claims on that basis that any property located in a Swiss freeport remained “in transit” for the entire time the property was in the freeport. Respondent's sole authority for this proposition — upon which its entire theory rests — is a printout from the website of the Swiss Federal Customs Authority (“SFCA”). (See Resp.'s Mot. at 17-18 (citing Ex. R-7).) That website printout describes the freeports as “[d]uty-free warehouses” that “are used to temporarily store goods on which no tax or duty has been paid” and notes that one of the “main benefits” of freeports is that “transit goods can be stored in the customs territory free of import tax.” (Id. at 17 (quoting Ex. R-7).) According to Respondent, the website printout means that freeports are not “destinations” and that “by definition,” goods in a Swiss freeport were “in transit.”²⁶ (Id. at 17-18.) Respondent apparently proposes that this must be so as a matter of law, stating in a footnote that it gives notice that it is relying on the website as governing foreign law. (See id. at 7 n.9.) Respondent cites no support for the proposition that a website maintained by a government entity is a statement of law or even an authoritative statement of position, and there is no basis for such an assertion.

As detailed in the accompanying expert declaration of Marc-Andre Renold, the UNESCO Chair of International Cultural Heritage Law and Director of the Art-Law Center at the University of Geneva, Respondent's characterization of the legal status of freeports under Swiss law is wrong. Swiss law imposes no restrictions on the length of time property can be stored in a Swiss freeport. (Renold Decl. ¶¶ 33-34, 53(b)(1), 75.) The statement on the SFCA's website that “[d]uty-free warehouses are used to temporarily store goods” (Ex. R-7) cannot be understood to suggest that temporary storage is the exclusive — or even the primary — purpose for which freeports are used. (Renold Decl. ¶¶ 53(b)-54.) As a matter of practice, high-value goods, such as fine art, are commonly stored in Swiss freeports for extended periods of time by galleries, dealers, auction houses and collectors. (Id. ¶¶ 20-21.) As just one example, the Art History Museum of Geneva has been storing a major collection of antiquities in a Swiss freeport for nearly twelve years. (Id. ¶ 21 n. l3.) Far from being mere temporary way stations for goods in transit, freeports are commonly utilized by owners of fine art for long-term storage of their artworks for reasons that include the high level of security provided, the amenities offered (including on-site restoration and framing services, rooms to display works for sale, and climate and humidity controls conducive to preservation), and the ease of access to potential buyers given their location near major international hubs. (Id. ¶¶ 18-19.)

Dr. Renold's declaration shows that Respondent misconstrues the SFCA website printout on which it exclusively relies. (Renold Decl. ¶¶ 50-52.) For example, the SFCA website speaks of “transit goods” and “the transit procedure” (Ex. R-7), not because such goods are “in transit” in any sense relevant to the Treaty, but rather because the website is referencing a technical customs procedure, the “transit procedure” (“Transitverfahren,” in German), that regulates the passage of items from the border to the freeport in order to ensure that no items are improperly diverted to other destinations in Switzerland without first paying import duties. (Renold Decl. ¶ 53(a)(1)-(3).) But once the items arrive at the freeport, they are no longer subject to the “transit procedure” and cannot properly be understood as “in transit.” (Id. ¶ 53(a)(4).)

Dr. Renold also rejects Respondent's theory that Swiss freeports “are not 'destinations'” (Resp.'s Mot. at 17). (See Renold Decl. ¶¶ 56-72.) Dr. Renold explains that Swiss freeports are fully a part of Switzerland and subject to the laws and regulations of Switzerland, including Swiss taxation laws. (Renold Decl. ¶¶ 56, 58.) Indeed, he cites a longstanding ruling from the Swiss Supreme Court that freeports are “subject to the sovereignty of Switzerland and to which Swiss law (federal or cantonal) applies in all respects (criminal law, building inspection regulations, etc.).” (Id. ¶ 60.) That items stored in a Swiss freeport may be eligible for certain exemptions from or postponements of the imposition of Swiss customs duties does not show that those items are in transit. Respondent provides no reason that goods stored in a Swiss freeport should be treated differently for purposes of U.S. federal taxation than goods stored in any other warehouse in Switzerland, or elsewhere around the world.²⁷

Finally, U.S. law is also instructive in understanding why Respondent's characterization of freeports is erroneous. A Swiss freeport is comparable in some respects to a foreign trade zone (“FTZ”) under U.S. law. According to the U.S. Bureau of Customs and Border Protection (“CBP”), an FTZ “is a secure area under the supervision of [CBP]. FTZs are considered to be outside of the Customs territory of the United States for the purposes of payment of duty.” (Ex. P-4 (CBP, Foreign Trade Zone Manual (“FTZ Manual”)) at 16.) However, for purposes other than the payment of customs duties, property in an FTZ is treated as property in the United States. For example, Respondent has ruled that items manufactured in an FTZ are manufactured in the United States within the meaning of Section 993(c)(1)(A),²⁸ and that income derived by a foreign corporation from the sale of goods in a foreign trade zone is subject to U.S. federal income tax.²⁹

FTZ specifically designed for the storage of cultural property and fine art exist in New York City and Newark, Delaware.³⁰ Adopting Respondent's errant legal theory could have the result that property stored in either of those facilities would not be taxable by the United States under the U.S.-France Treaty if it were sent to the FTZ directly from France prior to a decedent's death and returned to France directly from the FTZ at any point after the decedent's death. We are not aware that Respondent has ever taken that position or accepted that a taxpayer is excused from U.S. taxes on this basis.

2. Respondent's Interpretation of the U.S.-France Treaty's “In Transit” Provision Is Erroneous.

Respondent argues that artworks that are stationary for years at a Swiss freeport are nonetheless “in transit” for the entire period under the U.S.-France Treaty. Respondent provides no precedent for its interpretation, which would radically depart from any prior construction of “in transit.”

As an initial matter, “[w]hen a treaty is interpreted, its words are construed according to their ordinary meaning.” Zhengnan Shi, T.C. Mem. 2014-173, at *3 (citing Amaral, 90 T.C. at 812 and Sumitomo, 457 U.S. at 180). Article 7(1) of the Treaty states: “Tangible movable property . . . may be taxed by a Contracting State if such property is situated in that State. . . . For this purpose, tangible property which is in transit shall be considered situated at the place of destination” (emphasis added).³¹ The plain meaning of the term “in transit” is “in the process of being transported from one place to another.”³² As one court has put it, the “natural meaning of the word[] 'transit' . . . is that [an item] shall be in the course of movement by some kind of carriage from one place to another.” City Fuel Corp. v. Nat'l Fire Ins. Co. of Hartford, 846 N.E.2d 775, 778 (Mass. 2006) (quoting Koshland v. Columbia Ins. Co., 130 N.E. 41, 43 (Mass. 1921)). That is, transit requires movement.

Interpreting the term “in transit” in the analogous context of insurance contracts, multiple courts have observed that “[p]roperty is considered in transit when it is moving from one location to another.” Bonded Carriers, Inc. v. Hartford Fire Ins. Co., 2009 WL 10676024, at *4 (N.D. W. Va. Mar. 20, 2009) (quoting Lariviere v. N.H. Fire Ins. Co., 193 A.2d 13, 15 (N.H. 1963)); see also Pac. Tall Ships Co. v. Kuehne & Nagel, Inc., 76 F. Supp. 2d 886, 892 (N.D. Ill. 1999) (“transit involves movement”). Of course, there may be brief interruptions incidental to the process of transportation that do not preclude an item from being considered “in transit.” For example, trucks may travel “only during business hours, or might stop for periods of time during those hours to make other deliveries or to provide relief to the drivers.” City Fuel, 846 N.E.2d at 778. But such exceptions are narrow, and placing goods in storage — even for a period as short as two days — when such storage is not directly related to the conveyance of the goods from its point of origin to its destination, constitutes “[a]n abandonment of the original transporting process . . . even though such interruption is temporary.” Dealers Dairy Prods. Co. v. Royal Ins. Co., 164 N.E.2d 745, 747 (Ohio 1960); see also Hartford Cas. Ins. Co. v. Banker's Note, Inc., 817 F. Supp. 1567, 1573-74 (N.D. Ga. 1993) (stoppage of movement for two days rendered “course of transit . . . broken”). Once “an interruption or stoppage” of movement becomes “protracted,” transit ends. Ore & Chem. Corp. v. Eagle Star Ins. Co., 489 F.2d 455, 458 (2d Cir. 1973).

Further, courts agree that transit “cease[s]” when “goods . . . ha[ve] arrived at their destination,” even if that destination is a place where the goods are “merely being stored.” Bonded Carriers, 2009 WL 10676024, at *5 (quoting Boonton Handbag Co. v. Homes Ins. Co., 310 A.2d 510, 511 (N.J. Super. Ct. App. Div. 1973)).³³ Here, Respondent asks the Court to consider artworks that remained in long-term storage for, on average, four-and-a-half years (see supra note 23) — and often longer (see infra p. 47 & Ex. P-6, rows 1-257) — to be “in transit.” This distorts the meaning of the term and would be inconsistent with any other court's interpretation of the term.

In fact, adopting Respondent's interpretation of “in transit” would lead to absurd and impractical results. Under Respondent's theory, artworks are includible in the taxable estate of a non-U.S. decedent only if the artworks “ended up” in the United States. (Resp.'s Mot. at 18.) If the Estate had filed a return at the end of the year in which Mr. Wildenstein died, only eight artworks would need to have been included on the return, but if the Estate had filed at the due date in July 2002, the Estate would need to have included 114 artworks. Not until November 2012 would all the artworks need to be included.³⁴ (See Ex. G-3 at 2040.) Highlighting this impracticality, if today the Gallery were to send a work of art still stored in a Swiss freeport to the United States — nearly 18 years after Mr. Wildenstein died — to comply with Respondent's theory, Petitioner would need to further amend its return to include that artwork (but would not need to do so if the Gallery chose to send the artwork to Canada). This Court consistently rejects theories that, like Respondent's, “would lead to absurd and unintended results.” Am. Fin. Corp. v. Comm'r 72 T.C. 506, 513-14 (1979); see also Whistleblower 21276-13W v. Comm'r, 144 T.C. 290, 304 (2015) (rejecting an IRS theory that “leads to an absurd result”).

Finally, unable to cite any cases on point, Respondent points to Article V of the General Agreement on Tariffs and Trade (“GATT”) as supposedly supporting Respondent's interpretation of “in transit” in the U.S.-France Treaty. (See Resp.'s Mot. at 18-19.) GATT, a treaty designed to promote international trade, says nothing about how to interpret an “in transit” provision in an estate tax treaty. Respondent argues that GATT's bespoke definition of the term “traffic in transit” is somehow relevant because it deems goods “to be in transit across the territory” of a signatory country, even when the process of transit through that country includes, for example, “breaking bulk,” a “change in the mode of transport,” or “warehousing.” GATT Art. V, ¶ 1. But this GATT definition simply acknowledges the unremarkable fact that the international transportation of commercial goods may involve a complicated, multi-stage process. Given the purpose of GATT to facilitate the international movement of goods, GATT signatories determined that an intermediate country should not be able to impose customs or duties on goods that, for example, might need to be temporarily warehoused near a dock in the intermediate country because the truck carrying those goods through that country arrived at the dock several days before the ship that will carry goods on to their final destination is ready to be loaded. Respondent points to no authority — nor is it reasonable to assume — that GATT's definition of “traffic in transit” would apply to fine artworks maintained in specialized storage facilities for, on average, four-and-a-half years. (See Resp.'s Mot. at 18-19.)

3. The Evidence Demonstrates That the Artworks Subject to Respondent's Motion Were Not “In Transit.”

Summary judgment should be denied for the additional reason that the unrebutted evidence demonstrates that none of the artworks subject to Respondent's Motion — or any other of the Overseas Artworks — were “in transit” at the time of Mr. Wildenstein's death.³⁵ As a threshold matter, it is undisputed that none of the artworks subject to Respondent's Motion were in the hands of a common carrier or otherwise being transported at the time that Mr. Wildenstein died. (See Ex. P-5.) This fact alone should preclude Respondent's summary judgment motion. See, e.g., Bonded Carriers, 2009 WL 10676024, at *4 (quotations omitted) (“The 'transit' stage of the transportation of goods has ceased when the goods are placed at or delivered to the point designated by the consignee.”).

Respondent's theory that the artworks were “in transit” simply because, over a period of years, many were sent from the United States to Swiss freeports and later sent from Switzerland to the United States does not demonstrate, or even support an inference, that the artworks were “in transit” to the United States at the time of Mr. Wildenstein's death. In fact, the record demonstrates the opposite:

First, as discussed more fully above, Dr. Renold has demonstrated that, under Swiss law and practice, freeports are locations where valuable items may be stored indefinitely and, thus, the mere fact that an item is located in a freeport does not demonstrate that it is “in transit.”

Second, Respondent has submitted no evidence that the artworks were “in transit” while housed at the freeports. For example, there is no evidence of any instruction given at the time of shipment that the artworks should return to New York at some later date (see Godts Decl. 47), nor is there evidence of any contract binding the Gallery — or anyone else — to transport the artworks back to New York in the future. Respondent states that “Petitioner has never offered any explanation for this costly and risky roundtrip.” (Resp.'s Mot. at 15.) This argument, however, assumes without evidence its unproven conclusion: that someone set out to organize a “roundtrip” — costly, risky or otherwise — for the artworks. This is the very matter on which Respondent bears, but has not met, the initial burden at summary judgment. In addition, Petitioner has submitted with this memorandum affirmative contrary evidence demonstrating that the artworks were not sent to the Swiss freeports as a mere incident to a transit activity. As Ms. Godts has averred, consistent with how owners and custodians of fine art commonly use Swiss freeports, the Gallery used the Swiss freeports for the long-term storage of artworks in its care. (See supra pp. 11-12 & Godts Decl. ¶¶ 43-46.) The Gallery has, for decades, kept artworks where it makes prudent business sense to do so, given the cost and practicality of storing and securing high-value artworks. (Godts Decl. ¶¶ 40-41.) At least for the time period relevant to this action, Gallery employees determined that Swiss freeports were among the best long-term storage options available. (Id. ¶ 43.) Among other things, the ease of access to buyers around the world, the availability of restoration services, the security measures and the climate- and humidity-control systems offered by the Swiss freeports made them attractive locations to the Gallery for long-term storage from which artwork could then be deployed throughout the world as needed. (Id. ¶ 44.)

Third, Ms. Godts has averred that, contrary to Respondent's notion that so-called “roundtrip[s]” (see Resp.'s Mot. at 2, 10, 15) were pre-ordained from the time of shipment, the Gallery frequently determined (in agreement with and upon the authorization of the trustee of the Delta Trust) where, if anywhere, to send artworks after they were housed in the freeports. In some cases — often years after sending the artworks to the freeport — the Gallery recommended displaying an artwork on-site in Manhattan or at some other U.S. location, such as a museum. (Godts Decl. ¶ 46.) In other cases, the Gallery advised sending an artwork to another foreign country from the Swiss freeport for display at a museum, for possible sale at an auction or fair, for restoration, for storage at another site or for any number of other reasons. (Id.) Decisions about where to send the artworks, and their disposition by sale or otherwise, were made throughout the time that the artworks were at the freeports in the years after Mr. Wildenstein's death (id. ¶¶ 45-46) and thus cannot have reflected his intentions with respect to any particular artwork or group of artworks. Indeed, Respondent has not identified any instructions from Mr. Wildenstein as to when or for what purpose artwork should be moved from a Swiss freeport after he died. (See id. ¶ 47.)

Fourth, Respondent's factual theory for why the artworks subject to Respondent's Motion were “in transit” is based entirely on the fact — known only with hindsight — that this subset of all the artwork shipped from the United States to Switzerland were later shipped from Switzerland to the United States. But the artworks subject to Respondent's Motion are not otherwise distinguishable from other artworks that were not shipped back to the United States. It is therefore impossible (indeed, it would be a fallacy of composition) to infer intent upon shipment by referring only to the subset of artwork shipped from Switzerland to the United States while ignoring that 170 other artworks (20% of all the Overseas Artworks) shipped to a Swiss freeport in the same or similar circumstances did not return to the United States at all or did so only after spending time in an additional foreign location for purposes other than a temporary exhibition. (See supra pp. 13-14 & Ex. P-7, Secs. I-II.)³⁶ And yet infer from this selection bias is exactly what Respondent has done: the 739 artworks chosen by Respondent for inclusion in its Motion were selected by Respondent simply because this subset of all Disputed Artworks were purportedly the ones that “ended up” in New York after what, with hindsight, Respondent characterizes as “their temporary stay at the Swiss Freeport.” (Resp.'s Mot. at 18.)³⁷

The inference Respondent would draw is also undercut by the fact that, of the 710 Artworks Stored in a Swiss Freeport that were eventually shipped from Switzerland to the United States, 455 (64%) were not sent to the United States for at least three years following shipment to Switzerland (see Ex. P-6, rows 1-455), and 105 artworks were stored in a Swiss freeport for nine years or longer. (See id., rows 1-105.)³⁸ The sheer passage of time — over twelve years in some cases (see id., rows 1-14) — undercuts Respondent's theory that at the time the artworks were shipped from the United States, Mr. Wildenstein had formed the intent that they should return as part of a single voyage in the nature of a “roundtrip” (Resp.'s Mot. at 2, 10, 15).

In short, the only reason Respondent's Motion can state that “the works all ended up” in New York (id. at 18 (emphasis added)) is because Respondent ignores the hundreds of artworks that did not return to the United States at all or that passed through other foreign countries prior to being shipped to the United States. Viewing the broader context of the artworks and their varying movements over a multiyear period demonstrates that Respondent's inference is false and derived solely from Respondent's hindsight-based selection criteria. See Kaufman v. Comm'r, 55 T.C. 1046, 1054-55 (1971) (rejecting argument relying on the “hindsight” of later events to support “inferences . . . not warranted by the record” and “ascribe[ ] motives to the petitioners without . . . an iota of evidence”).

Fifth, Respondent's evidentiary failure is underscored by its inclusion of an unspecified number of artworks purportedly “sent to be exhibited temporarily elsewhere while at the Swiss Freeport” (Resp.'s Mot. at 5 n.4).³⁹ Respondent does not identify these works, nor point to any evidence that these artworks were sent to non-Swiss destinations solely for temporary exhibitions. In fact, the evidence shows that many of the artworks Respondent apparently seeks to include in this category were sent to non-Swiss destinations for other purposes. (See Godts Decl. ¶ 21; Ex. P-8, rows 42-69.) For example, at least 19 artworks listed in Respondent's Exhibit 4 were sent from a Swiss freeport to an auction, art fair or gallery in a foreign country for potential sale — showing that the intention was for such works to be sold overseas rather than to the United States. (See Ex. P-8, rows 42-60.)

Finally, just as with Respondent's arguments about the artworks' purported domicile (see supra pp. 29-33), Respondent's arguments about whether the artworks were “in transit” fails because it turns on the issue of Mr. Wildenstein's intent. For this reason, the argument is “particularly inappropriate for resolution by summary judgment,” since “issues of knowledge and intent . . . must often be resolved on the basis of inferences drawn from the conduct of the parties.” Riehl v. Travelers Ins. Co., 772 F.2d 19, 24 (3d Cir. 1985). And this is especially the case where, as here, there is substantial evidence negating any argument for inferring intent. (See supra pp. 44-46.)

C. There Are Additional Disputed Issues of Material Fact as to Which Artworks Are Subject to Respondent's Motion.

Respondent's Motion should also be denied because there are other disputed issues of material fact as to which artworks are subject to the Motion. Respondent claims that there are “739 works of art at issue” in its Motion. (Resp.'s Mot. at 4.) These 739 works were supposedly “transferred from New York City to the Swiss Freeport” and “then transferred back,” although Respondent concedes “that some works went to other locations temporarily both inside and outside the United States.” (Id. at 4, 5 n.4.) As detailed in Petitioner's Exhibit P-8, Respondent's list of the 739 artworks supposedly subject to Respondent's Motion (Ex. R-4) raises numerous disputed issues. Setting aside duplicate entries, inaccurate dates, typographical errors that make definitive identification of certain of the artworks difficult, and the fact that the list contains only 738 entries: (i) 36 of these artworks were not in a Swiss freeport on the date of Mr. Wildenstein's death; (ii) 5 of these artworks were never shipped to the United States after Mr. Wildenstein's death; (iii) 28 of these artworks were transported from a Swiss freeport to a foreign destination for a purpose other than “to be exhibited temporarily” (Resp.'s Mot. at 5 n.4) before being shipped to the United States; and (iv) 2 of the artworks are among a subset of 49 Disputed Artworks in the hands of a common carrier en route to Switzerland from the United States at the time of Mr. Wildenstein's death that Respondent expressly states elsewhere are not subject to Respondent's Motion (see id. at 16-17 & 17 n. 14).⁴⁰

II. PETITIONER'S CROSS-MOTION FOR SUMMARY JUDGMENT SHOULD BE GRANTED BECAUSE NONE OF THE OVERSEAS ARTWORKS IS TAXABLE BY THE UNITED STATES.

Petitioner should be granted partial summary judgment that the 892 Overseas Artworks physically located outside of the United States on the date of Mr. Wildenstein's death are not subject to the U.S. estate tax. Under Article 7(1) of the Treaty, which applies to French domiciliaries like Mr. Wildenstein, tangible movable property is not subject to U.S. estate tax unless “situated in” the United States. Unrebutted documentary evidence confirms that the 892 Overseas Artworks were physically located outside of the United States when Mr. Wildenstein died on October 23, 2001, and so are not subject to the U.S. estate tax.⁴¹

A. Because Mr. Wildenstein Was a French Domiciliary, the U.S.-France Treaty Applies to His Estate.

Article 1(1) of the U.S.-France Treaty provides that the Treaty “shall apply to estates of decedents whose domicile at death was in France.” Respondent has not disputed that Mr. Wildenstein was a domiciliary of France at the time of his death. Domicile has two components: “one physical — actual residence, however fleeting — and [one] mental — the intent to live in that place indefinitely, the intent to make that place home.” Smith v. Comm'r, T.C. Mem. 1975-314 (1975). Mr. Wildenstein physically resided in France for over 30 years prior to his death in France, and there can be no reasonable dispute that he intended to remain a resident of France indefinitely. (See supra pp. 6-8.)

For example, Mr. Wildenstein's primary residence, together with multiple secondary residences, was in France. (Wildenstein Decl. ¶¶ 12-13 & Ex. W-3 at 5, 55, 81.) He was a citizen of France (Wildenstein Decl. ¶ 5), held a French passport (id. ¶ 7 & Exs. W-1& W-2) and was registered to vote in France (Ex. W-3 at 80). Mr. Wildenstein spent the majority of his time in the years prior to his death in France (Wildenstein Decl. ¶ 6), and his business, social and charitable activities were all focused primarily in France (Wildenstein Decl. ¶ 14 & Ex. P-1 ¶¶ 8-10). Because the unrebutted evidence demonstrates that Mr. Wildenstein's domicile at the time of his death was in France, his estate “is entitled to the benefits provided in the [U.S.-France Treaty].” Estate of Arnaud v. Comm'r, 90 T.C. 649, 650 (1988) (U.S.-France Treaty applies to decedent who was “a citizen and resident of France” at the time of his death); see also Onderdonk v. Comm'r, T.C. Mem. 1984-241 (1984) (granting summary judgment based on “the uncontested evidence presented by [the moving party]”).⁴²

B. Under the U.S.-France Treaty, the Overseas Artworks Are Not Taxable by the United States.

Under the U.S.-France Treaty, the United States may not impose estate tax on the tangible movable property of French domiciliaries, who are not U.S. citizens, unless the property is “situated in” the United States at the time of death.⁴³ Specifically, Article 7(1) provides:

Tangible movable property other than currency may be taxed by a Contracting State if such property is situated in that State and is not taxable by the other Contracting State pursuant to Article 6 [governing certain business property].

See also 34A Am. Jur. 2d (Federal Taxation, France Estate and Gift Tax Treaty) ¶ 145,655 (“With three exceptions” — none of which apply here — “tangible movable (i.e., personal) property, other than currency, is subject to tax in the country in which the property is situated.”).

The unrebutted evidence of the Art Cards and shipping records shows that each of the 892 Overseas Artworks was located outside the United States at the time of Mr. Wildenstein's death. (See Exhibit P-5 and exhibits referenced therein.) For the reasons set forth in Section I, above, Respondent's argument that the Overseas Artworks should be construed as “situated in” the United States, despite there being no dispute that they were located overseas at the date of Mr. Wildenstein's death, is incorrect as a matter of law. Further, for the reasons set forth in Section II, above, Respondent's theory that the Overseas Artworks were “in transit” is likewise erroneous. Accordingly, Petitioner should be granted summary judgment that the 892 Overseas Artworks are not subject to the U.S. estate tax.

CONCLUSION

For the foregoing reasons, (i) Respondent's Motion should be denied; and (ii) Petitioner's Cross-Motion should be granted. Petitioner respectfully requests that the Court enter an order that the 892 Overseas Artworks listed in Exhibit P-5 are not includible in Mr. Wildenstein's U.S. gross estate.

Dated: July 16, 2019
New York, New York

Respectfully submitted,

Andrew S. Mason (Bar No. MA0123)
Basil P. Zirinis (Bar. No. ZB0030)
David MJ. Rein (Bar No. RD0564)
Isaac J. Wheeler (Bar No. WI0058)
Mark A. Popovsky (Bar No. PM0438)
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, New York 10004
Tel.: (212) 558-4000
Fax: (212) 558-3588
masona@sullcrom.com
zirinisb@sullcrom.com
reind@sullcrom.com
wheeleri@sullcrom.com
popovskym@sullcrom.com

Counsel for Petitioner
Royal Bank of Canada Trust Company (Bahamas) Ltd.