IRS Opposes Estate’s Claim That Art Works Not 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

Judge Cohen

RESPONDENT'S OBJECTION TO PETITIONER'S MOTION
FOR PARTIAL SUMMARY JUDGMENT AND RESPONSE TO PETITIONER'S
OPPOSITION TO RESPONDENT' S MOTION FOR PARTIAL SUMMARY JUDGMENT

Pursuant to the Court's Order dated August 28, 2019, respondent objects to Petitioner's Motion for Partial Summary Judgment filed August 27, 2019 (Petitioner's Cross-Motion), and responds specifically to the arguments set forth in Petitioner's Opposition to Motion for Partial Summary Judgment (Petitioner's Opposition), as follows:

PRELIMINARY STATEMENT

Respondent's and petitioner's cross-motions for summary judgment concern whether certain works of art owned by Daniel Wildenstein (Mr. Wildenstein) and settled by him into the Delta Trust (the Trust) are includible in his U.S. gross estate for federal estate tax purposes under the provisions of the Convention between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Estates, Inheritances, and Gifts (the U.S.-France Treaty). This question arises only if petitioner's claim that Mr. Wildenstein was a domiciliary of France at the time of his death, and that his estate is accordingly entitled to claim benefits under the U.S.-France Treaty, is true. Despite documentary evidence showing that Mr. Wildenstein did not consider himself a domiciliary of France during the period leading up to his death, respondent accepts, solely for purposes of Respondent's Motion for Partial Summary Judgment filed May 13, 2019 (Respondent's Motion), petitioner's claim that Mr. Wildenstein was domiciled in France for purposes of applying the U.S.-France Treaty.

Whether the works of art at issue are includible in Mr. Wildenstein's U.S. gross estate under the relevant provisions of the U.S.-France Treaty and thus subject to U.S. estate tax turns on whether the works, which made a roundtrip from New York City to a duty-free warehouse in Switzerland (the Swiss Freeport) then back to New York City without any intervening stops (except in some instances for temporary exhibitions) were "in transit" for purposes of Article 7(1) of the U.S.-France Treaty, and are therefore considered "situated" in the United States at the time of Mr. Wildenstein's death. Respondent contends that the term "in transit" in the treaty comprehends property temporarily stored in a duty-free warehouse or customs zone, commonly referred to as a "freeport", the purpose of which is to temporarily store property that is in transit before its importation into the country where the freeport is located or a third country.

Petitioner's Opposition claims that respondent's interpretation of the U.S.-France Treaty would "nullify the plain meaning of its terms." (Petitioner's Opposition, p. 1) On the contrary, respondent's motion for summary judgment seeks to make plain the meaning of one of its terms, "in transit". Respondent's interpretation is the only interpretation that makes sense for tangible movable property that goes from one country to another (or back to the same country, like the works of art at issue here) with the only stop during the journey being a duty-free warehouse, the purpose of which is storing "transit goods".

Given that petitioner's own "expert" has stated that Switzerland "plays a role as a transit nation" by virtue of its freeports¹, respondent's interpretation of the term "in transit" as encompassing works temporarily stored in a Swiss freeport is no stretch, but rather the obvious and natural interpretation of this term.

Petitioner misstates respondent's argument (Petitioner's Opposition, pp. 3-4 and pp. 20-33), apparently so that it can refute an argument that respondent has not made. Respondent did not argue in Respondent's Motion that the artworks were situated in the United States at the time of Mr. Wildenstein's death within the meaning of the first sentence of Article 7(1) of the U.S.-France Treaty², but that those works were in transit, and so, pursuant to the second sentence of Article 7(1), are considered situated in their ultimate destination, New York City.

This is not to say that, depending on the Court's ruling on Respondent's Motion, respondent will not make the argument that a different subset of the artworks owned by the Trust were situated in the United States under Article 7(1) of the U.S.-France Treaty. Article 3(2) of the treaty sets forth the framework for interpreting the terms of the treaty, and provides that U.S. domestic tax law may be relevant. Article 3(2) provides:

(2) As regards the application of the Convention at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, or the competent authorities agree to a common meaning pursuant to the provisions of Article 14 (Mutual Agreement Procedure), have the meaning which it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

Thus, under the U.S.-France Treaty, assuming no common meaning has been agreed to by the U.S. and French Competent Authorities, the United States is free to interpret the term "situated" according to its own applicable tax law, unless the context of the term's use in the treaty otherwise requires, which respondent does not believe is the case here. Notably, the artworks at issue have never been in France and petitioner has not alleged that France has made any claim to tax them under the French succession tax regime. Consequently, the interests of France will not be implicated or adversely affected by the Court's determination.

Moreover, if the artworks are not included in the decedent's U.S. gross estate, they will escape taxation altogether. In the amended Form 706-NA petitioner submitted during the examination, it removed approximately 400 works from the decedent's originally reported U.S. gross estate by claiming the benefits of the U.S.-France "Treaty. Petitioner is thus attempting to use the U.S.-France Treaty not to avoid double taxation, but as a shield solely for the purpose of escaping U.S., taxation. This use is contrary to one of the U.S.-France Treaty's purposes as stated in its title, as well as in its preamble, the "prevention of fiscal evasion". The terms of the treaty should be interpreted to advance this purpose, rather than to contravene it. See, e.g., Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations, 1986, Section 3, Article 31(1) ("A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." The context for the purpose of the interpretation includes its preamble.) A copy of the Vienna Contention is attached to the Second Declaration of Carina J. Campobasso (Second Campobasso Declaration) as Exhibit A.

For these reasons, if the Court denies Respondent's motion, respondent may argue that the term "situated" should be interpreted, pursuant to Article 3(2), with reference to United States tax law, in particular, Delaney v. Murchie, 177 F.2d 444 (1^st Cir. 1949). The determination of each work's situs under the test of Delaney v. Murchie, discussed below, would be a fact-intensive endeavor not amenable to summary judgment.

To counter the actual argument set forth in Respondent's. Motion, petitioner relies on a declaration by Marc-André Renold (Renold Declaration), a professor, not of international treaty law, but of cultural heritage law. The Renold Declaration is wholly beside the point.

First, respondent does not dispute that high-value goods are stored in freeports, often for long periods of time, as was the case for certain of the artworks at issue here. The length of time spent in the freeport is immaterial to whether it should be deemed in transit under the U.S.-France Treaty. The works at issue here were in transit while in the Swiss Freeport because they were imported neither into Switzerland nor into any third country. Respondent notes, however, that as a practical matter, because the artworks at issue in the instant motion were selected to exclude any artworks owned by the Delta Trust that remained in the Swiss Freeport for more than a specified period of time after Mr. Wildenstein's death, respondent has already in effect determined not to challenge the situs of those works that still had not been returned to the United States after that time.

Tangible movable property is either situated in a country or is in transit to a country. There is no third "no man's land" option, as petitioner's argument suggests. Moreover, petitioner's interpretation, applied to any similar bilateral estate tax treaty article, would allow families of wealthy individuals on the brink of death to escape estate or succession taxes by simply shipping high-value goods to a freeport in a third country and then shipping them back after the individual's death. Neither the U.S.-France Treaty nor any other such treaty should be interpreted so as to defeat their signatories' succession tax regimes.

Second, the Remold Declaration concerns whether such goods are in transit under Swiss law. Mr. Renold states that "goods stored in freeports are considered to be fully located in Switzerland for the purpose of Swiss legislation with the exception of customs duties". Renold Declaration, ¶ 53.a.(4). However, Swiss law, and thus Mr. Renold's testimony, as discussed more fully below, are wholly irrelevant to the interpretation of the U.S.-France Treaty.

As to petitioner's third argument, to the extent there are factual disputes about particular works of art, these disputes can be resolved between the parties after the Court has determined the correct interpretation of the term "in transit" in Article 7(1) of the U.S.-France Treaty.

As stated above, respondent has conceded the applicability of the U.S.-France Treaty for purposes of Respondent's Motion only.³ If the Court disagrees with respondent's interpretation of the U.S.-France Treaty and denies the motion for summary judgment, there remain factual disputes preventing the Court's granting Petitioner's Cross-Motion, including whether Mr. Wildenstein was in fact at the time of his death a French domiciliary to whose estate the treaty applies in the first instance.⁴ There are undisputed facts suggesting that Mr. Wildenstein was a resident of Switzerland, including his French passports, attached as Exhibits W-1 and W-2 to the Declaration of Guy Wildenstein (Wildenstein Declaration), his death certificate, attached as Exhibit W-5 to the Wildenstein Declaration, and his Swiss residency permit, attached as Exhibit B to the Second Campobasso Declaration, all of which state that Mr. Wildenstein's residence was at an address in Lachen, Switzerland. These documents suggest that, regardless of how much time he spent in France, his intention was to be a Swiss resident, not a French resident. Therefore, the Court should in. any case^-deny petitioner's motion for summary judgment.

UNDISPUTED FACTS

With the exception of disagreeing that certain artworks were properly included on the list of includible artworks, Exhibit 4 attached to the Declaration of Carina J. Campobasso filed with the Court on May 13, 2019 (First Campobasso Declaration), petitioner does not dispute any of the facts going to the substance of Respondent's Motion set out in the numbered paragraphs of the motion. Respondent supported all of these facts with unchallenged documentary evidence, most of which was provided by petitioner, the Wildenstein Gallery, or the decedent's son Guy Wildenstein during the examination. Nor does, petitioner dispute the sufficiency of these facts to decide the narrow legal issue presented by Respondent's Motion. Because the facts are undisputed and sufficient for ruling on Respondent's Motion, respondent reiterates his request that the Court grant Respondent's Motion based on these undisputed facts. As stated in Respondent's Motion, once the legal principles are established, the case can be sent to respondent's Appeals function for a conference with petitioner in order to determine exactly which works are includible in the decedent's U.S. gross estate under these legal principles, as well as each such work's value.

On the other hand, petitioner makes many assertions that are not relevant to the narrow legal issue set forth in Respondent's Motion and are, in any case, often based, not on undisputed documentary evidence, but rather testimony that has not been tested through cross-examination. Respondent sets forth his specific objections to petitioner's proposed facts as follows:

RESPONSE TO PETITIONER'S STATEMENT OF UNDISPUTED FACTS

A. Mr. Wildenstein's residency at the time of his death

As stated above, although respondent accepted, for purposes of Respondent's Motion that Mr. Wildenstein was domiciled in France at the time of his death, there are many facts suggesting that he was, in fact, domiciled in Switzerland under U.S. law.

First, a French passport issued to Mr. Wildenstein on February 24, 1988, stated that his domicile was 48 avenue de Rumine, 1005 Lausanne, Canton of Vaud, Switzerland. Exhibit W-l attached to the Wildenstein Declaration. A French passport, issued to Mr. Wildenstein on January 22, 1997, stated that his domicile was 6 Seidenstrasse, 8853 Lachen, Switzerland (the Lachen address). Exhibit W-2 attached to the Wildenstein Declaration. This second passport was valid through January 21, 2002, a date after Mt. Wildenstein's death. Mr. Wildenstein held a Swiss residence permit, valid through December 31, 2003, on which he also reported the Lachen address as his residence. Second Campobasso Declaration, Exhibit B. Moreover, the Lachen address was reported as Mr. Wildenstein's domicile on his death certificate issued by the 8^th Arrondissement of Paris, France. Wildenstein Declaration, Exhibit W-5. Given that Mr. Wildenstein, as well as, apparently, his family after his death, reported to both the French and Swiss governments that his residence was in Switzerland, it seems unlikely that he actually considered himself to be domiciled in France rather than in Switzerland. Further, it is notable that the examination report on which petitioner relies for its claim that Mr. Wildenstein was domiciled in France makes this determination for the 1996, 1997 and 1998 years only. This report makes no determination regarding Mr. Wildenstein's domicile during 1999, 2000 and 2001.

As to petitioner's claim, based on an analysis of Mr. Wildenstein's diary by Claudine Godts, that he spent a certain number of days in France in 1999, 2000 and 2001, such evidence is not relevant to the definition of domicile for U.S. federal estate tax purposes. Treas. Reg. § 20.0-1(b) provides:

A person acquires a domicile in a place by living there, for even a brief period of time with no definite present intention of moving therefrom. Residence without the requisite intention to remain indefinitely will not constitute domicile nor will intention to change domicile effect such a change unless accompanied by actual removal.

Thus, for estate tax purposes, the decedent's intention, regarding his domicile, not the number of days he spent in any one place, is primary. Here, Mr. Wildenstein's passports and residence permits, as well as the fact that he disputed, until his death, the French government's claim that he was a domiciliary of France⁵, all suggest that he considered himself a domiciliary of Switzerland, not France. At a minimum, this is a question of fact precluding petitioner's motion for summary judgment.⁶

In short, Mr. Wildenstein's domicile becomes relevant only if the Court denies Respondent's Motion, If the Court does deny Respondent's Motion, the Court will be able to make a determination on this fact-intensive issue only after viewing and assessing all the evidence.

B. Mr. Wildenstein's settlement of the Delta Trust

Petitioner claims that Mr. Wildenstein revoked the Delta Trust to the extent of the artworks held by the then-acting trustee. For this assertion; petitioner relies on the Declaration of Nirvana DeWeever. However, the facts surrounding the revocation of the Delta Trust are murky. A document entitled "Deed of Partial Revocation" purports on its first page to have been made October 2, 2001, but Mr. Wildenstein's signature on the second page is dated August 12, 2001. See Second Campobasso Declaration, Exhibit C. There is no explanation for this discrepancy or, indeed, for why Mr. Wildenstein would partially revoke the Delta Trust only to then almost immediately retransfer the works of art back into it. These facts suggest that perhaps Mr. Wildenstein did not intend to partially revoke the Delta Trust at all. If so, all the works that were in the United States at the time they were originally transferred to the Delta Trust are includible in the decedent's U.S. gross estate under I.R.C. § 2104(b), which provides that property transferred to a trust is deemed to be situated in the United States if so situated at the time of the transfer.

C. and D. Location of the artworks at issue

Respondent accepts the information on the art cards as accurate with respect to the disputed artworks' locations during the relevant period. Many of petitioner's assertions in Sections C and D of' Petitioner's "Statement of Undisputed Facts", however, are not relevant to the issue presented in Respondent's Motion. In addition, much of the information in Section C comes not from undisputed documentary evidence, but from the declarations of Claudine Godts and Marc-André Renold. To the extent that the information in these declarations is even relevant, and respondent contends it is not, it is not supported by any documentary evidence regarding the use and purpose of freeports. Further, Ms. Godts' and Mr. Renold's credibility has not been tested by cross-examination. In addition to the deposition of Ms. Godts, respondent is seeking to arrange the deposition of Mr. Renold.

E. Filing of Estate Tax Return by Royal Bank of Canada Trust Company

Respondent agrees that petitioner's estate tax return, Form 706-NA, was filed on October 22, 2014. None of the other assertions in this section of petitioner's Statement of Undisputed Facts is relevant to any issue in this case.⁷

F. Issuance of the Notice of Deficiency

Respondent does not dispute the facts in this section.

G. Respondent's Motion

Respondent objects to petitioner's characterization of respondent's motion. The motion speaks for itself.

DISCUSSION

I. RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT SHOULD BE GRANTED.

A. Respondent's motion for partial summary judgment relies only on the U.S.-France Treaty. However, the law supports respondent's contention that absent the U.S.-France Treaty, the artworks at issue are includible in the gross estate of Mr. Wildenstein.

Petitioner incorrectly states that respondent "ignores" the effect of the U.S.-France Treaty. This is patently incorrect, given that respondent's motion is based on the treaty itself. It appears that petitioner included the extensive arguments in pages 20-33 of the Petitioner's Opposition solely as a diversionary tactic. Respondent included the discussion of I.R.C. § 2103 and Delaney v. Murchie, 177 F.2d 444 (1st Cir. 1949), in Respondent's Motion only as background discussion of the applicable law if the U.S.-France Treaty is ultimately determined not to apply. Given that the parties agree, for purposes of Respondent's Motion (but not for purposes of Petitioner's Cross-Motion), that the U.S.-France Treaty is applicable, none of the arguments in pages 20-33 of Petitioner's Opposition is relevant to whether the works at issue are includible in Mr. Wildenstein's gross estate on the grounds set forth in Respondent's Motion. The Court should therefore not be distracted by the extensive, but at this point irrelevant, discussion on these pages of Petitioner's Opposition.⁸

In any case, petitioner is wrong on the question of the interpretation of undefined terms in the U.S.-France Treaty. Petitioner contends that "[t]o 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." Petitioner's Opposition, pp. 20-21. On the contrary, Article 3(2) of the U.S.-France Treaty provides:

(2) As regards the application of the Convention at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, or the competent authorities agree to a common meaning pursuant to the provisions of Article 14 (Mutual Agreement Procedure), have the meaning which it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

Since the treaty's rules of construction clearly provide that the meaning of terms under the applicable tax law prevails over any meaning under other laws, the Court can look to I.R.C. §§ 2103 and 2104(b) to define "situated", as long as this definition otherwise comports with the treaty's provisions. This principle should apply here especially, given that the property will not be taxed under French law regardless of the outcome of this case.

As the First Circuit stated in Delaney v. Murchie, 177 F.2d 444 (1st Cir. 1949)_, interpreting the term "situated" in section 861(a), the predecessor to I.R.C. § 2103:

. . . the statute remits to us a legal concept of situs which, as it has been developed in the cases, is certainly not synonymous with physical presence and which, indeed, has been applied to certain kinds of property interests incapable of actual location in space . . . Perhaps it is more accurate to say that the inquiry really is not to find where the property is located in space, with the automatic consequence that, if the property is found to be within the territorial limits of a particular state, such state has power or jurisdiction to deal with it, but rather, whether the property, considering its particular nature, has such a relationship to the state as to make it reasonable to attribute to that state the power of dealing with it in some particular way.

177 F.2d at 447. With respect to personal movable property, the First Circuit continued:

It is clear from a long line of decided cases that the situs of a chattel has not been deemed to be determined by its mere physical presence at a given place on the tax day. Upon the contrary, the concept involves some degree of permanence, an established abiding place or home base for the chattel, analogous to the notion of domicil as applied to the person. As stated by Holmes, J., in New York Central & H.R.R. v. Miller, 1906, 202 U.S. 584, 597, 26 S.Ct. 714, 717, 50 L.Ed. 1155: 'Using the language of domicil, which now so frequently is applied to inanimate things, the state of origin remains the permanent situs of the property, notwithstanding its occasional excursions to foreign parts.'

177 F.2d at 448.

In short, the term "situated" in I.R.C. § 2103(a) is not "synonymous with physical presence", but rather means the "permanent situs of the property, notwithstanding its occasional excursions to foreign parts." Here, an intensive fact-based inquiry for each work would have to be undertaken to determine which works held by the Delta Trust had an "established" abiding place or home base" in New York City. This fact-intensive question, along with the question of Mr. Wildenstein's residence at the time of his death under U.S. estate and gift tax law, must be left for trial if the Court denies Respondent's Motion.

B. The Artworks were in transit within the meaning of the U.S.-France Treaty.

1. Works stored in Swiss freeports should be considered in transit under the U.S.-France Treaty.

Petitioner suggests that simply because there is no case that construes the term "in transit" in the U.S.-France Treaty to cover personal property stored in freeports, the term should be interpreted to not include such property. This is a logical error. Rather, as petitioner aptly notes at page 21 of Petitioner's Opposition, "[w]hen a treaty is interpreted its words are construed according to their ordinary meaning." Zhengnan Shi v. Commissioner, T.C. Memo. 2014-173, at *3 (2014) (citing Amaral v. Commissioner, 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 ordinary meaning of the term "in transit" comprehends storage in Swiss freeports, as acknowledged by the Swiss Federal Customs Administration itself. See Campobasso Declaration, Exhibit 7. Moreover, petitioner's own expert, Mr. Renold, agrees. In an article on Switzerland's cultural heritage law, Mr. Renold states:

Owing to factors such as its geographical situation in the centre of Europe or the existence of freeports [Switzerland] also plays a role as a transit nation.

Marc-André Renold & Beat Schönenberger, Switzerland, in Handbook on the Law of Cultural Heritage and International Trade 408, 408 (James A.R. Nafziger and Robert Kirkwood Paterson eds., 2014).⁹

Given Messrs. Renold and Schönenberger's statement that Switzerland's freeports contribute to its character as a "transit nation", petitioner's statement that respondent's sole authority for its interpretation of the term "in transit" in the U.S.-France Treaty is the website of the Swiss Federal Customs Administration (SFCA) (see Petitioner's Opposition, p. 34), is incorrect.¹⁰ This interpretation rests also on petitioner's own expert's understanding of the purposes of Swiss freeports.

Petitioner's discussion and use of the Renold Declaration at Petitioner's Opposition, pp. 35-37, are faulty for three reasons.

First, Mr. Renold's conclusions are not pertinent to the issue before the Court. This issue is not "the legal status of freeports under Swiss law". Nor is the issue the particulars of the Swiss "transit regime". In short, petitioner is attempting to distract from the real issue with the irrelevant pronouncements of a so-called "expert".

For example, the fact that goods owned by Swiss residents and stored in a freeport, as in Agopian v. Zurich and Geneva, ATF 80 I 194, are subject to Swiss income tax has no bearing on whether other such goods in a Swiss freeport owned by non-Swiss residents are considered "in transit" under the U.S.-France Treaty. Similarly irrelevant to the interpretation of U.S.-France Treaty are cases, such as those cited by Mr. Renold, involving Swiss patent and trademark law.

Moreover, whether the goods stored in a Swiss freeport are considered to have "entered the Swiss territory" under Swiss law (Renold Declaration, ¶62) is similarly irrelevant to whether such goods should be considered "in transit" under the U.S.-France Treaty. Under Mr. Renold's construction, goods on a train in Switzerland traveling from the United States to France by way of an Italian port would not be considered in transit under the U.S.-France Treaty because they are in "Swiss territory".

Petitioner's discussion of the Swiss "transit procedure" is also irrelevant and misleading. Citing the Swiss "transit regime" defined in art. 49 of the FCL 2005, Mr. Renold states that under Swiss law, "[o]nce the goods enter the free port, they lose their 'in transit' nature and become subject to the particular freeport storage regime." Renold Declaration ¶ 53.a(4). However, he himself states that the "transit procedure" is "a technical customs procedure [under Swiss law] . . . which regulates the passage of items from the border to the freeport, ensuring that no items are improperly diverted to other destinations in Switzerland without first paying import duties." Renold Declaration ¶ 53.a.(3). This Swiss law "technical" term is not relevant to whether the works at issue are "in transit" under the U.S.-France Treaty.

Moreover, although not relevant to the issue before the Court, Mr. Renold's point that the transit procedure prevents the improper diversion of goods, indirectly supports respondent's interpretation of "in transit" by differentiating between goods that are being imported (or "diverted") into Switzerland, on which import duties must therefore be paid, and goods destined for other countries, such as France or the United States, on which no import duties are imposed. The artworks stored at the Swiss Freeport were all ultimately destined to be imported into countries other than Switzerland.

Mr. Renold's statement that "goods stored in freeports are considered to be fully located in Switzerland" (Renold Declaration ¶ 53.a(4)) also misses the point. Respondent does not contend that the goods stored in Swiss freeports are not "fully located in Switzerland" and thus not subject to Swiss law (other than Swiss import duties). They are — to the same extent that goods on a train passing through Switzerland would be. For example, Mr. Agopian, as a Swiss resident, would be subject to income tax on goods he sold from a train stopped at a station in Switzerland, just as he was subject to tax with respect to goods in the freeport. The goods are taxable under Swiss law even though in transit in both cases.

In short, movable property can be fully located somewhere, for example, on a ship or a train (or in a customs free warehouse), and still be "in transit". The fact that Swiss freeports are "fully a part of Switzerland and subject to the laws and regulations of Switzerland, including Swiss taxation laws" does not render Swiss freeports destinations rather than warehouses for transit goods for purposes of the U.S.-France Treaty.

Second, the fact that high-value goods may be stored for extended periods of time in Swiss freeports, which respondent does not dispute, does not change their character for purposes of the U.S.-France Treaty as goods in transit, given that, while they are in a freeport, they are imported neither into Switzerland nor into any other country. The Renold Declaration ignores this fact.

Nor does the fact that the freeports may be used by people to store, see Renold Declaration ¶53.b., (or conceal¹¹) their high-value property for long periods of time render them a "destination" for purposes of the U.S.-France Treaty.

Third, Mr. Renold observes that freeports provide a high level of security, on-site restoration and framing services, rooms to display works for sale, climate and humidity controls conducive to preservation, and ease of access to potential buyers given their location near major international hubs. Petitioner's Opposition, p. 35. This observation does not provide support for the proposition that goods stored in a freeport are not "in transit". Rather, it begs the question why, given that the Wildenstein Gallery in New York presumably has all the same amenities, the works were shipped to the freeport and then simply shipped back. Similarly, it begs the question why the works were sent to the Swiss Freeport, rather than the Wildensteins' facilities in Paris, which must also have the same amenities for storing artwork, and are not just "near a major international hub", but are in a major international hub.

Petitioner argues that items stored in Swiss freeports and items stored in foreign trade zones (FTZs) in the United States should be treated in a like manner. Petitioner's Opposition, pp. 37-38. Respondent does not disagree. If a citizen and domiciliary of France shipped high-value personal property from France to an FTZ and then had it shipped back to France, respondent does not see any reason that such goods would not be considered in transit under the U.S.-France Treaty during the entire roundtrip, just as the artwork at issue here was.

2. Respondent's interpretation of "in transit" in the context of the U.S.-France Treaty is the only logical interpretation. The cases cited by petitioner to support its interpretation of "in transit", to the extent they are relevant at all, support respondent's interpretation.

Petitioner cites many cases that purport to support its position that, under U.S. law, the term "in transit" cannot be interpreted to include goods temporarily stored in customs-free warehouses. None of these cases concern the interpretation of the term "in transit" under tax law, which prevails over other law pursuant to Article 3(2) of the U.S.-France Treaty. Rather, the cases all involve disputes between two private parties, an insurance company and an insured, over whether damage to, or loss of, commercial property of the insured is covered under "due-course-of-transit" provisions of the parties' insurance contract. These cases are therefore inapposite to the issue here, whether the artworks that were shipped out of the United States, were stored in the Swiss Freeport for a period of time without being imported into Switzerland, and then came back to the U.S. (or went to other final destinations in Europe or elsewhere) remained "in transit" while at the Swiss Freeport for purposes of the U.S.-France Treaty.

In any case, upon close analysis these cases generally support respondent's, not petitioner's, interpretation of "in transit". Most of the cases involve whether the goods at issue were covered under the "due-course-of-transit" clause because they had either not begun to be shipped (i.e., they were still at the consignor's place of business) or they had arrived at their final destination (the consignee's place of business). The cases that concern goods that have been shipped but have not reached their final destination, like the artworks here, generally hold that "stoppages" in the course of movement from the point of origin to the final destination do not remove the goods from coverage under the "due-course-of-transit" clauses.

For example, in Lariviere v. New Hampshire Fire Ins. Co., 105 N.H. 73, 193 A.2d 13 (N.H. 1963), the property at issue was a house that was transported from one location and was damaged while it was being lowered onto its foundation at this final destination. In finding that the house was not covered by the insured's "transportation trip policy", which covered damage while the property was "in transit", the New Hampshire Supreme Court stated:

Property is considered in transit when it is moving from one location to another. This does, not exclude temporary stops, incidental delays, or some deviation from the planned route of travel. However when the property to be transported has reached its destination it is generally no longer considered in transit.

193 A.2d at 15 (citations omitted). The Court noted that no further movement of the house was required or anticipated and all actual movement of the house itself was completed. Here, of course, the artworks were at a temporary stop, not having been imported into any country, while in the Swiss Freeport, before making their way either back to the United States or to a third country. No one would have considered that no further movement of the works was anticipated. Thus they come squarely within the meaning of "in transit" under the New Hampshire Supreme Court's definition of the term. The fact that some of the works remained at the freeport for long periods of time does not change the temporary nature of their stay, given the purpose and use of Swiss freeports.

Several of the other cases cited by petitioner follow the pattern of Lariviere. See Bonded Carriers, Inc. v. Harford Fire Insurance Company, 2009 WL 10676024 (N.D. W.Va. 2009) (grocery products had already arrived at supermarket chain's distribution center, the final delivery point for the plaintiff shipping company, when stolen, and were therefore not covered by the plaintiff's insurance policy's "due-course-of-transit" clause); Boonton Handbag Co. v. Homes Ins. Co., 310 A.2d 510, 511 (N.J. Super. Ct. App. Div. 1973) (goods stolen from plaintiff insured's premises had reached their destination and thus were not in transit under the plaintiff's insurance policy).

Another case cited by petitioner concerns goods that had not yet entered into transit at the time of the loss. In Pacific Tall Ships Co. v. Kuehne & Nagel, Inc., 76 F. Supp. 2d 886 (N.D. Ill. 1999), the goods at issue were damaged while they were still in the insured shipper's custody and control before delivery to the transportation company. In denying the claim against the insurance company by the owner of the goods, the court noted that "transit will not be considered to have commenced unless the shipment has been moved to a point beyond the control of the seller". The Pacific Tall Ships case thus does not stand for the proposition that the term, "in transit" excludes goods that have begun their journey and are in the hands of a transportation company or a business ancillary to the transportation business, such as a warehouse company that holds goods temporarily in a way station before the goods reach their final destination.

Hartford Casualty Insurance Company. v. Banker’s Note, Inc., 817 F. Supp. 1567 (N.D. Ga. 1993) involved a slightly different fact pattern. However, it also indirectly supports respondent's position. In Hartford, a shipment of merchandise was stolen at a station where the insured left its trailers at a facility owned by a third party routinely for its own business convenience. The court held that transit was broken with respect to stolen goods because the stop occurred to facilitate the insured's business needs. See also Dealers Dairy Products Co. v. Royal Ins. Co., 170 Ohio 336 (Ohio 1960) (terms "in transit" and "transportation" in insurance contract do not include a period during which, for the convenience of the insured, goods are unloaded and deposited on designated premises and left there at rest while the transporting conveyance departs and is used on another transportation project).

Thus, in Hartford Casualty and Dealers Dairy Products, the courts focused on the "convenience of the insured" to find against the insured and hold that transit was broken due to the business needs of the insureds. In other words, the contract was construed against the insured because of its own actions. Analogously, here the terms of the U.S.-France Treaty, one of the purposes of which is the prevention of fiscal evasion, should not be construed to allow the estate of a U.S. or French person to escape taxation by both the United States and France through its own conduct of keeping its property for a long period of time at a facility meant for transit goods.

In City Fuel Corp. v. National Fire Insurance Company of Hartford, 446 Mass. 638 (Mass. 2006), City Fuel, in the business of delivering oil to residential customers, brought an action against an insurer after the insurer denied coverage for a leak from a truck parked overnight, The oil was transferred to City Fuel’s delivery trucks at a terminal. Once loaded, the trucks delivered the oil to City Fuel’s customers. At the end of each business day the trucks returned to the terminal, where they parked overnight. If a truck had any undelivered oil in its tank, the oil remained there until it was delivered to customers on the following business day. The Court found that, the oil was "'in the course of transit," . . . once it had been picked up for delivery and had begun to travel to its destination, and that it remained in transit until it was delivered to City Fuel’s customers, even though there may have been ordinary delays and stoppages along the way." 446 Mass, at 642. Thus the fact that the trucks stopped for periods of time to make other deliveries or to provide relief to the drivers, did not alter the status of the oil as being "in the course of transit," Thus, far from supporting petitioner's interpretation of "in transit", City Fuel suggests that "in transit" includes not only goods "actively en route" (Petitioner's Opposition, p. 1) or "moving" (see Petitioner's Opposition, p. 39), but also goods that are stopped temporarily on the way to their destination, much as the artworks shipped from Wildenstein Gallery in New York City were held temporarily in a warehouse before travelling to their destinations, either back to New York City or to other countries.

Finally, the last case cited by petitioners, Ore & Chemical Corp. v. Eagle Star Ins. Co., Ltd. 489 F.2d 455 (2d Cir. 1973) also supports respondent's interpretation of "in transit". At issue in Ore was whether the armed robbery of placer gold in a motel to which the owners of the gold had traveled was covered under the "due-course-of-transit" provisions of a casualty insurance policy. The Court held that whether the stoppage at the motel was viewed as one in a continuing shipment with alternative destinations or as one in a bifurcated journey with an outgoing and incoming segment, it remains a stoppage incidental to the carriage and hence within the coverage of the due-course-of-transit clause. Again, this situation is analogous to the situation here, where the stoppage of the works of art at the Swiss Freeport, given that they were not imported into Switzerland or any other country, should be viewed as either a temporary stop in a continuing shipment with alternate destinations (back to the United States or on to third countries) or a temporary stop in a bifurcated journey with an outgoing segment (U.S. to Swiss Freeport) and an incoming segment (Swiss Freeport to U.S.).

Petitioner argues that respondent's interpretation of the term "in transit" under the U.S.-France Treaty would lead to impractical tax enforcement results, noting that the number of works that it would have had to include on the Form 706-NA would have varied depending on when it filed the return. Petitioner should leave this problem to respondent. Here the return was filed over 12 years late. The works that made the roundtrip to and from New York City are known to both respondent and petitioner. If petitioner or its predecessor had timely filed the return, perhaps the number of works included in the U.S. gross estate in respondent's examination would have been fewer. Perhaps a different taxpayer attempting the same scheme could limit its exposure by filing its return on a timely basis. It is not for petitioner here to be concerned with other taxpayers or how the Delta Trust might have limited its own liability by timely filing its return.

Finally, petitioner criticizes respondent's reference to Article V of the General Agreement on Tariffs and Trade (GATT), arguing that its inclusion of warehoused goods as "in transit" is not relevant to the meaning of this term for purposes of the U.S.-France Treaty. Certainly, though, GATT is more relevant to the interpretation of an international treaty than the insurance cases on which petitioner relies (and which, as discussed above, do not really support petitioner's position at all). The concept embodied in Article V of GATT with respect to international trade applies equally here: goods stored in a warehouse that are not imported into the country in which the warehouse is located or into any other country remain in transit.

3. The evidence shows that the artworks that are the subject of Respondent's Motion went from New York City to the Swiss Freeport and then came back to New York City and thus that these artworks were in transit within the meaning of the U.S.-France Treaty.

The question posed by Respondent's Motion is whether the artworks that were in New York City, went to the Swiss Freeport, and then came back, to New York City are in transit within the meaning of this term in the U.S.-France Treaty. This is purely a question of law — that is, of interpretation of the treaty. Thus petitioner's statement that the "evidence" shows that the artworks were not in transit within the meaning of the treaty is nonsensical. Neither evidence of the intentions underlying the shipment of the artworks to the Swiss Freeport and then back to New York City, nor any other evidence, other than the undisputed facts set forth in Respondent's Motion, is necessary for the Court to rule on this legal issue.

First, as discussed above, the mere fact that an item remained in a freeport for a long period of time does not demonstrate that it is not in transit for purposes of the U.S.-France Treaty.

Second, petitioner's entire discussion of intent, Petitioner's Opposition, pp. 44-49, is beside the point. Evidence of "intent" to bring the artworks back to New York City at the time they were shipped from New York City, or a lack thereof, in this case, is not relevant to the interpretation of the term "in transit" in the U.S.-France Treaty. It is interesting, however, that, given the excellent facilities for the maintenance and protection of fine art that the Wildenstein Gallery must have, the gallery would ship the works of art 4000 miles from these facilities to another facility owned by a third party at great expense, only to ship them back from that facility later, Thus, although intent is not relevant to the question at issue here, petitioner's claim that it made "prudent business sense" (Petitioner's Motion, p. 45) to store the works in the Swiss Freeport, rather than at the Wildenstein Gallery (or the Wildenstein Institute in Paris) is not credible. In short, the intent posited by petitioner is not only beside the point, it defies common sense.

C. To the extent that there are errors in Respondent's list of artworks includible in the decedent's U.S. gross estate for purposes of this motion for partial summary judgment, any such mistakes can be corrected following the Court's ruling on the motion.

Petitioner claims that respondent's list of artworks includible in decedent's U.S. gross estate contains errors. That may be a valid point. We agree, for example, with petitioner's conclusion with regard to 33 works listed in Exhibit P-8 to the Popovsky Declaration.¹² However, with regard to other works, we believe that the discrepancy may be the result of a typographical error in the art card number, such that although the work listed on Exhibit P-8 may not have been shipped from New York City and back again by way of the Swiss Freeport, another work, with a slightly different art card number was. Respondent will work with petitioner to clear up these discrepancies.

In at least one instance, however, the art card associated with a certain work provided to respondent (C28888B) differs substantially from the art card attached to the Declaration of Claudine Godts (Godts Declaration).

With respect to the works that Ms. Godts claims were sent to certain places other than the Swiss Freeport for purposes other than a temporary exhibition, this testimony has not been tested by cross-examination. Moreover, there appear to be discrepancies also in the art card numbers listed in the Godts Declaration.

Finally, as acknowledged above in footnote 2, the artworks associated with Art Card Nos. 23610 and C29936 referenced Exhibit P-8 to the Popovsky Declaration, are not a part of this motion for summary judgment. Because these two works were actually situated in the United States on October 23, 2001, they are includible in decedent' s U.S. gross estate for that reason alone and should not have been included in the works listed in Exhibit 4 to the Campobasso Declaration.

In any case, these errors and discrepancies do not change the legal question posed by Respondent's Motion-whether the term "in transit" in the U.S.-France Treaty includes storage of goods in a Swiss freeport the purpose of which according to the Swiss Federal Customs Administration is temporary storage of goods.

II. PETITIONER'S CROSS-MOTION FOR SUMMARY JUDGMENT SHOULD BE DENIED.

Petitioner's Cross-Motion should be denied for two reasons, as discussed more fully above.

First, there is conflicting evidence regarding whether Mr. Wildenstein was a resident of France at his death for purposes of U.S. estate and gift tax law. This question turns on Mr. Wildenstein's intent and, as discussed above, the documentary evidence strongly suggests that his intent was to be and be considered a Swiss domiciliary. If Mr. Wildenstein was a Swiss domiciliary, the U.S.-France Treaty does not apply.

Because petitioner's Cross-Motion relies on the unproven assumption that Mr. Wildenstein was a French resident, the motion cannot be granted.

Second, as discussed extensively in Respondent's Motion and above, even if Mr. Wildenstein is considered a resident of France such that the U.S.-France Treaty is applicable, the works that are the subject of the motion were in transit as a part of a roundtrip from and back to New York City, with a stop at the Swiss Freeport, at the time of Mr. Wildenstein's death. Thus under the second sentence of Article 7(1) of the U.S.-France Treaty, they are includible in the decedent's U.S. gross estate.

CONCLUSION

Because, the works of art that are the subject of Respondent's motion were either situated in, or in transit to, the United States on the date of Mr. Wildenstein's death, they are includible in Mr. Wildenstein's U.S. gross estate under I.R.C. § 2103 and the provisions of the U.S.-France Treaty. Therefore, respondent respectfully requests that the Court grant Respondent's Motion and deny Petitioner's Cross-Motion.

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

Date: October 18, 2019

By: CARINA J. CAMPOBASSO
Senior Counsel
Tax Court Bar No. CC0548
carina.j.campobasso@irscounsel.treas.gov
JAMES P.A. CALIGURE
Attorney
Tax Court Bar No. CJ1713
james.p.caligure@irscounsel.treas.gov
(Small Business/Self-Employed)
10 Causeway Street, Room 401
Boston, MA 02222-1061
Telephone: (617) 788-0813

OF COUNSEL:
BRUCE K. MENEELY
Division Counsel (Small Business/Self-Employed)
MICHAEL R. FIORE
Acting Area Counsel (Small Business/Self-Employed:Area 1)
NINA P. CHING
Associate Area Counsel (Small Business/Self-Employed)