Tarafa y Armas v. Commissioner

ESTATE OF JOSE M. TARAFA Y ARMAS, DECEASED, FERNANDO J. CANCIO Y ERRO, EXECUTOR AND ANCILLARY EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tarafa y Armas v. Commissioner Docket No. 82656. United States Board of Tax Appeals 37 B.T.A. 19; 1938 BTA LEXIS 1096; January 7, 1938, Promulgated *1096 1. Negotiable, unregistered, mortgage bonds of a domestic corporation, property of the community estate of which decedent was a member at the time of his death, physically situated in the Republic of Cuba, are not includable in his gross estate, he being a nonresident alien, who died July 23, 1932, while sojourning in New York. Herman A. Holsten, Executor,35 B.T.A. 568, followed. 2. Since the decedent was not engaged in business in the United States at the time of his death, bank deposits in domestic institutions are nt ncludable in his gross estate. Sec. 303(e), Revenue Act, 1926. 3. The amount of capital contributed by the decedent to the conjugal community, under the laws of the Republic of Cuba, at the time of his marriage in 1901, was property situated in that country at the time of his death and may not therefore be included in his gross estate. R. A. Littleton, Esq., for the petitioner. C. A. Gwinn, Esq., for the respondent. BLACK *19 The respondent having determined a deficiency in estate tax of $279,132.45 upon the transfer of property of the decedent allegedly situated in the United States at the time*1097 of his death, the petitioner brings this proceeding for the redetermination thereof, claiming error by reason of the inclusion in the decedent's gross estate of (1) the value of decedent's one-half community interest in a first mortgage bond of the Central Cuba Sugar Co. of the value of $3,304,139.22, which bond was physically situated in the Republic of Cuba at the time of death; (2) one-half of $130,830.01, representing moneys on deposit in banks in the United States doing a banking business here; and (3) the value of his $50,000 capital contribution to the matrimonial partnership created under the laws of the Republic of Cuba. The facts were partially stipulated and there was oral testimony at the hearing, from which we make the following findings of fact. *20 FINDINGS OF FACT. The petitioner is a duly qualified and acting executor under the laws of the Republic of Cuba, and also ancillary executor under and by virtue of the laws of the State of New York, of the estate of Jose M. Tarafa y Armas, deceased, a nonresident alien of the United States, citizen and resident of the Republic of Cuba, domiciled in the city of Habana at the time of his death in New York, New*1098 York, on July 23, 1932. The decedent and his wife, residents and citizens of the Republic of Cuba at the time, were married under its laws in 1901. By virtue of their marriage there was created under said laws then in force, which continued in force at the date of the decedent's death, a conjugal community or partnership, to which the decedent contributed capital of value equal to $50,000, and from that capital, the industry, salaries, or work of the spouses, profits, rents and interest accruing during marriage from community property and from the property which belonged to either one of the spouses, the assets of said community at the time of the decedent's death were derived. The Civil Code of Cuba pertaining to the status of property of a marital partnership at the death of the decedent, which has been agreed upon and stipulated by the parties, need not here be set forth in full, but is nevertheless incorporated herein by reference. The following articles are all that it seems necessary to specifically set forth in these findings: Article 1392. - By virtue of the conjugal community, the earnings or profits indiscriminately obtained by either of the consorts, during the marriage, *1099 shall belong to the husband and the wife, share and share alike, when the marriage is dissolved. * * * Article 1395. - The conjugal community shall be governed by the rules of the contract of partnership in all that does not conflict with the express provisions of this Chapter. Article 1396. - The Following is the separate property of each of the consorts. 1. That brought to the marriage as his or her own. 2. That acquired under a lucrative title by either of them, during the marriage. 3. That acquired by right of redemption or by exchange for other property belonging to only one of the consorts. 4. That bought with money belonging exclusively to the wife or the husband. * * * Article 1401. - To the conjugal community belong: 1. Property acquired by onerous title, during the marriage, at the expense of the community property, whether the acquisition is made for the community or for only one of the consorts. 2. That obtained by the industry, salaries or work of the consorts or of either of them. *21 3. The profits, rents or interests collected or accrued during the marriage, and which come from the community property, or from that which*1100 belongs to either one of the consorts. * * * Article 1407. - All the property of the marriage shall be considered as community property, until it is proven that it belongs exclusively to the husband or to the wife. * * * Article 1412. - The husband is the administrator of the conjugal community, with the exception of what is prescribed in Article 59. * * * Article 1417. - The conjugal community expires on the dissolution of the marriage or when it is declared null. The consort who, on account of his or her bad faith, caused the nullity, shall not share any part of the property of the community. * * * Article 1423. - After the debts, charges and obligations of the community are paid, the capital of the husband shall be liquidated and paid, in so far as the inventoried estate may reach, making the corresponding deductions according to the same rules which are prescribed in Article 1366, in reference to dowry. * * * Article 1426. - The net remainder of the community property shall be divided, share and share alike, between the husband and the wife or their respective heirs. Decedent owned no separate property at the time of his death and his estate passing*1101 at death consisted solely of the $50,000 capital contribution aforesaid and his community interest in the liquidation dividend of his marital partnership upon dissolution thereof by death. The marital partnership at that time owned stocks and bonds aggregating in value $3,577,034.75. This included $3,304,139.22 balance due on a first mortgage, 5 percent bond, negotiable under the laws of Cuba, of the Central Cuba Sugar Co., and $130,830.01 cash on deposit in banking institutions in the United States. These, together with the "decedent's capital contribution" of $50,000, were included by the respondent in the decedent's gross estate. All of said assets were physically located and situated in the United States at the time of his death except (a) the bond of the Central Cuba Sugar Co., the payment of which is secured by a mortgage on properties situated in the Republic of Cuba; and (b) the capital contributed by the decedent to the marital partnership at the time of his marriage in 1901. Said bond, which has never been registered, and mortgage, and the property pledged to secure the payment thereof, were physically located and situated in Cuba at the time of the decedent's death. *1102 The value of the stocks and bonds actually physically present in the United States at the time of decedent's death was $267,666.78, and decedent's interest therein was one-half. *22 The Central Cuba Sugar Co., organized under the laws of the State of New York on May 29, 1911, maintains a statutory agent at 95 Liberty Street, New York, New York, and is qualified to do business and own property in the Republic of Cuba, in accordance with the laws of that country, by recordation of its certificate of incorporation and its bylaws and by registering the corporation at the Mercantile Registry of Habana. It has never owned property situated in the United States. Its minute books are kept in the custody of its said statutory agent, who is also its secretary, but its ordinary and regular business - having to do with the manufacture and sale of sugar and molasses from sugar cane - is conducted and carried on in Cuba, where all of its properties and assets are situated, its business records and accounts ae kept, its principal business office is located, and its executive officers reside. The decedent was not engaged in business, nor did he owe any debts, in the United States at*1103 the time of his death. His deposits were made in United States banking institutions rather than institutions of his country to avoid the unstable tendencies there and to afford greater safety for the money. OPINION. BLACK: Section 301 of the Revenue Act of 1926 imposes a tax upon the value of the "net state", as determined under the provisions of section 303 of that act, of every decedent "whether a resident or nonresident of the United States." Section 302 provides for inclusion in the "gross estate" of the value at the time of the decedent's death of all property "wherever situated" to the extent of the decedent's interest therein at the time of his death. Section 303 prescribes how the net estate of a decedent shall be determined, and by section 303(b) the computation of the net estate of a nonresident starts with only that part of his gross estate which is situated in the United States. While "stock in a domestic corporation owned and held by a nonresident decedent" is "deemed property within the United States" (sec. 303(d)), "moneys deposited with any person carrying on the banking business, by or for a nonresident decedent who was not engaged in business in the United*1104 States at the time of his death" are not so deemed. (Sec. 303(e).) The first numbered issue herein - whether or not the respondent correctly included the value of the decedent's one-half community interest in a first mortgage bond of a private domestic corporation, which bond was physically located in the Republic of Cuba at the time of the decedent's death - has been considered and decided adversely to the respondent in , *23 on review (C.C.A., 2d Cir.). We there held that bonds, even though of domestic corporations and municipalities, to be included in the gross estate of a nonresident alien must be physically located in the United States at the time of his death. On the basis of this decision we sustain petitioner on the first point. The basis for the respondent's inclusion of deposits in United States banks in the decedent's gross estate is that the decedent was engaged in business in the United States and therefore such deposits are not within the ambit of subdivision (e) of section 303, supra. In this connection the proof shows that, while the decedent made many trips to the United States, usually*1105 stopping over for two or three weeks while on his way to Europe, he was not engaged in business here "at the time of his death." Decedent's son, Jose Miguel Tarafa, testified at the hearing that every year, after the busy season in grinding sugar cane was over, his father visited the United States and Europe; that on most of the trips he accompanied his father; that these trips were not business trips, but were made for pleasure and recreation; and that his father carried on no business in the United States and was not in business in the United States at the time of his death. He testified that the bank deposits which his father made with New York banking institutions were made because of unsettled conditions in Cuba and because of the greater safety which United States banking institutions afforded; that his father's death came while he was in the United States upon one of his habitual sojourns on pleasure. Respondent bases his contention that decedent was engaged in business in the United States at the time of his death solely upon the ground that decedent was the sole stockholder of the Central Cuba Sugar Co., which was incorporated under the laws of the State of New York*1106 in 1911. Only in justifiable instances - and we do not consider this one - have the courts and this Board disregarded the separateness of the corporate entity from its stockholders. . Therefore we are not persuaded by respondent's argument that the decedent was engaged in business inthe United States by reason of the fact that his principal interest - Central Cuba Sugar Co. - obtained and enjoyed a domestic charter. The domestication of a corporation does not domesticate its nonresident stockholders to the extent of causing them to be in business inthe United States if they are not otherwise engaged in business in the United States. Furthermore, the suggestion that these funds were deposited in the United States for business purposes therein is refuted by the testimony that they were in the interest of safety and to avoid unstable political tendencies prevalent inCuba since about 1917. These deposits, under the facts *24 and circumstances found, have been expressly excepted by the statute from the decedent's gross estate and the respondent's action in including them was erroneous. See *1107 ; ; affd., . The respondent's argument on the final issue, pertaining to the $50,000 contribution made by the decedent to the marital partnership, is that because, as he says, "all of the decedent's holdings were situated in the United States, it necessarily follows that the decedent's contribution of $50,000 to the marital partnership between himself and his wife necessarily had a situs in the United States for the purpose of the Federal estate tax." If in fact all of the property of the conjugal community had been situated in the United States at the time of decedent's death, we think respondent's contention on this point would be correct. We have held however that the principal asset of the community - a bond of the Central Cuba Sugar Co. on which a balance of $3,304,139.22 was due - was situated in the Republic of Cuba. According to article 1395 of the Civil Code in force in Cuba, "The conjugal community shall be governed by the rules of the contract of partnership * * *." Contracts of partnership are governed by the laws where*1108 entered into and where their businesses are conducted. ; ; ; and . This contract of partnership was entered into in and under the laws of the Republic of Cuba, where the relationship was apparently intended to and did in fact continue until the death of decedent. There is nothing in the record from which it might be even slightly inferred that it was ever intended that the situs of this capital would change or that it in fact did change. It is true that some of the fruits of the community partnership were situated in the United States, and it was stipulated by the parties that "from that capital [the $50,000 contribution], the industry, salaries or work of the spouses, profits, rents and interest accruing during marriage from community property and from the property which belongs to either one of the spouses, the assets of said community at the time of the decedent's death were derived." But certainly it can not be said, with any reasonable force, that because some of the fruits of the contribution are situated in the*1109 United States for tax purposes, the contribution itself became so situated. The contribution having been made at the domicile of the decedent, under the laws of that domicile, which determined its situs and regulated its administration, and there being nothing in the record nor in the laws of Cuba that are before us indicating that such situs changed, we hold, following the situs test now well established, that *25 the respondent's inclusion of this item in the decedent's gross estate was erroneous. ;Respondent has cited us to no authority to sustain his position on this point and we know of none. Reviewed by the Board. Decision will be entered under Rule 50.