Jones Trust v. Commissioner

B. W. JONES TRUST FOR BRIGADIER GENERAL O. C. HERBERT, BY D. B. NEVIUS, ONE OF THE TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. W. JONES TRUST FOR MRS. N. C. PRIESTLEY, BY D. B. NEVIUS, ONE OF THE TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. W. JONES TRUST FOR MRS. I. S. CHANNER, BY D. B. NEVIUS, ONE OF THE TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. W. JONES TRUST FOR MRS. C. E. JAMESON, BY D. B. NEVIUS, ONE OF THE TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. W. JONES TRUST FOR MRS. M. E. HOLMES, BY D. B. NEVIUS, ONE OF THE TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jones Trust v. Commissioner Docket Nos. 104404-104408. United States Board of Tax Appeals 46 B.T.A. 531; 1942 BTA LEXIS 855; March 10, 1942, Promulgated *855 Petitioner trusts were created in England by an English settlor for English beneficiaries. At the time of creation of the trusts the trusts had common trustees, three of whom were English and the fourth was a citizen of the United States. Most of the securities comprising the corpora of the trusts were of United States corporations. During the taxable years, and for many years prior thereto, the United States securities were kept in this country and the trustees maintained an office in New York, New York, in charge of the United States trustee. The trusts maintained a safety deposit box and bank accounts in New York. Held, that the trusts are resident alien entities and do not come within the provisions of section 211(a) of the Revenue Act of 1936, as amended, and section 211(a) of the Revenue Act of 1938; held, further, that the trusts had an "office or place of business" in the United States within the purview of the sections cited, supra. Aktiebolaget Separator,45 B.T.A. 243, distinguished. William Cornell Fleming, Esq., and Ralph B. Plager, Esq., for the petitioners. Walt Mandry, Esq., for the respondent. ARUNDELL*856 *531 The Commissioner determined the following deficiencies in the income tax of the petitioners: Docket No. [1938] B. W. Jones Trust for O. C. Herbert 104404 $54.22 B. W. Jones Trust for Mrs. N. C. Priestley 104405 $458.08 550.80 B. W. Jones Trust for Mrs. I. S. Channer 104406 492.96 608.70 B. W. Jones Trust for Mrs. C. E. Jameson 104407 492.96 608.70 B. W. Jones Trust for Mrs. M. E. Holmes 104408 492.96 608.70 *532 The sole issue before the Board is whether or not capital gains realized by the trusts in the taxable years are taxable to petitioners. The proceedings were consolidated for hearing. FINDINGS OF FACT. On or about February 7, 1912, Benjamin William Jones, hereinafter referred to as the settlor, a citizen and resident of England, executed five trust instruments at Derby, England. Each trust was established in favor of an English beneficiary and provided that the income of the trust should be currently distributed to the named beneficiary and that capital gains be added to corpus. The aggregate value of all securities forming the corpora of the trusts at the date of creation was approximately*857 $3,000,000. The beneficiaries of the trusts have at all times since the creation of the trusts remained residents and citizens of England. Petitioners herein are the said trusts. The petitioners' returns for the taxable years were filed with the collector of internal revenue at Baltimore, Maryland. At the creation of the trusts four individuals were named trustees, three of whom were citizens and residents of England and the fourth, Frederick Baldwin, was a citizen and resident of the United States. The trust instruments were English in form and English documentary tax stamps were affixed thereon. The three original English trustees executed the deeds of trust at Derby, England. Baldwin executed the deeds before an acting British vice consul at the British Consulate General, New York, New York. Three of the original trustees died and successor trustees were appointed. At all times after execution of the trust instruments three of the trustees were citizens and residents of England and one was a citizen and resident of the United States. About the year 1922, after Baldwin's death, David Barclay Nevius was appointed successor trustee to Baldwin. During the taxable years, *858 1937 and 1938, the English trustees were A. Preston Jones, Basil V. Priestley, and Cedric Neville Jones; the American trustee was Nevius. A. Preston Jones is a son of the settlor of the trusts. Under date of March 9, 1926, the trustees of the five trusts executed an instrument whereby the parties agreed that: WHEREAS * * * the bulk of the trust funds was and is invested in American Companies whose headquarters were and are in America and to facilitate dealings therein it has been found convenient and desirable to hold such securities in a name and manner indicating joint ownership of the trustees and the presumptive right of each to act for all in the purchase or sale of said American securities in the said respective trusts and the collection of the income and its payment to or distribution among the respective beneficiaries, * * * * * * Now, *533 THEREFORE, it is hereby mutually agreed as follows: 1. That the parties hereto shall for their convenience transact their business as trustees, as aforesaid, by taking, holding and transferring the American securities from time to time forming part of the investment of the trust funds aforesaid in and under the name and*859 style of "Jones, Jones, Priestley and Nevius" and to that end that either of the parties hereto shall be and he is hereby authorized to sign said name of "Jones, Jones, Priestley and Nevius" and to execute all necessary and proper papers. 2. That the said American securities shall be deposited and kept in a box in the said name of Jones, Jones, Priestley and Nevius with the National Park Bank of New York and that said box shall not be opened except in the presence of two of the parties hereto. 3. That the parties hereto shall not either by themselves or in connection with the beneficiaries of said trusts engage in any business except the business necessarily transacted as trustees as aforesaid. The United States securities, which in the taxable years constituted approximately 90 percent of the corpora of the trusts, were always kept in New York. Upon receipt of dividends and interest, Nevius rendered a cash statement to the English trustees and remitted quarterly to the Midland Bank, Ltd., Derby, England, the amount of the dividends and interest received less expenses. The non-United States securities were not kept in the United States. The reports and periodic accounting*860 of Nevius covered only the United States securities, and the books and records kept in the United States with regard to the trusts relate only to such securities. A. Preston Jones, hereinafter referred to as Jones, was the only active English trustee. Jones made semiannual trips to the United States, at which times he and Nevius went over all the United States securities of the trusts and determined which should be held and which sold. Problems of reinvestment were also discussed by Nevius and Jones. In all matters of purchase and sale, with few exceptions, Nevius usually followed Jones' advice. Nevius received a stipulated compensation for his services on a different basis from that received by the other trustees. Distribution of the income of the trusts to the respective beneficiaries is made in England by the English trustees. As the result of regulations issued by the British Treasury in September 1939, all of the securities of the trusts were registered with the British Treasury and the greater part of the securities has been taken over by that treasury. The trusts maintain an office in New York, New York, which is leased in the name of Jones, Jones, Priestley and*861 Nevius, and that name appears on the door of the office. One stenographer is employed by the trustees with respect to the American activities of the trusts. Bank accounts and a safety deposit box are kept in the name of the trustees in New York, New York. Where purchases of new securities were made, payment was effected by Nevius by check drawn in *534 the name of the four trustees on the trusts' bank account in a New York bank. Such purchases were effected with funds made available by sales of other securities from the trusts. In the year 1937 there were 17 sales of American securities from the trusts. In 1938 there were 14 sales of American securities from the trusts at a gross sale price of $270,000. In the taxable years the trusts reported the following amounts of taxable income: [1938] B. W. Jones trust for - O. C. Herbert $4,739.76 $3,632.00 Mrs. N. C. Priestley 27,617.20 22,678.50 Mrs. I. S. Channer 29,116.30 24,965.90 Mrs. C. E. Jameson 29,117.40 24,966.80 Mrs. M. E. Holmes 29,123.80 24,969.90 OPINION. ARUNDELL: The only issue before us is whether or not capital gains realized by petitioners in the taxable years*862 are taxable to petitioners or whether by virtue of the provisions of section 211(a) of the Revenue Act of 1936, as amended by section 501 of the Revenue Act of 1937, 1 and section 211(a) of the Revenue Act of 1938, such gains are not taxable in the hands of petitioners. The amount of the capital gains realized is not in dispute. *863 Prior to the enactment of the Revenue Act of 1936, the taxing authorities experienced great difficulty in collecting the tax from nonresident aliens. In 1936 a new method of taxation of such aliens was substituted for the former "theoretical" method which had been found impractical in application. See H.R. No. 2475, 74th Cong., 2d sess.; S.R. No. 2156, 74th Cong., 2d sess. In brief, after the enactment of the Revenue Act of 1936, the taxation of aliens became more simplified. Where the alien is a resident of this country, is engaged in a trade or business here, or has an office or place of business in the United States, he is taxed, with certain limitations, in the *535 same manner as a citizen of the United States. Where, on the other hand, the taxpayer is a nonresident alien doing no business here and having no office or place of business in the United States, he is taxed on his fixed or determinable annual or periodic income from sources within the United States and the tax is withheld at the source. Capital gains are not taxed to the latter class of alien. H.R. No. 2475, 74th Cong., 2d sess.; S.R. No. 2156, 74th Cong., 2d sess. Petitioners claim that they are taxable*864 under section 211 and consequently the capital gains realized by petitioners in the taxable years are not taxable to them. In order to be taxed under section 211(a) rather than under sections 161 and 162, petitioners must show that the trusts were (1) nonresident alien entities, (2) that they were not engaged in a trade or business within the United States, and (3) that they did not have an office or place of business in the United, states. The parties assume, and we think correctly, that trusts may be taxed under section 211, supra, the same as individuals. In his regulations dealing with section 211(a) [Regulations 94, art. 211-2 (Revenue Act of 1936); Regulations 101, art. 211-2 (Revenue Act of 1938)], respondent defines a nonresident alien individual as an individual "(a) Whose residence is not within the United States; and (b) Who is not a citizen of the United States. The term includes a nonresident alien fiduciary." Thus, we must determine whether the trusts, treated as individuals, under section 211(a), come within the requisites of that section. The provisions of section 211(a) clearly indicate that a taxpayer may not be taxed under that section unless all*865 three of the requisites enumerated, supra, are fulfilled. It is apparent therefore that if the trusts are resident alien entities their income tax can not be computed under section 211(a). This is so even though they might show that they did not engage in a trade or business in the United States and had no office or place of business here. We are of the opinion that the trusts are resident rather than nonresident entities. There is little question of their alienage. They were created under English law by an English settlor. All of the beneficiaries and three of the four common trustees were English. Such characteristics, however, point only to the alien nature of the trusts and have little effect upon a determination of the resident or nonresident status. We think that the "residence" of an entity should be determined by analogy to that of an individual. Respondent in article 211-2 of Regulations 94 and 101, interpreting the Revenue Acts of 1936 and 1938, respectively, has the following to say concerning the residence of an alien: An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes*866 of the income tax. *536 Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. * * * Similar statements have appeared in respondent's regulations since his regulations interpreting the Revenue Act of 1918 (art. 312, Regulations 45). That there was an intention to keep the securities in this country is evident from the agreement of the trustees of March 9, 1926. That there was not even a "floating intention" to take the securities out of the United States is apparent from the establishment and maintenance of an office under the title "Jones, Jones, Priestley & Nevius." The whole tenor of the March 9, 1926, agreement was that the trustees should maintain a permanent establishment in the United States under the control of a trustee. The intendment of the agreement was carried out throughout the years and during the taxable years we find the certificates physically located in this country, the maintenance*867 of an office in the city of New York under the supervision of Nevius, and bank accounts in New York banks kept in the names of the trustees. All dividends and interest were paid to Nevius at the office of the trusts in New York and there the records and accounts of the American activities of the trusts were kept. Tax returns were made from the New York office and from there accountings were rendered to the English trustees. From time to time securities of the several trusts were purchased and sold through that office. The trusts make no distinction between the powers and the duties of the several trustees. They are all equal. It is suggested that, because trustee Jones is a son of the settlor, he was listened to by the others, and particularly by Nevius, as to what course he should follow in the management of the affairs of the several trusts. If this be true it is of no importance. It often happens where several persons are associated together, whether as trustees or otherwise, that one may have a more marked influence in the handling of the joint affairs than do the others. A problem somewhat similar to the one before us has been considered in determining the "situs" *868 of trusts for purposes of taxation. Bogert in his treatise "Trusts and Trustees", vol. 2, ch. 15, sec. 262, p. 842, states: * * * Where there are two or more trustees residing in different states, the courts are in fairly general agreement, where a different rule is not established by statute, that the property will be taxable in the state of residence of the trustee who has actual custody or control of it. * * * He further states on p. 841 of the same chapter: In the absence of contrary statute, the weight of the case authority supports the principle that the executor, administrator, or trustee is to be regarded for *537 the purposes of property taxation as the owner of the trust property. Hence such property may and ordinarily will be assessed for taxation in the state in which the trustee is domiciled, even though the beneficiaries of the trust reside in some other state. The fact that the trustee derives his appointment from a court in another state is immaterial, at least where the property is actually in the possession or control of the trustee at his domicile. * * * * * * There is little or no tendency to hold that the mere fact that a trustee derives his*869 authority from the court of a state warrants the taxation of trust property in that state, without regard to the residence of the trustee or the place where the evidences of the trust property are kept and its affairs transacted. Thus, in matters of jurisdiction to tax the present trusts would be treated as having a situs in this country rather than elsewhere. Nor are we disturbed by petitioners' argument that these trusts must be regarded as having an English residence by reason of the presence of three of the trustees in England and the particular activity of Jones, one of their number, and the fact that the trusts were English in form, created by an Englishman for English beneficiaries, and subject to the jurisdiction of that country. It may be that they have a residence in England, but if such be the fact, there would be no inconsistency in holding that these trusts were likewise resident within the United States. Beale, Treatise on the Conflict of Laws, sec. 11.2, p. 123. See ; *870 ; ; . We conclude that the long continued and varied business activities of these trusts within the United States are such, in our opinion, as to deny them the status of a nonresident alien. While our holding that the trusts were resident aliens within the meaning of the statute disposes of the instant proceeding in favor of respondent, we are of the opinion that petitioners fail in their claim on still another ground. The office which they maintained in this country was an "office or place of business" within the meaning of section 211(a). The case of , does not compel a contrary conclusion.. In that case the taxpayer was a manufacturing corporation with principal offices in Sweden. It owned stock of two domestic corporations and rented space in the offices occupied by those corporations in New York, New York. In the proceeding before this Board the taxpayer conceded that it was not engaged in business in the United States. The space rented by the taxpayer was not used for the transaction of business nor was it intended*871 for such purpose. It was established merely as a place to receive the dividends of two subsidiary corporations resident within the United States. Such quarters could not be termed an "office" in any real sense and we so held, stating that an office or place of business means a place for the transaction of business. Mere statement of the essential facts of , indicates *538 the marked distinction of that case from the instant proceeding. Here there is nothing artificial about the office maintained for the trusts. This office was not merely a name or desk space for receiving dividends (see , but an office in the sense of the common everyday conception. It was not established for purposes of compliance with a statute but was maintained in this country because of the administrative necessity of having local supervision of its affairs. Whatever affairs of the trusts were conducted in this country were transacted through that office. For these reasons respondent must be sustained. Decision will be entered for the respondent. Footnotes 1. (a) No UNITED STATES BUSINESS OR OFFICE. - There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 11 and 12, upon the amount received, by every nonresident alien individual not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 10 per centum of such amount, except that such rate shall be reduced, in the case of a resident of a contiguous country, to such rate (not less than 5 per centum) as may be provided by treaty with such country. The tax imposed by this subsection shall not apply to any individual if the aggregate amount received during the taxable year from the sources above specified is more than $21,600. [Section 211(a) of the Revenue Act of 1938 is substantially the same as the one above quoted.] ↩