Docket No. 7700.
Maurice Austin, Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
1. GIFT TAX.— The petitioner, a nonresident alien, owned certain domestic stocks and bonds which she converted into United States Treasury notes under a prearranged program or understanding and solely for the purpose of making a gift of such notes in trust, within the gift tax exemption provisions of Title 31, United States Code Annotated, Sec. 750. Held, that such conversion was ineffectual to avoid gift tax, on authority of Pearson v. McGraw, 308 U.S. 313.
2. Specific exemption under section 1004(a)(1), I.R.C., not allowed a nonresident alien. Maurice Austin, Esq., for the petitioner. Walt Mandry, Esq., for the respondent.
The respondent has determined a deficiency of $20,467.51 in the petitioner's gift tax liability for the calendar year 1941, all of which is in controversy.
Petitioner assigns error in the respondent's determination (1) that she was a resident of the United States at the time the gifts involved herein were made; (2) that the gifts, of the aggregate value of $189,465.30, did not constitute bonds, notes, or certificates of indebtedness of the United States transferred by gift by a nonresident alien and consequently were not exempt from gift tax within the provisions of Title 31, United States Code Annotated, section 750, and section 86.2 of respondent's Regulations 108; and (3) (assigned in the alternative) that she was not entitled to the specific exemption of $40,000 provided in section 1004(a)(1) of the Internal Revenue Code in computing her net taxable gifts.
FINDINGS OF FACT.
The petitioner is an alien, presently residing at 602 North Bedford Drive, Beverly Hills, California. Petitioner's gift tax return for the calendar year 1941 was filed with the collector of internal revenue for the second district of New York. On that return petitioner stated that she was a citizen of France and that her residence was the ‘U.S.A. since May 9, 1941.‘ Also, she reported gifts as made on February 19, 1941, in trust for her children, of United States Treasury notes of an aggregate value of $189,465.30, and reported such gifts as exempt from gift tax, stating that at the time the gifts of United States Government securities were made she was a nonresident alien, not engaged in business in the United States, within article 2 of Regulations 79. The petitioner made no other gifts during the calendar year 1941. No part of the specific exemption provided in section 1004(a)(1) of the Internal Revenue Code or in the corresponding provisions of any prior law was ever claimed by or allowed to petitioner.
The petitioner was born in Germany in 1896 and was a citizen of that country until 1938, when she became, and has since remained, a naturalized citizen of France. From 1921 until her departure from Paris in May 1940, as hereinafter set out, the petitioner resided permanently and continuously in France, but visited Germany quite regularly. For many years she owned, and she still owns, two residences in France, one in Paris and the other near Toulon.
Petitioner has two children, a daughter, Antoinette Miness (nee Kuhlman), by her first marriage, and a son, Gilbert De Goldschmidt-Rothschild, by her second marriage, and in the fall of 1940 they were 17 and 15 years of age respectively. During 1940 and 1941 petitioner's mother lived in France. Petitioner has a legal divorce from her last husband, who lives in Switzerland.
At the outbreak of World War II petitioner possessed a personal fortune of the value of approximately $20,000,000. Among other properties, all in Europe, she owned all of the stock of a Dutch corporation, which in turn owned American securities on deposit at Brown Brothers, Harriman & Co., of New York. Petitioner never actively managed any of her properties or financial affairs. They were managed by a trustee.
Due to the invasion of France by the German Army and its approach to Paris and her fear that she and her children would be placed in a concentration camp, the petitioner procured from the American consul in Paris a visitor visa to the United States for herself and two children and, on May 20, 1940, she and her children left Paris for Lisbon, Portugal, for the purpose of arranging transportation to America. Petitioner took with her only such personal property as she could carry with her and sufficient cash funds to make the journey. While in Lisbon awaiting passage on ‘The Clipper‘ to America their visitor visas were canceled under a general order affecting all United States visitor visas issued prior to a certain date. Petitioner sought revalidation of those visitor visas, but was advised by the American consul at Lisbon that validation was not possible and that petitioner and her two children would have to wait for immigration visas to the United States. Petitioner did not want immigration visas, because she desired only to visit America and to return to France when conditions were favorable. She then obtained Mexican visas and sailed from Lisbon on August 9, 1940, bound for Mexico via New York, where the ship stopped over for three days before proceeding to Mexico.
Upon the arrival of petitioner and her two children in Mexico City in the latter part of August 1940, she went to the American consul in that city and requested revalidation of their United States visitor visas, but was advised that before that could be done it would be necessary for them to obtain visas to another country in the Western Hemisphere to which they could proceed upon expiration of their United States visitor visas. Petitioner thereupon obtained Argentina visas good for a period of two years, for herself and children. On September 23, 1940, petitioner subscribed to, before the American vice consul at Mexico City, an alien registration form wherein she stated, inter alia, that she expected to remain in the United States for six months and intended to engage in ‘pleasure and taking care of certain business interests.‘ On September 24, 1940, the American consul in Mexico City revalidated the petitioner's and her childrens' United States visitor visas.
Due to illness, the petitioner was delayed several weeks in leaving Mexico City, but her children proceeded to New York City, where they, with the aid of friends, secured a furnished apartment as a place in which to live, but in order to obtain it petitioner had to agree to a nine-month lease, with the privilege of subleasing. In view of the fact that her temporary visitor visa was good for only six months, she insisted on the privilege of subleasing.
On October 17, 1940, petitioner was admitted to this country at Brownsville, Texas, as a temporary visitor under section 3(2) of the Immigration Act, and her ‘Certificate of Admission of Alien‘ set forth, inter alia, that she was a ‘.nonimmigrant,‘ that he destination was ‘Argentina via N.Y.,‘ and the ‘Purpose and period of time for which admitted, visit to 3/16/41.‘
Petitioner proceeded to New York City, and moved into the rented apartment, and for a period of several months she was quite ill with double kidney inflammation and a nervous depression, and remained under a doctor's care, but was not confined to bed at all times. At the time of her arrival in America and for several months thereafter petitioner desired and fully intended to return to France as soon as conditions would permit, and she constantly declared such intention to her friends and also to her children, who wished to remain permanently in the United States.
In November 1940 petitioner made application to the French consul in New York City for permission to return to France, but received no answer with respect thereto during the following five or six months. In January or February 1941 petitioner applied for a visa to Portugal, with the hope that if she could get to that country she could see her mother, who was living in southern France.
On February 3, 1941, petitioner signed and, on February 5, 1941, filed with the Immigration and Naturalization Service an application and a supporting general information form for the privilege of preexamination for the purpose of determining, in advance of making application for an immigration visa, her admissibility into the United States as a permanent resident. On February 19, 1941, petitioner wrote a letter to the Immigration and Naturalization Service requesting prompt action on that application, since she had received a letter from the American consul in Montreal, Canada, saying that he was expecting her and her children after preexamination and also since their visitor visas would expire in about a fortnight.
On February 21, 1941, the applications of petitioner and her children for preexamination were officially denied, because they had not lived in the United States for at least six months.
In reply to petitioner's letter of February 19, she was notified by letter dated February 25, 1941, that, since she and her children had not lived in the United States for at least six months, they were not eligible for preexamination for the purpose of proceeding to Canada to make application for immigrant visas and that their applications for preexamination could be renewed ‘if and when you and your children have had the required six months residence.‘
From the time petitioner arrived in this country on October 17, 1940, and up to April 1941, she did not want to become a permanent resident of the United States, but desired and hoped to return to France, which to her was home and also was where her mother lived. During February 1941 petitioner, with uncertainty and hesitation, took the above mentioned preliminary steps looking toward making application for an immigration visa, because of the insistence of her two children, who wished to remain permanently in the United States.
In April 1941 after having lived in this country for the required six months and having become eligible for preexamination, the petitioner definitely decided, for the first time, that she would seek entry into the United States under an immigrant visa, and she was preexamined in Baltimore, Maryland, in April 1941. On May 7, 1941, she made application to the American Consul in Montreal for a visa as a quota immigrant, which was granted, and on the same day she entered the United States at the port of Rouses Point, New York, as a quota immigrant under visa No. 1619. Also, on May 7, 1941, petitioner executed an alien registration form wherein she stated that she expected to remain in the United States permanently. In the fall of 1942 petitioner applied for her first papers for American citizenship.
At the time of petitioner's entry into the United States in October 1940, her wholly owned Dutch corporation had assets in this country consisting of approximately $300,000 of marketable American securities on deposit with Brown Brothers, Harriman & Co., New York City, and petitioner caused such securities to be transferred to a custodian account for herself as the sole owner thereof. Also, at the time of her entry, her cousin by marriage, Alexander Van Marx, was living in New York City. He had been a banker for many years in Amsterdam, Holland, and had general knowledge of American securities, and petitioner relied upon him for advice and guidance as to her financial affairs. Shortly after petitioner's arrival in New York City, in October 1940, Van Marx recommended and for a time thereafter urged that petitioner transfer a portion of her assets in this country in trust for the benefit of her two minor children. The primary purpose of such recommendation was to provide financial protection for the children because of petitioner's poor health at that time and also because both children had announced their desire to remain permanently in the United States, while it was petitioner's desire and intention to return to France as soon as that was possible. Van Marx further recommended that the Fiduciary Trust Co. of New York be made the trustee of the proposed trusts. Petitioner accepted Van Marx' advice and decided to create two trusts, each having a corpus of approximately $100,000. In October or November 1940 Van Marx introduced petitioner to a trust officer of the Fiduciary Trust Co., who, in the course of discussions of the terms of the proposed trusts, suggested that, if a sufficient amount of her assets were converted into United States Government bonds or treasury notes, the principal amount to be transferred to the two trusts would qualify as tax exempt gifts by a nonresident alien, as provided by law.
On December 18, 1940, and under a Treasury Department license, securities valued at approximately $190,000 were transferred from Brown Brothers, Harriman & Co. and deposited with the Fiduciary Trust Co. to be held in a custodian account for petitioner, subject to the restrictions on transactions dealing with securities of aliens. On December 24, 1940, the Fiduciary Trust Co. made application, No. 30, to the Treasury Department for a license to sell at the market, the securities, valued at approximately $190,000 held in petitioner's custodian account and to reinvest the proceeds in United States Government securities, to be held in the custodian account for petitioner. The license applied for was granted on January 9, 1941, and therein the purchase of United States Government securities was limited to a total cost of $190,000, to be held for petitioner's account, subject to payments, transfers, and withdrawals only in accordance with licenses issued.
By letter dated January 9, 1941, the petitioner authorized the Fiduciary Trust Co., upon receipt of Treasury license, to sell all securities in her custodian account at market and with the proceeds to buy at market $100,000 United States Treasury 1 per cent notes due September 15, 1944, and as many United States Treasury 3/4 per cent notes due March 15, 1945, as the remaining principal proceeds permitted. That letter was received by the Fiduciary Trust Co. on January 11, 1941.
During the period from January 14 to January 22, 1941, inclusive, and for the custody account of the petitioner, the Fiduciary Trust Co. sold all of the securities held in that account for the aggregate sum of $190,932.99, and with such proceeds purchased, at an aggregate principal cost of $189,986.58, the following:
$100,000 United States 1% Treasury notes, series C, dated December 22, 1939, and due September 15, 1944.
$86,900 United States 3/4% Treasury notes, series A, dated March 15, 1940, and due March 15, 1945.
On January 4, 1941, the Fiduciary Trust Co. made application, No. 32, to the Treasury Department for license to transfer the United States Government securities referred to in the above mentioned application No. 39 to itself as trustee of two irrevocable trusts, and it attached thereto copies of the proposed trust agreements as approved by the Fiduciary Trust Co. and petitioner as the prospective trustee and donor, which agreements were to be executed upon issuance of the license. On February 17, 1941, a license was granted to make the proposed transfers in trust, ‘provided payments, transfers or withdrawals from such property will be made only in accordance with licenses issued pursuant to Executive Order No. 8389, as amended.‘
Upon receipt of the above mentioned license on February 19, 1941, the Fiduciary Trust Co. by written acceptance of the trust, completed execution of the two trust instruments, which had theretofore been executed and delivered by petitioner on January 15, 1941. The delay from January 15 to February 19 in acceptance of the trust by the Fiduciary Trust Co. was occasioned by the necessity of waiting for the granting of the license, which it received on February 19, 1941. On February 19, 1941, there were transferred from the custodian account for petitioner to the Fiduciary Trust Co. as trustee, securities for the designated trusts as follows:
Gilbert De Goldschmidt-Rothschild Trust
$50,000 United States 1% Treasury notes, series C, due September 15, 1944.
$43,450 United States 3/4% Treasury notes, series A, due March 15, 1945.
Antoinette Kuhlman Trust
$50,000 United States 1% Treasury notes, series C, due September 15, 1944.
$43,450 United States 3/4% Treasury notes, series A, due March 15, 1945.
The two trust instruments contained similar provisions, except as to the names of the beneficiaries, one trust being for the benefit of petitioner's son, then 15 years of age, and the other being for the benefit of petitioner's daughter, then 17 years of age. Each trust agreement provided that petitioner, as ‘a citizen and resident of France temporarily living in New York City,‘ assigned and transferred U.S. Government securities, which were specifically described as above set out, to the trustee ‘irrevocably,‘ to pay the net income to the beneficiary for life and, after his or her attaining the age of 21 years, to deliver to him or her any part or all of the principal requested by him or her. The contingent remaindermen did not include petitioner. The trusts could not be altered, amended, or modified. The trustee was given broad powers to manage, sell, invest, and reinvest the trust property, and to make investments in income- or non-income-producing property; but it was provided that no purchase, sale, or exchange should be made for the trust fund without approval of the donor during the minority of the beneficiary or the latter's approval after attaining majority. The trustee was given absolute discretion to retain any investment or to hold any uninvested property for such period as it might determine. The trustee could, in its absolute discretion it if deemed such action advisable by reason of any emergency or any change of circumstances, pay over the whole or any part of the principal to the beneficiary entitled at the time to receive the income from such property. The trusts also provided that the donor could remove the trustee and appoint a successor.
Subsequent to February 19, 1941, the United States Treasury notes transferred to the two trusts on that date were sold from time to time by the trustee and the proceeds reinvested in domestic stocks and securities, including $16,000 United States 2 1/2 per cent Treasury bonds. Such sales and reinvestments were made in accordance with a policy of the Fiduciary Trust Co. of establishing investment diversification for trusts and also to derive more income out of the trust property. Petitioner from time to time received for her approval written recommendations from the trust company with respect to proposed purchases or sales of various securities, which she invariably signed and returned to the trust company. The dates and the face amounts of those sales were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Face amount ¦ +------------+----------------------------------------+-----------------------¦ ¦Date sold ¦Description of treasury notes ¦For ¦For ¦ ¦ ¦ ¦Antoinette ¦Gilbert ¦ +------------+----------------------------------------+------------+----------¦ ¦ ¦ ¦ ¦Kuhlman ¦Rothschild¦ +-----+------+----------------------------------------+------------+----------¦ ¦ ¦ ¦ ¦trust ¦trust ¦ +-----+------+----------------------------------------+------------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦Feb. ¦25, ¦U.S. Treasury notes, 3/4%, series A, due¦$43,450 ¦$43,450 ¦ ¦ ¦1941 ¦3/15/45 ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦Feb. ¦27, ¦U.S. Treasury notes, 1%, series C, due 9¦3,000 ¦3,000 ¦ ¦ ¦1941 ¦/15/44 ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦May ¦12, ¦-----do ¦5,000 ¦5,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦May ¦23, ¦-----do ¦10,000 ¦10,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦June ¦2, ¦-----do ¦8,000 ¦8,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦July ¦29, ¦-----do ¦11,000 ¦11,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦Sept.¦17, ¦-----do ¦8,000 ¦8,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦Oct. ¦15, ¦-----do ¦5,000 ¦5,000 ¦ ¦ ¦1941 ¦ ¦ ¦ ¦ +-----+------+----------------------------------------+------------+----------¦ ¦ ¦ ¦Total ¦93,450 ¦93,450 ¦ +-----------------------------------------------------------------------------+
On April 10, 1941, each of the trusts then having on hand approximately 50 per cent of the above mentioned Treasury notes, Van Marx, who was then in the employ of Fiduciary Trust Co., wrote a letter to Gilbert De Goldschmidt-Rothschild, stating that the retention by the trust of approximately 50 per cent of the original securities and cash ‘is the right thing to do with the bad news on hand and more of it to be expected‘; that as the investments then stood each beneficiary had ‘an approximate annual income of $3,000‘; and that Eastman Kodak stock would be repurchased when the price went down.
In asserting the deficiency involved herein, respondent determined that at the time the gifts were made petitioner ‘was a resident of the United States,‘ and further, ‘that the property transferred was not bonds, notes or certificates of indebtedness of the United States within the meaning of Section 86.2 of Regulations 108 relating to the gift tax.‘ The respondent allowed no part of the specific exemption of $40,000 provided in section 1004(a)(1) of the Internal Revenue Code.
Until about the first part of April 1941 petitioner did not desire or intend to become a resident of the United States, but desired and intended to return to her home in France.
At the time the petitioner's gifts in question were completed by transfers in trust on February 19, 1941, she was a nonresident alien temporarily living in New York City, having been admitted into the United States at Brownsville, Texas, on October 17, 1940, for the purpose of a ‘visit to 3/16/41‘ under a United States visitor visa issued in Mexico City on September 24, 1940. At the time the gifts were made she was not engaged in business in this country; nor was she so engaged at any time during 1940 or 1941.
The sales of the domestic stocks and bonds for the petitioner's custody account and the use of the proceeds therefrom for the purchase of the aggregate $186,900 face amount of United States Treasury notes, during the period from January 14 to 22, 1941, were made with the intention that the petitioner's then contemplated gifts in trust could be made as tax exempt gifts.
In this proceeding there is no question but that petitioner was a citizen of France and an alien living in but not engaged in business in the United States at the times material to her transfer of property by gift on February 19, 1941. However, if she was a resident alien, as determined by respondent, then clearly the gifts involved herein are subject to the gift tax imposed by section 1000 of the Internal Revenue Code.
SEC. 1000. IMPOSITION OF TAX.
(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. * * *
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresidents not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States.
The questions (aside from the alternative third issue) presented for our redetermination are: First, was petitioner a nonresident alien not engaged in business in the United States at the time the gifts were made, and, if so, second, did the property transferred by gift consist of bonds, notes, or certificates of indebtedness of the United States, thus making the gifts exempt from gift tax under the provisions of Title 31, United States Code Annotated, Sec. 750, and the respondent's regulations, as contended by petitioner?
Sec. 750. Bonds and certificates of indebtedness beneficially owned by nonresident aliens not engaged in business in United States exempt from taxation. Notwithstanding the provisions of sections 745, 747, 752-754(b), 757, 757b, 757c, 758, 760, 764-766, 769, 771, 773, 774 and 801 of this title, or of any other law, bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a nonresident alien individual, or a foreign corporation, partnership or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation imposed on July 9, 1918, or thereafter by the United States, any State, or any of the possessions of the United States, or by any local taxing authority.
SEC. 86.0 (Regulations 108 (approved July 30, 1943)). SCOPE OF REGULATIONS.— These regulations deal with the gift tax imposed by chapter 4 of the Internal Revenue Code and apply to transfers of property by gift during the calendar year 1940 and thereafter. * * *
To the extent that Regulations 79 (1936 Edition), as amended by Treasury decisions, have been made applicable to gift taxes imposed by the Internal Revenue Code, they are hereby superseded.
SEC. 86.2 TRANSFERS REACHED.— (a) In general.— The statute imposes a tax whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. * * * a gift of a bond, note, or certificate of indebtedness issued by the Federal Government prior to March 1, 1941, if made by a nonresident alien not engaged in business in the United States, is not subject to the tax; * * *
SEC. 86.4 RESIDENT.— * * *
A resident is one who has his domicile in the United States (including only the States, the Territories of Alaska and Hawaii, and the District of Columbia) at the time of the gift. (See section 3797(a)(9).) All others are nonresidents. 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 suffice to constitute domicile, nor will intention to change domicile effect such change unless accompanied by an actual removal.
(The pertinent provisions of Regulations 108, sections 86.2 and 86.4, are similar to those in Regulations 79, articles 2 and 4.)
The respondent contends that the facts of record show that prior to and on February 19, 1941, petitioner had a fixed intention to remain indefinitely in the United States and thus was a resident alien, and he further contends that, regardless of her status as a resident or nonresident alien, her acquisition of United States Treasury notes during January 1941 and transfer of them to the trusts were only for the purpose of avoiding gift taxes and formed no functional or business purpose apart from the transfers by gift and therefore were ineffectual for tax purposes.
Regulations 108, section 86.4, supra, and also the earlier Regulations 79, article 4, provide a test of the term ‘resident‘ as used in the Internal Revenue Code for gift tax purposes and states, briefly, ‘A resident is one who has his domicile in the United States * * * at the time of the gift. * * * All others are nonresidents. * * * Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile. * * * ‘ Both parties cite those regulations for the proposition that the test of petitioner's residence is domicile and cite authorities to the effect that to change an established domicile to a new one there must be a fixed purpose to remain in the new location permanently or indefinitely. Axiomatic principles of law are that domicile once acquired is presumed to continue until shown to have been changed by two indispensable facts, namely, residence in the new locality and intention to remain there permanently or indefinitely; and, further, that intention, which must be more than a mere floating one, may be determined from acts and declarations. Mitchell v. United States, 21 Wall. 350; Shilkret v. Helvering, 138 Fed.(2d) 925, affirming 46 B.T.A. 1163; Rosenberg v. Commissioner, 37 Fed.(2d) 808, affirming 10 B.T.A. 601; Pietro Crespi, 44 B.T.A. 670; Samuel W. Weis, 30 B.T.A. 478, and the authorities cited in those cases.
There is no dispute between the parties as to the essential facts relating to the various acts and declarations of petitioner at times material to the first question herein, but they differ as to the ultimate conclusion to be drawn therefrom as to whether or not petitioner had changed her domicile or permanent residence from France to the United States prior to making the gifts on February 19, 1941. On this record, we have concluded, and have found as an ultimate fact, that petitioner was a nonresident alien at the time the gifts were made. The facts herein lead clearly to that conclusion. The petitioner was a citizen of and domiciled in France at the time she fled that country to avoid persecution by invading Germans, with the intention of returning to France as soon as favorable conditions would permit. She was permitted to enter this country in October 1940, under a temporary visitor visa, as a ‘nonimmigrant‘ whose destination was ‘Argentina via N.Y.‘ and whose stay in the United States was limited for the purpose of a ‘visit to 3/16/41.‘ Prior to being granted permission to enter this country as a temporary visitor, petitioner was required to obtain a visa to another country in the Western Hemisphere to which she could proceed upon expiration of her United States visitor visa. From the time of her entry as a visitor until March 16, 1941, she was under compulsion to leave this country at the termination of that period, unless through proper procedure the United States Government granted her an additional stay as a visitor, and at no time material here was an additional stay granted nor did she, during that period, reenter the country as a quota immigrant. During that time petitioner had continuously told friends and her children that she intended to return to her home in France. From the date of her arrival and throughout January, February, and March 1941 petitioner had not decided to change her domicile from France to the United States, but, on the contrary, definitely maintained an unchanged intention not to become a resident of this country, since she continued to have the intention of returning to her home in France as soon as conditions beyond her control would permit. The fact that petitioner took certain steps in February 1941 looking towards preexamination to determine in advance her eligibility for entry as a quota immigrant from Canada did show some degree of uncertainty in her state of mind and that she might change her intention, but did not show that she had changed her then continued intention to return to France, for those steps were purely preliminary to a possible change of intention in the future.
On the facts herein, we conclude that petitioner did not, at any time material here, change her established residence or domicile from France to the United States, and we hold that respondent erred in determining that she was a resident of the United States at the time the gifts were made.
Notwithstanding we have decided on the first question that petitioner was a nonresident of the United States at the time she made the gifts, we are nevertheless of the opinion that the gifts were taxable, upon authority of Pearson v. McGraw, 308 U.S. 313, as contended by respondent. Also, see Van Dyke v. Wisconsin Tax Commission, 235 Wis. 128; 292 N.W. 313; affirmed per curiam, 311 U.S. 605, on authority of Pearson v. McGraw, supra.
In the Pearson case, supra, a resident of Oregon, who afterwards died, made a gift in trust, in contemplation of death. The donor owned intangibles which were located in the hands of his agent in Illinois and a few days prior to the gift the agent was instructed to sell such intangibles and purchase Federal reserve notes, which was done. A few days thereafter the donor executed, in Oregon, a trust agreement by which the Federal reserve notes were irrevocably transferred in trust for certain beneficiaries. Shortly after the creation of the trust the trustee used those notes to purchase bonds and other personal property for the trust. All of the property involved in those transactions remained physically in Illinois. Admittedly, under the statutes of Oregon, that state had the power to tax the transfer if the gift consisted of intangibles, because the situs of such property was determined by the domicile of the donor. The donor's estate contended that it was not liable for the asserted tax on the transfer in trust because the subject matter of the gift consisted of tangible property (Federal reserve notes) the situs of which was in Illinois and consequently immune from taxation by Oregon under the Fourteenth Amendment of the United States Constitution. The Supreme Court of Oregon held that the Fourteenth Amendment prohibited the imposition of the tax, since neither the securities, the cash used to purchase the Federal reserve notes, nor the notes themselves were ever in Oregon, and further, that the notes were tangible property. The Supreme Court of the United States held that the various steps in the series of transactions constituted one integrated and indivisible transaction; that the transaction was a transfer in trust by the decedent of the intangibles which he originally owned located in Illinois and from the proceeds of which the Federal reserve notes were purchased; and that such result was reached notwithstanding each step in the series was real, saying:
* * * basically the sale of intangibles, the acquisition of federal reserve notes, and their transfer under the agreement * * * were interdependent. * * * The mere sale of the intangibles and the acquisition of the federal reserve notes had no functional or business significance apart from the * * * transfer. * * * Admittedly decedent had such a purpose (to make a gift in contemplation of death) on the transfer of the notes. To hold that such purpose was not present on the sale of the intangibles would be to isolate one part of the total transaction and to give it significance and meaning utterly inconsistent with the fact that the intangibles were sold for the purpose of acquiring the notes which, in turn, were to be placed under an irrevocable trust. (Brackets supplied.)
The Court held that the transfer was subject to the Oregon tax and that it was not necessary to decide whether or not the Federal reserve notes constituted tangible property.
The Pearson case, supra, and the instant proceeding are clearly analogous. In both cases the taxing authority asserted a tax on a transfer of property by gift in trust; shortly prior to the gift the donor owned property, the gift of which would have been clearly subject to tax; the donor, for the sole purpose of making the gift, converted that property into other property of such a character that it was thought that the gift thereof would not be subject to tax; the donor fully intended to make the gift at the time his (taxable) property was sold and the proceeds converted into other (nontaxable) property; and such conversion served no function or business significance apart from the transfer coupled with the purpose of avoiding a tax thereon; and the actual transfer in trust of what was thought to be nontaxable property can not be isolated to stand apart from the total integrated transaction.
The petitioner endeavors to distinguish the Pearson case, supra, contending that there the donor had a prearranged program which included the trustee's reconversion of the property transferred in trust into property similar to that originally owned by the donor immediately prior to the gift, while here there was no such prearranged program. In our opinion, there was here such a program, clearly established by the facts and circumstances surrounding the transaction. The petitioner never actively managed her financial affairs and relied wholly on the advice of others (in this country on the advice of Van Marx), but she knew of, discussed, and assented to the plan to sell her various income-producing domestic stocks and bonds and to purchase low interest rate United States Treasury notes for the purpose of avoiding a gift tax on the transfer in trust she intended to make. Her testimony to the effect that she did not ‘discuss with Van Marx the details of any investments that the trustee would make after the trusts were created ‘ or her testimony that she did not ‘discuss with anyone either before or after the trusts were created how long these United States Treasury notes would be held by the trustee‘ is not sufficiently persuasive to throw a different light on the transaction as it actually took place. The testimony of Van Marx, petitioner's principal advisor as to the creation of the trusts and the several steps involved in the transfers, does not change the picture either. While he remembered most of the details surrounding the gifts in trust and while he testified that he did not before the trusts were created discuss ‘how long‘ the United States Treasury notes would be held by the trustee after the trusts were created, when it came to the question of whether he discussed with petitioner, before the trusts were created, he testified that ‘I suppose I did‘ and, further, ‘I do not remember exactly any more.‘
On this record, we conclude that petitioner's conversion of domestic stocks and bonds into United States Treasury notes under a prearranged program or understanding and solely for the purpose of making a tax-exempt gift in trust, was ineffectual for gift tax purposes.
The respondent did not err in his determination that the gifts were not exempt from gift tax.
Having concluded that petitioner was a nonresident of the United States at the time the gifts involved were made, it necessarily follows that she was not entitled to the $40,000 specific exemption provided by section 1004(a)(1) of the Internal Revenue Code, which is granted to residents only. The respondent did not err in not allowing petitioner such specific exemption.
Reviewed by the Court.
Decision will be entered for the respondent.