Estate of Silver v. Comm'r

*431 OPINION

VASQUEZ, Judge: Respondent determined a deficiency of $ 105,325 ¹ in the Federal estate tax of the Estate of Avrom A. Silver (decedent). The issue for decision is whether the estate of decedent, who was not a citizen of the United States and did not reside in the United States, is entitled to a charitable contribution deduction on the estate tax return (of more than the amount allowed by respondent) pursuant to the Revised Protocol Amending the Convention With Respect to Taxes on Income and Capital, Mar. 17, 1995, U.S.-Can., S. Treaty Doc. 104-4 (1995) (1995 Protocol).

BackgrounThe parties submitted this case fully stipulated pursuant to Rule 122. ² The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time the petition was filed, *16 the mailing address for the estate was in Toronto, Ontario, Canada.

Decedent, a citizen and resident of Canada, died on October 26, 1997. The executors of the estate are Bonny Fern Silver, Kenneth Kirsh, and Ronald Faust, none of whom resides in the United States.

Decedent's will provided for charitable bequests of $ 312,840 to Canadian-registered charities; these charities are organizations described in paragraph 1 of article XXI of the Convention With Respect to Taxes on Income and Capital, Sept. 26, 1980, U.S.-Can., art. XXI, par. 1, T.I.A.S. No. 11087, 1986-2 C.B. 258, 265, 1986 IRB LEXIS 1083 (the convention). The bequests were *432 paid solely out of funds and property located outside the United States.

Decedent's gross estate in the United States consisted of 252,775 shares of Neuromedical Systems, Inc., valued at $ 516,268 on the alternate valuation date. See sec. 2104(a). The*17 value of decedent's gross estate outside the United States was over $ 100 million.

Upon decedent's death, the estate filed a Form 706NA, United States Estate (and Generation Skipping Transfer) Tax Return (tax return). The estate claimed a charitable contribution deduction of $ 312,840 on the tax return.

In the notice of deficiency, respondent allowed a charitable contribution deduction of only $ 1,615. Respondent explained:

   The decedent's will, however, did not direct payment of the

   residuary charitable bequests exclusively from the U.S. assets.

   As a result, the charitable deduction is limited to the

   proportionate part of the U.S. assets that passes to the

   charitable legatees.

Respondent calculated the deduction as follows: ($ 516,268/$ 100 million) x $ 312,840 = $ 1,615 (i.e., the value of U.S. assets over the value of worldwide assets multiplied by the amount of charitable bequests in issue).

Discussion

The estate argues that the value of decedent's charitable bequests is deductible in full pursuant to article XXIX B of the convention, as amended by the 1995 Protocol. Respondent argues that only a proportional deduction is allowed because there is no direction in the will regarding which property is to be used to fund the bequests.

A decedent who is not a resident or citizen of the United States*18 is subject to a tax on the transfer of the taxable estate which is situated in the United States at the time of the decedent's death (estate tax). Secs. 2101, 2103. Section 2106(a)(2)(A)(ii)allows a deduction from the value of the decedent's taxable estate for bequests to a domestic corporation organized and operated for charitable purposes. ³ Further, *433 this deduction is limited to "transfers to corporations and associations created or organized in the United States, and to trustees for use within the United States". Sec. 20.2106-1(a)(2)(i), Estate Tax Regs.; see sec. 2106(a)(2)(A)(ii). This deduction may not exceed the value of the transferred property required to be included in the gross estate. Sec. 2106(a)(2)(D). Decedent did not make a bequest to a corporation or association created or organized in the United States; decedent made all relevant bequests to Canadian-registered organizations described in paragraph 1 of article XXI of the convention. ⁴ We conclude that the estate is not entitled to a deduction for the charitable bequests for more than the amount allowed by respondent. ⁵

*19 The 1995 Protocol added to the convention article XXIX B, paragraph 1, ⁶ which provides:

     Where the property of an individual who is a resident of a

   Contracting State passes by reason of the individual's death to

   an organization referred to in paragraph 1 of Article XXI

   (Exempt Organizations), the tax consequences in a Contracting

   State arising out of the passing of the property shall apply as

   if the organization were a resident of that State.

In the instant case, this provision takes precedence over the statute according to the "last-in-time" rule. ⁷Whitney v. *434 Robertson, 124 U.S. 190, 194, 31 L. Ed. 386, 8 S. Ct. 456 (1888);*20 Square D Co. & Subs. v. Commissioner, 118 T.C. 299, 313 (2002). The estate argues that this paragraph in the 1995 Protocol overrides section 2106, allows the Canadian-registered charities to be treated as U.S. residents, and allows the estate the full charitable deduction. Respondent argues that the convention, as amended by the 1995 Protocol, does not change the result from that under section 2106.

*21 With regard to interpreting the 1995 Protocol, we stated in N.W. Life Assurance Co. of Can. v. Commissioner, 107 T.C. 363, 378-379 (1996):

      The goal of convention interpretation is to "give the

   specific words of a * * * [convention] a meaning consistent with



   the genuine shared expectations of the contracting parties".

Maximov v. United States, 299 F.2d 565, 568(2d Cir.

   1962), affd. 373 U.S. 49, 10 L. Ed. 2d 184, 83 S. Ct. 1054, 1963 C.B. 689 (1963). Courts liberally construe

   treaties to give effect to their purpose.

  United States v. Stuart, 489 U.S. 353, 368, 103 L. Ed. 2d 388, 109 S. Ct. 1183 (1989);

  Bacardi Corp. of Am. v. Domenech, 311 U.S. 150, 163, 85 L. Ed. 98, 61 S. Ct. 219, 1941 Dec. Commissioner Pat. 790 (1940). * * * "Although not

   conclusive, the meaning attributed to treaty provisions by the



   Government agencies charged with their negotiation and



   enforcement is given great weight".

   United States v. Stuart, supra at 369 (citing Kolovrat v. Oregon, 366 U.S. 187, 194, 6 L. Ed. 2d 218, 81 S. Ct. 922 (1961)

  ).

   * * * It is the role of the judiciary to interpret international

   conventions and to enforce domestic rights arising from them.

   See Kolovrat v. Oregon, 366 U.S. 187, 6 L. Ed. 2d 218, 81 S. Ct. 922 (1961);*22 Perkins

   v. Elg, 307 U.S. 325, 83 L. Ed. 1320, 59 S. Ct. 884 (1939); Charlton v. Kelly, 229 U.S. 447 ,57 L. Ed. 1274, 33 S. Ct. 945 (1913); United States v. Rauscher, 119 U.S. 407, 30 L. Ed. 425, 7 S. Ct. 234

   (1886). Tax treaties are purposive, and, accordingly, we should

   consider the perceived underlying intent or purpose of the



   treaty provision. See, e.g., Estate of Burghardt v.

   Commissioner, * * * [80 T.C. 705, 717 (1983), affd. without

   published opinion 734 F.2d 3 (3d Cir. 1984)] (treating a

   reference to a "specific exemption" in a U.S.-Italy

   estate tax treaty as not limited to an exemption as such, but



   included a subsequently enacted unified credit having the same



   function as an exemption); Smith, "Tax Treaty Interpretation

   by the Judiciary", 49 Tax Law. 845, 858-867 (1996). In

   addressing the issues of this case, we shall keep at the

   forefront our role in the interpretation of conventions.

We examine the underlying intent and purpose of the provision in the 1995 Protocol to clarify whether the relevant language of article XXIX B overrides section 2106 in this instance by treating the Canadian-registered*23 charities at issue as U.S. residents, even though the bequests were funded by sources outside the United States.

*435 The technical explanation accompanying the 1995 Protocol states:

   Under paragraph 1 of Article XXIX B, a U.S. estate tax deduction

   also will be allowed for a bequest by a Canadian resident (as

   defined under Article IV (Residence)) to a qualifying exempt

   organization that is a Canadian corporation. However,

   paragraph 1 does not allow a deduction for U.S. estate tax

   purposes with respect to any transfer of property that is not

   subject to U.S. estate tax. [Emphasis added.]

Treasury Department Technical Explanation of the Protocol Amending the Convention Between the United States of America and Canada (June 13, 1995), 4 Roberts & Holland, Legislative History of United States Tax Conventions 1366, 1403 (1996). ⁸

*24 Further, the Senate report from the Committee on Foreign Relations states:

     The proposed revised protocol obligates Canada and the

   United States to treat a decedent's bequest to a religious,

   scientific, literary, educational, or charitable organization

   resident in the other country in the same manner as if the

   organization were a resident of the first country. Thus, for

   U.S. estate tax purposes, a deduction generally is allowed for a

   bequest by a Canadian resident to a qualifying exempt

   organization resident in Canada, provided the property

   constituting the bequest is subject to U.S. estate tax.

   [Emphasis added.]

S. Exec. Rept. 104-9, at 10 (1995). ⁹ These explanations clarify that, to take advantage of article XXIX B of the 1995 Protocol, the bequest must have been made from property that is subject to the U.S. estate tax.

*25 The parties stipulated that the bequests were paid solely out of funds and property located outside the United States. The funds used to pay the bequests were, therefore, not subject to the estate tax in the United States. Secs. 2101, 2103. We conclude that the convention, as amended by the 1995 Protocol, does not change the result from that under*436 section 2106 in this instance. Accordingly, we sustain respondent's determination.

In reaching our holding herein, we have considered all arguments made, and to the extent not mentioned above, we conclude them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.