Court Opinion

ID: 4594228
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:12:29.892171+00
Date Added: 2024-06-11T07:51:12.902204
License: Public Domain

Edith Rosenkranz, Petitioner v. Commissioner of Internal Revenue, Respondent; George W. Rosenkranz, Petitioner v. Commissioner of Internal Revenue, RespondentRosenkranz v. CommissionerDocket Nos. 9278-72, 9281-72United States Tax Court65 T.C. 993; 1976 U.S. Tax Ct. LEXIS 157; February 17, 1976, Filed *157 Decisions will be entered under Rule 155.  In 1941, petitioner George W. Rosenkranz moved to Cuba from Hungary, and in 1942, petitioner Edith Rosenkranz moved to Cuba from Austria.  They were married in Cuba in August 1945 and moved to Mexico City in October of that year.  During 1958 through 1967, petitioner George W. Rosenkranz was engaged in trade or business within the United States, earning more than $ 3,000 as salary from United States sources.  During 1958 through 1962, he also realized capital gains from transactions in the stock exchange in New York.  Held, both the salary and capital gains were the community property of petitioners under the applicable Mexican law.  Held, further, petitioner Edith Rosenkranz is taxable under sec. 871(c), I.R.C. 1954, on her community share of both the salary and the capital gains. Benjamin C. O'Sullivan, for the petitioners.James Silhasek, for the respondent.  Featherston, Judge.  FEATHERSTON*994  Respondent has determined the following deficiencies in petitioners' Federal income taxes:Docket No. 9278-72Docket No. 9281-72YearAmountYearAmount1959$ 22,545.001958$ 1,616.00196018,868.00195923,648.00196114,439.00196019,931.00196212,174.00196117,026.00196215,918.001963509.001964693.0019651,308.0019661,483.0019671,491.00The issues for decision are as follows:(1) Whether the income of petitioners from sources within the United States was community property under the governing law of Mexico.(2) Assuming an affirmative answer to issue 1, whether the community share of petitioner Edith Rosenkranz in such income was subject to Federal income taxes under section 871.  1*160  FINDINGS OF FACTAt the time their petitions were filed, George W. Rosenkranz and Edith Rosenkranz (hereinafter petitioners) were legal residents of Mexico City, Mexico.  On May 16, 1968, they filed their separate Federal income tax returns for 1958 through 1967 with the Director, Office of International Operations, Washington, D. C.Petitioner George W. Rosenkranz (hereinafter George) was born in Budapest, Hungary, on August 20, 1916, and became a citizen of that country by virtue of his birth.  He arrived in Havana, Cuba, in 1941 as a refugee.  From 1941 until October 1945, he resided in Havana, Cuba, and was employed as a research chemist.  At no point during this period of time did he intend to return to Hungary and, until shortly before his *995  departure from Cuba for Mexico in October 1945, he intended to become a Cuban citizen.Petitioner Edith Rosenkranz (hereinafter Edith) was born in Austria and was a citizen of that country by reason of her birth.  She arrived in Cuba in 1942 as a refugee from Nazi persecution.  From 1942 until October 1945, Havana was the place of her residence and domicile.  During this period, she had no intention of returning to Austria, and, *161  until shortly before her departure from Cuba to Mexico in October of 1945, she intended to become a Cuban citizen.George and Edith were both of the Jewish faith.  They were married in Havana, Cuba, in August of 1945.  At the time of the marriage, George was a citizen of Hungary and Edith was a citizen of Austria.  Neither one of them became a citizen of Cuba.In order that George might accept employment with Syntex Corp. in Mexico City, he and Edith immigrated to the Federal District of Mexico in October 1945, where they have since continued to reside.  Both of them acquired Mexican citizenship in 1949.George and Edith never entered into any express stipulations or agreements either before, at the time of, or after their marriage, with respect to any system or regime of property ownership.For each of the years 1958 through 1967, George earned income from sources within the United States in amounts in excess of $ 3,000 by reason of personal services rendered from time to time within the United States to his employer, Syntex Corp.  However, Edith conducted no activities in her own name or by her own efforts during those years by reason of which she might be deemed to be "engaged in*162  trade or business in the United States" within the meaning of that term as defined in the Internal Revenue Code.During 1958 through 1962, George sold, or caused to be sold, approximately 26,000 shares of corporate stock which had been purchased with funds representing earnings from his employment by Syntex Corp. after he became a resident of Mexico.  All of the stock sales were made through stock brokerage firms located in New York City, N. Y., with ownership of the shares passing in New York.In the income tax returns which George filed for the years in controversy, he reported as a nonresident alien doing business in *996  the United States, one-half of his salary income from United States sources and one-half of the gains realized on his stock sales on the theory that his income was community property. Edith reported, as a nonresident alien not engaged in business in the United States, one-half of George's salary as her income but none of the gains from the stock sales.Respondent determined that all the income, both the salary and the capital gains, is taxable to George.  Alternatively, if the United States source income is subject to division as community property, respondent*163  determined that one-half of such income is taxable to Edith.OPINIONTo sustain the determined deficiencies in George's case, respondent relies upon section 871(c).  In the form effective during the years 1958 through 1966, that section taxed capital gains as well as salary income from United States sources to a nonresident alien if he was engaged in trade or business (including the performance of services) in the United States and earned as much as $ 3,000.  2 George maintains that, under the laws of Mexico and Cuba, which control the ownership of the disputed items, both the capital gains and salary were community property and, therefore, only one-half thereof may be taxed to him.Alternatively, if only one-half of the capital gains and salary may be taxed to George, respondent maintains that the other half is taxable to Edith under section *164  871(c).  Edith concedes she is taxable under section 871(a)(1) on one-half of George's salary from United States sources, but contends that, since she was not present in the United States during 1958 through 1962, section 871(a)(2)(A) relieves her of any tax on the capital gains.Issue 1. Community PropertyThe first issue to be resolved is the ownership of the salary and stock sale income -- whether it was the separate property of George or the community income of George and Edith.  For the answer, we turn to the laws of Mexico, where petitioners were domiciled. Robert P. Lord, 60 T.C. 199, 204 (1973), affd. on this issue 525 F.2d 741 (9th Cir. 1975). As we shall discuss, those laws lead to an examination of Cuban law.  To aid us in the understanding *997  of those laws, the parties have furnished us with English translations of the pertinent statutes, certain court opinions, and the testimony of experts in Mexican and Cuban law.  Based on our study of these materials and our own independent research, 3 we have concluded that both the salary and the capital gains from the stock sales were community income.*165 Article 178, Civil Code of Mexico, 4 contemplates that Mexicans marrying in Mexico may agree that their property will be subject to a community property or separate property regime.  That article, however, does not apply to non-Mexican citizens marrying outside of Mexico.  No articles of the Civil Code of Mexico expressly deal with such cases.  In such cases, the parties agree that the Mexican courts would follow what is called the "Estatuto Personal," literally translated as the "law of nationality."Under the "Estatuto Personal," Mexico would look either to the laws of the nationality of the individuals or to the laws of their marital domicile to determine whether the marriage participants were subject to a community property regime.  Prior to their marriage, petitioners were living in Cuba where they expected to become Cuban citizens and live indefinitely.  They had fled Nazi persecution*166  in Austria and Hungary and, being of the Jewish faith, were essentially "stateless persons." 5In these circumstances, *167  we think petitioners are correct in their position that, under the "Estatuto Personal," the Mexican courts would look to the law of Cuba, where they were domiciled at the time of their marriage, to determine the law controlling the ownership of their marital property.  In this respect, the second paragraph of article 1315 of the Cuban Civil Code is as follows: "In default of a contract regarding property, the *998  marriage shall be understood to have been contracted under the community property system." Since petitioners entered into no contract regarding the ownership of property, article 1315 would apply, and their property is subject to the regime of community property. This conclusion is buttressed by other provisions of Cuban law, article 187, Code of Private International Law, 6 as well as the testimony of the Cuban law expert.*168 Under the Cuban community property system, the wife obtains a present vested interest in one-half of the husband's earnings from employment and the increase in the value of the property purchased with such earnings. See art. 1401, Cuban Civil Code.  7 This interpretation of Cuban law is confirmed by the testimony of the expert witness as well as the decisions of the New York courts.  See Sanchez v. Bowers, 70 F.2d 715, 718 (2d Cir. 1934); In re Mesa's Estate, 172 App. Div. 467, 159 N.Y.S. 59 (1st Dept. 1916), affd. per curiam 219 N.Y. 566, 114 N.E. 1069 (1916). Since Edith had a vested interest in one-half of George's salary and capital gains, he may not be taxed on the full amount thereof.  See United States v. Mitchell, 403 U.S. 190 (1971); United States v. Malcolm, 282 U.S. 792 (1931); Bender v. Pfaff, 282 U.S. 127 (1930); Poe v. Seaborn, 282 U.S. 101 (1930). Respondent's determination that the full amount of the capital gains and salary*169  are taxable to George, therefore, cannot be sustained.  See and compare Alejandro Zaffaroni, 65 T.C. 982 (1976).Issue 2. Taxability of Petitioner Edith's Share of the Community IncomeWe have this day decided Alejandro Zaffaroni, supra, in which we concluded on facts similar to those in the instant case that a wife's community share of both salary and capital gains realized from United States*170  sources through the efforts of her husband, *999  engaged in trade or business in this country, were taxable to her under section 871(c).  We adhere to that conclusion here.Briefly, in the form effective during the taxable years in controversy, section 871(a)(1)8 taxed at a 30-percent rate the United States source salary income of nonresident aliens not engaged in trade or business in this country even though they were not physically present in this country.  That section would tax Edith's community share of George's United States source salary to her, but it does not apply to the capital gains derived from the stock sales in dispute.  Section 871(a)(2)(A)9 taxes at a 30-percent rate the United States source net capital gains of a nonresident alien not engaged in trade or business in the United States, present in the United States less than 90 days during the taxable year, only if the sales or exchanges of capital assets from which the net gains were derived were effected during his presence in this country.  Relying upon these provisions, Edith points out that she was not engaged in trade or business in the United States and was not present in the United States at any time*171  during 1958 through 1962, when the disputed capital gains were realized. On this ground, she argues, she is taxable upon her community share of the salary but is taxable upon none of the capital gains.*172 Section 871(c), 10 however, provides that a nonresident alien *1000  engaged in business in the United States is taxable upon all United States source income if his compensation for services performed in the United States amounts to as much as $ 3,000.  George's salary for services performed in the United States exceeded $ 3,000, and his activities concededly fall squarely within the terms of section 871(c).  Edith argues, however, that since she personally was not engaged in United States business activities, section 871(c) does not reach her community share of the capital gains.*173 In Alejandro Zaffaroni, supra, we held on similar facts, however, that a husband who is subject to a community property regime performs services on behalf of the conjugal partnership, referred to as the community. Poe v. Seaborn, supra at 112, 113; Fink v. United States, 454 F.2d 1387 (Ct. Cl. 1972), cert. denied 409 U.S. 844 (1972); Graham v. Commissioner, 95 F.2d 174 (9th Cir. 1938), revg. and remanding a Memorandum Opinion of this Court.  The community income so earned is as much the property of one spouse as the other, and it retains its character as the product of the services of the agent of the community in this country when attributed to the other spouse for Federal tax purposes.  See Inez de Amodio, 34 T.C. 894, 906 (1960), affd.  299 F.2d 623 (3d Cir. 1962); Frank Handfield, 23 T.C. 633, 637-638 (1955); Jan Casimir Lewenhaupt, 20 T.C. 151, 162-163 (1953), affd. per curiam 221 F.2d 227 (9th Cir. 1955).*174 Accordingly, Edith's community share of both the salary and capital gains is taxable to her under section 871(c).  Section 871(a)(2)(A) is rendered inapplicable by the community property doctrine that George's business activities in the United States were conducted by him as agent of the community, and his earnings were as much the earnings of Edith as his own.To reflect the foregoing conclusion,Decisions will be entered under Rule 155.  Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.↩2. Act of Nov. 13, 1966, Pub. L. 89-809, 80 Stat. 1539, amended sec. 871.  For taxable years beginning Jan. 1, 1967, sec. 871(b) is the amended equivalent of old sec. 871(c)↩.3. Under Rule 146↩ of the Rules of Practice and Procedure of this Court, the determination of foreign law is treated as a ruling on a question of law.4. Art. 178.  -- The marriage contract shall be made under the system of marriage community, or under that of separation of property.↩5. Petitioners' position was not unique during World War II.  Austria was incorporated into Germany in 1938 and became subject to its racial and political exclusion laws.  By 1941, Germany had divested all German Jews of their citizenship, and Austrian Jews suffered the same treatment.  Hungary, an Axis satellite, also enacted similar laws divesting Jews of their Hungarian citizenship. See Study on the Position of Stateless Persons, U.N. Doc. No. E/1112 (1949); Holborn, "The Legal Status of Political Refugees, 1920-1938," 32 Am. J. Int'l L. 680 (1938). The effect of statelessness is that the individual is subject to the laws of the government within whose jurisdiction he happens to reside and has no protection of the laws of his mother country.  See 1 Oppenheim, International Law, Secs. 291-294, 308-313 (7th ed. 1948); 64 Yale L.J. 1164↩ (1955).6. Art. 187, Code of Private International Law, states as follows:This contract is governed by the personal law common to the parties, and in the absence thereof, by that of the first matrimonial domicile.The same laws determine, in that order, the supplemental legal control in the absence of stipulation.↩7. The interpreter-witness translated art. 1401 into the record as follows:"To the conjugal partnership belongs: (1) Property acquired for a value consideration during the marriage at the expense of the partnership property whether the acquisition is made for the partnership or for one of the spouses only; (2) that obtained by the industries, salaries or work of the spouses of either of them; (3) the fruits, income or interest collected or accrued during the marriage forming from the partnership property or from that which belongs to either one of the spouses."↩8. SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.(a) No United States Business -- 30 Percent Tax.  -- (1) Imposition of tax.  -- Except as otherwise provided in subsection (b) there is hereby imposed for each taxable year, in lieu of the tax imposed by section 1↩, on the amount received, by every nonresident alien individual not engaged in trade or business within the United States, from sources within the United States, as * * * salaries, * * * a tax of 30 percent of such amount.9. Sec. 871(a)(2) reads as follows:(2) Capital gains of aliens temporarily present in the United States.  -- In the case of a nonresident alien individual not engaged in trade or business in the United States, there is hereby imposed for each taxable year, in addition to the tax imposed by paragraph (1) -- (A) if he is present in the United States for a period or periods aggregating less than 90 days during such taxable year -- a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from sales or exchanges of capital assets effected during his presence in the United States exceed his losses, allocable to sources within the United States, from such sales or exchanges effected during such presence; or↩10. Sec. 871(c) provides as follows:(c) United States Business.  -- A nonresident alien individual engaged in trade or business within the United States shall be taxable without regard to subsection (a). For purposes of part I, this section, sections 881 and 882, and chapter 3, the term "engaged in trade or business within the United States" includes the performance of personal services within the United States at any time within the taxable year, but does not include the performance of personal services -- (1) for a nonresident alien individual, foreign partnership, or foreign corporation, not engaged in trade or business within the United States, or(2) for an office or place of business maintained by a domestic corporation in a foreign country or in a possession of the United States,↩by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensation for such services does not exceed in the aggregate $ 3,000.  Such term does not include the effecting, through a resident broker, commission agent, or custodian, of transactions in the United States in stocks or securities, or in commodities (if of a kind customarily dealt in on an organized commodity exchange, if the transaction is of the kind customarily consummated at such place, and if the alien, partnership, or corporation has no office or place of business in the United States at any time during the taxable year through which or by the direction of which such transactions in commodities are effected).