SWAN v. COMMISSIONER

Docket No. 44690.

24 T.C. 829 (1955)

ESTATE OF OEI TJONG SWAN, OEI ING TJHING, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

United States Tax Court.

Filed August 3, 1955.


Attorney(s) appearing for the Case

Harry J. Rudick, Esq., and Mason G. Kassel, Esq., for the petitioner.

Ellyne E. Strickland, Esq., and Arthur L. Nims, Esq., for the respondent.


The respondent determined a deficiency in estate tax, in the amount of $758,649.32, and a delinquency penalty of $189,662.33. The petitioner claims that there has been an overpayment of tax and penalty.

The principal issue presented for consideration is whether assets located in the United States at the date of the decedent's death and held in the names of two foreign Stiftungs, including cash on deposit with two New York banks, are includible in the gross estate of the decedent for Federal estate tax purposes. The questions presented in this connection are: (A) Whether the transfers were "by trust or otherwise," subject to the power to amend or revoke within the meaning of sections 811 (d) and 862 (b) of the Internal Revenue Code; (B) whether the moneys on deposit in the name of the Stiftungs, or any part thereof, are to be treated as on deposit for the decedent and exempt from Federal estate tax under section 863 (b) of the Internal Revenue Code; and (C) whether the assets of the Stiftungs and of the decedent were vested in the State of the Netherlands at the date of the decedent's death and not includible in the gross estate. Other issues presented are: The value, on the date of decedent's death, of certain shares in American corporations and Dutch certificates representing a beneficial interest in shares of United States companies for Federal estate tax purposes; the fair market value of the Dutch guilder on the date of the decedent's death in terms of United States dollars; and whether there was reasonable cause for any delay in filing a Federal estate tax return on behalf of decedent's estate.

FINDINGS OF FACT.

The facts are partly stipulated, and to the extent so stipulated are incorporated herein by reference.

An estate tax return for the Estate of Oei Tjong Swan (hereinafter sometimes referred to as the decedent), who died a citizen and resident of the Netherlands (hereinafter sometimes referred to as Holland) on July 23, 1943, was filed on August 10, 1949, with the then collector of internal revenue for the second district of New York.

At the date of the decedent's death and until about June 1948, Oei Ing Tjhing, the decedent's oldest son and executor of the decedent's estate, was residing in Switzerland. Since he was not available to administer the decedent's estate in Holland, he executed a power of attorney in his capacity as executor of the decedent's estate, on August 9, 1943, to his brother, Oei Ing Hing, and K. Blom, authorizing these individuals to act for him in the administration of the estate. Both Oei Ing Hing and K. Blom were then and are presently residents of Holland. At that time K. Blom was a member of the Dutch firm of Kantoor H. J. Vooren which handled the administration of the estate. K. Blom had previously been an advisor to the decedent.

A United States estate tax return (Form 706) was executed in Holland on July 5, 1949, by Oei Ing Hing and K. Blom, acting as attorneys in fact for Oei Ing Tjhing. It disclosed a tax liability of $227,566.23, based on the inclusion in the gross estate of the value of United States securities held by two New York banks for the account of two Stiftungs, as described infra. Attached to the return was an affidavit in support of a request for a waiver by the Commissioner of Internal Revenue of delinquency penalties with respect to the tax shown by the return.

Thereafter, the respondent determined a deficiency in estate tax, in the amount of $758,649.32, and assessed a 25 per cent delinquency penalty.

The petitioner has made the following payments to the collector of internal revenue for the second district of New York on account of Federal estate tax liability, penalty, and interest:

    Date                                              Payment

July 29, 1949 -----------------------------------   $227,566.23
Aug. 10, 1949 -----------------------------------     78,737.92
Apr. 21, 1952 -----------------------------------     42,234.40

On May 27, 1952, Oei Ing Tjhing, as executor of the Estate of Oei Tjong Swan, filed Form 843 claiming a refund of Federal estate tax and delinquency penalty in the amount of $284,457.79.

Issue I.

A. Transfers to Yan and Kien Stiftungs.

The decedent was born in 1898 in Semarang in the Dutch East Indies (since renamed Indonesia, and so called hereinafter) and lived there until about 1931. While in Indonesia his occupation was that of an import and export merchant. In 1931, he left Indonesia with his family and established residence in Holland. His primary purpose for going to Europe was to give his children an education in European schools. After the decedent left Indonesia in 1931, his activities consisted mainly of attending to his personal investments.

In 1931, when the decedent settled his family in Holland, he had four sons and one daughter, namely, Oei Ing Tjhing, born in 1917, Oei Ing Hing, born in 1918, Oei Ing Bian, born in 1920, Oei Ing Wan, born in 1923, and the daughter, Oei Tien Nio, born in 1930. In 1934, the decedent became the father of another girl, Djie Swan Nio, who was considered illegitimate under the law of Holland since she was born to a woman who was not the decedent's legal wife under Dutch law.

On March 10, 1939, the decedent, Oei Tjong Swan, through Dr. W. Stauffacher, a Swiss lawyer, caused to be organized under Swiss law, a Stiftung, or family foundation, under the name of Yan Foundation in Zug, having its seat in the Municipality of Zug, Switzerland.

The pertinent provisions of the articles of the Stiftung are as follows:

1. NAME AND SEAT. Under the name of Yan Foundation there exists a Family Foundation in accordance with article 80 etc. of the Swiss Civil Code. It has its Seat at Zug (Switzerland).

2. PURPOSE. The purpose of the Foundation is the management of the Foundation Fund and the use thereof to the best interests of the legitimate descendants of the Founder.

3. DURATION. The duration of the Foundation is not limited as to time.

4. FUND. The Founder allots to the Foundation a fund of s.Fr. 10,000. — (ten thousand Swiss Francs).

The Fund of the Foundation may be increased by taking over the fund of other foundations or by additional allocations on the part of the Founder or other persons. If the allocations are made conditionally or subject to a special stipulation, they may be added to the fund of the Foundation only subject to the charge that the condition or charge does not conflict with the provisions of the Articles of the Foundation.

The income of the Foundation is formed by the proceeds and revenues derived from the fund of the Foundation. Advantages or disadvantages entailed by increases or decreases in value of individual assets shall not be taken into consideration when computing the income.

5. INVESTMENT OF THE FUND. The fund of the Foundation is to be administered and applied in the manner to be determined by the Board of the Foundation.

The investment of the fund of the Foundation may only be made in the form of conservative participations in corporations, furthermore in the form of bonds, mortgage bonds, purchase of realty, and granting of loans, secured by first-class securities in rem.

6. BOARD OF THE FOUNDATION. The first Board of the Foundation consists of the Founder as Chairman and one or several members who are to be appointed by the Founder.

In the event that one of these members should, for any reason whatsoever, leave the Board of the Foundation during the life of the Founder, then the Founder shall appoint a new member. The Board is entrusted with the legal representation of the Foundation in and out of court and the management of the Foundation. The Board of the Foundation may also invest the fund of the Foundation in a manner different to that laid down in article 5. It may dispose of the income of the Foundation within the purposes set forth in the Articles (article 2), or may set same aside in whole or in part; it may also in special cases use assets of the Foundation for legitimate descendants of the Founder or transfer the fund as a whole or in part to other Foundations.

The Founder, as Chairman of the Board of the Foundation, is the only party authorised to sign individually for the Foundation. The other members sign jointly with the Founder.

The Founder, as Chairman of the Board of the Foundation, is authorised to have himself represented in that capacity by a proxy, who shall also be authorised to sign individually.

7. APPOINTMENT AND DISCHARGE. As long as the Founder lives, he alone shall have the right to appoint and discharge the members of the Board of the Foundation. After the death of the Founder or in the event of his legal incompetence, this right shall devolve on the Family Council (article 13).

If the Founder withdraws during his lifetime from the Board of the Foundation, then the other members must resign from the Board of the Foundation, and the Board of the Foundation, as well as the Chairman thereof, will be newly appointed by the Founder.

If the Founder should die or become legally incompetent during the period in which he is Chairman of the Board of the Foundation, the other members of the Board of the Foundation shall withdraw and the renewal of the Board of the Foundation by the Family Council shall take place unless the Founder has already made provision inter vivos or mortis causa concerning the new composition of the Board of the Foundation.

The provisions of Articles 1 to 5, and also of 8 to 22 and of 25 to 28 of these Articles shall apply to a Board of the Foundation of which the Founder is not personally a member.

8. VACANCIES, COOPTATION. If, after the death of the Founder, a member of the Board of the Foundation withdraws for any reason whatsoever, the new appointment to this office shall be effected by the Family Council (article 13).

If there are only three or less members of the Family Council available or if, for any reason whatsoever, it is to be feared that the Family Council might possibly not be able to make the appointment, the Board of the Foundation itself shall appoint its successors by Notarial Act, namely one successor for each member. Such successors appointed by the Board of the Foundation shall assume office only if, when the vacancy occurs, there are no members of the Family Council or if it is not possible for the Family Council to appoint a new member of the Board of Foundation.

If there are no members of the Family Council or if it is not possible, for any reason whatsoever, for the Family Council to make the appointment and if no successors should have been appointed by the Board of the Foundation either, then the Board of the Foundation shall be completed by co-optation.

* * * * * * *

10. DUTIES OF THE BOARD OF FOUNDATION. The Board of the Foundation shall take care of the business management and representation of the Foundation in accordance with the customary principles of sound business.

It shall, in particular, ensure the carrying into effect of the provisions of the Articles and of the By-laws and Regulations, the careful management and investment of the Foundation fund, as well as the use of the Foundation fund and income in accordance with the Articles of the Foundation.

The Board of the Foundation may not borrow money without the approval of the Family Council and may not commit the Foundation as guarantor or surety.

11. RELATIONSHIP TO THE FAMILY COUNCIL. The Board of the Foundation, while it takes care of the business management and representation of the Foundation independently, is nevertheless accountable to the Family Council for its entire management and for all acts which it undertakes in the name of the Foundation.

12. RIGHT TO SIGN. If the Founder no longer is a member of the Board of the Foundation, then the right to sign for the Foundation in a legally binding manner shall be vested in the Chairman or the Deputy Chairman jointly with one of the other members of the Board of the Foundation.

13. FAMILY COUNCIL. The Family Council consists of the legitimate descendants of the Founder, who are registered as such in the Register of Descendants and who have completed their 25th year. The number of members of the Family Council may not exceed 30 and more detailed provisions concerning membership of the Family Council shall be set forth in By-Laws (Regulations).

14. REGULATIONS GOVERNING BOOKKEEPING AND BALANCE SHEETS. The Board of the Foundation shall keep books concerning the conducting of its entire business in accordance with sound business principles and shall submit to the Family Council, within three months of the expiry of a calendar year, an exact business report together with balance sheet, and profit and loss account.

15. MEETING OF THE FAMILY COUNCIL. Annually, on June 15th, or if this day falls on a Sunday or public holiday, on the next following weekday, the Family Council shall hold a meeting at the place where the office of the Foundation is located.

This Meeting shall examine and/or approve the business report and the annual accounting, and exercise all functions which are vested in the highest agency of an artificial person by law.

16. REGISTER OF DESCENDANTS. A register shall be kept at the office of the Foundation concerning the legitimate descendants of the Founder (Register of Descendants). An extract from this Register, issued by Office of the Foundation, shall exclusively serve as proof of the legitimacy of the descendant.

More detailed provisions concerning the form and the keeping of the Register of Descendants shall be set forth in supplementary regulations.

These regulations will be sent to all persons registered in the Register of Descendants or to their legitimate representatives, this being done regularly every three years. Similarly, these persons will be advised of any amendments to said regulations.

In the event of the Board of the Foundation refusing to make an entry in the Register of Descendants, the person concerned has the right to take legal proceedings. The suit is to be brought before the courts having jurisdiction at the place where the office of the Foundation is located.

17. GENERAL RESERVE. The Board of the Foundation shall allot 10% of the net profit made to a Reserve Fund A every year.

This Reserve Fund A may only be used to cover losses shown in the Balance Sheet.

The balance of the profits or losses, which are produced by appreciation or depreciation in value of individual assets in any one fiscal year shall be entered as "appreciation in value" or "depreciation in value" of the fiscal year in question.

Any "appreciation in value" in the Foundation fund shall be credited to the Reserve Fund A.

Any "depreciation in value" will be debited to the Reserve Fund A.

Insofar and as long as the Reserve Fund A is insufficient to cover this "depreciation in value", this capital loss shall appear in the asset column of the balance sheet, so that this loss can be debited in later years as far as possible to Reserve Fund A. On the other hand, the income of the Foundation, mentioned in Article 4, third paragraph, shall not be distributed after the allocation of 10% to Reserve Fund A, in accordance with article 18, but shall be set aside in a Reserve Fund B in the amount of the Fund loss appearing in the asset column of the balance sheet.

If and to the extent that, in later years, Reserve Fund B exceeds the Fund loss appearing in the asset column of the Balance Sheet, this surplus will then as yet be distributed in accordance with article 18.

18. DISTRIBUTION OF SURPLUS. After 10% of the net profit have been allocated to the Reserve Fund A pursuant to these Articles (art. 17), 75% of the net profit shall be paid out to the legitimate descendants (art. 19) whilst 15% may be used by the Board of the Foundation for general purposes in accordance with article 20 of the Articles of the Foundation.

19. PAYMENT TO LEGITIMATE DESCENDANTS. The portion of the net profit intended for distribution among the legitimate descendants according to article 18 shall devolve, share and share alike, upon the children of the Founder. In the event of the death of a child, the latter's legitimate descendants (children), who have been registered in the Register of Descendants, shall take his place, whereby the share devolving upon the deceased child shall be distributed equally among his children. The same applies in the event of the death of one of these descendants, and so on for each further degree of descent.

The status of the Register of Descendants at the end of a fiscal year is decisive with regard to a claim to payment. Deaths or births between the end of the fiscal year and the date of the next annual meeting of the Family Council shall not effect any change therein.

The Board of the Foundation shall stipulate the amount to be paid out to each person registered in the Register of Descendants.

In the event of any dispute arising concerning the amount to be paid out, the descendant concerned and the Board of the Foundation shall, as far as they cannot arrive at an agreement, submit the determination of the amount to the award of the Court at the place where the office of the Foundation is located.

As soon as possible after the approval of the annual balance sheet by the Family Council, each individual beneficiary shall be advised of the amount devolving upon him, such advice being accompanied by a certified copy of the annual accounting. Payments shall be made in cash, as soon as possible.

Portions which have not been collected by the descendants concerned within five years of the date of distribution shall devolve upon the Foundation.

20. USE FOR GENERAL PURPOSES. The Board of the Foundation may, pursuant to article 18, each year use part of the net profit (at most 15%) for general purposes.

Institutions desiring to be considered for such gifts or contributions must be open to everyone without distinction as to religion or station.

If less than 15% of the net profit are used for general purposes during any one fiscal year, the balance may be allocated to a special Reserve Fund, from which an extra payment for general purposes may be made in one of the following years, this naturally taking place with due regard to the provisions of the Articles of the Foundation and of the By-Laws and Regulations.

21. EXCLUSION OF ASSIGNMENT, COMPULSORY EXECUTION, etc. Payments to beneficiaries of the Foundation in accordance with article 19 and contributions in accordance with article 20 cannot be the subject matter of assignments to third parties. Similarly, the beneficiaries cannot be deprived of payments or contributions by their creditors by way of attachment proceedings, execution proceedings or bankruptcy.

The Board of the Foundation is authorised not to make payment, if such cases should arise.

22. USE OF THE NET PROFIT, ABSENCE OF DESCENDANTS OF THE FOUNDER. If no legitimate descendants of the Founder are alive any more, the available net profit shall be used for the promotion and encouraging of the Arts and Sciences, for the nursing and treatment of the sick and infirm, for poor relief and for fellowships and scholarships. This use shall be effected in accordance with the stipulations of the Board of the Foundation, subject, however, to the provision that 60% (sixty per cent) of the available net profit be paid out in China, 15% (fifteen per cent) in the Netherlands Indies. Article 20, paragraph 3 of the Articles of Foundation shall find corresponding application also in these cases.

23. BY-LAWS OF THE FOUNDER. These Articles of Foundation shall be supplemented by By-laws, to be laid down by the Founder after the setting up of the Foundation. The Founder may at all times amend these by-laws by inter vivos or causa mortis provisions.

The By-laws shall contain more detailed provisions concerning the relationship between the Board of the Foundation and the Family Council, the qualifications for members of the Board of the Foundation and of the Family Council, the manner of appointment of members of both bodies, the powers of the Family Council and of the individual members thereof, the meetings of the Board of the Foundation and of the Family Council and furthermore the manner and conditions of registration of legitimate descendants in the Register of Descendants as well as the registration of their legal marriages. Furthermore, these By-laws shall contain more detailed provisions concerning the cases in which the reserves according to article 17 and article 20 shall be added to the Fund of the Foundation, and finally everything which the Founder desires to set forth in fuller detail.

24. AMENDMENT OF THESE ARTICLES BY THE FOUNDER. The Founder alone has the right, during his lifetime or by testamentary disposition, to amend the provisions of this Instrument of Foundation and to transfer the seat of the Foundation at any time to another location within the country or abroad.

25. AMENDMENT OF THESE ARTICLES AND OF THE BY-LAWS AFTER THE DEATH OF THE FOUNDER. After the death of the Founder the Articles of the Foundation and the By-Laws of the Foundation may be amended by the Family Council. The rights of the legitimate descendants, pursuant to article 19 of these Articles, as well as the general rights of the descendants may not be impaired by such amendment.

A resolution of the Family Council to amend the Articles or the By-Laws shall be valid only under the following conditions:

a. that it is not adopted earlier than five years after the death of the Founder; b. that all living children of the Founder have completed their 25th year; c. that the resolution is adopted unanimously if the Family Council consists of ten or fewer members and that it is adopted with a majority of three-quarters of all members if the number of members of the Family Council is greater than ten.

26. DISSOLUTION. The Foundation may be dissolved by the Family Council:

a. If at any time legal provisions enter into force, which impede the continued existence of the Foundation; b. By resolution of the Family Council, in which case, however, the provisions of article 25, letters a, b and c must be observed.

After dissolution of the Foundation, the Foundation Fund shall be distributed by the Board of the Foundation or by one or more Liquidators to be appointed by the Family Council, among the legitimate descendants registered in the Register of Descendants, in which case the provisions of article 19 of this Instrument of Foundation shall find corresponding application.

27. REMOVAL OF THE REGISTERED OFFICE. After the death of the Founder, the Family Council, may, upon motion of the Board of the Foundation, transfer the registered office of the Foundation by an unanimously adopted resolution. In the same manner the Family Council may transfer the office of the Foundation to another location.

On August 11, 1939, the articles of the Yan Stiftung in Zug were amended by deleting the word "legitimate" from articles 2 and 6. The reason for this amendment was that the decedent wished to transfer some of the funds of the Yan Stiftung to another Stiftung which he intended to create for the benefit of his illegitimate daughter, Djie Swan Nio.

Later, on December 27, 1939, articles 6 and 26 of the Yan Foundation in Zug were further amended as follows:

Art. 6 paragraph 3 of the Articles shall in future read as follows: The Founder, as Chairman of the Board of the Foundation, is the only party authorised to sign individually for the Foundation and exercises, in addition to the Board of the Foundation, the powers of the Board as stipulated above. The other members sign jointly with the Founder.

Art. 26 of the Articles shall in future read: The Foundation can be dissolved by the Founder during his lifetime and by the Family Council after his death:

a) If at any time legal provisions enter into force, which impede the continued existence of the Foundation or make the attaining of its purpose difficult. b) By resolution of the Family Council, in which case, however, the provisions of Article 25, letters a, b and c must be complied with.

After dissolution of the Foundation by the Founder, the Foundation Fund shall be used by the latter in accordance with the purpose of the Foundation.

After dissolution of the Foundation by the Family Council, the Foundation Fund shall be distributed by the Board of the Foundation or by one or more liquidators to be appointed by the Family Council, among the legitimate descendants registered in the Register of Descendants, in which case the provisions of Article 19 of this Instrument of Foundation shall find corresponding application.

Pertinent portions of the bylaws of the Yan Foundation are as follows:

In carrying out Article 23 of the Instrument of Foundation of the Yan Foundation in Zug bearing date of March 10, 1939, the founder issues the following By-Laws.

A. FAMILY COUNCIL.

1) MEMBERS.

As long as the founder is alive, there is no Family Council.

Upon the death of the founder or in the event that he becomes incompetent the Family Council assumes its function as supreme agency of the Foundation.

5.

POWERS AND ADOPTION OF RESOLUTIONS.

The Family Council is the supreme agency of the Foundation, which expresses the intent of the Foundation toward the beneficiaries of the Foundation and the Board of the Foundation.

The powers of the Family Council include the following:

1) Election of the Board of the Foundation and its discharge; 2) Approval of the balance sheet and determination of its results as well of the payments to the beneficiaries of the Foundation; 3) Granting of release and discharge to the Board of the Foundation; 4) Adoption of resolutions on amendments to the Constitution and By-laws, transformation or dissolution of the Foundation; 5) Adoption of resolutions on those matters which are reserved for the Family Council by special provisions of the Constitution and By-laws of the Foundation.

Resolutions are adopted by the Family Council, unless the Constitution and By-laws provide specifically otherwise, with a simple majority of the votes present which are countable (valid). In the case of a tie the Chairman casts the decisive vote. A quorum is present if at least half of all members of the Family Council are present.

6.

BOARD OF THE FOUNDATION.

Qualification and Appointment.

As long as the Founder is alive, he alone determines whether a person is qualified to become a member of the Board of the Foundation. After the death of the Founder the Family Council appoints the members of the Board of the Foundation within the meaning of the provisions of the Constitution and By-laws in accordance with the following principles:

a) The members of the Board of the Foundation need not be members of the Family Council; b) They must act in their own right and have completed the 25th year of their life; c) They must be in enjoyment of their civil rights and prerogatives; d) They shall if possible be persons who are esteemed in public life.

7.

Powers and Adoption of Resolutions.

The Board of the Foundation has all powers which are not conferred upon the Family Council by the laws, the Constitution or the By-laws.

As long as the Founder himself is a member of the Board of the Foundation, a quorum requires solely the presence of the Founder. No resolution may be adopted without the consent of the Founder.

If the Founder is not a member of the Board of the Foundation, it may adopt resolutions if at least two members are present.

Resolutions are adopted with a majority of votes. In case of a tie the Chairman cast the decisive vote.

The office of the Foundation has its seat at a place which is to be determined by the Founder as long as he is alive and competent to act and then by the Chairman of the Family Council.

The Board of the Foundation meets as often as its Chairman deems it advisable or two of its members express the desire for a meeting.

The decedent's purpose in setting up the Yan Foundation was to provide funds for the benefit of his descendants. This was in accordance with the custom of wealthy Chinese. The decedent's father had established a similar fund during his lifetime.

The Yan Stiftung was originally organized in 1933 in Vaduz, Liechtenstein, and was liquidated in March 1939. In that same month the Yan Stiftung in Zug was created under the laws of Switzerland and continued as such until December 28, 1939. On that date the seat of the Yan Foundation was transferred from Zug, Switzerland, to Vaduz in the Principality of Liechtenstein by appropriate proceedings in the Municipality of Zug and in the Principality of Liechtenstein, and it thereupon became Yan Stiftung in Vaduz.

The original Yan Stiftung was liquidated because the decedent believed that war in Europe was imminent and that Switzerland would be a safer place for the Stiftung than Liechtenstein. Under the law of Switzerland, it was not possible to merely transfer the seat of the Stiftung from Liechtenstein to Switzerland, and the creation of a new Stiftung in Switzerland was therefore required. In December 1939, after the old Yan Stiftung in Vaduz had been liquidated and the new Stiftung in Zug, Switzerland, had been created, the decedent and his advisers reached the conclusion that Switzerland would not be any safer than Liechtenstein. Since taxes in Switzerland were much higher than in Liechtenstein, it was decided that the seat of Yan Stiftung should be transferred back to Liechtenstein. It was not necessary to liquidate the Yan Stiftung in Zug, Switzerland, since under Liechtenstein law it was possible to transfer a Swiss Stiftung to Liechtenstein merely by transferring its seat to Liechtenstein.

At the date of the decedent's death, the seat of the Yan Stiftung was in Vaduz in the Principality of Liechtenstein and the Foundation was known as the Yan Foundation in Vaduz. The Yan Stiftung was a valid Liechtenstein entity under Liechtenstein law. Transfer of its seat in 1939 from Zug in Switzerland to Vaduz in Liechtenstein validated the organization at that time since certain provisions in the articles which were invalid in Switzerland were not invalid in Liechtenstein (described infra, Issue 1, B). The compliance of the external forms of the Yan Stiftung with the Swiss Notarial Act are considered sufficient under the law of Liechtenstein to permit certification of the foundation.

On December 21, 1939, the decedent, through an old friend, A. J. Oudheusden, who was a Dutch accountant and adviser on Netherlands law, caused to be organized under Swiss law a Stiftung, or family foundation, under the name of Kien Foundation in Chur having its seat at Chur, Switzerland.

The provisions of the articles of the Kien Foundation in Chur were based on and were substantially similar to the articles of the Yan Stiftung, except that it was created for the benefit of the decedent's daughter, Djie Swan Nio, and her descendants.

The decedent's reason for creating the Kien Stiftung in Chur to provide for Djie Swan Nio was that he had been advised that under Dutch law he could not legally provide for her by will since Djie Swan Nio was considered illegitimate under Dutch law. The decedent thought it necessary to create a separate Stiftung for Djie Swan Nio because under the articles of the Yan Stiftung the control of that Stiftung after the decedent's death would be in his legitimate children who would compose the family council, whereas he wished the funds to be used for the benefit of Djie Swan Nio to be managed after his death by Mr. Oudheusden, who had been appointed at his request by a court in Amsterdam as supervising guardian of Djie Swan Nio.

On December 21, 1939, when the Kien Stiftung was created, the decedent was designated as a member of the board of the Kien Foundation and its first chairman, and A. J. Oudheusden was appointed as the other member of the board of Kien Foundation.

The Kien Stiftung was created as a Swiss rather than Liechtenstein Stiftung since it was not anticipated that the Stiftung would have a large amount of assets, and consequently, taxes were not considered a significant factor in determining where the Stiftung should be organized.

At the date of the decedent's death, the seat of the Kien Foundation was in Chur, Switzerland, and the foundation was known as the Kien Foundation in Chur.

On July 23, 1943, the date of the decedent's death, the Yan Stiftung in Vaduz had on deposit in New York with the Guaranty Trust Company of New York a cash balance of $1,039,072.20. It also owned shares of stock of United States corporations having a fair market value of $543,772.26 which were held by the Guaranty Trust Company of New York in a custody account.

On July 23, 1943, the Kien Stiftung in Chur had on deposit in New York with the New York Trust Company a cash balance of $648,884.98. It also owned shares of stock of United States corporations having a fair market value of $192,131.25 which were held by the New York Trust Company in a custody account.

At the date of the decedent's death, the originals of the articles of foundation and the bylaws of both the Yan and Kien Stiftungs were situated outside the United States. The first executed original of the articles had been filed with the notary in Switzerland and remained there even though the Yan Stiftung had been transferred to Vaduz, Liechtenstein. The duplicate-originals of the articles of each foundation were kept in the office of Kantoor H. J. Vooren in Holland continuously from the date of their creation until the trial of this proceeding.

Under Swiss and Liechtenstein law a Stiftung is treated as a separate juridical entity. It is taxed solely on its own assets and income without consideration of the assets and income of the founder of the Stiftung. The Yan and Kien Stiftungs were in fact taxed in this manner. A Stiftung can sue and be sued in its own name. Creditors of the founder have no claim against the assets of a Stiftung, and creditors of the Stiftung have no claim against the founder or his property.

Under Swiss and Liechtenstein law, a Stiftung may engage in or conduct a business incident to the primary purpose for which it was organized, but it may not be organized for the specific purpose of engaging in business. In case a Swiss Stiftung engages in business it must register at the Public Registry. Neither the Yan nor the Kien Stiftung ever engaged in any business activity. Both were family foundations organized for the purpose of providing funds for the needs of the members of the founder's family.

In both Switzerland and Liechtenstein these entities are taxed at rates applicable to individuals and are not subject to the rates of tax applicable to corporations, even though the Stiftung may be engaged in business.

Under Liechtenstein law, the decedent at any time prior to his death could have revoked or terminated the Yan Stiftung and obtained direct ownership of its assets in accordance with the articles of the foundation. Similarly, under the articles of the Kien Stiftung, the decedent had the power to revoke or terminate the Kien Stiftung and to reacquire ownership of its assets.

In 1943, at the date of the decedent's death, it was not possible under any Swiss statute or decision to establish a valid Swiss trust within the meaning of the Anglo-Saxon concept of a trust.

B.

Decedent's Relation to Assets of Stiftungs.

At all times since the creation of the Yan Stiftung in Vaduz, the Yan Stiftung in Zug and the Kien Stiftung in Chur, until the date of his death, the decedent retained the power to amend or revoke the Stiftungs, and was the sole manager of the Stiftungs and the only person authorized on his sole signature to withdraw funds of the Stiftungs and to issue instructions with respect to the accounts of the Stiftungs at the Guaranty Trust Company of New York and the New York Trust Company.

The account of the Yan Stiftung in Vaduz, predecessor to Yan Stiftung in Zug, with the Guaranty Trust Company of New York, was opened on June 27, 1933, and was closed on June 7, 1939, at which time the balance of the account, in the amount of $293,868, was transferred to a new custody cash account in the name of Yan Stiftung, Zug. This latter account existed on the date of decedent's death and continues to exist presently. During the period of the account in the name of Yan Stiftung, whether Yan Stiftung in Vaduz or Yan Stiftung in Zug, the Guaranty Trust Company of New York followed instructions of the decedent alone with respect to deposits in and payments from the account. On July 5, 1938, $50,000 was transferred from the account of the predecessor Yan Stiftung to a personal account of the decedent. The notation on the bank ledger sheet reads as follows:

July 5 Amount transferred to the account of Mr. Oei Tjong Swan The Hague, Holland as requested in your cable of July 4th 1938 $50,000 [debit]

The only other transfers made by the decedent from either Yan Stiftung account to any personal account of the decedent prior to his death, were for $100 on February 20, 1941, $200 on March 20, 1941, $1,800 on April 2, 1941, $200 on April 3, 1941, $200 on May 5, 1941, and $200 on June 5, 1941, all made shortly after a transfer by decedent of funds from his personal account to the account of the Stiftung described below.

The account of the Kien Stiftung in Chur with the New York Trust Company was opened on March 29, 1940, by the transfer of $85,000 from the account of the Yan Stiftung at the Guaranty Trust Company of New York. The decedent during his lifetime had exclusive signing authority with respect to this New York Trust Company account.

The cash on deposit with the Guaranty Trust Company of New York and the cash on deposit with the New York Trust Company on July 23, 1943, in the name of the Yan Stiftung and in the name of the Kien Stiftung, respectively, were ordinary deposit liabilities of these banks. The Kien account was one termed a "foreign checking account" against which an authorized person might withdraw by check or other form of demand. The Yan account was similar except that it was the policy of the bank to request customers not to withdraw against the deposit by check, but rather to forward instructions to effect remittances for payments.

Up to the date of the decedent's death, both the New York Trust Company and the Guaranty Trust Company of New York, in the absence of governmental foreign funds regulations, would have transferred all of the cash on deposit in the name of the Kien Stiftung and all of the cash on deposit in the name of the Yan Stiftung to the decedent's personal account either in the United States or abroad on instructions of the decedent alone.

At the date of his death, the decedent was a nonresident alien of the United States not engaged in business in the United States. He had not been in the United States subsequent to 1930 and he had never been engaged in business in the United States.

Defective Provisions of Stiftungs Under Swiss Law.

Swiss law allows a family foundation to be organized for the purpose of providing for the cost of education, of endowment, and of assistance in case of need to members of the family, but does not permit the creation of a family foundation for the general support of beneficiaries without limitation. The articles of both the Yan and Kien Stiftungs contain provisions which are defective in these respects. In addition, the articles of each Stiftung contained a provision reserving to the founder a broad right to alter the purposes of the foundation which is not permitted under Swiss law. Defects in the articles of the Yan Stiftung under Swiss law were not contrary to Liechtenstein law, however, and transfer of the seat of the Yan Stiftung to Liechtenstein cured such defects. (See findings, supra.) The Kien Stiftung, however, remained and presently is a foundation organized under Swiss law.

Transfer of Cash From Decedent's Personal Account.

On May 10, 1940, the German Army invaded Holland. On that date, the decedent was in Brussels, Belgium, and his wife and children were residing in Holland. Thereafter, the decedent attempted to cross the border to return to his family in Holland but was captured by the Belgian police and sent to an internment camp in Perpignan in the southern part of France. He remained in that camp for a short period of time until he was released in the custody of his brother-in-law, Dr. Wellington Koo, who was then at Vichy as the Chinese Ambassador to Unoccupied France.

Subsequently, the decedent attempted to and did finally obtain permission from the French and German authorities to go from Vichy, France, to Holland. The decedent returned to his family in Holland from Vichy in June 1941.

On August 26, 1940, in anticipation of his return to Holland, which was then occupied by the Germans, the decedent wrote the following letter from Vichy to the Guaranty Trust Company of New York:

GUARANTY TRUST COMPANY OF NEW YORK, Trust Department, 140 Broadway, New York.

DEAR SIRS,

Your Vichy Office has communicated to me the contents of your cable 5426 from which it appears that you cable to me on the 7th inst., in reply to my cable of the 6th from Perpignan.

However, I have never received your cable, but as it is my urgent desire to close my personal cash and securities account at your Office by transferring everything to the account of the Yan Stiftung, I hereby authorize you to make the required application in Washington in order to obtain the necessary license. As you know, I am a Dutch subject residing normally in Amsterdam, but at present in French unoccupied territory. My intentions are to return to Amsterdam as soon as possible, but before doing so and as a matter of protection, I authorize you to make the transfers as outlined above. As you are aware, the Yan Stiftung a Corporation registered in Switzerland, is also under my sole control.

I trust this will be sufficient to permit you to make the transfers, and thanking you in anticipation, I am

Yours very truly, /s/ Oei Tjong Swan OEI TJONG SWAN

P. S. Please advise your Vichy Office by cable as soon as my above instructions have been complied with.

On September 2, 1940, the decedent also wrote the following letter from Vichy to the New York Trust Company:

T. S. OEI VICHY, September 2nd 1940. care Chinese Embassy, THE NEW YORK TRUST CO. VICHY. New York. SIRS,

With reference to my letter of August 26th. I wish to emphasize that it is my urgent desire to close my personal cash and securities account at your office by transferring everything to the account of the Kien Stiftung.

I therefor [sic] hereby authorize you to make the required application in order to obtain the necessary license.

As you know I am a Dutch subject at present in French unoccupied territory. My intentions are to return to Holland as soon as possible, but before doing so and as a matter of protection, I authorize you to make the transfers as outlined above.

As you are aware, the Kien Stiftung, a corporation registered in Switzerland, is also under my sole control.

Please cable at above mentioned address as soon as my instructions have been complied with.

Trusting this will be sufficient to permit you to make the transfers and thanking you in anticipation, I remain,

faithfully yours, s/s Oei Tjong Swan OEI TJONG SWAN

On January 22, 1941, the decedent again wrote a letter from Vichy to the Guaranty Trust Company of New York, the concluding paragraph of which read as follows:

It may happen that I leave Vichy for Holland and I should like you to take note that in no case you will transfer funds or securities, belonging to me in private or to the Yan Stiftung, to any other country nor to any other person, even when so instructed by me personally or in my capacity as Vorsitzender of the Yan Stiftung and even when so instructed by my proxy or proxies, during the time that I will be in territory occupied by enemies of Holland. Naturally I shall keep you informed of my removals. Please confirm. With many thanks in advance,

The decedent's personal deposit account with the Guaranty Trust Company of New York was closed on February 1, 1941, by transfer of $545,448.34 from that account to the Yan Stiftung account with the Guaranty Trust Company of New York pursuant to the instructions received from the decedent by letter dated August 26, 1940. The securities owned personally by the decedent were also transferred from the decedent's personal accounts at the Guaranty Trust Company of New York to the Yan Stiftung account at the Guaranty Trust Company of New York. The reason for the delay by the Guaranty Trust Company in closing out the decedent's personal accounts by transferring the cash and securities in those accounts to the account of Yan Stiftung was caused by the necessity of obtaining a license to effect the transfers.

The decedent's personal cash account with the New York Trust Company, opened by the decedent on October 4, 1939, by the transfer of $200,000 from the Nederlandsch-Indische Handelsbank, N. V., Amsterdam, Holland, was closed on September 20, 1940, by transfer of $634,218.10 to the account of the Kien Stiftung in Chur with the New York Trust Company pursuant to instructions received from the decedent by letter dated September 2, 1940. Securities owned personally by the decedent were also transferred by the New York Trust Company to the Kien Stiftung.

The cash in the amount of $545,448.34 transferred from the decedent's personal account with the Guaranty Trust Company of New York on February 4, 1941, to the Yan Stiftung account was part of the cash, in the amount of $1,039,072.20, on deposit with the Guaranty Trust Company of New York in the name of the Yan Stiftung in Vaduz at the date of the decedent's death. Likewise, the cash in the amount of $634,218.10 transferred from the decedent's personal account with the New York Trust Company on September 20, 1940, to the Kien Stiftung account was part of the cash, in the amount of $648,884.98, on deposit with the New York Trust Company in the name of the Kien Stiftung in Chur at the date of the decedent's death.

C. Netherlands Decree.

On the date of the decedent's death there was in effect a Decree of the Royal Netherlands Government in Exile located in London, dated May 24, 1940. Articles 1 and 5 of the decree provide as follows:

ARTICLE 1.

1. Title to claims against persons, partnerships, companies, corporations, firms, institutions and public bodies, which claims belong to natural or legal persons domiciled in the Kingdom of the Netherlands, as well as to all claims of the aforesaid persons for the delivery of gold deposited, in so far as these claims are in any form whatsoever capable of being encumbered, pledged, transferred or sold or the like, outside of the Realm in Europe, is hereby vested in the State of the Netherlands, as represented by the Royal Netherlands Government, temporarily resident in London and exercising its functions there, subject always to the provisions of Article 5.

2. The foregoing is also applicable to all claims resulting from confirmed credits, participation in the capital of and loans to companies, corporations and firms (regardless of whether these claims are evidenced by stock certificates, bonds or other securities or commercial paper) in so far as the aforementioned claims belong to natural or legal persons within the Kingdom of the Netherlands and, in so far as these claims are in any form whatsoever capable of being encumbered, pledged, transferred or sold, or the like, outside of the Realm in Europe.

3. The proprietary rights vested in the State of the Netherlands, by virtue of the provisions of the preceding paragraphs, shall only be exercised for the conservation of the rights of the former owners.

* * * * * * *

ARTICLE 5.

1. Three months after the present emergency conditions shall in Our judgment have ceased to exist, restitution shall be made of the claims mentioned in Article 1 to the former owners.

2. In deviation from the provisions in the previous paragraph Our Ministers of Justice and of Colonies are jointly empowered to make restitution in advance of the time mentioned in the previous paragraph to the former owners, provided it be proven to their satisfaction that direct or indirect use of these claims in behalf of the enemy is excluded.

The United States recognized the Decree of the Royal Netherlands Government in Exile located in London, dated May 24, 1940, and accepted the authority of the Netherlands' Minister to the United States to operate all accounts and other assets in the United States belonging to the Netherlands Government.

Issue II.

Value of Decedent's Securities.

At the date of his death, the decedent owned United States certificates for 100 shares of $6 cumulative preferred stock of Armour & Company and 200 shares of stock of Commonwealth Edison Company. At that date, these certificates were physically located in Holland; they could not be sold because of the war; and no dividends had been paid thereon to the decedent since the outbreak of the war.

At the date of his death, the decedent also owned certificates issued by Dutch organizations (administration offices) representing a beneficial interest in shares of stock of United States corporations. These certificates were as follows:

1. 20 certificates each covering 10 shares of American Metal Company, Ltd.

2. 40 certificates each covering 10 shares of Bethlehem Steel Corporation.

3. 20 certificates each covering 10 shares of Standard Brands.

4. 10 certificates each covering 10 shares of Chesapeake and Ohio Railway.

5. 20 certificates each covering 10 preferred shares of Kansas City Southern Railway.

The Dutch certificates were bearer certificates with dividend coupons attached. They were normally traded on the Amsterdam Stock Exchange. Trading in these securities stopped in 1941. The dividends payable by the American corporations were normally paid to the Dutch organization which issued the Dutch certificates and the Dutch organization would then pay these dividends, less expenses, to the holder of the certificate in guilders. From the time the United States entered World War II, no dividends on these Dutch certificates were paid to the decedent or his estate. Likewise, from that time, the holder of a Dutch certificate had no right to demand the underlying United States shares.

At the date of the decedent's death, July 23, 1943, Holland was occupied by the German Army. A Dutch government in exile was located in London. Both England and the United States were at war with Germany.

By Executive Order No. 8389, dated April 10, 1940, and by subsequent amendments thereto, the United States prohibited transactions in foreign exchange, transfers of credit and export of coin and currency, except as specifically authorized in regulations or licenses issued by the Secretary of the Treasury pursuant to the Executive order.

On or about June 24, 1940, the German occupation authorities issued the "Foreign Exchange Decree 1940," sometimes known as the Devisen Decree, which required a license from the Devisen Institute for foreign exchange transactions. Under this decree a license would have been necessary from the German occupation authorities to sell assets located in the Netherlands for a foreign currency. Such a license was rarely issued.

In the respondent's deficiency notice, both the American and the Dutch certificates referred to herein were valued in United States dollars on the basis of quotations for corresponding unrestricted securities on the New York Stock Exchange on the date of the decedent's death.

Under the decree of the Royal Netherlands Government in Exile located in London, dated May 24, 1940 (see Issue I, C, supra), a decree of that government dated June 7, 1940, and regulations promulgated thereunder, and the Devisen Decree, Dutch certificates could not have been sold at the date of the decedent's death for United States dollars without a license. There was no market in the United States for American securities owned by Netherlands residents where the securities were physically situated in the Netherlands. An owner of Dutch administration certificates could not have obtained a buyer in the United States for such certificates if the certificates were physically located in the Netherlands.

At the date of the decedent's death, the fair market value in United States dollars of the certificates referred to herein (both the American and the Dutch) was that value of the corresponding unrestricted shares as traded in dollars on the New York Stock Exchange converted into guilders at the last official rate of exchange and reconverted into dollars at $0.065 per guilder.

Issue III.

Deductions From Gross Estate.

At the date of his death, the decedent owned personal property located in various parts of the world, including bank deposits and claims against debtors, expressed in terms of the currency of the country in which the bank or debtor was located, and securities, also valued in the currency of the country in which the securities were issued, such as Dutch guilders, German reichsmarks, British pounds, Belgian francs, Czech crowns, and Hungarian pengos.

It has been stipulated that for the purposes of computing the deduction to which the petitioner may be entitled under section 861 (a) (1) of the Internal Revenue Code, non-guilder assets shall be converted into guilders at the official rate of exchange, and that the resulting guilders shall be converted into dollars at whatever rate the Court shall determine to be appropriate on the date of the decedent's death.

At the date of death the value of decedent's assets (exclusive of the Stiftungs' assets and of certain Indonesian assets) in guilders was 4,255,295.23 guilders. The decedent's debts at the date of his death aggregated 65,657.25 guilders. The administration expenses of the decedent's estate (exclusive of the attorneys' fees and expenses of this proceeding) aggregated 162,958.34 guilders.

The non-United States assets of the Yan Stiftung at the date of the decedent's death aggregated 1,302,482.82 guilders. The non-United States debts of the Yan Stiftung at the date of the decedent's death aggregated 281,906.73 guilders.

The administration expenses of the Yan Stiftung subsequent to the decedent's death aggregated 233,977.19 Swiss francs. The minimum dollar value of the Swiss franc from the date of the decedent's death to the time of the trial was 22.86 cents.

The non-United States assets of the Kien Stiftung as of the date of the decedent's death aggregated 357,486.77 guilders.

The non-United States debts of the Kien Stiftung as of the date of the decedent's death aggregated 57,462.11 Swiss francs, and the administration expenses of the Kien Stiftung after the decedent's death aggregated 218,823.57 Swiss francs. The minimum dollar value of the Swiss franc up to the date of the decedent's death was 23.31 cents.

The last official rate of dollar-guilder exchange prior to the German occupation of the Netherlands on May 10, 1940, was $0.5309 per guilder. At the date of the decedent's death, there was no official rate of exchange for Dutch guilders, and on that date, July 23, 1943, there was no available current market rate of dollar-guilder exchange. The first official rate of dollar-guilder exchange after the termination of such occupation of the Netherlands on May 5, 1945, was $0.379 per guilder. These official rates are the rates at which transactions specifically authorized by the Netherlands Government could be converted from guilders into dollars.

The assets owned by the decedent and located in Indonesia were worth 10,000 guilders on the date of death.

The fair market value of a Dutch guilder in terms of United States dollars on July 23, 1943, was $0.065 per guilder.

Issue IV.

Delinquency Penalty.

Decedent, a nonresident alien, died on July 23, 1943, in Holland, then occupied by the Germans. The executor of the estate, Oei Ing Tjhing, was then residing in Switzerland and so resided until about June 1948, when he came to the United States. No one qualified as or acted as executor or administrator of the decedent's estate in the United States prior to that date. No estate tax return was filed on behalf of the decedent's estate until August 10, 1949. The United States had previously instituted an investigation on May 9, 1949, with the Guaranty Trust Company of New York and the New York Trust Company which were in possession of the assets of the Yan and Kien Stiftungs. The decedent's estate had not previously applied for or received an extension of time for filing an estate tax return. In August 1951, respondent assessed a 25 per cent delinquency penalty in the amount of $56,891.56 and in the notice of deficiency proposed an additional penalty in the total amount of $189,662.33.

Attached to the Federal estate tax return which was filed on August 10, 1949, was an affidavit requesting a waiver by the Commissioner of Internal Revenue of delinquency penalties with respect to the tax shown by the return. The affidavit states as the reason for the request the following:

The decedent, OEI TJONG SWAN, died in Holland on July 23, 1943. At that time and until 1945, Holland was occupied by German troops. Prior to the outbreak of World War II, the decedent had caused to be created under Swiss law two family foundations or "Stiftungs" and at the date of his death, the Stiftungs owned securities of American corporations held in the custody of the Guaranty Trust Company of New York and The New York Trust Company, and also had on deposit with those banks substantial sums of cash. OEI ING TJHING, the executor named in the decedent's will is not, except in a general way, familiar with the decedent's affairs and the aforementioned Stiftungs and therefore made deponents his attorneys in fact pursuant to a deed executed in Zurich, Switzerland on August 9, 1943, a certified copy of which is attached hereto. Neither the said executor nor the deponents were aware until April, 1949, that a Federal estate tax return might be required to be filed with the United States authorities with respect to the property owned in the United States by the Stiftungs. Neither deponents nor any members of the Oei family ever received any communication from either the Guaranty Trust Company of New York or The New York Trust Company that a United States estate tax return should be filed for the decedent with respect to the assets and property owned in the United States by the Stiftungs. Deponents ate [sic] now advised by their attorney, Harry J. Rudick, that there is a question as to the legal effect of the Stiftungs for United States tax purpose and that it is uncertain whether the property owned by the Stiftungs or any part of it is subject to United States estate tax.

Neither the deponents nor any members of the Oei family were in the United States either on the date of the decedent's death or within 15 months thereafter.

Since the creation of the Stiftungs, the Guaranty Trust Company of New York and the New York Trust Company have considered the Stiftungs to be foreign corporations for account purposes, and taxable as such for United States tax purposes. On May 26, 1939, the Yan Stiftung and the Guaranty Trust Company of New York entered into a custody agreement which recited that the Yan Stiftung was a corporation organized and existing under the laws of Switzerland. The New Account Report of Yan Stiftung at the Guaranty Trust Company of New York, dated June 2, 1939, states that the Yan Stiftung is a foreign corporation domiciled in Zug, Switzerland.

Similarly, on January 22, 1941, the decedent on behalf of the Kien Stiftung entered into an agreement with the New York Trust Company captioned "Instructions Governing the Custodian Account of Kien Stiftung in Chur," in which it was certified that the Kien Stiftung in Chur was a corporation duly organized under the laws of Chur, Switzerland. The New Account Report of the New York Trust Company, dated April 3, 1940, designates that the account of Kien Stiftung in Chur is the account of a foreign corporation.

Prior to March 14, 1940, Donald Coyle, a vice president of the New York Trust Company, consulted White & Case, the general counsel for the New York Trust Company, as to the legal status of the Kien Stiftung in Chur and as to how the Stiftung should be treated both for account and for tax purposes. On March 14, 1940, White & Case rendered a written opinion which stated the following:

It is our view that the Stiftung should be treated as a corporation as far as operation of the account is concerned. In this connection, we enclose for your file excerpt from letter dated December 14, 1928 from Mr. Mannix of this office to our Paris office discussing the character which the Federal Tax Authorities would probably attribute to a Swiss Family Foundation.

The enclosed letter from Mr. Mannix, dated December 14, 1928, was as follows:

HM:McP DECEMBER 14, 1928 GUIDO PANTALEONI, Esq., Messrs. WHITE & CASE, 3 Place Vendome, Paris, France.

DEAR PANTALEONI:

I have your letters of October 31st and November 3rd relating to the "Swiss Foundation." It is difficult to say just what would be the status of a "foundation" for Federal tax purposes. I think it probable that the Treasury Department would regard it as an association, which would make it taxable as a corporation. It would seem to come under the definition of an association contained in Article 1502 of Regulations 69. See also Article 1504. We had up with the Treasury Department the question of the taxable status of an arrangement known as the "Securities Investment Trust." The instrument involved consisted of a declaration of trust by a single trustee. The trustee issued trust certificates to about fifteen different individuals who gave him sums of money to invest and reinvest. The arrangement was revocable at any time by any certificate holder, who was entitled to withdraw the equivalent of his interest in the trust on notice to the trustee. The income was collected by the trustee and distributed prorata to the certificate holders. This arrangement was held to constitute an association taxable as a corporation.

In your case it seems to me that the Department would be more likely to hold the foundation taxable as an association or corporation than the arrangement above described. The organization of a foundation requires the filing of a certificate equivalent to a certificate of incorporation. The foundation has managers, presumably the equivalent of the directors of a corporation, and has a "place of business." From our experience, the various Treasury rulings make taxable, as an association, any trust which involves (1) the carrying on of a business by the trustees, and (2) the association together of the trustees with powers similar to those possessed by the directors of a corporation. These factors would seem to exist in the case of a foundation.

Forms 1120NB, United States Nonresident Foreign Corporation Income and Defense Tax Returns, were filed by the Guaranty Trust Company of New York on January 8, 1943, in behalf of Yan Stiftung for the years 1940 and 1941.

Oei Ing Hing, who had a power of attorney from his brother, the executor of the decedent's estate, believed that if a tax return was required to be filed in the United States with respect to the decedent's property, the Guaranty Trust Company of New York and the New York Trust Company would take care of the filing of the requisite returns. The executor of the decedent's estate had no belief before April 1949 that a return was required to be filed, and if he had been informed that an estate tax return should have been filed for the decedent's estate he would have caused one to be filed.

Holland was occupied by the Germans from May 1940 to May 1945. During that time there were no means of communication between either Holland and the United States or between Holland and England.

All of the members of the Oei family were in Holland during the period of the German occupation except Oei Ing Tjhing, who was in Switzerland. During that entire time no member of the Oei family communicated with either the Guaranty Trust Company of New York or the New York Trust Company.

Prior to April 1949, neither the executor nor any member of the Oei family ever received any mail or other communication from the Guaranty Trust Company of New York or the New York Trust Company or from anyone else in the United States informing them that a United States estate tax return should be filed with respect to the decedent's estate.

It was not until April 1949 that either the executor or any member of the Oei family received information that it might be advisable to file a United States estate tax return with respect to the decedent's estate.

In the spring of 1949, Harry J. Rudick of the firm of Lord, Day & Lord, was consulted with respect to the status of the two Stiftungs for United States tax purposes. It was his opinion, rendered in writing, that the Stiftungs were taxable as foreign corporations for United States tax purposes and on that assumption that the decedent's estate would not be liable for United States estate tax on the assets owned by the Stiftungs. However, he recommended that a Federal estate tax return should be filed.

Thereafter, arrangements were made for Rudick to go to Amsterdam in order to assemble the necessary data required for the United States estate tax return. A return was prepared by Rudick in Amsterdam in July 1949, and it was executed there by Oei Ing Hing and K. Blom as attorneys in fact for the executor, Oei Ing Tjhing.

Subsequent to the decedent's death, the first member of the Oei family to come to the United States was the youngest brother, Oei Ing Wan, who arrived here in 1946 for the purpose of studying at the University of California. The decedent's second son, Oei Ing Hing, who resides in Holland, visited the United States in 1947 for a period of 1 week, passing through the United States on a return trip from Semarang to Holland. The third brother, Oei Ing Bian, came to the United States in April 1947, with his two sisters, Oei Tien Nio and Djie Swan Nio. Oei Ing Tjhing, the executor of the decedent's estate, resided in Switzerland from a date prior to the decedent's death until June or July of 1948 when he came to the United States for the first time. Subsequent to his arrival in the United States he also went to California to study at the University of California in Los Angeles.

At the date of the trial, Oei Ing Tjhing, Oei Ing Bian, Oei Ing Wan, and Djie Swan Nio all resided in the United States; Oei Ing Hing resided in Holland and the decedent's daughter, Oei Tien Nio, resided in Bangkok, Siam.

At the date of the decedent's death, Dutch law would not have subjected to death duties Dutch securities owned by a United States citizen and resident and cash on deposit with a bank in the Netherlands in the name of a United States citizen and resident.

Subsequent to the filing of the Federal estate tax return for the decedent's estate, Forms 1120H, Personal Holding Company returns, were filed with the collector of internal revenue for the second district of New York on behalf of Yan Stiftung for the years 1934 through 1952, inclusive, and for the Kien Stiftung for the years 1940 through 1953, inclusive. Also, at that time, Forms 1120NB, United States Nonresident Corporation income tax returns, were filed for the Yan Stiftung for the years 1936 and 1948 and for the Kien Stiftung for the years 1940 and 1948.

We find as an ultimate fact that the delay in filing a Federal estate tax return on behalf of decedent was due to reasonable cause, and not to willful neglect.

OPINION.

FISHER, Judge:

Issue I.

A.

The principal issue presented is whether the value of the assets of the Yan and Kien Stiftungs is includible in the decedent's gross estate for Federal estate tax purposes as determined by the respondent.

Section 811 (d) requires that there be included in the gross estate for Federal estate tax purposes the value of any property transferred by the decedent (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) "by trust or otherwise," where the decedent up to the date of his death retained the power "to alter, amend, revoke or terminate." Property of a nonresident alien decedent subject to such a transfer is deemed to be situated in the United States for Federal estate tax purposes if the property was so situated either at the time of the transfer or at the time of the decedent's death. Sec. 862 (b).

Petitioner contends that the United States assets of the Stiftungs are not includible in the decedent's gross estate on the theory that the Stiftungs must be considered foreign corporations, and the instruments representing the decedent's interest in the Stiftungs (the articles of foundation) were at the date of the decedent's death physically situated outside the United States. Petitioner argues that although stock was not issued by the Stiftungs, such an unincorporated entity should be treated as a foreign corporation and the instrument of organization (the articles of foundation) received by the decedent should be considered as stock. Thus, petitioner argues that the transfers of decedent's property to the Stiftungs would have been for a valuable consideration and without the scope of sections 811 (d) or 862 (b).

The two Stiftungs in question were organized by the decedent in 1939 for the purpose of providing funds for the benefit of his descendants. On July 23, 1943, the date of the decedent's death, the Yan Stiftung in Vaduz was a legal entity of and governed by the laws of the Principality of Liechtenstein and the Kien Stiftung in Chur was a legal entity of and governed by the laws of Switzerland. On that date the Yan Stiftung had on deposit in New York with the Guaranty Trust Company a cash balance of $1,039,072.20 and it also owned United States securities having a fair market value of $543,772.26, which were held by Guaranty in a custody account. The Kien Stiftung had on deposit in New York with the New York Trust Company a cash balance of $648,884.98 and it also owned securities having a fair market value of $192,131.25, which were held by New York Trust in a custody account.

The articles of foundation of the Yan Stiftung in Vaduz (originally organized as Yan Stiftung in Zug) provide that it may have a perpetual existence and that its purpose is the management of the Foundation fund and the use of such fund to the best interests of the descendants of the founder. Investments may be made by the board of the Foundation, composed of several members, in the form of corporate stocks, bonds, mortgage bonds, purchase of realty, the granting of loans secured by first mortgages, or it may "invest the fund in a manner different" from the stated powers. The first board of the Foundation was to consist of the founder as chairman and one or several other members appointed by him. As long as the founder lived, he alone was to have the right of appointment and discharge of the board and after his death or legal incompetence, this right was to devolve on the Family Council. The board of the Foundation was entrusted with the legal representation of the Foundation and with its management. It could not, however, borrow any money without the approval of the Family Council and it could not commit the Foundation as guarantor or surety. It was accountable to the Family Council for its management and for all acts which it undertook in the name of the Foundation. The Family Council was to consist of the legitimate descendants of the founder, registered as such in the Register of Descendants, who have attained their 25th year. The number of members of the Family Council was not to exceed 30. The Family Council was to hold annual meetings at the office of the Foundation and to "exercise all functions which are vested in the highest agency of an artificial person by the law."

The articles also provided that 10 per cent of the Foundation's annual net profits should be allocated to a "Reserve Fund A" which was to be used to cover balance sheet losses and unrealized losses such as declines in the value of assets. Whenever this fund was not sufficient to cover such loans, the balance of the Foundation's annual income was to be paid to a "Reserve Fund B" to the extent of "the amount of the fund loss" appearing in the balance sheet. If it were unnecessary to allocate any part of the Foundation's annual net profits to Fund B, 75 per cent of such profits were to be paid to the founder's descendants and the balance of 15 per cent could be used by the board of the Foundation for general purposes or for gifts or contributions. The portion of the Foundation's annual net profits intended for distribution for the founder's descendants was to devolve, share and share alike, upon the children of the founder. In the event of the death of a child, the latter's legitimate children who were registered in the Register of Descendants were to take his place and his share was to be distributed equally among such children. The same principle was to apply in the event of the death of any descendant for each further degree of descent. Beneficiaries could not assign their shares or payments and could not be deprived of such payment by their creditors. Upon the death of the last legitimate descendant of the founder, the Foundation's annual profits were to be used for promoting and encouraging the Arts and Sciences, for the care and treatment of the sick and infirm, for the care of the poor, and for fellowships and scholarships, with the further proviso, however, that 60 per cent of such profits should be paid out in China and 15 per cent in the Netherlands Indies.

The articles of foundation of the Kien Stiftung are substantially similar to the articles of foundation of the Yan Stiftung except that the Kien Stiftung was created for the benefit of Djie Swan Nio and her descendants.

Under Swiss and Liechtenstein law, a Stiftung is a legal entity created by dedication of property for a specific purpose which can be of a public, charitable, or private character and, being a legal entity, is subject to separate taxation in both Switzerland and Liechtenstein. The concept of trust ownership in the legal sense in effect in the United States is not recognized under Swiss or Liechtenstein law.

The precise nature of the foreign Stiftung for United States tax purposes, and in particular for Federal estate tax purposes, has not been determined. In a number of respects, the Yan and Kien Stiftungs closely resemble a corporation. For example, like a corporation, the Stiftungs have perpetual existence; they are managed by a board which is analogous to a board of directors; the board may be changed by decision of the Family Council in somewhat the same way as stockholders may change the board of directors of a corporation; they continue regardless of the death of beneficiaries; there is no personal liability on beneficiaries for the acts of the Stiftungs; and the foundations may engage in business activities. Moreover, the Stiftungs have articles (and bylaws) comparable to certificates of incorporation (and corporate bylaws); they are treated as separate juridical entities; they may sue and be sued in their own names; and they are taxed on their own capital and income. On the other hand, there are no certificates of interest such as shares of stock as in the case of the usual corporation; the interests of the beneficiaries are nontransferable; the articles have characteristics which are similar in many respects to a deed of trust; and provision can be made as in the case of a trust for changing the trustees.

However, the features above referred to appear to us to be largely the general formal characteristics of the Stiftungs as organizational entities, which, considered alone, are not a sufficient basis for categorization for every tax purpose as petitioner appears to contend. For estate tax purposes, we think that the most significant features of these Stiftungs are other than the characteristics of their formal organization as Swiss entities. The decedent caused the Stiftungs to be created as family foundations for the purpose of providing funds for the care and education of members of his family; at all times up to the date of his death the decedent had the power to amend the articles of the Foundation and to revoke the Stiftungs; and the Stiftungs did not engage in business.

These features we think give the decedent such power to control the enjoyment of the property of the Stiftungs as was contemplated by the broad scope of section 811 (d). That the purpose of the section was to prevent avoidance of estate tax by valid inter vivos transfers of property while retaining the important element of control over ultimate enjoyment of that property up to the date of death is evident. And it is this element of control which is decisive in determining the applicability of the section, regardless of the form of the transfer or the manner in which it is made. We would hardly assume that all of the possible means of conveying property while retaining control over enjoyment have been devised or are even presently predictable, although the most common form for such transfers is by trust. Section 811 (d), however, is not limited in its application to any one particular or few well recognized means of so transferring property and covers broadly in the terms of the statute such transfers "by trust or otherwise." We think, therefore, that regardless of the precise nature of the Stiftung, transfers such as involved in the instant case are subject to the provisions of section 811 (d).

We do not think that these transfers are excepted from the purview of that section as bona fide sales for adequate and full consideration in money or money's worth. Decedent transferred the assets to the Stiftungs gratuitously in essentially the same manner as would have been followed if he were to have made such a transfer to a trust in this country. It is conceded that the decedent did not receive stock or like certificates for the transfer, and we do not think the articles of foundation may stand in lieu thereof. It is by virtue of these very articles that the decedent retained the powers which bring the transfers within the purview of section 811 (d). It would be wholly anomalous to consider the articles establishing the Stiftungs and reserving to the decedent the powers normally leading to taxation under section 811 (d) as full and adequate consideration for the transfers.

We think the features described above give the Stiftungs a character which both in purpose and function very closely resembles the private trust which is organized and used solely for a family purpose. See 1 Nossaman, Trust Administration and Taxation (1945), page 2, where in referring to the traditional type of trust (those created for other than business reasons) it is stated that "the principal purposes which motivate its creation are * * * the management of the property * * * its conservation * * * protection of beneficiaries * * *." See also, 1 Scott, Trusts (1939), sec. 2, pp. 30-42, generally on the nature of the trust. We think that the difference between the trust as we conceive it and these particular Stiftungs is merely one of formal organization under differing legal systems.

The civil law does not recognize the trust as we know it, and we do not have in our law an identical institution such as the Stiftung (though in the area of charitable foundations the relationship between Swiss, Liechtenstein, and American law is probably closer). However, it is clear that the uniqueness of the trust as a juridical institution of the Anglo-American system of law is not a consequence of the situations to which it applies. Quite to the contrary, the underlying factual complex is not peculiar, and different devices have been developed in other legal systems to meet the needs of these situations. In fact, it has been stated that "[often] there is a striking similarity between the juridical devices employed." 1 Scott, Trusts (1939), p. 26. See also, Lepaulle, "Civil Law Substitutes for Trusts," 36 Yale L. J. 1126 (1927); Nussbaum, "Sociological and Comparative Aspects of the Trust," 38 Col. L. Rev. 408 (1938). We are, therefore, faced with the serious difficulty of translating a foreign law concept into our own terms. For tax purposes such a problem must be handled in a practical way. We think that for Federal estate tax purposes we must look to the essence of the foreign organization—its functional features—and treat it accordingly.

In view of our expression that we consider the particular Stiftungs involved in the instant case to be very much like a private trust, and in the absence of any compelling reason to the contrary, we think that the transfers of property by the decedent to the Stiftungs subject to the power of revocation should not be treated any differently than we would treat such transfers to a private trust. In fact, we think that it is relatively insignificant for Federal estate tax purposes that the decedent, a nonresident alien, carried out his purposes within the particular legal means and juridical concepts which were recognized in his own country (and which there have particular and definite legal effect), since it seems more important in resolving a problem such as the one before us to consider the method and technique that the decedent would have had to have employed in the United States in order to accomplish his basic purposes. We think that in the circumstances of this case it is evident that it would have been necessary to have established a trust.

Section 811 (d) is clearly broad enough in its terms to include the transfers here in issue. The Stiftungs, which for Federal estate tax purposes are to be treated as comparable to our private trust, obviously are encompassed by the broad statutory language "by trust or otherwise."

For the sake of completeness, petitioner's several arguments will be discussed briefly.

Petitioner cites Article II (1) (f) of the Income Tax Convention between the United States and Switzerland, signed on May 24, 1951, Treaty Series No. 2316 (1952), which is as follows:

(f) The term "Swiss enterprise" means an industrial or commercial enterprise or undertaking carried on in Switzerland by an individual resident in Switzerland or by a Swiss corporation or other entity; the term "Swiss corporation or other entity" means a corporation or institution or foundation1 having juridical personality, or a partnership (association "en nom collectif" or "en commandite"), or other association without juridical personality, created or organized under Swiss laws.

Petitioner argues that by treating the Stiftung in the same way as a corporation, the Convention definition supports his position that the Stiftungs here in issue should be treated as foreign corporations rather than more in the nature of revocable trusts, particularly since the Stiftung has juridical personality like a corporation as distinguished from partnerships and trusts.

We disagree, and think that it should be recognized that the classification of the Stiftung as a corporation for tax purposes under the Convention is only for the purpose of income taxation. (The United States Estate Tax Convention with Switzerland contains no reference to the Stiftung.) The objective of the definition is to specify those enterprises which may have taxable industrial and commercial profits (business income) under the Convention. We think that the inclusion of the Stiftung is obviously based on the fact that a Stiftung may engage in business and thus may have business income subject to tax in accordance with the terms of the Convention. Clearly such a Stiftung ought not to be treated differently than other commercial enterprises. But it is evident that the Convention classification assumes that the Stiftung is carrying on a business, whereas such is not the case in respect to the Yan and Kien Stiftungs. Thus, in the instant case, where the Stiftungs were not engaged in business, we think that for estate tax purposes they are to be treated as something in the nature of private trusts and subject to the terms of section 811 (d).

Petitioner also contends that even if it were considered that the Stiftungs were not corporate bodies under Swiss and Liechtenstein law, but merely associations or entities in some respects similar to a trust, for all purposes of United States tax law, each of the Stiftungs should be considered as an association taxable as a corporation under section 3739 (a) of the Internal Revenue Code, which provides that "the term `corporation' includes associations, joint stock companies and insurance companies." We think it well established, as petitioner asserts, that whether a trust or an association is taxable as a corporation depends on the facts of each case. It is clear, however, that ultimately such classification must depend upon the nature of the activities carried on by the trust or association. In this connection, it was pointed out in Morrissey v. Commissioner, 296 U.S. 344 (1935), relied on by petitioner, that,

"Association" implies associates. It implies the entering into a joint enterprise, and, as the applicable regulation imports, an enterprise for the transaction of business. This is not the characteristic of an ordinary trust—whether created by will, deed, or declaration—by which particular property is conveyed to a trustee or is to be held by the settlor, on specified trusts, for the benefit of named or described persons. Such beneficiaries do not ordinarily, and as mere cestuis que trust, plan a common effort or enter into a combination for the conduct of a business enterprise. Undoubtedly the terms of an association may make the taking or acquiring of shares or interests sufficient to constitute participation, and may leave the management, or even control of the enterprise, to designated persons. But the nature and purpose of the co-operative undertaking will differentiate it from an ordinary trust. In what are called "business trusts" the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. * * *

The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity. * * *

* * * * * * *

The suggestion ignores the postulate that we are considering those trusts which have the distinctive feature of being created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking, trusts that thus satisfy the primary conception of association and have the attributes to which we have referred, distinguishing them from partnerships. In such a case, we think that these attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations.

See also William F. Buckley, 22 T.C. 1312 (1954), cited by petitioner, where in determining the character of two organizations formed under the laws of Venezuela as "anonymous companies" we held that the organizations were corporations or in any event legal entities, in accordance with Morrissey. In pointing out that the organizations were not pure trusts for tax purposes (there is no concept of trusts in the Venezuelan law), we emphasized that the Venezuelan organizations were created and operated for business purposes, and the record clearly indicated that the activities of the organizations were of a business character. See Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

Petitioner's last contention is that in Oak Commercial Corporation, 9 T.C. 947 (1947), affd. (C. A. 2, 1949) 172 F.2d 896, it was conceded or assumed that the Aramo-Stiftung was taxable as a corporation. We think it needs only to be pointed out, as petitioner admits, that the question presented to the Court was not whether the Stiftung was taxable as a corporation or otherwise. The tacit assumption of the parties is obviously not binding on us.

B.

Petitioner urges an alternative contention to the effect that the cash on deposit with the Guaranty Trust Company of New York and the New York Trust Company in the names of the Yan and Kien Stiftungs, respectively, constituted moneys on deposit for the decedent (a nonresident alien not engaged in business in the United States at the time of his death) within the meaning of section 863 (b) of the Internal Revenue Code, providing that "Any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death" shall be deemed property outside of the United States, which in the case of such a nonresident alien decedent is exempt from United States estate tax. It is argued, in effect, that the decedent so dominated and controlled both Stiftungs and treated the assets thereof as his own that the moneys held on account in the names of the Yan and Kien Stiftungs should be considered as on deposit for the decedent's own use and benefit, and accorded the same status under section 863 (b) as if they had also been in decedent's own name.

Respondent, on the other hand, argues that in fact the Stiftungs were not so controlled or the assets thereof so treated, and further, that the cash assets were owned and on deposit for the Stiftungs, which were independent juridical entities, and not the decedent. Accordingly, respondent contends that the exemption provided for in section 863 (b) is inapplicable. We agree with respondent for the reasons set out below.

Both the Yan and Kien Stiftungs were originally established by petitioner in 1939 in order to provide a fund which might be used by members of his family for education and support. The petitioner as founder was, during his lifetime, chairman of the board of each of these family foundations. Within the terms of the articles governing these foundations, the decedent was actually the sole manager of the Stiftungs and he had the power to amend the articles in any respect and to revoke the Stiftungs. The decedent was the only person authorized to withdraw the funds of the Stiftungs or to issue any instructions with respect to the accounts of the Stiftungs at the two New York banks. Withdrawals might be made and other instructions given on his signature alone. It appears that if the decedent had wished he might have withdrawn the entire amounts of cash held in the Stiftung accounts and deposited these to his own personal account either in the United States or abroad, subject only to foreign funds restrictions. Whether such an act would constitute a violation of decedent's duties as chairman of the board to carry out the stated purpose of the foundations, i.e., to use the assets "to the best interests of the descendants of the Founder," is not clear. However, it is clear that decedent could have accomplished this by amending or revoking the Stiftungs. On the other hand, no such transfer was made, and only on several occasions did the decedent withdraw small amounts for his own use. One transfer to his own account occurred prior to the establishment of the present Yan and Kien Stiftungs.

We do not think that these facts alone are sufficient to sustain petitioner's view of the decedent's relationship to the funds of the Yan and Kien Stiftungs. The decedent did not treat the assets of the two Stiftungs as his own personal property. In fact, it is apparent from the record that the decedent actually considered the assets of the two Stiftungs as the separate assets of those foundations and, despite his ultimate control over the two Stiftungs, treated them during his life-time as separate entities. The limited number of withdrawals from these two Stiftungs at a time when the decedent had shortly before transferred a substantial amount of his own personal funds to the Stiftungs is not sufficient to support petitioner's view.

It is our view that deposits made to the credit of separate entities for trust purposes are not to be deemed "moneys deposited * * * by or for a nonresident not a citizen of the United States * * *" within the meaning of section 863 (b), even though the nonresident furnished the funds so deposited and retained the unexercised power to revoke the instruments creating the entities or to withdraw any part or all of the funds for his own purposes and upon his own order.

Neither of the parties has called to our attention any decision which is clearly determinative of the issue, and we have found none. We find, however, that there are authorities which shed some light on the issue, and since the problem is not free from difficulty, we think it helpful to discuss them in some detail.

City Bank Farmers Trust Co. v. Pedrick, (C. A. 2, 1948) 168 F.2d 618, certiorari denied 335 U.S. 898, at least suggests that our view is correct. In that case, a nonresident alien created a trust for the benefit of himself and his wife. The trust property included a cash deposit in a New York bank. The trust was subject to revocation and amendment by the settlor with the consent in writing of the trustee. In urging the applicability of section 863 (b), it was argued that for practical purposes, the settlor had reserved an unconditional power to withdraw the deposit. In this connection, the court said (p. 619):

The plaintiff's argument presupposes that the case is the same as though the settlor had reserved an unconditional power to withdraw the deposit from the trust whenever he chose. It argues that, although the trustee was a "department of the National City Bank, the deposit after its transfer by the settlor was no more than a debt owed to the trustee by the bank, precisely as it had been while the settlor himself was the depositor; and with all this we agree. It further argues that the transfer, whatever might otherwise have been its effect, when read with the power of revocation, affected the settlor's control over the deposit only in form. Although it then became necessary for him, as a preliminary to drawing a cheque on the account, to execute the document prescribed in the deed revoking the trust pro tanto, that did not clog his control; it merely added to the number of papers he must sign. We are not sure that § 863 (b) would exempt the deposit, even if the power were as absolute as this argument assumes. The purpose of the section was indeed to encourage the maintenance by aliens of bank deposits in our banks; but it is at least open to doubt whether the deposits intended were other than ordinary bank accounts subject to withdrawal by cheque, of which the public often speaks as "cash in bank" and regards much as it does currency. Contrary to the plaintiff's assertion, the section is a tax exemption; and it is idle to try to disguise its purpose by setting it down as a regulation of the "situs"—that much abused word—of bank deposits. As an exemption section we look at it jealously; and we wish to guard against the implication that, even if the reserved power had put the deposit unconditionally within the settlor's control, it would have been exempt. [Emphasis supplied.]

In 1 Scott, Trusts (1939), page 225, we find, among others, the following statements:

A conveyance in trust is incomplete unless the settlor has passed the title to the property to the trustee by delivery of the subject matter of the trust or of an instrument of transfer. On the other hand, if the conveyance in trust is completed by such delivery, the trust is not incomplete merely because the settlor reserves power to revoke or to alter the trust. There is a sufficient surrender of control over the property if the settlor transfers the title to it to the trustee, even though he reserves power to undo what he has done. The surrender of control is sufficient even though the settlor reserves power to reassume control. [Emphasis supplied.]

In 4 Bogert, Trusts and Trustees (1951), sec. 994, page 442, the author says:

So likewise the settlor may by express provision vest in himself a power to revoke or cancel the trust at will, * * * Such a reservation of a power to revoke does not affect the validity of the trust. It merely makes the interests of the trustee and cestui defeasible at the desire of the settlor.

We make brief reference to Estate of Fredericka Loewenstein, 17 T.C. 60 (1951), cited as authority by respondent, in which we held that funds in the general bank account of a trust for the benefit of a nonresident alien were not excludible from the gross estate as bank deposits by or for a nonresident alien within the meaning of section 863 (b), Internal Revenue Code. Although it is consistent with our holding in the instant case, we do not consider it to be controlling, because the nonresident alien had no control over the trust or the funds on deposit.

Our consideration of authorities relied upon by petitioner demonstrates that they are distinguishable upon the facts. The following are illustrative:

In Estate of Karl Weiss, 6 T.C. 227 (1946), where a friend of the decedent had deposited money belonging to the decedent in an account in his own name and the name of his son, the respondent argued that such a deposit made by another was not "for the decedent" if the funds were not deposited to the credit of the decedent or in the decedent's name, and if there was not some direct contractual relationship between the decedent and the bank. We held that the question of whether or not moneys on deposit were for the decedent depended on whether the moneys so on deposit were "for the use and benefit of" or "upon behalf of" the decedent. We carefully pointed out in our Opinion that the friend "did not deposit the money for himself as a regularly constituted fiduciary or trustee."

In Estate of Elizabeth Hawxhurst Davey, 10 T.C. 515 (1948), moneys were on deposit with a New York bank in the name of that bank as trustee under a trust previously established by the decedent. Prior to the date of the decedent's death, she exercised her power to revoke the trust, forwarding appropriate papers to the bank, which, at the date of decedent's death, had not made a final distribution of funds then on deposit in its name as trustee. We held that the requirements of section 863 (b) had been satisfied and that the moneys on deposit in the name of the trustee were, within the meaning of that section, on deposit for the decedent. In the instant case, however, the power to revoke had not been exercised with respect to the funds of the Stiftungs on deposit at the time of decedent's death.

In Estate of Anna Floto De Eissengarthen, 10 T.C. 1277 (1948), moneys were on deposit in a New York bank in the name of decedent's testator. Under Swiss law, property of the testator became by force of law at the moment of death the property of the person appointed by his will as heir. Thus the decedent, upon the death of the testator, became the sole owner of the bank deposit in question even though it stood in the name of the testator. In those circumstances we held that the money was on deposit for the decedent's use and benefit within the meaning of section 863 (b). In the instant case, the Stiftungs were separate entities under the laws of Switzerland and Liechtenstein, and the funds on deposit were not vested in decedent at the time of his death.

In Estate of Irene de Guebriant, 14 T.C. 611 (1950), as in the Davey case, moneys previously subject to a trust were at the date of the decedent's death on deposit in a New York bank in the name of the trustee. The trust had terminated, however, and, as in the Eissengarthen case, the decedent was by force of law, immediately upon termination, entitled to one-half of the trust corpus, subject to settlement and accounting by the trustees in whom legal title to these assets was reposed. The bank was in the position of a mere liquidating trustee obliged only to settle the accounts and distribute the trust corpus. We held, in accordance with our previous decisions in Weiss, Eissengarthen, and Davey, that the moneys on deposit, despite the absence of a direct contractual relationship between decedent and the bank, and despite the fact that the deposit had not been made by the decedent and was not in the decedent's name, were nevertheless "for" the decedent within the meaning of that term in section 863 (b). The decedent had a direct enforceable claim against the trustees for one-half of the bank deposit, subject only to the formal requirements of accounting and distribution to be performed on behalf of the decedent by the trustees. We stated that "the decisive fact * * * is that the trust had terminated and the decedent had an unconditional right to the trust funds held on deposit." See also Estate of Mertyn S. Bradford-Martin, 18 T.C. 544 (1952), decided on the authority of Eissengarthen; Estate of Leslie Diana Worthington, 18 T.C. 796 (1952); Estate of Lena Joachim, 22 T.C. 875 (1954).

We think that the principle which emerges from the foregoing discussion is that while section 863 (b) does not require that a deposit be made by the decedent or in the decedent's name, or that there be a contractual relationship between the decedent and the bank, but only that the deposit be actually owned by the decedent and be for the decedent's use and benefit, such ownership does not exist where funds are held in an existing active trust. We think the same principle is applicable in the instant case where the Stiftungs remained as active and separate entities on the date of the decedent's death.

Estate of F. Herman Gade, 10 T.C. 585 (1948), relied on by petitioner, is also distinguishable. Petitioner argues that "[s]ince the statute is apparently satisfied if the funds are on deposit with a bank and are `subject to decedent's order', it is submitted that the cash on deposit in the Yan and Kien Stiftungs at the date of the decedent's death, being also subject to the decedent's order, is within Section 863 (b) of the Code."

In Gade the decedent and a bank had entered into an agreement entitled "Agency Agreement," in which decedent was designated as the "Owner" and the bank as the "Company." Under its terms, the bank was appointed "agent and custodian" for decedent of certain securities and investments which were delivered to it by decedent. The bank was to collect the income and principal on the securities and investments. The net income was to be distributed as follows: "Hold subject to owner's instructions." The precise question presented was whether moneys held by a banking institution, clearly for the use and benefit of the decedent, were moneys "on deposit" within the ordinary meaning of that term and within the meaning of the statute. Resolving the question in favor of the taxpayer we stated:

And if we reach beyond the surface language and seek out the objective at which the legislation was aimed, we likewise find that application of the exclusion to estates of persons in decedent's position is equally indicated. The legislative purpose, as manifested when the provision was adopted, was to place American banks in a competitive position with those abroad in their activities carried on for foreigners. S. Rept. 275, 67th Cong., 1st Sess., p. 25. Limiting application to the deposit of funds in conventional savings or checking accounts, and excluding the comparable relationship of cash in a custody or management account would fall far short of accomplishing this statutory objective. If foreign investors are deterred from placing funds in bank accounts by the fear that the property will be subjected to estate tax in the United States, the effect would presumably be similarly adverse in respect of funds subject to decedent's order but growing out of arrangements calling for custody or management.

Only by attributing to the word "deposit" a narrow and technical meaning, entirely at variance with the remaining language of the section and with its declared spirit, is there ground for denying the claimed exclusion. Nothing in the authorities to which we have been referred appears to call for any such treatment.

There is no issue in this proceeding concerning whether the moneys held in custody account were "moneys on deposit" within the meaning of section 863 (b), which was the issue involved in Gade. The only issue here is whether or not these moneys were so on deposit for the decedent within the meaning of that section. The criteria selected in Gade, namely, whether funds were subject to decedent's order, was in recognition of practical realities to give substance to the concept "on deposit" and furnish no basis for determining whether moneys subject to the order of an individual were on deposit for that individual when they were in fact the property of separate entities, such as trusts, or, more specifically in the instant case the Stiftungs. See also Estate of Annina Fabbricotti Fara Forni, 47 B. T. A. 76 (1942).

A further contention of petitioner respecting the moneys on deposit in the name of the Kien Stiftung requires consideration. Petitioner argues that the Kien Stiftung was invalid under Swiss law from its very inception and, therefore, that its assets were in reality assets of the decedent, since under Swiss law it is as though no transfer had ever been made from the decedent to the Stiftung. Accordingly, petitioner argues, the moneys on deposit in the name of the Kien Stiftung were in fact on deposit for the decedent as owner and fall clearly within the exemption provided for by section 863 (b).

Both parties offered expert testimony as to the validity of the Kien Stiftung under Swiss law. Both experts agreed that the Stiftung was invalid because it provided for the general support of the beneficiary without limitation. Both agree that, to be valid, the provisions for the beneficiary must be limited to provisions for "education, endowment and assistance in case of need."

The expert witnesses disagreed, however, as to the nature and effect of such invalidity. Petitioner's expert expressed the view that the Kien Stiftung was invalid ab initio and that no formal action or proceeding was necessary to establish the fact that it was a nullity from its inception. Respondent's expert expressed the view that the Stiftung would be regarded as a de facto entity unless and until it was determined to be invalid by appropriate proceedings (in which event it would be declared invalid ab initio in such proceeding).

The burden of proof of applicable Swiss law was upon petitioner. We think he has failed to meet that burden insofar as it is here material. Both expert witnesses appeared to be intelligent and well-versed in Swiss law. No question of the veracity of either of them was raised. The record furnishes to the Court no standard by which their respective abilities may be significantly compared. Other factors, however, persuade that, if there is a preponderance of evidence on this issue, it is favorable to respondent's position.

Our examination of the Kien Stiftung indicates careful preparation by a skilled draftsman. It did in fact operate as a separate entity. It was formed for a clear and recognized purpose. Its founder conducted himself in a manner which evidenced recognition of its existence. The bank which handled its funds in New York recognized its existence. There is no evidence that its existence was ever questioned by anyone prior to the emerging of the present issue in relation to the applicability of the Federal estate tax. There is no evidence that any proceeding (whether technically required or merely for the practical purpose of removing all doubts) was ever instituted or prosecuted to a conclusion to establish its invalidity, and if invalid whether such invalidity rendered it void ab initio. In sum, there is nothing in the record which suggests that anyone deemed the Kien Stiftung a nullity or denied at least its de facto existence as a separate entity at the time of, prior to, or subsequent to decedent's death except in relation to the present issue.

Under the circumstances, we hold that petitioner has failed to establish by a preponderance of the evidence that the Kien Stiftung was a nullity or that the funds on deposit for its account in New York at the time of decedent's death were the property of the decedent on the theory that the Kien Stiftung had no legal existence.

Petitioner presents a further contention to the effect that the portion of the moneys transferred by the decedent to the two Stiftung accounts shortly after the war began was money on deposit for him within the meaning of section 863 (b). Petitioner argues that this transfer by the decedent was merely transitory and was made only for the purpose of safekeeping the funds. At that time the decedent was in Vichy, France, and was endeavoring to obtain permission from the French and German authorities to return to Holland to his family who were then living in occupied territory. The decedent was undoubtedly afraid that the Germans might force him to transfer his property to them or that they might issue a vesting order transferring the property of all Dutch nationals to the German state. To avoid such happenings, the decedent requested the New York banks to transfer moneys then in his own personal accounts to the accounts of the Yan and Kien Stiftungs. Petitioner contends that this transfer was for such a limited purpose that the moneys were in reality being held on deposit for the benefit and use of the decedent within the meaning of section 863 (b).

We hold that the record fails to establish petitioner's contention. There is nothing in the record which demonstrates that decedent intended to make only a temporary transfer of his personal funds to the accounts of the Stiftungs. His letters in evidence indicate only that a transfer was to be made, and other evidence indicates only that one purpose for which these transfers were probably made was to prevent any of the funds being forced through the hands of the decedent into those of the German army of occupation. These circumstances, however, do not preclude the possibility that the petitioner might have intended to make a permanent transfer of funds from his own account to the Stiftungs for the use of the Stiftungs in carrying out their function. Upon the state of the record, we do not think that petitioner has established what decedent's intention was in making the transfers, and we therefore find no basis for upsetting the respondent's determination.

Estate of Karl Weiss, supra, and Marguerite F. Schwarzenbach, 4 T.C. 179 (1944), cited by petitioner, are distinguishable on their facts. In Weiss the decedent had died in a German concentration camp in 1941. Prior to this, however, his partner and friend had succeeded in emigrating to the United States bringing with him some money which belonged to the decedent. The money was deposited in the partner's name and that of his son for the benefit of the decedent in order to safeguard it against German confiscation. In holding that the money so on deposit was exempt from estate tax under section 863 (b) of the Code, we recognized the obvious and well-established fact that the money in question was being held by the partner for the use and benefit of the decedent. No such fact has been established in the instant case with respect to the money transferred by the decedent to the Stiftungs.

In Schwarzenbach, which involved a question of gift tax, the taxpayer, a resident of Switzerland, created a trust in 1940, the purpose of which was to prevent confiscation of her property by Germany in the event of the invasion of Switzerland. Under the trust indenture, the taxpayer reserved a power of revocation subject to the unanimous consent of the trustees, one of whom was a beneficiary of the remainder interest. The trustees, however, had agreed to give their consent to revocation after the emergency had passed. The Court held that there was no transfer subject to gift tax for the reason that the taxpayer did not have the "clear and unmistakable intention * * * to absolutely and irrevocably divest * * * [herself] of the title, dominion and control of the subject matter of the gift * * *." The Court also held that the taxpayer "did not lose control of her `gift' nor did the trustees have possession of it free from a duty to return it to her after the accomplishment of the limited purpose for which the trust was created."

We think that, unlike the instant case, it was clearly established in Schwarzenbach that the taxpayer was making a temporary transfer for a limited purpose.

C.

Another argument advanced by petitioner is that the value of those assets constituting property within the United States for estate tax purposes, held by the Stiftungs and by the decedent personally, may not be included in the gross estate since title to and ownership of the assets vested in the State of the Netherlands, as represented by the government in exile in London, under a decree, issued on May 24, 1940. Petitioner argues that the United States Government officially recognizes and gives such effect to the decree.

Respondent, on the other hand, contends that assets belonging to the Stiftungs were not subject to the Dutch decree, and further, with respect to assets belonging to the decedent and subject to the decree, that recognition and effect are accorded the decree only to the extent that so doing is not against public policy. Respondent urges that no effect may be given to the decree which would preclude the United States Government from enforcing valid rights against assets located in the United States but belonging to Dutch nationals and residents, or from taxing such assets as though title had not been vested in the Netherlands Government.

With respect to the assets of the Yan and Kien Stiftungs, petitioner appears to assume in his argument that if we determine that the Stiftungs are to be treated essentially in the same manner as revocable trusts for estate tax purposes, we must treat such assets for all purposes as if they were in fact owned individually by decedent. It is evident from our discussion of Issue I, B, that we do not so hold, and we think it unnecessary to repeat our reasons at this point.

Construction of the Netherlands decree is a judicial problem. See Anderson v. N. V. Transadine Handelmaatschappij, 289 N.Y. 9 (1942), in which it was said that the "scope and the effect within this state of a decree promulgated by the recognized government are judicial questions, just as the scope and effect of the law of any long-established and recognized friendly foreign government * * *." It is our view that the decree purports only to vest in the Netherlands Government title to claims which belong to natural or legal persons domiciled in the Netherlands. The Stiftungs were not Dutch legal entities and therefore were not subject to the Netherlands decree. The decedent, however, was domiciled in Holland, but we think it is clear that he had no "claim" against the assets of the Stiftungs within the meaning of the decree. It is recognized by both parties that neither the decedent nor his creditors could effectively assert any claim against these assets (except perhaps if the Kien Stiftung were to be deemed a nullity, considered hereinbefore, or if a portion of the cash on deposit for the Stiftungs had been transferred by the decedent only for safekeeping, likewise considered hereinbefore). We hold, therefore, that the decree did not operate to vest title to the assets of the Stiftungs in the Netherlands, since the decedent was possessed of nothing which could so vest within the terms of the decree. In this connection, we point out that the decedent's unexercised power to amend or revoke the Stiftungs was not a "claim" to the assets of the Stiftungs. Any "claim" thereto which might be encumbered, pledged, transferred, or sold, within the meaning of the decree, could arise only upon exercise of that power. Even if we agreed with petitioner's assumption that the assets of the Stiftungs were in fact assets of the decedent, it is our view (for reasons hereinafter set forth with respect to assets admittedly owned by decedent) that the assets held by the Stiftungs would not be relieved from Federal estate taxes by virtue of the decree.

At the date of his death, decedent owned certain securities (see Issue II, infra), title to which was, we think, subject to being divested under the Netherlands decree. See State of The Netherlands v. Federal Reserve Bank, (C. A. 2, 1953) 201 F.2d 455, reversing in this respect 99 F.Supp. 655. We must therefore consider the effect for the purposes of this case to be given to that decree as an act of the Netherlands Government in Exile, which the United States recognized as the legitimate Dutch Government. Respondent contends that the decree cannot be given any effect which will limit the right of the United States to impose and collect taxes on assets located within the United States under the provisions of the Internal Revenue Code. Petitioner, on the other hand, argues that courts of this country have given effect to this decree and others like it for all purposes which are not in conflict with established public policy. We agree with the respondent for the reasons set out below.

Several courts have had occasion to consider the validity of and effect to be given this decree, although the precise question presented here has not been previously considered. In Anderson v. N. V. Transandine Handelmaatschappij, supra, the plaintiff, a resident of the State of New York, was an assignee for collection of a certain claim belonging to his assignor, the real party in interest, who was a nonresident alien, a citizen of Liechtenstein, and a resident of Cuba. Plaintiff brought an action against the defendants for failure to deliver to the assignor securities and Dutch currency deposited with defendants, attaching the assets which were located in the United States. Defendants were residents of Amsterdam and subjects of the Netherlands. The attachment was vacated upon motion of the defendants, and the State of the Netherlands intervened. Defendant's position was that title to the property and funds which the plaintiff sought to attach was vested in the State of the Netherlands under the decree of May 24, 1940. The Court of Appeals of New York, upon certification of the following question (p. 503),

"Did the Netherlands Royal Decree of May 24, 1940, operate to bar the levy of attachment by the plaintiff subsequent to the enactment of said decree on property in this state belonging to the defendants when said decree was entered and the title to which was declared by said decree to be thereby vested in the State of the Netherlands?"

affirmed the decisions of the lower courts vacating the attachment.

The New York court accepted as a part of the record therein a statement of the State Department of the United States setting forth its policy in respect to the effect to be given to the decree here in question. Pertinent portions of the State Department views are as follows:

The United States has an interest and concern in the subject matter and outcome of this action insofar as there is involved the question of the effect on assets within the United States of the decree of May 24, 1940, of the Royal Netherlands Government, purporting to affect title to certain assets of nationals of the Netherlands. * * *

* * * * * * *

* * * at the time of the adoption of the Decree of May 24, 1940, the Royal Netherlands Government was recognized by the Government of the United States, and the Government of the United States has consistently taken cognizance of that Decree as an act of the Royal Netherlands Government; * * * However, * * * prior to the entry of the United States into the present war and to the signing of the Declaration of the United Nations, the Government of the United States did not adopt any policy with reference to the effect which should be given to that Decree on assets within the United States; * * *

It appears from the opinion of the Supreme Court of the State of New York herein (28 N.Y.S.2d 547, at pages 553, 558) that that court gave to the expression of cognizance of June 27, 1940, a construction broader than was intended, apparently finding in it a determination by the executive branch of the Government relative to public policy ([28 N. Y. S. 2d] page 553) and holding that the Decree, "implemented by the recognition given to it by our national government, is self-executing" ([28 N. Y. S. 2d] page 558). On the contrary, * * * the recognition was merely of the Royal Netherlands Government and of the Decree as an act of that Government without the adoption at that time of any policy with reference to the effect which should be given to that Decree on assets within the United States, leaving that question, pending the adoption of such a policy, for judicial determination.

* * * however, * * * since the entry of the United States into the present war and the signing of the Declaration of the United Nations, the Government of the United States has adopted a policy with reference to the particular question presented by this case. That policy, * * * is as follows:

"It is the policy of the United States that effect shall be given within the territory of the United States to that Decree insofar as it is intended to prevent any person from securing an interest in, or control over, assets of nationals of the Netherlands located in the United States on account of claims arising outside of the United States in territory now or at any time under the jurisdiction of the Netherlands Government, for the benefit of persons who are not at the time of their assertion citizens or residents of the United States."

The foregoing statement of policy is made with express reservation * * * as follows:

"This statement reserves for further determinations of policy, in the light of further consideration and developments, all questions relating to the effectiveness of the Decree as applied to other circumstances or persons and relating to the bearing of control which the Government of the United States may undertake through its executive and legislative branches to exercise over any assets purported to be affected by the terms of that Decree."

The Secretary of State, as shown by said communication, finds that the result of the decision of the Supreme Court of the State of New York, as affirmed by the Appellate Division, is in harmony with and will promote the policy of the United States, but the Secretary expressly refrains from expressing any views as to the compatibility with that policy of all the reasons stated in the opinion of the Supreme Court of the State of New York. The Secretary points out that it would be highly desirable that this Court, in deciding the present case, confine itself to giving effect to the announced policy of the United States stated in that communication without expressing any view with respect to the effectiveness of the Decree as applied to persons and circumstances other than those referred to in the statement of policy set forth in that communication.

It is submitted that the policy announced by the Department of State, if given effect, is dispositive of the controlling issues herein. As appears from the opinion of the Supreme Court of the State of New York (28 N.Y.S.2d 547, 550), the plaintiff, although a resident of the State of New York, is what is commonly known as an assignee for collection, the alleged assignment to him having been made solely for the purpose of making him, instead of his assignor, the plaintiff in the action, and that the plaintiff's assignor is a non-resident alien, a citizen of a country in Europe said to be Liechtenstein, and is now understood to be resident in Cuba. It further appears from said opinion that the plaintiff's alleged cause of action arose outside of the United States in territory under the jurisdiction of the Netherlands Government. [Emphasis supplied.]

Clearly it was not necessary for the New York court to decide in that case whether it would enforce the Netherlands decree in a situation where the plaintiff was himself the real party in interest and a resident or citizen of the State of New York and of the United States, or where the State Department refused to recognize the Netherlands decree as a matter of public policy. The decree was designed basically to prevent property from falling into the hands of an enemy of the Netherlands. The Netherlands, by vesting property of its nationals in the government in exile, acted as conservator of the assets of its nationals, making specific provision for restitution subsequent to cessation of the hostilities. The decree is not offensive to any public policy of the United States upon its face, and we have no quarrel with the view that where the real party in interest is a national of a country other than the United States and is not a resident of the United States and where the claims are against Dutch residents, it is not offensive to our public policy to give effect to the decree. But whether to give effect to the decree where the rights against assets of Dutch domiciliaries are rights of United States residents or citizens or of the United States Government is an entirely different question.

A like view has been expressed by the Court of Appeals for the Second Circuit in State of The Netherlands v. Federal Reserve Bank, supra, where an American citizen, in violation of the Trading with the Enemy Act of 1917, purchased securities from a Swiss firm which had secured them by purchase on the Paris black market from an agent of the German Government who had confiscated them from Jewish residents of Holland. The court held that the American resident purchaser had no valid claim to these bonds because of his violation of control legislation. The court further held that the decree of the Netherlands Government in Exile vesting in the Netherlands Government protective title to all claims belonging to Dutch domiciliaries was effective to permit the Netherlands Government to recover the bonds by appropriate interpleader in the action before the court. In so holding the court said (p. 461):

Of course we would endeavor to protect the rights of the original Dutch owners or their legitimate assignees to ultimate possession of their Nazi-confiscated securities if they were left to secure for their own property as best they could. But it seems clearly preferable to recognize the claim to protective possession by this plaintiff under its obligation to act only for the conservation of the rights of the former owners than to force the possibly complicated unscrambling of these rights upon American courts.

The court indicated clearly that the circumstances were such that to give effect to the decree would not violate the public policy of the United States as evidenced by any expression of the views of the State Department, and in fact would be fully in accord with the public policy of the United States which forbids such trading with the enemy as was done by the United States claimant. Therefore, the decree as an act of the Netherlands Government, a friendly government, was entitled to be given effect to whatever extent it did not conflict with public policy of the United States. The court emphasized, however, that in finding that the decree did not conflict "with any legitimate legislation or regulation of * * * our * * * public policy," the conclusion it reached was supported by the fact that so far as appeared therein "the claim of the Netherlands [did] not compete with any valid rights of United States residents."

We think it is clear that the opinions expressed by both courts indicate only that effect will be given to the Netherlands decree if to do so is not in conflict with the public policy of the United States. It was not decided whether to accord the decree full effect where rights of United States citizens or residents or of the United States are involved. No basic policy of recognition has been expressed by the State Department beyond that limited view previously quoted. And there has never been any legislative pronouncement with respect to the Netherlands decree. See generally Lourie and Meyer, "Governments-In-Exile and the Effect of Their Expropriating Decrees," 11 Univ. of Chi. L. Rev. 26 (1943).

We do not think that the decree of the Netherlands Government should be given effect where to do so would prevent the imposition and collection of a tax validly due the United States in the absence of such a decree. The decree was not a general nationalization of assets of Dutch citizens and residents for all purposes,1 but was a limited vesting order to secure title to the Netherlands Government in Exile for the purpose of conserving the assets of such Dutch citizens and nationals eventually for their own use and benefit, and in order to prevent the acquisition thereof by the enemy and use by such enemy of these assets. There is no relationship between such purposes and the objective for which we are asked to apply the decree in the circumstances of the instant case, and we think that it would be contrary to our public policy to treat petitioner differently than he would have been treated had the Netherlands Government not secured title for such purposes. The petitioner clearly had a right to reclaim these assets from the Netherlands Government upon cessation of hostilities. We think that such right is indicative of the real nature of petitioner's relation to these assets, namely, that while not technically owning them during the period in question, they were being held in protective custody ultimately for the benefit of decedent and those claiming under him as well as for the benefit of the Netherlands Government in preventing the enemy from obtaining title to the assets and the use thereof. Recognition of the decree as effective to defeat the application of Federal estate taxes would, we think, frustrate basic tax policy in this area. Cf. In re Kahn's Estate, 38 N.Y.S.2d 839 (1942), where the court refused to give effect to the Netherlands decree and required local administration of the property of the decedent (a Dutch domiciliary) which was located within the jurisdiction of the forum on the basis of the public policy of the forum to protect the rights of domestic creditors, next of kin, and legatees of estates who are citizens or residents of the United States and of the forum.

It should be noted that the decisions in United States v. Belmont, 301 U.S. 324 (1937), and United States v. Pink, 315 U.S. 203 (1942), are not in conflict with our refusal to give effect to the Netherlands decree for the purposes of this case. In both cases the assets in question, which vested pursuant to a Russian expropriation decree, were the subject matter of an international agreement to which the United States and the expropriating government were parties. The over-riding consideration of the Supreme Court in recognizing and giving effect to the expropriation order there in issue was obviously the fact that, under the international agreement, the confiscated property within the United States had been assigned to the United States in satisfaction of certain claims of the United States and its nationals. Recognition thus served to sustain the claim of the United States against the assets. In Belmont the Court specifically reserved for consideration in the appropriate case the question of "the rights of our nationals when, if ever, by proper judicial proceeding, it shall be made to appear that they are so affected as to entitle them to judicial relief," since there only the rights of the Russian corporation were affected by the Russian decree.

The case of Bickford-Smith v. United States, (Ct. Cl., 1948) 80 F.Supp. 660, relied on by petitioner, is distinguishable on its facts. There the Court of Claims held that shares of stock in a United States corporation owned by a British citizen, which were delivered to the British Government to serve as security for a Reconstruction Finance Corporation loan to England, were not subject to Federal estate tax as stock owned by a nonresident alien. The court considered that the decedent was not the owner of said shares at the time of his death even though title to the shares of stock was not transferred on the books of the corporation and even though decedent at the date of his death had the right to receive from the British Treasury the equivalent in British money of the dividends paid and also the right to be paid the market value of the stock if the British Government decided not to release it.

It is evident that decedent's stock was not taken by a vesting order for a limited purpose. The British Government had acquired from the decedent full ownership of the stock for a promise to ultimately return comparable stock or an equivalent value in cash. The British Government intended to make use of the decedent's stock and was not merely holding it to prevent an enemy from acquiring it. We think the decedent's act of turning the stock over to the British Treasury was in effect a sale of the stock for a promise to return either comparable securities or cash, and that such promise (which was all that the decedent owned at the date of death) was clearly not property deemed within the United States for estate tax purposes.

Issue II.

At the date of death, the decedent owned both United States certificates for shares of stock in American companies and certificates issued by Dutch organizations (administration offices) representing a beneficial interest in shares of stock of United States corporations, all of which were physically located in Holland. The respondent determined that the value of these certificates was includible in the decedent's gross estate under section 862 (a) and valued them on the basis of New York stock market quotations as provided in Regulations 105, section 81.10 (c), in the amount of $53,681.25. Petitioner concedes in his reply brief that both the shares and certificates are includible in the gross estate and raises only the issue of the value at which they should be included. Petitioner contends that if the shares and certificates (in terms of the underlying shares) had any value at the date of decedent's death for United States estate tax purposes, such value was not more than 10 per cent of the price at which comparable unrestricted securities physically situated in the United States could have been sold at the date of the decedent's death.

We think that the respondent's determination of fair market value of the securities includible in decedent's gross estate is manifestly incorrect, and that it does not accord with the rule of Regulations 105, section 81.10 (c). The regulation provides generally for the use of New York Stock Exchange quotations in finding the fair market value of stocks but expressly limits application of that technique of valuation in cases where such quotations would not truly reflect the fair market value of securities included in the gross estate. In such circumstances, other factors bearing on value must be considered in determining the actual fair market value of the securities. Regulations 105, section 81.10 (c), provides in pertinent part, as follows:

In cases in which it is established that the value per bond or share of any security determined on the basis of selling or bid and asked prices as herein provided does not reflect the fair market value thereof, then some reasonable modification of such basis or other relevant facts and elements of value shall be considered in determining fair market value.

We think it is obvious that in valuing securities in terms of United States dollar figures, as is required for estate tax purposes, diminution in value caused by war and governmental restrictions must be reflected in determining the fair market value of the property. See Morris Marks Landau, 7 T.C. 12 (1946); Estate of Ambrose Fry, 9 T.C. 503 (1947); Estate of Anthony H. G. Fokker, 10 T.C. 1225 (1948); Estate of Jan Willem Nienhuys, 17 T.C. 1149 (1952).

While we do not think that the securities involved in this issue were worthless, we think it is evident that their value at the date of decedent's death in 1943 was substantially less than the market value of comparable unrestricted securities being freely sold in the United States on that date. At the date of decedent's death both the shares in United States companies and the Dutch certificates representing a beneficial interest in shares of stock of American companies (held by Dutch administration offices) were located in Holland, which was then occupied by the Germans. The United States was at war with Germany. Communication and commerce between occupied Holland and the United States, as well as other countries of the Allied Powers, was severely restricted, if possible at all. Normal dollar-guilder foreign exchange transactions were nonexistent. No dividends were paid to the decedent or his estate on any of the shares in United States companies from the outbreak of the war. Dividends payable by the American corporations on the Dutch certificates (bearer certificates with dividend coupons attached) were normally paid to the Dutch organization which issued the certificates and then distributed by such organization to the holder of the certificates in guilders (less expenses), but no such payments or distributions were made during the period in question. Furthermore, at the date of decedent's death there were in effect a Netherlands decree imposing restrictions on the sale of property of Dutch nationals in foreign exchange, a United States Executive order prohibiting transactions in foreign exchange and transfers of credit or export of currency except as authorized by special license, and the Devisen Decree of the German occupation authorities requiring a license to sell assets located in Holland for a foreign currency.

Clearly, except by special license from several authorities, neither the shares nor certificates located in Holland at the date of decedent's death could be sold for United States dollars. Moreover, the evidence establishes that there was no market in the United States for either the shares in American companies or the Dutch certificates as long as they were physically located in Holland. However, the various decrees and orders were not absolute prohibitions, and there is no evidence that the licenses required in order to trade the securities for foreign exchange could under no circumstances be obtained. We are not unmindful of the sacrifice and risk involved in such transactions, but the possibilities for trading convince us that the shares and certificates here in issue had some value, convertible in an appropriate manner into United States dollar figures. See Estate of Jan Willem Nienhuys, supra.

Our view is supported by the testimony of K. Blom, petitioner's witness, on cross-examination, to the effect that despite any limitations on the ability to trade in the securities owned by decedent and despite war conditions the securities still had value. Doubtless petitioner makes the following concession partly in view of this testimony. Petitioner in its brief states:

Petitioner is willing to concede that the value of these certificates should be determined by (1) taking the value in dollars of corresponding unrestricted securities at the date of the decedent's death as reflected by transactions on the New York Stock Exchange, (2) converting such values into guilders at the last official rate of exchange which was $0.5309 per guilder, and (3) then converting such guilders into United States dollars at the rate of $0.05 per guilder * * * In no event, however, should such guilders be converted at a rate in excess of $0.10 per guilder * * *

The extent of value conceded by petitioner is based on the uncontroverted testimony of its expert witness as to the value of the securities in issue, and on our holdings in Morris Marks Landau, supra, Estate of Anthony H. G. Fokker, supra, and Estate of Jan Willem Nienhuys, supra.

Morris Landau involved valuation of blocked South African pounds for gift tax purposes. The taxpayer had made a gift of blocked pounds which it would have been impossible for him to have freed from the restrictions on exchange limiting transfer of funds from the Union of South Africa. United States dollars could not have been realized by the petitioner. In fixing the exchange rate for conversion at less than the official rate of exchange for free pounds, we gave effect to the impact on the value of the taxpayer's property of the generally disturbed conditions and the restrictions on foreign exchange.

In Fokker we were required to determine the value for estate tax purposes of certain guilder assets located in Holland and Switzerland, measured in terms of United States dollars. The value of the properties in Dutch guilders was not in dispute, and the only question before us was the rate of exchange to be used in converting the Dutch guilders into American dollars. At the date of valuation, December 23, 1940, Holland was occupied by the German Army, foreign transactions were blocked except by special license, and no official rate of exchange existed for that date. The last official rate of exchange was $0.531 per guilder. Furthermore, there was no market in the United States for blocked Dutch guilders. Applying the principle expressed in Morris Marks Landau, supra, where we fixed the amount of a gift as the value of blocked South African pounds in terms of dollars, we determined that the value of the blocked Dutch guilders was 5 cents per guilder as conceded by the petitioner. Similarly, in Nienhuys, the April 8, 1947, value of the decedent's property in the Netherlands was known in terms of Dutch guilders. However, such value was obviously depressed by government blocking restrictions then in effect, and we held that the respondent's application of the official rate of exchange of $0.37695 was in error. We determined that the value of decedent's property could be found by converting the guilder value into United States dollars at the rate of $0.10 per guilder.

Unlike either Fokker or Nienhuys, the guilder value of the assets in issue in the instant case is not agreed upon or otherwise known. However, since we have determined that the securities in question did have some value, that value must be determined under the estate tax provisions of the statute, Ithaca Trust Co. v. United States, 279 U.S. 151 (1929), despite the difficulty of fixing an exact value for property located outside of the United States in wartime and subject to various foreign exchange restrictions. Estate of Jan Willem Nienhuys, supra. In circumstances where there is no market in the United States in which dollar values can be realized, conversion of other values into dollar terms must be accomplished by other means. We think that the method urged by petitioner is not unreasonable. Petitioner would, in effect, accept respondent's determination as to the dollar value of comparable unrestricted securities selling on the New York Stock Exchange on the date of decedent's death as the basis for conversion into guilder value at the last official rate of exchange, established some three years before, and then reconvert this guilder value into dollar figures by the rate of exchange to be determined here. We think that this method quite adequately reflects the value of securities located in Holland, since the then current New York Stock Exchange quotations on the date of decedent's death would reflect the various changes in value of the underlying shares from the date of the last official exchange rate. Reconversion of that guilder value at the actual rate of exchange on the date of decedent's death will thus yield a value adequately reflecting, we think, in the required dollar figures, the fair market value of the shares and certificates at the date of death.

Petitioner contends that on the basis of the testimony before us and in view of the $0.05 rate of exchange determined by us in Fokker for December 23, 1940, the applicable rate in the instant case should be $0.05. However, petitioner contends alternatively that if some other rate of exchange is to be applied, it should not exceed $0.10 as determined in Nienhuys for April 8, 1947. Petitioner argues that conditions reflected by the rate of exchange of $0.05 on December 23, 1940, in Fokker, more closely compare with those existing on July 23, 1943, the date of decedent's death, than those existing in 1947. In 1947 the war was over, and the allies, including Holland, had been victorious. Trade, while still subject to restriction, was resuming. In 1943, however, the world was still at war and it was impossible at that time to foretell the duration of the war or the victor, a situation more like that existing in 1940. Nevertheless, world conditions in 1943, while still very much in doubt, were perhaps less so than in 1940 at a time when the United States was not at war with Germany and when the battle of Britain was in its darkest hour. After careful consideration of all of the evidence before us, our best judgment is that the decedent's properties in Holland should be valued on the date of his death by converting their guilder value (by the technique approved above) into United States dollars at the rate of $0.065 per guilder, a rate of exchange not seriously objected to by petitioner.

We think that the principles expressed in Estate of Ambrose Fry, supra, are fully consistent with our views in the instant case and the views expressed in the cases which we cite. In Fry certain blocked British assets, located in Britain, were valued on the basis of the amount which could, in the circumstances of that case, have been realized in the United States by lawful means. It would have been virtually impossible, however, to realize United States dollars for the assets in question in the instant case, and under the circumstances we have held that valuation for estate tax purposes may be accomplished (in the absence of an American market) by converting value in other terms into terms of dollars by a rate of exchange which reflects the factors bearing on value. In other words, if an amount had actually been realizable in United States dollars, our holding would have been based thereon; but since there could have been no realization of dollars in respect to the blocked assets under consideration, it is necessary to translate foreign value into dollars for estate tax purposes by conversion at an appropriate rate of exchange which will reflect the various restrictions and other factors impinging on value.

Issue III.

Deductions from the gross estate of the decedent, a nonresident alien, are to be computed in accordance with section 861 (a) (1) of the Internal Revenue Code allowing that proportion of the deductions permitted under section 812 (b) (except as otherwise specified) which the value of the gross estate situated in the United States bears to the value of the entire gross estate wherever situated. It has been stipulated by the parties, inter alia:

that upon submission of proof satisfactory to the respondent with respect to the payment of administration expenses or attorneys' fees in connection with these proceedings, such administration expenses or attorneys' fees, if any, will be allowed in computing the deductions to which the petitioner may be entitled under Section 861 (a) (1) of the Internal Revenue Code in the computation submitted in accordance with Rule 50 of the court's Rules of Practice.

Therefore, only the value of the decedent's entire gross estate and the value of that portion situated within the United States for estate tax purposes need to be determined.

At the date of his death, the decedent owned various assets in many parts of the world, including certain assets situated in Indonesia. Respondent contends that petitioner has not shown the extent and value of the Indonesian assets and, therefore, has failed to prove the value of the gross estate wherever situated. In this respect, Blom, who is a partner of the firm of Kantoor H. J. Vooren which handled the administration of the estate, testified on cross-examination that the Indonesian assets "might be of some value, but a rather small amount, and very difficult to ascertain an objective value." On re-direct examination, he stated that at the date of the decedent's death, Indonesia was occupied by Japan and that even at the date of the hearing, there was no effective contact with Indonesia, and he did not even know whether the assets existed. He also stated that the Indonesian assets are still blocked, and valuation "depends upon the personal ideas of the value you will give to such assets blocked over there." In the opinion of the witness, the assets were not worth 10,000 guilders.

Despite the brevity of the testimony offered as to the value of the Indonesian assets owned by the decedent, absent any other evidence of value, we think that the value of the decedent's Indonesian assets was not in excess of 10,000 guilders on the date of death. It is evident that valuation of foreign assets located in enemy occupied territory is difficult of precise proof. We think that petitioner has met the burden of proof, in the light of the unusual circumstances confronting it, and should not be denied a deduction to which it is substantially entitled.

In order to avoid the necessity of valuing each of the divers assets owned by the decedent by converting numerous currencies into United States dollars, the parties have stipulated, inter alia:

that for the purposes of computing the deduction to which the petitioner may be entitled under Section 861 (a) (1) of the Internal Revenue Code, non-Guilder assets shall be converted into Guilders at the official rate of exchange, and that the resulting Guilders shall be converted into Dollars at whatever rate the Court shall determine to be appropriate on the date of the decedent's death.

The respondent contends that the petitioner has failed to prove the dollar value of the guilder on July 23, 1943, for the purpose of converting the agreed-upon guilder value of the decedent's assets into dollars. In Issue II, we determined that on the date of the decedent's death the fair market value of the guilder in terms of United States dollars was $0.065. That determination is controlling here. Our reasons for determining this amount as a fair rate of exchange were fully set out above and need not be further discussed.

Issue IV.

The respondent assessed a 25 per cent delinquency penalty in the amount of $56,891.56 in August 1951, and in the notice of deficiency determined an additional delinquency penalty, totaling $189,662.33, in accordance with section 3612 (d) (1), for failure to timely file an estate tax return on behalf of the estate of the decedent.

The petitioner presents two arguments: (1) That an estate tax return was timely filed under sections 864 and 3804 (and regulations, T. D. 5279, 1943 C. B. 953, as amended by T. D. 5610, 1948-1 C. B. 98, promulgated thereunder); and (2) that in the circumstances of this case there was reasonable cause for delay in filing the return, and accordingly no penalty should be imposed.

Respondent in his brief does not counter petitioner's argument that an estate tax return was timely filed. On the other hand, the point is not conceded and respondent continues to assert the delinquency penalty previously assessed. In these circumstances, we do not think that respondent should be considered as having abandoned the assessment of a delinquency penalty. However, since we are of the view, expressed below, that if there was any delay in the filing of an estate tax return on behalf of the decedent, such delay was, under the circumstances of this case, due to reasonable cause and not to willful neglect, we find it unnecessary to consider petitioner's contention that an estate tax return was timely filed.

What constitutes "reasonable cause" within the meaning of section 3612 (d) (1) depends in each case on the circumstances of that case. We think that in the instant case the circumstances fully justify a finding that there was reasonable cause for delay in filing and that such delay was not due to willful neglect.

It is evident that neither the executor nor those having a power of attorney from him were aware at any time prior to April 1949, that the filing of a Federal estate tax return might be required. At the date of the decedent's death and until May of 1945, Holland was occupied by the Germans, and there were no means of communication between Holland and the United States. During this period of time and until June of 1948, the executor of the estate was residing in Switzerland. The other members of the Oei family were then residing in Holland.

Until April of 1949 the executor of the decedent's estate and his brother, Hing, who had a power of attorney from the executor, both evidently relied upon the Guaranty Trust Company of New York or The New York Trust Company to look after their interests in America. Until that time, neither the executor nor any member of the Oei family ever received any communication from either the Guaranty Trust Company of New York or The New York Trust Company indicating in any way that a United States estate tax return should be filed for the decedent with respect to the assets and property owned in the United States by the Stiftungs. Nor was any mail or other communication ever received from anyone else in the United States informing them that a United States estate tax return should be filed with respect to the decedent's estate.

Within a reasonable time after April 1949, a return was in fact filed under circumstances clearly reflecting the quality of the action. In the spring of 1949, Harry J. Rudick, counsel in this proceeding, was consulted with respect to the status of the two Stiftungs for United States tax purposes. It was his opinion, rendered in writing, that the Stiftungs were taxable as foreign corporations for United States tax purposes. On that assumption, the decedent's estate would not have been liable for United States estate tax on the assets owned by the Stiftungs. He recommended, nevertheless, that a Federal estate tax return should be filed. Thereafter, arrangements were made for Rudick to go to Amsterdam in order to assemble the necessary data required for the United States estate tax return. A return was prepared by Rudick in Amsterdam in July 1949, and it was executed there by Oei Ing Hing and K. Blom as attorneys in fact for the executor, Oei Ing Tjhing.

We think that the actions of the executor of decedent's estate and of those duly appointed by him to act on his behalf were not acts of willful neglect and that under the unusual circumstances of this case there was reasonable cause for any delay in filing. At all times from the creation of the Stiftungs, decedent, until the time of his death, and thereafter those responsible for the affairs of decedent's estate, including the two New York banks, appear to have considered the Stiftungs to be foreign corporations and taxable as such for United States tax purposes at least until April 1949. This is evidenced in part by the various custody agreements which recited that the Stiftungs were foreign corporations, the internal records of the banks, and the letters written by the decedent to the banks. Moreover, the New York Trust Company at the time the account was opened at that bank consulted White & Case, its general counsel, as to the legal status of the Kien Stiftung and as to how such Stiftung should be treated for tax purposes. White & Case rendered a written opinion in which the view was expressed that the Stiftung should be treated as a corporation and that it was believed that the Treasury Department would regard such Stiftung as an association taxable as a corporation. Furthermore, the Guaranty Trust Company of New York filed United States nonresident foreign corporation income tax returns on behalf of the Yan Stiftung.

We think it evident from our Opinion herein that the question of the status of the Stiftungs for Federal estate tax purposes is difficult and complex. It was very unlikely that it would have occurred to anyone other than a tax expert of highly specialized training that the filing of an estate tax return was required. Such circumstance can hardly be ignored in considering the reasonableness of the belief of those responsible for filing an estate tax return on behalf of the decedent, and the reasonableness of the cause for delay in so filing.

We hold, therefore, that the 25 per cent delinquency penalty is not to be applied.

Decision will be entered under Rule 50.

FootNotes


1. In the Swiss German version of this treaty, the word "Stiftung" is found in place of the English word "foundation."
1. Obviously we do not now decide what effect might be given to such a decree. It might be pointed out, however, that the concept of territorial jurisdiction has been relied on in refusing to recognize the attempt of a foreign country to confiscate property not within the boundaries of the expropriating country. Moscow Fire Insurance Co. v. Bank of New York, 280 N.Y. 286, 20 N.E.2d 758 (1939), affirmed without opinion by an equally divided court, 309 U.S. 624 (1940).

Comment

1000 Characters Remaining

Leagle.com reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

User Comments

Listed below are the cases that are cited in this Featured Case. Click the citation to see the full text of the cited case. Citations are also linked in the body of the Featured Case.

Cited Cases

  • No Cases Found

Listed below are those cases in which this Featured Case is cited. Click on the case name to see the full text of the citing case.

Citing Cases