SCOTUS Reports

Tag: Engaged in Trade or Business

  • Lewenhaupt v. Commissioner, 20 T.C. 151 (1953): Taxability of Non-Resident Alien’s U.S. Real Estate Gains

    20 T.C. 151 (1953)

    A non-resident alien actively managing U.S. real estate through a resident agent is considered to be engaged in a U.S. trade or business and is therefore subject to U.S. income tax on gains from the sale of that property, notwithstanding tax treaty provisions regarding capital assets.

    Summary

    Jan Lewenhaupt, a Swedish citizen and resident, challenged a tax deficiency assessed on the capital gain from the sale of U.S. real property. He argued that the U.S.-Sweden tax treaty exempted such gains. The Tax Court held that Lewenhaupt was engaged in a U.S. trade or business due to his active management of U.S. real estate through an agent, making the capital gain taxable under U.S. law. The court found that managing multiple properties and engaging in activities beyond mere ownership constituted a U.S. business, overriding the treaty’s capital gains exemption.

    Facts

    Lewenhaupt, a Swedish citizen, owned several pieces of real property in the United States. He appointed Clinton LaMontagne as his agent with broad powers to manage these properties, including buying, selling, leasing, and mortgaging real estate. LaMontagne managed the properties, collected rents, paid expenses, and supervised repairs. In 1946, Lewenhaupt sold a property in Modesto, California, realizing a significant capital gain. Lewenhaupt spent only one month in the U.S. that year and performed no personal services in the U.S. before 1948.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Lewenhaupt’s 1946 income tax due to the inclusion of the capital gain from the sale of the Modesto property. Lewenhaupt contested the deficiency in the Tax Court, arguing that the gain was exempt under the U.S.-Sweden tax treaty.

    Issue(s)

    1. Whether the provisions of Article IX of the U.S.-Sweden tax convention exempt capital gains derived from the sale of U.S. real property by a Swedish resident.

    2. Whether Lewenhaupt was engaged in a trade or business within the United States during the taxable year.

    Holding

    1. No, because Article V of the tax convention governs the taxability of income derived from real property, including gains from the sale of such property, and Article IX does not apply.

    2. Yes, because Lewenhaupt’s activities with respect to his U.S. real estate constituted engaging in a business within the meaning of section 211 (b) of the Internal Revenue Code.

    Court’s Reasoning

    The court reasoned that while Article IX of the tax treaty generally exempts capital gains from taxation if the resident of the other contracting state has no permanent establishment in the taxing state, Article V specifically addresses income from real property, including gains from its sale. The court relied on Senate Executive Reports to interpret the treaty, concluding that it aimed to avoid double taxation, not to exempt income from both countries’ taxes. It also emphasized that the treaty’s definition of “permanent establishment” was similar to the U.S. tax code’s concept of “United States business or office.” The court found Lewenhaupt’s activities, conducted through his agent LaMontagne, went beyond mere passive ownership. These activities were “considerable, continuous, and regular and, in our opinion, constituted engaging in a business within the meaning of section 211 (b) of the Code.”

    Practical Implications

    This case clarifies that non-resident aliens actively managing U.S. real estate can be deemed to be engaged in a U.S. trade or business, subjecting them to U.S. income tax on related gains, even if they are not physically present in the U.S. It emphasizes the importance of examining the extent of management activities when determining tax liability. It also illustrates how tax treaties are interpreted in conjunction with domestic tax laws and regulations. The level of activity, delegation to agents, and the scale of the real estate holdings are key factors in determining whether a non-resident alien is engaged in a U.S. trade or business. Later cases cite Lewenhaupt for the proposition that active management of real estate, rather than passive ownership, triggers U.S. business status for non-resident aliens.

  • Nubar v. Commissioner, 13 T.C. 566 (1949): Determining Nonresident Alien Status and ‘Engaged in Trade or Business’ for Tax Purposes

    13 T.C. 566 (1949)

    A nonresident alien’s presence in the U.S., even for an extended period, does not automatically equate to residency for tax purposes, and trading in securities or commodities through a U.S. resident broker does not constitute ‘engaging in a trade or business’ within the U.S. under Internal Revenue Code Section 211(b).

    Summary

    Zareh Nubar, an Egyptian citizen, entered the U.S. on a visitor’s visa in 1939 and remained until 1945 due to wartime travel restrictions. During this time, he engaged in substantial securities and commodities trading through U.S. brokers. The Commissioner of Internal Revenue determined Nubar was a resident alien and thus taxable on all income. The Tax Court held that Nubar was a nonresident alien and that his trading activities, conducted through resident brokers, did not constitute ‘engaging in a trade or business’ in the U.S., thus exempting him from U.S. tax on foreign income and capital gains.

    Facts

    Nubar, a wealthy Egyptian citizen, entered the U.S. in August 1939 on a visitor’s visa. He intended to visit the New York World’s Fair, meet with Dr. Einstein, and travel in the Americas. Due to the outbreak of World War II, he could not return to Europe. He applied for and received extensions to his visa, but was eventually subject to deportation proceedings. During his time in the U.S., Nubar maintained a hotel room, traveled extensively, and engaged in significant trading of securities and commodities through various U.S. brokerage firms. He maintained a residence in Paris and expressed his intent to return to Europe.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Nubar’s income tax for the years 1941, 1943, and 1944, asserting that Nubar was a resident alien subject to U.S. tax on all income. Nubar petitioned the Tax Court for a redetermination, arguing he was a nonresident alien not engaged in a trade or business in the U.S. The Tax Court ruled in favor of Nubar.

    Issue(s)

    1. Whether Nubar was a resident alien of the United States during the years 1941 through 1944.
    2. Whether Nubar was engaged in a trade or business in the United States during the years 1941 through 1944.

    Holding

    1. No, because Nubar’s intent was to be a temporary visitor, and his extended stay was due to wartime travel restrictions.
    2. No, because Section 211(b) of the Internal Revenue Code specifically excludes trading in securities or commodities through a resident broker from constituting a trade or business.

    Court’s Reasoning

    The court reasoned that residency for tax purposes depends on an individual’s intent, as determined by the totality of the facts. Nubar’s intent was to visit the U.S. temporarily, and his extended stay was due to circumstances beyond his control. The court emphasized Nubar’s maintenance of a residence abroad, his expressions of intent to return, and his transient living arrangements in the U.S. Regarding the ‘engaged in trade or business’ issue, the court relied on Section 211(b) of the Internal Revenue Code, which states that effecting transactions in commodities or securities through a resident broker does not constitute engaging in a trade or business. The court distinguished this case from Adda v. Commissioner, where a resident agent was making discretionary trading decisions for a nonresident alien, while in Nubar’s case, Nubar himself made all trading decisions.

    The court quoted Beale, Conflict of Laws, vol. 1, p. 109, sec. 10.3 stating, “For residence there is an intention to live in the place for the time being. For the establishment of domicil the intention must be not merely to live in the place but to make a home there.”

    Practical Implications

    This case clarifies the distinction between physical presence and residency for tax purposes, particularly for aliens whose stay in the U.S. is prolonged due to unforeseen circumstances. It confirms that nonresident aliens can engage in significant trading activities in the U.S. through resident brokers without being deemed to be ‘engaged in a trade or business,’ thus avoiding U.S. tax on foreign income and capital gains. This encourages foreign investment and trading in U.S. markets. Later cases have cited Nubar to support the principle that intent is paramount in determining residency, and the ‘engaged in trade or business’ exception for trading through resident brokers remains a key aspect of tax law for nonresident aliens.