Maximov v. United States

Background

A private trust was created in Connecticut by a United Kingdom citizen and was administered in the United States by an American trustee. The trust’s income beneficiaries were British citizens and residents. The trust realized capital gains in 1954–1955 and, under Connecticut law, treated those gains as additions to corpus that were not distributed. The trustee paid the U.S. tax, sought a refund under the U.S.–U.K. income tax Convention, was denied, and sued; a lower court relied on an earlier Ninth Circuit decision to allow the refund, but the Second Circuit reversed, and the Supreme Court granted review.

Reasoning

The key question was whether the treaty’s Article XIV — which exempts gains of a “resident of the United Kingdom” not doing business in the United States — covered a U.S. trust whose beneficiaries were U.K. residents. The Court read the treaty’s words and definitions literally. Article II says an undefined term gets the meaning it has under the domestic tax law of the country applying the treaty; under U.S. tax law a trust is a “person.” The trust here is a U.S. resident and not a U.K. resident, so it does not fall within the Article XIV exemption. The Court rejected the trustee’s argument that the economic burden on U.K. beneficiaries should carry the exemption, finding neither the treaty language nor its purposes require ignoring the trust as a separate taxable entity.

Real world impact

The ruling means a domestic American trust cannot claim this treaty exemption simply because its beneficiaries live in the U.K.; the trust itself must meet the treaty’s resident definition. The decision affirms the Second Circuit and resolves a disagreement with earlier Ninth Circuit authority on the same issue.