Lewenhaupt v. Commissioner
1953 U.S. Tax Ct. LEXIS 186, 20 T.C. 151 (1953)
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Rule of Law:
A specific provision in a tax treaty governing income from real property, which taxes such income in the country where the property is located, controls over a general provision exempting capital gains for those without a 'permanent establishment.' Furthermore, a nonresident alien's property-related activities are considered 'engaging in a trade or business' if they are considerable, continuous, and regular, extending beyond mere passive ownership.
Facts:
- The petitioner was a citizen and resident of Sweden.
- During the 1946 tax year, the petitioner owned three improved commercial real estate parcels and one residential property in the United States.
- The petitioner employed a resident agent, LaMontagne, in the United States under a broad power of attorney to manage his properties and financial affairs.
- The agent's activities included executing leases, collecting rent, supervising repairs, paying taxes and mortgage interest, and executing property sales and purchases on the petitioner's behalf.
- In 1946, the petitioner, through his agent, sold one of the U.S. properties (the Modesto property), realizing a capital gain.
Procedural Posture:
- The Commissioner of Internal Revenue determined a tax deficiency against the petitioner for the 1946 tax year.
- The petitioner challenged the Commissioner's determination by filing a petition with the United States Tax Court, which is a trial-level court.
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Issue:
Does Article IX of the U.S.-Sweden tax convention exempt a Swedish resident's capital gain from the sale of real property located in the United States from U.S. taxation?
Opinions:
Majority - Judge Harron
No. The capital gain is not exempt from U.S. tax under the convention. The court reasoned that while there is a seeming conflict between Article V (taxing real property income where the property is located) and Article IX (exempting capital gains for residents without a permanent establishment), the specific provision must control the general one. The treaty's purpose is to avoid double taxation, not to create a complete exemption from taxation by both countries. The court found that the drafters intended for Article V to exclusively govern real property gains, making them taxable in the U.S. The court also held that the petitioner's activities, conducted through his agent, were 'considerable, continuous, and regular,' constituting a 'trade or business' under U.S. tax law, which provides an independent basis for taxation.
Analysis:
This decision clarifies the interpretation of tax treaties, establishing the principle that a specific clause governing a particular type of income (real estate) prevails over a more general clause (capital gains). It underscores that the fundamental purpose of such treaties is to prevent double taxation, not to create opportunities for income to escape taxation altogether. The ruling also solidifies the factual test for what constitutes 'engaging in a trade or business' for a nonresident alien, making it clear that active, continuous management of real estate through an agent surpasses the threshold of passive investment.
