Taxation–Federal Income Tax–Treatment of Nondistributable Capital Gains of Domestic Trust with Foreign Beneficiaries

Taxpayer, trustee of a domestic inter vivos trust, sued for a refund of United States income taxes paid on nondistributable capital gains of the trust. Trustee claimed that since all the beneficiaries of the trust were United Kingdom residents, this income was tax-exempt under the United States-United Kingdom tax convention provision that a United Kingdom resident “shall be exempt from United States tax on gains from the sale or exchange of capital assets.” On appeal by the United States from a district court judgment for the trustee, held, reversed. Although distributable gains are allowed the exemption, long term capital gains realized by a domestic trust, and accumulated for later distribution, are considered income to the trust regardless of the beneficiaries’ residence; the convention was not intended to override United States law which treats a trust as a separate taxable entity. Maximov v. United States, 299 F.2d 565 (2d Cir.), cert. granted, 371 U.S. 810 (1962).