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Background actsThe Internal Revenue Service (IRS) assessed

the Estate o Noordin M. Charania (Estate) or

US ederal estate tax (FET) on the ull value

o 250,000 shares o Citigroup common

stock (the shares) held in saekeeping or Mr

Charania (decedent) by Fortis Bank, Hong

Kong when he died in 2002, notwithstanding

that the decedent and his surviving spouse

had resided rom 1972 to 2002 in Belgium, a

community property jurisdiction which grants

each spouse an equal undivided interest in

marital property absent a matrimonial property

agreement. The decedents two-page will,

executed in 1985, let such property as he

owned at death as ollows: one third to his

spouse and one third to each o his twochildren, consistent with the requirements o

Belgian orced heirship rules.

The Estates contention that the decedent

utilised unds earned while married and a

resident o Belgium to purchase the shares

was not challenged. The decedent and his

spouse had both been born in Uganda at a

time when it was still a protectorate o the

United Kingdom. They married in Uganda

in 1967, at which time Uganda was an

independent country. They were expelled

rom Uganda by Idi Amin in 1972 on accounto their Asian ethnicity. All o their assets

within Uganda were conscated, and they

intention o residing indenitely in Belgium.

By circumstance o birth the The Charanias

acquired UK citizenship, but they never lived in

the UK during the decedents lietime.The Tax Court held in Estate o Charania,

133 T.C. No. 7 (14 September 2009) that the

decedent owned the whole o the shares

(not merely an undivided one hal) ater

determining that Belgian law in orce rom the

time o the decedents marriage in 1972 until

his death in 2002 would look to the law o the

common UK nationality o the decedent and

his spouse or the purpose o determining the

matrimonial property regime to which they

were subject throughout their marriage. This

holding sustained the IRS determination o a

deciency in the Estates payment o FET in the

amount o USD2,070,000.01. The Court also

held that the IRS did not exceed its statutory

authority when it assessed an addition to tax

in the amount o USD511,758.93 or ailure to

le the FET return on time.

Choice o lawAs a matter o local law, the UK adheres to

a regime o separate property or husband

and wie and or confict purposes looks to

the doctrine o implied contract, i.e., absent

compelling considerations the UK will treat a

couple married in the UK as keeping the same

marital regime throughout the duration o the

marriage, regardless o residence. I a UK courtis required to determine the marital regime

applicable to spouses who were married

marriage occurred and endeavor to replicate

what that court would do (so called oreign

court theory, see De Nichols v.Curlier, 1900

A.C. 21 (HL) ). An example o this is that Frenchcommunity law applied to the determination

o marital property rights o a UK domiciliary

who had been married in France, because that

is what a French court would do.

Because the Estate agreed with the

Commissioner that ownership o matrimonial

property is governed by the law o the

common nationality o the spouses, in this cas

the United Kingdom, and because neither

Estate nor Commissioner were able to discern

what marital property regime might have been

prescribed by Ugandan law, the argument

between the Estate and Commissioner

ocused upon whether a UK court, applying

its oreign court theory, would hold that a

Belgian court would adhere to the nationality

test (and apply UK separate property law) or

to a habitual residence test (and apply Belgian

community law). The argument also concerne

whether, to avoid application o the law o

common nationality, the couple would have

had to make ormal application to a Belgian

court to modiy the original regime.

Inexplicably, given the undisputed

longstanding Belgian residence o thedecedent and his surviving spouse, neither

the Estate nor the Commissioner described

or the Tax Court how the ownership o the

shares was reported or purposes o Belgian

inheritance tax, which applies to all assets

o a deceased resident wherever located

(see BNA TMP No. 953, IV.C.2.a (2008) ).

In the absence o such data, which one may

iner would have been highly persuasive i

presented, the Tax Court concluded that

there was no evidence that a Belgian court

would recognise mutability, even wheremarital domicile had changed permanently

by reason o politically-motivated expulsion

Caught a trapChristopher Armstrong and Diana Hastings explain how inadequate planning and conused postmortem strategy can permit a debatable application o oreign law to ensnare a oreign estate in aUS estate tax trap

Christopher ArmstrongTEP is the Presidento Christopher

S. Armstrong, AProessional Corporationand Diana HastingsTEP is a shareholder inthe frm o Friedman,McCubbin, Spalding,Bilter, Roosevelt,Montgomery &Hastings, A ProessionalCorporation

ABOUT THE AUTHORS (L-R)

The Court held that theIRS did not exceed its

authority when it assessed anaddition to tax or ailure to lethe FET return on time

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inteRnAtionALestAte PLAnni

a change o the governing marital property

regime in Belgium was atal to a claim o

mutation. In consequence, or FET purposes,

all o the shares were treated as owned by

the decedent at death.

There are two bases upon which the Tax

Court could have applied local Belgian

law (viz., community property law) to the

determination o the ownership o the

decedents property acquired during his

residence in Belgium, had it reasoned thatsuch action would be appropriate, taking into

account all o the acts and circumstances.

Substantial American judicial precedent

holds that, when a ederal court sits in

a non-diversity matter to determine a

ederal question (which would include an

interpretation o ederal tax law), choices o

law are determined by reerence to a ederal

common law standard. Federal common law

treats The Restatement (Second) o Confict

o Laws (1969) (the Restatement) as a source

o general choice-o-law principles and as

an appropriate starting point or applying

ederal common law (see Harris v. Polskie

Linie Lotnicze, 820 F.2d 1000 ( 9th Cir. 1987)

and IRS FSA 33320960 (10/29/96). For

example, citing with approval the application

o ederal common law to a choice o law

determination in Chuidian v. Philippine

National Bank, 976 F.2d 561, 564 (9th Cir.

1992). Local Philippine law applied here

to determine illegality o perormance o

a letter o credit. The Restatement, 258

expressly directs one to the local law o

the jurisdiction that has the most signicantrelationship with the spouses, and states that

greater weight will usually be given to the

state where the spouses were domiciled at

the time the movable property was acquired,

rather than to any other state that the couple

may have had contact with.

The Tax Court was correctly advised in

bries submitted by the Commissioner that

Belgium did not adopt habitual residence

as the codied test or determination o

rights to property acquired during marriage

until 2004 and that a Belgian high courtdecision rendered in 1980 did hold that

the law o common nationality determined

September 1993, did approve the husbands

nationality as the test or determining the

marital property regime o an Italian husband

and a Belgian wie married in 1952. Neither

the Estate nor the Commissioner disclosed

to the Court that the Charanias were

resident in Belgium, at an evolutionary time

during which Belgian courts had begun, as

early as 1975, to apply a residence test to

determine rights to assets, particularly when

it would protect the interests o a spousewho had established residence in Belgium

and integrated into Belgian society. See,

Schoenblum, Multistate and Multinational

Estate Planning (cch 2009), 10.24[a] , n.

716 (citing J.D.I. 1, 1996) which, under

the heading Matrimonial property regime

Primary Regime Law o the Eects o

Marriage, asserts, with supporting citations,

that several Belgian court decisions have

considered a number o the provisions

governing the oundations o spousal asset

status: to be laws o immediate application

to be imposed on all spouses established

in Belgium, regardless o their nationality

(emphasis supplied). See also McEleavy, The

Codication o Private International Law:

The Belgian Experience, 54 Intl & Comp Law

Qtly 499, 504 (2005) The ollowing is taken

rom that publication: one o the specic

motivating actors which led to the call or

codication [o Belgian private international

law and ormal adoption o the habitual

residence test] was a series o controversial

and highly criticised decisions rendered by

the Cour de Cassation on the law applicableto matrimonial regimes.

Assessment o ederal estate tax on USsecurities owned by a non-domiciledalien (NDA) at deathThe controversy over whether the Estate

should be taxed on the whole o the value o

the shares at the decedents death, or only on

one hal, begs the question: why was there

any FET at all assessable on the shares, given

that the decedent was an NDA and that the

shares were publicly traded securities o aninternational bank?

Estate planners routinely engaged in the

NDAs are liable or an advalorem FET on

stock o US issuers owned at death, at a fat

rate tax o 45 per cent on aggregate value

above USD1,500,000, without benet o any

meaningul applicable exemption amount,

or o a marital deduction (i the surviving

spouse is a non-US citizen) without the use o

a qualied domestic trust.

The FET may be avoided by NDAs through

the interposition o a oreign corporation

between the NDA and the securities o theUS issuer, an act which transorms what the

NDA directly owns rom US situs property

to oreign situs property (See RIA Federal

Tax Coordinator R-8012 and Lawrence,

International Tax and Estate Planning: a

Practical Guide or Multinational Investors

3:2.3 (PLI).

American tax policy towards NDA

investors is schizophrenic. To encourage

investment o capital by NDAs in the United

States some provisions o the tax law show

particular avouritism to NDAs. For example

capital prots, which do not constitute

xed or determinable annual or periodic

income, are wholly exempt rom ederal

income tax when realised. Inter vivos gits o

intangible personality with a US situs, made

even moments beore death by an NDA, are

exempt rom ederal git tax and are beyond

the reach o FET, subject to certain traps or

the unwary contained in IRC 2104(b). No

FET is levied on xed income securities that

produce portolio-interest-exempt income,

or upon Treasury Bills or general bank

deposits, or upon insurance policies on thelie o a NDA who dies.

The policy o encouraging investment

by NDAs in the US is vitiated by levying a

FET upon capital investment in the stock

o a US corporation upon the NDAs death,

unless the NDA is knowledgeable enough

to know to interpose a oreign corporation

as a holding company and is willing to risk

the cautions o commentators that the

interposed corporation may be treated as

a mere nominee. For example, Stephens,

Maxeld et al., Federal Estate and GitTaxation 6.04[1] (WG&L 2009). The Tax

Court decision is in the process o being

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