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Wednesday, September 16, 2009

COMMUNITY PROPERTY PRINCIPLES DID NOT ATTACH TO COUPLE'S PROPERTY WHEN THEY MOVED TO COMMUNITY PROPERTY COUNTRY

Noordin Charania owned substantial holdings in the stock of a U.S. corporation when he died. Even though he was a nonresident of the U.S., his estate was taxable on that stock for U.S. estate tax purposes based on the U.S. situs of stock of a U.S. corporation.

Mr. Charania's estate argued that only half of the stock was includible in his estate for estate tax purposes because the property was owned as community property with his surviving wife. Mr. Charania married his spouse in Uganda, which was at the time governed by British common law principles and was not a community property jurisdiction. Mr. Charania and his spouse eventually fled Uganda with little in the way of assets, and settled in Belgium, a community property jurisdiction, where the couple was living when he died. Mr. Charania acquired the subject assets while living in Belgium.

Mr. Charania's estate argued that the marital domicile was changed to Belgium, and community property principles applied to the stock. That is, it sought to apply the concept of a "mutable" marital domicile - one that moves with the couple (here, to Belgium). The IRS argued for an "immutable" marital domicile - one that does not move with the couple but that remains where the couple lived when they married.

The Tax Court undertook an extensive analysis on whether marital domiciles were mutable or immutable under British common law. That analysis, along with a finding that the Charanias did nothing under Belgium law to submit themselves to the local community property regime and did not otherwise evidence any intent to be part of that regime, led the Tax Court to conclude that the Charanias were not governed by Belgium community property law and the decedent's entire interest in the U.S. stock was subject to U.S. estate tax.

The case is of limited precedential value, per its reliance on British common law issues. Nonetheless, it demonstrates the difficulties that often arise in determining appropriate estate tax consequences when dealing with international taxpayers and/or international assets. This case was resolved only after integrating British common law rules, the obscure concepts of mutable and immutable marital domiciles, Belgium marital property rules, and international conflict of law provisions. For good measure and interesting reading, it included a dose of 20th century international politics, since the decedent was expelled from Uganda by its infamous dictator, Idi Amin.

Estate of Noordin M. Charania, et al. v. Commissioner, 133 T.C. No. 7
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