MUTABILITY DOCTRINE

When tax issues turn on international conflict of laws analysis, attempting to determine tax consequences can become a hair-pulling exercise. A recent Tax Court case provides a good illustration.

On its face, the tax issue was fairly simple. A married resident and domiciliary of Belgium died while owning a significant amount of shares in a U.S. corporation. Under U.S. tax law, those shares are subject to U.S. estate tax. The issue for the court was whether the decedent owned 100% of the shares for estate tax purposes, or whether he owned only 50% with the other 50% of the shares being deemed owned by his surviving spouse under community property principles.

The husband and wife were married in Uganda, which at the time of their marriage was governed by United Kingdom law. The UK is a “separate property” regime - not a community property regime. The couple later moved to Belgium, where they resided for many years and had their domicile. Belgium is a community property regime. They never changed their nationality, however, out of the UK. It was while they were domiciled in Belgium that the decedent acquired the U.S. shares.

To determine whether the surviving spouse had a community property interest, the Tax Court had to work through and ultimately apply the following conflict of law and marital property issues:

a. Which country’s conflict of laws provisions should be applied? In this situation, the general rule that the law of the country of domicile applies to determine ownership of intangible property was applied - so Belgium law applied. Interestingly, Belgium conflict of laws rules then kicked the question of ownership back to England since both the husband and wife were U.K. nationals.

b. Which country’s spousal ownership rules should be applied? Applying the doctrine of immutability, the Tax Court determined that the law of the couple at the time of their marriage applied. This was the U.K.’s separate property regime. Thus, since the stock was titled solely in the name of the decedent, all of the stock was included in the decedent’s U.S. gross estate and subjected to U.S. estate tax.

The case is interesting for two particular reasons.

The first relates to the discussion under a. above. Applying the “use the law of the country of domicile for intangibles” rule to determine ownership of intangible personal property, many would think that Belgium law should decide the ownership of the marital property. As noted above, however, since the individuals were UK nationals, Belgium conflicts of law rules apparently applies UK law even though the individuals were Belgium domiciliaries.

The second relates to the doctrines of mutability vs. immutability. It isn’t often that one sees these doctrines discussed in tax cases, so the case provides a good review (and learning opportunity for those not familiar with the concepts). The doctrines apply to determine what happens when a married couple get married under one marital property regime, but later acquire property while domiciled under another regime. The doctrine of mutability provides that the law of the country of domicile at the time of acquisition of the property governs questions of separate vs. community property. This doctrine is more often applied in the U.S. The doctrine of immutability provides that the law of the country of marriage applies (absent affirmative steps by the spouses to change the applicable law) to any later property acquisition. This concept is more often applied in European jurisdictions. In the case, it was a finding by the Tax Court that a U.K. court would apply the doctrine of immutability that ultimately resulted in 100% gross estate inclusion.

Estate of Charania, et al. v. Shulman, 105 AFTR 2d ¶2010-988 (1st Cir. 2010)