Israel's Tax Authority lost a major showdown. Here's what happened

The United Jewish Appeal, Federation of Jewish Philanthropies of Greater New York (UJA), has just won an amazing showdown in Court with the Israeli Tax Authority (Real Estate Tax Tribunal at the Jerusalem District Court, 22968-06-21, January 17, 2024). It was a double trust case with more between the lines than on them.

Main facts

The Benin skyscraper complex in Jerusalem was owned by the late Albert Benin and two of his companies. Albert Benin died in 1999.

His will required “the Trustees” of the will to invest money derived from selling the Benin Complex to buy bonds and equities at their discretion and transfer the resulting portfolio to the UJA. 

The resulting investment profits were to be used by the Salim Trust, set up by Mr. Benin in his lifetime, to promote higher education in various sciences by granting scholarships and interest free loans to talented students who matriculated at an  Israeli school. The UJA’s fee for this was capped at 0.5% of the fund (or $3,000 apparently, according to a different paragraph in the judgment).

The Israeli Family Court ruled that the two companies were to gift their holdings to the executors.

The UJA argued that it was really the heir under the will and no Israeli tax applied to the gift. This was thanks to an exemption in a 1952 tax treaty between the State of Israel and the Jewish Agency, which the UJA belonged to.

Later, at the end of 2020, the UJA sold part of its rights to the Benin Complex to the State of Israel so it could construct an underground railway station in central Jerusalem.  (We did a google map search and found The Benin School of Computer Science and Engineering).

The UJA again claimed a treaty exemption.

The Israeli Tax Authority objected to these treaty exemptions, saying the UJA was not the taxpayer as it was not the heir to the estate of Albert Benin, the students were. The ITA claimed this was because the UJA exercised no control and management over the assets concerned.

This was apparently a polite way of saying the UJA was being used as a conduit (i.e. a stooge) that did little more than derive a small fee.

The parties referred the matter to the Court for a ruling whether or not tax was due in the circumstances, The Court was acting as a King Solomon.

What the treaty provides

Donations, gifts, grants and estates given to the UJA, among others, are exempt from Israeli tax, so is the UJA itself, subject to certain conditions.

The Court ruling

The Court analyzed things in depth and ruled that the students were not the heirs of Mr Benin’s estate. Many weren’t even alive at the time of his death. Instead, the Court ruled that the UJA was the owner of the bequeathed real estate as Trustee of an endowment fund, since four fundamental criteria were met: intention to create an endowment fund, objectives of the fund, assets and conditions (Para 43). 

The UJA was not acting abusively for self interest (Para 58).

The recent Galis Case in the Supreme Court ruled that contributing assets to a trust triggers Israeli land appreciation tax (i.e. capital gains tax for Israeli real estate) and purchase tax. But not in this case thanks to the Treaty.

What was really going on?

We don’t know, the judgment merely tells us that the UJA is a not-for-profit body governed by US law. The case could be appealed.

As a general matter, Yaacov Jacob of the US CPA firm Philip Stein & Associates told us: “If the estate of a deceased US person donates say $10 million to a qualified US charity, that could save $4m. of US federal estate tax under US law and provide a “step-up” of the US cost basis.”

Israeli real estate taxes may also be avoided under the Treaty.

The treaty is also applicable to the United Israel Appeal of Canada, the Joint Israel Appeal of Great Britain, and other charities belonging to the Jewish Agency.

UK accountant Jeremy Leboff of UK accounting firm Sobell Rhodes says a double UK incentive is possible. First, a 40% inheritance tax saving on a legacy to a charity. Second, if over 10% of a net estate is left to charity, the 40% rate reduces to 36% on the remaining estate.

To sum up:

US, Canadian and UK donors, and their heirs, may want to check out the potential estate tax planning possibilities arising from this case.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd