* * * *

owned and held by a nonresident not a citizen of [Spain] shall be deemed property within [Spain]. With respect to estates of decedents dying after December 31, 1969, deposits with a domestic [Spanish] branch of a foreign corporation, if such branch is engaged in the commercial banking business, shall for purposes of this subchapter, be deemed property within [Spain]. This subsection shall not apply to a debt obligation to which section 2105(b) applies or to a debt obligation of a domestic [Spanish] corporation if any interest on such obligation, were such interest received by the decedent at the time of his death, would be treated by reason of section 861(a)(1)(B), section 861(a)(1)(G), or section 861(a)(1)(H) as income from sources without [Spain].

The general rule reflected in section 2104(c) is that the location of debt obligations is governed by the location of the obligor, not by the location of the obligee. Therefore, under the general rule, obligations of a [Spanish] person or company are treated as property within [Spain]. 1984 U.S. Tax Ct. LEXIS 3">*18 The statutory language speaks in terms of debt obligations held by a "nonresident not a citizen of [Spain]" only because those statutory provisions (namely, the provisions of section 2104(c)) in their own right 83 T.C. 943">*949 only pertain to decedents who are neither citizens nor residents of [Spain]. It is obvious to us that when that rule is applied to residents of [Spain] (as the last sentence of section 2014(a) requires), the general rule must be the same -- that is, the location of the obligor will control, and the location of debt obligations of [Spanish] persons and [Spanish] companies owed to [Spanish] residents will be considered to be within [Spain].

Any interpretation of the general rule of section 2104(c) other than that set forth in the prior paragraph, as it applies to U.S. citizens who are residents of Spain, would be absurd. Debt obligations of Spanish persons held by nonresidents of Spain would be treated as located withinSpain, but such obligations held by residents of Spain would be treated as located outsideSpain. Any such interpretation would also ignore the fact, previously explained, that the only reason the words "nonresident not a citizen" 1984 U.S. Tax Ct. LEXIS 3">*19 are used in section 2104 (and the associated sections 2101 through 2108 of subchapter B) is that those provisions in their own right only pertain to non-[Spanish] citizens who also are not residents of [Spain], and therefore there was no reason to refer expressly to "residents" of [Spain] in those sections.

Based on our analysis of the general rule of section 2104(c), as set forth above, when that rule is applied to a debt obligation of a Spanish obligor which is held by a U.S. citizen who also is a resident of Spain, the Spanish identity of the obligor requires that the debt obligation be treated as Spanish property. Only if one of the exceptions found in section 2104(c)(2) to the general rule is applicable, or if the provisions of section 2105 are applicable, will the property in question be treated as located without Spain.

The first exception to the general rule of section 2104(c) (that the identity of the obligor will control the location of the property) is found in the second sentence of section 2104(c)(2) and provides that with respect to estates of decedents dying after December 31, 1969, deposits with a [Spanish] branch of a non-[Spanish] commercial bank will be treated1984 U.S. Tax Ct. LEXIS 3">*20 as located within [Spain] even though the obligor (namely, the parent bank) is a non-[Spanish] corporation. That exception is not applicable to the instant case because the deposits in question were made in a branch of a Spanish bank.

83 T.C. 943">*950 The second and third exceptions to the general rule of section 2104(c) are found in the third sentence of section 2104(c)(2) and provide that debt obligations to which section 2105(b)(1) or (2)⁴ applies will be treated as located outside [Spain]. Section 2105(b)(1) applies to obligations that under section 861(c), ⁵1984 U.S. Tax Ct. LEXIS 3">*22 among other things, constitute deposits with a person carrying on a banking business and that under section 861(a)(1)(A) ⁶ would be treated as producing foreign (i.e., non-[Spanish]) 83 T.C. 943">*951 source interest income. Under sections 861(c) and 861(a)(1)(A), interest earned by a nonresident alien of [Spain] from deposit obligations of a Spanish commercial bank would be treated as non-[Spanish] source income if the interest therefrom is not effectively connected with the taxpayer's conduct of a trade or business in Spain. However, interest earned by a resident of Spain (such as decedent herein) would not qualify for that exception1984 U.S. Tax Ct. LEXIS 3">*21 whether or not the interest is effectively connected with the taxpayer's conduct of a trade or business in Spain. Sec. 861(a)(1)(A).

1984 U.S. Tax Ct. LEXIS 3">*23 Section 2105(b)(2) applies to bank deposits with a foreign branch of a [Spanish] bank if the foreign branch is engaged in the commercial banking business. Since the deposits herein were made in a Spanish branch of a Spanish bank, that exception is not applicable.

The fourth exception to the general rule of section 2104(c) is also found in the third sentence of section 2104(c)(2) and provides that debt obligations which produce foreign (i.e., non-[Spanish]) source interest income under section 861(a)(1)(B) will be treated as located outside [Spain]. Section 861(a)(1)(B) ⁷ applies to obligations where the obligor is a resident alien or domestic corporation of [Spain] and where less than 20 percent of the obligor's gross income from all sources for the prior 3 years was derived from sources within [Spain]. Since the bank deposits in question were the obligations of Spanish banks, there would appear to be no basis to apply that exception and respondent asserts none.

1984 U.S. Tax Ct. LEXIS 3">*24 The fifth and sixth exceptions to the general rule of section 2104(c) are also found in the third sentence of section 2104(c)(2) and are based on technical characteristics of the particular debt obligations as described in section 861(a)(1)(G) and in section 861(a)(1)(H). ⁸ The bank deposits in question herein do not satisfy the descriptions set forth in section 861(a)(1)(G) or in section 861(a)(1)(H) and therefore those exceptions are not applicable.

83 T.C. 943">*952 Section 2105 provides three rules for determining whether life insurance proceeds, bank deposits, and art works are to be treated as having been located outside [Spain]. The rules for life insurance proceeds (section 2105(a)) and art works (section 2105(c)) obviously are not applicable to this case. The rule for bank deposits (section 2105(b)) already was discussed in connection with the exceptions found in section 2104(c)(2), and we previously concluded that section 2105(b)1984 U.S. Tax Ct. LEXIS 3">*25 did not require the bank deposits involved herein to be treated as property located outside Spain.

For the reasons set forth above, the bank deposits of decedent herein do not qualify for any of the exceptions of section 2104(c)(2), or section 2105, and, under the general rule of section 2104(c), the identities of the obligors (namely, the Spanish commercial banks) control the determination of the location of decedent's bank deposits for Federal estate tax purposes.

We will now address respondent's specific arguments. As previously mentioned, respondent argues that the cross-reference in section 2014(a) to subchapter B requires not only that the principles and rules of sections 2104 and 2105 apply, but also that the decedent's actual residence in Spain be ignored and that the decedent be treated as a nonresident of Spain. Respondent refers to certain language in section 20.2014-1(a)(3), Estate Tax Regs., and to two District Court decisions in support of his argument. We acknowledge that the pertinent language in the regulation is ambiguous, and we surmise that that ambiguity may well be responsible for the result reached in at least one of the District Court decisions. However, 1984 U.S. Tax Ct. LEXIS 3">*26 we are not bound by the District Court decision, and we are obliged to resolve any ambiguities in the regulations in a manner which is reasonable and consistent with the statutory scheme.

It is a fundamental principle of statutory construction that a common sense, rather than a literal, interpretation of words should be adopted where adoption of the literal interpretation would lead to an absurd result. 1 J. Mertens, Law of Federal Income Taxation, sec. 3.02, at 4 (1981). Furthermore, a "common sense interpretation is the safest rule to follow in the administration of income tax laws." (Citation omitted.) Keeble v. Commissioner, 2 T.C. 1249">2 T.C. 1249, 2 T.C. 1249">1252 (1943). It is also well 83 T.C. 943">*953 established that where administrative regulations are ambiguous, the rules of statutory construction will apply. 1A C. Sands, Statutes and Statutory Construction, sec. 31.06 (1972).

The ambiguous language in the regulations is found in the fourth sentence of section 20.2014-1(a)(3), Estate Tax Regs. For purposes of understanding that regulation, it is not necessary to substitute "Spain" for "the United States." The fourth sentence of the regulation provides as follows:

1984 U.S. Tax Ct. LEXIS 3">*27 Whether or not particular property of a decedent is situated in the foreign country imposing the tax is determined in accordance with the same principles that would be applied in determining whether or not similar property of a non-resident decedent not a citizen of the United States is situated within the United States for Federal estate tax purposes. ⁹

83 T.C. 943">*954 Respondent argues that the use in that regulation of the words "similar property of a nonresident decedent not a citizen of the United States" (emphasis added) requires that the actual residence of decedent herein in Spain be ignored and that decedent must be treated as a nonresident of Spain.

1984 U.S. Tax Ct. LEXIS 3">*28 Respondent's interpretation of the regulation is supported by the example in the regulation pertaining to life insurance proceeds. That example provides that life insurance proceeds on the life of a decedent (such as the decedent involved herein) who was a citizen of the United States but not a resident of the United States are not deemed to be located within the foreign country in which the decedent was resident and in which the insurance company was located. That example makes no distinction between a decedent who was a U.S. citizen who resided in the foreign country in which the insurance company was located and a decedent who was a U.S. citizen but who resided in the United States. Thus, the example in section 20.2014-1(a)(3), Estate Tax Regs., pertaining to life insurance proceeds does support respondent's argument that once reference must be made, under section 2014(c), to the rules of sections 2104 and 2105, the decedent is to be treated as if he were a nonresident of the foreign country (e.g., Spain) on the date of death, regardless of decedent's actual residence. Because the location of insurance proceeds is not involved in this case, we need not rule on the validity1984 U.S. Tax Ct. LEXIS 3">*29 of that portion of the regulation, and we decline to do so. Furthermore, we decline to consider the example in the regulation with respect to life insurance proceeds to be a valid precedent for resolving the question herein concerning bank deposits.

We think the statutory rule is clear, and we emphasize that the statutory language simply states that the "rules" of sections 2104 and 2105 shall be utilized in determining the country in which property is located. The statutory language does not use the additional words found in the regulation thereunder that create the ambiguity (namely, "similar property of a nonresident decedent not a citizen of the United 83 T.C. 943">*955 States"). (Emphasis added.) The statutory language thus avoids and clarifies the ambiguity found in the regulation, and thereby obviates the need to invalidate the regulation.

Certain additional language in the regulation also supports our interpretation. Following the example pertaining to insurance proceeds, two examples are provided involving debt obligations and bank deposits. See sec. 20.2014-1(a)(3), Estate Tax Regs. Both examples conclude with limiting language to the effect that the obligations and bank1984 U.S. Tax Ct. LEXIS 3">*30 deposits only will be deemed not to have been located within the foreign country under "circumstances corresponding" to those involved in sections 2104 and 2105. Those sections, as previously explained, directly involve only nonresidents who are not citizens of the respective country. Thus, the fact in a particular case of residency in the foreign country (as distinguished from nonresidency) would cause the examples in the regulation not to correspond with the facts typically involved in sections 2104 and 2105, and therefore the results called for in the examples in the regulation (namely, the property would have been deemed to be located outside Spain) would not follow.

Under the particular circumstances of this case, ¹⁰ the principles of sections 2014, 2104, and 2105 require that the bank deposits be treated as located within Spain.

1984 U.S. Tax Ct. LEXIS 3">*31 Respondent's reliance on Borne v. United States, an unreported case ( N.D. Ind. 1983, 52 AFTR 2d 83-6444, 83-2 USTC par. 13,536), is on point but is unpersuasive. That opinion simply adopts respondent's argument without any analytical explanation. In fact, the ambiguous language contained in the regulation is referred to as if it were a part of the statutory language of section 2014. Under our interpretation of the statute, due to the decedent's residence in Canada in that case, the bank accounts involved in Borne should have been treated as being located in Canada.

Respondent also cites Riccio v. United States, also an unreported case ( D. P.R. 1971, 21 AFTR 2d 71-6230, 71-2 USTC par. 12,801), as support for his position. That case involved taxes paid to Puerto Rico, bank deposits in U.S.83 T.C. 943">*956 branches of U.S. banks, and insurance proceeds. As we stated with respect to the insurance example in section 20.2014-1(a)(3), Estate Tax Regs., insofar as Riccio involved insurance proceeds, that decision does not affect our decision herein with respect to the rules to be applied to 1984 U.S. Tax Ct. LEXIS 3">*32 bank deposits. Insofar as the Riccio decision involved bank deposits, the facts of that case are completely different from the facts involved herein. The bank deposits in Riccio were not made in branches of banks located within the particular foreign country (Puerto Rico), but rather were made in U.S. branches of U.S. banks. Based on those facts, the deposits correctly were held to be located outside Puerto Rico. The District Court in Riccio also appears to have incorrectly applied, to the bank deposits involved therein, the rules applicable to tangible personal property, rather than the more specific rules applicable to debt obligations (see sec. 2104(c)) and to bank deposits (see sec. 2105(b)).

Of interest herein, however, is the fact that the District Court opinion in Riccio rejected the taxpayer's efforts to apply verbatim a portion of the caption heading of subchapter B of chapter 11 (namely, the words "Not Citizens"), which would have required the taxpayer therein to have been treated as an alien of the United States even though he in fact was a citizen of the United States; but, at the same time, the District Court opinion in Riccio in effect adopted 1984 U.S. Tax Ct. LEXIS 3">*33 the Government's argument that the words "Nonresidents" in the caption heading of subchapter B of chapter 11 must be adopted verbatim, thereby treating the taxpayer as a nonresident, even though he was a resident of Puerto Rico.

It is our opinion that neither the word "Nonresidents," nor the words "Not citizens [of Spain]" that appear in the subchapter headings of sections 2104 and 2105 and in the statutory language itself should be applied verbatim to a decedent who is governed by subchapter A because of either his U.S. citizenship or his U.S. residence and who is subject only to the "rules" of subchapter B in the determination of where his property is located. As we have previously stated, in applying the rules of subchapter B, the decedent's actual citizenship and the location of his actual residence should be taken into account.

83 T.C. 943">*957 For the reasons set forth above, we find that the bank deposits which decedent owned in branches in Spain of Spanish banks were located within Spain for purposes of the Federal estate tax credit.

Decision will be entered for the petitioner.