Docket No. 19927.

13 T.C. 909 (1949)


United States Tax Court.

Promulgated December 12, 1949.

Attorney(s) appearing for the Case

Edward R. May, Esq., for the petitioner.

William C. W. Haynes, Esq., for the respondent.

This proceeding involves the determination of income and victory tax liability for the taxable year ended December 31, 1943, disclosing a deficiency of $785.85.

The issue is whether petitioner was a bona fide resident of a foreign country for the full year 1943 so as to entitle him to exclude from his gross income his earnings in that country as provided in section 116 (a) (1) of the Internal Revenue Code. Three other issues are raised should we find that the petitioner was not a bona fide resident of Nassau: First, whether the respondent can collect as a deficiency a sum equal to a refund of a part of the tax paid, which refund was made subject to audit by the Bureau of Internal Revenue; second, whether certain expenses for the maintenance of petitioner's family, who remained in the United States, may be deducted; and, third, whether entertainment expenses in Nassau for which petitioner was not reimbursed are deductible as business expenses.


Petitioner Carl Thorsell resides in Wethersfield, Connecticut, and he filed his 1943 Federal income tax return with the collector of internal revenue for the district of Connecticut, at Hartford.

Carl Thorsell is now and has been since January 1927 employed by the Travelers Insurance Co. of Hartford, Connecticut, hereinafter called the company.

Except for the period June 4, 1942, to December 31, 1943, petitioner has been living in Wethersfield, Connecticut, since November 1926.

In April or May 1942, petitioner was appointed by the company to act as its agent under a contract of insurance with the Pleasantville Constructors, Inc., in Nassau, Bahama Islands, British West Indies.

The insurance policy issued by the company to the Pleasantville Constructors, Inc., covered workmen's compensation claims, public liability claims, and public damage claims which might arise in the construction of two airfields for the British Royal Air Forces, a war project. Although the duration of the project of the Pleasantville Constructors, Inc., was estimated at three to six months, the company issued a policy for two years, as was its custom, on the expectation that the contract would be extended from time to time. This was automatic, regardless of the length of time the work was to cover.

The petitioner accepted the appointment and reached Nassau, Bahama Islands, on June 4, 1942, and remained there continuously until January 1, 1944. While at Nassau he was engaged in the investigation of accidents and the settlement of claims under the various forms of insurance coverage in force under the policy. He acted as an advisor to a committee appointed by the Governor of the Bahamas to draw up a plan of compensation benefits for native labor. Petitioner was not under military discipline, and was at liberty to go about as he pleased. He had all his clothes in Nassau. He lived in hotels while there and his expenses for rooms, meals, and transportation were paid by the insurance company.

Petitioner was a married man and had a family at the time of his departure. He lived at 23 Somerset Street in Wethersfield, Connecticut, with his wife and his two sons. At the time of his departure and during part of his absence, both of his sons were attending public schools in Wethersfield, Connecticut. After he left and during 1943, one of his sons was put in a private school in Wethersfield. Petitioner was a member of the Wethersfield Congregational Church and made a pledge to his church each year and in the year 1943, although he was away during that year. He was a registered voter in Connecticut in 1943 and voted by absentee ballot while he was in Nassau. He and his wife had a joint bank account in the Connecticut River Trust Co. in Connecticut where, with the exception of the amount he drew for pocket money and personal expenses, his salary was deposited for him by his employer while he was in Nassau. He did not intend to take his family with him to Nassau when he was given the assignment by the Travelers Insurance Co. as claims agent and at no time desired to bring his family to Nassau.

When the petitioner accepted the position as claims agent for the company in Nassau, he was told by his direct supervisor that it was thought that the work of the Pleasantville Constructors, Inc., which was covered by insurance would last only three to six months. He had no idea when he took the assignment in Nassau that the project would be extended beyond its original estimated period, but it was understood he would stay until the job was completed. The company was required by the terms of its contract with Pleasantville Constructors, Inc., to have a claims agent in the place of work covered by its contract of insurance. The company had never had a claims agent in Nassau prior to the time that petitioner went there, nor has it had any there since his departure. The company had no intention of maintaining a claims agent in foreign countries after the completion of the projects on which it issued insurance. Petitioner applied for and was granted a passport to go to Nassau for six months, and was granted a visa by the British Government for two months.

The project in Nassau extended beyond the original estimated three to six months and petitioner's passport and visas were extended for six months. It was expected late in 1942 that the job might be finished in January or February, 1943. Petitioner expected in 1943 that the work in Nassau would be completed some time before the end of the year. He wrote to his employer authorizing it to withhold taxes from his salary because he expected to have to pay a tax because it appeared that the work would be completed before the end of 1943. In September 1943 petitioner wrote to his supervisor that an effort was being made to complete the job by the end of October 1943, but he stated it may run well beyond that time. Petitioner intended to stay only until the work was finished. He also wrote to his wife that unless the work was prolonged he might be home earlier than the full year. Petitioner's superior, Carlton A. Harris, expected in 1943 that the Nassau contract would be completed prior to the end of 1943.

Petitioner authorized his wife to file his 1942 income tax return for him, since he was in Nassau when it was due. This 1942 income tax return, which was filed in March 1943, showed the petitioner's address as 23 Somerset Street, Wethersfield, Connecticut. A note written by petitioner's wife was appended to this return, stating that the petitioner had been expected home on March 1, but would not arrive until May 1. Under the provisions of the Internal Revenue Code effective for 1942, petitioner's claim of exemption from income tax because of absence from the United States during more than six months of the tax year ending December 31, 1942, was allowed.

For some years prior to his going to Nassau, petitioner had suffered with chronic bronchitis. He hoped the climate in Nassau would prove beneficial. The first summer he was there he had colds and he had another in the early part of 1943. He was hospitalized in the latter part of 1943 with bronchitis. It became apparent to him in 1943 that the climate in Nassau was not beneficial to his health.

On returning to his home, petitioner filed his 1943 income tax return, showing the same address as his 1942 return, 23 Somerset Street, Wethersfield, Connecticut. Petitioner in June 1943 first became aware that his mere physical presence outside the United States was no longer sufficient to exempt his income from taxation, and he felt at one time in 1943 that the tax might apply to him because he might not be out of the country the entire calendar year. Petitioner expected that he would have to pay tax on his income for 1943. After receiving a letter from his employer telling him of the Current Tax Payment Act of 1943, he wrote authorizing his employer to withhold from his salary an amount sufficient to cover his income tax requirements as if he were working in the United States. Petitioner paid no tax in Nassau in 1943.

On petitioner's return to the United States, he applied for a refund of the tax withheld from his salary, on the ground that he had been out of the country in Nassau, Bahama Islands, for the whole year. The application was made on his original return for 1943. The amount that was withheld was $293.59. Petitioner received a refund check in February 1945 from the collector of internal revenue for overpayment of tax withheld from his earnings at the source, based upon a comparison of the amount of tax withheld by his employer, with the declaration of income tax liability by the petitioner, which was accompanied by the usual note to the effect that the return was still subject to final audit.

The petitioner was notified by the Commissioner that there was a deficiency in his income tax return for the calendar year 1943 of $785.85 arising from the disallowance of an exemption of $4,842.79 which he claimed as income from a foreign source; an inclusion in this deficiency of an amount of $293.59 previously refunded to him in error before a final determination of the Commissioner; and a disallowance of deductions of $10 to $15 per week for a period of five and one-half weeks, plus $300, as ordinary and necessary expenses.

We find as an ultimate fact that the petitioner was not a bona fide resident of Nassau, Bahama Islands, British West Indies, during the taxable year 1943.



The question which is presented in this case is whether the petitioner was throughout the year 1943 a bona fide resident of Nassau within the meaning of section 116 (a) (1) of the Internal Revenue Code,1 as amended by section 148 (a) of the Revenue Act of 1942, so as to be entitled to the exemption for taxes on his earnings in Nassau.

Prior to the amendment of the statute in 1942, physical absence from the United States for a period of six months in the year was sufficient to constitute one a bona fide nonresident in the United States and thus relieve from taxation earnings from outside sources except in the case of income paid by the United States or any of its agencies. The statute with which we are concerned requires that the taxpayer be "a bona fide resident of a foreign country or countries during the entire taxable year" before he may exclude from gross income his earnings from outside of the United States. The Commissioner by regulation has set as a test for establishing that a citizen of the United States is a bona fide resident in a foreign country substantially the same criteria used in determining whether an alien is a resident within the United States for taxation purposes. Regulations 111, secs. 29.116-1 and 29.211-2.2

On facts not substantially different from those present in the instant case, this Court, in Arthur J. H. Johnson, 7 T.C. 1040, and Michael Downs, 7 T.C. 1053; affd., 166 Fed. (2d) 504; certiorari denied, 334 U.S. 832, concluded that the taxpayers therein were not bona fide residents of foreign countries and that their earnings while so employed in the foreign countries were taxable as a part of their gross income. We think those cases are dispositive of the issue raised in this case.

The petitioner has since 1927 been an employee of the Travelers Insurance Co. of Hartford, Connecticut. That company in the spring of 1942 wrote a policy of insurance with a contractor about to build airfields in Nassau, which policy covered workmen's compensation claims, public liability claims, and public damage claims which might arise incident to the contemplated job. Petitioner's work was to represent the insurance company on the ground and service the policy. It was contemplated that the job would be completed within from three to six months, but petitioner was to stay until the work was done, even though it might take a longer time. Changes in plan and delays incident to the war did extend the period of the work and petitioner in fact spent nineteen months in Nassau. During that period he lived at hotels and his expenses were paid by his employer. His family remained at home in Connecticut and he never had any intention of bringing them to Nassau, and in fact he continued to keep all his family business and other ties in his home community. He, of course, intended to return to the United States as soon as this particular undertaking was completed, and the insurance company had no thought of establishing an office in Nassau or permanently locating an agent there. Petitioner expected during the year 1943 that the work would be completed at an earlier date than it was, but it appears to have extended throughout the entire year and it was not until the first of 1944 that he actually returned to the United States.

We think in these circumstances petitioner was what the regulation characterizes as a sojourner rather than a bona fide resident of Nassau, and, although his stay may have been in a sense indefinite, it was decidedly temporary and incident to a very limited undertaking. On this issue we think the respondent must prevail.

Petitioner raised in the pleadings an issue having to do with the inclusion in the deficiency notice of a sum equivalent to an amount theretofore refunded. This matter is not discussed on brief and it may be that petitioner no longer urges the issue. It appears that petitioner asked for a refund on his 1943 return solely on the ground that he earned his entire salary in Nassau, while a bona fide resident of that place. A refund in the amount of $293.59, plus interest, was made by the collector in February 1945, which refund was accompanied by a note from the collector to the effect that this was done subject to a final audit of petitioner's return. In the deficiency notice an amount was determined which permitted of the recovery of the erroneous refund. We think there is no merit in petitioner's contention that a tax refunded under these circumstances may not be recovered by the administrative processes of assessment and collection. This matter was decided adversely to petitioner's contention in Clark v. Commissioner, 158 Fed. (2d) 851. In that case the court said "that such refunds are a matter of grace to the taxpayer, are made in consequence of the amount due as shown on the return, are made subject to final audit and adjustment, and are not, therefore, the final determinations under the cited section" (sec. 3801, I. R. C.). See Henry C. Warren, 13 T.C. 205.

The petition also asked in the alternative for the deduction of certain expenses incident to sending petitioner's oldest boy to a private school, on the ground that this had to be done because of petitioner's absence from the United States. This matter was not argued on brief, but, in any event, the contention is without merit, as under section 24 of the Internal Revenue Code, personal living or family expenses are not deductible.

Petitioner's allegation in his petition that respondent erred in denying as a deduction certain unreimbursed entertainment expenses finds no support in the record.

Decision will be entered for the respondent.



In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:


(1) FOREIGN RESIDENT FOR ENTIRE TAXABLE YEAR.—In the case of an individual citizen of the United States, who establishes to the satisfaction of the Commissioner that he is a bona fide resident of a foreign country or countries during the entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income as defined in section 25 (a) if received from sources within the United States; but such individual shall not be allowed as a deduction from his gross income any deduction properly allocable to or chargeable against amounts excluded from gross income under this subsection.

2. SEC. 29.116-1. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES.—For taxable years beginning after December 31, 1942, there is excluded from gross income earned income in the case of an individual citizen of the United States provided the following conditions are met by the taxpayer claiming such exclusion from his gross income: (a) It is established to the satisfaction of the Commissioner that the taxpayer has been a bona fide resident of a foreign country or countries throughout the entire taxable year; (b) such income is from sources without the United States; (c) the income constitutes earned income as defined in section 25 (a) if received from sources within the United States; and (d) such income does not represent amounts paid by the United States or any agency or instrumentality thereof. Hence, a citizen of the United States taking up residence without the United States in the course of the taxable year is not entitled to such exemption for such taxable year. However, once bona fide residence in a foreign country or countries has been established, temporary absence therefrom in the United States on vacation or business trips will not necessarily deprive such individual of his status as a bona fide resident of a foreign country. Whether the individual citizen of the United States is a bona fide resident of a foreign country shall be determined in general by the application of the principles of sections 29.211-2, 29.211-3, 29.211-4, and 29.211-5 relating to what constitutes residence or nonresidence, as the case may be, in the United States in the case of an alien individual.

SEC. 29.211-2. DEFINITION.—A "nonresident alien individual" means an individual—

(a) Whose residence is not within the United States; and

(b) Who is not a citizen of the United States.

The term includes a nonresident alien fiduciary.

An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States within the meaning of this section, in the absence of exceptional circumstances. [Emphasis supplied.]


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