PIERCE v. COMMISSIONER

Docket No. 46812.

22 T.C. 493 (1954)

FRED H. PIERCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

United States Tax Court.

Filed June 8, 1954.


Attorney(s) appearing for the Case

George L. McKnight, Esq., for the petitioner.

Thomas R. Charshee, Esq., for the respondent.


The Commissioner has determined a deficiency in petitioner's income tax for the year 1949 of $937.94. The deficiency is due to adjustments made by the Commissioner to the income tax return filed by petitioner, which adjustments are explained in the deficiency notice as follows:

(a) It is held that you were not a bona fide resident of Iceland during the taxable year 1949 and, therefore, income received in such year from Lockheed Aircraft Overseas Corporation is not exempt from United States income tax under the provisions of Section 116 (a) of the Internal Revenue Code but is includible in taxable income under the provisions of Section 22 of the Internal Revenue Code.

(b) A standard deduction of $735.00 is allowed in conformance with the provisions of Section 23 (aa) of the Internal Revenue Code.

Petitioner, by an appropriate assignment of error, contests the foregoing determination of the Commissioner.

FINDINGS OF FACT.

Most of the facts are stipulated and the stipulation of facts incorporated by reference.

The petitioner is an individual and resides at Kenmore, New York. He filed his income tax return for the year 1949 with the collector of internal revenue at Baltimore, Maryland.

On November 9, 1948, petitioner entered into an agreement of employment and an amendment to agreement of employment with the Lockheed Aircraft Overseas Corporation, sometimes hereafter referred to as Lockheed. The basis for the employment of the petitioner was a subcontract awarded to Lockheed by Lockheed Aircraft Service, Inc., under a prime contract, W 33-038 AC-21679 (a cost-plus-a-fixed-fee contract), awarded to Lockheed Aircraft Service, Inc., by the United States Government, wherein Lockheed Aircraft Service, Inc., had been designated by the United States Government to operate, as an international airport, the Keflavik Airport at Keflavik, Iceland.

The operation of the international airport was a joint operation between Lockheed and the Government of Iceland. The Government of Iceland levied and collected a landing fee from all commercial aircraft which landed at the airport and Lockheed collected a fee for servicing such aircraft and also received revenue for repairs to such aircraft, for housing and feeding the crews and passengers of such aircraft, as well as for housing and feeding the passengers and crews of all military (MATS) aircraft of the United States Air Force which landed at this airport.

The Government of Iceland exercised full sovereignty and jurisdiction over the airport and personnel working there. Icelandic licenses were required for all motor vehicles and all personnel driving such vehicles had to have an Icelandic driver's license. Icelandic personnel had free and unrestricted access to the airport and its facilities including the recreation centers, restaurant, and living quarters of all American or Icelandic employees. An Icelandic police station was located at the airport.

Petitioner's employment by Lockheed was to act as chief accountant for Lockheed at the Keflavik Airport. The contract which petitioner signed with Lockheed provided, inter alia, as follows:

WHEREAS, the United States of America (hereinafter sometimes referred to as the Government) and Lockheed Aircraft Service, Inc., a California corporation with its principal place of business in Burbank, California (hereinafter sometimes referred to as Service) have entered into Contract No. W 33-038 AC-21679, wherein and whereby the Government has designated Service to operate, as an International Airport, Keflavik Airport at Keflavik, Iceland, and to perform certain related services thereat and in connection therewith, all as are more specifically provided in the above numbered contract or subsequent contracts for the Keflavik project between the Government and Service; and

WHEREAS, for the purpose of expediting the performance of and administering such work, Lockheed Aircraft Overseas Corporation, a wholly-owned subsidiary corporation of Service, has accepted designation as a major subcontractor under the above-mentioned contract and has entered into a subcontract with Service under which Lockheed Aircraft Overseas Corporation has undertaken to operate said Airport and to perform said services thereat and in connection therewith. Said contract and subcontract (hereinafter for convenience referred to collectively as the Government Contract) are subject to extension of the term thereof and subject to termination by the Government under the terms and conditions therein set forth; and

WHEREAS, Employer desires to employ Employee for work in connection with Employer's performance under said Government Contract; and Employee desires to accept such employment in accordance with the terms and conditions herein; and

WHEREAS, Employee understands that working and living conditions in Iceland are extremely rigorous in all respects;

NOW, THEREFORE, the parties hereto, in consideration of the premises and the mutual undertakings hereinafter contained, do hereby agree as follows:

* * * * * * *

Employer hereby employs Employee to render such services and perform such duties in connection with the performance of the Government Contract hereinabove referred to as Employer may direct or designate; and Employee accepts such employment with knowledge of the terms and conditions herein set forth and agrees throughout the term of this Agreement of Employment to give his exclusive time and attention to the diligent and faithful performance of such services and duties, and to abide by and be subject to all rules, regulations and requirements of Employer, its officers, agents and supervisory employees, as well as those of the United States Government, or Icelandic government, all civil laws and regulations in effect from time to time at the place or places of duty where Employee may be assigned during the continuance of, and in connection with, Employee's employment hereunder.

* * * * * * *

The term of Employee's employment hereunder shall commence on the date when Employee reports for duty hereunder at the time and place designated by the Employer, and shall continue for a period of 3 years from the date of Employee's departure from the Continental United States, unless terminated at an earlier date pursuant to one of the provisions of Section 17 hereof.

* * * * * * *

SECTION 12. MEDICAL SERVICES

A. Prior to each departure from the United States, Employee shall submit to such physical examination, vaccination and inoculation as Employer shall direct, at no expense to Employee. Employee shall further from time to time, while engaged in overseas service, and shall immediately prior to Employee's termination as provided herein under this Agreement of Employment, submit, without expense to Employee, to such further examination, vaccination, inoculation and other medical, dental, surgical, nursing and hospital treatment, preventative or curative, as Employer's medical staff (or medical examiners appointed by Employer) at Employee's place of duty may from time to time specify as necessary or desirable.

B. Employer will to the extent that its facilities, equipment and personnel permit, provide without charge, necessary medical and dental care for the Employee under this Agreement and such other medical and dental care as may be authorized by the Government.

SECTION 13. ADDITIONAL BENEFITS AND ALLOWANCES

A. In the event that it is necessary for the Employee to wear arctic equipment in the course of his employment, the Employer will issue such equipment to the Employee at no expense to the latter. The Employee will, however, be accountable and liable for the return of such equipment in good condition, normal wear and tear excepted.

B. The Employee may be required to wear such uniform or special clothing as may be prescribed by the Employer. When a uniform or special clothing is prescribed, it will be issued by the Employer, but the expense of its maintenance shall be borne by the Employee.

C. The Employer will, to the extent that its facilities, equipment and personnel permit, provide at reasonable cost to the Employee housing, messing, commissary, recreational, laundry, dry cleaning and sales store facilities.

* * * * * * *

SECTION 16. TAX PROTECTION

Employer will reimburse Employee for the excess of income taxes paid by him as a result of his foreign assignment over the sum of United States income taxes for which he would have been liable as a resident of and working in the United States earning the same salary (assuming no other income), provided (1) Employee gives Employer written notice of any liability for foreign tax on his income, (2) Employee makes no payments of such liability without written approval of Employer, and (3) Employee gives Employer written notice and claim for reinmbursement of any payment so authorized within thirty (30) days after the date such payment is made. Such reimbursement will be based upon computation of tax liability on salary paid Employee by Employer and approved by Employer as having been made in accordance with established policy.

The petitioner was in the employ of Lockheed and was in Keflavik, Iceland, from December 12, 1948, to January 18, 1950.

Petitioner's wife did not accompany him to Iceland, but remained in the United States in an apartment on a month-to-month rental basis. The petitioner did not pay any foreign income tax while in Iceland. While in Iceland petitioner lived in a Quonset hut provided by Lockheed and most of his time was spent at a camplike base with co-workers.

The petitioner did not directly receive his salary except for advances or certain expenses incurred in Iceland which were deducted from his salary. The remainder of his salary was deposited by Lockheed to petitioner's account in the Bank of Manhattan, New York, New York. In December of 1949, the petitioner secured his month's vacation payment that had accrued by that time and on January 18, 1950, returned to the United States by air service supplied by Lockheed.

Petitioner was not required to live on a base of Lockheed while in Iceland, nor was Lockheed obligated to furnish housing, messing, or other services to petitioner under the terms of the employment agreement.

Petitioner's wife died at Buffalo, New York, June 20, 1953. She earned no income during 1949 and was supported by petitioner.

Petitioner's family consisted only of his wife and they occupied a rented apartment on a month-to-month basis at the time he was employed by Lockheed. Petitioner was informed during the employment interviews with Lockheed that American families were living on the airport and that, while family accommodations could not be guaranteed to him, the normal turnover in personnel, plus an existing program of equipping Quonset huts for such family units, would make such accommodations available to him within a reasonable period after his arrival in Iceland. After petitioner's arrival in Iceland it became evident that because of rearrangements in the housing program there would be some delay in obtaining family accommodations, and this continued uncertainty and inability to make any definite plans made it impossible for the wife of petitioner to join him in 1949, and she continued to remain in the United States. That petitioner's wife did not join him in Iceland in 1949 was through no fault of petitioner's. It was due solely to the inability of petitioner to secure housing accommodations for her, although he diligently sought to secure such housing accommodations.

On March 5, 1950, petitioner filed an income tax return for the year 1949 with the collector of internal revenue at Baltimore, Maryland, in which return he excluded from his gross income the amount of $7,350, which he had received from Lockheed in 1949, on the ground that such amount was exempt under the provisions of section 116 (a) of the Internal Revenue Code. Petitioner had no other income in 1949 except the $7,350 which he received from Lockheed.

Petitioner was a bona fide resident of Iceland throughout the year 1949.

OPINION.

BLACK, Judge:

In this proceeding there is no issue as to the amount of petitioner's income in the year 1949. In 1949, petitioner was paid a total of $7,350 by Lockheed. Petitioner filed a return with the collector of internal revenue at Baltimore, Maryland, on March 5, 1950, but he did not include the $7,350 as taxable income. He excluded it on the ground that such amount was exempt under the provisions of section 116 (a) of the Code. Therefore, the issue which we have to decide is whether the petitioner was a bona fide resident of Iceland during the calendar year 1949 within the requirements of section 116 (a) (1) of the Code. Section 116 (a) (1) and the applicable Treasury regulations are printed in the margin.1

The legislative history of the applicable statute was fully discussed in Arthur J. H. Johnson, 7 T.C. 1040. Likewise, the Treasury regulations which are pertinent to the interpretation of the statute were discussed in that case. We shall not repeat that discussion here. As we said in Charles F. Bouldin, 8 T.C. 959:

Residence is, of course, mainly a question of fact and each case naturally must be determined upon its own facts. In determining the issue which we have here to decide, it should be kept in mind that we do not have to determine where petitioner was domiciled in 1943. Our task is to determine whether petitioner was "a bona fide resident of a foreign country during the entire taxable year." * * *

In the instant case it is not disputed that petitioner was living in Iceland during the entire year of 1949. Nor is it disputed that the $7,350 which he received from Lockheed was received from sources without the United States. There is no claim by respondent that the amount was paid by the United States Government or any agency thereof, as those words are used in the applicable statute. What respondent does contend is that petitioner was not a bona fide resident of Iceland during the year 1949. On that ground alone respondent has denied petitioner the exemption which he claims.

Respondent relies heavily on our decision in Michael Downs, 7 T.C. 1053, affd. 166 F.2d 504, certiorari denied 334 U.S. 832. Petitioner contends that the facts in the instant case are distinguishable from those which were present in the Downs case. Among those differences in facts petitioner points out that in the instant case petitioner's family consisted only of his wife and they occupied a rented apartment on a month-to-month basis at the time he was employed by Lockheed in 1948. Petitioner was informed during his interview with Lockheed that American families were living at the airport in Iceland and that, while family accommodations could not be guaranteed to him, the normal turnover in personnel, plus an existing program of equipping Quonset huts for such family units, would make such accommodations available to him within a reasonable length of time after his arrival in Iceland. Petitioner testified that after his arrival in Iceland it became evident that because of rearrangements in the housing program there would be some delay in obtaining family accommodations and this continued uncertainty and inability to make any definite plans made it impossible for the wife of petitioner to join him in 1949. Petitioner, however, testified that at all times in 1949 he desired to bring his wife to Iceland and from time to time he was doing his best to secure housing accommodations so that he could bring her. On these facts, petitioner contends that in 1949 he earned the $7,350 in question while residing in Iceland, that there were no restrictions through business or family which prevented petitioner from carrying out his intention of residing in Iceland in 1949, and that the fact that the scarcity of housing accommodations prevented him from bringing his wife to join him is not sufficient cause to prevent him from being classed as a bona fide resident of Iceland during the year 1949. These facts, petitioner contends, were not present in the Downs case, supra, and are sufficient to distinguish that case from the instant case. We think petitioner must be sustained in such contention.

It is true, of course, that petitioner was not domiciled in Iceland in 1949, but that is not necessary in order that he be classified as a "bona fide resident of a foreign country" in 1949 within the meaning of section 116 (a) (1) of the Code. In Herman Frederick Baehre, 15 T.C. 236, we said: "Petitioner does not contend that he changed his domicile or had any intention of doing so; however, a change of domicile is not necessary to come within the provisions of section 116 (a) (1)." We think the facts in the instant case bring it within the ambit of Charles F. Bouldin, supra, and Herman Frederick Baehre, supra. It is true that the evidence in those cases was somewhat stronger for the taxpayers than here. In the Bouldin case, the taxpayer proved that his stay in Canada had been of such an extended nature that, taken together with other facts and circumstances, it constituted him a bona fide resident of Canada for the entire year 1943, which was the only year involved. In the Baehre case the taxpayer's family, his wife and two children, went to Canada in September 1942 with all of taxpayer's possessions, including furniture and automobile, with intent to reside there for an indefinite period. Under these facts, we held that the taxpayer became a bona fide resident of Canada for the period involved.

In the instant case petitioner's wife did not join him in Iceland but the reason why she did not do so has been fully explained by petitioner. See Seeley v. Commissioner, 186 F.2d 541. In that case the Court of Appeals for the Second Circuit said:

The only reason why she [the wife] did not go was "because of war travel restrictions and the housing shortage caused by the bombings." Certainly it would not further the general purpose of the statute to induce Americans to take jobs abroad, if those were granted tax exemption who could take their wives, but those were not, who could not. Such husbands were pro tanto in the same position as single men; and, if Seeley had been single, he would certainly have had a "temporary home" in London. * * *

Unless we are to disbelieve his testimony, it seems to us that it is reasonable to hold that throughout the year 1949 petitioner was a bona fide resident of Iceland notwithstanding his wife was not there with him. It is true that when he returned to the United States for a vacation in January 1950, he found his wife in a highly nervous condition and on account of his wife's illness petitioner reluctantly secured a release from his contract with Lockheed and never returned to Iceland. These latter facts, however, do not have the effect of changing his status in 1949.

After a careful consideration of the whole record, we have concluded that petitioner was a bona fide resident of Iceland for the full year of 1949, and we have so found. We, therefore, decide that the $7,350 which petitioner received from Lockheed in 1949 is exempt from tax under the provisions of section 116 (a) (1).

Reviewed by the Court.

Decision will be entered under Rule 50.

HARRON, J., dissenting:

It has been stated repeatedly that whether a taxpayer is a bona fide resident of a foreign country during an entire taxable year is a question of fact. Because of the view that decisions of questions of fact are peculiarly within the judgment of the trier of the facts, I hesitate to disagree with the author of the view which has received the approval of the majority of the Court. But I feel obliged to say that upon the facts of this case I would sustain the Commissioner's determination. Furthermore, as I read the facts in the cases of Herman Frederick Baehre, 15 T.C. 236, and Charles F. Bouldin, 8 T.C. 959, I conclude that those cases are distinguishable, clearly, from this case, and, also, I find almost nothing to distinguish the facts here from those in Michael Downs, 7 T.C. 1053.

The Downs case followed Arthur J. H. Johnson, 7 T.C. 1040. In the Johnson case, this Court gave the most careful consideration to the legislative history of section 148 (a) of the Revenue Act of 1942, by the enactment of which the Congress plainly imposed a new test, bona fide residence in a foreign country, in amending section 116 (a) of the Code. We observed that the Congress had believed that under the former law there had been "unjust discrimination favoring individuals receiving their compensation for services abroad from nongovernmental sources; that it had `suffered considerable abuse' * * *." We observed, also, that "Clearly, the idea [of the new test] was associated with unjust duplication of income taxes upon American citizens abroad" (p. 1046). And we noted that the term "resident" has so many shades of meaning that the word must be considered in the light of its use in the particular statute. Indeed, other courts have been wary of the word as was pointed out in Downs v. Commissioner, 166 F.2d 504, 508, affirming 7 T.C. 1053.

It is to be regretted that in this case the Court appears to be less concerned with the legislative intent underlying the adoption of the new test in section 116 (a), than it has been in the past. In Downs v. Commissioner, supra, the Court of Appeals for the Ninth Circuit rejected the idea that "mere presence other than sojourning in the foreign lands for the full tax year ripens the right to the exemption" p. 508, and expressed the view that the Commissioner's regulations on the subject mean

that unless the United States citizen abroad "makes his home temporarily" in the foreign country, that is, as we see it, identifies himself in some degree with its customs and lives under and within such customs, he is not a resident of the foreign country in which he is staying temporarily. * * * [p. 508]

Applying the analysis of legislative intent of this Court in the Johnson case and of the Court of Appeals for the Ninth Circuit in the Downs case to the facts here, I would conclude that the petitioner was not a bona fide resident of Iceland and, therefore, does not qualify for exemption from income tax. The petitioner, during the time he was in Iceland, lived in quarters provided by his employer. His salary, after deductions for certain expenses incurred in Iceland, was deposited to his account in a New York bank. There was no certainty that petitioner could establish a home in Iceland, and he did not do so. He did not pay income tax to the Government of Iceland. There is no evidence that the petitioner so established himself in Iceland as to become a bona fide resident within the meaning of section 116 (a). Indeed, the fact that petitioner's wife could not join him, in Iceland, albeit housing accommodations were not available, makes it difficult to find in petitioner's situation during his presence in Iceland that element of stability which is ordinarily satisfied where a married person establishes a bona fide residence in a particular place. These facts do not satisfy the explicit legislative purpose of the amendment to section 116 (a) but, rather, establish that the petitioner was no more than a "transient or sojourner" for a specific purpose in Iceland.

The rule, or view, expressed in the Johnson and Downs cases has stood since 1946, and has been applied by this Court in many cases which have been decided adversely to taxpayers in unreported Memorandum decisions. More recently, in 1952, this Court, in a reported decision, reaffirmed its understanding of the "explicit legislative purpose" of the enactment of the new test in section 116 (a), as amended. See Ernest Rudolf Hertig, 19 T.C. 109. The Hertig case has since been followed, reaching the same result, by this Court in unreported Memorandum decisions. It seems to me that the result reached here is sharply in conflict with the holding in the Hertig case, and represents such a liberalization of our construction of the meaning of the test set forth in section 116 (a) that a great deal of uncertainty must inevitably result. I regret exceedingly this pulling away from the touchstone which earlier decisions have provided, and, accordingly, respectfully note my dissent.

KERN, MURDOCK, TURNER, and OPPER, JJ., agree with this dissent.

FootNotes


1. Internal Revenue Code.

SEC. 116. EXCLUSIONS FROM GROSS INCOME.

* * * * * * *

(a) EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES. —

(1) BONA FIDE RESIDENT OF FOREIGN COUNTRY. — In the case of an individual citizen of the United States, who establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an 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 constitute earned income (as defined in paragraph (3)) attributable to such period; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this paragraph.

Regulations 111. (As amended by T. D. 6039, 1953-2 C. B. 162.)

SEC. 29.116-1. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES. — (a) Resident of a foreign country. — For taxable years beginning after December 31, 1942, and before January 1, 1951, 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) such income would constitute earned income as defined in section 25 (a) if received from sources within the United States for taxable years beginning before January 1, 1944, or as defined in section 116 (a) (3) for taxable years beginning after December 31, 1943; 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.

* * * * * * *

Whether the individual citizen of the United States is a bona fide resident of a foreign country shall be determined by the application, to the extent feasible, 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.

Section 29.211-2, Treasury Regulations 111, reads, in part, as follows:

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.


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