Opinion
Docket No. 18821.
1950-09-20
HERMAN FREDERICK BAEHRE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Leonard L. Scott, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
On or about August 23, 1942, petitioner, a United States citizen, left this country for Canada in pursuance of his employment concerning a war contract. About 10 days after his arrival in Canada petitioner moved out of his hotel room and arranged for the arrival of his family. Petitioner's family, his wife and two children, went to Canada in September 1942, with all of petitioner's possessions, including furniture and automobile, with intent to reside there for an indefinite period. Petitioner and his family lived in an apartment in Edmonton, Canada, until October 1, 1944, at which time petitioner and his family departed for the United States. For at least 2 years prior to October 1, 1944, petitioner and his family had no home other than their apartment in Edmonton and during this period they took part in various community activities. Petitioner did not pay any Canadian income tax. Held, petitioner was a bona fide resident of Canada for at least 2 years prior to October 1, 1944, and the compensation received from his work in Canada during 1943 and 1944 should be excluded from his gross income under section 116(a)(1) and (2). Held, further, the income received from his work in Canada in 1942 is not excludible from gross income within the meaning of section 116(a)(2). Leonard L. Scott, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
This proceeding involves a deficiency in income and victory tax for the year 1943 in the amount of $651.57 and a deficiency in income tax for the year 1944 in the amount of $568.88. The year 1942 is involved because of the Current Tax Payment Act of 1943. Petitioner claims a refund of $238.62 representing income taxes paid for the year 1942. In denying this claim for refund the Commissioner stated in his deficiency notice as follows:
Your claim for refund for the year 1943, based upon exclusion from 1942 income of compensation received for personal services while you were employed in Canada, is denied for the reason that such income is held to be taxable.
Your 1942 return, showing tax liability of $238.62, is accepted as correct.
The deficiencies result from the respondent's determination that petitioner is not entitled to exclude from gross income the compensation received by him while employed in Canada. This was explained in a statement attached to the deficiency notices for the year 1943, as follows:
Income omitted from your return for 1943 in the amount of $5,434.31 subject to income tax and $5,823.72 subject to victory tax, representing compensation received for personal services rendered while you were temporarily employed in Canada, is held to be taxable under section 22 of the Internal Revenue Code.
It is further held that all earnings during your temporary employment in Canada may not be excluded from gross income under section 116 of the Internal Revenue Code.
A similar explanation was given for the year 1944, wherein respondent determined that $5,355.23 was includible in petitioner's gross income.
By appropriate assignments of error petitioner contests these adjustments and claims an overpayment of his 1942 income tax.
FINDINGS OF FACT.
Petitioner, a United States citizen, filed his income tax returns for 1942 and 1944 with the collector of internal revenue for the district for Indiana at Indianapolis, Indiana. His return for the year 1943 was filed with the collector of internal revenue for the district of Maryland at Baltimore, Maryland.
From 1936 to 1941, petitioner was employed by Trans-American Freight Lines as a dispatcher where he performed clerical work. About March 1941, the Miller Construction Co., which was not an agency of the United States, employed petitioner as auditor and chief accountant. Petitioner, his wife and two children lived in an apartment in Indianapolis, Indiana.
On or about August 23, 1942, petitioner, at the direction of the Miller Construction Co. (hereinafter called Miller), went to Canada to work on a war contract job. Petitioner, who had no passport, went to Canada by plane and there were no restrictions on the length of petitioner's stay. For the first week or 10 days he stayed at a hotel during which time petitioner discovered that his work would last a year and a half to two years rather than the three or four months originally contemplated. Petitioner thereupon arranged for his family to come to Edmonton, Canada. Petitioner's wife relinquished their apartment in Indianapolis and came to Canada with their two children and all of the family's possessions, including furniture and automobile. Petitioner and his family moved into an apartment in a 4-unit apartment house in Edmonton. This was sometime in September 1942.
Around Christmas of 1942, petitioner began attending St. Peter's Lutheran Church in Edmonton. He had been attending and was a member of the Trinity Lutheran Church in Indianapolis. Although he was not required to change his Indianapolis membership in order to go to the church at Edmonton, sometime in 1943, he did request and obtain a transfer of his membership from the Indianapolis to the Edmonton church. Also after petitioner had been in Canada some three or four months his wife desired to join the church in Canada. Accordingly, she took a course of religious instruction and became a member of St. Peter's Church in Edmonton. In about May of 1943, petitioner's youngest child was baptized in Canada by Professor Schwermann, President of Concordia College, the Lutheran seminary in Edmonton.
In 1944, petitioner joined a Masonic lodge in Edmonton designated as Norwood No. 90. He had to have his home in Edmonton for 12 months before he would qualify for acceptance. Petitioner has never withdrawn his membership from the Edmonton church or the Edmonton Masonic lodge and had paid his dues up to December 27, 1949.
Petitioner paid no income tax to the Canadian Government on income earned while in Canada and he made no inquiry of the Canadian Government as to his liability. Petitioner never applied for Canadian citizenship.
At various intervals during his stay in Canada petitioner discussed the possibilities of obtaining employment from one Clifford, who was a wool broker, but was not in business due to the fact that he could not get materials. The conversations with Clifford were predicated on an indefinite future basis.
Charles Hazelrigg worked in the Dominion of Canada from August 8, 1942, until July 30, 1944. He was acquainted with the petitioner and on various occasions talked to him about his intention of staying in Canada. During the spring of 1944, petitioner and Hazelrigg talked a lot about staying in Canada and about the many opportunities it offered. Petitioner talked to Hazelrigg extensively about the Yellow Knife Gold Field and supplied Hazelrigg with an assay on the same.
Fred J. Bradley has resided in Edmonton since 1922 and has known petitioner since 1942. Bradley is secretary of the Masonic lodge in Edmonton. Petitioner, in casual conversations with Bradley, stated that he liked Edmonton and hoped to come back to reside there permanently.
On October 1, 1944, petitioner left Canada at Miller's request. Petitioner took his family and possessions to Linton, Indiana, where he continued to work for Miller for a period of 6 months clearing up the last phases of the Canadian work.
After leaving Miller petitioner was employed as chief accountant by a concern in Camden, Arkansas, for about 10 months or a year. He then returned to Indianapolis to work for a public accounting firm for approximately nine months. Petitioner then went to New Mexico for a period of four or five months where he performed work as an auditor. He then went to Phoenix, Arizona, and took a position as chief estimator of industrial and commercial work. After this employment petitioner took about five months' leave of absence. Petitioner then went to work for the Business Service Bureau in Phoenix, Arizona, where he is presently employed. Petitioner brought his wife and children when he went to Arkansas and Phoenix, Arizona.
Petitioner was a bona fide resident of Canada for at least two years prior to October 1, 1944.
OPINION.
BLACK, Judge:
The only question in this proceeding is whether the compensation which petitioner received during the years 1942, 1943, and 1944 for services rendered in the Dominion of Canada is includible in his taxable income within the meaning of sections 116(a)(1) and (2) of the Internal Revenue Code as amended by section 148(a) of the Revenue Act of 1942.
SEC. 148. INCOME FROM SOURCES WITHOUT THE UNITED STATES IN CERTAIN CASES.(a) EXCLUSION OF EARNED INCOME FROM FOREIGN SOURCES.— Section 116(a) (relating to earned income from sources without the United States) is amended to read as follows:‘(a) EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES.—‘(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 deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.‘(2) TAXABLE YEAR OF CHANGE OF RESIDENCE TO UNITED STATES.— In the case of an individual citizen of the United States, who has been a bona fide resident of a foreign country or countries for a period of at least two years before the date on which he changes his residence from such country to the United States, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof), which are attributable to that part of such period of foreign residence before such date, 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 deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.‘
Petitioner contends that in accordance with the provisions of section 116(a)(1) compensation received in 1943 for services rendered in Canada is to be excluded from gross income because petitioner was a bona fide resident of Canada during the entire taxable year 1943. Petitioner also contends that the compensation received in 1942 and 1944 is excludible from gross income in accordance with section 116(a)(2) because he was a bona fide resident of Canada for at least two years ending October 1, 1944.
Respondent contends that petitioner was not a bona fide resident of Canada during the years 1942, 1943, and 1944, and that, therefore, section 116 does not apply to petitioner and the compensation involved is includible in taxable income. Respondent recognizes that if petitioner was a bona fide resident of Canada for the entire year 1943, section 116(a)(1) does apply to the compensation received in 1943 for services rendered in Canada. Respondent also recognizes that if petitioner was a bona fide resident of Canada for at least two years ending October 1, 1944, then under section 116(a)(2) income which was received in 1944 from Miller for services rendered in Canada is excludible from gross income. Respondent contends, however, that the income received in 1942 is not in any event excludible from gross income for it cannot be brought within the provisions of section 116(a). That part of Treasury Regulations 111 (as amended by T.D. 5373, 1944, C.B. 143) which deals with section 116(a), as amended, reads as printed in the margin.
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) 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. 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 section 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.For any taxable year beginning after December 31, 1941, in the case of an individual citizen of the United States, there shall be excluded from gross income earned income from sources without the United States derived during the period of his foreign residence if (a) such citizen was a bona fide resident of a foreign country or countries for at least two years prior to the date upon which he became a resident of the United States and ceased to be a resident of such foreign country or countries; (b) 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 (c) such income does not represent amounts paid by the United States or any agency or instrumentality thereof. * * *
The legislative history of section 116 was discussed in Arthur J. H. Johnson, 7 T.C. 1040, wherein it is stated that, ‘* * * the criteria as to whether a taxpayer is a resident of a foreign country were to be, generally, those applicable in ascertaining whether an alien is a resident of the United States.‘ Section 29.116-1 of respondent's Regulations 111 printed in the margin incorporates this concept by referring to the principles of section 29.211-2 of the Regulations which section relates to what constitutes residence or nonresidence in the United States of an alien individual. Section 29.211-2 of Regulations 111 is printed in the margin.
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 extend 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.
Whether petitioner was a bona fide resident of Canada during the years 1942, 1943, and 1944, is a question of fact. Charles F. Bouldin, 8 T.C. 959. Shortly after petitioner's arrival in Canada, on or about August 23, 1942, his family joined him in Edmonton, Canada, and brought with them all of their possessions, including furniture and automobile. This was sometime in the month of September 1942. Thereafter petitioner and his family lived in an apartment in Edmonton and took part in the community activities. Petitioner had no home in the United States from the time of his family's arrival until his return to Linton, Indiana, on October 1, 1944. 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). In Charles F. Bouldin, supra, we held on somewhat similar facts that petitioner was a bona fide resident of Canada. We believe that petition in the instant proceeding was a bona fide resident of Canada from the time that petitioner moved from his hotel room to an apartment (about 19 days after his arrival on August 23, 1942) until his departure for Linton, Indiana, on October 1, 1944.
The instant proceeding is distinguishable on its facts from Arthur J. H. Johnson, supra; Michael Downs, 7 T.C. 1053, affd., 166 Fed.(2d) 504, certiorari denied, 334 U.S. 832; J. Gerber Hoofnel, 7 T.C. 1136, affd., 116 Fed.(2d) 504, certiorari denied, 334 U.S. 833. We think that the instant proceeding is more akin to Charles F. Bouldin, supra, and Swenson V. Thomas, 164 Fed. (2d) 783.
A determination that petitioner was a bona fide resident of Canada for at least two years prior to October 1, 1944, leaves no dispute as to the excludible income for 1943 and 1944, for the income received in 1943 is excludible under section 116(a)(1) and the income received in 1944 from without the United States is excludible under section 116(a)(2).
There is, however, a question raised by petitioner's assignments of error as to the exclusion of income received in 1942. We hold that the income received in 1942 is not excludible from gross income because petitioner was not a bona fide nonresident of the United States for more than six months in that year. Under the provisions of section 148(b), Revenue Act of 1942, the provisions of section 116(a)(1) were made applicable with respect to taxable years beginning after December 31, 1942. The corresponding provisions applicable with respect to taxable years beginning in 1942 are as follows:
* * * In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the 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 deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.
Petitioner does not contend that he was a nonresident of the United States for more than six months in the taxable year 1942. He does contend, however, that because of the amendment to section 116 carried in the Revenue Act of 1942 he is entitled to exclude the income which he received in 1942 from sources ‘without the United States.‘ In making this contention he relies upon that part of section 116(a)(2) which reads in part as follows:
(2) Taxable year of change of residence to United States.— In the case of an individual citizen of the United States, who has been a bona fide resident of a foreign country or countries for a period of at least two years before the date on which he changes his residence from such country to the United States, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof), which are attributable to that part of such period of foreign residence before such date, * * *.
It is clear that without such a provision as the above in the law, petitioner would not be entitled to exclude from his taxable income of 1944 the $5,355.23 which he received from Miller for his services in Canada for the period beginning January 1, 1944 and ending October 1, 1944. He was not a resident of Canada in 1944 for the entire year but only 9 months of that year. He is entitled, however, under the above-quoted provisions to exclude the $5,355.23 in question from his 1944 taxable income because he had been a resident of Canada for more than two years prior to his return to the United States. This much respondent concedes, if we hold as we have done that petitioner acquired a residence in Canada in September of 1942.
Respondent does contend, however, as we have already stated, that section 116(a)(2) has no application to the $2,108.96 which petitioner received in 1942 from Miller for his services in Canada. In that contention, we think, respondent is correct. It should be noted that the caption of section 116(a)(2) reads‘ ‘Taxable year of change of residence to United States.‘ It seems clear that the language which follows the caption is intended to cover the part of the year of the change of residence back to the United States. Without this language the income received for services without the United States for the part of the year of return would not be excludible from taxable income because section 116(a)(1) provides that only such income shall be excludible where the taxpayer has been a bona fide resident of a foreign country for the ‘entire taxable year.‘
In Swenson v. Thomas, supra, the court, after pointing out that the changes in section 116 made by section 148(a) of the Revenue Act of 1942 were made to tighten up the law so as to require bona fide residence in a foreign country for an entire year rather than to be a ‘nonresident of the United States for a period of six months‘ as under the old law, says:
* * * The act goes on to provide that if such foreign residence has lasted for two years and return to the United States occurs during a subsequent year, the exemption may be claimed proportionally for the subsequent year although the foreign residence had not continued for all of that year. * * * (Emphasis added.)
While it is true that the above language of the Fifth Circuit in the Swenson v. Thomas case was dicta because the court did not have before it for decision the question which we now have to decide, nevertheless, we think that what was said with reference to the meaning and purpose of section 116(a)(2) was correct.
That is our construction of its meaning. Therefore, petitioner's contention that the $2,108.96 which he received from Miller in 1942 for his services in Canada should be excluded from his taxable income, is not sustained.
See Senate Report 1631 77th Cong. 2nd Session (1942).
Decision will be entered under Rule 50.