Opinion
Docket No. 20156.
1950-11-30
Ceska Cooper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
George R. Sherriff, Esq., and George H. Reges, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
1. Petitioner, a citizen and resident of London, England, came to the United States on a temporary visa as a visitor in 1940. Her principal reason for coming was to escape the bombing dangers in London at that time. In 1941, she visited Mexico and in the same year returned to the United States as a quota immigrant. She remained in the United States until the war's end in 1945, when she returned to England where she has since resided. Held, that during the taxable years 1942, 1943, and 1944, petitioner was a resident alien in the United States and is taxable as such.
2. In the years 1942, 1943, and 1944, petitioner was unconditionally credited with salaries and dividends by Helena Rubinstein, Ltd., of London, England, in British pounds. These British pounds could not be brought to the United States on account of exchange regulations but were freely expendable within any part of the sterling area. Held, that these salaries and dividends credited to petitioner in England were taxable income to her in the years when credited.
3. In taxing these salaries and dividends to petitioner, the Commissioner has valued the pounds thus credited to petitioner at the official rate of exchange which was considerably higher than blocked British pounds were selling in the United States. Held, that the Commissioner erred in this respect and the the pounds thus credited to petitioner in England should be valued at the rate the blocked British pound was selling on the free market in New York City. George R. Sherriff, Esq., and George H. Reges, Esq., for the petitioner. Sheldon V. Ekman, Esq., for the respondent.
The Commissioner has determined against petitioner deficiencies in income tax as follows:
+--------------------+ ¦Year ¦Deficiency ¦ +------+-------------¦ ¦1943 ¦$3,701.73 ¦ +------+-------------¦ ¦1944 ¦4,168.22 ¦ +--------------------+
The adjustments upon which the deficiencies are based are explained in the deficiency notice, as follows:
Explanation of Adjustments
(a) and (b)— It is held that salary and other income constructively received from Helena Rubinstein, Ltd. and from other sources located in Great Britain in the years 1942, 1943 and 1944, and not reported on your returns, constitute taxable income to you, as follows:
+--------------------------------+ ¦Year ¦Salary ¦Other income ¦ +------+---------+---------------¦ ¦1942 ¦$3,147.30¦$9,441.90 ¦ +------+---------+---------------¦ ¦1943 ¦3,147.30 ¦3,647.64 ¦ +------+---------+---------------¦ ¦1944 ¦3,147.30 ¦9,357.17 ¦ +--------------------------------+
(c) British income taxes paid for each of the years 1942, 1943 and 1944, not claimed on your returns, have been allowed as deductions in the determination of taxable income, as follows:
+-----------------+ ¦Year ¦Amount ¦ +------+----------¦ ¦1942 ¦$5,694.26 ¦ +------+----------¦ ¦1943 ¦2,550.62 ¦ +------+----------¦ ¦1944 ¦6,121.80 ¦ +-----------------+
The petitioner contests the foregoing adjustments by appropriate assignments of error. In addition to contesting the foregoing adjustments, the petitioner claims an overpayment of $20,893.15 for the year 1943 and an overpayment of $10,118.29 for the year 1944 based upon the following assignment of error:
(c) The Commissioner, in determining taxable net income as adjusted for the years 1942, 1943 and 1944, erred by including therein the following capital gains and losses from the sale of securities within the United States and reported by the petitioner in her returns:
+---------------------------------------+ ¦ ¦Long term ¦ ¦ +------+----------------+---------------¦ ¦ ¦capital losses ¦Short term ¦ +------+----------------+---------------¦ ¦Year ¦(50 per cent) ¦capital gains ¦ +------+----------------+---------------¦ ¦1942 ¦$1,695.69 ¦$3,879.44 ¦ +------+----------------+---------------¦ ¦1943 ¦32.63 ¦40,303.08 ¦ +------+----------------+---------------¦ ¦1944 ¦73.86 ¦23,028.95 ¦ +---------------------------------------+
The year 1942 is involved because of the Current Tax Payment Act.
FINDINGS OF FACT.
Petitioner is a citizen of Great Britain presently residing in London, England, and filed delinquent Federal income tax returns for the years 1942, 1943, and 1944, with the collector of internal revenue for the second district of New York on June 26, 1945.
Petitioner entered the United States under a nonimmigrant visa on August 21, 1940, as a temporary visitor. That visa was extended until June 21, 1941, upon petitioner's application. She is a director of Helena Rubinstein, Ltd., a cosmetics business of London, England, and stated in her application for a nonimmigrant visa and for extension thereof that her purpose in coming to the United States was to visit her sister, Helena Rubinstein, in connection with that business. Helena Rubinstein was head of Helena Rubinstein, Ltd., of London and also Helena Rubinstein, Inc. of New York.
In 1941, petitioner went to Mexico to visit a cousin there and on May 12, 1941, was granted an immigration visa to enter the United States as a quota immigrant. Petitioner reentered the United States from Mexico as a quota immigrant on May 12, 1941. In her application for a quota immigrant visa, petitioner stated: ‘That my purpose in going to the United States is to reside, and I intend to remain permanently.‘ As a matter of fact, petitioner did not intend to reside in the United States permanently. She did intend to reside here for the duration of the war. In an alien registration form executed by petitioner on May 12, 1941, petitioner stated that she expected to remain in the United States permanently and that her activities in the United States would be ‘To assume my duties as Executive of Helena Rubinstein.‘ Since petitioner expected to remain in the United States for the duration of the war she procured a quota visa in order to enable her to do so. She feared that if she did not enter the United States under an immigration quota visa, she would not be permitted to remain here for the duration of the war.
While petitioner was in the United States she received word that her home in London had been bombed and she, therefore, made no attempt to leave the United States until after the war.
On December 9, 1941, petitioner applied for a permit to reenter the United States and such a permit was granted on December 22, 1941, and extended until June 22, 1943. Petitioner thereupon went to Mexico and reentered the United States on January 22, 1943.
On March 20, 1944, petitioner again applied for a permit to reenter the United States. She stated in her application that she intended to visit England for about six months, that her place of employment was 16 East 55th Street, New York, New York, that her employer was Gourielli, Inc., and that her business was ‘Executive.‘ She further stated therein that she would await the reentry permit if it were not issued in time for her proposed sailing, and that her temporary address abroad would be North Holmwood, Surrey, England. A reentry permit was issued to petitioner on November 3, 1944, and on or about June 27, 1945, she went to England, where she has since remained. She has not even visited the United States since her return to England in 1945.
While in the United States petitioner made some efforts to learn American methods to assist in her work with Helena Rubinstein, Ltd., of London. She had brought from England sufficient funds to provide for her support and maintenance during her stay in the United States. Petitioner was not engaged in business in the United States during the years here involved but was at all times a director and executive of Helena Rubinstein, Ltd., of London, England.
Income from United States Sources
Petitioner's only income from United States sources was as follows:
+-----------------------------------+ ¦Year¦Dividends¦Interest¦Net capital¦ +----+---------+--------+-----------¦ ¦ ¦ ¦ ¦gains ¦ +----+---------+--------+-----------¦ ¦1942¦$2,639.99¦$170.64 ¦$2,098.87 ¦ +----+---------+--------+-----------¦ ¦1943¦5,410.98 ¦ ¦40,270.45 ¦ +----+---------+--------+-----------¦ ¦1944¦5,317.09 ¦ ¦22,955.09 ¦ +-----------------------------------+
The capital gains were derived from purchase and sale of securities through brokers in New York. Her income tax returns for each of the years 1942, 1943, and 1944 were filed with the collector for the second district of New York on June 26, 1945. Capital gains were included in income therein. The taxes of $21,614.15 shown by the 1943 return and $10,232.31 shown by the 1944 return were paid in full on June 26, 1945.
Foreign Income
In December of each of the years 1942, 1943, and 1944, there was credited to petitioner by Helena Rubinstein, Ltd., of London, England, on the books of that company certain salary and dividends as follows:
+---------------------------------------+ ¦Year¦Salary ¦Share of profits¦Total ¦ +----+--------+----------------+--------¦ ¦ ¦(pounds)¦(pounds) ¦(pounds)¦ +----+--------+----------------+--------¦ ¦1942¦780 ¦2,340 ¦3,120 ¦ +----+--------+----------------+--------¦ ¦1943¦780 ¦904 ¦1,684 ¦ +----+--------+----------------+--------¦ ¦1944¦780 ¦2,319 ¦3,099 ¦ +---------------------------------------+ These sums were never received or made available to petitioner in the United States because of British Exchange Control Regulations under which she was deemed to be a resident of Great Britain. If a resident of Great Britain left that country after September 3, 1939, the Treasury Department of England under the Defence Finance Regulations still considered him a resident of the United Kingdom. Any funds, therefore, that were held in England on his behalf, or accruing in that country on his behalf, could not be transferred to the United States without prior approval of the Bank of England. No such approval was given during the taxable years here involved.
During the years 1942, 1943, and 1944, the petitioner could have freely directed the application and expenditure of her salaries and shares of profits from Helena Rubinstein, Ltd., within the sterling area. The ‘sterling area‘ included the United Kingdom, the Isle of Man, all British Dominions (except Canada and Newfoundland), all British protectorates or protected States, Egypt, the Anglo-Egyptian Sudan, Iraq, the Belgium Congo, Ruanda-Urandi, the Free French Empire, Iceland, the Faroe Islands, Hong Kong, Syria, and Lebanon.
Valuation of Sterling
During the years 1942, 1943, and 1944, blocked pounds sterling were selling in the New York Free market, as follows:
+----------------------------+ ¦ ¦1942 ¦1943 ¦1944 ¦ +----------+-----+-----+-----¦ ¦January ¦$1.65¦$2.50¦$3.10¦ +----------+-----+-----+-----¦ ¦February ¦1.85 ¦2.65 ¦3.25 ¦ +----------+-----+-----+-----¦ ¦March ¦2.00 ¦2.80 ¦3.10 ¦ +----------+-----+-----+-----¦ ¦April ¦2.00 ¦2.90 ¦3.15 ¦ +----------+-----+-----+-----¦ ¦May ¦2.00 ¦3.20 ¦3.10 ¦ +----------+-----+-----+-----¦ ¦June ¦2.10 ¦3.40 ¦3.15 ¦ +----------+-----+-----+-----¦ ¦July ¦2.20 ¦3.20 ¦3.25 ¦ +----------+-----+-----+-----¦ ¦August ¦2.20 ¦3.20 ¦3.35 ¦ +----------+-----+-----+-----¦ ¦September ¦2.20 ¦3.30 ¦3.50 ¦ +----------+-----+-----+-----¦ ¦October ¦2.30 ¦3.35 ¦3.50 ¦ +----------+-----+-----+-----¦ ¦November ¦2.40 ¦3.25 ¦3.60 ¦ +----------+-----+-----+-----¦ ¦December ¦2.40 ¦3.20 ¦3.40 ¦ +----------------------------+
On June 21, 1948, petitioner filed with the collector for the second district of New York a claim for refund of taxes paid for 1943 of $20,893.15. The claim was filed within 3 years after June 26, 1945, the date upon which the 1943 return was filed and the tax shown thereon was paid.
On June 21, 1948, petitioner filed with the collector for the second district of New York a claim for refund of taxes paid for 1944 of $10,118.29. This claim was filed within 3 years after June 26, 1945, the date upon which the 1944 return was filed and the tax shown thereon was paid.
Ultimate Facts
Petitioner was not a mere transient or sojourner in the United States, but intended to remain for an extended period until the end of the war. At least after May 12, 1941, when she entered the United States as a quota immigrant, petitioner intended to reside in the United States during 1942, 1943 and 1944, and was taxable as such. The salaries and shares of profits credited to petitioner's account in British pounds in England in December of 1942, 1943, and 1944, constitute taxable income to her in the United States for those years at the free market rate of exchange of British blocked pounds in New York City at the time credited.
OPINION
BLACK, Judge:
The questions we have for decision in this proceeding are as follows:
1. Was the petitioner a resident of the United States during 1942, 1943, and 1944?
2. Is petitioner taxable upon dividends and salary unconditionally credited to her account in England in British pounds which she did not receive in the United States during the taxable years because of British Exchange Control Regulations?
3. If question No. 2 is answered in the affirmative, then should her taxable income be measured by the official exchange rate of the British pound or should it be measured by the value of the blocked British pound in the free market of the United States during such period?
We shall first take up and decide the issue raised by question 1. Petitioner strongly urges that she at no time during the taxable years was a resident of the United States and that, therefore, she should be taxed as a nonresident alien. If this should be true then petitioner would not be taxable upon the salaries and dividends which were credited to her account in England nor would she be taxable on the capital gains which she had in the United States during the taxable years as a result of her trading in stocks and bonds through a broker. See Zareh Nubar, 13 T.C. 566.
Respondent contends that during the period covered by his deficiency notice petitioner was a resident of the United States and, being a resident of the United States, her income is taxable in all respects the same as if she had been a resident citizen of the United States. See Regulations 111, section 29.211-1.
Whether petitioner was a resident of the United States during the period in question is largely a question of fact to be determined from her intent. Treasury regulations applicable to the question we have here to decide are printed in the margin.
The Treasury regulations printed in the margin have often been cited with approval by our Court and other courts. We think that when we apply these regulations to the facts which we have present in the instant case, we must hold that during the years 1942, 1943, and 1944, petitioner was a resident of the United States. Petitioner earnestly argues that unless we can make a finding that it was petitioner's intention to permanently reside in the United States, then we must hold that she was a mere transient or sojourner within the meaning of Treasury regulations and was not a resident of the United States.
Regulations 111.SEC. 29.211-1. TAXATION OF ALIENS IN GENERAL.— For the purpose of chapter 1 alien individuals are divided generally into two classes, namely, resident aliens and nonresident aliens. Resident aliens are in general taxable the same as citizens of the United States, that is, a resident alien is taxable on income derived from all sources including sources without the United States. Nonresident aliens are taxable only on income from sources within the United States. * * *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.
For example, petitioner, after reciting the circumstances which caused petitioner to come to the United States in 1940 and to remain here during all the intervening years until she returned to England in 1945 after the war, argues in her brief as follows: ‘She never renounced her British citizenship or took any steps toward becoming naturalized in the United States.‘ Then further, along the same line, in her reply brief petitioner says: ‘The principal question is one of fact— Whether Petitioner intended to permanently reside in the United States.‘ Thus it is clear that the gist of petitioner's argument is that in order for a nonresident alien to change his residence to the United States the facts must establish that he intends to permanently reside here. We do not understand such to be the law. If the question were one of change of domicile, that would doubtless be a correct statement of law, but not as to a change in resident.
In the recent case of Herman Frederick Baehre, 15 T.C. 236, we had the question as to whether during the period in question the taxpayer, a citizen of the United States, had changed his residence from the United States to Canada. We held that under the facts there present the taxpayer had made such a change in residence. It was perfectly clear in that case that at no time did the taxpayer intend to abandon his domicile in the United States and become a permanent resident of Canada. The taxpayer there so conceded. He did contend, however, that during the period in question he was, under the Treasury regulations, more than a mere transient or sojourner in Canada and had become a resident thereof for the period in question. We upheld that contention.
It is appropriate that we point out that the Treasury regulations relating to residence which applied in the Baehre case are the same as applicable here and have been printed in the margin. It seems clear to us that it was petitioner's intent, at least from the time she entered the United States from Mexico on May 12, 1941, as a quota immigrant, to become a resident of the United States during the duration of the war and, in fact, did so. We are perfectly well convinced from petitioner's testimony that she did not intend to reside in the United States permanently but that she intended to return to England after the war had ended. These facts, however, for reasons we have already explained, do not serve to alter the fact that petitioner was a resident of the United States during the period in question. We have accordingly found in our findings of fact that: ‘Petitioner was a resident alien of the United States during 1942, 1943, and 1944 and was taxable as such. ‘ The petitioner, in making her contention that during the years here involved she was a nonresident of the United States, strongly relies on Florica Constantinescu, 11 T.C. 36, and Zareh Nubar, supra. We have carefully examined these cases and we think they are clearly distinguishable on their facts. As to this issue of residence, the Commissioner is sustained.
We next take up question 2. We think this question must be answered in the affirmative. It is entirely clear from the evidence that these credits were available to petitioner in blocked British pounds and would have been, if she had chosen, freely expendable anywhere in the sterling area. In fact the parties stipulated at the hearing as follows:
The parties stipulate that during the taxable years here involved, the petitioner could have freely directed the application and expenditure of her salaries and shares of profits from Helena Rubinstein, Ltd., within the sterling area.
It is true that under British law and British Treasury regulations these credits could not have been brought to the United States in cash. But, as we have already said, they were freely expendable by petitioner anywhere in the sterling area and we think that makes them taxable income to petitioner. See Eder, et al. v. Commissioner, 138 Fed.(2d) 27; Max Freudmann, 10 T.C. 775.
Petitioner, in contending that she should not be taxed on the salaries and profits unconditionally credited to her account in British pounds by Helena Rubinstein, Ltd., of London because she could not bring these credits to the United States in cash, strongly relies on International Mortgage & Investment Corporation, 36 B.T.A. 187. We think that case is distinguishable on its facts. In that case the taxable year before us was 1931 and we made a finding of fact, as follows: ‘There was no market in 1931 for the restricted marks, and no one could form an opinion as to their value at that time.‘ We have no such situation in the instant case. In each of the taxable years the British blocked pound was freely selling in the New York free market and we have made findings of fact with reference to the prices at which it was selling. We, therefore, overrule petitioner's contention that she had no taxable income from the unconditional crediting to her account of the salaries and profits in blocked British pounds.
This leaves for our decision question number 3. It is our view that the value of the blocked British pound as determined in the free market of the United States should be used as the measure of petitioner's income in each of the taxable years from the salaries and profits which were credited to her account in England.
In Morris Marks Landau, 7 T.C. 12, we had essentially the same question as we have here, although that was a gift tax case whereas the instant case is an income tax case. This difference in the cases, we think, makes no difference in the fundamental question involved. In the Landau case, the Commissioner, relying upon I.T. 3568, 1942-2 C.B. 112, had determined that in the valuing of the gift, the official rate of the British pound sterling should be used. We said: ‘We can find no support for respondent in this ruling.‘ We then went on to hold in petitioner's favor. In that case we specifically found that ‘The official rate of exchange does not apply to a 'blocked pounds', i.e., pounds subject to the restrictions imposed by the Emergency Finance Regulations.‘ See our findings of fact in the Landau case on page 14. To the same effect is Estate of Ambrose Fry, 9 T.C. 503. See also Weil, Inc. v. Commissioner, 150 Fed.(2d) 950.
The Commissioner has used in his determination of the deficiencies the official rate of exchange of the pound. This, we hold, was error on his part and the free rate of exchange should be used instead. See Foundation Co., 14 T.C. 1333. As to this issue, petitioner is sustained.
Reviewed by the Court.
Decision will be entered under Rule 50.