Opinion
Docket No. 9117.
1946-11-12
J. GERBER HOOFNEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert A. Waring, Esq., for the petitioner. A. J. Hurley, Esq., for the respondent.
Petitioner, a citizen of the United States, went to the British Isles in 1942 as an employee of Lockheed Overseas Corporation to do work essential to the war effort. Petitioner went aboard a British vessel then anchored in New York Harbor on June 30, 1942. The vessel did not sail until the morning of July 1, 1942. Petitioner landed in the British Isles in July 1942 and remained there until July 1944, when he returned to the United States. After disembarking at Liverpool in July 1942, petitioner went to a small base in Glazebrook, England, where he spent a few weeks, and after that he was stationed at the main American air base in Northern Ireland. Held, that petitioner was not a bona fide nonresident of the United States for more than six months in the year 1942 within the meaning of section 116, I.R.C., and the compensation which he received for his overseas service in 1942 is not exempt from taxation; held, further, that petitioner was not during 1943 a ‘bona fide resident of a foreign country or countries‘ within the meaning of section 116, I.R.C., as amended by section 148(a) of the Revenue Act of 1942, and the salary which he received from Lockheed in 1943 is not exempt from taxation. Michael Downs, 7 T.C. 1053, followed. Robert A. Waring, Esq., for the petitioner. A. J. Hurley, Esq., for the respondent.
The Commissioner determined a deficiency of $1,311.01 in petitioner's income tax for the year 1943. In explanation of the deficiency he stated in the deficiency notice:
It is held that compensation in the amount of $1,418.59 received by you during the year 1942 for personal services rendered in the United States for Vega Aircraft Corporation and Lockheed Overseas Corporation, and compensation in the amounts of $2,600.00 and $5,262.50 received by you in 1942, and 1943, respectively, for services rendered while temporarily employed in Northern Ireland by Lockheed Overseas Corporation, represent taxable income under the provisions of Section 22 of the Internal Revenue Code, as amended.
It is held further that all earnings during your temporary employment in Northern Ireland may not be excluded from gross income under section 116 of the Internal Revenue Code, as amended.
In contesting the foregoing determination, the petitioner assigns errors as follows:
(a) In determining the taxable net income of petitioner for the year 1942, the Commissioner and Revenue Agent in Charge erroneously included the sum of $2,600.00 earned by taxpayer while a bona fide resident overseas.
(b) In determining the net income for the year 1943, the Commissioner and Revenue Agent In Charge erroneously included the sum of $5,262.50 earned outside of the United States by taxpayer while a bona fide resident of North Ireland.
FINDINGS OF FACT.
Petitioner is a single man, a citizen of the United States residing in Los Angeles, California. Petitioner timely filed income tax returns for the taxable years 1942 and 1943 with the collector of internal revenue for the district of Maryland.
Early in 1942 Lockheed Aircraft Corporation entered into a contract with the United States Government in which the corporation agreed to organize, equip, and operate an aircraft depot in Northern Ireland in connection with the war effort. The project was designated by the United States Army as operation ‘Magnet.‘ In connection with the operation it was necessary for the Lockheed Aircraft Corporation and its subcontractor, Lockheed Overseas Corporation, sometimes hereinafter referred to as Lockheed, to employ large numbers of skilled men in the United States and transport them to the British Isles. It was estimated that some 5,400 American citizens at one time or another were employed by Lockheed at the aircraft depot in Northern Ireland.
From January 1 to June 30, 1942, petitioner was employed as a secretary by Vega Aircraft Corporation and by Lockheed at Burbank, California. During that time he received a salary amounting to $1,418.59.
On or about February 18, 1942, petitioner made out and signed a formal application for overseas employment with Lockheed, and he signed a contract shortly thereafter with that corporation in which he agreed to perform services for it at an aircraft depot to be operated by it in the British Isles. The application which petitioner signed for employment with Lockheed was headed ‘APPLICATION FOR FOREIGN SERVICE.‘ The application contained the following question:
Are you willing to go to any part of the world? Yes
For how long? 1 year 2 years Longer X
Petitioner in his application for foreign service thus indicated a willingness to serve as an employee of Lockheed overseas for more than two years, if necessary. The contract provided, inter alia, as follows:
ARTICLE 1. TIME AND DURATION OF EMPLOYMENT
Contractor employs Employee to render services in connection with said aircraft depot with such duties as reasonably may be assigned to him, an Employee accepts such employment with knowledge of the conditions recited above. Subject to the terms and conditions hereinafter set forth, Employee's employment hereunder shall commence when he reports for duty at a point within the United States to be designated by Contractor, at the time and place designated by Contractor, and shall continue until November 1, 1942, or such later date as may be agreed upon and thereafter until sixty (60) days after return transportation to the United States is made available by Contractor, it being understood that such return transportation shall be made available on November 1, 1942, or the later date agreed upon or as soon thereafter as is practicable under the circumstances then existing.
ARTICLE 7. HOUSING, SUBSISTENCE AND MEDICAL SERVICES
During the time that Employee is employed hereunder and remains at the place or places of his duty outside of the United States, Contractor shall furnish or cause to be furnished, without cost to Employee, such adequate food, lodging, special clothing and equipment, medical, nursing, and hospital services and treatment and recreational facilities as circumstances may reasonably permit.
Employee shall submit prior to departure and from time to time during his employment to such vaccination, inoculation, and/or any other medical, dental, surgical, nursing, and/or hospital treatment, preventative or curative, as the Contractor or other medical staff at the destination or elsewhere may from time to time specify, without expense to Employee.
Contractor may direct the return to the United States of Employee, if in Contractor's judgment Employee's health condition is unfavorable.
ARTICLE 9. TAXES
Contractor shall either pay or reimburse Employee for any and all taxes lawfully levied or assessed by any foreign Government against Employee with respect to his residence, occupation, salary, or income, provided, however, that Employee shall immediately notify Contractor in writing of any such levy or assessment and that Employee shall not pay any of such taxes as Contractor may direct him not to pay and that any claim for reimbursement shall be asserted in writing to Contractor within thirty (30) days after such payment, and provided further that Contractor shall save Employee harmless from any monetary loss resulting from or occasioned by Employee's failure to pay such taxes in compliance with instructions or directions given by Contractor.
Pursuant to the terms of his contract petitioner, on June 30, 1942, boarded the H.M.S. Maloja, a vessel of British registry and under a British captain and officers, berthed in New York Harbor. Because of the danger of German submarines, Hoofnel was not allowed any contacts with the mainland after he boarded the vessel. The Maloja, with petitioner aboard, sailed from New York Harbor early on the morning of July 1, 1942, bound for the British Isles. Petitioner landed in Liverpool, England.
Petitioner was admitted to the British Isles on a visa as an employee of Lockheed. This visa, under British law, had to be put in use within three months from the date it was issued, but the time that the holder would be allowed to stay is not mentioned therein. The visa, under British law, would permit him to remain for the purpose for which it was given, as an employee of Lockheed, and if and when Lockheed terminated its work over there petitioner would be expected to depart within a reasonable time when transport was available and subject to any extensions that might be given him by the home office in London or local authorities in Belfast.
After disembarking, petitioner was first assigned to a small base near Glazebrook, England, for several weeks, after which he was transferred to the main base in Ireland.
The expiration date of petitioner's contract was extended by agreement of the parties until May 1, 1943, at which time he entered into a new contract with Lockheed Overseas Corporation. This new contract provided, inter alia, as follows:
ARTICLE 1. TIME AND DURATION OF EMPLOYMENT
Contractor employs Employee to render services in connection with said aircraft depot with such duties as reasonably may be assigned to him, and Employee accepts such employment with knowledge of the conditions recited above. The term of Employee's employment hereunder shall * * *
* * * continue, subject to the terms and conditions hereinafter set forth, for (i) the duration of the contract between the Government and Lockheed as from time to time extended and for such period after the termination or completion of said contract as Contractor may, in respect of such Employee, deem necessary for the winding up of the operations carried on under said contract after such termination or completion; and (ii) thereafter until return transportation to the United States for such Employee is made available by Contractor or by the Government to Contractor, which transportation Contractor shall use its best efforts to obtain as promptly after the end of the period described in the foregoing clause (i) as is practicable under the circumstances then existing; * * *
The petitioner remained in the employ of Lockheed and was stationed in Northern Ireland until July 13, 1944, when he returned to the United States.
Petitioner received as compensation for personal services rendered to Lockheed in the British Isles and Northern Ireland during the year 1942 the sum of $2,600 and during 1943 the sum of $5,262.50, of which sums 90 per cent was deposited by the corporation to the account of the petitioner with the Bowling Green Trust Co., Bowling Green, Kentucky, pursuant to article 2 of his employment contract.
Petitioner did not at any time make any application to become a citizen of Northern Ireland, or a British subject. During the taxable year 1943 he was domiciled in the United States and his intentions were to remain in Ireland not longer than the duration of the war or until his employment with Lockheed Overseas Corporation terminated, at which time he intended to return to the United States. He did not pay any income taxes to the Government of Northern Ireland or to the United Kingdom of Great Britain. Taxpayer stated on both his returns for 1942 and 1943 as follows:
Taxpayer claims exemption from Federal Income Tax for the period June 30, 1942 to July 12, 1944, for the reason that during that period he was a resident of the British Isles and North Ireland within the meaning of the Revenue Code and of Sec. 116 thereof and as the term resident is defined in Regulations 111 Sec. 29.211-2.
Taxpayer embarked on June 30, 1942 on H.M.S. Maloja bound for British Isles and Ireland, where he remained a resident until his return to New York City on July 12, 1944.
When he applied to Lockheed for the above employment he intended to and promised them he would remain in their overseas service as long as their contract with the U.S. Army required for the duration of the war and as long thereafter as needed: He had no definite intentions as to his stay overseas other than as above stated; he did not know or plan when he might be able to return because of the uncertainty of the duration of the war.
Any of the stipulated facts not embodied in the foregoing facts are incorporated herein by reference.
OPINION.
BLACK, Judge:
This proceeding involves a deficiency in income tax for the year 1943 in the amount of $1,311.01. The deficiency includes an unforgiven tax liability for the taxable year 1942 in the amount of $172.60. That is why the year 1942 is involved.
Petitioner was paid $2,600 for his services overseas with Lockheed in 1942. If petitioner was absent from the United States more than six months in 1942, then the $2,600 is not taxable to him. Both parties agree on this. The applicable statute is section 116 of the Internal Revenue Code
as it existed before the 1942 Act amendment. The statute in question has been interpreted to mean that the taxpayer must actually be physically absent from the United States for more than six months in the taxable year before he is entitled to the granted exemption. See Commissioner v. Fiske's Estate, 128 Fed.(2d) 487; Commissioner v. Swent, 155 Fed.(2d) 513.
SEC. 116. EXCLUSIONS FROM GROSS INCOME.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:(a) EARNED INCOME FROM SOURCES WITHOUT UNITED STATES.— 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.
The decision of the question whether petitioner was absent from the United States for more than six months in 1942 depends upon the answer to a simple question of law, namely: Is an American citizen ‘outside the United States‘ when he is aboard a vessel belonging to a foreign Government tied to a pier in New York Harbor? Petitioner boarded a British vessel in New York Harbor on June 30, 1942, bound for the British Isles. After he boarded the British vessel he was kept there and was not allowed to communicate with anyone on the outside. This was on account of guarding against submarine danger. The vessel, however, did not sail until the morning of July 1, 1942. Petitioner seems to argue that he was ‘outside the United States‘ the moment he boarded the British vessel. If that were true, then of course petitioner was absent from the United States all of July, August, September, October, November, and December and part of a day in June. That would mean that he was absent from the United States for more than six months in 1942 and would be entitled to have the $2,600 excluded from his income in 1942.
Respondent argues, however, that, although petitioner boarded the British vessel in New York Harbor on June 30, 1942, he did not sail until the morning of July 1 and that as long as he was in New York Harbor he was still in the United States, even though aboard a British vessel. We see no escape from this conclusion.
Whatever may be the International Maritime Law with respect to jurisdiction over crimes committed aboard foreign vessels, we do not think such law would have any application to such a question as we have here. While it may be true that for certain purposes British sovereignty extended over the vessel H.M.S. Maloja while she was anchored in New York Harbor, nevertheless for purposes of section 116(a), supra, petitioner was not ‘outside the United States‘ as long as the ship remained at its pier in New York Harbor. Petitioner cites no case which would support his position on this issue and we do not know of any. We, therefore, hold on the facts that petitioner was not a bona fide nonresident of the United States for more than six months during the taxable year 1942 and the $2,600 in question should not be excluded from his income in 1942.
As to the $5,262.50 which petitioner received from Lockheed for overseas service in 1943, section 116 of the code, as amended by section 148(a) of the Revenue Act of 1942, governs. That section is printed in the margin.
This same section of the statute and the applicable Treasury regulations were fully discussed by us in the recent cases of Arthur J. H. Johnson, 7 T.C. 1040, and Michael Downs, 7 T.C. 1053, both promulgated October 24, 1946. The facts in the case of Michael Downs were very similar to those present in the instant case. It did not involve the year 1942, but it did involve the year 1943, under facts which we think are not distinguishable from those which are present here. Therefore, following Michael Downs, supra, we decide the issue as to 1943 in favor of the respondent.
SEC. 116. EXCLUSIONS FROM GROSS INCOME.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:(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 individuals 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.
Reviewed by the Court.
Decision will be entered for the respondent.