Henningsen v. Commissioner

Robert A. Henningsen, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. A. and Margaret Henningsen, Petitioners, v. Commissioner of Internal Revenue, Respondent Henningsen v. Commissioner Docket Nos. 52544, 52545 United States Tax Court 26 T.C. 528; 1956 U.S. Tax Ct. LEXIS 161; June 13, 1956, Filed *161 Decisions will be entered under Rule 50. 1. Held, petitioner, a citizen of the United States, who claims to have been a bona fide resident of China, became a resident of the United States sometime between November 1941 and February 1946, during all of which period he was in the United States. 2. Held, petitioner was not a bona fide resident of a foreign country or countries for the entire year 1946 or 1947, or for a period of at least 2 years before the date in 1947 on which he reestablished his residence in the United States. 3. Respondent's imposition of an addition to tax for failure to file a return in 1946, sustained. 4. Held, a $ 100,000 bonus paid petitioner by the Henningsen Produce Company did not become unqualifiedly subject to the demands of petitioner at any time prior to January 15, 1947, and is properly taxable in 1947; held, further, respondent, by amended pleadings timely filed, has made proper claim for an increased deficiency in 1947. Carl E. Davidson, Esq., for the petitioners. Wendell M. Basye, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *529 The respondent determined a deficiency in income tax of petitioner in Docket No. 52544, for the year 1946, in the amount of $ 73,677.25 and an addition to the tax for failure to file a return for such year. Respondent also determined a deficiency in income tax of petitioners in Docket No. 52545, for the year 1947, in the amount of $ 18,694.44. At the trial, respondent was granted leave to amend his answer to claim, in the alternative, an increased*163 deficiency for the year 1947 should it be determined herein that a certain bonus paid Robert A. Henningsen was received by him in the year 1947 instead of in the year 1946, as originally determined by respondent. The questions presented for our consideration and disposition are: (1) Whether Robert A. Henningsen was a bona fide resident of China during the years 1946 and 1947; and (2) if not for the entire year 1947, then whether he had been a bona fide resident of China "for a period of at least two years before the date on which he * * * [changed] his residence from such country to the United States," within the scope and intendment of section 116 (a) (2) of the Internal Revenue Code of 1939. A collateral issue is whether respondent properly imposed the addition to tax for 1946 for the failure of Robert A. Henningsen to file a return in that year or whether such failure was due to reasonable cause and not to willful neglect. FINDINGS OF FACT. These proceedings came on to be heard on a stipulation of facts. The facts as stipulated and as supplemented by additional facts adduced at the hearing are hereby found, as follows: The petitioner in Docket No. 52544 is Robert A. Henningsen, *164 at present a resident of Portland, Oregon. Henningsen, who will hereinafter be referred to as petitioner, is also a co-petitioner with his wife, Margaret, in Docket No. 52545. Petitioner filed no income tax return for the year 1946. Petitioner filed a joint return with Margaret for the year 1947 with the then collector of internal revenue for the district of Maryland, at Baltimore. During the years 1946 and 1947, and prior thereto, Henningsen Produce Company (hereinafter sometimes referred to as Produce Company) was a China Trade Act corporation, with its principal office and all of its operations at or in the vicinity of Shanghai, China. The income tax returns of the Produce Company for 1946 and 1947 were filed with the then collector of internal revenue for the district of Maryland, at Baltimore. *530 The Henningsen Produce Company was organized by petitioner's father and other members of petitioner's family sometime prior to the year 1929. In the year 1941, and for some time prior thereto, and until the year 1947, there were 15,000 shares of issued and outstanding stock of the Produce Company, which was owned 3,750 shares thereof by Victor Henningsen, an uncle of petitioner, *165 who was a resident of the United States, 317 shares thereof by the petitioner, 8,143 shares thereof by U. S. Harkson, the husband of petitioner's sister, 1,400 shares thereof by Anker B. Henningsen, a brother of the petitioner, and the remainder by other persons. Petitioner was born in Butte, Montana, on February 5, 1905, and moved to Portland, Oregon, in 1914. In October 1929, petitioner left the United States, with his wife and his then only child, who was 9 months old, for full-time employment by the Produce Company at Shanghai, China. It was then his intention to remain in China permanently. Petitioner remained in Shanghai in such full-time employmet until November 1941, except for customary and occasional leave on vacation trips to the United States. At all times from October 1929 until November 1941, petitioner was a bona fide resident of China, during which period he occupied a residence building in Shanghai with his wife and family. In about July 1940, Margaret and their three children were advised to leave China because of the war situation. Pursuant to such advice, they thereupon came to the United States, where they remained until January 1947. Petitioner came to*166 the United States in about August 1940. In the year 1941, and for sometime prior thereto, U. S. Harkson was the president of the Produce Company, Anker B. Henningsen (hereinafter called Anker) was vice president of the company and manager of its operations, and petitioner was secretary and treasurer of the corporation and assistant manager of its operations. It was agreed between these persons in about August 1940, that it would be advisable, in view of the threatened war situation in China, that only one of them should remain in Shanghai as manager of the operations, and that they should rotate terms of duty as manager, until the situation with respect to the threat of war was clarified. It was further agreed that petitioner should take the first tour of duty upon his return from the United States in the latter part of 1940. Pursuant to that agreement, Anker and Harkson remained in the United States while petitioner went to Shanghai and returned to the United States in November 1941, at which time Anker relieved petitioner as manager of the operations of the Produce Company. Anker was in Shanghai on December 7, 1941, was taken prisoner by the Japanese, and was interned for about*167 11 months. In the year 1936, petitioner purchased residence property in Portland, Oregon, at a cost of approximately $ 4,500, which residence *531 property was thereafter occupied by Margaret's parents. Upon the return of Margaret and the children in 1940, they occupied the residence property with her parents, until about September 1940, when such residence property was sold, and at which time other residence property located in Milwaukie, Oregon, a suburb of Portland, Oregon, was purchased. Petitioner and Margaret, their children, and their parents lived in such residence property until about April 1944. The Milwaukie property was sold in June 1944. In about April 1942, at the request of Harkson, petitioner went to Brazil to get a dried egg plant into operation for U. S. Harkson do Brazil, a corporation, in which the Produce Company owned a controlling stock interest. Petitioner had experience in the dried egg business during his employment by the Produce Company in Shanghai, China. Margaret and the Henningsen children remained in the Milwaukie residence property while petitioner was in Brazil. Petitioner returned from Brazil to Portland in November 1942. In February 1943, *168 petitioner entered the service of the Office of Strategic Services (hereinafter called O. S. S.) in the Far Eastern Section of that organization. Petitioner's post of duty, in connection with the O. S. S., was Washington, D. C., for about 10 months, after which his post was transferred to San Francisco. Petitioner left the O. S. S. in February 1944. During the time petitioner was connected with the O. S. S., Margaret and the Henningsen children, as well as her parents, occupied the Milwaukie, Oregon, residence property. In March 1944, petitioner, at the request of his uncle, went to Lamesa, Texas, to manage a dried egg factory. Margaret and the Henningsen children, except the oldest son who was then attending Shattuck Military School in Minnesota, joined petitioner. The Henningsen family occupied a rented residence at Lamesa, Texas, until about April 1945, at which time Margaret and the children, except the aforementioned oldest son, returned to Portland, and from April 1945 to July 1945 occupied, with Margaret's parents, a residence in Portland which was owned by the parents. Petitioner left Lamesa and went to Portland in June 1945, and for a few weeks occupied with Margaret*169 and their children such residence in Portland. In July 1945, petitioner purchased residence property in Portland, into which he, Margaret, and their children moved. This property was sold December 17, 1946. In August 1945, immediately following termination of hostilities, petitioner went to San Francisco, where the Produce Company maintained a temporary office, for the purpose of assisting in preparations for the company's return to Shanghai as soon as possible. Petitioner worked at this location until February 1946. After going to San Francisco, petitioner made constant efforts to obtain passage to China, *532 but was unable to do so until February 2, 1946, on which date he left Los Angeles for Shanghai. He arrived there in due course and took up his duties with the Produce Company. Margaret and the Henningsen children remained in the Portland residence, purchased by petitioner in July 1945, until August 1946, when petitioner purchased residence property at Gearhart, Oregon, then owned by his mother. Margaret and the children then moved to Gearhart, where they resided until January 1947, at which time she and three of their children (being all of the children except the*170 oldest boy who was in military school) left the United States for Shanghai, arriving there in due course. Petitioner rented an apartment in Shanghai and installed therein all of the furniture required. Margaret and the children stayed in Shanghai and resided in the apartment with petitioner until July 1947, when Margaret and the children left Shanghai. In or about August 1947, it was agreed among Harkson, petitioner, and Anker that Harkson would purchase the stock of the Produce Company owned by petitioner and Anker, and that petitioner and Anker should terminate their employment therewith. This agreement was carried into effect and the stock acquired by Harkson. Petitioner's profit upon the sale was $ 21,459.91, which profit was reported on the return of petitioner and Margaret for the year 1947. During the calendar years 1946 and 1947, petitioner received from the Produce Company as compensation for his services the total amount of $ 152,500, consisting of salary payments of $ 30,000 and bonus payments of $ 122,500. One of the bonus payments was in the amount of $ 100,000, which sum, at the instruction of Harkson, was transferred by telegraph to the National City Bank of New*171 York to be credited to petitioner's account in the U. S. National Bank of Portland and which amount was received by the latter bank on January 15, 1947. The Produce Company deducted its payment of such bonus on its 1946 income tax return. Shortly after sale of their stock in the Produce Company, petitioner and Anker acquired the franchise to bottle and distribute Coca-Cola in Hong Kong. They formed a corporation under the China Trade Act and entered upon the business of bottling and distributing Coca-Cola in Hong Kong, which business is still in existence and operation. The capital stock of the bottling corporation was originally purchased and is now owned 48 per cent by Anker and 12 per cent by petitioner. It was agreed between petitioner and Anker that the latter would manage the Coca-Cola business alone until such time as the business would justify both of their services, and that petitioner would return to the United States until such time arrived. Pursuant to this arrangement, Anker went from Shanghai to Hong Kong in the latter part of 1947, took over the general management of the Coca-Cola business *533 there, and has remained and managed such business ever since that*172 time. Petitioner left Shanghai in November 1947 and arrived in the United States on December 6, 1947. Thereafter, he and Margaret and their family resided in the residence at Gearhart, until the year 1954, in which year they moved to Portland, where they now reside. In 1950, petitioner, with others, established an outdoor moving picture theatre at Gearhart. Petitioner sold his interest in this business in August 1953. Thereafter, in the early part of 1954, petitioner established a restaurant business in Portland, which business he still operates. In addition, based on the foregoing findings, we make the following ultimate conclusions of fact: Petitioner ceased to be a bona fide resident of a foreign country or countries and became a resident of the United States sometime between November 1941 and February 1946, during which period he was in the United States. Petitioner was not a bona fide resident of a foreign country or countries for the entire year of 1946 or 1947. Petitioner was not a bona fide resident of a foreign country or countries for a period of at least 2 years before the date in 1947 on which he reestablished his residence in the United States. The $ 100,000 bonus *173 paid petitioner by the Produce Company did not become unqualifiedly subject to the demands of petitioner at any time prior to January 15, 1947. OPINION. The main question here is whether the income received by petitioner from sources without the United States during 1946 and 1947 is excluded from taxation pursuant to the provisions of section 116 (a) of the Internal Revenue Code of 1939. 1 *174 The parties have stipulated that petitioner, an American citizen, was a bona fide resident of China, within the meaning of the cited *534 statute, from October 1929 until November 1941. In November 1941, petitioner was relieved by Anker and returned to this country pursuant to the agreement he had with Harkson and Anker that they should rotate among them tours of duty in China. Shortly after petitioner's return, the United States declared war on Japan and petitioner did not go to China again until February 1946, from which he returned to the United States, arriving on December 6, 1947. Although apparently conceding the bona fides of petitioner's residence in China during part of each of the taxable years, it is respondent's position that such residence was acquired by petitioner in February 1946; that petitioner's residence was changed back to the United States no later than December 6, 1947; and that, therefore, petitioner fails to come within the express provisions of the pertinent statute for either of the years in dispute. Such position is grounded upon respondent's view that petitioner abandoned his China residence upon his return to the United States in 1941 or at sometime*175 thereafter prior to his going back to China in 1946. Petitioner maintains that having acquired a bona fide residence in China in 1929, he continued to be a bona fide resident of such foreign country at all times until at least the date in 1947, at which time he came back to the United States. He contends that in the years 1941 to 1946, he consistently entertained the intention of returning to China, being prevented from doing so and held in this country against his will because of the war then existing. Alternatively, petitioner asserts that even if his bona fide China residence be considered as not having continued during the period of his enforced absence, he nevertheless was a bona fide resident of China during the year 1947. We are here dealing with the question of residence, not with the question of domicile. Although residence and domicile each contain certain attributes of the other, they nevertheless are words of art and have distinct and different meanings in the law. This distinction has been pointed up in numerous cases. See, e. g., Walter J. Baer, 6 T. C. 1195; Robert W. Seeley, 14 T. C. 175, reversed in*176 part and affirmed in part 186 F. 2d 541; Leigh White, 22 T. C. 585; Commissioner v. Nubar, 185 F. 2d 584, reversing 13 T. C. 566; Neuberger v. United States, 13 F. 2d 541. See also 1 Beale, Conflict of Laws sec. 10.3, p. 109. In the Neuberger case, supra, Judge Learned Hand pointed out that while a long voluntary period of absence may be conclusive in determining the abandonment of a residence once acquired, absence through constraint has no effect on it. Here, however, we are dealing with a specific statute and the meaning of the term "resident" as used therein. The legislative history of the statute with which we are thus concerned and the intent of Congress underlying its enactment have been traced and set forth on many occasions (see, e. g., Leigh White, supra;C. Francis Weeks, 16 T. C. 248; Arthur J. H. *535 , 7 T. C. 1040) and need not be repeated here. Suffice it to say that the criteria to be used in determining*177 whether an alien has acquired residence in the United States are equally applicable in ascertaining the same with respect to a citizen thereof who has been a bona fide resident of a foreign country or countries. Robert W. Seeley, supra;Commissioner v. Nubar, supra.Such criteria are set forth in Regulations 111, section 29.211-2, 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, *178 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. * * * Applying the foregoing criteria to the facts of this case, we are constrained to hold that petitioner abandoned his China residence when he came back to the United States in 1941 or shortly thereafter. Petitioner's return to this country was made pursuant to his agreement with Harkson and Anker. His obvious intent at that time was to remain in the United States and, temporarily at least, make it his residence until it again became time for him to serve another tour of duty in China -- apparently some 2 years thereafter. Furthermore, it appears to be a fair inference that even this definite intent to return to China, after such necessarily extended stay in the United States, was abandoned after the outbreak of the war between Japan and the United States and replaced by a "mere floating intention, indefinite as to time," to return to China if and when such war was brought to a successful conclusion by the United States and her allies. Thus, albeit petitioner's return to China was rendered impossible by the*179 circumstances of war, nevertheless, as was aptly observed in Robert W. Seeley, supra, at p. 182, "did he not then, from the time it was determined that conditions would not permit his return, fully intend to be a resident of the United States until those conditions were removed?" See also Marsman v. Commissioner, 205 F. 2d 335, modifying 18 T. C. 1. In our opinion, the facts here, as above outlined, admit of no answer to the quoted question other than in the affirmative. Nor do we agree with petitioner's alternative contention that he was a resident of a foreign country or countries for at least the entire year 1947. Petitioner's argument is that although he left China and returned to the United States prior to the close of 1947, he definitely *536 intended to return abroad to the British crown colony of Hong Kong as soon as his Coca-Cola business there required his services, which intention he did not abandon until 1950. Albeit petitioner was a bona fide resident of China for a portion of 1947, the record does not disclose that he ever established a residence in Hong Kong. In fact, *180 it appears that after his departure from China in 1947, he never was physically present in Hong Kong. He cites no authority and we know of none for the proposition that one may become a bona fide resident of a sovereignty different from that in which he has established such residence by a mere floating intention to do so in the indeterminate future. Moreover, what we have said above with regard to the question of the petitioner's continued residence in China during the war years is of equal application here insofar as the requirements of section 116 (a) (2) are concerned. In view of the foregoing, therefore, it is our conclusion that the income earned by petitioner in 1946 and 1947 from sources without the United States is not to be excluded from taxation under either section 116 (a) (1) or (2), and respondent's determination is sustained. Next is the question whether respondent is correct in his imposition of the addition to tax provided in section 291 (a) of the 1939 Code, for petitioner's failure to file a return in 1946. That petitioner properly entertained a sincere and honest belief that he was not required to file such return is patent. But, there is no showing that advice*181 of counsel was in fact sought or relied upon. Mere uninformed and unsupported belief by a taxpayer, no matter how sincere that belief may be, that he is not required to file a tax return, is insufficient to constitute reasonable cause for his failure so to file. Rafael Sabatini, 32 B. T. A. 705, affd. 98 F. 2d 753. Wherefore, we have no recourse but to sustain respondent's action in the premises. By amended petition, petitioner raises the additional question as to the year in which he is properly taxable on the $ 100,000 bonus paid him by the Produce Company. In this respect, we are of the opinion that on the facts found herein, the bonus in question was not unqualifiedly made subject to the demands of the petitioner at any time prior to January 15, 1947, albeit payment thereof was deducted by the Produce Company on its 1946 income tax return. Cf. Avery v. Commissioner, 292 U.S. 210; Maurice Fox, 20 T. C. 1094. By proper amendment of his pleadings, respondent has made timely claim for the increased deficiency in 1947 consequent on such holding. Pierce Oil Corporation, 30 B. T. A. 469;*182 Commissioner v. Ray, 88 F. 2d 891, certiorari denied 301 U.S. 711; see also sec. 272 (e), I. R. C. 1939, and Rule 17 of this Court's Rules of Practice. Decisions will be entered under Rule 50. Footnotes 1. 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 * * * if such amounts constitute earned income * * * (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 * * *, which are attributable to that part of such period of foreign residence before such date, if such amounts constitute earned income * * *↩