Swent v. Commissioner

J. W. Swent and Ursula L. Swent, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Swent v. Commissioner Docket No. 4381 United States Tax Court 5 T.C. 33; 1945 U.S. Tax Ct. LEXIS 167; May 14, 1945, Promulgated *167 Decision will be entered under Rule 50. An American citizen who had resided in Mexico for many years, had carried on his business there, and had otherwise qualified as a nonresident of the United States, is not deprived of the exclusion from income granted by section 116 (a) of the Revenue Act of 1938 by reason of having been absent from Mexico for more than 183 days during the taxable year. Estate of W. M. L. Fiske, 44 B. T. A. 227, followed notwithstanding reversal in 128 Fed. (2d) 487. Nathan Moran, Esq., for the petitioners. B. H. Neblett, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *34 The respondent determined a deficiency of $ 147.48 in the income tax of each petitioner for the year 1940. Each petitioner also asserts an overpayment of $ 2,544.94 for that year. The sole issue is whether or not the petitioner, James W. Swent, is entitled to exclude from his gross income amounts received from sources without the United States, as provided in section 116 (a) of the Revenue Act of 1938. FINDINGS OF FACT. The petitioners are husband and wife, native citizens of the United States, and were born in the State of California. James W. Swent will generally be referred to as the petitioner. They filed their separate income tax returns for the taxable year, on the community property basis, with the collector of internal revenue at Baltimore, Maryland. Their address as stated in their returns was Tayoltita, Durango, Mexico. Prior to 1935 the petitioners filed their returns*169 with the Sorting Section, Washington, D. C., and therein designated the same address. The petitioner, James W. Swent, first went to Mexico in September 1915 and was employed as an engineer by the Mexico Candelaria Co. At that time he was engaged to be married to the petitioner, Ursula L. Swent, who came to Mazatlan, Sinaloa, Mexico, where the petitioners were married. They then went to San Dimas, Durango, Mexico, where they "set up housekeeping." They lived there for about three years, when the petitioner, in March 1918, was employed as a geologist by the San Luis Mining Co., a company engaged in mining gold and silver, and moved to Tayoltita. He became assistant manager of the company and about 1920 he became the manager, a position which he has held ever since. He and his family have resided in Tayoltita since 1918. Tayoltita is a primitive mining town with about 1,500 inhabitants. It has no hotels or residences suitable or available for rent. The petitioners and their family lived in an adobe house belonging to the company. It is a part of the petitioners' duties to entertain in their own home any company officials or other business guests. The petitioner owned the household*170 furniture and paid the servants of the household. The petitioners have two sons, age 27 and 22. Both were born in Oakland, California. Mrs. Swent taught them in Mexico through the grammar school grades. They then were sent to the United States for preparatory school and college training. The older son is now in the United States Navy. Tayoltita is just inside the Tropic of Cancer. Its climate is very hot for seven or eight months of the year. Both petitioners have suffered *35 from its climatic conditions. The petitioner had low blood pressure and his wife was anemic. Practically all of their visits to the United States in recent years have been on account of their health. The Mexican Government requires the registration of its residents as a prerequisite to their entering a gainful occupation. In so registering, the petitioner declared himself to be a resident of Tayoltita, Durango. The petitioner's passports to the United States also stated that his place of residence was that village. He gave his address in the United States as 485 California Street, San Francisco, a business office. The petitioner had an assistant manager and a staff of from 12 to 15 American and*171 from 20 to 25 Mexican technical assistants. During the petitioner's absence from Mexico, the mine was operated and managed by the assistant manager and the staff. In emergent matters arising occasionally, the petitioner received telegrams from his assistants relating to questions of policy, amounts of purchases, etc. With the exception of making decisions in such cases, the petitioner did nothing toward operating the San Luis Co. Mines in Mexico. In 1940 the petitioner received an annual salary of $ 25,000 from the San Luis Co. Approximately one-half of this amount was regularly placed to the petitioner's credit on the company's books in Mexico and the other half was deposited to his credit in a San Francisco bank. He drew from his account in Mexico as he needed funds. During 1940 the petitioner's salary from the San Luis Co. was continued undiminished for any deduction for time spent out of Mexico. During 1940 the petitioners each spent a total of 241 days, comprising four visits, in the United States. Mrs. Swent always accompanied her husband on his trips to this country. In each of the years 1939, 1942, and 1943 the petitioners were in the United States over 6 months. *172 While in San Francisco the petitioner rented a furnished apartment, on a month-to-month basis, in an apartment house at 2222 Hyde Street. On his various trips he did not occupy the same apartment. The apartment was also used as headquarters for the petitioners' sons while attending school in California. In 1940 the petitioner served as a consultant in litigation involving apex rights on a mine in Idaho. Intermittently he devoted several months during the period of a year and a half to such work, for which he received a fee of $ 10,000 in that year. He also was employed for about six months in 1940 as an expert in a depletion case in New Mexico. He received $ 4,000 for such services. He included both sums in his income tax return for 1940. The San Luis Co. had no connection with either employment. The domicile of origin and the last domicile of each of petitioners prior to their going to Mexico was the State of California, and the *36 community property law of the State of Durango, Republic of Mexico, in which the petitioners have resided, is substantially the same as the community property law of the State of California. The Civil Code of California, section 156, provides*173 that the husband is the head of the family. He may choose any reasonable place or mode of living, and the wife must conform thereto. The Civil Code of the State of Durango, Mexico, article 188, provides that the wife is obligated to follow her husband if he so requires, wherever he establishes his residence, except when it is agreed to the contrary in a marriage contract. Even though it be not so agreed the courts for good cause may exempt the wife from this obligation when the husband transfers his residence to a foreign country. The petitioner is still manager of the San Luis Co. and expects to continue his activities as such. He intends to retain his residence in Tayoltita. The company is expanding and contemplates enlarging its mill. The petitioner is also president of a manganese company which has just completed a mill in Lower California. He is a director of the International Bank in Mexico City. During the year 1940 the petitioners were bona fide nonresidents of the United States. The $ 25,000 salary received by the petitioner from the San Luis Co. in 1940 was earned income from a source without the United States and would have constituted earned income as defined in*174 section 25 (a) of the Internal Revenue Code if it had been received from a source within the United States. OPINION. The respondent bases his objection to the exclusion from the petitioner's gross income of the $ 25,000 salary received from the San Luis Co., as provided by section 116 (a) of the Revenue Act of 1938, 1 on the narrow ground that the petitioner was physically within the United States for a period of more than six months during the taxable year, "regardless of the fact that he previously resided in Mexico and intended to return there." He relies wholly on Commissioner v. Fiske's Estate, 128 Fed. (2d) 487; certiorari denied, 317 U.S. 635, reversing 44 B. T. A. 227. A careful *37 examination of the decision in that case leads us to the conclusion that the Circuit Court of Appeals for the Seventh Circuit reversed the Board chiefly on the ground that the taxpayer failed to prove that his income was for personal services performed without the United States during the taxable period. Although the majority opinion comments on the amount of time spent within the United States and observes: *175 * * * we believe that Congress was not concerned with the question where a taxpayer had his permanent residence, but rather intended the act to apply to any American citizen actually outside of the United States for more than six months during the taxable year, engaged in the promotion of American foreign trade. * * * We find ourselves in accord with the minority opinion of Judge Major who, in supporting the view of the Board, states that the reasons given by the Board for its decision are "of such a convincing character as to justify their inclusion" in his opinion. *176 In Estate of W. M. L. Fiske, 44 B. T. A. 227, the Board said: * * * The use of the words "bona fide nonresident" instead of a straightforward statement that mere physical presence in or absence from the United States would be determinative, is indication enough that Congress did not mean the exemption to depend upon mere physical presence in or absence from the United States during six months of the year. The Bureau rulings are neither clear nor controlling on the question of what was meant by "bona fide nonresident." The exemption has been held applicable in the rulings, provided that the citizen was merely absent from the United States for more than six months during a taxable year, but it is quite another thing to say that it does not apply unless the person has been absent from the United States for more than six months during a taxable year. Physical absence from the United States for the prescribed time would be a prerequisite in the case of a person who had no actual residence outside of the United States. However, a citizen who had an actual bona fide residence outside of the United States and no residence within the United States, has been*177 held entitled to the exemption even though he was not physically absent from the United States for more than six months during the taxable year. (Carstairs v.United States (Dist. Ct., E. Dist. Pa., 1936, not officially reported.)) While decisions relating to the words "residence" and "nonresidence," as used in other statutes are not particularly helpful, they do indicate that the test of mere physical presence or absence is not determinative. Cf. Hall v. Godchaux, 149 La. 733; 90 So. 145. In re Conis, 35 Fed. (2d) 960; United States v. Dick, 291 Fed. 420; United States v. Rockteschell, 208 Fed. 530; United States v. Jorgenson, 241 Fed. 412. The above cases, as well as many others, are authority for the proposition that a person may be an actual bona fide resident of a place and yet be absent from that place for one reason or another. * * * * Thus, it seems proper to conclude that the question of whether the decedent was a nonresident depends not merely upon the period of time*178 he spent in the United States, but depends also upon the purpose of his visit, his intentions, and surrounding facts and circumstances. Carstairs v. United States, supra. Also cf. District of Columbia v. Murphy, 314 U.S. 441. *38 The legislative history of section 116 (a) as set forth in the Board's opinion is a factor in the decision there reached, but we do have further light on the intent and understanding of Congress as to that section in Senate Finance Committee Report No. 1631, 77th Cong., 2d sess., relating to the repeal of the section as proposed by the House bill. The report stated: In lieu of the repeal of this section, your committee recommends that subsection (a) be amended so as to change the test there provided to one of residence in a foreign country or countries during the entire taxable year. In the application of such provisions, the tests as to whether a taxpayer is a resident of a foreign country or countries will be those generally applicable in ascertaining whether an alien is a resident of the United States. Vacation or business trips to the United States during the taxable year will not necessarily deprive*179 a taxpayer, otherwise qualified, of the exemption provided by this section. Hence, Congress intended that the same standards governing the determination of the residence of aliens should apply to nonresidents as prescribed in section 116 (a). Obviously following this indication of legislative intent, the Commissioner, in section 29.116-1 of Regulations 111, provided as follows: * * * 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 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*180 29.211-2 of Regulations 111, stating in general terms the requirements for establishing the residence of an alien, provides 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 *181 not a resident of the United States within the meaning of this section, in the absence of exceptional circumstances. *39 The words of definition and description above set forth are precisely applicable to the facts in the case at bar. We need not repeat them. They all point conclusively to the facts that the petitioner, many years ago, had established his bona fide residence in Mexico; that he maintained it there, up to and including the taxable year, and that he intends to continue it as long as his business requires. As stated in the Senate Finance Committee Report, "vacations or business trips to the United States during the taxable year will not necessarily deprive a taxpayer, otherwise qualified, of the exemption." The adventitious circumstance of ill health consequent upon continued residence in the tropics is no less a reason for modifying the rule requiring an entire year's nonresidence than vacations or business trips. By invoking the arithmetical percentage which the respondent seeks, a single day's absence from the place of the taxpayer's "nonresidence" would defeat the exclusion under the later act. This result, of course, would be absurd. What we have said concerning*182 the petitioner applies equally well to his wife. Incidentally, we suggest this interesting question: Assuming that the petitioner had been physically present in Mexico for more than 183 days of the taxable year and that his wife's ill health had required her to undergo treatment or hospitalization in the United States for more than 183 days thereof, would the respondent's theory deprive her of the exclusion granted by the statute? It would seem to do so. The manifest unreasonableness of such a result is collaterally persuasive that our conclusion is sound -- it certainly is just. We adhere to our position set forth in Estate of W. M. L. Fiske, supra, and hold that the petitioners are entitled to the exclusion provided in section 116 (a) of the Revenue Act of 1938. Decision 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 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.