Downs v. Commissioner

Michael Downs, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eleanor J. Downs, Petitioner, v. Commissioner of Internal Revenue, Respondent Downs v. Commissioner Docket Nos. 9643, 9644 United States Tax Court 7 T.C. 1053; 1946 U.S. Tax Ct. LEXIS 48; October 24, 1946, Promulgated *48 Decisions will be entered for the respondent. 1. Petitioner Michael Downs, a citizen of the United States, went to the British Isles in 1942 as an employee of Lockheed Overseas Corporation, to do mechanical work important and essential to the war effort. He landed in the British Isles in July 1942 and remained there until July 1944, when he returned to the United States. After disembarking in July 1942, petitioner was first assigned to an R. A. F. base near Liverpool, England, in the capacity of a field and service mechanic. Later he was transferred to Ireland for a short time, after which he was moved from time to time to different air bases in England and Ireland. Held, on the facts, that petitioner was not during 1943 a "bona fide resident of a foreign country or countries" within the meaning of section 116 of the Internal Revenue Code as amended by section 148 (a) of the Revenue Act of 1942, and the salary which he received from Lockheed is not exempt from taxation. Arthur J. H. Johnson, 7 T. C. 1040, followed. 2. The Commissioner has determined that the salary received in 1943 by Michael Downs from Lockheed was, under the laws of California, *49 community property of Michael Downs and his wife, petitioner Eleanor J. Downs, and has determined a deficiency against Eleanor. Because she did not file an income tax return for the year 1943, the Commissioner has added a 25 per cent delinquency penalty against her for failure to file a return. In her petition Eleanor did not assign as error the action of the Commissioner in imposing the penalty and no evidence was offered that failure to file a return for her for 1943 was due to reasonable cause and not willful neglect. Held, the Commissioner is sustained in imposing the penalty under section 3612 (d) (1), Internal Revenue Code. Robert A. Waring, Esq., for the petitioners. A. J. Hurley, Esq., for the respondent. Black, Judge. Leech, J., dissents. BLACK *1053 The Commissioner has determined a deficiency of $ 225.79 for the year 1943 in income tax against Michael Downs, petitioner in Docket No. 9643, and he has determined against Eleanor J. Downs, wife of Michael and petitioner in Docket No. 9644, a deficiency for the same year of $ 219.52, plus delinquency penalty of 25 per cent, amounting to $ 54.88. In the deficiency notice addressed to petitioner Michael Downs it was stated: Taxpayer has not established that he was "a bona fide resident of a foreign country or countries" within the meaning of Section 116 of the Internal Revenue Code. The amounts shown*51 below are therefore restored to income, as community income, and the tax for 1943 determined as indicated. *1054 A statement to the same effect was made in the deficiency notice addressed to Eleanor J. Downs. Both petitioners, by appropriate assignments of error, contest the correctness of the Commissioner's foregoing determination. The proceedings have been consolidated. Some of the facts have been stipulated. FINDINGS OF FACT. The stipulated facts are hereby found accordingly. Petitioners Michael Downs and Eleanor J. Downs are husband and wife and citizens of the United States, residing in Los Angeles, California. Petitioner Michael Downs timely filed an income tax return for the taxable year 1943 with the collector of internal revenue for the district of Maryland. Petitioner Eleanor J. Downs filed no return for the taxable year 1943. When the word "petitioner" is used hereinafter it will generally refer to Michael Downs. 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*52 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 wholly owned subsidiary, 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, counting those who came over and returned before the completion of the job, were employed by Lockheed at the aircraft depot in Northern Ireland. From January 1 to June 30, 1942, petitioner was employed as an aircraft mechanic in the United States by Lockheed Aircraft Corporation at Burbank, California. On or about April 23, 1942, petitioner made out and signed a formal application for overseas employment with Lockheed and in connection with such application signed a contract shortly thereafter with the corporation in which he agreed to perform services for the company 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*53 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 *1055 than two years, if necessary. The contract which petitioner signed 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. 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*54 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*55 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 left the United States for the British Isles on June 30, 1942, and landed several weeks later in Glasgow, Scotland. 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 *1056 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 *56 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 an R. A. F. base near Liverpool, England, in the capacity of a field and service mechanic. Later he was transferred to Ireland for a short time, after which he was moved from time to time to different air bases in England and Ireland, where he performed essential services for the British Air Force, the American Air Force, and the Polish Air Force, always as an employee of Lockheed. 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. This new contract provided, inter alia, as follows: Article 1. Time and Duration of Employment Contractor employes 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*57 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, stationed in the British Isles and Northern Ireland until July 12, 1944, when he returned to the United States and to the address where he now resides in Los Angeles, California. During the period of petitioner's absence from the United States, his wife Eleanor remained in the United*58 States with petitioner's three minor children and lived at the family residence in Los Angeles. Petitioner received as compensation for personal services rendered to Lockheed in the British Isles and Northern Ireland during the year 1943 the sum of $ 5,438.50, of which 90 per cent was deposited by the corporation to the account of the petitioner with the California Bank in Los Angeles pursuant to article 2 of his employment contract. *1057 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 intended to return to this country as soon as the war in Europe was over. He did not pay any income taxes to the Government of Northern Ireland or the United Kingdom of Great Britain for the year 1943. On October 9, 1944, petitioner Michael Downs filed an income tax return for the year 1943 with the collector of internal revenue at Baltimore, Maryland, in which return he excluded from his gross income the aforesaid sum of $ 5,438.50 on the ground that during the entire year of 1943 he was a bona fide resident of a foreign country within the meaning of section*59 116 of the Internal Revenue Code. Any of the stipulated facts not embodied in the foregoing findings are incorporated herein by reference. OPINION. There is but one issue in these consolidated proceedings and that is whether the $ 5,438.50 which the petitioner earned in 1943 while an employee of Lockheed Overseas Corporation is exempt from taxation under the provisions of section 116 of the Internal Revenue Code, 1 printed in the margin. *60 There is no dispute as to the underlying facts in the instant case. The only dispute is as to the ultimate fact. Petitioner contends that on the facts which have been stipulated, and those proved at the hearing, we should find that during the entire year 1943 he was a "bona fide resident of a foreign country or countries" within the meaning of section 116 of the code. Respondent asks us to find on these same facts that petitioner was not a "bona fide resident of a foreign country or countries" during the period in question. In the consideration of the issue we have here to decide, certain things are clear. When petitioner went overseas in 1942 he had no intention of changing his domicile. At all times material hereto petitioner's domicile was in the United States. He concedes that. We agree with petitioner that the fact that at no time material hereto did he have any intention of changing his domicile is not decisive *1058 of the question we have here to decide. It is also clear that petitioner was physically absent from the United States during the entire taxable year 1943, and during this time he was engaged in important and essential work in the war effort as an employee*61 of Lockheed at the aircraft depot established in Northern Ireland and elsewhere in the British Isles. Both parties seem to agree in their briefs that there are many and varied definitions of the word "residence" to be found in adjudicated cases in the law books not having to do with income taxes, and that these definitions are of little help in deciding the issue which we have here. They are in agreement that, inasmuch as section 116 of the code does not define the meaning of "bona fide resident of a foreign country or countries," the Treasury regulations must be looked to to find the correct interpretation of the words thus used in the statute. Both parties seem to agree that the applicable regulations are those printed in the margin. 2 The legislative history of section 116 of the code (printed in footnote 1) has been fully discussed in Arthur J. H. Johnson, 7 T. C. 1040, this day decided. Also, sections 29.116-1 and 29.211-2 of Treasury Regulations 111 were analyzed and discussed in that case. We shall not repeat that legislative history and discussion here. In the Johnson case we held on the facts present therein that the taxpayer was *62 not during 1943 a bona fide resident of a "foreign country or countries" within the meaning of section *1059 116 of the code. On authority of that case, we think we must make the same holding here. It is true, of course, that there are some differences in the facts of the Johnson case from those of the instant case, but we do not think those differences are sufficient to make the cases distinguishable as to the result reached. *63 Petitioner, in arguing that during 1943 he was a "bona fide" resident of a foreign country or countries within the meaning of section 116, says in his brief: These two Latin words "bona fide" mean acting in "good faith." These words were wisely designed to prevent persons not acting in good faith from travelling out of the country just to avoid taxes thereby -- taking a trip perhaps at the expense of the Government. The purpose was to prevent persons acting in bad faith from tax avoidance by false claims. The good faith of Michael Downs surely cannot be seriously questioned by the Commissioner. * * * We agree that the good faith of petitioner in going overseas as an employee of Lockheed and rendering important and essential services to the war effort can not be questioned. We do not understand that it is being questioned by the Commissioner. The Commissioner states in his brief that his attitude in this sort of cases is correctly stated in I. T. 3642, 1944 C. B. 262. In I. T. 3642 advice was requested whether A, a citizen of the United States who went to Canada on January 1, 1943, where he was employed on a war project during the entire year 1943, intending*64 to remain until May 1944, was entitled under section 116 (a) (1) of the Code as amended by section 148 (a) of the Revenue Act of 1942, to exclude from gross income for Federal income tax purposes for the taxable year 1943 the compensation received by him for personal services rendered in Canada during that year. The answer to the advice requested was stated in I. T. 3642 as follows: In determining whether a citizen of the United States is a bona fide resident of a foreign country or countries within the meaning of section 116 (a) (1) of the Code, * * * the tests generally applicable will be those used in ascertaining whether an alien is a resident of the United States. * * * Mere physical presence in a foreign country or countries during the entire taxable year is not of itself sufficient to constitute a citizen of the United States a bona fide resident of such country or countries for the purpose of section 116 (a) (1) of the Code. The burden of proof is on the taxpayer to establish to the satisfaction of the Commissioner that he was a "bona fide resident" of a foreign country or countries throughout the entire taxable year. A citizen of the United States who is employed in a *65 foreign country on a war construction project and living in more or less temporary quarters which he will in all probability abandon upon the termination of such employment in the foreign country, must be classified as a transient (with respect to such foreign country), and not as a bona fide resident of a foreign country within the meaning of section 116 (a) (1) of the Internal Revenue Code, as amended, supra. While the administrative interpretations in the form of "I. T's" do not, of course, have the same force and effect as departmental regulations *1060 and rulings, it is believed that in a case such as we have here, where Congress has in express language vested in the Commissioner discretionary powers to determine certain questions of fact in the administration of the statute, the Commissioner's administrative interpretations in effect at the time the deficiency was determined should be accorded some consideration, particularly where they reveal a uniform and consistent practice. Of course, if the office construction given in I.T. 3642, supra, was wrong, it should be given no weight, but we are not convinced that it was wrong. While, as we have already said, petitioner*66 for the entire year of 1943 was overseas and was rendering valuable and essential services to the war effort as an employee of Lockheed, nevertheless, we do not think it can be said, under the facts, that he was a "bona fide resident of a foreign country or countries" during such period under section 116. Following our decision in Arthur J. H. Johnson, supra, we decide this issue in favor of respondent. The deficiency determined against Michael Downs did not impose any delinquency penalty because it was stated in the deficiency notice that "Taxpayer filed a nontaxable return for 1943 claiming exemption under Section 116 of the Internal Revenue Code." In the determination of the deficiency against Eleanor J. Downs, the Commissioner added a delinquency penalty of 25 per cent, stating as a reason therefor: "Mrs. Downs did not file a return in the belief that her share of the community income was nontaxable income and that she had no filing requirement." The petition filed by her in Docket No. 9644 did not assign any error as to the imposition of this delinquency penalty. It simply alleged that in his determination of the deficiency the Commissioner "erroneously*67 included the sum of $ 5438.50 earned outside the United States by tax-payer's husband, while a bona fide resident of North Ireland." Of course, if that allegation of error had been sustained there would have been no deficiency and therefore no penalty. Neither party in his brief discusses the delinquency penalty imposed in the case of Eleanor. Where a delinquency penalty has been imposed, the burden of proof is on the taxpayer to show that his failure to file a return was due to reasonable cause and not to willful neglect. No such showing has been made in the instant case. Therefore the delinquency penalty determined against petitioner Eleanor J. Downs must stand. See section 3612 (d)(1), I. R. C.; see also Economy Savings & Loan Co., 5 T. C. 543. Decisions will be entered for the respondent. 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 (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.↩ 2. Sec. 29.116-1 [Regulations 111]. 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 years; (b) such income is from sources without the United States; (c) the income constitutes earned income as defined in section 25 (a) if received from sources within the United States; and (d) such income does not represent amounts paid by the United States or any agency or instrumentality thereof. * * * 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. * * * * Sec. 29.211-2. Definition. -- * * * * 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.↩