Balestreri v. Commissioner

JOHN BALESTRERI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Balestreri v. Commissioner Docket No. 104025. United States Board of Tax Appeals 47 B.T.A. 241; 1942 BTA LEXIS 716; June 30, 1942, Promulgated *716 Petitioner was employed as a crew member of an American ship registered in San Diego, California. During the taxable year all fishing was done outside the territorial waters of the United States, but at all times the ship sailed from and returned to San Diego, and all fish were sold there. His earnings were a part of the net proceeds of sales in San Diego of all fish caught. None of petitioner's earnings were from business conducted in a foreign country. Petitioner did not reside in any foreign country. His residence was in San Diego, from which he was absent, temporarily, when he went on fishing trips. Held, that petitioner's earned income was not exempt from income tax under section 116(a) of the Revenue Act of 1936. Raymond M. Wansley, C.P.A., for the petitioner. Frank T. Horner, Esq., for the respondent. HARRON *241 The Commissioner determined a deficiency in income tax for the year 1937 in the amount of $131.76, and added a penalty of $32.94 under section 291 of the Revenue Act of 1936. The only issue is whether petitioner was a bona fide nonresident of the United States for more than six month during the taxable year, and whether*717 his earnings were received from sources without the United States, so that his earnings were exempt from taxation under the exclusion provided in section 116(a). Petitioner filed a delinquent return for 1937 with the collector for the sixth district of California. FINDINGS OF FACT. The petitioner is a native-born citizen of the United States. During 1937 he was a tuna fisherman. He was an employee of the owner of the fishing boat Europa. During 1937 he was a full crew member. He was discharged by his employer at the end of 1937. The petitioner's earnings during 1937 from his employment as a full crew member on the Europa amounted to $4,669.09. He had no other income during the taxable year. During the taxable year the petitioner was not married. His residence was in San Diego, where he lived with his mother when he was no away on fishing trips. Petitioner kept all of his personal belongings in his mother's home, taking with him on trips only his fishing clothes. He received his mail and telegrams at his mother's home. The fishing boat Europa was registered under the laws of the United States with the collector of customs at the port of San Diego, California. The*718 owner of the Europa lived in San Diego, and that place was the home port of the Europa. All of the fishing trips started out *242 from San Diego. The boat's run was from San Diego to fishing waters toward the south and out from Mexico and Central America. The kind of fishing done was pole fishing for a type of tuna which is caught in the southern waters. This type does not come up into the waters off the coast of California in sufficiently large numbers to make fishing profitable there. On each trip of the Europa, all of the catch was brought back to San Diego and unloaded at the docks of canneries to which the fish were sold, or the fish were unloaded on some other docks in San Diego and sold to the San Diego fish canneries. The Europa had a load capacity of 200 tons and each trip was for as long as filling the boat with fish to load capacity required, within the limitation of keeping fish from spoiling. During 1937 the elapsed time of trips from the date of sailing from San Diego to the date of returning with the catch to San Diego ranged from about 52 days per trip to about 16 days. When the Europa returned to San Diego, it stayed in port from 4 to 23 days to clean*719 up the boat for the next trip, which ordinarily took only 3 or 4 days, and to await orders to go out again, which depended upon the reports of fishing conditions in the southern waters. The periods of time during the fishing season for the year 1937 during which the Europa stayed in port in San Diego and away from San Diego on fishing trips were as follows: Dates of sailings Dates of return Days Days from San Diego to San Diego away in port Dec. 11 (1936) Feb. 1 [23] Feb. 24 Mar. 27 [11] Apr. 7 May 12 [6] May 18 June 26 [13] July 9 Aug. 1 [5] Aug. 6 Aug. 22 [4] Aug. 26 Sept. 21 [4] Sept. 25 Oct. 25 [68] Total [134] On October 25, 1937, the Europa returned to San Diego and, thereafter, did not go on any more fishing trips during the year 1937. Petitioner remained in the United States during the period from October 25, 1937, to the end of the year, a total of 68 days. (See above table.) Petitioner's earnings during the taxable year were a share of the net proceeds received from the sales of fish in San Diego. He was paid at the end of each trip out of the proceeds received from the sales in San Diego. *720 At all times during the fishing season for the year 1937 the Europa went out beyond the the territorial waters of the United States, and none of the fishing was done within the United States territorial waters. The fishing was done usually about three miles out from some port along the coast of Mexico or any one of the Central American *243 countries. The Europa always went to a port in Mexico or in Central America under papers obtained from the consul in San Diego of the country in whose port the Europa would dock. Then in the port of the foreign country, the Europa would get a fishing permit to fish in the waters of that country, if necessary. Also, it was necessary to get food supplies and bait in the port of some foreign country at the start of each fishing trip, and frequently daily during the trip. In other words, the Europa sailed from San Diego to some part on the coast of Mexico or Central America, and then it carried on the fishing operations out from such port. When the fishing trip was completed, the Europa returned to San Diego. When the Europa was docked in San Diego, the petitioner was not required to and did not stay on the boat, but he went home. *721 The boat had to be unloaded, and it was petitioner's practice to hire a man to do his work in the unloading of the boat. While the Europa was in San Diego, in between trips, petitioner worked several hours a day on the boat getting the boat ready for the next trip. On or about March 1, 1938, petitioner was advised by a tax consultant that his earnings from the fishing trips were exempt from Federal income tax, but that he should file an income tax return showing his earnings and the facts and reporting no tax. Petitioner went on fishing trips thereafter and did not file a return for 1937. The Bureau of Internal Revenue notified him that he had not filed a return for 1937, but there was delay in petitioner's receipt of the letters. They were sent to petitioner's residence in San Diego, his mother's home, but petitioner was not always given his mail promptly by the members of his family. Petitioner was not a bona fide nonresident of the United States during any portion of the calendar year 1937 within the meaning of section 116(a) of the Revenue Act of 1936, and his earnings for the year were not received from sources without the United States. OPINION. HARRON: Petitioner*722 contends that the facts and circumstances relating to his employment in the taxable year bring his earnings within the terms of section 116(a) of the Revenue Act of 1936, 1 so that such income is exempt from Federal income tax. Petitioner *244 contends that his earnings were received from sources without the United States, because the labor was performed on a ship which was outside of the territorial waters of the United States. Petitioner contends, also, that he was a bona fide nonresident of the United States for more than six months during the taxable year, because when he was away from San Diego on fishing trips, he was not a "resident" of San Diego, and because the aggregate time away on fishing trips during the taxable year was more than six months. *723 The question is whether or not petitioner's earned income was, in fact, from "sources without the United States" within the intendment of section 116(a). The question presented is one of first impression under the facts. Respondent contends, first, that petitioner's case presents a situation to which Congress did not intend to apply the benefits of section 116(a). We agree with this contention. The provision excluding from gross income "earned income from sources without the United States" was first enacted in the Revenue Act of 1926. The purpose of Congress in enacting the provision is perfectly clear. The enactment of the provision was a "step toward increasing our foreign trade" by excluding from gross income subject to Federal income tax the income earned by a nonresident citizen of the United States in the conduct of business abroad. See Report of Ways and Means Committee, 69th Cong., 1st sess., H. Rept. 1, p. 7; and Report of the Conference Committee, 69th Cong., 1st sess., H. Rept. 356, p. 33. The late Senator Reed Smoot, later a coauthor of the Hawley-Smoot Tariff Act, and always a patron of our foreign trade, was a supporter of the provision in the Senate. He*724 stated, at the time the proposed provision was debated, that it affected "all our commercial agents abroad who go to get business", and that it applied to an American citizen engaged in business in a foreign country for a period of six months or more. Congressional Record, vol. 67, p. 3781; Seidman's Legislative History of Federal Income Tax Laws, 1938-1861, pp. 472, 596. It was stated on the floor of the Senate more recently, when the Revenue Act of 1932 was before Congress, that the reason Congress originally enacted the exemption provision and reenacted it in several successive tax bills was because most foreign countries subject Americans who live within the foreign countries more than six months to their income tax, with the result that American citizens conducting business abroad and earning income abroad are subject to the income taxes of both the foreign countries and the United States. 2 Congress, *245 following a liberal policy in the promotion of our foreign trade, intended that American citizens who earned income in a foreign country during a period of residence within such country for six months or more should not be required to include that income, earned outside*725 the United States, in gross income for our income tax, because such income would be taxed by the government of the foreign country. The exclusion provision is a method of relieving some of our taxpayers from the income taxes of two countries, our own and a foreign country, with respect to income earned within a foreign country. Obviously, petitioner's earnings in the taxable year were not subject to the income*726 tax of any foreign country, and, although his labor out on the high seas was performed outside of the territorial waters of the United States, it was not performed within any foreign country. Petitioner does not so contend, and it appears that the income in question has not been taxed by the government of any foreign country. In our opinion, petitioner's case is not one within the area of the express Congressional intent. Respondent contends, further, that the income in question was not received from sources without the United States because the labor performed in the earning thereof was upon an American registered ship. Respondent relies upon the rule that "a vessel is deemed a part of the territory of the country to which she belongs." . Respondent cites many cases where the rule has been applied, among them, , where it was held that the right of a seaman as respects a lien on the ship for wages earned is governed by the law of the vessel's flag. See also *727 ; ; affd., ; ; ; affd., ; ; ; certiorari denied, . We need not decide in this case the law upon the question where petitioner earned his wages under the facts. That question, strictly speaking, is not before us. Rather, the question is whether the income in question was "received from sources without the United States" within the intendment of section 116(a). It is held that section 116(a) is not applicable to the income in question for the following reasons: (1) The income was derived from sources within the United States, *246 because petitioner's receipt of compensation was entirely dependent upon the sale of the fish within the United States. None of the*728 fish caught were sold outside of the United States. Petitioner's testimony is clear that if the fish were not sold, if no fish were caught, or if the caught fish spoiled and became unsuited for sale, he received no compensation for the time and work given. This is because his wages were derived solely from his right to share in the net proceeds from sales made in the United States, if any net proceeds were realized. (2) Petitioner was not a "bona fide nonresident of the United States" within the intendment of Congress as it used such phrase in section 116(a). Petitioner called San Diego his "home", as his testimony shows. The term residence connotes, among other things, the place in which a person makes his home. See Joseph H. Beale, The Conflict of Laws, vol. 1, p. 254; ; . The term residence means actual place of abode, whether temporary or permanent. . "Residence" in law, once obtained, continues without intermission until a new one is gained. *729 . Petitioner's residence was at his mother's home in San Diego in 1936 and 1937. By absenting himself therefrom temporarily when he went away on fishing trips, petitioner did not give up his established residence. It is unnecessary, in view of the holding made, to consider petitioner's contention that his work outside the territorial waters aboard ship was "for more than six months during the taxable year." Since the income in question was not derived from sources without the United States, within the intendment of section 116(a), it is immaterial whether or not petitioner was aboard ship for a continuous six-month period or an aggregate time of six months, intermittently. Respondent added a penalty of 25 percent of the tax for delinquency in the filing of the return for 1937 under section 291. That determination was correct unless it can be shown that petitioner's failure to file his return within the time prescribed by law was due to reasonable cause and not due to willful neglect. See *730 . In this case petitioner has not shown reasonable cause for failure to file the return. Sometime around the date the return for 1937 was due petitioner was told by a tax consultant that he should file a "no tax" return. He failed to act upon this advice for reasons unknown. His returns from fishing trips during 1937 were frequent and he could have filed the return. The notices from the Bureau of Internal Revenue telling petitioner that he had not filed a return were sent to petitioner's residence. The delay in his receipt of the notices, personally, is immaterial, as is the fact that the Bureau sent the notices to him. The penalty is imposed for failure of *247 the taxpayer to file a return within the time prescribed by law. Petitioner, without reasonable cause, failed to file his return on time. ; ; *731 . Decision 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 title: (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. ↩ 2. Congressional Record, vol. 75, pp. 10410, 10411: "Mr. Reed. * * * In order to help our foreign trade and to put all Americans who are working abroad in a position of equality with their competitors, the Congress in several successive tax bills has exempted from our income taxes that part of the earnings of those Americans which was earned abroad, provided they lived abroad more than six months out of the year. "The reason for doing that was that most countries - Canada and Great Britain, for example - subject an American to their income tax if that American lives in their country for more than six months. The result of taxing such Americans would be that, first, they paid the British or the Canadian income tax and then the American income tax on top of it." ↩