SCOTUS Reports

Tag: Bona Fide Residence

  • Ferrer v. Commissioner, 50 T.C. 177 (1968): Bona Fide Residence in a Foreign Country for Tax Exemption

    50 T.C. 177 (1968)

    To qualify for the foreign earned income exclusion under Section 911(a)(1) of the Internal Revenue Code, a U.S. citizen working abroad must demonstrate bona fide residence in a foreign country, which requires a degree of permanent attachment to that country, beyond mere transient presence for specific projects.

    Summary

    Jose Ferrer, a U.S. citizen and actor, claimed foreign earned income exclusion for salaries earned while working on films in various foreign countries in 1962. The Tax Court denied the exclusion, finding Ferrer was not a bona fide resident of any foreign country. The court reasoned that Ferrer’s presence in foreign countries was temporary and project-based, lacking the requisite degree of permanent attachment indicative of bona fide residence. The court did, however, allow a deduction for certain secretarial expenses as ordinary and necessary business expenses, while disallowing other claimed deductions due to insufficient evidence.

    Facts

    Petitioner Jose Ferrer, a U.S. citizen, worked as an actor, director, and producer. In 1962, he traveled extensively to India, England, Spain, Yugoslavia, Italy, and other European countries for film projects. During this time, he maintained a home in Ossining, N.Y., and faced marital difficulties in the U.S. Ferrer claimed foreign earned income exclusion on his U.S. tax return for income earned abroad, arguing he was a bona fide resident of foreign countries. He lived in rented apartments or hotels while abroad, never owned property, voted, or participated in community life in any foreign country. His agent actively sought employment for him both in the U.S. and abroad.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Ferrer’s federal income tax for 1962, disallowing the foreign earned income exclusion. Ferrer petitioned the Tax Court, contesting the deficiency. The Tax Court upheld the Commissioner’s determination regarding the foreign earned income exclusion but allowed a deduction for some business expenses.

    Issue(s)

    1. Whether the income earned by Ferrer in 1962 while working on films in foreign countries is exempt from U.S. taxation under Section 911(a)(1) of the Internal Revenue Code as income earned by a bona fide resident of a foreign country.
    2. If the foreign earned income exclusion is not applicable, whether Ferrer is entitled to deduct unreimbursed business expenses related to his foreign income, beyond the amount already allowed by the Commissioner.

    Holding

    1. No, because Ferrer did not establish that he was a bona fide resident of a foreign country or countries for an uninterrupted period including an entire taxable year.
    2. Yes, in part. Ferrer is entitled to a deduction for certain secretarial expenses under Section 162(a)(1) as ordinary and necessary business expenses, but other claimed deductions are disallowed due to insufficient proof.

    Court’s Reasoning

    The Tax Court reasoned that to qualify as a bona fide resident of a foreign country under Section 911(a)(1), a taxpayer must demonstrate a degree of permanent attachment to that country. The court referenced regulations defining residence by analogy to alien residency in the U.S., emphasizing the need for more than a transient or temporary presence. Citing Rudolf Jellinek, 36 T.C. 826 (1961), the court stated that bona fide residence requires “some degree of permanent attachment for the country of which he is an alien.” The court found Ferrer’s presence in foreign countries was solely for specific film projects, lacking intent for indefinite or extended stay. His agent sought work for him globally, indicating no commitment to foreign residency. The court distinguished this case from Leonard Larsen, 23 T.C. 599 (1955), where the taxpayer intended to make a career of foreign employment. Regarding business expenses, the court applied the three conditions from Commissioner v. Flowers, 326 U.S. 465 (1946) for travel expense deductibility, finding Ferrer failed to adequately substantiate most expenses as being incurred in pursuit of business, except for secretarial expenses, which were sufficiently proven by testimony.

    Practical Implications

    Ferrer v. Commissioner clarifies the distinction between being physically present in a foreign country and establishing bona fide residence for tax purposes. It emphasizes that temporary work assignments abroad, even if extended, do not automatically confer bona fide residency. Legal professionals and taxpayers should consider factors demonstrating a degree of permanent attachment to a foreign country, such as establishing a home, participating in community life, and the nature and duration of foreign stays, when evaluating eligibility for the foreign earned income exclusion. This case serves as a reminder that the IRS and courts scrutinize claims of foreign bona fide residence, requiring taxpayers to provide substantial evidence beyond mere physical presence and foreign income generation.

  • Nelson v. Commissioner, T.C. Memo. 1957-66: Defining Bona Fide Foreign Residence for Tax Exemption

    T.C. Memo. 1957-66

    To qualify for the foreign earned income exclusion under Section 116(a)(1) of the 1939 Internal Revenue Code, a U.S. citizen must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year; temporary stays or stopovers do not constitute bona fide residence.

    Summary

    Donald H. Nelson, a retired U.S. military officer, was employed for a telecommunications project in Ethiopia. He and his wife traveled from the U.S., intending to go directly to Ethiopia, but stopped in France to handle preliminary matters. Unexpected delays extended their stay in France for several months. The Tax Court considered whether the Nelsons were bona fide residents of a foreign country for an entire taxable year to qualify for the foreign earned income exclusion. The court held that while they were bona fide residents of Ethiopia, their time in France was merely a temporary stopover and did not qualify as foreign residence. Consequently, they did not meet the requirement of bona fide residence in a foreign country for an entire taxable year.

    Facts

    Petitioners, Donald H. Nelson and his wife Edwina C. Nelson, were U.S. citizens. Donald Nelson, after retiring from the military in 1949, was hired for a telecommunications project in Ethiopia in 1951. Prior to departing the U.S., they obtained passports listing foreign addresses in Ethiopia. They sold their belongings and leased their ranch in Oregon. They departed the U.S. on November 21, 1951, en route to Ethiopia, but first stopped in Paris, France, for project-related matters. Unexpected delays caused them to remain in France from November 28, 1951, to February 28, 1952. During this time, they resided in a hotel in Paris and traveled to other European countries. They arrived in Addis Ababa, Ethiopia, on March 2, 1952, and stayed until March 13, 1953. Nelson received his salary from the Ethiopian government for his work on the telecommunications project.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the Nelsons’ income tax for 1952 and 1953. The Nelsons petitioned the Tax Court, contesting this determination.

    Issue(s)

    1. Whether the petitioners were bona fide residents of a foreign country or countries for an uninterrupted period which includes an entire taxable year, as required by section 116(a)(1) of the Internal Revenue Code of 1939, to exclude foreign earned income from their gross income.

    Holding

    1. No. The Tax Court held that the petitioners were not bona fide residents of a foreign country or countries for a period including an entire taxable year.

    Court’s Reasoning

    The court emphasized that determining bona fide residence is a factual question decided on a case-by-case basis. While acknowledging the Nelsons were bona fide residents of Ethiopia from March 2, 1952, to March 13, 1953, this period did not encompass an entire taxable year (calendar year 1952). The court then considered whether their stay in France could be considered bona fide foreign residence. The court reasoned that the Nelsons went to France solely for matters related to their Ethiopian project and initially intended a brief stay. Despite unforeseen delays prolonging their time in France, the court concluded their stay was a “mere stopover, a delay in their movement from the United States to their destination of Addis Ababa.” They were deemed “transients or sojourners in France, and not bona fide residents.” The court cited Treasury Regulations defining a non-resident alien as one who is “merely a transient or sojourner.” The court stated, “They were in France ‘for a definite purpose which in its nature may be promptly accomplished.’ See Regs. 118, sec. 39.211-2”. Because the Nelsons’ time in France was not considered bona fide foreign residence, and their Ethiopian residence did not cover a full taxable year, they failed to meet the statutory requirements for the foreign earned income exclusion. The burden of proof was on the petitioners to demonstrate they qualified for the exemption, which they failed to do.

    Practical Implications

    Nelson v. Commissioner clarifies that physical presence in a foreign country is not automatically equivalent to bona fide residence for tax purposes. The case underscores the importance of intent and the nature of the stay. Taxpayers intending to claim the foreign earned income exclusion must demonstrate more than just being physically present in a foreign country; they must establish bona fide residence, indicating a degree of permanence and integration into the foreign environment. Temporary stays, even if unexpectedly prolonged, particularly those considered preparatory or transitional to reaching a final foreign destination, may not qualify as bona fide foreign residence. This case highlights that the IRS and courts will scrutinize the circumstances of a taxpayer’s foreign stay to determine if it meets the criteria for bona fide residence, focusing on whether the stay is more than a transient or temporary visit.

  • Sochurek v. Commissioner, 30 T.C. 540 (1958): Defining ‘Bona Fide Resident’ for Foreign Earned Income Exclusion

    Sochurek v. Commissioner, 30 T.C. 540 (1958)

    To qualify for the foreign earned income exclusion, a U.S. citizen must establish a bona fide residence in a foreign country, which requires more than a mere floating intention to return, particularly when considering the impact of events such as war on the taxpayer’s ability to return.

    Summary

    The case addresses whether a U.S. citizen, who had resided in China for several years but returned to the U.S. due to WWII, could exclude foreign-earned income for the years 1946 and 1947. The court held that the taxpayer had abandoned his Chinese residence upon his return to the U.S. in 1941 and failed to reestablish it during the relevant tax years. The court distinguished between residence and domicile, emphasizing the importance of the taxpayer’s intentions and actions regarding their return to the foreign country. The court also addressed a failure to file penalty, and the proper tax year to report a bonus payment. The case is significant for clarifying the requirements for the foreign earned income exclusion under the Internal Revenue Code.

    Facts

    The taxpayer, an American citizen, was a bona fide resident of China from October 1929 to November 1941. He returned to the United States in November 1941 due to an agreement with his employer for a rotation of duties. Shortly after his return, the United States declared war on Japan, preventing his return to China until February 1946. He returned to the U.S. on December 6, 1947. The IRS contended the taxpayer abandoned his China residence, while the taxpayer argued he maintained a continuous bona fide residence in China, or at least for part of 1947, and sought to exclude income earned from sources outside the United States for tax purposes.

    Procedural History

    The case was heard by the U.S. Tax Court. The Commissioner of Internal Revenue determined deficiencies in the taxpayer’s income tax for 1946 and 1947, including an addition to tax for failure to file a return in 1946. The taxpayer contested the determination, leading to the Tax Court’s review of the facts and applicable law.

    Issue(s)

    1. Whether the income earned by the taxpayer from sources outside the United States during 1946 and 1947 was excludable from taxation under Section 116(a) of the Internal Revenue Code of 1939.
    2. Whether the taxpayer was subject to an addition to tax under section 291(a) of the 1939 Code for failure to file a tax return in 1946.
    3. In what year should the taxpayer be taxed on a $100,000 bonus payment.

    Holding

    1. No, because the taxpayer abandoned his China residence when he returned to the U.S. in 1941.
    2. Yes, because the taxpayer’s belief that he was not required to file a return was insufficient to constitute reasonable cause.
    3. The bonus should be included in 1947, not 1946.

    Court’s Reasoning

    The court distinguished between residence and domicile, applying the definition of “resident” from Regulations 111, section 29.211-2, which states, “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.” The court determined that the taxpayer abandoned his China residence upon his return to the United States in 1941. His intention to return was indefinite, and his return was prevented by the war. The court reasoned that the taxpayer’s intent, after being prevented from returning, was to reside in the U.S. until conditions changed, thus he became a resident of the United States. Furthermore, the court rejected the alternative argument that he was a resident of Hong Kong in 1947 because he never established residence there, only intending to do so in the future.

    The Court cited, “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?” In regard to the failure to file penalty, the court stated, “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.”

    Practical Implications

    This case is important for understanding how the IRS and the courts interpret the “bona fide residence” requirement for the foreign earned income exclusion. Legal practitioners should advise clients to document their intentions when relocating or returning from a foreign country, including any factors (e.g., war or other events) that may affect their ability to return. This case also highlights the need to establish an actual residence, rather than merely intending to establish a residence in the future. Taxpayers should also seek professional tax advice to avoid penalties for failing to file returns. Later cases will likely examine the facts and the taxpayer’s intentions to determine if they abandoned their foreign residence.

  • Larsen v. Commissioner, 23 T.C. 599 (1955): Determining Bona Fide Foreign Residence for Tax Purposes

    23 T.C. 599 (1955)

    A taxpayer is considered a bona fide resident of a foreign country for tax purposes if they intend to make a career of foreign employment, even if their living conditions are controlled by the employer and they return to the U.S. for temporary leave.

    Summary

    The United States Tax Court considered whether Leonard Larsen, a U.S. citizen working in Saudi Arabia, was a bona fide resident of a foreign country during 1949, thus qualifying for a tax exemption under Section 116(a) of the Internal Revenue Code of 1939. Larsen worked for Bechtel, living in company-controlled communities with limited social integration. He returned to the U.S. for a vacation in November 1949, after which he resumed his employment in Saudi Arabia. The court held that Larsen was a bona fide resident, emphasizing his intention to pursue a career in foreign employment through a series of employment contracts, despite the temporary nature of his vacation in the U.S. and the restrictive conditions of his work environment.

    Facts

    Leonard Larsen, a U.S. citizen, enlisted in the U.S. Army in 1939 and served overseas. After his military service, he sought employment abroad. In May 1948, he began working for International Bechtel, Inc., in Saudi Arabia. His work involved materials and supplies, similar to his Army work. He signed a contract with International Bechtel, which was renewable. He was provided with transportation, food, and lodging by his employer and could not participate in local politics. His wife was in the U.S. He had no specific plan to remain for a fixed period, intending to stay as long as needed. In November 1949, he returned to the U.S. for vacation, terminating his contract to get travel pay, but with an understanding that he would return to the same job. He left most of his belongings in Dhahran. He resumed his employment in January 1950 after vacation, and continued foreign assignments through 1954.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Larsen’s 1949 income tax return. The sole issue was whether Larsen was a bona fide resident of a foreign country during 1949, under Section 116(a) of the Internal Revenue Code. The case was brought before the United States Tax Court for a decision.

    Issue(s)

    Whether Leonard Larsen was a bona fide resident of Saudi Arabia throughout 1949 within the meaning of Section 116(a) of the Internal Revenue Code of 1939.

    Holding

    Yes, because the court found that Larsen intended to make a career of foreign employment, and his temporary vacation in the U.S. did not interrupt his residency in Saudi Arabia.

    Court’s Reasoning

    The court acknowledged that the determination of bona fide residence is a question of fact and that similar cases often depend on their specific facts. The court analyzed Larsen’s circumstances in the context of existing case law. The court distinguished this case from those where the taxpayer had only short-term or temporary contracts. The court emphasized that Larsen’s employment in Saudi Arabia was part of a series of contracts, indicating a career focus on foreign employment. The court also found that the brief vacation in the U.S. in late 1949 was intended to be a vacation, and Larsen’s subsequent return to Saudi Arabia, with all arrangements for his return in place, supported the finding of continuous foreign residency, which was not interrupted by his temporary absence. The court referenced the holding in David E. Rose, 16 T.C. 232, 237, that a temporary absence from a foreign country does not interrupt the period of foreign residence.

    Practical Implications

    This case clarifies the factors considered when determining whether a U.S. citizen qualifies for the foreign earned income exclusion. It demonstrates that the court will consider the totality of circumstances, especially the taxpayer’s intentions and the continuity of employment. Attorneys advising clients on potential foreign income tax exclusions should evaluate the duration and nature of the employment, the frequency of returns to the U.S., and the intent of the taxpayer, which is a primary factor in making this determination. This decision is relevant to cases involving individuals working on overseas projects, even if living conditions are restricted. Subsequent cases have followed this holding, providing a framework for analyzing whether employment is temporary or indicative of a bona fide foreign residence. A significant factor is whether the taxpayer intends to make a career of foreign employment, even with temporary returns to the United States.

  • Hamer v. Commissioner, 22 T.C. 343 (1954): Determining Bona Fide Residence for Foreign Earned Income Exclusion

    22 T.C. 343 (1954)

    To qualify for the foreign earned income exclusion, a U.S. citizen must establish bona fide residency in a foreign country, which is determined by examining the individual’s intentions regarding the length and nature of their stay, and the nature of their employment.

    Summary

    The United States Tax Court considered whether Burlin and Marjorie Hamer were bona fide residents of China during 1948, entitling them to exclude their foreign-earned income from U.S. taxes. The Hamers, U.S. citizens, worked for UNRRA and then FAO in China. The court, applying residency tests similar to those for aliens in the U.S., found that the Hamers had established bona fide residency in China, focusing on the indefinite nature of their employment with FAO, their intentions to remain employed in the region, and their integration into the local community. This case clarifies the factors used to determine bona fide residence abroad for purposes of the foreign earned income exclusion under the Internal Revenue Code.

    Facts

    Burlin and Marjorie Hamer, husband and wife, were U.S. citizens. Before 1946, they lived in Iowa. In 1946, Burlin accepted employment with UNRRA and went to China, followed by Marjorie. They intended to stay for the duration of UNRRA, seeking other foreign employment opportunities. They sold some of their belongings and shipped other possessions to China. They worked for UNRRA until it ceased operations in China in late 1947, then transitioned to employment with FAO. The Hamers rented a house in Nanking but were evacuated due to the advance of Chinese Communist forces. The Hamers maintained bank accounts and church memberships in the U.S. They did not apply for citizenship in China.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Hamers’ 1948 income taxes, disputing their claim for the foreign earned income exclusion, because the Commissioner did not believe they were bona fide residents of China. The Hamers petitioned the United States Tax Court, which ruled in their favor.

    Issue(s)

    Whether the petitioners were bona fide residents of China during the entire taxable year 1948, as defined by the applicable tax code and regulations.

    Holding

    Yes, because the court found that the Hamers had established bona fide residency in China during 1948.

    Court’s Reasoning

    The court considered whether the Hamers met the requirements for the foreign earned income exclusion under Section 116(a)(1) of the Internal Revenue Code. The court stated the criteria for determining residency, noting the emphasis on the intention of the taxpayer. The court examined the regulations for determining alien residency in the U.S. and applied those criteria to the Hamers, focusing on their intent and the nature of their stay in China.

    The court distinguished this case from others, like Lovald v. Commissioner, where the taxpayer’s employment ended before the end of the tax year or Steve P. Sladack, 51 T.C. 1081 (1969) where the employment had a fixed end date. The court found that the Hamers’ employment with FAO was indefinite and the organization’s work was ongoing. The court noted that although the Hamers’ contracts were for short periods, these contracts were renewable and provided for repatriation. Also, they established a home and participated in social activities. The court emphasized that Burlin intended to remain in foreign work. Therefore, the court concluded that the Hamers had established bona fide residency in China during the entire taxable year 1948. The Court also recognized that the nature of FAO’s work, and the Hamers’ indefinite intentions, supported the residency determination.

    Practical Implications

    This case is essential for understanding what constitutes “bona fide residence” in a foreign country for U.S. tax purposes. Attorneys and tax advisors can use this case to guide clients in establishing and documenting their foreign residency to support claims for the foreign earned income exclusion.

    • Demonstrates that a taxpayer’s intent to stay in a foreign country for an indefinite period, especially for a job that is not time-limited, is a critical factor.
    • Shows that even short-term contracts may not preclude a finding of bona fide residence if the overall employment situation indicates a long-term commitment.
    • Emphasizes the importance of integrating into the local community, although this is only one factor to be considered.
    • Guides tax professionals in advising clients who work abroad on what evidence to gather to prove residency.

    The case highlights the importance of the taxpayer’s intention to establish a foreign home for an extended period as a central factor. The facts showing the indefinite duration of employment and the Hamers’ plans for the future were critical to the Court’s decision.

  • Fuller v. Commissioner, 15 T.C. 810 (1950): Establishing Bona Fide Foreign Residence for Income Exclusion

    15 T.C. 810 (1950)

    A U.S. citizen working abroad can qualify as a bona fide resident of a foreign country for income tax exclusion purposes under Section 116(a) of the Internal Revenue Code, even with visits to the U.S., if their purpose for being in the foreign country necessitates an extended stay and establishing a temporary home there.

    Summary

    The case addresses whether an American citizen, Fuller, was a bona fide resident of Great Britain during 1943-1946, allowing him to exclude income earned there from his U.S. gross income. Fuller worked as a managing director for Paramount subsidiaries in the UK. The Tax Court held that Fuller was indeed a bona fide resident of Great Britain during those years. His employment required a prolonged stay and he established a residence there, despite periodic visits to the U.S. The court emphasized that these visits didn’t negate his foreign residency, as they were related to family and business, and his primary employment was in Great Britain.

    Facts

    Fuller moved to Great Britain in 1938 to become the managing director of Paramount subsidiaries, a permanent position requiring residence in the UK.
    He relocated his family, personal belongings, and furniture to London, leasing an apartment for five years.
    Before leaving the U.S., Fuller relinquished his California apartment and club memberships.
    In England, he joined local clubs and established charge accounts.
    During 1943-1946, Fuller made trips to the U.S., primarily to see his family who had returned for safety during the war, and to confer with his employer.
    Fuller did not pay income taxes in Great Britain during these years.

    Procedural History

    The Commissioner of Internal Revenue determined that Fuller’s income earned in Great Britain was not excludible from his U.S. gross income because he was not a bona fide resident of Great Britain during the entire taxable year.
    Fuller petitioned the Tax Court for a redetermination.

    Issue(s)

    Whether Fuller was a bona fide resident of Great Britain during the tax years 1943, 1944, 1945, and 1946, thereby entitling him to exclude income earned in Great Britain from his U.S. gross income under Section 116(a) of the Internal Revenue Code.

    Holding

    Yes, because Fuller’s employment necessitated an extended stay in Great Britain, he established a residence there, and his visits to the U.S. were not sufficient to negate his status as a bona fide resident of Great Britain during the tax years in question.

    Court’s Reasoning

    The court applied the same criteria used to determine residency for aliens in the U.S. to determine Fuller’s residency in Great Britain.
    The court emphasized that Fuller’s position with Paramount was permanent and required his presence in the UK. He established a home there, demonstrating an intent to stay for an extended period.
    The court cited Senate Finance Committee reports stating that “vacation or business trips to the United States during the taxable year will not necessarily deprive a taxpayer, otherwise qualified, of the exemption provided by this section.”
    The court noted that the payment of taxes to a foreign government was not a condition precedent to the exclusion under Section 116(a).
    The court distinguished Fuller from a “transient or sojourner,” emphasizing that his purpose for being in Great Britain required an extended stay.

    Practical Implications

    This case clarifies the factors considered when determining bona fide foreign residency for U.S. citizens working abroad seeking to exclude foreign-earned income.
    It confirms that temporary returns to the U.S. for business or personal reasons do not automatically disqualify a taxpayer from claiming foreign residency.
    The ruling emphasizes the importance of demonstrating an intent to establish a home and reside in the foreign country for an extended period.
    Later cases have cited Fuller to support the proposition that the determination of bona fide foreign residency is a fact-dependent inquiry focusing on the taxpayer’s intentions and the nature of their stay in the foreign country. This case serves as a reminder that tax regulations should not be interpreted to penalize those whose personal circumstances (e.g., family in the US due to war) necessitate occasional returns to the US, provided they maintain a primary residence and employment abroad.

  • Rose v. Commissioner, 16 T.C. 232 (1951): Establishing Bona Fide Foreign Residence for Tax Exemption

    16 T.C. 232 (1951)

    A U.S. citizen working abroad may qualify for a tax exemption under Section 116(a) of the Internal Revenue Code if they establish a bona fide residence in a foreign country, considering factors such as the length and nature of their stay, intent to remain, and connections to the foreign country.

    Summary

    David Rose, a U.S. citizen, worked as a managing director for Paramount Pictures in the United Kingdom from 1938 to 1946. He claimed a tax exemption under Section 116(a) for income earned abroad, arguing he was a bona fide resident of the UK. The Commissioner of Internal Revenue denied the exemption, arguing he wasn’t a bona fide resident. The Tax Court ruled in favor of Rose, finding he had established a bona fide residence in the UK despite periodic trips to the U.S., and was therefore entitled to the tax exemption for the years 1943-1945 and until September 30, 1946.

    Facts

    Rose was hired by Paramount Pictures in 1938 to manage their UK subsidiaries. A condition of his employment was that he reside in England. He moved to London with his family, leased an apartment, joined English clubs, and opened local charge accounts. Due to the war, his family returned to the U.S. in 1940, but Rose remained in England to continue his work. He made semi-annual trips to the U.S. to visit his family and confer with his employer. His family returned to England in 1945. In 1946, Rose planned a new motion picture venture, resigned from Paramount effective September 30, 1946, and returned to the U.S. permanently in November 1946.

    Procedural History

    The Commissioner of Internal Revenue assessed deficiencies in Rose’s income tax for the years 1943-1946. Rose petitioned the Tax Court for a redetermination of the deficiencies, arguing he was entitled to a tax exemption under Section 116(a) of the Internal Revenue Code. The Tax Court ruled in favor of Rose.

    Issue(s)

    Whether David Rose was a bona fide resident of Great Britain during the tax years 1943, 1944, 1945, and until September 30, 1946, and thus entitled to exclude his foreign-earned income from gross income under Section 116(a) of the Internal Revenue Code.

    Holding

    Yes, because Rose established a bona fide residence in Great Britain based on the nature and length of his stay, the purpose of his presence there, and his intent to remain in England for an indefinite period to fulfill his employment obligations with Paramount Pictures.

    Court’s Reasoning

    The Tax Court considered various factors to determine Rose’s residency status, applying the same criteria used to determine whether an alien is a resident of the United States. The court noted that Rose’s employment in England was permanent and continuous, requiring his residence there. He took his family, personal effects, and furniture to England, leased an apartment, and integrated himself into English society. The court acknowledged Rose’s trips to the U.S., but stated that “vacation or business trips to the United States during the taxable year will not necessarily deprive a taxpayer, otherwise qualified, of the exemption provided by this section.” The court emphasized that Rose’s income was earned from services rendered in Great Britain, and the war necessitated his family’s temporary relocation to the U.S. The fact that Rose didn’t pay UK income taxes was not determinative because the exemption under Section 116(a) is not contingent upon payment of taxes to a foreign government.

    Practical Implications

    This case illustrates the factors considered when determining whether a U.S. citizen working abroad qualifies for the foreign-earned income exclusion under Section 116(a) (now Section 911). It confirms that temporary returns to the U.S. for vacation or business do not automatically disqualify a taxpayer from claiming bona fide residency in a foreign country. The key is the taxpayer’s intent and the nature of their connections to the foreign country. This case is frequently cited in disputes regarding foreign residency, emphasizing the importance of establishing a clear intent to reside in the foreign country and integrating into its society. Taxpayers should document their ties to the foreign country to support their claim of bona fide residency.

  • Baehre v. Commissioner, 15 T.C. 236 (1950): Establishing Bona Fide Foreign Residence for Tax Exemption

    15 T.C. 236 (1950)

    A U.S. citizen working abroad can exclude foreign-earned income from U.S. gross income if they establish bona fide residency in a foreign country for a specified period, as determined by their intent and the nature of their stay.

    Summary

    The Tax Court addressed whether a U.S. citizen working in Canada could exclude his Canadian-earned income from his U.S. gross income under Section 116 of the Internal Revenue Code. The court held that the taxpayer was a bona fide resident of Canada for over two years, allowing him to exclude income earned during 1943 and 1944. However, income earned in 1942 did not qualify because he wasn’t a resident of Canada for the entire year. The decision hinged on the determination of “bona fide residence,” considering factors such as the taxpayer’s intent, the duration of his stay, and his integration into the Canadian community.

    Facts

    Herman Baehre, a U.S. citizen, was sent to Edmonton, Canada, by his employer, Miller Construction Co., to work on a war contract in August 1942. Initially expecting a short assignment, Baehre soon realized the project would last much longer and arranged for his family to join him. His wife and children moved to Edmonton with all their possessions, including furniture and a car, intending to reside there indefinitely. The family lived in an apartment, participated in local church and community activities, and maintained no other home. Baehre joined a Masonic lodge in Edmonton. He did not pay Canadian income taxes or apply for citizenship.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Baehre’s income tax for 1943 and 1944, arguing that his Canadian earnings were taxable. Baehre contested this determination in the Tax Court, claiming he was entitled to exclude his foreign-earned income under Section 116. He also sought a refund for 1942 taxes, claiming the same exclusion. The Tax Court reviewed the evidence to determine if Baehre met the requirements for bona fide residency in Canada.

    Issue(s)

    Whether the compensation Herman Baehre received for services rendered in Canada during 1942, 1943, and 1944 is excludable from his taxable income under Sections 116(a)(1) and 116(a)(2) of the Internal Revenue Code, as amended by Section 148(a) of the Revenue Act of 1942, based on his residency status in Canada.

    Holding

    1. Yes, the compensation received in 1943 is excludable because Baehre was a bona fide resident of Canada during the entire taxable year 1943.
    2. Yes, the compensation received in 1944 is excludable because Baehre was a bona fide resident of Canada for at least two years ending October 1, 1944.
    3. No, the income received in 1942 is not excludable because Baehre was not a bona fide nonresident of the United States for more than six months during that year.

    Court’s Reasoning

    The court determined that Baehre established a bona fide residence in Canada shortly after his arrival in August 1942, when he moved his family and belongings there with the intent of staying for an indefinite period. Key factors included his family’s relocation, participation in local community and church activities, and the absence of a home in the United States. The court likened the situation to that in Charles F. Bouldin, 8 T.C. 959, where similar facts led to a finding of bona fide Canadian residence. Regarding the 1942 income, the court noted that Section 116(a)(2) was intended to cover the portion of the taxable year when the taxpayer changed their residence back to the United States, and did not apply retroactively to the entire year when the residency was initially established.

    Practical Implications

    This case illustrates the importance of establishing bona fide residency in a foreign country to qualify for tax exclusions on foreign-earned income. It highlights that physical presence alone is insufficient; intent to reside in the foreign country, integration into the community, and the duration of the stay are all critical factors. The decision clarifies the application of Section 116(a)(2), emphasizing that it primarily applies to the year a taxpayer returns to the United States after establishing foreign residency for at least two years, allowing for proportional exclusion of income earned abroad during that return year. Later cases have relied on Baehre to analyze similar residency questions, emphasizing the fact-specific nature of these determinations.

  • Swenson v. Thomas, 164 F.2d 783 (5th Cir. 1947): Establishing Bona Fide Foreign Residence for Tax Exemption

    Swenson v. Thomas, 164 F.2d 783 (5th Cir. 1947)

    To qualify for the foreign earned income exclusion under Section 116(a) of the Internal Revenue Code, a U.S. citizen must establish a bona fide residence in a foreign country, which requires demonstrating an intention to live there for the time being, not necessarily with the intent to make it a permanent home or domicile.

    Summary

    Swenson, a U.S. citizen, claimed a foreign earned income exclusion based on his alleged residence in Sweden and later England. The court held that Swenson was not a bona fide resident of either country during the tax years in question (1943 and 1944). The court reasoned that Swenson’s ties to Sweden were severed when he relinquished his apartment and employment there. His time in England was deemed a temporary sojourn, not a residence, due to frequent trips back to the U.S. and his family’s continued residence in the U.S. This case clarifies the criteria for establishing foreign residence for tax purposes, distinguishing it from domicile.

    Facts

    Swenson, a U.S. citizen, arrived in the U.S. from Sweden in February 1941.
    He had been employed by General Motors Overseas Operations.
    Approximately six months after arriving in the U.S., he relinquished his apartment and domestic help in Stockholm.
    In June 1941, he was assigned to work in the U.S. by his employer.
    His wife and children resided with him in the U.S., where the children attended school.
    From June 1942 he was assigned to England, but made multiple return trips to the US.
    He did not report income or pay taxes to any foreign country during the years in question.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Swenson’s income tax for 1943 and 1944.
    Swenson petitioned the Tax Court for review, arguing he was a bona fide resident of Sweden or, alternatively, England, and thus entitled to the foreign earned income exclusion.
    The Tax Court upheld the Commissioner’s determination.
    Swenson appealed to the Fifth Circuit Court of Appeals.

    Issue(s)

    Whether Swenson was a bona fide resident of Sweden during the tax years 1943 and 1944, entitling him to the foreign earned income exclusion under Section 116(a) of the Internal Revenue Code.
    Whether, in the alternative, Swenson was a bona fide resident of England during the tax years 1943 and 1944, entitling him to the foreign earned income exclusion under Section 116(a) of the Internal Revenue Code.

    Holding

    No, because Swenson relinquished his ties to Sweden and established a residence in the United States.
    No, because Swenson’s time in England was a temporary sojourn rather than a bona fide residence.

    Court’s Reasoning

    The court relied on the definition of “residence” as an intention to live in a place for the time being, as opposed to “domicile,” which requires an intention to make a home there. It distinguished “sojourn” which requires no specific intent.
    The court determined that Swenson’s actions, such as relinquishing his apartment in Stockholm and working in the U.S., indicated he was no longer a resident of Sweden. The court noted: “Though of course not conclusive, we regard the point of taxes paid one to be weighed in determining foreign residence”.
    The court considered Treasury Regulations defining residence for aliens, noting that an alien can become a U.S. resident even with the intention to return to their domicile abroad eventually.
    The court dismissed Swenson’s argument that wartime conditions prevented his return to Sweden, reasoning that this circumstance reinforced the idea that he intended to reside in the U.S. until conditions changed.
    Regarding the claim of English residence, the court emphasized the temporary nature of Swenson’s stays in England, his frequent returns to the U.S., and the fact that his family remained in the U.S. These factors indicated a sojourn, not a residence.

    Practical Implications

    This case highlights the importance of demonstrating a clear intention to reside in a foreign country to qualify for the foreign earned income exclusion. Taxpayers must show more than a mere physical presence; they must establish ties to the foreign country that indicate an intent to live there for the time being.
    The decision emphasizes that maintaining a residence in the U.S., frequent trips back to the U.S., and the location of one’s family are factors that weigh against establishing a bona fide foreign residence.
    The case underscores the distinction between “residence” and “domicile” for tax purposes. A taxpayer can be a resident of a foreign country without intending to make it their permanent home.
    The case is frequently cited in subsequent cases involving the foreign earned income exclusion, particularly when determining whether a taxpayer’s presence in a foreign country constitutes a bona fide residence or merely a temporary sojourn. Later cases citing Swenson include those that distinguish between temporary assignments and indefinite stays.

  • Chapin v. Commissioner, 9 T.C. 142 (1947): Establishing Bona Fide Foreign Residence for Tax Exclusion

    Chapin v. Commissioner, 9 T.C. 142 (1947)

    To qualify for the foreign earned income exclusion under Section 116 of the Internal Revenue Code, a U.S. citizen must demonstrate bona fide residency in a foreign country, considering factors beyond mere physical presence and stated intent.

    Summary

    Dudley A. Chapin, a U.S. citizen, sought to exclude income earned while working in North Ireland for Lockheed Overseas Corporation in 1943, claiming bona fide residency in the British Isles under Section 116 of the Internal Revenue Code. The Tax Court denied the exclusion, finding that Chapin’s intent to remain permanently was unconvincing given his lack of familiarity with Ireland, the lower wages compared to the U.S., and the restrictions on his stay after his contract expired. The court relied on previous similar cases involving fellow Lockheed employees, emphasizing the lack of genuine intent to establish permanent foreign residency.

    Facts

    Chapin, a U.S. citizen, worked for Lockheed Overseas Corporation in North Ireland during 1943.
    His employment contract was similar to those of other Lockheed employees working in Ireland.
    Chapin testified that he intended to remain in Ireland permanently when he went there.
    He admitted he had never been to Ireland before, knew little about the country, and was aware that wages were lower than in the U.S.
    Chapin was not permitted to remain in Ireland after his contract expired and his visa period ended.

    Procedural History

    The Commissioner of Internal Revenue assessed a deficiency in Chapin’s income tax for 1943.
    Chapin petitioned the Tax Court for a redetermination of the deficiency, arguing he was entitled to the foreign earned income exclusion under Section 116.
    The Tax Court ruled in favor of the Commissioner, denying the exclusion.

    Issue(s)

    Whether Dudley A. Chapin was a bona fide resident of the British Isles during 1943, as required to qualify for the foreign earned income exclusion under Section 116 of the Internal Revenue Code.

    Holding

    No, because Chapin’s stated intent to remain permanently in Ireland was not credible, given his lack of knowledge about the country, the wage disparity, and the limitations on his stay. Therefore, he did not establish bona fide residency as required by Section 116.

    Court’s Reasoning

    The court emphasized that the facts were almost identical to those in previous cases involving fellow Lockheed employees (Arthur J.H. Johnson, Michael Downs, and Ralph Love), where the court had already determined that the employees were not bona fide residents of the British Isles.
    The court found Chapin’s testimony about his intent to remain permanently unconvincing. The court stated, “It is difficult to believe in view of the fact that he admits that he had never been to Ireland, that he knew nothing of the country except what he had read, and that the pay of workers in Ireland was far below that received by them in the United States. Moreover, it would have been impossible for him to have remained in Ireland, since he was not permitted to stay after the expiration of his contract and the termination of the visa period.”
    The court concluded that Chapin was bound by the precedent established in the Johnson, Downs, and Love cases.

    Practical Implications

    This case highlights the importance of demonstrating a genuine intent to establish a permanent residence in a foreign country to qualify for the foreign earned income exclusion. Taxpayers cannot simply claim residency based on physical presence or a stated desire to stay permanently. Courts will examine objective factors such as familiarity with the country, economic ties, and immigration restrictions to determine whether a taxpayer is truly a bona fide resident. This case reinforces that temporary work assignments abroad, even with an expressed intention to remain, are unlikely to meet the bona fide residency test. Subsequent cases continue to emphasize the need for a holistic assessment of a taxpayer’s connections to the foreign country and their intent to make it their home.