SCOTUS Reports

Tag: Foley v. Commissioner

  • Foley v. Commissioner, 87 T.C. 605 (1986): Taxation of Foreign Incentive Payments to U.S. Citizens

    Foley v. Commissioner, 87 T. C. 605 (1986)

    Incentive payments from foreign governments to U. S. citizens are taxable income under U. S. tax law, even if not considered income in the foreign jurisdiction.

    Summary

    James Foley, a U. S. citizen residing in West Berlin, received incentive payments under the Berlin Promotion Law. The U. S. Tax Court held that these payments must be included in Foley’s U. S. taxable income under IRC §61, as they constituted accessions to wealth. However, the court also ruled that Foley correctly calculated his foreign tax credit without including these payments, as they were not considered income under German law. The decision underscores the broad scope of U. S. taxation on worldwide income of its citizens and the limitations of foreign tax credit calculations.

    Facts

    James M. Foley, a U. S. citizen and pilot for Pan American World Airways, resided in West Berlin from August 1978 through the relevant tax years. He received incentive payments of $2,068 in 1978, $6,931 in 1979, and $7,209 in 1980 under article 28 of the Berlin Promotion Law, which aimed to boost West Berlin’s economy. These payments were not subject to German income tax. Foley did not report these payments on his U. S. tax returns but included all German taxes withheld in calculating his foreign tax credit.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Foley’s federal income taxes for 1978, 1979, and 1980, asserting that the incentive payments should be included in income and reduce the foreign tax credit. Foley petitioned the U. S. Tax Court, which held that the payments were taxable under U. S. law but did not affect the foreign tax credit calculation.

    Issue(s)

    1. Whether incentive payments received by a U. S. citizen under the Berlin Promotion Law are includable in U. S. taxable income under IRC §61.
    2. Whether such payments should be included in the calculation of the foreign tax credit under IRC §901.

    Holding

    1. Yes, because the payments represent accessions to wealth and are not exempt under U. S. tax law.
    2. No, because the payments are not considered income under German law and thus do not affect the foreign tax credit calculation.

    Court’s Reasoning

    The court applied IRC §61, which taxes all income “from whatever source derived,” to determine that the incentive payments were taxable. The court rejected Foley’s arguments that the payments were gifts or excludable under U. S. social welfare programs, noting that the payments were made in anticipation of economic benefits to West Berlin. The court distinguished the Berlin Promotion Law from U. S. social benefit programs, emphasizing that the payments were tied to employment and economic contribution rather than need or social welfare. Regarding the foreign tax credit, the court found that since the payments were not taxable under German law, they did not affect the calculation of the credit. The court also noted that the U. S. -Germany tax treaty did not exempt these payments from U. S. taxation.

    Practical Implications

    This decision clarifies that U. S. citizens must report foreign incentive payments as income on their U. S. tax returns, even if such payments are not taxable in the foreign jurisdiction. It highlights the importance of understanding the distinction between foreign and U. S. tax laws when calculating taxable income and foreign tax credits. Practitioners should advise clients working abroad to include such payments in their U. S. income, while ensuring that foreign tax credits are calculated correctly based on taxes paid on taxable income in the foreign jurisdiction. This case has been cited in subsequent decisions regarding the taxation of foreign income and the application of foreign tax credits, reinforcing the principle that U. S. citizens are taxed on their worldwide income.

  • Foley v. Commissioner, 56 T.C. 765 (1971): Correcting Depreciation Method Errors on Amended Returns

    Foley v. Commissioner, 56 T. C. 765 (1971)

    A taxpayer can correct an erroneous depreciation method on an amended return without Commissioner’s consent if the original method was legally unavailable.

    Summary

    Robert Foley, a truck business owner, erroneously used the double declining-balance method on used property in his 1964 tax return, which is not permissible. After discovering the error, he filed an amended return using the 150-percent declining-balance method. The Commissioner argued only the straight-line method was available. The Tax Court held that Foley could use the 150-percent method for the 16 items previously depreciated incorrectly but not for the two items initially depreciated correctly under the straight-line method, as that would require the Commissioner’s consent for a method change.

    Facts

    Robert M. Foley operated a truck business and acquired 18 used trucks and trailers in August 1964. On his original 1964 tax return, he used the double declining-balance method for 16 items and the straight-line method for two. After realizing the double declining-balance method was not applicable to used property, Foley filed an amended return in February 1966, applying the 150-percent declining-balance method to all 18 items. The Commissioner disallowed this method, asserting only the straight-line method was permissible.

    Procedural History

    Foley filed his original 1964 return using the double declining-balance method for most of the equipment. After discovering the error, he filed an amended return in 1966 using the 150-percent declining-balance method. The Commissioner issued a deficiency notice in 1968, leading Foley to petition the Tax Court. The court addressed whether Foley could use the 150-percent method on the amended return for both sets of equipment.

    Issue(s)

    1. Whether a taxpayer can elect the 150-percent declining-balance method on an amended return for property erroneously depreciated under the double declining-balance method.
    2. Whether a taxpayer can change from the straight-line method to the 150-percent declining-balance method on an amended return without the Commissioner’s consent.

    Holding

    1. Yes, because the taxpayer had not previously regularly used the double declining-balance method on the 16 items and was correcting an error on his own initiative.
    2. No, because the straight-line method was a correct application and changing it required the Commissioner’s consent, which was not obtained.

    Court’s Reasoning

    The court relied on the principle that the 150-percent declining-balance method is available for used property under the Commissioner’s regulations. It distinguished between the two sets of equipment: for the 16 items, Foley was correcting an error with a method he had not regularly used, thus not needing the Commissioner’s consent. The court cited Silver Queen Motel, where a similar correction was allowed after an audit. For the two items depreciated correctly under the straight-line method, Foley was attempting to change his accounting method, which required the Commissioner’s consent under section 446(e). The court emphasized that Foley’s proactive correction of his error should not be penalized and upheld the 150-percent method for the 16 items but not for the two.

    Practical Implications

    This decision clarifies that taxpayers can correct erroneous depreciation methods on amended returns without needing the Commissioner’s consent if the original method was legally unavailable. However, if the original method was correct, a change requires consent. This ruling impacts how taxpayers and practitioners approach depreciation corrections, emphasizing the importance of using permissible methods initially. It also influences how the IRS audits and challenges depreciation methods, potentially affecting business planning and tax strategy concerning asset depreciation. Subsequent cases like Silver Queen Motel have reinforced this principle, guiding taxpayers on how to address similar situations.