SCOTUS Reports

Tag: Foreign Earned Income Exclusion

  • Flanagan v. Commissioner, 18 T.C. 1241 (1952): Taxation of Income Received After Returning from Foreign Residence

    18 T.C. 1241 (1952)

    Section 116(a)(2) of the Internal Revenue Code exempts income earned abroad only in the year a U.S. citizen returns from foreign residence, not in subsequent years when that income is received.

    Summary

    James Flanagan, a U.S. citizen, resided in Canada from 1926 to 1942. After retirement, he received pension payments based partly on compensation for services performed outside the U.S. during his Canadian residence. The IRS assessed deficiencies, arguing that these pension payments were fully taxable because Flanagan was a U.S. resident when he received them. Flanagan’s estate argued that a portion of the pension income attributable to his foreign service should be exempt under Section 116(a)(2) of the Internal Revenue Code. The Tax Court upheld the IRS’s assessment, finding that the exemption applies only to the year of change of residence.

    Facts

    • James W. Flanagan was a U.S. citizen.
    • He worked for Standard Oil Co. and Andian National Corporation from 1912 to 1942.
    • From 1926 to 1942, he was a bona fide resident of Canada.
    • In 1942, at age 70, he retired and returned to the U.S., remaining a resident until his death.
    • Upon retirement, he received an annual pension from Imperial Oil, Ltd., based on his prior compensation, including that earned while a resident of Canada.
    • In 1944 and 1945, Flanagan reported the pension income but claimed an exemption for the portion attributable to services performed in Canada during his period of Canadian residence.

    Procedural History

    The Commissioner of Internal Revenue assessed income tax deficiencies for 1944 and 1945. Flanagan’s estate petitioned the Tax Court for a redetermination of the deficiencies. The Tax Court, after considering the arguments and a similar case decided by the Court of Claims, upheld the Commissioner’s assessment.

    Issue(s)

    1. Whether pension payments received by a U.S. citizen in 1944 and 1945, attributable to compensation for services rendered during more than two years of foreign residence but received after the taxable year of change of residence to the United States, are exempt from gross income under Section 116(a)(2) of the Internal Revenue Code.

    Holding

    1. No, because Section 116(a)(2) applies only to the year in which the taxpayer changes his residence from a foreign country back to the United States, and not to subsequent years.

    Court’s Reasoning

    The court relied heavily on the Court of Claims decision in Wood v. United States, which addressed the same issue. The court reasoned that while Section 116(a)(2) is not explicitly clear on its face, the title of the section, “Taxable year of change of residence to United States,” clarifies that the exemption is limited to the year the taxpayer returns to the U.S. The court also examined the legislative history of the section, citing Senate Report 1631, which states that the same treatment (exemption of foreign-earned income) will be accorded to the taxpayer “for the year in which they return to the United States.” The court further explained that the word “derived” in the regulations refers to the actual receipt of income. Therefore, Congress only intended to allow an exclusion in the year of the change of residence for funds earned and received during the period of foreign residence. The court prioritized consistency in the interpretation of federal tax statutes.

    Practical Implications

    This case clarifies that the exemption for income earned abroad under Section 116(a)(2) is strictly limited to the tax year in which a U.S. citizen returns to the United States after a period of foreign residence. It prevents taxpayers from claiming the exemption in subsequent years, even if the income received is directly attributable to services performed during their time abroad. This ruling emphasizes the importance of the “year of change of residence” in determining the applicability of the exemption. Legal professionals advising clients on foreign income exclusions must consider this case when determining eligibility for exemptions in years following the return to the U.S. This case, along with Wood v. United States, serves as a key precedent in interpreting Section 116(a)(2).

  • Weeks v. Commissioner, 16 T.C. 248 (1951): Determining Bona Fide Residency for Foreign Earned Income Exclusion

    16 T.C. 248 (1951)

    A U.S. citizen working abroad is not a “bona fide resident” of a foreign country for income tax exclusion purposes if their intent is to remain abroad only for the duration of a specific project, maintains a home in the U.S. for their family, and intends to return to the U.S. upon completion of the project.

    Summary

    C. Francis Weeks, a U.S. citizen, worked as an engineer in Iran for an indefinite period under a contract that could be terminated at will. His employer provided room, board, and transportation. Weeks intended to stay in Iran only for the project’s duration and maintained a home for his family in the U.S. The Tax Court held that Weeks was not a bona fide resident of Iran and therefore could not exclude his foreign earned income from his U.S. gross income under Section 116(a) of the Internal Revenue Code. The court also addressed the includability of life insurance premiums paid by Weeks’s employer in his gross income.

    Facts

    E.B. Badger & Sons Company (Badger Company) contracted with Anglo-Iranian Oil Company to build petroleum refineries in Iran. Weeks, an engineer, executed an employment contract with M.W. Kellogg Company (working for Badger) to work in Iran for an indefinite period, subject to termination at any time. The employer provided transportation, room, board, and medical service. Badger Company also agreed to provide Weeks with life insurance. Weeks left the U.S. on April 24, 1942, and arrived in Iran on June 2, 1942. Weeks maintained a home for his wife and children in Massachusetts.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Weeks’s income tax for 1944. The Commissioner then amended the answer to request an increase in the deficiency. The Tax Court addressed whether Weeks was a bona fide resident of Iran and whether certain insurance premiums were includable in his gross income.

    Issue(s)

    1. Whether Weeks was a bona fide resident of Iran during the entire year of 1944, thereby exempting his foreign-earned income from U.S. income tax under Section 116(a) of the Internal Revenue Code.
    2. If Weeks was not a bona fide resident of Iran, whether the “dividends” applied against life insurance premiums paid by his employer on a policy on his life should be included in his gross income.

    Holding

    1. No, because Weeks intended to remain in Iran only for the duration of the construction project, maintained a home for his family in the U.S., and intended to return to the U.S. upon completion of the project.
    2. No, because the “dividends” constituted a reduction of the payment required for the insurance coverage, and only the net amount of the premium paid by the employer is includible in Weeks’s income.

    Court’s Reasoning

    The court reasoned that the criteria for determining whether a U.S. citizen is a bona fide resident of a foreign country are the same as those used to determine whether an alien is a resident of the U.S. Relevant factors include the taxpayer’s intentions regarding the length and nature of their stay. The court emphasized that Weeks’s intention was to remain in Iran only as long as required to construct the refineries. His family remained in the U.S., and he intended to return to them upon completing his work. The court relied on precedent such as Downs v. Commissioner, 166 F.2d 504, to support its conclusion that Weeks was not a bona fide resident of Iran. Regarding the insurance premiums, the court noted that amounts received as a return of premiums or “dividends” of a mutual insurance company credited against the current premium are not subject to tax, citing Regulations 111, section 29.22(a)-12 and Penn Mutual Life Insurance Co. v. Lederer, 252 U.S. 523.

    Practical Implications

    This case provides guidance on determining “bona fide residency” for U.S. citizens working abroad, emphasizing the importance of intent, the nature of the stay, and the maintenance of ties to the U.S. It clarifies that merely working on a project in a foreign country for an indefinite period is not sufficient to establish residency if the taxpayer’s intent is temporary. Legal professionals should consider factors such as the taxpayer’s intent, family ties, and the nature of their employment contract. Subsequent cases have cited Weeks to distinguish between temporary assignments and establishing a true residence in a foreign country. This ruling also confirms that only the net premium paid by an employer for life insurance is includible in an employee’s income when dividends reduce the gross premium amount.

  • 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.

  • Sverdrup v. Commissioner, 14 T.C. 859 (1950): Income Paid by U.S. to Nonresident Citizen is Not Exempt

    Sverdrup v. Commissioner, 14 T.C. 859 (1950)

    Amounts paid by the United States to a U.S. citizen residing abroad for more than six months are not exempt from gross income, even if the income is earned income from sources outside the U.S.

    Summary

    Leif Sverdrup, a U.S. citizen and partner in an engineering firm, worked outside the U.S. for more than six months in 1942. He sought to exclude income earned from contracts with the U.S. government from his gross income, arguing it was earned income from sources outside the U.S. under Section 116(a) of the Internal Revenue Code. The Tax Court held that the income was not excludable because it fell under the exception for “amounts paid by the United States or any agency thereof,” even though the income was earned outside of the United States.

    Facts

    Leif Sverdrup was a U.S. citizen and a partner in the engineering firm Sverdrup & Parcel. The partnership engaged in a joint venture with J. Gordon Turnbull to perform contracts related to the U.S. national defense program. Sverdrup worked outside the continental U.S., Hawaii, and Alaska from November 1941 to April 1942, overseeing construction projects in the South Pacific. He selected sites, supervised surveys, and arranged for labor and materials. The partnership received payments from the U.S. government under these contracts, depositing the funds into the joint venture’s bank account, and then distributed a share to Sverdrup. Sverdrup also received additional compensation of $5,000 from the joint venture.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Sverdrup’s income tax for 1943, stemming from the 1942 tax year. Sverdrup petitioned the Tax Court, contesting the Commissioner’s determination that certain income was not excludable under Section 116(a) of the Internal Revenue Code.

    Issue(s)

    Whether amounts received by a U.S. citizen, who is a bona fide nonresident of the United States for more than six months during the taxable year, from contracts with the U.S. government for services performed outside the U.S., are excludable from gross income under Section 116(a) of the Internal Revenue Code, prior to its amendment by the Revenue Act of 1942 and Revenue Act of 1943.

    Holding

    No, because the amounts were “paid by the United States,” and therefore fall within the exception to the exclusion provided by Section 116(a) for income earned abroad by U.S. citizens.

    Court’s Reasoning

    The court reasoned that because the funds originated from the U.S. government, the income was “paid by the United States,” regardless of the intermediate entities (joint venture and partnership). Citing Craik v. United States, the court emphasized that partnership income is treated as though each partner received their distributive share directly. The court rejected Sverdrup’s argument that the exception only applied to employees of the U.S., pointing to the broad language of the statute: “except amounts paid by the United States or any agency thereof.” The court did find that the $5,000 paid by the Joint Venture was excludable, as it was considered compensation paid by the joint venture, not directly by the United States.

    Practical Implications

    This case clarifies that the exception in Section 116(a) for amounts paid by the U.S. government applies broadly to any payments originating from the U.S. government, even if the income is earned outside the U.S. and would otherwise qualify for exclusion. It illustrates the importance of tracing the source of income when determining eligibility for tax exclusions related to foreign earned income. Later cases distinguish this ruling by focusing on whether the payment truly originated from the U.S. government, emphasizing that payments made by private entities, even if those entities receive government funding, may not fall under the “paid by the United States” exception.

  • 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.

  • Cruise v. Commissioner, 12 T.C. 1064 (1949): Establishing Bona Fide Foreign Residence for Tax Exemption

    Cruise v. Commissioner, 12 T.C. 1064 (1949)

    To qualify for foreign earned income exclusion under Section 116(a) of the Internal Revenue Code, a taxpayer must demonstrate bona fide foreign residence, which requires more than a temporary presence for employment purposes and necessitates demonstrating an intention to establish residency apart from the specific job assignment.

    Summary

    The petitioner, Mr. Cruise, sought to exclude his salary earned while working for the American Red Cross in England from his U.S. income tax, claiming bona fide foreign residence under Section 116(a) of the Internal Revenue Code. The Tax Court denied his claim, finding that despite his testimony of intent to remain in England, his actions and circumstances indicated he was in England temporarily for war-related employment and lacked the requisite intent to establish bona fide foreign residence. The court emphasized that temporary wartime employment abroad, even for a non-governmental organization, does not automatically equate to bona fide foreign residence for tax exemption purposes.

    Facts

    1. In September 1942, Mr. Cruise, a single man, was employed by the American Red Cross and sent to England for war-related work.

    2. His employment was for the duration of the war.

    3. Mr. Cruise testified he intended to remain in England if he found suitable opportunities after his Red Cross employment.

    4. He did not obtain a passport and never applied for one.

    5. He did not seek other employment in England during or after his Red Cross service.

    6. In November 1945, he returned to the United States due to illness.

    7. Three months after returning to the U.S., he began a lecture tour, suggesting his illness was due to overwork and resolved with rest in the U.S.

    Procedural History

    1. The Commissioner of Internal Revenue assessed a deficiency in Mr. Cruise’s income tax.

    2. Mr. Cruise petitioned the Tax Court to contest the deficiency, arguing his Red Cross salary was exempt under Section 116(a) due to bona fide foreign residence.

    3. The Tax Court heard the case and issued a decision in favor of the Commissioner.

    Issue(s)

    1. Whether Mr. Cruise, by virtue of his employment with the American Red Cross in England from 1942 to 1945, established bona fide residence in a foreign country for the purposes of Section 116(a) of the Internal Revenue Code, thereby exempting his foreign-earned income from U.S. income tax?

    Holding

    1. No, because Mr. Cruise’s actions and the circumstances of his employment indicated a temporary presence in England for a specific wartime purpose, lacking the intent to establish bona fide foreign residence apart from his Red Cross employment.

    Court’s Reasoning

    The Tax Court reasoned that Mr. Cruise’s self-serving declaration of intent to remain in England was unconvincing and appeared to be an afterthought. The court emphasized the lack of objective actions supporting his claim of foreign residence. The court noted:

    “Petitioner’s testimony with respect to his intention to remain in England after the termination of his employment with the Red Cross is not-convincing. This self-serving declaration made in 1949 appears to be an afterthought, for as far as the record discloses he never gave expression to such an intention either before he sailed or while he was in England. Something more is required than a mere statement that a taxpayer intended to remain in a foreign country and therefore became a resident of that country. Otherwise, income taxes properly due from many taxpayers could be easily avoided.”

    The court highlighted his failure to obtain a passport, seek other employment in England, or demonstrate any concrete steps to establish a life independent of his Red Cross assignment. The court categorized him with other civilian workers in foreign countries for the war effort, who were deemed not to be bona fide residents. The court distinguished this case from those where taxpayers had demonstrated more substantial ties to a foreign country beyond temporary wartime employment.

    Practical Implications

    This case clarifies that claiming bona fide foreign residence for tax exemption requires more than mere presence in a foreign country for employment. Taxpayers must demonstrate a genuine intention to establish residency, evidenced by concrete actions and circumstances beyond the scope of their temporary employment. Factors such as seeking local employment, establishing community ties, obtaining local documentation (like passports or visas), and the duration and nature of the foreign stay are critical in determining bona fide residence. This ruling emphasizes that wartime or temporary work assignments abroad, even for humanitarian organizations, are scrutinized to ensure taxpayers are genuinely establishing foreign residences and not merely seeking tax advantages while maintaining primary ties to the U.S.

  • Glackner v. Commissioner, 1948 Tax Ct. Memo LEXIS 235 (1948): Determining Bona Fide Residency in a Foreign Country for Tax Exemption

    Glackner v. Commissioner, 1948 Tax Ct. Memo LEXIS 235 (1948)

    To qualify for a tax exemption under Section 116(a) of the Internal Revenue Code for income earned abroad, a U.S. citizen must demonstrate bona fide residency in a foreign country, considering factors like the length of stay, nature of employment, intent, and connections to the foreign country.

    Summary

    The petitioner, a geophysical exploration employee, sought a tax exemption on income earned in Colombia, claiming bona fide residency. The Tax Court held that he was indeed a resident of Colombia during the taxable years. The court considered the length of his employment abroad (almost ten years), his three-year contract in Colombia, payment of Colombian income taxes, and the nature of his work requiring him to live and work in Colombia for extended periods. The court distinguished this case from others involving temporary absences from the United States.

    Facts

    The petitioner worked for a company conducting geophysical explorations globally since 1936. He had assignments in Arabia, the Persian Gulf, Sumatra, Colombia, and the United States. In 1941, he entered into a three-year contract to work in Colombia and remained there somewhat longer, returning in 1945. Income taxes were paid to Colombia on his behalf. He was subject to the U.S. Selective Service draft, but his company obtained deferments based on his essential oil development work. His work required constant travel within Colombia. He was unmarried and learned both Arabian and Spanish. He intended to continue working abroad.

    Procedural History

    The Commissioner of Internal Revenue assessed a deficiency against the petitioner for income taxes. The petitioner contested this assessment in the Tax Court, arguing that he was exempt from U.S. income tax on income earned while a bona fide resident of Colombia.

    Issue(s)

    Whether the petitioner, a U.S. citizen working abroad for an extended period, was a bona fide resident of Colombia during the taxable year, thus qualifying for an exemption from U.S. income tax under Section 116(a) of the Internal Revenue Code.

    Holding

    Yes, because the petitioner’s long-term employment abroad, his extended stay in Colombia under contract, his payment of Colombian income taxes, and the nature of his work demonstrated that he had established bona fide residency in Colombia.

    Court’s Reasoning

    The court emphasized that the 1942 amendment to Section 116(a) required affirmative proof of foreign residency, a stricter standard than mere non-residency in the United States. The court considered the totality of the circumstances, including the length and nature of the petitioner’s employment, his intent to remain in Colombia for a significant period (three years), and the fact that he paid income taxes to Colombia. The court distinguished this case from those involving temporary absences from the U.S. by individuals whose primary residence and career were in the U.S., stating, “…here we consider a man whose career is that of foreign service with a company…actually abroad from November 1938 until February 1945… Plainly, his position is broadly different from one who had a home, a wife, and children residing in the United States.” The court found his deferment from military service, while potentially indefinite, did not negate his intent to remain in Colombia, and his lack of participation in Colombian social life was understandable given his work and contractual restrictions.

    Practical Implications

    This case clarifies the factors considered when determining bona fide residency for tax exemption purposes under Section 116(a) of the Internal Revenue Code. It highlights the importance of demonstrating a long-term connection to the foreign country, including the length and nature of employment, intent to remain, and payment of foreign taxes. This ruling informs how similar cases should be analyzed by emphasizing a holistic approach to assessing residency, considering all relevant facts and circumstances. It is significant for legal practitioners advising U.S. citizens working abroad, providing a framework for evaluating their eligibility for the foreign earned income exclusion. Later cases cite it as precedent for analyzing foreign residency claims.

  • Harvey v. Commissioner, 10 T.C. 183 (1948): Establishing Bona Fide Foreign Residence for Tax Exemption

    10 T.C. 183 (1948)

    A U.S. citizen working abroad for an extended period, demonstrating intent to remain in a foreign country, and integrating into that country’s economic and social life can be considered a bona fide resident of that foreign country for U.S. tax purposes, even if subject to potential military draft and temporary work contracts.

    Summary

    Audio Gray Harvey, a U.S. citizen employed by Geophysical Service, Inc., sought to exclude income earned in Colombia from U.S. taxation, claiming bona fide residency in Colombia during 1943. The Tax Court ruled in Harvey’s favor, finding that his continuous employment abroad since 1938, his integration into Colombian life through language acquisition and tax payments, and his intent to remain in Colombia for the duration of his work contract established bona fide residency despite temporary deferments from military service. This case highlights the factors courts consider when determining foreign residency for tax exemptions.

    Facts

    Harvey was employed by Geophysical Service, Inc. since 1936. From 1938 to 1945, he worked in various foreign countries, including Colombia from September 1941 to February 1945. He performed services for the company outside the U.S. throughout 1943 and did not return to the U.S. at any time during that year. His income in 1943 included salary for services performed in Colombia. He obtained temporary deferments from the Selective Service based on his essential work. Harvey’s employment contract, a “Foreign Service Agreement”, contemplated a three-year term. He paid Colombian income taxes.

    Procedural History

    Harvey filed his income tax return for 1943 with the collector at Dallas, Texas, excluding income earned in Colombia. The Commissioner of Internal Revenue assessed a deficiency, arguing that Harvey was not a bona fide resident of Colombia. Harvey petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    Whether Audio Gray Harvey was a bona fide resident of Colombia during the entire taxable year of 1943, thus exempting his income earned in Colombia from U.S. taxation under Section 116(a)(1) of the Internal Revenue Code, as amended.

    Holding

    Yes, because Harvey’s continuous presence in Colombia, coupled with his intent to remain there for an extended period for employment purposes and his integration into Colombian society, established bona fide residency despite temporary deferments from military service.

    Court’s Reasoning

    The court emphasized the distinction between mere physical presence and bona fide residency. It distinguished Harvey’s situation from cases involving temporary absences from the U.S., noting that Harvey’s career was centered on foreign service. The court considered several factors: Harvey’s continuous employment abroad since 1938, his intent to remain in Colombia for at least three years (and potentially longer), his payment of Colombian income taxes, and his adaptation to the local language. The court noted, “Though of course not conclusive, we regard the point of taxes paid one to be weighed in determining foreign residence. They were paid by the petitioner… It was not the act of a transient, and it is consistent with residence.” The court found that the temporary nature of his draft deferments did not negate his intent to reside in Colombia for an extended period. It cited Swenson v. Thomas, a similar case involving a colleague, as further support for its decision.

    Practical Implications

    This case provides guidance on determining bona fide foreign residency for U.S. tax purposes. It emphasizes the importance of demonstrating an intent to reside in a foreign country for more than a temporary or transient purpose. Factors such as the duration of stay, integration into the local community (e.g., language acquisition, payment of local taxes), and the nature of employment are crucial. The ruling clarifies that temporary factors, such as renewable work contracts or potential military service obligations, do not automatically preclude a finding of bona fide residency if other factors support such a determination. This case is frequently cited when individuals working abroad seek to exclude foreign-earned income from U.S. taxation and provides a framework for analyzing similar cases.