SCOTUS Reports

Tag: Nonresident Citizen

  • Kluckhohn v. Commissioner, 18 T.C. 892 (1952): Determining ‘Earned Income’ for Nonresident U.S. Citizens

    18 T.C. 892 (1952)

    Income derived from the sale of foreign publication rights to an article, by a nonresident U.S. citizen, is not considered ‘earned income’ from sources outside the U.S. if the rights were sold within the U.S. after the article was written.

    Summary

    Frank Kluckhohn, a nonresident U.S. citizen residing in Argentina, wrote an article and later sold the foreign publication rights to Reader’s Digest while in the United States. He sought to exclude the income from his U.S. taxes under Section 116 of the Internal Revenue Code, arguing it was earned income from foreign sources. The Tax Court held that the income was not exempt because it didn’t meet the definition of ‘earned income’ under the statute, relying on the precedent set in *E. Phillips Oppenheim*.

    Facts

    Frank Kluckhohn, a U.S. citizen, lived in Argentina from 1945 to early 1947 and worked as a newspaper correspondent and writer.
    While in Argentina in 1946, he wrote an article about Peron and retained the rights to sell the article outside the United States.
    In early 1947, while in the United States, he received an offer from Reader’s Digest to reprint the article in foreign countries.
    He accepted the offer and received $1,200 in 1947 for the foreign rights, which he did not report as gross income.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Kluckhohns’ income tax for 1947.
    The Commissioner included the $1,200 in gross income, which the Kluckhohns contested in the Tax Court.

    Issue(s)

    Whether the $1,200 received by Frank Kluckhohn from Reader’s Digest for foreign rights to his article constitutes ‘earned income’ from sources without the United States under Section 116 of the Internal Revenue Code.

    Holding

    No, because the income was not considered ‘earned income’ within the meaning of Section 116, as it was not received as compensation for personal services rendered as an employee or at the request of Reader’s Digest.

    Court’s Reasoning

    The court relied on *E. Phillips Oppenheim, 31 B.T.A. 563*, which held that royalties received by a writer for granting publication rights do not constitute ‘earned income’ as defined by the statute.
    The court distinguished between wages received as an employee and royalties or payments received for granting rights to intellectual property.
    The court noted that Kluckhohn wrote the article independently and not as an employee or at the request of Reader’s Digest. Therefore, the payment was not considered compensation for personal services actually rendered.
    Section 116(a)(3) defines earned income as “wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered.”

    Practical Implications

    This case clarifies the definition of ‘earned income’ for U.S. citizens living abroad, particularly regarding income from intellectual property.
    It highlights that income from the sale of rights to an article is treated differently from wages or fees for services rendered.
    Attorneys should consider the source and nature of the income when advising clients on the applicability of Section 116 exclusions.
    This ruling is relevant for self-employed individuals and those who receive income from royalties or licensing agreements while residing outside the United States.
    Later cases would likely distinguish this case based on the specific facts, such as whether the writer was commissioned to write the article or was an employee of the publisher.

  • 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.