SCOTUS Reports

Tag: Section 116

  • Hertig v. Commissioner, 19 T.C. 109 (1952): Establishing Bona Fide Residency for Foreign Income Exclusion

    19 T.C. 109 (1952)

    To qualify for the foreign earned income exclusion under 26 U.S.C. § 116(a)(1) (1939 I.R.C.), a U.S. citizen working abroad must demonstrate a bona fide residency in a foreign country, not merely a temporary presence for employment purposes.

    Summary

    Ernest Hertig, a U.S. citizen, worked in Afghanistan for nearly three years and sought to exclude his foreign earnings from U.S. income tax under Section 116(a)(1) of the Internal Revenue Code of 1939, claiming bona fide residency in Afghanistan. The Tax Court denied the exclusion, finding that Hertig was merely a transient or sojourner in Afghanistan for a specific employment purpose, lacking the intent to establish a true residence there. The court emphasized that the 1942 amendment to the statute required residency in a specific foreign country, not simply non-residency in the U.S.

    Facts

    Hertig, a U.S. citizen and former construction engineer for Union Pacific, divorced his wife in 1946. Prior to the divorce, he expressed interest in working abroad permanently. He entered a 2-year employment contract with Morrison-Knudsen Afghanistan, Inc. in October 1946 and worked in Afghanistan until September 1949. His contract provided board and lodging and obligated the employer to pay any foreign income taxes. He lived in company-provided barracks and spent weekends in Pakistan for recreation. After his contract ended, he sought other foreign employment before returning to the U.S.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Hertig’s income tax for 1947 and 1948. Hertig petitioned the Tax Court, arguing that he was exempt from U.S. income tax under Section 116(a)(1) of the Internal Revenue Code because he was a bona fide resident of Afghanistan. The Tax Court ruled in favor of the Commissioner, upholding the tax deficiencies.

    Issue(s)

    Whether Ernest Hertig was a bona fide resident of Afghanistan during the tax years 1947 and 1948 within the meaning of Section 116(a)(1) of the Internal Revenue Code of 1939, thus entitling him to exclude his income earned in Afghanistan from U.S. income tax.

    Holding

    No, because Hertig’s presence in Afghanistan was solely for employment purposes, and he did not demonstrate an intention to establish a bona fide residence there.

    Court’s Reasoning

    The Tax Court emphasized that the 1942 amendment to Section 116(a)(1) required a taxpayer to be a bona fide resident “of a foreign country,” not merely a nonresident of the United States. The court distinguished this case from cases like Charles F. Bouldin, 8 T.C. 959 and Audio Gray Harvey, 10 T.C. 183, where the taxpayers demonstrated a stronger connection to the foreign country. The court noted that Hertig’s intent was to work abroad generally, not specifically to reside in Afghanistan. His employer paid any foreign taxes, and his stay was relatively short. Citing Downs v. Commissioner, 166 F.2d 504, the court viewed Hertig as a “transient or sojourner” in Afghanistan for a specific purpose and definite period, lacking the obligations of a true home there. The court quoted Senator George’s explanation that the amendment was intended to exempt American citizens “who establish a home, maintains his establishment and is taking on corresponding obligations of a home in a foreign country,” while reaching “technicians… who are merely temporarily away from home.”

    Practical Implications

    This case clarifies the requirements for establishing bona fide residency in a foreign country for the purpose of excluding foreign earned income from U.S. taxation. It highlights that merely working in a foreign country under an employment contract is insufficient. Taxpayers must demonstrate an intent to establish a genuine residence in the foreign country, taking on the obligations and characteristics of a resident. Later cases have cited Hertig to emphasize the importance of intent and the specific facts demonstrating residency, focusing on factors like the duration of stay, integration into the local community, payment of foreign taxes, and the establishment of a home in the foreign country. The ruling underscores the need for detailed documentation and a clear demonstration of residential intent when claiming the foreign earned income exclusion.

  • 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.

  • покидає США, коли він перебуває на борту судна, що належить уряду іншої країни в гавані Нью-Йорка?, 9 T.C. 96 (1947): Definition of “Outside the United States” for Tax Purposes

    покидає США, коли він перебуває на борту судна, що належить уряду іншої країни в гавані Нью-Йорка?, 9 T.C. 96 (1947)

    An individual is not considered outside the United States for tax exemption purposes under Section 116 of the Internal Revenue Code until the vessel on which they are traveling has departed U.S. territorial waters.

    Summary

    The Tax Court addressed whether an American citizen was “outside the United States” for income tax purposes when he boarded a British vessel in New York Harbor that did not set sail until the following day. The petitioner argued that his presence on the foreign vessel, regardless of its location, constituted being outside the United States. The court ruled that physical departure from U.S. territory is required to meet the “outside the United States” threshold for the purposes of claiming the tax exemption under Section 116. The court upheld the tax deficiency assessed against the petitioner.

    Facts

    The petitioner, an American citizen, was employed by Lockheed and received income for services performed overseas. To claim a tax exemption, he needed to demonstrate he was outside the United States for more than six months in 1942. On June 30, 1942, the petitioner boarded a British vessel (H.M.S. Maloja) in New York Harbor, bound for the British Isles. Although aboard the vessel, he was not allowed to communicate with anyone outside of it for security reasons. The vessel did not sail until the morning of July 1, 1942.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the petitioner’s income tax for 1942 and 1943. The petitioner contested the deficiency, arguing he was entitled to an exemption under Section 116 of the Internal Revenue Code for income earned while outside the United States. The Tax Court heard the case to determine whether the petitioner met the requirements for the exemption.

    Issue(s)

    Whether an American citizen is considered “outside the United States” for the purposes of Section 116 of the Internal Revenue Code when they are aboard a vessel belonging to a foreign government that is tied to a pier in New York Harbor.

    Holding

    No, because for the purposes of Section 116(a) of the Internal Revenue Code, the petitioner was not “outside the United States” as long as the ship remained at its pier in New York Harbor.

    Court’s Reasoning

    The court reasoned that physical presence within the United States, even aboard a foreign vessel, does not constitute being “outside the United States” for the purposes of the tax exemption. The court acknowledged that international maritime law might address jurisdiction over crimes committed on foreign vessels, but it found that such law was not applicable to determining residency or presence for tax purposes under Section 116. The court emphasized the lack of legal precedent supporting the petitioner’s argument that simply boarding a foreign vessel within U.S. territory equates to being outside the United States. The court stated, “While it may be true that for certain purposes British sovereignty extended over the vessel H. M. S. Maloja while she was anchored in New York Harbor, nevertheless for purposes of section 116 (a), supra, petitioner was not ‘outside the United States’ as long as the ship remained at its pier in New York Harbor.”

    Practical Implications

    This case clarifies the interpretation of “outside the United States” for tax purposes, establishing that physical departure from U.S. territory is required to meet the exemption requirements under Section 116 of the Internal Revenue Code. This ruling has implications for individuals seeking to claim tax exemptions based on foreign residency or presence. It emphasizes the importance of establishing actual physical absence from the United States to qualify for such exemptions. Later cases would likely distinguish this ruling based on factual differences regarding the individual’s physical location and the specific requirements of the tax code at the time.

  • Bertin v. Commissioner, 1 T.C. 355 (1942): Calculating Nonresidency for Tax Exemption

    1 T.C. 355 (1942)

    When determining whether a U.S. citizen is a bona fide nonresident for more than six months for tax exemption purposes, the calculation should include aggregate days of absence, not just full calendar months.

    Summary

    Michel Bertin, a U.S. citizen, worked for Socony-Vacuum Oil Co. and traveled extensively abroad. In 1939, he was outside the U.S. for 186 days across three trips. Bertin prorated his salary, excluding income earned while abroad. The Commissioner argued that only full calendar months of absence could be counted, and Bertin did not meet the six-month requirement. The Tax Court held that the statute intended for the aggregate days of absence to be considered, not just full months, and ruled in favor of Bertin, allowing the exemption.

    Facts

    Michel J. A. Bertin, a U.S. citizen, worked for Socony-Vacuum Oil Co. His duties required him to travel to European, South, and Central American countries. In 1939, Bertin was absent from the U.S. for 186 days, spread across three separate trips. His salary was deposited monthly in his New York bank account.

    Procedural History

    Bertin filed his 1939 tax return, prorating his salary based on time spent inside and outside the U.S. The Commissioner determined a deficiency, arguing that Bertin did not qualify for the foreign earned income exclusion because he was not a bona fide nonresident for more than six months. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    Whether, in determining if a U.S. citizen is a bona fide nonresident of the United States for more than six months during a taxable year under Section 116(a) of the Internal Revenue Code, the calculation should include the aggregate of days spent outside the U.S., or only full calendar months?

    Holding

    Yes, because the statute intended to include aggregate days of absence, not just full calendar months, in determining whether the six-month nonresidency requirement was met.

    Court’s Reasoning

    The court rejected the Commissioner’s argument that only full calendar months should be counted, relying on a General Counsel Memorandum (G.C.M. 22065) that supported this view. The court noted that prior G.C.M.s had allowed the aggregation of days to meet the six-month requirement. The court found that the Commissioner’s interpretation was too narrow and not supported by the statute’s intent. The court reasoned that the purpose of the statute, originating in the Revenue Act of 1926, was to encourage foreign trade by exempting income earned by U.S. citizens working abroad. The court stated, “Taxation is a realistic matter…the respondent’s view here is, in our opinion, the antithesis of realism.” The court highlighted the absence of specific language in Section 116 requiring the exclusion of partial months, contrasting it with explicit language in Section 25(b)(3) regarding personal exemptions, which provided specific rules for fractional parts of months. The court held that Bertin’s 186 days of absence, consisting of five full calendar months and 36 additional days, satisfied the more-than-six-month requirement.

    Practical Implications

    This case clarifies how to calculate the six-month nonresidency requirement for U.S. citizens seeking the foreign earned income exclusion. It confirms that taxpayers can aggregate days of absence from the U.S. to meet the requirement, even if they do not have six full calendar months of continuous absence. This ruling benefits taxpayers who travel frequently for work, ensuring they are not penalized for shorter trips abroad. Later cases and IRS guidance continue to refine the definition of “bona fide resident,” but Bertin remains a key authority for understanding the temporal aspect of the six-month rule.