Opinion
Docket No. 7877.
1947-12-16
PAUL J. FICHTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
M. K. Eckert, Esq., for the petitioner. A. J. Hurley, Esq., for the respondent.
From 1919 until August 1941, petitioner was the manager of the Osaka, Japan, branch of an American industrial concern. It is stipulated that he was a resident of Japan for 22 years up until January 1, 1941. In the early part of 1941 petitioner came to the United States to confer with his firm concerning the threatening international situation. Before returning to Japan he visited his children, who were being educated in Canada. After returning to Japan he found the situation worsened and decided to leave that country. He left August 1, 1941, and arrived in this country August 28. During 1941 petitioner was physically absent from the United States, in Japan, on the high seas and in Canada, more than six months. Held, on the facts shown, petitioner was a bona fide nonresident of the United States for more than six months during 1941. M. K. Eckert, Esq., for the petitioner. A. J. Hurley, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income tax for the calendar year 1941 in the amount of $8,914.35. This deficiency arises by reason of respondent's determination that the amount of $29,578.75 was received in the taxable year by petitioner from Anderson, Clayton & Co. of Houston, Texas, for services rendered by petitioner as the manager of the Osaka, Japan, branch of that company, and was income to him under section 22(a) of the Internal Revenue Code and was not within the exclusion provisions of section 116(a).
FINDINGS OF FACT.
The petitioner is an individual and was at all times material herein a naturalized citizen of the United States. He now resides at 227 South McCarthy Drive, Beverly Hills, California.
Petitioner filed his income tax return for the calendar year 1941 with the collector of internal revenue for the sixth district of California at Los Angeles.
In the year 1915 petitioner entered the employ of Anderson, Clayton & Co., a cotton merchandising firm, with principal offices at Houston, Texas. In August of 1919 petitioner went to Japan to accept the position of manager of the Osaka branch of Anderson, Clayton & Co., which position he retained until his return to the United States in 1941.
In 1921 petitioner married a woman of British nationality in Kobe, Japan. In 1927 he purchased a house in that city. From 1919 until 1941 petitioner lived in Japan. Prior to 1941 petitioner made periodic business and holiday trips to the United States. Petitioner and his wife have 3 children. The children were educated in Japan until they were 13 or 14 years of age, after which they were sent to school in Canada, where his wife had friends. It was customary for the children of American or British parents residing in Japan to be sent at this age for education to English-speaking countries. During the years the children were in school in Canada petitioner visited them there after his trips to the company's head office in the United States. In 1941 petitioner's wife and 3 children were living in Ontario, Canada.
Petitioner, after several years in Japan, registered with the American consul as a resident of Japan, and made no contrary statements at any subsequent time. In each trip to the United States, in clearing through customs, petitioner stated to custom officials that his status was that of a nonresident citizen, a resident of the Empire of Japan.
Early in the year 1941 the political situation in Japan and the Far East had deteriorated to the point where petitioner deemed it advisable to return to the United States for the purpose of reporting personally to the head office of Anderson, Clayton & Co., in Houston, Texas, concerning the then existing state of affairs in Japan. After an exchange of cables he was instructed by the company to come to the United States for the purpose of giving such a report.
Petitioner departed from Japan on March 1, 1941, aboard the liner President Coolidge, bound for the United States. The destination called for by his ticket was Los Angeles, California. After a brief stopover enroute at Honolulu, Territory of Hawaii, petitioner arrived in San Francisco, California, U.S.A., on March 13, 1941, at 5:50 a.m. He remained in San Francisco for a period of approximately two days and on March 15 at 1:20 p.m. sailed from San Francisco for Los Angeles, California. He arrived in Los Angeles, California, March 16, at 6:21 a.m.
Upon his arrival in Los Angeles petitioner traveled to Houston, Texas, to confer with officials of Anderson, Clayton & Co., with respect to the Japanese situation. On April 8, 1941, he proceeded to Ontario, Canada, to be with his wife and family during the Easter holidays. He returned to the United States on April 28, 1941, and on Mary 9, 1941, left the United States for Japan under instructions for the company to take steps to protect its interests with regard to its business in Japan. After a brief stopover in Honolulu, Territory of Hawaii, en route, petitioner arrived in Japan in the latter part of May 1941.
Upon his return to Japan petitioner realized that the international situation had deteriorated to such an extent that it was inadvisable to enter into any new contracts for the sale of cotton and he began to take steps to liquidate the existing contracts and to wind up his affairs. In July 1941 he decided to get out of Japan and arranged for the sale of his house there.
On August 1, 1941, petitioner left Japan for the United States and, after a brief stopover in Honolulu, Territory of Hawaii, arrived in the United States on August 28, 1941. Upon his arrival he first traveled to the head office of Anderson, Clayton & Co., in Houston, Texas, where he stayed for a brief period before proceeding on September 9, 1941, to Canada to again visit his family. He returned to the United States on September 17, 1947, and took up residence in Beverly Hills, California, where he presently resides.
The following tabulation shows petitioner's presence in and absence from the United States during the calendar year 1941:
+----------------------------------------------------------------------------+ ¦ ¦Days ¦ +--------------------------------------------------------------------+-------¦ ¦Days within continental limits of the United States ¦156 1/3¦ +--------------------------------------------------------------------+-------¦ ¦Days enroute via S.S. President Coolidge from San Francisco to Los¦ ¦ +--------------------------------------------------------------------+-------¦ ¦Angeles ¦2/3 ¦ +--------------------------------------------------------------------+-------¦ ¦Days in Japan and on high seas ¦180 1/2¦ +--------------------------------------------------------------------+-------¦ ¦Days in Canada ¦26 ¦ +--------------------------------------------------------------------+-------¦ ¦Days in Honolulu, Territory of Hawaii ¦1 1/2 ¦ +--------------------------------------------------------------------+-------¦ ¦Total ¦365 ¦ +----------------------------------------------------------------------------+
Petitioner was a bona fide nonresident of the United States for more than six months during the taxable year 1941.
The income here involved represented salary paid to petitioner by Anderson, Clayton & Co. for his services as manager of its Osaka, Japan, branch, and commissions upon the sales made in Japan of its products.
OPINION.
KERN, Judge:
The primary question presented in this proceeding is whether petitioner during the taxable year was a bona fide nonresident of the United States for more than six months. If he was, then the income received by him from Anderson, Clayton & Co. during 1941 in compensation for his services as manager of its branch in Osaka, Japan, is exempt from taxation under the provisions of section 116(a) of the Internal Revenue Code.
SEC. 116. EXCLUSIONS FROM GROSS INCOME.In addition to the items specified in section 22(b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:(a) EARNED INCOME FROM SOURCES WITHOUT UNITED STATES.— In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income as defined in section 25(a) if received from sources within the United States; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection. * * *
Petitioner, in addition to his contention on the primary issue, contends in the alternative that if he is not held to be a bona fide nonresident of the United States for more than six months during the taxable year, then certain amounts of the sum included by respondent in his income for 1941 were, in reality, constructively received by him in 1940, and certain exclusions should be made from these receipts on account of commissions paid by him to his Japanese assistants.
Because of our conclusion that petitioner is correct in his primary contention, we have made no findings with regard to the alternative questions, which it is unnecessary for us to decide.
The question which we decide in the instant case is of the same generic type as that decided by us in Estate of W. M. L. Fiske, 44 B.T.A. 227; reversed, 128 Fed.(2d) 487, and in J. W. Swent, 5 T.C. 33; reversed 155 Fed.(2d) 513; but the facts presented by the record here before us are so much more favorable to the taxpayer that, even if we were to abandon the position taken by us in those cases and followed the Seventh and Fourth Circuits, we should decide in the instant case that the petitioner was a bona fide nonresident of the United States for more than six months of the taxable year.
The legislative history and background of the section of the code here in question was discussed in our opinions in the Fiske and Swent cases, supra, and a repetition of that discussion is unnecessary in this opinion. The evident purpose of section 116(a) was to increase and encourage our foreign trade by exempting from tax the income derived from export sales by American citizens engaged in that trade and forced to be absent on account thereof from the United States for considerable periods of time. The statute as finally adopted exempted from taxation the amounts received from sources without the United States by ‘a bona fide non-resident of the United States for more than six months during the taxable year.‘
In the instant case petitioner had been for many years employed by one of the large business concerns of the United States in selling its products in Japan, and the income here in question represented salary for such services and commissions earned on such sales. In order to carry on his duties as a foreign representative for this American business concern, petitioner was compelled to reside in Japan. He married there, owned a house there, and reared through childhood three children there. During those years he made the customary business and vacation trips to the United States, but no contention is made that these trips deprived him of his status as a bona fide nonresident. See J. W. Swent, supra, at page 38. In fact, respondent has stipulated that petitioner was a resident of Japan for 22 years up until January 1, 1941.
In 1941 the international situation understandably caused petitioner to travel more than usual, to be absent from Japan more than usual, and finally, to return to the United States, but the facts show without question that petitioner was physically absent from the United States during 206 1/2 days of the year.
In the Fiske case, supra, the taxpayer was physically present within the United States during practically all of the taxable year while in the Swent case, supra, the taxpayers were physically present within the United States for two-thirds of the year. In the Swent case, the Circuit Court of Appeal said: ‘The Commissioner here contends (we think rightly) that the exemption statute requires actual physical absence from the United States for six months during the taxable year,‘ and the gist of that Court's opinion was expressed in the following language:
In view of what has been said, we feel that Swent, who in 1940 spent two-thirds of the year in the United States for pleasure and profit (though probably consideration of health had some influence), whose stay was neither casual nor incidental, was not ‘a bona fide nonresident of the United States for more than six months during the taxable year‘ as that phrase is used in the exemption statute.
After our reversal in the Fiske and Swent cases, be said in J. Gerber Hoofnel, 7 T.C. 1136, 1141:
The statute in question has been interpreted to mean that the taxpayer must actually be physically absent from the United States for more than six months in the taxable year before he is entitled to the granted exemption. See Commissioner v. Fiske, 128 Fed.(2d) 487; Commissioner v. Swent, 155 Fed. (2d) 513.
Thus, the test contended for by respondent and approved by the Circuit Courts in the Fiske and Swent cases was the physical absence of the taxpayer from the United States for more than six months in the taxable year.
In the instant case, for the first time respondent contends that physical absence from the United States for six months of the year is not enough, but that the taxpayer must also show that each day of his physical absence from the United States was spent on business for his employer. Thus he disregards the days spent by petitioner in Canada and contends that petitioner was a bona fide nonresident for only the 180 1/2 days when he was in Japan and on the high seas.
The facts show that petitioner acted as manager of the Osaka, Japan, branch of Anderson, Clayton & Co. from January 1 to August 1, 1941, and during that time had his residence and place of business in Japan. In that period he made a business trip to the United States. Before returning to Japan he went to Canada to see his children, who were being educated there. This had been his custom when coming to the United States on business. On this occasion he stayed in Canada for 18 days. Thus, in 1941 petitioner was physically absent from the United States for 198 1/2 days during the period beginning January 1 and ending with his return to the United States on August 28. This was the period of his employment as foreign representative of the American business concern, out of which he derived the income here involved.
Under these facts we have concluded that petitioner was a bona fide nonresident of the United States for more than six months of the taxable year. It may be that petitioner's temporary presence in the United States incident to his business trip during the first part of 1941, which was closely related to his employment in Japan, should not be considered in computing the period of petitioner's bona fide nonresidence; but, without deciding that, we are confident that his physical presence in Canada in April 1941 can not adversely effect his status as a bona fide nonresident of the United States, in view of his immediate return to his place of duty in Japan.
The opinions of the Circuit Courts in the Fiske and Swent cases do not require such a result. Assuming, without deciding, that these opinions correctly state the law as applied to the facts of those cases, we are not disposed to extend the rationale of those cases to a case such as this where a taxpayer, clearly a bona fide nonresident under the doctrine of our own decisions in those cases, has not been physically present in the United States for more than six months in the taxable year.
Reviewed by the Court.
Decision will be entered for the petitioner.