Opinion
No. 50101.
June 3, 1952.
Irving H. Bull, New York City (B.H. Bartholow, New York City, on the briefs), for plaintiffs.
Elizabeth B. Davis, Washington, D.C., Ellis N. Slack, Acting Asst. Atty. Gen. (Andrew D. Sharpe, Washington, D.C., was on the brief), for the defendant.
Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.
The Court, upon the evidence, a stipulation of facts entered into between the parties, and the briefs and argument of counsel, makes the following
Special Findings of Fact
1. The plaintiffs, Judson Wood and Teresa P. Wood, are husband and wife and are citizens of the United States.
2. The plaintiff, Judson Wood, was born June 29, 1891, entered the employ of Gulf Oil Corporation January 15, 1920, and from April 1, 1921, to December 1, 1946, he was employed successively in Mexico, Colombia, and Venezuela by various wholly owned, direct or indirect, subsidiaries of Gulf Oil Corporation operating in those countries. During the period of such employment in Mexico, Colombia, and Venezuela the plaintiff, Judson Wood, was a bona fide resident of these countries.
3. The plaintiff, Judson Wood, married the plaintiff, Teresa P. Wood, September 11, 1926. On December 1, 1946, the plaintiff, Judson Wood, retired, and he and the plaintiff, Teresa P. Wood, returned to the United States and since that time have been residing continuously in San Antonio, Texas. From the time of her marriage on September 11, 1926, to Judson Wood, until December 1, 1946, the plaintiff, Teresa P. Wood, was a bona fide resident of Venezuela. The plaintiffs, Judson Wood and Teresa P. Wood, were bona fide residents of the United States during the entire calendar year 1947.
4. Gulf Oil Corporation and its wholly-owned subsidiaries maintain an "Annuities and Benefits Plan" qualified under section 165 of the Internal Revenue Code as a pension or profit-sharing plan, under which retired employees receive monthly payments (hereinafter called "pensions") for life. The Plan became effective as of January 1, 1944, when the plaintiff, Judson Wood, was employed and residing in Venezuela, S.A., and covered the entire period of his foreign service. Judson Wood on his retirement on December 1, 1946, became a beneficiary under the said Plan entitled to receive an annual pension of $7,899.36.
5. During the year 1947 the plaintiff, Judson Wood, received under the Plan 12 monthly pension payments totaling $7,899.36. Said payments constituted additional compensation for services rendered by the plaintiff, Judson Wood, during the entire period of his employment by Gulf Oil Corporation and its subsidiaries.
6. The plaintiff, Judson Wood, in August, 1947, received severance pay from his former employer, Mene Grande Oil Company, C.A., a wholly-owned subsidiary of Gulf Oil Corporation, in the amount of $8,662.50, representing six months' salary (less the Venezuela income tax withheld thereon).
7. The plaintiffs, Judson Wood and Teresa P. Wood, filed a joint Federal income tax return for the year 1947, prepared on the cash basis, in which they reported as taxable income 2/26ths ($607.64) of said pension payments in the amount of $7,899.36 and omitted 24/26ths as non-taxable income.
8. The plaintiffs, Judson Wood and Teresa P. Wood, reported in their said joint income tax return as taxable income 2/26ths ($666.35) of said severance pay in the amount of $8,662.50 and omitted 24/26ths as non-taxable income.
9. Subsequent to the filing by the plaintiffs, Judson Wood and Teresa P. Wood, of their joint Federal income tax return for 1947, said return was audited and a deficiency of $5,374.65 was proposed based upon adding to taxable income reported by the plaintiffs in their return pension payments in the amount of $7,291.72 received by the plaintiff, Judson Wood, in 1947, being 24/26ths of the total pension payments received by him in that year in the amount of $7,899.36 and adding to taxable income reported by the plaintiffs in their return severance pay in the amount of $7,996.15 received by the plaintiff, Judson Wood, in 1947, being 24/26ths of the total severance pay received in that year in the amount of $8,662.50. The proposed deficiency of $5,374.65, together with interest of $490.76, or a total of $5,865.41, was duly paid by the plaintiffs to the Collector of Internal Revenue at Austin, Texas, on October 5, 1949.
10. On January 24, 1950, the plaintiffs, Judson Wood and Teresa P. Wood, mailed by registered mail to the Collector of Internal Revenue at Austin, Texas, a claim for refund of said proposed deficiency and interest totaling $5,865.41.
11. On May 10, 1950, the plaintiffs, Judson Wood and Teresa P. Wood, received a letter dated May 9, 1950, from Frank Schofield, Collector of Internal Revenue, Austin, Texas, in which said claim for refund in the amount of $5,865.41 was rejected.
12. There has been no assignment by the plaintiffs of the aforementioned claim for refund or any part thereof.
Conclusion of Law
Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiffs are not entitled to recover, and the petition is therefore dismissed.
Judgment is rendered against the plaintiffs for the cost of printing the record herein, the amount thereof to be entered by the clerk and collected by him according to law.
Plaintiffs sue to recover taxes assessed against their income for the year 1947. We do not think they are entitled to recover. A few brief words to state why we are of this opinion.
In the first place, plaintiffs made their returns on a cash basis, instead of on an accrual basis. This means, of course, that we must view their status as of the time they received their income, instead of the time it accrued to them; that is to say, instead of the time they earned it.
We are concerned with the income plaintiff Judson Wood received in 1947. What he received in this year was called a pension and severance pay, but, whatever it was called, it was in payment for services rendered. It was, therefore, to be included in his gross income, unless section 116(a) of the Internal Revenue Code, 26 U.S.C. § 1946 Ed. § 116, provides for its exclusion. This section, quoted in the footnote below, in subparagraph (1), excludes from a taxpayer's gross income amounts received from sources without the United States, if the taxpayer is a resident of a foreign country throughout the entire taxable year. This taxpayer was not a resident of a foreign country in the year in which he received the income under consideration, although he was in the years in which he earned it. But, since he made his return on the cash basis, instead of the accrual basis, the material fact is his status at the time he received the income, and not at the time he earned it.
"(a) Earned income from sources without the United States.
"(1) Foreign resident for entire taxable year. In the case of an individual citizen of the United States, who establishes to the satisfaction of the Commissioner that he is a bona fide resident of a foreign country or countries during the entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts constitute earned income as defined in paragraph (3); * * *.
"(2) Taxable year of change of residence to United States. In the case of an individual citizen of the United States, who has been a bona fide resident of a foreign country or countries for a period of at least two years before the date on which he changes his residence from such country to the United States, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof), which are attributable to that part of such period of foreign residence before such date, if such amounts constitute earned income as defined in paragraph (3); * * *.
"(3) Definition of earned income. For the purposes of this subsection, `earned income' means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered * * *."
Nor does subparagraph (2) of the section help him. This provides for exclusion from gross income of amounts attributable to his foreign service which were received in the taxable year in which he changed his residence from a foreign country to this country. This subparagraph clearly is applicable only to the year in which he changes his residence; it is not applicable to a subsequent year. Had the taxpayer made his tax returns on an accrual basis, this might have permitted him to exclude this income, but he made his returns on a cash basis, and the income in question was received, not in the year in which he changed his residence, but in the following year.
Plaintiff's income does not come within the exclusions of section 116(a) of the Internal Revenue Code, and no other reason has been advanced for excluding it from their gross income. If it is to be included, the taxes have been correctly assessed.
We are of opinion that plaintiff's income attributable to his foreign service should have been included in his gross income and, hence, plaintiffs' petition must be dismissed.
JONES, C.J., and HOWELL, MADDEN and LITTLETON, JJ., concur.