Bruckner v. Commissioner

*3 The Commissioner redetermined a deficiency in the income tax of the petitioner for the year 1937 in the sum of $216.67.

Two questions are presented:

(1) Did the petitioner's temporary absence on leave from his permanent domicile in the Canal Zone deprive him of the provisions of section 251 of the Revenue Act of 1936?

(2) What are the proper definition and correct application of the "period immediately preceding the taxable year" prescribed in section 251(a)(1)?

FINDINGS OF FACT.

The facts were stipulated substantially as follows:

The petitioner is a citizen of the United States, residing at Balboa Heights, Canal*1068 Zone. He resided in the Canal Zone from August 27, 1935, to February 17, 1936, during which period he was employed by the Panama Canal under a temporary appointment as "Assistant to the Comptroller, The Panama Canal." From January 1 to August 27, 1935, and from February 17 until December 29, 1936, he resided in and was employed in the United States.

The petitioner has been employed as "Assistant Comptroller, The Panama Canal" by the Panama Canal in the Canal Zone under a permanent appointment since December 29, 1936, and has made his residence there since that date to the present time. So far as can reasonably be expected, he will continue his residence and employment there indefinitely.

The petitioner was on regular leave of absence for vacation purposes from the Panama Canal during the period from November 29, 1937, to January 19, 1938, and was absent from the Canal Zone during that period. During his absence from the Canal Zone, the petitioner visited the United States, and on December 31, 1937, the last day of the taxable year here in controversy, he was in the United States.

*6 On March 9, 1938, the petitioner filed with the collector of internal revenue at*1069 Baltimore, Maryland, his Federal income tax return for the calendar year 1937, Form 1040 A, reporting thereon a net income of $438.24, against which he claimed a personal exemption of $1,000 under section 251(f) of the Revenue Act of 1936, resulting in no taxable income as shown on the return. The petitioner did not include in the income reported on Form 1040 A the sum of $7,126.39 consisting of compensation received for personal services performed by him in the Canal Zone for the Panama Canal.

The petitioner also filed with his Federal income tax return, Form 1040 A, a return on Form 1040 E for the calendar year 1937, reporting thereon as follows:

In answer to question No. 3 on Form 1040 E, "Were you living in such possession on the last day of your taxable year?", the petitioner answered, "On vacation leave of absence. *1070 " Under date of November 26, 1938, the collector of internal revenue at Baltimore, Maryland, advised petitioner as follows:

From the figures furnished on the Form 1040-E you do not meet the 80% and 50% requirements of Section 251 regarding income for the three-year period 1935, 1936 and 1937. Therefore, you are not entitled to exemption on $7,126.39 salary from sources in a possession of the United States.

The petitioner replied to the collector under date of December 17, 1938, as follows:

Permit me to call your attention to the fact that I claimed the benefits of Section 251 in my 1936 return for that portion of income received here but that this was ruled out by the Bureau because I was in the United States from February 17, 1936, to December 29, 1936, and the greater portion of my income was received in the States. I do not have the exact date on which I filed my 1937 return but am quite sure it was filed before I received final advice of the settlement of the 1936 tax. See letter to me dated February 17, 1938, from the Internal Revenue Agent in Charge, Baltimore, Maryland; also Certificate of overassessment, 1446688, schedule 62914. Consequently, Form 1040-E, filed with*1071 my 1937 return was incorrectly prepared and therefore subject to correction to show income only in the last column and for the year 1937, because this is the only part of the three-year period "immediately preceding the close of such taxable year as may be applicable," quoting from Section 251(a) and (1). In other words, the year 1937 is the only part of the three-year period immediately preceding the close of the taxable year and is the only year I should have reported on Form 1040-E.

*5 Under date of January 24, 1939, the Commissioner of Internal Revenue replied as follows:

The contents of your letter of December 17 have been carefully noted. However, since you were not in a possession of the U.S.A. on December 31, 1937, the last day of the taxable year, the gross income must be determined for the full three year period regardless of the date when you first arrived in the possession, and on that basis your income from sources within the Canal Zone does not meet the 80% and 50% requirements of Section 251 and no exemption is allowable.

In view of the above, no change has been made in the audit of your return, and tax in the amount of $216.67 is properly due*1072 and payable. Interest has accrued thereon at the rate of 6% per annum from March 15, 1938, to date of payment.

During the calendar year 1937, the petitioner was married and lived with his wife, Christina Bruckner. He had no dependent persons other than his wife who received their chief support from him during the taxable year. The petitioner paid his Federal income tax for the calendar year 1936 without benefit of section 251 of the Revenue Act of 1936.

OPINION.

VAN FOSSAN: Article 254(4) of Regulations 94 denominates the Panama Canal Zone a possession of the United States. By article 251(1) of Regulations 94, the respondent has construed the salary of the petitioner as a member of the civil personnel of the United States for services rendered in the Panama Canal Zone to represent income derived from the active conduct of a trade or business within a possession of the United States and thus to come within the purview of section 251 of the Revenue Act of 1936. ¹ The problem then is to determine how the provisions of section 251(a)(1) shall be applied to the stipulated facts.

*1073 The percentage requisites designated in subsections (1) and (3) are conjunctive - the petitioner must derive 80 percent of his gross *6 income for the period described and also 50 percent of such income must arise from the active conduct of a trade or business, both within a possession of the United States. ; affd., ; certiorari denied, . Since all of the income which the petitioner received within the Canal Zone was derived from his services as a member of the civil personnel of the United States and therefore, from the active conduct of a trade or business, no question arises under section 251(a)(3).

The first issue scarcely deserves comment. The fortuitous circumstance that the petitioner happened to be on a vacation out of the Canal Zone on December 31, 1937, has no bearing whatever on the situation. He was still under a permanent appointment as assistant comptroller of the Panama Canal, he returned to his duties as such in due time, and he expects to continue indefinitely his employment and residence in the Canal Zone. There is nothing in the act which requires*1074 the taxpayer to be physically present in a possession of the United States on the last day of the taxable year in order to enable him to exclude his income derived from sources within such possession, nor can we conceive that such a requirement could or would be exacted. The statute limits the petitioner's gross income to that derived from sources within the United States if he satisfies certain "conditions." Presence in the possession on the last day of the taxable year is not one of them. The suggested holding is arbitrary and capricious.

There remains, therefore, the primary question to be answered - under the facts before us, how should the statutory language "for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable)" be construed?

The respondent's position is that the part of the three-year period "applicable" begins with the date on which the petitioner first engaged in conducting a trade or business in the possession, or August 27, 1935, and extends to the end of the taxable year, December 31, 1937. However, this theory ignores one important*1075 fact: The petitioner received a temporary appointment as assistant to the Comptroller of the Panama Canal and served in that capacity until February 17, 1936. On that day he returned to the United States and was employed and resided there until December 29, 1936. The record does not reveal the circumstances or character of his employment or position during that period but, obviously, it was not that of a civilian employee of the Panama Canal. His temporary appointment in the Canal Zone terminated on the day he left the possession.

The petitioner returned to the Canal Zone on December 29, 1936, under a permanent appointment as an assistant comptroller, a position quite different from that which he occupied earlier in that year *7 and one which he expects to hold indefinitely. The continuity of his employment as assistant to the comptroller (held by the respondent to be a trade or business) was thus effectively and conclusively broken when he left the Canal Zone and should not be taken into consideration in determining the portion of the three-year period applicable to the case at bar.

The language of the statute is, "immediately preceding the close of such taxable year*1076 as may be applicable." The period from August 27, 1935, to February 17, 1936, must be excluded for the reasons above stated. During the period from February 17 to December 29, 1936, the petitioner resided and was employed in the United States. Hence, the applicable period is that immediately preceding December 31, 1937, the close of the taxable year, or from December 29, 1936, to December 30, 1937, inclusive.

Of the petitioner's total gross income ($7,657.79) received by him during the year 1937, $7,126.39 was paid to him as an employee of the Panama Canal. The amount so paid to him for the last three days of 1936 is negligible. He thus satisfied the conditions imposed by section 251 and income so derived is not includible in his gross income for the year 1937. His act in setting forth in his return, Form 1040 E, for that year, the amounts received by him in 1935, 1936, and 1937 is wholly immaterial to the issue. In cases such as this, decisions are controlled, not by the inclusion in the taxpayer's return of unnecessary data nor by his misconception of their tax significance, but by the applicable facts.

Decision will be entered for the petitioner.