Opinion · United States Court of Claims

Chidester v. United States

Chidester v. United States, 82 F. Supp. 322 (Ct. Cl. 1949)

Type: Opinion
Court: United States Court of Claims
Jurisdiction: Federal
Date: 1949-02-07
Topic: general

Madden, Judge, delivered the opinion of the court: The plaintiff is the administrator of the estate of Lewis B. Mallery, who died on December 80, 1945. He sues for a refund of income taxes paid by him on the income of the decedent for the year 1945. The decedent had been an employee of the National City Bank of New York from June 4,1929, until his death. Except for a period of one month before he was sent abroad, all of his services for the bank had been in foreign countries, of which he was, during his services in them, a bona fide resident, though a citizen of the United States.

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Cited by: 4 opinions

CHIDESTER v. UNITED STATES, (1949)

82 F. Supp. 322

CHIDESTER v. UNITED STATES.

No. 47693.

United States Court of Federal Claims.

February 7, 1949.

Action by Augustus B. Chidester, administrator of the estate of Lewis B. Mallery, deceased, against the United States for recovery of income taxes wrongfully collected.West Page 323

Judgment for plaintiff in accordance with opinion.

This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following

Special Findings of Fact.

1. Plaintiff, a citizen of the United States and a resident of Auburn, New York, is the administrator of the estate of Lewis B. Mallery, hereinafter sometimes referred to as the "decedent," who died on December 30, 1945.

2. The decedent was at all times up to his death a citizen of the United States.

3. Plaintiff, on April 5, 1946, after an allowed extension of time, duly filed with the Collector of Internal Revenue for the Twenty-first District of New York a federal income tax return for the decedent covering the period from January 1, 1945, to December 30, 1945, the date of the decedent's death. That return reported a net income of $7,847.02, a surtax net income of $7,347.02, and a total United States income tax of $1,984.52. Of the total tax of $1,984.52 disclosed by the return, $1,256 was paid by withholding and that amount was paid over by the National City Bank of New York to the Collector of Internal Revenue for the Second District of New York and is deemed to have been paid not earlier than March 15, 1946. The remainder of the tax, namely, $728.52, plus interest of $2.52, was paid by plaintiff to the Collector of Internal Revenue for the Twenty-first District of New York on April 9, 1946.

4. On May 15, 1946, plaintiff filed with the Collector of Internal Revenue for the Twenty-first District of New York a claim for refund of $1,755.52 of the income taxes paid by or on behalf of the decedent for the period from January 1, 1945, to December 30, 1945. One of the grounds set forth in that claim was the contention that the sum of $6,692.30 received as sick leave compensation from the Bank covering the period from March 1, 1945, to December 30, 1945, was exempt under Section116(a)(2) of the Internal Revenue Code,26U.S.C.A. § 116(a)(2), as earned income derived from sources without the United States and attributable to the period of the decedent's residence in foreign countries.

5. More than six months have passed since the claim for refund was filed and the Commissioner of Internal Revenue, hereinafter sometimes referred to as the "Commissioner," has not mailed to plaintiff by registered mail a notice of the disallowance thereof.

6. There was included in the income reported in the return filed by plaintiff on April 5, 1946, $6,692.30 received by the decedent from the National City Bank of New York, hereinafter sometimes referred to as the "Bank," as sick leave compensation to cover the period from March 1, 1945, to December 30, 1945, during which the decedent was on sick leave furlough with pay from that Bank. Under date of September 4, 1945, the Bank filed with the Commissioner a request for a ruling with respect to the application of the provisions of Section116(a) and Section 1621(a)(8) of the Internal Revenue Code,26U.S.C.A. §§ 116(a), 1621(a)(8), to the vacation and sick leave pay paid by the Bank to the decedent involved herein. On November 27, 1945, the Commissioner issued his ruling letter in response to the request for ruling just mentioned in which he held that the vacation pay for the period December 1944, through February 1945, both inclusive, was exempt from taxation under Section116(a)(2) of the Internal Revenue Code, but that the sick leave pay received during the period thereafter, during which the decedent was on sick leave furlough, was not exempt under Section 116(a)(2).

7. The decedent began working as an employee of the Bank on June 4, 1929, and continued in that employment up to the date of his death on December 30, 1945, including the period of his sick leave furlough from March 1, 1945, to December 30, 1945. However, the decedent performed no services for the Bank during the period of his sick leave furlough.

8. Except for a period of less than one month of preliminary training in the United States prior to July 1, 1929, all of the decedent's services for the Bank commencingWest Page 324on that day were rendered in foreign countries. He was a bona fide resident of foreign countries from July 1, 1929, until March 1, 1945. He changed his residence from Brazil to the United States on March 1, 1945. The last foreign country of which he was a bona fide resident was Brazil, of which he was such a resident beginning August 26, 1941, his place of residence and post of duty there being Rio de Janeiro.

9. At the end of November 1944, the decedent returned to the United States for his triennial vacation furlough of three months commencing December 1, 1944, and extending to the end of February 1945. The Bank regularly grants a three months' vacation furlough once in every three years to its foreign service employees and the decedent's vacation furlough was pursuant to that practice.

10. The Bank at the present time grants and for many years has granted sick leave furlough with pay to such of its employees as become sick while in its service. It has had, however, no announced or approved policy with respect to the matter, and the granting of sick leave, the length thereof, and the salary payable therefor are discretionary in each case. Its policy in this matter has been a very informal one.

11. In determining whether to grant sick leave to an employee, the Bank takes the following items into consideration in addition to the state of the employee's health: Age, length of service, value to the organization up to the time he became sick, potential future value, salary, family responsibilities, and the origin of the illness, that is, whether it was caused by his employment or arose through other causes. Such sick leave is entirely noncontractual and in any case in which the Bank has granted sick leave the leave could be canceled or modified, or if the employee was needed at his post or if some special work was required of him even at his home or where he happened to be staying, the Bank reserved the privilege of recalling him to active service accordingly.

12. The procedure with respect to the granting of sick leave in any particular case is as follows: A recommendation for sick leave originates with the supervising officer of the employee involved and must be based upon the recommendation of a physician. From the immediate supervising officer the matter goes to the district officer in the case of a foreign staff employee, or a general officer in the case of a domestic employee. If the district officer approves, the matter then goes to the cashier and vice president who is in charge of all personnel policies, and if the latter approves, he then submits his recommendation to the president for final decision by the latter. As part of the procedure, the recommendation is passed upon by the Bank's own medical department.

13. In the decedent's case, the recommendation for sick leave originated with the manager of the Rio de Janeiro branch on September 6, 1944. It was thereafter approved by the district officer in charge of the South American district on October 25, 1944, and the procedure outlined above was thereafter followed. The general considerations or factors enumerated in finding 11 were applied in determining the amount of sick leave in the decedent's case.

14. The approval of sick leave in the decedent's case carried the proviso that he should report to the proper type of specialist for a complete examination as soon as he arrived in New York, which was done before the matter was finally passed upon by the officers of the Bank in New York. The final approval of the sick leave was not granted until just prior to March 1, 1945, when the officials charged with the decision in the matter had all of the facts and knew it would be necessary for the decedent to stay out of work beyond the vacation furlough period.

15. When sick leave was first granted to the decedent, it was for six months, commencing March 1, 1945, and ending September 1, 1945. It was then extended to December 31, 1945. It was again extended in the latter part of November 1945, through 1946. However, the sick leave for 1946 was granted at a reduced rate of $4,000 per year instead of at the decedent's salary rate of $8,030.

16. The sick leave pay actually received by the decedent during the sick leave furlough period was at the same rate as heWest Page 325would have received salary, had he rendered services during that period.

17. Other factors being equal, the amount of sick leave does not vary between home office and foreign staff employees. The amount of sick leave granted to a foreign staff employee does not vary, depending on whether such employee is a resident of the United States or a resident of a foreign country during the sick leave period.

18. The decedent held the post of sub or assistant manager for the Rio de Janeiro branch. The decedent's title as such sub-manager of that branch was not revoked until January 11, 1946, twelve days after his death. The revocation formally revoked not only his title and position, but also the signing powers which he held by reason of such position.

19. The books of account kept by the Bank contain a breakdown, or division, between home-office income and income earned by its foreign branches. There is likewise a division in the accounts of the foreign branch income for the Rio de Janeiro branch.

20. Customarily where an employee has been an employee of a foreign branch and has had sick leave furlough granted to him, the charge for the sick leave furlough payments is made to the foreign branch for which he was last active in service. That is the method which was followed in the decedent's case in charging his sick leave pay to the subdivision of the undivided profits account that related to the Rio de Janeiro branch.

Conclusion of Law.

Judgment is rendered in favor of the plaintiff against the United States in the sum of $1,755.52, with interest as provided by law.

Dean P. Kimball, of Washington, D.C. (M.P. Wormhoudt and Covington, Burling, Rublee, Acheson Shorb, all of Washington, D.C., on the brief), for plaintiff.

Elizabeth B. Davis, of Washington, D.C., and Theron L. Caudle, Asst. Atty. Gen. (Andrew D. Sharpe and Ellis N. Slack, both of Washington, D.C., on the brief), for defendant.

Before JONES, Chief Judge, and MADDEN, HOWELL, WHITAKER and LITTLETON, Judges.

MADDEN, Judge.

The plaintiff is the administrator of the estate of Lewis B. Mallery, who died on December 30, 1945. He sues for a refund of income taxes paid by him on the income of the decedent for the year 1945.

The decedent had been an employee of the National City Bank of New York from June 4, 1929, until his death. Except for a period of one month before he was sent abroad, all of his services for the bank had been in foreign countries, of which he was, during his services in them, a bona fide resident, though a citizen of the United States. At the end of November 1944, the decedent, then having been stationed in Brazil for some three years, came to the United States for his triennial vacation furlough of the three months of December, January, and February. Before he left Brazil, the manager of the bank's Rio de Janeiro branch had recommended that he be granted sick leave. The bank had no announced policy regarding sick leave and determined, at its discretion, the length of sick leave and the amount of salary payable during such leave, taking into consideration age, length of service, family responsibility, value to the organization, and other factors. The bank granted the decedent sick leave at his full salary of $8,030 per annum from March 1, 1945, to December 31, 1945. The decedent changed his residence from Brazil to the United States on March 1, 1945. As we have said, he died on December 30, 1945.

Our question is whether the salary which the decedent received while on sick leave in 1945 should have been subjected, as it was, to United States income tax.

In Section116of the Internal Revenue Code, covering exclusions from gross income, in subsection (a), applying to earned income from sources without the United States, paragraph (2), says the following:

"(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 foreignWest Page 326country 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); 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."

The quoted language of the statute seems to us to fit the instant situation quite exactly. The decedent had had the required foreign residence. He had earned his sick leave in foreign service, and the salary, though paid by a New York bank, was charged by it to its Rio de Janeiro branch. The salary was treated by the Government as earned income when the Government taxed it. If it was not earned income, it was, so far as occurs to us, a gift, and should not have been taxed as income at all. But it was taxed, and the Government would not concede, and, we suppose, ought not to concede, that such noncontractual payments are not taxable as income in ordinary situations.

The Government urges that the exemption granted by Section 116(a)(2) is somehow contingent upon the payment of income taxes for the period in question to the foreign country where the taxpayer resided when the income in question was earned. The avoidance of double taxation may well have been one of the motives for the enactment of the section, but the language does not make the imposition of taxes by or their payment to a foreign government a condition precedent to the permitted exclusion. We conclude, therefore, that the plaintiff may recover $1,755.52 with interest as provided by law.

It is so ordered.

JONES, Chief Judge, and HOWELL, WHITAKER and LITTLETON, Judges, concur.West Page 333