Cornman v. Comm'r of Internal Revenue

• Decision Date: 18 March 1975
• Docket Number: Docket No. 789-74.
• Citation: 63 T.C. 653
• Parties: IVOR CORNMAN, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

63 T.C. 653

IVOR CORNMAN, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 789-74.

United States Tax Court

Filed March 18, 1975.

Ivor Cornman, pro se.

Robert A. Johnson, for the respondent.

Petitioner, a United States taxpayer residing in a foreign country, earned no income from biological research activities in 1970. He did, however, deduct expenses related to these activities on his joint Federal income tax return for 1970. Respondent disallowed such expenses on the ground that they were allocable to income which would be exempt from taxation under sec. 911(a), I.R.C. 1954, if earned. Held, petitioner is entitled to deduct the biological research expenses under sec. 162(a), where he received no ‘earned income’ within the intended scope of sec 911(a) to which his expenses would be properly allocable or against which they would be chargeable.

OPINION

DAWSON, Judge:

Respondent determined a deficiency of $1,545.07 in petitioner's Federal income tax for the year 1970. The only issue presented for decision is whether section 911(a)¹ prevents petitioner from deducting ordinary and necessary expenses incurred in 1970 in connection with his trade or business of biological research, where he earned no income from such activities while residing in a foreign country.²

All of the facts are stipulated. We adopt the stipulation of facts as our findings. The relevant facts are summarized below.

The principal place of residence in 1970 of Ivor Cornman (herein called petitioner) was Fort George, Stony Hill, Kingston 9, Jamaica, and he had been a bona fide resident of Jamaica since 1963. This was petitioner's residence at the time the petition was filed in this proceeding.

For the taxable year 1970 the petitioner filed a joint Federal income tax return with his wife, Margaret E. Cornman, with the Philadelphia Service Center, Philadelphia, Pa.

Petitioner and his wife are both citizens of the United States. Petitioner has been engaged in biological research, either as a salaried employee or on a self-employed basis, for about 25 years. He has been self-employed since 1964, except for a brief period in 1969 when he worked for Environmental Development, Inc. Petitioner's primary line of endeavor is the isolation of organic substances with potential commercial use in pharmaceutical products. This research requires a tropical environment which consideration led to petitioner's becoming a resident of Jamaica, where his research was conducted in 1970.

Petitioner's research activities generated no income from this source in 1970. He had four purposes for keeping his research service operational: (1) To be ready to initiate work for a new client; (2) to be able to collect additional material for all clients; (3) to conduct and publish basic research in techniques of screening for medicinal substances; and (4) to examine new undertakings as alternative sources of income.

Petitioner received income in 1971 as an advance for conducting a scientific tour for college students. This tour was conducted in 1972.

Petitioner incurred the following expenses relating to his research in Jamaica in 1970:

+----------------------------+
                ¦Salaries paid        ¦$7,000¦
                +---------------------+------¦
                ¦Rent paid            ¦226   ¦
                +---------------------+------¦
                ¦Transportation paid  ¦151   ¦
                +---------------------+------¦
                ¦Storage paid         ¦100   ¦
                +---------------------+------¦
                ¦Retirement trust fee ¦19    ¦
                +---------------------+------¦
                ¦Total                ¦7,496 ¦
                +----------------------------+
                

The $7,000 salary was paid to petitioner's wife for secretarial and ‘lab’ technician services. This income was excluded from petitioner's joint Federal income tax return filed for himself and his wife and appears on Form 2555, Exemption of Income Earned Abroad, filed with that return.

Respondent contends that although petitioner's expenses for biological research activities in 1970 would ordinarily be allowed as deductions under section 162(a) to a resident United States taxpayer, there is an exception in section 911(a) to the allowance of these expenses. Under section 911(a) such expenses are not allowable if they are allocable to income exempt from taxation because the person earning the income is a resident of a foreign country. Respondent correctly states that the place where the work was performed and not where the income was received is determinative of whether gross income is exempt under section 911(a). Moreover, the exemption provisions relating to income earned in a foreign country are mandatory and not elective. See Rev. Rul. 72-526, 1972-2 C.B. 450. Respondent points out that if petitioner had received income from his 1970 research activities in Jamaica, it would have been exempt income. Thus, respondent argues that since expenses incurred in earning exempt income are not deductible (no matter how small the income), it would not be rational to permit petitioner to deduct such expenses merely because he was not fortunate enough to earn any income in 1970. Respondent asserts that petitioner's expenses are ‘allocable’ to his attempt to earn income, and should therefore be nondeductible under section 911(a).

Petitioner, on the other hand, contends that the specific language of section 911(a) provides for disallowance of only those deductions ‘properly allocable to or chargeable against amounts excluded from gross income under this subsection.’ Thus, he argues that section 911(a) clearly has two prerequisites for disallowance of any deductions thereunder: (1) The presence of income which is, in fact, excluded under section 911, and (2) deductions which are properly allocable to or chargeable against such excluded income. He urges that neither prerequisite is met here. He earned no income which was excluded from taxation in 2970, and his expenses cannot be allocated to any such income. He points out that respondent's emphasis upon petitioner's attempt to earn income simply does not supply the missing statutory requirement of section 911(a) that actual amounts be so ‘excluded from gross income under this subsection.’

Petitioner asserts that his research expenses in 1970 are allocable to and deductible in his continuing trade or business of biological research. ³ He distinguishes his situation, where no income was earned, from those where some income was earned and excluded under section 911(a). See and compare Anne Moen Bullitt Brewster, 55 T.C. 251 (1970), affd. 473 F.2d 160 (C.A. D.C. 1972); Frieda Hempel, 6 T.C.M. 743 (1947). And we are not confronted with an expense so closely related to subsequently earned and excluded income that the expense must be disallowed under section 911(a). See Hartung v. Commissioner, 484 F.2d 953 (C.A. 9, 1973), reversing 55 T.C. 1 (1970).

Petitioner urges that respondent's position overlooks the basic reason for the disallowance of deductions allocable to earned income contained in section 911(a). He agrees that, where income is excluded under section 911(a), to allow a deduction of expenses allocable thereto has the effect of allowing a double deduction— once for the expenses deducted and once for the income excluded. He argues, however, that where there is no income excluded, because there is no income earned, then there can be no double deduction. Instead, there is only a single deduction— the deduction of expenses incurred in a taxpayer's continuing trade or business. He points out that where Congress was wanted to obtain parity of treatment for losses, where there was no income of like character, it has drafted specific provisions to create such equality. Thus, Congress has provided an offset of long-term capital losses against ordinary income in section 1211(b)(1)(c). It has also defined in section 163(d) conditions for the disallowance of half the interest deduction associated with debt used to finance investments which will later produce capital gain upon their sale or exchange. Both sections achieve equality of tax treatment where there is no current income to which associated expenses may be allocable. By contrast, Congress utilized no such explicit language in section 911(a). Rather, in section 911(a) Congress required the presence of excluded income before providing for the nondeductibility of expenses allocable thereto. Petitioner urges us not to read into section 911(a) an additional effect not explicitly intended by Congress, i.e., to deny deductibility of expenses where no income is earned or excluded, especially where the allowance of such expenses.

In general, under section 911(a), amounts within statutory limits which constitute earned income attributable to services actually rendered by a bona fide resident of a foreign country are excludable from gross income and exempt from taxation. Section 911(b) defines the term ‘earned income,‘ in part, as wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered.

In relevant part, section 911(a) further provides that:

An 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. Respondent has promulgated section 1.911-2(d)(6), Income Tax Regs., which provides in pertinent part as follows:

(6) Treatment of deductions. In any case in which any amount is excluded from the gross income of an individual under paragraph (a) or (b) of this section, there shall be disallowed as a deduction any expenses, losses, or other items otherwise deductible * * * properly allocable to or chargeable against the amount so excluded from gross income. * * * However, deductions which are not properly allocable to or chargeable against earned income excluded under paragraph (a) or (b) of this section are deductible in their entirety * * * . Examples of such items include personal and family medical expenses, real estate taxes on a personal...