Benfer v. Comm'r of Internal Revenue, Docket No. 3629-64.

• Citation: 45 T.C. 277
• Decision Date: 20 December 1965
• Docket Number: Docket No. 3629-64.
• Parties: RICHARD W. BENFER AND ELAINE P. BENFER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

45 T.C. 277

RICHARD W. BENFER AND ELAINE P. BENFER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 3629-64.

Tax Court of the United States.

Filed December 20, 1965.

Alan C. Kay, for the petitioners.

Wesley A. Dierberger, for the respondent.

Held, under the unique facts and circumstances of this case, petitioner was a bona fide resident of a foreign country and the income earned without the United States during the taxable year is exempt from taxation under the provisions of section 911(a)(1), I.R.C. 1954.

TIETJENS, Judge:

The respondent determined a deficiency in petitioners' income tax for 1961 in the amount of $8,018.16. The sole issue is whether petitioners were bona fide residents of a foreign country within the meaning of section 911(a)(1), I.R.C. 1954.

On brief, respondent conceded that, for the purposes of this case, Kwajalein, Marshall Islands, is a ‘foreign country’ within the meaning of section 911, supra. On brief, respondent also conceded petitioners' alternative issue, viz, that petitioners are entitled to exclude $9,315.06 of their 1961 income under the provisions of section 911(a)(2) of the 1954 Code.

FINDINGS OF FACT

The stipulated facts are found as stipulated.

The petitioners, husband and wife, filed their joint 1961 Federal income tax returns, Form 1040, with the District Director of International Operations, Washington, D.C. On their return, they excluded from income $27,000 in salary earned by Richard W. Benfer from the Bell Telephone Laboratories upon the ground that this amount had been earned by him while a bona fide resident of a foreign country. Attached to their joint return was Form 2555 which sets forth a statement of support of their exclusion of income earned abroad. The term ‘petitioner,‘ as used herein, refers to Richard W. Benfer.

In June 1929, petitioner graduated from the University of Illinois. In July 1929, he became an employee of Western Electric Co., part of the Bell System. Since that time he has continued to be an employee of the Bell System. He worked in New York City for about 10 years as a design engineer in radio and sound movie fields. Late in 1939, Western Electric transferred him to its Los Angeles office, where he worked with the same type of equipment as a supervisor.

Shortly after December 7, 1941, Benfer was transferred to the Bell Telephone Laboratories, Whippany, N.J., for fire control and radar equipment design for the Armed Forces. Petitioner remained at Whippany for the duration of the war and thereafter, working 7 days a week. His work assignments were all within the United States. At the end of the war petitioner rented a house in New Jersey and continued in military type activities at Whippany.

In 1947, petitioner was assigned to the Nike series of defense weapons and thereafter worked on that project. There are a series of missiles in the Nike family: Nike-Ajax, Nike-Zeus, and Nike-Hercules. The petitioner has worked on all of them. The Nike-Ajax missile has been phased out but Bell Laboratories is still supporting tests on Nike- Hercules at its White Sands Laboratory, Las Cruces, N. Mex., and is working on an advanced system known as Nike-X. Bell Laboratories has experimental stations at White Sands, several in New Jersey, the Pacific Missile Range on the west coast, and at Kwajalein, Marshall Islands.

In September 1953, petitioner was promoted to director of Bell's White Sands Laboratory which was being started for the purpose of testing missiles on the White Sands Missile Range. Petitioner was director of White Sands Laboratory until he was appointed director of Bell's Kwajalein Field Station, Kwajalein, Marshall Islands, effective October 1, 1960. He bought a house in Las Cruces in 1953.

Petitioner did not volunteer for the Kwajalein assignment. He was consulted about the assignment, was assigned to it, and accepted the position as an assignment. He received no written contract from his employer for the assignment, and he has no written contract now as this is not the policy of his employer. His assignment at Kwajalein was indefinite, a minimum of at least 3 or 4 years. His employer did not know when he would return from Kwajalein or what his next assignment would be. The programing at Kwajalein was continued yearly with no termination date in sight and with existing programs extending operations at Kwajalein to 1969 or 1970.

The Kwajalein project was an extension of the land range activities at White Sands. Petitioner's job was to establish Bell's research station on Kwajalein, get it operational, and conduct the test program. He participated in all negotiations for the test planning of the program. The first phase was participating with the people contracting to rehabilitate the island, install and prepare sites for radar and missile facilities for test purposes, and set up proper office and laboratory facilities and staff.

The site was scheduled to be operational by the middle of 1962, and this was accomplished. It took approximately 18 months to prepare the site for operational tests. This period of 18 months was devoted to construction of facilities, site preparations, installations of equipment, checkout, and preparing for operational tests. Thereafter, operational tests were conducted with the gear installed. Simultaneously therewith, additional gear was installed and sites prepared for additional equipment for further operational tests with the result that the operation was a continuous process.

Bell Laboratories' participation in the Nike contract was research and development of the Nike systems, not manufacturing or operation of the defense system as a weapon. Nike-Zeus was the only system in Kwajalein while petitioner was there. The Nike-Zeus missile, with its accompanying system, which is a complex of radars and computers, is capable of intercepting an ICBM missile on its terminal trajectory. It is a missile that has been developed over a period of years and initially tested at the White Sands Missile Range. The accompanying equipment had been tested partially at the White Sands Missile Range, and such testing was continued at the Kwajalein test site.

Bell Laboratories does not make the rocket. It is made by Douglas Aircraft Co. Bell's connection with the rocket on Kwajalein is as follows: The Department of the Army contracts with Western Electric and Bell Telephone Laboratories, the Bell System, as a system developer. Douglas Aircraft is a subcontractor to Bell Laboratories. The contracting officers of Bell Laboratories look to Bell as the prime contractor for the weapons system regardless of what it takes to do it, and Bell Laboratories subcontracts for things like missiles, but controls and has full responsibility for the development of the system. The Douglas Aircraft people and the other technical people on Kwajalein were subcontractors to Bell Telephone Laboratories and worked for Bell.

After the site became operational petitioner had about 600 people working for him in specific authorized activities. He was under day-to-day supervision of his Bell director at Whippany, but was responsible to no one at Kwajalein. Among the firms, agencies, institutions, and others operating and having employees on or near Kwajalein were the following:

The only Air Force officer on the Island known to petitioner was with MATS.

The Transport Co. of Texas was the logistic contractor that provided the island facilities. It ran the schools, the hospital, the doctors, and the school teachers. It operated the housing facilities as part of its contract to provide basic housing without charge to employees. It was a contractor to the Navy Department.

Army Rocket Guided Missile Agency (ARGMA), now Army Material Command (AMC), located at Huntsville, Ala., Redstone Arsenal, is the contracting officer with technical cognizance over the scope of the contract. It funds the contract and determines the scope of the technical research activities. At any site where petitioner is working, or at Bell's headquarters office, ARGMA has certain resident liaison people, some contract type and some technical type people, who are supposed to see that Bell runs the contract in accordance with Government regulations. They are contract monitors. ARGMA does not run or shoot the missile. Its personnel on Kwajalein consisted of a half dozen officers and three civil service employees during 1960 and 1961.

American Electric Co. of Honolulu, the electrical contractor on the island, had employees on Kwajalein, the number of which varied with the level of work.

During 1961, Douglas Aircraft Co. had approximately 100 employees there.

Kentron, Hawaii, had employees there in 1961 who provided technical support for instrumentation on the range.

Lincoln Laboratories and MIT had an installation on the Island of Roi. Part of their technical staff resided on Kwajalein although they worked at Roi.

New Mexico State, one of Bell's subcontractors, provided data analysts and handlers.

Pacific Martin-Zachry, a contractor, had civilian employees doing construction work in the Pacific area.

Remington Rand, a subcontractor to Bell, had a half dozen computer programer people on Kwajalein.

The U.S. Army Corps of Engineers and its contractors were on Kwajalein. They prepared the site and constructed the buildings and facilities used by Bell.

In view of the instructions from his employer at the time he accepted the Kwajalein assignment, petitioner decided to sell his house in Las Cruces, since he did not know when he would return. In October or November of 1960, petitioner offered his house and two cars (one being his wife's) for sale. The cars were sold, but the said of the house was delayed until July of 1961 because petitioner could not get the price he thought he should have for the property. Petitioner sold the house for approximately $3,300 less than he paid for it new in 1953. In addition, he had expended approximately $3,000 on improvements, such...