Jones v. C.I.R.

• Decision Date: 02 April 1991
• Docket Number: No. 90-4322,90-4322
• Citation: 927 F.2d 849
• Parties: -795, 91-1 USTC P 50,174 George H. JONES and Betty A. Jones, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 849

927 F.2d 849

67 A.F.T.R.2d 91-795, 91-1 USTC P 50,174

George H. JONES and Betty A. Jones, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 90-4322.

United States Court of Appeals Fifth Circuit.

April 2, 1991.

Jerrold E. Miertschin, John S. Klotsche, Baker & McKenzie, Dallas, Tex., for petitioners-appellants.

Janet A. Bradley, David E. Carmack, U.S. Dept. of Justice, Tax Div., Shirley D. Peterson, Gary R. Allen, Chief Asst. Attys. Gen., Abraham N.M. Shashy, Jr., Ch. Cnsl., IRS, Washington D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before GOLDBERG, JOLLY and WIENER, Circuit Judges.

GOLDBERG, Circuit Judge:

In a notice dated December 8, 1987, the Commissioner of Internal Revenue (the "Commissioner") determined deficiencies in George H. and Betty A. Jones' (collectively hereinafter referred to as "Taxpayers") income tax for the taxable years ending December 31, 1981, 1982 and 1983, in the amounts of $7,355, $37,513, and $37,031 respectively. The case was subsequently tried before the tax court. Finding that Jones failed to prove he was a bona fide resident of Japan during the applicable period, the tax court determined deficiencies in Taxpayers' income tax in the amounts of $3,081 for 1981, $20,208 for 1982, and $15,661 for 1983. Taxpayers appeal this decision. Because we find that the tax court erred as matter of law in finding that Jones was not a bona fide resident of Japan and because we find that Jones' tax home for the relevant years was in Japan, we reverse.

I. FACTS AND PROCEEDINGS BELOW

When George H. Jones ("Jones") retired from the air force in 1970, he entered into an employment agreement with International Air Service Company, Ltd. ("IASCO"), a California corporation in the business of furnishing flight crew personnel to aircraft operators. Pursuant to a contract between IASCO and Japanese Air Lines Co., Ltd. ("JAL"), Jones was assigned exclusively to JAL, flying out of Tokyo, Japan. While in Japan on this initial assignment, Taxpayers and their four children resided in a rented house in Japan.

Jones served with JAL, based in Tokyo, from 1971 through March 1972. On March 31, 1972, JAL furloughed Jones. Jones moved his family and belongings back to San Antonio, Texas, so he could attempt to obtain interim employment. On January 1, 1973, JAL recalled Jones to active duty and reassigned him to JAL's Tokyo base. Although he then moved back to Tokyo, his wife remained in San Antonio so that their son could graduate from high school, after which time Mrs. Jones and their youngest daughter anticipated joining Jones in Tokyo. During both his first and second assignment in Tokyo, Jones' flights consisted of routes within Japan and between Japan and Asia.

In March 1974 JAL reassigned Jones to Anchorage, Alaska, its only base located in the United States. Therefore, after Taxpayers' son graduated from high school in San Antonio, Mrs. Jones and Taxpayers' youngest daughter also moved to Anchorage. Taxpayers' youngest daughter only lived in Anchorage until she left for college. After moving to Anchorage, Mrs. Jones began a career for the first time. She eventually went to work for a newly-formed bank and worked directly for the chairman of the bank.

On March 3, 1980, and continuing through the years in issue, JAL transferred Jones back to Tokyo. Although Mrs. Jones had the opportunity to move to Tokyo as well, she decided to remain in Anchorage and pursue her own career until Jones' expected retirement in 1988. She continued to occupy the townhome that Taxpayers' jointly owned in Anchorage. Taxpayers filed joint United States income tax returns for the years in question, 1981, 1982, and 1983.

When he moved back to Tokyo, Jones moved into the Hotel Nikko Narita (the "Hotel"), where he stayed until his retirement in 1988. Jones apparently elected to stay at the Hotel instead of renting an apartment or a house for reasons of convenience, economy, and the society of other JAL crewmembers who also lived in the Hotel. He checked into and out of the Hotel in accordance with his schedule, and left his personal belongings in storage at the Hotel when he was away.

Although Taxpayers tried to see each other as frequently as possible, Jones was only able to fly on JAL with discount tickets for approved vacation periods. Unlike many domestic air carriers, JAL did not allow its flight crew members the privilege of flying free anytime a seat was available. This same policy applied to Mrs. Jones.

Although Jones did not own an automobile in Japan during the years in issue, he had renewed his Japanese driver's license so that he could occasionally borrow a car or rent a car when his family came to visit him. Jones also maintained his Alaska driver's license and two cars in the United States were co-titled in his name. Although he did not maintain a bank account in Japan and held no Japanese-based credit cards, he did maintain joint bank accounts with his wife in Alaska and San Antonio, and held U.S.-based credit cards. During the years in question, Jones was registered to vote in Alaska and voted absentee in United States elections.

Jones held a commercial multi-entry visa, renewable every four years, which allowed him to stay in Japan a maximum of three years per entry. The only limitation was a requirement that he leave Japan at least once every three years. Since his profession dictated frequent trips outside Japan, this was not a problem for Jones.

Jones paid both Japanese and United States income taxes for the years at issue. Jones' Japanese income tax returns were prepared at his expense by a Japanese accountant in Japan. After moving to Japan, Jones received a dividend check, representing a 1981 payment under the Alaska Permanent Fund Distribution Program. Because entitlement was based on Alaskan residence, Jones returned the check, explaining that he was no longer an Alaska resident.

During the years in issue, JAL assigned Jones to flights which were either intercontinental between Japan and the United States, or intracontinental segments of such international flights within Japan and the United States. Jones had no control over which flights he was scheduled to fly. During the relevant period, Jones spent less than 165 nights a year in Japan. Since Anchorage was JAL's only U.S. base, and one of the normal stopover cities on Japan/U.S. routes, Jones' job required that he be in Anchorage frequently. When overnight in Anchorage, Jones stayed in the townhouse co-owned by Taxpayers.

During the years in issue, Jones did not have extensive contact with Japanese culture. He did visit a local Japanese doctor for medical attention and he participated in certain recreational activities, including jogging and playing golf. Jones socialized with co-workers also living at the Hotel and occasionally drove into Tokyo for dinner and entertainment.

On Taxpayers' joint 1981 federal income tax return, they claimed a deduction of $5,590 under Section 913 of the Internal Revenue Code (the "Code"). On their 1982 and 1983 joint returns, Taxpayers claimed exclusions of $76,050 and $81,272, respectively, under Section 911 of the Code. The Commissioner issued a statutory notice of deficiency determining deficiencies in each year resulting from, among other items, the disallowance of taxpayer's Section 913 deduction in 1981, and their Section 911 exclusions in 1982 and 1983. The Taxpayers timely filed a petition with the tax court for a redetermination of these deficiencies. The tax court held that Jones was not a bona fide resident of Japan during the applicable period and therefore was not entitled to section 913 deductions and section 911 exclusions. Jones now appeals this decision.

II. DISCUSSION

The Tax Court's conclusion regarding Jones' residency is a conclusion of law or at least a determination of a mixed question of law and fact. As such, it is reviewable de novo and this court may freely substitute its judgment for that of the tax court. Sochurek v. Commissioner, 300 F.2d 34, 37 (7th Cir.1962).

The only issue this court must address is whether Jones was a "qualified individual" within the meaning of sections 913 and 911 of the Code. ¹ To be entitled to the deduction available under Code Section 913 ² for certain expenses while living abroad, and the exclusion available under Code Section 911 ³ of foreign earned income, a taxpayer had to have a tax home in a foreign country and demonstrate (1) that he had either been a "bona fide resident" of a foreign country for an uninterrupted period including an entire taxable year (the "bona fide residency test"), or (2) that he had been physically present in a foreign country for a certain period of time (the "physical presence test"). See Secs. 913(a)(1) and 911(d)(1)(A); 26 C.F.R. Secs. 1.913-1, 1.911-2(a); see also Lemay v. Commissioner, 837 F.2d 681, 682 (5th Cir.1988). Jones concedes that he does not meet the "physical presence test." Therefore, Jones must show that his tax home was in Japan and that he was a bona fide resident of Japan during the applicable period.

Since the tax court below only addressed the issue of whether Jones was a bona fide resident of Japan, we will begin our discussion with that inquiry. Neither section 913 nor section 911 defines the term "bona fide resident." Residence is an elusive expression peculiarly related to the facts in any given case. Sochurek, 300 F.2d at 37. As the Ninth Circuit succinctly stated, "residence ... has an evasive way about it, with as many colors as Joseph's coat." Weible v. United States, 244 F.2d 158, 163 (9th Cir.1957). This court must determine residence in light of congressional intent, which was to encourage foreign trade by encouraging foreign employment for citizens of the United States, and to place them in an equal position with citizens of other countries going abroad who are not taxed by their own countries. ...