On Aug. 30, 1949, petitioner entered into an agreement obligating him to make monthly payments to his wife, a nonresident alien, for her support and maintenance. A decree of divorce was subsequently obtained in the United States. Petitioner at all times relevant was a resident alien in the United States. The payments here involved were made by petitioner upon his order, from an account maintained by him with bankers in London.
49 T.C. 689">*689 OPINION
The Commissioner, pursuant to
Year | Deficiency |
1950 | $ 168 |
1951 | 300 |
1952 | 360 |
1953 | 360 |
1954 | 360 |
1955 | 360 |
1956 | $ 360 |
1957 | 360 |
1958 | 360 |
1959 | 360 |
1960 | 360 |
1961 | 360 |
The 1968 U.S. Tax Ct. LEXIS 157">*158 question for decision is whether alimony payments made by petitioner, a resident of the United States, to his ex-wife, a nonresident alien, constituted "gross income from sources within the United States" where the payments were made from an account maintained by petitioner in England. The facts have been largely stipulated.
Petitioner is, and at all the periods involved herein has been a resident alien in the United States, whose present residence is at R.D. 1, West Redding, Conn.
49 T.C. 689">*690 On August 30, 1949, an agreement was entered between petitioner and his then wife, Lesley Margaret Howkins, a resident of the city and county of Northampton, England. Paragraph Twelfth of that agreement reads as follows:
The husband agrees to pay to the wife, as an allowance for her support and maintenance a minimum net sum of One Hundred Dollars ($ 100) per month, said payments to be credited to the account of the wife at Westminster Bank Limited, Northampton, England. Such payments for the support and maintenance of the wife shall cease on her death or remarriage.
A final decree of divorce was issued by the Superior Court of Rhode Island on April 10, 1950.
Petitioner, in individual income tax returns filed 1968 U.S. Tax Ct. LEXIS 157">*159 by him in 1950 and 1951, claimed deductions for alimony payments of $ 560 and $ 1,000, respectively. For the years 1952 through 1961, inclusive, petitioner, in joint returns filed with his present wife, Elizabeth P. Howkins, claimed deductions of $ 1,200 per year, as alimony. All such alimony payments were made by crediting to Lesley Margaret Howkins' account in Westminster Bank Ltd., Northampton, England, payments made, upon petitioner's order, from an account maintained by him with C. Hoare & Co., bankers, of 67 Park Lane, London, England. Although petitioner had claimed deductions for alimony in his own (or joint) income tax returns for each of the years 1950-61, he at no time during any of those years filed the annual return (Form 1042) required in respect of income tax to be paid at source, nor did he ever withhold income tax from the alimony payments made to his former wife.
The following schedule shows petitioner's foreign income (from C. Hoare & Co.) for the years 1953-61, the amount of United Kingdom tax paid on such foreign income, and the amount of foreign tax credit claimed by petitioner for each of these years:
Petitioner's | U.K. | Foreign | |
Year | foreign | tax | tax credit |
income | |||
1953 | $ 1,010.22 | $ 430.97 | $ 281.32 |
1954 | 1,838.95 | 827.53 | 374.37 |
1955 | 1,293.48 | 549.73 | 350.25 |
1956 | 1,830.42 | 778.93 | 493.47 |
1957 | 1,787.38 | 759.64 | 413.05 |
1958 | 1,139.04 | 484.12 | 344.75 |
1959 | 1,422.68 | 551.29 | 370.44 |
1960 | 1,882.02 | 729.28 | 532.10 |
1961 | 1,181.90 | 393.73 | 313.22 |
1968 U.S. Tax Ct. LEXIS 157">*160 During the years 1950-52, petitioner had income from salary in the amounts of $ 5,600, $ 12,500, and $ 11,561.25, respectively. During the years 1953-61 petitioner conducted a wholly owned import-export business, which had reported sales, cost of goods sold, gross profit, expenses and other deductions, and net profit, as follows: 49 T.C. 689">*691
Cost of | Expenses | Net profit | |||
Year | Sales | goods sold | Gross profit | and other | (or loss) |
deductions | |||||
1953 | $ 14,681.33 | $ 8,723.80 | $ 5,957.53 | $ 4,841.55 | $ 1,115.98 |
1954 | 14,355.29 | 9,074.88 | 5,280.41 | 6,046.80 | 11968 U.S. Tax Ct. LEXIS 157">*161 (766.39) |
1955 | 27,218.95 | 25,296.17 | 1,922.78 | 2,606.16 | (683.38) |
1956 | 43,619.24 | 39,245.05 | 4,374.19 | 2,421.87 | 1,952.32 |
1957 | 43,590.20 | 35,871.05 | 7,719.15 | 15,219.08 | (7,499.93) |
1958 | 37,652.03 | 19,257.08 | 18,394.95 | 11,012.15 | 7,382.80 |
1959 | 45,619.32 | 35,495.74 | 10,123.58 | 13,636.95 | (3,513.37) |
1960 | 51,996.80 | 32,908.22 | 19,088.58 | 15,447.82 | 3,640.76 |
1961 | 13,852.69 | 10,062.40 | 3,790.29 | 6,288.20 | (2,497.91) |
During the years 1952-61 petitioner's present wife was a fashion editor and earned substantial amounts of income. The total amounts of adjusted gross income from all sources and net taxable income (computed after deductions and exemptions), as reported for both spouses on their joint returns for 1952-61, were as follows:
Adjusted | Net | |
gross | taxable | |
Year | income 2 | income |
1952 | $ 38,950.33 | $ 23,519.25 |
1953 | 27,445.47 | 19,918.70 |
1954 | 18,569.09 | 11,420.32 |
1955 | 32,402.49 | 24,148.47 |
1956 | 34,266.24 | 23,943.10 |
1957 | $ 24,907.51 | $ 16,503.61 |
1958 | 37,274.76 | 29,902.50 |
1959 | 31,066.52 | 22,005.64 |
1960 | 38,703.89 | 27,356.22 |
1961 | 34,335.34 | 24,227.02 |
In the first place, it must be remembered that petitioner is not the taxpayer; the taxpayer is his former wife. If the alimony payments are of such character that they represent income 1968 U.S. Tax Ct. LEXIS 157">*164 in her hands, it is immaterial whether petitioner himself had any income or whether he made such payments out of income or out of capital.
The fallacy 1968 U.S. Tax Ct. LEXIS 157">*166 in petitioner's present position is his groundless assumption that the London bank account from which the alimony was paid was the "source" of the payment within the meaning of the statute. The real and immediate "source" of the alimony was petitioner himself, a resident of the United States. And his obligation to make the payments had its source in turn in contractual provisions, as well as in a divorce decree of an American court in Rhode Island. 51968 U.S. Tax Ct. LEXIS 157">*167
Petitioner's emphasis upon the sources of income available to him to make these payments and even upon the origin of the actual physical funds used to satisfy his obligation of support misconceives the meaning of the phrase "income from sources within the United States." Congress was not referring here to the origin of the physical means of payment, but rather to the place where the recipient's income was "produced." That this interpretation of the statute is the correct one, is illustrated by the definitive construction which Congress has accorded to the phrase "gross income from sources within the United States" in other contexts.
Although the Code does not contain a comprehensive general rule or set of rules for determining the "source" of an item of income, a number of source-of-income rules, now contained in sections 861-864, have been provided for certain common classes of income. While alimony is not among the categories of income for which a statutory source-of-income rule is available, 61968 U.S. Tax Ct. LEXIS 157">*169 the rules which are set forth show, 49 T.C. 689">*694 for the most part, that Congress thought of the "source" of an item 1968 U.S. Tax Ct. LEXIS 157">*168 of income in terms of the place where the income was "produced." Thus, as a general rule, income received as the result of services performed in the United States, or from the sale or rental of property located within the United States, is to be treated as gross income from sources within the United States, without regard to the payor's sources of income or the origin of the funds used to effectuate payment, for in such cases the income is the proximate result of activity or property within the United States. See subsecs. (a)(3), (4), (5), and (6) of
Especially instructive for our purposes is the source-of-income rule provided by statute for the payment of interest, for, like alimony, interest involves an obligation, usually to make periodic payments over a period of time, which is not incurred in exchange for property or services. Lacking these touchstones, Congress turned to the residence of the obligor -- the situs of the debt -- as the place where the income is produced, and thus the source of the income. See
This obligation has its source in the obligor, and thus the source of the payment of the obligation is the residence of obligor. There the right of payment arises and there the right may be enforced. The only qualification is that the payment be actually made by the resident obligor or on its behalf and pursuant to its obligation. * * *
We think the considerations taken into account in
To be sure, the general rule of
Finally, we pause to comment upon a factual argument made by petitioner, namely, that the alimony was paid out of a "blocked" or restricted account in London and that he could not in any event have withheld any portion of the alimony for use in paying the tax as withholding agent. The precise thrust of this contention is not clear. The facts set forth earlier in this opinion indicate a failure of proof that petitioner did not have funds within the United States which he might have used for this purpose, or that his use of the London account rather than American funds was anything other than a matter of convenience; and we now add that the record fails to provide convincing proof that had petitioner withheld the 30-percent tax on the alimony paid out of the London account he could not have obtained the amount so withheld for use in discharging his obligation as withholding agent. The only materials presented in this connection consist of two letters that leave the matter entirely obscure. Granted that there were currency restrictions of some kind, there is no showing that official permission to obtain these funds for the purpose of paying U.S. taxes could not 1968 U.S. Tax Ct. LEXIS 157">*173 have been obtained upon proper application therefor. In this state of the record, we must reject whatever factual argument petitioner may make in respect of this point, even assuming that it might otherwise have a controlling bearing upon this case.
1. The parties have, however, stipulated that petitioner had income in 1954 of $ 3,766.86. Elizabeth P. Howkins, petitioner's present wife, reported net income from her business as a "fashion editor" in 1954 of $ 4,533.25. The $ 3,766.86 figure stipulated by the parties most likely resulted from the netting of the $ 766.39 loss sustained by petitioner's import-export business against the gain from his wife's business in that year.
2. Any losses sustained by petitioner in his import-export business are reflected in the adjusted gross income.↩
3.
(a) General Rule. -- * * * all persons, in whatever capacity acting * * * having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b) (to the extent that any of such items constitutes gross income from sources within the United States), of any nonresident alien individual, * * * shall * * * deduct and withhold from such items a tax equal to 30 percent thereof
(b) Income Items. -- The items of income referred to in subsection (a) are interest, * * * dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, * * *↩
4. This flat-rate tax was made applicable during the years involved only to nonresident aliens who are not engaged in trade or business within the United States, and whose total annual income of the type spelled out in sec. 871(a)(1) plus certain net capital gains does not exceed $ 15,400. See sec. 871(b).
Corresponding provisions are contained in sec. 211 of the 1939 Code.↩
5. The record does not specifically state that the Rhode Island decree incorporated the terms of the contract, but the stipulation does indicate either that they were so incorporated or that the decree independently spelled out the same obligations; for the payments referred to in the contract are designated as an allowance for "maintenance and support" while the stipulation also refers to them as "alimony," thereby suggesting that provision therefor was made in the decree. In any event, the burden of proof was upon the petitioner, and he has failed to present any evidence to the contrary. In view of that burden we cannot assume any facts in his favor and must proceed upon the assumption that omitted facts are unfavorable to him. Cf.
6. The items of income for which specific source-of-income rules are given by statute are interest, dividends, compensation for personal services, rentals and royalties, sales of real property and sales of personal property purchased outside the United States. See
For a survey of this general area, somewhat outdated by the Foreign Investors Tax Act of 1966 but still useful, see Dailey, the "Concept of the Source of Income,"
7. Compare