72 T.C. 958">*958 OPINION

In these consolidated cases, respondent determined deficiencies in petitioners' Federal income tax for the calendar year 1973 in the following amounts:

These deficiencies were based on exclusions from income of reimbursements for moving expenses under section 911¹ in the amounts of $ 13,507.05 for petitioners Liston F. and Catherine F. 72 T.C. 958">*959 Hills and $ 13,147.35 for petitioners Edward G. and Dorothy T. Voss.

1979 U.S. Tax Ct. LEXIS 67">*69 The issue herein is whether petitioners may exclude from gross income reimbursements paid to them for moving expenses, pursuant to section 911. Section 1.911-1(c)(1), Income Tax Regs., provides, in pertinent part, that amounts received as compensation during the taxable years ending after September 4, 1962, may be excluded from gross income if such amounts are attributed to services performed on or before December 31, 1962, and are received after December 31, 1962, provided that on March 12, 1962, the taxpayer had a "right" to receive such amounts.

These cases were fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioners Liston F. Hills and Catherine F. Hills, at the time of the filing of their petition herein, were legal residents of Vida, Oreg. For the calendar year 1973, they filed a joint Federal income tax return with the Director of International Operations, Washington, D.C. ²

1979 U.S. Tax Ct. LEXIS 67">*70 Petitioners Edward G. Voss and Dorothy T. Voss, at the time of the filing of their petition herein, were legal residents of Owls Head, Maine. They filed their joint Federal income tax return for the calendar year 1973 with the Director of International Operations, Washington, D.C.³

Petitioners claimed exclusions from gross income on their 1973 Federal income tax returns in the amount of $ 13,507.05 by Hills and $ 13,147.35 by Voss, which represented reimbursements to them or payments made by the Arabian American Oil Co. (Aramco) for their moving expenses to the United States from Saudi Arabia. Respondent disallowed the exclusions, stating only that reimbursements for moving expenses are not excludable under section 911.

Aramco is engaged in exploration for and recovery of oil in Saudi Arabia. Aramco's headquarters are in Saudi Arabia, 1979 U.S. Tax Ct. LEXIS 67">*71 which 72 T.C. 958">*960 is where substantially all of its operations are located and where its principal officers reside.

Petitioner Hills was an employee of Aramco from 1938 until his retirement in 1973, except for a period of military service from 1941 to 1946. At the time of his retirement, he was chairman of the board of directors. Petitioner Hills, while employed by Aramco these 35 years, resided in Saudi Arabia from 1941 to 1955, and from 1964 to 1973. From 1955 to 1964, petitioner was assigned by Aramco to positions with a wholly owned subsidiary of Aramco in the Netherlands and with a shareholder affiliate of Aramco in Canada, and resided there while being trained for future executive positions with Aramco, which were likely to be in Saudi Arabia. In 1973, petitioner Hills retired from Aramco, and returned to the United States, as did petitioner Voss. Petitioner Voss had been employed by Aramco since 1948. At the time of his retirement, petitioner Voss was treasurer of Aramco, and had resided in Saudi Arabia since 1961.

When the petitioners retired and subsequently returned to the United States, Aramco reimbursed them for, or paid directly on their behalf, their moving expenses. 1979 U.S. Tax Ct. LEXIS 67">*72 These expenses were as follows:

Aramco's Industrial Relations Manual which was in effect on March 12, 1962, provides in part:

1. GENERAL REGULATIONS. The Company will ship at Company expense from a point not more distant than the employee's point of origin those personal and household effects desired for living in Saudi Arabia, but limited to personal requirements of employee and his family members, subject to the limitations and conditions outlined in the following paragraphs. [Emphasis in original.]

1.1 Shipment Charges. The Company will absorb fees for packing, shipping, insurance and customs only if shipments are made through approved Company facilities and established ER/ERF procedures. Articles listed in Paragraph 4 will not be processed at Company expense.

1.2 Items of High Value or Requiring Special Handling. Items of high value, unusual nature, requiring special type storage (chill, Freeze) or special handling, must be approved for shipment in advance if the Company1979 U.S. Tax Ct. LEXIS 67">*73 is 72 T.C. 958">*961 expected to absorb shipping and customs charges. Approval will be granted by the District Head of Residential Services or the New York Personnel Department.

* 1.3 Air Freight or Air Parcel Post Shipments. The Company will not absorb packing, shipping, customs and insurance charges on such shipments forwarded via commercial airlines except when the shipment is specifically so authorized by the Company, or so routed at the discretion of the Traffic Division. * * *

* * * *

* 3. WEIGHT ALLOWANCE -- UNACCOMPANIED EFFECTS. No specific weight limitation will apply, except as stated in Paragraph 3.2.3. It is the intent to allow the shipment of a reasonable quantity of personal and household effects for normal living requirements. [Emphasis added.]

3.1 Allowance -- Accompanied Effects. Refer to Chapter XXXI, International Travel.

* 3.2 Shipments from Saudi Arabia. A reasonable quantity of personal/household effects (exclusive of exempt items and articles for resale) may be packed and shipped at Company expense to employee's point of origin, or to a point to which shipping expense does not exceed the expense of shipping to the point of origin. [Emphasis1979 U.S. Tax Ct. LEXIS 67">*74 added.]

3.2.1 Upon Separation from Company Service for any Reason

3.2.1.1 Retirees. Shipments, not to exceed two, may be made for a retiree to any location within the United States. If the retiree establishes a home outside the United States which is more distant than his point of origin, one unlimited shipment of a reasonable quantity of effects may be made at Company expense.

3.2.1.2 Employee Remaining in Saudi Arabia upon Separation. If an employee plans to remain in Saudi Arabia following separation from the Company, shipment may be made to his point of origin or to a location within Saudi Arabia. Shipments should be made within one month after separation, and no subsequent shipments will be permitted.

* 3.2.1.3 Storage Fees. The Company will absorb storage fees up to 30 days, which will include any time required for goods to clear customs. This period may be extended to 90 days for annuitants. Storage other than herein specified will be at personal expense. * * *

* * * *

4. EXEMPT ITEMS. The Company will not absorb any charges incidental to packing, transportation, customs or insurance on the following items: [Emphasis added.]

1979 U.S. Tax Ct. LEXIS 67">*75 Whenever tobacco, food, beverages or candy are included in a personal effects 72 T.C. 958">*962 shipment, the Company will absorb the packing, transportation and insurance charges provided the weight of the item or items does not exceed 25 pounds; when shipment exceeds 25 pounds, the employee will be charged for full weight of item shipped. All customs assessments will be charged to the employee.

The Industrial Relations Manual also provided that Aramco would provide for the insurance coverage in shipping personal and household effects, as well as for payment of custom duties, within specified guidelines.

Also, the manual, in chapter XXX, specifically set forth rules governing the transportation of employees upon termination of employment with Aramco. It provided for transportation with allowance to the point of origin upon termination of an employee "for cause" or upon resignation. ⁴

1979 U.S. Tax Ct. LEXIS 67">*76

For taxable years ending before September 4, 1962, a citizen of the United States qualifying under section 911⁵ was entitled 72 T.C. 958">*963 to exclude from his gross income all amounts received as earned income (as defined in section 911(b)) from services performed outside the United States provided that he qualified as a bona fide foreign resident (as petitioners herein do) or was present in a foreign country for a certain minimum time period. In the Revenue Act of 1962 (Pub. L. 87-834), Congress imposed certain limitations and restrictions on the amounts that could be excluded under section 911 for services performed after December 31, 1962. In enacting these changes, Congress provided a "grandfather clause" that allowed eligible employees to receive the same Federal tax treatment on certain payments received after December 31, 1962, as they would have received before that date. The grandfather clause applies to subsequently received compensation attributable to services performed on or before December 31, 1962, provided the employees had an existing right to receive such amounts before the effective date of the statutory changes, March 12, 1962. Sec. 11(c)(1), Revenue Act 1979 U.S. Tax Ct. LEXIS 67">*77 of 1962, Pub. L. 87-834, 76 Stat. 960, 1005-1006.

1979 U.S. Tax Ct. LEXIS 67">*78

The regulations which interpret section 11(c)(1) of the Revenue Act of 1962, supra, focus particularly on what constitutes a "right" for purposes of the statute. Section 1.911-1(c)(2), Income Tax Regs., provides that the existence, on March 12, 1962, of a right to receive earned income may be established by a contract, agreement, plan, or provision of foreign law. The regulations ( sec. 1.911-1(c)(2), Income Tax Regs.) further state that this right must provide its holder with any one of the following:

1. the payment of a fixed amount of compensation for services performed during a term; or

2. the payment of an amount of compensation computed solely by reference to sales, profits, or other objectively determinable facts; or

3. the payment of fixed or determinable amounts which are in the nature of compensation for past services. [Emphasis added.]

Thus, the issue for our determination is whether any of these tests of the "grandfather clause" of section 11(c)(1) of the 72 T.C. 958">*964 Revenue Act of 1962, supra, as embodied in section 1.911-1(c)(2), Income Tax Regs., may be applied to petitioners, so that they may exclude under section 911, the moving expense reimbursements1979 U.S. Tax Ct. LEXIS 67">*79 received by them in 1973.

Petitioners contend that on March 12, 1962, they had an "existing right," within the meaning and purpose of section 1.911-1(c), Income Tax Regs., ⁶ as evidenced by their employment contract (the Industrial Relations Manual) with Aramco, and by Saudi Arabian law, to have their moving expenses paid for by Aramco. They further contend that they meet both the congressionally prescribed date (March 12, 1962) for the determination of the existence of the right to be paid an amount "attributable" to pre-1963 services, and also meet the requirements of establishing a "right" by not only the second but also the third tests provided in section 1.911-1(c)(2), Income Tax Regs. Accordingly, they argue, their 1973 moving expense payments relate back, in effect, to the right to reimbursement which they possessed under the contract prior to the enactment of section 911, and thus they may exclude such amounts from earned income for section 911 purposes.

1979 U.S. Tax Ct. LEXIS 67">*80 Respondent, on the other hand, asserts that under section 82, ⁷ reimbursements or payments for moving expenses must be included in gross income. Respondent further asserts that since petitioners used up their full amount of earned income exclusions under section 911 for 1972 and 1973 (the year of the move and the prior year), they must include the full amounts of payments for moving expenses in their gross incomes for 1973.

In the alternative, respondent contends that even if the payments are "attributable to services performed" prior to 1963, petitioners' asserted "right" to have Aramco pay for their moving expenses is not a "right" which meets the proscriptions of section 1979 U.S. Tax Ct. LEXIS 67">*81 1.911-1(c)(2), Income Tax Regs., because the amount petitioners received could not be computed, as of March 12, 1962, solely by reference to "objectively determinable facts" (the 72 T.C. 958">*965 second of three possible means of establishing a right under section 1.911-1(c)(2), Income Tax Regs.).

This is a case of first impression. Though the issue is a close one, we agree with petitioners. After a close examination of the legislative history and the statute, and especially of section 1.911-1(c)(1)-(4), Income Tax Regs., we feel that the petitioners meet the second test and, even if they do not, we find that they clearly meet the third test as prescribed by the regulations.

Initially, it is important to understand that we are not confronted with any contention by petitioners that payments or reimbursements for moving expenses upon retirement are normally excludable from gross income. Rather, they merely contend that since they had the pre-March 12, 1962, right to the payments based on their ongoing employment with, and services to, Aramco, they should be able to rely upon the statute's provisions (essentially a grandfather clause) applying to pre-1963 compensation rights. They acknowledge1979 U.S. Tax Ct. LEXIS 67">*82 that had they not had the right to the payments before the effective date of the changes made by the Revenue Act of 1962, they would have included the payments in income under section 82, since they had already used their full statutory exclusion of $ 20,000 for their 1973 taxable year under section 911.

Petitioners concede that they do not meet the first of the three alternative tests set forth in the regulations. They point out, however, that it is necessary to meet only one, and submit that they meet not only the third test but also the second. On the basis of the second test, they assert that the objectively determinable facts on which such reimbursement is to be made are the actual costs, at the time of termination, of transporting an employee and family members, as well as their personal effects, and contend that "payment of future compensation based on the cost of moving and transportation expenses is certainly as objectively determinable as compensation based on future sales or profits."

Petitioners argue, under the third test provided in the regulations, that if they would have been eligible to retire on January 1, 1963, and had done so and moved back to the United States, 1979 U.S. Tax Ct. LEXIS 67">*83 they would have been able to exclude the moving expense income by relying on section 1.911-1(c), Income Tax Regs., because (1) on March 12, 1962, they had had the right to payment of moving expense amounts, and (2) the services they 72 T.C. 958">*966 had performed for Aramco before December 31, 1962, under their employment contract, made them eligible for reimbursement. Thus, they reason, the mere factor of intervening years between 1962 and 1973, the year their pre-March 12, 1962, legal right under the contract was exercised, should not cause the result to differ.

Respondent argues that the pre-1963 services theory upon which petitioner relies is expressly contrary to the reasonable and administrable Service position which is contained in situation (4) of Rev. Rul. 75-84, 1975-1 C.B. 236. Respondent there provided that in retirement move cases any reimbursement is attributable to services performed in the year of and in the year preceeding retirement. We do not find this relevant in the instant case, as there is nothing in the legislative history of section 82 which indicates the intention to usurp the special provisions of the 1962 "grandfather1979 U.S. Tax Ct. LEXIS 67">*84 clause" under section 911. This clause, specifically section 1.911-1(c)(1), Income Tax Regs., is a fiction in that it allows rights that were in existence before the enactment of the Revenue Act of 1962 to continue to apply as if the 1962 limitations on amounts of excludable income had not been enacted, to prevent retroactive changes in contractual rights which were in existence both when the petitioners' employment contract was made and as it was in effect on March 12, 1962. Thus, the petitioners, having performed their legal obligation of services under the contract prior to March 12, 1962 (and continuing through December 31, 1962), were, on March 12, 1962, legally entitled to the rights and benefits provided in the contract and thus meet the third test permitted by the regulations under section 911.

Respondent bases his reading and interpretation of section 1.911-1(c)(2), Income Tax Regs., on a mistaken assumption that the tests therein are based on determinable amounts as of December 31, 1962. However, we find nothing that requires the exact amount of compensation must be determinable as of December 31, 1962. Section 11(c) of the Revenue Act of 1962 states only1979 U.S. Tax Ct. LEXIS 67">*85 as follows:

(c) Effective Dates. --

(1) Amendment to section 911 -- The amendment made by subsection (a) shall apply to taxable years ending after September 4, 1962, but only with respect to amounts --