Commissioner of Internal Revenue, Petitioner, v. Lyon Tyler Matthew et al., Respondents, 335 F.2d 231 (5th Cir. 1964)

The question in this case is whether each of the three Taxpayers was a "bona fide resident of a foreign country or countries," 26 U.S.C.A. § 911(a) (1), during the pertinent tax years running from 1956 through 1958. The Tax Court held that each was. 38 T.C. 417. We disagree and reverse.

Taxpayers¹  during the years concerned were employees of Pan Am²  at various United States Auxiliary Air Force Bases situated on British Islands in the Atlantic Ocean.³  Pan Am, under a yearly contract, was a civilian contractor of the United States Air Force Missile Test Center at Patrick Air Force Base, some 18 miles from Cape Kennedy, Florida, the Atlantic Long Range Guided Missile launching station. These operations, now eclipsed by the spectacular orbital launchings of manned spacecraft from the Cape, were part of the post-World War II legislation to develop and test military missiles.⁴  Construction at Down-Range Missile Tracking Stations began early in 1951. For all practical purposes, the operation and management of these down-range tracking stations, though nominally commanded by an Air Force officer, were committed to Pan Am through its civilian employees.

The Government attacks the Tax Court decision primarily on the ground that the nature of this employment at remote, sometimes almost uninhabited or uninhabitable islands, demonstrated that apart from this governmentally initiated, controlled, and operated military project, none of the Taxpayers would have ever sought out employment there.⁵ 

On the basis of this, the Government then contends that this Taxpayer does not meet the person Congress described as a "bona fide resident." This is because, so the argument runs, Congress enacted the tax exemption in order to encourage, promote and stimulate the foreign trade of our country. In support of this thesis, it emphasizes what we and others have said. Thus in Swenson v. Thomas, 5 Cir., 1947, 164 F.2d 783, in discussing the predecessor of § 911(a) (1), we commented: "It is demonstrable from the history of that legislation that the exemption was made in the interest of foreign trade, to induce Americans to accept employment abroad and put American business on an equality with foreign competitors. * * * [T]he change was made not because of a reversal [in 1942] of the original purpose to encourage foreign employment of Americans, but to so tighten the law as to require bona fide residence * * *."⁶ 

Of course this thesis rests on the unquestioned and universally recognized purpose of Congress in enacting the 1942 forerunner of § 911(a) (1) to eliminate the many abuses which had arisen under the former law which required, not presence in a foreign country, so much as absence from the United States.⁷  Downs v. Commissioner, 9 Cir., 1948, 166 F.2d 504, 508, cert. denied, 1948, 334 U.S. 832, 68 S. Ct. 1346, 92 L. Ed. 1759; Souza v. Commissioner, 1960, 33 T.C. 817, 824; S.Rep. No. 781 82d Cong., 1st Sess., 52, U. S. Code Congressional and Administrative News 1951, p. 1969; Meals v. United States, 1953, N.D.Calif., 1953, 110 F. Supp. 658, 660-661; and Swenson v. Thomas, 5 Cir., 1947, 164 F.2d 783, 784.

This argument, in our view, is neither persuasive nor sufficient. Despite the difficulties in applying the term "bona fide residence," characterized by some as "slippery"⁸  and as being as variable as Joseph's coat of many colors,⁹  and by others as "elusive,"¹⁰  we think the promoting-foreign-trade-test offers no real guide or help. Modern business is complex and the activities which companies or individuals regard as commercially feasible or profitable are varied. Consequently, we think it would be a very rare case indeed in which a Court, as are we here, could be urged to hold as a matter of law that neither Pan Am nor its civilian employees could have considered this a corporate or individual vocation pursued as American traders with a profit motive.

In similar vein, we would have to conclude that if the detailed circumstances concerning the activities of these Taxpayers, their efforts to assimilate themselves into whatever community life was available in these primitive societies, the indefinite extent and duration of their service and employment, and like factors were significant, we could not displace the fact findings of the Tax Court. They are certainly not clearly erroneous, F.R. Civ.P. 52(a); Int.Rev.Code of 1954, § 7482(a), 26 U.S.C.A. § 7482(a), whatever might have been our evaluation of them were we the trier of this mixed question of fact and law.

Our reversal of this case rests on our conclusion that, as a matter of law, the treaties between the two governments kept the presence of these civilian employees from ever ripening into residence.

There was, first, a virtual cession of territory to the United States during the life of the treaty. The United Kingdom, in collaboration with Island authorities, obligated itself to "provide * * * such Sites for the purpose of the operation of the Long Range Proving Ground as may * * * be necessary." By a provision that "access to the Sites shall not be permitted to persons not officially connected with" the Missile Testing Program except by joint consent of the senior British and American representatives, the territory, comprising a site was effectually withdrawn from the local government. This was in no sense confined to the geographical boundary of the sites, since extensive rights were granted for activities within the "Range Area".¹¹  Likewise accorded was the vicarious right of condemnation of entering upon, inspecting and "taking any necessary measures" on off-site land if required "to improve sanitation and protect health" on the Sites.

The full sweep of such extraterritorial rights was reflected by treaty provisions concerning personnel. These provisions also revealed a purpose to treat Pan Am's civilian employees as something other than (a) local residents subject to local authorities or (b) immigrant-aliens subject to local law. Thus, the treaties expressly provided that "the immigration laws of [the named] island shall not operate or apply so as to prevent admission * * * of any person * * * employed by, or under a contract with, either the Government of the United States * * * or a contractor, in connection with the establishment, maintenance, or use of the * * * Proving Ground." This extraordinary privilege was coextensive with employment by Pan Am on the Missile project since the United States bound itself to notify the local authorities of any change of status for deportation of such persons by the United States if required. Likewise, such employees were exempt from import, excise, consumption or other tax, duties or imposts of the local governments with respect to personal belongings imported by United States citizens or purchased by them at Post Exchange or Commissary Stores at the site. Perhaps more important, in this day and world of high taxes, the employees were exempted from income tax imposed upon alien residents of the islands or citizens of the islands with respect to income earned in "connection with the establishment, maintenance, or use of the Long Range Proving Ground." The tax exemption also covered the "ownership or use of property which is within a Site, or situated outside [the named] island." These privileges were likewise extended to the contractors, subcontractors, or beneficial owners thereof and included specifically any "income tax * * in respect of any profits derived under a contract * * * with * * * the United States" or any "license [tax] in respect of any service or work for the * * * United States."

Even more vital, these civilian employees had a complete or partial immunity from the operation of local laws and local governmental authorities. Classified as "a person * * * who is * * subject to the United States Uniform Code of Military Justice,"¹²  the treaty exempted such employees from arrest, service of process, civil or criminal, while within the Site, "except with the permission of the Commanding Officer in charge of the United States Forces in such Sites." More important, under this classification, the United States was granted "the right to exercise * * * exclusive jurisdiction over security offenses"¹³  on or off the site. The treaty prescribed "concurrent jurisdiction over all other offenses¹⁴  wherever committed." Specific machinery was also established to enable the United States to exert or waive its right to exclusive jurisdiction and for mutual determination as to the trial of cases of concurrent jurisdiction.

These employees are in these islands solely because of the terms of the treaties. Under this basic arrangement, these civilian employees have rights and privileges which set them apart from the general community. They bear none of the usual obligations of a local resident, whether citizen or alien resident. They are exempt from all of the affirmative obligations and responsibilities of a resident citizen or alien. And as to the universal negative obligation imposed on all inhabitants not to violate established law, they are above the community and beyond the reach of its judicial power unless a reasonable official of the United States Government purposefully waives the right to exert exclusive or concurrent jurisdiction. They are in no real sense then a part of the local community. They are free from all of the ordinary, traditional and essential burdens of the people who work, live, own property and pay taxes there. They are merely present and presence alone, since the amendment of 1942, has not been sufficient.

Conceding that the Taxpayers in good faith intended to work in one or more of these islands wherever Pan Am would send them for an indefinite period of time for employment which might extend over many years¹⁵  and each did his best to enter into the life of the community to the fullest extent of this primitive society, the existence of each, except for the physical environment imposed by presence, was for all practical purposes the same as within the United States. Extraterritorial rights, privileges, and immunities of the fundamental kind accorded here keep this physical presence from ripening into actual residence in a foreign country. We emphasize this inescapable consequence of the basic relationship created by the treaties to make clear that while the result here is the same as in Downs v. Commissioner, 9 Cir., 1948, 166 F.2d 504, cert. denied, 1948, 334 U.S. 832, 68 S. Ct. 1346, 92 L. Ed. 1759, and Jones v. Kyle, 10 Cir., 1951, 190 F.2d 353, cert. denied, 1951, 342 U.S. 886, 72 S. Ct. 175, 96 L. Ed. 664, we do not rely, as did such decisions, on the limited, restricted nature of the employment in terms of time and nature of work to be accomplished.

Whether for 20 days or for 20 years, employment under the arrangement authorized by such a treaty could not amount to residence in a foreign country, no matter how bona fide the presence might be.

Reversed.