'(a) General rule. In the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States --
'(1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section), for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and * * *
'(3) If, in case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another.
'(b) Amounts received in United States. Notwithstanding the provisions of subsection (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States. * * *
'(i) Prisoners of war and internees. In the case of a citizen of the United States taken as a prisoner of war while serving within a possession of the United States as a member of the military or naval forces of the United States, * * * --
'(1) if such citizen was confined in any place not within a possession of the United States, such place of confinement shall, for the purposes of this section, be considered as within a possession of the United States; and
'(2) any compensation received within the United States by such citizen attributable to the period of time during which such citizen was a prisoner of war or interned by the enemy shall, for the purpose of subsection (b) be considered as compensation received outside the United States.' (Emphasis supplied.)
Perusal of the various subsections of § 251 readily discloses that only subsections (a) and (b) provide what should be excluded from and included in gross income. Subsections (c) through (i)
merely define some of the terms in (a) and (b) or provide for the application or limitation of other sections of the Code where a taxpayer excludes income under § 251.
Section § 251(a) provides for the exclusion of income, under given conditions, derived from sources within a possession of the United States.
Section 251(b) provides that irrespective of the source derived, income received in the United States shall be included in gross income.
Congress, by the Act of August 1, 1947, amended § 251 by adding subsection (i) thereto. Section 251(i) did not expressly exclude from gross income prisoner of war pay. What it did was to enlarge the meaning of certain phrases in § 251(a) and (b) so as to allow prisoners of war the benefit thereof. Section 251(i)(1) enlarged the meaning of 'within a possession of the United States' in subsection (a) so that irrespective of where a prisoner of war was confined, such place of confinement shall, for the purpose of § 251, be considered as within a possession of the United States.
Section 251(i)(2) in effect negated § 251(b) by providing that even though a prisoner of war received his pay (for the period during which he was confined) in the United States, it shall be considered as compensation received outside the United States.
The necessary conclusion then is that no income is excluded under § 251 except that the conditions imposed by § 251(a) and (b) are satisfied. See Haussermann v. Burnet, 1933, 61 App.D.C. 347, 63 F.2d 124.
Plaintiff has satisfied the condition imposed by § 251(b) because his service pay received in the United States is within the provisions of § 251(i) (2). And the defendant has admitted that the requirement of § 251(a) (3) has been met. But plaintiff has failed to satisfy the condition imposed by § 251(a) (1) in that 80% of his gross income was not derived from sources within a possession of the United States; in other words, his Navy pay which accrued each year that he was a prisoner in Japan (which for the purposes of 251 is considered as a possession of the United States) was less than 80% of his total gross income. See footnote 3.
Plaintiffs do not contend that Mr. Newman's compensation paid by his employer and received by Mrs. Newman in the United States was derived from a source within a possession of the United States, and we think such an argument would be futile. This income is obviously from a source within the United States where the services pursuant to Mr. Newman's employment had been rendered and where it was probably expected similar services would be rendered in the future. See Ingram v. Bowers, D.C.S.D.N.Y.1931, 47 F.2d 925, affirmed 2d Cir., 1932, 57 F.2d 65.
In the skillful and persuasive briefs submitted in behalf of plaintiffs, their counsel earnestly contends that it was the intention of Congress that the naval compensation accruing while Mr. Newman was a prisoner should be completely exempt from income tax. He cites 116(a)(1) and 939 of the 1939 Code, as amended, in support of the alleged Congressional intention. Although we may agree with the sentiments he has expressed, the short answer to his argument is that if Congress had intended to make a serviceman's compensation which accrued while he was a prisoner of war wholly tax exempt, it would have specifically so provided and would not have amended 251 in the manner quoted above.
Conclusions of Law
1. This court has jurisdiction of the parties and the subject matter.
2. Plaintiffs are not entitled to exclude any income under the provisions of § 251 of the Internal Revenue Code of 1939, as amended.
3. Judgment should be entered in favor of the defendant.
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