*308 Decision will be entered under Rule 50.
1. Held, on the facts, that compensation received by petitioner in 1941 was for services rendered over a period from November 1935 through 1940, and that tax liability for 1941 is to be computed under the provisions of section 107 (a), Internal Revenue Code.
2. The petitioner was not a bona fide nonresident of the United States for more than six months during 1941, but was such during each of the years 1936 and 1937. It being assumed, for lack of proof, that petitioner's return for 1941 was on a cash basis, it is held that section 116 (a), Internal Revenue Code, does not apply, and that compensation received in 1941 for services rendered in the years 1936 and 1937 is not excludible from gross income.
*141 The Commissioner determined a deficiency in income tax in the amount of $ 86,095.42 for the year 1941. The questions involved are whether the tax liability of petitioner for 1941 is determinable under the provisions of section 107 (a) of the Internal Revenue Code, and, if so, whether the income of petitioner apportionable*310 to 1936 and 1937 under the provisions of section 107 (a) is excludible from his gross income under the provisions of section 116 (a) of the Internal Revenue Code.
FINDINGS OF FACT.
The petitioner was born in Parral, Mexico. During the years 1935 to 1941, inclusive, he was married and a citizen of the United States. He filed his 1941 Federal income tax return in the third district of New York. The return so filed was blank, except that opposite the item "Net income" the word "None" was inserted. It also contained the name, address, and signature of petitioner and the affidavits therein were executed. The petitioner kept no books of account during the years 1940 and 1941. He was during the years 1935 to 1941, inclusive, a banker and economic adviser. He was a linguist and spoke several languages fluently, including German. He had been connected as interpreter with the Dawes Commission in 1923, and later became connected with the investment house of Harris, Forbes & Co., of Boston, which had handled considerable financing for Germany, and the Harris Trust & Savings Bank of Chicago.
In July 1916 the Lehigh Valley Railroad terminal at Black Tom, New Jersey, was destroyed by explosions*311 and fire and in January 1917 the ammunition assembling plant at Kingsland, New Jersey, was also destroyed by explosion and fire. In the destruction of its Black Tom terminal the Lehigh Valley Railroad Co. (hereinafter referred to as Lehigh) sustained a substantial loss, as did Bethlehem Steel Corporation (hereinafter referred to as Bethlehem) and a large number of so-called Black Tom underwriters. The ammunition assembling plant at Kingsland was owned by Agency of Canadian Car & Foundry Co. (hereinafter referred to as Agency), a New York corporation, which, however, was a wholly owned subsidiary of Canadian Car & Foundry Co. (hereinafter referred to as Canadian Co.), a *142 Canadian corporation, located at Montreal, Canada. In the Kingsland fire the Delaware, Lackawanna & Western Railroad, as well as numerous American insurance companies, sustained losses, the claims of which were prosecuted as hereinafter described by Agency, together with its own, under powers of attorney.
L. A. Peto, vice president since 1927 of Agency, and in 1935 vice president, treasurer, and comptroller of Canadian Co., was in charge of the prosecution of Agency's claims. Amos J. Peaslee was chief *312 counsel for Lehigh. In 1924 he also became counsel and later chief counsel for Agency and other so-called sabotage claimants. Bethlehem and a large number of underwriters were represented in the prosecution of their claims by other counsel, of whom John J. McCloy was most active.
The Mixed Claims Commission, United States and Germany, was established in 1922 to determine the financial responsibility of Germany under the Treaty of Berlin. It consisted of a German commissioner, an American commissioner, and an umpire. The so-called sabotage claims, of which there were 153 in number, which arose out of the destruction of the Black Tom terminal and the Kingsland plant, were formally presented in a group, in March 1927, to the Commission as claims of the United States by the American agent representing the United States before the Commission. However, such claims had received the attention of the American agent prior to their formal presentation to the Commission and in particular during the summer of 1924 when he, together with his assistant, went to Berlin, Germany, for informal conferences with the German agent before the Commission to effect a settlement thereof with the German*313 Government.
The sabotage claims were first argued before the Commission in April 1929. Because of the death of the umpire of the Commission, the claims were argued a second time at The Hague, Holland, in September 1930. On October 16, 1930, the Commission handed down a decision at Hamburg, Germany, dismissing the sabotage claims on the ground that sufficient evidence had not been presented to justify a finding that Germany was responsible for the acts complained of. Two petitions for rehearing filed on behalf of the sabotage claimants were dismissed in March 1931 and December 1932, respectively. In May 1933 a third petition for rehearing was filed, alleging that the Commission in reaching its prior decisions in the sabotage claims had been misled and defrauded by perjury, collusion, and suppression of evidence. In December 1933 the Commission rendered its decision sustaining its juridical right to reopen its previous decisions as asked for in the petition of May 1933.
In June 1936 a motion filed by the German agent with the Commission to postpone further proceedings with respect to the sabotage *143 claims to permit negotiations of a compromise settlement thereof was granted. *314 The American agent and his assistant arrived in Munich, Germany, on or about June 30, 1936, and met with the designated German representative, Hauptman von Pfeffer. After several conferences and exchanges of notes, the German and American representatives, on July 10, 1936, agreed upon a compromise settlement of the sabotage claims. Shortly thereafter the American agent returned to the United States.
To consummate the compromise settlement its formal submission to the Mixed Claims Commission by the German and American agents was required. Certain holders of prior awards of the Commission and three German nationals, holders of awards of the war claims arbitrator, all of whom claimed an interest in a so-called German special deposit account set up under the provisions of the Settlement of War Claims Act of 1928 and who had already received partial payments on account of their awards from such account, learning of the compromise settlement, immediately initiated activities, both in Germany and in the United States, to obstruct the formal carrying out of the Munich agreement. They filed with the Commission, through the Department of State, protests against the carrying out of the *315 Munich agreement, based primarily on the ground that if the sabotage claims were allowed the funds in the German special deposit account would be insufficient to pay their own claims in full, and for that reason they claimed that they were entitled to participate in the hearings on the merits of the sabotage claims. The German agent refused to sign the papers required to present the Munich settlement to the Commission. Karl Markau, who, as expert to the German representative, had taken an active part in the Munich settlement, came to Washington to persuade the German agent to effectuate the settlement, but his efforts were of no avail and he returned to London. Becoming impatient with the delays and the failure to cooperate on the part of the German agent, the American agent on January 4, 1937, filed a motion with the Commission requesting the entry of an award in each of the sabotage claims in accordance with the provisions of the Munich settlement, notwithstanding the failure of the German agent to join in its formal submission, which motion was denied July 7, 1939. At the same time, the application of the prior award holders to intervene in the proceedings relative to the sabotage*316 claims was denied.
After the failure of the Munich agreement, litigation before the Mixed Claims Commission was resumed. Counsel for the sabotage claimants procured evidence consisting of documents and affidavits and filed the same with the American agent, to be presented by him to the Commission to substantiate their claim that the former decisions of the Commission were obtained through fraud and collusion and to establish that sabotage had been committed by German agents which *144 caused the damages sustained by claimants. Witnesses were examined by the Commission. Final oral argument on the sabotage claims was had before the Commission in January 1939. Thereafter, in March 1939, the German commissioner retired from the Commission. Nevertheless, the American commissioner and the umpire rendered a decision favorable to the sabotage claimants on June 15, 1939, and directed the American agent to prepare forms of awards in each of the sabotage claims for submission to the Commission and its consideration. On October 30, 1939, the Commission determined and entered the awards, which awards were on October 31, 1939, certified by the Secretary of State to the Secretary of the*317 Treasury for payment. On the same day action was instituted by a prior award holder, Z. & F. Assets Realization Corporation against the Secretary of State and Secretary of the Treasury to enjoin payment of the awards on the ground that the awards were null and void and without jurisdiction on the part of the alleged Commission. The American Hawaiian Steamship Co., another prior award holder, intervened in such action as plaintiff and Lehigh and other sabotage claimants intervened therein as defendants. Upon dismissal of the complaint by the District Court of the United States of the District of Columbia (31 Fed. Supp. 371, Jan. 3, 1940), the prior award holders appealed to the United States Court of Appeals for the District of Columbia. On June 3, 1940, the Court of Appeals for the District of Columbia rendered its decision in which the decision of the District Court was affirmed. ( Z. & F. Assets Realization Corporation v. Hull, 114 Fed. (2d) 464.) Petitions for certiorari were filed by the prior award holders, which were granted October 14, 1940. The Supreme Court affirmed the decision of the Court of Appeals on *318 January 6, 1941. ( Z. & F. Assets Realization Corporation v. Hull, 311 U.S. 470.) The awards were paid January 10, 1941.
The petitioner's attention was first directed to the so-called sabotage claims in 1926 by a member of the firm which at that time was counsel for Agency and Canadian Co. In that year, at the request of such counsel, petitioner went to Berlin, Germany, where, through connections known to him there, he was introduced to the Foreign Secretary and Reich Chancellor of Germany, Stresseman, who favored a settlement of such claims. Petitioner had several conferences with Stresseman and others over a period of two months, at the end of which Stresseman informed him that no settlement could be effected at that time because of considerable opposition thereto in the Reichstag. From the outset many of the counsel for the sabotage claimants were of the opinion that payment of the claims could be obtained only by a settlement with, or the consent of, the German Government, and for a long period of time their efforts were almost exclusively directed toward that end. During the fore part of 1935 Peaslee was again considering *145 the advisability*319 of renewing negotiations with Germany for the settlement of the claims. In discussing the matter with others, petitioner, whom Peaslee had known since about 1912, was suggested as negotiator. Petitioner was contacted and on or about September 11, 1935, he had a conference with Peaslee. Subsequently, he conferred with McCloy, with Peto, with the then president of Canadian Co., and with officials of Lehigh and others. Records were turned over to him to familiarize himself with all the claims preparatory to going abroad. It was agreed that petitioner was to go abroad to ascertain whether he could be of help in settling the claims with the German Government.
On November 29, 1935, petitioner sailed for Europe. Funds for expenses and retainer were advanced to him by some of the claimants. When petitioner arrived in Berlin he contacted an acquaintance, one Albert, who was then a partner of von Lewinski, who had been a German commissioner on the Mixed Claims Commission. After Albert and von Lewinski had taken the matter up with the Foreign Office and with the German agent who was then in Berlin, petitioner was informed by them that the German Government was willing to negotiate a *320 settlement of the sabotage claims. He thereupon went to London, where he met Peaslee, who had been in Europe for some time. At London, on December 19, 1935, the following agreement was entered into by petitioner and Peaslee:
Dear Sir: Referring to our conversations in New York and in London, this is to confirm the arrangement that if before March 1st, 1936, and without oral argument or submission to the Mixed Claims Commission, Germany makes official proposals satisfactory respectively to Agency of Canadian Car and Foundry Co., and Lehigh Valley Railroad Co. for the settlement of their claims, and if before April 1st, 1936 awards are actually entered in their favour upon the consent of Germany, then Agency of Canadian Car and Foundry Co. is to pay you as compensation for your services, five per cent. of whatever amount is received by it, and also is to pay out of any such recoveries three-fifths of your actual disbursements, not to exceed $ 90,000 payable by it for such disbursements. Lehigh Valley Railroad Company is to pay you as compensation for your services, five per cent. of such amount as is received by it in excess of $ 5,000,000.
As indicated in the attached cables from*321 Mr. McCloy, dated December 19th, 1935, I understand that the Bethlehem Steel Co. and the Black Tom Underwriters are also to pay you, under the same conditions five per cent. of their respective total recoveries and two-fifths of such disbursements, not to exceed $ 60,000 payable by them for such disbursements.
It is understood that you are to devote substantially all of your time to the matter until at least March 1st, 1936.
If under the same conditions, such proposals of settlement are made and awards entered after the dates abovementioned, and prior to July 1st, 1936, you are to receive two per cent., but no more. You have no interest in any awards entered upon a contest and adjudication by the Commission, nor in any possible results after July 1st, 1936.
Very truly yours,
[Signed] Amos J. Peaslee.
*146 The foregoing is accepted and agreed to, and receipt is acknowledged of $ 8,000 for disbursements and retainer which is in full settlement of all obligations to date and to be incurred for future services and disbursements, except upon the same conditions, or upon any new written agreement.
[Signed] F. Stallforth.
On June 23, 1936, the above agreement was extended at London*322 as follows:
Mr. F. Stallforth,
Hotel Berkeley, London, England.
Dear Mr. Stallforth: This will confirm our arrangements that notwithstanding the expiration of the agreement contained in my letter to you of December 19th, 1935 as previously extended, Agency of Car & Foundry Company, Ltd. and Lehigh Valley Railroad Company now agree to an extension of that original agreement to cover satisfactory proposals of settlement which may be received before July 15th, 1936 and awards entered before September 1st, 1936. From the attached copy of a cable received from Mr. McCloy, it is understood that the Bethlehem Steel Co. and the Black Tom Underwriters likewise agree to such an extension.
Except as so modified, the terms of the agreement are the same.
Very truly yours,
[Signed] Amos J. Peaslee.
Accepted and agreed to:
[Signed] F. Stallforth,
June 23rd, 1936.
After December 19, 1935, petitioner returned from London to Berlin. Since the officials he desired to contact left Berlin for the Christmas holidays, petitioner went to Zurich, Switzerland, where he contacted a man who was formerly assistant of Albert when Albert was commercial attache in Washington. This man advised him *323 how to go about getting a settlement. Petitioner also conferred with Peaslee at Geneva. During January, February, and March 1936 the petitioner worked in Berlin. The negotiations initiated by him and his continued efforts led to the issuance in May 1935 by the German Government through its Foreign Office to the United States Government of an invitation requesting that representatives of the United States be sent to Germany for the purpose of negotiating a settlement of the sabotage claims. Pursuant to such invitation the American agent before the Mixed Claims Commission and his assistant arrived in Munich, Germany, on or about June 30, 1936, and thereafter met with the German representative, and on July 10, 1936, agreed, as above set forth, upon a compromise settlement of the sabotage claims. Petitioner, counsel, and officials of the various claimants were also in Munich at the time.
After the Munich settlement, petitioner, together with McCloy, went to Berlin to induce the German Foreign Office to authorize the German agent to effectuate the Munich agreement before the Mixed Claims Commission. McCloy left Berlin in July. In August or September *147 1936 petitioner received*324 a communication from New York informing him that the German agent had refused to sign the papers required to present the Munich settlement to the Commission and he was requested to confer with the German representative, von Pfeffer. The petitioner did so and von Pfeffer arranged for his Government to send Karl Markau to the United States to persuade the German agent to effectuate the settlement. Petitioner also obtained from von Pfeffer letters and cables which had been sent by prior award holders in opposition to the Munich agreement. The petitioner sailed for the United States on November 5, 1936. He met Markau in New York about November 10, 1936, and went with him to Washington. The efforts of Markau and petitioner to procure favorable action on the part of the German agent, however, were of no avail and Markau returned to London.
Thereafter, petitioner conferred in New York with counsel and officials of Agency, Canadian Co. and Lehigh. It was determined that petitioner return to Germany, and on December 26, 1936, he sailed with the then president of Canadian Co., arriving in London on January 1, 1937. There they conferred with Markau and about January 10, 1937, proceeded*325 to Berlin for the purpose of inducing the German Foreign Office to issue instructions to the German agent before the Mixed Claims Commission to effectuate the Munich settlement. The president of Canadian Co. tired of the dilatory tactics on the part of German officials and left Germany, but requested petitioner to remain and continue his efforts. Petitioner did so until September 3, 1937, when he returned to the United States. During September and October 1937 he conferred at various times with Peto and the president of Canadian Co. in Montreal and with McCloy and Peaslee in New York.
On February 2, 1938, Canadian Co. and petitioner entered into an agreement, prepared by petitioner's attorney, Stuart N. Updike, as follows:
Canadian Car and Foundry Company, Limited,
Montreal, Canada.
Attention L. A. Peto, Vice President and General Manager.
Dear Sirs: Referring to our negotiations, as a complete and final settlement of all matters between us, I offer the following proposal:
(1) Concurrently with the acceptance of this proposal, you will pay to me in cash the sum of $ 15,000;
(2) You will pay to me, if as and when received by you, a sum equal to two and one-half percent (2 *326 1/2%) of the "net amounts" received directly or indirectly, by any or all of the following companies:
Lehigh Valley Railroad Company; and Agency of Canadian Car and Foundry Company, Limited, both on its own behalf, and as attorney in-fact for Kingsland Underwriters, and for Delaware, Lackawanna & Western Railroad Company,
*148 and resulting from a settlement or compromise of their respective so-called "sabotage claims", but only if such settlement or compromise is effectuated before the date of the commencement of the oral argument upon the motion now pending before the Commission to reopen the so-called Hamburg decision. If any settlement or compromise is effectuated after that date, you will pay me one and one-half percent (1 1/2%) of the "net amounts" so received. The term "net amounts", as used in this paragraph, shall mean the gross moneys retained by the respective companies without deduction for: (a) disbursements, (b) lawyers' or other fees, and/or (c) expenses of any kind, but after deducting any amounts paid by way of settlement to any person or persons claiming rights in the German Special Deposit Account.(3) You and I will exchange instruments of general*327 release covering any and all claims and demands whatsoever, except the obligations contained herein, but reserving to me whatever right I have against the other so-called "sabotage claimants";
(4) I am hereafter to be free to pursue any other work or calling; and
(5) I represent that I have made no commitments and incurred no obligations on your behalf to any person or persons whomsoever, and agree to indemnify and hold you harmless respecting any such obligation of yours claimed to have been incurred by or through me.
If the foregoing proposal is acceptable to you, kindly sign at the space indicated at the foot of this letter.
Very truly yours,
[Signed] F. Stallforth.
Confirmed and Accepted for:
Canadian Car and Foundry Company, Limited,
By L. A. Peto.
Under date of July 8, 1938, McCloy wrote a letter to Updike, petitioner's attorney, as follows:
I am enclosing herewith our check for $ 2,500 to your order as attorney for Mr. Federico Stallforth on the understanding that you will give me a full general release signed by Mr. Stallforth in favor of Bethlehem Steel Company and all its subsidiary and affiliated corporations as well as in favor of this firm and myself as attorneys for*328 Bethlehem of any liability (which we contest) for any services whatsoever that Mr. Stallforth has rendered in connection with the sabotage cases now pending before the Mixed Claims Commission, United States and Germany, or otherwise, and that unless Bethlehem or we as Bethlehem's counsel hereafter in writing expressly employ Mr. Stallforth for a stated compensation neither Bethlehem nor we shall have any liability to Mr. Stallforth for any compensation in respect of his services.
This payment is intended to be and must be accepted as a complete settlement of all liability, if any, to Mr. Stallforth. It should not be taken to mean, however, that irrespective of circumstances we now desire to preclude the possibility that we may hereafter recommend an additional payment to him as a matter of grace out of any eventual recoveries which our client might receive as a result of a settlement of the sabotage cases in which Mr. Stallforth may have had a part. However, the determination of whether such a payment should be recommended or paid and if so recommended or paid, its size, will be matters solely within our discretion and that of our client and the possibility of such further payment*329 is not to be considered in any sense as an inducement by us to him to enter into this settlement, which is absolute and unconditional.
*149 I have also seen the letter which Messrs. Katz & Sommerich have sent to you releasing us and our client from the consequences of any warrants of attachment which were served upon us and this seems to be satisfactory except that of course it is understood that we do not admit in any way any lien attached as a result of such service and we do not admit that Stallforth has any valid claim against any of the parties served with the warrant.
I should like to have you confirm this understanding.
Under the same date the petitioner executed a general release in consideration of the receipt of $ 2,500, releasing Bethlehem, its subsidiaries and affiliated companies, and its attorneys, agents, employees, and stockholders from any claims and demands whatsoever which he ever had against them. Neither Bethlehem nor its attorneys called upon petitioner after the execution of the above release for the performance of any additional services in connection with its sabotage claim.
After the failure of the Munich agreement, although litigation before the *330 Commission was resumed, negotiations were also initiated by the claimants, and in particular Canadian Co. and Agency, for the purpose of settling the differences between the sabotage claimants and prior award holders, in which efforts McCloy and Peto, both acting for Canadian Co. and Agency, were the principal participants. At the request of Peto and McCloy, petitioner cooperated in these negotiations and discussed settlement and withdrawal of their objections with some of the prior award holders and their attorneys. He rendered no services in connection with the proceedings before the Commission.
On July 26, 1939, Canadian Co. and petitioner entered into an agreement as follows:
Mr. F. Stallforth,
Windsor Hotel, Montreal.
Dear Mr. Stallforth: As a final cleaning up of all previous agreements between us in respect to your services in endeavoring to secure settlement of the so-called Sabotage Claims before the Mixed Claims Commission, U. S. and Germany, I wish to state as follows:
We will pay you one (1) percent of any money received by Agency of Canadian Car & Foundry Company, Limited, out of its claim through the U. S. Government on the Mixed Claims Commission, U. S. and Germany; *331 such payments to be made to you if, as and when received by Agency of Canadian Car & Foundry Company, Limited, and regardless of whether the payments are received by it by way of settlement, compromise, judgment, decree, awards or otherwise.
In regard to the claim of the Lehigh Valley Railroad Corporation, we can only commit ourselves insofar as the Lehigh Valley pays to Amos J. Peaslee certain percentages of its claim which it has assigned to him in order to enable Mr. Peaslee to arrange with others to carry the financial burden of prosecuting its claim. If, as and when Lehigh Valley Railroad Corporation pays to A. J. Peaslee such commitments, and if, as and when A. J. Peaslee out of such commitments pays to us such sums as he has assigned to us from the percentages thus made available, and which amount to not less than 10% of the claim of Lehigh Valley Railroad Corporation, we agree to pay you one (1) percent of such claim if, as and when the aforementioned 10% of such claim is received by us.
*150 The acceptance of this proposition will constitute a waiver of all previous agreements between us.
Yours very truly,
[Signed] L. A. Peto,
Vice-President & General Manager.
*332 LAP.T.
ACCEPTED:
F. Stallforth.
The above agreement was entered into by Peto because he desired to retain petitioner's services for further negotiations.
On July 28, 1939, a further agreement was entered into by Canadian Co. and petitioner as follows:
Mr. Frederico [sic] Stallforth,
Windsor Hotel, Montreal.
Dear Mr. Stallforth: Referring to our agreement of July 26 in regard to the so-called Sabotage Claims, we are willing to amend it by agreeing to pay you $ 36,000 not later than December 31, 1940, whether or not any payment has then or shall later be made on any of our claims. This $ 36,000 will, however, be a credit on our obligations to you set forth in our letter of July 26.
We understand that you are assigning your rights under this letter to The First National Bank of Boston as security for a loan and, as requested by you, we are writing them a letter in the attached form.
Your signature in the space below will modify our agreement of July 26 accordingly.
Yours very truly,
Canadian Car & Foundry Company, Limited,
By [Signed] L. A. Peto,
Vice-President & General Manager.
LAP.T.
ACCEPTED:
F. Stallforth.On the same date the petitioner addressed a letter to *333 Canadian Co. at Montreal as follows:
Referring to the letter from you to The First National Bank of Boston of even date, I hereby agree that in case the loan of $ 36,000 is not repaid in full by December 31, 1940 to The First National Bank of Boston, I will repay to you any amount that you may have paid for my account to said bank.
After October 1939 and throughout 1940 petitioner, at the request of Peto and McCloy, at various times and at times with Peto, discussed settlement with prior award holders and their attorneys, including Z. & F. Assets Realization Corporation and Hawaiian Steamship Co. Petitioner, sometime after the June 15, 1939, decision of the Commission, contacted the German commissioner, who was then in Germany, several times by telephone. From the conversations had, petitioner inferred that it might be possible to obtain his consent to the awards. Notwithstanding the favorable decision of the Commission and the District Court, the consent of the Foreign Office and the German commissioner to the awards would have benefited *151 the sabotage claimants, since the prior award holders could then no longer delay the payment of the awards. The petitioner contemplated*334 going to Europe on another matter. He reported to McCloy and discussed with him the method or procedure to be followed in further negotiations in Germany. McCloy informed petitioner that in view of the then status of the proceedings only an unconditional surrender on the part of the German Government would be acceptable. He gave petitioner a form of consent by the terms of which the German Government consented to the awards without admitting its responsibility for the destruction of the property upon which the sabotage claims were based. On April 6, 1940, petitioner sailed from New York, arriving in Rome, Italy, in due course. From there he telephoned to Albert in Berlin and to others to ascertain when he could see the German commissioner. Petitioner went to Berlin, and after various conversations with Albert and the German commissioner and through them with the Foreign Office, petitioner was advised by them to engage a prominent lawyer connected with the German Government. On May 7, 1940, he cabled the Cravath firm as follows:
Provided suggested or other satisfactory note is send [sic] before June fifteenth are claimants prepared pay me additional one percent to take*335 care of necessary expenses and lawyers fees cable or telephone Rome Grand Hotel before Wednesday night leaving Thursday.
The reply thereto sent on the same day was "No." Petitioner sailed for the United States August 14, 1940. His negotiations pertaining to the sabotage awards extended over a period of about two months. The rest of the time he devoted to other matters not connected with such awards. Pursuant to agreement, about $ 500 or $ 600 was paid to petitioner to reimburse him for a portion of the expenses incurred by him on such trip. Upon his return he reported the results of his negotiations to McCloy and Peto. During October and November 1940 petitioner had several conferences with counsel and Peto, during which discussions were had as to what action to take in the event the Supreme Court decision would be unfavorable to the sabotage claimants, in which event Peto indicated that petitioner's services would be required for further negotiations with respect to the Munich agreement.
In January 1941 Agency paid the petitioner, pursuant to the agreement of July 26, 1939, the amount of $ 168,645.36, which, in accordance with assignments made by him was paid to the persons*336 and in the amounts as follows:
| Mrs. Yolanda Stallforth | $ 64,940.57 |
| Benjamin Webster | 19,733.12 |
| Messrs. Townley, Updyke & Carter | 10,000.00 |
| First National Bank of Boston | 37,790.00 |
| Theodore H. Thiesing, as attorney-in-fact for Walter Bodenstedt | 28,181.67 |
| Victor Drury | 8,000.00 |
| Total | 168,645.36 |
*152 In addition, during the entire period from 1935 to 1941 Agency made payments to petitioner as reimbursements for expenses incurred by him.
On August 2, 1939, the petitioner filed an offer of compromise covering his tax liability for 1925, 1926, and 1927, including a financial statement as of March 31, 1939. In the offer petitioner left blank the answer to the following question: "Give general statement regarding the prospect of an increase in the value of assets in the near future, and increase in present income."
He answered "No" to the following question: "Have you any other assets, either actual or contingent, other than those represented herein? Answer yes or no."
No disclosure was made in the offer of compromise of the contract involved herein. In the course of an investigation by revenue agents of the petitioner's financial condition, made in approximately*337 November and December 1939 and January 1940, the petitioner disclosed that he was working on a matter before the Mixed Claims Commission, the Black Tom matter, and was told by one of the revenue agents, in effect, that if it was the Black Tom matter, he would never receive anything and to forget it, that what they wanted was real assets, not dreams.
The above compensation received by petitioner in 1941 was for personal services rendered by him covering a period from November 1935 to the end of 1940, or a period of 62 months.
OPINION.
The petitioner contends that compensation received by him in 1941 for services rendered over a period from September 3, 1935, to January 10, 1941, was, in determining the deficiency for 1941, erroneously included in gross income and that his tax liability should be computed under the provisions of section 107 (a), Internal Revenue Code. 1 The respondent contends that petitioner's tax liability is not determinable under section 107 (a) because the compensation received in 1941 was not in payment of services covering a period of sixty calendar months or more as required by that section, but that the services for which the compensation was paid in *153 *338 1941 began in November 1935 and terminated on or about July 26, 1939, and hence the services covered a period of only forty-five months.
*339 In his 1941 income tax return the petitioner reported no income whatever. In determining the deficiency the Commissioner included in taxable income $ 150,645.36 ($ 168,645.36 gross income, less $ 18,000 deductible expenses) as compensation received and allowed a deduction of $ 2,230.26 interest paid.
The amount received by petitioner as compensation in 1941 is not in dispute, nor is it disputed that the amount received was compensation for personal services rendered by him, and that the amount received in 1941 represented at least 75 per centum of the total compensation received. The parties disagree as to the period during which his services were rendered.
That petitioner's services began in November 1935 and that such month is includible in determining the period fixed by the statute is conceded by the respondent. In our opinion the evidence would not support a finding that petitioner's employment commenced prior to November 1935.
In support of his contention that petitioner's services for which the compensation was paid in 1941 were concluded in July 1939, the respondent states, among other things, that the compensation was paid under the last agreement of July 26, 1939; that*340 such agreement did not require the performance of further or additional services; that the German Government never contested the decision of the Mixed Claims Commission of June 15, 1939, or the awards made pursuant thereto; that nothing resulted insofar as the sabotage claims were concerned from the conversations and conferences which petitioner held in Rome and in Berlin in 1940; that in 1939 Europe was in a state of war and petitioner was in no position to negotiate any further with the German Government with respect to the sabotage claims; that petitioner performed no services in obtaining evidence of any kind and submitting the same to the Commission; and that in view of the favorable decision of the Mixed Claims Commission of June 15, 1939, its awards on October 30, 1939, and the certification of the awards by the Secretary of State to the Secretary of the Treasury on October 31, 1939, there was nothing which the petitioner could have done thereafter toward settling the sabotage claims.
The record shows clearly that the agreements of February 2, 1938, and July 26, 1939, were negotiated and entered into between petitioner and Peto, an official of both the Canadian Co. and Agency*341 and the one most active throughout the prosecution of the claims, and that at least from 1938 on, petitioner's dealings were primarily with Peto. Peto testified that he entered into the contract of July 26, 1939, with petitioner *154 because "we wished to retain his services throughout"; that he agreed to retain petitioner's services "on his representations that he still thought that he could get the German Government not to take any active steps in opposing the decision of the Mixed Claims Commission"; that the agreement of July 26, 1939, was "a compromise for Mr. Stallforth's services up to the time when the case was settled one way or the other"; that his company had call upon petitioner's services in connection with the claims until January 10, 1941; and that "we did carry Mr. Stallforth and demand his services because we expected to use him if, as and when the Supreme Court rendered a decision unfavorable to our cause." The record further shows that the petitioner did render services at various times throughout 1938, 1939, and 1940 at the request of Peto or McCloy or with their active cooperation and knowledge, and that during the years from 1935 to 1941 petitioner was *342 reimbursed by Agency for expenses incurred by him during such period in rendering such services, including expenses incurred on his trip to Europe in 1940. McCloy, although not chief counsel for Agency, acted as counsel for it in certain matters connected with the claims. Obviously Agency would not have reimbursed petitioner for such expenses had his services not been performed at its request and in its behalf. That nothing resulted from petitioner's negotiations is not material. It appears also that the refusal of the German agent to sign the formal papers necessary for the submission of the Munich agreement to the Commission was due in large part to the efforts and opposition of the prior award holders to the carrying out of such agreement and the allowance of the sabotage claims, although the great majority of awards to the protesting award holders had been entered following settlements reached in substantially the same manner as was the Munich settlement; that on March 1, 1939, the German commissioner withdrew from the Commission; that on receiving notice of a meeting of the Commission to be held on June 15, 1939, the German Embassy advised the Secretary of State that, since*343 the withdrawal of the German commissioner, the Commission was incompetent to make decisions, and that on October 3, 1939, the German Charge d'Affaires addressed an elaborate communication to the Secretary of State making a detailed statement with respect to the alleged illegal acts of the umpire in making his decision of June 15, 1939, and protesting against all further measures by the umpire, the American commissioner and the American agent which were aimed at securing awards in the Black Tom and Kingsland cases. ( Z. & F. Assets Realization Corporation v. Hull, 311 U.S. 470, 483, 484.) The action of the German commissioner and the position taken by the German Government gave the prior award holders grounds for bringing their suit to restrain payment of the awards. No one knew what the decision of the Court of Appeals would be, and the same is true of the decision of the Supreme *155 Court. Counsel for the German shipowners and award holders testified that he was consulted by counsel for the American award holders prior to the institution of the proceedings in the District Court, and he and other counsel were of the opinion that the Mixed*344 Claims Commission was functus officio and that the awards were invalid, and that this opinion in that connection was heightened by the granting of certiorari by the Supreme Court. He also corroborated petitioner's testimony that after October 30, 1939, negotiations were under way between the sabotage claimants and the two American award holders who had brought suit, and others, to end the litigation, and that petitioner conferred with him in that respect on several occasions. Under the circumstances the continued efforts of Peto and petitioner to obtain the consent of the German Government to the entry of the awards or to settle with the prior award holders were not wholly without reason or unjustified. In any event the services were performed by petitioner. The fact that petitioner had a personal interest in the payment of the awards because the payment of his compensation depended thereon is unimportant; so too, is the fact that he performed no services in connection with the litigation before the Commission. He was not employed to render any services in that respect.
The respondent relies heavily upon the testimony of Michael A. Loughman, secretary-treasurer of Agency *345 since 1936. He testified categorically that Agency was perfectly satisfied with the decision of the Commission of June 15, 1939; that it was interested neither in any compromise of the matter after October 30, 1939, nor in the revival of the Munich agreement, because under the decision of the Commission the claimants would receive a great deal more than they would under the Munich agreement; and that petitioner, so far as he knew, did not render any services to Agency after the decision of June 15, 1939. However, he also testified that he was assistant to Peto in connection with the claims until January 10, 1941; that his duties as such were to locate witnesses and get evidence and consult with counsel as to the preparation of briefs; that he traveled "around the country and down to Central America" and was over in Europe for the purpose of locating witnesses and getting evidence; that no oral testimony was taken before the Commission until about 1936 or 1937; that he did not go to Europe at the time the Munich agreement was made; that he was not consulted by either Peto or Peaslee with reference to the employment of petitioner in 1935 or with respect to the contract of December *346 19, 1935; that Peto did not consult with him with respect to the fee arrangements prior to their being made with petitioner, and that he did not consult him with reference to the agreement of July 26, 1939. Since Loughman's attention was primarily directed to the proceedings before the Commission, and in view of his testimony that he was not *156 consulted as to the employment of petitioner and later arrangements made with him, the testimony of Peto, who directly negotiated with petitioner and cooperated with him in his efforts after October 31, 1939, is more persuasive than that of Loughman. Peto, too, testified that his company was satisfied with the decision of the Commission on June 15, 1939, but he also testified that he was informed by counsel for the German award holders and counsel for the American award holders, who later brought suit at the time the German commission withdrew, that they would contest any favorable decision made in the absence of the German commissioner. Peto, in our view, had a greater over-all knowledge of the entire proceedings and negotiations than did Loughman.
The respondent urges that the petitioner in August 1939 filed with the collector an*347 offer in compromise, not disclosing his interest in the contract herein involved. We think the point of not much importance, first, because the financial statement attached to the offer was as of March 31, 1939, a time when, under the record before us, the chances of recovery under the contract appeared very slight, and, second, because in the course of an investigation by revenue agents later that year and during January 1940 petitioner disclosed to one of the revenue agents that he had an interest in a matter before the Mixed Claims Commission, the Black Tom matter, and was told that if it was the Black Tom matter he would never receive anything, to forget it, and that they, the agents, wanted real assets, not dreams. All this gives a minimum of assistance in the determination as to the period covered by petitioner's activities and services in which the amount involved was earned.
Upon a careful consideration of all the evidence, we are of the opinion, and have so found as a fact, that petitioner's services, for which he received compensation in 1941, were rendered from November 1935 through 1940. Hence, his tax liability for 1941 is to be computed according to the provisions*348 of section 107 (a).
The petitioner further contends that the compensation received in 1941 "allocable" to 1936 and 1937 under section 107 (a) is excludible from gross income of such years under the provisions of section 116 (a) of the Internal Revenue Code, 2 since he was a citizen of the *157 United States but a bona fide nonresident thereof for more than six months during 1936 and 1937.
*349 The respondent contends that, since the petitioner was not a bona fide nonresident for the statutory period of more than six months in 1941 and since his tax return was made on a cash basis, he is not entitled to the benefits of section 116 (a), citing Muhleman v. Hoey (C. C. A., 2d Cir.), 124 Fed. (2d) 414.
Petitioner makes no claims that he was out of the United States more than six months in 1941. It is indicated in the record that petitioner left this country on April 12, 1941, and returned on September 27, 1941, a period less than six months. It is argued by petitioner that the amounts of the compensation received in 1941 "allocable" to 1936 and 1937 must be looked upon as actually received in 1936 and 1937, respectively, under section 107 (a); that if a taxpayer had actually received the compensation ratably over the period September 1935 through December 1940 and in addition met the requirements of section 116 (a) as to 1936 and 1937, the amounts in those two years would have been excluded from gross income and exempted from taxation, therefore a like relief should be available to a taxpayer when the amounts are considered as received in*350 1936 and 1937 "in the eyes of the law," i. e., under section 107 (a); that amounts actually received in certain years should not be treated differently under section 116 (a) than amounts considered under section 107 (a) as received in certain years; and that sections 107 (a) and 116 (a) are not mutually exclusive, but that they are complementary.
In Julius B. B. Stryker, 29 B. T. A. 1025, the taxpayer in 1928 received compensation for services rendered in 1927 of which he claimed 140/365 was properly taxable in 1928 and 225/365 in 1927, since he spent 225 days in Java during 1927, upon the theory that the term "during the taxable year" in section 116 (a) meant the year in which the services were performed and compensation earned rather than the year in which the compensation was received. It was held therein that the "taxable year" under section 116 (a) was determinable by the method of accounting employed rather than by the period in which the services were performed and that, since taxpayer employed the cash basis, the entire amount was includible in taxpayer's 1928 income. In the Muhleman case, supra, the taxpayer in this country received*351 compensation in 1932 which he had earned in 1931, during which year he was a nonresident for more than six months. The court stated:
* * * When a taxpayer reports on the cash basis, his cash receipts for the period covered by the return are to be taken into account no matter when the transactions or services which produced the income represented by the cash receipts may have been consummated or performed. * * *
The taxpayer therefore, was bound, unless Sec. 116 (a) is applicable, to report this additional salary or bonus in the year during which he received it for *158 it was a part of his actual gross income for that period and for no other. The manner in which he elected to report his income did, indeed, determine the period for which it was reportable, and therefore taxable, but that is no anomaly. Whether a taxpayer reports on the cash or the accrual basis often changes the taxable year for which items of income are to be returned for taxation.
Since the taxable year for which the bonus was returnable for taxation was 1932 and there is neither claim nor proof that the taxpayer was a bona fide nonresident of this country for more than half of that period, it is clear that*352 the statute relied on by the plaintiffs is not applicable.
See also George W. P. Heffelfinger, 5 T. C. 985.
Petitioner's 1941 return does not disclose the basis upon which it was made. There is no evidence upon what basis he made his 1936 and 1937 returns. He kept no books of account in 1940 and 1941. The records fail to disclose whether books were kept by him in 1936 and 1937. It is well established that where a taxpayer does not keep accounting records it may be assumed that the cash basis is used. Court Holding Co., 2 T. C. 531, 536; Mansuss Realty Co., 1 T. C. 932, 936; affd. (C. C. A., 2d Cir.), 143 Fed. (2d) 286.
Furthermore, section 107 is a part of Supplement A of Subchapter C, entitled "Rates of Tax," whereas section 116 is a part of Supplement B of Subchapter C, entitled "Computation of Net Income." Hence, section 107 (a) and section 116 (a) relate to different subject matters, i. e., a rate of taxation to be applied under certain conditions and the computation of net income under certain conditions. That section 107 (a) imposes a tax and does not*353 purport to set up a rule for the determination or computation of taxable income is apparent from the language used, for it provides that the "tax" upon certain income for the taxable year "shall not be greater than the aggregate of the taxes attributable to such part [of such income] had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual." Had it been intended otherwise, Congress would no doubt have placed the section under Supplement B of Subchapter C, rather than under Supplement A of Subchapter C. Furthermore, section 107 (a) is also applicable to the "taxable year" and does not permit the recomputation of tax liability for years other than the taxable year. The recomputation of the tax for prior years is merely used as a measure of the tax to be imposed in the taxable year. Section 107 (a) does not provide that for all purposes or in general, the income shall be treated as received over the sixty-month (or more) period. Moreover, since section 107 (a) provides relief only when the income is received or accrued "in one taxable year," it is apparent that if, as petitioner wishes, the*354 income here is in part considered constructively received 3 in 1936 and 1937, section 107 (a) becomes inapplicable.
*159 It is therefore our opinion that section 116 (a) is not applicable, and that income received in 1941 for services rendered in 1936 and 1937 is not excludible from gross income.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF SIXTY MONTHS OR MORE AND BACK PAY.
(a) Personal Services. -- If at least 75 per centum of the total compensation for personal services covering a period of sixty calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual. [As amended by sec. 119 (b), Act 1942.]
* * * *
(c) Fractional Parts of a Month. -- For the purposes of this section a fractional part of a month shall be disregarded unless it amounts to more than half a month, in which case it shall be considered as a month.↩
2. SEC. 116. EXCLUSIONS FROM GROSS INCOME.
In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter:
(a) Earned Income from Sources Without United States. -- In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from without the United States (except amounts paid by the United States or any agency thereof) if such amounts would constitute earned income as defined in section 25 (a) if received from sources within the United States, but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.↩
3. On brief petitioner argues, and repeats, that it is as though the amounts had "actually been received in those years."↩