## Facts

- Julian C. Stanford and Elizabeth C. Stanford, husband and wife, filed separate cash-basis U.S. income tax returns for 1955.
- Julian Stanford worked for a German department store company (Leonhard Tietz A.G., later succeeded by Kaufhof A.G.) since 1909; he became a director/officer and owned about 5% of the company’s stock.
- A 1927 employment contract provided that, upon retirement at age 65 or disability, either party could require pensioning, with a pension of 30,000 marks payable until death.
- The Stanfords, German citizens of Jewish background, left Germany in 1937 due to Nazi persecution; Julian was forced out of corporate positions and compelled to surrender his stock, and the couple suffered losses and wartime deprivation.
- After World War II, Julian pursued claims against Kaufhof; in 1949 Kaufhof indicated it would resume the contractual pension and adjust it for economic changes.
- In 1955, Kaufhof agreed to increase Julian’s pension by 50%, and the Stanfords received 45,000 German marks (about $10,662.48).
- The Commissioner treated the 45,000-mark payment as taxable pension income and determined deficiencies for 1955; the Tax Court sustained the deficiencies, finding the payment was a pension for prior services.
- The Stanfords petitioned for review, arguing the payment was non-taxable reparation-type compensation, or otherwise excludable under foreign-source rules including I.R.C. § 872.

## Issues

1. Whether the 45,000-mark payment received in 1955 from a German corporation was taxable income as a pension for past services or non-taxable reparation-type compensation.
2. Whether I.R.C. § 872 or related foreign-source concepts excluded the payment from the gross income of U.S. taxpayers.

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision sustaining the deficiencies.
- The court upheld the Tax Court’s finding that the 1955 payment represented a pension paid for services previously rendered under the employment relationship.
- The court rejected the argument that the payment was non-taxable reparations or damages for persecution-related injuries and losses.
- The court held I.R.C. § 872 did not apply because it addresses nonresident aliens reporting U.S.-source income, not U.S. citizens or residents seeking to exclude foreign-source income.

## Legal Principles

- Payments are taxed according to their substantive character and the legal rights that produce them; a payment that is, in substance, a pension for past services is includable in gross income even if connected historically to wartime events.
- Appellate review generally accepts the Tax Court’s supported factual characterization of a payment’s nature (here, pension for prior services).
- I.R.C. § 872 operates within the statutory scheme governing nonresident aliens and limits their required inclusion to U.S.-source income; it does not provide an exclusion for U.S. citizens or residents receiving foreign-source payments.
- A foreign source of payment, by itself, does not create an exclusion from U.S. taxable income for U.S. citizens or residents.

## Conclusion

The Ninth Circuit held that the taxpayers’ 1955 receipt of 45,000 German marks from a German corporate successor was taxable pension income arising from an employment contract, not excluded reparation-type compensation, and that I.R.C. § 872 afforded no exclusion to U.S. taxpayers for foreign-source pension payments.


Stanford v. Comm’r of Internal Revenue, 297 F.2d 298 (9th Cir. 1961)