Abdel-Fattah v. Commissioner

SHOUKRI OSMAN SALEH ABDEL-FATTAH, PETITIONER v.

COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 4683–09. Filed April 27, 2010.

In 2005–2007 P, a non-U.S. citizen, was an employee of the

Embassy of the United Arab Emirates (UAE) in Washington,

D.C., performing for that Embassy services of a sort that are

performed by employees of the U.S. Embassy in the UAE. The

UAE does not impose an income tax, so employees of the U.S.

Embassy in the UAE incur no income tax; but the

U.S. Department of State did not certify this fact (pursuant

to I.R.C. sec. 893(b)) until 2008. For 2005–2007 P filed tax

returns reporting his embassy wages as income. R issued a

notice of deficiency for those years based on adjustments

unrelated to the embassy wages. P filed a petition in which

he contends that the embassy wages are exempt from income

tax under I.R.C. sec. 893. The parties agree that P satisfied

the three requirements for exemption from income tax under

I.R.C. sec. 893(a). Held: I.R.C. sec. 893 does not require, as a

condition of a claim of exemption by an employee of a foreign

government, the U.S. Department of State’s certification of

reciprocal exemption by the foreign country under I.R.C. sec.

893(b). Because P satisfied the three requirements of I.R.C.

sec. 893(a), his wages from working for the UAE Embassy

from 2005–2007 are exempt from income tax.

Hamilton Loeb and Anne C. Loomis, for petitioner.

Lindsey D. Stellwagen, for respondent.

OPINION

GUSTAFSON, Judge: The Internal Revenue Service (IRS)

issued to petitioner Shoukri Osman Saleh Abdel-Fattah a

notice of deficiency pursuant to section 6212, 1 showing the

IRS’s determination of the following deficiencies in income

tax, additions to tax for failure to file under section

6651(a)(1), and accuracy-related penalties under section 6662

for tax years 2005, 2006, and 2007:

1 Unless otherwise indicated, all citations of sections refer to the Internal Revenue Code (26

U.S.C.) in effect for the years in issue, and all citations of Rules refer to the Tax Court Rules

of Practice and Procedure.

190

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(190) ABDEL-FATTAH v. COMMISSIONER 191

Accuracy-related

Addition to tax penalty

Year Deficiency sec. 6651(a)(1) sec. 6662

2005 $6,428 --- $1,285.60

2006 6,465 $343.50 1,293.00

2007 6,858 --- 1,371.60

Mr. Abdel-Fattah brings this case pursuant to section

6213(a), asking this Court to redetermine those deficiencies.

After various concessions, the only issue for decision is

whether Mr. Abdel-Fattah’s wages paid by the Embassy of

the United Arab Emirates (UAE) are exempt from income tax

under section 893. That issue is currently before the Court

on the parties’ cross-motions for summary judgment. For the

reasons explained below, we will grant Mr. Abdel-Fattah’s

motion and deny respondent’s motion. 2

Background

The following facts are based on the parties’ stipulations

(which we incorporate herein by this reference) and on the

assertions in the parties’ motion papers that are supported

in accordance with Rule 121 and as to which the opposing

party did not raise any genuine issue of material fact. At the

time he filed his petition, Mr. Abdel-Fattah resided in Vir-

ginia.

The UAE and taxes

The United Arab Emirates was formed as a union of sepa-

rate emirates in 1971 and 1972. Since its founding, the UAE

has not imposed any income tax on individual income. This

non-taxation applies both to UAE nationals and to foreign

individuals who work in the UAE, including persons who are

employed by the U.S. Embassy or consulate in the UAE.

The UAE opened its Embassy in Washington, D.C., in 1974;

and in 1977 it became a party to the Vienna Convention on

Diplomatic Relations, Apr. 18, 1961, 23 U.S.T. 3227. Under

that convention, the administrative and technical and service

staff employed by the Embassy of the UAE was considered

exempt from U.S. tax starting in 1977.

2 If Mr. Abdel-Fattah’s motion were denied, then certain substantiation issues would have to

be resolved. Because we grant his motion, those issues are moot.

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192 134 UNITED STATES TAX COURT REPORTS (190)

However, in April 1991 the U.S. Department of State

(State Department) announced a change in its policy con-

cerning the interpretation of the relevant provision of the

Vienna Convention, so that A–2 visa holders were no longer

eligible for exemption from tax under the Vienna Convention.

In 1991 the State Department invited embassies to submit

certificates of reciprocity (which would result in a certifi-

cation of exemption under the Code—viz., section 893—

rather than under the Vienna Convention); but the UAE

Embassy did not submit a certificate of reciprocity or request

such certification from the State Department until after the

years at issue.

Mr. Abdel-Fattah’s employment and tax returns

Mr. Abdel-Fattah is an Egyptian national, and he was in

the United States as a nonresident alien on an A–2 visa

during the years in issue. Except for six months in 2006

during which he was unemployed, Mr. Abdel-Fattah was

employed by the UAE Embassy from 2000 through the years

at issue. In the three years at issue he worked for the UAE

Embassy as a security guard and as a driver.

Employees of the U.S. Government Embassy in the UAE

performed services similar to Mr. Abdel-Fattah’s services as

a driver and security guard. Like everyone else in the UAE,

those U.S. employees were not subject to income tax by the

UAE.

For each of the years 2005, 2006, and 2007 Mr. Abdel-

Fattah filed a Form 1040, U.S. Individual Income Tax

Return 3—the latest in April 2008—on which he reported his

UAE Embassy wages. His returns reported overpayments of

tax and claimed refunds.

State Department certification

As of August 2008 several UAE Embassy employees

(including Mr. Abdel-Fattah) had received inquiries from the

IRS. In response, on August 14, 2008, the UAE Embassy

requested from the State Department a certification under

3 A non-resident alien like Mr. Abdel-Fattah should use Form 1040NR, U.S. Nonresident Alien

Income Tax Return. Unlike the Form 1040NR, the Form 1040 that Mr. Abdel-Fattah filed in-

cludes certain credits for which non-resident aliens are ineligible. Mr. Abdel-Fattah concedes he

wrongly claimed items on Form 1040, and we therefore do not address further the distinctions

between Form 1040 and Form 1040NR.

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(190) ABDEL-FATTAH v. COMMISSIONER 193

section 893(b). On September 26, 2008—i.e., six weeks after

the request and nine months after the end of the latest year

at issue—the State Department issued such a certification,

signed by the Director of the Office of Foreign Missions,

which read:

Acting pursuant to Department of State Delegation of Authority 285

(October 31, 2005), I hereby certify to the Secretary of the Treasury, in

accordance with 26 U.S.C. § 893(b), that the government of the United

Arab Emirates does not tax the wages, fees or salaries of employees of the

United States Embassy and Consulate in the United Arab Emirates

received as compensation for their official services to the United States. I

further certify that such employees perform services of a character similar

to those performed by employees of the Embassy of the United Arab Emir-

ates and its consulates in the United States.

The State Department delivered the certification to the UAE

Embassy on October 1, 2008, and delivered it to the U.S.

Department of the Treasury on March 10, 2009.

Notice of deficiency

In June 2008 the IRS had commenced an examination of

Mr. Abdel-Fattah’s 2006 return. Eventually the IRS examined

all three years (2005, 2006, and 2007), and in December 2008

the IRS issued a notice of deficiency addressing all three

years. By that time the Secretary of State had already issued

the certification as to the UAE, but the IRS did not treat it as

retroactive. Consequently, the deficiency notice did not

reduce Mr. Abdel-Fattah’s income by the amount of his UAE

Embassy wages (which he had reported) but rather made

other adjustments, adverse to Mr. Abdel-Fattah, that

increased his tax liability (all of which Mr. Abdel-Fattah con-

cedes for purposes of this motion).

Tax Court petition

In response to the IRS’s December 2008 notice of deficiency,

Mr. Abdel-Fattah filed a timely petition in this Court. His

petition asserts that his UAE Embassy wages are exempt

from income tax under section 893.

Discussion

Section 893(a) provides a tax exemption for wages that sat-

isfy certain conditions, and Mr. Abdel-Fattah’s wages satis-

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194 134 UNITED STATES TAX COURT REPORTS (190)

fied all those conditions during the years in issue. Section

893(b) requires the Secretary of State to certify two of those

three conditions, but as of the years in suit the Secretary of

State had not yet certified those conditions. We must decide

whether, under section 893, the certification required in sub-

section (b) is a prerequisite to the exemption provided in

subsection (a). We hold that it is not, under the plain lan-

guage of section 893. 4

I. Summary judgment standards

Where the pertinent facts are not in dispute, a party may

move for summary judgment to expedite the litigation and

avoid an unnecessary trial. Fla. Peach Corp. v. Commis-

sioner, 90 T.C. 678, 681 (1988). Rule 121 provides for sum-

mary judgment in terms equivalent to Rule 56 of the Federal

Rules of Civil Procedure. Summary judgment may be granted

where there is no genuine issue as to any material fact and

a decision may be rendered as a matter of law. Rule 121(a)

and (b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.

Commissioner, 90 T.C. 753, 754 (1988). In this case the facts

are largely stipulated, and the parties acknowledge that

there are no genuine issues of material fact. 5

Where a motion for summary judgment involves an issue

of foreign law (here, the UAE’s non-taxation of individual

income), we look to Rule 146 (in pari materia with rule 44.1

of the Federal Rules of Civil Procedure). Where ‘‘an issue

concerning the law of a foreign country’’ is raised, ‘‘[t]he

Court’s determination shall be treated as a ruling on a ques-

4 In the alternative, if the section 893(b) certification is a condition of the section 893(a) ex-

emption, petitioner argues: that the State Department’s September 2008 certification of UAE

reciprocity is an ‘‘administrative determination * * * relating to the internal revenue laws’’

under section 7805(b)(8); that the IRS made no effective prescription that it would be applied

without retroactive effect; that there is no valid basis for non-retroactive application; and that

non-retroactive application is inconsistent with longstanding administrative practice. Respond-

ent disputes each of these propositions, and argues that, in any event, non-retroactive applica-

tion of the certification would be reviewed for abuse of discretion—which proposition petitioner

disputes. Respondent contends that retroactive application would perversely benefit noncompli-

ant taxpayers and punish compliant taxpayers. Because we decide that the section 893(b) certifi-

cation is not a prerequisite to the section 893(a) income tax exemption, we need not reach this

alternative argument as to retroactive application of the State Department’s certification. Like-

wise, since the employment tax exemption is not before us, we do not decide whether a State

Department certification could have retroactive effect for purposes of section 3121(b)(12)(B).

5 Respondent stated that the only disputed facts concern alleged delay or inaction by the State

Department; but Mr. Abdel-Fattah has made clear that he makes no such allegations, and he

affirms that there is no factual dispute regarding the section 893 issue.

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(190) ABDEL-FATTAH v. COMMISSIONER 195

tion of law’’, Rule 146, rather than fact, ‘‘so that appellate

review will not be narrowly confined by the ‘clearly erro-

neous’ standard’’, Fed. R. Civ. P. 44.1, Advisory Committee

Notes (1966 amendment). However, Rule 146 permits the

consideration of ‘‘testimony’’. Testimony about the law is nor-

mally not permitted, see O’Donnabhain v. Commissioner, 134

T.C. 34, 56 (2010), but Rule 146 permits such testimony, in

continuity with the former rule that foreign law was treated

as a factual matter, see Black Diamond S.S. Corp. v. Robert

Stewart & Sons, 336 U.S. 386, 397 (1949). Moreover, the

Court is not required to take judicial notice of foreign law of

which the parties have not made a showing. See Afshar v.

Commissioner, T.C. Memo. 1981–241, 41 T.C.M. (CCH) 1489,

1503 (and cases cited thereat) (‘‘where neither party has

offered any material with respect to the applicable foreign

law, we need not take judicial notice of such law’’), affd. with-

out published opinion 692 F.2d 751 (4th Cir. 1982).

As a result, the procedure for establishing foreign law

remains analogous to the procedure for establishing facts.

For purposes of summary judgment under Rule 121, where

the moving party (here, Mr. Abdel-Fattah) makes a credible

showing of foreign law (the UAE’s non-taxation of individual

income) and the non-moving party makes no dispute, we can

determine foreign law on the basis of the movant’s showing.

II. Taxation of foreign government employees

A. Pre-1934 income tax and customs regulations

After the income tax was enacted and until 1934, the

Treasury Department granted an exemption from U.S.

income tax to employees in the consular offices of any foreign

country that granted a reciprocal exemption from its own

income tax to U.S. consular employees who worked in that

country. This exemption was not based on any statute but

was granted as a matter of administrative policy. The policy

was embodied in regulations that provided as follows:

All foreign consular officers and employees in foreign consulates in the

United States who are nationals of the States appointing them are exempt

from Federal income tax with respect to the wages, fees, and salaries

received by them in compensation for their consular services, provided the

appointing State grants a similar exemption to citizens of the United

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196 134 UNITED STATES TAX COURT REPORTS (190)

States who are American consular officers or employees of the American

consulates in such State. * * *

Regs. 65, art. 86 (1924). 6 The regulation did not state any

requirement as to certification, by the State Department, of

the foreign country’s reciprocal exemption.

During the same period the Customs Regulations of 1931

afforded a ‘‘somewhat comparable privilege’’ 7 allowing

exemption from customs on baggage and articles imported by

government representatives arriving in the United States.

Article 425 is ambiguous about the necessity of State Depart-

ment approval of a ‘‘privilege’’ as to baggage: It refers to

‘‘application to the Department of State’’; but it appears to

authorize the privilege upon a mere showing of ‘‘their creden-

tials or other proof of identity’’. Article 426 more explicitly

provides that a privilege as to ‘‘Imported articles’’ will be

allowed ‘‘only when application is made therefor through the

Department of State’’.

B. Income tax statutes

When the Treasury Department concluded that this policy,

though ‘‘meritorious from the standpoint of administrative

policy or expediency’’, was ‘‘indefensible from the standpoint

of law’’, it announced that it would cease to allow the exemp-

tion. 8 Corrective legislation was proposed, as to which the

Department of State ‘‘hope[d] that you [the Chairman of the

Committee on Ways and Means] will find it possible to bring

about its passage by the House of Representatives at an

early date.’’ 9 The Department of the Treasury had its own

reasons to favor the proposal. The Treasury Department

advised Congress:

A demand has been made upon the United States Treasury attache´ and

several American members of his staff for the payment of income taxes to

6 Regs.

77, art. 641 (1932), included an identical provision.

7 See

H. Rept. 1759, 74th Cong., 1st Sess. 3 (1935), 1939–1 C.B. (Part 2) 891, 892 (‘‘A some-

what comparable privilege is afforded by the Customs’ Regulations of 1931, specifically articles

425 and 426, extending special customs courtesies and free entry privileges to representatives

of our own and foreign governments who arrive in the United States on official business’’). Be-

cause the Congress enacting the income tax exemption referred to these customs regulations as

creating only a ‘‘somewhat comparable privilege’’ (emphasis added), we infer that the details of

the customs regulations do not disclose the legislative intent as to the income tax exemption.

8 See letter from the Treasury Department to the Secretary of State (Aug. 7, 1934) 4–5, de-

scribed in H. Rept. 1759, supra at 3, 1939–1 C.B. (Part 2) at 892.

9 See letter from State Department to the Chairman, Committee on Ways and Means (Aug.

9, 1935), quoted in H. Rept. 1759, supra, at 2, 1939–1 C.B. (Part 2) at 892.

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(190) ABDEL-FATTAH v. COMMISSIONER 197

the Austrian Government. These officers are, of course, paying income

taxes to the United States, and payment of the Austrian taxes will impose

a real hardship.

If H.R. 7998 is enacted into law, however, it will be possible for our

Department of State to advise the Government of Austria that representa-

tives of that Government, employed in the United States and of a rank

comparable to that of the Treasury attache´ and his staff, would be exempt

from taxation upon the salaries they receive in the United States from the

Government of Austria. I am informed that the Austrian Government has

intimated that if this advice is received taxes will not be levied upon the

official income of our representatives in that country.

In view of these circumstances, I urgently recommend that favorable

consideration be given by your [Ways and Means] committee to H.R. 7998

with a view to its enactment at the earliest practicable date.

Very truly yours,

L.W. Robert, Jr.

Acting Secretary of the Treasury[10]

The House report explained that the proposed new statu-

tory exemption (H.R. 7998) ‘‘was formerly covered by

Treasury regulations.’’ H. Rept. 1759, 74th Cong., 1st Sess.

3 (1935), 1939–1 C.B. (Part 2) 891, 892. Section 116 of the

Revenue Act of 1934 was amended to add a new subsection

(h), as follows:

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 title:

* * * * * * *

(h) COMPENSATION OF EMPLOYEES OF FOREIGN GOVERNMENTS.—Wages,

fees, or salary of an employee of a foreign government (including a con-

sular or other officer, or a nondiplomatic representative) received as com-

pensation for official services to such government—

(1) If such employee is not a citizen of the United States; and

(2) If the services are of a character similar to those performed by

employees of the Government of the United States in foreign countries;

and

(3) If the foreign government whose employee is claiming exemption

grants an equivalent exemption to employees of the Government of the

United States performing similar services in such foreign country.

The Secretary of State shall certify to the Secretary of the Treasury the

names of the foreign countries which grant an equivalent exemption to the

10 See letter from Treasury Department to the Chairman, Committee on Ways and Means

(Aug. 9, 1935), quoted in H. Rept. 1759, supra at 2, 1939–1 C.B. (Part 2) at 892.

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198 134 UNITED STATES TAX COURT REPORTS (190)

employees of the Government of the United States performing services in

such foreign countries, and the character of the services performed by

employees of the Government of the United States in foreign countries.

[Act of Aug. 27, 1935, ch. 767, 49 Stat. 908; emphasis added.]

The flush language referring to the Secretary of State was

thus in a single subsection with the rest of the provision, but

was not stated as one of the numbered conditions for the

exemption.

The next year, when the same Congress (the 74th) enacted

the Revenue Act of 1936, ch. 690, 49 Stat. 1648, it included

an almost identical provision, but it divided subsection (h)

into two paragraphs and gave them headings:

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 title:

* * * * * * *

(h) COMPENSATION OF EMPLOYEES OF FOREIGN GOVERNMENTS.—

(1) RULE FOR EXCLUSION.—Wages, fees, or salary of an employee of a

foreign government (including a consular or other officer, or a nondiplo-

matic representative) received as compensation for official services to

such government—

(A) If such employee is not a citizen of the United States; and

(B) If the services are of a character similar to those performed by

employees of the Government of the United States in foreign countries;

and

(C) If the foreign government whose employee is claiming exemption

grants an equivalent exemption to employees of the Government of the

United States performing similar services in such foreign country.

(2) CERTIFICATE BY SECRETARY OF STATE.—The Secretary of State

shall certify to the Secretary of the Treasury the names of the foreign

countries which grant an equivalent exemption to the employees of the

Government of the United States performing services in such foreign

countries, and the character of the services performed by employees of

the Government of the United States in foreign countries.

[Emphasis added.]

In 1939 Congress reenacted the identical income tax exemp-

tion in section 116(h) of the Internal Revenue Code of

1939. 11

11 Section 116(h) was amended in 1945 to exempt the income of employees of international

organizations (such as the United Nations), in addition to employees of foreign governments. See

Act of Dec. 29, 1945, ch. 652, sec. 4, 59 Stat. 670; Ying v. Commissioner, 25 F.3d 84, 86–87 (2d

Cir. 1994), affg. in part and revg. in part 99 T.C. 273 (1992).

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(190) ABDEL-FATTAH v. COMMISSIONER 199

In 1954 Congress reenacted the income tax exemption in

section 116(h) of the 1939 Code, with no significant

change, 12 as section 893 of the Internal Revenue Code of

1954. It has thereafter appeared without relevant amend-

ment as section 893, and subsections (a) and (b) thereof pro-

vide as follows:

SEC. 893. COMPENSATION OF EMPLOYEES OF FOREIGN GOVERN-

MENTS OR INTERNATIONAL ORGANIZATIONS.

(a) RULE FOR EXCLUSION.—Wages, fees, or salary of any employee of a

foreign government or of an international organization (including a con-

sular or other officer, or a nondiplomatic representative), received as com-

pensation for official services to such government or international

organization shall not be included in gross income and shall be exempt

from taxation under this subtitle if—

(1) such employee is not a citizen of the United States * * *; and

(2) in the case of an employee of a foreign government, the services

are of a character similar to those performed by employees of the

Government of the United States in foreign countries; and

(3) in the case of an employee of a foreign government, the foreign

government grants an equivalent exemption to employees of the Govern-

ment of the United States performing similar services in such foreign

country.

(b) CERTIFICATE BY SECRETARY OF STATE.—The Secretary of State shall

certify to the Secretary of the Treasury the names of the foreign countries

which grant an equivalent exemption to the employees of the Government

of the United States performing services in such foreign countries, and the

character of the services performed by employees of the Government of the

United States in foreign countries.

Thus, as has been the case since 1936, the statute provides

the ‘‘Rule for Exclusion’’ in subsection (a) and instructs the

Secretary of State to certify reciprocity in a separate sub-

section (b). That certification is not presented in subsection

(a) as one of the conditions for the exemption; and section

893 does not explicitly provide that the wages shall be

exempt only ‘‘if ’’ the Secretary certifies reciprocity (unlike

the social security tax provisions, discussed next).

C. Employment tax statutes

The income tax provision in section 893 may be contrasted

with the corresponding employment tax provisions. In the

12 In enacting new section 893 as a stand-alone section, Congress included in section 893 the

introductory language from section 116 that specified that such compensation is not included

in gross income and is exempt from income tax.

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200 134 UNITED STATES TAX COURT REPORTS (190)

1930s as now, the income tax and employment taxes were

distinct; and though the compensation of foreign government

employees was made exempt from income tax by section

116(h), no equivalent exemption from Social Security tax had

yet been enacted. 13 Congress addressed that gap in the

Social Security Act Amendments of 1939, ch. 666, sec. 606,

53 Stat. 1383, which revised the definition of ‘‘employment’’

in section 1426(b) of the 1939 Code by adding new exceptions

in paragraphs (11) and (12):

(11) Service performed in the employ of a foreign government (including

service as a consular or other officer or employee or a nondiplomatic rep-

resentative);

(12) Service performed in the employ of an instrumentality wholly owned

by a foreign government—

(A) If the service is of a character similar to that performed in foreign

countries by employees of the United States Government or of an

instrumentality thereof; and

(B) If the Secretary of State shall certify to the Secretary of the

Treasury that the foreign government, with respect to whose instrumen-

tality and employees thereof exemption is claimed, grants an equivalent

exemption with respect to similar service performed in the foreign

country by employees of the United States Government and of

instrumentalities thereof * * *.

[Emphasis added.]

These employment tax exceptions survive verbatim in cur-

rent section 3121(b)(11) and (12) (and in identical exceptions

to the Federal Unemployment Tax in current section

3306(c)(11) and (12)), and they are incorporated by reference

into an exemption from self-employment tax, section

1402(c)(2)(C). These employment tax provisions bear two

obvious differences from the income tax provision in section

116(h) (now section 893). First, service performed in the

direct employ of a foreign government is simply stated in

paragraph (11) to be excepted from the Social Security tax—

without any stated conditions involving citizenship or the

reciprocity of the foreign government’s employment taxes. 14

13 Respondent explains, ‘‘the U.S. Government is not authorized under the U.S. Constitution

to pay foreign employment taxes on behalf of its employees. At the time of enactment and today,

foreign governments did not pay U.S. employment taxes based on claims of foreign sovereignty.

As a matter of reciprocity and practicality, Congress relieved foreign governments from payment

of the employer’s portion of U.S. social [security] taxes.’’

14 The unconditional character of the exception for employees of foreign governments is quite

clear in the legislative history. The House Report (H. Rept. 728, 76th Cong., 1st Sess. 61 (1939)),

explains the amendments to section 1426(b)(11) and (12) in the Social Security tax statute by

a cross-reference to the corresponding amendments to the Social Security benefits provisions,

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(190) ABDEL-FATTAH v. COMMISSIONER 201

Second, certification by the Secretary of State is made one of

two explicit conditions for the exception for service performed

for an instrumentality of the foreign government (i.e., ‘‘If the

Secretary of State shall certify’’ reciprocity (emphasis

added)).

In 1943, when employers began to be required to withhold

income tax from employee wages, Congress exempted wages

for services that U.S. citizens and residents performed for a

foreign government and wages earned by certain nonresident

aliens. See former sec. 1621(a)(5), (6), and (7), enacted by the

Current Tax Payment Act of 1943, ch. 120, sec. 2(a), 57 Stat.

126. Under current section 3401(a)(5), foreign governments

are unconditionally exempted from the duty to withhold

income tax from the compensation of U.S. citizens and resi-

dents. Under section 3401(a)(6), foreign governments are

exempted from the duty to withhold income tax from the

compensation of nonresident aliens only ‘‘as may be des-

ignated by regulations prescribed by the Secretary’’, but

those regulations make the exemption unconditional. See 26

C.F.R. sec. 31.3401(a)(5)–1(a)(2), Employment Tax Regs. That

is, foreign governments are exempt from income tax with-

holding whether or not the State Department has certified

reciprocity.

III. Lack of regulatory guidance on the income tax exemption

The income tax regulations promulgated under section

893—26 C.F.R. section 1.893–1, Income Tax Regs.—shed no

light on our issue, because they simply restate the statute.

Mr. Abdel-Fattah stresses that section 1.893–1(a) puts the

conditions for the exemption in a subparagraph (1) (‘‘Exempt

from tax’’) and sets out the duty of the Secretary of State to

certify reciprocity in the separate subparagraph (2) (‘‘Certifi-

cate by Secretary of State’’). However, in this regard the

regulation simply mirrors the statute, and if the wording of

the provisions in the regulation is meaningful, it is meaning-

ful only because the corresponding wording of the statute is

meaningful. If the corresponding wording of the statute does

section 209(b)(11) and (12). The benefits amendment is explained as follows: ‘‘Paragraph (11)

excepts service performed in the employ of a foreign government, and paragraph (12) similarly

excepts, on a basis of reciprocity, service performed in the employ of an instrumentality wholly

owned by a foreign government.’’ Id. at 48–49. To the same effect, see S. Rept. 734, 76th Cong.,

1st Sess. 58, 74 (1939).

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202 134 UNITED STATES TAX COURT REPORTS (190)

not have the significance that Mr. Abdel-Fattah urges, then

the regulation likewise does not have that significance. Thus,

the regulation does not add anything on this point.

The parties cite no published guidance of the IRS (such as

revenue rulings) that address the issue in this case. Rather,

Mr. Abdel-Fattah asks us to consider several private letter

rulings in support of his position. We decline to do so in light

of section 6110(k)(3), which provides:

(3) PRECEDENTIAL STATUS.—Unless the Secretary otherwise establishes

by regulations,[15] a written determination may not be used or cited as

precedent. [Emphasis added.]

We will not consider the private letter rulings that Mr.

Abdel-Fattah proffers.

IV. Interpretation of section 893

A. Two forms of certification statutes

Where a tax statute provides a benefit, states conditions

for its application, and provides that a government official

shall certify the fulfillment of those conditions, that certifi-

cation may take one of two alternative characters. We find

that, to be better able to put section 893 into perspective, it

is helpful to consider examples of statutory provisions of both

kinds.

1. Statutes in which certification is a prerequisite

Certification is sometimes required as a prerequisite to a

tax benefit provided in the Code. Where a statute is of this

sort, the absence of the certification precludes the claiming

of the benefit. For example, the employment tax exemption

of section 3121(b)(12)(B), by its terms, applies only ‘‘if the

Secretary of State shall certify * * * that the foreign govern-

ment * * * grants an equivalent exemption’’. (Emphasis

added.) Thus, certification is made an explicit condition of

the exemption. Respondent contends that section 893 is a

15 By regulation, taxpayers are permitted to cite and rely on published Revenue Rulings. See

26 C.F.R. sec. 601.601(d)(2)(v)(d), Statement of Procedural Rules (‘‘Revenue Rulings * * * are

published to provide precedents to be used in the disposition of other cases, and may be cited

and relied on for that purpose’’ (emphasis added)). However, the regulations applicable to any

other ‘‘written determination’’ (including a ‘‘ruling’’ that is ‘‘issued to a taxpayer’’), see 26 C.F.R.

sec. 301.6110–2(a), (d), Proced. & Admin. Regs., provide the default rule that a ‘‘written deter-

mination may not be used or cited as precedent’’, 26 C.F.R. sec. 301.6110–7(b), Proced. & Admin.

Regs.

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(190) ABDEL-FATTAH v. COMMISSIONER 203

provision of this sort and that the Secretary of State’s certifi-

cation of reciprocity is a prerequisite to the exemption ben-

efit.

Statutes of this sort—requiring certification as a pre-

requisite 16—have certain advantages of convenience and

administrability. Rather than assigning to the tax collector

the task of making, in the first instance, difficult determina-

tions that may be well outside his knowledge or expertise,

such a statute commits the determination to the agency with

the relevant subject-matter expertise. However, such statutes

may also have corresponding disadvantages. The tax benefit

may be denied, even in a circumstance clearly within

Congress’s intention to grant the benefit, because a certifi-

cation is lacking as a result of the certifying official’s delay

or error, or of a taxpayer’s failure to comply with the official’s

rules for requesting certification, or (depending on the

statute) of a third party’s failure to make the certification

request.

2. Statutes in which certification is not a prerequisite

Mr. Abdel-Fattah contends that section 893(b) is a provi-

sion of a different sort—i.e., one in which the absence of the

certification does not preclude the claiming of the benefit.

For example, taxes on firearms are not imposed on devices

that ‘‘the Secretary finds’’ have certain characteristics, sec.

5845(a), (f). Pursuant to 27 C.F.R. sections 479.24 and 479.25

(2009), a taxpayer requests such a determination from the

Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF),

but before ATF makes any ruling, the manufacturer may

claim and sue for a refund of firearms tax. See, e.g., Blakley

v. United States, 593 F.3d 1337 (Fed. Cir. 2010); 27 C.F.R.

sec. 70.123 (2009). Congress certainly committed to ATF the

duty of classifying firearms, but ATF’s ruling is not a pre-

requisite to a taxpayer’s claim and is not immune from the

taxpayer’s challenge. 17

16 See also, e.g., Nielsen-True Pship. v. Commissioner, 109 T.C. 112, 120–125 (1997) (former

sec. 29(c)(2)(A) required a determination as a prerequisite for the credit), affd. sub nom. True

Oil Co. v. Commissioner, 170 F.3d 1294 (10th Cir. 1999); Manor Care, Inc. v. United States, 89

Fed. Cl. 618, 623 (2009) (certification by a State employment security agency is a prerequisite

to the work opportunity credit under sec. 38(b)(2) for wages paid to ‘‘a qualified SSI recipient’’

under sec. 51(d)(1)(H)).

17 See also, e.g., sec. 7428 (declaratory remedy by which an organization claiming tax-exempt

Continued

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204 134 UNITED STATES TAX COURT REPORTS (190)

A statute that allows a tax benefit without certification

may have advantages and disadvantages that are converse to

those of the first sort of statute. That is, this latter sort of

statute may require the tax collector or a reviewing court to

decide, without prior ventilation by subject-matter experts in

an agency, matters that may be outside the tax specialist’s

expertise (such as firearms classification); but on the other

hand these statutes assure that the vagaries of a certification

process do not block the intended benefit of the statute.

Thus, both of these approaches appear in different provi-

sions in the Internal Revenue Code. We now examine section

893 to see which approach is reflected there.

B. Analysis of certification in section 893

1. The language of section 893 does not condition the

income tax exemption on State Department certi-

fication.

In section 893 the exemption is not explicitly described as

conditional, as if it depended on certification by the Secretary

of State; it does not create the exemption only ‘‘if the Sec-

retary of State shall certify’’ as does section 3121(b)(12)(B).

Certification is not explicitly stated to be part of the exemp-

tion qualification (as in section 51(d)(9) (‘‘ ‘qualified SSI

recipient’ means any individual who is certified’’)). Rather,

section 893(a) provides for an exemption ‘‘if ’’ three conditions

are met (not including certification) and then comes to a full

stop. Certification is not a fourth ‘‘if ’’ in the list but instead

is addressed thereafter in subsection (b). Section 893(a) pro-

vides an exemption, and section 893(b) requires action by the

Secretary of State but does not purport to qualify the exemp-

tion or to take it away in any instance. We conclude, there-

fore, that under the plain language of the statute, certifi-

cation is not a condition or prerequisite of the exemption. 18

Mr. Abdel-Fattah’s argument about the language of the

statute stresses that the certification provision is in a sub-

section after and separate from the subsection imposing

status under sec. 501(c)(3) may challenge the IRS’s adverse ruling or failure to rule on the orga-

nization’s application for recognition of exempt status); sec. 7478 (declaratory remedy by which

a State or city that claims that interest on its bonds qualifies for exclusion under sec. 103 may

challenge the IRS’s adverse determination or failure to determine).

18 However, certification, when present, will dramatically simplify a taxpayer’s proof of section

893(a)(2) and (3).

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(190) ABDEL-FATTAH v. COMMISSIONER 205

three express conditions for the exemption and stresses that

the heading ‘‘Rule for Exclusion’’ is assigned to subsection (a)

only. We should not exaggerate the significance of the sub-

division and the placement of the heading since, as the

Supreme Court explained in Bhd. of R.R. Trainmen v. Balt.

& Ohio R.R., 331 U.S. 519, 528–529 (1947),

headings and titles are not meant to take the place of the detailed provi-

sions of the text. Nor are they necessarily designed to be a reference guide

or a synopsis. Where the text is complicated and prolific, headings and

titles can do no more than indicate the provisions in a most general

manner; to attempt to refer to each specific provision would often be

ungainly as well as useless. As a result, matters in the text which deviate

from those falling within the general pattern are frequently unreflected in

the headings and titles. Factors of this type have led to the wise rule that

the title of a statute and the heading of a section cannot limit the plain

meaning of the text. * * * For interpretative purposes, they are of use

only when they shed light on some ambiguous word or phrase. They are

but tools available for the resolution of a doubt. But they cannot undo or

limit that which the text makes plain.

In the case of section 893, however, the headings are not at

any variance with the text. Section 116(h) was originally

drafted in 1934 in such a way—with the State Department

certification being stated after, and distinctly from, the three

‘‘if ’’ conditions—that it was susceptible of being split neatly

and easily into two paragraphs (in 1936), without any re-

wording whatsoever. The headings added in 1936 correspond

to the text, in that the text of paragraph (1) with its three

explicit conditions does describe (as the heading indicates)

the ‘‘Rule for exclusion’’; and the text of paragraph (2) does

separately call for a ‘‘Certificate by Secretary of State’’. This

is an instance in which the headings ‘‘are of some use for

interpretative purposes’’, Wallace v. Commissioner, 128 T.C.

132, 140–141 (2007), and they confirm our reading of the text

of the statute.

2. The language of section 893 differs from that of com-

parable contemporaneous provisions.

This reading of the income tax statute—i.e., that the cer-

tification in section 893(b) is not a prerequisite to the benefit

provided in section 893(a)—is confirmed by comparison to the

different language Congress used five years later in 1939

when it provided a reciprocal exception from Social Security

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206 134 UNITED STATES TAX COURT REPORTS (190)

tax. Then-section 1426(b)(12)(B) (now section 3121(b)(12)(B))

excepted certain service for foreign instrumentalities—

If the Secretary of State shall certify to the Secretary of the Treasury that

the foreign government, with respect to whose instrumentality and

employees thereof exemption is claimed, grants an equivalent exemption

* * *. [Emphasis added.]

That language (unlike the language of section 893) plainly

makes the certification a condition of the exception. Congress

could have used such language in section 893, but it did not.

To read the statute as if it had been so worded would be not

to interpret it but to correct it, and we decline to do so.

The Congress that enacted the statute in 1934 had before

it both (1) the existing income tax regulations, which had not

explicitly required State Department certification of reci-

procity, and (2) the customs regulations that provided a

‘‘somewhat comparable privilege’’ (see supra note 7) that, in

some particulars, was available ‘‘only when application is

made therefor through the Department of State’’. In creating

the income tax exemption, Congress followed the model of

the income tax regulation and did not make the exemption

available ‘‘only when’’ the State Department had certified

reciprocity. Instead, the language (now in section 893(a)) that

creates the exemption is silent about the State Department.

Respondent defends his different interpretation by arguing

that section 893 is simply ‘‘less precisely drafted’’ than sec-

tion 3121(b)(12), but that begs the question. That is, the

argument assumes (without showing) that certification was

intended to be a condition of the exemption and then

explains the distance between that intention and the actual

statutory language as a lack of precision. If instead we look

first at what the statute says and attempt to learn from that

language what the legislative intention was, we find that

Congress precisely stated three conditions for the exemption

in what is now section 893(a) and then precisely stated, in

what is now section 893(b), a distinct obligation of the Sec-

retary of State. The text gives no indication of the intention

that respondent assumes, and bears no imprecision in

expressing its evident intention.

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(190) ABDEL-FATTAH v. COMMISSIONER 207

3. Treating State Department certification as a prerequisite

to the exemption is at odds with the purpose of the

statute.

Respondent argues that allowing a qualifying employee to

obtain the exemption without State Department certification

makes that certification ‘‘non-mandatory’’, whereas the

statute does admittedly use mandatory language (i.e., ‘‘The

Secretary of State shall certify to the Secretary of the

Treasury’’ (emphasis added)). However, the only mandate in

the statute is directed to the Secretary of State. That is,

there is no language in the statute mandating that the tax-

payer ‘‘shall obtain’’ a certification before claiming the

exemption, or mandating that the IRS ‘‘shall require’’ a cer-

tification before allowing the exemption. Rather, to facilitate

claims of exemption, Congress mandated action by the Sec-

retary of State, who ‘‘shall certify’’.

Our record shows that the Secretary of State certifies reci-

procity only upon the application by a foreign country for

such certification. That is, the State Department follows the

mandate of section 893(b) only when a foreign country first

applies for certification. It should be noted that the statute

makes no provision for a foreign country to apply for such

certification; that the statute does not conceive of a certifi-

cation being issued to a foreign country; 19 and that the

statute certainly does not condition the issuance of a certifi-

cation upon an application. We assume that, in view of the

complexity of the task of certifying income tax reciprocity of

all the countries in which U.S. citizens work for U.S. con-

sulates, the expedient of waiting for an application is prac-

tical—perhaps even inevitable. And even if this implementa-

tion of the mandate effectively permits the State Department

to fail indefinitely to do what section 893(b) says it ‘‘shall’’ do,

the income tax exemption of section 893(a) is not frustrated

as long as certification is not treated as a prerequisite. But

if certification were a prerequisite, and if an otherwise valid

claim for exemption failed for the lack of certification, then

19 In form, the State Department’s eventual certification as to the UAE was—consistent with

section 893(b)—directed to Treasury (‘‘I hereby certify to the Secretary of the Treasury’’). How-

ever, the certification (signed September 26, 2008) was promptly provided to the UAE on Octo-

ber 1, 2008, but was not transmitted to the Department of the Treasury until five months later,

on March 10, 2009. In substance, the State Department seems to treat the certification as grant-

ed to the foreign country upon its application.

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208 134 UNITED STATES TAX COURT REPORTS (190)

the failure of the State Department to make a certification

unless and until it received a (non-statutory) application

would preclude the exemption.

This dynamic is hard to reconcile with the congressional

intention in 1935. There is no evidence of a congressional

purpose to deny exemption until a foreign country had initi-

ated and completed an exemption application process. The

impulse behind the statute was not to reign in an overly gen-

erous IRS and use a State Department certification process to

restrict exemptions. On the contrary, the subject of real

interest to the Congress (and to both the State Department

and the Department of the Treasury) (see supra pp. 196–197)

was the adverse foreign tax consequences to U.S. consular

employees that was resulting from the lack of a reciprocal

U.S. income tax exemption. The congressional impulse was to

loosen the situation, not to tighten it—i.e., to create a statu-

tory exemption so that the prior administrative practice

could continue and U.S. workers in foreign countries would

not become subject to foreign taxes. It is possible that a

legislature creating such an exemption would nonetheless

establish procedures to limit it (e.g., requiring an application,

and denying an exemption not duly applied for and granted);

but the statute and the legislative history show no signs of

that contrary impulse.

Treating the State Department’s certification as separate

from the conditions for exemption hardly ‘‘relegates sub-

section (b) to a mere administrative ‘helpful hint’ ’’, as

respondent suggests. On the contrary, in a matter concerning

the application of U.S. law to foreign embassy staffs, Con-

gress sensibly charged the State Department (not the IRS)

with the front-line diplomatic responsibility of determining

the reciprocity of foreign tax law; and it seems fair to assume

not only that the State Department’s certification of reci-

procity will be the last word in virtually every case, 20 but

also that the State Department’s certification will greatly

20 Since respondent admits that Mr. Abdel-Fattah did meet the qualifications of section 893(a)

during the years in suit, we need not decide what standard of review would be adopted if one

or both of the qualifications of section 893(a)(2) and (3) were in dispute. Likewise, we need not

decide by what standard we would review a taxpayer’s challenge of an actual certification of

non-reciprocity—if in fact the State Department ever issues such negative certifications, which

our record does not disclose. Neither do we decide whether the Commissioner could deny section

893(a) treatment by disputing the correctness of a section 893(b) certification that had been

made by the State Department and had been relied on by an embassy employee.

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(190) ABDEL-FATTAH v. COMMISSIONER 209

simplify an embassy employee’s claim of exemption and the

IRS’s ruling on that claim. Only where there is no certifi-

cation will a dispute on the matter be at all likely.

4. Potential difficulties with the statute as written do not

warrant judicial correction of the statute.

Respondent contends that several difficulties may result

from this interpretation of section 893. He urges that in some

circumstances the reciprocity determination may be difficult

(for example, where the foreign country has a value added

tax or user fees from which U.S. Embassy employees are not

exempted, or where the determination requires treaty

interpretation, or where the information necessary to make

the determination may not be accessible to IRS agents or

even to the taxpayer). 21 Respondent suggests that, in cir-

cumstances where there is no State Department certification,

the statute as we interpret it—

• requires section 893 to be administered without the ben-

efit of ‘‘State’s expertise in the arena of international affairs’’;

• commits the reciprocity issue to the judgments of tax-

payers as they file returns, to IRS personnel as they examine

them, and to the several courts as the issues are litigated, so

that uniformity of outcome among foreign employees from

the same country is not assured; and

• fails to create an occasion for the State Department ‘‘to

ensure that Americans working at embassies abroad receive

equivalent exemptions * * * in their host countries’’ and

‘‘undercuts State’s ability to ensure reciprocity’’. 22

21 We assume arguendo that such difficulties exist, though they are not demonstrated on our

record. All that section 893 requires is a determination of ‘‘an equivalent exemption’’. Sec.

893(a)(2), (b). For this purpose, ‘‘an equivalent exemption’’ is an exemption equivalent to an

‘‘exempt[ion] from taxation under this subtitle’’. Sec. 893(a) (emphasis added). ‘‘[T]his subtitle’’

(of title 26, the Internal Revenue Code) is subtitle A, ‘‘Income Taxes’’. Inquiry into reciprocity

as to other taxes would therefore appear to be unnecessary. And where information necessary

to a determination of reciprocity is not accessible, then the outcome would presumably be re-

solved by the operation of the burden of proof.

22 Again, we assume arguendo that our interpretation has this disadvantage that respondent

describes—i.e., it diminishes the role of section 893 certification as a means for ensuring tax

exemption for U.S. consular employees in foreign countries. However, neither of the competing

interpretations of section 893 bars the State Department from determining how a foreign coun-

try treats U.S. consular employees and informing the IRS. Rather, the State Department may

do so on whatever schedule and by whatever means it desires; and if it finds non-reciprocity

in a given country and so advises the IRS, then presumably the IRS will follow the State De-

partment’s conclusion and will rule adversely on claims by employees of that country’s con-

sulate.

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210 134 UNITED STATES TAX COURT REPORTS (190)

These issues of diplomacy and tax administration might be

reasons to prefer a rule that required State Department cer-

tification as a prerequisite to the income tax exemption.

However, these considerations would be properly addressed

to Congress as reasons to enact such a rule; and in the

absence of such a rule, these considerations cannot alter our

interpretation of the different rule that Congress actually

enacted. If the rule that Congress enacted—which does not

require State Department certification as a condition for

claiming the exemption—is problematic for these reasons,

then the problems can be addressed not by corrective

interpretation but only by legislative amendment.

Respondent’s position here has an ironic resemblance to

the situation that existed in 1934. The Treasury Department

had administratively granted an exemption that the statute

did not provide, but Treasury came to realize the impropriety

of its having done so. Resisting the State Department’s

urging that the administrative exemption be perpetuated,

Treasury explained:

The formulation of such policies is not within the province of the execu-

tive department of the government. * * *

* * * * * * *

This Department fully appreciates the difficulties and possible loss of

revenue, to which you refer, as the result of any change in the practice

heretofore adopted * * *. The question, however, is not one which

addresses itself to administrative solution or which may properly be

considered or determined by this Department on the basis of the benefits

which might accrue to the United States by a continuation of such prac-

tice, but is one which involves the constitutional authority of this Depart-

ment to grant exemptions from taxation except as directed by the law-

making branches of the government.[23]

Now at issue is not the granting but the denying of the

exemption. Denying the exemption where the State Depart-

ment has not certified reciprocity could again be defended

‘‘on the basis of the benefits which might accrue to the

United States’’, but that action must again be said to be ‘‘not

within the province of the executive department of the

government’’. The IRS can no more deny now an exemption

on a condition that Congress did not impose than it could

allow then an exemption that Congress had not granted.

23 Letter from Treasury Department to the Secretary of State 4–5 (Aug. 7, 1934).

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(190) ABDEL-FATTAH v. COMMISSIONER 211

The statute as it stands does not require State Department

certification, and we therefore hold in favor of Mr. Abdel-

Fattah.

To reflect the foregoing,

An appropriate order will be issued, and

decision will be entered under Rule 155.

f

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