# Petition for Writ of Certiorari — Wolfe v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1615%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1966 - **Citation:** 385 U.S. 838 ## Text fo ESSENESESY - "+ 4 T ottien Supsome Court, US. “COURT, U, & FILED | oO "AT JUL 16F 1988 pA. > , 36 4 JOHN. F. DAVIS, CLERK ? - re No.. ; ” a ie | IN THE Supreme Court of the United States OctoBER Tease, 1965 Epon E. Wore ann Sara A. Wotfe, PeritioneRs . : v. CoMMISSIONER OF INTERNAL REVENUE, RESPONDENT » PETITION FOR A WRIT OF CERTIORARI TO THE | UNITED STATES COURT OF APPEALS FOR THE vara OF COLUMBIA CIRCUIT | E. E. WOLFE, JR., + ; Counsel for Petitioners, 1225 Washington Street, Columbia, S. C. - — oa » ae Pa ° e t * Supreme Court of th the be United S States, | . Sekeaas TERM, 1965 sd q ee -. a , 4 ’ bd Expon. EK. Woure anp Sara A. Woxre, Petrrioners CoMMissIoNER OF INTERNAL ReveNvE, RESPONDENT 2 7 2 _ PETITION FOR A WRIT OF CERTIORARI TO THE ‘UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT ‘The petitioners petition for a writ of certiorari to review . the judgment of the United States Court of Appeals a the | District of. Columbia Circuit j in this cage. OPINIONS BELOW The 0 opinion ofthe Tax Court (Appendix, dineat pp. 2 | ny i6) is reported at 43 T. C. 572 (1965): The opinion of the court of appeals (Appendix, infra, pp. tia de is not Sar repogfed. J URISDICTION: A The judgment of the court of appeals was renienel on April 22, 1966, and it was entered on that date; The jpris- _ diction: of this Court i is invoked under 28 U.S. C. § 1254(1). QUESTION PRESENTED Whether or not salary received by a United States Gov- 2 - ernment employee for services rendered abroad to a foreign government, which salary was paid out of or reirhbursed: tee » oe 2, Sf ‘ons funds cna by the foreign giveruniant, was “paid pertinent provisions of the Internal Revenue *. of 1954. — by the United States or an agency thereo ” and consequently not ex¢luded from taxation by the United’ States under the @'.°: STATUTE INVOLVED ied Revenue Code of 1954: -— Sec. 911. Earned Income from Sources Without the _ United States. (a). General Rule.—The following itens: shall net “be included in gross income and shall be. extant from °. ' “taxation under this subtitle: who - during any: period. of 18 consecutive months is present in a foreign country or countries during at least. * 510 full\days in such period, amounts received from sources without the United States (except amounts paid by the United States or an ‘agency thereof) if such ‘amounts constitute earned income (as defined in sub- : —- (b)) — hs such aa — . * * (26 US.C. (1968 0) 911 a o if STATEMENT | Petitioner," as a career Civil Service employee of the Bureau of Public Roads, U. S. Department of Commerce (hereinafter referred to as the “Bureau”), was assigned by the Bureau to duty in Iran during the year's 1957-60. Assign- ‘ment was pursuant to an agreement between the Bureau and» Iran (Joint Appendix .p. 34, et seq) whereby the Bureau. : agreed to assist Iran in developing a modern highway pro- - gram by assigning its personnel to duty in that country ( Lp. 36) and by procuring the equipment (JA p. 39) 1 Mrs. Wolfe is a "party solely because joint returns were filed for 1959 and 1960. Counsel refers to Mr. Wolfe as. petitioner. _\ (2) Presence in in Foreign County for 17 Months +, In the case of ah individual citizen of the United States, - ott we necessary tO carry out the program. All expenses incurred _by the Bureau in performing the agreément,i including pay- ment of petitioner’s salary, were paid out of or reimbursed — from a Dollar Working Fund (JA pp. 12, ¥ 11, & 37-39). provided by: Iran from the proceeds of its loan from the Ex- ‘port-Impért Bank of Washington. (JA pp. 34-35 & 18, e¢ seq. The Bureaiu’s furnishing of the services of petitioner was contingent upon. Iran providing the funds necessary to. ‘pay the cost of such services. (JA p.. 13, par. 15) The - entire-amount of this loan, plus interest, has been repaid by Iran. (JA p. 11, par. 4) Petitioners, in their joint income tax returns fbr the years 1959 and 1960, excluded from petitioner’s gross income his salary received while assigned to Iran. This exclusion was _ based upon See. 911 (a) (2) of the LR.C:, p. 2, supra. The Commissioner determined that the exclusion should not be” allowed and issued a Notice of Deficiency to petitioners*on February 27, 1963.(JA p. 5,.et seq) Petitioners petitioned. ~ the Tax Court for a redetermination. of the deficiencies (JA pp. 2-4)," which relief was granted by the Tax ‘Court { Appendix, infra, pp. 7-16). The court of appeals, one judge dinstatone, réversed the Tax Court on the ground that the salary in question was “paid by” an agency of the United States and consequently : not exempt from taxation under Sec. 911 (a) ( doe of the Code. ( sa, tafra, PP- 17-28) REASONS FOR GRANTING THE WRIT . Iti is respectfully. submitted that an early and definitive exposition by this Court of the long standing tax statute (1st enacted in 1932) involved in this case is of far reaching present and continuing importance to the public interest. ‘Evidence of the scope of the present need for such clarifica- tion was emphasized by the Government in the court below ‘on page 23 of its brief, to wit: “This is an important ¢ase. Thirteen cases involving the issue in 1 this case are being held | a. . &’ in suspense pending final rensbutitin of this appesk These __. eases involve 33 taxable. years and a- total: of $52,000. In ‘- addition, . approximately 215 other taxpayers are being in- «vestigated for years prior to 1963 in connection with income excluded pursuant to Section 911, with each case depending entirely. on the proper interpretation of ‘paid by.’ Such tax- payers excluded from their respective incomes approxi- mately. $4,000,000.” . In view of the i increasing ‘eihile and Saat to op- position to grants of non-military aid to foreign countries, - '. it is logical to assume that the United States’ future assist-. “ance to under-developed nations will be largely financed by : business type loans to such countries, and that a substantial - - portion of such assistance wjll be provided by contracts _ between foreign governments and Federal agencies having - personnel qualified to provide the need technical assistance. Also, it will be of continued vital importance to the United _ States to: maintain its; gold reserves by increasing our . | foreign export of goods. and services. Contracts by Federal agencies as noted above are significant factors in promoting _ exports, as is exemplified by the agreements in this case be- tween Iran and the Export-Import Bank of Washington - (JA; p. 19) and the Bureau of Public Roads (JA, pp. 35 & ae 39). Thus, the tax statute interpretation sought herein will ag? _ be of increasing public concern in future years, and any un- — certainty in regard thereto will result in extensive disputes _ _ between numerous taxpayers and the Internal Revenue Ser- vice at both the administrative and judicial levels. This un-. certainty v would undoubtedly deter many Federal employees. from accepting such foreign assignments, thus significantly impeding: the development of our nation’s export trade. 2. The decision of the District of Columbia Circuit is in direct conflict.with that. of the Ninth Circuit in Evlandson v.: Commissioner;-277 F2d.70 (1960). In that ease the-court, ‘in construing subject statute, held that a‘private company . employee’s salary paid from funds furnished the company 2 e°* 5 for that purpose by the United States was paid -by” the | United States and consequently not exempt from taxation. In 80 holding the court concluded that the phrase “paid by” referred to the entity which furnished the funds for pay- ment, and not to the entity. contractually liable. to’ the em- ployee for salary payment. In the instant case the Court of ‘Appeal for the District of Columbia Cireuit concluded that ‘Statutory phrase referred not to ‘the entity which furnished the salary funds, but rather to the entity which actially executed the salary.checks and which was ee obligated to its employee for such payments. .“ .- . 3. The decision of.the court below is erroneous. Although | there are no adjudicated eases (other than the Tax Court decision in favor of the petitioners herein). involving the. - Specific factual situation present in this case, the only three analagous decisions,’ in addition to Erlandson, supra, were rendered by the Tax Court during an eleven-year period . . and follow the same rationale, to wit: that the phrase “paid < .. by”, as used i in subject: statute, refers to the entity which bears the economic burden of salary payment, and that the i . question of who has ‘the contractual liability for and actu- ally ‘disburses the salary is not material. It is of: -significant. interest’to note that in each. of these four cases the’ Commissioner prevailed by advocating the identical statutory construction relied upon in this case by the taxpayers. Such. inconsistency by a Federal. agency in the administration of a statute is a flagrant example of, the current tendency of some Federal administrative agencies to amend the laws of Congress by the issuances of rules; regulations and policy directives. This casé offers a clear - Opportunity for this Court to condemn such unconstitutional encroachments — the legislative oon of our Govern-. ment. : ie . * Leif J. Sete 14 T. C. 859 (1950) : Robert W. Teskey, 30 T. tec ~ 456 (1968) ; and Laurence P. Dowd, 37 T. Cc. 399. (1961). A s & 6 CONCLUSION aan _ For the foregoing reasons, the petition for a writ of . certiorari should be granted. F : Respectfully submitted. | Po i one ae E. E. Wours, Jz, : | ee qi ey ap | Counsel for Petitioners. JULY 1966. * a f , eta gn go . . APPENDIX "43 TC. 572 | Tax Court of the United States Epon E. Wore anp Sara A. WOLFE, PETITIONERS, © Ps Vv. : | ComissionEr ‘OF INTERNAL REVENUE, ‘RESPONDENT Docket No. 1651-63. Filed January 29, 1965 Firypines or Fact N early all of the facts have been stipulated and the stipu- lation of facts, together with the exhibits attached thereto, is incorpgrated.-herein and made a part of our Findings by ‘reference, ~ The petitioners, husband and wife, are both United States citizens and currently reside in Washington, D. C. They filed _ their joint Federal income tax returns for the years 1959 — and 1960 with the Director of International Operations, Washington, D.C. For the year 1959 they excluded’ the amount of $14,578 from their gross income under section 911 of the 1954 Code. Of that amount, $1,609 was earned by _ Sara A. Wolfe as an employee of the Iran-American So- - ' ciety. There is no dispute as to this amount. For the year 1960 petitioners excluded $7,302.51 from their gross in- come on the same grounds. | ‘Eldon E. Wolfe, during the years at issue, was employed as a highway bridge engineer by the Bureau of Public Roads which is part of the United States Department of Com- merce. The Bureau of Public Roads (sometimes hereinafter referred to as Bureau) is an “agency” of the United States . as that word is used in the parenthetical phrase “except amounts paid by the United States or any agency thereof,” in section 911 of the Internal Revenue Code of 1954. On December 7, 1956, the Imperial Government of Iran entered into a credit agreement with the Export-Import Bank of Washington( hereinafter referred to as Eximbank) ar * 8 in connection with a —_ construction project in .— The project involved the Bureau of Public Roads in an under- taking which was entered into by such agency with Iran pur- - suant to.and in accordance with the applicable provisions of the Mutual Security Act of 1954. Pursuant to the provisions of article III of the credit agreement of December 7, 1956, Iran designated the Riggs National Bank of Washington, D. C., as the depositary for funds constituting the revolving fund which was to be “used by Iran exclusively for the purpose of financing United’ States dollar expenditures in connection with the Project.’’ . In accordance withthe provisions of articles III and IV of the credit agreement, Eximbank advanced to the Iranian . Government the total sum of $947,597.96 over the years ° 1957, 1958, and 1959. The loan agreement contained a number of restrictions, including a maximum line of credit of $5,000,000; the re- quirement that Iran submit detailed financial statements before each succeeding $500,000 advance; and a negative pledge that no other external debt of the Iranian Govern- ment would have priority over this loan. According to the terms of articles X and XI and default in the prompt and full payment of any installment of principal or interest on any advance under the loan was to make the entire principal and interest become payable at the option and demand of . the holder. As of January 1, 1964, Iran had repaid the entire amount of this loan, plus the interest, to Eximbank. The credit agreement also prescribed in article XVII that . prior to and as a condition of the first advance under the loan the United States Bureau of Public Roads would make - arrangements satisfactory to the Eximbank under which the Bureau would provide the services of United States | engineers, and technicians to carry out the project. It was © this aspect of the agreement that brought the peliencr, Eldon E. Wolfe, to work in Iran. Prior to April 7, 1956, the petitioner was employed in the competitive civil service of the United States Government. _ On April 7, 1956, he terminated his competitive service — status, and received an appointment in the excepted service of the United States Government on the following day. He was then assigned to perform services in Pakistan as an employee of the Bureau of Public Roads. On June 22, 1957, » | aie the petitioner ‘was transferred from Pakistan to the Irdit Division in Tehran. . , Neither the Iranian Government nor any of its employees was empowered to, or did, supervise or control the work of " any of the employees of the Iran Division. The Iranian Government could not hire or fire any of the employees of the Iran Division or in any manner control the salary paid , or the promotions given to any of the personnel of the Bureau of Public Roads assigned to the Division. The petitioner and his wife left Iran on April 5, 1960, for - the United States, and reported to Washington, D.C., for duty on May 24, 1960. Effective July 10, 1960; he was of. ficially transferred from the Iran Division to thé Office of -Engineering, Bridge Division, Bureau of F xblic Roads, United States Department of Commerce, Washington, D.C. | The transfer of the petitioner from Pakistan to Iran in - 1957 was an action taken by the Bureau of Public Roads at - its initiative and that of the petitioner, but not that of any _ foreign’ government. ; ae 2 Pursuant to the requirement in article XVII of the credit - agreement that some arrangement: be entered into between the Buréau. of Public Roads and the: Imperial Government of Iran for the loan of Bureau. employees, a letter agree- ment was signed between the two governments on December 18, 1956. This letter agreement specified that the Bureau would assign a certain numberof personnel for a period not to exceed 2.years unless the credit ‘agreement was ex- _ tended. es ' The fundamental mechanics of payment of the assigned _ employees are described in the agreement as follows: ' V. COMPENSATION OF PERSONNEL ASSIGNED >TO IRAN: | | : ‘The compensation of all personnel of the Bureau assigned to Iran from the date of assignment to the date of separation from the program will be paid or © reimbursed out of the Dollar Working Fund to be established by your Government [Iran] as provided in Paragraph VII... -— eee The compensation of.each employee will include his — salary, post differential, post allowance, quarters allow- ance, education allowance, and separation allowance, all | 10 as prescribed for an employee of the Bureau of his grade and, term of. service by the applicable United © . ,, States statutes and regulations a8 now in effect or ' hereafter amended. Salaries and wages will be paid on the basis: of a 40-hour week in accordance with the pains vane anenen megeietens, VI. DOLLAR WORKING FUND ' To carry out the conditions of the $5,000,000 loan from the Export-Import Bank signed on December 7, 1956 your Ministry [Tran] will establish a Dollar * Working Fund in the maximum amount of $500,000 with the Bureau to be at the disposal of the Bureau for the payments as set out in this Agreement. __ The Dollar Working Fund shall be established in the - amount of $200,000 and shall be-replénished by your Government [Iran] from time to time upon the request — of the Bureau accompanied by an itemized statement signed by an authorized representative of the Bureau setting forth all expenditures made therefrom. which have not been reported in any previous itemized state- ment. With respect to each such expenditures, such statement shall specify the date, purpose and amount | thereof and the name and address of the person or other | entity receiving the same and shall be accompanied by such supporting documents as your Government [Iran] . may reasonably request. For such replenishment of the Dollar Working Fund by your Government shall be in an amount equal to the total of the expenditures set out in the itemized statement accompanying the request for replenishment. In connection with any such replenishment of the Dol- ° lar- Working Fund, your Government shall deposit — _- therein such additional amount as the Bureau may recommend and your Ministry may approve to meet prospective expenditures. from the Dollar Working Pund; provided, however, that the amount in the Dol- . _ lar Working Fund at any one time shall not exceed ~ $500,000. ; 11 - Pursuant to the terms of paragraph VII of the letter agreement.of December 18, 1956, a Dollar Working Fund was established by Iran in favor of the Bureau of Public Roads. Checks: drawn on the Riggs National Bank by Iran and made payable to the Bureau of Public Roads were de- posited with the United States Treasury Department and _. credited to a trust fund account entitled “Technical As- ° . sistance, United States Dollars Advanced From Foreign Governments, Bureau of Public Roads.” Salaries paid to Bureau of Public Roads personnel, including the petitioner, who were assigned to the Iran Division throughout 1959 ~ and. through July 10, 1960, were either reimbursed from or were directly charged against the Treasury ‘account previously mentioned. This trust fund was not physically segregated in any way. Thus petitioner was paid by a check drawn by the Treasurer of the United States on proceeds of this Dollar Working Fund. - jay The funds credited to this Treasury account were not-ap=-—— propriated by Congress for salary ‘expensés for Bureau of - Public Roads ‘personnel, but were funds ‘provided by the Imperial Government of Iran to which the Bureau was re- quired to account for expenditures on the project. In article XI of the credit agreement the Iranian Gov- ernment. agreed to indemnify all Bureau ‘personnel from any civil claims arising out of their employment unless such claims were based upon gross negligence or wilful miscon- duct. : eee pried ¥ The petitioner did not pay or owe any income taxes to any foreign government based on the salary he received in each of the years 1959 and 1960 from the Bureau of Public Roads. During the years in question the Bureau of Public Roads deducted from petitioner’s salary the regular 644 percent Federal employee retirement contribution, and an amount representing his contribution for the United States Govern- _* ment Employee Group Life Insurance. Moreover, the pe- titioner was entitled to exercise rights under the United _ States Government Employee Group Health B nefits Pro- | gram. | ; ; ‘ The petitioner is a career civil service United States Gov- ernment. employeé, having commenced his service counting _ toward career tenure on July 12, 1937. The entire period he ‘ . - spent assigned to the Iran Division counted as service toward his career tenure. During his service in Iran pe- titioner received periodic grade and in-grade step i increases, as well as a foreign differential allowance equal to 10 per~ cent of his applicable base salary rate. Opinion ; ‘Kern, teh The question in this proceeding i is whether the salary received by the petitioner for services which he performed in Iran constitute “amounts paid by the United. States or any agency thereof” within the terms ‘of section ) 911 of the a Revenie Code’ of 1954.* | 21SEC. 911. EARNED INCOME FROM SOURCES WITHOUT THE UNITED STATES. | (a) General Rule.—The following items shall not be included i in gross _ income and shall be exempt from taxation under this ‘subtitle: - | () Bona fide resident of foreign country.—In the case of an in- — dividual citizen of the United States, who establishes to the satisfaction - _ of the Secretary or his delegate that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts constitute earned income (as.defined in subsection (b)) attributable to. such period; but such individual . shall not be allowed as a deduction from his gross income any de- ductions (other than those allowed by section 151, relating to pér- * sonal exemptions) properly-allocable to or chargeable against amounts excluded from gross income under this paragraph. _ (2) Presence-in foreign country for 17 months.—In the case of an’ ; individual citizen of the United States, who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States (except amounts paid by the United States or an agency thereof) if such-amounts constitute earned income (as defined in subsection (b)) attributable to such period; but such in- dividual shall not be allowed as a deduction from his gross income any _ deductions (other than those allowed by section 151, relating to per- . sonal exemptions) properly allocable to or chargeable against amounts’. excluded from gross income under this paragraph. If the 18-month — period includes the entire taxable year, the amount excluded under this paragraph for such taxable year shall not exceed $20,000. If the 18- month period does not include the entire taxable year, the amount excluded under this paragraph for such taxable year shall not exceed an amount which bears the same ratio to $20,000 as the number of days in the part of the taxable year within the 18-month period bears to the total number of days’ in such year. a ‘\ ‘ 4° of ; a 13 . If we answer this question in the affirmative, the peti- tioner would not be entitled to exclude the wages in ques- tion under section 911, and respondent’s determination would be sustained. tee we ey ee p : : It is the position of the respondent that the petitioner was - paid by the United States and cannot exclude the salary payments derived from his work in Iran because the United _. States had the primary obligation to pay his compensation. Respondent contends that the proper test in interpreting the statute should be that of “primary legal obligation”’ or “debt satisfaction.” Respondent further urges that the legislative history of section 911 (a)(2) of the 1954 Code indicates that the purpose of thé phrased exception to the exclusion, was: to eliminate possibilities of double taxation. Because “no double taxation exists in the case at bar, re- spondent insists that the exclusion should not apply. In reply, petitioner argues that the “primary legal obliga- tion” testis incorrect and is not supported by authority. He _ Suggests that the correct construction of the statute involves an inquiry into who bears the economic burden of the salary payment, or asking who has the real ownership of the funds from which the payment is made. He insists that under the facts the United States acted in a mere paymaster capacity. Moreover, he contends that despite any legislative history - to the contrary, the respondent’s contentions would do violence to the plain language of the statute. In support of this point petitidner cites Krichbaum v. United States, 138 F. Supp. 515. 7 | . ay (b) Definition of Earned Income.—For purposes of this settion, the : term “earned income” means wages, salaries, or professional fees, and other amounts réceived as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by hith to a corporation which ‘represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually .. rendered. In the case of a taxpayer engaged in a trade or business in . Which both personal services and capital are material income-producing factors; under regulations prescribed by the Secretary or his delegate, a rea8onable allowance as compensation for the personal services ren- dered by the taxpayer, not in excess of 30 percent of his share of the ‘net profits of such trade or business, shall be considered as earned in- come. " — el oe : ae * . te * ; * . < | “140 Weare » unable to agree with ilies s-contention that the “primary legal obligation” test will lead to a correct . solution of our problem. Whether petitioner was an em- ployee of the United States or of the Empire of Iran is immaterial. See Lief J. Sverdrup, 14 T. C. 859, 866; Robert W. Teskey, 30 T. C.456, 461; Lawrence P. Dowd, 37 T.C. 399, 406; and Erlaudson v. Commissioner, 277 F. 2d 70, 72 (affirming a Memorandum Opinion of this Court). The ques- . tion for our decision is whether the amounts of petitioner’s fe . income here in issue were “amounts paid by the United States or any agency thereof.” If they were paid by the United States they would be includable in-petitioner’ S gross . inconie aceording to the views expressed in the cited cases, even though petitioner was not an employee of the United “ ‘States: Conversely it would follow that if they were not . paid by the United States or an agency thereof they would not be includable in petitioner’s gross income even though petitioner was an employee of the United States.- The precise question here is whether the checks issutd to. petitioner by the Treasurer of the United States for. the amounts in issue.and paid from funds which were owned ‘by the Iranian Government and which had been deposited by that Government with the Bureau of Public Roads for that purpose were issued by the United States in the role of a payor or in the role of a paymaster for the Iranian Government. The facts in the instant case are quite similar to those in ' Krichbaum v. United States, swpra..There, as here, the tax- ' payer was an employee of the Bureau of Public Roads of the United States Department of Commerce, was “loaned” by his regular employer to a foreign government (Ethiopia) for work therein, and was paid by checks drawn by the United States which were paid from funds borrowed by the Ethiopian: Government from the International Bank and deposited by it with the United States for the purpose of paying the salaries of the taxpayer and others who had been “loaned” by the American Government. In that case it was held that the amounts so paid to the taxpayer were not “amounts paig by the United States or any agency thereof’’ and, accordingly, were not includable in the taxpayer’s © gross income. Respondent contends that the K viihenin case is dis- tinguishable from the instant case since in that case the . Ethiopian Government expressly assumed the obligation to pay the salaries of the personnel “loaned” to it by the Bureau and therefore the salary of the taxpayer in that case was a debt of Ethiopia which was paid with Ethiopia’s money, while in the instant case there was no express as- sumption by the Iranian Government of the obligation to pay petitioner’s salary while he was on loan to Iran. While the assumption by the Iranion Government of an | obligation to pay the salaries of the personnel “loaned” to it by the Bureau of Public Roads was not as specific and categorical'as the assumption of such liability by the Ethio- pian Government in the Krichbawm case, we are of the opinion that the letter agreement of. December 18, 1956, entered into between the Bureau and the Government of Iran, from-which we have quoted in our Findings, clearly indicated that the Iranian Government undertook the obli- gation of paying petitioner’s salary out of its own funds. ' _ It provided that “[t]he compensation of all personnel of the Bureau assigned to Iran * * * will be paid or reim- bursed out of the Dollar Working Fund to be vstablished by [the Iranian] Government” and that “(t]he Dollar Working ' Fund shall be established in the amount of $200,000 and shall « be. -replenished by [Iran] from time to time upon the fe- quest of the Bureau,” from which the Bureau was to make “the payments as set out in this Agreement,’’ which in- cluded the compensation of personnel assigned ‘to Iran. Simply stated, the Government of Iran, wishing to have road construction work done in Iran. with the. aid of trained personnel of the Bureau of Public Roads and as an induce- ment to the Bureau to furnish such personnel, not only agreed that the salaries of such personnel would be paid from funds belonging to Iran but also, in effect, guaranteed the payment of such salaries by depositing its funds with . the Bureau so that the Bureau could cause the issuance of checks against these funds for that ‘purpose. _ In our opinion the question of whether the obligation of - the Iranian Government ran directly to petitioner and the . question whether the obligation of Iran in connection with - the payment of petitioner’s salary was primary or secon- dary are irrelevant. See Erlandson v. Commissioner, swpra at 73. The point is that pursuant to an obligation of some kind imposed on it by the letter agreement of December o® nem on y : 2 acer eee . 16. 18, 1956, the Iranian Government authorized the payment - from its funds ‘of petitioner’s salary earned by the per- formance of ‘services to Iran at its request and for its benefit. It is our opinion that in drawing the checks upon’ the funds belonging to Iran for the payment of petitioner’s salary, under ‘the circumstances of this case, the officials of — the United States were acting as paymasters for Iran and by the United States or any agency thereof.” ; Decision will be entered for the Petitioners. ' that the amounts of such salary were not “amounts paid. uw : 17 as eee Sea United States Court of Appeals for the District of Columbia , oan , | | - Cireuit ioe | Apis Ne MT. CoMMISSIONER OF INTERNAL REvENvE, PEririonER Expon E. WoiFE aNnp Sara A. Woure, RESPONDENTS *. [April 22, 1966] . : Petition for Review of Decision of the Fax Court of the . 7 United States © Before: Bazetox, Chief Judge, ‘and Fany and. Leven- _ taf, Cireuit Judges. ~ ie cataty tin eee -.- Leventua, Circwit Judge: Respondents are husband and: _ wife who filed a joint return in 1959 and 1960, the tax years subject to the dispute in this case, They sought exclusion, under § 911(a) (2) of the Internal Revenue Code of 1954, of amounts earned by them while residing and working in - Iran during the years: in question. The Commissioner al- lowed the exclusion of the wife’s income in Iran. The sole’ / question is whether respondent Eldon E. Wolfe properly - excluded, as exempt from federal income taxation, amounts _ earned while employed by the United States Bureau of Public Roads to work on a highway project of the Govern- ment of Iran. — Pessbac es ia ect: Section 911(a) (2) exempts from taxation earned income received by a United. States citizen located in a foreign country for eighteen consecutive months if such income constitutes “amounts received. from sources without the United States (except amounts paid by the United ‘States or an agency thereof).” Mr. Wolfe satisfies the foreign residency’ requirements of § 911. The question is whether rs thé amounts received by him from his employer, the United ‘States Bureau of Public’ Roads, are to be’ considered ~ , “amounts paid by the United States or an agency thereof,” >... and thus outside the scope of the exemption. sr On December 7, 1956, the Government of Iran entered into a ‘credit agreement with the. Export-Import Bank _. . (Eximbank) in Washington with respect to.a road construc- tion project in Iran. Pursuant to this agreemept Iran de- > , 7 18 posited i in the Riggs National Bank j in Washington funds, out of the proceeds of the Eximbank loan, to be used_‘ex- clusively for the purpose of financing United States dollar _ expenditures in connection with the Project.” The credit agreement'also provided that prior to and as a condition of the first advance under the loan to Iran, the Bureau of Pub- lic Roads would make arrangements satisfactory to Exim- bank for providing the services é6f United States engineers and technicians for the road construction project. It was this aspect, of the agreement that brought: the taxpayer to work in Iran. : The Tax Court concluded that taxpayer ‘was entitled ‘under § 911(a)’ (2) to exclude from his income the salary paid him by the Bureau of Roads for his work in Iran. .43 T. C.572 (1965): It reasoned that since the reimbursement provisions of the éredit agreement between the Eximbank - and Iran placed the ultimate burden of taxpayer’s salary on the Government of Iran,-Wolfe’s salary. did not represent “amounts paid by the United States or an agency thereof.” In drawing the checks upon the funds belonging to Iran for the payment of .petitioner’s salary,” concluded the Tax Court, “the officials of the United States were acting as pay- masters for Iran.” 43 T.C. at 579. We. cannot agree with the Tax Court’s interpretation of the statute and its application of the statute to the facts of this case. We disagree, too, with a similar ruling in Krich- baum v. United States, 138 F. Supp. 515 (E. D. Tenn. 1956). A.-In' our opinion the exception ‘provision has broad sweep as to taxpayers who are employees of the U.S. Gov- ernment, as well as applying in some circumstances’ to taxpayers who are not employees. The salient features of this case are certainly sufficient, though we do fot say they ~~ are all necessary, to establish that taxpayer’s salary should be viewed as “amounts paid by the United States or an: ‘agency thereof.” Four aspects are especially significant. } ® Taxpayer was an employee of the United States main- taining unique. status as such and receiving unique benefits as such. . On April 8, 1956, taxpayer, an employée of the ornaen of Public Roads, transferred from the competitive civil service 1 Erlandson v. oiislsatiinas: 277 F. 2d 70 (9th Cir. 1960); Laurence P. Dowd, 37 T. C. 399..(1961) ; Robert W. Teskey, 30 T. C. 456 (1958) . : ~~ 4g and accepted an appointment offered by the Burean in the excepted service. He was then assigned to perform services in Pakistan. On June 22, 1957, he was transferred from Pakistan to the Iran Division in Tehran. Neither the Iranian Government nor any of its employees was empowered to, or - did, supervise or control the work of any of the employees of the Irani Division. The Iranian Government could not hire or fire any of the employees of the Iran DiVision or in any manner control the salary paid or the promotions given to any of the personnel of the Bureau of Public Roads as- signed to the Division ) as As a United States Government employee in the excepted service having prior Civil Service status, Wolfe was covered throughout the period by various federal laws giving bene- fits to Government emyloyees4,'Phe Tax Court found (43 T.C. at 576): ae During the years in question the Bureau of Public Roads ‘deducted from petitioner’s salary the regular. 61% percent Federal employee retirement contribution, and an amount representing his contribution for the U.S. Government employee group life insurance. More- _ over, the petitioner was entitled to exercise rights un- der the U.S. Government employee group health bene- ‘fitg program. . ° ae The petitioner is a career civil service U.S. Govern- - ment employee, having: commenced his service counting toward career tenure on July 12, 1937. The efitire period he spent assigned to the Iran Division counted as ser- vice toward his career tenure. During his service in Iran petitioner received periodic. grade and in-grade - step increases, as well as a foreign: differential allow- ance equal to 10 per cent of his applicable base salary rate.’ Furthermore, taxpayer had re-employment rights to rein- _ statement in the competitive service; and he was rein- stated in the competitive service effective, July 10, 1960. 2 These laws are as follows: °(1) Performance ‘Rating Act; (2) Gov- ernment Employees Incentive Awards Act; (3) Federal Employees Pay Act; (4) -Annual and Sick Leave Act; (5) Federal Employees Com- F pensation Act; (6) Civil Service Retirement Act; (7) Unemployment Compensation Act; (8) Federal Employees Group Life Insurance ‘Act; _ (9) Federal Employees Health Benefits Act. / 20 . 2. The United States had the primary and indeed ace obligation to pay taxpayer’s salary, and his B rights were only against the United States Taxpayer’s only contract, whether express or implied through employee status, was with the United States. The parties stipulated: ' Eldon E. Wolfe at not time, and i in no event, had any right to request or demand payment of his salary from | Iran. Mr. Wolfe did not acquire, by virtue of either his employment agreement with. the Bureau’ of Public Roads or his assignment to the Iran Division, any direct rights against the Iranian Government [except immunity from taxation by Iran]. Taxpayer’ s only connection with Iran was &s an engineer included in a group of employees of the Bureau of Public Roads sent by the Bureau to Iran to assist Iran in develop- ing a highway system. His presence in Iran was in discharge of the obligation of the Bureau, under a letter — with Iran, to send experts to assist Iran. x Iran agreed to make funds available to the Bureau in order that the Bureau might: pay taxpayer’s salary. But the obligation of Iran’ ran to the United States, not to tax- payer. - : s It was stipulated that taxpayer had no agreement either with Iran or with the Bureau of Public Roads whereby payment of his salary was to be made-out of Iranian funds or was dependent upon advances having first been made by . Iran to the Bureau. -. 3. A United States agency actually executed and delivered . the salary checks to taxpayer. The Tax Court specifically found that iad s salary was paid by a check drawn by the Treasurer of the United . States. The record shows that the Treasury checks were ‘ drawn on the appropriation of the Bureau-of Public Roads. © This payment was reimbursable to the Bureau by Iran through payments by check, payable to the Bureau of Pub- lie Roads, which were deposited with the United States Treasury Department and credited to a trust fund account ‘entitled “Technical Assistance, United States Dollars Ad- vance From Foreign Governments, Bureau of Public Roads.” Salaries paid to Bureau of Public Roads personnel, , 21 including the taxpayer, who were assigned to the Iran Di- vision throughout 1959 and: through July 10, 1960, we either reimbursed from or were directly charged agai es the Treasury account previously mentioned. This trust fund was not physically segregated in any way. 4, In addition to these three primary factors, there are also in this record secondary facts supporting the Govern-. - ment’s position. To take an analogy from the game of bridge, these are not “quick tricks” but rather “plus” oo filling in the hand: We note the following: a..Taxpayer was exempt not only from all income taxes, _ but also from duties, fees and customs charges of Iran and . ‘ any political subdivision pote a y virtue of the agreement between Iran and the Bureau of Public Roads. b. Taxpayer’s income under review includes a 10% in-- crement over his base salary as a foreign post differential. _- ¢, Although the basic salary paid to taxpayer was reim- __bursed to the Bureau by Iran, there were financial burdens on the U. S. Government which were not compensable by Iran. The agreement provides for reimbursement of salary and certain allowancés, but these do not include the “em- . ployer” contributions of the Government toward retirement benefits and group life insurance. d. The Iranian use of personnel provided by the Bureau of Public Roads was a requirement of the U.S. Government (Eximbank) ‘as a condition of the loan to Iran. And,. of course, the dollars used by Iran were an advance from the United States Government, -which bore the credit risk that - the dollar loan might not be: repaid. B. The only fact brought out to support the claim of. exemption is the fact that Iran, by agreement, had the obli- gation. to reimburse the United States for its salary pay- ‘ments to taxpayer as its employer. As already noted in item c, this left some economic burden on the United States, But even assuming Iran reimbursed the United States fully, tax- ' payer’s felations were solely with. the United — not at all with Iran. Ready analogies abound in private economic relations. Frequently an American company agrees to furnish a for- eign company with American know-how and to station — re abroad an American employee equipped to transmit that 22 nuiion The foreign company typically agrees, in. addi- tion to a fee, to reimburse the American company. for the - salaries paid to its American employees while assigned to _ the foreign company’s premises. It is plain that the Ameri- ~ can employee assigned to duty on the licensee’s premises is receiving amounts paid by his continuing American em- . ployer, even though: that American company is being re- imbursed.for his salary, a cost which it incurs in the first instance and for which it is liable to him. The tax law: is concerned with the arrangements of the taxpayer. It'is strained to read the law as making his lia- bility to tax depend on arrangements between his employer . and some one else which are beyond his sphere of concern.° C. Our interpretation is consonant with and in further- ance'‘of the: Congressional objectives underlying the excep- tion to § 911. The legislative history is set forth in Krich- baum v. United States, supra, and need not ar reviewed at length here. The original statute exempting from United States taxa- tion the income -earned by American citizens abroad was intended to help our foreign trade and’ to put Americans who work abroad in a position of equality with their com- petitors by leaying. them subject only to the income tax. levied on them by. the>country where they were employed. See 138 F. Supp. at 519. The exception for amounts paid by the United States.or any agency thereof was written into the law in 1932 in what was then § 116 of the Internal Revenue Code. The Senate , Finance Committee, which first sought complete elimination . of the. exclusion of foreign income, made particular refer- ence to the unsuitability of granting the exemption to United States employees,.S. Rep. No. 665, 72d Cong., 1st Sess. p. 31: | - Furthermore, a considerable proportion of the indi- viduals previously benefited by this sub-section have %-The record een that, when taxpayers were requested by the In- - ternal Revenue Service to provide a copy of the Eximbank credit agree- ment and other disbursement information, taxpayers had to obtain this from Eximbank, which advised that it was providing this information to taxpayer’s attorney as a matter of cougtesy to him and Senator Johnston and on the understanding that it would be used only to assist _ in preparation of the.facts in the tax controversy. v _ LA ‘ a + 23 been employees of the United States who, -becausg of their status as such, were usually exempt from any foreign tax upon their compensation recéived from the United States; these citizens are not believed by your committee to ‘be entitled to a complete exemption from the Federal income tax upon such compensation. On the floor, Senator Reed disagreed with the Committee on abolishing the exemption entirely, and proposed the ex- ception for United States employees. Hhis views ultimately - won out. Senator Reed stated that the purpose of the exemp- tion generally was to avoid double taxation of Americans working abroad, and to put them “in a position of equality with their competitors,” but that this was wholly inapplic- . able to Government employees. (See 75 Cone. Rec. 10410) : We discovered that the provision had been stretched . to the point of exempting an American naval officer or army officer who was stationed, let us say, in the embassy in London or in some foreign country, like our troops in China. Those people were getting com- plete exemption from the American income tax.. We discovered further, to our surprise, that it had been - held that American ambassadors and ministers and ' officers of the Foreign Service were getting clear out of the payment of any incomie tax by virtue of the same provision, which nobody in the world ever in- tended when the provision was first adopted. These ‘people do not deserve the exemption, because they are not subject to the income taxation of the foreign coun- . tries in which they are stationed, any more than we would tax the British ambassador here i in ee : on his income. Taxpayer Wolfe’s position clearly falls within the scope of the legislative purpose of the exception. He was a _ Government employee, and he was not subject to income tax by Iran. The agrément by Iran not to subject him ~ ‘ to income tax confirms what would bé the normal practice with respect to an employee of a foreign government. _ We think the wording of the statute, the ordinary mean- ing of the words used, and the legislative history, all sup- port the vie at basically salaries of U. S. Government employees by the U. S. Government are not within 24 : 5 od ‘ eqwere 00-18 + CeO Srey Aen eee ee ene “ — een a the exemption. We see no basis for inserting a gloss that would make the tax exemption applicable where the Gov- ernment receives reimbursement (here, not complete reim- bursement) from another source having no direct rela- tionship to employee-taxpayer. No difference in legisla- tive intention should be ascribed to the fact that the reim- bursement is secured by an advance deposit( here made with funds in turn advanced by the’ U. S. Government). It has not been suggested to us why the tax policy or any other policy of the Government would be furthered by giving the employee whose salary cost is thus reim- bursed, say, an extra 15 percent or more, depending on his tax bracket, according him a net benefit not conferred, e. g., on an Army officer serving as an aide to the Army of South Vietnam, and relieying him of the obligation” resting on all other Government employees to pay.federal income tax on their Government salary. No such distinction based on reimbursement to the Gov- . ’ ernment has: beén noted im any committee.report or similar legislative history. If interjected: into the tax law it would create invidious discriminations among the U. S. Govern- ment employees assigned for service abroad, dependent on adventitious factors’ having nothing to do with their , employment relationship with the Government or rights - te eompensation from the ——e - Reversed. Fany, Cirowit Judge, dissenting: I would affirm the Tax Court,’ whose decision aceords with Krichbaum v. United States, 138 F. Supp. 515 (Ed D. Tenn.). ¢ Admittedly, all along, taxpayer.was ‘an er of the United States, in an excepted position,” and admittedly he could look only to the United States for payment of ‘his salary. But the provision of the tax statute now con- strued looks to the “source’’ of the. income to be: exempted, not to the employer-employee relationship. The provision 2 The radiate relies in good part on government employee benefit " programs in which the appellee was allowed to participate by contribut- ing. The government also made small contributions to two of these ‘ programs: These contributions grew out of the employer-employee re- lationship, leaving unanswered in the circumstances of this case the question whether - United _— or Iran paid the amounts of sslary involved. : z Metin ys pala rar tt DS casneecrnatnee ae > , ee 25. kis --must be construed in conjunction with the Export-Import Bank Act of 1945* and the Mutual Security Act of 1954.° - Unider those Acts certain financial arrangements were made between the United States and Iran, as a result of which Iran and not the United States bore the burden of taxpayer’s salary while he was on loan to Tran. Except in the formal sense that his salary was’ remitted to him by check of the United States it was paid by Iran. The payment, though at times referred to as reimbursement, was from a deposit of funds Iran made with the United | States as now explained. ’ Tran has entered into a loan agreement with the Export- Import Bank of Washington. A maximum line of credit of . $5,000,000 was established with the Bank. The agreement provided for loan to Iran of employees of the Burean of Public Roads. It was. pursuant to this that respdéndent husband, an employee of the Bureau, was loaned to Iran. The agreement further provided that compensation . of such personnel would be paid or reimbursed out of: the. “Dollar Working Fund” established under the agreement and acutally on deposit with the United States Treasury Department as a trust fund entitled “Technical Assistance, United States Dollars Advanced from Foreign Govern- ment, Bureau of Public Roads.” Initially $200,000 was placed in the Dollar Working Fund. The agreement pro- vided that the Fund should be replenished by Iran from time to time at the request of the Bureau, and the parties have stipulated that such funds “have been advanced by foreign governments, as a general rule, prior to the actual expenditure of moneys by the United States.” It- would ‘appear the requisite deposit by Iran preceded the pay- ment of Wolfe’s salary; but even if there were a temporary time lapse this would have no‘significance. For taxpayer’s. _ salary here involved came out of a fund established by Iran in the manner described. It was. not paid out of any “money belonging to the United States. As the Tax Court - found, Salaries paid to Bureau of Public Roads personnel, including taxpayer, who was assigned-to the Iran | Division throughout 1959 and through July 10, 1960, 212 U. 8.°C. §§ 635-35i . (1964 ed.) ‘8 Mutual sania Act of 1954, ch. 937, § 505(b), 68 Stat. 851. j j ) ~ 26 were either reimbursed from or were directly charged . _ against the Treasury account “Dollar Working Fund’ -. previously mentioned. This ‘trust fund was not physi- |. Cally segregated in any way. Thus taxpayer was paid \ by a check drawn by/the Treasurer of the United States on proceeds of this Dollar Working Fund. The funds credited to this Treasury account were not appro-, priated by Congress for salary expenses for Bureau 7 of Public Roads personnel, but were funds provided by. tlie Imperial Government of Iran. Consideration of the objectives of the provisions under which American personnel are obtaned by Per cy ein ments supports the view that the salary was tax exempt as paid by Iran. The statutes under which the monetary loan to Iran.was made and personnel obtained, set forth the objectives to be in part “to aid in financing and to facilitate exports and imports and the exchange of com- modities between the United States . . and any foreign country or the agencies or nationals thereof. .. .”* Under the agreement with Iran, in addition to loan of men; the funds. borrowed were to be expended mainly in the United States in the purchase of equipment and the like. This is an immediate and measurable benefit to the economy of the United States. The loan of the men, however, was _ intended to have a long range effect on our economy by ‘putting Iran in a better position to engage in foreign commerce through improved internal transportation. These benefits to the United States are achieved without reference to whether appellee’s salary'is taxed by the United States. Moreover, legislative history shows that the general ex- emption was intended to encourage technical personnel to go abroad in furtherance of our political and economic objectives; that is, to encourage a bridge engineer like Mr. Wolfe to accept an assignment in Iran. When the _ exception “(except amounts paid by the United States or any agency thereof)”. was added by the 72d Congress the legislators were focusing on those who were in the service of the United States and were ‘abroad as a regular: and ordinary incident of that service, namely, military and _ diplomatic. personnel, not the volunteer who must be in- $ Export-Import Bank Act of 1945, 12 U.S. C. § 635 (a) (1964 ed.). Also see Mutual Security Act.of 1954, ch. 937, § 301, 68 Stat. 841. Se Ce 27 ad duced to go abroad. As Senator Reed said: “I was pro- posing to tax Americans who I think are unfairly exempted now, like officers of: our military service and our Diplo-. matic Service . . .” 75 Cong. Rec. 10411 (1932). In adding what is®iow subsection (a) (2) of Section 911, which is our concern here, the Senate. Committee specifically stated sonnel to agree te work abroad for short periods of time in furtherance of our foreign aid policy: “. . . managers, technicians, and skilled workmen ... . are induced to. go abroad for periods of 18 to 36 months to complete specific that this ‘ares to was meant to encourage technical per- - projects. Your committee believes, in accord with the point 4 program, that it is particularly desirable to en- courage men with technical knowledge to go abroad.” S. Rep. 781, 82d Cong., Ist Sess. 53 (1951). ' Ina lengthly and well-balanced review of the history of the statute up to 1956 the District Court for the Eastern District of Tennessee, in the case of Krichbaum v. United - States, supra, came to the conclusion reached by the Tax .Court in the present ese. The court there held that wages earned in Ethiopia by. an employee of the Bureau loaned to that country, borne by money: borrowed from the Inter- national Bank and transferred to the Government of the - _ United States to cover the salary and.other expenditures, were not to be included in gross income as “amounts paid by the United States or any agency thereof.” The court said: ‘If the United States is. not the debtor but eis pays the amount which is in fact a debt of another _ debtor the amount so paid is within the exemption and without the exclusion in the exemption. In the several.instances in which Congress has amended ‘ _ the statute, three times since Krichbaum, no effort appears. _ to have been made to clarify further the particular prob- lem involved -in “Krichbaum and in our ease. Since the problem has had the continuing attention of Congress. - through the years, it is fair to give some weight to Con- - gressional silence in the face of three other amendments to Section 911 in the nine years since Krichbaum. “Absent further Congressional action it seems to me the Tax Court in our case, and the District Court in Krich- baum, reached the correct decision; that is, that since { . , : . | x Ma" Pah deer he aaa} transmitted by. a check was not taken from f ds of the United States. 28 ‘Tran ‘eaudty paid the a it should not he held tobe - - an amount “paid by the United States or any agency there- of” within the intent and meaning: of Section 911, though of the United States. The amount 2 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385602_1615%3A1. Public record. Not legal advice.