Opinion
Docket No. 20780.
1950-11-30
M. E. S. BRUNELLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Scott P. Crampton, Esq., for the petitioner. Sanford M. Stoddard, Esq., for the respondent.
INCOME— EXEMPTIONS— COST-OF-LIVING ALLOWANCE— ALASKA COURT CLERK— SECTION 116(j).— Increase in the basic salary of a District Court Clerk in Alaska to offset increased living costs is not exempt from tax under section 116(j). Scott P. Crampton, Esq., for the petitioner. Sanford M. Stoddard, Esq., for the respondent.
The Commissioner determined deficiencies in income tax of $305.37 for 1945 and $316.92 for 1946. The only issue for decision is whether $1,182.59 for 1945 and $1,385.65 for 1946 is exempt from tax as a cost-of-living allowance under section 116(j) of the Internal Revenue Code.
FINDINGS OF FACT.
The individual returns of the petitioner for the taxable years were filed with the collector of internal revenue for the district of Washington.
The petitioner resided in Anchorage, Alaska, during the two taxable years. He was employed there by the Government of the United States as a Clerk of the United States District Court for the Territory of Alaska.
The Territory of Alaska is ‘outside continental United States‘ as that phrase is used in section 116(j) of the Internal Revenue Code.
Certain departments and independent establishments of the Government were paying some of their employees recruited in the United States but working outside of the territorial limits of the United States a salary differential based upon high living costs at the place of employment. The Administrative Office of the United States Courts asked Congress to increase its appropriation so that it could pay court employees serving outside the territorial limits of the United States an additional 25 percent of their base salaries.
The petitioner received a letter dated July 1, 1944, from the Administrative Office of the United States Courts, which was as follows:
The Appropriation Act for the fiscal year 1945 includes funds for the purpose of granting a 25 percent increase in the basic salary of the clerks and deputy clerks in offices outside the continental United States as a differential for increased living costs. We are, therefore, glad to authorize the increase in your salary effective July 1, 1944, as follows:
+---------------------------------------------------------+ ¦ ¦ ¦ ¦Additional ¦ ¦ +-----------------+------+------------+------------+------¦ ¦ ¦ ¦ ¦compensation¦ ¦ +-----------------+------+------------+------------+------¦ ¦Name ¦Basic ¦Differential¦pursuant to ¦Total ¦ +-----------------+------+------------+------------+------¦ ¦ ¦salary¦ ¦War Overtime¦ ¦ +-----------------+------+------------+------------+------¦ ¦ ¦ ¦ ¦Pay Act of ¦ ¦ +-----------------+------+------------+------------+------¦ ¦ ¦ ¦ ¦1943 ¦ ¦ +-----------------+------+------------+------------+------¦ ¦M. E. S. Brunelle¦$4,400¦$1,100 ¦$435 ¦$5,935¦ +---------------------------------------------------------+
This letter or a copy thereof filed with the United States marshal will be his authority to pay the compensation as above set forth from the appropriation ‘Salaries of Clerks, United States Courts.‘
The differential for increased cost of living above specified shall terminate on such date as the Director of the Administrative Office of the United States (Courts) may prescribe.
The petitioner, as Clerk of the United States District Court of the Territory of Alaska, Third Division, was paid $6,275.76 by the Administrative Office of the United States Courts in 1945. Included in that amount was $1,182.59, computed upon his base salary and paid from funds appropriated by Congress through the Judiciary Appropriation Act of 1945 ‘salaries‘.
He was likewise paid $7,073.17 in 1946. Included in that total was $1,385.65, computed upon his base salary and paid from funds appropriated by Congress through the Judiciary Appropriation Act of 1946 for ‘salaries.‘
The cost of living in Alaska in 1945 and 1946 was not less than 40 per cent higher than the cost of living in the United States in those years.
The petitioner, had he been transferred to a post within the United States or the District of Columbia, would not have been entitled to receive any part of the $1,182.59 or of the $1,385.65, mentioned above, attributable to services subsequent to the effective date of his transfer.
The petitioner, on his return for 1945, excluded the $1,182.58 from net income and on his return for1946 excluded the $1,385.65 from net income.
The Commissioner, in determining the deficiencies, included those amounts in income and explained that section 116(j) of the Internal Revenue Code‘does not authorize exclusion from gross income of the 25 per cent differential in pay allowed civilian employees of the Federal Government for service in Alaska. As stated in GCM 24162, RIB (sic) #13 dated July 11, 1944 (1944 C.B. 266), this additional payment does not constitute a cost of living allowance, but is an increased compensation given to induce federal employees to accept hazardous or isolated posts and as such is taxable in full.‘
The stipulation of facts is incorporated herein by this reference.
OPINION
MURDOCK, Judge:
Section 116(j) of the Internal Revenue Code was added by section 125(a) of the Revenue Act of 1943. It provides that there shall be excluded from gross income and exempt from tax under Chapter 1:
(j) In the case of a clerk or employee in the Foreign Service of the United States, amounts received as cost-of-living allowances under authority of section 3, as amended, of the Act of February 23, 1931; and in the case of an ambassador, minister, diplomatic, consular, or foreign Service officer, amounts received as post allowances under the authority of section 12, as amended and renumbered, of the Act of May 24, 1924; and in the case of other civilian officers or employees of the Government of the United States stationed outside continental United States, amounts received as cost-of-living allowances in accordance with regulations approved by the President.
It has been stipulated that the petitioner was a civilian officer or employee of the Government of the United States stationed outside continental United States. The question is whether the amounts here in question were ‘amounts received as cost-of-living allowances in accordance with regulations approved by the President.‘ The parties present the question as a novel one.
The addition of (j) to section 116 was due to a Senate Amendment. The Report of the Committee on Finance on the Revenue Bill of 1943, Report No. 627, 78th Congress, 1st Session, at page 24, contains the following with reference to the new provision:
COST-OF-LIVING ALLOWANCES FOR FEDERAL EMPLOYEES IN FOREIGN SERVICE
The committee bill provides a new subsection to section 116 of the Internal Revenue Code to exempt from gross income the cost-of-living allowances granted personnel of the Government assigned for foreign duty.
Relief is essential to Government personnel stationed in foreign countries who are having a very difficult time and who are reported to be experiencing in the face of rapidly rising living costs a diminution from 22 to 59 percent of the individual amounts it is now possible to provide personnel to assist in meeting official requirements. Under present regulations inclusion of these allowances is required and the income tax thus nullifies in large measure the efficacy of the allowances to meet official expenses incurred by personnel on foreign assignment, and granted in order to meet official requirements.
The personnel of the Government do not choose the posts to which they are assigned, and they have no control over the costs which there are experienced. They are sent to the posts because highly important duties of the Government must there be accomplished. Payment of allowances to meet the extra costs of living at individual posts is indistinguishable from the payment of allowances to defray the expenses of operation of the establishment, the official entertainment which is necessarily undertaken, the travel personnel is ordered to perform or the rental paid for quarters appropriate to house essential activities.
The Secretary of State has reported that at posts in the countries now associated with us in common war against the enemy and in those neutral states of supreme importance to us where the Foreign Service is performing a vitally important part of the Nation's war effort, the cost of living continues to mount higher and higher and the financial difficulties of our officers and employees grow progressively worse, threatening the efficiency and morale of this important group of personnel. The Department has neither the authority nor the funds to compensate such personnel for the extra burden which falls upon them by reason of the tax levied on cost of living allowances. The situation is acute and as the allowances are to meet official needs as distinguished from personal requirements, the exclusion of such allowances from tax consideration for this class of personnel is in the public interest.
The Commissioner argues from the above report and from various statutes which he says authorize ‘cost-of-living allowances,‘ that the payments here in question were not of the kind which Congress intended to exempt; Congress intended to grant the exemption to assist personnel in meeting official requirements at posts to which they have been sent; the petitioner was merely given additional salary because living costs in Alaska were high, and that part of his salary should not be exempt any more than any other part of his salary. There is no showing that the petitioner was sent to any post or that he had to operate any establishment involving official entertainment or anything of the kind.
Section 3, as amended, of the Act of February 23, 1931, referred to in section 116(j) authorizes the Secretary of State ‘at posts where in his judgment it is required by the public interests for the purpose of meeting the unusual or excessive costs of living ascertained by him to exist, to grant compensation to clerks assigned there in addition to the basic rates herein specified.‘
Section 12, as amended and renumbered, of the Act of May 24, 1924, referred to in section 116(j), authorizes the Secretary of State to grant ‘at all posts allowances for living quarters, heat, light, fuel, gas, and electricity, and at all posts where, in his judgment, it is required by the public interests for the purposes of meeting unusual or excessive costs of living ascertained by him to exist, to grant post allowances to clerks * * * and other employees of the Foreign Service.‘
Section 901(2) of the Foreign Service Act of 1946 authorizes the Secretary of State to grant to any officer or employee of the Service who is a citizen of the United States cost of living allowances whenever the Secretary shall determine, inter alia, that the cost of living at a post abroad is proportionately so high that an allowance is necessary to enable an officer or employee of the service at such post to carry on his work efficiently.
The legislative history of section 116(j), and the words of the statutes referred to above, give considerable support to the contention of the Commissioner that Congress did not intend to exempt mere salary increases but only a limited class of payments that had a close tie-in with the efficient performance of official duties or requirements. Furthermore, payments, to be exempt under the latter part of section 116(j), must be ‘in accordance with regulations approved by the President.‘ The petitioner has been unable to point to any regulation approved by the President which in any way relates to the payments here in question. The Court is not aware of the existence of any such regulation. The record does not show that there is any error in the determination of the Commissioner.
Reviewed by the Court.
Decision will be entered for the respondent.