Abdel-Fattah v. Comm'r of Internal Revenue

• Decision Date: 27 April 2010
• Docket Number: No. 4683–09.,4683–09.
• Citation: 134 T.C. No. 10,134 T.C. 190
• Parties: Shoukri Osman Saleh ABDEL–FATTAH, Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

134 T.C. 190

134 T.C. No. 10

Shoukri Osman Saleh ABDEL–FATTAH, Petitioner

v.COMMISSIONER of INTERNAL REVENUE, Respondent.

No. 4683–09.

United States Tax Court.

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:

+------------------------------------------------------------------------------------------+
                ¦Year  ¦Deficiency  ¦Addition to Tax Sec. 6651(a)(1)  ¦Accuracy-Related Penalty 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 Virginia.

The UAE and taxes

The United Arab Emirates was formed as a union of separate 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.

However, in April 1991 the U.S. Department of State (State Department) announced a change in its policy concerning 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 certification 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 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 Emirates 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 concedes 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 satisfy certain conditions, and Mr. Abdel–Fattah's wages satisfied 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 subsection (b) is a prerequisite to the exemption provided in subsection (a). We hold that it is not, under the plain language 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. Commissioner, 90 T.C. 678, 681, 1988 WL 31439 (1988). Rule 121 provides for summary 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 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir.1994); Zaentz v. Commissioner, 90 T.C. 753, 754, 1988 WL 34876 (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 question of law”, Rule 146, rather than fact, “so that appellate review will not be narrowly confined by the ‘clearly erroneous' standard”, Fed.R.Civ.P. 44.1, Advisory...