CIR v. Mooneyhan

• Decision Date: 05 December 1968
• Docket Number: No. 18192.,18192.
• Citation: 404 F.2d 522
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Louis H. MOONEYHAN, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

404 F.2d 522 (1968)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Louis H. MOONEYHAN, Respondent.

No. 18192.

United States Court of Appeals Sixth Circuit.

December 5, 1968.

Louis M. Kauder, Dept. of Justice, Washington, D. C., for petitioner; Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Stephen H. Paley, Attys., Dept. of Justice, Washington, D. C., on brief.

Lowe Watkins, Nashville, Tenn., for respondent.

Before WEICK, Chief Judge, and CELEBREZZE and PECK, Circuit Judges.

CELEBREZZE, Circuit Judge.

This is a petition for review of a Tax Court judgment rendered in favor of Respondent Mooneyhan, hereinafter Respondent. The main question concerns Section 911(a) (2) of the 1954 Internal Revenue Code as it applies to payments Respondent received while working overseas.

In 1956, Iran borrowed funds to begin a comprehensive program of highway maintenance and construction. Lacking the pertinent resources, men, machines, and expertise in particular, Iran entered into a letter agreement on December 18, 1956, with the United States which provided generally that in return for money furnished by Iran, the United States would put its experience and personnel at that Country's disposal to help carry out the program's objectives.

In September of 1959, Respondent, a United States citizen living in Nashville, Tennessee, accepted an "indefinite appointment" as an equipment specialist in the Iran division of the Bureau of Public Roads, Department of Commerce, hereinafter Bureau, the United States agency charged with the administration of the Iran program. Respondent had performed similar work in Ethiopia for the Bureau for several years prior to this appointment. Although he agreed to stay in Iran for at least two years, Respondent could have chosen to remain longer. As it was, he remained for successive two-year periods, interrupted by a nine-month period in the United States.

To obtain the necessary funds for its program, Iran entered into credit agreements with the Export-Import Bank and the International Bank for Reconstruction and Development, located in Washington, D.C. Article XVII of the credit agreement between the Export-Import Bank (Eximbank) and Iran provided:

"Prior to and as a condition of the first advance under the credit, Iran shall make arrangements satisfactory to Eximbank under which the Bureau of Public Roads will provide the services of United States Engineers and technicians to assist in developing and carrying out the program of highway maintenance and training referred to herein and, at the request and with the approval of Iran, will select and purchase highway maintenance equipment, spare parts, and laboratory and shop equipment appropriate thereto and cause the same to be transported and insured to Iran."

Iran issued checks on drawing accounts established with the bank credits, which were deposited as a trust fund account in the United States Treasury under the designation, "Technical Assistance U.S. Dollars Advanced From Foreign Governments, Bureau of Public Roads." This "Working Fund" was established for the following purposes: to pay or reimburse to the United States, either by direct charges against the Fund or through reimbursements therefrom (1) the compensation of all Bureau personnel assigned to Iran and (2) the cost of transporting them, their dependents and household goods both to and from Iran. Iran paid a fee to the Bureau to cover its cost of administering the Fund which was recovered by the Bureau through a one percent charge against the total amount paid out of the Fund. Certain local expenses, such as those for office rental, personnel and transportation, were to be paid directly by Iran.

The letter agreement further provided that Bureau personnel assigned to Iran were to be under the exclusive supervision of a Bureau employee, a Division Engineer, who would write efficiency reports required by Civil Service regulations that apply to United States employees. Such reports are used to determine whether an employee should be promoted. The decision whether to hire an employee for the Iran program or to retain him in it also rested with the Bureau.¹

Respondent's activities when in Iran were to be controlled by his immediate employer, the Bureau; however his and the Bureau's presence there were contingent upon Iran meeting its obligation to supply dollars for the Working Fund.

Section 911(a) (2) of the Code allows a United States citizen to exclude from gross income "amounts received from sources without the United States." This language is followed by the parenthetical clause, "except amounts paid by the United States or any agency thereof." The exclusion is available when the individual has met certain residence requirements which Respondent did.²

Respondent contends that he was paid by Iran, a source admittedly outside the United States, because, when viewed functionally the arrangement delegated to the United States the role of a mere paymaster on behalf of Iran. Petitioner, on the other hand, urges that we ignore the arrangement made by the parties for disbursing the funds and look to the legislative history of Section 911(a) (2) which shows a clear congressional intent to deny the exclusion to virtually all United States employees, including Respondent, because they are such.

The issue presented here is not new, having been passed on by the Courts of Appeals for the Fifth and District of Columbia Circuits, and the Court of Claims. These Courts held that the exclusion was never meant to reach the payments in question.³ But the United States District Court for the Eastern District of Tennessee and the Tax Court have held to the contrary.⁴

The legislative history of Section 911 demonstrates that the exclusion was intended to spur Americans to work abroad by placing them on an equal footing with their foreign competitors by leaving them subject only to the income taxes levied in the country where they are employed. See Krichbaum v. United States, 138 F.Supp.515 (E.D.Tenn.1956) where Judge Taylor details the history of this Section.

Attempts were then made in Congress to eliminate the exclusion. Certain Americans, specifically United States employees stationed abroad and paid by the United States Government were receiving a double tax benefit, namely, exemption from all income tax. The exclusion from United States taxes permitted them to escape some of their burden while the traditional reluctance of one sovereign to tax another freed these employees from the rest.⁵

The exclusion was not eliminated; but Congress did add the parenthetical phrase "except amounts paid by the United States or any agency thereof" found in the present Section 911(a) (2) to put an end to the double benefit received by individuals who were paid by the United States or its agency while working abroad.

We now focus on the language of the statute to determine whether, given the congressional purpose behind the exclusion and its exception, Iran or the United States or its agency, the Bureau of Public Roads, paid Respondent's salary.

The Tax Court, relying principally on the reasoning of the Ninth Circuit in Erlandson v. Commissioner of Internal Revenue, 277 F.2d 70 (1960), held that Iran paid Respondent's salary. 47 T.C. 693. Although we agree with the result in Erlandson, we believe that the Tax Court reached the wrong conclusion.

In Erlandson, the taxpayer worked aboard a ship owned by the United States and operated by its agent, a private corporation. The United States deposited funds with its agent out of which Erlandson was paid. The source of these funds was the United States and the Ninth Circuit had to decide who paid them within the meaning of Code Section 911(a) (2). In deciding that Erlandson's salary fell within the exception, the Court used the following yardstick: "If Erlandson was an employee of the United States, the conclusion necessarily follows that his wages were paid by the United States or an agency thereof." The Court determined that Erlandson was an employee of the United States because he worked for that country through its corporate agent, so that: "the corporate agent was but a conduit for the payment of wages by the United States to taxpayer."

We agree with this result since Erlandson was working for the United States and being paid with American money. Under the facts of the Erlandson case, the Court properly concluded that when United States employees are paid with United States funds while working abroad, they are not entitled to the Section 911(a) (2) exclusion. Even though the United States was not the source of the funds in the case before us, we believe, nevertheless, that when Congress added the exception it meant to deny the exclusion to all United States employees working overseas no matter who provides the funds for their salaries.

United States employees do not become while working overseas employees of foreign countries competing as such with other employees of those countries for identical wages; nor do they travel abroad with that purpose in mind. To be entitled to the exclusion, there must be a direct relationship between the individual claiming it and his foreign employer; the absence of such a relationship defeats the claim. As we read its legislative history, the exception to the exclusion logically denies to employees of the United States a tax benefit that was enacted by Congress to help American citizens become foreign employees.

This leads to what we believe to be the proper construction of the Section 911(a) (2) exclusion, giving full effect to the congressional purpose behind it; whenever an employee of the United States receives his wages from his employer — whether this be "the United States itself or an agency thereof" — the exclusion and the exception to it are to be read together so that the source of the...