Davis v. Comm'r of Internal Revenue

• Decision Date: 29 May 1958
• Docket Number: Docket No. 58168.
• Citation: 30 T.C. 462
• Parties: EDWARD L. DAVIS AND BARBARA T. DAVIS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

30 T.C. 462

EDWARD L. DAVIS AND BARBARA T. DAVIS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 58168.

Tax Court of the United States.

Filed May 29, 1958.

S. Stephen Nakashima, Esq., for the petitioners.

Leslie T. Jones, Jr., Esq., for the respondent.

Petitioner, a United States citizen, was employed by the Territorial Government of American Samoa during the taxable years 1951 and 1952. Held, that the Government of American Samoa was an ‘agency’ of the United States within the purview of section 251(j), I.R.C. 1939, and that the amounts received for services performed for such government are not exempt from taxation. Held, further, that petitioner has failed to show that the amounts of so-called cost-of-living allowances received in the taxable years involved were pursuant to a regulation approved by the President as required by section 116(j), I.R.C. 1939, so as to exempt such amounts from taxation.

This proceeding involves deficiencies in income tax of petitioners for the years 1951 and 1952 in the respective amounts of $132.80 and $90.34. Petitioners filed timely claims for refund in the amount of $782.66 for the year 1951, and $917.96 for 1952.

The primary issue is whether petitioners are immune from Federal income tax on the amounts received for services rendered in the taxable years involved under contracts of employment with the Government of American Samoa. In the event it is held petitioners are not immune, are the amounts paid to Edward L. Davis in the respective taxable years as territorial post differential, excludible under section 116(j) of the Internal Revenue Code of 1939?

FINDINGS OF FACT.

The stipulated facts are found accordingly.

Petitioners are husband and wife residing at 2366 Ramona Drive, Palo Alto, California. Their joint returns for the periods involved were filed with the district director of internal revenue at Baltimore, Maryland on the cash basis.

As Barbara Davis is involved only by reason of filing a joint return, Edward L. Davis will be referred to as the petitioner.

Between November 11, 1949, and July 3, 1954, petitioner was employed by the Government of American Samoa. During such period petitioner and his wife resided in Samoa. The contracts of employment between petitioner and the Government of Samoa are attached to the stipulation and are incorporated here by this reference.

Petitioners were at all times citizens of the United States and during the taxable years in question their income from sources within American Samoa exceeded 80 per cent of their total income, and more than 50 per cent of such income was earned for personal services rendered to the Government of American Samoa, a possession of the United States of America.

Petitioner was employed by and performed duties for the Government of American Samoa during the entire term of his employment, and for such services he was paid the sum of $5,564.55 in 1951, and $5,769 in 1952.

During the years 1951 and 1952, petitioner was paid a territorial post differential in the amount of $674.96 and $752.84, respectively. This differential was discontinued by the Government of American Samoa on July 18, 1952. Such sums were not reported on the joint returns filed for the years 1951 and 1952.

Petitioner's original position with the Government of American Samoa was as Assistant Treasurer and his salary was $4,500 per year. Under the second contract of employment commencing September 1, 1952, petitioner was Assistant Director of Administration and his salary was $6,400 per year. He received accrued sick and leave time each pay period. His salary was paid from commingled funds obtained from the United States and from local revenues. Petitioner's salary grade was that of a GS-11.

In Samoa, petitioner and his wife lived in a two-bedroom home. Originally these accommodations were rent free, but later petitioner paid a rental of $55 per month.

On July 1, 1951, the administration of American Samoa was transferred from the Navy Department to the Interior Department, and petitioner commenced receiving a cost-of-living allowance. On August 24, 1952, such allowance was discontinued and petitioner's basic salary was increased to give him the same dollar income.

In 1951 and 1952, petitioner paid income tax on the salary he received from the Government of American Samoa.

In the notice of deficiency the Commissioner increased petitioner's gross income by the amounts of the territorial post differential received in the respective taxable years with the following explanation:

The territorial post differential which is paid for services at posts having conditions of environment which differ substantially from conditions of environment in the States is considered to be additional compensation paid as a recruitment incentive and, therefore, is includible in gross income and subject to tax.

OPINION.

LEMIRE, Judge:

Petitioner contends that the amounts he received in the taxable years in question from the Territorial Government of American Samoa are exempt from income tax under section 251 of the Internal Revenue Code of 1939, as amended. The provisions of such section, so far as here pertinent, are set forth in the margin.¹ The purpose of the addition of (j) to section 251 as set forth in the Report of the Ways and Means Committee on the Revenue Bill of 1950, H. Rept. No. 2319, 81st Cong., 2d Sess., p. 58, is as follows:

(W) United States Employees in the Possessions.

Section 251 of the Internal Revenue Code exempts from tax the income of individual citizen and domestic corporations from sources outside the United States if 80 percent or more of their gross income is derived from sources within a possession of the United States and 50 percent or more of their gross income is derived from the active conduct of a trade or business within a possession of the United States. For the purposes of section 251, however, United States possessions do not include the Virgin Islands. Individuals are entitled to this exemption whether they engage in a trade or business on their own account or as employees or as agents. The exemption has been interpreted as applying to military and civilian personnel employed by the United States.

Military and civilian personnel of the Government who are citizens of the United States are not exempt from income tax when they are stationed in any other part of the World, and their exemption while stationed in the possessions is not in any way related to the original purpose of section 251, which was to encourage American businesses in the possessions.

Section 216 of your Committee's bill eliminates the special treatment accorded the military and civilian employees of the United States Government and its agencies who are stationed in the possession. Wages paid to them in taxable years beginning after December 31, 1949 for services to the United States or its agencies performed in such possessions will not be considered income from such possessions, in determining whether they are entitled to the benefits of section 251 of the Code, and will be subject to tax as income from sources within the United States. Withholding on such wages will apply effective January 1, 1951. See also H. R. 2013, Committee of Ways and Means 81st Cong., 2d Sess., page 103 and S.R. 2375 Finance Committee, 81st Cong., 2d Sess., page 100.

There is little dispute about the facts. It is stipulated that petitioner is a citizen of the United States and that American Samoa is a possession of the United States.

The record also shows that the petitioner entered into two agreements with the Government of American Samoa. In the first agreement dated November 11, 1949, petitioner was employed for a term of 2 years in the position of assistant to the Treasurer of American Samoa. Under the second agreement, the petitioner was employed as Director of Administration for a term of 2 years commencing on the 1st day of September 1952. Both contracts were executed by the then Governor on behalf of the Government of American Samoa. The agreements contain many terms and conditions which are not material to the issues presented for decision.

A brief summary of the historical facts relating to the Samoan Islands shows that on February 16, 1900, England and Germany renounced whatever claims they had to the Samoan Islands. On February 19, 1900, the President of the United States, by Executive Order No. 125-A, directed the Navy to assume control and to administer the affairs of the Islands.

On February 20, 1929, Congress by Joint Resolution accepted the cession of the Samoan people's interest in the Islands to the United States. Said resolution, inter alia, provided:

(c) Until Congress shall provide for the government of such islands, all civil, judicial, and military powers shall be vested in such person or persons and shall be exercised in such manner as the President of the United States shall direct; and the President shall have power to remove said officers and fill the vacancies so occasioned. (45 Stat. 1253, 48 U.S.C.A. 1431(a)).

This situation continued unchanged until the President, by Executive Order 10624, dated June 29, 1951, transferred the administration of the Government of American Samoa from the Secretary of the Navy to the Secretary of the Interior effective as of July 1, 1951. It was further provided that when the transfer was effected the Secretary of the Interior ‘shall take such action as may be necessary and appropriate and in harmony with applicable law for the administration of civil government in American Samoa.’ Executive Order No. 125-A was specifically revoked. (1 U.S. Code and Administrative Service 1951, p. 1052.) That situation exists at the present time. Congress has not provided a government for American Samoa, but has recognized the government established under the Executive Orders.

The question for decision is whether the amounts paid to petitioner in the taxable years 1951 and 1952 were for services...