Groves v. U.S., 74-4219

• Decision Date: 25 June 1976
• Docket Number: No. 74-4219,74-4219
• Citation: 533 F.2d 1376
• Parties: , 76-2 USTC P 9509 Kenneth R. GROVES and Peggy L. Groves, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1376

533 F.2d 1376

43 A.L.R.Fed. 523, 76-2 USTC P 9509

Kenneth R. GROVES and Peggy L. Groves, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 74-4219.

United States Court of Appeals, Fifth Circuit.

June 25, 1976.

H. Edward Moore, Jr., Larry Hill, Pensacola, Fla., for plaintiffs-appellants.

William H. Stafford, Jr., U. S. Atty., Pensacola, Fla., Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept. of Justice, Alfred S. Lombardi, Atty., Gilbert E. Andrews, Acting

Chief, App. Section, Dept. of Justice, Washington, D. C., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Florida.

Before BROWN, Chief Judge, and THORNBERRY, Circuit Judge, and MILLER, ^* Associate Judge.

MILLER, Associate Judge:

This appeal is from the judgment of the district court in favor of the United States, dismissing appellants' suit for refund of federal income taxes for the calendar years 1970 and 1971, which was based on disallowance of their claims for refund by the Internal Revenue Service. Appellants' earned income for the years involved consisted of salaries paid them by the Government of the Trust Territory of the Pacific Islands (GTTPI), and the ultimate question is whether, as appellants maintain, this income was excludable from gross income under subsection 911(a)(1) of the Internal Revenue Code of 1954 (I.R.C.), as amended (26 U.S.C. § 911(a)(1)). ¹ This question turns on whether, as the district court held, the GTTPI is an "agency of the United States for purposes of that subsection. We affirm.

Facts

There is no dispute that appellants meet the residence requirements of subsection 911(a)(1) for both 1970 and 1971. Pertinent stipulated and undisputed facts, as found by the district court, are as follows:

Taxpayers, husband and wife, were both employed during the years involved as contract teachers by the GTTPI. The Trust Territory is a group of more than 2,000 islands and atolls situated in the Western Pacific Ocean. It includes the Northern Mariana Islands, the Eastern and Western Caroline Islands, and the Marshall Islands. ² Between World War I and World War II the group was under control of Japan, which held a mandate over it under the old League of Nations. At the end of World War II, the group was under the military control of the United States, and this continued until the United Nations established a Trusteeship Council, which had jurisdiction over non-self-governing territories, including the Trust Territory of the Pacific Islands. Trusteeship agreements were entered into between the United Nations and those member nations which were in de facto control and possession of such territories. One of these agreements, effective July 18, 1947, was between the United Nations Security Council and the United States, which accepted administrative responsibility for the people of the Trust Territory of the Pacific Islands. Congress, by joint resolution, authorized the President to approve this agreement. Joint Resolution of July 18, 1947, ch. 271, 61 Stat. 397.

Under the Trusteeship Agreement, the United States, as the administering authority, was granted full powers of administration, legislation, and jurisdiction over the Trust Territory in order to promote the objectives of the United Nations, namely, the development of the economic, social political and educational well-being of the people of the Trust Territory. ³ Administration of the trusteeship was vested in the President of the United States by section 1 of the Act of June 30, 1954, ch. 423, 68 Stat. 330 (48 U.S.C. § 1681(a)), wherein it was directed

That until Congress shall further provide for the government of the Trust Territory of the Pacific Islands, all executive, legislative, and judicial authority necessary for the civil administration of the Trust Territory shall continue to be vested in such person or persons and shall be exercised in such manner and through such agency or agencies ⁴ as the President of the United States may direct or authorize.

Responsibility for administration of the Trust Territory was divided between the United States Department of Interior and the Department of the Navy until 1962, when President Kennedy by Executive Order No. 11021, 3 CFR 600 (1959-63 comp.), 48 U.S.C. § 1681, redelegated his authority for civil administration of the Trust Territory exclusively to the Secretary of the Interior. Pursuant to this authority, the Secretary of the Interior established the Trust Territory Government, which included legislative, judicial, and executive branches similar to the governmental organization of the United States. Department of Interior Order No. 2918.

The Executive Branch of the Trust Territory carries out its responsibilities through the High Commissioner of the Trust Territory. The High Commissioner is appointed by the President of the United States with the advice and consent of the Senate. Act of May 10, 1967, Pub.L.No.90-16, § 2, 81 Stat. 15 (48 U.S.C. § 1681a).

The legislature of the Trust Territory is known as the "Congress of Micronesia" and consists of two houses, the Senate and the House of Representatives. The legislative powers extend over all subjects of the islands except that these powers are limited in that they may not be inconsistent with treaties or international agreements of the United States, laws of the United States applicable to the Trust Territory, Executive Orders of the President of the United States, and orders of the Secretary of the Interior. The legislature has general legislative authority except as specifically restricted by the Secretary of the Interior. Department of Interior Order No. 2918, pt. III.

Every bill which is passed by the Congress of Micronesia has to be presented to the High Commissioner. If the High Commissioner should veto any bill, it is then returned to the Congress. If repassed over his veto, the High Commissioner, if he still does not approve of the bill, must send the bill, with his comments, to the Secretary of the Interior, who then shall either approve or disapprove of the bill regardless of the recommendations and action taken by the Congress of Micronesia. ⁵ Department of Interior Order No. 2918, pt. III, Section 13.

The judicial branch of the Trust Territory consists of the High Court for the Trust Territory and such other courts as may be established pursuant to law. The High Court consists presently of a Chief Justice and two Associate Justices, who are appointed by the Secretary of the Interior. Department of Interior Order No. 2918, pt. IV.

Appellants, like other employees of the Trust Territory Government, are paid by checks drawn on the General Fund of the Trust Territory, which fund is composed of both United States grant funds and locally generated revenues. The Trust Territory Government has control of its Department of Education and the hiring of teachers and salaries paid them. ⁶ United States citizens employed by the Trust Territory Government are taxed by it, with the amount based on the gross income of the taxpayer.

Preliminary Issues

Appellants argue that the trial court erred in denying their motion to compel the production of "any and all files of the Internal Revenue Service or any other United States Government files relating to Revenue Ruling 68-608 and the reasons for any rationale behind that ruling," ⁷ stating that they relied upon the Federal Rules of Civil Procedure for purposes of discovery. The Government responds that since the sole issue to be decided is one of law, the facts having been stipulated, discovery was properly denied because the materials sought were not relevant, as required by Rule 26(b)(1), Fed.R.Civ.P. We agree.

Appellants also argue that the trial court erred in citing Revenue Ruling 68-608 and in according any weight to it, citing Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958). We note that the trial court stated that the ruling "is not controlling," although it added that "it is not without weight and is entitled to respectful consideration." We find no error, let alone prejudicial error, in the trial court's position. If anything the cited case supports the trial court by its reference to an administrative agency's "continuing rule-making power" (citing Helvering v. Reynolds, 313 U.S. 428, 432, 61 S.Ct. 971, 85 L.Ed. 1438 (1941)). Id. n. 5. In any event, the position the Government takes on the ruling in its brief should satisfy appellants:

(It) is simply a published statement of the Commissioner's view that as a matter of law the Trust Territory Government is an agency of the United States within the intendment of Section 911 of the Code . . . .

The Government does not argue that it was brought to the attention of the Congress and that successive revenue acts of the Congress leaving subsection 911(a)(1) unchanged constitute implied approval.

Citing Treas.Reg. § 1.911-2(a)(1) (1963), the Government states that for appellants' income to be excluded three tests must be satisfied: the amounts must be

(i) from sources without the United States,

(ii) attributable to such uninterrupted period (which includes an entire taxable year), and

(iii) not paid by the United States or any agency or instrumentality thereof.

It then says (Br. at 13):

It is uncontroverted here that the taxpayers meet the first two tests . . . .

However, the Government calls attention to the fact that "well over ninety percent of all funds expended by the Trust Territory Government are provided by appropriations and grants from the United States" and incorporates a table in its brief showing that approximately 98% and 94%, respectively, for the years 1971 and 1972, represent the portion of such appropriations and grants. Nevertheless, we accept the Government's position that the amounts of income here involved were "from sources without the United States." ⁸

Citing legislative history of the Revenue...