Matthews v. Comm'r of Internal Revenue
| Decision Date | 16 February 1989 |
| Docket Number | 7717-87.,Docket Nos. 4254-87 |
| Citation | 92 T.C. 351,92 T.C. No. 21 |
| Parties | DAVID W. MATTHEWS AND CHRISTA MATTHEWS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps were employed by nonappropriated fund instrumentalities of the United States while living in Germany.
HELD, Ps were employees of an agency of the United States for purposes of sec. 911(b)(1)(B), I.R.C. 1954, and accordingly are not entitled to elect to exclude foreign earned income under section 911. Gerald A. Kafka, William F. Brown, and Susan B. Rock, for the petitioners.
David S. Kosterlitz and Susan T. Mosley, for the respondent.
The issues for decision are:
(1) May petitioners 1 exclude from gross income as foreign earned income under section 911 2 certain wages paid by a non- appropriated fund instrumentality of the United States while located in the Federal Republic of Germany during the taxable years at issue.
(2) If petitioners are not eligible to make the election under section 911, were the under payments of tax due to negligence or intentional disregard of rules or regulations under section 6653(a).
Section 911 allows a qualified individual to elect to exclude limited amounts of foreign earned income from gross income. Excluded from the definition of foreign earned income (i.e., not eligible for section 911) are amounts ‘paid by the United States or an agency thereof to an employee of the United States or an agency thereof.‘ Sec. 911(b)(1)(B)(ii).
As discussed below, we hold that petitioners are employees of an agency of the United States and are not eligible for exclusion of that income under section 911. We also find they are not subject to the addition to tax for negligence or intentional disregard of rules or regulations under section 6653(a).
Respondent determined deficiencies in petitioners' Federal income tax for the 1983 and 1984 taxable years as follows:
These cases have been submitted fully stipulated under Rule 122. The stipulated facts are found accordingly. The stipulation of facts and exhibits attached thereto are incorporated by reference.
David W. Matthews (Matthews) and Christa Matthews (collectively Mr. and Mrs. Matthews) are husband and wife who have lived in the Federal Republic of Germany (West Germany) since 1969. They used an APO New York address when they filed their petition.
At all times pertinent to this case, Matthews was a United States citizen. Mrs. Matthews did not work outside her home during the taxable years 1983 and 1984. She is a party to this case solely because she filed joint returns with Matthews during the years in issue.
Ronald Davis (Davis) and Marie Davis (collectively Mr. and Mrs. Davis) are husband and wife. During 1983 and 1984, Mr. and Mrs. Davis resided in West Germany. At the time their petition was filed, Mr. and Mrs. Davis used an APO New York address.
Davis was a United States citizen at all times pertinent to this dispute. Like Mrs. Matthews, Mrs. Davis was not employed outside her home during the taxable years 1983 and 1984. She is a party to this action because she filed joint returns with Davis during the years at issue.
During taxable years 1983 and 1984, the years before the Court, Matthews and Davis both worked for nonappropriated fund instrumentalities (NAFIs) associated with the Morale, Welfare, and Recreation (MWR) system of the United States Army. They were required to work 40 hours per week and were supervised by others working for their respective NAFI.
Matthews worked in the European Regional Office of the United States Army Community and Family Support Center (CFSC). Davis worked for the United States Army Europe Morale, Welfare, and Recreation Fund (USAREUR Fund).
The CFSC and USAREUR Fund are NAFIs because a portion of their funding comes from funds that are not appropriated by Congress. Both NAFIs carefully segregate their Nonappropriated Funds from funds they receive through the appropriations process.
Matthews and Davis are compensated only through the use of Nonappropriated Funds. Matthews and Davis were both paid on a salaried basis in 1983 and 1984. They did not have written employment contracts during those years.
Mr. and Mrs. Matthews prepared and timely filed joint United States income tax returns for taxable years 1981 and 1982 reporting all income paid to Matthews by the CFSC. The returns were not signed by a tax return preparer. On or about May 22, 1984, Mr. and Mrs. Matthews filed a claim for refund for taxable year 1982, attaching Form 2555 to exclude from United States taxable income the compensation Matthews received from the CFSC for taxable year 1982. On March 4, 1985, Matthews was paid a refund of $5,184.39, comprised of $4,175.00 in tax and $1,009.39 in interest.
Mr. and Mrs. Matthews prepared joint United States income tax returns for taxable years 1983 and 1984 and timely filed these returns with the Internal Revenue Service. Their returns were not signed by a preparer. They used Form 2555 to exclude Matthews' compensation from CFSC in 1983 and 1984 from United States taxable income.
Mr. and Mrs. Davis prepared and timely filed a joint United States income tax return for taxable year 1982 reporting all income paid to Davis by the USAREUR Fund. This return was not signed by a tax return preparer. Mr. and Mrs. Davis filed a claim for refund on or about September 14, 1983, for taxable year 1982, attaching Form 2555 to exclude from United States taxable income the compensation Davis received from the USAREUR Fund for taxable year 1982. On December 26, 1983, Davis was paid a refund of $2,738.73 comprised of $2,519.00 in tax and $219.73 in interest.
Mr. and Mrs. Davis prepared joint United States income tax returns for taxable years 1983 and 1984 and timely filed them with the Internal Revenue Service. Neither of these returns were signed by a tax return preparer. Mr. and Mrs. Davis used Form 2555 to exclude Davis' compensation in 1983 and 1984 from the USAREUR Fund from United States taxable income.
There is no evidence that either petitioner sought tax advice.
Respondent issued statutory notices of deficiency to petitioners determining that NAFI compensation is not excludable. Respondent also determined additions to tax for negligence under section 6653(a).
Petitioners timely filed their petitions. Respondent's motion to consolidate for trial, briefing and opinion was granted.
The parties agree that petitioners are qualified individuals paid by the United States or an agency thereof. They disagree as to whether each petitioner is ‘an employee of the United States or an agency thereof.‘
Petitioners contend that they are not employees of their payor under section 911 because section 2105(c) of Title 5 and Army Regulations deem petitioners not to be employees of the United States for certain purposes.
Respondent contends that common law rather than section 2105(c) of Title 5 and Army Regulations govern whether petitioners were employees for purposes of section 911, and that petitioners are common law employees.
OPINIONThe relevant language of section 911 was amended in 1981. Petitioners believe the 1981 change made them eligible for the exclusion of income under section 911.
Prior to the Economic Recovery Tax Act of 1981 the exclusion of income under section 911 did not apply to amounts ‘paid by the United States or any agency thereof.‘ Similar language has applies since 1926. 3
From 1978 to 1981 this language was set forth as follows:
Sec. 911. INCOME EARNED BY INDIVIDUALS IN CERTAIN CAMPS OR FROM CHARITABLE SERVICES.
(a) General Rule. — In the case of an individual described in section 913(a) 4 who, because of his employment, resides in a camp located in a
hardship area, or who performs qualified charitable services in a lesser developed country, the following items shall not be included in gross income and shall be exempt from taxation under this subtitle:
(1) Bona fide resident of foreign country. — If such individual is described in section 913(a)(1), amounts received from sources within a foreign country or countries (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during the period of bona fide residence.
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