McComish v. C. I. R.

Decision Date28 August 1978
Docket NumberNo. 76-1486,76-1486
Parties78-2 USTC P 9677 John D. McCOMISH and Genevieve A. McComish, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

John D. McComish, pro se.

Russell W. Walker (argued), of Walker & Gann, Escondido, Cal., for petitioners-appellants.

David E. Carmack (argued), of Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the United States Tax Court.

Before ANDERSON and HUG, Circuit Judges, and MUECKE, District Judge. *

J. BLAINE ANDERSON, Circuit Judge:

Under section 911(a)(2) of the Internal Revenue Code, United States citizens who reside in foreign countries for more than 17 months need not pay income tax on foreign-source income, provided the income is not received from the United States or a United States agency. The question presented in this case is whether the Taxpayers, Mr. and Mrs. McComish, can benefit from the exclusion provided by section 911(a)(2).

John D. McComish, a United States citizen, was employed during 1967 and 1968 as the District Attorney of the government of the Trust Territory of the Pacific Islands (hereinafter "Trust Territory"). His wife, who also resided in the Territory, was employed in a private capacity. In 1968, the Taxpayers filed a joint return with the Internal Revenue Service, excluding their salaries earned in the Trust Territory from their computation of income.

The Commissioner asserted a deficiency against the Taxpayers in the amount of $2,810.45. After paying this amount, the Taxpayers brought suit in the Tax Court for a refund. 1 The Tax Court upheld the Commissioner's determination that Mr. McComish's salary constituted taxable income, concluding that the Trust Territory of the Pacific Islands is a United States agency under section 911(a)(2) of the Code. McComish v. Commissioner, 64 T.C. 909 (1975). We reverse.

The Trust Territory government hired McComish in 1967 to be its District Attorney and assume responsibility for all government-related civil litigation. McComish's salary was paid by the Trust Territory from funds drawn on its bank account, comprised of revenues from the United States and local tax revenues.

The Trust Territory of the Pacific Islands, also known as Micronesia, is composed of over 2,000 islands including the Northern Mariana Islands, the Eastern and Western Caroline Islands, and the Marshall Islands. The islands have been ruled by a succession of foreign interests. 2

The Taxpayers raise two issues on appeal: (1) whether the Trust Territory of the Pacific Islands is an agency of the United States under section 911(a)(2) of the Internal Revenue Code; and (2) whether the Tax Court abused its discretion in failing to allow the petitioner to take the deposition of the Commissioner of Internal Revenue and in failing to compel discovery of the tax records of other taxpayers who were employed by the Trust Territory. Because we agree with the Taxpayers on the first issue, we find it unnecessary to reach the second.

I.

Section 911(a) of the Internal Revenue Code provides that under certain circumstances an individual citizen of the United States who resides in a foreign country may exclude from his gross income amounts he receives from sources without the United States. 3 The taxpayers' claim is under § 911(a) (2) of the Internal Revenue Code, which excludes from gross income:

(i)n the case of an individual citizen of the United States who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States (Except amounts paid by the United States or any agency thereof ) which constitute earned income attributable to services performed during such 18-month period.

I.R.C. § 911(a)(2) (emphasis added).

The Commissioner concedes that the Taxpayers are entitled to the exclusion if the Trust Territory government is not a United States agency. Although the Code does not contain a definition of "agency," the applicable regulation equates "agency" and "instrumentality." Our review of the legislative history of section 911 persuades us that the Taxpayers here can benefit from the exemption and that the "agency" exception does not apply.

Subsections (a)(1) 4 and (a)(2) of section 911 require the payment of income taxes on amounts paid by a United States agency. The legislative history concerning subsection (a)(1) provides guidance for the proper construction of subsection (a)(2).

The precursor of subsection 911(a)(1) was section 116(a) of the Revenue Act of 1932, ch. 20, 47 Stat. 204. The portion of the bill containing section 116(a) was passed by the House but was rejected by the Senate Finance Committee, which stated:

Your committee believes there is no reason for the continuance of this exemption in the case of citizens of the United States residing abroad for the reason that under other sections of the act such citizens are granted a credit for income taxes paid foreign countries and should not be further relieved from Federal income taxes. Furthermore, a considerable proportion of the individuals previously benefited by this subsection have been employees of the United States who, because of their status as such, were usually exempt from any foreign tax upon their compensation received from the United States; these citizens are not believed by your committee to be entitled to a complete exemption from the Federal income tax upon such compensation.

S.Rep.No. 665, 72d Cong., 1st Sess. 31 (1932).

The Conference Committee restored the exemption for citizens residing outside the country but added the proviso "except amounts paid by the United States or any agency thereof." H.R.Rep.No. 1492, 72d Cong., 1st Sess. (1932). Although the Conference Committee did not explain the insertion, the exception apparently reflected the concern, expressed by the Senate Committee, that United States employees who were living abroad did not have to pay tax in foreign countries, yet would be exempt from American taxation.

The precursor of subsection 911(a)(2) was subsection 116(a) of the Internal Revenue Code of 1939, ch. 619, 56 Stat. 842 (1941). The section excluded from taxable income:

(i)n the case of an individual citizen of the United States, who has been a bona fide resident of a foreign country or countries for a period of at least two years before the date on which he changes his residence from such country to the United States, amounts received from sources without the United States (Except amounts paid by the United States or any agency thereof ), which are attributable to that part of such period of foreign residence before such date, if such amounts would constitute earned income . . . from sources within the United States; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.

(Emphasis added.)

The subsection contained the same phrase, "except amounts paid by the United States or any agency thereof," that the Conference Committee had inserted in section 116(a) of the Revenue Act of 1932.

Subsequently, the House passed a bill that would have repealed section 116(a). H.R. 7378, 77th Cong., 2d Sess. (1942). The Senate Finance Committee refused to adopt the position of the House, stating that:

For example, many employees of American business in South America do not return to the United States for periods of years. Such persons are fully subject to the income tax of the foreign country of their residence.

S.Rep.No. 1631, 77th Cong., 2d Sess. 54 (1942). The Conference Committee adopted the Senate position. H.R.Rep.No. 2586, 77th Cong., 2d Sess. (1942). Almost 20 years later, section 321 of the Revenue Act of 1951 carried forward the exemption first enacted in section 116(a) despite the fact that the House had attempted to drop it. See H.R.Rep.No. 4473, 82d Cong., 1st Sess. (1951). The Senate Finance Committee had again restored the section, stating:

Section 116(a) of the code exempts from income tax citizens of the United States who are bona fide residents of a foreign country with respect to income earned outside the United States, and disallows deductions chargeable against this income. This provision is intended both to encourage citizens to go abroad and to place them in an equal position with citizens of other countries going abroad who are not taxed by their own countries.

S.Rep.No. 781, 82d Cong., 1st Sess. 52-53 (1951) U.S.Code Cong. & Admin.Serv. 1951, pp. 1781, 2023. The Conference Committee again adopted the Senate position. H.R.Rep.No. 1213, 82d Cong., 1st Sess. (1951).

The purpose of section 116(a) was to place Americans who reside and work outside the United States in an equal taxpaying position with citizens of other foreign countries and to encourage United States citizens to go abroad to provide technical expertise. Section 911(a)(2) of the current Code undoubtedly serves the same purpose. It is clear that Mr. McComish falls within the purpose of the section; the Government concedes that he went abroad to provide expertise to a foreign country. 5

It is also clear that the exception for employees of the United States or any agency thereof was designed to prevent United States government employees from obtaining a windfall under subsections 911(a)(1) or 911(a)(2).

When section 911(a)(2) was enacted, the Trust Territory was not in existence and thus there is no indication that Congress intended the "agency" exception to apply to Trust Territory employees. It seems, however, that the drafters used the "agency" exception to prevent a windfall to United States "agency" employees who did not have to pay tax in certain foreign countries by virtue of their status as United States employees.

Although McComish did not have to pay tax...

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