Soboleski v. Comm'r of Internal Revenue, Docket No. 10267-83 .JUST

• Decision Date: 22 April 1987
• Docket Number: Docket No. 10267-83 .JUST
• Citation: 88 T.C. 1024,88 T.C. No. 56
• Parties: JOSEPH N. AND MARGARET J. SOBOLESKI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

88 T.C. 1024

88 T.C. No. 56

JOSEPH N. AND MARGARET J. SOBOLESKI, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10267-83 .JUST

United States Tax Court

Filed April 22, 1987.

During 1980 and 1981, petitioner Joseph N. Soboleski was employed as a civil engineer with the United States Army Corps of Engineers. Petitioner was assigned to work in the Kingdom of Saudi Arabia where he supervised the construction of a Saudi

HELD, petitioner's salary was paid by an agency of the United States, and therefore he is not entitled to exclude his salary from taxable income under sec. 911(a), I.R.C. 1954. Edward N. Delaney, Evan M. Migdail, and John Hardin Young, for the petitioners.

Dennis D. Curtin, for the respondent.

SWIFT, JUDGE:

In a statutory notice of deficiency dated February 18, 1983, respondent determined deficiencies in petitioners' Federal income tax liabilities for 1980 and 1981 in the amounts of $9,089 and $3,463, respectively. The issue for decision is whether petitioners may exclude under section 911(a) ¹ salary payments received by petitioner Joseph N. Soboleski for work he performed in Saudi Arabia as a civil engineer on the construction of a Saudi Arabian military installation.

FINDINGS OF FACT

Many of the facts have been stipulated and are so found. Petitioners timely filed joint Federal income tax returns for 1980 and 1981, and an amended return for 1980. Petitioner Joseph N. Soboleski is a citizen of the United States and resided in Oman at the time the petition herein was filed. Petitioner Margaret J. Soboleski resided in Winchester, Virginia, at the time the petition herein was filed. Hereinafter, all references to ‘petitioner‘ will be to Joseph N. Soboleski.

For 25 years petitioner has been employed as a civil engineer with the United States Army Corps of Engineers (hereinafter referred to as the ‘Corps‘). The Corps is an agency of the United States Department of Defense. Since 1965, the Corps has been engaged in the construction of military bases located within the Kingdom of Saudi Arabia pursuant to a bilateral agreement between the United States and Saudi Arabia generally referred to as the Engineering Assistance Agreement (‘EAA‘). ²

During the periods from March 29, 1968, to June 14, 1969, and from October 10, 1976, to May 23, 1981, petitioner worked for the Corps in Saudi Arabia as a supervising engineer on certain EAA construction projects. Under the EAA, the Corps is authorized to provide Saudi Arabia with engineering and construction management services on a not-for-profit basis for the design and construction of certain Saudi Arabian military bases. As part of its management services, Corps personnel in Saudi Arabia award contracts to construction companies to do work on the military bases. Corps personnel review costs of the companies associated with the construction contracts. They make payments on behalf of the Corps to the construction companies, and they take other actions to monitor compliance with the contracts.

The work of individual Corps personnel was not supervised or controlled by Saudi Arabian Government officials. As ultimate beneficiary of the work, however, the Saudi Arabian Government could influence the work of Corps personnel. As an example, officials of the Saudi Arabian Government could request changes in the design of structures under construction, and they could request reductions in construction noise levels at certain times of the day. Also, they could restrict the use of Corps automobiles to designated areas, and they could require Corps personnel to respect Saudi Arabian religious customs and laws.

Prior to the commencement of a construction project, the Corps furnished Saudi Arabia with an estimate of the total cost of a project. Upon approval by Saudi Arabia, the estimate was then submitted for approval to the United States Department of Defense (or the United States Congress if an estimate for a particular project exceeded $25 million). Upon approval by the Department of Defense (or the Congress), the Corps notified the Saudi Arabia Ministry of Defense and Aviation (hereinafter referred to as ‘MODA‘) that it was prepared to begin work on a project.

Each construction project undertaken by the Corps pursuant to the EAA was entirely funded in advance by the Government of Saudi Arabia. Prior to the beginning of each fiscal year of the Saudi Arabian Government, the Corps furnished MODA with an estimate of the costs expected to be incurred by the Corps on all EAA projects in Saudi Arabia during the next fiscal year. The cost estimate included all salaries and employee benefits that would be paid to Corps employees assigned to work in Saudi Arabia.

Upon approval by MODA of the yearly cost estimates, the Saudi Arabian Monetary Agency (hereinafter referred to as ‘SAMA‘) funded the projects as follows. Upon approval of a project, SAMA would request Chase Manhattan Bank, N.A., (‘Chase Bank‘) in New York City to increase the amount of an irrevocable letter of credit it had issued on behalf of the Government of Saudi Arabia in favor of the Corps in an amount sufficient to cover the total estimated costs of the EAA projects for the next fiscal year.

Upon notification of the increase in the amount of the letter of credit, and quarterly thereafter, the Corps would present to Chase Bank a sight draft in an amount that was expected to cover the Corps' costs for the next 90 days under the construction contracts with Saudi Arabia. Chase Bank would then transfer U.S. dollars in the amount of the sight draft to a United States Treasury account maintained in the name of SAMA at the Federal Reserve Bank in New York City. Funds deposited in this account were not recoverable by the Government of Saudi Arabia and were earmarked for payment to the Corps with respect to its costs on the Saudi Arabian construction contracts.

At the first of each month and in amounts specified by the Corps, funds were transferred out of SAMA's account at the Federal Reserve Bank in New York City to the Foreign Military Sales trust fund (hereinafter referred to as the ‘FMS trust fund‘). The FMS trust fund was established by the United States Department of Treasury in order to facilitate sales of military-related goods and services by the United States Government to foreign governments, including the sale of engineering and construction-related services to Saudi Arabia under the EAA. See 31 U.S.C. sec. 1321 (1982). The owner of the funds in the FMS trust account was the United States Government, and the Corps had disbursement authority with respect to such funds. Funds from the FMS trust fund account were transferred on a regular basis to the Corps' Payroll Center in Omaha, Nebraska, to enable the Corps to pay the salary and benefits of Corps employees working in Saudi Arabia.

Petitioner was interviewed and selected for work in Saudi Arabia by employees of the Corps. The Corps was solely responsible for determining which of its employees it would send to Saudi Arabia to work on the EAA construction projects. The Saudi Arabian Government, however, could deny entry visas to Corps employees it finds unacceptable. ³

During the years in issue, petitioner was assigned to work at Ras al Mish'ab, a Saudi Arabian naval base located on the Persian Gulf in northeastern Saudi Arabia. The Corps previously had built a naval base at Ras al Mish'ab, and petitioner's assignment during 1980 and 1981 was to supervise certain modifications to the pier at the naval base and the construction of housing and other support buildings at the base. The construction project at Ras al Mish'ab was expected to cost $45 million.

Petitioner had general supervisory responsibilities over the construction project, such as interpreting contracts, making cost estimates, and approving modifications in the design of the naval base. Petitioner also supervised the four or five other Corps employees assigned to Ras al Mish'ab, who included a contract administrator, a quality insurance inspector, and a secretary.

With respect to his work on the Ras al Mish'ab project, petitioner was supervised by a senior Corps employee who was headquartered in Riyadh, Saudi Arabia, approximately 250 miles from Ras al Mish'ab. Petitioner's supervisor had general, supervisory responsibility over petitioner's work. He evaluated petitioner's job performance and recommended petitioner for promotions, salary increases, and outstanding service awards. Petitioner's supervisor also was responsible for initiating administrative disciplinary action against petitioner, if any was necessary. Petitioner's employment with the Corps could be terminated only by the Corps, not by the Government of Saudi Arabia.

During the time petitioner worked for the Corps in Saudi Arabia, he received yearly cost-of-living increases and periodic grade and in-grade step increases. Petitioner also received various employee benefits from the United States Government, including basic benefits granted to Federal employees (such as annual holiday and sick leave, workers' compensation, and health insurance). As an incentive to working abroad, petitioner received special benefits for Federal employees assigned to overseas posts (such as free transportation to and from Saudi Arabia and the United States, a foreign post differential allowance equal to 25 percent of base salary, and re- employment rights ⁴). The Corps' Payroll Center paid petitioner's salary on a monthly basis in U.S. dollars by means of United States Treasury checks. All of petitioner's salary and employee benefits was paid to petitioner by the Corps with funds obtained by the Corps from the FMS trust fund.

The Corps had the sole obligation to pay petitioner for the work he performed in Saudi Arabia. Petitioner had no agreement with the Saudi Arabian Government or with any of its political subdivisions under which payment of his salary was to be dependent upon or to be made out of funds advanced by...