Wolfe v. Comm'r of Internal Revenue, Docket No. 1651-63.

• Decision Date: 29 January 1965
• Docket Number: Docket No. 1651-63.
• Parties: ELDON E. WOLFE AND SARA A. WOLFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

43 T.C. 572

ELDON E. WOLFE AND SARA A. WOLFE, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1651-63.

Tax Court of the United States.

Filed January 29, 1965.

E. E. Wolfe, Jr., for the petitioners.

Eugene L. Meyers, for the respondent.

Petitioner, an employee of the Bureau of Public Roads of the U.S. Department of Commerce, was assigned to do work in Iran pursuant to an agreement by which his salary was to be paid from funds to be deposited by Iran with the Bureau. Accordingly, Iran borrowed (and later repaid) the necessary funds from the Export-Import Bank, deposited them in a trust account with the Bureau, and petitioner's salary was paid from this fund by checks drawn by the Treasurer of the United States. Held, the amounts of such salary were not ‘amounts paid by the United States or any agency thereof’ within the meaning of section 911 of the Internal Revenue Code of 1954.

Respondent determined deficiencies in petitioners' income tax for the years 1959 and 1960 in the respective amounts of $2,399.97 and $1,579.95. In his statutory notice of deficiency respondent determined that the petitioners had excluded from their gross income during the years in question amounts which were properly subject to tax because they did not represent exempt income under section 911 of the Internal Revenue Code of 1954. In the petition it is alleged that the source of petitioners' income for the years before us was from a fund owned by the Imperial Government of Iran, and that petitioner was not paid by the United States or an agency thereof.

The sole question for our decision is whether during the taxable years in question petitioners' income was ‘paid by the United States or any agency thereof’ within the meaning of that phrase in section 911 of the 1954 Code.

FINDINGS OF FACT

Nearly all of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein and made a part of our findings by reference.

The petitioners, husband and wife, are both U.S. citizens, and currently reside in Washington, D.C. They filed their joint Federal income tax returns for the years 1959 and 1960 with the Director of International Operations, Washington, D.C. For the year 1959 they excluded the amount of $14,578 from their gross income under section 911 of the 1954 Code. Of that amount, $1,609 was earned by Sara A. Wolfe as an employee of the Iran-America Society. There is no dispute as to this amount. For the year 1960 petitioners excluded $7,302.51 from their gross income on the same grounds.

Eldon E. Wolfe, during the years at issue, was employed as a highway bridge engineer by the Bureau of Public Roads which is part of the U.S. Department of Commerce. The Bureau of Public Roads (sometimes hereinafter referred to as Bureau) is an ‘agency’ of the United States as that word is used in the parenthetical phrase ‘except amounts paid by the United States or any agency thereof’ in section 911 of the Internal Revenue Code of 1954.

On December 7, 1956, the Imperial Government of Iran entered into a credit agreement with the Export-Import Bank of Washington (hereinafter referred to as Eximbank) in connection with a road construction project in Iran. The project involved the Bureau of Public Roads in an undertaking which was entered into by such agency with Iran pursuant to and in accordance with the applicable provisions of the Mutual Security Act of 1954.

Pursuant to the provisions of article III of the credit agreement of December 7, 1956, Iran designated the Riggs National Bank of Washington, D.C., as the depositary for funds constituting the revolving fund which was to be ‘used by Iran exclusively for the purpose of financing United States dollar expenditures in connection with the Project.’

In accordance with the provisions of articles III and IV of the credit agreement, Eximbank advanced to the Iranian Government the total sum of $946,597.96 over the years 1957, 1958, and 1959.

The loan agreement contained a number of restrictions, including a maximum line of credit of $5 million; the requirement that Iran submit detailed financial statements before each succeeding $500,000 advance; and a negative pledge that no other external debt of the Iranian Government would have priority over this loan. According to the terms of articles X and XI any default in the prompt and full payment of any installment of principal or interest on any advance under the loan was to make the entire principal and interest become payable at the option and demand of the holder. As of January 1, 1964, Iran had repaid the entire amount of this loan, plus the interest, to Eximbank.

The credit agreement also prescribed in article XVII that prior to and as a condition of the first advance under the loan the U.S. Bureau of Public Roads would make arrangements satisfactory to the Eximbank under which the Bureau would provide the services of U.S. engineers and technicians to carry out the project. It was this aspect of the agreement that brought the petitioner, Eldon E. Wolfe, to work in Iran.

Prior to April 7, 1956, the petitioner was employed in the competitive civil service of the U.S. Government. On April 7, 1956, he terminated his competitive service status, and received an appointment in the excepted service of the U.S. Government on the following day. He was then assigned to perform services in Pakistan as an employee of the Bureau of Public Roads. On June 22, 1957, the petitioner was transferred from Pakistan to the Iran Division in Tehran.

Neither the Iranian Government nor any of its employees was empowered to, or did, supervise or control the work of any of the employees of the Iran Division. The Iranian Government could not hire or fire any of the employees of the Iran Division or in any manner control the salary paid or the promotions given to any of the personnel of the Bureau of Public Roads assigned to the Division.

The petitioner and his wife left Iran on April 5, 1960, for the United States, and reported to Washington, D.C., for duty on May 24, 1960. Effective July 10, 1960, he was officially transferred from the Iran Division to the Office of Engineering, Bridge Division, Bureau of Public Roads, U.S. Department of Commerce, Washington, D.C.

The transfer of the petitioner from Pakistan to Iran in 1957 was an action taken by the Bureau of Public Roads at its initiative and that of the petitioner, but not that of any foreign government.

Pursuant to the requirement in article XVII of the credit agreement that some arrangement be entered into between the Bureau of Public Roads and the Imperial Government of Iran for the loan of Bureau employees, a letter agreement was signed between the two Governments on December 18, 1956. This letter agreement specified that the Bureau would assign a certain number of personnel for a period not to exceed 2 years unless the credit agreement was extended.

The fundamental mechanics of payment of the assigned employees are described in the agreement as follows:

V. COMPENSATION OF PERSONNEL ASSIGNED TO IRAN

The compensation of all personnel of the Bureau assigned to Iran from the date of assignment to the date of separation from the program will be paid or reimbursed out of the Dollar Working Fund to be established by your Government (Iran) as provided in Paragraph VII.

The compensation of each employee will include his salary, post differential, post allowance, quarters allowance, education allowance, and separation allowance, all as prescribed for an employee of the Bureau of his grade and term of service by the applicable United States statutes and regulations as now in effect or hereafter amended. Salaries and wages will be paid on the basis of a 40-hour week in accordance with the existing United States regulations.

VII. DOLLAR WORKING FUND

To carry out the conditions of the $5,000,000 loan from the Export-Import Bank signed on December 7, 1956, your Ministry (Iran) will establish a Dollar Working Fund in the maximum amount of $500,000 with the Bureau to be at the disposal of the Bureau for the payments as set out in this Agreement.

The Dollar Working Fund shall be established in the amount of $200,000 and shall be replenished by your Government (Iran) from time to time upon the request of the Bureau accompanied by an itemized statement signed by an authorized representative of the Bureau setting forth all expenditures made therefrom which have not been reported in any previous itemized statement. With respect to each such expenditures, such statement shall specify the date, purpose and amount thereof and the name and address of the person or other entity receiving the same and shall be accompanied by such supporting documents as your Government (Iran) may reasonably request.

For such replenishment of the Dollar Working Fund by your Government shall be in an amount equal to the total of the expenditures set out in the itemized statement accompanying the request for replenishment. In connection with any such replenishment of the Dollar Working Fund, your Government shall deposit therein such additional amount as the Bureau may recommend and your Ministry may approve to meet prospective expenditures from the Dollar Working Fund; provided, however, that the amount in the Dollar Working Fund at any one time shall not exceed $500,000.

Pursuant to the terms of paragraph VII of the letter agreement of December 18, 1956, a dollar working fund was established by Iran in favor of the Bureau of Public Roads. Checks drawn on the Riggs National Bank by Iran and made payable to the Bureau of Public Roads were deposited with the...