Hudson v. Commissioner

Shirley Duncan Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent Hudson v. Commissioner Docket No. 38356 United States Tax Court 20 T.C. 926; 1953 U.S. Tax Ct. LEXIS 77; August 25, 1953, Promulgated *77 Decision will be entered under Rule 50. The United States Educational Foundation in China was an instrumentality of the United States and was under the general control of the Secretary of State. The salary and allowances of petitioner as an officer of the Foundation were fixed with the approval of the State Department in accordance with its regulations governing the pay and allowances of Foreign Service officers and employees. Cost-of-living allowances so paid petitioner are excludible from her gross income under section 116 (j) of the Internal Revenue Code. Edmund L. Browning, Jr., Esq., for the petitioner. A. Russell Beazley, Esq., for the respondent. Arundell, Judge. ARUNDELL *926 Respondent determined a deficiency in the petitioner's income tax for the year 1948 in the amount of $ 626.83. For a part of that year petitioner was employed in China by the United States Educational Foundation in China, during which period she was paid, in addition to her salary, a cash cost-of-living allowance amounting to $ 961.08 and was furnished living quarters and related services of the value of $ 1,324.08. Those items, excluded by petitioner in her return, have been added to gross income by respondent. The sole issue remaining for decision is whether those amounts are properly excludible under section 116 (j) of the Internal Revenue Code. An additional issue raised in the deficiency notice has been conceded by respondent and can be disposed of under a Rule*79 50 computation. FINDINGS OF FACT. Shirley Duncan Hudson, petitioner herein, filed a separate income tax return for 1948 with the collector of internal revenue at Baltimore, Maryland. On November 10, 1947, the United States entered into an Executive agreement with the Republic of China for the establishment of the *927 United States Educational Foundation in China, hereinafter referred to as the Foundation. That agreement was executed pursuant to the authority vested in the Secretary of State of the United States by the Fulbright Resolution 1 to enter into agreements with foreign countries so as to make available for educational activities the proceeds from surplus property disposals. The primary purpose of the Foundation was the furtherance of educational exchange between China and the United States, taking the form of grants to exchange students, scholarships, payment of travel expenses, and similar educational projects. Certain pertinent provisions of the Executive agreement may be summarized as follows: 1. The term "Secretary of State" should be understood to mean the Secretary of State of the United States or any officer or employee of the Government designated by him*80 to act in his behalf. 2. The management and direction of the affairs of the Foundation were vested in a board of directors headed and designated by the principal officer of the diplomatic mission in China (the Ambassador during the period here in question). 3. All decisions of the board were subject to review by the Secretary of State in his discretion. 4. All expenditures of the Foundation were to be made pursuant to an annual budget subject to approval by the Secretary of State. 5. The Government of the Republic of China was to deposit, with the Treasurer of the United States, Chinese currency in an amount not to exceed $ 20,000,000 over a period of years. 6. The Secretary of State was to make Chinese currency available to the Foundation as required within its budget. 7. The board was empowered to appoint an executive officer to direct and supervise the activities of the Foundation. During the early part *81 of 1948, petitioner was employed in China by the United Nations Relief and Rehabilitation Administration. There is no dispute as to this period. Beginning on or about February 19, 1948, petitioner was employed at Nanking, China, by the Foundation in an administrative position with the title of program officer. Among her duties were the interviewing and entertainment of educators, officials, and prospective grantees, often after the close of regular business hours. It was the policy of the board and the executive officer to communicate with the Department of State in Washington as to the salaries and allowances proposed for staff officers of the Foundation. When petitioner was hired it was determined that her duties and responsibilities were comparable to those of a Foreign Service officer, class 4, and the Foundation proposed to the Department of State that *928 she be compensated accordingly. During the period here in question, the basic salary and cost-of-living allowances paid petitioner and the quarters and services furnished her by the Foundation were identical with those of a Foreign Service officer, class 4, as set forth in the Foreign Service regulations of the Department*82 of State in effect at that time. The Foundation was an agency of the United States Government. Although not an officer or employee of the Department of State, petitioner was an officer or employee of the United States Government. OPINION. Under section 116 (j) of the Internal Revenue Code, 2*83 civilian officers and employees of the Government of the United States stationed outside continental United States may exclude from gross income amounts received as cost-of-living allowances in accordance with regulations approved by the President. Although the exact technical relationship between the Foundation and the Department of State does not appear ever to have been finally determined, the parties are agreed that the Foundation was an agency of the United States and that petitioner was an employee of the Government. 3 Petitioner concedes that no specific regulations covering cost-of-living allowances were issued for employees of the Foundation, nor does she contend that she was an employee of the Department of State. It is her position that the quarters furnished and the cost-of-living allowance paid her during the time quarters were not furnished were "in accordance with" the Foreign Service regulations of the Department of State prescribing the pay schedules of Foreign Service officers, including quarters and cost-of-living allowances. We think her position is well taken. *929 Under the Act of June 26, 1930 (46 Stat. 818 (1930), 5 U. S. C. § 118 (a)), 4 heads of Departments were authorized to issue regulations with the approval of the President, under which regulations civilian officers and employees *84 of the Government permanently stationed in a foreign country would be furnished with living quarters without cost, or an allowance for living quarters if none was available. Clearly, then, there was ample statutory authority for the issuance of regulations expressly providing for the benefits here in question. The Executive agreement under which the Foundation was established makes it clear that its operations and activities were under the direct control and supervision of the Secretary of State and his subordinates. *85 In determining the salaries and allowances of the administrative staff of the Foundation, the Department of State looked to its Foreign Service regulations as its authority for fixing the salary and allowances and it, therefore, did not seek the issuance of specific regulations. No authority existed for the payment of cost-of-living allowances by an agency of the Government without reference to some regulations, and we are not prepared to say that the Department of State's construction of its own regulations as being broad enough to cover petitioner's case was improper. Certainly there was nothing arbitrary or patently illegal in the fixing of petitioner's salary and allowances under the regulations as they applied to Foreign Service officers, and we doubt if respondent may collaterally attack this action. The word "accordance" is defined as "agreement, harmony, conformity, or the act of accord." The word "accord" means "to agree, to be in correspondence or harmony, or agreement or concurrence of opinion, will, or action." Webster's New International Dictionary; American College Dictionary, and College Standard Dictionary. Applying those definitions to the words of section 116*86 (j), we are of the opinion that petitioner was paid "in accordance with" the regulations of the Department of State governing the pay of Foreign Service officers. It is noted that section 116 (j) uses the words "under authority of" where it deals with officers and employees of the Department of State, and the words "in accordance with" only when referring to other officers and employees of the Government. The case of M. E. S. Brunelle, 15 T. C. 766, affd. 192 F. 2d 423, is inapplicable, the decision there being that the payments in question were additions to salary rather than cost-of-living allowances. The *930 fact that petitioner was paid certain "subsidiary cost-of-living" and "post differential" allowances not paid Foreign Service officers is of no significance. Petitioner was paid in rapidly depreciating Chinese currency, and those items were nothing more than compensatory adjustments intended to bring her real income up to its proper dollar value. Foreign Service officers, being paid in United States dollars, had no need for such adjustments. We are of the opinion, therefore, that the cost-of-living allowances*87 and the value of quarters furnished petitioner in 1948 were properly excludible from gross income under section 116 (j) and that respondent improperly included those items in petitioner's gross income. Decision will be entered under Rule 50. Footnotes 1. Surplus Property Act of 1944, as amended, sec. 32 (b), Public Law 584, 79th Cong., 2d Sess., 60 Stat. 754.↩ 2. SEC. 116. EXCLUSIONS FROM GROSS INCOME. In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this chapter: * * * * (j) Cost-of-Living Allowances Paid to Civilian Officers and Employees Stationed Outside of Continental United States. -- In the case of a clerk or employee in the Foreign Service of the United States, amounts received as cost-of-living allowances under authority of section 3, as amended, of the Act of February 23, 1931; and in the case of an ambassador, minister, diplomatic, consular, or Foreign Service officer, amounts received as post allowances under the authority of section 12, as amended and renumbered, of the Act of May 24, 1924; and in the case of other civilian officers or employees of the Government of the United States stationed outside continental United States, amounts received as cost-of-living allowances in accordance with regulations approved by the President.↩ 3. In fact, if petitioner were not an employee of the Government, she would apparently be entitled to exclude all of her earned income from gross income as a bona fide resident of a foreign country within the meaning of section 116 (a) of the Internal Revenue Code↩. 4. "Be it enacted↩ * * * That under such regulations as the heads of the respective departments concerned may prescribe and the President approve, civilian officers and employees of the Government having permanent station in a foreign country may be furnished, without cost to them, living quarters, including heat, fuel, and light, in Government-owned or rented buildings, and, where such quarters are not available, may be granted an allowance for living quarters, including heat, fuel, and light, * * *."