15 T.C. 766 (1950)

An increase in the basic salary of a U.S. District Court Clerk in Alaska, intended to offset increased living costs, is not exempt from federal income tax under Section 116(j) of the Internal Revenue Code when it is not a cost-of-living allowance made in accordance with regulations approved by the President.

Summary

The petitioner, M.E.S. Brunelle, a U.S. District Court Clerk in Alaska, sought to exclude a portion of his salary from gross income, arguing it was a tax-exempt cost-of-living allowance under Section 116(j) of the Internal Revenue Code. The Tax Court ruled against Brunelle, holding that the salary increase, though intended to offset high living costs, was not a cost-of-living allowance made under presidential regulations, nor was it tied to specific official duties or requirements. The court emphasized the lack of evidence showing the payment met the criteria for exemption, aligning with the Commissioner’s view that it was simply increased compensation for service in Alaska.

Facts

M.E.S. Brunelle worked as a Clerk for the U.S. District Court in Anchorage, Alaska, during 1945 and 1946. Alaska is considered “outside continental United States” for tax purposes. Due to high living costs in Alaska, the Administrative Office of the U.S. Courts requested and received increased appropriations from Congress to provide a 25% salary increase for court employees serving outside the continental U.S. The petitioner received a letter authorizing the salary increase as a differential for increased living costs. Brunelle excluded $1,182.59 in 1945 and $1,385.65 in 1946 from his gross income, claiming them as tax-exempt cost-of-living allowances.

Procedural History

The Commissioner of Internal Revenue determined deficiencies in Brunelle’s income tax for 1945 and 1946, including the disputed amounts in his gross income. Brunelle petitioned the Tax Court for a redetermination of the deficiencies.

Issue(s)

Whether the amounts received by the petitioner as a 25% increase in his basic salary as a U.S. District Court Clerk in Alaska, intended to offset increased living costs, are exempt from federal income tax under Section 116(j) of the Internal Revenue Code as a cost-of-living allowance.

Holding

No, because the amounts received were not cost-of-living allowances made in accordance with regulations approved by the President, nor were they tied to specific official duties as intended by Congress in enacting Section 116(j).

Court’s Reasoning

The Tax Court analyzed Section 116(j) of the Internal Revenue Code, which exempts certain cost-of-living allowances from gross income for U.S. government employees stationed outside the continental United States. The court noted that such allowances must be “in accordance with regulations approved by the President.” The court examined the legislative history, citing the Senate Finance Committee Report, which indicated that the exemption was intended to assist personnel in meeting official requirements at foreign posts, not merely to provide additional salary due to high living costs. The court found that the petitioner’s salary increase, while related to the cost of living, was not tied to any specific official duties or requirements. Moreover, the petitioner failed to demonstrate any presidential regulation authorizing the specific payments in question. The court cited statutory examples of cost-of-living allowances that were tied to the efficient performance of official duties. The court stated that the record did not establish any error in the Commissioner’s determination.

Practical Implications

This case clarifies the requirements for excluding cost-of-living allowances from gross income under Section 116(j) of the Internal Revenue Code. It emphasizes that a payment, even if intended to offset high living costs, must meet specific criteria to qualify for the exemption: (1) it must be a cost-of-living allowance made in accordance with regulations approved by the President; and (2) it must be closely tied to the efficient performance of official duties. This case serves as a reminder that not all payments related to the cost of living are automatically tax-exempt; taxpayers must demonstrate that the payments meet the specific requirements of the relevant tax code provision and related regulations. Later cases would likely distinguish payments made pursuant to specific presidential regulations or linked directly to unique expenses incurred in performing official duties as potentially excludable, while general salary increases would remain taxable.