State Department employee could not exclude foreign income

A U.S. citizen working in Germany for the U.S. Department of State under a personal services agreement (PSA) was a U.S. government employee for federal income tax purposes. Therefore, he was not entitled to the foreign earned income exclusion for wages he received.

Foreign earned income exclusion. Under Code Sec. 911, a qualified individual can elect to exclude from gross income his or her foreign earned income. However, foreign earned income does not include amounts paid by the federal government or a U.S. government agency to an employee of the federal government or agency.

Basic Authorities Act. The taxpayer’s PSA was negotiated and signed under the State Department Basic Authorities Act of 1956 (22 U.S.C. §2669(c)). This authorizes the U.S. Secretary of State to employ individuals, by contract, for services abroad. The Basic Authorities Act states that those individuals are not considered employees of the U.S. government for purposes of any law administered by the Office of Personnel Management. The taxpayer cited 22 U.S.C. §2669(c) to claim that he was not a U.S. government employee during the tax years at issue.

However, courts have ruled that employees under the Basic Authorities Act are employees of the federal government for purposes of any law not administered by the Office of Personnel Management. Code Sec. 911 is not a “law administered by” the Office of Personnel Management, but is part of the Internal Revenue Code, which is administered by or under the supervision of the U.S. Treasury Secretary. (S. O’Kagu, 151 TC —, No. 6, Dec. 61,271.)

Visit our News Library to read more news stories.