Rev. Rul. 87-29

1987-1 C.B. 183, 1987-15 I.R.B. 15.

COST-OF-LIVING; FEDERAL COURT EMPLOYEES

Published: April 13, 1987

Section 912.-Exemptions For Certain Allowances, 26 CFR 1.912-1: Exclusion of certain cost-of-living allowances

  Cost-of-living; Federal Court employees. Cost-of-living allowances paid to Federal Court employees of the United States Government are not excludable from gross income under section 912 of the Code.

ISSUE

  Whether cost-of-living allowances received by certain Federal court employees of the United States Government are excludable from gross income under section 912(2) of the Internal Revenue Code.

FACTS

  The Federal Courts are part of the Judicial branch of the United States Government. The Courts have office in Hawaii, Alaska, the United States Virgin Islands, Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands. Employees of the Courts in these locations are paid a basic salary plus a cost- of-living allowance (COLA) to compensate them for the high cost of living in these areas.

LAW AND ANALYSIS

  Section 912(2) of the Code provides that, in the case of civilian officers or employees of the Government of the United States stationed outside of the continental United States or in Alaska, there shall not be included in gross income amounts (other than those received under Title II of the Overseas Differentials and Allowances Act) received as COLAs in accordance with regulations approved by the President. Thus, a payment qualifies for the COLA exemption under section 912(2) of the Code only if (1) the recipient is a United States Government employee stationed outside of the continental United States or in Alaska, and (2) the COLA is received in accordance with regulations approved by the President.

  Section 5941(a) of the Title 5 of the U.S. Code authorizes payment of the COLAs described in section 912(2). Specifically, that provision authorizes COLAs of up to 25 percent of basic pay to employees of the Executive branch of Government who are stationed outside the continental United States or in Alaska provided that the rates of the basic pay are fixed by statute. Section 5941(a) of Title 5 requires that the allowance be paid in accordance with regulations prescribed by the President establishing the rates and defining the area, groups of positions, and classes of employees to which each rate applies.

  The regulations implementing section 5941(a) of Title 5 are contained exclusively in section 207 of Executive Order No. 10000. These regulations are approved by the President and authorize every Executive department, independent establishment, and wholly owned Government corporation to pay a COLA to their employees who are stationed in Territorial locations designated by the Office of Personnel Management, 3 CFR 792 (1943-1948 compilation), as amended (5 U.S.C. section 5941 (1982)). 'Territories' as used in the Executive Order refers to Alaska, Hawaii, the possessions of the United States, the Trust Territory of the Pacific Islands and other designated areas. Section 207 of Executive order 10000, like section 5941(a) of Title 5, requires that the employee's basic compensation must be fixed by statute. See Rev. Rul. 59-407, 1959-2 C.B. 19, which amplified Rev. Rul. 237, 1953-2 C.B. 52, and Munson v. Commissioner, 36 T.C. 953 (1961), limited acq., 1963-1 C.B. 4, concerning the requirement that the basic pay of the employee be fixed by statute.

  In Hudson v. Commissioner, 20 T.C. 926 (1953), the Tax Court considered the exclusion from gross income of COLAs received from the State Department by an employee of the United States Educational Foundation in China. Although a U.S. Government employee, the taxpayer was not an employee of the State Department and did not receive a COLA that was authorized by the Foreign Service regulations or any other regulations approved by the President. Since, however, the State Department paid the COLA in a manner that conformed to the requirements of the Foreign Service regulations, the Tax Court held that the COLA in question had been paid 'in accordance with regulations approved by the President' (i.e., the Foreign Service regulations) and that, therefore, the COLA was exempt from taxation.

  The Service acquiesced only as to the result in Hudson. 1954-1 C.B. 5. It is the Service's position that, in order for a COLA to be received 'in accordance with regulations approved by the President,' the COLA must be authorized by such regulations and not be merely paid in an amount and in a manner consistent with regulations governing COLAs paid to U.S. Government employees legally covered by those regulations.

  Section 5941(a) of Title 5, which authorizes Executive Order 10000, applies only to employees of the Executive Branch. The regulations in Executive Order 10000 relating to the payment of COLAs apply by their terms only to employees of Executive departments, independent establishments, and wholly owned Government corporations. The Executive Order is not applicable to the COLAs paid by the Courts because the Courts are part of the Judicial branch of the Government and not the Executive branch and, as such, are not an Executive department, independent establishment or wholly owned Government corporation within the meaning of Executive Order 10000. Accordingly, the COLAs received by employees of the Courts are not authorized by Executive Order 10000 and, therefore, are not paid in accordance with the regulations contained in the Executive Order and approved by the President. Furthermore, the COLAs are not authorized by any other regulations approved by the President. Accordingly, the COLAs by employees of the Courts are not received in accordance with regulations approved by the President as required by section 912(2).

HOLDING

  COLAs received by employees of the Courts are not excludable from gross income under section 912(2) of the Code.

  Pursuant to the authority contained in section 7805(b) of the Code, this holding will be applied prospectively from October 13, 1987, six months following the date that this revenue ruling is published in the Internal Revenue Bulletin.

EFFECT ON OTHER DOCUMENTS

  The limited acquiescence in the Hudson case is withdrawn and is replaced with a nonacquiescence. See page * * * of this bulletin.

Rev. Rul. 87-29, 1987-1 C.B. 183, 1987-15 I.R.B. 15