Adair v. Commissioner

T.C. Memo. 1995-493

UNITED STATES TAX COURT

WILLIAM H. ADAIR AND PATRICIA ADAIR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5731-93. Filed October 12, 1995.

Pursuant to the U.S. Code, U.S. employees may be
either detailed or transferred to international
organizations for foreign service. P was transferred
from the U.S. Army to NATO. For years after 1981, sec.
911, I.R.C., was amended to exclude from the definition
of foreign earned income amounts "paid by the United
States or an agency thereof to an employee of the
United States or an agency thereof". Held: P was an
employee of NATO, and not an employee of the United
States.

Daniel Harvey FitzGibbon, for petitioners.

Brian M. Harrington, for respondent.
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MEMORANDUM OPINION

KÖRNER, Judge: Respondent determined deficiencies in

petitioners' Federal income tax for the years 1988, 1989, and

1990 in the respective amounts of $22,641, $14,864, and $12,568.

Petitioners timely filed their 1988, 1989 and 1990 U.S.

Individual Income Tax Returns, Forms 1040, as married filing

jointly. Pursuant to an extension of time agreed to by

petitioners and respondent for the year 1988, the statutory

notice of deficiency with respect to the taxable years 1988, 1989

and 1990 was timely mailed to petitioners on November 16, 1992.

This case was submitted under Rule 122. The stipulation of

facts and the attached exhibits are incorporated herein by this

reference. All statutory references are to the Internal Revenue

Code in effect for the years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, except as

otherwise noted.

Petitioners were residents of Brussels, Belgium, when they

filed their petition. Patricia Adair is a party to this

proceeding solely by virtue of having filed joint income tax

returns with her husband; consequently, all references to

petitioner hereinafter will be to William H. Adair. The

controversy for decision is whether section 911 exempted

petitioner from taxation as to a portion of his income during the

years in issue while performing services for the North Atlantic

Treaty Organization (NATO) as a transferee from the U.S. Army.
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1. NATO

NATO is an organization of sovereign states created by the

North Atlantic Treaty (treaty). 63 Stat. 2241 (1949), T.I.A.S.

1964, 34 U.N.T.S. 243. The original signatory states included

the United States of America, the Kingdom of Belgium, Canada, the

Kingdom of Denmark, France, Iceland, Italy, the Grand Duchy of

Luxembourg, the Kingdom of the Netherlands, the Kingdom of

Norway, Portugal, and the United Kingdom of Great Britain and

Northern Ireland.

NATO was organized in order to promote stability and well-

being in the North Atlantic region. The parties to the treaty

seek to preserve peace and security and to unite efforts for

their collective defense. Treaty Art. 2, 63 Stat. 2243.

Article 9 of the treaty created the North Atlantic Council

(council), a body on which each of the parties would be

represented. This council is the highest decision-making body in

NATO and is composed of permanent representatives appointed by

each of the NATO member states. The Council created various

committees which were supported by an international staff drawn

from all member states.

Member states entered into an additional agreement entitled

the Agreement on the Status of the North Atlantic Treaty

Organization, National Representatives and International Staff.

This agreement was signed in Ottawa, Canada, on September 29,

1951, and is referred to herein as the Ottawa Agreement. 5
 4

U.S.T. 1087, T.I.A.S. 2992. Part IV of the Ottawa Agreement

applies to officials of NATO's international staff. Article 17

therein provides that such officials will be agreed upon by the

Chairman of the Council of Deputies and the member state

concerned. Article 19 provides:

Officials * * * [so agreed upon] shall be exempt from
taxation on the salaries and emoluments paid to them by * *
* [NATO] in their capacity as such officials. Any Member
State may, however, conclude an arrangement with the Council
acting on behalf of * * * [NATO] whereby such Member State
will employ and assign to * * * [NATO] all of its nationals
(except, if such Member State so desires, any not ordinarily
resident within its territory) who are to serve on the
international staff of * * * [NATO] and pay the salaries and
emoluments of such persons from its own funds at a scale
fixed by it. The salaries and emoluments so paid may be
taxed by such Member State but shall be exempt from taxation
by any other Member State. * * * [5 U.S.T. at 1098.]

Article 22 of the Ottawa Agreement states that the

privileges and immunities provided to such officials were so

granted in the interests of NATO and not for the personal benefit

of the individuals themselves.

The United States and the Council also concluded an

arrangement in London, England, on September 29, 1951 (London

Agreement), as allowed by the second sentence of Article 19 of

the Ottawa Agreement. 5 U.S.T. at 1112. The London Agreement

essentially provides:

A. Whenever NATO desires the services of a U.S. national,
it will notify the deputy U.S. Council Representative of the
nature of the position to be filled, the qualifications required,
and the salary such individual would receive if employed by NATO;

B. the Government of the United States may assign to NATO a
U.S. national from its Government service who is acceptable to
 5

NATO, and the U.S. Government will provide security clearances
for the individual concerned;

C. the Government of the United States will pay any and all
salaries and emoluments of U.S. nationals, who are employed by it
and assigned to NATO, from its own funds at rates determined by
the U.S. Government;

D. NATO agrees that it will not pay salaries and emoluments
to any citizen of the United States; and

E. NATO will credit to the United States the amounts of
salaries and emoluments which would otherwise have been paid by
NATO to U.S. nationals and will deduct the total of such credits
for each fiscal year from the amount assessed the Government of
the United States by NATO, in respect of the annual contribution
of the United States Government for the subsequent fiscal year.

2. Federal Employees International Organization Service Act

The U.S. Senate deemed it appropriate and advantageous for

the United States to take an active interest in the number and

caliber of Americans serving with international organizations.

It was determined that the increasing difficulties such

organizations were experiencing in recruiting American

specialists were due principally to the following: (1) Reduced

salary scales; (2) a lack of protection of Federal employment

rights and benefits; and (3) a lack of authority to detail

Federal employees to international organizations. The

appointment of Federal personnel to international organizations

was deemed to have the advantage of providing a means of

increasing the experience of Government employees. To remedy

recruitment difficulties, the Senate proposed legislation

(S.4004) providing Federal agency heads with the authority to
 6

detail employees to international organizations, and protecting

the Federal employment rights of such employees.

On August 28, 1958, Congress enacted the Federal Employees

International Organization Service Act (FEIOSA), Pub. L. 85-795,

72 Stat. 959, to encourage and authorize details and transfers of

Federal employees for service with international organizations.

This act is now codified at 5 U.S.C. secs. 3343, 3581-3584

(1994). Section 3584 of Title 5 provided the President with the

authorization to prescribe regulations necessary to carry out the

provisions governing the detail and transfer of employees to

international organizations. In 1970, the President delegated to

the Office of Personnel Management (OPM) the authority granted

him by 5 U.S.C. sec. 3584.

3. Details and Transfers to International Organizations

Section 3343 of Title 5 addresses details, and 5 U.S.C.

secs. 3581-3584 address transfers to international organizations.

An international organization is defined as a public

international organization in which the Government of the United

States participates. An agency may detail or transfer an

employee without prior approval of OPM if an organization is

already designated as a qualifying international organization.

NATO is listed as one such qualifying international organization.
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a. Details

A detail is defined as the assignment or loan of an employee

to an international organization without a change of position

from the agency by which he is employed. 5 U.S.C. sec.

3343(a)(2). The status of an employee detailed to an

international organization remains that of an employee of his

agency for all purposes. A detailed employee is deemed an

employee of the agency from which detailed for the purpose of

preserving his allowances, privileges, rights, seniority, and

other benefits, and he is entitled to pay, allowances, and

benefits from funds available to that agency. 5 U.S.C. sec.

3343(c) and (d). A detailed employee continues to earn leave

under his agency's system. The head of an agency may detail an

employee from his agency to an international organization that

requests services. 5 U.S.C. sec. 3343(b). Details may be made

with or without reimbursement by the international organization

to the United States. 5 U.S.C. sec. 3343(d).

b. Transfers

A transfer is defined as a change of position by an employee

from an agency to an international organization. 5 U.S.C. sec.

3581(4).

An employee who transfers to an international organization

is entitled to retain coverage, rights, and benefits under any

system established by law for the retirement of employees of the

United States; to continue to participate in the Federal
 8

Employees Group Life Insurance Program under chapter 87 of Title

5 U.S.C.; and to continue enrollment in the Federal Employees

Health Benefits Program under chapter 89 of Title 5 U.S.C. 5

U.S.C. sec. 3582(a)(1) and (2). To retain the above coverage,

rights, and benefits during a period of transfer, all necessary

employee payments and agency contributions must be currently

deposited in the respective trust funds for these programs. 5

U.S.C. sec. 3582(a)(1) and (2). The agency must continue its

contributions so long as employee payments are made. 5 U.S.C.

sec. 3582(a)(1) and (2), (d). Consequently, a transferred

employee who makes such contributions and retains such coverage,

rights, and benefits remains an employee of the agency from which

transferred for retirement, health benefits, and group life

insurance purposes. 5 C.F.R. sec. 352.309(b) (1995). The period

during which such coverage is retained is deemed creditable

service under any retirement system and service as an employee

for health and life insurance purposes. 5 U.S.C. sec. 3582(a)(1)

and (2).

A transferee is also entitled to retain coverage, rights,

and benefits for work-related injuries pursuant to chapter 81

(subchapter I) of Title 5 U.S.C. For this purpose, a

transferee's employment with an international organization is

deemed employment by the United States. However, any payments

made by an international organization due to injury or death are
 9

creditable against any benefits payable under subchapter I of

chapter 81 of Title 5. 5 U.S.C. sec. 3582(a)(3).

At the time of transfer, a transferee may elect to retain

all accumulations and accruals of annual leave to his credit

which would otherwise be liquidated by a lump-sum payment. A

transferee may also request payment of all retained leave at any

time prior to reemployment; however, if a transferee elects a

lump-sum payment and is reemployed within 6 months of a transfer,

such transferee must refund the lump-sum payment to the agency.

5 U.S.C. sec. 3582(a)(4).

A transferee has an absolute right to reemployment with the

agency from which he was transferred, at his former position or a

position of like seniority, status, and pay, within 30 days of

application if he meets two conditions. The transferee must

separate from the international organization within his term of

employment with the international organization, that is, within

the agreed-upon time and any extensions thereof, and the

transferee must make such application to his former agency no

later than 90 days after separation. If application is made 30

days or more prior to separation, such applicant is entitled to

reemployment upon separation. 5 U.S.C. sec. 3582(b); 5 C.F.R.

sec. 352.311-312.

Upon reemployment, a transferee is entitled to the same rate

of pay to which he would have been entitled had he continuously

remained in Federal Civil Service. 5 U.S.C. sec. 3582(b). Also,
 10

a transferee's sick leave account will be restored to its status

at the time of transfer. 5 U.S.C. sec. 3582(b). Additionally,

the period of separation caused by a transfer to an international

organization, as well as the period necessary to effectuate

reemployment, is deemed creditable service for all appropriate

Civil Service purposes. For example, the service is counted for

retirement purposes if a transferee retains retirement coverage.

5 U.S.C. sec. 3582(b).

An employee may be detailed or transferred pursuant to a

written request by an international organization for the services

of a U.S. employee only upon the consent and at the discretion of

the head of a U.S. agency. An agency may authorize the detail or

transfer of an employee to the organization for a period not to

exceed 5 years. The period of employment may be extended for an

additional 3 years with the consent of the head of the agency,

only when the Secretary of State determines such extension to be

in the national interest. 5 U.S.C. secs. 3343, 3582(a); 5 C.F.R.

sec. 352.308.

Refusal to authorize a transfer or an extension to transfer

is not reviewable or appealable. An agency and an international

organization shall by mutual agreement establish the effective

date of detail or transfer. 5 C.F.R. sec. 352.308. Upon

separation, an agency shall furnish a transferee with a statement

of his leave account and shall include on the personnel action

form effecting the employee's separation for transfer: (1) The
 11

identity of the international organization to which he transfers;

and (2) a clear statement of the period during which he retains

reemployment rights in the agency. Id.

4. NATO Vacancy

On August 20, 1985, NATO posted a notice that a position on

its international staff would become vacant in May 1986.

Secretaries of Delegations were invited to submit names of

qualified candidates. The notice stated that the successful

candidate would be offered a definite duration contract not

exceeding 3 years, but that such term could be renewed by mutual

consent for an additional 3 years. The record herein does not

include such a contract. At the time petitioner applied for the

post advertised, he was in the U.S. Department of the Army (DOA),

as a program analyst in the Office of the Comptroller of the

Department of Defense (DOD) of the U.S. Government. Petitioner

was interviewed by NATO personnel at NATO headquarters in

Brussels, Belgium, sometime in March 1986. NATO paid all

expenses relating to petitioner's interview.

By letter dated March 25, 1986, NATO's Deputy Director of

Management informed the Administrative Adviser of the U.S.

Mission to NATO that the Secretary General of NATO had decided to

appoint petitioner, subject to a valid security clearance, to the

grade A.4 post of senior statistician. This letter also inquired

whether petitioner should be recruited on a reimbursable or

direct hire basis. In April, the U.S. Mission to NATO notified
 12

the U.S. Secretary of Defense of petitioner's proposed

appointment. The notification requested the Defense Secretary

to: (1) Confirm petitioner's acceptance of the offer; (2)

provide an estimated reporting date; (3) certify petitioner's

security clearance status and the date of his last background

investigation; and (4) confirm whether petitioner's appointment

would be on a reimbursable basis.

5. NATO's International Staff Position

As a result of his interview, petitioner was offered the

NATO position. He accepted the offer. Upon acceptance, a Form

50-B, Notification of Personnel Action, was prepared by the DOA,

reflecting petitioner's transfer from his position with the DOD

to his new position with NATO for a 3-year term, effective June

22, 1986. While the United States initially paid the expenses of

moving petitioner and his family to Belgium, NATO reimbursed the

United States for these costs.

At the time NATO extended the offer, it was explained to

petitioner that because he was a U.S. Government employee, he had

the option of being recruited on a "reimbursable" or a "direct

hire" basis. Petitioner was notified that if he elected to be

recruited on a direct hire basis, he would lose his Civil Service

retirement and other benefits, as well as any right to be

reemployed by the United States following his term with NATO.

Petitioner would receive his salary, emoluments, and other

employment benefits directly from NATO, at the NATO salary scale
 13

applicable to his position. If, instead, petitioner chose to be

recruited on a reimbursable basis, he would receive his salary

and emoluments directly from the DOA at the salary level

applicable to his former grade as a U.S. employee (GS-14), would

be granted reemployment rights with the U.S. Government for a

limited period following his employment under the NATO

appointment, and would continue to be eligible to participate in

employee benefit programs. Under the reimbursable option, NATO

would provide the United States with a credit against its fiscal

assessment for the amount of salary and emoluments that would

otherwise have been paid by NATO to petitioner pursuant to NATO's

salary scale. Petitioner would continue to be considered for

every promotion he would have been considered for had he remained

with the DOA, and if his former position was upgraded during his

absence, he would be upgraded as if he were still in that

position. Even in the reimbursable status, however, petitioner

would be entitled to certain educational allowances provided and

paid to him directly by NATO in accordance with NATO policy and

regulations.

Petitioner elected to be recruited on the "reimbursable"

basis and was transferred to NATO's international staff in

accordance with the London Agreement. Accordingly, as a then

employee of the U.S. Government who was transferred to an

international organization (NATO), petitioner was entitled to,

and did continue to participate in the U.S. Civil Service
 14

Retirement System health and life insurance programs available to

U.S. employees, and was granted the right to be reemployed by the

United States following his tenure with NATO.

During the years in issue, petitioner was paid on a monthly

basis from the U.S. DOA in the United States for the services he

performed for NATO on its international staff. Forms W-2, Wage

and Tax Statements, were issued to petitioner by the DOA for each

of the years in issue. While the general salary level was

determined by NATO, the specific amount of petitioner's salary

was determined and paid in accordance with the internal salary

schedule of the U.S. Government. Although the NATO salary level

of a senior statistician, Systems Analysis and Statistics

Service, Defense Planning and Policy Division, was a grade A-4,

petitioner was paid under the U.S. salary level as a GS-14.

Before beginning work with NATO in June 1986, pursuant to

NATO's regulations, petitioner was required to sign a

"Declaration On Accepting Appointment", which provided:

I solemnly undertake to exercise in all loyalty,
discretion and conscience the functions entrusted to me as a
member of the staff of NATO, and to discharge these
functions with the interests of NATO only in view. I
undertake not to seek or accept instructions in regard to
the performance of my duties from any government or from any
authority other than the Organization.

Petitioner was required to devote substantially full time to

his duties on the international staff. He was required to render

services to NATO personally and performed services solely for
 15

NATO during his term of transfer. A continuing relationship

existed between petitioner and NATO during the years in issue.

NATO authorities dictated the results that petitioner was to

accomplish through his work, as well as the means by which he was

to attain those results. NATO retained the right to control the

order and sequence of the tasks that petitioner performed.

NATO's personnel regulations set forth various details concerning

employment, including work hours, holidays, and rights concerning

leave.

NATO's personnel regulations required the organization to

provide insurance coverage to appropriately compensate staff

members and their families for physical injuries suffered as a

result of the performance of NATO duties. As an international

staff member, petitioner was also entitled to, and did receive,

certain educational allowances that were paid directly by NATO.

The stipulated record in this case does not reveal the exact

amounts paid to him.

A staff member could be separated from NATO due to the

expiration of the term of contract, resignation by the member,

age limitation, death, dismissal, or termination by the head of a

NATO body. Termination could result if a staff member did not

perform satisfactorily; became incapacitated; if the country from

which he were a national ceased to be a member of NATO, or

withdrew or failed to renew a security clearance; or due to

disciplinary action.
 16

Petitioner's initial term with NATO was for 3 years

beginning June 22, 1986, and ending June 21, 1989. Petitioner

was required to obtain approval from appropriate U.S. authorities

for any and all extensions of his NATO tour. Petitioner's

initial term was extended by U.S. authorities, and twice by the

Secretary General of NATO, through June 21, 1994. In order to

continue his reemployment rights with the U.S. Government,

petitioner was required to obtain an extension of such rights.

Petitioner was granted extensions of his rights to reemployment.

6. Petitioners' Tax Returns

For the years 1988, 1989, and 1990, petitioner reported

gross income of $110,465.59, $83,290.72, and $73,457.92,

respectively. He received compensation for services performed

for NATO from the DOA totaling $67,625.10, $67,625.36 and

$70,082.76, respectively. These amounts were reflected in

petitioners' tax returns, including Form 2555, Foreign Earned

Income. Additionally, in part III of Form 2555, petitioner

reported as part of his foreign earned income, total allowances,

reimbursements, and other expenses paid on his behalf totaling

$28,960.49, $3,616, and $8,545.45, respectively, for the years

1988, 1989, and 1990. Petitioner reported these allowances

inconsistently during the years in issue. The significant

decrease in amounts reported between the years 1988 on the one

hand, and 1989 and 1990 on the other hand, is attributable to the

fact that petitioner in 1989 and 1990 did not include the total
 17

allowances he received as part of the total foreign earned income

reflected on the form. Petitioner included a total figure for

the allowances he received in 1989 and 1990 in the space beside

the description for such allowances and described some allowances

as tax exempt; therefore, he did not include these amounts as

part of the total foreign earned income. Petitioner reflected

the home leave allowance as taxable in the only year it was

received. He reported the NATO education allowances as tax-

exempt in 1 year and as part of his foreign earned income in 2

other years. Petitioner consistently determined that the costs

of living, overseas differential, and the quarters allowances

were foreign earned income for all 3 years. Consequently,

petitioner reported foreign earned income for the years 1988,

1989, and 1990 totaling $96,585.59, $71,241.36, and $78,628.21,

respectively, before applying the limitations of section

911(b)(2)(A). On his returns, petitioner claimed exclusions from

income of $83,486.54, $65,100, and $70,000 for the years 1988,

1989, and 1990, respectively. For each year, petitioner

consistently reported that his employer was the "NATO

International Staff."

Respondent's notice of deficiency determined that petitioner

was not entitled to the total amounts claimed as section 911

exclusions because the salary petitioner received from the DOA

was not qualified foreign earned income.
 18

7. Section 911

At the election of a qualified individual, section 911(a)(1)

provides a limited exclusion for foreign earned income. Such

exclusion is limited to $70,000 annually. Sec. 911(b)(2). A

qualified individual is a U.S. citizen whose tax home is a

foreign country and who meets the bona fide residence test, or

resides in a foreign country for a qualifying period. Sec.

911(d)(1). The parties agree that petitioner was a U.S. citizen

and was a qualifying individual during the years in issue.

Foreign earned income includes amounts received from sources

within a foreign country as earned income for services performed,

but does not include amounts "paid by the United States or an

agency thereof to an employee of the United States or an agency

thereof". Sec. 911(b)(1)(A) and (B)(ii).

a. Petitioner's Employment Status

Respondent essentially contends that although petitioner was

transferred to NATO in accordance with the hiring procedures of

the London Agreement, he remained a U.S. employee for purposes of

section 911, regardless of common law principles of employment;

additionally, that amendments to section 911 made pursuant to the

Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, sec.

111(a), 95 Stat. 172, 190, do not alter this result.

Article 19 of the Ottawa Agreement allowed member states to

conclude an arrangement with NATO whereby a member state would
 19

hire its nationals, assign them to NATO's international staff,

and pay their salaries from its own funds at a scale fixed by it.

By entering into such an arrangement, a member state could still

tax the amounts it so paid its nationals. The United States

entered into such an arrangement (the London Agreement). We have

determined that the United States retained the power to subject

its nationals to its taxing jurisdiction by complying with the

mechanism provided in Article 19. We have also found that

Article 19 gave the United States the ability to tax U.S.

nationals, rather than directly imposing the tax itself. Amaral

v. Commissioner, 90 T.C. 802, 815-816 (1988).

Prior to 1981, the relevant language limiting section 911

excludability referred to amounts "paid by the United States or

any agency thereof." In 1981, ERTA broadened the potential

section 911 exclusion by narrowing the definition of amounts

excluded from foreign earned income. Effective for taxable years

beginning after December 31, 1981, ERTA changed "paid by the

United States or an agency thereof" to "paid by the United States

or an agency thereof to an employee of the United States or an

agency thereof". ERTA sec. 111(a), 95 Stat. 190; Matthews v.

Commissioner, 907 F.2d 1173 (D.C. Cir. 1990), affg. 92 T.C. 351

(1989).

Petitioner acknowledges that before the ERTA amendment,

there would have been little doubt that he would not qualify for
 20

the benefits of section 911. By making this concession,

petitioner agrees with respondent that he was "paid" by the

United States or an agency thereof, thereby eliminating from

consideration any question regarding who paid petitioner for the

services he performed for NATO. It is clear that before

enactment of ERTA in 1981, the United States retained the power

to tax its nationals by following the hiring procedures set forth

in the London Agreement. Amaral v. Commissioner, supra at 816.

Respondent argues that following the London Agreement

procedures conclusively determines that petitioner is a U.S

employee pursuant to section 911(b)(1)(B)(ii), as amended by

ERTA, on the theory that the language "employ and assign" of the

Ottawa Agreement is sufficient, in and of itself, to resolve the

employment question without consideration of the facts and

circumstances involved herein. Article 19 of that agreement

contemplates that member states which hire and pay their

nationals may "assign or detail" those persons for duty with

NATO. Such persons are considered "seconded" to NATO. Amaral v.

Commissioner, supra at 806. Respondent contends that both

detailed and transferred employees are "seconded" from the United

States and that, therefore, both are assigned to NATO and both

are U.S. employees, taxable on the salaries they receive from the

United States. While the term "detail" is defined as the

"assignment or loan" of an employee to an international
 21

organization, a transfer is defined as a change of position by an

employee from a U.S. agency to an international organization. 5

U.S.C. secs. 3343(a)(2), 3581(4). It is evident that petitioner

was required to be an employee of the U.S. Government in order to

apply for the NATO position; whether he remained a U.S. employee

while performing services for NATO throughout the years in issue

is a threshold issue we are called upon to decide.

We cannot ignore that ERTA modified the relevant language of

section 911, while the language of the Ottawa and London

Agreements has remained unchanged. Although the United States

retained the power to tax its nationals by following the London

hiring procedures, ERTA added a change to the tax law that has

not caused a change in the Ottawa or London Agreements.

Congress can abrogate a treaty provision by subsequent statute.

Reid v. Covert, 354 U.S. 1, 18 (1957). It is equally true,

however, that when a treaty and a statute relate to the same

subject, courts will always attempt to construe them so as to

give effect to both. Whitney v. Robertson, 124 U.S. 190, 194

(1888). The intention to abrogate or modify a treaty is not to

be lightly imputed to Congress. Menominee Tribe v. United

States, 391 U.S. 404, 413 (1968). We agree with petitioner that

respondent fails to distinguish between Congress' power to tax

and its exercise of that power. The Ottawa and London Agreements

are construed as contracts, one among nations and the other
 22

between the United States and an international organization.

Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. 243,

253 (1984); Sullivan v. Kidd, 254 U.S. 433, 439 (1921). They are

not laws by which a nation imposes a tax on its citizens.

An examination of existing law and the facts herein is

required in light of the ERTA change.

The conference report accompanying ERTA states:

The bill extends the benefits of the exclusion to
individuals who receive compensation from the U.S. or any
agency thereof, but who are not employees of the U.S. or any
agency thereof. Thus, for example, the bill extends the
exclusion to certain overseas independent contractors and
teachers at certain schools for U.S. dependents who are not
employees of the U.S. or any agency thereof. [H. Rept. 97-
215 (1981), 1981-2 C.B. 481, 486.]

Respondent argues that petitioner is not a member of the

protected class carved out by the ERTA amendment as he is not an

independent contractor. Respondent further argues that as

petitioner is an employee, he is not an intended beneficiary of

the amendment and should not be eligible for the section 911

exclusion. The conference explanation does not limit the

exclusion to independent contractors and teachers but merely

provides examples of beneficiaries of the legislation. Although

the most obvious beneficiaries of the amendment may be

independent contractors, the language of the amendment speaks for

itself, and we cannot determine from the legislative history

alone that petitioner was not an intended beneficiary of the

amendment. The legislation clearly extends the benefits of
 23

section 911 to individuals who receive compensation from the

United States but who are not employees of the U.S. Government.1

The Ways and Means Committee report accompanying ERTA

explains the change further:

The bill extends the benefits of the exclusion to
individuals who are paid by the United States but who are
not eligible for any exclusion under section 912 or any
other provision of U.S. law. As a general rule, therefore,
employees of the Federal Government will not be eligible for
the exclusion. [H. Rept 97-201 (1981), 1981-2 C.B. 352,
355.]

It is respondent's position that petitioner was eligible

for, and did receive, certain benefits from the U.S. Government,

such as allowances, reimbursements and expenses for cost of

living and overseas differentials, education expenses, and

quarters and housing. Section 912 generally provides that

amounts received by civilian officers and employees of the United

States as foreign area, cost of living, and Peace Corps

allowances are exempt from taxation. To be eligible for these

benefits and this exclusion, a taxpayer must be a civilian

officer or an employee of the U.S. Government, a determination we

have yet to make. Consequently, an analysis of section 912 alone

is not helpful in resolving the issue before us as it presupposes

petitioner is a U.S. employee. As revealed by petitioners' tax

1
Stated more precisely, the 1981 amendment to sec. 911 did
not directly increase the exclusion from income therein; it may
have done so indirectly by narrowing the limitation on that
exclusion.
 24

returns, petitioner did receive allowances. Contrary to

respondent's assertions, receipt of these benefits by itself is

not determinative of petitioner's status as a U.S. Government

employee. Although petitioner may have received benefits of a

type contemplated by section 912, this fact does not conclusively

determine that petitioner is a U.S. employee, but merely

indicates that someone thought he qualified for such benefits.

Neither in section 911 nor elsewhere does the Code contain

definitions of "employee" or "U.S. employee". Respondent agrees

that precedents adopt the common law test when defining

"employee" for purposes of section 911(b)(1)(B)(ii). Matthews v.

Commissioner, 907 F.2d at 1175. It is clear that absent

indications to the contrary, courts have used the common law test

for defining "employee" in tax cases. Id. at 1178. Courts have

identified several factors to be considered when determining

whether an employment relationship exists. Among them are: (1)

The right to control the manner in which the work is performed;

(2) whether the individual performing the work has an opportunity

for profit or loss; (3) the furnishing of tools and the work

place to the worker; (4) the permanency of the working

relationship; (5) whether the service rendered is an integral

part of the alleged employer's business; (6) whether services are

offered to the general public rather than to one individual; (7)

the right to discharge; and (8) the intent of the parties or the
 25

relationship they think they are creating. Juliard v.

Commissioner, T.C. Memo. 1991-230. The control factor overlaps

many other factors and is often cited as the fundamental or

"master" test of an employment relationship. Matthews v.

Commissioner, 92 T.C. at 361. Having stipulated virtually every

significant element of the common law test, it seems that

respondent has largely conceded that petitioner was a common law

employee of NATO during the years in issue. Although respondent

states that it cannot be said that petitioner was clearly an

employee of NATO, an examination of the facts and applicable law

demonstrates otherwise.

Respondent asserts that NATO had no authority to hire

petitioner but instead had to seek petitioner's transfer from the

U.S. Government. The London and Ottawa Agreements and the U.S.

Code and the Code of Federal Regulations, as well as the manner

by which petitioner was transferred to NATO, reveal that the

transfer process was a joint endeavor whereby both NATO and the

U.S. Government, respectively, agreed to acceptable hirees and

transferees. The effective date of transfer was likewise

mutually agreed upon. NATO notified the U.S. Government of a

vacancy, the nature of the position, qualifications required, and

the salary, if employed by NATO. We agree that potential NATO

hirees could be accepted only upon the consent and at the
 26

discretion of the head of a U.S. agency, as well as the Secretary

General of NATO.

Requests for extensions of tour with NATO were subject to

U.S concurrence, but contrary to respondent's contentions, there

is no authority for the proposition that the United States could

require petitioner's return or terminate petitioner's tour before

expiration of an agreed-upon term. Respondent seeks support for

her contention in language contained in a standard form entitled

Rotation Agreement--Employees Recruited From The United States,

stating that extensions beyond the initial tour will be

authorized should management decide that an extension would be in

the best interests of the DOA. This form further states that

denial of such extension was not contestable. These statements

are consistent with U.S. law. To retain reemployment rights, a

transferee must separate from an international organization

within his agreed term of employment and any agreed extensions

thereof. We find that the United States retained the right to

deny a request for an extension of an agreed term, but could not

require a transferee to return before his agreed term expired.

Further, should a transferee choose to remain beyond his tour

without U.S. approval, he would forfeit any right to

reemployment.

NATO's rights of termination were markedly broader than the

rights of the United States. Significantly, NATO could terminate
 27

petitioner not only upon the expiration of his term, but also due

to disciplinary action, unsatisfactory performance, or if the

country from which he was a national ceased to be a NATO member,

withdrew, or failed to renew a security clearance.

While respondent argues that petitioner and the United

States intended to continue their employment relationship

throughout petitioner's tenure with NATO, such intent is not

clear under the facts herein. We do find that the United States

sought not only to encourage transfers, but also sought to

encourage the reemployment of transferees upon the expiration of

their term of transfer. Congress enacted FEIOSA for the purpose

of encouraging details and transfers to international

organizations in which the United States participates. Houchens

v. Office of Personnel Management, 939 F.2d 970, 971 (Fed. Cir.

1991). Increasing the number and caliber of U.S. employees

serving in these international organizations was considered to be

of benefit to the United States as such individuals would gain

valuable international expertise which could be employed to

increase the effectiveness of the participation of the United

States in these international organizations. Congress sought to

encourage such transfers by eliminating deterrents. Transferees

were provided with the ability to protect their employment

benefits and the right to reemployment upon the expiration of a

term of transfer.
 28

Respondent argues that petitioner's election to be paid

pursuant to the reimbursable option instead of as a direct hire

reflects his intent to continue his employment relationship with

the United States. The legislation outlined herein specifically

contemplates that transferees could retain such rights and

benefits and further specifies that one of the deterrents to such

transfers was the prospect of reduced salary scales upon

transfer. We note that the London Agreement provided that the

U.S. Government was to pay its nationals assigned to NATO at

rates determined by the former.

NATO, during petitioner's term of transfer, exclusively

directed petitioner's daily activities including the sequence of

tasks, the desired results to be achieved, and the means by which

such results were to be obtained. Petitioner was accountable

solely to NATO. This is revealed not only by NATO's personnel

regulations but also by the loyalty declaration petitioner signed

upon accepting his appointment to NATO.

Respondent argues that even though petitioner may be an

employee of NATO pursuant to the common law test, petitioner also

remained an employee of the United States for purposes of section

911, by virtue of the benefits and rights he retained as a

transferred employee.

Respondent suggests that the common law test for "employee"

should be construed broadly so as to consider the significant
 29

benefits retained by petitioner. Petitioner argues that his

retention of benefits is not conclusive as to the identity of his

employer. We agree with petitioner. The determination of

whether petitioner was an employee of the United States depends

on all the facts and circumstances, including the paramount fact

that NATO, rather than the United States, controlled the manner

in which his work was performed. Matthews v. Commissioner, 92

T.C. at 360.

Other facts also indicate that petitioner was separated from

U.S. Government service during his transfer to NATO. Unlike a

detail, a transfer was considered a change in position.

Additionally, a transferee's right to reemployment with the

United States, in and of itself, indicates that a transferred

employee was no longer considered a U.S. employee. Although a

transferee retained an absolute right to reemployment, he had to

affirmatively apply for such reemployment. Upon transfer,

transferees were entitled to liquidate their accumulated leave

accounts in the same manner as separated employees. If a

transferee chose to retain retirement health and life insurance

coverage, the transferee was considered a U.S. employee for these

limited purposes. While on transfer to an international

organization, transferees were also considered employed by the

United States for purposes of workman's compensation coverage.

It can be inferred from these provisions that transferees were
 30

not considered U.S. employees for other purposes. Cf. Matthews

v. Commissioner, supra.

Petitioner's performance was regularly evaluated by his NATO

supervisors. We do not find such arrangement to be contrary to a

transferee's status as a separated employee.

In sum, we find that in the years in issue, petitioner was

an employee of NATO, and not of the United States or an agency

thereof.

b. Petitioner's Income Under Section 911

We have decided that petitioner in the years in question was

the employee of NATO and not of the United States. This means

that the restrictions of section 911(b)(1)(B)(ii) do not apply to

petitioner here because although he was paid by the United

States, as the parties have stipulated, he was not an employee of

the United States. This does not mean that the exemption from

income under section 911 was broadened by the 1981 amendment to

section 911, but rather that the exclusion from that exemption

from income was somewhat narrowed, so that before the benefits of

section 911 could be denied the employee, it had to be shown that

he was both paid by the United States and at that time was also

an employee of the United States. Since we have found that

petitioner was not an employee of the United States, the

restriction on his right to claim section 911 benefits is

removed.
 31

The parties have agreed and stipulated:

If Mr. Adair was not, during the taxable years at
issue, "an employee of the United States" within the
meaning of I.R.C. section 911(b)(1)(B)(ii), the
compensation he received for his work for NATO during
those years was "foreign earned income", as that term
is defined in I.R.C. section 911(b)(1)(A).

We treat this stipulation by the parties as a concession by

respondent that since we have found that petitioner was not an

employee of the United States, his compensation, both pay and

allowances, as a member of NATO, are entitled to exemption from

United States income tax under section 911(a)(1), cf. Walker v.

Commissioner, 101 T.C. 537, 550 (1993), subject, of course, to

the other applicable restrictions of section 911, including the

dollar limitations on foreign earned income in section 911(b)(2)

for the years in question. Although petitioners claimed an

exclusion from income for the year 1988 on account of housing,

presumably under section 911(a)(2), and although respondent's

statutory notice of deficiency disallowed this claimed exclusion

as well as the claimed exclusion for salary under section

911(a)(1), petitioners did not allege error on respondent's part

because of the disallowance of this housing exclusion, and

alleged no facts or argument, either in their petition or on

brief, in support of the proposition that such housing exclusion

for 1988 should be allowed. We conclude that petitioners have

abandoned the issue.
 32

Accordingly, since the only issue presented in this case was

the right of petitioner to take advantage of the foreign earned

income exclusion of section 911(a)(1) because of his compensation

for serving as a member of NATO, and since respondent has

conceded that issue if we decide, as we have, that petitioner was

an employee of NATO and not of the United States, a recomputation

of petitioners' tax liability for the years 1988, 1989, and 1990

will be necessary, and

Decision will be entered

under Rule 155.