Louis M. Pavich - Page 2

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          Raytheon pays its employees who, like Pavich, spend much of their           
          working life outside the continental United States.  The parties            
          settled most of the other issues in these cases, but the major              
          one left unresolved is whether these Raytheon Allowances are                
          exempt from income tax under section 912(2).1  The Court                    
          consolidated these cases and held a short trial in Dallas.                  
          Pavich was a resident of Texas when he filed the petitions.                 
               Section 912 states:                                                    
                    The following items shall not be included in gross                
               income, and shall be exempt from taxation under this                   
               subtitle:                                                              
                                    * * * * * * *                                     
                           (2) Cost-of-Living Allowances.--In the case of             
                    civilian officers or employees of the Government of the           
                    United States stationed outside the United States                 
                    (other than Alaska) amounts * * * received as cost-of-            
                    living allowances in accordance with regulations                  
                    approved by the President * * *.                                  

               The Commissioner has two reasons for not allowing Pavich to            
          exclude the Raytheon Allowances from his gross income:  (1)                 
          Pavich was not an employee of the Government, but only of                   
          Raytheon; and (2) his Raytheon Allowances were not “received as             
          cost-of-living allowances in accordance with regulations approved           
          by the President.”                                                          
               The question of whether Pavich was an “employee of the                 
          Government of the United States” should be answered, according to           

               1 Section references are to the Internal Revenue Code except           
          where we note otherwise; the Rule reference is to the Tax Court             
          Rules of Practice and Procedure.                                            




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