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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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Last modified: May 25, 2011