Does the fact that the IRS dropped an issue for an earlier year preclude them from raising the same issue in a later year? And does it make a difference if the Tax Court entered a decision after the parties had come to an agreement that no tax was due outside the Tax Court?
These issues were important in the case of Dinger v. Commissioner, TC Memo 2015‑145. Ms. Dinger was a German citizen who was married to a United States citizen for 50 years. She and her husband had made a §6013(g)(1) election to treat Ms. Dinger as a United States resident.
Ms. Dinger worked at the U.S. Army Dental Clinic in Friedberg, Germany. She had an employment agreement with the United States Army, but was actually paid by the “Aufsichts und Dienstleistungsdirektion (ADD)” that administered the payroll relating to civilian employees of the U.S. Army under The Agreement Between the Parties to the North Atlantic Treaty Organization Regarding the Status of Their Forces (NATO SOFA), June 19, 1951, 4 U.S.T. 1792.
The Court noted that:
The ADD disbursed wages to petitioner. The U.S. Army provided the funds ADD disbursed to petitioner in a salary statement that stated: “This is not an activity of the German civil service. Payment will be made by the home country and subject to recovery”.
Ms. Dinger claimed a Foreign Earned Income exclusion under IRC §911 for the wages she received from her work at the clinic. IRC §911 generally provides that:
(a) Exclusion from gross income
At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year -
(1) the foreign earned income of such individual…
“Foreign earned income” is generally defined as “the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period…” [IRC §911(b)(1)(A)]
However, IRC §911(b)(1)(B)(ii) excludes from this definition “paid by the United States or an agency thereof to an employee of the United States or an agency thereof…” Ms. Dinger claimed that she was actually paid by the German agency, thus this limitation did not apply to her. And, when the IRS had raised this issue for return that were for 2003 and 2004, the agency eventually settled with her that no tax was due prior to going to trial.
Ms. Dinger notes this and argues that the IRS cannot now seek to maintain a different position from the one they accepted for the earlier years. So, clearly, the first question is whether she is right, since if IRS is precluded from arguing the amounts are taxable then it doesn’t matter if she was or was not employee of the United States.
The Tax Court notes, citing its decision in the case of Bussell v. Commissioner, that for the IRS to be bound by the prior proceeding the following would all need to be true:
- The issue in the second suit must be identical in all respects with the issue decided in the first suit,
- The issue in the first suit must have been the subject of a final judgment entered by a court of competent jurisdiction,
- The person against whom collateral estoppel is asserted must have been a party or in privity with a party in the first suit,
- The parties must actually have litigated the issue in the first suit and resolution of the issue must have been essential to the prior decision, and
- The controlling facts and applicable legal principles must remain unchanged from those in the first suit.
The Court found that, because the matter was settled before trial, the issue had truly never been litigated before the Court. Thus, the IRS was not bound to accept the result it had accepted for the earlier years.
Given that, the Court then turned to look at whether, in fact, Ms. Dinger was an employee of the United States. The Court did not agree that merely because she was paid by a German agency she was not an employee of the United States Army.
The Court held:
In sum, petitioner was a U.S. Army employee, subject to hiring, firing, and supervision by that Government agency. Although ADD was the immediate source of the funds paid to petitioner, as an employee of the United States she was paid by “an agency” of the United States and therefore cannot avail herself of the foreign earned income exclusion. Accordingly, we hold that petitioner is not entitled to exclude from her 2007 income the wages she received as an employee of the U.S. Army in Germany.