
    LeROY D. BRUMMITT AND MARY A. BRUMMITT v. THE UNITED STATES
    [No. 406-60.
    Decided March 13, 1964]
    
      
      Scott P. Grampton for plaintiffs. Jules G. Komer III and Komer, Doyle, Worth <& Grampton were on the briefs.
    
      Mitchell Samuels on, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. Philip B. Miller, Lyle M. Turner, and Earl L. Hu/nti/ngton were on the brief.
    Before JONES, Chief Judge, Whitaker, Laramore, Dureee and Davis, Judges.
    
   Dureee, Judge,

delivered the opinion of the court:

This is an action to recover income taxes paid by plaintiffs for the calendar year 1959 in the amount of $544.40.

At issue is whether the salary earned by Mrs. Brummitt as an employee of the United States Officers’ Open Mess, Taipei, hereafter referred to as USOOMT, was exempt from taxation under § 911 of the Internal Revenue Code of 1954, 26 U.S.C. § 911, which provided in pertinent part:

§ 911. Earned income from sources without the United States
(a) General Rule. — The following items shall not be included in gross income and shall be exempt from taxation under this subtitle:
* * * * *
(2) Presence in foreign country for 17 months. — In the case of an individual citizen of the United States, who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States {except amounts paid by the United States or an agency thereof) if such amounts constitute earned income (as defined in subsection (b)) attributable to such period; but such individual shall not be allowed as a deduction from his gross income any deductions (other than those allowed by section 151, relating to personal exemptions) properly allocable to or chargeable against amounts excluded from gross income under this paragraph. * * * [Emphasis added.]

Throughout 1959 plaintiffs, LeRoy D. Brummitt, an Army officer, and his wife, Mary A. Brummitt were present in Taiwan. Their joint return for the year 1959 reported a taxable net income of $4,590.00 and an income tax liability of $929.80. The return further disclosed that $1,437.87 had been withheld from salaries paid to plaintiffs and requested a refund of $508.07. The claim for refund was denied.

No question is here raised whether Mrs. Brummitt was “present in a foreign country or countries during at least 510 full days” during a period of 18 consecutive months The only question to 'be decided is whether Mrs. Brummitt’s wages were paid “by the United States or an agency thereof.”

It is well established that military nonappropriated fund activities, such as post exchanges, officers’ messes, lunchrooms, and even bowling alleys, are instrumentalities of the United States, cf. Standard Oil Co. v. Johnson, 316 U.S. 481 (1942); Rizzuto v. United States, 298 F. 2d 748 (C.A. 10, 1961); Pulaski Cab Co. v. United States, 141 Ct. Cl. 160 (1958); Borden v. United States, 126 Ct. Cl. 902 (1953); Bleuer v. United States, 117 F. Supp. 509 (E.D.S.C. 1950); Nimro v. Davis, 204 F. 2d 734 (C.A.D.C. 1953) cert denied 346 U.S. 901. While these cases establish that nonappropriated fund activities are instrumentalities of the United States for certain purposes, these cases do not construe § 911 of the Internal Revenue Act of 1954, and they do not establish the proposition that wages received from such a nonappropriated fund activity are “amounts paid by the United States or an agency thereof.” On the contrary, it is established that employees of nonappropriated fund activities are not employees of the United States. In Borden, supra, a suit for salary withheld from an employee of the Army Exchange Service, a nonappropriated fund activity, pursuant to a contract of employment, this court held that the United States could not be sued on a contract of employment signed by the Army Exchange Service, cf. Bleuer, supra; Gradall v. United States, 161 Ct. Cl. 714, 329 F. 2d 960 (1963). It is scarcely arguable then that such employees are “paid by the United States.”

But are nonappropriated fund-activity employees paid by “an agency” of the United States ? The question whether a nonappropriated fund activity is an agency of the United States as contemplated by § 911 of the Internal Revenue Code is interesting, but may not need definitive resolution here. The question presented to us by the parties is whether this officers’ mess, USOOMT, was in fact a nonappropriated fund activity in 1959. If it was not, the status of nonappropriated fund activities vis-a-vis § 911 becomes a moot question, at least in this case. Accordingly, we will examine the nature of USOOMT.

USOOMT was formed as a club on January 27,1953, by 93 individuals. Though a stock issue was planned, and indeed subscribed to, no stock was ever issued. Rather, the necessary funds were obtained through issuance of $50.00 six percent bonds to the members. The club was constructed on land owned by the Bank of Taiwan with funds borrowed from that bank. From 1953 through 1959, the membership reserved to itself full authority over the club’s constitution and by-laws. The membership was in no way limited to service personnel. The club consistently operated at a profit. Its funds were deposited in a Texas 'bank and its books were audited by an independent civilian Chinese certified public accountant.

On May 24,1960, the Staff Judge Advocate of the Military Assistance Advisory Group issued a report entitled “Status of USOOMT” which stated in part:

* * * The USOOMT is not a nonappropriated fund club, its employees are not paid with money belonging to the United States, its agencies or instrumentalities. As a private club the U.S.O.O.M.T. does not receive financial support from nonappropriated funds and neither the United States nor its Armed Forces have any right to supervise or audit the U.S.O.O.M.T. No right exists for the United States Armed Forces to force compliance with any regulations in that, in addition to being a private club, it is not located on a United States installation.

Subsequent to this report, on January 9,1961, the Deputy Chief of Staff, Headquarters, MAAG requested “that the USOOMT be operated henceforth, generally in accordance with AR-230-60 as a nonappropriated fund open mess.”

Accordingly, the constitution was re-written to expressly make USOOMT a nonappropriated fwnd activity. The new constitution was adopted in 1961 by the club membership.

In determining whether the USOOMT was a nonappro-priated fund activity prior to the new constitution which expressly made it so, we might first discuss the concept of control as exercised over the club by the military commandant of the area. Concededly, considerable control was exercised over USOOMT. But command of a military area requires that a certain degree of control be exercised over the personnel and activities within and related to the command. Compounding the problem of analyzing Governmental control exercised in regard to this club is the fact that the initial constitution of the club specified that operation and administration of the club would generally follow the principles set forth in Army Regulations which controlled nonappro-priated fwnd activities:

ARTICLE HI-OPERATING REGULATIONS
Although this organization is not a nonappropriated fwnd it will follow generally the basic principles for administration and operation established by Army Regulations 230-60, dated 26 July 1956 and Air Force Regulations 176-11 dated 22 June 1956 as changed. [Italics supplied.]

Thus, by agreement among the members, the club took on some of the indicia or characteristics of a nonappropriated fund activity.

But while USOOMT did possess some of the characteristics of a nonappropriated fund activity by reason of both the command control it was subject to, and the regulations it was guided by; and while USOOMT did receive benefits from the military such as the loan of equipment and the assignment of personnel, other more convincing factors militate against a determination that the club was in fact, at that time, a nonappropriated fund activity. No nonappropri-ated funds were ever made available to the club. Though the club operated at a considerable profit, it was allowed to retain and accumulate its profits. Such retention and accumulation of profits by nonappropriated fund activities was proscribed by Army Regulations AR-230-60, §1, 4, d, (3).

Though the club did employ a private civilian Chinese certified public accountant to audit its books, no official Governmental audit, as required by regulation, was ever performed (AR 230-60 § I, 9, b). In short, no fiscal control over the club was ever exercised by the military command. Lending further weight to our conclusion that USOOMT was not a nonappropriated fund activity are the following factors — the club was not located on or in a military installation, but was constructed on land independently owned; the club negotiated its own construction loan, and its lease for which it alone was responsible. The club membership was not restricted in any way — officers, civilians, Government employees, foreign nationals — all were entitled to membership.

The totality of all these factors leads us to the conclusion that the club was not established as a nonappropriated fund activity; was not treated as a nonappropriated fund activity and was not deemed to be a nonappropriated fund activity by either the membership or the military command. We are not prepared to say that despite all this, the club was a non-appropriated fund activity.

Defendant urges, however, that the benefits received by the club from the Government — the use of Government equipment; the privilege of duty-free import of foods; use of Post Office and Post Exchange facilities; the assignment of personnel to the club — are sufficient to overcome the factors we discussed above. But we do not believe that these benefits received by the club should be given conclusive weight on whether the club was, or was not, a nonappropri-ated fund activity. Other organizations which are clearly not nonappropriated fund activities receive similar benefits. Quite recently, the Commissioner of Internal Revenue ruled that an overseas employee of the American Red Cross was entitled to the § 911 exclusion at issue here. In the course of that opinion, Revenue Ruling 60-36, 1960-1 Cum. Bull. 279, the Commissioner pointed out that Red Cross employees can be furnished transportation, meals and quarters, office space, warehousing, wharfage and communications by the Government. Yet, the Government-conferred benefits do not make the Red Cross an agency of the United States. We do not believe that similar benefits conferred on this club make it a nonappropriated fund activity.

As we pointed out above, our determination that this club was not a nonappropriated fund activity makes it unnecessary to consider whether a nonappropriated fund activity is an agency of the United States within the meaning of § 911 of the Internal Revenue Code of 1954.

From the foregoing, and upon the Commissioner’s findings of fact which are adopted as the findings of the court, we conclude that plaintiffs are entitled to recover, and judgment is accordingly entered for plaintiffs in the amount of $544.40.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Donald E. Lane, and the briefs and argument of counsel, makes findings of fact as follows:

1. This is an action to recover income taxes paid by plaintiffs for the calendar year 1959.

2. Throughout 1959 plaintiff LeRoy D. Brummitt was an Army officer stationed in Taiwan [Formosa] where he lived with his wife, plaintiff Mary A. Brummitt. Their joint 1959 income tax return was filed with the Director of International Operations, Internal Revenue Service, Washington, D.C., on or before April 15, 1960. In said return plaintiffs reported a taxable net income of $4,590 and an income tax liability of $929.80. This tax return disclosed that $1,437.87 had been withheld from salaries paid to the plaintiffs, and requested a refund of $508.07.

3. During 1959, Mary A. Brummitt was employed as Administrative Cashier by the “United States Officers’ Open Mess, Taipei” located at Taipei, Taiwan. In that capacity Mrs. Brummitt supervised the work of from 13 to 15 cashiers at the club and arranged for the deposit in private banks of the receipts of the club. The calendar year 1959 was a part of a period of 18 consecutive months in which Mrs. Brummitt was present in a foreign country during at least 510 full days of such 18-month period.

4. The United States Officers’ Open Mess, Taipei, hereinafter referred to as USOOMT, was formed as a club on January 27, 1953, by 93 individuals. The original name of the club was “Military Assistance Advisory Group Officers’ Open Mess, Taipei,” hereinafter referred to as MAAGOOM.

5. As originally set up, the MAAGOOM proposed to issue stock at $20 a share. A number of subscriptions were received but no stock was ever issued. Shortly after January 27, 1953, the United States Staff Judge Advocate prepared an opinion to the effect that a club having a nonappropriated fund activity status could not issue stock under Army Regulations. The Staff Judge Advocate wrote the Department of the Army during the summer of 1953 to request for MAAGOOM the use of nonappropriated funds and was advised that no such funds were available.

6. The necessary funds for the organization of the MAAGOOM were actually obtained during September and October, 1953, by the issuance of $50 bonds (6%) to the members. No appropriated funds or nonappropriated funds were ever received from the United States by MAAGOOM or USOOMT during times relevant to this suit. The United States did not in any way guarantee the payment of the debts of the club.

7. The club was not located on or in a military installation or military compound. The building was constructed by the club on land owned by the Bank of Taiwan. The club borrowed money for its building from the Bank of Taiwan under an arrangement whereby the loan would be repaid over a period of 10 years. The leases with the Bank of Taiwan in effect during 1959 were signed on behalf of the USOOMT by an officer of the club and do not bear any indication of official approval by the United States Military Assistance Advisory Group or by the Department of the Army.

8. From the organization of the club in 1953 and throughout 1959, the members of the club reserved to themselves the full authority to amend the club’s constitution. While various types of membership were provided for in the club, all members were entitled to equal use of the club facilities. During 1959, tbe club membership included members of the armed forces and also employees of government agencies, representatives of foreign governments, and employees of industrial organizations, airlines, etc. During 1959, the club had over 1,100 members and employed about 150 persons. The monthly gross receipts and exchange transactions are estimated to average about $200,000. During the period here involved the club operated at a profit and realized a monthly profit estimated to be about $10,000 from its slot machines. The club retained its profits and had a total net worth of about $350,000. The club funds were deposited in a private bank account in the National Bank of Fort Sam Houston, Texas. From the organization of the club in 1953 through 1959, the United States made no attempt to claim any interest in the club profits.

9. The funds of the club were audited by Mr. P. K. Cheng, an independent civilian Chinese certified public accountant. Mr. Cheng was employed by the club for this purpose and was paid by the club. Prior to 1960, the funds of the club were not formally audited by any auditors from any of the military services or by the General Accounting Office.

10. The salary paid to plaintiff Mary A. Brummitt in 1959 by USOOMT amounted to $2,354.50 and was paid by a check drawn on the club’s private bank account in Fort Sam Houston, Texas.

11. On May 24, 1960, the Staff Judge Advocate of the Military Assistance Advisory Group issued a report entitled “Status of USOOMT” which stated in part :

* * * The USOOMT is not a nonappropriated fund club, its employees are not paid with money belonging to the United States, its agencies or instrumentalities. As a private club the U.S.O.O.M.T. does not receive financial support from nonappropriated funds and neither the United States nor its Armed Forces have any right to supervise or audit the U.S.O.O.M.T. No right exists for the United States Armed Forces to force compliance with any regulations in that, in addition to being a private club, it is not located on a United States installation.

12. On January 9,1961, the USOOMT was advised by the Deputy Chief of Staff, Headquarters, MAAG, that it was desired “that the USOOMT be operated henceforth, generally in accordance with AR 280-60 as a nonappropriated fund open mess,” and that the constitution be revised or rewritten to indicate establishment under AR 230-60. In 1961, the members of the USOOMT adopted a new constitution under which the club expressly became a nonappropriated fund activity.

13. Army Regulations AR 230-60, dated July 26, 1956, relate to “NONAPPROPRIATED FUNDS AND RELATED ACTIVITIES,” and prescribe procedures for establishment, administration, operation, and dissolution of military sundry funds of the Army within the continental limits of the United States. Army Regulations AR 230-5, dated July 18,1956, also relate to “NONAPPROPRIATED FUNDS AND RELATED ACTIVITIES,” and provide in part as follows:

SECTION I
GENERAL
1. Purpose. These regulations set forth basic policies and principles governing the nonappropriated fund system in the Army establishment.
2. Scope.
* $ $ $ *
b. Private associations and funds thereof, organized, established, and operated by individuals acting not within the scope of their official capacity as officers, employees, or agents of the Government, and which are not established to provide essential morale and recreational facilities and services, are not subject to these and other departmental regulations governing nonappropriated funds as defined herein as instrumentalities of the Government. _ Such associations and funds thereof, except as otherwise provided by law or regulations, shall exist on a military installation only with the written consent of the installation commander. * * *
3. Definitions. For the purpose of these and implementing regulations, the following definitions apply:
a. Nonappropriated fimd. A nonappropriated fund prescribed by these regulations is an entity established by authority of the Secretary of the Army for the purpose of administering moneys not appropriated by the Congress for the benefit of military personnel or civilian employees of the Army and not incorporated under the laws of any State or tlie District of Columbia. Nonappropriated funds authorized by these regulations are instrumentalities of the United States.
*****
4. Basic concept of nonappropriated fund system.
*****
d. Nonappropriated funds authorized by these regulations are instrumentalities of the Federal Government and as such are entitled to all the immunities and privileges which are available under the Federal Constitution and statutes to the departments and agencies of the Federal Government. Among the additional characteristics peculiar to nonappropriated funds established by these regulations are the following:
(1) Such funds are established and supervised as a command function by officers or employees of the Government acting within the scope of their official capacity.
(2) Individuals, installations, organizations, and units have no proprietary interest in these non-appropriated funds, and profits, if any, generated by such funds do not accrue to any individual.
(3) Accumulations of nonappropriated funds which are in excess of the requirements of an installation, organization, or unit may be redistributed to other activities, installations, organizations, or units in accordance with procedures established by the Department of the Army.
Íí $ ‡ ‡
9. Administration, audits, and inspections.
a. Administration. Nonappropriated funds and property therof will be administered, safeguarded, transferred, and liquidated in accordance with these and other applicable departmental regulations.
b. Audits.
(1) Nonappropriated funds at departmental level will be audited not less frequently than annually.
(2) Nonappropriated funds other than those indicated in (1) above will be audited in accordance with AR 36-5 and AR 36-75.

14. The constitution and by-laws of the USOOMT in effect during 1959 provided in part as follows:

ARTICLE II — PURPOSE
The purpose of this mess is to provide social diversion, recreational, and messing facilities for the members and their families within the meaning of paragraph 26, AR 230-5 and for such other purpose as may be approved by Chief, MAAG.
ARTICLE HI — OPERATING REGULATIONS
Although this organization is not a nonappropriated fvmd it will follow generally the basic principles for administration and operation established by Army Regulations 230-60, dated 26 July 1956 and Air Force Regulations 176-11 dated 22 June 1956 as changed. [Italics supplied.]
ARTICLE XII
Section 1. This constitution shall come into force and effect upon approval by a majority of the officers attending the meeting at the United States Officers’ Open Mess, Taipei, Taiwan on 23 June 1958.
Section 2. This constitution may be changed by a majority vote of the active members present at the annual meeting or at a special meeting called for that purpose.

The above excerpts are taken from plaintiffs’ exhibit B which is incorporated herein by reference.

15. At the organizational meeting January 27, 1953, the MAAG commanding general indicated that he did not want anyone to think that he was forcing a club down anybody’s throat. An official MAAG bulletin dated September 25, 1953, stated than an officers’ open mess was being formed and that it was expected that all commissioned personnel in the Taipei area would be members.

16. During 1953, the Chief of Staff for MAAG appointed various commissioned officers as Secretary-Treasurer of MAAGOOM in addition to their other duties. Other officers and enlisted men were assigned to MAAGOOM from time to time. The Secretary-Treasurer of MAA-GOOM signed all correspondence and contracts pertaining to the erection of the club, and arranged for the loan of money for buildings and for the lease of land. These contracts were not underwritten or guaranteed by the United States.

17. After formation of the MAAGOOM club, it was issued various equipment from the MAAG property office including refrigerators, furniture, piano, office machines, kitchen utensils, and the like. MAAGOOM obtained food and equipment under diplomatic immunity via Army aircraft and paid no import duty. MAAGOOM used the facilities of the Army Post Office and Post Exchange. In 1959, the club Board of Governors authorized the Secretary-Treasurer to allow members of USOOMT to exchange Taiwan currency for dollars upon a permanent change of duty status from Taiwan. MAAG authorized military personnel, dependents, and employed United States citizens to exchange Taiwan currency at the exchange facility operated by the MAAG Disbursing Officer. Certain sanitary and financial inspections were made of the club facilities by representatives of the Army Medical Department and Army Inspector General. All profits were retained by the club and no dividends were paid to any member.

18. Under the applicable Treasury Eegulations, the 1959 Federal income tax return filed by plaintiffs constituted a claim for refund for the recovery of $508.07. More than 6 months elapsed from the filing of said return and prior to the filing of the present suit without any action having been taken by the Commissioner of Internal Eevenue with regard to the claim. A copy of said 1959 tax return is plaintiffs’ exhibit A herein. Plaintiffs are the sole owners of the claim here sued upon. No transfer or assignment has been made of said claim and no action other than as aforesaid has been had thereon. Plaintiffs have exhausted their administrative remedies.

19. It is concluded that the evidence herein warrants a finding that during 1959 the United States Officers’ Open Mess, Taipei, was not a nonappropriated fund activity, and that plaintiffs are entitled to a refund of $508.07.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover, and it is therefore adjudged and ordered that they recover of and from the United States the sum of five hundred forty four dollars and forty cents ($544.40). 
      
       This section was amended by the Revenue Act of 1962 Pub. L. 87-834; 26 U.S.C. § 911.
     
      
       In fact, an additional assessment of $34.31 plus $2.02 in interest was made on April 4, 1961. The assessment was paid. The parties have agreed that this additional sum should be treated as part of this claim. (¶10 of Ans.; Tr. 6-7). The sum therefore claimed by plaintiffs is $644.40.
     
      
       For certain limited purposes under certain statutes such employees may be considered employees of the united States. For example, they are considered employees for Federal unemployment compensation, 42 U.S.C. § 1361. For discussion and analysis, see Gradall v. United States, supra.
      
     
      
      
         In 1953, the TJ.S. Staff Advocate General opined that a club having a nonappropriated fund activity status could not issue stock under Army regulations. But the club never received nonappropriated funds, as none were available.
     