Rev. Rul. 73-46

Advice has been requested whether the Government of the Trust Territory of the Pacific Islands is a foreign government and whether the income from funds invested in securities of domestic corporations by the Trust Territory Social Security Board is exempt from Federal income tax under section 892 of the Internal Revenue Code of 1954.

The Trust Territory of the Pacific Islands is a group of more than 2,000 islands and islets and situated in the western Pacific Ocean containing the Northern Mariana Islands, the Eastern and Western Caroline Islands and the Marshall Islands. The United States accepted administrative responsibility for the people of the Trust Territory through a Trusteeship Agreement between the United States and the United Nations Security Council on July 18, 1947 (61 Stat. 3301). By the terms of this agreement, the United States is responsible for promoting the economic, social, political, and educational development of the people of the Trust Territory. In discharging its obligations under the Trusteeship, the United States, as administering authority, must act in accordance with the objectives of the United Nations.

The responsibility for the civil administration of the Trust Territory is placed in the Secretary of the Interior by Executive Order 11021, 27 F.R. 4409 (1962). Executive and administrative authority for the Government of the Trust Territory is vested in the High Commissioner who is appointed by the Secretary of the Interior. By Secretarial Order 2882 dated July 12, 1965, certain legislative authority was transferred from the High Commissioner to the Congress of Micronesia, the members of which are elected by citizens of the Trust Territory. The judicial authority, which is independent of the other two branches of government, is vested in the High Court of the Territory and such other courts as may be established by law. The Chief Justice and the Associate Justice are appointed by, and are directly responsible to, the Secretary of the Interior.

The Trust Territory Social Security Act which established the Trust Territory Social Security System was enacted by the Congress of Micronesia (Public Law No. 3-40) and became effective on July 1, 1968. It is patterned after and provides benefits similar to those granted by the United States Social Security System. The employer and employee contributions and earnings from investment of the contributions are deposited with the Trust Territory Social Security Fund. The Fund is separate and apart from all public monies or funds of the Trust Territory and is administered by the Trust Territory Social Security Board exclusively for the purposes of the Act. All monies in the Fund are deposited, administered, and disbursed in the same manner and under the same conditions and requirements as provided by law or regulations for other public monies or funds of the Trust Territory Government. The Board is investing a portion of the trust funds in securities of domestic corporations through a United States investment company.

Section 892 of the Code provides, in part, that income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on bank deposits in the United States of moneys belonging to such foreign governments, or from any other source within the United States is excluded from gross income and exempt from Federal income taxation.

The Trust Territory of the Pacific Islands has a unique status vis-a-vis the United States. Although the United States is the administering authority with full powers of administration, legislation, and jurisdiction, it does not have sovereignty over the Territory. Moreover, no other nation has such sovereignty, and it is not clear where sovereignty lies or whether the concept of sovereignty has any significance under the trusteeship system. 1 Whiteman, Digest of International Law, at pages 867-869.

The Trust Territory has an anomalous international status and the Internal Revenue Code contains no provision that specifically taxes or exempts the income of the Government of the Trust Territory. The Trust Territory is not a State. Since the term "Territory" as used in the Internal Revenue Code refers only to the former Territories of Alaska and Hawaii (the "organized" territories) and since under the Trust Agreement the United States was not given sovereignty of the Trust Territory, it is not one of the territories of the United States. Neither is the Trust Territory a possession of the United States since Revenue Ruling 70-193, 1970-1 C.B. 163, holds that the United States does not have such sovereignty over the Marshall Islands (one of the island groups of the Trust Territory) as would justify the position that they constitute a possession of the United States.

Revenue Ruling 68-608, 1968-2 C.B. 2, however, recognizes the Trust Territory to be a foreign country within the meaning of section 911 of the Code. Revenue Ruling 68-608 further states that the executive, legislative and judicial branches of the Trust Territory Government are agencies or instrumentalities of the United States within the meaning of section 911 of the Code. Therefore, Revenue Ruling 68-608 holds that a United States citizen is not entitled to the exclusion provided by section 911 of the Code with respect to compensation received by him from the Government of the Trust Territory for services performed by him in the Trust Territory since the compensation is considered paid by the United States or any agency thereof.

The specific issue is whether a government whose three branches are recognized as agencies of the United States within the meaning of section 911 of the Code may at the same time be considered a foreign government within the meaning of section 892 of the Code.

Neither section 892 of the Code, the regulations thereunder, nor the legislative history of that section supply any definition of "foreign government." Hackworth, 1 Digest of International Law, 127 (1940), defines government as the instrumentality through which a state functions. Black's Law Dictionary gives as its first definition of government, "an agency of the state." Assuming that the word "state" here means "country" and, assuming further that the word "foreign" means the same thing when used with the word "government" as it does when used with the word "country," a foreign government would then be defined to mean "the agency through which a foreign country functions."

The relationship existing between the Trust Territory and the United States is unique because the United States has authority over the Territory but the Territory is not a political subdivision of the United States. The Government of the Trust Territory is the agency through which the United States carries out its responsibilities as administering authority for the United Nations and, thus, in this context, the Government of the Trust Territory is an agency or instrumentality of the United States within the intendment of section 911(a)(1) of the Code. See Revenue Ruling 68-608. On the other hand, the Trust Territory Government is not a mere administrative arm or division of the United States Government as it would be if it were a bureau or a division of the Department of the Interior. Rather, it is a separate legal personality with delegated responsibilities and powers. Since in this capacity the Trust Territory Government is the agency or government through which a foreign country functions, it can be recognized as a "foreign government" within the meaning of section 892 of the Code. See also Commissioner v. Chicago Portrait Co. 285 U.S. 1 (1932), Ct. D. 463, XI-1 C.B. 286.

Similar to a department, commission, or administrative agency of the United States Government, the Trust Territory Social Security Board is an administrative arm or branch of the Trust Territory Government.

Accordingly, the Government of the Trust Territory of the Pacific Islands is a foreign government within the meaning of section 892 of the Code and the income from the Trust Territory Social Security Funds invested in securities of domestic corporations by the Trust Territory Social Security Board is exempt from Federal income tax under section 892 of the Code.

Revenue Ruling 68-608 distinguished.