Rev. Rul. 68-608

Advice has been requested whether compensation paid to a United States citizen employed by a Government of the Trust Territory of the Pacific Islands, for services performed by him in the Trust Territory is excluded from gross income for Federal income Tax purposes by the provisions of section 911(a) of the Internal Revenue Code of 1954.

The Trust Territory of the Pacific Islands is composed of the Northern Mariana Islands, the Eastern and Western Caroline Islands, and the Marshall Islands. These islands were formerly held by Japan under mandate in accordance with Article 22 of the Covenant of the League of Nations. Their status was that of foreign countries when they were mandated to Japan, and they are considered to be foreign countries for purposes of section 911 of the Code notwithstanding their being made a part of the Trust Territory.

Since July 18, 1947, the United States has administered the Trust Territory of the Pacific Islands pursuant to a Trusteeship Agreement between the United States and the United Nations Security Council. The responsibility for the civil administration of the Trust Territory was placed in the Secretary of the Interior by Executive Order No. 10265 in 1951. Although later Executive Orders transferred the responsibility for part of this territory to the Secretary of the Navy, all of the Trust Territory was once again consolidated under the civilian administration of the Secretary of the Interior on July 1, 1962.

All governmental and administrative acts of the United States in discharging its obligations under the Trusteeship Agreement are fiduciary in character and performed as representatives of all member nations. The executive and administrative authority, legislative veto and other powers, and judicial authority of the Government of the Trust Territory are vested in a High Commissioner, a Chief Justice, and an Associate Justice, who are appointed by the Secretary of the Interior and subject to his general supervision and direction. Certain legislative authority was transferred from the High Commissioner to the Congress of Micronesia on July 12, 1965, by Secretarial Order 2882.

Section 911 of the Code provides, in part, for the exclusion from gross income of earned income from sources without the United States (except amounts paid by the United States or any agency thereof) in the case of a United States citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year, or is physically present in a foreign country or countries during at least 510 full days of a period of 18 consecutive months.

In view of the control exercised by the Secretary of the Interior or his representatives over the Government of the Trust Territory of the Pacific Islands, United States citizens employed by the government are paid by `the United States or any agency thereof' for the purpose of section 911 of the Code, whether they are Civil Service employees or contract employees who are outside the Civil Service system.

Accordingly, the United States citizen in the instant case 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 of the Pacific Islands for services performed by him in the Trust Territory for purposes of the Federal income tax and for purpose of income tax withholding under section 3402(a) of the Code.