IRS News Release  
March 21, 1989

IRS Will Continue to Examine
the Returns of Government Employees
Living Overseas

In light of a recent Tax Court decision, the Internal Revenue Service today said that it will continue to examine the returns of government employees who are paid out of non-appropriated funds and claim the $70,000 exclusion for income earned abroad.

On February 16, the United States Tax Court, in David W. Matthews, et ux. v. Commissioner, ruled that personnel of non- appropriated fund instrumentalities are generally employees of an agency of the United States and not entitled to the foreign earned income exclusion. Non-appropriated fund employees are civilians who typically work in overseas military commissaries and recreational facilities.

Under section 911 of the Internal Revenue Code, many Americans living and working overseas are allowed to exclude up to $70,000 of their earned income from taxation. The law does not permit U. S. government employees to claim this exclusion, however. Some non-appropriated fund employees had contended that they are not government employees for tax purposes because they are paid from funds not appropriated by Congress.

The IRS has consistently taken the position that these individuals are government employees and not entitled to the exclusion. The Court, in Matthews v. Commissioner, upheld the IRS position.

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