Boleslaw D. Kalinski and Dorothy M. Kalinski, Petitioners-appellants, v. Commissioner of Internal Revenue, Respondent-appellee.carol Marie Schmidt, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 528 F.2d 969 (1st Cir. 1976)

In their federal income tax returns for the year 1969 appellants excluded from gross income amounts earned as employees of the United States Air Force Europe (USAFE) Child Guidance Center in Wiesbaden, Germany.¹  The Commissioner determined that these amounts were not excludable under Int.Rev.Code § 911(a) (2)²  and asserted deficiencies for each of the appellants.³  The Tax Court found for the Commissioner and the taxpayers appeal. The resolution of this case depends on whether the center at which taxpayers worked is covered by the language of § 911(a) (2) which excepts from the income exclusion 'amounts paid by the United States or any agency thereof.'

In 1969 Dorothy M. Kalinski earned $5,890.59 as a secretary-stenographer, and Carol Marie Schmidt earned $8,892.98 as a speech pathologist at the USAFE Child Guidance Center (Center).⁴  The Center was set up in 1964 on the recommendation of the chief surgeon to General G. P. Disosway, USAF commander-in-chief who authorized the Center's establishment.⁵  It was located in the hospital of the USAF base at Wiesbaden. However, it was not a service for the Wiesbaden base alone, and by 1969 it served the entire USAFE command. The director was an Air Force child psychiatrist although the work of the Center was performed by nonmilitary, civilian personnel.⁶  These personnel were attached to the Wiesbaden base hospital for all administrative purposes. The Directorate of Personal Services, Personnel Affairs Division, USAF, designed the salaries and benefits of the Center's civilian employees to correspond with those provided for nonappropriatedfund employees.⁷  Appellants' contracts for employment at the Center were executed with 'The USAFE Child Guidance Clinic, represented by the Custodian, Central Base Fund' as the employer, and were signed by an Air Force sergeant who had custody of the Central Base Fund.⁸ 

The Center was operated under an official Air Force program called 'Children Have A. Potential' (CHAP).⁹  CHAP sponsorship and monitoring of the Center included review of the Center's budget, documentation, and professional ethics. CHAP had power to disapprove Center budget requests, and the decision to begin charging fees from users of the Center was approved by CHAP in consultation with the Air Force Aid Society (AFAS).¹⁰ 

The Center's operating funds came from several sources. Appropriated funds paid for the salary of the Air Force child psychiatrist who directed the Center, and for office space, supplies, utilities, and equipment. Grants from the AFAS¹¹  initially paid for the salaries and other benefits of the civilian employees.¹²  However, after March 1968, when the Center began charging fees for its services most of the funds to pay the Center's civilian employees' salaries and benefits came from parents of children served by the Center and the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). See 10 U.S.C. § 1071 et seq. (1970).

The Custodian of the Central Base Fund administered the funds of the Center and served as its contracting and disbursing officer. Funds from AFAS and from parental fees were received by the custodian and placed in a designated fund for the benefit of the Center. The Center's expenses were paid by checks drawn on this fund, including salaries of the Center's employees.

Center requests for AFAS funds were forwarded and approved through military channels. The hospital commander in Wiesbaden would approve a request and send it on to the surgeon at Air Force headquarters; it would then go to CHAP for approval, then to the AFAS section at the Military Personnel Center at Randolph Air Force Base, Texas, and thereafter to AFAS national headquarters. AFAS disbursements to the Center travelled the same path in reverse. The Center's operations were subject to audit by the Air Force Comptroller General; they were not audited by AFAS. In 1969 the Center's operating expenses were approximately $100,000. AFAS paid $16,414.54 of that amount. The difference came from fees the Center charged parents. Parents paid the first $50 and 20 percent of all additional charges. CHAMPUS paid the remaining 80 percent of the additional charges.

Appellants claim they are entitled to the § 911(a) (2) income exclusion because the salaries they earned from employment at the Center were not paid directly by the United States or any agency thereof. However, this claim cannot avail. It restricts too narrowly the definition of 'agency' by making it depend on who fills the role of payor. A United States 'agency' for purposes of § 911(a) (2) is more appropriately identified by essential characteristics of its structure. As the Court of Claims has stated: 'The elements of control, with power to initiate and terminate, with effectuation of Government purposes paramount over those of organizers and members, the exclusion of private profit, and the limitation of membership to Government-connected persons, serve to identify an 'agency'.' Morse v. United States, 443 F.2d 1185, 1188, 195 Ct. Cl. 1 (1971), cert. denied, 405 U.S. 989, 92 S. Ct. 1251, 31 L. Ed. 2d 455 (1972). See Bell v. C.I.R., 278 F.2d 100, 103 (4th Cir. 1960).

As the Tax Court correctly held, these elements of agency status are present in this case. The United States Air Force had pervasive control over the Center and its personnel. The Center was initiated by the USAF commander-in-chief to satisfy command needs for a facility to provide care to dependent handicapped children of Air Force personnel in Europe. The Center was operated under the official Air Force CHAP program which monitored important elements of the Center's functioning. CHAP had the power to disapprove Center budget requests for other than financial reasons; and CHAP in consultation with the AFAS determined (over the opposition of certain Center personnel) that the Center would begin charging fees. It was under the immediate direction of an Air Force psychiatrist, and under the overall supervision of the commander of the Air Force hospital at the Wiesbaden base.

The Center was not operated for profit¹³  and its major funding sources were subject to military control or influence. Although the AFAS in 1969 contributed a portion of the Center's funds, request for AFAS grants required clearance through military channels, including approval by CHAP and the surgeon at the United States headquarters of the Air Force. The Air Force paid the salary of the military psychiatrist in charge of the Center and for its office space, supplies, utilities, and equipment. After March 1968 most of the Center's funds derived from fees charged parents of children treated there. The Center's services were available only to Air Force personnel.

The Center's employment contracts made appellants and other civilian employees 'subject to military law, including but not limited to applicable rules, regulations, and directives issued by competent US military authorities, to the same extent . . . as . . . any US citizen employees paid from appropriated funds by the Air Force.' Center employees also contracted to conform to 'the same standards of conduct and rules of discipline as are applicable to US citizen employees paid from appropriated funds.' Center holidays were those 'observed by the USAF and its US citizen (appropriated fund) employees.' Further, the contracts specified that employee grievances not satisfactorily settled by the Center director who himself was an Air Force officer, could be appealed for a final decision to the Wiesbaden base commander. Boleslaw D. Kalinski, supra, P64.10 P--H TC at 71.

In summary, the Center was established and operated under pervasive Air Force financial and supervisory control, solely to accomplish Air Force purposes, on a nonprofit basis, limited to persons directly or indirectly affiliated with the Air Force. Accordingly, as the Tax Court correctly concluded, the Center was an 'agency of the United States' for purposes of § 911(a) (2). See Morse v. United States, supra; see also cecil A. Donaldson,51 T.C. 830, 836 (1969); cf. Frank E. Raffensperger, 33 T.C. 1097 (1960).

Appellants contend that even if the Center was an agency their earnings are still excludable under § 911(a) (2) because the Center was merely a conduit for money actually paid to them by private sources. Appellants emphasize that although the Air Force Central Base Fund handled their salaries, these funds were not commingled with other monies but were treated as separate trust funds and came entirely from nongovernmental sources, in particular the AFAS. In pressing these claims appellants rely principally on Krichbaum v. United States, supra. In that case (involving a provision of the 1939 Code, as amended, essentially similar to § 911(a) (2)) the taxpayer worked as an administrative assistant to a road-builder engaged by the Bureau of Public Roads of the United States Department of Commerce to work in Ethiopia. The district court found that the Ethiopian government paid the taxpayer's salary and thereafter received reimbursement for this outlay from the Bureau of Public Roads. The court held that although an agency of the United States was the ultimate source of funds, nevertheless a payment made 'by another, but with the debtor's money, . . . is payment by the debtor,' 138 F. Supp. at 518, and that consequently the taxpayer's income from Ethiopia was not subject to United States taxation. However, Krichbaum, apart from its questionable status as precedent, see C.I.R. v. Wolfe, supra at 64, does not aid appellants since the Center, not the AFAS, was in fact both obligor and payor of their salaries. The employment contracts ran directly from the Center, 'represented by the Custodian of the (Wiesbaden) Central Base Fund' to appellants Kalinski and Schmidt. And the Tax Court properly found that 'the AFAS did not contract individually with, or have any obligation to, Center employees . . .,' and that no 'other source of the Center's funds had financial obligations directly to the Center's civilian employees.' Boleslaw D. Kalinski, supra, P64.10 P--H TC at 71--72.

Appellants also contend that because the Center was neither an 'appropriated fund activity' nor a 'nonappropriated fund activity' it was not an agency of the United States. They claim support for this proposition in Brummitt v. United States, 329 F.2d 966, 165 Ct. Cl. 78 (1964), which held that income earned from a United States army officers' club on Taiwan was exempt from taxation because the club was not a 'nonappropriated fund activity.' However, we need not decide whether the Center was a nonappropriated fund activity¹⁴  since even if it were not, the Center could be, as the Tax Court properly found it was, an agency of the United States for purposes of § 911(a) (2). See Morse v. United States, supra at 1188.

Affirmed.