Rev. Rul. 69-353

Advice is requested whether, under the circumstances described below, a taxpayer is entitled to the combat pay exclusion provided by section 112 of the Internal Revenue Code of 1954.

The taxpayer, a member of the Armed Forces of the United States, served in a combat zone while on detail for 12 months to the Agency for International Development (AID) pursuant to an agreement between the Department of Defense (DOD) and AID. The authority for the agreement is derived from the Foreign Assistance Act of 1961. Pursuant to that Act, an agency "may utilize the services (including defense services) and facilities of * * * any agency of the United States as the President shall direct, or with consent of the head of such agency * * *."

Under the agreement, the taxpayer is to be compensated by AID on the Foreign Service Pay Scale at rates not less than his military pay and allowances at the time of his detail to AID. The agreement further provides that AID must make any adjustments in the taxpayer's pay due to military promotion while detailed, provide the appropriate branch of the Armed Forces with efficiency reports, and grant the taxpayer the leave allowable under military regulations.

Section 112 of the Code provides, in part, that gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed Forces of the United States for any month during any part of which such member served in a combat zone during an induction period. Commissioned officers may exclude up to $500 per month of their pay under similar circumstances.

Section 7701(a)(15) of the Code defines the term "Armed Forces of the United States" as including all regular and reserve components of the uniformed services that are subject to the jurisdiction of the Secretaries of Defense, the Army, the Navy, and the Air Force. The term also includes the Coast Guard.

The Comptroller General of the United States held, in decision B-150096, 42 Comp. Gen. 296 (1962), as follows:

"* * * [T]he suspension of the individual's active duty pay and allowance status in the Armed Forces during the actual period of assignment to duty outside the United States under authority of section 625(d)(1) of the Foreign Assistance Act of 1961 does not terminate the individual's membership in the Armed Forces of the United States.

"* * * There is not evident any legislative intent to suspend the active duty status of a member of the Armed Forces while so assigned and it is our view therefore that the member remains in the "active service" of the Armed Forces. * * *."

The subject agreement arose under the same section of the Foreign Assistance Act of 1961 as that cited above in decision B-150096.

It is held that for purposes of section 112 of the Code, the taxpayer continues in an active service status as a member of the Armed Forces of the United States during the period of his detail.

Accordingly, he may exclude from his gross income under section 112 of the Code, subject to the limitation therein provided, the compensation paid to him by AID, under the agreement, for any month during any part of which he served in a combat zone. Furthermore, the remuneration of the taxpayer that is excludable from his gross income under section 112 of the Code is excepted from the withholding of income tax under section 3401(a)(1) of the Code.