GENERAL COUNSEL'S OPINION NUMBER 55-29, DATED 3 NOVEMBER 1955

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-05844A000100070059-0
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 12, 2016
• Document Release Date: April 12, 2001
• Sequence Number: 59
• Publication Date: November 3, 1955
• Content Type: REGULATION

OGC Has Reviewed
Approved For Release 2002/05/06 : CIA-RDP78-05844A000100070059-0
GENERAL COUNSEL'S OPINION NUMBER 55-29, DATED 3 NOVEMBER 1955
Cost-of-living allowances aid to employees are not subject to
U. S. income taxation.
Post differentials are subject to taxation.
1. This Office has sought to clarify the liability of 'employees.
for U. S. income tax on living-quarters allowances. The Internal
Revenue Code (IRC), Sec. 912, provides that the following items shall
not be included in gross income and shall be exempt from taxation:
"(1) COST-OF-LIVING ALLOWANCES - In the case of civilian
officers or employees of the Government of the United States
stationed outside continental United States, amounts received
as cost-of-living allowances in accordance with regulations
approved by the President.
"(2) i'OREIGN SERVICE ALLOWANCES - In the case of an officer
or employee of the Foreign Service of the United States, amounts
received by such officer or employee as allowances or otherwise
under the terms of title IX of the Foreign Service Act of 19+6
(22 U.S.C. 1131-1158)."
2. Generally, there are two groups of allowances, defined as
"living-quarters" and "cost-of -living." "Living- quarters" allowances
are temporary lodging allowances and quarters allowances. "Cost-of-
living" allowances comprise post, transfer and separation allowances.
(A tentative approach by the State Department also includes the
education allowance, but this is not yet established.) It should be
understood that allowances are separate and distinct from post
differential. Allowances are designed to relieve certain economic
hardships of living overseas. Post - or more properly salary -
differential is a recruitment incentive where the environment differs
substantially from that of the U. S. and is granted only where one of
the following exists: "(a) extraordinarily difficult living conditions,
(b) excessive physical hardship, or (c) notably unhealthful conditions."
There is no question of the tax liability for post differential since,
in the absence of a congressional mandate, it is an increment of
salary and therefore taxable income. The allowances are another
matter. For foreign areas outside the territories and possessions
of the U. S., they are clearly distinguished from the salary differential
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Page 2 - GC Opinion No. 55-29
in regulations (Standardized Regulations, Government Civilians, Foreign
Areas) issued by the Secretary of State. For territories, i.c., Alaska
and any other area outside the continental U. S., the Civil Service:
Commission pays an amount not in excess of 25 per cent of the basic
salary. The nature of the payment is identified as either post differen-
tial or cost-of-living allowances. However, there are no territorial
living-quarters allowances as such.
3. In view of the language of sec. gip, IRC, it was not clear
that civilian employees of the Government who were not members of the
Foreign Service were entitled to an exemption for living-quarters
allowances "outside the continental U. S." We are now informed that
the Internal Revenue Service, in an unpublished opinion, has'ruled that
the term "cost-of-livir-?" is construed in this instance to include
"living-quarters" allo-vances. Thus, neither the value of the quarters
nor the allowance in lieu thereof needs be reported as taxable income.
This applies however only to individuals who are actually employees.
In this regard, the actual status under the common-law definition
will control. Executive Order 10,000, Sec. 209, provides that
persons seiv,;rm under contract are not entitled to the territorial
cost-of-living allowances and it would, therefore, appear that any
individual in this situation would be required to treat anything
designated as an allowance as taxable compensation without regard to
the intrinsic nature of his status.
4. Thus, employees are not required to pay a U. S. income tax
on cost-of-living allowances. For purposes of the exclusion, "cost-of-
living" includes quarters or an allowance in lieu thereof. Whether
an individual is an "employee" will be determined by the Agency, and
where it is.decided that the individual is actually an independent
contractor the exemption will not be available since he is neither an
officer nor an employee.
FOIAb3b LAWRENCE R. HOUSTON
General Counsel