June 26, 2014
Ambrosius, TC Memo 2014-126TC Memo 2014-126

The Tax Court has concluded that an individual couldn’t exclude from his income, as a nontaxable military allowance, the part of his salary received from his employment as a Junior Reserve Officers’ Training Corps (JROTC) instructor.

Background. Gross income subject to tax is generally defined in Code Sec. 61(a) as all income from whatever source derived. Generally, the pay of persons active in the armed forces falls within the scope of Code Sec. 61(a) and is taxable. (Reg. § 1.61-2(a)(1)) However, money received as military subsistence, uniform allowances, and amounts received as commutation of quarters are excluded from gross income. (Reg. § 1.61-2(b)(1))

Facts. In 2003, Chris Allen Ambrosius retired as a first sergeant from the U.S. Army. During 2010, he was employed by the Baltimore City Public School System (BCPSS) as a JROTC instructor at a salary of $69,735. He only reported $36,993 of that salary on his 2010 return.

Under the Department of Defense directives concerning the pay of JROTC instructors, Ambrosius was paid a salary as a JROTC instructor equal to the difference between his retired pay and the amount he would have been paid if he were still on active duty, including basic pay plus active duty allowances.

Ambrosius argued that, although some part of his salary was includible in his 2010 gross income, the remainder represented nontaxable amounts received as military subsistence, uniform allowances, and commutation of quarters.

Court’s conclusion. The Tax Court concluded that Ambrosius did not receive any nontaxable “allowances” from the Federal Government because he was employed by the Baltimore City Public School System and was not on active duty. Therefore, the amount he had tried to exclude was includible in his income.

Relying on Lyle, (1981) 76 TC 66876 TC 668, the Court determined that retired service members serving as JROTC instructors do not receive nontaxable allowances. Members of the military entitled to receive basic pay are permitted an allowance for military subsistence and amounts received as commutation of quarters, but Ambrosius did not qualify for the allowance because he did not receive basic pay. He didn’t receive basic pay because he wasn’t on active duty in the 2010 tax year. While his pay as a JROTC instructor was computed on the basis of his hypothetical basic pay and allowances, he did not receive any nontaxable quarters, uniform, or subsistence “allowances” from the Federal Government.

The Court reasoned that, to be entitled to the allowance for subsistence and housing, one must be a member of a uniformed service entitled to basic pay. To qualify for basic pay, one must be on active duty, or if not on active duty, be participating in full-time training, training duty with pay, or other full-time duty, as provided by law. (37 USC 402; 37 USC 403) An allowance for uniforms is provided under certain conditions, but the officer is required to be on “active duty” to be eligible for the allowance. (37 USC 415(a); 37 USC 416(a)) Army Regulations (AR) further provide that military retirees who are JROTC instructors “are members of the Armed Forces not on active duty.” (AR 145-2, para. 4-3 (Feb. 24, 2000)) Further, while the Army has regulations specifying the manner in which retired members hired as JROTC instructors will be paid by the employing secondary school, AR 145-2, para. 4-20 states, “[a]lthough an instructor may receive an amount “equal” to the military pay and allowances he or she would receive if on active duty, the payments he or she receives are not, in fact, military pay and allowances paid by the Army.”

References: For payments to military personnel excludible from income, see FTC 2d/FIN ¶ H-3101 ; United States Tax Reporter ¶ 614.040 ; TaxDesk ¶ 138,001 ; TG ¶ 7261

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