                       T.C. Memo. 2001-142



                     UNITED STATES TAX COURT



                 HOLLAND E. BYNAM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8397-00.                       Filed June 15, 2001.


     Holland E. Bynam, pro se.

     Susan M. Pinner, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     ARMEN, Special Trial Judge:   Respondent determined a

deficiency in petitioner’s Federal income tax for the taxable

year 1998 in the amount of $5,394.1




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1998, the taxable year in
issue.
                               - 2 -

     The issue for decision is whether a portion of the

compensation received by petitioner in his capacity as a Junior

Reserve Officers’ Training Corps (JROTC) instructor from a local

school district is excludable from gross income.2   We hold that

no portion of such compensation is excludable.

                         FINDINGS OF FACT

     Most of the facts have been stipulated, and they are so

found.   Petitioner resided in Houston, Texas, at the time that

his petition was filed with the Court.

Petitioner’s Career

     After graduating from college, petitioner entered military

service in 1957 as a lieutenant in the U.S. Army.    Twenty-six

years later, in 1983, petitioner retired from active duty as a

colonel, having attained that rank in 1979.

     Upon retirement from active duty, petitioner became entitled

to receive retired pay from the Army.    However, as a retired

military officer, petitioner was no longer entitled to receive

(and never in fact received) any military allowances, such as a

basic allowance for quarters, a basic allowance for subsistence,

or a variable housing allowance.

     In August 1987, petitioner was hired by the Houston

Independent School District (HISD) as a JROTC instructor.    Since


     2
       An adjustment to petitioner’s itemized deductions is a
mechanical matter, the resolution of which depends on our
disposition of the disputed issue. See sec. 67(a).
                               - 3 -

that time, petitioner has remained continuously employed by HISD

in the JROTC program.   At the time of trial, petitioner was

deputy director of the JROTC program for 25 high schools within

the HISD system.

     Petitioner’s employment by HISD as a JROTC instructor (and

subsequently as a JROTC administrator) did not affect either

petitioner’s right to receive retired pay from the Army nor the

amount of such pay.

The JROTC Program

     The JROTC program is authorized by 10 U.S.C. sec. 2031

(1994).   Its purpose is “to instill in students in United States

secondary educational institutions the values of citizenship,

service to the United States, and personal responsibility and a

sense of accomplishment.”   10 U.S.C. sec. 2031(a)(2).   Retired

officers may serve as instructors and administrators, consistent

with the following provisions of 10 U.S.C. sec. 2031(d):

     (d) Instead of, or in addition to, detailing officers
     and noncommissioned officers on active duty * * *, the
     Secretary of the military department concerned may
     authorize qualified institutions to employ, as
     administrators and instructors in the program, retired
     officers * * * whose qualifications are approved by the
     Secretary and the institution concerned and who request
     such employment, subject to the following:

     (1) A retired member so employed is entitled to receive
     the member's retired or retainer pay without reduction
     by reason of any additional amount paid to the member
     by the institution concerned. In the case of payment
     of any such additional amount by the institution
     concerned, the Secretary of the military department
     concerned shall pay to that institution the amount
     equal to one-half of the amount paid to the retired
                                 - 4 -

     member by the institution for any period, up to a
     maximum of one-half of the difference between the
     member's retired or retainer pay for that period and
     the active duty pay and the allowances which the member
     would have received for that period if on active duty.
     Notwithstanding the limitation in the preceding
     sentence, the Secretary concerned may pay to the
     institution more than one-half of the additional amount
     paid to the retired member by the institution if (as
     determined by the Secretary) the institution is in an
     educationally and economically deprived area and the
     Secretary determines that such action is in the
     national interest. Payments by the Secretary concerned
     under this paragraph shall be made from funds
     appropriated for that purpose.

     (2) Notwithstanding any other provision of law, such a
     retired member is not, while so employed, considered to
     be on active duty or inactive duty training for any
     purpose.

     In implementing the statute, the Department of Defense (DOD)

has issued directives specifying the manner in which retired

officers who serve as JROTC instructors are to be compensated by

the employing school district.    In this regard, paragraph 1.3 of

Enclosure 2 of DOD Instruction Number 1205.13 (Dec. 26, 1995)3

provides that secondary schools participating in the JROTC

program will pay retired officers in accordance with the

following procedures:

          The [secondary educational] institution is the
     employing agency and shall pay the full amount due the
     JROTC instructor. The JROTC instructor shall receive
     retired or retainer pay from the U.S. Government.

          The amount due from the institution is the amount
     equal to the difference between retired or retainer pay


     3
        The parties stipulated to the applicability of this
directive to the year in issue.
                              - 5 -

     and the active duty pay and allowances that the JROTC
     instructor would receive if ordered to active duty.
     The institution shall be reimbursed for JROTC
     instructor salaries at the rate of one-half the
     difference of instructor retirement or retainer pay and
     active duty pay and allowances. For calculating JROTC
     instructor pay, “active duty pay and allowances” shall
     be limited to basic pay, basic allowance for quarters,
     allowance for variable housing (VHA), * * * and basic
     allowance for subsistence. The level of active duty
     pay and allowances, less retired or retainer pay, is
     the minimum salary the institution shall pay JROTC
     instructors. That should not be considered an attempt
     to cap or limit the amount of pay that may be agreed
     between the individual JROTC instructor and the
     employer.

          The institution may pay more than the amount equal
     to the difference between retired or retainer pay and
     individual active duty pay and allowance rate, but
     shall do so without additional entitlement for
     reimbursement from the Federal Government. * * *

Minimum JROTC Pay and Reimbursement to HISD

     As illustrative of the foregoing provisions, the minimum

JROTC instructor pay that petitioner was entitled to receive from

HISD for the month of April 1998 was $3,929.44, and the amount of

reimbursement that HISD was entitled to receive from the Federal

Government for that same month was $1,964.72, determined as

follows:

     Minimum JROTC instructor pay
     Basic pay (active duty colonel)          $6,461.70
     Plus: Active duty allowances
        Basic allowance for quarters (BAQ)       939.60
        Basic allowance for subsistence (BAS)    155.70
        Variable housing allowance (VHA)         327.44
     Total active duty pay (colonel)           7,884.44
     Less: retired pay rec’d. by petitioner   -3,955.00
     Minimum JROTC instructor pay              3,929.44
                                  - 6 -
     Reimbursement
     Minimum JROTC instructor pay                     $3,929.44
     Less: Reimbursement percentage (50%)             -1,964.72
     Reimbursement                                     1,964.72


Petitioner’s Income and Tax Return

     Petitioner received retired pay in 1998 from the Army in the

amount of $46,320.    This amount was paid to petitioner in respect

of his 26 years of active duty service in the Armed Forces.

Petitioner reported this amount in full as a pension or annuity

on line 16b of his 1998 income tax return.

     Petitioner received compensation in 1998 from HISD in the

amount of $50,997.    This amount was paid to petitioner for

services rendered in the JROTC program.         Petitioner reported

$33,923 of this amount as compensation on line 7 of his 1998

income tax return and excluded the balance, or $17,073.4

Petitioner attached a statement to his return stating that the

excluded amount represents “qualified military benefits” that are

“not taxable and should be excluded from gross income.”

Petitioner computed the excluded amount as follows:


 Basic Allowance for Quarters (BAQ):    $939.60/month x 12 months = $11,275
 Basic Allowance for Subsistence (BAS): $155.70/month x 12 months =   1,869
 Variable Housing Allowance (VHA):      $327.44/month x 12 months =   3,929
 Total Allowances                                                    17,073




     4
       There is a $1 error; petitioner meant to enter $33,924 on
line 7 of his tax return.
                                  - 7 -

Respondent’s Determination

        In the notice of deficiency, respondent determined that no

portion of the JROTC pay that petitioner received from HISD is

excludable from income.      Accordingly, respondent increased

petitioner’s taxable income by the amount petitioner excluded.

                                 OPINION

        We begin our discussion with section 61(a).   That section

defines gross income as “all income from whatever source derived,

including (but not limited to) * * * (1) Compensation for

services, including fees, commissions, fringe benefits, and

similar items”.     Military pay received by members of the Armed

Forces is also within the scope of section 61(a).      See sec. 1.61-

2(a)(1), Income Tax Regs.

        Congress may, if it chooses, specifically exempt certain

items from gross income.      See Commissioner v. Glenshaw Glass Co.,

348 U.S. 426, 430 (1955).     Thus, for example, certain military

compensation, such as compensation received by members of the

Armed Forces serving in combat zones, is excluded from gross

income.     See sec. 112.   Moreover, military subsistence, uniform

allowances, and other amounts received as commutation of quarters

are excludable from gross income.     See sec. 1.61-2(b), Income Tax

Regs.
                               - 8 -

     The issue before us is whether the pay that petitioner

received as a JROTC instructor included (or should be deemed to

include) nontaxable military allowances, or whether such pay (in

its entirety) was nothing other than an amount received as

compensation for services rendered.

     Petitioner contends that a portion ($17,073) of his JROTC

pay represents “qualified military benefits” that are excludable

from gross income pursuant to 10 U.S.C. sec. 2031(d) and section

134 of the Internal Revenue Code.   We disagree.

     Petitioner relies heavily on the statute and the DOD

directive providing that the total compensation received by a

retiree-instructor is equal to the difference between retired pay

and active duty pay plus “allowances” that the retiree-instructor

would receive if ordered to active duty.   In this regard,

petitioner proposes that the statute and the DOD directive

establish “equitable parity” in the compensation of retired and

active duty instructors.   Petitioner then argues for an exclusion

from income equal to the sum of the allowances received by active

duty members of the same rank; otherwise, in petitioner’s view,

the disposable income that he would receive as a JROTC instructor

would be less than that of an active duty officer performing

identical services.   However, petitioner’s contention is flawed

in several fundamental respects.
                               - 9 -

     Initially, we note that petitioner, in his capacity as a

JROTC instructor, is not, while so employed, considered to be on

active duty for any purpose.   See 10 U.S.C. sec. 2031(d)(2).    We

addressed this matter in Lyle v. Commissioner, 76 T.C. 668

(1981), affd. without published opinion 673 F.2d 1326 (5th Cir.

1982), and in Tucker v. Commissioner, T.C. Memo. 1999-373.      The

fact that Congress never intended to afford similar treatment to

active duty officers and retired officers serving as JROTC

instructors is evident because:

     The legislative history [of 10 U.S.C. sec. 2031] does
     not suggest that Congress intended to establish
     “parity” between active duty and retired officers
     serving as Junior ROTC instructors; instead, retired
     officers were to be utilized in order to permit
     expansion of the Junior ROTC program at lesser cost and
     with fewer drains on active duty military strength than
     would be required if the program were staffed by active
     duty personnel. * * * Thus, it appears that the
     “additional amount” paid to retired officers [by the
     employing school] was not intended to provide either
     basic pay or allowances to reimburse retired officers
     serving as Junior ROTC instructors for their costs for
     meals and quarters. Instead, the “additional amount”
     was designed as an incentive payment to induce retired
     personnel to accept employment as Junior ROTC
     instructors so that the Government could realize
     economies in staffing the Junior ROTC program. * * *
     [Lyle v. Commissioner, supra at 676.]

     Petitioner also contends that a portion of his pay as a

JROTC instructor is excludable from gross income because the

source of such pay is the Federal Government and the employing

school is not given discretion with respect to compensation

scales.
                              - 10 -

     Although it is true that the Federal Government reimburses

school districts for one-half the “additional amount” paid to

retired officers, see 10 U.S.C. sec. 2031(d)(1), the ultimate

burden of disbursing funds and establishing compensation scales

lies with the employing school, see Lyle v. Commissioner, supra

at 674; Tucker v. Commissioner, supra.   In this regard, the

employing institution is responsible for issuing compensation

checks and Forms W-2 to all of its employees.   Petitioner’s

understanding of the degree of control that the employing school

exercises is illustrated by the following passage from the trial

transcript:

          The civilian folk who are really the employing --
     they’re designated as the employing agency for good
     reasons. They’ve got to keep the records, they’ve got
     to turn in the W-2 materials, they can fire you.
                       * * * * * * *
          The principal can recommend retention or recommend
     that you lose your credentials for being able to teach,
     or in the case of a serious violation * * * they can
     recommend immediate dismissal * * *

     Clearly, the Federal Government does not assume any kind of

employer status.   Therefore, it is inconceivable that any portion

of the compensation that petitioner received as a JROTC

instructor could be classified as a subsistence, quarters, or

variable housing allowance from the Armed Forces.   See Lyle v.

Commissioner, supra at 674.
                              - 11 -

     Further, the statutory provision, in conjunction with the

implementing directives issued by DOD, simply establishes a

formula for computing the minimum “additional amount” of

compensation retired instructors are entitled to receive from the

employing school and the maximum portion of such additional

amount that will be reimbursed by the Federal Government.    See

id. at 675.   Moreover, the “additional amount” is not in the form

of basic pay or an allowance afforded to active duty officers.

Id. at 676.   Rather, the “additional amount” is tantamount to an

inducement offered to persuade retired personnel to accept

employment as JROTC instructors.   Id.

     The active duty pay is merely a guideline in determining the

level at which JROTC instructors are to be compensated.

Consequently, each school district is given discretion to

compensate their JROTC instructors in amounts greater than the

statutory “additional amount”, subject to the condition that

there will be no additional reimbursement from the Federal

Government.   Thus, the only limitation imposed on school

districts is that instructors must, at a minimum, be paid the

“additional amount” set out in the statute.   Id. at 674.

     In view of the foregoing, we hold that no portion of the

JROTC pay that petitioner received from HISD is excludable from

gross income pursuant to 10 U.S.C. sec. 2031(d).
                                - 12 -

     Petitioner also relies on section 134 to support his

argument that a portion of his compensation from HISD is

excludable from gross income.

     Section 134(a) provides that “Gross income shall not include

any qualified military benefit.”    The term “qualified military

benefit” is defined by section 134(b)(1) as:

     any allowance or in-kind benefit * * * which–-
          (A) is received by any member or former member of
     the uniformed services of the United States * * * by
     reason of such member’s status or service as a member
     of such uniformed services, and
          (B) was excludable from gross income on September
     9, 1986, under any provision of law, regulation, or
     administrative practice which was in effect on such
     date (other than a provision of this title). [Emphasis
     added.]

     Petitioner focuses narrowly on the phrase “member or former

member” in section 134(b) to support his contention that he falls

within the exclusionary rule of section 134(a).    Petitioner

reasons that the “member or former member” language was inserted

to apply to “some category of [authorized] personnel other than

active members * * * [and] there would be no other reason for

these particular benefits being mentioned if not for the tax

treatment of JROTC instructors”.    We disagree.

     Petitioner did not receive any “qualified military benefit”

within the meaning of section 134(b)(1).    First, petitioner’s

JROTC pay did not constitute an allowance or in-kind benefit.
                               - 13 -

Indeed, as petitioner acknowledged at trial, “I don’t get paid

allowances.”   Further, petitioner received nothing from the

Federal Government, other than the retired pay to which he was

entitled regardless of whether he participated in the JROTC

program.   Second, petitioner’s JROTC pay was not received “by

reason of [petitioner’s] * * * status or service as a member of

such uniformed services”.    Rather, as this Court has previously

held, the pay received by a retired officer as an instructor in

the JROTC program is not received by reason of the officer’s

status as a “member or former member” of the uniformed services,

but rather is received as compensation for services rendered to

the employing school district.    See Tucker v. Commissioner, supra

(citing Lyle v. Commissioner, supra at 675-676).

     In view of the foregoing, we hold that no portion of

petitioner’s compensation from HISD is a “qualified military

benefit” within the meaning of section 134(a).    Petitioner’s

reliance on the “member or former member” language in section

134(b) is misplaced.

Conclusion

     No portion of the compensation received by petitioner in his

capacity as a JROTC instructor from HISD is excludable from gross

income.    Respondent’s determination is therefore sustained.

     We have considered all of the other arguments made by
                             - 14 -

petitioner, and, to the extent that we have not specifically

discussed them above, we find those arguments to be without

merit.

     In order to give effect to our disposition of the disputed

issue,

                                   Decision will be entered

                              for respondent.
