HELD: (1) The 1979 Panama Canal Treaty with its Implementation Agreement does not exempt petitioners from United States income tax on wages received from the Panama Canal Commission. McCain v. Commissioner, 81 T.C. 918 (1983), followed. (2) Tropical differentials received by petitioners in 1979 from employment by the Panama Canal Company and the Panama Canal Commission are not excludible from taxable income under either section 912(1)(C) or section 912(2).
These treaties were signed in order to gradually restore to the Republic of Panama full sovereign control over the Panama Canal and the Canal Zone. The effective date of the Panama Canal Treaty of 1977 and the accompanying agreements was October 1, 1979, T.I.A.S. 10030; Billman v. Commissioner, 83 T.C. 534, 541 n. 6 (1984); McCain v. Commissioner, 81 T.C. 918, 920 (1983). Article I of the Treaty establishes the Republic of Panama as territorial sovereign of the Canal Zone, with rights to regulate ‘manage, operate, maintain, improve, protect and defend the Canal‘ reserved in favor of the United States.
The courts have held that deference to the views of the Executive Branch is equally important where the interpretation of tax-related provisions are at issue. See, e.g., McCain v. Commissioner, 81 T.C. 918, 929, 1983 WL 14900 (1983) (interpreting the tax provision of the Panama Canal Treaty). It is of course the United States government, not the government of the District of Columbia, which is responsible for ensuring that relations with other countries and international organizations, including the World Bank, run smoothly and in accordance with applicable treaties.
Other courts have had little trouble categorizing the PCC as a federal agency. For instance, the Tax Court, in McCain v. Commissioner, 81 T.C. 918 (1983), faced the exact issue of whether the PCC is an agency for purposes of Section 911 and concluded it is. In O'Connor itself, Justice Scalia referred to the PCC as a "United States Government agency."