Taxation (Federal)

• Author: International Law Group
• Pages: 16-

Page 16

Dave Arnett (Taxpayer) worked for Raytheon Support Services Co. at McMurdo Station, Ross Island, Antarctica during calendar year 2001. On his tax return for that year, he claimed an exclusion for the gross income earned in a "foreign country" pursuant to 26 U.S.C. ß 911.

The Internal Revenue Service (IRS) disagreed with his claim and assessed a defi ciency on the theory that Antarctica is not a "foreign country." Under 26 C.F.R. ß 1.911-2(h), only the territory under the sovereignty of a foreign nation is to be considered a "foreign country." The Tax Court agreed with the IRS, and the Taxpayer appealed. The U.S. Court of Appeals for the Seventh Circuit, however, affirms.

In Smith v. United States, 507 U.S. 197 (1993), the U.S. Supreme Court analyzed the status of Antarctica in the context of the Federal Tort Claims Act, and indicated that federal courts have to construe the term "foreign country" in its particular statutory setting. The phrase "foreign country" is ambiguous and ß 911 itself provides little or no guidance on how to resolve the ambiguity.

The Court decides whether the IRS's interpretation is reasonable. The history of how the courts have treated foreign-earned income for U.S. tax purposes shows that the interpretations focused on a reading that decreases the taxpayer's tax burden. The courts consistently make the "sovereign" status of the non-U.S. territory the decisive criterion.

The Court notes that the U.S. does not recognize any claims of national sovereignty over Antarctica. See Smith, above at 198 n.1. "When read in its entirety and in common sense...