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Is Antarctica a foreign country?

IRC section 911 (a) permits any U.S. citizen who resides and works in a foreign country to exclude up to $80,000 of earned income. To qualify for the exclusion, citizens must perform the services while their tax home is in a foreign country and must reside in that country for an uninterrupted period of 12 months or be physically present in that country for at least 330 days during a consecutive 12-month period.

In 2001 Dave Arnett, a U.S. citizen and resident of Wisconsin, worked for Raytheon Support Services Co. at a scientific station on Ross Island, Antarctica. Arnett excluded roughly $49,000 of earnings from his tax return that year because he had earned the money while working and residing in a foreign country. His was the lead case for 150 taxpayers who believed income earned in Antarctica was exempt from tax. The IRS disagreed, maintaining that Antarctica was not a foreign country, and assessed Arnett an $8,066 deficiency. Arnett petitioned the Tax Court for relief.

Result. For the IRS. Treasury regulations section 1.911-2(h) defines a foreign country as "any territory under the sovereignty of a government other than that of the United States." In 1968, after examining an international treaty and noting that the U.S. State Department "did not consider Antarctica to be under the sovereignty of any government," the Tax Court, in Martin v. Commissioner (50 TC 59), held Antarctica was not a foreign country.

Arnett challenged the validity of this holding, citing two later court decisions. In Smith v. United States, 507 US 197, the Supreme Court held the claimant could not bring a wrongful death action against the United States under the Federal Tort Claims Act (FTCA) as the claim had arisen in a foreign country, Antarctica. The Court used the specific language contained in the FTCA to support its finding. Arnett also cited Smith v. Raytheon, 297 FSupp2d 399, where after examining the language of the Fair Labor Standards Act, the Court held that an employer was not required to pay a higher overtime rate for work performed in Antarctica because the act did not apply to services performed in a foreign country.

The Tax Court said those cases referred to the way other laws defined a foreign country, but those definitions did not apply to the tax code. The Tax Court noted that Congress, in IRC section 911(d)(9), gave the Treasury secretary the authority to issue regulations to implement section 911. Those regulations, specifically Treasury regulations section 1.911-2(h), defined a foreign country for purposes of the foreign income exclusion. The Tax Court held that in this case the IRS must apply the definition in that section. Since Antarctica is not a foreign country for tax purposes, the foreign earned income exclusion was denied for the wages Arnett earned while working and residing there.

This case illustrates the importance of legislative regulations. The tax courts are required to follow these regulations unless the taxpayer is able to demonstrate that they are unreasonable or clearly inconsistent with the law.

* Dave Arnett v. Commissioner, 126 TC no. 5.

Prepared by Charles J. Reichert, CPA, professor of accounting, University of Wisconsin, Superior.
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Author:Reichert, Charles J.
Publication:Journal of Accountancy
Date:Jun 1, 2006
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