Antarctica is Not a Foreign Country (for Tax Purposes)

I’m not a tax guy, but stories like this make me want to get an LLM in tax and a collection of bowties.

IRS regulations allow U.S. citizens who live and work in a foreign country to exclude up to $80,000 in foreign-earned income, which could result in a significant tax savings.

David Arnett, a Wisconsin Resident, excluded $ 48,894 in income received from his 2001 income taxes due to his claim that he lived and worked in a foreign country.

The foreign country? Antarctica. Arnett worked for Raytheon at McMurdo Station, Ross Island, Antarctica.

In Smith v. United States, 507 U.S. 197 (1993), the Supreme Court held that the Federal Tort Claims Act did not apply to a wrongful death in Antarctica, because Antarctica was considered to be a “foreign country.” In Smith v. Raytheon Co., 297 F. Supp. 2d 399 (D. Mass. 2004), the Fair Labor Standards Act didn’t apply to overtime pay in Antarctica — same reason.

However, the IRS took the position that Antarctica is not a foreign country.

At first blush, this seems inconsistent and unfair. If you can’t sue for wrongful death or deprivation of overtime, since Antarctica is a “foreign country,” then why can’t you apply the same rule to income tax?

In Arnett v. Comm’r, 473 F.3d 790 (7th Cir. 2007), the appeals court held that the relevant statute was ambiguous, therefore the IRS commissioner had latitude in interpreting it. Where a statute does not delegate rule-making authority to an agency, the the Seventh Circuit considers ambiguities “to be implicit delegations to the agency administering the statute to interpret the statute through its rulemaking authority.”

Since the court held that the statute was ambiguous, the court only needed to determine whether IRS commissioner interpreted the statute reasonably. Since the purpose of the statute was to avoid double-taxation of income, and to thereby increase American competitiveness abroad. Accordingly, the foreign income exclusion applies only to territory that is within the sovereign territory of a foreign nation — which Antarctica is not.

2 Responses to Antarctica is Not a Foreign Country (for Tax Purposes)

  1. Supe says:

    Interesting case. I disagree with the wording for the non-tax law cases, but do agree with the general reasoning. From what I remember from my (rather impractical) int’l law course, the US does not have dominion over Antartica according to the Antartic Treaty that the US is a party to. So to give full force to this treaty, it makes sense not to enforce the federal laws to those working in Antartica. (I’m a bit foggy on the exact “rules” for jurisdiction in the int’l context, so I may be off in the last sentence.)

    Also, Antartica is not a foreign country because it does not have fulfill a certain statehood requirements, such as recognition, ability to enter int’l relations, and a defined people. This would clearly mean that it’s not a “foreign country”, but something along the lines of a foreign, unclaimed territory. The Supreme Court didn’t choose its words wisely here (not that I’m John Updike or anything).

  2. Tara says:

    Should I invest in a collection of bowties? UF’s LLM term starts in two weeks.

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