Joseph D. Specking v. Commissioner

117 T.C. No. 9

UNITED STATES TAX COURT

JOSEPH D. SPECKING, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 12010-99, 12348-99, Filed August 28, 2001.
14496-99.

During the years in issue, Ps lived and worked on
Johnston Island, a U.S. insular possession. Ps claim
that, under sec. 931, I.R.C., they can exclude from
gross income the compensation they received for
services they performed on that island.
Held: Ps may not exclude from their gross income
under sec. 931, I.R.C., the compensation they earned on
Johnston Island because that island is not a specified
possession as defined in sec. 931(c), I.R.C.
Alternatively, Ps claim that, under sec. 911,
I.R.C., and sec. 1.931-1(b)(2), Income Tax Regs., they
can exclude from gross income up to $70,000 of the

1
Cases of the following petitioners are consolidated
herewith: Eric N. Umbach, docket No. 12348-99; and Robert J.
Haessly, docket No. 14496-99.
 - 2 -

compensation they earned on Johnston Island.
Held: Ps may not exclude from gross income under
sec. 911, I.R.C., the compensation they earned on
Johnston Island during the years in issue because
Johnston Island is not a foreign country within the
meaning of sec. 911, I.R.C. See sec. 1.911-2(g) and
(h), Income Tax Regs.

Kenneth W. McWade, for petitioners.

Jonathan J. Ono, for respondent.

OPINION

MARVEL, Judge: These cases were submitted fully stipulated

pursuant to Rule 122.2 In separate notices of deficiency,

respondent determined the following deficiencies with respect to

petitioners’ Federal income tax returns:

Joseph D. Specking, docket No. 12010-99

Year Deficiency

1995 $8,522
1996 11,531
1997 10,173

2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts are rounded to the nearest dollar.
 - 3 -

Eric N. Umbach,3 docket No. 12348-99

Year Deficiency

1995 $17,844
1996 18,802
1997 20,025

Robert J. Haessly, docket No. 14496-99

Year Deficiency

1995 $17,859

Petitioners filed separate petitions to redetermine the

deficiencies. We consolidated these cases for purposes of

briefing and opinion pursuant to Rule 141(a) because they present

common questions of fact and law. These cases in the aggregate

are referred to as “this case”.

After a concession,4 the only issue remaining for decision

is whether petitioners may exclude from gross income, under

section 931 or, alternatively, under section 911, compensation

they received during the years in issue for services they

performed on Johnston Island.

3
For 1997, petitioner Eric N. Umbach (Umbach) filed a joint
Federal individual income tax return with Alicia LePard. She did
not join with Umbach in filing the petition for 1997. In the
notice of deficiency for 1997, respondent refers to Alicia LePard
as Alicia Lepard Umbach.
4
Respondent concedes that petitioner Robert J. Haessly is
entitled to claim a credit for child and dependent care expenses
in the amount of $43 for 1995.
 - 4 -

Background5

The facts have been stipulated and are so found. The

parties’ stipulations of fact are incorporated into our opinion

by this reference.

Johnston Island is located in the central Pacific Ocean

approximately 700 nautical miles west-southwest of Honolulu,

Hawaii, and it is the largest of four islands making up Johnston

Atoll. The U.S. Constitution and Insular Areas, GAO/OGC-98-5

(app. II), at 50-51 (Nov. 1997); 16 Encyclopedia Americana 147

(1998); 6 New Encyclopaedia Britannica 598 (15th ed. 1998).

Johnston Atoll is an unorganized, unincorporated insular

possession of the United States currently under the operational

control of the Defense Threat Reduction Agency (formerly known as

the Defense Nuclear Agency).6 Johnston Atoll has no local

government or native population. Act of Aug. 18, 1856, ch. 164,

11 Stat. 119, current version at 48 U.S.C. secs. 1411-1419

(1994); 5 U.S.C. sec. 5942a (1994); 5 C.F.R. sec. 591.402 (2001);

19 C.F.R. sec. 7.2 (2000); 50 C.F.R. sec. 32.7 (2000); 14 Op.

Atty. Gen. 608 (1873); 9 Op. Atty. Gen. 364 (1859); The U.S.

Constitution and Insular Areas, supra at 39-40, 50-51; U.S.

5
We rely on judicial notice and stipulations of the parties
for statements describing Johnston Island and Johnston Atoll.
6
Johnston Atoll, furthermore, is a national wildlife refuge
under the jurisdiction of the U.S. Department of the Interior.
Environmental Assessment, 57 Fed. Reg. 9278 (Mar. 17, 1992).
 - 5 -

Department of the Interior, OIA: Other Insular Islands Fact

Sheets, Johnston Atoll (Aug. 2000). A military installation,

including an airstrip, occupies Johnston Island; however, access

to the island, as well as to all of the atoll, is restricted.

Environmental Assessment, 57 Fed. Reg. 9277 (Mar. 17, 1992); 32

C.F.R. sec. 761.4(c) (2000); 16 Encyclopedia Americana, supra at

147. Also located on Johnston Island is Johnston Atoll Chemical

Agent Disposal System (JACADS), a facility for incinerating U.S.

chemical weapons stockpiles. Greenpeace USA v. Stone, 748 F.

Supp. 749, 752-753 (D. Haw. 1990); Environmental Assessment,

supra at 9278.

Johnston Atoll is not a part of American Samoa, see S.J.

Res. 110, ch. 281, 45 Stat. 1253 (1929), current version at 48

U.S.C. secs. 1661-1662 (1994); Guam, see Organic Act of Guam, ch.

512, sec. 2, 64 Stat. 384 (1950), current version at 48 U.S.C.

sec. 1421 (1994); or the Commonwealth of the Northern Mariana

Islands (CNMI), see Covenant to Establish a Commonwealth of the

Northern Mariana Islands in Political Union with the United

States of America, Pub. L. 94-241, sec. 1005(b), 90 Stat. 263,

278 (1976), current version at 48 U.S.C. sec. 1801 (1994);

Trusteeship Agreement for the Former Japanese Mandated Islands,

July 18, 1947, U.N.-U.S., Art. 1, 61 Stat. 3301; H.J. Res. 233,

ch. 271, 61 Stat. 397 (1947). Additionally, islands making up

Johnston Atoll are specifically excluded from the islands making
 - 6 -

up the State of Hawaii. Act Admitting Hawaii to Statehood, Pub.

L. 86-3, sec. 2, 73 Stat. 4 (1959), current version at 48 U.S.C.

ch. 3, sec. 2 (1994) (“The State of Hawaii shall consist of all

the islands * * * included in the Territory of Hawaii * * *

except * * * Johnston Island, Sand Island (offshore from Johnston

Island)”.); see also Petition of Alacar, 196 F. Supp. 564, 567

n.5, 569 (D. Haw. 1961); United States v. Fullard-Leo, 66 F.

Supp. 774, 778-779 (D. Haw. 1940).

During the years in issue, petitioner Joseph D. Specking

(Specking) and petitioner Eric N. Umbach (Umbach) were employed

by Raytheon Demilitarization Co., a part of Raytheon Engineers &

Constructors, Inc. (Raytheon), a private contractor. During

1995, petitioner Robert J. Haessly (Haessly) was employed by

Raytheon. Hereinafter, both companies are referred to as

Raytheon. During the applicable period, petitioners worked for

Raytheon on Johnston Island on permanent assignment to the JACADS

project, and they lived in quarters provided by Raytheon. Each

year they were allowed five 2-week rotations for vacations and to

attend to personal matters.

Joseph D. Specking

Specking resided in Rifle, Colorado, when he filed the

petition in his case. He was assigned to the JACADS project for
 - 7 -

the period June 16, 1993, through at least March 22, 2000.7

On his returns for 1995 through 1997, Specking reported the

following wages from Raytheon, income from other sources, and

adjusted gross income (not including any exclusions from income

under sections 931 or 911):

Income from Adjusted
Year Wages other sources gross income
1
1995 $74,552 ($15,895) $58,657
1996 85,385 (18,203) 67,182
1997 95,246 (28,211) 67,035
1
The negative numbers result from a Schedule F, Profit or
Loss From Farming, farm loss Specking sustained in each year.

With the 1997 return, Specking included a Form 2555, Foreign

Earned Income, on which he claimed that he had foreign earned

income of $95,246 relating to work performed on Johnston Island,

of which $70,000 was an eligible “foreign earned income

exclusion”.

On or about June 1, 1998, Specking filed Forms 1040X,

Amended U.S. Individual Income Tax Returns, for 1995 and 1996 on

which he claimed he was entitled to refunds of $8,522 and

$11,531, respectively, because he could exclude $70,000 from

gross income for each of those years because “UNDER SECTION 931

AND REGULATION 1.931-1 PERSONS EARNING INCOME FROM JOHNSTON

ISLAND ARE CONSIDERED TO HAVE EARNED INCOME FROM A FOREIGN SOURCE

7
Specking previously had been assigned to the JACADS project
between Aug. 22, 1988, and Nov. 20, 1991.
 - 8 -

WHICH CAN BE EXCLUDED AS FOREIGN INCOME.” On or about July 6,

1998, respondent issued refunds to Specking for 1995 and 1996 for

the amounts claimed.

In a notice of deficiency issued to Specking on April 1,

1999, respondent determined that Specking was not entitled to

exclude any income for 1995 through 1997 because his tax home was

not in a foreign country, but in a territory of the United

States, and because he was not a bona fide resident of a

specified possession as defined in section 931(c). In that

notice of deficiency, respondent also made certain computational

adjustments to itemized deductions resulting from the adjustments

to income.

Eric N. Umbach

Umbach resided in Gillette, Wyoming, when he filed the

petition in his case. He was assigned to the JACADS project for

the period February 5, 1990, through at least June 8, 2000.

On his returns for 1995 through 1997,8 Umbach reported the

following wages from Raytheon, income from other sources, and

adjusted gross income (not including any exclusions from income

under sections 931 or 911):

8
Umbach filed electronic returns for 1995 and 1996. The
record does not contain a copy of the 1996 return. We rely on
stipulations of the parties and the 1996 Form 1040X for pertinent
information relating to the Form 1040 Umbach filed for 1996.
 - 9 -

Income from Adjusted
Year Wages other sources gross income

1995 $97,492 ($2,337) $95,155
1996 103,112 16 103,128
1
1997 100,659 33,363 134,022
1
Included in income from other sources is $31,209 of Form
W-2 wages earned by Alicia LePard.

With the 1997 return, Umbach included a Form 2555 on which he

claimed that he had foreign earned income of $100,659 relating to

work performed on Johnston Island, of which $70,000 was an

eligible “foreign earned income exclusion”.

On or about October 7, 1997, Umbach filed a Form 1040X, for

1996 on which he claimed he was entitled to a refund of $18,802

because he could exclude $70,000 from gross income for that year

because “UNDER SECTION 931 AND REGULATION 1.931-1 PERSONS EARNING

INCOME FROM JOHNSTON ISLAND ARE CONSIDERED TO HAVE EARNED INCOME

FROM A FOREIGN SOURCE WHICH CAN BE EXCLUDED AS FOREIGN INCOME.”

On or about April 15, 1999, Umbach filed a Form 1040X for 1995 on

which he claimed he was entitled to a refund of $18,262 because

he could exclude $99,829 from gross income for that year since he

was entitled to exclude earnings from his work on Johnston Island

Atoll. Respondent issued refunds to Umbach for 1995 and 1996 in

the amounts of $17,844 and $18,802, respectively.

In notices of deficiency issued to Umbach for 1995 and 1996

on April 13, 1999, and to Umbach and Alicia Lepard Umbach for

1997 on June 9, 1999, respondent determined that Umbach was not
 - 10 -

entitled to exclude any income for 1995 through 1997 because his

tax home was not in a foreign country, but in a territory of the

United States, and because he was not a bona fide resident of a

specified possession as defined in section 931(c). In the

notices of deficiency, respondent also made certain computational

adjustments to itemized deductions resulting from the adjustments

to income.

Robert J. Haessly

Haessly resided on Johnston Island when he filed the

petition in his case. He was assigned to the JACADS project for

the period March 9, 1994, through at least October 31, 1997.

On his return for 1995, Haessly reported the following wages

from Raytheon, income from other sources, and adjusted gross

income (not including any exclusions from income under sections

931 or 911):

Income from Adjusted
Year Wages other sources gross income
1
1995 $95,654 $1,692 $85,346
1
Haessly also claimed a $12,000 adjustment to income for
alimony paid.

Subsequently, Haessly filed a Form 1040X for 1995 on which

he claimed he was entitled to a refund of $17,816 because he

could exclude $95,654 from gross income for that year since he

was “A BONA FIDE RESIDENT OF U.S. POSSESSION JOHNSTON ISLAND”.

With the Form 1040X, Haessly included a Form 4563, Exclusion of
 - 11 -

Income for Bona Fide Residents of American Samoa. On February 6,

1998, respondent issued a refund to Haessly for 1995 for $17,816

in tax, plus $2,691 in accrued interest.

In a notice of deficiency issued to Haessly on April 1,

1999, respondent determined that Haessly was not entitled to

exclude any income for 1995 because his tax home was not in a

foreign country, but in a territory of the United States, and

because he was not a bona fide resident of a specified possession

as defined in section 931(c). In that notice of deficiency,

respondent also made certain computational adjustments to

itemized deductions resulting from the adjustment to income.

Discussion

Section 61(a) provides that gross income means all income

from whatever source derived. That section has been interpreted

broadly to encompass all gains except those specifically exempted

by Congress. E.g., Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 430 (1955). Exclusions from income, furthermore, are

construed narrowly, and taxpayers must bring themselves within

the clear scope of the exclusion. E.g., Rule 142(a);

Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Dobra v.

Commissioner, 111 T.C. 339, 349 n.16 (1998). Thus, citizens of

the United States generally also are taxed on income earned

outside the geographical boundaries of the United States unless
 - 12 -

they prove that the income is specifically exempted. E.g., sec.

61(a); Cook v. Tait, 265 U.S. 47, 54, 56 (1924).

Petitioners contend that the compensation they earned for

services they performed on Johnston Island during the years in

issue is excludable under section 931, or, in the alternative,

under section 911. Respondent, on the other hand, contends that

petitioners’ income for the years in issue is not excludable

under either provision. For the reasons discussed below, we

agree with respondent.

I. Section 931

Petitioners contend that the compensation they earned on

Johnston Island is excludable under section 931 because Johnston

Island is a possession of the United States and they otherwise

satisfy the requirements of that section.

A. Statutory Language Before the Tax Reform Act of 1986

Before the enactment of section 1272(a) of the Tax Reform

Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2593, section

9319 permitted citizens of the United States to exclude income

9
Sec. 931, as in effect before enactment of the Tax Reform
Act of 1986 (TRA 1986), Pub. L. 99-514, 100 Stat. 2085, read in
pertinent part as follows:

SEC. 931. INCOME FROM SOURCES WITHIN POSSESSIONS OF
THE UNITED STATES.

(a) General Rule.--In the case of individual
citizens of the United States, gross income means only
gross income from sources within the United States if
(continued...)
 - 13 -

derived from sources within possessions of the United States,

except for Puerto Rico, the U.S. Virgin Islands, or Guam, if

certain conditions were satisfied. Hereinafter, we refer to

section 931 before its amendment by TRA 1986 section 1272(a) as

old section 931. Old section 931 did not define the term

“possession of the United States”. However, regulations

promulgated under old section 931 provide, in pertinent part:

9
(...continued)
the conditions of both paragraph (1) and paragraph (2)
are satisfied:

(1) 3-year period.--If 80 percent or more of
the gross income of such citizen (computed without
the benefit of this section) for the 3-year period
immediately preceding the close of the taxable
year (or for such part of such period immediately
preceding the close of such taxable year as may be
applicable) was derived from sources within a
possession of the United States; and

(2) Trade or business.--If 50 percent or more
of his gross income (computed without the benefit
of this section) for such period or such part
thereof was derived from the active conduct of a
trade or business within a possession of the
United States either on his own account or as an
employee or agent of another.

(b) Amounts Received in United States.--
Notwithstanding subsection (a), there shall be included
in gross income all amounts received by such citizens
* * * within the United States, whether derived from
sources within or without the United States.

(c) Definition.--For purposes of this section, the
term “possession of the United States” does not include
the Commonwealth of Puerto Rico, the Virgin Islands of
the United States, or Guam.
 - 14 -

§1.931-1. Citizens of the United States and
domestic corporations deriving income from sources
within a possession of the United States.--(a)
Definitions. (1) As used in section 931 and this
section, the term “possession of the United States”
includes American Samoa, Guam, Johnston Island, Midway
Islands, the Panama Canal Zone, Puerto Rico, and Wake
Island. However, the term does not include (i) the
Virgin Islands and (ii), when used with respect to
citizens of the United States, the term does not
include Puerto Rico or, in the case of taxable years
beginning after December 31, 1972, Guam.

(2) As used in section 931 and this section, the
term “United States” includes only the States, the
Territories of Alaska and Hawaii, and the District of
Columbia. [Emphasis added.]

The last amendment to section 1.931-1, Income Tax Regs., was

promulgated in 1975. T.D. 7385, 40 Fed. Reg. 50260 (Oct. 29,

1975).

B. Statutory Language After TRA 1986

TRA 1986 section 1272(a) amended old section 931 to read, in

pertinent part:

SEC. 931. INCOME FROM SOURCES WITHIN GUAM, AMERICAN
SAMOA, OR THE NORTHERN MARIANA ISLANDS.

(a) General Rule.--In the case of an individual
who is a bona fide resident of a specified possession
during the entire taxable year, gross income shall not
include--

(1) income derived from sources within any
specified possession, and

(2) income effectively connected with the
conduct of a trade or business by such individual
within any specified possession.

* * * * * * *

(c) Specified Possession.--For purposes of this
 - 15 -

section, the term “specified possession” means Guam,
American Samoa, and the Northern Mariana Islands.

(d) Special rules.--For purposes of this section--

(1) Employees of the United States.--Amounts
paid for services performed as an employee of the
United States (or any agency thereof) shall be
treated as not described in paragraph (1) or (2)
of subsection (a).

(2) Determination of source, etc.--The
determination as to whether income is described in
paragraph (1) or (2) of subsection (a) shall be
made under regulations prescribed by the
Secretary.

(3) Determination of residency.--For purposes
of this section and section 876, the determination
of whether an individual is a bona fide resident
of Guam, American Samoa, or the Northern Mariana
Islands shall be made under regulations prescribed
by the Secretary. [Emphasis added.]

C. Positions of The Parties

1. Petitioners’ position

Petitioners contend that the amendments to old section 931

were not in effect for the years in issue; rather, they argue,

old section 931 remained in effect for those years.10

10
To be more precise, petitioners assert that there are
three possible interpretations for the overall effect of TRA 1986
secs. 1271, 1272, and 1277, 100 Stat. 2591, 2593, 2600, on old
sec. 931 for the years in issue: (1) Sec. 931 as amended by TRA
1986 sec. 1272 is in effect, but only as to American Samoa; (2)
old sec. 931 remains in effect; or (3) no sec. 931 remains in
effect. Petitioners, however, argue that only interpretation (2)
gives full effect to the terms and conditions of the statute and
to congressional intent, and that is the only interpretation
advocated by petitioners.
 - 16 -

Petitioners assert that, under TRA 1986 section 1277,11 Congress

made the effective date of the amendments to old section 931 for

all taxpayers conditional on the implementation of the agreements

between the United States and the specified possessions required

under TRA 1986 section 1271(b), 100 Stat. 2592.12 Petitioners

11
TRA 1986 sec. 1277 provides, in pertinent part:

SEC. 1277. EFFECTIVE DATE.

(a) In General.--Except as otherwise provided in
this section, the amendments made by this subtitle
shall apply to taxable years beginning after December
31, 1986.
(b) Special Rule for Guam, American Samoa, and the
Northern Mariana Islands.--The amendments made by this
subtitle shall apply with respect to Guam, American
Samoa, or the Northern Mariana Islands (and to
residents thereof and corporations created or organized
therein) only if (and so long as) an implementing
agreement under section 1271 is in effect between the
United States and such possession.
12
TRA 1986 sec. 1271 provides, in pertinent part:

SEC. 1271. AUTHORITY OF GUAM, AMERICAN SAMOA, AND THE
NORTHERN MARIANA ISLANDS TO ENACT REVENUE
LAWS.

(a) In General.--Except as provided in subsection
(b), nothing in the laws of the United States shall
prevent Guam, American Samoa, or the Northern Mariana
Islands from enacting tax laws (which shall apply in
lieu of the mirror system) with respect to income--
(1) from sources within, or effectively
connected with the conduct of a trade or business
within, any such possession, or
(2) received or accrued by any resident of
such possession.
(b) Agreements To Alleviate Certain Problems
Relating to Tax Administration.--Subsection (a) shall
apply to Guam, American Samoa, or the Northern Mariana
(continued...)
 - 17 -

maintain that such condition precedent to the effective date of

TRA 1986 section 1272(a) has not been fulfilled inasmuch as only

American Samoa has effectuated a tax implementation agreement

with the United States. Tax Implementation Agreement Between the

United States of America and American Samoa, 1988-1 C.B. 408.13

Petitioners further assert that there is no evidence that the tax

implementation agreement executed by American Samoa and the

United States fully satisfies the requirements of TRA 1986

section 1271(b). Hence, petitioners maintain, since the

12
(...continued)
Islands only if (and so long as) an implementing
agreement is in effect between the United States and
such possession with respect to--
(1) the elimination of double taxation
involving taxation by such possession and taxation
by the United States.
(2) the establishment of rules under which
the evasion or avoidance of United States income
tax shall not be permitted or facilitated by such
possession.
(3) the exchange of information between such
possession and the United States for purposes of
tax administration, and
(4) the resolution of other problems arising
in connection with the administration of the tax
laws of such possession or the United States.
13
Representatives for the Government of American Samoa
signed the tax implementation agreement on Dec. 10, 1987, and the
representative for the Government of the United States signed it
on Jan. 7, 1988. The tax implementation agreement generally
became effective as of Jan. 1, 1988. Tax Implementation
Agreement Between the United States of America and American
Samoa, 1988-1 C.B. 408, 411. Although the United States and Guam
entered into a tax implementation agreement, Tax Implementation
Agreement Between the United States of America and Guam, 1989-1
C.B. 342, that agreement is not yet effective. Treasury News
Release NB-1077 (Dec. 27, 1990).
 - 18 -

conditions required for the effectuation of the amendments to old

section 931 were not satisfied, those amendments never became

effective; therefore, old section 931 continued to be applicable

for the years in issue. Thus, petitioners argue, they may

exclude the compensation they received for services performed on

Johnston Island during those years under old section 931.

Petitioners contend further that respondent’s failure to

amend section 1.931-1, Income Tax Regs., to exclude Johnston

Island from the list of possessions for which section 931

applies, shows that respondent believes that old section 931

remained in force for the years in issue. Petitioners further

argue that section 1.931-1, Income Tax Regs., is not inconsistent

with the statute because the conditions required by Congress for

the effectuation of the amendments to old section 931 have not

yet occurred.

2. Respondent’s Position

Respondent contends that, under TRA 1986 section 1277(a),

100 Stat. 2600, the amendments to old section 931 became

effective as to petitioners for taxable years beginning after

December 31, 1986. Thus, respondent maintains, section 931 does

not apply to petitioners for the years in issue because Johnston

Island is not a “specified possession” within the meaning of the

statute. Sec. 931(c). Respondent asserts, in effect, that any

provision of section 1.931-1, Income Tax Regs., which includes a
 - 19 -

U.S. possession other than Guam, American Samoa, or the CNMI as a

U.S. possession for purposes of section 931 is inconsistent with

the statute, and hence invalid, for any taxable year beginning

after December 31, 1986. Hereinafter, for purposes of this case,

possessions of the United States other than Guam, American Samoa,

the CNMI, and the Virgin Islands14 will be referred to as the

other U.S. possessions.

Respondent maintains that, in TRA 1986 section 1272(a),

Congress clearly intended to limit the exclusion provided by

section 931 to bona fide residents of only Guam, American Samoa,

and the CNMI, and to income derived from sources therein. Thus,

respondent argues, under TRA 1986 sections 1272(a) and 1277(a),

the existence of an implementing agreement is not a condition

precedent for the effectuation of the amendments to old section

931 for residents of Johnston Island; rather, under TRA 1986

sections 1271(b) and 1277(b), that requirement applies only to

bona fide residents of the specified possessions and to income

derived from sources within those possessions. Therefore,

respondent asserts, the question of whether a valid implementing

agreement exists between the United States and American Samoa,

Guam, or the CNMI is not relevant in this case. Respondent

argues that, for years beginning after 1986, bona fide residents

14
We include the Virgin Islands here because other
provisions in subtit. G of tit. XII apply specifically to the
Virgin Islands. TRA 1986 secs. 1273-1277, 100 Stat. 2595-2600.
 - 20 -

only of Guam, American Samoa, and the CNMI are eligible for the

exclusion provided by section 931, as amended by TRA 1986 section

1272(a), and only if the possession has an implementing agreement

in force.15

D. Analysis

Our first step in analyzing the issue involved in this case

is to ask “whether Congress has directly spoken to the precise

question at issue.” Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842 (1984). In determining whether

Congress specifically addressed the precise question at issue, we

do not examine the statutory provision in isolation; rather,

guided by common sense, we consider the provision in context,

with a view to its place in the overall statutory scheme. FDA v.

Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-133 (2000);

15
The mirror system of taxation in effect in a qualified
possession the day before the effective date of TRA 1986
continues to operate until the possession amends its tax laws.
S. Rept. 99-313, at 482-484, 490-491 (1986), 1986-3 C.B. (Vol. 3)
1, 482-484, 490-491. Unlike Guam and the CNMI, before the
enactment of the TRA 1986, American Samoa had the authority to
enact its own tax system; however, with certain modifications not
pertinent here, it generally adopted the U.S. Internal Revenue
Code as its own. S. Rept. 99-313, at 477 (1986), 1986-3 C.B.
(Vol. 3) 1, 477. Thus, had American Samoa and the United States
not entered into an implementing agreement, income from sources
within that possession would qualify for the exclusion provided
by old section 931. For a description of the mirror system of
taxation in force in Guam and the CNMI, see Preece v.
Commissioner, 95 T.C. 594 (1990); see also S. Rept. 99-313, at
475-476 (1986), 1986-3 C.B. (Vol. 3) 1, 475-476.
 - 21 -

Gustafson v. Alloyd Co., 513 U.S. 561, 568 (1995); Brown v.

Gardner, 513 U.S. 115, 118 (1994).

For this case, the precise question at issue is whether the

amendments to old section 931 made by TRA 1986 section 1272(a)

were in effect during the years in issue as to residents of

Johnston Island. To resolve that question, we look first to the

statute itself. Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., supra. In particular, we look to TRA 1986

sections 1271, 1272, and 1277.16

TRA 1986 sections 1271, 1272, and 1277 are encompassed in

TRA 1986 Title XII--Foreign Tax Provisions, Subtitle G--Tax

Treatment of Possessions. TRA 1986 sections 1271 and 1272 are in

part I of subtitle G. Part I specifically addresses the

“Treatment of Guam, American Samoa, and the Northern Mariana

Islands”. TRA 1986 section 1271, see supra note 12, does not

appear in, or make any changes to, the Internal Revenue Code

(Code). Rather, that provision grants Guam, American Samoa, and

16
TRA 1986 sec. 1273, in pt. I of subtit. G of tit. XII,
relates to the treatment of corporations organized in Guam,
American Samoa, and the CNMI. TRA 1986 secs. 1274 and 1275, in
pt. II of subtit. G, relate specifically to the Virgin Islands.
TRA 1986 sec. 1276, in pt. III of subtit. G, amends I.R.C. sec.
7654. Pub. L. 99-514, 100 Stat. 2599-2600. That section relates
to the “cover over” of income tax into the Treasury of a
“specified possession” (which for purposes of sec. 7654 is
defined to mean “Guam, American Samoa, the Northern Mariana
Islands, and the Virgin Islands”). Sec. 7654(b)(2). None of
those provisions are applicable to the issue involved in this
case.
 - 22 -

the CNMI, under certain conditions, the right to enact their own

tax laws, independent of the Code, with respect to income (1)

from sources within, or effectively connected with the conduct of

a trade or business within, the possession, or (2) received or

accrued by a resident of the possession. TRA 1986 sec. 1271(a).

TRA 1986 section 1271(b) makes that grant of authority applicable

to Guam, American Samoa, or the CNMI provisional on the existence

of an implementing agreement “between the United States and such

possession”. (Emphasis added.)

TRA 1986 section 1272 amends old section 931 (as well as

other Code provisions not pertinent here). Specifically, TRA

1986 section 1272(a) provides in pertinent part: “In General.--

Section 931 (relating to income from sources within possessions

of the United States) is amended to read as follows: ‘SEC. 931.

INCOME FROM SOURCES WITHIN GUAM, AMERICAN SAMOA, OR THE NORTHERN

MARIANA ISLANDS.’” See supra p. 14.

TRA 1986 sections 1271 and 1272 do not specifically address

the other U.S. possessions. Nonetheless, the language of the

statute, taken in context, indicates that Congress intended to

provide an exclusion from gross income under section 931 as

amended by TRA 1986 section 1272(a) only for bona fide residents

of Guam, American Samoa, and the CNMI, and only if the specified

possession has an implementing agreement in force with the United

States. Had Congress intended to retain the benefits of section
 - 23 -

931 for residents of the other U.S. possessions it would not have

used the restrictive language found in those provisions, as well

as in TRA 1986 section 1277. Compare TRA 1986 sec. 1271(a)

(“such possession”), sec. 1271(b) (“such possession”), sec.

1272(a) (“specified possession”), and sec. 1277(b) (“such

possession”), with, e.g., TRA 1986 sec. 201(a), 100 Stat. 2121,

2127, 2131, amending Code sec. 168 (Code sec. 168(g)(6)(B): “For

purposes of this subparagraph, the term ‘United States’ includes

the Commonwealth of Puerto Rico and the possessions of the United

States” (emphasis added), and Code sec. 168(h)(4)(A)(ii): “For

purposes of clause (i), the United States, each State, and each

possession of the United States” (emphasis added)); TRA 1986 sec.

252, 100 Stat. 2189, 2199, adding Code sec. 42 (Code sec.

42(h)(7)(B): “The term ‘State’ includes a possession of the

United States” (emphasis added)); TRA 1986 sec. 1301(a), 100

Stat. 2602, 2603, amending Code sec. 103 (Code sec. 103(c)(2):

“The term ‘State’ includes the District of Columbia and any

possession of the United States” (emphasis added)).

We find support for our understanding of the statute in its

legislative history. E.g., S. Rept. 99-313, at 477-482 (1986),

1986-3 C.B. (Vol. 3) 1, 477-482. Nowhere in that legislative

history does Congress indicate an intention to continue to extend

the benefits of section 931 to bona fide residents of any of the

other U.S. possessions or to income from sources within those
 - 24 -

other possessions. The following passage from S. Rept. 99-313 is

illustrative:

An individual who is a bona fide resident of Guam,
American Samoa, or the CNMI during the entire taxable
year is subject to U.S. taxation in the same manner as
a U.S. resident. However, in the case of such an
individual, gross income for U.S. tax purposes does not
include income derived from sources within any of the
three possessions * * *. * * * Thus, even a bona fide
resident of Guam, the CNMI, or American Samoa is
required to file a U.S. return and to pay taxes on a
net basis if he receives income from sources outside
the three possessions (i.e., U.S. or foreign source
income). * * * [Id. at 480-481, 1986-3 C.B. (Vol. 3)
at 480-481; emphasis added.]

Our understanding of the statute also comports with

congressional intent of enabling Guam, American Samoa, and the

CNMI to enact their own tax laws independent of the Code, subject

to certain restrictions, coordinating their tax systems with the

U.S. tax system, and preventing those possessions from being used

as tax havens. Id. at 479, 1986-3 C.B. (Vol. 3) at 479.

Petitioners, however, contend that the amendments to old

section 931 made by TRA 1986 section 1272(a) are merely “proposed

changes” until Guam, American Samoa, and the CNMI enact valid

implementing agreements with the United States. We do not agree.

TRA 1986 section 1277, see supra note 11, in part IV of

subtitle G, provides effective dates for all of subtitle G. TRA

1986 section 1277 does not specifically address the other U.S.

possessions. However, the language of that provision, taken in

context with the other statutory provisions and the overall
 - 25 -

statutory scheme, shows that the amendments to old section 931

became effective as to petitioners for tax years beginning after

December 31, 1986.

TRA 1986 section 1277(a) provides that the amendments made

by TRA 1986 subtitle G in general become effective for taxable

years beginning after December 31, 1986, unless otherwise

provided in TRA 1986 section 1277. Thus, unless an exception to

that general effective date is provided by another subsection of

TRA 1986 section 1277, the amendments to old section 931 became

effective as to petitioners for tax years beginning in 1987. We

focus below on subsection (b) of TRA 1986 section 1277 because

the other subsections are not relevant to the issue involved in

this case.17

TRA 1986 section 1277(b) provides that the amendments made

by subtitle G of title XII “apply with respect to Guam, American

Samoa, or the Northern Mariana Islands” and to residents thereof

and corporations created or organized therein “only if (and so

long as) an implementing agreement under section 1271 is in

effect between the United States and such possession.” (Emphasis

17
TRA 1986 sec. 1277(c) relates to the Virgin Islands; TRA
1986 sec. 1277(d) mandates reports from the Secretary relating to
the implementation agreements described in TRA 1986 sec. 1277(b)
and (c), should certain conditions arise; and TRA 1986 sec.
1277(e) provides a special rule for U.S. citizens who become
residents of Guam, American Samoa, or the CNMI. TRA 1986, 100
Stat. 2601-2602.
 - 26 -

added.) As we read TRA 1986 section 1277, the amendments to old

section 931 made by TRA 1986 section 1272(a) are not provisional

in their application to petitioners. Congress specifically

provided in TRA 1986 section 1272(a) that section 931 is amended

for tax years beginning after December 31, 1986. In TRA 1986

section 1277(b), Congress makes the application of those

amendments conditional on the existence of the required

implementation agreement between the United States and the

specified possession, but only as to Guam, American Samoa, and

the CNMI, and the residents and corporations thereof. Thus, TRA

1986 section 1277(b) does not apply for bona fide residents of

the other U.S. possessions. As for those residents, the general

effective date of TRA 1986 section 1277(a) controls. As a

result, income earned in any possession other than Guam, American

Samoa, and the CNMI is not eligible for the exclusion provided

under section 931 as amended by TRA 1986 section 1272(a) for tax

years beginning after December 31, 1986. We note further that

nothing in the legislative history supports petitioners’ argument

that Congress intended to keep old section 931 in force as to the

other possessions should one or more of the specified possessions

not implement a tax agreement with the United States. E.g., S.

Rept. 99-313, supra at 484-485, 1986-3 C.B. (Vol. 3) at 484-485.

Petitioners’ reliance on section 1.931-1, Income Tax Regs.,

is misplaced. The regulatory language on which petitioners rely
 - 27 -

defines the term “possession” for purposes of old section 931.

As we have concluded above, that provision no longer applies to

petitioners. Consequently, the regulatory provision also has no

application to them and is obsolete as to petitioners.

We do not agree with petitioners that respondent’s failure

to amend section 1.931-1, Income Tax Regs., supports petitioners’

position. As the Supreme Court recently observed regarding

another unamended regulation provision: “The Treasury’s relaxed

approach to amending its regulations to track Code changes is

well documented. * * * The absence of any amendment * * * is

more likely a reflection of the Treasury’s inattention than any

affirmative intention on its part to say anything at all.”

United Dominion Indus., Inc. v. United States, 532 U.S. ___, 121

S. Ct. 1934, 1942-1943 (June 4, 2001).

E. Summary

For the years in issue, section 931 does not apply to the

compensation petitioners received for services they performed on

Johnston Island. Accordingly, we sustain respondent’s

determination that petitioners may not exclude any of that

compensation from their gross income for the years in issue under

section 931.

II. Section 911

Petitioners argue, in the alternative, that if they may not

exclude the compensation they earned on Johnston Island under
 - 28 -

section 931 for the years in issue, then that compensation can be

excluded under section 911.

A. In General

Section 911(a) provides in part that a “qualified

individual” may elect to exclude from gross income his or her

“foreign earned income”. Section 911(b)(2) limits the amount of

the exclusion for foreign earned income to $70,000.

Section 911(b)(1)(A) defines the term “foreign earned

income” to mean, in general, “the amount received by such

individual from sources within a foreign country or countries

which constitute earned income attributable to services performed

by such individual” during the period set forth in section

911(d)(1). Section 911(b)(1)(B) excludes from foreign earned

income certain amounts not relevant to this case.

Section 911(d)(1) defines the term “qualified individual”

for purposes of section 911 to mean

an individual whose tax home is in a foreign country
and who is--
(A) a citizen of the United States and
establishes to the satisfaction of the Secretary
that he has been a bona fide resident of a foreign
country or countries for an uninterrupted period
which includes an entire taxable year, or
(B) a citizen or resident of the United
States and who, during any period of 12
consecutive months, is present in a foreign
country or countries during at least 330 full days
in such period.
 - 29 -

The Internal Revenue Code does not define the term “foreign

country” for purposes of section 911. However, section 1.911-

2(h), Income Tax Regs., provides:

(h) Foreign country. The term “foreign country”
when used in a geographical sense includes any
territory under the sovereignty of a government other
than that of the United States. It includes the
territorial waters of the foreign country (determined
in accordance with the laws of the United States), the
air space over the foreign country, and the seabed and
subsoil of those submarine areas which are adjacent to
the territorial waters of the foreign country and over
which the foreign country has exclusive rights, in
accordance with international law, with respect to the
exploration and exploitation of natural resources.
[Emphasis added.]

Section 1.911-2(g), Income Tax Regs., furthermore, provides

that the term “United States”

when used in a geographical sense includes any
territory under the sovereignty of the United States.
It includes the states, the District of Columbia, the
possessions and territories of the United States, the
territorial waters of the United States, the air space
over the United States, and the seabed and subsoil of
those submarine areas which are adjacent to the
territorial waters of the United States and over which
the United States has exclusive rights, in accordance
with international law, with respect to the exploration
and exploitation of natural resources. [Emphasis
added.]

B. Positions of the Parties

1. Petitioners’ Position

Petitioners acknowledge that Johnston Island is a territory

under the sovereignty of the United States and not a foreign

country. Nonetheless, they assert that, if the income they

earned on Johnston Island is not excludable under section 931,
 - 30 -

then under section 1.931-1(b)(2), Income Tax Regs.,18 petitioners

satisfy the requirements for exclusion under section 911;

therefore, they argue, they may exclude up to $70,000 of the

income they earned on Johnston Island during the years in issue.

2. Respondent’s Position

Respondent contends that section 1.931-1(b)(2), Income Tax

Regs., cannot operate to provide petitioners an exclusion from

income under section 911. Respondent asserts that petitioners do

not qualify for the exclusion provided by section 911 because,

pursuant to section 1.911-2(g) and (h), Income Tax Regs.,

Johnston Island is a possession of the United States and, thus,

it cannot constitute a foreign country for purposes of that

section. Therefore, respondent maintains, the compensation

petitioners earned on Johnston Island cannot constitute foreign

earned income as defined in section 911(b), and, thus,

18
Sec. 1.931-1(b)(2), Income Tax Regs., provides:

(2) Relationship of sections 931 and 911. A
citizen of the United States who cannot meet the 80-
percent and the 50-percent requirements of section 931
but who receives earned income from sources within a
possession of the United States, is not deprived of the
benefits of the provisions of section 911 (relating to
the exemption of earned income from sources outside the
United States), provided he meets the requirements
thereof. In such a case none of the provisions of
section 931 is applicable in determining the citizen’s
tax liability. For what constitutes earned income, see
section 911(b).
 - 31 -

petitioners may not exclude any of that compensation under

section 911(a).

C. Analysis

We agree with respondent that under section 1.911-2(g) and

(h), Income Tax Regs., Johnston Island cannot constitute a

foreign country for purposes of section 911 because the island

constitutes a possession under the sovereignty of the United

States. Inasmuch as Johnston Island does not fall within the

definition of a foreign country, the compensation petitioners

earned on Johnston Island does not come within the definition of

“foreign earned income”, nor was their “tax home” in a foreign

country. Sec. 911(b)(1)(A) and (d). Consequently, petitioners

cannot satisfy the requirements for the exclusion from income

provided by section 911.

We do not agree with petitioners that section 1.931-1(b)(2),

Income Tax Regs., nonetheless operates to provide them an

exclusion from income under section 911. Section 1.931-1(b)(2),

Income Tax Regs., was promulgated in 1960 by T.D. 6500. See 25

Fed. Reg. 11402, 11951 (Nov. 26, 1960). Subsequent amendments to

the regulations promulgated under section 931 did not change the

text of section 1.931-1(b)(2), Income Tax Regs. See T.D. 7283,

38 Fed. Reg. 20823 (Aug. 3, 1973); T.D. 7385, 40 Fed. Reg. 50260

(Oct. 29, 1975). At the time section 1.931-1(b)(2), Income Tax

Regs., was promulgated, section 911(a)(1) provided an exclusion
 - 32 -

from gross income for a citizen of the United States who

satisfied the statutory residency test in a foreign country or

countries for “amounts received from sources without the United

States (except amounts paid by the United States or any agency

thereof) which constitute earned income [as defined in section

911(b)] attributable to services performed” during the required

period. In addition, section 911(a)(2) provided a limited

exclusion from gross income for a citizen of the United States

who was present in a foreign country for a certain minimum time

period for amounts received from sources without the United

States which constituted earned income attributable to services

performed during that period. See Miller v. Commissioner, 52

T.C. 752, 757 (1969). Congress imposed certain limitations and

restrictions on the amounts that could be excluded under section

911(a)(1) for services performed after December 31, 1962. See

Revenue Act of 1962, Pub. L. 87-834, sec. 11, 76 Stat. 1003-1006;

see also Hills v. Commissioner, 72 T.C. 958, 962-963 (1979).

Subsequently, for taxable years beginning after December 31,

1977, Congress limited the application of section 911 to

individuals residing in camps located in hardship areas and

provided a deduction in section 913 for certain living expenses

for a taxpayer who had a tax home in a foreign country and who

satisfied the statutory residency or presence tests. See Foreign

Earned Income Act of 1978, Pub. L. 95-615, secs. 201-203, 209(a),
 - 33 -

92 Stat. 3098-3106, 3109; see also Sislik v. Commissioner, T.C.

Memo. 1989-495, affd. per curiam by court order (D.C. Cir. 1992).

For tax years after 1981, Congress repealed section 913 and

completely revised section 911 to provide that an individual

must have his "tax home" in a foreign country and must satisfy

either the "bona fide residence" requirement or the "physical

presence" requirement of section 911(d)(1) to be entitled to the

foreign earned income exclusion within the context of section

911. See Economic Recovery Tax Act of 1981, Pub. L. 97-34, secs.

111-112, 115, 95 Stat. 190-195, 196; see also Lemay v.

Commissioner, 837 F.2d 681, 682 (5th Cir. 1988), affg. T.C. Memo.

1987-256; Harrington v. Commissioner, 93 T.C. 297, 303-304

(1989). For purposes of section 911, the term “tax home” is

defined as the individual's home for purposes of section

162(a)(2) (relating to traveling expenses while away from home).

Sec. 911(d)(3). However, section 911(d)(3) further provides that

"An individual shall not be treated as having a tax home in a

foreign country for any period for which his abode is within the

United States." See also Sislik v. Commissioner, supra; sec.

1.911-2(b), Income Tax Regs.19

19
Sec. 1.911-2(b), Income Tax Regs., defines “tax home” as
follows:

(b) Tax home. For purposes of paragraph (a)(i) of
this section, the term “tax home” has the same meaning
which it has for purposes of section 162(a)(2)
(continued...)
 - 34 -

Section 911(d)(9) authorizes the Secretary to prescribe

“necessary or appropriate regulations to carry out the purposes

of” section 911.20 Pursuant to that grant of authority, the

Treasury promulgated proposed regulations under section 911 in

1983 (see 48 Fed. Reg. 33007 (July 20, 1983)) and final

regulations in 1985 (see T.D. 8006, 50 Fed. Reg. 2959 (Jan. 23,

1985)) that apply to the years in issue. Those regulations are

legislative in character; therefore, they are entitled to greater

weight than interpretative regulations.21 See Faltesek v.

19
(...continued)
(relating to travel expenses away from home). Thus,
under section 911, an individual’s tax home is
considered to be located at his regular or principal
(if more than one regular) place of business or, if the
individual has no regular or principal place of
business because of the nature of the business, then at
his regular place of abode in a real and substantial
sense. An individual shall not, however, be considered
to have a tax home in a foreign country for any period
for which the individual’s abode is in the United
States. Temporary presence of the individual in the
United States does not necessarily mean that the
individual’s abode is in the United States during that
time. Maintenance of a dwelling in the United States
by an individual, whether or not that dwelling is used
by the individual’s spouse and dependents, does not
necessarily mean that the individual’s abode is in the
United States.
20
Sec. 911(d)(9) originally was designated sec. 911(d)(7) in
sec. 111(a) of the Economic Recovery Tax Act of 1981, Pub. L. 97-
34, 95 Stat. 194. It was redesignated sec. 911(d)(8) by sec.
101(c)(1) of the Technical Corrections Act of 1982, Pub. L. 97-
448, 96 Stat. 2366, and then further redesignated sec. 911(d)(9)
by sec. 1233(b) of TRA 1986, 100 Stat. 2564.
21
Furthermore, the regulations would be valid under the
(continued...)
 - 35 -

Commissioner, 92 T.C. 1204, 1211-1213 (1989); Estate of Gunland

v. Commissioner, 88 T.C. 1453, 1457 (1987). Included in those

legislative regulations are the definition of “tax home” quoted

supra note 19 and the definitions of “United States” and “foreign

country” set forth in section 1.911-2(g) and (h), Income Tax

Regs., and quoted supra p. 29.

The regulations under section 911 promulgated in 1985 take

priority over section 1.931-1(b)(2), Income Tax Regs.,

promulgated in 1960. The regulations under section 911 are not

only later in time; they also are legislative regulations

construing the very statute, i.e., section 911, that is in issue.

By contrast, section 1.931-1(b)(2), Income Tax Regs., interprets

old section 931, which ceased to apply to Johnston Island, and

thus to petitioners’ situation, for tax years beginning after

December 31, 1986. Accordingly, section 1.931-1(b)(2), Income

Tax Regs., is obsolete to the extent it suggests a connection

between sections 911 and 931. Thus, section 1.931-1(b)(2),

Income Tax Regs., cannot operate to allow petitioners an

exclusion from income under section 911 for any of the

compensation they earned on Johnston Island during the years in

issue.

21
(...continued)
Secretary's general authority to promulgate regulations set forth
in section 7805. Faltesek v. Commissioner, 92 T.C. 1204, 1212
(1989).
 - 36 -

D. Summary

Section 911 does not apply to the compensation petitioners

received for personal services performed on Johnston Island.

Accordingly, we sustain respondent’s determination that

petitioners may not exclude from their gross income for the years

in issue under section 911 any of the compensation they received

for the personal services they performed on Johnston Island.

Conclusion

We have carefully considered all remaining arguments made by

petitioners for contrary holdings, and, to the extent not

discussed, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decisions will be entered for

respondent in docket Nos. 12010-99

and 12348-99.

Decision will be entered under

Rule 155 in docket No. 14496-99.