John A. Francisco v. Commissioner

119 T.C. No. 20

UNITED STATES TAX COURT

JOHN A. FRANCISCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7670-00. Filed December 19, 2002.

Petitioner (P), a U.S. citizen residing in
American Samoa, was employed as chief engineer of a
fishing vessel that operated primarily in international
waters in 1995, 1996, and 1997.

Sec. 931(a), I.R.C., provides that a resident of
American Samoa may exclude income that is American
Samoan source or effectively connected with a trade or
business in American Samoa (American Samoan source or
effectively connected income). Sec. 931(d)(2), I.R.C.,
provides that the determination of whether income is
excludable under sec. 931(a), I.R.C., shall be made
under regulations prescribed by the Secretary.

Held: American Samoan source or effectively
connected income is excludable from U.S. income by sec.
931(a), I.R.C., even though the Secretary has not
issued regulations under sec. 931(d)(2), I.R.C.
 - 2 -

Held, further, To the extent P’s fishing income in
1995, 1996, and 1997 was earned in international
waters, it is not American Samoan source or effectively
connected income, and it is U.S. source income.

Held, further, P must include in gross income the
amount of State income tax refunds he received in 1995
and 1996.

Daniel R. King and Richard T. Luoma, for petitioner.

Peter C. Rock, for respondent.

COLVIN, Judge: Respondent determined deficiencies of

$18,324, $52,870, and $31,913, and section 6662(a)1 accuracy-

related penalties2 of $3,665, $10,574, and $6,383, relating to

petitioner’s 1995, 1996, and 1997 Federal income taxes,

respectively.

The issues for decision are:

1. Whether the section 931(a) exclusion applies even though

the Secretary has not issued regulations under section 931(d)(2).

We hold that it does.

2. Whether income earned by petitioner from performing

personal services in international waters is American Samoan

source or effectively connected income, as petitioner contends,

1
Section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
2
Respondent concedes that petitioner is not liable for the
accuracy-related penalty for the years in issue.
 - 3 -

or U.S. source, as respondent contends. We hold that it is U.S.

source income.

3. Whether petitioner must include in gross income the

amount of State income tax refunds he received in 1995 and 1996.

We hold that he must.

FINDINGS OF FACT

A. Petitioner

Petitioner was a U.S. citizen residing in American Samoa

during the years in issue and when he filed his petition.

B. Petitioner’s Fishing Employment

Petitioner was employed by the De Silva Sea Encounter Corp.

(De Silva), a Nevada corporation, as the chief engineer of a tuna

fishing vessel (the M/V Sea Encounter). As chief engineer,

petitioner was primarily responsible for the operation, repair,

and maintenance of the ship’s engine and other machinery,

including the refrigeration, storing, and offloading systems

designed to ensure the quality of the catch.

Petitioner performed services for the M/V Sea Encounter in

an American Samoan port or territorial waters 7 days in 1995, 10

days in 1996, and 11 days in 1997, and in international waters

208 days in 1995, 193 days in 1996, and 272 days in 1997. Each

fishing trip began and ended at a port in American Samoa. Each

trip took from 3 weeks to 3 months. After the ship left port, it
 - 4 -

generally remained at sea until it filled its storage capacity

for fish (i.e., 1,150 tons).

The ship returned to port in American Samoa to sell,

pursuant to an exclusive contract, the entire catch to the Van

Camp Seafood Co. (Van Camp) fish processing plant. De Silva and

its workers were paid only for fish accepted by Van Camp. On

average, Van Camp rejected about 2 percent of the catch. If Van

Camp rejected the entire catch, none of the crew members would be

paid.

Petitioner was paid the second highest amount of any crew

member. Petitioner was paid $30 per ton and had no right to, or

any ownership interest in, the fish. Petitioner was paid in

American Samoa. Petitioner was responsible for preparing the

ship for each voyage, taking care of the catch, and delivering

the fish to the Van Camp cannery in American Samoa. Petitioner’s

prevoyage duties included making cold water to refrigerate the

fish, making brine to store the fish, and ensuring that the

engines and machinery were all in order. At the conclusion of

each voyage, petitioner was in charge of the hydraulic equipment

used to offload the fish as well as the cargo booms, conveyor

belts, and other equipment.
 - 5 -

On timely filed 1995, 1996, and 1997 returns, petitioner,

relying on section 931, excluded wage income relating to his

employment with De Silva.

C. Petitioner’s State Tax Payments and Refunds

On his 1994 return, petitioner claimed an $8,708 deduction

for California State income taxes paid. In 1995, petitioner

received a $1,150 California State income tax refund. Petitioner

did not report the amount of the 1995 refund on his 1995 Federal

income tax return. On his 1995 return, petitioner claimed a

$4,000 deduction for California State income taxes paid. In

1996, petitioner received a $3,839 California State income tax

refund. On his 1996 return, petitioner reported as income and

also deducted that $3,839 refund.

OPINION

The issues for decision are whether petitioner’s income

earned from services performed in international waters is

excludable from income under section 931, and whether he must

include in gross income the amount of his State tax refunds.

A. Provisions in the Tax Reform Act of 1986 Relating to Guam,
American Samoa, and the CNMI

1. Retention and Revision of the Section 931(a) Exclusion

Individuals who are U.S. citizens or resident aliens are

taxed by the United States on their worldwide income. Sec. 1.1-
 - 6 -

1(b), Income Tax Regs. However, an exclusion applies to

possessions source income of U.S. citizens who reside in Guam,

American Samoa, and the Confederated Northern Mariana Islands

(CNMI). Sec. 931.3

Congress amended section 931 in 1986. Tax Reform Act of

1986 (1986 TRA), Pub. L. 99-514, sec. 1272(a), 100 Stat. 2593.

Under section 931 as amended, an individual who is a bona fide

resident of a “specified possession”4 (e.g., American Samoa)

during an entire tax year may exclude from gross income

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

and (2) income effectively connected with the conduct of a trade

or business (“American Samoan source or effectively connected

income”) by that individual within any specified possession.

Sec. 931(a).5

3
Before 1986, sec. 931 provided an exclusion from U.S. tax
for American Samoan source income received by U.S. citizens, if
certain conditions were met. Specking v. Commissioner, 117 T.C.
95, 102 (2001).
4
For purposes of sec. 931(a), specified possessions are
Guam, American Samoa, and the Northern Mariana Islands. Sec.
931(c).
5
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
(continued...)
 - 7 -

2. Grant to Guam, American Samoa, and the CNMI of Control
Over Their Tax Systems

Guam, American Samoa, and the CNMI had a mirror or modified

mirror system of taxation for many years before 1986. Under that

system, American Samoa, in 1963, adopted substantially all of the

Internal Revenue Code of 1954, 11 A.S.C.A. sec. 11.0501,6 but

American Samoans paid the tax to American Samoa, not the United

States.

5
(...continued)
any specified possession, and

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

* * * * * * *

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

* * * * * * *

(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.
6
See Boral Gas, Inc. v. Iaulualo, No. CA 87-1 (Am. Samoa
Oct. 3, 2002).
 - 8 -

In 1986, Congress concluded that the Internal Revenue Code,

developed for the complex U.S. economy, may be inappropriate for

Guam, American Samoa, and the CNMI. S. Rept. 99-313, at 477-478

(1985), 1986-3 C.B. (Vol. 3) 477-478. Thus, except as explained

in the next paragraph of this opinion, Congress granted to those

possessions control over their local tax systems. 1986 TRA sec.

1271(a), 100 Stat. 2591.

3. Concerns About the Potential for Abuse Under the Mirror
System of Taxation

In 1986, Congress also concluded that the mirror systems of

tax then in effect in Guam, American Samoa, and the CNMI created

opportunities for abuse by U.S. taxpayers. S. Rept. 99-313,

supra at 478, 1986-3 C.B. (Vol. 3) at 478. As a result, for each

of the specified possessions, Congress delayed (1) implementation

of the 1986 amendments to section 931, and (2) the grant of

control over the local tax system until that possession and the

Secretary executed a tax implementation agreement providing for

elimination of double taxation, prevention of tax abuse, and

sharing of tax information. 1986 TRA sec. 1271(b), 100 Stat.

2592.7

7
Sec. 1271(b) of the Tax Reform Act of 1986 (1986 TRA),
Pub. L. 99-514, provides:

(b) Agreements To Alleviate Certain Problems
Relating to Tax Administration.–-Subsection (a) shall
apply to Guam, American Samoa, or the Northern Mariana
Islands only if (and so long as) an implementing
agreement is in effect between the United States and
(continued...)
 - 9 -

The Tax Implementation Agreement Between the United States

and American Samoa was executed for the United States by the

Assistant Secretary for Tax Policy, effective January 1, 1988.

See Tax Implementation Agreement Between the United States of

America and American Samoa, 1988-1 C.B. 408. Adoption of that

agreement satisfied the sole precondition to availability of the

revised section 931(a) exclusion for residents of American Samoa.

See 1986 TRA sec. 1277(b), 100 Stat. 2600.

7
(...continued)
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.

Any such implementing agreement shall be executed on
behalf of the United States by the Secretary of the
Treasury after consultation with the Secretary of the
Interior.
 - 10 -

B. Whether Section 931(a) Applies in the Absence of Regulations
Under Section 931(d)(2)

1. Regulation Authority Under Section 931(d)(2)

Section 931(d)(2) provides:

(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.

The first issue for decision is whether section 931(a)

applies even though respondent has not issued regulations under

section 931(d)(2). The dissent argues, contrary to the view of

both parties, that section 931(d)(2) delegates to the Secretary

the authority to decide (simply by issuing or not issuing

regulations) whether the section 931(a) exclusion applies to

residents of Guam, American Samoa, and the CNMI. Dissenting op.

pp. 33-34. Because the Secretary has issued no regulations,

according to the dissenting opinion, the section 931(a) exclusion

has not applied to anyone since 1986, and it will never apply to

anyone if the Secretary does not issue regulations under section

931(d)(2).

We believe the view expressed in the dissenting opinion

conflicts with the language of the 1986 amendments to section

931, closely related non-Code provisions enacted in 1986, and

clear expressions of congressional intent contained in the

legislative history accompanying enactment of those provisions.

First, section 931(a) itself provides the exclusion, independent
 - 11 -

of the regulatory authority in section 931(d)(2). The 1986

Senate Finance Committee report provides as follows:

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, or income effectively connected with
the conduct of a trade or business by that individual
within any of the three possessions. * * *

S. Rept. 99-313, supra at 480, 1986-3 C.B. (Vol. 3) at 480. This

language shows the legislative assumption that the exclusion

would take effect independently of the issuance of Treasury

regulations. The dissent’s view that the exclusion has no effect

absent regulations creates an unnecessary conflict between

section 931(a) and (d)(2). See FDA v. Brown & Williamson Tobacco

Corp., 529 U.S. 120, 133 (2000) (courts must interpret a statute

to “fit, if possible, all parts into an harmonious whole”,

quoting FTC v. Mandel Bros., Inc., 359 U.S. 385, 389 (1959)).

Second, the legislative history states (and illustrates with

examples) that the purpose of the regulatory authority is to

prevent abuse under the mirror system of taxation. See S. Rept.

99-313, supra at 481, 1986-3 C.B. (Vol. 3) 481. The Senate

Report states:
 - 12 -

The bill delegates to the Secretary of the
Treasury the authority to prescribe regulations to
determine whether income is sourced in, or effectively
connected with the conduct of a trade or business in,
one of these possessions, and to determine whether an
individual is a resident of one of these possessions.
The committee anticipates that the Secretary will use
this authority to prevent abuse. * * *

Id. Thus, Congress stated a reasonable purpose for enacting

section 931(d)(2): to prevent abuse. This reading of section

931(d)(2) avoids any conflict between it and section 931(a).

Third, in closely related provisions in the 1986 TRA (i.e.,

sections 1271, 1272, and 1277(b),8 applicable to Guam, American

Samoa, and the CNMI), Congress used explicit language to impose a

precondition to implementation of the section 931(a) exclusion.

That is, Congress explicitly provided that the amendments to

section 931(a) and the grant to the possessions of authority over

their local tax systems would take effect only upon adoption of

tax implementation agreements between the U.S. and Guam, American

Samoa, and the CNMI. 1986 TRA secs. 1271(b), 1277(b). In

contrast, Congress did not use similar language conditioning

8
1986 TRA sec. 1277(b), 100 Stat. 2600, provides as
follows:

(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.
 - 13 -

implementation of the exclusion on the issuance of regulations.

We can reasonably assume Congress intentionally chose different

words in closely related statutory provisions to produce a

different meaning.

Fourth, contrary to the view stated in the dissent, section

931(d)(2) lacks one “plain meaning”. Section 931(d)(2) states

merely that the determination of whether income is from sources

within, or effectively connected with a trade or business within,

a possession “shall be made under regulations prescribed by the

Secretary.” The statute is silent as to whether those

regulations may be issued under section 931 or another section

of the Code, such as sections governing the determination of

sources of income (sections 861-865). In the absence of

regulations under section 931(d)(2), we believe it is appropriate

to consider sections 861-865 and related regulations in deciding

what is American Samoan source and effectively connected income.

2. The Cases

We have frequently held that the Secretary may not prevent

implementation of a tax benefit provision simply by failing to

issue regulations. Estate of Maddox v. Commissioner, 93 T.C.

228, 233-234 (1989); First Chi. Corp. v. Commissioner, 88 T.C.

663, 676-677 (1987), affd. 842 F.2d 180 (7th Cir. 1988);

Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819, 829

(1984). The dissent relies on Alexander v. Commissioner, 95 T.C.
 - 14 -

467, 473 (1990), affd. without published opinion sub nom. Stell

v. Commissioner, 999 F.2d 544 (9th Cir. 1993). In Alexander, we

considered the effect of the Secretary’s failure to issue

regulations under section 465(c)(3)(D). Section 465(c)(3)(D)

provides that a limitation imposed on taxpayers by the at-risk

rules “shall apply only to the extent provided in regulations

prescribed by the Secretary.” In Alexander, we held that, absent

regulations, the limitation does not apply. That holding is

fully reconcilable with the principle that the Secretary’s

failure to issue regulations does not bar application of a

beneficial tax statute. Nothing in the cases cited in the

dissenting opinion suggests that section 931(a) does not apply

until regulations are issued under section 931(d)(2).

3. Conclusion

We conclude that the exclusion under section 931(a) applies

even though the Secretary has not issued regulations under

section 931(d)(2).

C. Whether Petitioner’s Income Was American Samoan Source
Income or Was Effectively Connected With a Trade or Business
in American Samoa

1. Positions of the Parties

The parties dispute whether income earned by petitioner for

performing services while the M/V Sea Encounter was in

international waters is excludable from gross income. Respondent

contends primarily that, under section 863(d)(2), the income

petitioner earned for performing services in international waters
 - 15 -

is U.S. source income. Petitioner relies primarily on section

931(a) and on section 1.863-6, Income Tax Regs., for the

proposition that the compensation he earned for services

performed in international waters is sourced in American Samoa or

is effectively connected with a trade or business in American

Samoa.

2. Ocean-Based Personal Services Income

We first consider respondent’s contention that petitioner’s

income earned in international waters is U.S. source income under

section 863(d).

Generally, personal services income of U.S. persons9 is

sourced where the services are performed, without regard to the

location of the payor, the residence of the taxpayer, the place

of contracting, or the place of payment. Secs. 861(a)(3),

862(a)(3); Dillin v. Commissioner, 56 T.C. 228, 244 (1971); sec.

1.861-4(a), Income Tax Regs.

Before 1987, income earned by U.S. citizens and residents

from personal services performed in international waters was

generally sourced where the services were performed; thus, income

from those activities was generally treated as foreign source

income. Sec. 862(a)(3); H. Rept. 99-426, at 381 (1985), 1986-3

C.B. (Vol. 2) 381; S. Rept. 99-313, at 357 (1986), 1986-3 C.B.

(Vol. 3) 357; H. Conf. Rept. 99-841, at II-599 (1986), 1986-3

C.B. (Vol. 4) 599. This resulted in a larger foreign tax credit

9
A U.S. person is a citizen or resident of the United
States. Sec. 7701(a)(30)(A).
 - 16 -

limitation, even though foreign countries generally did not tax

that income. H. Rept. 99-426, supra at 382, 1986-3 C.B. (Vol. 2)

at 382; S. Rept. 99-313, supra at 358, 1986-3 C.B. (Vol. 3) at

358.

Section 863(d) was enacted in 1986. Section 863(d)(1)

provides generally that income earned by a U.S. person from

personal services performed in an ocean-based activity is U.S.

source income, and income derived by a non-U.S. person for such

services is not U.S. source income. Sec. 863(d)(1); 1986 TRA

sec. 1213(a), 100 Stat. 2540.

Petitioner contends that Congress intended for section

863(d) to apply based on the residence, and not the citizenship,

of the taxpayer. If petitioner’s contention were correct,

section 863(d) would not apply to petitioner (i.e., it would not

treat his income earned from personal services performed in

international waters as U.S. source) because he is not a U.S.

resident. Petitioner bases this contention on the following

language in the House Ways and Means Committee report

accompanying enactment of the 1986 TRA:

all income from space or ocean activities is sourced in
the country of residence of the person generating the
income: income derived by a U.S. resident is U.S.
source income and income derived by a nonresident is
sourced outside the United States. * * *

H. Rept. 99-426, supra at 382, 1986-3 C.B. (Vol. 2) at 382.
 - 17 -

We disagree with petitioner; the statutory language,

differences between the House and Senate versions of the 1986

TRA, and differences in the House and Senate committee reports

for the 1986 TRA compel a different reading. The House bill

(section 615(a) of H.R. 3838) provided that ocean activity income

is sourced in the country of residence of the person generating

the income. H. Rept. 99-426, supra at 382, 1986-3 C.B. (Vol. 2)

at 382. In contrast, the Senate bill (section 915(a) of H.R.

3838) provided that ocean-activity income derived by U.S.

persons10 is sourced in the United States and income derived by

persons other than U.S. persons is sourced outside the United

States. S. Rept. 99-313, supra at 358, 1986-3 C.B. (Vol. 3) at

358. The Senate Finance Committee report for the 1986 TRA

included a modified version of the House description which

reflects the change in bill language. The Senate report said in

pertinent part:

all income derived from space or ocean activities is
sourced in the country of residence of the person
generating the income: income derived by United States
persons (as defined in sec. 7701(a)(30)) is U.S. source
income and income derived by persons other than U.S.
persons is sourced outside the United States.

S. Rept. 99-313, supra at 358, 1986-3 C.B. (Vol. 3) at 358.

The conference report included the Senate version of the

10
See supra note 9.
 - 18 -

bill on this point with modifications, none of which are relevant

here. H. Conf. Rept. 99-841, supra at II-600, 1986-3 C.B. (Vol.

4) at 600. Thus, section 863(d) as enacted applies to all U.S.

persons; i.e., to both U.S. citizens and residents.

Petitioner is a U.S. person because he is a U.S. citizen.

Thus, subject to our review of authorities cited by petitioner,

income earned by petitioner from performing services in

international waters is U.S. source income. Sec. 863(d)(2); sec.

1.863-8(d)(2)(ii)(A), Proposed Income Tax Regs., 66 Fed. Reg.

3911 (Jan. 17, 2001).

3. Source of Income Received by Possessions Residents:
Sec. 1.863-6, Income Tax Regs.

We next consider whether authorities cited by petitioner,

primarily section 931(a) and section 1.863-6, Income Tax Regs.,

lead to a result different than respondent contends applies under

section 863(d).

As stated above at paragraph A-1, section 931(a) provides an

exclusion for income sourced or effectively connected with a

trade or business in American Samoa. However, section 931 does

not define American Samoan source or effectively connected

income, and so we consider the sourcing rules contained in

sections 861-865 and related regulations in construing those

terms.

Sections 1.861-1 through 1.863-5, Income Tax Regs.,

establish rules for determining whether income is from a U.S.
 - 19 -

source. Section 1.863-6, Income Tax Regs., states that the

principles of sections 1.861-1 through 1.863-5, Income Tax Regs.,

are applied in determining whether gross income is from sources

within or without a possession of the United States. Section

1.863-6, Income Tax Regs., also provides that, in applying

sections 1.861-1 through 1.863-5, Income Tax Regs., the name of

the possession shall be substituted for the term “United

States”.11 Thus, the effect of section 1.863-6, Income Tax

Regs., is to treat income from personal services which would be

sourced in the United States under sections 1.861-1 through

1.863-5, Income Tax Regs., if the services were performed in the

United States, as sourced in American Samoa if the services were

performed in American Samoa.

11
Sec. 1.863-6, Income Tax Regs., provides:

Sec. 1.863-6. Income From Sources Within a Foreign
Country or Possession of the United States.

The principles applied in §§1.861-1 to 1.863-5,
inclusive, for determining the gross and the taxable
income from sources within and without the United
States shall generally be applied, for purposes of the
income tax, in determining the gross and the taxable
income from sources within and without a foreign
country, or * * * possession of the United States.
* * * In the application of this section the name of
the particular foreign country or possession of the
United States shall be substituted for the term “United
States, * * *”

The last sentence quoted above was added to sec. 1.863-6, Income
Tax Regs., in 1975. T.D. 7378, 1975-2 C.B. 272, 283.
 - 20 -

Petitioner contends that, in the absence of regulations

under section 931(d)(2), we should conclude that under section

1.863-6, Income Tax Regs., petitioner’s fishing income is

American Samoa source and thus excludable under section 931(a).

We disagree. Sections 1.861-1 to 1.863-5, Income Tax Regs.,

adopted before 1986, do not treat income earned from personal

services performed in international waters as U.S. source income;

instead, they provide that the source of income from personal

services is the place where the services are performed. Sec.

1.861-4(b)(1), Income Tax Regs. Income earned from personal

services performed in international waters was not treated as

U.S. source income until section 863(d)(2) was enacted in 1986.12

Thus, section 1.863-6, Income Tax Regs., does not support

petitioner’s position.

The Secretary has not proposed that section 1.863-6, Income

Tax Regs., be changed to refer to section 1.863-8, Proposed

Income Tax Regs. Thus, section 1.863-6, Income Tax Regs., does

not incorporate section 1.863-8, Proposed Income Tax Regs. As a

result, income earned from services performed in international

waters, which is sourced in the United States by section 863(d)

and section 1.863-8, Proposed Income Tax Regs., is not treated as

American Samoan source if earned by a resident of American Samoa.

12
Sec. 863(d) is effective for tax years beginning after
Dec. 31, 1986. 1986 TRA sec. 1213(b); see also sec. 1.863-8(b),
Proposed Income Tax Regs.
 - 21 -

The Secretary could have proposed that change when section 1.863-

8, Proposed Income Tax Regs., was proposed. We consider the

absence of proposed changes to section 1.863-6, Income Tax Regs.,

to be an indication that the Secretary intended section 1.863-6,

Income Tax Regs., not incorporate the rules of section 863(d)

relating to income earned from personal services performed in

international waters.

4. Whether Section 863(d) Violates the Anti-Discrimination
Provisions of the 1986 TRA or Results in Discriminatory
Treatment

Petitioner points out that section 931 was amended in 1986

because (inter alia):

[t]he possessions need tax systems that help them to
pursue development policies and to exercise greater
control over their own economic welfare.

H. Rept. 99-426, supra at 485, 1986-3 C.B. (Vol. 2) at 485; S.

Rept. 99-313, supra at 478, 1986-3 C.B. (Vol. 3) at 478.

Petitioner contends that it would be inconsistent for Congress to

give the possessions control over their economic welfare while

taking away their ability to tax their residents’ income earned

from personal services in international waters. We disagree that

Congress intended to end all U.S. taxation of the income of

residents of the possessions. Congress made this clear in the

Senate report, which states:

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. * * * Thus, even a bona fide resident
 - 22 -

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).
* * *

S. Rept. 99-313, supra at 480-481, 1986-3 C.B. (Vol. 3) at 480-

481.

Section 1271(d) of the 1986 TRA provides that Guam, American

Samoa, and the CNMI may not enact any tax law that discriminates

against any U.S. person or any resident of any other possession.

Petitioner contends that treating income from personal services

earned by residents of the possessions as U.S. source income

under section 863(d) violates section 1271(d) of the 1986 TRA

because there are different classes of taxpayers within the

possessions and there may be unintentional discrimination. We

disagree because the provision petitioner cites applies to those

specified possessions, and not to the United States.

Petitioner also asserts that a U.S. citizen who resides in

American Samoa can avoid sourcing income from the performance of

services in international waters in the United States by

operating as a personal services corporation formed in American

Samoa because Congress exempted bona fide residents of the

specified possessions from the treatment of subpart F for

controlled foreign corporations. Sec. 957(c)(2).

Congress anticipated that problem in the 1986 TRA. S. Rept.

99-313, supra at 358. Congress stated that this problem was
 - 23 -

substantially lessened because space and ocean income is included

in the separate foreign tax credit limitation for shipping

income, secs. 904(d)(2)(D) and 954(f), flush language, and is

subject to U.S. tax under the subpart F rules, 1986 TRA sec.

1221(c)(2) (which amended the definition of foreign base company

shipping income under section 954(f) to include income from a

space or ocean activity (as defined in section 863(d)(2)). Conf.

Rept. 99-841, supra, at II-600; General Explanation of the Tax

Reform Act of 1986, at 934 (J. Comm. Print 1987) (the 1986

Bluebook).

5. Whether Petitioner’s Income Was Fully or Partially
Sourced in American Samoa

Petitioner performed services for the M/V Sea Encounter in

an American Samoan port or territorial waters 7 days in 1995, 10

days in 1996, and 11 days in 1997, and in international waters

208 days in 1995, 193 days in 1996, and 272 days in 1997.

Respondent concedes that wages earned by petitioner while the M/V

Sea Encounter was in port in American Samoa or within its

territorial waters are American Samoan source income, secs.

861(a)(3), 862(a)(3), and that petitioner may exclude those

amounts from income under section 931(a)(1).

Petitioner contends that the services he performed in

American Samoa were so substantial that, under the facts and
 - 24 -

circumstances test of section 1.861-4(b)(1), Income Tax Regs.13

(providing generally that income from labor or services is

sourced where the services are performed), all his income should

be sourced in American Samoa. He contends that the source of his

income should not be determined solely by counting the number of

days he performed services in American Samoa. He points out that

he received his wages in American Samoa and that his employer’s

contract was with an American Samoan cannery. Petitioner

contends that, because of those activities, his fishing-related

income was sourced exclusively in American Samoa.

13
Sec. 1.861-4(b)(1)(i), Income Tax Regs., provides as
follows:

If a specific amount is paid for labor or personal
services performed in the United States, that amount
* * * shall be included in the gross income. If no
accurate allocation or segregation of compensation for
labor or personal services performed in the United
States can be made, or when such labor or service is
performed partly within and partly without the United
States, the amount to be included in the gross income
shall be determined on the basis that most correctly
reflects the proper source of income under the facts
and circumstances of the particular case. In many
cases the facts and circumstances will be such that an
apportionment on the time basis will be acceptable,
that is, the amount to be included in gross income will
be that amount which bears the same relation to the
total compensation as the number of days of performance
of the labor or services within the United States bears
to the total number of days of performance of labor or
services for which the payment is made. In other
cases, the facts and circumstances will be such that
another method of apportionment will be acceptable.
 - 25 -

Section 1.861-4(b)(1), Income Tax Regs., provides that,

where appropriate, income from services performed within and

without the United States may be allocated on the basis of time.

Under that approach, the amount included in gross income is the

amount that bears the same relation to total wages as the number

of days the taxpayer performed services in the United States

bears to the total number of days for which the taxpayer

performed services for which wages were paid.

We disagree that all of petitioner’s fishing-related income

was sourced in American Samoa. The location of the payor, the

place of contracting, and the place of payment do not control for

purposes of sourcing service income. Sec. 861(a)(3); Dillin v.

Commissioner, 56 T.C. 228, 244 (1971); sec. 1.861-4(a), Income

Tax Regs. Petitioner was chief engineer of the M/V Sea Encounter

while it was fishing in international waters, which was the vast

majority of the days petitioner performed the services at issue

here. We believe that the fact that petitioner was paid based on

fish tonnage shows that petitioner’s services performed in

American Samoa were not disproportionately important. Thus, we

find no reason to depart from the proportionality rules of

section 1.861-4(b), Income Tax Regs.

We conclude that the portion of petitioner’s income that is

eligible for the section 931(a) exclusion is based on the number

of days he worked in American Samoa.
 - 26 -

6. Whether Petitioner’s Income Was Effectively Connected
With a Trade or Business in American Samoa

We next consider whether, as petitioner contends, his income

is excludable from U.S. income on the grounds that it was

effectively connected with a trade or business in American Samoa.

As stated earlier, section 931(a)(2) provides that the

income of an individual who resides in, for example, American

Samoa, is excludable from U.S. income if it is “effectively

connected with the conduct of a trade or business” in American

Samoa. Petitioner contends that all his fishing-related income

is effectively connected with the conduct of a trade or business

in American Samoa because he performed substantial services in

American Samoa (e.g., preparing the vessel before trips and

unloading the catch afterwards) and that those services were a

material factor in the production of his income.

Under section 864(c), income can be “effectively connected

with the conduct of a trade or business within the United States”

if it is from “sources within”, or “sources without”, the United

States. Sec. 864(c)(1)(A), (c)(4). In the absence of

regulations under section 931(a)(2) defining the phrase

“effectively connected with the conduct of a trade or business”,

both parties refer to provisions governing whether income is

effectively connected with a U.S. trade or business under section

864(c), and contend that application of those principles favors

their respective position. We believe respondent has the better
 - 27 -

argument, and we conclude that application of effectively

connected income concepts leads to the same result as occurs by

applying the sourcing rules discussed above in paragraph C-5.

a. Sources Within

Section 864(c)(1)(A) determines whether income from sources

within the United States is effectively connected with a U.S.

trade or business. Under the effectively connected rules

applicable to income from sources within the United States,

income is effectively connected to the extent it has a U.S.

source. See sec. 864(c)(3). Thus, the effect of applying the

principles of section 864(c)(3) to section 931 would be that a

taxpayer’s income would qualify for the section 931 exclusion to

the extent the income is from an American Samoan source. That

analysis leads to the same result that we reached above at

paragraph C-5.

b. Sources Without

Section 864(c)(4) determines whether income from sources

without the United States is effectively connected with a U.S.

trade or business. The effect of applying the section 864(c)(4)

principles to construe section 931(a)(2) here is the same as

applying the sourcing rules (see par. C-5, above) for two

reasons. First, income from sources without the United States is

effectively connected with a U.S. trade or business of an

individual only if the income is earned through an office or
 - 28 -

other fixed place of business of that individual. Sec.

864(c)(4)(B); sec. 1.864-7(b)(1), Income Tax Regs. There is no

evidence petitioner meets this requirement. Second, for income

received by an individual from sources without the United States

to be effectively connected with a U.S. trade or business, it

must be income from one of the following categories: Rents,

royalties, dividends, interest, or the sale or exchange of

personal property. Sec. 864(c)(4)(B). Although the term “trade

or business” can refer to income from the performance of personal

services, sec. 863(b), that category of income is not listed in

section 864(c)(4)(B).

Thus, application of principles governing whether income is

effectively connected with a trade or business does not result in

sourcing more of petitioner’s income in American Samoa that the

amount discussed above in paragraph C-5.

7. Conclusion

We conclude that income earned by petitioner in 1995, 1996,

and 1997 from the performance of personal services in

international waters is not excluded from U.S. tax by section

931(a).

D. Petitioner’s State Tax Payments and Refunds

Gross income does not include income attributable to the

recovery during the taxable year of any amount deducted in any

prior taxable year to the extent such amount did not reduce the
 - 29 -

amount of tax imposed. Sec. 111; Kadunc v. Commissioner, T.C.

Memo. 1997-92.

Petitioner claimed an $8,708 income tax deduction relating

to payment of State taxes in 1994, and he received a $1,150 State

tax refund in 1995. Petitioner contends that he received no tax

benefit in 1995 relating to the refund because his 1995 adjusted

gross income was negative. We disagree; 1994 (i.e., the year of

the deduction) is the relevant year for determining whether he

received a tax benefit. Kadunc v. Commissioner, supra.

Petitioner does not contend that he did not receive a tax benefit

in 1994. Accordingly, the amount of the 1995 refund is

includable in his 1995 gross income.

Similarly, in 1995, petitioner claimed a $4,000 income tax

deduction relating to payment of State taxes, but paid no U.S.

income tax because, relying on section 931, he excluded all of

his wage income. In 1996, he received a $3,839 refund.

Petitioner contends he received no tax benefit because he had no

taxable income in 1995. We disagree. As a result of our holding

that he may not exclude his wage income, petitioner enjoyed a tax

benefit by his deduction of State income taxes for 1995. Thus,

petitioner must include in his 1996 gross income the amount of
 - 30 -

the refund to the extent respondent allows him a deduction

relating to the payment of State taxes in 1995.

Accordingly,

Decision will be entered

under Rule 155.

Reviewed by the Court.

WELLS, COHEN, SWIFT, GERBER, RUWE, WHALEN, HALPERN, BEGHE,
CHIECHI, LARO, GALE, THORNTON, and MARVEL, JJ., agree with this
majority opinion.

VASQUEZ, J., concurs.
 - 31 -

BEGHE, J., concurring: Having joined the majority opinion,

I write separately to make two additional points in support of

the results we reach in this case.

First, adoption of the dissenting view would be contrary to

published guidance and administrative practice of the Internal

Revenue Service; the Service has operated on the assumption that

section 931 was in force during the years in issue, and that it

continues in force, notwithstanding the failure to issue

regulations. Since the Tax Implementation Agreement with

American Samoa was entered into in 1988, the Service has issued

Publication 570, Tax Guide For Individuals With Income From U.S.

Possessions, which provides instructions and examples on

reporting income from sources in American Samoa and other

possessions, and for preparing Form 4563, Exclusion of Income for

Bona Fide Residents of American Samoa.

Although 14 years seems like plenty of time to come up with

regulatory guidance, U.S. citizens residing and working in

American Samoa have not been completely in the dark. I therefore

see no objection to sustaining the Service’s stopgap effort to

implement the statutory scheme.

Second, petitioner argues on brief that the United States

should not interfere with American Samoa’s “primary tax

jurisdiction” over his income-earning activities in international

waters. Petitioner’s argument is belied by his otherwise
 - 32 -

unexplained claim--on his American Samoan tax returns for 1995,

1996, and 1997--that his earned income for those years was

completely exempt from American Samoan taxation “per fisherman’s

agreement”.1 Acceptance of this well-compensated U.S. citizen’s

argument that he also has no U.S. income tax liability for the

years in issue would result in his escaping virtually all income

taxes for those years. Cf. Estate of Durkin v. Commissioner, 99

T.C. 561 (1992). Petitioner’s professed solicitude for American

Samoa’s ability to collect its income tax from American Samoa-

based workers earning income from personal services in

international waters, majority op. p. 21, therefore strikes me as

disingenuous and unworthy of credence. There will be time enough

in some later case to consider the merits of the ultimate

resolution of this issue after the Treasury finally gets around

to issuing new section 931 regulations.

1
Materials in the record cited by respondent’s second
supplemental brief would seem to indicate petitioner tried to
attach himself as a free rider to a tax exemption certificate
issued by the American Samoan government to Van Camp, or took the
position that none of his income was earned in American Samoa
pursuant to the fish purchase and sale agreement between Van Camp
and petitioner’s employer.
 - 33 -

FOLEY, J., dissenting: I disagree with the majority’s

analysis and holding.

A. The Statute’s Plain Language Dictates

Congress, through its grant of legislative regulatory

authority, mandated that “the determination as to whether income

is [sourced, or effectively connected to a taxpayer’s trade or

business, in American Samoa] shall be made under regulations

prescribed by the Secretary.” Sec. 931(d)(2). Pursuant to the

plain and unambiguous language of section 931(d)(2), there can be

no such determination until regulations are issued. Where the

statute’s language is plain, the language is where the

interpretive task should end, and the sole function of the courts

is to enforce such language according to its terms. United

States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989);

United States v. Merriam, 263 U.S. 179, 187-188 (1923)(stating

that tax statutes are not to be extended by implication beyond

the clear import of the language used).

Section 931 cannot be reasonably interpreted because

definition of the statute’s most integral terms is relegated to

regulations that do not exist. Congress explicitly vested the

Secretary with the authority to prescribe legislative regulations

delineating the scope of the income exclusion pursuant to section

931(d)(2). See Coca-Cola Co. v. Commissioner, 106 T.C. 1, 19

(1996); Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
 - 34 -

467 U.S. 837, 843-844 (1984) (holding that where Congress has

explicitly left a gap for the agency to fill, there is an express

delegation of authority to the agency to elucidate a specific

provision of the statute by regulation, and such regulations are

legislative). Indeed, the determination whether income is

“derived from sources within [American Samoa]” or “effectively

connected with the conduct of a trade or business * * * within

[American Samoa]” is the crux of the statute. Sec. 931(a). Such

determination can be accomplished in a variety of ways, and this

Court cannot divine what rules the Secretary would promulgate.

Moreover, our role is to interpret, not make, the law.

The statute states that the determination of whether income is

effectively connected “shall be made under regulations prescribed

by the Secretary.” Sec. 931(d)(2). The majority imply that such

language is ambiguous, and that the Court, and presumably

taxpayers, may look to any regulation if the Code does not specify

the section under which the regulations must be drafted. Majority

op. p. 13. The above-referenced language is commonly used in

statutes. Respondent and tax practitioners will certainly find

creative uses for this sophistic line of analysis.

The majority’s analysis eventually shifts to section 864.

Application of that statute does not work, however, because section

864 was intended to determine whether income of a nonresident alien

is effectively connected to the United States. Sec. 864(c)(1). In
 - 35 -

fact, a literal application of section 864 to section 931 would

result in no U.S. citizen’s qualifying under the effectively

connected prong. Nevertheless, the “principles” of an inapplicable

section (i.e., section 864) are being relied on, and the mandate of

the applicable section (i.e., section 931(d)(2)) is ignored in a

desperate attempt to make the statute work. See majority op. p.

26. The bottom line is that, other than section 931, there are no

statutes or regulations addressing whether an individual’s income

is “effectively connected with the conduct of a trade or business

by such individual within * * * [American Samoa]”. Sec. 931(a)(2).

Rather than adhere to the statute, the majority relies on

effectively connected “concepts” and “principles”. See majority

op. pp. 27-28. The statute, legislative history, and Implementing

Agreement do not authorize the application of section 864's

“principles”. In numerous other grants of regulatory authority

Congress explicitly provided that the “principles” of a particular

section should be applicable, but with respect to section 931

Congress failed to provide such direction. See sections

41(f)(1)(B), 52(b), 120(d)(6)(B), 127(c)(4)(B), 129(e)(5)(B),

267(a)(3), 367(e)(1), 383(b), 404(g)(3)(C), 414(c),

416(i)(1)(B)(iii)(II), 597(b), 1092(b)(1), 2663(2), et al. In

order to give effect to section 931(d)(2), the Court must follow,

not ignore, its mandate.
 - 36 -

B. Exceptions to the Plain Language Doctrine Are Not
Applicable

There are two exceptions to the plain language doctrine. We

need not adhere to a literal application of a statute if such

language produces an outcome that is ‘demonstrably at odds’ with

clearly expressed congressional intent to the contrary, United

States v. Ron Pair Enters., Inc., 489 U.S. at 241 (1989) (quoting

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982));

Peaden v. Commissioner, 113 T.C. 116, 122 (1999), or results in

an outcome so absurd “as to shock the general moral or common

sense”, Crooks v. Harrelson, 282 U.S. 55, 60 (1930); Tele-

Communications, Inc. v. Commissioner, 95 T.C. 495 (1990). A

conclusion that section 931 is inapplicable without regulations

neither conflicts with clearly expressed congressional intent nor

results in an absurd outcome. To the contrary, the legislative

history and the implementing agreement both support the plain

language of the statute which provides that section 931 is

inapplicable in the absence of regulations.

1. Legislative History

The legislative history indicates that Congress gave only

the Secretary the authority to prescribe the applicable rules.

Congress was equally concerned about American Samoa’s authority

to implement its own tax system and the minimization of potential

abuse. The Senate Committee on Finance stated:
 - 37 -

Therefore, to promote fiscal autonomy of the
possessions, it is important to permit each possession
to develop a tax system that is suited to its own
revenue needs and administrative resources. It is also
important to coordinate the possessions’ tax systems
with the U.S. tax system to provide certainty and
minimize the potential for abuse. [S. Rept. 99-313, at
478 (1986), 1986-3 C.B. (Vol. 3) 1, 478.]

To accomplish these goals, Congress gave extraordinary power to

the Secretary to negotiate an implementing agreement between the

United States and American Samoa, and to prescribe regulations

for purposes of defining the boundaries of American Samoa’s tax

authority. Id. at 479-481.

Congress intended that the Secretary define “effectively

connected income” in a manner that would prevent tax avoidance.

Id. at 481; H. Conf. Rept. 99-841 (Vol. II), at II-680 (1986),

1986-3 C.B. (Vol. 4) 1, 680. The legislative history identifies

situations where taxpayers with assets having built-in gain move

to a U.S. possession, sell their assets, and avoid tax on the

gain. S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 481.

These tax avoidance techniques are an illustrative, rather than

exhaustive, delineation of machinations Congress wanted the

Secretary to foreclose. The Secretary was given this

responsibility because he, rather than Congress or this Court,

has experience with the specific problem and the expertise to

solve it.
 - 38 -

2. Implementing Agreement

Congress gave the Secretary the responsibility to negotiate

the implementing agreement, without which section 931 is

inoperative. Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514,

sec. 1271, 100 Stat. 2085, 2591; S. Rept. 99-313, supra at 479.

Moreover, the implementing agreement indicates that the Secretary

has the responsibility of defining the scope of American Samoa’s

tax authority and explicitly states that “the United States may

use its regulatory authority over sourcing rules under section

931(d)(2) and 7654(e) of the Code to determine that certain

income is U.S.-source income.” Tax Implementation Agreement

Between the United States of American and American Samoa, 1988-1

C.B. 408, 410. (Emphasis added.)

Pursuant to section 1271 of TRA 1986, and the resulting

implementing agreement, the Secretary is granted extraordinary

authority. For example, American Samoa is allowed to replace the

“mirror” system of taxation with its own tax scheme, but the

Secretary has the authority to return the possession to the

“mirror” system if the possession enacts discriminatory tax laws

or the possession’s tax receipts fall (revenue requirement). TRA

1986 sec. 1271, 100 Stat. 2592. Thus, after discovering a

violation of these requirements and informing Congress of its

findings, the possession will return to the “mirror” system

unless Congress passes a law providing otherwise. Id.
 - 39 -

The aforementioned revenue requirement is a good example of

the coordination between the implementing agreement and the

regulations. Obviously, whether tax receipts rise or fall within

American Samoa is directly related to the Secretary’s definition

of “income derived from sources within [American Samoa]” and

“income effectively connected with the conduct of a trade or

business by such individual within [American Samoa].” The

definition of these terms can be adjusted to ensure that certain

income does not escape from both the U.S.- and American Samoan-

tax systems. Thus, the implementing agreement and the regulation

were intended to, and in fact do, work in tandem to outline the

scope of American Samoa’s tax authority.

C. Section 931(d)(2) Presents a Case of First Impression

On numerous occasions, this Court has considered whether the

promulgation of regulations pursuant to a statutory grant of

authority was a condition precedent to the execution of a

statute. See Schwalbach v. Commissioner, 111 T.C. 215 (1998);

Intl. Multifoods Corp. v. Commissioner, 108 T.C. 579 (1997);

Estate of Neumann v. Commissioner, 106 T.C. 216 (1996); H Enters.

Intl., Inc. v. Commissioner, 105 T.C. 71 (1995); Estate of Hoover

v. Commissioner, 102 T.C. 777 (1994); Alexander v. Commissioner,

95 T.C. 467 (1990); Estate of Maddox v. Commissioner, 93 T.C. 228

(1989); First Chicago Corp. v. Commissioner, 88 T.C. 663 (1987);

Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819 (1984).
 - 40 -

In those cases, however, the grant of regulatory authority was

not similar to section 931(d)(2)’s mandate, and the statute’s

ambit was not as dependent on the promulgation of regulations.

In addition, the Court was not asked to interpret the statute’s

most integral term without sufficient guidance regarding

Congress’ intent.

In Alexander v. Commissioner, supra at 473, we held that a

statute was not applicable because the Secretary had failed to

promulgate regulations. We concluded:

Section 465(c)(3)(D) unambiguously provides that
section 465(b)(3) “shall apply only to the extent
provided in regulations prescribed by the Secretary,”
to an activity described in section 465(c)(3)(A).
Regulations have not been prescribed by the Secretary.
Accordingly, we hold that section 465(b)(3) does not
apply to the activities of the limited partnerships.
Id.

We chose not to exercise our independent judgment because

Congress gave the Secretary, and only the Secretary, the

authority to prescribe the applicable rules.

In Schwalbach, Intl. Multifoods, Estate of Neumann,1 and H

1
In Estate of Neumann v. Commissioner, 106 T.C. 216, 219
(1996), the Court set forth the “whether versus how” test. The
Court stated that:

we are called upon to resolve the following question:
Are the regulations a necessary condition to
determining “whether” the GST tax applies * * * or do
they constitute only a means of arriving at “how” that
tax, otherwise imposed by the statute, should be
determined * * *. Id.

(continued...)
 - 41 -

Enters., the statutes at issue provided that “The Secretary shall

prescribe such regulations as may be necessary or appropriate”.

See secs. 469(l), 865(j)(1), 2663, 7701(f). Thus, these cases

are distinguishable from petitioner’s because of the permissive

nature of the grants of regulatory authority.

The majority rely on Estate of Maddox, First Chicago, and

Occidental, for the proposition that the Secretary’s failure to

promulgate regulations as directed by Congress cannot prevent the

application of a statute which confers a benefit on taxpayers.

The majority’s reliance on these cases is misplaced for two

reasons. First, section 931 provides an exclusion for income

sourced in, or effectively connected to, American Samoa, but such

income is subject to taxation in American Samoa. See TRA 1986

sec. 1271(a), 100 Stat. 2593. Any tax reduction that may result

from the interplay between the two tax systems was not intended

by Congress. Thus, an exclusion from U.S. taxes pursuant to

1
(...continued)
Without regulations to determine the scope of the exclusion, we
are unable to discern “whether” or “how” sec. 931 relates to
petitioner. Thus, the “whether” versus “how” test is not useful.
The regulatory grant of authority in sec. 931(d)(2), unlike the
grant of authority in previous cases holding that the “how” prong
of the test was applicable, explicitly provides that “whether
income is described in paragraph (1) or (2) of subsection (a)
shall be made under regulations prescribed by the
Secretary.”(Emphasis added.) In addition, the grant of authority
at issue in Estate of Neumann v. Commissioner, supra at 218,
directed the Secretary to draft regulations “consistent with the
principles of chapters 11 and 12”, thus giving the Court a
foundation for its conclusion. See sec. 2663(2).
 - 42 -

section 931 confers no benefit of the type contemplated in Estate

of Maddox (i.e., reduction in estate tax due to application of

section 2032A), and First Chicago and Occidental (i.e., relief

from alternative minimum tax liability). Accordingly, these

cases are distinguished.

Second, the grants of authority in Estate of Maddox, First

Chicago, and Occidental allowed the Secretary to promulgate

legislative regulations that enlarged the scope of section 2032A

and the tax benefit rule. The Secretary was not required to

define terms integral to the operation of the entire statute.

Thus, even in the absence of regulations, the Court in those

cases could arrive at a reasonable conclusion regarding whether

the taxpayer met the terms of the statute. See Estate of Maddox

v. Commissioner, supra at 233 (concluding that the language of

section 2032A(g) “backhandedly tells us that Congress did not

want the estate of a stockholder in a family corporation to be

deprived of the benefits of section 2032A”); First Chicago Corp.

v. Commissioner, supra at 672 (reasoning that section 58(h) “was

obviously intended to give the tax benefit rule unlimited

scope”); see also Occidental Petroleum Corp. v. Commissioner,

supra at 827. Congress, in section 931, did not, however,

provide a basis upon which this Court can determine whether

petitioner’s income qualifies for exclusion.
 - 43 -

D. Conclusion

Congress enacted a statutory scheme delegating broad

authority to the Secretary. Whether we agree with such

delegation, or are comfortable with its consequences, is

irrelevant. We must follow the statutory mandate and not do the

job reserved for either the legislative or executive branch.