T.C. Memo. 2003-14
UNITED STATES TAX COURT
STEPHEN JONES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2970-01. Filed January 14, 2003.
Kenneth W. McWade, for petitioner.
Jonathan J. Ono, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: Respondent determined a $17,052 deficiency
in petitioner’s income tax for 1997.
The sole issue for decision is whether petitioner may
exclude from gross income under either section 931 or section 911
compensation he earned for personal services he performed in 1997
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on Johnston Island, a U.S. possession in the Pacific Ocean.1 We
hold that he may not. See Farrell v. United States, F.3d ,
(9th Cir., Dec. 24, 2002); Specking v. Commissioner, 117 T.C. 95,
111, 113, 116 (2001), on appeal (10th Cir., May 9, 2002).
Unless otherwise specified, section references are to the
Internal Revenue Code as amended. Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
All of the facts have been stipulated and are so found. The
parties submitted the case fully stipulated under Rule 122.
Petitioner resided in Melbourne, Florida, when he filed the
petition.
Petitioner was employed by Raytheon Engineers &
Constructors, Inc. (Raytheon), on Johnston Island throughout
1997. Petitioner received wages of $83,842 from Raytheon in
1997. On his individual income tax return as amended for 1997,
petitioner excluded from his gross income all of the wages that
he received from Raytheon in 1997 on the grounds that those wages
were excludable under section 931 or section 911.
1
Johnston Island is a U.S. possession. Act of Aug. 18,
1856, ch. 164, 11 Stat. 119, 48 U.S.C. secs. 1411-1419 (2000).
Johnston Island is not part of American Samoa, Guam, or the
Commonwealth of the N. Mariana Islands. Specking v.
Commissioner, 117 T.C. 95, 97 (2001).
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Discussion
A. Whether Petitioner May Exclude From Income Under Section 931
Compensation That He Received for Services He Performed on
Johnston Island
Petitioner contends that he may exclude from income under
section 931 compensation that he received for services he
performed on Johnston Island in 1997. Before 1986, section 931
permitted citizens to exclude income derived from sources within
various possessions of the United States, including Johnston
Island, if certain conditions were satisfied. See Farrell v.
United States, F.3d at ; Specking v. Commissioner, supra at
102-103. Section 931, as amended by the Tax Reform Act of 1986
(1986 TRA), Pub. L. 99-514, sec. 1272(a), 100 Stat. 2593, applies
only to income derived from sources within Guam, American Samoa,
and the Northern Mariana Islands; it does not apply to income
derived from sources within Johnston Island. Sec. 931(c).
Petitioner points out that section 1.931-1(a), Income Tax Regs.,2
continues to provide that section 931 applies to Johnston Island
and contends that, as a result, residents of Johnston Island may
exclude income derived from sources within Johnston Island.
Respondent recognizes that section 1.931-1(a), Income Tax Regs.,
is inconsistent with section 931 and contends that section 931
controls, not section 1.931-1(a), Income Tax Regs. We agree with
2
Sec. 1.931-1, Income Tax Regs., was most recently amended
in 1975. T.D. 7385, 40 Fed. Reg. 50260 (Oct. 29, 1975).
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respondent. It is well settled that when a regulation conflicts
with a subsequently enacted statute, the statute controls.
Bingler v. Johnson, 394 U.S. 741, 750 (1969); Commissioner v. S.
Tex. Lumber Co., 333 U.S. 496, 501 (1948); Farrell v. United
States, F.3d at .
We decided this issue in Specking v. Commissioner, supra at
111. One of the years at issue in that case was 1997, which is
the year at issue here. In Specking, we said:
For the years in issue, section 931 does not apply
to the compensation petitioners received for services
they performed on Johnston Island. * * * [Id.]
The U.S. Court of Appeals for the Ninth Circuit, to which this
case is appealable, reached the same conclusion in Farrell.
Petitioner also contends, on the basis of a footnote in
Specking v. Commissioner, supra at 106 n.15, that former section
931 still applies to Johnston Island. The footnote states:
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 sec. 931. * * * [Id.]
We disagree. Former section 931 applied to Johnston Island.
However, section 931, as amended by 1986 TRA section 1272(a),
does not. Note 15 in Specking does not provide otherwise. 1986
TRA section 1277(a) and (b), 100 Stat. 2600, provides the
following effective dates for the amendments to section 931:
(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.
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(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.
Thus, the 1986 TRA section 1272(a) amendments that apply to
Johnston Island are effective for taxable years beginning after
December 31, 1986. However, under note 15 in Specking, the
amendments that apply with respect to American Samoa apply only
when and so long as an implementing agreement is in effect.
Thus, petitioner may not exclude income under the pre-1986 TRA
version of section 931. See Specking v. Commissioner, supra at
109-110.
B. Whether Petitioner May Exclude From Income Under Section 911
$70,000 That He Received for Services He Performed on
Johnston Island
Petitioner contends that $70,000 of his income from
employment on Johnston Island is exempt from tax under section
911. Petitioner relies on section 1.931-1(b)(2), Income Tax
Regs., which 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. * * *
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We disagree with petitioner. A taxpayer who resides in
Johnston Island does not qualify for the section 911 exclusion
because Johnston Island is a U.S. possession and not a foreign
country. Section 1.931-1(b)(2), Income Tax Regs., does not
provide otherwise. Thus, income petitioner earned on Johnston
Island is not foreign earned income excludable under section 911.
See Farrell v. United States, F.3d at ; Specking v.
Commissioner, supra at 113-116.
We conclude that petitioner may not exclude from gross
income under either section 931 or section 911 compensation he
earned for personal services he performed on Johnston Island in
1997. See Farrell v. United States, F.3d at ; Specking v.
Commissioner, supra at 111, 116.
To reflect the foregoing,
Decision will be
entered for respondent.