Arnett v. C.I.R.

• Decision Date: 16 January 2007
• Docket Number: No. 06-1934.,06-1934.
• Citation: 473 F.3d 790
• Parties: Dave ARNETT, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

473 F.3d 790

Dave ARNETT, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 06-1934.

United States Court of Appeals, Seventh Circuit.

Argued November 6, 2006.

Decided January 16, 2007.

Larry D. Harvey (argued), Englewood, CO, for Petitioner-Appellant.

Teresa T. Milton (argued), Frank P. Cihlar, Department of Justice Tax Division, Appellate Section, Washington, DC, for Respondent-Appellee.

Before RIPPLE, WILLIAMS and SYKES, Circuit Judges.

RIPPLE, Circuit Judge.

Petitioner Dave Arnett was employed by Raytheon Corporation and stationed in Antarctica for the calendar year 2001. When he filed his tax return for that year, he claimed an exclusion for income earned in a foreign country under 26 U.S.C. § 911 ("section 911") for the income he earned while working in Antarctica. The Internal Revenue Service ("IRS") assessed a deficiency for this exclusion based on its view that Antarctica is not a "foreign country" for purposes of section 911. Mr. Arnett challenged that deficiency in the Tax Court. The Tax Court sustained the IRS' position. For the reasons set forth in this opinion, we affirm the judgment of the Tax Court.

I BACKGROUND

The facts of this case are not in dispute. Mr. Arnett, a resident of Hayward, Wisconsin, was employed by Raytheon Support Services Co., which provided support services under contract with the National Science Foundation at McMurdo Station, Ross Island, Antarctica. When he filed his tax return for income received during tax year 2001, Mr. Arnett claimed that, by virtue of section 911, he was entitled to exclude $48,894 in income received from his work in Antarctica. On March 7, 2003, the IRS sent Mr. Arnett a notice of deficiency, stating that he was not permitted to exclude the income that he had received from his work in Antarctica because Antarctica is not a foreign country within the meaning of section 911. Mr. Arnett contested the IRS' conclusion in the Tax Court.

In the Tax Court, the Commissioner of Internal Revenue ("Commissioner") moved for summary judgment, contending that, under the treasury regulations then in effect, only territory under the sovereignty of a foreign nation is considered a "foreign country" for purposes of section 911. See 26 C.F.R. § 1.911-2(h). The United States neither makes any claim to sovereignty nor recognizes any other nation's claims of sovereignty over Antarctica. See Antarctic Treaty art. IV, Dec. 1, 1959, 12 U.S.T. 794; Smith v. United States, 507 U.S. 197, 198 n. 1, 113 S.Ct. 1178, 122 L.Ed.2d 548 (1993). Thus, the Commissioner submitted, under the applicable treasury regulations Antarctica is not a foreign country for purposes of section 911. Relying on Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), the Tax Court deferred to the Commissioner's interpretation of section 911, embodied in IRS regulations, and held that, for purposes of section 911, the term "foreign country" applied only to territory within the sovereignty of a foreign country. The Tax Court therefore concluded that, because Antarctica was not within the sovereign territory of any foreign country, Mr. Arnett could not exclude income earned for services rendered in Antarctica.

II DISCUSSION

A.

In challenging the Tax Court's holding, Mr. Arnett makes two arguments. First, he submits that the term "foreign country" is not ambiguous and therefore there is no need for deference to the IRS' regulation defining the term. In Mr. Arnett's view, the word "foreign country" unambiguously includes Antarctica. Secondly, Mr. Arnett submits that, even if the statute is ambiguous, the language of the regulation does not support the Tax Court's conclusion that Antarctica is not a "foreign country" for purposes of section 911. We begin our assessment of these contentions by first examining the statute in question and the methodology mandated by the Supreme Court's cases for resolving the issues before us.

Under section 911, qualified individuals may exclude, within statutory limits,¹ foreign earned income from their gross income. 26 U.S.C. § 911(a)(1), (b)(2)(D). Foreign earned income is defined in the statute as amounts received "from sources within a foreign country" for services performed by the taxpayer. Id. § 911(b)(1)(A). The Internal Revenue Code ("IRC") does not define "foreign country." The Commissioner, therefore, has issued regulations to define this term. These regulations were promulgated under a specific grant of statutory authority to prescribe regulations to carry out the purposes of section 911, id. § 911(d)(9), and under the IRC's general grant of authority to prescribe rules to enforce the provisions of the IRC, id. § 7805(a). See 48 Fed. Reg. 33,007 (July 20, 1983). These regulations define "foreign country" to include territory under the sovereignty of a foreign nation. See 26 C.F.R. § 1.911-2(h). The Tax Court accorded this definition Chevron deference and concluded that Antarctica did not fall within the definition of a "foreign country" because the United States does not recognize Antarctica to be the sovereign territory of any foreign government.

Under the Chevron doctrine, we examine an agency's construction of a statute that it administers under a two-part analysis that mirrors Mr. Arnett's arguments. We first ask "whether Congress has directly spoken to the precise question at issue," and second, "if the statute is silent or ambiguous with respect to the specific issue," whether the agency's construction is permissible. Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778 (emphasis added). When the statute grants the agency "an express delegation of authority ... to elucidate a specific provision of [a] statute by regulation," the agency's construction of the statute is permissible, and the regulation will be controlling, unless the regulation is "arbitrary, capricious, or manifestly contrary to the statute." Id. at 843-44, 104 S.Ct. 2778; see also United States v. Mead Corp., 533 U.S. 218, 227, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). When the statute does not delegate rulemaking authority explicitly, we shall consider statutory ambiguities to be implicit delegations to the agency administering the statute to interpret the statute through its rulemaking authority. See Mead, 533 U.S. at 229, 121 S.Ct. 2164; Chevron, 467 U.S. at 844, 104 S.Ct. 2778. Such interpretation will be permissible, and we shall defer to it, so long as the interpretation is a reasonable construction of the statute. Chevron, 467 U.S. at 844, 104 S.Ct. 2778.

B.

We must first determine whether the term "foreign country" is unambiguous. The term has been defined in other contexts by the Supreme Court. In Smith v. United States, 507 U.S. 197, 113 S.Ct. 1178, 122 L.Ed.2d 548 (1993), the Court had to determine whether Antarctica was a foreign country for purposes of the Federal Tort Claims Act ("FTCA"), 28 U.S.C. §§ 1346(b), 1402(b), 2401(b), 2671-80. That statute states that the United States' waiver of sovereign immunity does not apply to "[a]ny claim arising in a foreign country." 28 U.S.C. § 2680(k); see also Smith, 507 U.S. at 201, 113 S.Ct. 1178. In its examination of the issue, the Court explicitly noted that the dictionary definition of "country" which it noted, "[a] region or tract of land," was "not the only possible interpretation of the term." Id. (quoting Webster's New International Dictionary 609 (2d ed.1945)) (internal quotation marks omitted). Then, in order to arrive at a definition of "country" for purposes of the FTCA, the Court examined the rest of the FTCA. Id.

First, the Court noted that the FTCA's provisions operated both as a waiver of sovereign immunity and as a choice of law provision. Id. The Court reasoned that, if Antarctica were not a foreign country under the statute, the FTCA would waive the United States' sovereign immunity in Antarctica and, at the same time, direct the district "courts to look to the law of a place that has no law in order to determine the liability of the United States," a result the Court found "bizarre." Id. at 201-02, 113 S.Ct. 1178. Additionally, the FTCA's venue provisions would result in a waiver of sovereign immunity but provide no venue when a person injured in Antarctica did not reside in the United States. Id. at 202, 113 S.Ct. 1178. The Court found that this result was incompatible with the presumption that "Congress does not in general intend to create venue gaps." Id. at 202-03, 113 S.Ct. 1178 (quoting Brunette Mach. Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706, 710 n. 8, 92 S.Ct. 1936, 32 L.Ed.2d 428 (1972)) (internal quotation marks omitted). The Court also noted that, because the FTCA is a limited waiver of sovereign immunity, the Court should not "extend the waiver beyond that which Congress intended." Id. at 203, 113 S.Ct. 1178 (quoting United States v. Kubrick, 444 U.S. 111, 117-18, 100 S.Ct. 352, 62 L.Ed.2d 259 (1979)) (internal quotation marks omitted). Lastly, the Court found important the presumption against extra-territorial application of statutes. Id. at 203-04, 113 S.Ct. 1178.

In short, in order to give meaning to the term "foreign country" in the FTCA, the Supreme Court focused in Smith on the purpose and operation of the FTCA. The Court's resort to the statute's context in order to give meaning to the term undercuts Mr. Arnett's claim that the term "foreign country" unambiguously includes Antarctica.² Smith demonstrates that the term "foreign country" has meaning only when that term is interpreted in the particular statutory context in which it appears.

The conclusion that the term "foreign country" is inherently ambiguous is certainly validated by an examination of the text of section 911. Here, the appropriate meaning of the term is even more difficult to discern from the statutory context. Indeed, the text of section 911 provides no indication of the proper definition of "foreign country" or whether Antarctica...