Francisco v. Comm'r of Internal Revenue, 7670–00.
| Decision Date | 19 December 2002 |
| Docket Number | No. 7670–00.,7670–00. |
| Citation | 119 T.C. No. 20,119 T.C. 317 |
| Parties | John A. FRANCISCO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer petitioned for redetermination of deficiencies arising from income earned while a resident of American Samoa operating fishing vessel in international waters. The Tax Court, Colvin, J., held that: (1) American Samoan source or effectively connected income was excludable from U.S. income; (2) portion of fishing income earned in international waters that was not American Samoan source or effectively connected income was taxable U.S. source income; and (3) State income tax refunds were includable in gross income.
Decision for IRS in part, and for taxpayer in part.
Beghe, J., concurred and filed written opinion.
Foley, J., dissented and filed written opinion. Daniel R. King and Richard T. Luoma, for petitioner.
Peter C. Rock, for respondent.
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.
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.
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, 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.
Petitioner was a U.S. citizen residing in American Samoa during the years in issue and when he filed his petition.
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 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.
On timely filed 1995, 1996, and 1997 returns, petitioner, relying on section 931, excluded wage income relating to his employment with De Silva.
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.
OPINIONThe 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 CNMI1. 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. 1.1–1(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
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.
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
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.
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...
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