Specking v. Comm'r of Internal Revenue
| Decision Date | 28 August 2001 |
| Docket Number | 14496–99.,Nos. 12010–99,12348–99,s. 12010–99 |
| Citation | 117 T.C. 95,117 T.C. No. 9 |
| Parties | Joseph D. SPECKING, et al.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Kenneth W. McWade, for petitioners.
Jonathan J. Ono, for respondent.
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 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.
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:
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.
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. 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 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) (); 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.
Specking resided in Rifle, Colorado, when he filed the petition in his case. He was assigned to the JACADS project for 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):
+------------------------------------------------------------+
¦Year¦Wages ¦Income from other sources¦Adjusted gross income¦
+----+-------+-------------------------+---------------------¦
¦ ¦ ¦ ¦ ¦
+----+-------+-------------------------+---------------------¦
¦1995¦$74,552¦1 ($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 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.
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): 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 entitled to exclude any income for 1995 through 1997...
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