Tax Court Holds—Repeatedly—That Antarctica Is Not a Foreign Country

Those who pay attention to Tax Court decisions may have noticed a trend in 2007: case after case decided on the issue of whether a taxpayer can exclude income earned while in Antarctica under the foreign earned income exclusion provisions of Sec. 911.

By mid-February 2008, 74 decisions had been issued on this subject. Most of these cases were litigated in the Tax Court, but one made it up to the Seventh Circuit on appeal. In every case, the courts have held that Antarctica is not a foreign country and therefore income earned there does not qualify for the exclusion.

The taxpayers in most of these cases worked for Raytheon Support Services under contract with the National Science Foundation at McMurdo Station in Antarctica. (According to Larry Harvey, the lawyer who represented the petitioners in most of these cases, about 160 such cases have been filed.)

The first case was decided by the Tax Court in 2006. It was appealed to the Seventh Circuit, which affirmed the Tax Court’s decision that Antarctica is not a foreign country and income earned there by U.S. citizens is not excludible under Sec. 911 (Arnett, 126 TC 89 (2006), aff’d, 473 F3d 790 (7th Cir. 2007)).

Sec. 911(b)(1)(A) defines “foreign earned income” to generally mean amounts earned “from sources within a foreign country.” Regs. Sec. 1.911-2(h) defines “foreign country” as “any territory under the sovereignty of a government other than the United States.” In holding that Antarctica is not a foreign country under these definitions, the Tax Court in Arnett looked to its prior decision in Martin, 50 TC 59 (1968), which held that under the Antarctic Treaty, December 1, 1959, 12 U.S.T. 794, which currently has 45 signers, Antarctica is a “sovereignless region.”

The Seventh Circuit also noted that, under Sec. 863, activity in Antarctica is deemed to be “space or ocean activity,” and the United States is considered to be the source country of income from such activity (Arnett, 473 F3d at 797).

While Antarctica has been consistently held not to be a foreign country for tax purposes, it has been held by federal courts to be a foreign country for other purposes. In Smith v. Raytheon, 297 FSupp2d 399 (D. Mass. 2004), a district court held that, for purposes of the Fair Labor Standards Act, Antarctica was a foreign country and therefore workers there were not entitled to overtime compensation.

The Supreme Court has held that the “ordinary meaning of ‘foreign country’ includes Antarctica, even though it has no recognized government” (Smith, 507 US 197 (1993)), thereby barring a claim under the Federal Tort Claims Act, which precludes “any claim arising in a foreign jurisdiction” (28 USC §2680(k)).

The taxpayer in Arnett argued that the more recent Smith v. Raytheon and Smith decisions overruled the older Martin case, but the Tax Court distinguished the newer cases because they did not deal with tax issues. According to Mr. Harvey, the taxpayer also argued on the grounds of consistency and fairness that Antarctica should be treated as a foreign country for all purposes: “Why do you get a different result in a tax context?” he asks.

Mr. Harvey also points out that taxpayers who work in a no-income-tax country, such as the Bahamas, still get the Sec. 911 exclusion, even though the ostensible purpose of the exclusion is to account for the added foreign tax burden U.S. taxpayers will bear when living and working in a foreign country.

However, the Tax Court was unpersuaded by these arguments and spent 2007 routinely ruling against the taxpayers in these cases.