Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-03-01210/USCOURTS-caDC-03-01210-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue Service
Appellee
John A. Francisco
Appellant

Document Text:

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made

before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 19, 2004 Decided June 18, 2004

No. 03-1210

JOHN A. FRANCISCO,

APPELLANT

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

APPELLEE

Appeal from the United States Tax Court

(No. IRS–7670–00)

R. Todd Luoma argued the cause for appellant. With him

on the briefs was Daniel R. King.

Teresa E. McLaughlin, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief

was Michael J. Haungs, Attorney.

Before: SENTELLE, ROGERS and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 1 of 7
2

SENTELLE, Circuit Judge: John A. Francisco (‘‘Francisco’’

or ‘‘taxpayer’’), a citizen of the United States and resident of

American Samoa, appeals from a judgment of the United

States Tax Court upholding in large part an Internal Revenue

Service deficiency notice. The notice assessed Francisco for

taxes on earnings he was paid in American Samoa but which

he earned while working on a fishing boat in international

waters. For the reasons more fully set forth below, we

affirm the judgment of the Tax Court.

I. BACKGROUND

In tax years 1995, 1996, and 1997, Francisco, a United

States citizen, resided in American Samoa, a 76-square-mile

U.S. territory in the South Pacific. During those tax years,

he was employed as chief engineer on a tuna fishing boat, the

M.V. Sea Encounter based in American Samoa, but operating

principally in international waters. His employer, DeSilva

Sea Encounter Corporation (‘‘DeSilva’’), had a contract with

Van Kamp Seafood Company Inc. under which it sold the

Encounter’s entire catch to Van Kamp’s cannery in American

Samoa. While Van Kamp had the right to refuse fish that

were not up to standard, its refusal rate apparently ran no

higher than approximately 2% of the catch. Francisco’s pay,

like all members of the vessel’s crew, was based on a percentage of the payment of Van Kamp to DeSilva, and in his case

amounted to $30 for each ton Van Kamp accepted.

Francisco filed tax returns for each of the years in question, reporting wages and salary respectively for 1995 of

$111,330.00, 1996 of $179,010.00 and 1997 of $148,188.00, all of

which derived from his work on the Encounter. Francisco

claimed a 100% exclusion of the income under § 931 of the

Internal Revenue Code (‘‘Code’’). That section governs income derived from ‘‘specified possessions of the United

States,’’ including American Samoa. It provides ‘‘a general

rule’’ covering any individual taxpayer ‘‘who is a bona fide

resident of a specified possession during the entire taxable

year,’’ and provides that for such a taxpayer, ‘‘gross income

shall not include (1) income derived from sources within any

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 2 of 7
3

specified possession, and (2) income effectively connected with

the conduct of a trade or business by such individual within

any specified possession.’’ 26 U.S.C. § 931(a).

The Commissioner of Internal Revenue sent the taxpayer a

notice of deficiency pursuant to 26 U.S.C. § 6212 disallowing

the entire claimed exclusion, on the theory that the earnings

were governed by § 863(d) of the Code, rather than § 931 as

asserted by the taxpayer. Section 863(d) governs income

source rules ‘‘for space and certain ocean activities.’’ It

provides that income ‘‘derived by a United States person’’

from an ocean activity ‘‘shall be sourced in the United

States.’’ 26 U.S.C. § 863(d)(1)(A). That section defines

‘‘ocean activity’’ as ‘‘any activity conducted on or under water

not within the jurisdiction as recognized by the United

States’’ of a foreign country, possession of the United States,

or the United States. Id. § 863(d)(2)(A)(ii). Operating under

the theory that all of Francisco’s income from his employment

on the fishing vessel fell within the terms of § 863(d), the

Commission disallowed the entire exclusion, and asserted

deficiencies for each of the tax years under review.

The taxpayer filed a petition for review of the Commissioner’s determination with the United States Tax Court contesting the Commissioner’s determinations. The Tax Court entered its decision, for the most part upholding the position of

the Commissioner. Francisco v. Commissioner, 119 T.C. 317

(2002). In a divided opinion,1

 that court held that § 863

governed the portion of taxpayer’s earnings attributable to

his activity on the vessel while it was in international waters.

1 Judge Maurice Foley dissented from the court’s opinion expressing a view that § 931 was inapplicable. 119 T.C. at 331

(Foley, J., dissenting). In Judge Foley’s view, because that section

allowed for exclusion based on a source determination ‘‘made under

regulations prescribed by the Secretary,’’ § 931(d)(2), and because

the Secretary had never issued any such regulations, he would have

held the statute incapable of application. Neither party in this

appeal asserts Judge Foley’s theory, and we have no occasion to

pass upon the question it raises.

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 3 of 7
4

Because he performed some duties in port, the Tax Court

prorated his liability, holding that § 931 in fact did govern

that portion of his earnings attributable to activities actually

occurring within American Samoa. By far the largest part of

taxpayer’s work time occurred in international waters and the

bulk of his exclusion was therefore disallowed. The taxpayer

filed the present appeal from that judgment.

II. ANALYSIS

As is, we think, evident from the discussion above, the

question before us is straightforward. So is its resolution.

Section 863(d)(1)(A) provides: ‘‘Income derived from a[n]

ocean activity’’ as defined therein shall, for a ‘‘United States

person TTT be sourced in the United States.’’ Section

7701(a)(30)(A) of the Code defines a ‘‘United States person’’

as including ‘‘a citizen or resident of the United States.’’ The

parties agree that Francisco is a citizen of the United States.

His residence in the specified possession is immaterial to the

statutory definition of a United States person, which would

include him as a citizen even if he lived in a foreign country.

The international waters in which he fished during the tax

years fit precisely the statutory description of ‘‘water not

within the TTT jurisdiction TTT of a foreign country, possession of the United States, or the United States.’’

§ 863(d)(2)(A)(ii). Therefore, the Tax Court properly held

§ 863(d) to be the section governing Francisco’s tax liability.

Francisco argues that the waters within which he fished

are not governed by § 863(d). He claims that for purposes of

the Tax Code, those waters should be considered as being

within the jurisdiction of a possession of the United States.

He bases that argument on the American Samoa Code, the

governing law of the possession, which adopts a so-called

‘‘mirror image tax code.’’ Under a mirror-image code, the

possession’s statute adopts the United States Internal Revenue Code but replaces ‘‘the United States,’’ where necessary,

with ‘‘American Samoa.’’ Thus, the possession, like the United States, taxes worldwide the income derived from ocean

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 4 of 7
5

sources of its taxable ‘‘persons.’’ From this, taxpayer reasons

that the international waters upon which he fished were

within the ‘‘tax jurisdiction’’ of the United States’ possession

and therefore outside the reach of § 863. We have little

trouble rejecting this argument.

If taxpayer’s interpretation were correct, § 863(d)(2)(A)(ii)

would be a meaningless section covering no water whatsoever. If a government’s claim to tax is sufficient to meet the

meaning of ‘‘jurisdiction’’ in that subsection, then no water

falls within its reach. Since § 863(d) purports to reach all

water ‘‘not within the jurisdiction TTT of the United States’’ or

its possessions, and since the United States, along with any

possession having a mirror-image code, asserts the authority

to tax earnings from activities on all such waters, taxpayer’s

reasoning would mean that § 863(d)(2)(A)(ii) could cover no

waters. The section reaches water not within the jurisdiction

of the United States. The section purports to tax all waters

in the world except insofar as they fall within the jurisdiction

of the United States or other specified governments. Under

taxpayer’s reasoning that leaves no waters to be covered by

the section. This argument does not pass the straight-face

test.

Taxpayer makes one more attempt at bringing his earnings

under § 931 so as to source them in American Samoa rather

than under § 863. He stresses that § 931(a)(2) provides for

the exclusion of ‘‘income effectively connected with the conduct of a trade or business by [an] individual within any

specified possession,’’ such as American Samoa. 26 U.S.C.

§ 931(a)(2). He contends that his earnings fall within the

meaning of that section.

As did the Tax Court, we reject that proposition. In the

absence of a statutory or regulatory definition of income

‘‘effectively connected’’ with the conduct of a trade or business in a specified possession, the Tax Court, like the parties

before it, sensibly looked to parallel provisions of the Code,

specifically § 864(c)(4)(B), which governs whether income

from sources outside the United States qualifies as being

‘‘effectively connected’’ to the conduct of a trade or business

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 5 of 7
6

within the United States. That section provides that a taxpayer qualifies for such a determination only where he ‘‘has

an office or other fixed place of business within the United

States to which such income, gain, or loss is attributable.’’

Id. Francisco has never claimed any such office or fixed

place of business in American Samoa.

Section 864(c)(4)(B) provides further guidance as to what

income is to ‘‘be treated as effectively connected with the

conduct of a trade or business within the United States.’’ It

specifies that such income:

(i) consists of rents or royalties for the use of or for

the privilege of using intangible property described in

section 862(a)(4) derived in the active conduct of such

trade or business;

(ii) consists of dividends or interest, and either is

derived in the active conduct of a banking, financing, or

similar business within the United States or is received

by a corporation the principal business of which is trading in stocks or securities for its own account; or

(iii) is derived from the sale or exchange (outside the

United States) through such office or other fixed place of

business or personal property described in section

1221(a)(1), except that this clause shall not apply if the

property is sold or exchanged for use, consumption, or

disposition outside the United States and an office or

other fixed place or business of the taxpayer in a foreign

country participated materially in such sale.

26 U.S.C. § 864(c)(4)(B).

Conspicuously, that section does not include any reference

to earnings from personal services. Like the Tax Court, we

do not find it necessary to hold that a tax provision dealing

with income ‘‘effectively connected with the conduct of a trade

or business’’ could never include earnings from personal

services. However, the taxpayer has fallen far short of

convincing us that it covers his earnings in this case. Given

the other requirements of § 864(c)(4)(B), and the silence of

the statute on the specific point, taxpayer’s argument falls far

short of overcoming the clear compelling language of § 863.

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 6 of 7
7

We therefore affirm the holding of the United States Tax

Court that the earnings from fishing in international waters

are included in Francisco’s taxable gross income under 26

U.S.C. § 863, not excluded under 26 U.S.C. § 931.2

III. CONCLUSION

For the reasons set forth above, we affirm the judgment of

the United States Tax Court.

2 While not essential to our decision, we note that taxpayer’s

American Samoan return claims a complete exclusion from something called a ‘‘fisherman’s contract exclusion.’’ Thus, problems of

double taxation or questions of the extent of allowable tax credits

should not arise.

USCA Case #03-1210 Document #830825 Filed: 06/18/2004 Page 7 of 7