In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 06-1934

DAVE ARNETT,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

____________

Appeal from the United States Tax Court

No. 8866-03

____________

ARGUED NOVEMBER 6, 2006—DECIDED JANUARY 16, 2007

____________

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
2 No. 06-1934

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 (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
No. 06-1934 3

1 For calendar year 2001 the exclusion was limited to $78,000.

26 U.S.C. § 911(b)(2)(D)(i). In calendar year 2002, the limit

(continued...)

Defense Council, 467 U.S. 837 (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
4 No. 06-1934

1 (...continued)

increased to $80,000. Id. Beginning with calendar year 2007, the

amount excludable will be adjusted each calendar year to

account for inflation. Id. § 911(b)(2)(D)(ii).

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 twopart 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 (emphasis added). When the statute grants the

agency “an express delegation of authority . . . to elucidate
No. 06-1934 5

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; see also United States v. Mead Corp.,

533 U.S. 218, 227 (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;

Chevron, 467 U.S. at 844. 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. 

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 (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.

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.
6 No. 06-1934

2 The Supreme Court’s methodology in Smith v. United States,

507 U.S. 197 (1993), also makes clear that we cannot rely di-

(continued...)

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. 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. 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 (quoting Brunette Mach. Works, Ltd. v. Kockum Indus., Inc.,

406 U.S. 706, 710 n.8 (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 (quoting United States v. Kubrick, 444

U.S. 111, 117-18 (1979)) (internal quotation marks omitted). Lastly, the Court found important the presumption

against extraterritorial application of statutes. Id. at 203-04.

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
No. 06-1934 7

2 (...continued)

rectly on that precedent to give meaning to the term “foreign

country.” Indeed, the Supreme Court recently has emphasized

that a prior judicial interpretation of a statutory term will

foreclose Chevron deference only if the “judicial precedent

hold[s] that the statute unambiguously forecloses the agency’s

interpretation, and therefore contains no gap for the agency

to fill.” Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs.,

125 S. Ct. 2688, 2700 (2005).

3 We also note that the text of section 911 expressly delegates to

the Commissioner the power to “prescribe such regulations

(continued...)

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 should be considered a

foreign country. 

C.

Because we conclude that the term “foreign country,” as

employed in section 911, is ambiguous, we must examine

whether the IRS’ interpretation, as set forth in its regulations, is permissible. In doing so, we must remember that

United States v. Mead Corp., 533 U.S. 218 (2001), requires that

we give great deference to the interpretation of the Commissioner. See id. at 218; see also Chevron, 467 U.S. at 842-43.3
8 No. 06-1934

3 (...continued)

as may be necessary or appropriate to carry out the purposes

of” section 911. 26 U.S.C. § 911(d)(9). The term “foreign country” is used throughout the section, including in definitions

relating to who may take advantage of the exclusion. See id.

§ 911(d)(1). Given the importance of the term, it is certainly

“appropriate” that the Commissioner define the term “foreign

country.” Under the most deferential standard we apply to

rules issued under specific grants of authority, see Bankers Life &

Cas. Co. v. United States, 142 F.3d 973, 979 (7th Cir. 1998), it is

clear that the rule in question is within the Commissioner’s

delegated authority.

4 See infra part II.C.2.

The Commissioner submits that the regulation is reasonable under the Chevron doctrine. When evaluating

the reasonableness of a rule issued by the Commissioner,

we must assess “whether the regulation harmonizes

with the language, origins, and purpose of the statute.”

Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 983

(7th Cir. 1998). Of course, we must also remember that

exclusions from income are narrowly construed. See

Comm’r v. Schleier, 515 U.S. 323, 328 (1995).

1.

The Commissioner’s definition of “foreign country” is

consistent with the congressional purpose underlying the

exclusion. When Congress replaced the deduction for

foreign earned income established by the Foreign Earned

Income Act of 1978, Pub. L. No. 95-615, §§ 201-210, 92 Stat.

3097, 3098-3110 (1978), with the current exclusion,4

 it did

so as a part of a legislative enactment intended to promote
No. 06-1934 9

economic growth. See Staff of the Joint Committee on

Taxation, General Explanation of the Economic Recovery Tax

Act of 1981 at 17 (J. Comm. Print 1981) [hereinafter “General Explanation”]. Congress viewed the added employment costs which flowed from providing employees with

additional reimbursement to account for added tax burdens experienced by American citizens working abroad

as an impediment to the competitiveness of United States

companies overseas. Id. at 43. Congress also believed that

American companies, in order to remain competitive

overseas, would resort to hiring nationals of the countries in which they sought to compete, and that these

nationals would, in turn, purchase fewer American-made

goods than an American citizen in the same position

overseas. Id. Given these legislative purposes, the Commissioner reasonably could have concluded that, because

there would not be similar tax burdens in territories

outside of the sovereignty of a foreign nation, limiting

the definition of “foreign country” to those geographic

areas under the sovereignty of a foreign nation would

advance the goal of Congress.

2.

“[T]reasury regulations and interpretations long continued without substantial change, applying to unamended

or substantially reenacted statutes, are deemed to have

received congressional approval and have the effect of

law.” Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 561 (1991)

(quoting United States v. Correll, 389 U.S. 299, 305-06 (1967)).

The regulation in question originated in a rule issued in

1957, which read:

Definition of “foreign country”. The term “foreign

country” means territory under the sovereignty of a
10 No. 06-1934

5 The act placed the deduction in a new section, 26 U.S.C. § 913.

The exclusion for foreign earned income had been codified

previously at 26 U.S.C. § 911.

government other than that of the United States. It does

not include a possession or Territory of the United

States.

26 C.F.R. § 1.911-1(a)(9), (b)(7) (1957), 22 Fed. Reg. 6758,

6759 (Aug. 22, 1957). The statute relating to this rule

remained largely the same until the Foreign Earned Income Act of 1978, Pub. L. No. 95-615, §§ 201-210, 92 Stat.

3097, 3098-3110 (1978), replaced the exclusion for foreign

earned income with a deduction for foreign earned income.5 See General Explanation at 41. Nevertheless, despite

this change, the general requirements for the deduction

were no different than those for the exclusion it replaced.

Id. As a result of the Foreign Earned Income Act of 1978,

the then existing 26 C.F.R. § 1.911-1 was deleted and

replaced with regulations relating a new 26 U.S.C. § 911,

the provisions of which are not pertinent here. See 44

Fed. Reg. 27,079, 27,080 (May 9, 1979). The definition of

“foreign country” was moved to a new regulation related

to the deduction for foreign earned income that replaced

the old exclusion. See 26 C.F.R. § 5b.913-3(d) (1979), 44

Fed. Reg. 27,084 (May 9, 1979). The new regulation substantially followed the old definition, adding only a

sentence that a “foreign country” included the air space

above any territory under the sovereignty of a government other than that of the United States. Id.

In 1981, Congress eliminated the foreign earned income

deduction created by the Foreign Earned Income Act of

1978 and reinstated the income exclusion at 26 U.S.C. § 911.
No. 06-1934 11

See Economic Recovery Tax Act of 1981, Pub. L. No. 97-34,

§ 111, 95 Stat. 172, 190-94 (1981); General Explanation at 44.

The 1981 act made no changes to the existing law relating to residence or the sort of income to which the exclusion applied. See General Explanation at 44. As a result

of the 1981 act, the Commissioner issued a new regulation, 26 C.F.R. § 1.911-2(h), again defining “foreign country” with some clarification. See 48 Fed. Reg. 33,007,

33,011 (July 20, 1983). This rule provided the definition of

“foreign country” in its present form:

Foreign country. The term “foreign country” when used

in a geographical sense includes any territory under

the sovereignty of a government other than that of the

United States. It includes the territorial waters of the

foreign country (determined in accordance with the

laws of the United States), the air space over the

foreign country, and the seabed and subsoil of those

submarine areas which are adjacent to the territorial

waters of the foreign country and over which the

foreign country has exclusive rights, in accordance

with international law, with respect to the exploration and exploitation of natural resources. 

26 C.F.R. § 1.911-2(h).

In sum, although, over time, there have been some

changes to the precise treatment of foreign earned income,

these changes focused primarily on the manner in

which that income would reduce the taxpayer’s overall

liability, not the type of income or class of individuals

permitted to claim the exclusion or deduction. Additionally, the regulations defining “foreign country,” although

moved around to reflect changes in the IRC, remained

largely unchanged substantially. Although the definition

has become more detailed, the focus on sovereign ter-
12 No. 06-1934

ritory has remained constant. Such consistency is highly

indicative of reasonableness. See Cottage Sav., 499 U.S.

at 561-62.

We must conclude, therefore, that the Commissioner’s

definition of “foreign country” is reasonable, and, accordingly, we must defer to the Commissioner’s reading of

the statute.

D.

We now turn to the ultimate question of whether the

Commissioner is correct in determining that Antarctica

is a “foreign country” under 26 C.F.R. § 1.911-2(h). Although we have deferred to the Commissioner’s interpretation of the term “foreign country” embodied in 26 C.F.R.

§ 1-911.2(h), we cannot give the same deference to the

Commissioner’s conclusion in this regard because the

conclusion that Antarctica is not a “foreign country” is not

an “authoritative, prelitigation interpretation” of the rule.

See Cottage Sav., 499 U.S. at 562-63. We now turn to an

examination of that question.

1.

At the outset, we think that it is important to note that

considering Antarctica not to be a “foreign country” is

compatible with the general statutory scheme. Notably,

section 911 is found under subtitle A, chapter 1, subchapter N of the IRC, which is designated “Tax Based on

Income from Sources Within or Without the United States.”

Part I of this subchapter, entitled “Source Rules and Other

General Rules Relating to Foreign Income,” deems any

activity in Antarctica to be “space or ocean activity.” In
No. 06-1934 13

turn, the United States is designated the source country

of income from such activity when earned by a citizen of

the United States. 26 U.S.C. § 863(d). Although this provision does not provide a definitive answer as to whether

Antarctica is a “foreign country,” it supports the conclusion that section 911 is not intended to apply to income

earned for services provided in Antarctica.

We think it also important to note that the United States

does not recognize any claims of sovereignty over

Antarctica. See Smith, 507 U.S. at 198 n.1. Under the prior

versions of the rules defining “foreign country” for purposes of foreign earned income, the Tax Court has held,

and the IRS has ruled, that Antarctica is not a “foreign

country.” See Martin v. Comm’r, 50 T.C. 59, 62 (1968); see

also Rev. Rul. 67-52, 1967-1 C.B. 186. Mr. Arnett does not

challenge the rulings under the prior versions of the

rules defining “foreign country,” but instead contends

that the current version of the rule defines “foreign

country” differently than the rules in place at the time of

Martin.

Prior to 1983, the rules defined “foreign country” to

“mean[] territory under the sovereignty of a government

other than that of the United States.” 26 C.F.R. § 1.911-

1(a)(9), (b)(7) (1957), 22 Fed. Reg. 6758, 6759 (Aug. 22, 1957).

The rules now define “foreign country” to “include[] any

territory under the sovereignty of a government other

than that of the United States.” 26 C.F.R. § 1.911-2(h)

(emphasis added). Mr. Arnett submits that use of the

term “includes” suggests that the rule now envisions a

broader definition of “foreign country.”

We cannot accept this view. The text, structure and

history of the current rule do not support Mr. Arnett’s

interpretation. Although the current version of the rule
14 No. 06-1934

differs from the prior versions in its use of “includes”

rather than “means,” the sentence stating that the rule

“includes any territory under the sovereignty of a government other than that of the United States” cannot be

read in isolation. It would make little sense for a definition of “foreign country” that purports to reach all land

outside of the United States, as Mr. Arnett suggests, to

focus on the narrower category of land outside of the

United States, composed only of territory within the

sovereignty of a foreign nation.

When read in its entirety and in common sense fashion,

the rule supports the position that sovereignty is an

essential component of the definition a “foreign country”

under 26 C.F.R. § 1.911-2(h). The definition itself goes on to

elaborate those other areas included in the definition of

a “foreign country,” all of which are tied to claims of

sovereignty by a foreign nation. The rule uses the word

“includes” not only to reference territory within the

sovereignty of a foreign nation, but also in reference to

“territorial waters . . ., air space over the foreign country,

and the seabed and subsoil . . . adjacent to the territorial

waters . . . over which the foreign country has exclusive rights, in accordance with international law.” 26 C.F.R.

§ 1.911-2(h). Each use of the word “includes” in the definition of “foreign country” is made in connection with

some form of sovereign territorial rights.

Indeed, with respect to the word “includes,” the definition of “foreign country” largely mirrors the rule’s definition of “United States” in its usage of “includes.” See 26

C.F.R. § 1.911-2(g). The rule defines the “United States” as:

United States. The term “United States” when used in a

geographical sense includes any territory under the

sovereignty of the United States. It includes the
No. 06-1934 15

states, the District of Columbia, the possessions and

territories of the United States, the territorial waters

of the United States, the air space over the United

States, and the seabed and subsoil of those submarine areas which are adjacent to the territorial

waters of the United States and over which the United

States has exclusive rights, in accordance with international law, with respect to the exploration and

exploitation of natural resources.

26 C.F.R. § 1.911-2(g). This definition of “United States” is

found in the same rule, in the subsection immediately

preceding the definition of “foreign country.” Use of the

same word in an interrelated regulation and in close

proximity to one another “presents a classic case for

application of the ‘normal rule of statutory construction

that identical words used in different parts of the same act

are intended to have the same meaning.’ ” Comm’r v. Lundy,

516 U.S. 235, 250 (1996) (quoting Sullivan v. Stroop, 496 U.S.

478, 484 (1990)) (some internal quotation marks omitted).

If, as Mr. Arnett argues, the word “includes” renders the

definition of “foreign country” so broad as to reach a

limitless class of sovereign-less territory, a similar effect

should be given to the use of “includes” in connection

with the definition of “United States” to reach a similarly limitless class of sovereign-less territory.

Lastly, the Supreme Court’s decision in Smith neither

requires nor counsels that Antarctica be considered a

“foreign country.” The FTCA involves a number of significant considerations not present in the context of section 911. First, the FTCA directs district courts to apply

the law of the place where the acts or omissions giving

rise to the injury occurred in tort claims against the

United States. 28 U.S.C. § 1346(b)(1). Antarctica lacks any
16 No. 06-1934

civil tort law of its own. Smith, 507 U.S. at 198. As a matter of statutory interpretation, the Court found it unlikely

that, given this concern, Congress would have waived

the sovereign immunity of the United States under the

FTCA with respect to claims arising in Antarctica. Id. at

204-05. The Court also noted that Congress acted against

a background presumption against extraterritorial application of United States laws. Id. at 204.

These concerns do not counsel the same result in the

context of section 911. Like a waiver of sovereign immunity, exclusions from gross income are narrowly construed. See Schleier, 515 U.S. at 328. In the case of a waiver

of sovereign immunity, a narrow construction means

avoiding a construction that would broaden the waiver

beyond what Congress intended. See Smith, 507 U.S. at 203.

In the case of exclusions from gross income, a narrow

construction means avoiding a construction which

would exclude more income than Congress intended.

Thus, narrow constructions of the FTCA and section 911

necessarily lead to different conclusions as to whether

Antarctica is a “foreign country.” A construction of section 911 that excludes Antarctica from the definition of

“foreign country” does not exclude from, but includes

within, gross income that income received for services

provided in Antarctica. Moreover, unlike a broad construction of the FTCA, such a reading does not implicate

the problem of extraterritorial application of United

States law.

In sum, we believe that the Tax Court correctly determined that Antarctica is not a “foreign country” as that

term is employed in the Commissioner’s regulations.
No. 06-1934 17

Conclusion

Accordingly, we conclude that Antarctica is not a

“foreign country” for purposes of section 911. The decision

of the Tax Court is affirmed.

AFFIRMED

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—1-16-07