1 5 4 T.C. No . 3

UNITED STATES TAX COURT

ADAM S CHALLENGE (UK) LIM ITED, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 4 8 1 6-1 5. Fi l edJ an uary8 , 2 0 2 0
.

P i s a U.K. p ri vat e l i m i t edl i ab i l i ty co m p an y wh o s e s ol e i n co m e-p ro du ci n g as s et fo r t h e y ears ati s su e was a m u l t i -p u rp o s e s up p o rtv es sel
. Th e v es sel was ch art eredb y a U.S. co m

p an y t o as s i st i n d eco m m is s i o n i n g o i l an dg as wel l s an d rem o v i n g d eb ri s o n p o rt io n s o f t h e U.S. Ou t er Co n t i n en tal Sh el f (OCS) i n th e Gu l f o f M ex i co . Du ri n g 2 0 0 9 -2 0 1 1 p et i t i on er d eri v edg ro ss i n co m e o f $ 4 5 m i l l i o n fro m th e ch art er. Fo rei g n co rp o rat i o n s are s ub jectt o Fed eral i n co m e t ax o n i n co m e “ effect i v el y

co n n ect edwi th the co n du cto f a t rad e o r b us i n es s wi th in th e Un i t edSt at es . ” I.R.C. s ec. 8 8 2 (a)(1 ). Gen eral l y , th e t erm “ Un i t edSt at es ” d o es n oti n cl u d e t h e OCS. See I.R.C. s ec. 7 7 0 1 (a)(9 ). Ho wev er, I.R.C. s ec. 6 38 p ro v i d es that , fo r p u rp o s es o f ap p l y i n g Fed eral i n co m e t ax p ro v i s i o n s “ wi th res p ectt o m i nes , o i l an d g as wel l s, an do th er n atu ral d ep o s i t s ,” t h e t erm “ Un i t edSt at es ” i ncl u d es “ th e s eab edan d s ub s o i l o f t h o s e s ub m ari n e areas ” wi th i n th e OCS.- 2
- Th e b i lat eral i nco m e t ax treat y (Treat y ) b et ween the Un i t ed St at es an dth e U.K. p ro v i d es th ata U.K. en t erp ri se s hal l n o t b e s ub

jectt o Fed eral i n co m e t ax u n l es s i tco n du ct s b u s i n es s i n th i s co u n try th ro ug h a U.S. “ p erm an en tes t ab l i s h m en t .” Treat y art
. 7 (1 ). An en t erp ri s e i s d eem ed t o h av e a U.S. p erm an en t es tab l is h m en t “ wh ere act i v i t i es are carri edo n o ffs h o re * * * i n co n nect i o n wi th t h e ex p l o rat i o n * * * o r ex p lo it at i o n * * * o f t h e s ea b edan d s ub -s oi l an d th ei r n atu ral res o u rces .” Treat y art . 2 1 (1 ). Hel d : P’ s act i v i t i es were co n du ct edo n th e OCS “ wi th res p ect t o * * * o il an dg as wel l s,” I.R.C. s ec. 6 3 8 , an di t s act i v i t i es were “ rel at edt o t h e * * * ex p l o i t at i o n o f * * * o i l an dg as wel l s ,” s ec. 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s . P was therefo re en g ag edi n a t rad e o r b u s i n es s wi th in th e Un i t ed St at es , an di ts act i v i t i es were effect i v el y co n n ect edwi th th atU.S. trad e o r b u s in es s . See I.R.C. s ec. 8 8 2 (a)(1 ). P’ s ch art er i n co m e was th u s s ub jectt o Fed eral i n co m e t ax u n l es s ex em p t edb y th e Treat y . Hel d , fu rt h er, P’ s act i v i t i es were carri edo n o ffs ho re “ i n co n n ect io n wi th t h e * * * ex p l o i t at i o n * * * o f t he s ea b edan ds ub -s o i l an dth ei r n atu ral res o u rces ” u n d er art i cl e 2 1 o f t he Treat y . P i s th erefo re d eem edt o h av e a U.S. p erm an en tes t ab l i s h m en t , an d th e Treat y d o es n o tex em

p t i t s ch art er i n co m e fro m Fed eral i n co m e t ax .

An dri u s R. Ko n tri m as an dRo b ertC. M o rri s , fo r p et it io n er. W i l l i am D. Wh i t e, Ri ch ardA. Rap p azzo , an dRu s s el l S. Sh i el d es , fo r
res p o n d en t.- 3
- OPINION LAUBER, J u d g e: Pet i t i o n er i s a co m p an y i nco rp o rat ed u nd er t h e l aws o f th e Un i t edKi n g d o m (U.K.). Fo r t h e t ax y ears ati s s u e p et i ti o n er’ s o n l y i n co m ep ro duci n g as s etwas a m

u l t i-p urp o se s up p o rtv es s el
. A U.S. fi rm ch art eredp et i

t i on er’ s v es s el t o p erfo rm wo rkd eco m

m i s si o n in g o il an dg as wel l s an d rem o v i n g h u rri can e-rel at edd eb ri s o n p o rt i o n s o f t h e U.S. Ou t er Co n t i n en t al Sh el f (OCS) i n th e Gu l f o f M ex i co . Fro m th i s ch art er p et i ti o n er du ri n g 2 0 0 9 -2 01 1 earn edi n co m e
o f ab o ut$ 4 5 m i ll i o n , m o s t o f wh i ch i ttreat edas ex em p tfro m Fed eral i n co m e t ax . Befo re t h e Co u rtare p et i t i o ner’ s m o ti o n fo r s u m m ary ju d gm en tan da cro s s m o ti o n fo r p art i al s umm ary ju d g m en tfi l edb y

th e In t ern al Rev en u e Serv i ce (IRS
o r res po n d en t ). Th es e m o t i o n s req u i re u s t o d eci d e wh et h er p et i t i o n er’ s ch art er i n co m e was s ub

jectt o t ax u n d er t h e In t ern al Rev en ue Co d e (Co d e) 1 an d t h e b i l at eral i n co m e t ax treat y

b et ween th e Un i t ed St at es an d t h e U.K. (Treat y ). 2 Co n cl u d i n g th atp et i t i o n er’ s ch art er i n co m e was effect i v el y co n n ect edwi th th e co ndu cto f a

1 Un l es s o th erwi s e i nd i cat ed , al l s tatu to ry referen ces are t o th e Co d e i n effect atal l rel ev an t ti m es , an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re. Al l m o n et ary am o u n t s are ro un d edt o th e n eares td ol lar, an dal l p ercen t ag es are ro u n d edt o th e n eares tp ercen t ag e p o i n t
.

2 Co n v en t io n fo r t h e Av o i d an ce o f Do ub l e Tax at i on an dth e Prev en ti o n o f Fi s cal Ev as i on wi th Res p ectt o Tax es o n In co m e an do n Cap i t al Gai n s , UK.-U.S., J u l y 2 4 , 2 0 0 1, T.I.A.S. No . 1 3,1 6 1 (en tered i n t o fo rce M ar. 3 1 , 2 0 0 3).- 4
-

U.S. trad e o r b u s i n es s an dth ati twas n o t ex em p t ed b y th e Treat y , we wi l l g ran t
res p o n d en t’ s m o t i o n fo r p art i al s u m m ary ju d g m en tan dd en y

p et i t i o n er’ s m o t i o n . Back gro u n d Th e fo l l o w i n g fact s are b as edo n th e p art i es ’ m o t i o n p ap ers , th e s t i p ul at i o n
o f fact s , an d th e at t ach edex h i b i t s . Duri n g th e t ax y ears at i ss u e p et i t i o n er h adi ts reg i s tered o ffi ce an dm ai l i n g ad dres s i n No rt h am p t on , En g l an d
. A. Th e Ch al l en ge Ves s el Pet i t i o ner was fo rm edi n 2 0 0 6 as a p ri v at e l i m i t edl i ab il i ty co m p an y u n d er U.K. l aw. Iti s a s ub s i di ary o f a Berm

u d a en t i ty wh o l l y o wn ed b y

Kh al ifa A. Al g os ai bi Di v i n g an dM ari n e Tech n i cal Serv i ces Co ., a Sau d i Arab i an b ran ch o f a Bah rai n i en t it y . Pet i ti o n er i s th e reg i s t eredo wn er o f a m ul t i p u rp o s e s up p o rtv es s el , the M .V. Ad am s Ch al l en g e (Ch al l en g e Ves s el ), wh i ch was p laced i n s erv i ce
o n J an uary1 , 2 0 0 9 . Duri n g 2 0 0 9 -2 0 1 1 th e Ch al l en g e Ves sel was p et i t i o n er’ s o n l y i n co m e-p ro du ci n g as s et
. Th e Ch al l en ge Ves s el was equi p p edwi th s t at e-o f-t h e-art s peci al i zeds y s t em s . Th es e i n cl u d eda “ cl as s 2 dyn am i c p os i t i o ni n g s y s tem , ” a n i n e-m an “ s aturat i on d i v i n g s y s t em ,” a h el i p ad , an da h y drau li c d eckcran e cap ab l e o f l i ft i n g 1 0 0 t o n s . A dyn am i c p o s i t i on in g s y s t em en ab l es a v es s el t o m ai n t ai n a reas o n ab l y s t at i on ary p os i t i o n ab ov e an u n derwat er wo rk s i t e. Th e v es s el p l an t s tran sp o nd ers o n- 5
-

th e s ea fl o o r, th en tri an g u l at es d at a fro m th o s e t ran s p o nd ers t o k eep i t s p o s i t i o n
s t ab l e o v er a p art i cu l ar s p ot . A s atu rat i o n d i v i n g s y s t em en ab l es d iv ers t o wo rkat g reat er d ep th s fo r l o n g er p eri o d s . Di v ers l i ve i n a s eal ed , p res s u ri zedch am b er t h at i s l owered t o wo rk in g d ep th . Th i s p erm i t s th e d iv ers t o b e “ d eco m p res s ed ” o n l y
o n ce atth e en do f t h ei r t o ur o f du ty , thu s redu ci n g th e ri s ko f i ll n es s . Satu rat i o n d i v i n g i s a h i g hl y

s p eci al i zedfo rm

o f d i v i n g . In2 0 1 5 o n l y

3 3 6 co m m erci al d i v ers
were reco g n i zedb y

th e U.S. Co as tGu ardas reg u l at eds atu rat i o n d i v ers . 3 B. Th e Ti m e Ch art er EPIC Di v in g & M ari n e Serv i ces , LLC (EPIC), i s an o i l an dg as s erv i ces
co m p an y th ats p eci al i zes i n d eco m m i s s i on i ng o i l an d g as wel l s an d rel at edact i v i t ies . Inearl y

2 00 9 EPIC was p l an n in g t o b i do n a p ro jecti n th e Gu l f o f M ex i co , b u ti t s ex i s t i ng fl eetd i dn oth av e t he cap aci ty t o co m p l et e t he p ro

ject . EPIC ch art eredthe Ch al len g e Ves s el t o fi l l thi s g ap . It s el ect edth e Ch al l en g e Ves s el b ecau s e i twas a b ran dn ew v es s el wi th th e s p eci al i zedequi p m en tn eces s ary t o ex ecu t e EPIC’ s i n ten d eds co p e o f wo rk
. OnM ay 1 5 , 2 0 0 9 , EPIC an dp et i t i o n er en t eredi n to a s t an dardt i m e ch art er fo r t h e Ch al l en g e Ves sel . Un d er a t im e ch art er a v es sel i s h iredfo r anag reed

3 See Co m m erci al Di v i n g Op erat i o ns , 8 0 Fed . Reg . 9 1 52 , 9 1 6 0 (Feb . 1 9 , 2 0 1 5 ) (t o b e co di fi ed at4 6 C.F.R. p t s . 8 an d1 9 7).- 6
-

up o n p eri o d , as o p p o s edt o a v o y ag e ch art er, wh ere a v es s el i s h ired t o co m p l et e a p art i cu l ar t ri p . Th e ch art er was m em o ri al i zedo n a s tan d ardBal t i c an dIn tern at i on al M ari t im e Co u n ci l fo rm . Vari o u s ad den d a were ad d edt o th e ch art er du ri n g 2 0 0 9 an d2 0 1 0 , an dthe Ch al l en g e Ves s el o p erat edatal l t im es co n s i s t en t l y wi t h th e t erm s o f t h e ch art er as thu s rev i s ed . At n o t i m e were p et i t i o n er an dEPIC p art n ers o r ag en t s o f o ne an o th er. Th e ch art er s p eci fi edp aym en tt o p et i t i o n er o f a fl atd ai l y rat e (ad ju st edfro m t i m e t o t i m e) p l u s a d ai l y m eal fee o f $ 7 0 fo r each m em b er o f t he Ch al l en g e Ves s el
m ari t i m e crew. 4 Pet i t i o n er recei v edth i s p aym en t reg ard l es s o f wh ether t h e s h i p
was en g ag ed i n o p erat i o n s , i n tran si t b etw een wo rks i t es , o r i n p o rtb etw een as s i gn m en t s . Th e ch art er i n i t i al l y reci t edth atn o t ax es were du e i n th e Un i t ed St at es . As o f Oct o ber 1 3 , 2 0 1 0, th e ch art er was am en d ed t o s t at e th at “ O wn ers [v i z., p et it i o n er an di ts affi l i at es ] are res p on s ib l e fo r an y t ax es , i n cl u d i n g U.S. t ax es o wedas a res u l to f i n co m e t o th e Own ers u n d er t h e Ch art er Part y .” Th e Ch al l en ge Ves s el h adb ert h s fo r 9 8 wo rk ers . Un d er th e t i m e ch art er p et i t i o n er co n tract ed t o p ro vi d e a m ari n e crew o f 2 8 , i n cl u di n g th e m as t er, m at es , en g in eers , an dt ech n i cal o ffi cers . Crew m em b ers were fu rn i s h edb y

two o f p et i

4 EPIC al s o p ai d p et i t io n er a m o b i l i zat i on fee o f $ 7 5 0,0 0 0 t o m o ve t h e Ch al

l en g e Ves s el fro m

Gi b ral t ar t o th e Gu l f o f M ex ico . Res p o nd en t d o es n o tco n t en d th atp et i t i o n er was t ax ab l e o n th i s m o b i l i zat i o n fee.- 7
-

t i on er’ s affi l iat es , Ad am s Offs h o re Serv i ces , Lt d ., an d Ad am s Offs h o re, W LL, wh i ch al so s upp li eden g i n eeri ng , p ro cu rem en t , an dt ech n i cal s erv ices rel at i n g t o th e ch art er. EPIC g en eral l y h adb et ween 4 0 an d6 2 wo rk ers o n b o ard , i n cl u d i n g EPIC em p l o y ees , s ub co nt ract o rs , an d rep res en tat i v es o f EPIC’ s cl i en t s . Th e Ch al l en ge Ves s el an di t s m ari n e crew s hared res po n s i b i l i ty wi th EPIC fo r d eep wat er o p erat io n s . Crew m em b ers were res p o n s i bl e fo r o perat i o n o f t h e h y drau l i c d eckcran e an dm ai n t en an ce o f al l v es s el equi p m en t, i n cl u d i n g th e
s atu rat i o n d i v i ng s y s t em

wh en i twas n o ti n act iv e u s e b y EPIC’ s d i vers . Al th o u g h EPIC g en eral l y

h adres p o ns i bi l i ty

fo r al l s ub s urface o p erat i o n s , the m as t er o f t h e Ch al len ge Ves s el was au tho ri zedt o s u s p en d al l d i vi n g act iv i ty fo r s afet y

reas o n s , e.g ., b ecau s e o f ad v ers e weat h er o r el ect ri cal p ro b l em s . EPIC en t eredi nt o co n tract s wi th o i l an dg as co m p an i es t o p erfo rm v ari o u s d eco m m i s s i o n in g s erv i ces o n o i l an dg as ri g s wi th i n th e OCS. Ho l d ers o f Fed eral
o ffs h o re l eas es , i n cl u d i n g th e co m p an i es wi th wh i ch EPIC co n tract ed , are req u i red t o d eco m m i s s i o n an drem o ve eq u i p m en tfo r t erm i n at edo r n o n -p ro du ci n g l eas es
an d are s ub

jectt o th e d eco m

m i s s i o n i n g req u irem en ts o f t h e Dep art m en t o f t h e In
t eri o r (In t eri or Dep art m en t ). See 3 0 C.F.R. p t . 2 5 0 , s ubp t
. Q, Deco m m i s s io n i n g Act i v i t i es . Hurri can es du ri n g 2 0 0 4 -2 0 0 8 cau sedd am ag e t o o i l an d g as faci l i t i es i n th e Gu l f o f M ex i co . InSep t em b er 2 0 1 0 th e In t eri o r Dep art m en ti ss u eda n o t i ce- 8
-

p ro v id i n g l es s ees wi th g u i d an ce ab o u tth ei r d eco m m i ss i on i ng o b l i g at i o n s i n th e wak e o f h u rri can e d am ag e. 5 Du ri n g 2 0 0 9 -2 0 1 1 EPIC u sedth e Ch al l en g e Ves s el fo r wo rko n 1 1 p ro ject s i n v ari ou s “b l o ck s” wi th i n th e Gu l f o f M ex i co . Each p ro jects i t e was wi thi n 2 0 0
n au ti cal m i l es o f t h e co as to f Lo u i si an a o r Tex as , wi th i n th e OCS. Th e Fed eral
o ffs h o re l eas e u nd erl y i n g each “b l o ck ” ex p res sl y req u i redco m p l i an ce wi th th e In t eri o r Dep art m en t’ s d eco m m i s s i o n i ng reg u l at i o n s , i ncl u d in g th e rem o v al o f al l
s tru ctu res up o n t erm i n at i o n o f t h e l eas e. Th e p ro ject s o n wh i ch th e Ch al l en ge Ves s el wo rk edi n v o l v edd eco m m i s s i on i n g o f o i l an d g as faci l it i es , i n cl u d in g wel l s an d p i p el i n es . Sp eci fi c t as k s i n cl u d edex cav at i n g aro un dd am ag edri g s , s ev eri ng m et al co m p o n en ts fro m

t o p p l ed p l at fo rm s , p l u g g i ng ab an d o n edwel l s , an drem ov i ng m et al d eb ri s fro m th e s eab ed
. No n e o f t h e s i t es was act i vel y p ro du ci ng o i l o r g as atth e t i m e. At m o s ts i t es act i ve p ro du ct i o n h adceas eds ev eral y ears p rev i o u s ly , an d ato n e s i t e n o o i l o r g as
was ev er p ro du ced . Atn o t i m e d i dEPIC em p l oy th e Ch al l en g e Ves s el t o ex p l o re fo r o i l or g as .

5 See Dep ’ to f t h e In t eri o r, NTL No . 2 01 0 -G0 5 , No t ice t o Les s ees an d Op erat o rs o f Fed eral Oi l an d Gas Leas es an dPi p el in e Ri g h t-o f-W ay Ho l d ers i n th e Ou t er Co n t i n en tal Sh el f, Gu l f o f M ex i co OCS Reg i o n (Sep t . 1 5 , 2 0 1 0 ) (In t eri o r Dep art m en t No t i ce).- 9
-

Th e m ari n e crew m ai n tai n edl o g s t o reco rd h ow t h e Ch al l en g e Ves sel s p en t i t s t i m e du ri n g th e ch art er. Th e l o g s d i vi d e th at t i m e i n t o fo ur cat eg ori es : wo rk , p o rt , tran s i t , an d“ o th er.” W o rkt i m e refl ect edact i v e u s e o f t h e v es sel atp ro ject
s i tes ; p o rtt i m e refl ect edh o u rs s p en ti n h arb o r res up p l y i ng o r m ai n t ai ni n g th e v es s el ; tran s i tt i m e refl ect edh ou rs m o v i n g the v es s el b et w een p o rt (s ) an dp ro j ect
s i tes ; “ o ther” t im e was a cat ch al l th ati n cl u d ed h o urs th e v es s el was ats ea b u ti d l e b ecau s e o f b adweat h er. Th e l o g s s h o w th atth e v es s el ’ s t i m e was d i v i d ed as fo l l o w s : Year W o rkPo rtTran s i tOth er

2 0 0 9 8 5 % 6 % 2 % 6 % 2 0 1 0 6 4 % 2 2 % 4 % 1 0% 2 0 1 1 6 1 % 2 4% 7 % 7 % AtEPIC’ s d i rect i o n th e Ch al len g e Ves s el d ep art edfo r M ex i co o n Au g u s t 1 1 , 2 0 1 1 . It rem ai nedo u ts i d e th e Un i t edSt at es (i n cl u d i n g t h e OCS) fo r t h e rem ai n d er o f t h aty ear. C. Tax Fi l i n gs an dIRS Ex am i n at i o n Pet i t i o ner d i dn o tfi l e a t i m el y Fed eral i n co m e t ax return fo r 2 0 0 9 o r 2 0 1 0
. OnAp ri l 9 , 2 0 1 4 , th e IRS p rep ared a s ub s t i tu t e fo r retu rn fo r each y ear. See s ec. 6 0 2 0 (b ). On Decem

b er 1 3 , 2 0 1 3 , p et it i on er fi ledwi th th e IRS o ffi ce i n Ho u s t o n , Tex as , a d el i n qu en t Fo rm 1 1 2 0 -F, U.S. In co m e Tax Retu rn o f a Fo rei g n Co rp o ra-- 1 0 -

t i on , fo r 2 0 1 1 . Th i s retu rn rep o rt ed$ 2 ,7 3 6 ,4 5 0 o f effect i v el y co n n ect edi nco m e, cl ai m edt o t al d edu ct io ns o f $ 2 ,3 6 6 ,6 2 9 , an drep ort edt ax ab l e i n co m e o f $ 3 6 9 ,8 2 1
. OnNo vem

b er 2 5, 2 0 1 4 , th e IRS i ss u ed t o p et i t i o n er a n o t ice o f d efi ci en cy fo r t h e t ax y ears ati s s u e. Th e n o t i ce d et erm i n ed thatp et i t i o n er fo r 2 0 0 9 an d2 0 1 0 h ad effect i v el y

co nn ect edi n co m e o f $ 1 3,5 9 5 ,1 6 7 an d$ 1 9 , 1 3 5 ,1 2 5 , res p ect i v el y , an d th atp et i t io n er fo r 2 0 1 1 h adu n d errep o rt edi ts effect iv el y co n n ect ed i n co m e b y $ 9 ,8 9 7 ,9 7 5 . Pet i t io n er t i m el y p et i t i o n edfo r red et erm i n at i o n o f t he res ul t i n g d efi

ci en ci es an d ad d i t i o n s t o t ax . 6 By am en d m en t s t o p l ead i n g s res p on d en tal l eg edi n creas edd efi ci en ci es fo r 2 0 1 0 an d2 0 1 1 . Fo r 2 0 1 0 res p on d en tu rg es th atp et i t i o n er’ s effect i v el y co n n ect ed i n co m e was $ 2 1 ,3 8 0,5 4 1; fo r 2 0 1 1 h e co n t en d s th atp et i t i o n er s h o ul db e al l o wed
n o d edu ct i o n s , i n creas i n g i t s t ax ab l e i n co m e t o $ 1 2 ,6 3 4 ,4 2 5. Pet i t i o ner am en d ed i t s p l ead i n g s t o al leg e t h ati terro neo u s l y rep o rt ed$ 2 ,7 3 6 ,4 5 0 o f g ro s s i n co m e o n i t s 2 0 1 1 retu rn an dth ati t s effect i v el y co n n ect edi nco m e fo r t h aty ear was zero .

6 Th e IRS d et erm i nedad d i t i o n s t o t ax u n d er s ect i o ns 6 6 51 (a)(1 ) an d (2 ) an d 6 6 5 5 . W e d o n o tad dres s i n th i s Op i n i o n p et it i o n er’ s l iab i l i ty fo r ad d it i on s t o t ax . OnFeb ru ary

1 5 , 2 0 1 7, p et i t i o n er fi l edwi th th e IRS Serv i ce Cen t er i n Og den , Ut ah , Fo rm s 1 1 2 0-F fo r 2 0 0 9 an d2 0 10 . Pet i t i o n er fi l edth es e ret u rn s , wh ich rep o rt edn o i n co m e o r t ax du e, i n an effo rtt o “p ro t ecti t s ri g h tt o recei v e t h e b en efi t o f * * * d edu ct i o n s an dcred it s ” i n the ev en t i twas d et erm i n edt o h av e i n co m e effect i v el y

co n n ect edwi th th e co n du cto f a t rad e o r b u si n es s wi th i n th e Un i t ed St at es .- 1 1 -

OnM ay 3 , 2 0 1 9 , p et it i o n er fi l eda m o t i o n fo r s umm ary ju d g m en tco n t en d

i n g th atn o n e o f t h e i n co m e d eri v edfro m th e ch art er o f t h e Ch al l en g e Ves s el was
s ub jectt o Fed eral i n co m e t ax . Res p o n d en tco n cu rren t ly fi l eda cro s s -m o t i o n fo r p art i al s u m

m ary ju d gm en tco n t en d i ng th atal l o f t he i n co m e fro m thatch art er was
s ub jectt o Fed eral i n co m e t ax . Nei th er m ot io n as k s u s t o ad dres s , an d we d o n o t ad dres s i n th i s Op i n i on , th e ex t en tt o wh i ch p et it i on er fo r an y y ear m ay b e en t i t l ed t o d educt i o n s fro m

g ro s s i n co m e o r cred i t s ag ai n s tU.S. t ax .

Di s cu ss i o n Th e p u rp os e o f s u m

m ary ju d g m en t i s t o ex p ed it e l i t i g at i o n an d av o i dco st l y , u n n eces sary , an dt i m e-co n s u m in g tri al s . See FPL Grp ., In c. & Sub s . v . Co m m i s s i on er, 1 1 6 T.C. 7 3 , 7 4 (2 0 0 1). W e m ay g ran ts u m

m ary ju d g m en treg ard i n g an i s su e as t o wh i ch th ere i s n o g enu i n e d i s p u t e o f m at eri al fact an da d eci s i o n m ay b e ren d eredas a m at t er o f l aw. Ru l e 1 2 1(b ); El ec. Art s , In c. & Sub s . v . Co m m i s s i on er, 1 1 8 T.C. 2 2 6 , 2 3 8 (2 00 2 ). Th e s o l e i s su e p res en t edfo r d eci s io n atth i s
s t ag e o f t h e p ro ceed i ng s i s wh et h er p et i t i o n er’ s ch art er i n co m e i s s ub ject t o Fed eral i nco m e t ax . Th e p art i es h av e fi l edcro s s -m ot i o ns fo r s u m m ary ju d g m en t
o n th i s qu es t i o n , an dwe fi n dthati tm ay ap pro p ri at el y b e ad

ju di cat eds u m

m ari l y . Wh et h er p et i t i o ner’ s ch art er i n co m e i s s ubjectt o Fed eral i nco m e t ax d ep en ds fi rs to n wh et h er th ati n co m e was t ax ab l e u n der t he Co d e, i .e., was “ effec-- 1 2 -

t i vel y co nn ect edwi th t h e co n du ct[b y p et i t i o n er] o f a t rad e o r b u s in es s wi th i n the Un i ted St at es .” See s ec. 8 8 2 (a)(1 ). If we an s wer t h atqu es t i o n i n the affi rm at i v e,
we m u s td eci d e the ex t en t(i f an y ) t o wh i ch p et it i on er’ s ch art er i n co m e was ex em pt edfro m U.S. t ax b y

treat y . See s ec. 8 9 4 (a)(1 ) (“ Th e p ro v is i o n s o f t h i s t i t l e
s h al l b e ap pl i ed t o an y

t ax p ay er wi th du e reg ard t o an y treat y o b l i gat i o n o f t h e Un i ted St at es wh ich ap p l i es t o s u ch t ax p ay er.”). A. Tax ab i l it y

Un d er t h e Co d e Sect io n 8 8 2 (a)(1 ) p ro v i d es : “ A fo rei g n co rp o rat i o n en g ag edi n trad e o r b u s i n es s wi th i n t h e Un i t ed St at es du ri n g th e t ax ab l e y ear s h al l b e t ax ab l e * * * o n i t s t ax ab l e i n co m e wh i ch i s effect i v el y co n n ect edwi th th e co n du cto f a t rad e o r b u s i n es s wi th i n t h e Un i t ed St at es .” “ [E] ffect i v el y co n n ect ed ” i nco m e g en eral l y i n cl u d es “ [a] ll i n co m e, g ai n , o r l o s s fro m s o u rces wi th i n th e Un i t edSt at es .” Sec. 8 6 4 (c)(3 ). Sect i o n 8 6 1 set s fo rt h g en eral ru l es fo r t h e s o u rci n g o f i n co m e. Sub ject t o ex cep ti o n s n o trel ev an th ere, U.S.-s o urce i n co m e i n cl u d es “ [c] o m p en s at i o n fo r l ab o r o r p ers o n al s erv i ces p erfo rm edi n the Un i t ed St at es ” an d i n co m e fro m ren t i n g o r l eas in g “p ro pert y

l o cat edi n th e Un it ed St at es . ” Sec. 8 6 1 (a)(3 ) an d(4 ). Un d er th e t im e ch art er, p et i ti o n er p ro v i d edp ro p ert y (t he Ch al l en g e Ves s el )
an d th e s erv i ces o f i ts m ari n e crew i n as s i st i n g wi th th e d eco m m i s si o n i n g o f o i l
an d g as faci l i t i es i n th e Gu lf o f M ex i co . Th e qu es t i o n s we m u std eci d e are wh et h

-- 1 3 -

er p et it i o n er co n du ct edth es e act i v i t i es “ wi th i n th e Un i t edSt at es ” an dwh et h er i t s i n co m e was “ effect iv el y

co n nect ed ” wi th the co n du cto f t h atb us i n es s . See s ecs . 8 6 4 (b ), 8 8 2(a)(1 ). 7 Th atwi l l b e t ru e i f t he Ch al len g e Ves s el was “ l o cat edi n th e Un i ted St at es ” o r i f t h e s erv i ces o f i t s m ari n e crew were “ p erfo rm edi n th e Un i t ed St at es .” See s ec. 8 6 1 (a)(3 ) an d(4 ). 8 1
. An al y s i s Sect io n 7 7 0 1 (a)(9 ) g en eral l y p ro v i des th at“ [t ] he t erm ‘ Un it edSt at es ’ wh en
u s ed in a g eo g rap hi cal s en s e i n cl u des o n l y th e St at es an dth e Di s tri cto f Co l u m b i a.” Ho wev er, s ect i o n 6 3 8 ex p an d s t h e d efi n i t i o n o f t h e Un i t edSt at es fo r cert ai n p u rp os es . Ad d ed t o th e Co d e i n 1 9 6 9 , s ect io n 6 38 s et s fo rt h reci pro cal d efi n i t i o n s

7 Pet i t i on er d o es n otd i sp u t e t h ati ti s t ax ab l e as a co rp o rat i o n o r t h at i ten g ag edi n a “ trad e o r b u s i n es s ” du ri n g 2 00 9 -2 01 1
.

8 In Ti d ewat er In c. v . Un i t edSt at es , 5 6 5 F.3 d2 9 9 , 3 0 8 (5 th Ci r. 2 00 9 ), th e U.S. Co urto f Ap p eal s fo r t h e Fi ft h Ci rcu i th el dth atth e t i m e ch art er o f a v es s el , o n th e fact s p res en t edth ere, was m o re p ro perl y ch aract eri zedas a l eas e t h an as a co n tract fo r s erv i ces . W e n eedn o tad dres s th atqu es t i o n h ere, s i n ce p et it i on er’ s ch art er i n co m e wo u l db e s o u rcedth e s am e way u n d er ei th er ch aract eri zat i o n . Pet i t io n er s u g g es t s th ati t s ch art er i n co m e m i g h tb e ch aract eri zedas “ tran s p o rt at i on ” i nco m e an db e s o u rcedacco rd i ng l y . Ad o p t i o n o f t h is treat m en tl i k ewi s e wo u l dn o tch an g e t h e an al y s i s . “ Al l tran s p o rt at i o n i n co m e at tri b u t ab le t o tran s p o rt at i o n wh i ch b eg i n s an d en d s i n th e Un it edSt at es s h al l b e t reat ed as d eri v ed fro m s o u rces wi th i n th e Un it edSt at es .” Sec. 8 6 3 (c)(1 ). Fro m th e co m m en cem en t o f t h e t i m e ch art er t o Au g u s t1 1, 2 0 1 1 , al l o f t h e Ch al l en ge Ves s el ’ s t ran s p o rt at i o n b eg anan den d ed w it hi n U.S. t erri t o ri al wat ers o r o n th e OCS. Ho wev er p et i t i o n er’ s i n co m e i s ch aract eri zed , therefo re, t h e o u t co m e d ep en d s o n wh et h er th e “ Un i t edSt at es ” i s d efi n edt o i n cl u d e th e OCS.- 1 4 -

o f t h e t erm s “ Un i tedSt at es ” an d“ fo rei g n co un try ” fo r p urp o s es o f t ax juri s d i ct i o n
o v er co n t i n en t al s h el f areas
. See Tax Refo rm Acto f 1 96 9 , Pub . L. No . 9 1 -1 7 2 , s ec. 5 0 5(a), 8 3 St at
. at 6 3 4
. Sect io n 6 3 8 i s i n ch ap ter 1 , s ub ch ap t er I o f t h e Co d e, t it l ed“Natu ral Res ou rces .” Itp ro v i d es i n p ert i n en tp artas fo l l o w s :

Fo r p u rp o s es o f ap p l y i n g th e p ro v i s i o n s o f t h i s ch ap t er (i n cl u d

i n g s ect i o n s 8 6 1 (a)(3 ) an d8 6 2(a)(3 ) i n th e cas e o f t h e p erfo rm an ce o f p ers on al s erv i ces ) wi th res p ectt o m i n es , o i l an dg as wel ls , an d o th er n atu ral d ep os i ts --

(1 ) t h e t erm

“ Un i t edSt at es ” wh en u s edi n a g eo grap h i cal s en s e i n cl u d es the s eab edan ds ub so i l o f t h o s e s ub m ari n e areas wh i ch are ad

jacen tt o th e t erri t ori al wat ers o f t h e Un i t ed St at es an do v er wh i ch th e Un i t edSt at es h as ex cl u s i ve ri gh t s , i n acco rd an ce wi th i n t ern at i o n al l aw, wi th res pect t o th e ex p l o rat i on an dex p lo i t at i o n o f n atu ral res o u rces * * *
. Pet i t i o ner d o es n o td is p ut e t h atth e Un i t edSt at es “ h as ex cl u s i v e ri g h t s , i n
acco rd an ce wi th i nt ern at i o n al l aw, wi th res p ect t o t h e ex p l o rat io n an dex p l o i t at i o n
o f n atu ral res o u rces ” o n th e OCS. Th e Un i t edSt at es cl ai m s s u ch ex cl u s i v e ri g h t s . See Ou t er Co n ti n en t al Sh el f Lan d s Act , ch . 3 4 5, 6 7 St at
. 4 6 2 (1 9 5 3 ) (co d i fi edas
am en d edat4 3 U.S.C. s ecs . 1 3 3 1 -1 35 6 a (2 0 1 8 )). An dth atcl ai m “ acco rd s wi th
cu s t o m ary

i n t ern at i on al l aw.” FM C Co rp . & Sub s .v . Co m m i s s i o n er, 1 0 0 T.C. 5 9 5, 5 9 7 (1 99 3 ).- 1 5 -

In th e Gu l f o f M ex i co th e OCS ex t en d s t o a d i s t an ce o f up t o 2 0 0 n au t i cal
m i l es fro m

th e U.S. co as t l i n e. Ib i d .; s ee 4 3 U.S.C. s ec. 1 3 3 1 (a). Th e OCS th u s
co m p ri s es a t erri t ory th ato ccupi es m an y th o u s an d s o f s quare m i l es . Need l es s t o
s ay , a g reat v ari et y

o f m ari ti m e act i v i ty --co m m erci al an do th erwi s e--o ccu rs wi t h i n th i s t erri t o ry . Th es e act i v i t i es i n cl u d e fi s h i n g , s h ri m pi ng , p l eas u re b o at i n g an d
s ai l i n g , an d co m

m erci al tran sp o rt at io n o f p ers o n s an dp ro p ert y . Sect io n 6 3 8 ex p an d s th e t erm “ U n i t ed St at es ” t o i n cl ud e t h e OCS “ [f] o r p u rp o s es o f ap p l y in g th e p ro v i s i o n s o f t h i s ch ap t er,” v i z., ch ap t er 1 (“N o rm al Tax es
an d Su rt ax es ”), wh ich i ncl u d es s ect i o n s 1 th ro u g h 1 40 0 u -3
. Bu ts ect i o n 6 3 8 effect s t h i s ex p an si o n o n l y

fo r a s ub seto f act iv i t i es o ccu rri n g o n th e OCS, n am el y , act i vi t i es “ wi th res p ectt o m in es , o i l an dg as wel l s , an do th er n atu ral d ep os i t s .” Th e Ch al l en ge Ves s el co n du ct ed al l o f t h e act i v i t i es ati s s u e wi th i n U.S. t erri t o ri al wat ers o r o n th e OCS. Th e qu es t i o n , th erefo re, i s wh et h er t h es e act i vi t i es were
co n du ct ed “ wi th res p ectt o m i n es , o i l an dg as wel l s , * * * [o r] o th er n atu ral d ep o s i ts .” See s ec. 6 3 8. If t h e s t atut e i s co n s tru edacco rd i n g i t s p lai n t erm s , th e an s wer t o th i s qu es t i on wo u l ds eem

t o b e “ y es .” Du ri n g 2 00 9 -2 01 1 th e Ch al len g e Ves s el wo rk edo n 1 1 p ro j ect s i n vari o u s “b l o ck s ” o n t h e OCS wi th i n th e Gu lf o f M ex i co . Al l 1 1 p ro ject s i n v o l v ed d eco m

m i ss i o n i n g o f o i l an dg as wel l s o r p ip el in es co n n ect edt o- 1 6 -

o i l an dg as ri g s . Th e Ch al l en g e Ves s el s p en t m o s to f i ts t i m e act i v el y en g ag edi n d eco m m i s s i o n in g act i v i ty . Its p en tth e b al an ce o f i t s t i m e i n tran si t b et ween p ro j

ects i tes , p erfo rm i n g m ai n t en an ce an drep ai rs i n p o rt , o r i dl e ats ea awai t i n g b et t er weat h er. Th e l at t er act i v i t i es were i n d is pen s ab l e co m p o n en t s o f i t s cen tral p u rp o s e u nd er t h e ch art er--t o as s i s ti n d eco m m i s s i on i ng o i l an d g as faci li t ies
. Pet i t i o ner u rg es th atth e Ch al l en ge Ves s el was equ i p p ed i n a way th aten ab l edi tt o s up po rto th er ty p es o f m ari t i m e act iv i ty --e.g ., l ay in g u n d ers ea cab l es o r
co n st ru ct i n g wi n dfarm s --wh o ll y u n rel at edt o o i l an dg as d eco m m i s si o n i n g act i v i ty . Wh i l e t h i s was a t h eo ret ical p o s s i b i l i ty , we d o n ot s ee h o w i ti s m at eri al t o
res o l ut i o n o f t h e qu es t i o n p res en t ed
. Du ri n g the t ax p eri o d s ati s s ue t he Ch al l en g e Ves sel i n factco n du ct edal l o f i t s act i v i t ies , n otwi th res p ectt o fi sh i n g , tran s p o rt at i on o f p as s en g ers fo r h i re, l ay in g u nd ers ea cab les , o r o th er m ari t i m e act iv i ty , b u t

“ wi th res p ectt o * * * o i l an dg as wel l s .” See s ec. 6 3 8 . Fo r t hatreas o n , th e s t atu t e b y i t s t erm s ap p ears t o ex pan d“ th e Un i t edSt at es ” t o i n cl u de t h e OCS fo r p u rp o s es
o f ap p ly i ng th e Fed eral i n co m e t ax t o p et i t i on er. Th e p art i es h av e d i rect edm o s to f t h ei r at t en t i o n t o a reg u l at i o n i s s u edb y th e Dep art m en to f t h e Treas u ry (Treas u ry Dep art m en t ) i n 1 97 3 . See s ec. 1 .6 3 8 -1 , In co m e Tax Reg s . Th e reg u lat i o n b eg i n s b y rep eat i n g t h e s t atu t o ry

t ex t , p ro v i d i n g th at , fo r p u rp o ses o f ap p l y i ng Fed eral t ax l aw “ w i th res pect t o m i n es , o i l an dg as- 1 7 -

wel l s , an do th er n atu ral d ep o s it s ,” t h e t erm “ Un i t edSt at es ” i ncl u d es th e OCS. See i d . p ara. (a)(1 ). Parag rap h (c)(4 ), cap t i o n ed“ Sco p e,” p ro v i des i n p ert i n en tp art : Pers on s , p ro p erty , o r act i v i ti es are wi th i n th e Un it edSt at es * * * o r a fo rei g n co u n try , as th e cas e m ay b e, p u rs u an tt o t h i s p arag rap h, o n ly t o th e ex t en t s uch p ers o n s , p ro p ert y , o r act iv i t i es are en g ag edi n o r rel at edt o th e ex p l o rat i on fo r, o r t h e ex p l oi t at i o n o f, m i n es , o i l an d g as wel l s, o r o th er n atu ral d ep o s i t s . Res p o n d en td o es n otco nt en dth atth e Ch al len g e Ves s el was u s edt o ex p lo re fo r o i l or g as , an dal l 1 1 p ro ject s o n wh i ch i two rk edi nv o lv edwel l s th at were n o n p ro duci n g atth e t i m e. Res po n d en tn ev erth el es s co n t en d s th atth e v es sel ’ s act i v i

t i es were wi th i n th e s co pe o f s ect i on 6 3 8 b ecau s e i t s act i v it i es were “ rel at edt o th e
* * * ex p l o i tat i o n o f * * * o i l an dg as wel ls .” Id . p ara. (c). Th atwas s o , res p o n d

en tco n t en d s , b ecau s e d eco m m i s s i o n i n g o f o i l an dg as wel l s i s an i n ev i t ab l e co ro l

l ary o f p ro du ct i o n act i v i ty

u n d er Fed eral o ffs h o re l eas es an dIn teri o r Dep art m en t reg u l at i o n s . Th e p art i es h av e ci t ed , an dwe h av e d i s co vered , n o ju d i ci al p reced en td i ct at i n g h o wth e reg ul at i o n s h ou l db e i n terp ret edas ap p l i edt o th e fact s h ere. Ho wev er, cert ai n g en eral p ri n ci pl es s eem fai rl y wel l es t ab l i s hed . On e ex am p le i n th e reg u l at i o n s p eci fi cal l y

ad dres s es i n co m e fro m

the t i m e ch art er o f a v es s el . See i d
. p ara. (f), Ex am

p le (5 ). Th i s ex am

p l e i n d i cat es th atch art er i n co m e wi l l b e s o u rced i n the Un i t edSt at es u n d er s ect io n 6 3 8 i f t h e v es s el ’ s act iv i t i es are co n du ct edo n- 1 8 -

th e OCS an dare rel at edt o t h e ex p l o rat io n fo r, o r t he ex p l o i t at io n o f, o i l an dg as wel l s . 9 It al s o s eem s cl ear t h atp ro p ert y o r act i v i ty

m ay b e “ rel at edt o ” ex pl o rat i o n
o r ex p lo i t at i o n o f n atu ral res o u rces ev en th o ug h thatrel at i o ns h ip i s n o t d i rectan d i m m ed i at e. In FM C Co rp ., 1 0 0 T.C. at6 0 5 , th e t ax p ay er m an u fact u redi n du s tri al
cran es th atwere s o ldt o o i l co m p an i es “ t o p ro v i de as si s t an ce o n [OCS] dri ll i n g p l at fo rm s .” Th e qu es ti o n was wh et her t h e cran es co n st i tu t ed “ ex p o rtp ro p ert y ” fo r p u rp os es o f s ect io n 9 9 3 (c)(1 )(B), wh i ch req u i redth atth ey b e s ol dfo r u s e “ o u t s i d e th e Un i t edSt at es .” Th e t ax p ay er arg u ed th at“ th e b ro ad er d efi n i t i o n o f ‘ U n i t ed St at es ’ u nd er s ect io n 6 3 8 ap p l i es o n l y t o d et erm i n e t h e Fed eral i n co m e t ax co n s equ en ces o f i n co m e d eri vedd i rect l y fro m th e ex p l orat io n an d ex p lo it at io n ” o f
m i n eral res o u rces . FM C Co rp . , 1 0 0 T.C. at6 05 (em p h as i s ad d ed ). W e reject ed th atarg u m en t, h ol d i n g th ats ect i o n 6 3 8 ex p an d edth e “ Un i t edSt at es ” t o i n cl u d e

9 In Ex am p l e 5 an o i l an dg as co m

p an y ch art ers a s h ip fro m N, a d o m es t i c co rp o rat i o n, wh os e p ers on n el co n t i n u e t o n av ig at e an dm an ag e t h e s h i p . Th e s h i p en g ag es i n th e ex p l o rat i on fo r o i l an dg as o n the co n ti n en t al s h el f o f a fo rei g n co u nt ry . Sec. 1 .6 38 -1 (f), Ex am p l e (5 ), In co m e Tax Reg s . Th e ex am p l e co n cl u d es th at“ th e en t i re i n co m e d eri v ed* * * [b y N] fro m the ch art er i s i n co m e d eri v ed fro m s o u rces wi th i n * * * [t h e] fo rei g n co u n try .” Ib i d . Th e reci p ro cal co n cl u s i o n n eces s ari l y

fo l l o ws i n th e reci pro cal s i tu at i o n (as h ere) wh ere a fo rei g n co rp o rat i on d eri v es i nco m e fro m ch art eri n g a v es s el fo r u s e i n o i l -rel at edact i v it i es o n th e Un i ted St at es OCS. See s ec. 6 3 8 (1 ) an d(2 ) (p ro v i d i ng reci p ro cal d efi n i t i o n s o f
“ Un i t edSt at es ” an d“ fo rei g n co u n try ” wi th res p ectt o act i v i t i es o n co n t i nen t al s h el f areas ).- 1 9 -

th e OCS ev en th o u g h th e affi l i at e s el l i ng th e cran es “ h adn o d i rect i n v o l v em en ti n th e act u al ex p l o rat i o n an dex p l o i tat i o n o f t h e n atu ral d ep o s i ts .” Id . at 6 0 6
. Th e ex am p l es i n t h e reg ul at i o n l ik ewi s e g i v e b ro ads co p e t o t h e p h ras e “ rel at ed t o.” See s ec. 1 .6 3 8 -1 (f), In co m e Tax Reg s . Ex am p l e 3 as s u m es a m ed i cal d o ct o r wh o trav el s t o OCS d ri l l i n g p l at fo rm s t o v eri fy th e h eal th o f ri g wo rk ers b y
m ak i n g “ ro u t i n e p h y s i cal ex am i n at i o n s.” Th e ex am p l e co n cl u d es th atthe d o ct o r i s en g ag edi n act i v i t i es “ rel at edt o th e ex p l o i t at i o n o f o i l ” fo r p u rp o s es o f s o u rci n g h i s i n co m e. Ex am

p l e 6 as s u m es an i n d i v i du al wh o s e s o le act i v i ty co n s i s t s o f
co o ki n g m eal s fo r p ers o n n el o n b o arda v es s el ch art eredt o ex pl o re fo r o i l o n th e OCS. Itco n cl u d es th atth e co o k ’ s act i vi t i es are “ rel at edt o th e ex pl o rat i o n fo r o i l .” Ex am p l e 2 , b y co n tras t, co n cl u d es th ata l awy er wh o trav el s t o an OCS d ri l l i n g p l at fo rm t o i n t erv iew a cl i en ti n a d o m es ti c rel at i o n s m at t er “ i s n o ten g ag edi n act i vi t i es rel at edt o th e ex p l o rat i o n fo r, o r ex p l o i t at i o n o f, n atural d ep o s i t s .” Th es e ex am

p l es g i v e wi d e (b utn o tl i m i t l es s ) s co p e t o th e t y p es o f act i v i t i es th atare “ rel at edt o ” t he ex p l o rat i o n fo r, o r ex p lo i t at i o n o f, n atu ral d ep o s it s . Al

th o u g h th e fact p at t ern s o f th es e ex am p l es i n v o l v e ex p l o ri n g fo r o r p ro du ci n g o i l , res p o n d en t u rg es th atth e u n iv ers e o f act i v it i es “ rel at ed t o th e * * * ex p l o it at i o n ”
o f n atu ral res o u rces i s b ro ad er. Res p o n den tco n t en d s th atth e Ch al l en ge Ves s el ’ s act i vi t i es i n d eco m

m is s i o n in g o i l an d g as wel l s were “ rel at edt o th e * * * ex p l o i

-- 2 0 -

t at i o n o f * * * o i l an dg as wel l s ” b ecau s e th es e act i v i ti es were i n t eg ral t o , an dan i n ev i t ab l e co ro l l ary

o f, ex p l o i t i n g o i l an dg as res o u rces o n th e OCS. W e ag ree. Th e In t eri o r Dep art m en th as p ro m u l g at edd et ai l ed reg u lat i o n s req u i ri n g al l
o i l an dg as l es s ees th ato p erat e o n th e OCS t o u n d ert ak e ex ten s i v e d eco m m i s s i o n i n g act i v i t i es wh en wel l s ceas e p ro du ct i o n . Les s ees an do wn ers o f o p erat i n g ri gh t s are jo i n t l y

an ds ev eral l y

res p o n s ib l e fo r p l ug g i n g ab an d o n edo r n o n p ro duci n g wel ls , d eco m

m i s s i o n i n g p i p el in es , rem o vi n g p l at fo rm s an drel at ed
s tru ctu res , an dcl eari ng th e s ea fl o or o f al l o b s tru ct i o n s res u l ti n g fro m act i vi t i es
u n d ert ak en t o ex p l o i to i l an dg as res o u rces . See 3 0 C.F.R. s ecs . 2 5 0
. 1 7 0 1 , 2 5 0 .1 7 0 3 (2 0 1 8 ). Th e Fed eral o ffs h o re l eas es fo r th e areas i n wh i ch th e Ch al l en g e Ves sel wo rk edex p l i ci tl y

req ui red , as a co n d i ti o n o f ex p l o i t i n g o i l an d g as
res o u rces th erei n , th atwel l s b e d eco m m is s i o n edi n a res p o n s i b l e m an n er wh en p ro duct i o n act i v i ty

ceas ed
. Pet i t i o ner co n ten d s th atth e Ch al l en ge Ves s el h adn o th i n g t o d o wi th th e

“ ex p l o i tat i on o f * * * o i l an d g as wel ls ,” s ee s ec. 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s ., b ecau s e al l wel l s o n wh i ch i two rk edei th er h adn ev er p ro du ced o r h adceas edp ro du ct i o n s ev eral y ears p rev i o u s ly . Bu tth e ex p l o i t at io n o f o i l an dg as res o u rces o n th e OCS en t ai l s a l o n g p ro ces s , an d m an y d ifferen t ty

p es o f act i v i ti es are es s en t i al t o thi s p ro ces s . Th e t i m el i n e fo r “ ex p l o it at i o n” i ncl u d es p re-p ro du ct io n act i v i t i es- 2 1 -

(b i d d i n g o n o ffs h o re l eas es , g et t i n g p erm i t s , an ddri l l i n g wel l s), p ro du ct i o n act i vi t ies (s t affi n g p l at fo rm s , ex tract i n g res o u rces , an dp erfo rm i n g rep ai rs an dm ai n t en an ce), an dp o s t -p ro du ct io n act i v i t i es (p l u g g i n g wel l s , d eco m m i s s i o n i n g p i p el i n es , an d rem ov i n g d eb ri s ). Al l th ree s et s o f act i v i ti es are eq u al l y es s en t ial . No l eas e
co u ldb e s ecu red an dn o p ro du ct i o n wo u l dev er o ccu r un l es s th e l es s ee b o u n d i t sel f t o carryo u tth e p o s t -p ro du ct i o n p h as e o f th e ex pl o i t at i o n cy cl e. W e s ee n o l o g i cal reas o n t o ex cl u d e p o s t -p ro du ct i o n act i v i t i es (an y m o re t h anp re-p ro du ct i o n act i vi t i es ) fro m

th e u n i v ers e o f act i v i t i es th atare “ rel at edt o th e * * * ex p l o i t at i o n
o f * * * o i l an d gas wel l s ” o n th e OCS. Ib i d
. 1 0 Pet i t i o ner em

p h as i zes th atd eco m

m i s si o n in g o f wel l s was th e l eg al o b l i g at i on o f t he o i l an dg as l es s ee (o r o p erat o r), th atEPIC an di t s d i v ers u n d ert o o kth e
u n d ers ea d eco m

m i s s i o n i n g wo rk , an dth atp et i t i o n er s i m p l y p ro v i d eda s h i p an d crew. Bu t we d o n ot s ee h o w th i s affect s th e an al y s is . Ind eci d i n g wh et h er d e1 0 Th e Ch al l en g e Ves sel ’ s d eco m m i s s i o ni n g act i v i ti es were ch i efl y fo cu s ed o n ri g s , p l at fo rm s , an dp i p el i n es d am ag edb y h u rri can es . Ch aract eri zi n g h u rri

can es as “ fo rce m ajeu re” ev en t s th at“ d i s rup t ed the n atu ral l i fe cy cl e o f t h e wel l s ,” p et i t i o n er co n t en d s th ath urri can es “ s h o u l db e d eem edt o b reakan y rel at i o ns h i p b et ween ex p l o rat i o n /ex p l o it at i o n an dd eco m m i s s i o n i ng .” Th e In t eri o r Dep art m en t ’ s d eco m

m is s i o n i n g reg u l at i o n s , h owev er, ex p li ci t l y req u i redth atwel l s b e d eco m m i s s i o n edwh enp ro duct i o n act i v i ty ceas ed . Pro du ct i o n act i v i ty m i g h t ceas e fo r an y

n u m b er o f reas o ns , i n cl u di n g res o u rce d ep l et i o n, m ari n e acci d en t s , o r h u rri can e d am ag e. Th e l eg al o b l i g at i on t o d eco m m i s si on ap pl i es reg ard l es s o f wh atcau sed p ro du ct i o n t o ceas e. See In teri o r Dep art m en tNo t i ce, s up ra n o t e 5
.- 2 2 -

co m m i s s io n in g i s “ rel at edt o th e * * * ex p lo i tat i on o f * * * o i l an d g as wel l s ,” i ti s i rrel ev an twh et h er t h e l es s ee p erfo rm s th atwo rko r co n tract s i to u t. An dal th o u gh EPIC’ s d i v ers actu al ly

d i s m an tl edth e p l at fo rm s an dp l u g g edth e wel l s , th e Ch al

l en g e Ves s el an di t s m ari n e crew p erfo rm edi n d is p en sab l e s up p o rt i n g s erv i ces . In d eed , EPIC reco g n i zedth ati tco u l d n o th av e co m p l et ed i t s i n ten d ed s co p e o f
wo rkwi tho u tch art eri n g th e Ch al l en g e Ves s el . If th e act i v it i es o f a m ed i cal d o ct o r
an d co o kare “ rel at edt o ” t h e ex p l o i t at i o n o f o il an dg as res o u rces --as ex am p l es i n th e reg u l at i o n s h o w--i t fo l l o ws a fo rt i o ri th atth e act iv i t i es o f t h e Ch al l en g e Ves s el
an d i t s crew were s o “ rel at ed .” Ex am pl e 5 i n t h e reg ul at i o n l i k ewi s e s h o w s th e erro r o f p et i t i o n er’ s arg u m en t . Itp o s i t s th at co m

p an y M ch art ers a v es s el fro m co m p an y N t o ex p l o re fo r
o i l o n a fo rei g n co u n try ’ s OCS. Co m p an y M (co rres po n di n g t o EPIC) s up p l i es p ers o n n el t o o p erat e s p eci al i zedequ i p m en t , an dco m p an y N (co rres p on d in g t o p et i t i o n er) s up p l i es p ers o n n el t o n av i g at e an dm an ag e t h e s h i p . Th e ex am p l e co n cl u d es th at“ th e en t ire i n co m e d eri v ed* * * b y N Co rp o rat i o n fro m th e ch art er i s i n co m e d eri v edfro m

s o u rces wi t h i n [t h e] fo rei g n co u n try .” Sec. 1 .6 3 8 -1 (f), Ex am p l e (5 ), In co m e Tax Reg s . Th is ex am pl e s h o w s th atp ro v i di n g a s h i p an d- 2 3 -

crew t h ro u g h a t i m e ch art er m ay b e rel at edt o th e ex p lo i t at i on o f o i l an dg as wel l s . 1 1 In s u m , b ecau s e t h e d eco m m i s s i o n i n g act i vi t i es i n wh ich th e Ch al l en g e Ves sel en g ag ed were i n t eg ral t o , an dl eg al l y req ui redt o b e u n d ert ak en i n co n n ect i on wi th , th e ex p l o it at i o n o f o i l an dg as res o u rces o n th e OCS, t h o s e act iv i t i es were “ rel at edt o the * * * ex p l o i t at i o n o f * * * o il an dg as wel l s ” wi th i n the m ean i n g o f s ect io n 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s . Sect i on 6 3 8 (1 ) acco rd i n g l y ex p an dedth e “ Un i t edSt at es ” t o i n cl u d e t h e OCS. Fro m th e co m m en cem en to f t h e ch art er u nt i l Au gu s t 1 1 , 2 0 11 , p et i t i o ner co n du ct ed al l o f i t s act i v i t i es wi th i n th e

“ Un i t edSt at es ” as th u s d efi n ed . Becau s e p et i t i o n er’ s ch art er i nco m e was d eri v ed fro m th e u s e o f p ro p erty

an d t h e p erfo rm an ce o f s erv i ces i n th e Un i t edSt at es , i ts i n co m e was s o u rcedi n the Un i t edSt at es an d was “ effect i vel y co n n ect ed ” t o a trad e o r b u si n es s wi th i n th e Un i t ed St at es . See s ecs . 8 6 1 (a)(3 ) an d(4 ), 8 64 (b ), 8 8 2 (a). Pet i ti o n er’ s ch art er i nco m e was th u s t ax ab l e u n der t h e Co d e.

1 1 Pet i t i o ner co n ten d s th atEPIC’ s d eco m m i s s io n i n g act i vi t i es can n o tb e at tri b u ted t o th e Ch al l en g e Ves s el b ecau s e i tan d EPIC were n o t ag en t s o r p art n ers o f o n e an o th er. Bu t we are n o tem p l o y i n g an at tri bu t i o n ru l e. Li k e co m p an y N i n Ex am p l e 5 , p et i t i o n er was res po n s i b l e fo r t h e Ch al l en g e Ves s el ’ s n av i g at i o n an d m an ag em en t , an d t h o s e s up p o rt i n g act iv i t i es were “ rel at edt o th e * * * ex p l o i t at i o n o f * * * o i l an d gas wel l s .” See s ec. 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s .- 2 4 -

2
. Pet i t i o ner’ s Arg um en t s Pet i t i o ner u rg es s ev eral arg u m en t s i n s up p o rto f a co n traryco n cl u s i o n . It s p ri n ci p al p o s i t io n i s th ats ect i o n 6 3 8 d o es n o tap p l y b ecau se t he p ro

jects i t es were
n o tact i v el y

p ro du ci ng o i l an dg as . Bu tas ex p lai n eds up ra p p . 2 0-2 1 , act i v i t i es
m ay b e co n du ct ed“ wi th res p ectt o * * * o i l an d g as wel l s , ” s ec. 6 3 8, an db e “ rel at ed t o t h e * * * ex p l o i t at i o n o f * * * o i l an dg as wel l s ,” s ec. 1
. 6 3 8 -1 (c)(4 ), In

co m e Tax Reg s . , ev en th o u g h t h e wel l s are n o tcu rren t l y p ro du ci n g . In as cert ai n i n g th e s co p e o f s ect i o n 6 3 8 , we co n s id er t h e en ti re cy cl e o f act i v i t i es n eces s ari l y i n v o l v ed i n ex p l o i t i n g o i l an dg as o n th e OCS, i n cl ud i n g p re-p ro du ct i o n , p ro du ct i on , an dp o st -p ro du ct i o n act i v i t i es . Th e Ch al len g e Ves s el ’ s d eco m m i ss i o n i n g act i vi t i es were i nex tri cab ly l in kedt o th e ex pl o it at i o n o f o i l an dg as res o u rces at th e 1 1 pro jects i t es , reg ard l es s o f wh et h er th e wel l s were cu rren t l y p ro du ci n g o r ab an do n ed . Cf. Sh el l Oi l Co . v . Co m m i s si o n er, 9 5 2 F.2 d 8 85 , 8 9 0 (5 th Ci r. 1 9 9 2 ) (h o l d i n g th atco st s i n cu rredatab an d o n eddri ll i ng s i tes were “ at tri b u t ab l e t o m i n i n g p ro ces s es ” fo r p u rp o s es o f co m p u t i n g wi n d fal l p ro fi t s t ax ), rev ’ g 8 9 T.C. 3 7 1 (1 9 8 7). Pet i t i o ner n ex t co n ten d s th at , b ecau s e s ect i o n 6 3 8 (1 ) ex p an d s th e d efi n i t i o n
o f t h e Un i t edSt at es t o i n cl ud e “ t h e s eab edan d s ub s o i l ” o f th e OCS, act i v i t i es co n du ct edo n th e wat er’ s s u rface are n o tco vered b y th e s t atu t e. Bu tth i s co un try ’ s- 2 5 -

ex cl u s i v e ri g h ts o n the OCS ex t en dt o “ i n s t al l at i o n s an do ther d ev i ces p erm an en t ly
o r t em p o rari l y at t ach edt o the s eab ed .” 4 3 U.S.C. s ec. 1 3 3 3 (a)(1 ). Th e p ro ject
s i tes atwh ich th e Ch al l en ge Ves s el wo rk edh ads u ch “ i n s t al l at i o n s ,” an dth ey were t h e s ub

jecto f t h e d eco m

m i s s i o n i n g act i v i ty . Th e Ch al l en g e Ves s el p ro v i d ed
es s en t i al s up p o rtfo r d eco m m i s s i o n i ng th es e i n s t al l at i on s b y s up p l y i n g (am o n g
o th er t hi n g s ) a cl as s 2 dy n am i c p o s i t i o n i n g s y s t em , a n i n e-m an s atu rat i o n d i v i n g
s y s t em , an da h y drau l i c d eckcran e cap ab l e o f l i ft i n g 1 0 0 t on s . Th e fact th at EPIC’ s p ers o n n el , rat h er th an p et i t i o n er’ s p ers o n n el , p erfo rm edth e d i v i n g act i v i

t i es i s n o td i s p os i t i ve i n d et erm i n i ng th e s t atu t e’ s reach
. Th e reg u l at i o n co n fi rm s th i s co n cl us i o n . Itp ro v i d es : “ Fo r p u rp o s es o f ap p ly i n g th i s s ect i o n, p ers o n s, p ro p ert y , o r act i v i t ies wh ich are en g ag ed i n o r rel at ed t o t h e ex p l o rat i on fo r, o r t h e ex p l oi t at i o n o f * * * o i l an dg as wel ls * * * n eed
n o tb e p hy s i cal l y

upo n , co n n ect ed , o r at t ach edt o th e s eab edo r s ub s o i l * * * t o b e d eem edt o b e wi th i n th e Un i tedSt at es .” Sec. 1 .6 3 8 -1 (c)(1 ), In co m e Tax Reg s .;
s ee St aff o f S. Fi n . Co m

m ., 9 1 stCo n g ., Tech ni cal M em o ran du m o f Treas u ry Po s it i o n o n H.R. 1 3 2 7 0 , Tax Refo rm Acto f 1 9 69 , at7 6 (Co m m . Pri n t1 9 6 9 ) (reco m m en d i n g thatth e “ Un i t edSt at es ” b e d efi n ed t o i n cl ud e OCS n atu ral
res o u rce act i v i ty

“ wh et h er o r n o t th ere i s a p h y s i cal co nn ect i o n wi th th e s h el f”). It- 2 6 -

i s i m m at eri al th at th e Ch al l en g e Ves s el an d i t s crew p erfo rm eds erv i ces o n th e wat er’ s s u rface o n l y . Th e ex am p l es t o t h e reg ul at i o n p o i n t t o t h e s am e co n cl u si o n . As n o t ed
s up ra p p . 1 7 -1 9, they

i n d i cat e th ats ect i o n 6 3 8 ex p an ds U.S. t ax juri s d ict i o n t o reach th e act i v i t ies o f a m ed i cal d o ct o r, a co o k , an da ch art eredv es s el wh o s e p ers o n n el “ n av i g at e an dm an ag e t h e s h i p .” Sec. 1 .6 38 -1 (f), Ex am p l es (3 ), (5 ), (6 ), In co m e Tax Reg s . Al l th es e act i v i t i es are co n duct edo n o r ab o v e th e wat er’ s s u rface. Yet s ect i o n 6 3 8 ap p l ies t o s u ch act i v i t i es b ecau s e t h ey are “ rel at edt o ” t h e
ex p lo rat i o n fo r, o r t h e ex p l oi t at i o n o f, o i l an dg as wel ls
. 1 2

1 2 Pet i t i o ner ci t es Rev . Ru l . 8 1 -2 57 , 1 9 8 1 -2 C.B. 2 1 4 , i n s up p o rto f i t s co n t en t i o n th atU.S. t ax juri s d ict io n o v er t h e OCS “ is l i m it edt o i t em s at t ach edt o th e s eab ed
. ” Th atru l i n g i n v ol vedth e ex ci s e t ax o n ai r t ran s po rt at i o n i m po s edb y s ect i on 4 2 6 1 ; th e ru l i n g co n cl u d edth atth is t ax d o es n o tap p l y t o h el i co p t er s erv i ces s up p li edt o s em i -s ub m ers i b l e d ri l l i n g ri g s wh i l e t h ey “ are b ei n g m o v ed ats ea.” Rev
. Ru l . 8 1 -2 5 7 , 1 9 8 1-2 C.B. at2 1 5 . Sect i o n 6 3 8 ap p l i es “ [f] or p u rp o s es o f ap p ly i n g th e p ro v i s io n s o f t h is ch ap t er,” v i z., ch ap t er 1 , wh i ch i n cl u d es s ect i o n s 1 th ro u g h 1 4 0 0 u -3 . Sect i o n 6 3 8 d o es n otap p l y fo r p u rp o s es ap pl y i n g s ect i o n 4 2 6 1 , wh i ch i s i n ch ap t er 3 3 o f th e Co d e, g o v ern i n g ex ci s e t ax es o n “ Faci l i t i es an d Serv i ces .” Rev . Ru l . 8 1 -2 5 7 acco rd i n g ly d oes n o t rel y

o n (o r m en t i o n) s ect i o n 6 3 8 . As ex p l ai n edi n th e t ex t , th e reg u l at i o n i n t erp ret in g s ect i o n 6 3 8 cl earl y s h o ws th atU.S. t ax juri s d i ct i o n o v er t h e OCS i s n o t l i m i t ed t o i t em s at t ach edt o th e s eab ed . Pet i t i o n er’ s rel i an ce o n two o th er rev en u e ru l i n g s i n v o l v i ng ex ci s e t ax es i s s i m i l arl y

m i s p l aced . See Rev . Ru l . 7 7 -1 9 7 , 1 9 7 7-1 C.B. 3 4 4 (ad dres s i n g s ect i on s 4 2 6 1 an d4 3 7 1 ); Rev . Ru l . 5 6 -5 0 5 , 1 9 5 6 -2 C.B. 8 9 1 (ad dres s i n g s ect i o n 4 3 7 1 ).- 2 7 -

Pet i t i o ner s eek s s up p o rtfo r i t s p o s i t i o n fro m a ru l i n g i trecei v edfro m th e Dep art m en to f Ho m el an dSecu ri t y , U.S. Cu s t o m s an dBo rd er Pro t ect i o n (CBP). Un d er t h e J o n es Actan drel at edFed eral l aws , fo rei g n s h i p s l i ke t h e Ch al len g e Ves sel are p ro hi b i t edfro m en g ag i n g i n th e t ran s p o rt at io n o f m erch an d i se (i n cl ud

i n g d eb ri s ) an dp as s en g ers (o th er t h an crew) b et w een “ co as twi s e p o i n t s ” i n th e Un i ted St at es . See 4 6 U.S.C. s ecs . 5 51 0 1 , 5 5 10 2 , 5 5 1 03 , 8 01 0 4 (2 0 1 2 ). “ Co as t wi s e p o i nt s ” are p o rt s, i s l an d s , an do th er fi x eds tru ctu res atwh i ch p as s en gers o r g o o d s m ay b e l o ad edo r u n l o ad ed
. See Am . M ar. As s ’ n v . Bl um en th al , 5 9 0 F.2 d 1 1 5 6 , 1 1 6 0 (D.C. Ci r 1 9 7 8) (“ Aco as twi se t ran s p o rt at i on o f m erch an di s e t ak es p l ace * * * wh en m erch an d i s e l ad en ata p o i n t em b raced wi th i n th e co as twi s e l aws (‘ co as twi s e p o i n t ’ ) i s u n l ad en atan o th er co as twi s e p oi nt .” (quo t in g 4 2 Fed . Reg
. 4 6 0 6 8 (1 9 7 7 ))). CBP h adp rev i o u s l y ru l edth atdri l l i n g p l at fo rm s an ds i m i l ar
s tru ctu res o n th e OCS are “ co as twi s e p oi n t s ” b u tthatd am ag edo r d es tro y edp l at fo rm s are n o tco n s i d ered“ co as twi s e p o i n ts ” i f n o l o n g er at t ach edt o th e OCS. OnJ u ne 2 2 , 2 00 9 , CBP i s s u eda ru l i n g t o p et i t i o n er rei terat i n g t h i s p o s i t i o n , b u twe d o n o tth i n k i th el p s p et i t i o n er’ s cau s e. To b eg i n wi th , CBP rev o k edth e
ru l i n g t wo m o nt h s l at er, s tat i n g : “ [F] u rt h er i n fo rm at i o n i s n eed edt o cl ari fy th e
s t atu s o f t h e wel l s b efo re a d et erm i n at i o n m ay b e m ad e reg ard i n g wh et h er th ey
co n st i tu t e co as twi s e p o i n ts .” M o re fu n d am en tal l y , wh et h er d am ag edp l at fo rm s- 2 8 -

co n st i tu t e “ co as twi s e p o i n t s ” fo r p u rp o s es o f t h e J on es Actan do th er m ari ti m e l aws i s n o t d et erm i nat i v e i n as cert ai n i n g th e s co pe o f U.S. t ax juri s d i ct i o n u n d er
s ect i on 6 3 8 o f t h e Co d e. Th e qu es t i o n p o s edb y th e reg u l at i o n i s wh et h er t h e Ch al len ge Ves s el ’ s d eco m m is s i o n i n g act i v it i es were “ rel at edt o t h e * * * ex p l o i

t at i o n o f * * * o i l an dg as wel l s .” Sec. 1 .6 38 -1 (c)(4 ), In co m e Tax Reg s . Th i s i s a d i fferen t qu es t io n fro m

th atco n s i d eredb y CBP, n am el y , wh et h er d am ag edp l at fo rm s are fi x ed st ru ctu res s u ffi ci en tl y s i m i l ar t o p o rt s t o b e co n s i d ered “ co as twi s e p o i n t s .” Fi n al l y , p et i t i o n er ci t es Ocean Dri l l in g & Ex p l . Co . v . Un i t edSt at es (ODECO), 9 8 8 F.2 d 1 1 35 (Fed . Ci r. 1 9 9 3 ), i n s upp o rt o f i t s as s ert i o n that“ [r] es p o n den th as g o n e ro g u e * * * i n i t s at t em p tt o ex p an d i t s t ax i n g au th o ri ty u n d er
s ect i on 6 3 8 .” Th e qu es t i o n b efo re t he U.S. Co u rto f Ap p eal s fo r t h e Fed eral Ci rcu i ti n th atcas e was wh et her i n co m e d eri vedb y a co n tro ll edfo rei g n co rp o rat i o n fro m i n s u ri n g o ffs h o re d ri l l i n g p l at fo rm s o n th e OCS co n s ti tu t eds ub p artF i n co m e. Atth e t i m e s ub part F i n co m e was g en eral l y d efi n edt o i n cl u de “ i n co m e d eri v edfro m th e i n s u ran ce o f Un i t edSt at es ri s k s ,” wh ich i n turn was d efi n edt o i n cl u d e i n co m e fro m

i n s u ran ce p ro v i d ed“ i n co nn ect i o n wi th p ro p ert y i n * * * th e Un i ted St at es .” Id . at1 1 5 4 (quo t i n g s ect i o n s 9 5 2 (a)(1 ), 9 5 3 (a)(1 )(A) (1 97 4 )).- 2 9 -

Th u s, the q u es t io n i n ODECO was wh et h er t h e OCS d ri l l i n g p l at fo rm s were “ i n th e Un i t edSt at es ” fo r s ub p artF p u rp o s es . Onth i s p o in t th e s ub p artF reg u l at io n s ap p eared t o co n fl i ctwi th s ect i o n 6 3 8
an d th e reg u l at i on s i s s u edu n d er i t . Th e s ub p artF reg u lat i o n s , i s s u edi n 1 96 4 , p ro v id edth at , “ [f] o r p u rp o s es o f s ect i o n 9 5 3 (a), t h e t erm ‘ Un i t edSt at es ’ i s u s edi n a g eo grap h i cal s en s e an di n cl u d es o n l y th e St at es an dth e Di s tri cto f Co l u m b i a.” Sec. 1 .9 5 3 -2 (a), In co m e Tax Reg s . (fl u s h l an g u ag e); s ee T.D. 6 7 81 , 1 9 6 5 -1 C.B. 3 2 0 , 3 2 4 . Sect i on 6 38 , en act edi n 1 9 6 9, ex pan d edth e t erm “ Un i t edSt at es ” t o i n cl u d e t h e OCS fo r p u rp o s es of ap p l y in g th e p ro v i s i o n s o f ch ap ter 1 (wh ich
co n tai n eds ect i o n 9 5 3 ) wi th res p ectt o o i l an dg as wel l s . An dEx am p l e 8 t o th e
s ect i on 6 3 8 reg u l at io n co n cl u dedth ati n co m e d eri v edfro m i ns u ri n g a dri l li n g p l at fo rm o n th e OCS was “ in co m e d eri v edfro m th e i n s u ran ce o f Un i t edSt at es ri sk s , wi th in th e m ean i n g o f s ect i o n 9 5 3 (a)(1 ),” b ecau s e th e “ o i l dri l l i ng p l at fo rm i s l ocat edwi th i n the Un i t edSt at es u n d er s ect i o n 6 3 8 .” Sec. 1 .6 3 8 -1 (f), Ex am p l e (8 ), In co m e Tax Reg s . Th e Fed eral Ci rcu i tres o l v edth is co n fl i cti n th e t ax p ay er’ s fav o r, co n cl u d

i n g th at“ s ect i on 6 3 8 d o es n o taffect s ect i on 9 5 3
. ” ODECO, 9 8 8 F.2 dat1 1 5 6
. Th e co u rtn o t ed th atth e l eg i s l at i v e h i s t o ry o f s ect io n 6 3 8 rep eat ed l y referred t o

“ m i n i ng act i v it i es an dt o p ers o n al s erv i ces p erfo rm edatm i n i ng s i t es , n o tt o i n s u r-- 3 0 -

an ce act i vi t i es .” Ib i d. Itreas o n edthat“ i n s u ran ce act i v i ty i s m o re rem o t e t o m i n i n g act i v i ty

th an p ers o n al s erv i ce act i v i ty co n du ct edatth e s i t e o f ex p lo rat i o n .” Ib i d . Its t at edthat“ [t ] h e ex am pl e p ro v id edi n th e reg ul at i o n s t o s ect i o n 6 3 8 , i n d i

cat i ng th ats ect i on 6 3 8 i s t o ap p l y t o i n s u ran ce act i v i ty

[v i z., Ex am

p l e 8 ] , can n o t
o v erri d e t h e reg ul at i o n s t o s ect i o n 9 5 3 .” Id . at1 1 5 7 n .3 0
. An di t rel i edo n th e p ri n ci p l e th at“ i f t h ere i s a d o ub tas t o th e m ean i n g o f t h e p ro vi s i o n s o f t h e In t ern al Rev enu e Co de, t h e d oub t‘ m us tb e res o l vedi n fav o r o f t h e t ax p ay er.’ ” Id
. at1 15 7 (qu o ti n g Ci t i zen s Nat ’ l Ban ko f W aco v . Un it ed St at es , 5 5 1 F.2 d8 3 2 , 8 4 3 (Ct . Cl
. 1 9 7 7 )). Th e Fed eral Ci rcu i t ’ s o p i n i o n i n ODECO s upp l i es n o s upp o rtfo r p et i t i o n er’ s p os i ti o n . Th e co u rth el dthati n co m e d eri v edfro m i n s u ri n g d ri l l i n g p l at fo rm s
o n th e OCS was n o ts ub p artF i n co m e. Th ath o l d i ng h as n o rel ev an ce t o th i s cas e. Th e co u rt ’ s s ubs i di ary

co ncl u s i o n th atOCS d ri l l i n g p l at fo rm s are n ot“ wi th i n th e Un i ted St at es ” fo r p u rp o s es o f t ax i n g i n s uran ce i nco m e l i k ewi s e h as n o s al i en ce h ere. In s u ran ce as i d e, p et i ti o n er d o es n o t d i s p u t e t h at s ect i o n 6 3 8 o p erat es t o ex p an d U.S. t ax juri s d i ct io n o v er n atu ral -res o u rce-rel at edact i v it i es o n th e OCS. Th e th ru s to f p et i t i o ner’ s p o s i t i o n i s t h atn o npro du ci n g wel l s s h ou l d b e d i s t in g u i s h ed fro m p ro du ci ng wel l s fo r t h i s p u rp o s e. Th e ODECO o p i n io n s h ed s n o l ig h to n th atp o i n t
.- 3 1 -

Th e Fed eral Ci rcu i t ’ s d i s cu s s i o n o f t he l eg i sl at i v e h i s to ry o f s ect i o n 6 3 8 i s
n o tp art i cu l arl y

h el pfu l t o p et i t i o n er. Th e co u rtci t edCo n g res s ’ i n t en ti o n t o ex t en dU.S. t ax juri s d i ct io n o v er “ p ers o n al s erv i ces p erfo rm ed atm i n in g s i t es ” an d
v i ewed i ns u ran ce act i v i t i es as “ rem o t e t o m i n i n g act i v i ty .” Id . at1 1 5 6 . Th e Ch al

l en g e Ves s el ’ s s erv i ces were “ p erfo rm edatm in i n g s i t es .” An dth o s e d eco m m i s s i on i n g s erv i ces were n o trem o t e fro m , b u trat h er were i nt eg ral t o , th e p ro ces s o f
ex p lo i t i n g o i l an dg as res ou rces o n th e OCS. Fi n al l y , p et i t i o n er errs i n i m p l y in g th atth e ODECO o p i n i o n s om eh ow t arn i s h eds ect i o n 1 .6 3 8 -1 , In co m e Tax Reg s ., g en eral l y . Th e Fed eral Ci rcu i t co n s i

d eredo n l y

o n e el em en to f th e reg u l at i o n --Ex am pl e 8 , d eal i n g wi th i ns u ran ce ri sk s --an dfo u ndi tt o co n fl i ctwi th th e Secret ary ’ s reg u l at i o n s u n d er s ubp artF. Si n ce ODECO i nv o l v ed s ub p artF i n co m e, t h e co u rtco ncl u d edth atEx am p l e 8

“ can n o to v erri d e t h e reg u lat i o n s t o s ect i on 9 5 3 .” Id . at1 1 5 7 n .3 0
. Ex am p l e 8 h as
n o rel ev an ce t o t h i s cas e, an dp et i t i o n er h as s up p l i edn o p l au si bl e b as i s fo r qu es ti o n i n g th e reg ul at i o n as i tap p l i es t o th e i s su e o f s t atu t o ry co n s tru ct i o n p res en t edh ere. 1 3

1 3 Pet i t i o ner s tat edi n i ts m o t io n fo r s u m m ary ju d g m en t th at , i f res p o n d en trel i edo n th e s ect i o n 6 3 8 reg u l at i o n s i n h i s s i m u lt an eo u s ly

fi l edcro s s -m o t i o n , p et i

t i on er wo u l d“ d em on s trat e t h atth o s e reg u l at i o n s are i n val i di n i t s res p o n s e.” In i t s res p o n s e p et i t i o n er d o es n o tactu al l y ch al l en g e t h e v al i d i ty o f t h e s ect i o n 6 3 8

(co n ti n u ed ...)- 3 2 -

B. Tax ab i l it y

Un d er t h e Treat y Hav i n g co n cl u d edth at p et i t io n er’ s ch art er i n co m e was t ax ab l e u n d er t h e Co d e, we co n s i d er n ex t wh et h er a d i fferen to u t co m e i s req ui redb y th e b il at eral i n co m e t ax treat y

b et ween th e Un i t edSt at es an dth e U.K. Th i s cas e i s g o v ern edb y th e Treat y

th at en t ered i n t o fo rce o n M arch 3 1 , 2 0 0 3. See s up ra n o t e 2 . As a th res ho l dm at t er t he p art i es h av e s t i p u l at edth atp et i t i o n er was a res id en to f t h e U.K. un der art icl e 4 o f t h e Treat y (Res i d en ce) an dm etth e req u i rem en t s o f art i cl e

1 3 (...co n t i nu ed ) reg u l at i o n s . Rat h er i tas s ert s th at th e “ reg u l at i on s are n o ten t i t l edt o an y d eferen ce i n the t reat y -i n t erp ret at i o n co n tex tb ecau s e t h ey fl u n kth e fam i l i ar t wo -s tep t es t req u i redb y

Ch ev ro n . ” See Ch ev ro n , U.S.A., In c., v . Nat . Res . Def. Co u n ci l , In c., 4 6 7 U.S. 8 3 7 (1 98 4 ). Pet i t i o n er as s ert s th atth e reg u lat i o n s co n trad i ctth e Treat y an d th us are en t i t ledt o n o d eferen ce i n i n t erp ret i n g i t
. W e d o n o tb el i ev e t h atp et i t i o n er h as rai s eda co g n i zab l e ch al l en ge t o th e v al i d i ty o f t h e reg u l at io ns . Its h o u l dh av e b een o b vi o u s t o p et i t i o n er t h at res p o n d

en two u l drel y

o n h i s reg u l at i o n s ; i f p et i t i o n er s eri o u s l y i n t en d edt o ch al l en g e t h ei r v al i d i ty , i ts h o ul dh av e d o n e s o i n i t s o p en i n g b ri ef. Itd i dn o td o th at , an di td i d n o tm o u n ta p ro per ch al len g e i n i t s an s weri n g b ri ef ei th er, co n t en d i n g o n l y th atth e reg u l at i o n s “ are n o ten t i t ledt o an y d eferen ce i n th e treat y -i n t erp ret at i o n co n t ex t .” Th e cl o s es tp et i t i o n er co m es t o ch al l en gi n g the v al i d i ty o f t h e reg ul at i o n s i s t o as s ertth at“ th e v al i di ty

o f t h e[] ex am

p les i s ques t i o n ab l e at b es t .” Th at as sert i o n i s acco m p an i edb y n o an al y s is , u n d er Ch ev ro n o r o th erwi s e. W e ad dres s i n fra p p . 4 4 -4 5 p et i t i o n er’ s as s ert i o n th atth e reg u lat i o n s “ co n trad i ct* * * th e l an gu ag e o f th e Treat y .”- 3 3 -

2 3 (Li m it at i o n o n Ben efi t s). Th e p art i es al s o ag ree t h atan earl i er v ers io n o f t h e treat y (1 9 7 5 Treat y ) 1 4 h as s o m e rel ev an ce i n i n t erp ret i n g t h e cu rren tv ers i o n . Art i cl e 7 (1 ) o f t h e Treat y p ro v i d es th at“bu s in es s p ro fi t s o f anen t erp ri s e o f a Co n tract i n g St at e s hal l b e t ax ab l e o n l y i n th atSt at e u n l es s th e en t erp ri s e carri es
o n b u s i n es s i n th e o th er Co nt ract i n g St at e t h ro ug h a p erm an en tes t ab l i s h m en ts i tu at edth erei n .” Th e p art i es h av e s t i p ul at ed thatp et i t i o n er d oes n o t h av e a p erm an en t es t ab l i s h m en ti n t h e Un it edSt at es u n d er t h e g en eral p ri n ci p les o f art i cl e 5 (Perm an en tEs t ab l i s h m en t ). Bu tart i cl e 2 1 , t i t l ed“ Offs h o re Ex pl o rat io n an d Ex p lo i t at i o n Act i vi t i es ,” creat es a s p eci al ru l e fo r act i v it i es carri edo n i n co n n ect i on wi th ex p l o i tat i o n of n atural res o u rces . It p ro v i d es i n p ert i nen tp art :

1
. Th e p ro vi s io ns o f t h i s Art i cl e s h al l ap p l y n o tw i ths t an d i ng an y o th er p ro v i s i o n o f t h i s Co n v en t i o n wh ere act i v i t i es are carri edo n o ffs h o re i n a Co n tract i n g St at e i n co n n ect i o n wi th th e ex p l orat i o n (h erei n aft er cal l ed“ ex p lo rat i o n act i v i t i es ”) o r ex p l o i t at io n (h erei naft er cal l ed“ ex pl oi t at i o n act i vi t i es ”) o f th e s ea b ed an ds ub -s o i l an d th ei r n atu ral res o u rces s i tu at edi n th at St at e. 2
. An en t erp ri s e o f a Co nt ract i n g St at e wh i ch carri es o n ex p l o rat i on act i v i t i es o r ex p l o i t at i o n act i v i t i es i n th e o th er Co n tract i n g St at e s h al l * * * b e d eem edt o b e carry i n g o n b u s in es s i n th at o th er St at e t h ro u g h a p erm an en tes t ab li s hm en t s i tu at edtherei n.

1 4 Co n v en t i on fo r t h e Av o i d an ce o f Do ub le Tax at i o n an dth e Prev en t i o n o f Fi s cal Ev as i on wi th Res p ectt o Tax es o n In co m e an dCap i t al Gai n s , U.K.-U.S., Dec. 3 1 , 1 9 7 5 , 3 1 U.S.T. 5 6 6 8 (en t eredi n t o fo rce Ap r. 2 5 , 1 9 8 0).- 3 4 -

Th e ques t i o n we m

us t d eci de i s wh et h er t h e Ch al l en g e Ves s el ’ s act i v i t i es , fo r p u rp o s es o f t h e Treat y , were carri edo n “ i n co nn ect i o n wi th th e * * * ex p l oi t at i o n
* * * o f t h e s ea b edan d s ub -s oi l an d t h ei r n atu ral res ou rces ” i n th e OCS. 1
. An al y s i s Th e Treat y

d oes n o t defi n e t h e t erm s “ ex pl o i t at i o n ” o r “ i n co n n ect i o n wi th .” Ho wev er, i tp ro vi d es th at , ab s en tTreat y co n t ex to r co m

p et en tau th ori ty

ag reem en t d i ct at i n g o th erwi s e, “ an y t erm n o td efi n ed therei n s h al l * * * h av e t h e m ean i n g wh i ch i th as atthatt i m e u n der t h e l aw o f th atSt at e fo r t he p u rp o s es o f th e t ax es t o wh i ch th i s Co n v en ti o n ap p l i es .” Treat y art . 3 (2 ). In p art i cu l ar, “ an y m ean i n g
u n d er t h e ap p li cab l e t ax l aws o f t h atSt at e”--i .e., th e co u n try wh os e t ax juri s d i ct i o n i s b ei n g i n v o k ed --“ p rev ai l[s ] o v er a m ean i n g g i v en t o th e t erm u n d er o ther l aws o f th atSt at e.” Ib id
. Nei ther p art y

co n t en ds th atth e Treat y ’ s co n tex to r an y co m p et en tau th o ri t y ag reem en tp o i n t s t o a p art i cu l ar d efi n i t i o n o f t h e t erm s “ ex pl o i t at i o n ” an d“ i n co n n ect i on wi th ” as u s edi n art icl e 2 1 . Acco rd i n g l y , s i n ce we are ap p l y i n g th e Treat y t o d et erm i n e wh et h er U.S. t ax ap p li es , we m u st as cert ai n th e m ean i ng th atth es e t erm s h av e u n der U.S. l aw, p art i cu l arl y u nd er U.S. t ax l aw. See M ax i m o v v . Un i t edSt at es , 3 7 3 U.S. 4 9 , 5 3 (1 9 6 3 ) (ap p l y i n g th e Co d e i n i n terp ret i n g an u n d efi n ed treat y t erm p u rs u an tt o a t reat y p ro v i si o n d eferri n g t o th e m ean i n g u nd er t h e l aws- 3 5 -

o f t h e St at e wh o s e t ax was s o u g h t t o b e ap pl i ed ); Fi l l er v . Co m m i s s i o n er, 7 4 T.C. 4 0 6 , 4 1 2 -4 1 3 (1 9 80 ) (s am e). Sect io n 6 3 8 an d th e reg u l at i o ns p ro m u l g at ed th ereu nd er p ro v i d e a n earp erfect p aral l el t o th e Treat y t ex t , an di ts eem s th atth is p aral l el i s m was n o acci den t . Co n g res s en act eds ect i o n 6 38 i n 1 9 6 9 , wh en d eep wat er o i l an d g as
ex p lo rat i o n was rap i d l y ex p an di n g i n th e No rt h Sea, es peci al l y o ff the co as t s o f th e U.K. an dNo rway . Sect i o n 6 3 8 ex p an d edth e d efi n i t i o ns o f “ Un i tedSt at es ”
an d “ fo rei g n co u n try , ” wi th res p ectt o “ m i nes , o i l an d g as wel l s , an do ther n atu ral d ep os i t s ,” t o i n cl u d e each co u n try ’ s co n t i n en t al s h el f. Itd efi n edth e co n ti n en t al
s h el f as “ th e s eab edan ds ub s o i l o f t h o s e s ubm ari n e areas wh ich are ad jacen tt o
* * * [t h e res p ect iv e co u n try ’ s ] t erri t o ri al wat ers ” an d o v er wh i ch i t h ad“ ex cl u s i v e ri gh t s, i n acco rd an ce wi th i nt ern at i o n al l aw, wi th res p ectt o th e ex p l o rat i o n an d
ex p lo i t at io n o f n atu ral res o u rces .” Sec. 6 3 8
. Du ri n g th e earl y

1 9 70 s th e Un i t edSt at es en t eredi n t o a n um b er o f b i l at eral i n co m e t ax treat i es th atm i rro redthe t ex to f s ect i o n 6 3 8 . Art i cl e 2 o f t h e U.S.- No rway treat y , 1 5 wh i ch en t eredi n t o fo rce i n 1 9 7 2 , p ro v id ed :

1 5 Co n v en t i on th e Av o i d an ce o f Do ubl e Tax at io n an dth e Prev en t i o n o f Fi s cal Ev as i on wi th Res p ectt o Tax es o n In co m e an dPro p ert y , No r.-U.S., art
. 2 (1 )(a)(i i ), Dec. 3 , 1 9 7 1 , 2 3 U.S.T. 2 8 3 2 , 2 8 3 6 (en t eredi n t o fo rce No v . 2 9 , 1 9 7 2).- 3 6 -

Wh en u s edi n a g eo g rap h i cal s en s e, t h e t erm “ Un it edSt at es ” * * * i n cl u d es (A) t h e t erri t ori al s ea th ereo f an d(B) t he s eab ed an d s ub s o i l o f t h e s ub m ari n e areas ad jacen tt o th e t erri t ori al s ea, o ver wh i ch th e Un i t edSt at es ex erci s es so v erei g n ri g h t s, i n acco rd an ce wi th i n tern at i on al l aw, fo r t h e p u rp o s e o f ex p lo rat i o n an d ex p l o i tat i o n o f t h e n atu ral res o u rces o f s u ch areas , b u t o n l y t o th e ex t en tth at the p ers o n , p ro p ert y , o r act i v i ty

t o wh i ch th i s Co n v en ti o n i s b ei n g ap p l iedi s co n n ect edwi th su ch ex p l o rat i o n o r ex p l o i t at i o n . Th e fi n al cl au se--p ro v id i n g th atp ers on s an dp ro p ert y are wi th in th e Un i t edSt at es

“ o n l y t o t h e ex t en t* * * co n nect edwi th s uch ex p l orat i o n o r ex pl o i t at i o n ”--ad d eda refi n em en to r cl ari fi cat i on th atwas n o t ex p l i ci ti n th e t ex to f s ect i o n 6 3 8
. Th e Treas u ry

Dep art m en ts up p l i eda t ech ni cal ex p l an at i o n o f th e U.S.- No rway treat y . See Treas ury

Dep art m en t Tech ni cal Ex p l an at i o n o f t he Pro p o s ed U.S.-No rway

In co m e Tax Co n v en ti o n , s i g n edatOs lo o n Dec. 3 , 1 9 7 1 , art . 2 , Tax Treat i es (CCH) p ara. 7 0 4 6 , at1 4 7 ,2 2 7
. Its t at edthatart icl e 2 was i n ten d edt o fo l l o ws ect i o n 6 38 , wh i ch h adb een en act edtwo y ears p rev io u s l y : Th e ad d i t i o n o f a d efi n i t i o n o f t h e co n t i n en t al s h el f * * * fo l l o ws s ect i on 6 3 8 o f t h e In t ern al Rev en u e Co d e an d d efi n es th e Un i t edSt at es co n t in en t al s h el f as the s eab edan ds ubs o il o f t h e ad jacen ts ub m ari n e areas o v er wh i ch th e Un it edSt at es ex erci s es ex cl u s i v e ri g h ts i n acco rd an ce wi th i n t ern at io n al l aw fo r t he p u rp o s e o f ex p lo rat i o n an d ex p l o i tat i o n o f t h e n atu ral res o u rces o f s u ch area, b u t o n l y t o th e ex t en t th atth e p ers o n , p ro pert y , o r act i v i ty t o wh i ch th e p ro po s edCo n v en t i on i s t o b e ap p l i edi s co n n ect ed wi th s u ch ex p l o rat i o n o r ex p l o i tat i on .- 3 7 -

It fu rt h er ex p l ai n ed : Th e d efi n edco n t i n en t al s h el f i s o n l y p arto f t h e Un i t edSt at es o r No rway , as th e cas e m ay

b e, i n l i m it eds i tu at i o n s . Iti s i n cl u d edo nl y t o th e ex ten tth atth e p ers on , p ro p ert y , o r act i vi ty t o wh i ch th e Co n v en t i on i s b ei ng ap p l i ed i s co n n ect edwi th ex p l o rat i o n o r ex p l o i tat i o n o f th e co nt in en t al s h el f. Th e p h ras e “ co n n ect ed wi th ” d o es n otreq u i re p h y s i cal at t ach m en t t o th e co n t i nen t al s h el f t o b e wi th in the s co p e o f th e d efi n it i on . Th e Un i t edSt at es ex ecu t edb i lat eral i n co m e t ax treat i es wi th s ev eral o th er
co u nt ri es du ri n g 1 9 7 0 -1 9 7 3 --i n cl u d i n g th e So v ietUn i o n , Bel gi u m , an dTri n i d ad
an d To b ag o 1 6 --t hati n cl u d eds i m i l ar t ex tan dwere acco m p an i edb y s i m i l ar t ech n i

cal ex p l an at io ns b y

the Treas u ry

Dep art m en t
. 1 7

1 6 See Co n v en t i o n o n M at t ers o f Tax at i o n , U.S.-U.S.S.R., art . II(2 )(b ), J u n e 2 0 , 1 9 7 3 , 2 7 U.S.T. 1 , 5 (en t ered i n t o fo rce J an . 2 9 , 1 97 6 ); Co n v en t i o n fo r t h e Av o i d an ce o f Do ub l e Tax at i o n an dth e Prev en t io n o f Fi s cal Ev as io n W i th Res p ect t o Tax es o n In co m e, Bel g .-U.S., art . 3 (1 )(a)(i i ), Ju ly 9 , 1 9 7 0 , 2 3 U.S.T. 2 6 8 7 , 2 6 9 1 (en t eredi n t o fo rce Oct . 1 3 , 1 9 7 2 ); Co n v en ti o n fo r t h e Av o i d an ce o f Do ub l e Tax
at i o n , th e Prev en t io n o f Fi s cal Ev as i o n W i th Res p ectt o Tax es o n In co m e, an dth e En co u rag em en to f In t ern at io n al Trad e an dIn v es t m en t , Tri n . & To b ag o -U.S., art
. 2 (1 )(a)(i i ), J an . 9 , 1 9 70 , 2 2 U.S.T. 1 6 4 , 1 6 6 -1 6 7 (en t eredi n t o fo rce Dec. 3 0 , 1 9 7 0 ).
1 7 See Treas ury Dep art m en tTech n i cal Ex p l an at i o n o f t h e 1 9 7 3 U.S.-So v i et Un i on In co m e Tax Co n ven t i o n , art . 2 , Tax Treat i es (CCH) p ara. 1 0,6 3 0 , at 1 9 7 ,2 1 5 ; Treas u ry

Dep art m en tTech n i cal Ex pl an at i o n o f t h e 1 9 70 U.S.-Bel g i u m In co m e Tax Co nv en t i o n , art . 3 , Tax Treat ies (CCH) p ara. 1 35 9 G, at3 1 ,5 3 1- 3 1 ,5 3 2 ; Treas u ry

Dep art m en tTech n i cal Ex p lan at i on o f t h e 1 9 7 0 U.S.-Tri ni d ad an d To b ag o In co m e Tax Co n v en ti o n , art . 2 , Tax Treat ies (CCH) p ara. 9 7 5 0 , at 1 8 9 ,2 0 1 -1 8 9 ,2 0 2.- 3 8 -

Th e Treas u ry

Dep art m en tp ub l i s h edth e s ect i o n 6 3 8 reg u l at i o n s o n M ay 1 5 , 1 9 7 3 , ret ro act i v e t o Decem ber 3 0 , 1 9 6 9
. See T.D. 7 27 7 , 1 9 7 3 -1 C.B. 3 18
. Sect i o n 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s ., track s th e refi n em en tth atap p ears i n th e fo u r t reat i es d i s cu s sed ab o v e, p ro v i d i n g : “ Pers o n s , p ro p erty , o r act i v i t i es are wi th i n th e Un i t edSt at es * * * o r a fo rei g n co u n try , as the cas e m ay b e, * * * o n l y t o the ex t en ts uch p ers o n s , p ro p ert y , o r act iv i t i es are en g ag edi n o r rel at edt o th e
ex p lo rat i o n fo r, o r ex p lo i t at i on o f, m i n es , o i l an dg as wel l s , o r o th er n atu ral d ep os i t s .” An d p arag rap h (c)(1 ) o f t h e reg u l at i o n p ro v i d es , s i m i l arl y t o t ex ti n t h e Treas u ry Dep art m en t ’ s t ech n i cal ex p l an at i o ns o f t h o s e t reat i es , th at“p ers o n s , p ro p erty , o r act i v i t ies wh i ch are en g ag edi n o r rel at ed t o th e ex p l o rat i o n fo r, o r
ex p lo i t at io n o f, * * * o i l an d g as wel l s * * * n eedn o tb e p h y s i cal l y up on , co n nect ed , o r at t ach edt o th e s eab edo r s ub so i l * * * t o b e d eem ed t o b e wi th i n th e Un i ted St at es .” Sec. 1 .6 3 8 -1 (c)(1 ), In co m e Tax Reg s. Th e 1 9 7 5 Treat y

b et ween th e Un i t edSt at es an dthe U.K. was s i gn edtwo y ears aft er t h e Treas ury Dep art m en t i s s u edth e s ect i on 6 3 8 reg u lat i o n s . Art i cl e 3 (1 )(g )(i i )(b b ) o f t h e 1 9 7 5 Treat y d efi n edth e “ U ni t edSt at es ” t o i n cl u d e th e s eab edan ds ubs o il o f t h e s ub m ari n e areas ad jacen tt o th e co as t th ereo f, b u t b ey on dthe t erri t o ri al s ea, o v er wh ich th e Un i t edSt at es ex erci s es s o verei g n ri g h t s , i n acco rd an ce wi th i n t ern at i o n al l aw, fo r th e p u rp o s e o f ex p l o rat i on fo r an d ex p l o i tat i o n o f t h e n atu ral res o u rces o f s u ch areas , b u to nl y t o th e ex t en tth atth e p ers o n , p ro p ert y ,- 3 9 -

o r act i v i ty

t o wh i ch the Co n v en t i o n i s b ei n g ap p li ed i s co n n ect edwi th s u ch ex p lo rat i on o r ex p l o i t at i o n * * *
. Art i cl e 2 7 A(1 ) was ad d edt o th e 1 9 75 Treat y i n 1 9 7 9 . See 1 9 7 5 Treat y , Th i rdPro t o co l , art . VI (M ar. 1 5 , 1 9 79 ), RIA In t . Tax Treat y 3 5 7 8
. Itp ro v i d ed : [A] p ers o n wh o i s a res id en to f a Co n tract i n g St at e an d carri es o n act i v i t i es i n th e o th er Co n tract i n g St at e i n co n n ect i o n wi th th e ex p l o rat i on o r ex p l o i tat i o n o f t h e s eab edan ds ub -s o il an dth ei r n atu ral res o urces s itu at ed i n th ato th er Co nt ract i ng St at e s h al l b e d eem edt o b e carry i n g o n i n res pect o f t h o s e act iv i t i es a b u s i nes s i n th ato ther Co n tract i n g St at e t hro ug h a p erm an en tes t ab l i s h m en t* * * s i tu at ed th erei n . Th e cu rren tTreat y was s i g n edo n J u l y 2 4 , 2 0 0 1 , an d en t eredi n t o fo rce o n M arch 3 1 , 2 0 0 3 . Art icl e 3 (1 )(h ) d efi n es th e “ U n i t ed St at es ” t o i n cl ud e “ th e t erri

t o ri al s ea t hereo f an dthe s ea b edan ds ub -s oi l o f t he s ub m ari n e areas ad jacen tt o th att erri t o ri al s ea, o v er wh ich th e Un i t edSt at es ex erci s es s ov erei g n ri g h t s i n acco rd an ce wi th i n t ern at io n al l aw.” An dart icl e 2 1 (1 ) an d(2 ) o f t h e Treat y , l i k e art i cl e 2 7 A o f t h e 1 9 7 5 T reat y , p ro v i des th atan en t erp ri s e i s d eem edt o d o b u s i

n es s th ro u g h a “ p erm an en tes t ab l i s h m en t ” i n a co n tract i n g St at e i f i t s act i v i t i es are

“ carri edo n o ffs h o re * * * i n co n n ect i o n wi th t h e ex p l orat i o n * * * o r ex p lo i t at io n
* * * o f t h e s ea b edan d s ub -s oi l an d t h ei r n atu ral res ou rces s i tu at edi n thatSt at e.” Treat y art . 2 1 (1 ) an d (2 ).- 4 0 -

On e d o es n otn eedan ad v an cedd eg ree i n l i n g u i st ics t o ap p reci at e th e s i m i

l ari t i es b et ween th e t ex to f th e s t atu t e, t h e s ect i on 6 3 8 reg u l at i on , an dth e Treat y . Sect i o n 6 3 8 ex t en d s U.S. t ax juri s d i ct i on o v er t h e OCS “ wi th res p ectt o m in es , o i l
an d g as wel l s , an d o th er n atu ral d ep o s i t s . ” Th e reg u lat i o n p ro v i d es th atU.S. t ax juri s d i ct i o n ex t en ds o v er t h e OCS “ t o th e ex t en t* * * [t h at ] p ers o n s , p ro pert y , o r act i vi t i es are en g ag edi n o r rel at edt o th e ex p l o rat i o n fo r, o r ex p l oi t at i o n o f, m i n es , o i l an dg as wel l s , o r o th er n atu ral d ep o s i t s .” Sec. 1 .6 3 8 -1 (c)(4 ), In co m e Tax Reg s . An dthe Treat y

p ro vi d es th atan en t erp ri s e i s d eem edt o carryo n act i vi t i es th ro u g h a p erm an en tes t ab l i s h m en ti n the Un i t edSt at es , an dth us b e s ubjectt o U.S. t ax juri s d i ct i o n , wh ere i t s act i v i t ies are “ carri ed o n o ffs h o re * * * i n co n n ect i o n wi t h th e ex p l o rat io n * * * o r ex p l o i t at io n * * * o f t h e s ea b edan ds ub -s o i l an dth ei r
n atu ral res o u rces s i tu at ed i n th atSt at e.” Treat y art . 2 1 (1 ) an d(2 ). Th e h i st o ri cal ev ol ut i o n o u t l i n edab o v e s h o ws th e s ym b io t i c rel at i o n s h i p b et ween s ect io n 6 3 8, the t reat i es s ig n edduri n g th e n ex td ecad e, an d the reg u l at i on s . As the Treas u ry

Dep art m en tex p l ai n ed , th e t reat i es s i g n edduri n g th e earl y 1 9 7 0 s were i n ten d edt o fo l l o ws ect i o n 6 38 . Th e reg u l at i o ns p ro m u lg at edi n 1 9 7 3 p i ck edup th e “ ex p l o rat i o n o r ex p l o i t at i o n ” fo rm u l a fro m th o se t reat i es . An dth at

“ ex p l o rat i o n o r ex p l o i t at i on ” fo rm u l a was i nco rp o rat ed i nt o th e 1 97 5 Treat y an d carri ed t o the cu rren tU.S.-U.K. Treaty . W e acco rd in g l y co n cl ud e t h atth e t erm- 4 1 -

“ ex p l o i tat i on ,” as u s edi n th e Treat y , h as th e s am e m ean in g th at i th as i n s ect i o n 1 .6 38 -1 , In co m e Tax Reg s . W e t h u s i n t erp ret“ ex p l oi t at i o n ” as u s edi n th e Treat y t o refer t o th e en t ire cy cl e o f act i v i t i es n eces s ari l y i nv o lv edi n ex pl o i ti n g res o u rces
o n th e OCS, i n cl u d i n g p re-p ro du ct i o n , p ro duct i o n , an d p o s t -p ro du ct i o n act i v i t ies
. 1 8 Th e o n l y

d is t i nct i o n b et ween th e fo rm u l as s etfo rt h i n th e Treat y an dth e reg u l at i o n ap p ears i n th e p h ras e t h atp reced es “ ex p l o rat i o n o r ex p l o i t at i o n .” Th e reg u l at i o n refers t o act i v i t i es “ rel at edt o ” ex p l o rat i o n o r ex p lo i t at i o n o f OCS res o u rces . Sec. 1 .6 38 -1 (c), In co m e Tax Reg s . Th e Treat y refers t o act i v i ti es “ i n
co n nect io n wi th ” ex p l orat i o n o r ex p l o i t at io n o f OCS res o u rces . Treat y art
. 2 1 (1 )
an d (2 ). Th e 1 9 7 5 Treat y referred t o act i v i t i es “ co n n ect edwi th ” s u ch ex p l o rat io n
o r ex p lo i t at i o n . 1 9 75 Treat y art . 3 (1 )(g )(i i )(b b ). An dart i cl e 2 7A o f t h e 1 9 7 5 Treat y referred t o act i v i t i es “ i n co n n ect i o n wi th ” ex p l o rat io n o r ex p lo i t at i on .

1 8 In n o n-t ax co n t ex t s th e Sup rem e Co u rth as s o u g htt o reads t atut es i n h arm o ny wi th treat i es an dreject edco n s tru ct i o n s o f t erm s th atwo u l du n n eces sari l y creat e co nfl i ct b et ween th e t wo . See M en o m i n ee Tri b e o f In d i an s v . Un i t ed St at es , 3 9 1 U.S. 4 04 , 4 1 2 -4 1 3 (1 9 6 8 ) (d ecl i n i n g t o i n t erp reta s tatu t e t o ab ro g at e h u n t i n g an dfi s h i n g ri g h t s g ran t edt o Nat i v e Am eri can s b y a t reat y ); Un i t edSt at es v . Payne, 2 6 4 U.S. 4 4 6 , 4 48 (1 9 2 4 ) (s t at i n g thata l at er-en act eds t atut e, wh i l e co n tro l l i n g i n cas e o f co n fl i ct , “ s h o u l d b e h arm o ni zedwi th th e l et t er an ds p i ri to f t h e treat y , s o far as th atreas o n ab l y can b e d o n e”); Wh i tn ey v . Ro b ert s o n , 1 2 4 U.S. 1 9 0 , 1 9 4 (1 8 8 8) (s t at i n g th at , wh ere a t reat y an d l eg i s l at i o n rel at e t o th e s am e s ub ject , “ th e co u rt s wi l l al way s en d eav or t o co n s tru e t hem s o as t o g i ve effect t o b o th , i f t h atcan b e d o n e wi tho utv i o l at i n g th e l an g u ag e o f ei th er”).- 4 2 -

Ap p ly i n g p ri nci p l es o f U.S. t ax l aw, we d i s cern n o ap p reci ab l e d i fferen ce b et ween th e t erm s “ rel at edt o ,” “ co nn ect edwi th ,” an d“ i n co nn ect i o n wi th .” Th es e t erm s ap p ear t h ro u g h o utth e Co d e an d s eem t o b e u s ed i n t erch an g eab l y . Co m p are s ec. 1 6 2 (e) (d en y i n g d edu ct i o n fo r ex pen ses i n cu rred“ i n co nn ect i o n wi th * * * i n fl u en ci n g l eg i s l at io n ”), wi th s ec. 1 62 (q ) (d en y i n g d educt i o n fo r p ay m en t“ rel at edt o s ex u al h aras s m en t”). Bo th t erm s reg u l arl y ap p ear cl o s e t o each
o th er i n t h e s am e Co d e p ro v i s i o n , wi th n o ap p aren td i fferen ce i n m ean i n g . Co m p are s ec. 6 1 0 3 (h )(2 )(A) (referri n g t o a p ro ceed i n g “ i n co nn ect i o n wi th ” d et erm i ni n g a t ax p ay er’ s l i ab i l i ty ), wi th s ec. 6 1 0 3(h )(2 )(B) (referri n g t o t reat m en to f an i t em “ rel at edt o ” res o l u t i o n o f an i s su e i n s u ch p ro ceed in g ). J u d i ci al p reced en t s i n t ax cas es l i k ewi s e s ho w th at“ in co n n ect i o n wi th ” an d

“ rel at edt o ” h av e t h e s am e m ean i n g . See Hu n t s m an v . Co m m i ss i o n er, 9 0 5 F.2 d 1 1 8 2 , 1 1 8 4 (8 th Ci r. 1 9 9 0 ) (i n terp ret i n g “ i n co n n ect i o n wi th ” i n s ect i o n 4 6 1 (g )(2 )
as equ iv al en tt o h av i ng an “ as s o ci at io n ” o r “ rel at i o n ”), rev ’ g 9 1 T.C. 9 1 7 (1 9 8 8 ); Fo rtHo wardCo rp . & Sub s . v . Co m m i s s i o ner, 1 0 3 T.C. 3 4 5 , 3 5 2 (1 9 9 4 ) (“ ‘ In
co n nect io n wi th ’ m ean s as s o ci at edwi th , o r rel at ed .”), s up p lem en t edb y 1 0 7 T.C. 1 8 7 (1 99 6 ); Hai rs t o n v . Co m m i s s i on er, T.C. M em o. 2 0 19 -1 04 , at* 4 (u s i n g “ rel at edt o ” an d“ i n co n n ect i o n wi th ” i n t erch an g eab l y ); Po p e & Tal b o t , In c. v . Co m -- 4 3 -

m i s s i o n er, T.C. M em o . 1 9 9 7 -3 9 9 , 7 4 T.C.M . (CCH) 4 7 1, 4 7 2 (u s i n g “ rel at i n g t o ”
an d “ i n co n n ect i o n wi th ” i n t erch an g eab l y ), s up p l em en t i ng T.C. M em o. 1 9 9 7 -1 1 6
. No n -t ax ju d i ci al p reced en t s p o i n tt o the s am e co n cl u s i on . InAzi m a v . RAK In v . Au th ., 9 2 6 F.3 d 8 7 0 (D.C. Ci r. 2 0 1 9), t h e qu es t i o n was wh et h er a d i s p u t e was

“ i n co n n ect i o n wi th ” a co n tract fo r p u rp o s es o f t h e co n tract ’ s fo ru m -s el ect i o n cl au s e. Ap p l y i n g g en eral U.S. co n tract p ri nci p l es , th e U.S. Co urto f Ap p eal s fo r th e D.C. Ci rcu its t at ed : “ W e b eg i n b y d efi ni n g ‘ in co n n ect io n wi th
. ’ Th i s p h ras e i s equ i v al en tt o ‘ i n rel at i o n t o ,’ wh i ch i s qu it e b ro ad .” Id . at8 7 7
. In Co reg i s In s . Co . v . Am . Heal th Fo u nd ., In c., 2 41 F.3 d 1 2 3 (2 dCi r. 2 0 0 1 ), th e qu es t i o n was wh et h er a d i s p u t e was “ rel at ed t o ” a p art y ’ s i n s o l ven cy fo r p u rp o s es o f t h e i n so l ven cy

ex cl u s i o n i n an i ns u ran ce co n tract
. Th e U.S. Co u rto f Ap

p eal s fo r t h e Seco n dCi rcu i t , s p eak i n g t h ro u g h J u d ge (n o w J u st i ce) So t o m ay o r, treat ed th e t erm

“ rel at i n g t o ” as “ equ i val en tt o t h e p h ras es ‘ i n co n n ect i o n wi th ’ an d

‘ as s oci at edwi th ,’ * * * an d s y n o n ym o u s wi th th e p h ras e[] ‘ wi th res p ectt o .’ ” Id
. at1 2 9 (an dcas es ci t edthereat ); s ee Hu ffi n g t o n v . T.C. Grp
. , LLC, 6 3 7 F.3 d1 8 , 2 2 & n .2 (1 s tCi r. 2 0 11 ) (co n cl u d in g th at“ rel at i n g t o ” i s s yn o nym o u s wi th “ i n
co n nect io n wi th ”). 1 9

1 9 Pet i t i o ner co n ten d s th at“ i n co nn ect i o n wi th” i s n arro wer t h an “ rel at edt o ,” b u ti tci t es n o U.S. t ax au th o ri ty o r cas e l aw t o s up p ortth atp ro p o s i t i o n . Pet i t i o n er (co n ti n u ed ...)- 4 4 -

As ex p l ai n eds upra p . 2 3 , we h av e co n cl u d edth atth e Ch al len g e Ves s el ’ s d eco m m i s s i o n in g act i v i t i es were “ rel at edt o th e * * * ex p l o i t at i o n o f * * * o i l an d g as wel l s ” fo r p u rp o s es o f s ect i o n 6 3 8 b ecau s e t h ey were i n teg ral t o , an dl eg al l y req u i redt o b e u n d ert ak en i n co n n ect i on wi th , th e ex p l o it at i o n o f OCS n atu ral
res o u rces . Sec. 1 .6 3 8-1 (c)(4 ), In co m e Tax Reg s . Fo r es s en ti al l y th e s am e reas o n s , we co n cl ud e t hatth e Ch al l en g e Ves s el ’ s d eco m m is s i o n i n g act i v i t ies were carri ed
o n “ i n co n n ect i o n wi th th e * * * ex p l oi t at io n * * * o f t he s ea b edan ds ub -s o i l an d th ei r n atu ral res o u rces ” fo r p urp o s es o f art i cl e 2 1 o f t h e Treat y . Pet i t i o n er t h u s
co n du ct ed i t s U.S. trad e o r b u s i n es s th ro u g h a “ p erm an en tes t ab li s hm en t ” i n th e Un i ted St at es . Treat y

art . 2 1
. 2
. Pet i t i o ner’ s Arg um en t s Pet i t i o ner fi rs tco n t en d s th atthe s ect i o n 6 38 reg ul at io n i s “ no ten t it l edt o
an y d eferen ce i n t h e t reat y -i n t erp ret at i o n co n t ex t ” b ecau s e i t“ co nt rad i ct [s ] * * * th e l an g u ag e o f t h e [T] reat y .” Bu tthe reg u l at i o n d o es n otco n trad ictan y Treat y l an g u ag e. Bo th refer t o “ ex p l o rat i o n o r ex p lo i t at i on ” o f OCS n atu ral res ou rces . Th e reg u lat i on refers t o act i v i t i es “ rel at edt o ” ex p l o rat i o n o r ex p l o i t at io n , wh ereas

1 9 (...co n t i nu ed ) rel i es ex cl u s i v el y o n Bl ack ’ s Law Di ct i on ary , wh i ch d efi n ed“ co n n ect i o n ” t o m ean (am o n g o th er t hi n g s ) “ [t ] h e s t at e o f b ei ng co nn ect edo r jo i n ed ” an d “ u n i o n b y * * * d ep en d en ce o r rel at io n.” See Bl ack ’ s Law Di ct i o nary2 7 4 (5 th ed . 1 9 7 9 ). Th i s d efi n i t i o n s h o ws th at“ co n n ect i o n ” an d“ rel at i o n” are b as i cal l y s yn o n ym o u s .- 4 5 -

th e Treat y

refers t o act i v i t i es “ in co n n ect i o n wi th ” ex p lo rat i on o r ex pl o i t at i o n . As
ex p lai n eds up ra p p . 4 1 -4 4 , th es e t erm s are s yn o n ym o u s. Wh en d et erm i n i n g th e ap p l icat i o n o f U.S. t ax , the Treat y p ro v id es th atan y t erm n o td efi n edth erei n s h al l h av e t h e m ean in g i th as u n d er U.S. l aw, p art i cu l arl y
u n d er U.S. t ax l aw. Treaty art
. 3 (2 ). Gen eral l y , reg ul at i o n s h av e “ the fo rce o f l aw.” SIH Part n ers LLLP v . Co m m i s s i o n er, 1 5 0 T.C. 2 8 , 4 1 (2 0 1 8 ), aff’ d , 9 2 3 F.3 d2 9 6 (3 d . Ci r. 2 0 1 9 ). Part icu l arl y g iv en th e s ym

b i ot i c rel at i o ns h ip b et ween th e reg u l at i o n s , th e 1 9 75 Treat y , an dth e cu rren tTreat y , i ti s p erfect ly ap p ro p ri at e t o g i v e t h e t erm “ ex p l o i t at i on ,” as u s edi n th e Treat y , th e s am e m ean in g t h atwe b el i ev e i tt o h av e i n the reg u lat i o n p ro m u lg at edu n d er s ect io n 6 38
. Seco n d , p et i t i o n er rel i es o n ex tra-t ex tu al s o u rces t o co n ten dth atth e Treat y
co v ers o nl y

“ dri l l i n g act i v i ty ” o n th e OCS. “ In i n t erp ret i n g a t reat y i ti s p ro p er, o f
co u rs e, t o refer t o th e reco rd s o f i t s draft i ng an dn eg o t i at io n . ” Ai r Fran ce v . Sak s , 4 7 0 U.S. 3 9 2 , 4 0 0 (1 9 8 5 ). Bu t th e Treas u ry Dep art m en t ’ s ex p l an at i o n o f t h e Treat y cl earl y

s t at es th atco v eredOCS act i v i t ies are n o t l i m i t edt o the d i rect ex tract i o n o f o i l an d g as . See Treas u ry Dep art m en tTech n i cal Ex p l an at i o n o f t h e U.S.-U.K. In co m e Tax Co n v en t i o n , art . 2 1 , Tax Treat i es (CCH) p ara. 1 0 ,9 1 1 , at 2 0 1 ,3 4 0 (s t at in g that“ ‘ ex p lo rat i o n act i v i t i es ’ an d‘ ex p lo i t at i o n act i v i t i es ’ * * *- 4 6 -

i n cl u d e, b u tare n o t l i m i t ed t o , th e ex p l o rat i o n fo r an dex tract i o n o f o i l , m i n eral s , an d n atu ral g as .” (Em

p h as i s ad d ed .)). Pet i t i o ner rel i es ch iefl y

o n th e Sen at e Fo rei g n Rel at io n s Co m m i t t ee’ s rep ort
o n th e Th i rdPro t o co l t o th e 1 9 7 5 Treat y , wh ich ad d ed art i cl e 2 7 A (th e p red eces s o r o f Treat y

art i cl e 2 1). Its t at edas fo ll o w s : Th e p ro p os edp ro t o co l ad ds a n ew Art i cl e 2 7 A t o th e p ro p o s ed treat y co v eri ng o ffs h ore act i v i t i es . Th i s p ro v i s i o n i s i n t en d edt o d eal p ri m ari l y wi th the act i vi t i es o f cert ai n U.S. i n d ep en d en t dri ll i n g co n tract ors i n t h e U.K. s ect or o f t h e No rt h Sea. * * * Wh i l e t h e p ro t o co l p ro v i s i o n s were ad d ed p ri m ari l y t o d eal wi th act i v i t ies o f U.S. p ers o n s i n th e No rt h Sea, t h ey al s o m ak e i tcl ear t h atBri t i s h act i v i ti es i n co n n ect i o n wi th act i v i ti es o n th e U.S. co n t i nen t al s h el f are s ub jectt o U.S. t ax . [S. Co m

m . o n Fo rei g n Rel at io n s , S. Ex ec. Rep t . No . 9 6-5 , at1 2 (1 97 9 ).] Si m i l ar s t at em en t s ap p ear i n o th er l eg i s l at i v e m at eri al s d es cri b i n g art i cl e 2 7 A. 2 0

2 0 See St aff o f J . Co m

m . o n Tax at io n , Ex p l an at i o n o f Pro p o s edTh i rdPro t o co l t o Pro p o s ed In co m e Tax Treat y Bet ween th e Un it edSt at es an dth e Un i t ed Ki n gd o m , at2 (J . Co m

m . Pri n t 1 9 7 9 ) (s t at i n g th atart i cl e 2 7 A “ wi l l p ri m ari l y affect U.S. i nd ep en d en tdri l l in g co n tract o rs * * * i n th e U.K. s ect o r o f t h e No rt h Sea an do th er s erv i ce co m p an i es carry i n g o n an ci l larys erv i ces i n co n nect i on wi t h dri l l i n g ”); In t ern at i o nal Tax Treat i es : Heari n g o n Si x In t ern at i o n al Tax Treat i es an d Pro t oco ls Befo re th e S. Co m m . o n Fo rei g n Rel at io n s, 9 6 th Co n g ., 1 s tSes s . 5 6 (1 9 7 9) (s t at em en to f Dav idH. Bro ckway , In t ern at i o n al Tax Co u n sel , St aff o f J
. Co m m . o n Tax at i o n , etal .) (h erei n aft er Bro ckway St at em en t ) (s t at i n g thatart i cl e 2 7 A was “ i n ten d edt o d eal p ri m ari l y wi th th e act i vi t i es o f cert ai n U.S. i n d ep en d en t dri l l i n g co n tract o rs an ds erv i ce an ds up pl y co m p an i es wh o o p erat e o n a t em p o rary b as i s i n t h e U.K. s ect o r o f t h e No rt h Sea”).- 4 7 -

Th es e l eg is l at i ve m at eri al s wi l l n o tb ear t h e wei g h t th at p et i t io n er s eek s t o p u tup on th em . As the J o i n t Co m m i t t ee o n Tax at io n ex p l ai n ed , art i cl e 2 7 A was ad d ed“ atth e req u es to f t h e Bri t i s h .” 2 1 It i s n o ts u rp ri s in g th at th i s art i cl e was ex p ect edt o d eal “pri m ari l y ” wi th No rt h Sea d ri l l i n g act i v i t i es , b ecau s e d ri l l i n g i n th e No rt h Sea was ex p an d i n g rap i d l y atth att i m e. Bu tart i cl e 2 7 A was draft edm o re b ro ad l y , co v eri n g al l act i v i t i es “ i n co n n ect i o n wi th th e ex p l o rat i on o r ex pl o i t at i o n
o f t h e s eab edan d s ub -s o i l an d th ei r n atural res o u rces .” Th e J o i n tCo m m i tt ee o n Tax at i o n m ad e cl ear t h atart icl e 2 7 A was i nt en d edt o tracks ect i on 6 3 8 an d was reci pro cal , s o th atfo rei gn co m p an i es o p erat i n g o n th is co u n try ’ s OCS wo u l db e t ax edo n th e s am e b as i s as U.S. co m p an i es o p erat i n g t h ere. 2 2 An d as ex p l ai n ed
s up ra p . 4 5 , th e Treas u ry D ep art m en t ’ s t ech ni cal ex p l an at i o n o f t h e cu rren tTreat y
m ak es cl ear t h atart i cl e 2 1 i s n o tres tri ct edt o “ dri ll i ng act i v i ty ,” s t at in g th at

“ ‘ ex p l orat i o n act i v i t i es ’ an d‘ ex p l o i tat i on act i v i t i es ’ * * * i ncl u d e, b u tare n o t l i m i ted t o , th e ex p l o rat i o n fo r an dex tract i o n o f o i l , m in eral s , an dn atu ral g as .”

2 1 Bro ckw ay

St at em en t , s up ra n o t e 2 0, at5 7
. 2 2 See Bro ckway

St at em en t , s up ra n o t e 2 0 , at5 7 (“ Th e In tern al Rev en u e Co d e was am en d edi n 1 96 9 s o th atfo rei g n co m p an i es o p erat i n g o n th e U.S. co n t i

n en tal s h el f wo u l db e fu l l y s ub jectt o U.S. t ax o n th e s am e b as i s as U.S. co m p an i es o p erat i n g o n th e s hel f (s ec. 6 38 ).”).- 4 8 -

Ad v an ci n g an al t ern at i v e arg u m en t , p et i t i o ner co nt en d s th atthe i n co m e i t
earn edfro m

ch art eri n g t h e Ch al l en g e Ves s el was “ s h i p p in g i n co m e” u nd er art i cl e 8 (1 ) o f t h e Treat y . Th atart i cl e p ro v i d es th at“ [p ] ro fi ts o f an en t erp ri s e o f a Co n tract i n g St at e fro m

th e o perat i o n o f s h i p s o r ai rcraft i n i nt ern at io n al traffi c s h al l b e t ax ab l e o n l y i n th atSt at e.” Treat y art . 8 (1 ). “ [I] n tern at i on al traffi c” i s d efi n edas

“ an y tran s p o rtb y

a s h i p o r ai rcraft , ex cep twh en th e s h i p o r ai rcraft i s o p erat ed
s o l el y b et ween p l aces i n th e o th er Co nt ract i ng St at e.” Id . art
. 3 (1 )(f). Th e Ch al l en ge Ves s el was n o ten g ag edi n m ere “ tran s p o rt ” o f p as s en g ers o r g o o d s . Itwas ch art eredas a s up p o rtv es s el wi th s p eci al i zedequ i p m en tv al u ab l e fo r d eco m

m i s s i o n i n g act i v i ty , i n cl u d i n g a cl as s 2 dyn am i c p o s i t i o n i n g s y st em , a
n i n e-m an s atu rat i o n d i v i n g s y s t em , an da h y drau l i c d eckcran e cap ab l e o f l i ft i n g 1 0 0 t o ns . Inan y

ev en tth e Ch al l en g e Ves s el was n o t en g ag edi n “ i n t ern at i o n al traffi c” b ecau s e i t was o p erat ed“ s o l el y b et ween p l aces i n ” t h e Un i t edSt at es as d efi n edi n s ect i o n 6 3 8 , v i z., wi th i n U.S. t erri t o ri al wat ers , i n U.S. p ort s , o r o n th e OCS. Fi n al l y , p et i t i o n er co n t en d s th at , i f i ti s d et erm i n edt o h av e h ada U.S. “p erm an en tes t ab li s hm en t ,” res p o n d en terred i n treat i n g 1 00 % o f t h e ch art er i n co m e as at tri b u t ab l e t o th atp erm an en tes t ab l i s h m en t . Duri ng 2 0 0 9-2 0 1 1 th e Ch al l en g e Ves sel s p en tb et ween 1 4 % an d3 8 % o f i t s t i m e i n p o rt (res up p l y i n g o r m ai n t ai n i n g- 4 9 -

th e v es s el ), i n tran s it(m o v i n g th e v es s el fro m p o rt t o p ro

jects i t es ), o r i n o th er
n o np ro du ct i v e act i v i ty

(e.g ., i dl i n g ats ea b ecau s e o f b adweat her). See s up ra p . 9
. Pet i t io n er co n ten d s th ati ts h o u l db e s ub jectt o U.S. t ax o n ly

o n the p o rt i o n o f i t s ch art er i n co m e co rres po nd i n g t o t i m e s p en ti n actu al d eco m m i ss i o ni n g act i v i ty

at th e 1 1 pro jects i t es . W e s ee n o m eri ti n th i s arg u m en t . Th e ch art er s p eci fi eda fl atd ai l y rat e (ad

ju s t edfro m

t i m e t o t i m e), an dp et i t i o n er recei v edth i s p aym en treg ard l es s o f wh et h er t h e Ch al len g e Ves s el was en g ag ed i n o p erat i o n s , i dl e ats ea, i n tran s i t b et ween wo rks i t es , o r i n p o rtb et ween as s ig n m en t s . Ti m e s p en t res upp l y i n g th e
v es s el , p erfo rm i n g m ai n t en an ce, m o v i n g b et ween s it es , an dd eal i n g ap p ro p ri at el y wi th b adweat h er are i n s ep arab l e co m p o n en t s o f a v es s el ’ s t i m e ch art er. Al l o f th es e act i v i t i es were es s en t i al i n carry i n g o u ti t s m i s s i o n --t o s up po rtth e d eco m m i s s i o n i n g o f o i l an dg as faci l i t i es . Al l o f th es e act i v i t i es were t h u s “ rel at edt o , ”
an d were carri edo u t“ i n co n n ect i o n wi th ,” t h e ex p l oi t at i o n o f o il an dg as wel l s o n th e OCS. Pet i t i o n er h as p ro v i dedn o l eg al b as i s fo r al l o cat i ng an y p o rt i o n o f i t s ch art er i n co m e t o a l o cat i o n o th er t han i t s U.S. “p erm an en t es t ab l is h m en t.”- 5 0 -

To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er wi ll b e i s s u ed d en y in g p et i t i o n er’ s m o t i o n fo r s u m m ary ju dg m en t an dg ran t i n g res po n d en t ’ s cro s s m o t i o n fo r p art i al s u m

m ary ju d g m en t
.