When it comes to the foreign earned income exclusion, a federal appeals court has upheld a ruling that Antarctica does not qualify as a foreign country. The Seventh Circuit Court affirmed a U.S. Tax Court decision that the 2001 earnings of a U.S. citizen living in Antarctica are subject to federal taxes.The petition was brought by Dave Arnett, a U.S. citizen and an employee of Raytheon Support Services Co., who worked on the continent at McMurdo Station, a research center that typically receives personnel and cargo en route to the South Pole. On his 2001 federal income tax return, Arnett excluded nearly $50,000 of wage income earned for services performed in Antarctica.

While the Supreme Court had found Antarctica to be a foreign country for purposes of the Fair Labor Standards Act, both courts agreed that income earned on the continent is not excludable under Section 911 of the U.S. Tax Code.

Arnett claimed that the term "foreign country" is not ambiguous and that there is no need to defer to the IRS definition the term. He also argued that even if the statute is ambiguous, the language does not support the court's conclusion that Antarctica is not a foreign country.

But the appeals court wrote in its opinion that the code defines a foreign country as "any territory under the sovereignty of a government other than that of the United States," and the opinion relies on the Antarctic Treaty to make its case. The appeals court also notes that the exclusion applies to income received only "from sources within a foreign country or countries," and that when read in "its entirety and in a common-sense fashion," there's no question that Antarctica doesn't meet the definition of a foreign country.

The ruling is available at www.ustaxcourt.gov/inophistoric/arnette.tc.wpd.pdf.

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