The IRS vs. Antarctica

Read Antarctic Taxation in the King Haakon VII Review section for background on the tax case.

For the last two years, many Antarcticans have been receiving thick bundles of frightening IRS documents—20% penalties! Compounding interest! Violation of law! Even those who ignored the warnings at first began to sweat as the IRS postponed legal proceedings at every turn, honing their advantage through delays. Click click click—$1000—click click click—$2000—click click click... Those who called the IRS to speak with the gentleman who is the primary instigator of the Great Turn-of-the-Millenium Ice Tax were first threatened with astronomical increases in penalties (which shook out a few Antarcticans who paid the penalties) and then later with the offer that if Antarcticans paid now, the penalties would be waived in return for a signature forfeiting the right to later bring the matter to court. The offer of mercy after the threat of harsh penalties shook out a few other litigants and, in the end, it must be acknowledged that the IRS strategy of divide-and-conquer was fairly successful.

But after two years of postponement, delays, and confidential one-on-one harrassment by the IRS gentleman, the case is scheduled for trial on 25 October 2004. To avoid the trial, the IRS has filed a Motion for Summary Judgment arguing that Antarctica should not be considered a foreign country as a matter of law. If the judge accepts the Motion, no trial will be held, no arguments will be heard, and from then on Americans working in Antarctica will pay taxes, and Americans working in Tahiti still will not.

Now, in their final lunge at victory, the IRS' previous scare tactics have been abandoned, and their Motion does not include penalties for those who've stuck it out to the end. Presumably this is to suggest to the judge that the IRS is a fine, upstanding agency with no desire to harrass or punish, but only to collect its rightful monies from this band of unethical polar scoundrels. A brilliant move considering that the IRS can look merciful while yet sitting on a pile of penalty dough extracted by threat, and a poke in the eye to those who got out early and paid more than those anarchist troublemakers who stayed in without penalty.

In response to the IRS Motion, the lawyer representing Antarcticans has filed a Cross Motion for Partial Summary Judgment, meaning that new arguments and facts pertinent to the case—such as the Supreme Court ruling that Antarctica is "a foreign country"—will be considered before a judgment is made.

In the lawyer's memo to the court (.pdf file, 64k), he acknowldges these issues:

1. Is a U.S. citizen employed in Antarctica entitled to the exclusion from gross income pursuant to IRC §911?

2. Do IRC §§863(d)(1) and (2) and regulations thereunder provide specific sourcing rules that affect the characterization of income earned as an employee by a U.S. citizen employed in Antarctica?

And supports these arguments:

1. Treasury Regulation §1.911-2(h) should be construed to include Antarctica within the meaning of “foreign country.”

2. The doctrine of stare decisis requires that this Court determine that Antarctica is a foreign country for the purposes of IRC §911.

3. IRC §863(d) does not provide sourcing rules for wage/salary income earned by U.S. citizen resident aliens in Antarctica for the purposes of IRC §911.

The memo is twenty-three pages long, and for the sake of those with demanding attention spans, here are some of the highlights:

The Supreme Court’s holding that Antarctica is a foreign country, even though it has no recognized government also makes sense when considered in the broader global context. Since the current war in Iraq, the former government of Iraq was toppled. Until earlier this year, there was no recognized government in that country, yet it would be hard to argue that during the period of U.S. control that Iraq was not a foreign country.

...almost every modern country, except the United States, does not tax its citizens who are non-residents. By reducing the non-resident citizen’s U.S. tax burden on foreign sourced earnings, "the cost of moving the American employee abroad should be reduced to some degree and may even encourage the expatriate to accept the foreign post."

It is logical to consistently apply the statement of law determined by the Supreme Court, and it would not make sense to treat Antarctica as a foreign country for some purposes and not others. It falls squarely within the stated purpose of the rule in that it gives regularity to judicial determinations. All of the policy statements made by the court as set forth above are clearly met with the determination here that Antarctica is, in fact, a "foreign country.” The impact of such a ruling will not be that substantial to the fisc as there are only a limited number of employees working in the Antarctic. However, all of those persons are aware of the cases that have been decided that affect them and to rule that Antarctica is a foreign county for some federal purposes and not others will appear unfair and arbitrary, bringing into to question the “perceived integrity of the judicial system.” If federal law does not apply to provide some of the basic protections afforded to employees in the United States why should it apply to tax them.