Section of Taxation Publications

VOL. 62
NO. 3

Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Section 911: The Foreign Earned Income Exclusion? Using Clark v. Commissioner to Demonstrate How Courts Have Improperly Narrowed the Scope of Section 911

Webster Beary

I. Introduction

This Note critiques a United States Tax Court’s decision on its narrow application of the foreign earned income exclusion. The foreign earned income exclusion generally provides that income earned from the performance of services within a foreign country, up to a certain amount, can be excluded for federal income tax purposes. In Clark v. Commissioner, the court rejected the taxpayer’s foreign earned income exclusion argument and held the taxpayer liable for accuracy related penalties for understating his income. The taxpayer, a United States citizen residing in Scotland, worked aboard two different ships that spent time in both foreign ports and international waters. While working aboard these ships, the taxpayer never entered into the territorial waters of the United States. The taxpayer unsuccessfully argued that income earned while in international waters should be excluded from gross income under the foreign earned income exclusion; however, the taxpayer was able to exclude income earned while in foreign ports.

The Clark court reached the wrong result given the legislative intent behind section 911; the court’s analysis incorrectly assumes a much narrower purpose for section 911. The law of the flag doctrine provides a potential means by which the court could have ruled in favor of the taxpayer. More broadly, this doctrine provides a workable solution to the effect of earning income in international waters for purposes of section 911.

Part II of this Note provides an overview of section 911 and Part III gives an overview of the Clark decision. Part IV (A) of this Note discusses how the Clark court failed to appreciate the legislative intent behind section 911 in reaching its decision. In this same vein, Part IV (A) provides an example illustrating the negative policy implications that result from the Clark court’s interpretation of section 911; these implications were exactly what Congress was attempting to ameliorate in enacting section 911 in the first place. Part IV (B) of this Note evaluates the court’s decision in light of the law of the flag doctrine, a widely accepted principle in both international and domestic law. Specifically, this doctrine supports the proposition that a taxpayer traveling in international waters on a foreign flagged vessel should qualify for the section 911 exclusion. Finally, Part IV (C) offers potential solutions to the problems outlined in Parts IV (A) and IV (B).

This Note should be of particular interest to tax practitioners for its tax policy implications. The fiscal impact of section 911 is relatively small—just under $5 billion in 2008. However, despite the comparatively low fiscal impact of the foreign earned income exclusion, this provision continues to be very controversial. The controversy surrounds the “fundamental questions [section 911] raises about the policy and equity implications for businesses and individuals regarding the exercise of Congress’s taxing authority beyond the borders of the United States.” This Note demonstrates how courts can misconstrue congressional attempts to address equity and competitiveness concerns. Additionally, a consequence of a worldwide taxation regime is an inevitable interaction with both foreign and international laws. This case presents a unique opportunity to examine the interaction between domestic tax law and international law.


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


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