How Tax Attorneys Use Statutory Construction

In Arnett v. Commissioner, the seventh circuit court of appeals confirms that Antarctica is not a “foreign country” for tax purposes.

Arnett was a US citizen stationed in Antarctica for purposes of his US corporate employer. Arnett claimed a Section 911 foreign earned income exclusion for amounts that he earned while stationed in Antarctica. The IRS assessed a deficiency for these excluded amounts because Antarctica is not a “foreign country,” pursuant to the definition spelled out in the IRS Treasury Regulations. The tax court and now the seventh circuit have upheld the IRS position.

While there are some very interesting issues surrounding whether income earned by US citizens working in non-governed lands (such as Antarctica) should be treated, for tax purposes, as if the income were earned in space or on the high seas, that is not why I am writing about this case.

The reason why I am writing about this case is that this court opinion provides a clear demonstration of how tax attorneys use the courts to change our tax laws.

Lets talk about “statutory construction.” At this point, you are probably thinking “okay, what do I care about that?” The answer is that “statutory construction” is one of the ways that (your?) tax attorneys can change losing cases into winning cases. Let me explain.

The term “statutory construction” essentially refers to how a tax statute or regulation is set out, how the words are employed or not employed, etc. In more famous instances the courts have used “statutory construction” analysis to find that the word “or” in a statute really means the word “and,” or vice versa, given how the statute was written or given the context of the statue.

Judges often use this type of analysis where they want to depart from the obvious meaning of the statute or to support their interpretation of the statute — validating their written opinion. We see statutory construction arguments mainly in cases where the judge wants to issue an opinion that reaches the right result or is fair given the particular facts in the case presented to them. Tax attorneys often use court opinions where judges have used “statutory construction” to make arguments and take positions for their clients that would not otherwise be feasible.

In this case the seventh circuit said the following with regard to the IRS Treasury Regulation:

Use of the same word in an interrelated regulation and in close proximity to one another “presents a classic case for application of the ‘normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning.’”

This language sounds harmless, right? Maybe not. The Treasury Regulations span several volumes and they are written and re-written by thousands of Treasury Department employees over the past hundred (or so) years. Because of this, our Treasury Regulations are replete with specific phrases that are understood to mean one thing in one particular regulation or section of the same regulation and they mean something entirely different for different regulations or different sections of the same regulation (the consolidated tax return regulations are notorious for this type of internal inconsistency).

Armed with the language cited by the seventh circuit in this case (and other statutory construction cases), tax attorneys can look to related regulations (either in location or in subject matter) to find inconsistent definitions or meanings of phrases in order to put on arguments that are helpful for their clients and, hopefully, for society.

Tax attorneys file this type of case away, with the hope of using the langauge to help clients’ in the future….