Every once in a while, there is a case where I think the taxpayers are getting a really raw deal. The DC Circuit appeals decision in the case of Yen-Ling Rogers is one of those situations. It was about the foreign earned income exclusion. The United States is unusual in taxing its citizens on their worldwide income. The foreign income exclusion mitigates this somewhat. The maximum amount is adjusted for inflation and just broke one hundred grand for 2015. Without getting into the fine points, you basically have to be living in a foreign country and working in a foreign country in order to qualify for the exclusion.
Earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries. The place of receipt of earned income is immaterial in determining whether earned income is attributable to services performed in a foreign country or countries.
While this regulation does not speak directly to the treatment of income earned over international waters, a separate regulation defines the term “foreign country” to mean “any territory under the sovereignty of a government other than that of the United States,” including, among other things, “the territorial waters of the foreign country” and “the air space over the foreign country.”
The regulation thus makes explicit that income earned over waters not subject to any foreign country's jurisdiction would not be income earned “in a foreign country or countries” for purposes of Section 1.911-3(a). In sum, it is clear that Appellants' position in this case is completely at odds with IRS's regulations.
An agency's regulation implementing its authorizing statute “is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute.”