John A. Francisco v. Commissioner of Internal Revenue Service

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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 19, 2004 Decided June 18, 2004
No. 03-1210
JOHN A. F RANCISCO,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Appeal from the United States Tax Court
(No. IRS–7670–00)
R. Todd Luoma argued the cause for appellant. With him
on the briefs was Daniel R. King.
Teresa E. McLaughlin, Attorney, U.S. Department of Jus-
tice, argued the cause for appellee. With her on the brief
was Michael J. Haungs, Attorney.
Before: S ENTELLE , ROGERS and GARLAND , Circuit Judges.
Opinion for the Court filed by Circuit Judge SENTELLE.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.

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SENTELLE, Circuit Judge: John A. Francisco (‘‘Francisco’’
or ‘‘taxpayer’’), a citizen of the United States and resident of
American Samoa, appeals from a judgment of the United
States Tax Court upholding in large part an Internal Revenue
Service deficiency notice. The notice assessed Francisco for
taxes on earnings he was paid in American Samoa but which
he earned while working on a fishing boat in international
waters. For the reasons more fully set forth below, we
affirm the judgment of the Tax Court.
I. BACKGROUND
In tax years 1995, 1996, and 1997, Francisco, a United
States citizen, resided in American Samoa, a 76-square-mile
U.S. territory in the South Pacific. During those tax years,
he was employed as chief engineer on a tuna fishing boat, the
M.V. Sea Encounter based in American Samoa, but operating
principally in international waters. His employer, DeSilva
Sea Encounter Corporation (‘‘DeSilva’’), had a contract with
Van Kamp Seafood Company Inc. under which it sold the
Encounter’s entire catch to Van Kamp’s cannery in American
Samoa. While Van Kamp had the right to refuse fish that
were not up to standard, its refusal rate apparently ran no
higher than approximately 2% of the catch. Francisco’s pay,
like all members of the vessel’s crew, was based on a percent-
age of the payment of Van Kamp to DeSilva, and in his case
amounted to $30 for each ton Van Kamp accepted.
Francisco filed tax returns for each of the years in ques-
tion, reporting wages and salary respectively for 1995 of
$111,330.00, 1996 of $179,010.00 and 1997 of $148,188.00, all of
which derived from his work on the Encounter. Francisco
claimed a 100% exclusion of the income under § 931 of the
Internal Revenue Code (‘‘Code’’). That section governs in-
come derived from ‘‘specified possessions of the United
States,’’ including American Samoa. It provides ‘‘a general
rule’’ covering any individual taxpayer ‘‘who is a bona fide
resident of a specified possession during the entire taxable
year,’’ and provides that for such a taxpayer, ‘‘gross income
shall not include (1) income derived from sources within any

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specified possession, and (2) income effectively connected with
the conduct of a trade or business by such individual within
any specified possession.’’ 26 U.S.C. § 931(a).
The Commissioner of Internal Revenue sent the taxpayer a
notice of deficiency pursuant to 26 U.S.C. § 6212 disallowing
the entire claimed exclusion, on the theory that the earnings
were governed by § 863(d) of the Code, rather than § 931 as
asserted by the taxpayer. Section 863(d) governs income
source rules ‘‘for space and certain ocean activities.’’ It
provides that income ‘‘derived by a United States person’’
from an ocean activity ‘‘shall be sourced in the United
States.’’ 26 U.S.C. § 863(d)(1)(A). That section defines
‘‘ocean activity’’ as ‘‘any activity conducted on or under water
not within the jurisdiction as recognized by the United
States’’ of a foreign country, possession of the United States,
or the United States. Id. § 863(d)(2)(A)(ii). Operating under
the theory that all of Francisco’s income from his employment
on the fishing vessel fell within the terms of § 863(d), the
Commission disallowed the entire exclusion, and asserted
deficiencies for each of the tax years under review.
The taxpayer filed a petition for review of the Commission-
er’s determination with the United States Tax Court contest-
ing the Commissioner’s determinations. The Tax Court en-
tered its decision, for the most part upholding the position of
the Commissioner. Francisco v. Commissioner, 119 T.C. 317
(2002). In a divided opinion,1 that court held that § 863
governed the portion of taxpayer’s earnings attributable to
his activity on the vessel while it was in international waters.
1 Judge Maurice Foley dissented from the court’s opinion ex-
pressing a view that § 931 was inapplicable. 119 T.C. at 331
(Foley, J., dissenting). In Judge Foley’s view, because that section
allowed for exclusion based on a source determination ‘‘made under
regulations prescribed by the Secretary,’’ § 931(d)(2), and because
the Secretary had never issued any such regulations, he would have
held the statute incapable of application. Neither party in this
appeal asserts Judge Foley’s theory, and we have no occasion to
pass upon the question it raises.

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Because he performed some duties in port, the Tax Court
prorated his liability, holding that § 931 in fact did govern
that portion of his earnings attributable to activities actually
occurring within American Samoa. By far the largest part of
taxpayer’s work time occurred in international waters and the
bulk of his exclusion was therefore disallowed. The taxpayer
filed the present appeal from that judgment.
II. ANALYSIS
As is, we think, evident from the discussion above, the
question before us is straightforward. So is its resolution.
Section 863(d)(1)(A) provides: ‘‘Income derived from a[n]
ocean activity’’ as defined therein shall, for a ‘‘United States
person TTT be sourced in the United States.’’ Section
7701(a)(30)(A) of the Code defines a ‘‘United States person’’
as including ‘‘a citizen or resident of the United States.’’ The
parties agree that Francisco is a citizen of the United States.
His residence in the specified possession is immaterial to the
statutory definition of a United States person, which would
include him as a citizen even if he lived in a foreign country.
The international waters in which he fished during the tax
years fit precisely the statutory description of ‘‘water not
within the TTT jurisdiction TTT of a foreign country, posses-
sion of the United States, or the United States.’’
§ 863(d)(2)(A)(ii). Therefore, the Tax Court properly held
§ 863(d) to be the section governing Francisco’s tax liability.
Francisco argues that the waters within which he fished
are not governed by § 863(d). He claims that for purposes of
the Tax Code, those waters should be considered as being
within the jurisdiction of a possession of the United States.
He bases that argument on the American Samoa Code, the
governing law of the possession, which adopts a so-called
‘‘mirror image tax code.’’ Under a mirror-image code, the
possession’s statute adopts the United States Internal Reve-
nue Code but replaces ‘‘the United States,’’ where necessary,
with ‘‘American Samoa.’’ Thus, the possession, like the Unit-
ed States, taxes worldwide the income derived from ocean

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sources of its taxable ‘‘persons.’’ From this, taxpayer reasons
that the international waters upon which he fished were
within the ‘‘tax jurisdiction’’ of the United States’ possession
and therefore outside the reach of § 863. We have little
trouble rejecting this argument.
If taxpayer’s interpretation were correct, § 863(d)(2)(A)(ii)
would be a meaningless section covering no water whatsoev-
er. If a government’s claim to tax is sufficient to meet the
meaning of ‘‘jurisdiction’’ in that subsection, then no water
falls within its reach. Since § 863(d) purports to reach all
water ‘‘not within the jurisdiction TTT of the United States’’ or
its possessions, and since the United States, along with any
possession having a mirror-image code, asserts the authority
to tax earnings from activities on all such waters, taxpayer’s
reasoning would mean that § 863(d)(2)(A)(ii) could cover no
waters. The section reaches water not within the jurisdiction
of the United States. The section purports to tax all waters
in the world except insofar as they fall within the jurisdiction
of the United States or other specified governments. Under
taxpayer’s reasoning that leaves no waters to be covered by
the section. This argument does not pass the straight-face
test.
Taxpayer makes one more attempt at bringing his earnings
under § 931 so as to source them in American Samoa rather
than under § 863. He stresses that § 931(a)(2) provides for
the exclusion of ‘‘income effectively connected with the con-
duct of a trade or business by [an] individual within any
specified possession,’’ such as American Samoa. 26 U.S.C.
§ 931(a)(2). He contends that his earnings fall within the
meaning of that section.
As did the Tax Court, we reject that proposition. In the
absence of a statutory or regulatory definition of income
‘‘effectively connected’’ with the conduct of a trade or busi-
ness in a specified possession, the Tax Court, like the parties
before it, sensibly looked to parallel provisions of the Code,
specifically § 864(c)(4)(B), which governs whether income
from sources outside the United States qualifies as being
‘‘effectively connected’’ to the conduct of a trade or business

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within the United States. That section provides that a tax-
payer qualifies for such a determination only where he ‘‘has
an office or other fixed place of business within the United
States to which such income, gain, or loss is attributable.’’
Id. Francisco has never claimed any such office or fixed
place of business in American Samoa.
Section 864(c)(4)(B) provides further guidance as to what
income is to ‘‘be treated as effectively connected with the
conduct of a trade or business within the United States.’’ It
specifies that such income:
(i) consists of rents or royalties for the use of or for
the privilege of using intangible property described in
section 862(a)(4) derived in the active conduct of such
trade or business;
(ii) consists of dividends or interest, and either is
derived in the active conduct of a banking, financing, or
similar business within the United States or is received
by a corporation the principal business of which is trad-
ing in stocks or securities for its own account; or
(iii) is derived from the sale or exchange (outside the
United States) through such office or other fixed place of
business or personal property described in section
1221(a)(1), except that this clause shall not apply if the
property is sold or exchanged for use, consumption, or
disposition outside the United States and an office or
other fixed place or business of the taxpayer in a foreign
country participated materially in such sale.
26 U.S.C. § 864(c)(4)(B).
Conspicuously, that section does not include any reference
to earnings from personal services. Like the Tax Court, we
do not find it necessary to hold that a tax provision dealing
with income ‘‘effectively connected with the conduct of a trade
or business’’ could never include earnings from personal
services. However, the taxpayer has fallen far short of
convincing us that it covers his earnings in this case. Given
the other requirements of § 864(c)(4)(B), and the silence of
the statute on the specific point, taxpayer’s argument falls far
short of overcoming the clear compelling language of § 863.

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We therefore affirm the holding of the United States Tax
Court that the earnings from fishing in international waters
are included in Francisco’s taxable gross income under 26
U.S.C. § 863, not excluded under 26 U.S.C. § 931.2
III. CONCLUSION
For the reasons set forth above, we affirm the judgment of
the United States Tax Court.
2 While not essential to our decision, we note that taxpayer’s
American Samoan return claims a complete exclusion from some-
thing called a ‘‘fisherman’s contract exclusion.’’ Thus, problems of
double taxation or questions of the extent of allowable tax credits
should not arise.

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