INDIVIDUAL MAY NOT CLAIM INCOME EXCLUSION.

UILC: 931.00-00

[2] Whether income derived from rendering personal services by taxpayer ("Taxpayer") as an employee of X Corporation on Johnston Island during Years 4 and 5 may be excluded by the Taxpayer from her gross income under section 931(a) of the Internal Revenue Code of 1986 ("I.R.C.")?

CONCLUSION

[3] Based on the facts presented, we conclude that the Taxpayer is not entitled to claim the I.R.C. section 931 exclusion, because Johnston Island is not a "specified possession" as defined in I.R.C. section 931(c).

FACTS

[4] Taxpayer is an individual U.S. citizen who was employed during Years 4 and 5 by X Corporation, a civilian contractor performing U.S. government contracts on Johnston Island. There is no information provided regarding the amount of income earned by the Taxpayer during Years 1 through 5, or the location of her employment during Years 1 through 3. The Taxpayer states that on her income tax return (Form 1040) for Year 5, she claimed the I.R.C. section 931 exclusion for compensation earned in Johnston Island. Taxpayer originally filed her income tax return (Form 1040) for Year 4, not claiming the I.R.C. section 931 exclusion and including in gross income all wages she earned while working on Johnston Island. She subsequently filed an amended return (Form 1040X), making a claim for refund of federal income taxes paid for Year 4 on the basis that she is entitled to the benefits of the I.R.C. section 931 exclusion.

[5] Johnston Island is a 625 acre island, and it is the largest of several islands constituting the island group known as the "Johnston Atoll", located approximately 700 nautical miles southwest of Hawaii. Johnston Island is an unincorporated territory of the United States. It was designated as a Naval Defensive Sea Area and Airspace reservation on February 14, 1941 by Executive Order 8682. It is currently operated and maintained by Field Command, Defense Special Weapons Agency (DAWA), Kirkland Air Force Base, New Mexico. In the early 1970s, the military began moving chemical weapons from Okinawa to Johnston Island, and the island became a major storage facility for U.S. chemical weapons.

[6] In the late 1980s, the U.S. Defense Department began construction of an incinerator facility to destroy the chemical weapons on the island. Testing of the facility began in 1990, with full-scale operations beginning in 1993, with the participation of private sector contractors such as Corporation X. Taxpayer was employed by Corporation X during Years 4 and 5. Years 1 through 5 are all calendar years subsequent to 1990.

LAW AND ANALYSIS

[7] I.R.C. section 931 provides in pertinent part as follows:

     (a) General rule. -- In the case of an individual who is a bona

[9] Prior to the Tax Reform Act of 1986 (Pub. L. 99-514, which enacted the Internal Revenue Code of 1986 (hereinafter "1986 Code"), I.R.C. section 931(a) of the Internal Revenue Code of 1954 (hereinafter 1954 Code"), provided an exclusion from U.S. gross income, for certain income of U.S. citizens engaged in a trade or business in a U.S. possession if such income was "derived from sources within a possession of the United States." The exclusion for possession source income that was available under section 931 of the 1954 Code was limited to individuals who could show that 80 percent or more of their gross income was derived from a U.S. possession for the three-year period immediately preceding the taxable year, and that 50 percent or more of their gross income was derived from a trade or business in such U.S. possession. The Taxpayer has not provided information regarding the amount of income she earned or the location of her employment during the three-year period immediately preceding Years 4 and 5. This omission is somewhat academic because it is clear that the 1954 Code provisions do not apply to Years 1-5.

[10] Section 931 of the 1954 Code did not define the term "U.S. possession." Treas. Reg. section 1.931-1, promulgated under the 1954 Code, lists various possessions of the United States, including Johnston Island, that were considered to be "possessions of the United States" for purposes of section 931 of the 1954 Code. The Tax Reform Act of 1986 generally amended the provisions of prior section 931, including the addition of a definition of the term "specified possession" in subsection (c). Since it is not included in this definition of "specified possession", Johnston Island is no longer a possession for purposes of I.R.C. section 931, regardless of the regulation issued under the 1954 Code.

[11] Thus, neither the regulation nor the prior Code section are applicable to the time period when the Taxpayer worked for X Corporation on Johnston Island. The effective date provisions of the Tax Reform Act of 1986, (Section 1277 of Pub. L. 99-514.) clearly indicate that the amended section 931, under the 1986 Code is to apply to taxable years beginning after December 31, 1986. Thus, Taxpayer is not entitled to claim the I.R.C. section 931 exclusion for Years 4 and 5.

                                   W. Edward Williams