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The Internal Revenue Code does not define the term “foreign
country” for purposes of section 911. However, section 1.911-
2(h), Income Tax Regs., provides:
(h) Foreign country. The term “foreign country”
when used in a geographical sense includes any
territory under the sovereignty of a government other
than that of the United States. It includes the
territorial waters of the foreign country (determined
in accordance with the laws of the United States), the
air space over the foreign country, and the seabed and
subsoil of those submarine areas which are adjacent to
the territorial waters of the foreign country and over
which the foreign country has exclusive rights, in
accordance with international law, with respect to the
exploration and exploitation of natural resources.
[Emphasis added.]
Section 1.911-2(g), Income Tax Regs., furthermore, provides
that the term “United States”
when used in a geographical sense includes any
territory under the sovereignty of the United States.
It includes the states, the District of Columbia, the
possessions and territories of the United States, the
territorial waters of the United States, the air space
over the United States, and the seabed and subsoil of
those submarine areas which are adjacent to the
territorial waters of the United States and over which
the United States has exclusive rights, in accordance
with international law, with respect to the exploration
and exploitation of natural resources. [Emphasis
added.]
B. Positions of the Parties
1. Petitioners’ Position
Petitioners acknowledge that Johnston Island is a territory
under the sovereignty of the United States and not a foreign
country. Nonetheless, they assert that, if the income they
earned on Johnston Island is not excludable under section 931,
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