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then under section 1.931-1(b)(2), Income Tax Regs.,18 petitioners
satisfy the requirements for exclusion under section 911;
therefore, they argue, they may exclude up to $70,000 of the
income they earned on Johnston Island during the years in issue.
2. Respondent’s Position
Respondent contends that section 1.931-1(b)(2), Income Tax
Regs., cannot operate to provide petitioners an exclusion from
income under section 911. Respondent asserts that petitioners do
not qualify for the exclusion provided by section 911 because,
pursuant to section 1.911-2(g) and (h), Income Tax Regs.,
Johnston Island is a possession of the United States and, thus,
it cannot constitute a foreign country for purposes of that
section. Therefore, respondent maintains, the compensation
petitioners earned on Johnston Island cannot constitute foreign
earned income as defined in section 911(b), and, thus,
18Sec. 1.931-1(b)(2), Income Tax Regs., provides:
(2) Relationship of sections 931 and 911. A
citizen of the United States who cannot meet the 80-
percent and the 50-percent requirements of section 931
but who receives earned income from sources within a
possession of the United States, is not deprived of the
benefits of the provisions of section 911 (relating to
the exemption of earned income from sources outside the
United States), provided he meets the requirements
thereof. In such a case none of the provisions of
section 931 is applicable in determining the citizen’s
tax liability. For what constitutes earned income, see
section 911(b).
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