John A. Francisco - Page 15




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          is U.S. source income.  Petitioner relies primarily on section              
          931(a) and on section 1.863-6, Income Tax Regs., for the                    
          proposition that the compensation he earned for services                    
          performed in international waters is sourced in American Samoa or           
          is effectively connected with a trade or business in American               
          Samoa.                                                                      
               2.   Ocean-Based Personal Services Income                              
               We first consider respondent’s contention that petitioner’s            
          income earned in international waters is U.S. source income under           
          section 863(d).                                                             
               Generally, personal services income of U.S. persons9 is                
          sourced where the services are performed, without regard to the             
          location of the payor, the residence of the taxpayer, the place             
          of contracting, or the place of payment.  Secs. 861(a)(3),                  
          862(a)(3); Dillin v. Commissioner, 56 T.C. 228, 244 (1971); sec.            
          1.861-4(a), Income Tax Regs.                                                
               Before 1987, income earned by U.S. citizens and residents              
          from personal services performed in international waters was                
          generally sourced where the services were performed; thus, income           
          from those activities was generally treated as foreign source               
          income.  Sec. 862(a)(3); H. Rept. 99-426, at 381 (1985), 1986-3             
          C.B. (Vol. 2) 381; S. Rept. 99-313, at 357 (1986), 1986-3 C.B.              
          (Vol. 3) 357; H. Conf. Rept. 99-841, at II-599 (1986), 1986-3               
          C.B. (Vol. 4) 599.  This resulted in a larger foreign tax credit            

               9  A U.S. person is a citizen or resident of the United                
          States.  Sec. 7701(a)(30)(A).                                               



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