Domestic Law Can Vary at Sea

I was just informed by my tax accountant that the IRS is trying to exclude a piece of equipment I bought for business purposes and installed aboard my vessel, which is U.S.-flagged and Coast Guard-documented. She was operated in foreign waters at the time that the equipment was in use and I’ve been told that since the equipment was used outside the U.S., it is not tax deductible. I’ve always been under the impression that a U.S.-flagged vessel is essentially considered to be on U.S. ’soil’ and all U.S. laws apply on board. Is that true?

I am not a tax attorney, but I can provide some guidance to your tax advisers that may be helpful.

It is a bit of a stretch to say that a U.S.-flagged vessel is on American ’soil,’ but they are nonetheless subject to U.S. jurisdiction and law wherever they are located on the planet.

An international treaty dating back to 1962 (the United Nations Conference on the Law of the Sea; Convention on the High Seas) provides the rules for nations to exert their jurisdiction on the high seas. Article 5 of the convention provides, in part, that ’Ships have the nationality of the State whose flag they are entitled to fly.’ Article 6 of the convention provides, in part, that ’Ships shall … be subject to [the Flag State’s] exclusive jurisdiction on the high seas.’

Most of the statutory and case law in this area concerns the enforcement of U.S. criminal law on the high seas, particularly in the area of drug trafficking. For example, in United States v. Riker, a 1982 case from the 11th Circuit Court of Appeals, the court said that ’the United States has power to define and punish criminal offenses aboard ships just as it has the power to do so upon American territory.’

The drug trafficking cases establish the right of the U.S. government to expressly extend various laws to the high seas (in the case of drug enforcement, they are referring to the ’Maritime Drug Law Enforce-ment Act’). Unfortunately, this is where the analogy to American soil begins to fall apart.

It’s one thing to say that the United States has the power and authority to extend its laws to the high seas, but that’s different than saying that all U.S. laws are automatically extended to the high seas. Congress has chosen to extend many of our criminal laws to the high seas, but you might find the provision of the tax code that includes your equipment deduction to have been left at the dock.

My suggestion to your tax advisers (again, I am not a tax attorney) would be to start with various criminal enforcement statutes that are expressly extended to the high seas, then look to aspects of the IRS Code that extend to U.S. interests operating in foreign territory and try to draw an analogy that will work for your case.