Question: 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 our vessel, which is a U.S. flagged, Coast Guard documented vessel. The vessel was operated in foreign waters at the time that the equipment was in use and they say that since the equipment was out of the U.S., it is not deductible. I’ve always been under the impression that essentially a U.S. flagged vessel is considered U.S. “soil” and all U.S. laws apply onboard. Is that true?
Answer: I am not a tax attorney but I can provide some guidance to your tax advisors that may be helpful.
It is a bit of a stretch to say that a U.S. flagged vessel is “American Soil” or “American Territory,” but U.S. flagged vessels are nonetheless subject to U.S. jurisdiction and U.S. 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 noted that ” the United States has power to define and punish criminal offenses aboard ship just as it has 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 Enforcement 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 may find the provision of the tax code that includes your equipment deduction to have been left at the dock.
My suggestion to your tax advisors (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.
David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at www.weilmaritime.com, or via email at firstname.lastname@example.org.