Estate of Travis L. Sanders, Thomas S. Hogan, Jr., Personal Representative, and The Government of the United States Virgin Islands v. Commissioner

ESTATE OF TRAVIS L. SANDERS, DECEASED, THOMAS S.
HOGAN, JR., PERSONAL REPRESENTATIVE, PETITIONER,
AND THE GOVERNMENT OF THE UNITED STATES VIRGIN
ISLANDS, INTERVENOR v. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT
Docket No. 4614–11. Filed January 29, 2015.
D was a U.S. citizen who built his own company in the
United States to both manufacture and distribute surge
suppression devices. In 2002 D signed an employment agree-
ment to work for M, an LP organized in the U.S. Virgin
Islands (USVI), as a professional consultant. The employment
agreement required D to become a resident of the USVI.
Pursuant to I.R.C. sec. 932(c)(2), D filed Forms 1040, U.S.
Individual Income Tax Return, with the USVI Bureau of
Internal Revenue (VIBIR) for tax years 2002, 2003, and 2004.
More than three years after D filed Forms 1040 with the
VIBIR, R mailed D a notice of deficiency determining that D
was not a bona fide resident of the USVI for tax years 2002–
04 and treating D as a nonfiler for U.S. tax purposes. P con-
tends that D filed proper tax returns for tax years 2002–04.
63
64 144 UNITED STATES TAX COURT REPORTS (63)
R contends that D was not a bona fide resident of the USVI
and the period of limitations has not expired because D did
not file U.S. tax returns. Held: The proper test for deter-
mining USVI residency for the years at issue is the ‘‘facts and
circumstances’’ test of Vento v. Dir. of V.I. Bureau of Internal
Revenue, 715 F.3d 455, 467 (3d Cir. 2013). Held, further,
Forms 1040 that D filed with the VIBIR met his Federal tax
filing obligations. Held, further, the period of limitations com-
menced when D filed his tax returns with the VIBIR and
expired before R mailed the notice of deficiency.
William M. Sharp, Matthew A. Cullen, David S. Barnhill,
and Vernon Jean Owens, for petitioner.
Vincent F. Frazer, Tamika Ancher, Barry J. Hart, Peter N.
Heibert, and Christopher M. Bruno, for intervenor.
Christopher A. Pavilonis and Anne M. Craig, for
respondent.
KERRIGAN, Judge: Respondent determined the following
deficiencies and additions to tax with respect to tax years
2002, 2003, and 2004:
Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2002 $485,805 $98,821 $109,801 $1,667
2003 106,758 24,021 26,690 2,754
2004 54,648 12,296 13,662 1,566
Unless otherwise indicated, all section references are to the
Internal Revenue Code (Code) in effect for the years in issue.
We round all monetary amounts to the nearest dollar.
The threshold issue for consideration is whether the sec-
tion 6501 period of limitations on assessment and collection
expired before the date respondent mailed the notice of defi-
ciency, and we consider whether Travis L. Sanders
(decedent) was a bona fide resident of the USVI for tax years
2002, 2003, and 2004. If we conclude the period of limitations
on assessment and collection has not expired, we must con-
sider whether (1) the transactions among decedent, his
companies, and Madison Associates, L.P. (Madison), lacked
economic substance; (2) decedent was entitled to the gross
income exclusion under section 932(c)(4) for tax years 2002,
2003, and 2004; and (3) additions to tax under sections
6651(a)(1) and (2) and 6654 apply.
(63) ESTATE OF SANDERS v. COMMISSIONER 65
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Decedent, a U.S. citizen, lived in Florida when he filed the
petition. On November 13, 2012, decedent died.
Decedent’s Companies
Decedent built his own company to both manufacture and
distribute surge suppression devices. Decedent owned 100%
of the stock of Surge Suppression, Inc., formerly known as
ITD of Destin, Inc., during the 2002, 2003, and 2004 tax
years. Surge Suppression, Inc., was in Florida. Decedent
owned 100% of the stock of Surge Technology, Inc., which
was in Florida during tax years 2002, 2003, and 2004. Effec-
tive December 30, 2003, Surge Suppression, Inc., and Surge
Technology, Inc., merged into ITD of Destin, Inc., which was
renamed Surge Suppression, Inc.
In 1997 Thomas Hogan began to represent decedent on
legal matters and continued this representation until
decedent’s death. Mr. Hogan and decedent had both a busi-
ness and a social relationship.
Madison
In 2001 Mr. Hogan partnered with Rick Roberts, Victor
Taglia, and Alan Teegardin to start Madison, a designated
services business in the USVI. Mr. Teegardin was licensed to
practice law in the USVI. Mr. Roberts was a certified public
accountant (C.P.A.) in Florida. This group hired USVI
attorney Vince Fuller to organize Madison and serve as the
general partner. They were interested in benefiting from the
USVI economic development program (EDP), which had
recently expanded to include consulting businesses. The Eco-
nomic Development Commission (EDC) oversaw EDP.
In order to encourage development in the USVI, Congress
allowed the USVI to reduce certain taxes. Section 934(b)(1)
provides that the USVI may reduce taxes on ‘‘income derived
from sources within the Virgin Islands or income effectively
connected with the conduct of a trade or business within the
Virgin Islands.’’ The USVI government enacted several incen-
tives, including the EDP program. Participating companies of
the EDP receive substantial tax benefits, including a 90%
exemption on local taxes.
66 144 UNITED STATES TAX COURT REPORTS (63)
Mr. Fuller organized Madison as a limited partnership in
the USVI in November 2001. In the spring of 2002 Madison
engaged Marjorie Roberts to advise them with respect to the
EDP residency requirement and other EDP compliance mat-
ters. Ms. Roberts is a USVI-based attorney focusing on tax
and corporate law. She has operated her own law firm since
1999, and her experience included working for the U.S.
Department of the Treasury as a technical adviser for the
VIBIR. In May 2002 Madison received approval of its
application for EDP benefits.
Madison prepared a pamphlet entitled ‘‘Obtaining a Lim-
ited Partnership in Madison Associates, L.P.’’ It provided
background information on Madison, how to become a limited
partner, and residence requirements for the USVI. Madison
considers an application to become a limited partner when
the applicant is a resident or will become a resident of the
USVI. The pamphlet explains that the limited partners are
employees who provide consulting services. Three Madison
limited partners who were unable to comply with the rules
of the EDP were encouraged to leave the partnership. The
EDC has not disciplined Madison regarding the EDP.
Madison provides scientific, electronic, investment, eco-
nomic, and management consulting services to businesses in
the United States. The Madison pamphlet explains that the
limited partners of Madison receive a 90% tax credit on the
distributions from Madison because they are all residents of
the USVI.
Decedent’s Involvement With Madison
In September 2002 Mr. Hogan recommended that decedent
become a limited partner of Madison. Mr. Hogan made this
recommendation because he knew that decedent liked the
USVI and was interested in changing the operational struc-
ture of Surge Suppressions, Inc.
On September 25, 2002, decedent signed an employment
agreement with Madison. Decedent was employed as a
professional consultant commencing on that date. The con-
tract stated that the ‘‘[e]mployee agrees to devote his full-
time talent and abilities to Employer for so long as this
Agreement is in effect.’’ The contract required decedent to
maintain records ‘‘including, but not limited to Affidavits of
(63) ESTATE OF SANDERS v. COMMISSIONER 67
residency or other certification for filing with the Economic
Development Commission.’’
On September 25, 2002, decedent also signed a Supple-
mental Agreement to Agreement of Limited Partnership of
Madison Associates which would make him a limited partner
of Madison. The Supplemental Agreement states the fol-
lowing:
Before acceptance as a Limited Partner, each Limited Partner will be
required to provide the partnership an opinion letter from a legal or
accounting firm in the form and content acceptable to the General Part-
ners in his sole and absolute discretion that the Limited Partner will
qualify as a resident of the USVI. * * *
Each Limited Partner agrees to cooperate with the Partnership and
the General Partner in providing or maintaining whatever documenta-
tion the Partnership or General Partner may require in his sole and
absolute discretion necessary to prove the continued residency in the
USVI of such Limited Partner.
Madison’s first office was at a property called Wind Song
in St. Thomas, USVI, and it moved to the American Yacht
Harbor office in St. Thomas, USVI, in December 2002.
Decedent had his own desk in Madison’s office at the
America Yacht Harbor. Madison filed Schedules K–1, Part-
ner’s Share of Income, Deductions, Credits, etc., for tax years
2002–04. Each of these Schedules K–1 listed decedent as
partner of Madison.
In the spring of 2002 Madison purchased a one-twelfth
deeded interest in a Ritz-Carlton condominium. Decedent
stayed in this unit or another unit that Ritz-Carlton made
available during 2002 and the beginning of 2003. Decedent
was able to store his personal items there.
Other USVI Contacts
STT Equipment, LLC (STT), was a USVI limited liability
company during 2003 and 2004. The Travis L. Sanders Rev-
ocable Inter Vivos Trust and Hogan Family, LLC, were equal
owners of STT. During July 2003 STT financed the purchase
of a vessel called the Nazdar. On February 11, 2003,
decedent signed a document titled ‘‘Lease Agreement’’ among
STT and himself, ITD of Destin, Inc., and the Hogan Law
Firm, LLC. Beginning in the spring of 2003 the Nazdar was
moored in the American Yacht Harbor in St. Thomas, USVI.
Decedent entered into license agreements with the American
68 144 UNITED STATES TAX COURT REPORTS (63)
Yacht Harbor which pertained to the dockage of the Nazdar
for the period between April 1, 2003, and April 1, 2004, and
the period between April 1 and December 31, 2004.
Decedent resided on the Nazdar during 2003 and 2004.
The Nazdar was two stories and had a full kitchen, a smaller
kitchen, and five bedrooms including a master suite.
Decedent kept personal effects on the Nazdar.
During 2002 and 2003 decedent maintained a checking
account at Banco Popular de Puerto Rico in St. Thomas,
USVI. The address for the checking account was a USVI
address. Decedent reported his residence as St. Thomas,
USVI, on his license and certificate of marriage. Decedent
was married in the USVI on June 18, 2003. During 2004
decedent had bank accounts with UBS Financial Services,
Inc., in the USVI and First Bank in St. Thomas in the USVI.
Decedent’s checks for his First Bank account showed a USVI
address as his address.
Tax Returns
On February 19, 2003, Scott C. Blair, C.P.A., whose prac-
tice is in the USVI, sent decedent a letter providing a tax
organizer for 2002. This letter was sent to a USVI address
and included a Form 8822, Change of Address, for decedent
to fill out if he had moved to the USVI during 2002.
The VIBIR directs individual and entity taxpayers to file
their income tax returns using the same forms that the
Internal Revenue Service (IRS) uses in administering the
Code. Decedent filed Forms 1040, U.S. Individual Income
Tax Return, with the VIBIR for tax years 2002–04. Decedent
filed his 2002, 2003, and 2004 tax returns on October 15,
2003, October 15, 2004, and December 15, 2005, respectively.
On each Form 1040 decedent reported a home address in the
USVI and claimed an ‘‘EDC Credit’’. Decedent attached a
statement entitled ‘‘Federal Supplemental Information’’ to
each Form 1040 indicating that he was entitled to income tax
benefits afforded under the EDP through his interest in
Madison. He further indicated that the EDP credit entitled
him to ‘‘reduce his income tax liability by 90% of the income
tax attributable to the net income derived by * * * [Madi-
son]’’.
(63) ESTATE OF SANDERS v. COMMISSIONER 69
For tax years 2002–04 Madison filed Forms 1065, U.S.
Return of Partnership Income, with the VIBIR. Attached to
each Form 1065 was a Schedule K–1 listing decedent as a
partner of Madison.
Decedent’s Forms 1040 were prepared by certified public
accountants in the USVI. The VIBIR provided the IRS with
a partial copy of decedent’s 2002 tax return consisting of the
first two pages of his Form 1040 for tax year 2002. This par-
tial Form 1040 was marked as received by the IRS in
Philadelphia, Pennsylvania, on December 29, 2003.
Decedent did not file Forms 1040 with the IRS for tax
years 2002–04. On April 7, 2009, the IRS prepared sub-
stitutes for returns for decedent for tax years 2002–04.
Decedent made estimated tax payments of $20,000 and
$25,000 on June 15 and September 15, 2002, respectively, to
the U.S. Treasury for tax year 2002. Decedent did not make
any estimated tax payments to the U.S. Treasury for tax
years 2003 and 2004.
Decedent made an estimated tax payment of $74,250 to the
VIBIR for tax year 2003. For tax year 2004 decedent made
an estimated tax payment of $53,363 to the VIBIR.
On November 30, 2010, respondent issued decedent a
notice of deficiency with respect to tax years 2002–04. In the
notice of deficiency respondent determined that (1) decedent
was not a bona fide resident of the USVI for tax years 2002–
04; (2) all transactions among decedent, his companies, and
Madison lacked economic purpose and substance; (3)
decedent was not entitled to the gross income exclusion
under section 932(c)(4) for tax years 2002–04 with the IRS;
(4) decedent was required to file a Form 1040 for each of tax
years 2002–04 with the IRS; and (5) decedent was liable for
additions to tax under sections 6651(a)(1) and (2) and 6654.
Attached to the notice of deficiency was a Form 886–A,
Explanation of Items, which states the following:
It is determined that you were not a bona fide resident of the United
States Virgin Islands (‘‘USVI’’) for the taxable years 2002, 2003, and
2004. During each of those taxable years, you participated in a tax
avoidance arrangement similar to that described in IRS Notice 2004–45,
Meritless Filing Position Based on Sections 932(c)(4) and 934(b), which
involved improperly claiming to be a bona fide resident of the USVI and,
through use of sham arrangements, superficially recasting income from
sources within the United States as income from sources within in the
70 144 UNITED STATES TAX COURT REPORTS (63)
USVI * * * in order to inappropriately and invalidly claim a 90% terri-
torial income tax credit under the USVI Economic Development Pro-
gram.[1]
Decedent filed timely his petition with this Court. Peti-
tioner contends that the statute of limitations under section
6501(a) applies to bar respondent from assessing the defi-
ciencies and additions to tax determined in the notice of defi-
ciency.
On January 22, 2014, the Government of the USVI filed a
motion to intervene. On February 25, 2014, we granted the
Government of the USVI’s motion.
OPINION
I. The USVI
The USVI is an unincorporated territory of the United
States acquired in 1916. 48 U.S.C. sec. 1541(a) (2006). The
USVI is not part of one of the 50 States or the District of
Columbia, and it is generally not part of the United States
for tax purposes. See sec. 7701(a)(9).
In 1921 Congress passed the Naval Service Appropriations
Act of 1922, ch. 44, sec. 1, 42 Stat. at 123 (1921) (codified as
amended at 48 U.S.C. sec. 1397 (2006)), which created a tax
system for the USVI. This tax system, usually referred to as
the mirror code, mirrors the provisions of the Code except
that ‘‘Virgin Islands’’ is substituted for ‘‘United States’’
throughout. Id. Originally, corporations and U.S. citizens
residing in the USVI who received both U.S. and USVI
source income were required to file returns with, and pay
1 Notice 2004–45, 2004–2 C.B. 33, states that the ‘‘highly questionable’’
positions described in this notice may be promoted to taxpayers in a vari-
ety of forms. However, they have frequently been promoted in the fol-
lowing manner:
Promoters typically approach a taxpayer (Taxpayer) living and work-
ing in the United States and advise Taxpayer to (i) purport to become
a USVI resident by establishing certain contacts with the USVI, (ii) pur-
port to terminate his or her existing employment relationship with his
or her employer (Employer) and (iii) purport to become a partner of a
Virgin Islands limited liability partnership (‘‘V.I.LLP’’) that is treated as
a partnership for U.S. tax purposes. V.I.LLP then purports to enter into
a contract with Employer to provide Employer with substantially the
same services that were provided by Taxpayer prior to the creation of
this arrangement. * * *
(63) ESTATE OF SANDERS v. COMMISSIONER 71
taxes to, both jurisdictions. Appleton v. Commissioner, 140
T.C. 273, 278 (2013).
In 1954 Congress modified the administration of the mirror
code and established the ‘‘inhabitant rule’’ by enacting the
Revised Organic Act of the Virgin Islands (ROA), ch. 558,
sec. 28, 68 Stat. at 508 (1954). ROA sec. 28(a) provided that
corporations and individuals whose permanent residence was
in the USVI satisfied their U.S. income tax obligations by
‘‘paying their tax on income derived from all sources both
within and outside the Virgin Islands in the treasury of the
Virgin Islands’’. Pursuant to the ROA any taxes levied by
Congress on the inhabitants of the USVI would be covered
into (i.e., paid to) the USVI Treasury. Id.
In 1986 Congress repealed the inhabitant rule as part of
Tax Reform Act of 1986 (TRA), Pub. L. No. 99–514, sec.
1274(a), 100 Stat. at 2596. As part of the TRA Congress
enacted a new section 932 which coordinates U.S. and USVI
income taxes for individuals who are bona fide residents of
the USVI under section 932. Appleton v. Commissioner, 140
T.C. at 279.
A. Section 932
Section 932 provides rules that govern the coordination of
the U.S. income tax system and the USVI income tax system.
Specifically, section 932 provides the filing and payment
requirements for ‘‘United States residents’’ (U.S. residents)
and ‘‘Virgin Islands residents’’ (USVI residents). With respect
to U.S. residents section 932(a) provides as follows:
SEC. 932(a). TREATMENT OF UNITED STATES RESIDENTS.—
(1) APPLICATION OF SUBSECTION.—This subsection shall apply to an
individual for the taxable year if—
(A) such individual—
(i) is a citizen or resident of the United States (other than a
bona fide resident of the Virgin Islands at the close of the taxable
year),[2] and
2 Sec. 932 was amended, effective for tax years ending after October 22,
2004, to replace the phrase ‘‘at the close of the taxable year’’ with the
phrase ‘‘during the entire taxable year’’. American Jobs Creation Act of
2004, Pub. L. No. 108–357, sec. 908(c)(2), 118 Stat. at 1656. Thus, the
amendment applies for decedent’s tax year 2004. Id. sec. 908(d)(1), 118
Stat. at 1657.
72 144 UNITED STATES TAX COURT REPORTS (63)
(ii) has income derived from sources within the Virgin Islands,
or effectively connected with the conduct of a trade or business
within such possession, for the taxable year, or
(B) such individual files a joint return for the taxable year with
an individual described in subparagraph (A).
(2) FILING REQUIREMENT.—Each individual to whom this subsection
applies for the taxable year shall file his income tax return for the tax-
able year with both the United States and the Virgin Islands.
(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an individual
to whom this subsection applies in a taxable year for purposes of so
much of this title (other than this section and section 7654) as relates
to the taxes imposed by this chapter, the United States shall be
treated as including the Virgin Islands.
Section 932(b)(1) provides the payment requirements for
U.S. residents. U.S. residents ‘‘shall pay the applicable
percentage’’ of the income tax shown due on their tax returns
to the USVI. The applicable percentage is the percentage
which the amount of a U.S. resident’s USVI adjusted gross
income bears to his or her total adjusted gross income. Sec.
932(b)(2). U.S. residents may claim credits on their U.S. tax
returns equal to the amounts of the tax paid to the USVI.
Sec. 932(b)(3).
With respect to USVI residents section 932(c) provides:
SEC. 932(c). TREATMENT OF VIRGIN ISLANDS RESIDENTS.—
(1) APPLICATION OF SUBSECTION.—This subsection shall apply to an
individual for the taxable year if—
(A) such individual is a bona fide resident of the Virgin Islands
at the close of the taxable year, or
(B) such individual files a joint return for the taxable year with
an individual described in subparagraph (A).
(2) FILING REQUIREMENT.—Each individual to whom this subsection
applies for the taxable year shall file an income tax return for the tax-
able year with the Virgin Islands.
(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an individual
to whom this subsection applies in a taxable year for purposes of so
much of this title (other than this section and section 7654) as relates
to the taxes imposed by this chapter, the Virgin Islands shall be
treated as including the United States.
(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an indi-
vidual—
(A) who is a bona fide resident of the Virgin Islands at the close
of the taxable year,[3]
(B) who, on his return of income tax to the Virgin Islands, reports
income from all sources and identifies the source of each item shown
on such return, and
3 See supra note 2. This change does not affect the outcome of this case.
(63) ESTATE OF SANDERS v. COMMISSIONER 73
(C) who fully pays his tax liability referred to in section 934(a) to
the Virgin Islands with respect to such income,
for purposes of calculating income tax liability to the United States,
gross income shall not include any amount included in gross income
on such return, and allocable deductions and credits shall not be taken
into account.[4]
Section 932 established two distinct filing regimes: one for
bona fide residents of the USVI and one for those who are
not bona fide residents. Bona fide residents file their tax
returns with the VIBIR. Those who are not bona fide resi-
dents must each file two income tax returns: one with the
IRS, and one with the VIBIR. The bona fide resident’s single
tax return filed with the VIBIR pursuant to section 932(c)
satisfies both the taxpayer’s territorial and Federal tax
obligations. Sec. 932(c)(4); see Huff v. Commissioner, 743 F.3d
790 (11th Cir. 2014) (allowing intervention by the USVI),
rev’g and remanding 138 T.C. 258, 262 (2012).
B. The Tax Implementation Agreement
In order to ensure the ‘‘fair implementation’’ of section 932,
the United States and the USVI entered into an agreement
‘‘for the exchange of information and mutual assistance with
respect to taxes in order to prevent the evasion or avoidance
of United States or Virgin Islands taxes’’. Tax Implementa-
tion Agreement Between the United States of America and
the Virgin Islands (TIA), Feb. 24, 1987, 1989–1 C.B. 347,
347–348. The TIA applies to (1) all taxes imposed by the
Code, (2) all taxes imposed by the mirror code, and (3) all
local income taxes imposed by the USVI as authorized by the
TRA. See id. art. 2, 1989–1 C.B. at 348. TIA article 4 governs
the exchange of information between the two governments.
Clause 1 provides that the competent authorities of the
United States and the USVI shall exchange information to
administer and enforce their respective tax laws. See id. art.
4(1), 1989–1 C.B. at 348.
TIA article 4(2)(b) provides that the USVI shall routinely
supply to the United States information with respect to audit
changes that disclose information of interest to the U.S.
4 Sec. 932(c) is not included in the mirror code and is not an element of
the USVI territorial tax system. See S. Rept. No. 100–445, at 324 (1988),
1988 U.S.C.C.A.N. 4515, 4825–4826.
74 144 UNITED STATES TAX COURT REPORTS (63)
Government, including, among other matters, (1) information
about the ownership interests of all corporations subject to
USVI tax having non-USVI-source income and which receive
a rebate, subsidy, or deduction of USVI taxes, as well as (2)
information about any individual subject to USVI tax who
has non-USVI-source income and who claims for the first
time to be a USVI resident. In addition, TIA article 4(2)(b)
provides that the USVI shall supply to the United States
‘‘copies of reports of individual, partnership, corporate, and
employment audit changes that disclose information relevant
to the United States.’’ Id. art. 4(2)(b), 1989–1 C.B. at 348–
349. The TIA provides that the VIBIR will permit the IRS to
examine USVI tax returns. Id. app. A, sec. 3.1, 1989–1 C.B.
at 352.
II. Federal Tax Filing Requirements
U.S. citizens are subject to Federal reporting requirements
and taxation on their worldwide income as set forth in the
Code. See, e.g., Cook v. Tait, 265 U.S. 47, 56 (1924); Huff v.
Commissioner, 135 T.C. 222, 230 (2010). Several sections of
the Code govern an individual’s filing requirements. Section
6012(a)(1)(A) provides that every individual with gross
income for the taxable year which equals or exceeds the
exemption amount, with certain exceptions not relevant here,
is required to file a U.S. income tax return. Thus, a
choreographed interplay between sections 6012(a) and 932(c),
together with mirror code section 6012(a), governs the tax
filing responsibilities of individuals having income equal to or
in excess of the exemption amount. See Appleton v. Commis-
sioner, 140 T.C. at 281.
Although an individual having gross income for the taxable
year which equals or exceeds the exemption amount must file
a Federal tax return, section 932(c)(2) directs bona fide resi-
dents of the USVI to file income tax returns with the USVI
(through the VIBIR), and section 932(c)(4) (flush language)
exempts both U.S. source income and USVI source income
from U.S. taxation if all of the requirements of section
932(c)(4) are met. Appleton v. Commissioner, 140 T.C. at 281.
But if any requirement of section 932(c)(4) is not satisfied,
then the individual falls back into the Federal tax reporting
and payment system, because his or her income would no
(63) ESTATE OF SANDERS v. COMMISSIONER 75
longer be excluded for purposes of calculating his or her U.S.
tax liability. Appleton v. Commissioner, 140 T.C. at 281.
Section 7654(e) provides that the Secretary shall prescribe
such regulations as may be necessary to carry out the provi-
sions of section 932, including prescribing the information
which individuals to whom section 932 applies must furnish
to the Secretary. The Secretary did not, however, promulgate
regulations for the years in issue. We turn to other sections
of the Code, as well as regulations and instructions published
by the IRS, for guidance as to the place where decedent was
required to file his tax returns for the years in issue. See
Appleton v. Commissioner, 140 T.C. at 282.
Section 6091 generally governs the place where a U.S. tax-
payer is required to file a tax return. Section 6091(b)(1)(B)(ii)
(flush language) provides that ‘‘citizens of the United States
whose principal place of abode * * * is outside the United
States’’ shall file their tax returns ‘‘at such place as the Sec-
retary may by regulations designate.’’ Pursuant to the
authority granted by the statute, the Secretary promulgated
section 1.6091–1(a), Income Tax Regs., which provides that,
in general, whenever an income tax return is required to be
filed and the place for filing the return is not provided by the
Code, the tax return shall be filed at the place prescribed by
the regulations.
Section 1.6091–3, Income Tax Regs., requires that certain
tax returns be filed with (1) the Director of Internal Oper-
ations, Internal Revenue Service, Washington, D.C. 20225, or
(2) the District Director, or (3) the director of the service
center, depending on the appropriate officer designated on
the return form or in the instructions issued with respect to
the form. 5 These tax returns include the income tax return
of (1) an individual citizen of the United States whose prin-
cipal place of abode for the period with respect to which the
return is filed is outside the United States, and (2) an indi-
vidual citizen of a possession of the United States (whether
or not a citizen of the United States) who has no legal resi-
dence or principal place of business in any internal revenue
district of the United States. Sec. 1.6091–3(b) and (c), Income
5 This regulation was revised in 2004 and the revisions were effective
September 16, 2004. The position of District Director no longer existed
after 1998. This change and these revisions do not affect this case.
76 144 UNITED STATES TAX COURT REPORTS (63)
Tax Regs. A taxpayer’s principal place of abode will be
considered to be outside the United States if his or her legal
residence is outside the United States or if his or her tax
return bears a foreign address. Id. para. (b).
The VIBIR directs individual and entity taxpayers to file
their income tax returns using the same forms that the IRS
uses in administering the Code. The instructions to Form
1040 for 2002, 2003, and 2004 provide specific filing instruc-
tions. Under the heading ‘‘Where do you file’’, for each year
the instructions state that ‘‘All APO, FPO addresses, Amer-
ican Samoa, nonpermanent residents of Guam or the Virgin
Islands, Puerto Rico (or if excluding income under Internal
Revenue Code section 933), dual-status aliens, a foreign
country: U.S. citizens and those filing Form 2555, 2555–EZ
or 4563’’ shall use the address of ‘‘Internal Revenue Service
Center Philadelphia, PA 19255–0215 USA’’.
In a footnote the instructions state that ‘‘permanent resi-
dents of the Virgin Islands should use: V.I. Bureau of
Internal Revenue, 9601 Estate Thomas, Charlotte Amalie, St.
Thomas, VI 00802’’ when filing their Form 1040 individual
income tax returns. 6
During the years in issue the IRS issued Publ’n 570, Tax
Guide for Individuals With Income From U.S. Possessions
(rev. February 2003), which states that ‘‘[i]f you are a bona
fide resident of the * * * [USVI] you must file your tax
return on Form 1040 with the Government of the Virgin
Islands and pay the entire tax due to the Virgin Islands. You
do not have to file with the IRS for any tax year in which
you are a bona fide resident of the Virgin Islands’’. 7 This
publication provides specific filing instructions for the dif-
ferent U.S. possessions. The instructions for the USVI do not
6 It appears that when the inhabitant rule was replaced by sec. 932, the
IRS failed to update the instructions to Form 1040 and continued to use
the terms ‘‘permanent resident of the Virgin Islands’’ and ‘‘nonpermanent
resident of the Virgin Islands’’ despite their obsolescence. Appleton v. Com-
missioner, 140 T.C. 273, 284 n.17 (2013).
7 Publication 570 for tax year 2004 states that ‘‘[i]f you are a bona fide
resident of the Virgin Islands during the entire tax year, you must file
your tax return on Form 1040 with the Government of the Virgin Islands
and pay the entire tax due to the Virgin Islands’’. It further states that
‘‘[y]ou do not have to file with the IRS for any tax year in which you are
a bona fide resident of the Virgin Islands’’. Publication 570 was revised for
tax year 2004 to reflect the changes of the AJCA.
(63) ESTATE OF SANDERS v. COMMISSIONER 77
include qualifications for a bona fide residency whereas the
instructions for America Samoa provide specific factors for
determining bona fide residency. These qualifications are
included on Form 4563, Exclusion of Income for Bona Fide
Residents of America Samoa. For 2002 Publication 570 did
provide the following example regarding bona fide USVI resi-
dents:
Mr. and Mrs. Maple left the United States on June 15, 2002, and arrived
in the Virgin Islands on the same day. They qualified as bona fide resi-
dents of the Virgin Islands on the last day of their tax year, December
31, 2002.
Mr. and Mrs. Maple file Form 1040 with the Government of the Virgin
Islands and attach a Form 1040 INFO. The Maples report their world-
wide income and pay the entire tax for the year to the Virgin Islands.
Even though they lived in the United States part of the year, their
income tax obligations for that year are completely satisfied by filing
their return with, and paying their tax to, the Virgin Islands Bureau of
Internal Revenue.
The same example appeared in Publication 570 for 2003.
We also note that the Senate Finance Committee report
published with the TRA states that ‘‘[a]n individual quali-
fying as a bona fide Virgin Islands resident as of the last day
of the taxable year will pay tax to the Virgin Islands under
the mirror system on his or her worldwide income. He or she
will have no final tax liability for such year to the United
States, as long as he or she reports all income from all
sources and identifies the source of each item of income on
the return filed with the Virgin Islands.’’ S. Rept. No. 99–
313, at 482 (1986), 1986–3 C.B. (Vol. 3) 1, 482.
Notice 2004–45, 2004–2 C.B. 34, states that ‘‘[t]he deter-
mination of whether an individual is a bona fide resident of
the USVI turns on the facts and circumstances and, specifi-
cally, on an individual’s intentions with respect to the length
and nature of his or her stay in the USVI.’’
III. Section 6501(a) Period of Limitations
The regulations and instructions regarding income tax
return filings are significant because the period of limitations
on assessment commences only when a tax return has been
properly filed. See Appleton v. Commissioner, 140 T.C. at
284. The general rule for the period of limitations is that ‘‘the
amount of any tax imposed by this title shall be assessed
78 144 UNITED STATES TAX COURT REPORTS (63)
within 3 years after the return was filed’’. Sec. 6501(a). The
term ‘‘return’’ for this purpose is defined as ‘‘the return
required to be filed by the taxpayer’’. Id. Section 6501 pro-
vides a list of exceptions, but none of the exceptions to the
three-year period specifically addresses a challenge to a claim
of bona fide residency.
Petitioner contends that the three-year period of limita-
tions for each year in issue commenced on the date that
decedent filed his tax return for the year with the VIBIR.
Respondent contends that the period of limitations has not
commenced for any of the years in issue because decedent
did not properly file his income tax returns for those years.
Thus, we must determine whether decedent’s Forms 1040
filed with the VIBIR were the returns required to be filed,
and if so, whether they were properly filed.
A. Required Returns
Section 1.6011–1(a), Income Tax Regs., provides that the
tax return required to be filed must include ‘‘the information
required by the applicable regulations or forms.’’ Following
the Supreme Court’s opinions in Zellerbach Paper Co. v.
Helvering, 293 U.S. 172 (1934), and Florsheim Bros.
Drygoods Co. v. United States, 280 U.S. 453 (1930), we used
a four-part test in Beard v. Commissioner, 82 T.C. 766, 777
(1984), aff ’d, 793 F.2d 139 (6th Cir. 1986), in determining
whether a document qualifies as a valid return for purposes
of section 6501(a): (1) the document must contain sufficient
data to calculate tax liability; (2) the document must purport
to be a return; (3) there must be an honest and reasonable
attempt to satisfy the requirements of the tax law; and (4)
the taxpayer must have executed the document under pen-
alties of perjury. See Appleton v. Commissioner, 140 T.C. at
285.
Petitioner contends that decedent met the requirements of
the Beard test because of the manner in which he filed his
tax returns for tax years 2002–04. Respondent contends that
decedent did not file Federal income tax returns for tax years
2002–04. We agree with petitioner.
Decedent hired a C.P.A. located in the USVI to prepare the
Forms 1040 that he filed with the VIBIR for tax years 2002–
04. These returns contained more than sufficient data to cal-
culate decedent’s tax liabilities. Both the Commissioner and
(63) ESTATE OF SANDERS v. COMMISSIONER 79
the VIBIR required the use of this form for income tax filing.
The forms purport to be returns. Not only did decedent hire
a C.P.A. to prepare his returns; he also consulted with an
established tax attorney in the USVI. Decedent’s tax returns
for tax years 2002–04 were an honest and reasonable
attempt to satisfy the requirements of the law. The tax
returns filed were consistent with the requirement of section
932(c)(4) and the Commissioner’s instructions for USVI tax-
payers. Decedent signed each tax return under penalties of
perjury.
Decedent’s tax returns for tax years 2002–04 meet the
requirements of the Beard test, and therefore the returns
filed were the required returns for purposes of section
6501(a).
B. Proper Filing
The Supreme Court has noted that ‘‘[u]nder the estab-
lished general rule a statute of limitations runs against the
United States only when they assent and upon the conditions
prescribed.’’ Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249
(1930). The Supreme Court has stated that to secure the ben-
efit of the limitation, there must be ‘‘meticulous compliance
by the taxpayer with all named conditions in order to secure
the benefit of the limitation’’. Id. We have stated that to
meticulously comply, a ‘‘taxpayer must file his return where
section 6091 or the regulations promulgated thereunder
require the return to be filed.’’ Winnett v. Commissioner, 96
T.C. 802, 808 (1991).
This Court, as well as other courts, has held that filing a
return with the wrong IRS representative does not constitute
‘‘filing’’ for purposes of commencing the limitations period.
Appleton v. Commissioner, 140 T.C. at 286; Winnett v.
Commissioner, 96 T.C. at 808–809; see Allnutt v. Commis-
sioner, 523 F.3d 406, 413 n.5 (4th Cir. 2008), aff ’g T.C.
Memo. 2002–311.
Section 1.6091–3(b), Income Tax Regs., requires a taxpayer
who is a U.S. citizen but whose principal place of abode is
outside the United States to file his or her return as des-
ignated on the return forms or in the instructions issued
with respect to those forms. Section 1.6091–3(c), Income Tax
Regs., requires a taxpayer who is a citizen of a possession of
the United States and has no legal residence or principal
80 144 UNITED STATES TAX COURT REPORTS (63)
place of business in the United States to file his or her tax
return as designated on the return forms or in the instruc-
tions issued with respect to those forms.
Petitioner contends that decedent’s tax returns for tax
years 2002–04 were properly filed with the VIBIR because
decedent was a bona fide resident of the USVI. Respondent
contends that decedent was required to file Federal returns
for tax years 2002–04 in Philadelphia per the instructions on
the Form 1040 for nonpermanent USVI residents.
Respondent contends that decedent was not a bona fide resi-
dent of the USVI and should have complied with section
932(a)(2), which requires tax returns to be filed in both the
United States and the USVI, rather than section 932(c)(2),
which requires a single filing in the USVI.
We held that the returns filed with the VIBIR met the tax-
payer’s Federal tax filing obligations. In Appleton v. Commis-
sioner, 140 T.C. at 283 n.16, the parties stipulated that
during the years at issue the taxpayer was both ‘‘a bona fide
resident of the Virgin Islands’’ within the meaning of section
932 and a ‘‘permanent resident of the Virgin Islands’’ as that
term is used in the instructions to Form 1040. We noted that
‘‘[t]he instructions to the Form 1040 are explicit: The form is
to be filed with the VIBIR.’’ Id. at 287. We rejected the
Commissioner’s argument that when the Form 1040 instruc-
tions are read together with Publication 570 the taxpayer fell
into the category of a taxpayer living abroad and should have
filed a protective return with the Internal Revenue Service
Center in Philadelphia, Pennsylvania. See id. at 288. We con-
cluded that a meticulous taxpayer researching his or her
filing obligations would have found the instructions and
these documents. A review of the instructions would not lead
a taxpayer who was a permanent resident of the USVI to
believe that he or she was required to make an additional
filing. In Appleton, we rejected the Commissioner’s argument
because there was no IRS document requiring such a filing
to be made. Id.
In Appleton, the parties conceded that the taxpayer was a
bona fide resident of the USVI. In the instant case
respondent disputes that decedent was a bona fide resident
and contends that he should have filed returns with the IRS.
In order to determine whether decedent’s tax returns for
2002–04 were properly filed as petitioner contends, we need
(63) ESTATE OF SANDERS v. COMMISSIONER 81
to address whether decedent was a bona fide resident of the
USVI for the purposes of section 932(c)(2). If we determine
that he was, his Forms 1040 for tax years 2002–04 would be
properly filed because they were filed with the VIBIR as the
proper place of filing directed by the instructions. See sec.
1.6091–3(b) and (c), Income Tax Regs.
C. Bona Fide Residency
The single filing requirement of section 932(c)(2) applies
only if a taxpayer ‘‘is a bona fide resident of the Virgin
Islands’’. Sec. 932(c)(1)(A). The term ‘‘bona fide resident of
the Virgin Islands’’ was not defined by the Code until 2004. 8
The Secretary did not promulgate final regulations for deter-
mining whether a taxpayer is a bona fide resident of the
USVI until 2006. 9 As a result, a taxpayer attempting to
determine whether he or she was a bona fide resident of the
USVI for tax years 2002–03 would not find the answer in
either the Code or the regulations.
Publication 570 for tax years 2002 and 2003 provides
information for filing returns for individuals with income
from U.S. possessions. These publications provide specific
instructions for different U.S. possessions or territories.
There is a possession exclusion for a bona fide resident of
American Samoa, and the publication includes factors that
may be considered in determining whether a taxpayer is a
bona fide resident of American Samoa. For the USVI there
8 Sec. 937(a) does provide a test for determining whether a taxpayer is
a ‘‘bona fide resident’’ of the Virgin Islands by creating a two-part resi-
dency test. The first part of the test requires an individual to be in the
possession for at least 183 days during the tax year, and this requirement
is effective for tax years beginning after October 22, 2004, and does not
affect this case. AJCA sec. 908(d). The second part of the test requires that
the taxpayer not have a closer connection to the United States or a foreign
country during the year, and the effective date is for taxable years ending
after the date of enactment, October 22, 2004. The second part of the test
applies for decedent’s 2004 tax year. However, the final regulations for sec.
937(a) allow taxpayers to apply the prior-law test for determining resi-
dency for 2004. See 71 Fed. Reg. 5000 (Jan. 31, 2006). Petitioner did not
address the final regulation in his arguments.
9 On April 11, 2005, the Secretary published sec. 1.937–1T, Temporary
Income Tax Regs., 70 Fed. Reg. 18940 (Apr. 11, 2005), which provided
rules to implement sec. 937(a) concerning bona fide residents in U.S. pos-
sessions, including the USVI. On January 31, 2006, the Secretary pub-
lished final regulations under sec. 937(a). Sec. 1.937–1, Income Tax Regs.
82 144 UNITED STATES TAX COURT REPORTS (63)
are no qualifications for a bona fide resident. The publication
states: ‘‘You do not have to file with the IRS for any tax year
in which you are a bona fide resident of the Virgin Islands
on the last day of the year, provided you report and pay tax
on your income from all sources to the Virgin Islands and
identify the source(s) of the income on the return.’’ 10 No
guidance was provided to help a taxpayer determine whether
he or she was a bona fide resident.
D. Factors To Determine Bona Fide Residency
The meaning of residency varies according to context. Mar-
tinez v. Bynum, 461 U.S. 321, 330 (1983). For tax purposes
residency has fewer requirements than domicile. Sochurek v.
Commissioner, 300 F.2d 34, 38 (7th Cir. 1962), rev’g and
remanding 36 T.C. 131 (1961). In Sochurek, the Court of
Appeals for the Seventh Circuit looked at 11 factors to deter-
mine whether a taxpayer’s claimed residency is bona fide. Id.The 11 factors are: (1) intention of the taxpayer; (2)
establishment of a home in the foreign country for an indefi-
nite period; (3) participation in activities; (4) physical pres-
ence in the foreign country; (5) nature, extent, and reasons
for absences from his temporary foreign home; (6) assump-
tion of economic burdens and payment of taxes to the foreign
country; (7) status of resident contrasted to transient or
sojourner; (8) treatment accorded his income tax status by
his employer; (9) marital status and residence of his family;
(10) nature and duration of employment; and (11) good faith
in making the trip abroad. See id. The 11 factors can be
grouped into 4 broad categories: intent; physical presence;
social, family, and professional relationships; and the tax-
payer’s own representations. Vento v. Dir. of V.I. Bureau of
Internal Revenue, 715 F.3d 455, 467 (3d Cir. 2013) (consid-
ering the Sochurek factors as grouped into these categories
for purposes of determining bona fide residency under section
932).
As we noted in Bergersen v. Commissioner, T.C. Memo.
1995–424 (applying the Sochurek factors to determine bona
fide Puerto Rican residency under section 933), aff ’d, 109
F.3d 56 (1st Cir. 1997), the Court has accepted and applied
10 As previously noted, different wording in Publication 570 for tax year
2004 reflected the change made by the AJCA.
(63) ESTATE OF SANDERS v. COMMISSIONER 83
these factors in determining bona fide residency under other
sections of the Code involving exclusion from gross income.
See, e.g., Schoneberger v. Commissioner, 74 T.C. 1016, 1023
(1980); Dawson v. Commissioner, 59 T.C. 264, 268 (1972)
(determining residency of U.S. citizen in Australia under sec-
tion 911(a)(1)); Vazquez v. Commissioner, T.C. Memo. 1993–
368 (determining whether taxpayer was bona fide resident of
Puerto Rico). And because the same phrase is used for the
same purpose in section 932, we see no reason to deviate
from using the Sochurek factors as grouped in Vento here as
well.
In this instant case considering the facts and cir-
cumstances and applying the Sochureck factors as grouped in
Vento, we find decedent was a bona fide USVI resident.
Decedent had the intent to be a bona fide resident because
he intended to remain indefinitely or at least for a substan-
tial period. See Vento, 715 F.3d at 470. He had a physical
presence in the USVI and was employed by a USVI business
and listed as a partner on their Schedules K–1 for tax years
2002–04. He conducted banking in the USVI and had checks
with a USVI address. Decedent was married in the USVI
and reported his address as the USVI on his marriage
license. Decedent identified himself as a resident of the USVI
and paid USVI taxes. Id. at 470–477. Therefore, decedent
was a bona fide resident of the USVI for tax years 2002–04
and he properly filed tax returns with the VIBIR for those
years.
IV. Conclusion
On the basis of the foregoing, we conclude that petitioner
has proven that the section 6501(a) period of limitations on
assessment expired before the date respondent mailed
decedent the notice of deficiency. Therefore, we do not need
to address determinations in the notice of deficiency.
Any contentions we have not addressed are irrelevant,
moot, or meritless.
To reflect the foregoing,
An appropriate decision will be entered.
f