Arthur I. Appleton, Jr. , and The Government of the United States Virgin Islands, Intervenor v. Commissioner

140 T.C. No. 14UNITED STATES TAX COURT
ARTHUR I. APPLETON, JR., Petitioner, AND THE GOVERNMENT OF THE
UNITED STATES VIRGIN ISLANDS, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7717-10. Filed May 22, 2013.
P, a U.S. citizen, was a permanent resident of the U.S. Virgin
Islands during 2002, 2003, and 2004. P timely filed Form 1040, U.S.
Individual Income Tax Return, for each year as a territorial tax return
with the U.S. Virgin Islands Bureau of Internal Revenue (VIBIR)
pursuant to I.R.C. sec. 932(c)(2). Claiming he qualified for the gross
income tax exclusion provided by I.R.C. sec. 932(c)(4), P did not file a
Federal tax return for 2002, 2003, or 2004 or pay income tax to the
Internal Revenue Service.
More than three years after P filed his tax returns, R mailed P a
notice of deficiency determining income tax deficiencies and penalties
for 2002, 2003, and 2004. R asserts that because the U.S. Virgin
Islands is a separate taxing jurisdiction, the Forms 1040 P filed with the
VIBIR are not properly filed Federal tax returns; and because P’s
Federal tax filing obligations were unmet, R posits that
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the I.R.C. sec. 6501(a) three-year period of limitations never
commenced.
P replies that the Forms 1040 filed with the VIBIR met his
Federal tax filing obligations and commenced the I.R.C. sec. 6501(a)
period of limitations because (1) they were “returns” as defined by
Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th
Cir. 1986), and (2) they were filed with the VIBIR as directed by
I.R.C. sec. 6091, the regulations promulgated thereunder, and R’s
filing instructions. Consequently, P asserts, in a motion for summary
judgment, that R’s notice of deficiency is time barred.
Held: Forms 1040 P filed with the VIBIR for 2002, 2003, and
2004 met P’s Federal tax filing obligations.
Held, further, the period of limitations commenced when P filed
his returns with the VIBIR, and the period of limitations expired before
R’s mailing of the notice of deficiency.
Held, further, P’s motion for summary judgment will be
granted.
Randall P. Andreozzi, Edward Doyle Fickess, Ryan M. Murphy, Teia M.
Bui, and Michael J. Tedesco, for petitioner.*
Vincent F. Frazer, Barry J. Hart, Gene C. Schaerr, Tamika M. Archer, and
Christopher M. Bruno, for intervenor.
*
Briefs amici curiae were filed by Richard C. Stark, Robert A. Katcher, and
Saul Mezei as attorneys for Bingham McCutchen, LLP, and by Marjorie Rawls
Roberts as attorney for Marjorie Rawls Roberts, P.C.
-3-
Ladd Christman Brown, Jr., Justin L. Campolieta, Randall L. Eager, Jr.,
Brian J. Bilheimer, Edward J. Laubach, Jr., James G. Hartford, and Jacob Russin,
for respondent.
OPINION
JACOBS, Judge: This case is before the Court on petitioner’s motion for
summary judgment filed pursuant to Rule 121. The specific question to be decided
is whether the section 6501 period of limitations on assessment and collection
expired before the date respondent mailed petitioner the notice of deficiency. For
the reasons set forth infra, we will grant petitioner’s motion.
All section references are to the Internal Revenue Code (Code) in effect for
the years at issue unless otherwise indicated, and all Rule references are to the Tax
Court Rules of Practice and Procedure. At the time petitioner filed his petition, he
resided in the U.S. Virgin Islands (Virgin Islands).
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Background
Petitioner is a U.S. citizen. He was a permanent resident of the Virgin
Islands during the years at issue (i.e., 2002, 2003, and 2004).1 He claims that for
each of those years he was entitled to income tax benefits afforded under the Virgin
Islands Industrial Development Program (EDP), currently codified at V.I. Code
Ann. tit. 29, secs. 701-726 (1998 & Supp. 2010), through his interest in a purported
Virgin Islands partnership.2
Petitioner filed a territorial income tax return with the Virgin Islands Bureau
of Internal Revenue (VIBIR) for each of the years at issue pursuant to section
932(c)(2). Petitioner filed his 2002 return on October 14, 2003, his 2003 return on
July 29, 2004, and his 2004 return on July 27, 2005. Asserting that his filing with
the VIBIR and paying tax to the Virgin Islands satisfied his Federal tax filing and
1
The parties have stipulated that petitioner was a “bona fide resident of the
Virgin Islands” within the meaning of sec. 932 and a “permanent resident of the
Virgin Islands” as that term was used in the instructions to Form 1040, U.S.
Individual Income Tax Return, for the years at issue. Both terms are discussed
more fully infra. The parties have also stipulated that as applied in this case, the
term “permanent resident of the Virgin Islands” is synonymous and interchangeable
with the term “bona fide resident of the Virgin Islands”.
2
To encourage investment in the Virgin Islands, companies participating in
the EDP can receive substantial benefits including: a 90% exemption on local
income taxes, a 90% exemption on the taxation of dividends, and a 100% exemption
on gross receipts taxes. See Huff v. Commissioner, 135 T.C. 222, 227 (2010).
-5-
payment requirements pursuant to section 932(c)(4), petitioner did not file
Federal income tax returns with, or pay income tax to, the Internal Revenue Service
(IRS).
The IRS received copies of petitioner’s 2002, 2003, and 2004 returns from
the VIBIR,3 and both the VIBIR and the IRS examined petitioner’s territorial
income tax returns. The VIBIR proposed no adjustments, but the IRS did,
determining that petitioner did not qualify for the section 932(c)(4) gross income
exclusion. Treating petitioner as a nonfiler, on November 25, 2009, respondent
mailed petitioner a notice of deficiency in which he determined the following
deficiencies in Federal income tax and additions to tax:
3
The Virgin Islands uses the same income tax return form (i.e., Form 1040)
that is used by the United States. The VIBIR forwarded copies of the first two
pages of Form 1040; Schedule C, Profit or Loss From Business; Schedule C-EZ,
Net Profit From Business; Form W-2, Wage and Tax Statement; and Form W-2VI,
U.S. Virgin Islands Wage and Tax Statement, to the IRS. The record contains an
IRS account transcript which states that the IRS received petitioner’s 2003 income
tax return on March 14, 2005, and that an examination of that return commenced on
August 4, 2005. The record does not reveal the dates on which the IRS received
copies of petitioner’s 2002 and 2004 income tax returns. Nor does the record reveal
the date the IRS commenced examining petitioner’s 2002 and 2004 income tax
returns.
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Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2002 $283,555 $35,563.73 $39,515.25 $9,045.50
2003 789,518 147,943.58 164,381.75 20,370.53
2004 280,241 56,728.35 63,031.50 8,030.86
Attached to the notice of deficiency was a Form 4549-A, Income Tax Discrepancy
Adjustments, which set forth the basis for the income tax deficiencies and additions
to tax at issue herein:
You do not, however, qualify for the gross income exclusion
under section 932(c)(4) of the Internal Revenue Code (I.R.C.)
for any of those taxable years. During each of the taxable years
2002, 2003, and 2004, you actively participated in an arrangement
that lacks economic purpose and economic substance that was
created to improperly claim a 90% credit against your income tax
liabilities in a scheme similar to those [sic] described in Notice 2004-45
Meritless Position Based on Sections 932(c)(4) and 934(b), resulting
in your failure to properly report and identify the source of each
item of income shown on the return of income tax you filed with
the USVI for each of those years.[4]
4
In 2004 the IRS issued Notice 2004-45, 2004-2 C.B. 33, in which it stated
that it intended to challenge “highly questionable, and in most cases meritless,
positions” of certain U.S. citizens who claimed to be residents of the Virgin Islands
in order to avoid U.S. taxation by claiming substantial tax benefits arising from the
tax policies enacted by the Government of the Virgin Islands, including the 90%
income tax reduction referenced supra note 2. See Huff v. Commissioner, 135 T.C.
at 228.
(continued...)
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Petitioner timely filed his petition with this Court on April 1, 2010.5
4
(...continued)
Notice 2004-45, 2004-2 C.B. at 33, states that the “highly questionable”
positions being challenged are promoted to taxpayers in a variety of forms;
however, they are frequently promoted in the following manner:
Promoters typically approach a taxpayer (Taxpayer) living and working
in the United States and advise Taxpayer to (i) purport to become a
USVI resident by establishing certain contacts with the USVI, (ii)
purport 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. Typically, after entering into the arrangement,
Taxpayer continues to provide substantially the same services for
Employer that he or she provided before entering into the arrangement,
but Taxpayer is nominally a partner of V.I.LLP instead of an employee
of Employer.
Under this arrangement, Employer makes payments to V.I.LLP for
Taxpayer’s services and no longer treats the payments as wages paid to
Taxpayer subject to the withholding and payment of employment taxes
and reporting on Taxpayer’s Form W-2. V.I.LLP, in turn, makes
payments to Taxpayer for his or her services to Employer. V.I.LLP
typically treats these payments for tax accounting purposes either as
guaranteed payments for services or as distributions of Taxpayer’s
allocable share of partnership income. Under this arrangement, the
promoter may be a general partner in V.I.LLP and may retain a
percentage of the fees received from Employer.
5
Because petitioner’s mailing address was outside the United States (his
mailing address was in the Virgin Islands), the deadline to file his petition was April
23, 2010 (i.e., 150 days after the mailing of the notice of deficiency). See sec.
(continued...)
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Petitioner contends that the Code and the regulations promulgated thereunder by the
Secretary, as well as the IRS’ instructions and tax forms, required him to file his tax
returns for the years at issue with the VIBIR. Petitioner maintains such filing
constitutes a Federal tax return filing. On the other hand, respondent posits that
although petitioner timely filed income tax returns with the VIBIR, those returns
were Virgin Islands territorial returns, not Federal income tax returns.
On November 8, 2011, petitioner filed the instant motion for summary
judgment in which he asserts that because the notice of deficiency was mailed more
than three years after he had filed his 2002, 2003, and 2004 returns with the VIBIR,
the section 6501(a) period of limitations bars the assessment of tax by
respondent for the years at issue.6 On November 9, 2011, intervenor filed a motion
for summary judgment, which was amended on November 28, 2011,
which also asserts that respondent’s notice of deficiency was time barred and hence
invalid. A hearing on petitioner’s motion was held on October 17, 2012.
5
(...continued)
6213(a).
6
The bar of the period of limitations is an affirmative defense, and must be
specifically pleaded and proven by the party raising this defense. Rules 39, 142(a);
Mecom v. Commissioner, 101 T.C. 374, 382 (1993), aff’d without published
opinion, 40 F.3d 385 (5th Cir. 1994); Daniels v. Commissioner, T.C. Memo. 2012-
355. Respondent acknowledges that petitioner has properly pleaded the statute of
limitations defense.
-9-
Discussion
I. Summary Judgment
Summary judgment is appropriate if the pleadings and other materials show
that there is no genuine issue as to any material fact and a decision may be rendered
as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518,
520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden
of proving that there is no genuine issue of material fact, and the Court views all
factual materials and inferences in the light most favorable to the nonmoving party.
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). Rule 121(d) provides that
where the moving party properly makes and supports a motion for summary
judgment “an adverse party may not rest upon the mere allegations or denials of
such party’s pleading”, but rather must set forth specific facts, by affidavits or
otherwise, “showing that there is a genuine issue for trial.” All parties agree that for
purposes of deciding petitioner’s motion for summary judgment, but for the running
of the period of limitations there would be a deficiency in petitioner’s income tax
with respect to each of the years at issue.
II. The Virgin Islands
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The Virgin Islands is an insular area of the United States; it is classified as an
unincorporated territory by 48 U.S.C. sec. 1541(a) (2006) and is not part of one of
the 50 States or the District of Columbia. It is generally not a part of the United
States for tax purposes. See sec. 7701(a)(9).
Congress established the “mirror tax system” as the tax law of the Virgin
Islands in 1921. Act of July 12, 1921, ch. 44, sec. 1, 42 Stat. at 123 (codified as
amended at 48 U.S.C. sec. 1397 (2006)); see Danbury, Inc. v. Olive, 820 F.2d 618,
620 (3d Cir. 1987). Under the mirror tax system, the Virgin Islands uses the Code
with “Virgin Islands” effectively substituted for “United States”, and vice versa.
See Danbury, Inc., 820 F.2d at 620. Originally, corporations and U.S. citizens
residing in the Virgin Islands who received both U.S. and Virgin Islands source
income were required to file returns and pay taxes to both jurisdictions.
In 1954 Congress modified the administration of the mirror tax system 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).7 ROA sec. 28(a) provided
7
Sec. 7651(5)(B) of the Internal Revenue Code of 1954 implemented the
inhabitant rule by providing that “For purposes of this title * * * section 28(a) of the
Revised Organic Act of the Virgin Islands shall be effective as if such section had
been enacted subsequent to the enactment of this title.” See Huff v. Commissioner
135 T.C. at 224-227, for a discussion of the history of taxation in the Virgin Islands
(continued...)
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that corporations and individuals whose permanent residence is in the Virgin Islands
satisfied their U.S. income tax obligations by “paying their tax on income derived
from all sources both within and outside the Virgin Islands into the treasury of the
Virgin Islands”. The ROA also provided that any taxes
levied by Congress on the inhabitants of the Virgin Islands would be covered into
(i.e., paid to) the Virgin Islands Treasury. Id.In 1986 Congress repealed the inhabitant rule by enacting the Tax Reform
Act of 1986 (TRA), Pub. L. No. 99-514, sec. 1274(a), 100 Stat. at 2596, and
amended in 1988. As part of the TRA, Congress enacted a new section 932,8 which
coordinates U.S. and Virgin Islands income taxes for individuals who are bona fide
residents of the Virgin Islands.9
SEC. 932. COORDINATION OF UNITED STATES AND
7
(...continued)
and the “mirror tax system” which governs Virgin Islands taxation.
8
While Congress enacted sec. 932 to protect individuals from reverting to the
old dual filing requirement rule, no similar law was enacted with respect to
corporations. Consequently, corporations have a dual filing requirement and must
file separate tax returns with the United States as well as the Virgin Islands. See
Condor Int’l, Inc. v. Commissioner, 78 F.3d 1355, 1358-1359 (9th Cir. 1996), aff’g
in part, rev’g in part 98 T.C. 203 (1992).
9
See Vento v. Dir. of V. I. Bureau of Internal Revenue, ___ F.3d ___, 2013
WL 1632735 (3d Cir. Apr. 17, 2013), for an analysis of whether a taxpayer’s
claimed residency in the Virgin Islands is bona fide.
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VIRGIN ISLANDS INCOME TAXES.
(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,[10] 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 taxable year with the Virgin Islands.[11]
(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
individual--
10
The American Jobs Creation Act of 2004, Pub. L. No. 108-357 sec.
908(c)(2), 118 Stat. at 1656, amended sec. 932(c)(2), replacing “at the close of the
taxable year” with “during the entire taxable year”, effective for tax years ending
after October 22, 2004. As respondent concedes petitioner was a bona fide resident
of the Virgin Islands for all years at issue, this change does not affect our decision.
11
U.S. citizens or residents (other than those who are bona fide residents of
the Virgin Islands) who have income derived from sources within the Virgin Islands
or effectively connected to a Virgin Islands trade or business are explicitly required
to file returns with both the United States and the Virgin Islands. Sec. 932(a)(2).
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(A) who is a bona fide resident of the Virgin Islands at
the close of the taxable year,
(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
(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.[12]
If a bona fide resident of the Virgin Islands does not meet the provisions of section
932(c)(4) and is compelled to file a Federal tax return, any tax collected by the IRS
must be covered over to the Virgin Islands. 48 U.S.C. sec. 1642 (2006). Thus, any
tax collected in this matter by the United States would be covered over to the
Government of the Virgin Islands.13
12
Sec. 932(c) is not included in the mirror code and is not an element of the
Virgin Islands territorial tax system. See S. Rept. No. 100-445, at 314-315 (1988),
1988 U.S.C.C.A.N. 4515, 4825-4826.
13
At the October 17, 2012, hearing, the Court queried respective counsel for
respondent and intervenor as to why their clients took opposing positions in this
matter even though all funds collected by the IRS would be covered over to the
Virgin Islands. Respondent’s counsel stated that the IRS has a duty to protect the
(continued...)
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III. Federal Tax Filing Requirements
As a U.S. citizen, petitioner is subject to Federal reporting requirements and
taxation on his 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 having for the taxable year gross
income which equals or exceeds the exemption amount, with certain exceptions not
applicable in this matter, shall file an income tax return. Thus, there exists a
choreographed interplay between sections 6012(a) and 932(c) of the Code which,
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.
Although an individual having for the taxable year gross income which equals
or exceeds the exemption amount must file a Federal tax return, section 932(c)(2)
13
(...continued)
entire Federal taxing system by promoting fair tax administration and that every
dollar involved in an abusive transaction or scheme should be taxed. Counsel for
intervenor stated that the Virgin Islands is involved in this matter because “we want
the jobs” and “the IRS’s position is a job killer.” Additionally, intervenor’s counsel
stated that “we are concerned about our own residents” and if the Virgin Islands
accepted the IRS’ position, Virgin Islands residents, after paying taxes to the
VIBIR, would always be “uncertain as to whether they reached a finality with their
government.”
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directs bona fide residents of the Virgin Islands to file income tax returns with the
Virgin Islands (through the VIBIR), and section 932(c)(4) (flush
language) exempts both U.S. source income and Virgin Islands source income from
U.S. taxation if all of the requirements of section 932(c)(4) are met. 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/her income would no
longer be excluded for purposes of calculating his/her U.S. tax liability. Respondent
contends that petitioner did not satisfy all of the requirements of
section 932(c)(4), and hence he was required to file Federal tax returns pursuant to
section 6012(a)(1)(A) for each of the years at issue.14
For purposes of deciding petitioner’s motion, applying the principle that any
inference to be drawn must be viewed in a light most favorable to the nonmoving
14
The residual U.S. tax liability was emphasized by the 1988 amendment to
the TRA in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub.
L. No. 100-647, sec. 1012(w)(3), 102 Stat. at 3530. Sec. 932(c)(2) originally
provided that an individual affected by subsection (c) “shall file his income tax
return for the taxable year with the Virgin Islands.” This was changed in 1988 to
“shall file an income tax return”. This change was made “to make it clear that
individuals who do not comply with all requirements for U.S. tax exemption will
have to file a U.S. return.” S. Rept. No. 100-445, supra at 315, 1988 U.S.C.C.A.N.
at 4826-4827.
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party, Espinoza v. Commissioner, 78 T.C. 412 (1982), we assume petitioner does
not meet all of the requirements of section 932(c)(4) and accordingly has fallen back
into the Federal reporting and payment system. Specifically, we assume that
petitioner does not meet the requirements of section 932(c)(4)(B) (that he did not
report income from all sources and identify the source of each item shown on his tax
returns) and section 932(c)(4)(C) (that he did not fully pay his tax liabilities to the
Virgin Islands with respect to his income).15 We therefore begin our task of
deciding petitioner’s motion by turning to section 7654(e), which provides that the
Secretary shall prescribe such regulations as may be necessary to carry out the
provisions 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 at issue. Consequently, 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 petitioner must file his tax returns for the
years at issue.
Section 6091 generally governs the place where U.S. taxpayers are required
15
As noted elsewhere in this Opinion, respondent concedes that petitioner
meets the requirement of sec. 932(c)(4)(A); i.e., that petitioner was a bona fide
resident of the Virgin Islands during the years at issue.
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to file their tax returns. 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 Secretary may by
regulations designate.” Pursuant to the authority granted him 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 return shall be filed at the place
prescribed by the regulations.
During the years at issue section 1.6091-3(c), Income Tax Regs., provided
that income tax returns of an “individual citizen of a possession of the United
States”16 (whether or not a citizen of the United States) who has no legal residence
or principal place of business in any internal revenue district in the United States
shall be filed with (1) the Director of Internal Operations, Internal Revenue Service,
Washington, DC 20225, or (2) the District Director, or (3) the director of the service
16
The term “individual citizen of a possession of the United States” is not
defined in the regulations. However, as noted supra note 1, the parties have
stipulated that petitioner is both a “bona fide resident of the Virgin Islands” within
the meaning of sec. 932, and a “permanent resident of the Virgin Islands” as that
term is used in the instructions to Form 1040, during the years at issue. We thus are
satisfied that during the years at issue, petitioner was “an individual citizen of a
possession of the United States” within the meaning of sec. 1.6091-3(c), Income
Tax Regs.
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center, depending on the appropriate officer designated on the return form or in the
instructions issued with respect to the form.
As mentioned supra note 3, Virgin Islands taxpayers file their tax returns on
the same Form 1040 that U.S. taxpayers use when they file their Federal tax returns.
The instructions to Form 1040 for 2002, 2003, and 2004 provide specific filing
instructions. Under the heading “Where do you file”, for each year the instructions
state that “All APO, FPO addresses, American 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 residents of Guam should
use the address of the Guam Department of Revenue and Taxation. Continuing, the
footnote states that “permanent residents 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.17
17
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
(continued...)
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IV. Section 6501(a) Period of Limitations
The regulations and the instructions issued by the IRS regarding income tax
return filings are significant for the resolution of petitioner’s motion because the
period of limitations on assessment commences only when a tax return has been
properly filed. Section 6501(a) governs the period of limitations. It provides:
“Except as otherwise provided in this section, the amount of any tax imposed by this
title shall be assessed within 3 years after the return was filed * * *. For purposes of
this chapter, the term ‘return’ means the return required to be filed by the taxpayer”.
Thus, we must determine whether the Forms 1040 filed by petitioner with the
VIBIR were the returns required to be filed and, if so, were they properly filed?
Unless the answers to both of these questions are in the affirmative, pursuant to
section 6501(c)(3) tax may be assessed against petitioner at any time and
petitioner’s motion must be denied.
A. Petitioner’s Returns Are “Required Returns”.
A return that commences the period of limitations is the return required to be
filed for purposes of section 6501(a)(1). The return must include “the information
required by the applicable regulations or forms.” Sec. 1.6011-1(a), Income Tax
17
(...continued)
Islands” despite their obsolescence.
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Regs. The Code does not define what constitutes a return. See Mendes v.
Commissioner, 121 T.C. 308, 329 (2003) (Vasquez, J., concurring); Swanson v.
Commissioner, 121 T.C. 111, 122-123 (2003). However, on the basis of 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 the following 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
filed 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 penalties of perjury. Perfect accuracy is not required for the document to
constitute a return. Zellerbach Paper Co., 293 U.S. at 180; see also Badaracco v.
Commissioner, 464 U.S. 386, 396-397 (1984) (“[a] document which on its face
plausibly purports to be in compliance, and which is signed by the taxpayer, is a
return despite its inaccuracies.”); Germantown Trust v. Commissioner, 309 U.S.
304, 310 (1940) (“It cannot be said that the petitioner * * * made no return of the
tax imposed by the statute. Its return may have been incomplete in that it failed to
compute a tax, but this defect falls short of rendering it no return whatsoever.”).
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Respondent argues that the Forms 1040 petitioner filed with the VIBIR do
not meet all of the requirements of the Beard test. First, respondent asserts that
petitioner’s Forms 1040 were inaccurate and therefore do not contain sufficient data
to calculate petitioner’s tax liability: “If petitioner had filed a federal income tax
return, it would have differed significantly from the forms filed with the VIBIR. The
federal income tax returns would instead mirror the statutory notice of deficiency
computations and amounts.” Moreover, respondent asserts the Forms 1040 do not
purport to be returns because petitioner intended only to satisfy his Virgin Islands
obligations, not his Federal filing obligations, by filing the documents. However,
respondent later acknowledges that
Intervenor begins its reply * * * with the conjecture that respondent
would not challenge the Forms 1040 filed by petitioner with the VIBIR
if such returns had been filed with the IRS. Intervenor relies on
Germantown Trust Co. v. Commissioner, 309 U.S. 304 (1940), holding
that a tax return does not have to be perfect to qualify as a tax return.
While respondent agrees with this premise, the reality is that petitioner
filed no returns with the IRS.
By this acknowledgment, we believe that respondent concedes that the Forms 1040
petitioner filed with the VIBIR are returns within the meaning of section 6501(a)(1),
sufficient to trigger the running of the period of limitations if properly filed. We
therefore turn our attention to whether the returns were properly filed for purposes
of commencing the section 6501(a) period of limitations.
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B. Petitioner’s Returns Were Properly Filed.
In Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930), the Supreme
Court noted that “[u]nder the established general rule a statute of limitations runs
against the United States only when they assent and upon the conditions
prescribed.” The Supreme Court concluded that to secure the benefit 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.; see Allnut v.
Commissioner, 523 F.3d 406, 413 n.5 (4th Cir. 2008), aff’g T.C. Memo. 2002-311.
Relying on Lucas v. Pilliod Lumber Co., we stated in Winnett v. Commissioner, 96
T.C. 802, 808 (1991):
To “meticulously comply” with the conditions for commencing the
running of the statute of limitations, a taxpayer must file his return
where section 6091 or the regulations promulgated thereunder require
the return to be filed. Thus, we hold that for purposes of determining the
commencement of the limitations period (when the timely mailing rule
does not apply), a return is not deemed “filed” until it is received by
the revenue office designated to receive such return.
Accordingly, this Court, as well as others, has held on several occasions that filing a
return with the wrong IRS representative does not constitute “filing” for purposes of
commencing the limitations period. Winnett v. Commissioner, 96 T.C. at 808-809;
see Allnutt v. Commissioner, 523 F.3d 406 (holding that taxpayer’s hand delivery of
returns to wrong individual does not constitute a filing); O’Bryan Bros., Inc. v.
- 23 -
Commissioner, 127 F.2d 645 (6th Cir. 1942) (holding that mailing of return to an
IRS agent does not constitute a filing), aff’g 42 B.T.A. 18 (1940); see also
Congelliere v. Commissioner, T.C. Memo. 1990-265 (holding that a return
incorrectly filed with a service center rather than the District Director is disregarded
for purposes of determining when the 60-day period for issuing the notice of
deficiency for the termination year begins to run).
We must determine whether petitioner, by filing his returns with the VIBIR,
“meticulously complied” with the conditions for commencing the period of
limitations. In so doing, we must determine whether the VIBIR was the correct
revenue office designated by the Secretary and the IRS to receive petitioner’s
returns. For the reasons set forth infra, we hold that it was.
The Secretary, using the authority expressly granted to him by section
6091(b)(1)(B), promulgated section 1.6091-3(c), Income Tax Regs., which requires
taxpayers like petitioner, residing in a possession of the United States, to file their
tax returns as designated on the return forms or in the instructions issued
with respect to those forms. The instructions to Form 1040 are explicit: The form is
to be filed with the VIBIR.18
18
In determining where a permanent resident of the Virgin Islands should file
(continued...)
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Respondent acknowledges that section 6091 and the regulations promulgated
thereunder are the starting points for determining where a tax return should be filed
and that the Form 1040 instructions direct permanent residents of the Virgin Islands
to file with the VIBIR. But respondent asserts on brief that the “instructions do not
explicitly take into account the Service’s position with regard to those individuals
who claim to be, but are not, exempt from their federal income tax filing obligation
under section 6012 because they do [sic] meet all of the requirements of section
932(c)(2).” Moreover, respondent’s brief states that when the Form 1040
instructions are read together with IRS Publication 570, “respondent’s instructions
clearly lead to the conclusion that the petitioner fell within the general place-of-filing
rule for individual taxpayers living abroad”, and therefore petitioner was required to
file a protective return with the Internal Revenue Service Center in Philadelphia,
Pennsylvania.19 Specifically, respondent’s brief states:
Common sense dictates that petitioner, knowing he did not meet all
three requirements of section 932(c)(4), should have filed a federal
18
(...continued)
his/her tax return, we have considered IRS Publication 570, Tax Guide for
Individuals With Income From U.S. Possessions, and I.R.S. F.S.A. 199906031
(Feb. 12, 1999), which we believe a meticulous taxpayer researching his/her filing
requirements would have found. Nothing in these documents leads us to a different
conclusion.
19
See our discussion regarding the Form 1040 instructions supra pp. 17-18.
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income tax return with the Philadelphia Service Campus. If petitioner
had any doubts as to where to file his federal tax return, he could have called
the Service’s toll-free phone line, (800) 829-1040, to seek advice,
but there is nothing in the record that indicates petitioner sought any
advice from the Service.
At the October 17, 2012, hearing, respondent’s counsel, in an attempt to clarify the
position set forth in respondent’s briefs, stated: “What our briefs set out is that
there was enough instructions in the publication out there where Mr. Appleton to
[sic] reasonable to come to the conclusion that he should have filed that return with
zeroes on it with the Philadelphia Service Center.”
We find respondent’s position unconvincing for several reasons. First, we do
not accept respondent’s assertion that a permanent resident of the Virgin Islands
would reasonably consider himself/herself to be a taxpayer living abroad. Indeed,
the instructions to Form 1040 make it clear that individuals living in a foreign
country (who are directed to file their returns with the Philadelphia Service Center)
are a separate category from those individuals who are permanent residents of the
Virgin Islands. Second, we do not agree with respondent’s counsel’s comment that
“common sense dictates that petitioner” should have known that he should file a
protective Federal income tax return with the Philadelphia Service Center, because
(1) for the years at issue, no IRS document has been brought to our attention that
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stated that such a filing should have been made, and (2) there is no indication that
the IRS employees at the Philadelphia Service Center were instructed to expect that
permanent residents of the Virgin Islands were to file protective returns at that
center. And finally, we question the logic of counsel’s suggestion that the protective
returns which petitioner purportedly should have filed should have zeros entered on
it, inasmuch as tax returns which reflect zero income and zero tax liability are
generally characterized by this Court, the IRS, and others, as frivolous. See United
States v. Mosel, 738 F.2d 157 (6th Cir. 1984); Grunsted v. Commissioner, 136 T.C.
455, 460 (2011); Alexander v. Commissioner, T.C. Memo. 2012-75; Blaga v.
Commissioner, T.C. Memo. 2010-170; Notice 2010-33, 2010-17 I.R.B. 609. In
sum, to expect a taxpayer to file a protective zero return with a service center to
which the taxpayer was not directed, and where IRS employees were not alerted to
expect such returns, is unreasonable.20
20
Respondent, in his brief, asserts that sec. 1.874-1(b)(6), Income Tax Regs.,
states that nonresident aliens who conduct limited activities in the United States may
file a protective return which reports no income to protect the right to receive the
benefit of deductions and credits should the IRS determine that such a nonresident
alien earned U.S. source income or income effectively connected to a U.S. trade or
business. Respondent’s argument is inapposite. Bona fide residents of the Virgin
Islands are not nonresident aliens, and we do not believe that either bona fide
residents of the Virgin Islands or IRS employees would make the substantial
“logical” leap respondent requests us to assume they would make.
- 27 -
It was only after respondent began investigating the transactions referred to in
Notice 2004-45, 2004-2 C.B. 33, that the IRS released Chief Counsel Advice
200624002 (June 16, 2006) which stated that the section 6501(a) period of
limitations remained open with respect to a U.S. citizen who timely filed an income
tax return with the VIBIR, if he/she failed to meet all of the requirements
of section 932(c)(4). In 2007 the IRS modified that position in Notice 2007-19,
2007-1 C.B. 689, and gave notice of its position that bona fide residents who earned
$75,000 or more were required to file a second return with the IRS in Bensalem,
Pennsylvania, reporting no gross income and no taxable income (i.e., a zero return)
and attach thereto a four-part statement (titled “Bona Fide Residence-Based Return
Position”) containing certain information set forth in the notice in order to start the
running of the section 6501(a) period of limitations. In contrast, returns filed with
the VIBIR by bona fide residents with income below $75,000 would commence the
period of limitations. Notice 2007-19, supra, emphasized that the IRS position
taken therein was retroactive and that prior years would remain open until such
filings were made.
Within two months after the issuance of Notice 2007-19, supra, the IRS
abandoned the aforementioned income-level distinction on a prospective basis in
Notice 2007-31, 2007-1 C.B. 971, and announced that for tax years ending on or
- 28 -
after December 31, 2006, a tax return filed with the VIBIR by a U.S. citizen
claiming to be a bona fide resident of the Virgin Islands would commence the
section 6501(a) period of limitations for Federal tax purposes. However, Notice
2007-31, supra, stated that for tax years ending before December 31, 2006, the rules
set forth in Notice 2007-19, supra, would remain effective, if the taxpayer so
chose.21 While all of these changes were taking place, the instructions to Form 1040
continued to direct permanent residents of the Virgin Islands to file their income tax
return with the VIBIR; the instructions made no mention of any other filing
requirements.
We do not challenge respondent’s right to modify an individual’s reporting
requirements. Indeed, section 7654(e) expressly delegates to the Secretary the
power to “prescribe such regulations as may be necessary to carry out the
21
In 2008, under the authority granted to him in sec. 7654(e), the Secretary
promulgated sec. 1.932-1(c)(2)(ii), Income Tax Regs., which provides that for all
tax years ending on or after December 31, 2006, for purposes of the sec. 6501(a)
period of limitations, an income tax return filed with the Virgin Islands by an
individual who takes the position that he or she is a bona fide resident of the Virgin
Islands will be deemed a U.S. income tax return, provided the United States and the
Virgin Islands have an operating working arrangement similar to the one discussed
in Notice 2007-31, 2007-1 C.B. 971. However, for tax years ending before
December 31, 2006, the interim rules of Notice 2007-19, 2007-1 C.B. 689, would
still be applied. Respondent concedes that this regulation does not apply for the
years at issue; therefore, he does not claim the deference afforded to regulations by
Chevron, U.S.A., Inc. v. Nat’l Res. Def. Council, Inc., 467 U.S. 837 (1984).
- 29 -
provisions of * * * [section] 932, including * * * prescribing the information which
the individuals to whom such sections may apply shall furnish to the Secretary.”
But this broad authority was not exercised, and no such regulations were in effect
for the years at issue. Rather, the only regulations in effect for the years at issue
were those which made it clear that permanent residents of the Virgin Islands were
to file their tax returns with the VIBIR. Retroactive notices published by the IRS do
not have the force and effect of law, nor are they regulatory. At best these notices
can be considered as the IRS’ litigating position. Standley v. Commissioner, 99
T.C. 259, 267 n.8 (1992), aff’d without published opinion, 24 F.3d 249 (9th Cir.
1994); Hellweg v. Commissioner, T.C. Memo. 2011-58.
Respondent posits that the returns petitioner filed with the VIBIR cannot be
determined to satisfy Federal reporting requirements because (1) the United States
and the Virgin Islands are separate taxing jurisdictions and (2) petitioner has
separate obligations to each jurisdiction. In support of this position, respondent
points out that the inhabitant rule was repealed in 1986; accordingly, respondent
maintains, Virgin Islands taxpayers could no longer automatically satisfy their
Federal tax obligations by filing with, and paying tax to, the Virgin Islands. To rule
otherwise, respondent asserts, would negate the purpose of section 932(c). We
disagree.
- 30 -
In support of his argument, respondent cites our Opinion in Huff v.
Commissioner, 135 T.C. 222, wherein we refer to returns filed with the VIBIR as
“territorial returns”, see id. at 223, and taxes paid to the Virgin Islands as “territorial
tax”, see id. at 225. Respondent contends that our discussion in Huff relating to the
taxpayer’s additional filing obligation if all of the requirements of section 932(c)(4)
are not met, and specifically our statement that the taxpayer “will be required to file
a Federal income tax return even if he filed a Virgin Islands tax return”, supports his
position. See id. at 230. Respondent is wrong.
Respondent misapplies our statements in Huff. We did not address therein
the question whether a tax return filed with the VIBIR pursuant to section 932(c)(2)
is “the return required to be filed by the taxpayer” under section 6501. Nor did we
address therein whether the taxpayer’s return filings with the VIBIR were sufficient
to trigger the commencement of the section 6501(a) period of limitations.22 Rather,
we held only that the United States and the Virgin Islands are separate taxing
jurisdictions within the context of our judicial jurisdiction. The Virgin Islands,
22
Our references to “territorial” in Huff v. Commissioner, 135 T.C. 605(2010), Huff v. Commissioner, 138 T.C. 258 (2012), and Appleton v.
Commissioner, 135 T.C. 461 (2010), rev’d, 430 Fed. Appx. 135 (3d Cir. 2011), do
not reach the question of filing requirements, nor do they reach the sec. 6501(a)
period of limitations question.
- 31 -
through the VIBIR, administers and enforces its tax laws separately from the United
States through the IRS. In the context of the matter therein before us (i.e., the
redetermination of the deficiencies determined by the IRS), we held in Huff that we
had jurisdiction to hear the case.
Respondent’s position in this case (i.e., that petitioner should have filed two
returns--one with the VIBIR and one with the IRS) is undermined by his position in
Notice 2007-19, supra, which states that bona fide residents of the Virgin Islands
who earn less than $75,000 may satisfy their Federal filing requirements by the
single filing of a return with the VIBIR. Thus, to an extent, respondent accepts
petitioner’s argument that a return filed with the VIBIR may be both a Federal
return and a territorial return.23
23
It is not unprecedented for a court to determine that a return filed in one tax
jurisdiction may commence the period of limitations in a second tax jurisdiction. In
Holmes v. Dir. of the Dep’t of Revenue & Taxation, Gov’t of Guam, 937 F.2d 481(9th Cir. 1991), the Court of Appeals for the Ninth Circuit determined that the
taxpayers’ tax return filing in the Commonwealth of the Northern Mariana Islands
(CNMI) commenced the period of limitations for the Guamanian Department of
Revenue and Taxation. Guam and the CNMI also use mirror codes of the Code
through which each jurisdiction administered its own income tax. The court in
Holmes stated that Guam could request tax returns filed by CNMI taxpayers
“simply by asking”. If Guam failed to request such information, or neglected to act
on that information while the period of limitations remained open, the court stated
(continued...)
- 32 -
We agree with respondent’s position that if a taxpayer does not meet all of
the section 932(c)(4) requirements, the taxpayer falls back into the Federal reporting
and payment regime. In such a case, section 6091 governs the place for filing
returns, and the regulations promulgated under section 6091, as well as the IRS’
filing instructions, provide specific directions to taxpayers. But, as we previously
discussed herein, those regulations and form instructions direct a permanent resident
of the Virgin Islands to file his/her return with the VIBIR.
Finally, respondent relies on Condor Int’l, Inc. v. Commissioner, 78 F.3d
1355 (9th Cir. 1996), aff’g in part, rev’g in part 98 T.C. 203 (1992), and
Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944), to support his position.
Both of these cases are inapposite.
Respondent cites Condor Int’l, Inc. for the proposition that the TRA did not
simply replace the inhabitant rule with section 932 but also established a dual filing
requirement for individuals who are bona fide residents of the Virgin Islands. We
disagree. In Condor Int’l, Inc., the corporate taxpayer filed returns with the Virgin
Islands only. The court found that this filing was insufficient to commence the
23
(...continued)
that “its rights will expire, as would the rights of its counterpart on the mainland, the
I.R.S.” Id. at 484-485.
- 33 -
period of limitations for Federal tax purposes because, as we noted supra note 8,
corporations are subject to the preinhabitant rule dual filing requirement and, as we
noted, do not come under the purview of section 932. Moreover, unlike the
instructions to Form 1040, the instructions to Form 1120, U.S. Corporation Income
Tax Return, explicitly state that a corporation in the Virgin Islands must file a tax
return with the IRS. If a corporation’s principal business, office, or agency is
located in “[a] foreign country or U.S. possession (or the corporation is claiming the
Possessions [sic] corporation tax credit under sections 30A and 936)” and “the total
assets at the end of the tax year (Form 1120, page 1, item D) are: * * * any
amount”, then the corporation is to “Use the following Internal Revenue Service
Center address: * * * Philadelphia, PA 19255-0012”.
Likewise, the holding in Lane-Wells Co. does not support respondent’s
position in this case. In that matter, the Supreme Court found that a taxpayer’s
normal corporate income tax return, Form 1120, did not commence the period of
limitations with respect to a special surtax because the taxpayer did not file a
separate return as required by the statute and the regulations. Respondent asserts
that the situation in the instant case is analogous because “[s]ection 932(c)(4)
implicitly requires territorial income tax to be paid to the USVI government and
federal income tax to the United States” if its requirements are not met. We do not
- 34 -
find Lane-Wells Co. to be analogous to the instant situation. In Lane-Wells Co., the
taxpayer was required by the regulations to file Form 1120-H, U.S. Income Tax
Return for Homeowners Associations, the special tax return for the surtax.
Moreover, as the Supreme Court points out, during the year at issue Form 1120
stated that if the taxpayer fell into the category of corporations subject to the surtax,
the taxpayer was required to file a Form 1120-H. Commissioner v. Lane-
Wells, Co., 321 U.S. at 220. The taxpayer in this case is an individual; thus, no
such explicit requirement exists in this matter.
The discussions in Condor Int’l Inc. and Lane-Wells, Co. of the period of
limitations occurred in a context where the corporate taxpayer knew that it had a
second filing obligation but failed to comply with that obligation. Such is not the
case in this matter. In this matter, respondent asserts that petitioner, an individual,
should have understood that he had an implied obligation to file a second, separate
return, an implied obligation for which respondent provided no notice until many
years after the years at issue.
V. Conclusion
On the basis of the foregoing, we conclude that petitioner has proven the
section 6501(a) period of limitations on assessment expired before the date
- 35 -
respondent mailed petitioner the notice of deficiency. Accordingly, we shall grant
petitioner’s motion for summary judgment. Intervenor’s motion for summary
judgment will be denied as moot.
An appropriate order and decision
will be entered.