Estate of Anthony R. Tanner, Marglen M. Tanner, Personal Representative

United States Tax Court
T.C. Memo. 2023-54ESTATE OF ANTHONY R. TANNER, DECEASED,
MARGLEN M. TANNER, PERSONAL REPRESENTATIVE,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 6521-16. Filed May 1, 2023.
—————
Joseph M. Erwin, for petitioner.
Ladd Christman Brown, Lauren B. Epstein, Alexander N. Martini, and
Jamie A. Schindler, for respondent.
MEMORANDUM OPINION
BUCH, Judge: Anthony R. Tanner was a U.S. citizen who filed
income tax returns with the Virgin Islands Bureau of Internal Revenue
(VIBIR), but not the U.S. Internal Revenue Service, for 2003 and 2004
(years in issue). On those returns, he claimed to be a bona fide resident
of the U.S. Virgin Islands (USVI). Because he claimed USVI residency
but had paid U.S. taxes, the VIBIR requested that those taxes be
“covered over” to the USVI Treasury through “cover-over requests” sent
to the Internal Revenue Service (IRS) in 2005 and 2006. A cover-over
request typically includes a partial or complete copy of a taxpayer’s
USVI return. Nearly a decade later, the Commissioner sent Mr. Tanner
a notice of deficiency for the years in issue. In the notice, the
Commissioner determined that Mr. Tanner was not a bona fide USVI
resident and that he was required to file U.S. income tax returns. The
Commissioner determined U.S. income tax deficiencies and penalties.
Served 05/01/23
2
[*2] The Commissioner must assess tax within three years after a
return is properly filed by the taxpayer. I.R.C. § 6501(a). 1 For a return
to be “properly filed by the taxpayer,” the taxpayer must have intended
the document to be filed as his return. Mr. Tanner’s estate (Estate)
makes three arguments for why the Commissioner’s notice of deficiency
should be barred by the statute of limitations regardless of whether Mr.
Tanner was a bona fide USVI resident.
The Estate contends that the three-year period for assessment
under section 6501(a) commenced when the VIBIR transmitted cover-
over requests to the IRS. However, whether Mr. Tanner intended that
those documents be filed as his returns is an outstanding issue of
material fact.
The Estate argues that the three-year period for assessment
commenced when Mr. Tanner filed USVI returns with the VIBIR. But
the U.S. Court of Appeals for the Eleventh Circuit, the court to which
this case is appealable, has held that the filing of a USVI return does
not begin the running of the period of limitations for U.S. income tax
purposes unless the taxpayer is a bona fide USVI resident.
Commissioner v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016),
vacating and remanding 144 T.C. 63 (2015).
The Estate’s remaining argument is that we should apply
Treasury Regulation § 1.932-1(c)(2)(ii). But by its own terms, the
regulation does not apply for the years in issue. The Estate asks us to
invalidate the effective date so that it would apply to the years in issue.
But we have previously held that this regulation’s effective date is valid.
Tice v. Commissioner, No. 24983-15, 160 T.C., slip op. at 6, 11–13 (Apr.
10, 2023).
Because issues of fact remain as to the Estate’s principal
argument, we must deny summary judgment.
Background
Mr. Tanner filed USVI income tax returns for 2003 and 2004 with
the VIBIR on December 29, 2004, and October 17, 2005, respectively.
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. All monetary amounts are rounded to the nearest dollar.
3
[*3] The VIBIR directs individual taxpayers to use the same forms that
the IRS uses in administering the income tax laws under the Internal
Revenue Code. Mr. Tanner followed the VIBIR’s directions by using
Form 1040, U.S. Individual Income Tax Return. On his returns, he
claimed to be a bona fide USVI resident.
The VIBIR made “cover-over” requests to the IRS. A cover-over
request is typically made when a bona fide USVI resident pays U.S.
taxes but files a USVI return. See I.R.C. § 7654. Through the cover-over
request, the VIBIR requests that taxes paid to the United States be
remitted to the USVI. The request will typically include some or all of
the taxpayer’s USVI return. The IRS received cover-over requests from
the VIBIR relating to Mr. Tanner’s 2003 and 2004 returns on April 11,
2005, and September 4, 2006, respectively. The 2003 request included
the first two pages of Mr. Tanner’s 2003 return, a Schedule C, Profit or
Loss From Business, and a Form W–2, Wage and Tax Statement. The
parties cannot find the 2004 request.
On December 9, 2015, the Commissioner mailed Mr. Tanner a
notice of deficiency for 2003 and 2004. In that notice, the Commissioner
determined that Mr. Tanner was not a bona fide USVI resident and that
all of his income was from U.S. sources. The Commissioner further
determined that Mr. Tanner was required, but failed, to file U.S. federal
income tax returns for 2003 and 2004. The Commissioner determined
deficiencies for 2003 and 2004 totaling $3,230,967 and additions to tax
totaling $1,624,168.
While residing in Florida, Mr. Tanner timely filed a Petition
disputing the notice of deficiency in its entirety. He alleged the
Commissioner erred in determining that he was not a bona fide USVI
resident, that his income was from U.S. sources, and that he was
required to file U.S. income tax returns. Mr. Tanner also argued that
the Commissioner is barred from assessing the deficiencies because the
period of limitations expired before the Commissioner issued the notice
of deficiency. While this case has been pending, Mr. Tanner passed
away. 2
2 On March 27, 2017, Marglen M. Tanner was appointed personal
representative of the Estate. On April 19, 2017, we granted a Motion to Substitute
Parties pursuant to Rule 63. The Estate was substituted for Mr. Tanner as the
petitioner in this case, and the caption was amended accordingly.
4
[*4] Discussion
Pending before us is the Estate’s Motion for Summary Judgment
in which the Estate asks us to find that the three-year period of
limitations to assess deficiencies for the years in issue has lapsed. The
Commissioner opposes the Estate’s Motion. He argues that the Motion
should be denied because material facts remain in dispute. Whether the
three-year period applies hinges upon whether a return has been filed
by the taxpayer. Without the filing of a return, the period never begins
to run. I.R.C. § 6501(c)(3). Thus, we must decide whether Mr. Tanner
filed a U.S. return, and if so, when.
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and
avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp.
v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment when there is no genuine dispute as to any material
fact and a decision may be rendered as a matter of law. Rule 121(a)(2);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). In deciding whether to grant summary
judgment here, we construe factual materials and make factual
inferences in the light most favorable to the Commissioner, the
nonmoving party. See Sundstrand Corp., 98 T.C. at 520.
II. Governing Statutes
A. U.S. Statute of Limitations
Section 6501(a) generally requires the Commissioner to assess
tax within three years after a return is filed, subject to various
exceptions. “Return” is defined as “the return required to be filed by the
taxpayer.” I.R.C. § 6501(a). Thus, to determine whether the three-year
period has been triggered, we consider (1) whether a document
submitted was the “return” required to be filed, and if so, (2) whether it
was properly “filed by the taxpayer.” Appleton v. Commissioner, 140 T.C.
273, 284 (2013). In the absence of a return, “tax may be assessed, or a
proceeding in court for the collection of such tax may be begun without
assessment, at any time.” I.R.C. § 6501(c)(3). In this case, the parties
disagree about whether the general three-year period or the exception
for nonfilers applies.
5
[*5] B. USVI Income Taxation—Section 932
1. Background
The USVI is a U.S. territory, but it has a separate tax system that
“mirrors” the U.S. system. 48 U.S.C. § 1541(a); Appleton, 140 T.C.
at 278. The USVI uses a “mirror code” that is identical to the Internal
Revenue Code, except the mirror code replaces “United States” with
“Virgin Islands.” Appleton, 140 T.C. at 278. The VIBIR administers the
mirror code. See Coffey v. Commissioner, 663 F.3d 947, 949 (8th Cir.
2011). Since Congress established the mirror code in 1921, filing
requirements for U.S. citizens residing in the USVI have changed. See
Appleton, 140 T.C. at 278–79. Originally, U.S. citizens residing in the
USVI who had income from both sources “were required to file returns
and pay taxes to both jurisdictions.” Id. at 278. In 1954, Congress
enacted a rule allowing permanent USVI residents to meet their U.S.
tax obligations by paying income tax to the USVI alone. See id. at 279.
The rule also provided that U.S. taxes paid by USVI residents would be
covered over (i.e., paid to) the USVI Treasury. Id.
In 1986, Congress replaced the existing rule with section 932,
which applies for the years in issue here. Appleton, 140 T.C. at 279.
Under section 932, a U.S. citizen who is a “bona fide” USVI resident and
meets certain requirements owes income tax to the USVI, not the United
States. See I.R.C. §§ 932(b), (c)(4), 7654; Appleton, 140 T.C. at 281;
Cooper v. Commissioner, T.C. Memo. 2015-72, at *15. If such an
individual happens to pay U.S. income tax, section 7654(a) provides a
coordination rule such that the U.S. taxes “shall be covered into the
Treasury” of the USVI. See Hulett v. Commissioner, 150 T.C. 60, 65–66
(2018), rev’d and remanded sub nom. Coffey v. Commissioner, 987 F.3d
808 (8th Cir. 2021); Appleton, 140 T.C. at 279; see also 48 U.S.C. § 1642(providing that taxes shall be covered into the USVI and “shall be
available for expenditure as the [USVI] Legislature . . . may provide”).
To get these taxes to the USVI, the VIBIR sends the IRS a cover-over
request that typically includes copies of the taxpayer’s USVI return (or
parts thereof). See Hulett, 150 T.C. at 65–66. Mr. Tanner took the
position that he was a bona fide USVI resident on his USVI returns. He
did not file U.S. returns, and the VIBIR requested the U.S. taxes he had
paid to be covered over into the USVI.
6
[*6] 2. Filing Requirements
Section 932 sets out different filing requirements for taxpayers
(including U.S. citizens such as Mr. Tanner) according to whether they:
(1) reside in the USVI or (2) do not reside in the USVI but receive USVI-
source income. See I.R.C. § 932(a), (c). A U.S. citizen who is a bona fide
USVI resident must file a return with the USVI. I.R.C. § 932(c)(1)
and (2). But if that person is not a bona fide USVI resident and has
USVI-source income, he or she must file a return with the United States
and the USVI. I.R.C. § 932(a)(1) and (2). For purposes of the pending
Motion, the Estate does not assert that Mr. Tanner was a bona fide USVI
resident, and we must presume for purposes of deciding the Motion that
he was not. 3 Because we presume that Mr. Tanner was not a bona fide
USVI resident, we also presume he was required to file U.S. returns for
2003 and 2004.
When Mr. Tanner filed his returns, the law was unsettled as to
how the different filing requirements in section 932 would operate in
conjunction with section 6501(a). See Hulett, 150 T.C. at 75–76. This
uncertainty results in the question presented here: If a U.S. citizen
claims bona fide USVI residency on USVI returns filed with the VIBIR,
will those returns trigger the three-year period for assessing U.S. tax
even if that person was not a bona fide USVI resident?
The IRS issued interim guidance addressing this question in
2007, after Mr. Tanner filed his USVI returns and after the IRS received
the cover-over requests for the years in issue. I.R.S. Notice 2007-19, §§ 2
and 3, 2007-1 C.B. 689, 689–90, provided that an individual who took
the position on a USVI return that he was a bona fide USVI resident
and had gross income greater than $75,000 could trigger section 6501(a)
only by also filing a U.S. Form 1040 reporting no gross income (a zero
return) with the IRS. Taxpayers with at least $75,000 of income could
elect to apply the notice retroactively to tax years ending before
3 Section 932 was amended during the years in issue. See American Jobs
Creation Act of 2004, Pub. L. No. 108-357, § 908(c)(2), 118 Stat. 1418, 1656. Effective
until October 22, 2004, bona fide residency was determined on the basis of residency
on the last day of the taxable year. See I.R.C. § 932(a) and (c) (before amendment).
Effective for tax years ending after October 22, 2004, the determination is based on
the entire taxable year, not just the last day. See I.R.C. § 932(a), (c) (after amendment).
The distinction is irrelevant for purposes of the pending Motion because we must
presume Mr. Tanner was not a bona fide USVI resident.
7
[*7] December 31, 2006, by filing a zero return for a past taxable year.
Id. § 3, 2007-1 C.B. at 689–90.
On April 9, 2008, the Secretary promulgated final regulations.
See Treas. Reg. § 1.932-1; T.D. 9391, 2008-1 C.B. 945. Treasury
Regulation § 1.932-1(c)(2)(ii) provides:
For purposes of . . . section 6501(a), 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 to be a U.S. income tax return,
provided that the United States and the Virgin Islands
have entered into an agreement for the routine exchange
of income tax information satisfying the requirements of
the Commissioner. The working arrangement announced
in Notice 2007-31 satisfies the condition of the preceding
sentence. See Notice 2007-31 (2007-16 IRB 971) (applicable
to taxable years ending on or after December 31, 2006,
unless and until arrangement terminates). In the absence
of such an agreement, individuals to whom this paragraph
(c) applies generally must file an income tax return for the
taxable year with the United States to begin the period of
limitations for Federal income tax purposes as provided in
section 6501(a) . . . .
(Emphasis added.) This regulation applies prospectively for tax years
ending after April 9, 2008, and could be applied retroactively to tax years
ending on or after December 31, 2006. Treas. Reg. § 1.932-1(j). The
regulation provides that the interim rules of Notice 2007-19 would still
be applied to tax years ending before December 31, 2006. Treas. Reg.
§ 1.932-1(c)(2)(ii). Thus, this regulation was not applicable for the years
in issue, and under Notice 2007-19, Mr. Tanner could have triggered
section 6501(a) only by filing zero returns with the IRS.
III. The Estate’s Arguments
The Estate argues that the notice of deficiency is time barred
under section 6501(a) because the Commissioner did not issue the notice
within three years after Mr. Tanner filed returns for 2003 and 2004. The
Estate offers three alternative grounds for this argument. First, the
Estate contends that section 6501(a) was triggered when the IRS
received cover-over requests from the VIBIR. See Hulett, 150 T.C.
at 96–97. Second, the Estate contends that section 6501(a) was triggered
8
[*8] when Mr. Tanner filed his returns with the VIBIR. See id. at 98–104
(Thornton, J., concurring in result only). Finally, the Estate contends
that Mr. Tanner’s USVI returns should be deemed U.S. returns
pursuant to Treasury Regulation § 1.932-1(c)(2)(ii) because that
regulation is invalid to the extent that is does not apply for the years in
issue. To address the first two grounds, we must revisit Hulett, a Court-
reviewed opinion in which we issued lead, concurring, and dissenting
opinions, but none garnered a majority vote. See Hulett, 150 T.C. at 97,
104, 107.
A. Were the Cover-Over Requests Returns Properly Filed by the
Taxpayer?
Citing the lead opinion in Hulett, the Estate argues that the
VIBIR’s transmission of cover-over requests to the IRS in 2005 and 2006
triggered the three-year period for assessment. The opinion of the Court
concluded that partial copies of USVI returns (first two pages and Forms
W–2) that the IRS received in the cover-over requests were federal
income tax returns for purposes of section 6501(a) after applying the test
laid out in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d
139 (6th Cir. 1986). Hulett, 150 T.C. at 81, 96–97. To be a “return” under
Beard, 82 T.C. at 777, a document must (1) contain “sufficient data to
calculate tax liability,” (2) “purport to be a return,” (3) “be an honest and
reasonable attempt to satisfy the requirements of the tax law,” and
(4) be executed “under penalties of perjury.” The opinion of the Court
concluded that the cover-over requests were “returns” because they
satisfied this test. As for the section 6501(a) requirement that those
returns were “filed by the taxpayer,” the opinion relied on a deemed
concession by the IRS that those returns had been filed. Hulett, 150 T.C.
at 80. The opinion of the Court thus held that the cover-over requests
triggered section 6501(a). Hulett, 150 T.C. at 80.
Genuine disputes of material fact preclude us from applying the
opinion of the Court’s holding here. Unlike Hulett, the Commissioner
does not concede in this case that the cover-over requests were returns
filed by Mr. Tanner. Although third parties may file on a taxpayer’s
behalf in certain circumstances, see Treas. Reg. § 1.6012-1(a)(5), the
taxpayer must intend that the return be filed, see, e.g., Florsheim Bros.
Drygoods Co. v. United States, 280 U.S. 453, 462 (1930); Espinoza v.
Commissioner, 78 T.C. 412, 422 (1982); Dingman v. Commissioner, T.C.
Memo. 2011-116, 101 T.C.M. (CCH) 1562, 1569; Allnutt v.
Commissioner, T.C. Memo. 2002-311, 84 T.C.M. (CCH) 669, 673, aff’d,
523 F.3d 406 (4th Cir. 2008). Intent is a factual issue that depends on
9
[*9] the circumstances of each case. See Rutter v. Commissioner, T.C.
Memo. 2017-174, at *25. The Commissioner has not conceded, and the
Estate has not established, that Mr. Tanner intended the VIBIR’s
transmission of the cover-over requests be the filing of his returns. Thus,
we cannot grant summary judgment on this ground. Moreover, the
record in this case includes only a copy of the 2003 cover-over request.
Without the 2004 cover-over request, we cannot determine whether its
contents satisfy Beard.
B. Were the USVI Returns Filed with the VIBIR Returns
Properly Filed by the Taxpayer?
Citing the concurring opinion in Hulett, the Estate argues that
Mr. Tanner’s filing of returns with the VIBIR in 2004 and 2005 triggered
the three-year period for assessment. The concurring opinion concluded
that returns filed with the VIBIR were federal income tax returns under
Beard regardless of whether the taxpayers were bona fide USVI
residents. Hulett, 150 T.C. at 98 (Thornton, J., concurring in result only).
The Eleventh Circuit, to which an appeal of this case would lie,
takes a different approach. See Commissioner v. Estate of Sanders, 834
F.3d 1269. In Estate of Sanders, the Eleventh Circuit held that “a
taxpayer who files a return only with the VIBIR does not trigger the
statute of limitations unless he actually is a bona fide resident of the
USVI.” Commissioner v. Estate of Sanders, 834 F.3d at 1278–79. The
Eleventh Circuit believed this holding was “clearly indicated by the
plain language of the statute” and noted that section 932(a) “expressly
requires” a U.S. citizen who is not a bona fide USVI resident to file both
U.S. and USVI returns. Commissioner v. Estate of Sanders, 834 F.3d at
1276, 1279. The Eleventh Circuit did not create an exception based on a
taxpayer’s subjective, good faith belief that he was a bona fide USVI
resident. Id. at 1279.
We must follow the precedent of the Court of Appeals to which an
appeal of a case would lie if it is squarely on point. See Golsen v.
Commissioner, 54 T.C. 742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir.
1971). Because the Eleventh Circuit has squarely held that Mr. Tanner
had to be a bona fide USVI resident for his USVI returns to trigger
section 6501(a), and we must presume for purposes of deciding this
Motion that he was not one, we cannot grant summary judgment on this
ground.
10
[*10] C. Should Treasury Regulation § 1.932-1(c)(2)(ii) Apply?
Finally, the Estate argues that Treasury Regulation § 1.932-
1(c)(2)(ii) is invalid to the extent that it does not apply for the years in
issue. Treasury Regulation § 1.932-1(c)(2)(ii) provides that a return filed
with the USVI “by an individual who takes the position that he . . . is a
bona fide [USVI] resident” is “deemed to be a U.S. income tax return”
for purposes of section 6501(a). The regulation applies prospectively to
tax years ending after April 9, 2008, and could be applied retroactively
to tax years ending on or after December 31, 2006. Treas. Reg. § 1.932-
1(c)(2)(ii), (j). The Estate argues that Treasury acted arbitrarily and
capriciously, and in violation of the Fifth Amendment Due Process
Clause, by not extending the benefit of this regulation to taxpayers for
tax years ending before December 31, 2006. We recently addressed
similar arguments in Tice, 160 T.C., slip op. at 11–13.
In Tice, we concluded that the regulation was valid because
Treasury “articulated a satisfactory explanation for its action . . . in the
preamble to the final rule.” Id. at 12. The preamble explained that the
“rule applies as long as the IRS and [the USVI] have in place an
agreement for the automatic exchange of information.” Id. (quoting T.D.
9391, Preamble, 2008-1 C.B. at 951). Because a 2007 arrangement
satisfied this condition, the “rule applie[d] to years ending on or after
December 31, 2006.” Id. We further explained that were we to invalidate
the regulation, the “consequence would be to ‘hold [it] unlawful and set
it aside,’ 5 U.S.C. 706(2), not make it applicable for the years in issue.”
Id. We also rejected the argument that Treasury Regulation § 1.932-1
violates due process because it fails to give fair warning of the conduct
it requires. We rejected this argument because “the conduct required is
found in the statute—i.e., section 932(a)(2)—not the regulations. See
Hulett, 150 T.C. at 95 (‘[T]he absence of regulations doesn’t repeal
section 932.’).” Tice, 160 T.C., slip op. at 12.
The Estate “understandably wants the rule in Treasury
Regulation § 1.932-1(c)(2)(ii) to apply for the years in issue. But it did
not.” See id. Accordingly, we cannot grant the Motion for Summary
Judgment on this ground.
IV. Conclusion
We may grant summary judgment only if material facts are not
in dispute and a decision can be rendered as a matter of law. Because
11
[*11] material facts remain in dispute, we must deny the Estate’s
Motion for Summary Judgment.
An appropriate order will be issued.