Commissioner of IRS v. Estate of Travis L. Sanders, 2016 U.S. App. LEXIS 15586

Background

Travis L. Sanders, a Florida businessman, became a limited partner in USVI-based Madison Associates in Sept. 2002; his Florida companies paid fees to Madison, which then distributed amounts to Sanders (K-1s listing USVI-source income).
Sanders filed returns only with the Virgin Islands Bureau of Internal Revenue (VIBIR) and claimed a 90% Economic Development Program (EDP) reduction for 2002–2004.
In 2010 the IRS issued deficiency notices alleging Sanders was not a bona fide USVI resident and that Madison was an abusive tax shelter; IRS therefore argued he should have filed returns with the IRS and VIBIR.
The Tax Court held Sanders was a bona fide USVI resident for 2002–2004, so the three-year assessment statute of limitations expired; the Commissioner appealed.
The Eleventh Circuit rejected a proposed ‘‘good-faith’’ trigger for the limitations period (i.e., filing only with VIBIR while subjectively believing one is a USVI resident) and vacated the Tax Court’s residency determination for lack of sufficient subsidiary factual findings (time present, nature of presence, and Madison’s economic substance).

Issues

Issue	Plaintiff's Argument (Estate/USVI)	Defendant's Argument (Comm’r)	Held
Whether a return filed only with VIBIR starts §6501 limitations if taxpayer subjectively believed he was a bona fide USVI resident	Good-faith belief should trigger limitations so VIBIR filing starts 3-year period	No: statute requires actual filing in proper place; if not a bona fide resident, taxpayer must file with IRS too, so limitations never ran	Rejected good-faith exception; limitations run only if taxpayer actually was a bona fide USVI resident
Whether Sanders was a bona fide resident of the USVI for 2002–2004	Sanders had physical presence, USVI banking, K-1s, married in USVI, paid USVI taxes — sufficient under totality of circumstances	Many contacts were formalities or tied to an abusive shelter; he maintained strong Florida ties and evidence on time present was unresolved	Tax Court’s finding vacated: the facts it relied on were legally insufficient without additional subsidiary findings (time in USVI by year; nature of presence; economic substance of Madison)
Whether the Tax Court needed to resolve subsidiary facts (time present; Madison’s substance) before finding residency	Estate argued existing findings suffice	Commissioner argued lack of specific findings prevents review and may mask shelter abuse	Held: remand required for detailed subsidiary findings (days present each year; when residency began; nature/economic substance of Madison)
Proper treatment of business-formalities (K-1s/employment) in residency analysis	K-1s and Madison employment show USVI ties	Such formalisms can be disregarded if lacking economic substance; business location alone is weak evidence of residence	Held: listing as partner and Madison employment carry little weight absent findings that Madison had economic substance; court must evaluate substance over form

Key Cases Cited

Huff v. Comm’r, 743 F.3d 790 (11th Cir. 2014) (discusses separate but interrelated US–USVI tax systems and related limitations concerns)
Swenson v. Thomas, 164 F.2d 783 (5th Cir. 1947) (good faith plus objective indicia required for bona fide foreign residency)
Sochurek v. Comm’r, 200 F.2d 34 (7th Cir. 1953) (multi-factor test for bona fide residence)
Vento v. Dir., V.I. Bureau of Internal Revenue, 715 F.3d 455 (3d Cir. 2013) (grouping Sochurek factors; disregard illegal tax-shelter contacts)
Jones v. Comm’r, 927 F.2d 849 (5th Cir. 1991) (intent important but objective factors govern residence analysis)
Carpenter v. United States, 495 F.2d 175 (5th Cir. 1974) (bona fide residency as mixed question reviewed de novo)
Commissioner v. Matthew, 335 F.2d 231 (5th Cir. 1964) (difficulty and variability of applying ‘bona fide residence’)
Nichols v. Comm’r, 314 F.2d 337 (5th Cir. 1963) (use of “bona fide” requires substance beyond form)
Comm’r v. Court Holding Co., 324 U.S. 331 (1945) (substance over form in tax transactions)
Winn–Dixie Stores, Inc. v. Comm’r, 254 F.3d 1313 (11th Cir. 2001) (economic-substance doctrine in tax law)