147 T.C. 7
Tax Ct.2016Background
- Petitioners (U.S. citizens and sisters) lived and worked in the U.S. in 2001, made estimated U.S. tax payments, but filed 2001 individual returns and paid tax to the Virgin Islands Bureau of Internal Revenue (BIR) in October 2002.
- Petitioners now concede they were not bona fide residents of the Virgin Islands for 2001 and had no Virgin Islands–sourced income or trade/business there in 2001.
- The U.S. Treasury "covered over" petitioners’ prior estimated U.S. payments to the Virgin Islands under IRC §7654 in 2003.
- Commissioner issued notices of deficiency for 2001; the sole remaining issue is whether petitioners may claim IRC §901 foreign tax credits for (a) payments made with their Virgin Islands returns and (b) U.S. estimated payments later covered into the Virgin Islands.
- Tax Court held petitioners failed to prove the amounts were "taxes paid" under Treas. Reg. §1.901-2(e), that the IRC §904 limitation did not bar the credits, and that Congress intended Virgin Islands taxes paid by U.S. citizens/residents to be creditable under §901.
Issues
| Issue | Petitioners' Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Whether amounts paid to the Virgin Islands qualify as "taxes paid" under §901/Reg. §1.901-2(e) | Vento: Their position that they were bona fide V.I. residents for 2001 was a reasonable interpretation of law, so the payments were compulsory taxes paid | Commissioner: Petitioners were not legally liable for V.I. tax (no bona fide residence/no V.I. source income); payments exceeded liability and were subject to refund, so not "taxes paid" | Held for Commissioner: Petitioners failed to show a reasonable interpretation or that they exhausted remedies; amounts not established as "taxes paid" |
| Whether the payments occurred in 2001 (timing/accrual) | Vento: Payments made with V.I. returns and cover-over of estimated U.S. payments should be treated as timely; Treasury regs treat taxes paid with a return as timely | Commissioner: No evidence of valid §905(a) accrual election; only cover-over occurred in 2003 | Held for Commissioner on record: no need to decide accrual election because petitioners failed on "taxes paid" and §904 grounds |
| Applicability of IRC §904 limitation to V.I. taxes | Vento: §904 limitation should not apply to V.I. taxes; TRA legislative history suggests transitional creditability without §904 limits | Commissioner: §904 limits apply; petitioners have no foreign-source income, so limitation is zero | Held for Commissioner: §904 limitation applies; petitioners failed to establish any nonzero §904 limitation |
| Whether Congress intended V.I. taxes paid by U.S. citizens/residents to be creditable under §901 | Vento: Equality principle and mirror-code harmony imply credits to avoid double taxation | Commissioner: Section 932 coordinates U.S./V.I. tax regimes and displaces the foreign tax credit for these situations | Held for Commissioner: Congress did not intend V.I. taxes paid by U.S. citizens/residents to be creditable under §901; §932 (and regs) govern and prevent double crediting |
Key Cases Cited
- Burnet v. Chicago Portrait Co., 285 U.S. 1 (1932) (foreign tax credit mitigates double taxation)
- Chi. Bridge & Iron Co. v. Wheatley, 430 F.2d 973 (3d Cir. 1970) (equality principle for harmonizing mirror-code treatment)
- Johnson v. Quinn, 821 F.2d 212 (3d Cir. 1987) (application of equality principle in mirror-code context)
- Vento v. Dir., V.I. Bureau of Internal Revenue, 715 F.3d 455 (3d Cir. 2013) (appellate holding that the Vento daughters were not bona fide V.I. residents for 2001)
- Huff v. Commissioner, 743 F.3d 790 (11th Cir. 2014) (discusses IRS position on potential credits for taxpayers claiming possession residence; court noted no regulation requires IRS to grant such credits)