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.
United States Tax Court
Filed May 22, 2013.
140 T.C. 273
JACOBS, Judge
For the foregoing reasons we conclude that Uniband is not exempt from tax, that the consolidated returns that Uniband filed with TMMC were invalid, and that Uniband‘s wage and employee expense deductions for the years at issues should have been reduced by the amount of the Indian employment credit determined under
To effect the foregoing,
Decision will be entered pursuant to Rule 155.
Vincent F. Frazer, Barry J. Hart, Gene C. Schaerr, Tamika M. Archer, and Christopher M. Bruno, for intervenor.
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
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).
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
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
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
* 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.
| 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
Petitioner timely filed his petition with this Court on April 1, 2010.5 Petitioner contends that the Code and the regula-
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
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.
The Virgin Islands is an insular area of the United States; it is classified as an unincorporated territory by
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
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 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),
SEC. 932. COORDINATION OF UNITED STATES AND 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—
(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
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.
Although an individual having for the taxable year gross income which equals or exceeds the exemption amount must file a Federal tax return,
During the years at issue
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
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.
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
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
[i]ntervenor 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
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 Allnutt v. Commissioner, 523 F.3d 406, 413 n.5 (4th Cir. 2008), aff‘g T.C. Memo. 2002-311. Relying on 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 a taxpayer‘s hand delivery of returns to the wrong individual does not constitute a filing); O‘Bryan Bros., Inc. v. Commissioner, 127 F.2d 645 (6th Cir. 1942) (holding that mailing a 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
The Secretary, using the authority expressly granted to him by
Respondent acknowledges that
Common sense dictates that petitioner, knowing he did not meet all three requirements of section 932(c)(4), should have filed a federal 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,
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 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
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
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 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
We do not challenge respondent‘s right to modify an individual‘s reporting requirements. Indeed,
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
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
Respondent misapplies our statements in Huff. We did not address therein the question whether a tax return filed with the VIBIR pursuant to
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-
We agree with respondent‘s position that if a taxpayer does not meet all of the
Finally, respondent relies on Condor Int‘l, Inc. v. Commissioner, 78 F.3d 1355, 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
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 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
V. Conclusion
On the basis of the foregoing, we conclude that petitioner has proven the
An appropriate order and decision will be entered.
JULIAN I. JACOBS
JUDGE
Notes
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.