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).
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).
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 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,
Additions to tax Sec. Sec. Sec. Year Deficiency 6651(a)(1) 6651(a)(2) 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:
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.
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
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 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,
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.
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) 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
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 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).
Section 6091 generally governs the place where U.S. taxpayers are required 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
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"
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. 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 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
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
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
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 Pilliod Lumber Co., we stated in Winnett v. Commissioner, 96 T.C. 802, 808 (1991):
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 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.
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.
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 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 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
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 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
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.
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,
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 period of limitations for Federal tax purposes because, as we noted
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
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 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.
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: