Cooper v. Commissioner of Internal Revenue, 040815 FEDTAX, 11810-10

Docket Nº:11810-10, 11811-10
Opinion Judge:JACOBS, JUDGE:
Party Name:BARRY P. COOPER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ANDTHE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor SANDRA G. COOPER, Petitioner ANDTHE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Joseph A. DiRuzzo III, for petitioners. Barry J. Hart, Christopher M. Bruno, Geoffrey P. Eaton, Peter N. Hiebert, and Tamika M. Archer, for intervenor. Ladd Christman Brown, Jr., James G. Hartford, and Jacob Russin, for respondent.
Case Date:April 08, 2015
Court:United States Tax Court
 
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T. C. Memo. 2015-72

BARRY P. COOPER, Petitioner

ANDTHE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

SANDRA G. COOPER, Petitioner

ANDTHE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 11810-10, 11811-10

United States Tax Court

April 8, 2015

Ps, husband and wife, are U.S. citizens. Asserting each was a bona fide resident of the Virgin Islands during 2002 and 2003, Ps filed joint territorial income tax returns with the Virgin Islands Bureau of Internal Revenue (VIBIR) claiming entitlement to income tax benefits under I.R.C. sec. 932(c)(4). They did not file joint income tax returns with the Internal Revenue Service (IRS).

The IRS received copies of Ps' returns from the VIBIR. After examining these returns, the IRS determined Ps did not qualify for the I.R.C. sec. 932(c)(4) gross income exclusion.

Treating Ps as nonfilers, the IRS mailed separate notices of deficiency to Ps, one to P-H for 2002 and 2003 and another to P-W for 2002, more than 3 years after Ps filed their territorial tax returns.

Ps assert that because they believed in good faith that they were bona fide residents of the Virgin Islands at the time they filed territorial income tax returns with the VIBIR, the filing of those returns with, and the payment of tax to, the VIBIR met their Federal income tax filing and payment obligations, without regard to objective facts indicating their residence. Ps each filed a motion for summary judgment maintaining the IRS' notices of deficiency were untimely mailed, i.e. the notices were mailed after the expiration of the I.R.C. sec. 6501 period of limitations; hence, the IRS' assessment of tax was time barred.

Held: The assertion that the period of limitations expired before the IRS' mailing of a notice of deficiency is an affirmative defense which Ps must prove.

Held, further, because Ps failed to make a proper showing that they were bona fide residents of the Virgin Islands during 2002 and 2003, Ps' motions for summary judgment will be denied, and a trial will be required.

Joseph A. DiRuzzo III, for petitioners.

Barry J. Hart, Christopher M. Bruno, Geoffrey P. Eaton, Peter N. Hiebert, and Tamika M. Archer, for intervenor.

Ladd Christman Brown, Jr., James G. Hartford, and Jacob Russin, for respondent.

MEMORANDUM OPINION

JACOBS, JUDGE:

These cases, consolidated for trial, briefing, and opinion, are before the Court on petitioners' motions for summary judgment,, pursuant to Rule 121. The specific question to be decided is whether petitioners (Barry Cooper and Sandra Cooper) qualify as bona fide residents of the U.S. Virgin Islands (Virgin Islands) during 2002 and 2003 for purposes of determining whether the section 6501 period of limitations on assessment and collection expired before the date respondent (Internal Revenue Service or IRS) mailed petitioners separate notices of deficiency. For the reasons set forth infra, we will deny petitioners' motions.

Unless otherwise indicated all section references are to the Internal Revenue Code (Code) in effect for 2002 and 2003, and all Rule references are to the Tax Court Rules of Practice and Procedure. At the time petitioners filed their respective petitions, they resided in Florida.

Background

The following includes undisputed facts in the record. Barry Cooper (petitioner husband) was married to Sandra Cooper (petitioner wife) during 2002 and 2003. They are U.S. citizens and assert that each was a bona fide resident of the Virgin Islands during 2002 and 2003. Petitioners filed a joint territorial income tax return with the Virgin Islands Bureau of Internal Revenue (VIBIR) for 2002 on October 10, 2003, and an amended joint territorial income tax return for 2002on December 31, 2003. They filed a joint territorial income tax return for 2003with the VIBIR on October 13, 2004.1 Asserting that their filings with the VIBIR and the payment of tax to the Virgin Islands satisfied their Federal tax filing and payment obligations pursuant to section 932, petitioners did not file a 2002 or 2003 Federal income tax return with, or pay income tax to, the IRS.

The IRS received copies of petitioners' 2002 and 2003 returns from the VIBIR, 2 and after examining these returns, the IRS determined that petitioners did not qualify for the section 932(c)(4) gross income exclusion. Treating petitioner husband as a nonfiler, on March 3, 2010, the IRS mailed him a notice of deficiency in which it determined the following deficiencies in Federal income tax and additions to tax:

Additions to tax

Year

Deficiency

Sec. 6651(a)(1)

Sec. 6651(a)(2)

Sec. 6654

2002

$125, 122

$8, 297.55

$9, 219.50

-0-

2003

149, 444

33, 624.90

37, 361.00

$3, 855.82

Attached to the notice of deficiency was a Form 4549-A, Income Tax Discrepancy Adjustments, which set forth the basis for the aforementioned income tax deficiencies and additions to tax:

It has been determined that during the taxable years ended December 31, 2002, 2003, and 2004 ("tax years 2002, 2003, and 2004") you were not a bona fide resident of the United States Virgin Islands ("USVI"). It is also determined that you participated in a tax avoidance scheme similar to that described in Notice 2004-45 Meritless Position Based on Sections 932(c)(4) and 934(b), which involved improperly claiming to be a resident of the USVI and superficially recasting income from sources within the United States as income from sources within the USVI or effectively connected to a trade or business within the USVI in order to inappropriately and invalidly claim a tax credit of 90% under the United States Virgin Islands Economic Development Program ("EDP credit").3

On March 3, 2010, the IRS mailed petitioner wife a notice of deficiency determining the following deficiency in Federal income tax and additions to tax:

Additions to tax

Year

Deficiency

Sec. 6651(a)(1)

Sec. 6651(a)(2)

Sec. 6654

2002

$171, 258

$38, 533.05

$42, 814.50

$5, 722.95

Attached to the notice of deficiency was a Form 4549-A which set forth, in language identical to that included in the notice of deficiency sent to petitioner husband, the basis for the income tax deficiencies and additions to tax with respect to petitioner wife.

Petitioners each filed a petition with this Court on May 24, 2010.4 Petitioners contend that both were bona fide residents of the Virgin Islands during 2002 and 2003 and, as this Court held in Appleton v. Commissioner, 140 T.C. 273 (2013), that they were required under the Code and the regulations promulgated thereunder, as well as by the IRS' instructions and tax forms, to file their income tax returns for 2002 and 2003 with the VIBIR. Petitioners assert those filings satisfied their Federal income tax return filing obligations. On the other hand, the IRS asserts that although petitioners filed income tax returns with the VIBIR, those returns were Virgin Islands territorial returns, not Federal income tax returns.

On August 22, 2013, petitioners each filed a motion for summary judgment in which each asserts that because each believed he /she was a bona fide resident of the Virgin Islands during 2002 and 2003, the IRS is required to accept their belief. Consequently, petitioners maintain (1) the respective notices of deficiency were untimely and (2) the section 6501(a) period of limitations bars assessment of tax by the IRS for 2002 and 2003.5

Discussion

I. Introduction

This is the third case involving the timeliness of notices of deficiency to U.S. citizens who filed income tax returns with the VIBIR rather than to the IRS. In Appleton v. Commissioner, 140 T.C. 273, we had to decide whether the filing of an income tax return with the VIBIR by an individual whom the IRS conceded was a bona fide resident of the Virgin Islands commenced the running of the 3-year period of limitations for Federal tax purposes (i.e., whether the filing of an income tax return with the VIBIR started the clock running on the IRS). We therein held that it did and that because the IRS issued a notice of deficiency more than three years after the taxpayer had filed with the VIBIR, the IRS' deficiency determination was untimely and accordingly granted the taxpayer's motion for summary judgment.

In Estate of Sanders v. Commissioner, 144 T.C. (Jan. 29, 2015), we had to grapple with the question of who is a "bona fide resident of the Virgin Islands". During certain of the years at issue in that matter, neither the Code6 nor the regulations promulgated thereunder provided a definition of a "bona fide resident of the Virgin Islands". In that case the IRS disputed the estate's assertion that the decedent was a bona fide resident of the Virgin Islands, but at trial the estate provided evidence establishing that he was. Consequently, we found, as we did in Appleton, that the notice of deficiency was untimely.

In the motions now before us, petitioners assert...

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