Appleton v. Comm'r

• Decision Date: 22 May 2013
• Docket Number: 140 T.C. No. 14,Docket No. 7717-10
• Parties: ARTHUR I. APPLETON, JR., Petitioner, AND THE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

ARTHUR I. APPLETON, JR., Petitioner, AND THE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent

140 T.C. No. 14

Docket No. 7717-10

UNITED STATES TAX COURT

Filed May 22, 2013

P, a U.S. citizen, was a permanent resident of the U.S. Virgin Islands during 2002, 2003, and 2004. P timely filed Form 1040, U.S. Individual Income Tax Return, for each year as a territorial tax return with the U.S. Virgin Islands Bureau of Internal Revenue (VIBIR) pursuant to I.R.C. sec. 932(c)(2). Claiming he qualified for the gross income tax exclusion provided by I.R.C. sec. 932(c)(4), P did not file a Federal tax return for 2002, 2003, or 2004 or pay income tax to the Internal Revenue Service.

More than three years after P filed his tax returns, R mailed P a notice of deficiency determining income tax deficiencies and penalties for 2002, 2003, and 2004. R asserts that because the U.S. Virgin Islands is a separate taxing jurisdiction, the Forms 1040 P filed with the VIBIR are not properly filed Federal tax returns; and because P's Federal tax filing obligations were unmet, R posits thatthe I.R.C. sec. 6501(a) three-year period of limitations never commenced.

P replies that the Forms 1040 filed with the VIBIR met his Federal tax filing obligations and commenced the I.R.C. sec. 6501(a) period of limitations because (1) they were "returns" as defined by Beard v. Commissioner, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986), and (2) they were filed with the VIBIR as directed by I.R.C. sec. 6091, the regulations promulgated thereunder, and R's filing instructions. Consequently, P asserts, in a motion for summary judgment, that R's notice of deficiency is time barred.

Held: Forms 1040 P filed with the VIBIR for 2002, 2003, and 2004 met P's Federal tax filing obligations.

Held, further, the period of limitations commenced when P filed his returns with the VIBIR, and the period of limitations expired before R's mailing of the notice of deficiency.

Held, further, P's motion for summary judgment will be granted.

Randall P. Andreozzi, Edward Doyle Fickess, Ryan M. Murphy, Teia M. Bui, and Michael J. Tedesco, for petitioner.^*

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 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).

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 was entitled to income tax benefits afforded under the Virgin Islands Industrial Development Program (EDP), currently codified at V.I. Code Ann. tit. 29, secs. 701-726 (1998 & Supp. 2010), through his interest in a purported Virgin Islands partnership.²

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 andpayment 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,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 section 932(c)(4) gross income exclusion. Treating petitioner as a nonfiler, on November 25, 2009, respondent mailed petitioner a notice of deficiency in which he 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¦$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 regulations promulgated thereunder by the Secretary, as well as the IRS' instructions and tax forms, required him to file his tax returns for the years at issue with the VIBIR. Petitioner maintains such filing constitutes a Federal tax return filing. On the other hand, respondent posits that although petitioner timely filed income tax returns with the VIBIR, those returns were Virgin Islands territorial returns, not Federal income tax returns.

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.⁶ On November 9, 2011, intervenor filed a motion for summary judgment, which was amended on November 28, 2011, which also asserts that respondent's notice of deficiency was time barred and hence invalid. A hearing on petitioner's motion was held on October 17, 2012.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.

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 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) providedthat 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...