Comm'r v. Estate of Sanders

• Citation: 834 F.3d 1269
• Decision Date: 24 August 2016
• Docket Number: No. 15–12582,15–12582
• Parties: Commissioner of IRS, Petitioner–Appellant, v. Estate of Travis L. Sanders, Deceased, Thomas S. Hogan, Jr., Personal Representative, Government of the United States Virgin Islands, Respondents–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

834 F.3d 1269

Commissioner of IRS, Petitioner–Appellant,

v.Estate of Travis L. Sanders, Deceased, Thomas S. Hogan, Jr., Personal Representative, Government of the United States Virgin Islands, Respondents–Appellees.

No. 15–12582

United States Court of Appeals, Eleventh Circuit.

Date Filed: August 24, 2016

Ellen Page DelSole, Judith Ann Hagley, Gilbert Steven Rothenberg, Francesca Ugolini, U.S. Department of Justice, Chief Appellate Section Tax Division, Ricardo A. Cadenas, Caroline D. Ciraolo, William J. Wilkins, Chief Counsel—IRS, Washington, DC, Anne M. Craig, U.S. Attorney's Office, Lauren B. Epstein, Internal Revenue Service, Christopher Pavilonis, Pavilonis Law Offices, PA, Jacksonville, FL, for Petitioner–Appellant.

David Scott Barnhill, William Morris Sharp, Matthew A. Cullen, Sharp Partners, PA, Tampa, FL, V. Jean Owens, Owens Law Group, PA, Ruskin, FL, Geoffrey P. Eaton, Winston & Strawn, LLP, Washington, DC, for Respondents–Appellees.

Before JORDAN and ANDERSON, Circuit Judges, and DALTON,^* District Judge.

ANDERSON, Circuit Judge:

Respondent–Appellant Commissioner of the Internal Revenue Service (the “Commissioner”) appeals the United States Tax Court's judgment in favor of Petitioners–Appellees the estate of Travis L. Sanders (the “Estate”) and the Government of the United States Virgin Islands. The Commissioner argues that the Tax Court erred by failing to make necessary factual findings. After review, and with the benefit of oral argument, we vacate the Tax Court's judgment and remand.

The United States of America and the United States Virgin Islands (“USVI”) operate “separate but interrelated tax systems.” Huff v. Comm'r, 743 F.3d 790, 793 (11th Cir. 2014). United States taxpayers who receive income related to the USVI are subject to different reporting requirements depending on their residency. Bona fide residents of the USVI are required to file tax returns only with the USVI Bureau of Internal Revenue (“VIBIR”). 26 U.S.C. § 932(c)(2). Taxpayers who have USVI-sourced income but are not bona fide residents of the USVI must file tax returns with both the VIBIR and the United States Internal Revenue Service (“IRS”). Id.§ 932(a)(2). Additionally, the USVI is permitted to reduce the income tax for bona fide USVI residents on income “derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands.” Id.§ 934(b). In an effort to attract business to the islands, the USVI established an Economic Development Program (“EDP”) that offered a 90 percent reduction on certain USVI-sourced income to bona fide USVI residents.

Travis L. Sanders (“Sanders”) was a successful Florida businessman until his death in 2012. He built a group of companies (the “Surge Suppression Companies”) that manufactured and distributed surge suppression devices. Sanders began spending time in the USVI in 2002, and in that year he became a limited partner in Madison Associates (“Madison”), a USVI-based consulting firm. As described more fully below, Sanders provided services to the Surge Suppression Companies through Madison, and his companies paid Madison for those services. Madison then passed on a portion of those payments to Sanders. Because of that arrangement, Sanders filed tax returns only with the VIBIR, and pursuant to the EDP, he claimed a 90 percent tax reduction for income paid to him through Madison for tax years 2002, 2003, and 2004.

In 2010, the IRS issued notices of deficiency to Sanders, alleging that he had not been a bona fide USVI resident during those years and that Madison was an illegal tax shelter. Because Sanders was not a bona fide USVI resident, the Commissioner claims, Sanders was required to file tax returns with the IRS and was not entitled to the EDP tax reduction. Sanders challenged the notices in the Tax Court, arguing that the statute of limitations had run for the IRS to assess his tax liability, and that he was, in fact, a bona fide resident of the USVI for tax years 2002, 2003, and 2004. After a bench trial, the Tax Court held that Sanders had been a bona fide USVI resident during those years. As a result, the Tax Court concluded, the statute of limitations had run, and the IRS's notices of deficiency were time-barred. The Commissioner now appeals.

This appeal requires that we interpret the statute of limitations for tax assessment and evaluate Sanders's residency. We begin by reviewing the factual background of this case. We proceed to discuss the statute of limitations issue, and we hold that the statute of limitations period was only triggered by Sanders's filings with the VIBIR if he was, in fact, a bona fide USVI resident. Then, we turn to the bona fide residency issue and hold that the facts the Tax Court relied upon were insufficient to demonstrate bona fide residency, at least in the absence of additional findings of subsidiary fact by the Tax Court. We therefore vacate and remand the Tax Court's judgment.

I. FACTS

Sanders visited the USVI during September of 2002. On September 25, 2002, he signed a limited partnership agreement and an employment agreement with Madison. Those contracts bound Sanders to work as a consultant for Madison and specified that distributions he would receive from the partnership would be based on revenue from clients he brought to Madison. Sanders also signed an agreement on behalf of one of his Florida Surge Suppression Companies by which the company agreed to pay fees to Madison in exchange for Sanders's consulting services. Over the next three years, Sanders's Surge Suppression Companies paid fees to Madison, which passed the fees on to Sanders after deducting a portion for operating expenses, administrative fees, and other costs. Madison issued Sanders Schedule K–1 tax forms listing Sanders as a limited partner and classifying the payments from Madison to Sanders as USVI-source income. As a result, Sanders's income from Madison was potentially eligible for the 90 percent tax credit pursuant to the USVI EDP.

The parties dispute the extent to which Sanders's role in the Surge Suppression Companies changed when he became a consultant for Madison. The Commissioner claims that Sanders spent much of his time in the Surge Suppression Companies' offices in Florida and that his duties for the companies were essentially unchanged. The Estate argues that Sanders worked from Madison's offices in the USVI at least once every two months, that he played a reduced role in the Florida companies, and that he also sought opportunities to expand his companies' reach into the USVI and other parts of the Caribbean.

From September 2002 through the end of that year, Sanders spent 18 days in the USVI, according to the Estate. The IRS asserts that he spent only eight days on the islands in 2002, and the Tax Court did not resolve this factual dispute. When he visited the USVI, Sanders stayed at a condominium at the Ritz Carlton St. Thomas (the “Ritz Carlton”) in which Madison owned a one-twelfth ownership interest. Because Madison owned only a partial interest in the condominium, the unit was sometimes in use by its other owners. If Sanders visited the USVI when the unit was being used by another owner, the Ritz Carlton provided a similar condominium for his use. Sanders also stored a container of personal belongings at the Ritz Carlton, and the container was made available to him whenever he visited.

In 2003, Sanders formed a limited liability company with his friend and attorney Thomas Hogan (“Hogan”), also the Estate's personal representative in this case. Through that company, Sanders and Hogan purchased an approximately 70-foot motor yacht, the Nazdar . The Nazdar had five bedrooms, two kitchens, two bathrooms, an elevator, and a large living room. After Sanders and Hogan's company purchased it, the Nazdar was retrofitted in Destin, Florida. In April of 2003, the Nazdar was moved to the USVI and connected to utilities, including electricity, water, and cable television. From then on, Sanders stayed on the Nazdar when he was in the islands. He spent between 49 and 78 days in the USVI in 2003, and between 74 and 109 days there in 2004.¹ Sanders never established a mailing address in the USVI; whenever he provided an address on the islands, he used Madison's business address.

Sanders's girlfriend at the time, Kathleen Hennessy (“Hennessy”), visited the USVI on occasion. When she did so during 2002, she stayed with Sanders at the Ritz Carlton. Sanders and Hennessy were married in the USVI in June of 2003. Throughout the entire time period relevant to this case, including after her marriage to Sanders, Hennessy continued live and work in Florida; she never sought to establish residence in the USVI. Sanders's two children—one an adult and one a minor—also lived on the mainland. Sanders's minor son lived in Destin, Florida with Sanders's ex-wife, though he spent time with Sanders when Sanders was in Florida, and Sanders maintained a room for his son at his home in Florida.

II. DISCUSSION

A. Statute of Limitations

We turn first to the statute of limitations issue. Ordinarily, the IRS must assess a taxpayer's liability within three years of the filing of a return. 26 U.S.C. § 6501(a). The law defines “return” as “the return required to be filed by the taxpayer.” Id.“[I]n order for returns to be considered ‘filed’ for purposes of setting the period of limitations in motion, the returns must be delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations.” Allnutt v. Comm'r, 523 F.3d 406, 413 (4th Cir. 2008). In other words, a return does not trigger the running of the statute of limitations unless it is filed in the place required by the statute or regulations. In this case, the Commissioner issued a notice of deficiency to Sanders in 2010, more than three years after Sanders filed his tax returns with the VIBIR.

There are several exceptions to the three-year statute of...