Estate of Sanders v. Commissioner of Internal Revenue, 070518 FEDTAX, 4614-11

Docket Nº:4614-11
Opinion Judge:KERRIGAN, Judge.
Party Name:ESTATE OF TRAVIS L. SANDERS, DECEASED, THOMAS S. HOGAN, JR., PERSONAL REPRESENTATIVE, Petitioner, AND THE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent[*]
Attorney:William M. Sharp, David S. Barnhill, and Vernon Jean Owens, for petitioner. Vincent F. Frazer, Peter N. Hiebert, and Geoffrey P. Eaton, for intervenor. Christopher A. Pavilonis and Anne. M. Craig, for respondent.
Case Date:July 05, 2018
Court:United States Tax Court
 
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T.C. Memo. 2018-104

ESTATE OF TRAVIS L. SANDERS, DECEASED, THOMAS S. HOGAN, JR., PERSONAL REPRESENTATIVE, Petitioner, AND THE GOVERNMENT OF THE UNITED STATES VIRGIN ISLANDS, Intervenor

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent[*]

No. 4614-11

United States Tax Court

July 5, 2018

William M. Sharp, David S. Barnhill, and Vernon Jean Owens, for petitioner.

Vincent F. Frazer, Peter N. Hiebert, and Geoffrey P. Eaton, for intervenor.

Christopher A. Pavilonis and Anne. M. Craig, for respondent.

SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION

KERRIGAN, Judge.

This matter is before the Court on remand from the Court of Appeals for the Eleventh Circuit for further consideration consistent with its opinion in Commissioner v. Estate of Sanders (Sanders II), 834 F.3d 1269 (11th Cir. 2016), vacating and remanding Estate of Sanders v. Commissioner (Sanders I), 144 T.C. 63 (2015).

The Court of Appeals held that the period of limitations pursuant to section 6501(a) was triggered only if decedent, Travis L. Sanders, was a bona fide resident of the United States Virgin Islands (USVI). Id. at 1285. The Court of Appeals' remand instructed this Court to make factual findings regarding the amount of time decedent spent in the USVI.1

Id.

Respondent determined the following deficiencies and additions to tax with respect to tax years 2002, 2003, and 2004:

Year Deficiency Sec. 6651(a)(1) Additions to tax Sec. 6651(a)(2) Sec. 6654
2002 $485, 805 $98, 821 $109, 801 $1, 667
2003 106, 758 24, 021 26, 690 2, 754
2004 54, 648 12, 296 13, 662 1, 566
The issue for consideration on remand is whether decedent was a bona fide resident of the USVI. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. FINDINGS OF FACT Facts with respect to this case were found in our original opinion, Sanders I, and are incorporated by this reference. We clarify and add to the facts to address the holding in Sanders II, 834 F.3d at 1284, that "facts relied upon by the Tax Court are insufficient to establish that Sanders ever became a bona fide resident of the USVI". Decedent, a U.S. citizen, lived in Florida when he filed the petition. On November 13, 2012, decedent died. Decedent's Companies Decedent built his own companies to both manufacture and distribute surge suppression devices. Decedent owned three surge suppression companies, ITD of Destin, Inc., Surge Suppression, Inc., and Surge Technology, Inc. (collectively decedent's companies or his companies). Decedent owned 100% of the stock of all of his companies at all times during tax years 2002, 2003, and 2004. Surge Suppression, Inc., and Surge Technology, Inc., had management agreements with ITD of Destin, Inc. Under the terms of the management agreements, ITD of Destin, Inc., was to provide administrative and labor services to both Surge Suppression, Inc., and Surge Technology, Inc. Effective December 30, 2003, Surge Suppression, Inc., and Surge Technology, Inc., merged into ITD of Destin, Inc., which was renamed Surge Suppression, Inc. (SSI). Surge Suppression, Inc., Surge Technology, Inc., and ITD of Destin, Inc., filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for tax years 2002 and 2003. SSI filed Form 1120S for tax year 2004. Before decedent started his companies, he was an independent distributor for Innovative Technology, where he met Thomas Hogan, a legal representative to Innovative Technology. In approximately 1995 decedent and Mr. Hogan traveled to St. Croix, USVI, to explore opportunities to work with another company. The two became friends and built a business and social relationship. In 1997 Mr. Hogan began to represent decedent on legal matters and continued the representation until decedent's death. Decedent considered selling his companies in 2002 but decided not to go through with the sale. The potential buyer expressed concern that the companies were too dependent on decedent's personal involvement and that they might fail to flourish in his absence. After the unsuccessful sale effort, decedent wanted to make changes to his companies' management and operations structure in order to exert less control. Decedent planned to operate his companies from the USVI and ultimately retire there. Madison Associates, L.P. In 2001 Mr. Hogan partnered with Rick Roberts, Victor Taglia, and Alan Teegardin to start Madison Associates, L.P. (Madison), a designated services business in the USVI. Madison provided scientific, electronic, investment, economic, and management consulting services to businesses in the United States. Mr. Teegardin was licensed to practice law in the USVI. Mr. Roberts was a certified public accountant in Florida. This group hired USVI attorney Vince Fuller to organize Madison and serve as the general partner. They were interested in benefiting from the USVI economic development program (EDP), which had recently expanded to include consulting businesses. Madison established a USVI office at the American Yacht Harbor, in an area known as Red Hook. Madison published a pamphlet about becoming a limited partner in Madison. Madison advertised that each of its limited partners received a 90% tax credit on distributions from Madison as a result of being a USVI resident. Each limited partner was entirely responsible for bringing in his or her own revenue to Madison. Limited partners did not share each other's revenue, and each partner had his or her own capital account. Each limited partner paid Madison up to a 5% fee of the revenue attributable to that limited partner. After overhead and general partner allocations were paid, the limited partner was entitled to a distribution of the remaining capital in his or her own account. Mr. Hogan introduced decedent to Madison. On September 25, 2002, decedent signed a Supplemental Agreement to Agreement of Limited Partnership of Madison Associates, which made him a limited partner of Madison. Decedent also signed an employment agreement with Madison on that date. The contract stated that the "[e]mployee agrees to devote his full-time talent and abilities to Employer for so long as this Agreement is in effect." The contract required decedent to maintain records "including, but not limited to Affidavits of residency or other certification for filing with the Economic Development Commission." Also on September 25, 2002, decedent executed an agreement on behalf of ITD of Destin, Inc., whereby ITD of Destin, Inc., would pay Madison fees for consulting. Decedent was to provide the consulting services on behalf of Madison to ITD of Destin, Inc. Decedent's two other companies, Surge Technology, Inc., and Surge Suppression, Inc., never entered into consulting agreements with Madison. Tax Years 2002-04 At the beginning of 2002 decedent was divorced and the father of a minor son (minor son) and an adult daughter. Decedent and Kathleen Hennessy, decedent's fiancee and future wife, lived in a home in Destin, Florida (Destin). The home was approximately 2, 500 to 3, 000 square feet. The value of the Destin home was approximately $275, 000. Decedent continued to own this home through 2004. Decedent's daughter was a college student who...

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