Hulett v. Comm'r
| Decision Date | 29 January 2018 |
| Docket Number | Docket No. 4720-10,150 T.C. No. 4,Docket No. 31119-09,Docket No. 30676-09,Docket No. 4949-10. |
| Parties | MELISSA COFFEY HULETT a.k.a. MELISSA COFFEY, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Ps filed a petition for redetermination of income-tax deficiencies for 2003 and 2004, which arose from R's finding that Ps were not bona fide residents of the U.S. Virgin Islands and that Ps were nonfilers for federal tax purposes. Ps moved for summary judgment and claimed that they were bona fide Virgin Islands residents and that filing returns in the Virgin Islands satisfied their federal filing obligations. Ps argue that their subjective good faith belief of residency is sufficient to start the statute of limitations. Alternatively, Ps argue that R's receipt of part of Ps' Forms 1040 directly from the Virgin Islands constituted Ps' returns' being filed with R.
Held: The IRS's receipt of a return determines its filing.
Held, further, Ps' Forms 1040 were filed with the correct IRS service center.
Held, further, the first two pages of Ps' Forms 1040 and attached Forms W-2 filed with the Virgin Islands and received by the IRS contained sufficient information to calculate tax liability.
Held, further, Ps' Forms 1040 purported to be their tax returns.
Held, further, Ps' Forms 1040 showed on their face an honest and reasonable attempt to satisfy their tax obligations.
Held, further, Ps' Forms 1040 were properly executed under penalties of perjury.
Randall P. Andreozzi, Edward Doyle Fickess, Michael J. Tedesco, and Heather L. Marello, for petitioners.
Gene C. Schaerr, Alexander H. Pepper, and Geoffrey P. Eaton, for intervenor in docket No. 4720-10.
Michael W. Berwind, James G. Hartford, and Randal L. Eager, Jr., for respondent.
HOLMES, Judge: Statute-of-limitations questions posed by taxpayers who filed returns with only the United States Virgins Islands (VI) are not new: This is the fourth case in a sequence. In Appleton v. Commissioner, 140 T.C. 273 (2013), we held that a bona fide resident of the Virgin Islands had to file a federal return, but that the return he filed with the Virgin Islands Bureau of Internal Revenue (VIBIR) was that return. In Estate of Sanders v. Commissioner, 144 T.C. 63 (2015), vacated and remanded, 834 F.3d 1269 (11th Cir. 2016), we held that we apply normal standards of residency when deciding who is a bona fide VI resident. And in Cooper v. Commissioner, T.C. Memo. 2015-72, we held that a subjective good faith belief that one is a bona fide resident is not itself proof of bona fide residency. Here our focus shifts yet again. We will assume that the taxpayer who filed with the VIBIR is not a bona fide VI resident. But the VIBIR sent what she filed--or at least a substantial part of what she filed--on to the IRS.
A nonresident of the VI with both U.S. and VI income has to file with both the VIBIR and the IRS to satisfy her obligation to file a return under the Internal Revenue Code. But does the VIBIR's sharing of information with the IRS amount to the filing of a return?
Today we answer that question.
We are asked to consider the Coffeys' motions for summary judgment.2 We find no facts. The background information comes from the documents that are in the record and facts that the Commissioner does not contest.
Judith and James Coffey have been married for over 35 years. They had a successful joint career in scholastic publishing and in May 1985 incorporated Rainbow Educational Concepts, Inc., an S corporation. Rainbow Concepts is a publisher's development company that focuses on the editorial design and production of school textbooks. It has an impressive list of big-name clients, such as Houghton Mifflin, McGraw-Hill, and Scholastic. Judith was the president of Rainbow Concepts until 2003, and James was and remains its vice president. It is a profitable business. They reported nearly $1.5 million of adjusted gross income on their 2003 joint income tax return and another $1.4 million on their 2004 return. With high income usually comes high taxes--at least sometimes.
The Coffeys first became aware of some of the advantages of VI taxation in 2003. Chief among these is the VI's Economic Development Program (EDP). The EDP's purpose is to bring business to the VI, and to do so, it offers very lucrative tax incentives to some taxpayers who establish that they are bona fide VI residents. See sec. 932;3 Huff v. Commissioner, 135 T.C. 222 (2010). This is not a secret--Congress specifically allows the VI to reduce taxes 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." Sec. 934(b)(1). The EDP provides substantial benefits to participating companies: a 90% exemption from local-income taxation, a 90% exemption from dividend taxation, and a 100% exemption from gross-receipts taxation. See Huff, 135 T.C. at 227.
It didn't take long for the IRS to notice these incentives and to identify their potential for abuse. It made adventurous taxpayers aware of its skepticism of the EDP by issuing Notice 2004-45, 2004-2 C.B. 33. In this notice the IRS described what it believed to be a typical scenario where U.S. taxpayers improperly claim to be bona fide VI residents to take advantage of the EDP when in reality theirsituation hadn't changed one bit. An example given in the notice was of an employee of a company in the U.S. who terminated his employment only to become a partner in a VI partnership that provided the same services for the company that the employee used to perform--same job, but dressed up in consultant's clothes.
The Coffeys spoke with some tax professionals and decided to take advantage of the EDP in 2003. Judith ended her relationship with REC and became a partner in a VI partnership, IFW St. Croix Group, LLLP, later becoming StoneTree Group, LLLP (StoneTree). The Coffeys started looking for some property in October of that year, and closed on a house in St. Croix in December. They continued to own the house through at least 2010.
The Coffeys bought two cars, Judith got a VI driver's license, and she became a VI registered voter (and voted in its elections). Judith argues that she was a bona fide VI resident starting in 2003 through at least 2006. To that end, she believed that her filing obligations rested with the VIBIR and not the IRS. While not claiming to be a VI resident himself, James argues that he fell within the language of section 932(d). This section says that if two taxpayers file a joint return and the spouse who earns the higher adjusted gross income for the year is a VI resident, the spouse who isn't will be treated as one. Id.
With her VI contacts and section 932(d) in hand, the Coffeys filled out Forms 1040, U.S. Individual Income Tax Return, for each tax year from 2003 through 2007. As we explain in greater detail below, both VI residents and VI nonresidents fill out the same Form 1040 familiar to all Americans. On it they report their income and deductions and compute their tax. That much is simple. What has made these cases so complicated are questions of allocation and of filing. VI nonresidents who have income from inside the VI must include with their Forms 1040 a Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, on which they figure out what percentage of the total tax imposed by the Code they owe to the VIBIR and what percentage they owe to the IRS. Where to file is even more complicated, as some VI residents have to file only with the VIBIR, some VI residents and some VI nonresidents have to file with both the VIBIR and the IRS, and some VI nonresidents have to file only with the IRS.
For the two years at issue on these motions, Judith's income came from StoneTree. StoneTree performed services for Rainbow Concepts (and only Rainbow Concepts because of a noncompete agreement) that ranged from research and development, to management and consulting. Rainbow Concepts paid Stonetree the following fees in 2003 and 2004: Year Project management Sales commissions Consulting 2003
$545,693 $181,898 $447,500 2004
1,008,292 336,097 275,000
REC also paid StoneTree $600,000 in 2003 as consideration for its agreement not to compete.
The amounts REC paid to StoneTree did not go directly or entirely to Judith--StoneTree had other partners and local employees. Judith received a Schedule K-1 from StoneTree that reported her income as a partner for each year. As the Coffeys took the position that Judith was earning this income in the VI, they claimed an EDP credit for 2003 and 2004. For 2003 their Form 1040 showed a precredit tax due of more than $450,000, but after the EDP credit a total tax liability of less than $100,000.4 The power of the EDP was even greater for their tax year 2004, when their credit lowered their tax bill from nearly $500,000 to less than $50,000.
The Coffeys' Forms 1040 were complete and accepted by the VIBIR. Judith and James, as well as their tax-return preparer, each signed the returns. Their returns were complex. Their 2003 return consisted of the two pages of Form 1040, Schedules A, B, D, and E, as well as Form 6251, Alternative Minimum Taxfor Individuals, Form 4562, Depreciation and Amortization, and Form 8801, Credit for Prior Year Minimum Tax. Their 2004 return consisted of the first two pages and Schedules A, B, and E, as well as Form 4797, Sales of Business Property, Form 6251, and Form 8801. There were also some miscellaneous papers attached that explained some calculations, as well as any W-2s they had. The VIBIR stamped the 2003 return "received" on October 15, 2004, and stamped the 2004 return "received" on October 24, 2005.
On each of their 2003 through 2006 tax returns, the Coffeys listed their St. Croix address. They sent their returns to the proper address for permanent residents of the VI: the V.I. Bureau of Internal Revenue in Charlotte Amalie...
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