The opinion
ARTHUR I. APPLETON, JR., PETITIONER, AND THE
GOVERNMENT OF THE UNITED STATES VIRGIN
ISLANDS, INTERVENOR v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 7717–10. 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 pro-
vided 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 sepa-
rate 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 that
the 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 instruc-
tions. Consequently, P asserts, in a motion for summary judg-
ment, 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
273
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274 140 UNITED STATES TAX COURT REPORTS (273)
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 peti-
tioner. *
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, Ran-
dall 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
* Briefs amici curiae were filed by Richard C. Stark, Robert A. Katcher,
and Saul Mezei as attorneys for Bingham McCutchen, LLP, and by Mar-
jorie Rawls Roberts as attorney for Marjorie Rawls Roberts, P.C.
1 The parties have stipulated that petitioner was a ‘‘bona fide resident
of the Virgin Islands’’ within the meaning of sec. 932 and a ‘‘permanent
resident of the Virgin Islands’’ as that term was used in the instructions
to Form 1040, U.S. Individual Income Tax Return, for the years at issue.
Both terms are discussed more fully infra. The parties have also stipulated
that as applied in this case, the term ‘‘permanent resident of the Virgin
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(273) APPLETON v. COMMISSIONER 275
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 and pay-
ment 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, deter-
mining 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:
Islands’’ is synonymous and interchangeable with the term ‘‘bona fide resi-
dent of the Virgin Islands’’.
2 To encourage investment in the Virgin Islands, companies participating
in the EDP can receive substantial benefits including: a 90% exemption on
local income taxes, a 90% exemption on the taxation of dividends, and a
100% exemption on gross receipts taxes. See Huff v. Commissioner, 135
T.C. 222, 227 (2010).
3 The Virgin Islands uses the same income tax return form (i.e., Form
1040) that is used by the United States. The VIBIR forwarded copies of
the first two pages of Form 1040; Schedule C, Profit or Loss From Busi-
ness; Schedule C–EZ, Net Profit From Business; Form W–2, Wage and Tax
Statement; and Form W–2VI, U.S. Virgin Islands Wage and Tax State-
ment, to the IRS. The record contains an IRS account transcript which
states that the IRS received petitioner’s 2003 income tax return on March
14, 2005, and that an examination of that return commenced on August
4, 2005. The record does not reveal the dates on which the IRS received
copies of petitioner’s 2002 and 2004 income tax returns. Nor does the
record reveal the date the IRS commenced examining petitioner’s 2002 and
2004 income tax returns.
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276 140 UNITED STATES TAX COURT REPORTS (273)
Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6651(a)(2) 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 sec-
tion 932(c)(4) of the Internal Revenue Code (I.R.C.) for any of those tax-
able 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]
4 In 2004 the IRS issued Notice 2004–45, 2004–2 C.B. 33, in which it
stated that it intended to challenge ‘‘highly questionable, and in most cases
meritless, positions’’ of certain U.S. citizens who claimed to be residents of
the Virgin Islands in order to avoid U.S. taxation by claiming substantial
tax benefits arising from the tax policies enacted by the Government of the
Virgin Islands, including the 90% income tax reduction referenced supra
note 2. See Huff v. Commissioner, 135 T.C. at 228.
Notice 2004–45, 2004–2 C.B. at 33, states that the ‘‘highly questionable’’
positions being challenged are promoted to taxpayers in a variety of forms;
however, they are frequently promoted in the following manner:
Promoters typically approach a taxpayer (Taxpayer) living and working
in the United States and advise Taxpayer to (i) purport to become a
USVI resident by establishing certain contacts with the USVI, (ii) pur-
port to terminate his or her existing employment relationship with his
or her employer (Employer) and (iii) purport to become a partner of a
Virgin Islands limited liability partnership (‘‘V.I.LLP’’) that is treated as
a partnership for U.S. tax purposes. V.I.LLP then purports to enter into
a contract with Employer to provide Employer with substantially the
same services that were provided by Taxpayer prior to the creation of
this arrangement. Typically, after entering into the arrangement, Tax-
payer continues to provide substantially the same services for Employer
that he or she provided before entering into the arrangement, but Tax-
payer is nominally a partner of V.I.LLP instead of an employee of Em-
ployer.
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(273) APPLETON v. COMMISSIONER 277
Petitioner timely filed his petition with this Court on April
1, 2010. 5 Petitioner contends that the Code and the regula-
tions 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 peti-
tioner 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.
Under this arrangement, Employer makes payments to V.I.LLP for Tax-
payer’s services and no longer treats the payments as wages paid to Tax-
payer subject to the withholding and payment of employment taxes and
reporting on Taxpayer’s Form W–2. V.I.LLP, in turn, makes payments
to Taxpayer for his or her services to Employer. V.I.LLP typically treats
these payments for tax accounting purposes either as guaranteed pay-
ments for services or as distributions of Taxpayer’s allocable share of
partnership income. Under this arrangement, the promoter may be a
general partner in V.I.LLP and may retain a percentage of the fees re-
ceived from Employer.
5 Because petitioner’s mailing address was outside the United States (his
mailing address was in the Virgin Islands), the deadline to file his petition
was April 23, 2010 (i.e., 150 days after the mailing of the notice of defi-
ciency). See sec. 6213(a).
6 The bar of the period of limitations is an affirmative defense and must
be specifically pleaded and proven by the party raising this defense. Rules
39, 142(a); Mecom v. Commissioner, 101 T.C. 374, 382 (1993), aff ’d without
published opinion, 40 F.3d 385 (5th Cir. 1994); Daniels v. Commissioner,
T.C. Memo. 2012–355. Respondent acknowledges that petitioner has prop-
erly pleaded the statute of limitations defense.
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278 140 UNITED STATES TAX COURT REPORTS (273)
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 fac-
tual 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 sub-
stituted for ‘‘United States’’, and vice versa. See Danbury,
Inc., 820 F.2d at 620. Originally, corporations and U.S. citi-
zens 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.
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(273) APPLETON v. COMMISSIONER 279
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) provided that
corporations and individuals whose permanent residence is
in the Virgin Islands satisfied their U.S. income tax obliga-
tions by ‘‘paying their tax on income derived from all sources
both within and outside the Virgin Islands into the treasury
of the Virgin Islands’’. The ROA also provided that any taxes
levied by Congress on the inhabitants of the Virgin Islands
would be covered into (i.e., paid to) the Virgin Islands
Treasury. Id.
In 1986 Congress repealed the inhabitant rule by enacting
the Tax Reform Act of 1986 (TRA), Pub. L. No. 99–514, sec.
1274(a), 100 Stat. at 2596, and amended in 1988. As part of
the TRA, Congress enacted a new section 932, 8 which coordi-
nates U.S. and Virgin Islands income taxes for individuals
who are bona fide residents of the Virgin Islands. 9
SEC. 932. COORDINATION OF UNITED STATES AND VIRGIN
ISLANDS INCOME TAXES.
(c) TREATMENT OF VIRGIN ISLANDS RESIDENTS.—
(1) APPLICATION OF SUBSECTION.—This subsection shall apply to an
individual for the taxable year if—
(A) such individual is a bona fide resident of the Virgin Islands
at the close of the taxable year,[10] or
7 Sec.
7651(5)(B) of the Internal Revenue Code of 1954 implemented the
inhabitant rule by providing that ‘‘[f]or purposes of this title * * * section
28(a) of the Revised Organic Act of the Virgin Islands shall be effective as
if such section had been enacted subsequent to the enactment of this title.’’
See Huff v. Commissioner, 135 T.C. at 224–227, for a discussion of the his-
tory of taxation in the Virgin Islands and the ‘‘mirror tax system’’ which
governs Virgin Islands taxation.
8 While Congress enacted sec. 932 to protect individuals from reverting
to the old dual filing requirement rule, no similar law was enacted with
respect to corporations. Consequently, corporations have a dual filing re-
quirement and must file separate tax returns with the United States as
well as the Virgin Islands. See Condor Int’l, Inc. v. Commissioner, 78 F.3d
1355, 1358–1359 (9th Cir. 1996), aff ’g in part, rev’g in part 98 T.C. 203
(1992).
9 See Vento v. Dir. of V.I. Bureau of Internal Revenue, 715 F.3d 455 (3d
Cir. 2013), for an analysis of whether a taxpayer’s claimed residency in the
Virgin Islands is bona fide.
10 The American Jobs Creation Act of 2004, Pub. L. No. 108–357, sec.
Continued
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280 140 UNITED STATES TAX COURT REPORTS (273)
(B) such individual files a joint return for the taxable year with
an individual described in subparagraph (A).
(2) FILING REQUIREMENT.—Each individual to whom this subsection
applies for the taxable year shall file an income tax return for the tax-
able year with the Virgin Islands.[11]
(3) EXTENT OF INCOME TAX LIABILITY.—In the case of an individual
to whom this subsection applies in a taxable year for purposes of so
much of this title (other than this section and section 7654) as relates
to the taxes imposed by this chapter, the Virgin Islands shall be
treated as including the United States.
(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an indi-
vidual—
(A) who is a bona fide resident of the Virgin Islands at the close
of the taxable year,
(B) who, on his return of income tax to the Virgin Islands, reports
income from all sources and identifies the source of each item shown
on such return, and
(C) who fully pays his tax liability referred to in section 934(a) to
the Virgin Islands with respect to such income,
for purposes of calculating income tax liability to the United States,
gross income shall not include any amount included in gross income
on such return, and allocable deductions and credits shall not be
taken into account.[12]
If a bona fide resident of the Virgin Islands does not meet
the provisions of section 932(c)(4) and is compelled to file a
Federal tax return, any tax collected by the IRS must be cov-
ered over to the Virgin Islands. 48 U.S.C. sec. 1642 (2006).
Thus, any tax collected in this matter by the United States
would be covered over to the Government of the Virgin
Islands. 13
908(c)(2), 118 Stat. at 1656, amended sec. 932(c)(2), replacing ‘‘at the close
of the taxable year’’ with ‘‘during the entire taxable year’’, effective for tax
years ending after October 22, 2004. As respondent concedes petitioner
was a bona fide resident of the Virgin Islands for all years at issue, this
change does not affect our decision.
11 U.S. citizens or residents (other than those who are bona fide resi-
dents of the Virgin Islands) who have income derived from sources within
the Virgin Islands or effectively connected to a Virgin Islands trade or
business are explicitly required to file returns with both the United States
and the Virgin Islands. Sec. 932(a)(2).
12 Sec. 932(c) is not included in the mirror code and is not an element
of the Virgin Islands territorial tax system. See S. Rept. No. 100–445, at
314–315 (1988), 1988 U.S.C.C.A.N. 4515, 4825–4826.
13 At the October 17, 2012, hearing, the Court queried respective counsel
for respondent and intervenor as to why their clients took opposing posi-
tions in this matter even though all funds collected by the IRS would be
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(273) APPLETON v. COMMISSIONER 281
III. Federal Tax Filing Requirements
As a U.S. citizen, petitioner is subject to Federal reporting
requirements and taxation on his worldwide income as set
forth in the Code. See, e.g., Cook v. Tait, 265 U.S. 47, 56
(1924); Huff v. Commissioner, 135 T.C. 222, 230 (2010). Sev-
eral sections of the Code govern an individual’s filing require-
ments. Section 6012(a)(1)(A) provides that every individual
having for the taxable year gross income which equals or
exceeds the exemption amount, with certain exceptions not
applicable in this matter, shall file an income tax return.
Thus, there exists a choreographed interplay between sec-
tions 6012(a) and 932(c) of the Code which, together with
mirror code section 6012(a), governs the tax filing respon-
sibilities of individuals having income equal to or in excess
of the exemption amount.
Although an individual having for the taxable year gross
income which equals or exceeds the exemption amount must
file a Federal tax return, section 932(c)(2) directs bona fide
residents of the Virgin Islands to file income tax returns with
the Virgin Islands (through the VIBIR), and section 932(c)(4)
(flush language) exempts both U.S. source income and Virgin
Islands source income from U.S. taxation if all of the require-
ments of section 932(c)(4) are met. But if any requirement of
section 932(c)(4) is not satisfied, then the individual falls
back into the Federal tax reporting and payment system,
because his/her income would no longer be excluded for pur-
poses of calculating his/her U.S. tax liability. Respondent
contends that petitioner did not satisfy all of the require-
ments of section 932(c)(4), and hence he was required to file
covered over to the Virgin Islands. Respondent’s counsel stated that the
IRS has a duty to protect the entire Federal taxing system by promoting
fair tax administration and that every dollar involved in an abusive trans-
action or scheme should be taxed. Counsel for intervenor stated that the
Virgin Islands is involved in this matter because ‘‘we want the jobs’’ and
‘‘the IRS’s position is a job killer.’’ Additionally, intervenor’s counsel stated
that ‘‘we are concerned about our own residents’’ and if the Virgin Islands
accepted the IRS’ position, Virgin Islands residents, after paying taxes to
the VIBIR, would always be ‘‘uncertain as to whether they reached a final-
ity with their government.’’
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282 140 UNITED STATES TAX COURT REPORTS (273)
Federal tax returns pursuant to section 6012(a)(1)(A) for
each of the years at issue. 14
For purposes of deciding petitioner’s motion, applying the
principle that any inference to be drawn must be viewed in
a light most favorable to the nonmoving party, Espinoza v.
Commissioner, 78 T.C. 412 (1982), we assume petitioner does
not meet all of the requirements of section 932(c)(4) and
accordingly has fallen back into the Federal reporting and
payment system. Specifically, we assume that petitioner does
not meet the requirements of section 932(c)(4)(B) (that he did
not report income from all sources and identify the source of
each item shown on his tax returns) and section 932(c)(4)(C)
(that he did not fully pay his tax liabilities to the Virgin
Islands with respect to his income). 15 We therefore begin our
task of deciding petitioner’s motion by turning to section
7654(e), which provides that the Secretary shall prescribe
such regulations as may be necessary to carry out the provi-
sions of section 932, including prescribing the information
which individuals to whom section 932 applies must furnish
to the Secretary. The Secretary did not, however, promulgate
regulations for the years at issue. Consequently, we turn to
other sections of the Code, as well as regulations and instruc-
tions published by the IRS, for guidance as to the place
where petitioner must file his tax returns for the years at
issue.
Section 6091 generally governs the place where U.S. tax-
payers are required to file their tax returns. Section
6091(b)(1)(B)(ii) (flush language) provides that ‘‘citizens of
the United States whose principal place of abode * * * is
outside the United States’’ shall file their tax returns ‘‘at
14 Theresidual U.S. tax liability was emphasized by the 1988 amend-
ment to the TRA in the Technical and Miscellaneous Revenue Act of 1988
(TAMRA), Pub. L. No. 100–647, sec. 1012(w)(3), 102 Stat. at 3530. Sec.
932(c)(2) originally provided that an individual affected by subsec. (c)
‘‘shall file his income tax return for the taxable year with the Virgin Is-
lands.’’ This was changed in 1988 to ‘‘shall file an income tax return’’. This
change was made ‘‘to make it clear that individuals who do not comply
with all requirements for U.S. tax exemption will have to file a U.S. re-
turn.’’ S. Rept. No. 100–445, supra at 315, 1988 U.S.C.C.A.N. at 4826–
4827.
15 As noted elsewhere in this Opinion, respondent concedes that peti-
tioner meets the requirement of sec. 932(c)(4)(A); i.e., that petitioner was
a bona fide resident of the Virgin Islands during the years at issue.
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(273) APPLETON v. COMMISSIONER 283
such place as the Secretary may by regulations designate.’’
Pursuant to the authority granted him by the statute, the
Secretary promulgated section 1.6091–1(a), Income Tax
Regs., which provides that, in general, whenever an income
tax return is required to be filed and the place for filing the
return is not provided by the Code, the return shall be filed
at the place prescribed by the regulations.
During the years at issue section 1.6091–3(c), Income Tax
Regs., provided that income tax returns of an ‘‘individual cit-
izen of a possession of the United States’’ 16 (whether or not
a citizen of the United States) who has no legal residence or
principal place of business in any internal revenue district in
the United States shall be filed with (1) the Director of
Internal Operations, Internal Revenue Service, Washington,
DC 20225, or (2) the District Director, or (3) the director of
the service center, depending on the appropriate officer des-
ignated on the return form or in the instructions issued with
respect to the form.
As mentioned supra note 3, Virgin Islands taxpayers file
their tax returns on the same Form 1040 that U.S. taxpayers
use when they file their Federal tax returns. The instructions
to Form 1040 for 2002, 2003, and 2004 provide specific filing
instructions. Under the heading ‘‘Where do you file’’, for each
year the instructions state that ‘‘All APO, FPO addresses,
American Samoa, nonpermanent residents of Guam or the
Virgin Islands*, Puerto Rico (or if excluding income under
Internal Revenue Code section 933), dual-status aliens, a for-
eign country: U.S. citizens and those filing Form 2555, 2555–
EZ, or 4563’’ shall use the address of ‘‘Internal Revenue
Service Center Philadelphia, PA 19255–0215 USA’’.
In a footnote the instructions state that permanent resi-
dents of Guam should use the address of the Guam Depart-
ment of Revenue and Taxation. Continuing, the footnote
states that ‘‘permanent residents of the Virgin Islands should
16 The
term ‘‘individual citizen of a possession of the United States’’ is
not defined in the regulations. However, as noted supra note 1, the parties
have stipulated that petitioner is both a ‘‘bona fide resident of the Virgin
Islands’’ within the meaning of sec. 932 and a ‘‘permanent resident of the
Virgin Islands’’ as that term is used in the instructions to Form 1040, dur-
ing the years at issue. We thus are satisfied that during the years at issue,
petitioner was ‘‘an individual citizen of a possession of the United States’’
within the meaning of sec. 1.6091–3(c), Income Tax Regs.
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284 140 UNITED STATES TAX COURT REPORTS (273)
use: V.I. Bureau of Internal Revenue, 9601 Estate Thomas,
Charlotte Amalie, St. Thomas, VI 00802’’ when filing their
Form 1040 individual income tax returns. 17
IV. Section 6501(a) Period of Limitations
The regulations and the instructions issued by the IRS
regarding income tax return filings are significant for the
resolution of petitioner’s motion because the period of limita-
tions on assessment commences only when a tax return has
been properly filed. Section 6501(a) governs the period of
limitations. It provides: ‘‘Except as otherwise provided in this
section, the amount of any tax imposed by this title shall be
assessed within 3 years after the return was filed * * *. For
purposes of this chapter, the term ‘return’ means the return
required to be filed by the taxpayer’’. Thus, we must deter-
mine whether the Forms 1040 filed by petitioner with the
VIBIR were the returns required to be filed and, if so, were
they properly filed? Unless the answers to both of these ques-
tions are in the affirmative, pursuant to section 6501(c)(3)
tax may be assessed against petitioner at any time and peti-
tioner’s motion must be denied.
A. Petitioner’s Returns Are ‘‘Required Returns’’.
A return that commences the period of limitations is the
return required to be filed for purposes of section 6501(a)(1).
The return must include ‘‘the information required by the
applicable regulations or forms.’’ Sec. 1.6011–1(a), Income
Tax Regs. The Code does not define what constitutes a
return. See Mendes v. Commissioner, 121 T.C. 308, 329
(2003) (Vasquez, J., concurring); Swanson v. Commissioner,
121 T.C. 111, 122–123 (2003). However, on the basis of the
Supreme Court’s opinions in Zellerbach Paper Co. v.
Helvering, 293 U.S. 172 (1934), and Florsheim Bros.
Drygoods Co. v. United States, 280 U.S. 453 (1930), we used
the following four-part test in Beard v. Commissioner, 82
T.C. 766, 777 (1984), aff ’d, 793 F.2d 139 (6th Cir. 1986), in
determining whether a document filed qualifies as a valid
17 It
appears that when the inhabitant rule was replaced by sec. 932, the
IRS failed to update the instructions to Form 1040 and continued to use
the terms ‘‘permanent resident of the Virgin Islands’’ and ‘‘nonpermanent
resident of the Virgin Islands’’ despite their obsolescence.
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return for purposes of section 6501(a): (1) the document must
contain sufficient data to calculate tax liability; (2) the docu-
ment must purport to be a return; (3) there must be an
honest and reasonable attempt to satisfy the requirements of
the tax law; and (4) the taxpayer must have executed the
document under penalties of perjury. Perfect accuracy is not
required for the document to constitute a return. Zellerbach
Paper Co., 293 U.S. at 180; see also Badaracco v. Commis-
sioner, 464 U.S. 386, 396–397 (1984) (‘‘[A] document which
on its face plausibly purports to be in compliance, and which
is signed by the taxpayer, is a return despite its inaccura-
cies.’’); Germantown Trust v. Commissioner, 309 U.S. 304,
310 (1940) (‘‘It cannot be said that the petitioner * * * made
no return of the tax imposed by the statute. Its return may
have been incomplete in that it failed to compute a tax, but
this defect falls short of rendering it no return whatsoever.’’).
Respondent argues that the Forms 1040 petitioner filed
with the VIBIR do not meet all of the requirements of the
Beard test. First, respondent asserts that petitioner’s Forms
1040 were inaccurate and therefore do not contain sufficient
data to calculate petitioner’s tax liability: ‘‘If petitioner had
filed a federal income tax return, it would have differed
significantly from the forms filed with the VIBIR. The federal
income tax returns would instead mirror the statutory notice
of deficiency computations and amounts.’’ Moreover,
respondent asserts the Forms 1040 do not purport to be
returns because petitioner intended only to satisfy his Virgin
Islands obligations, not his Federal filing obligations, by
filing the documents. However, respondent later acknowl-
edges that
[i]ntervenor begins its reply * * * with the conjecture that respondent
would not challenge the Forms 1040 filed by petitioner with the VIBIR
if such returns had been filed with the IRS. Intervenor relies on
Germantown Trust Co. v. Commissioner, 309 U.S. 304 (1940), holding
that a tax return does not have to be perfect to qualify as a tax return.
While respondent agrees with this premise, the reality is that petitioner
filed no returns with the IRS.
By this acknowledgment, we believe that respondent con-
cedes that the Forms 1040 petitioner filed with the VIBIR
are returns within the meaning of section 6501(a)(1), suffi-
cient to trigger the running of the period of limitations if
properly filed. We therefore turn our attention to whether
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286 140 UNITED STATES TAX COURT REPORTS (273)
the returns were properly filed for purposes of commencing
the section 6501(a) period of limitations.
B. Petitioner’s Returns Were Properly Filed.
In Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930),
the Supreme Court noted that ‘‘[u]nder the established gen-
eral rule a statute of limitations runs against the United
States only when they assent and upon the conditions pre-
scribed.’’ The Supreme Court concluded that to secure the
benefit of the limitation, there must be ‘‘meticulous compli-
ance by the taxpayer with all named conditions in order to
secure the benefit of the limitation’’. Id.; see Allnut v.
Commissioner, 523 F.3d 406, 413 n.5 (4th Cir. 2008), aff ’g
T.C. Memo. 2002–311. Relying on Pilliod Lumber Co., we
stated in Winnett v. Commissioner, 96 T.C. 802, 808 (1991):
To ‘‘meticulously comply’’ with the conditions for commencing the run-
ning of the statute of limitations, a taxpayer must file his return where
section 6091 or the regulations promulgated thereunder require the
return to be filed. Thus, we hold that for purposes of determining the
commencement of the limitations period (when the timely mailing rule
does not apply), a return is not deemed ‘‘filed’’ until it is received by the
revenue office designated to receive such return.
Accordingly, this Court, as well as others, has held on sev-
eral occasions that filing a return with the wrong IRS rep-
resentative does not constitute ‘‘filing’’ for purposes of com-
mencing the limitations period. Winnett v. Commissioner, 96
T.C. at 808–809; see Allnutt v. Commissioner, 523 F.3d 406
(holding that a taxpayer’s hand delivery of returns to the
wrong individual does not constitute a filing); O’Bryan Bros.,
Inc. v. Commissioner, 127 F.2d 645 (6th Cir. 1942) (holding
that mailing a return to an IRS agent does not constitute a
filing), aff ’g 42 B.T.A. 18 (1940); see also Congelliere v.
Commissioner, T.C. Memo. 1990–265 (holding that a return
incorrectly filed with a service center rather than the District
Director is disregarded for purposes of determining when the
60-day period for issuing the notice of deficiency for the
termination year begins to run).
We must determine whether petitioner, by filing his
returns with the VIBIR, ‘‘meticulously complied’’ with the
conditions for commencing the period of limitations. In so
doing, we must determine whether the VIBIR was the correct
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(273) APPLETON v. COMMISSIONER 287
revenue office designated by the Secretary and the IRS to
receive petitioner’s returns. For the reasons set forth infra,
we hold that it was.
The Secretary, using the authority expressly granted to
him by section 6091(b)(1)(B), promulgated section 1.6091–
3(c), Income Tax Regs., which requires taxpayers like peti-
tioner, residing in a possession of the United States, to file
their tax returns as designated on the return forms or in the
instructions issued with respect to those forms. The instruc-
tions to Form 1040 are explicit: The form is to be filed with
the VIBIR. 18
Respondent acknowledges that section 6091 and the regu-
lations promulgated thereunder are the starting points for
determining where a tax return should be filed and that the
Form 1040 instructions direct permanent residents of the
Virgin Islands to file with the VIBIR. But respondent asserts
on brief that the ‘‘instructions do not explicitly take into
account the Service’s position with regard to those individ-
uals who claim to be, but are not, exempt from their federal
income tax filing obligation under section 6012 because they
do [sic] meet all of the requirements of section 932(c)(2).’’
Moreover, respondent’s brief states that when the Form 1040
instructions are read together with IRS Publication 570,
‘‘respondent’s instructions clearly lead to the conclusion that
the petitioner fell within the general place-of-filing rule for
individual taxpayers living abroad’’, and therefore petitioner
was required to file a protective return with the Internal
Revenue Service Center in Philadelphia, Pennsylvania. 19
Specifically, respondent’s brief states:
Common sense dictates that petitioner, knowing he did not meet all
three requirements of section 932(c)(4), should have filed a federal
income tax return with the Philadelphia Service Campus. If petitioner
had any doubts as to where to file his federal tax return, he could have
called the Service’s toll-free phone line, (800) 829–1040, to seek advice,
18 In
determining where a permanent resident of the Virgin Islands
should file his/her tax return, we have considered IRS Publication 570, Tax
Guide for Individuals With Income From U.S. Possessions, and I.R.S.
F.S.A. 199906031 (Feb. 12, 1999), which we believe a meticulous taxpayer
researching his/her filing requirements would have found. Nothing in these
documents leads us to a different conclusion.
19 See our discussion regarding the Form 1040 instructions supra pp.
283-284.
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288 140 UNITED STATES TAX COURT REPORTS (273)
but there is nothing in the record that indicates petitioner sought any
advice from the Service.
At the October 17, 2012, hearing, respondent’s counsel, in an
attempt to clarify the position set forth in respondent’s
briefs, stated: ‘‘What our briefs set out is that there was
enough instructions in the publication out there where Mr.
Appleton to [sic] reasonable to come to the conclusion that he
should have filed that return with zeroes on it with the
Philadelphia Service Center.’’
We find respondent’s position unconvincing for several rea-
sons. First, we do not accept respondent’s assertion that a
permanent resident of the Virgin Islands would reasonably
consider himself/herself to be a taxpayer living abroad.
Indeed, the instructions to Form 1040 make it clear that
individuals living in a foreign country (who are directed to
file their returns with the Philadelphia Service Center) are
a separate category from those individuals who are perma-
nent residents of the Virgin Islands. Second, we do not agree
with respondent’s counsel’s comment that ‘‘common sense
dictates that petitioner’’ should have known that he should
file a protective Federal income tax return with the Philadel-
phia Service Center, because (1) for the years at issue, no
IRS document has been brought to our attention that stated
that such a filing should have been made, and (2) there is
no indication that the IRS employees at the Philadelphia
Service Center were instructed to expect that permanent
residents of the Virgin Islands were to file protective returns
at that center. And finally, we question the logic of counsel’s
suggestion that the protective returns which petitioner
purportedly should have filed should have zeros entered on
it, inasmuch as tax returns which reflect zero income and
zero tax liability are generally characterized by this Court,
the IRS, and others, as frivolous. See United States v. Mosel,
738 F.2d 157 (6th Cir. 1984); Grunsted v. Commissioner, 136
T.C. 455, 460 (2011); Alexander v. Commissioner, T.C. Memo.
2012–75; Blaga v. Commissioner, T.C. Memo. 2010–170;
Notice 2010–33, 2010–17 I.R.B. 609. In sum, to expect a tax-
payer to file a protective zero return with a service center to
which the taxpayer was not directed, and where IRS
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(273) APPLETON v. COMMISSIONER 289
employees were not alerted to expect such returns, is
unreasonable. 20
It was only after respondent began investigating the trans-
actions referred to in Notice 2004–45, 2004–2 C.B. 33, that
the IRS released Chief Counsel Advice 200624002 (June 16,
2006), which stated that the section 6501(a) period of limita-
tions remained open with respect to a U.S. citizen who timely
filed an income tax return with the VIBIR, if he/she failed
to meet all of the requirements of section 932(c)(4). In 2007
the IRS modified that position in Notice 2007–19, 2007–1
C.B. 689, and gave notice of its position that bona fide resi-
dents who earned $75,000 or more were required to file a
second return with the IRS in Bensalem, Pennsylvania,
reporting no gross income and no taxable income (i.e., a zero
return) and attach thereto a four-part statement (titled
‘‘Bona Fide Residence-Based Return Position’’) containing
certain information set forth in the notice in order to start
the running of the section 6501(a) period of limitations. In
contrast, returns filed with the VIBIR by bona fide residents
with income below $75,000 would commence the period of
limitations. Notice 2007–19, supra, emphasized that the IRS
position taken therein was retroactive and that prior years
would remain open until such filings were made.
Within two months after the issuance of Notice 2007–19,
supra, the IRS abandoned the aforementioned income-level
distinction on a prospective basis in Notice 2007–31, 2007–
1 C.B. 971, and announced that for tax years ending on or
after December 31, 2006, a tax return filed with the VIBIR
by a U.S. citizen claiming to be a bona fide resident of the
Virgin Islands would commence the section 6501(a) period of
limitations for Federal tax purposes. However, Notice 2007–
31, supra, stated that for tax years ending before December
20 Respondent, in his brief, asserts that sec. 1.874–1(b)(6), Income Tax
Regs., states that nonresident aliens who conduct limited activities in the
United States may file a protective return which reports no income to pro-
tect the right to receive the benefit of deductions and credits should the
IRS determine that such a nonresident alien earned U.S. source income or
income effectively connected to a U.S. trade or business. Respondent’s ar-
gument is inapposite. Bona fide residents of the Virgin Islands are not
nonresident aliens, and we do not believe that either bona fide residents
of the Virgin Islands or IRS employees would make the substantial ‘‘log-
ical’’ leap respondent requests us to assume they would make.
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290 140 UNITED STATES TAX COURT REPORTS (273)
31, 2006, the rules set forth in Notice 2007–19, supra, would
remain effective, if the taxpayer so chose. 21 While all of
these changes were taking place, the instructions to Form
1040 continued to direct permanent residents of the Virgin
Islands to file their income tax returns with the VIBIR; the
instructions made no mention of any other filing require-
ments.
We do not challenge respondent’s right to modify an
individual’s reporting requirements. Indeed, section 7654(e)
expressly delegates to the Secretary the power to ‘‘prescribe
such regulations as may be necessary to carry out the provi-
sions of * * * [section] 932, including * * * prescribing the
information which the individuals to whom such sections
may apply shall furnish to the Secretary.’’ But this broad
authority was not exercised, and no such regulations were in
effect for the years at issue. Rather, the only regulations in
effect for the years at issue were those which made it clear
that permanent residents of the Virgin Islands were to file
their tax returns with the VIBIR. Retroactive notices pub-
lished by the IRS do not have the force and effect of law, nor
are they regulatory. At best these notices can be considered
as the IRS’ litigating position. Standley v. Commissioner, 99
T.C. 259, 267 n.8 (1992), aff ’d without published opinion, 24
F.3d 249 (9th Cir. 1994); Hellweg v. Commissioner, T.C.
Memo. 2011–58.
Respondent posits that the returns petitioner filed with the
VIBIR cannot be determined to satisfy Federal reporting
requirements because (1) the United States and the Virgin
Islands are separate taxing jurisdictions and (2) petitioner
21 In 2008, under the authority granted to him in sec. 7654(e), the Sec-
retary promulgated sec. 1.932–1(c)(2)(ii), Income Tax Regs., which provides
that for all tax years ending on or after December 31, 2006, for purposes
of the sec. 6501(a) period of limitations an income tax return filed with the
Virgin Islands by an individual who takes the position that he or she is
a bona fide resident of the Virgin Islands will be deemed a U.S. income
tax return, provided the United States and the Virgin Islands have an op-
erating working arrangement similar to the one discussed in Notice 2007–
31, 2007–1 C.B. 971. However, for tax years ending before December 31,
2006, the interim rules of Notice 2007–19, 2007–1 C.B. 689, would still be
applied. Respondent concedes that this regulation does not apply for the
years at issue; therefore, he does not claim the deference afforded to regu-
lations by Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837 (1984).
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(273) APPLETON v. COMMISSIONER 291
has separate obligations to each jurisdiction. In support of
this position, respondent points out that the inhabitant rule
was repealed in 1986; accordingly, respondent maintains,
Virgin Islands taxpayers could no longer automatically sat-
isfy their Federal tax obligations by filing with, and paying
tax to, the Virgin Islands. To rule otherwise, respondent
asserts, would negate the purpose of section 932(c). We dis-
agree.
In support of his argument, respondent cites our Opinion
in Huff v. Commissioner, 135 T.C. 222, wherein we refer to
returns filed with the VIBIR as ‘‘territorial returns’’, see id.
at 223, and taxes paid to the Virgin Islands as ‘‘territorial
tax’’, see id. at 225. Respondent contends that our discussion
in Huff relating to the taxpayer’s additional filing obligation
if all of the requirements of section 932(c)(4) are not met, and
specifically our statement that the taxpayer ‘‘will be required
to file a Federal income tax return even if he filed a Virgin
Islands tax return’’, supports his position. See id. at 230.
Respondent is wrong.
Respondent misapplies our statements in Huff. We did not
address therein the question whether a tax return filed with
the VIBIR pursuant to section 932(c)(2) is ‘‘the return
required to be filed by the taxpayer’’ under section 6501. Nor
did we address therein whether the taxpayer’s return filings
with the VIBIR were sufficient to trigger the commencement
of the section 6501(a) period of limitations. 22 Rather, we held
only that the United States and the Virgin Islands are sepa-
rate taxing jurisdictions within the context of our judicial
jurisdiction. The Virgin Islands, through the VIBIR, admin-
isters and enforces its tax laws separately from the United
States through the IRS. In the context of the matter therein
before us (i.e., the redetermination of the deficiencies deter-
mined by the IRS), we held in Huff that we had jurisdiction
to hear the case.
Respondent’s position in this case (i.e., that petitioner
should have filed two returns—one with the VIBIR and one
with the IRS) is undermined by his position in Notice 2007–
22 Our references to ‘‘territorial’’ in Huff v. Commissioner, 135 T.C. 605
(2010), Huff v. Commissioner, 138 T.C. 258 (2012), and Appleton v. Com-
missioner, 135 T.C. 461 (2010), rev’d, 430 Fed. Appx. 135 (3d Cir. 2011),
do not reach the question of filing requirements, nor do they reach the sec.
6501(a) period of limitations question.
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292 140 UNITED STATES TAX COURT REPORTS (273)
19, supra, which states that bona fide residents of the Virgin
Islands who earn less than $75,000 may satisfy their Federal
filing requirements by the single filing of a return with the
VIBIR. Thus, to an extent, respondent accepts petitioner’s
argument that a return filed with the VIBIR may be both a
Federal return and a territorial return. 23
We agree with respondent’s position that if a taxpayer does
not meet all of the section 932(c)(4) requirements, the tax-
payer falls back into the Federal reporting and payment
regime. In such a case, section 6091 governs the place for
filing returns, and the regulations promulgated under section
6091, as well as the IRS’ filing instructions, provide specific
directions to taxpayers. But, as we previously discussed
herein, those regulations and form instructions direct a
permanent resident of the Virgin Islands to file his/her
return with the VIBIR.
Finally, respondent relies on Condor Int’l, Inc. v. Commis-
sioner, 78 F.3d 1355 (9th Cir. 1996), aff ’g in part, rev’g in
part 98 T.C. 203 (1992), and Commissioner v. Lane-Wells Co.,
321 U.S. 219 (1944), to support his position. Both of these
cases are inapposite.
Respondent cites Condor Int’l, Inc. for the proposition that
the TRA did not simply replace the inhabitant rule with sec-
tion 932 but also established a dual filing requirement for
individuals who are bona fide residents of the Virgin Islands.
We disagree. In Condor Int’l, Inc., the corporate taxpayer
filed returns with the Virgin Islands only. The court found
that this filing was insufficient to commence the period of
limitations for Federal tax purposes because, as we noted
23 It is not unprecedented for a court to determine that a return filed in
one tax jurisdiction may commence the period of limitations in a second
tax jurisdiction. In Holmes v. Dir. of Dep’t of Revenue & Taxation, Gov’t
of Guam, 937 F.2d 481 (9th Cir. 1991), the Court of Appeals for the Ninth
Circuit determined that the taxpayers’ tax return filing in the Common-
wealth of the Northern Mariana Islands (CNMI) commenced the period of
limitations for the Guamanian Department of Revenue and Taxation.
Guam and the CNMI also use mirror codes of the Code through which
each jurisdiction administered its own income tax. The court in Holmes
stated that Guam could request tax returns filed by CNMI taxpayers ‘‘sim-
ply by asking’’. If Guam failed to request such information, or neglected
to act on that information while the period of limitations remained open,
the court stated that ‘‘its rights will expire, as would the rights of its coun-
terpart on the mainland, the I.R.S.’’ Id. at 484–485.
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(273) APPLETON v. COMMISSIONER 293
supra note 8, corporations are subject to the preinhabitant
rule dual filing requirement and, as we noted, do not come
under the purview of section 932. Moreover, unlike the
instructions to Form 1040, the instructions to Form 1120,
U.S. Corporation Income Tax Return, explicitly state that a
corporation in the Virgin Islands must file a tax return with
the IRS. If a corporation’s principal business, office, or
agency is located in ‘‘[a] foreign country or U.S. possession
(or the corporation is claiming the Possessions [sic] corpora-
tion tax credit under sections 30A and 936)’’ and ‘‘the total
assets at the end of the tax year (Form 1120, page 1, item
D) are: * * * any amount’’, then the corporation is to ‘‘Use
the following Internal Revenue Service Center address: * * *
Philadelphia, PA 19255–0012’’.
Likewise, the holding in Lane-Wells Co. does not support
respondent’s position in this case. In that matter, the
Supreme Court found that a taxpayer’s normal corporate
income tax return, Form 1120, did not commence the period
of limitations with respect to a special surtax because the
taxpayer did not file a separate return as required by the
statute and the regulations. Respondent asserts that the
situation in the instant case is analogous because ‘‘[s]ection
932(c)(4) implicitly requires territorial income tax to be paid
to the USVI government and federal income tax to the
United States’’ if its requirements are not met. We do not
find Lane-Wells Co. to be analogous to the instant situation.
In Lane-Wells Co., the taxpayer was required by the regula-
tions to file Form 1120–H, U.S. Income Tax Return for
Homeowners Associations, the special tax return for the
surtax. Moreover, as the Supreme Court points out, during
the year at issue Form 1120 stated that if the taxpayer fell
into the category of corporations subject to the surtax, the
taxpayer was required to file a Form 1120–H. Commissioner
v. Lane-Wells Co., 321 U.S. at 220. The taxpayer in this case
is an individual; thus, no such explicit requirement exists in
this matter.
The discussions in Condor Int’l Inc. and Lane-Wells Co. of
the period of limitations occurred in a context where the cor-
porate taxpayer knew that it had a second filing obligation
but failed to comply with that obligation. Such is not the case
in this matter. In this matter, respondent asserts that peti-
tioner, an individual, should have understood that he had an
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294 140 UNITED STATES TAX COURT REPORTS (273)
implied obligation to file a second, separate return, an
implied obligation for which respondent provided no notice
until many years after the years at issue.
V. Conclusion
On the basis of the foregoing, we conclude that petitioner
has proven the section 6501(a) period of limitations on
assessment expired before the date respondent mailed peti-
tioner the notice of deficiency. Accordingly, we shall grant
petitioner’s motion for summary judgment. Intervenor’s
motion for summary judgment will be denied as moot.
An appropriate order and decision will be entered.
f
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