UNITED STATES TAX COURT

140 T.C. No. 14

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

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 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 that

SERVED MAY 2 2 2013

-2the 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.

*Briefs amici curiae were filed by Richard C. Stark, Robert A. Katcher, and

Saul Mezei as attorneys for Bingham McCutchen, LLP, and by Marjorie Rawls

Roberts as attorney for Marjorie Rawls Roberts, P.C.

-3Ladd 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).

-4Background

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).' 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 and

'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 Islands" is synonymous and

interchangeable with the term "bona fide resident of the Virgin Islands".

2To 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).

-5-

payment 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:

3The 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 Business; 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 Statement, 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.

-6Additions to tax

Year

Deficiency

Sec. 6651(a)(1)

Sec. 6651(a)(2)

Sec. 6654

2002

2003

2004

$283,555

789,518

280,241

$35,563.73

147,943.58

56,728.35

$39,515.25

164,381.75

63,031.50

$9,045.50

20,370.53

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.

4In 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 s_up_ra 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:

(continued...)

-7Petitioner 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

4(...continued)

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) purport 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, Taxpayer continues to

provide substantially the same services for Employer that he or she

provided before entering into the arrangement, but Taxpayer is

nominally a partner of V.I.LLP instead of an employee of Employer.

Under this arrangement, Employer makes payments to V.I.LLP for

Taxpayer's services and no longer treats the payments as wages paid

to Taxpayer 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 payments 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 received from Employer.

5Because 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 deficiency). See

sec. 6213(a).

-8-

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.

6The 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 properly pleaded

the statute of limitations defense.

-9-

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

- 10 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)

provided that corporations and individuals whose permanent residence is in the

Virgin Islands satisfied their U.S. income tax obligations by "paying their tax on

7Sec. 7651(5)(B) of the Internal Revenue Code of 1954 implemented the

inhabitant rule by providing that "For 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 history of taxation in

the Virgin Islands and the "mirror tax system" which governs Virgin Islands

taxation.

- 11 -

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 coordinates 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--

8While 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 requirement 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).

9See Vento v. Dir. of V. I. Bureau of Internal Revenue,

F.3d

, 2013

WL 1632735 (3d Cir. Apr. 17, 2013), for an analysis of whether a taxpayer's

claimed residency in the Virgin Islands is bona fide.

- 12 (A) such individual is a bona fide resident of the

Virgin Islands at the close of the taxable year,D°1or

(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 taxable year with the Virgin Islands DU

(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

individual-(A) who is a bona fide resident of the Virgin Islands at

the close of the taxable year,

1°The American Jobs Creation Act of 2004, Pub. L. No. 108-357 sec.

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.

"U.S. citizens or residents (other than those who are bona fide residents 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).

- 13 -

(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

mcome,

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.

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 covered 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."

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.

13At the October 17, 2012, hearing, the Court queried respective counsel for

respondent and intervenor as to why their clients took opposing positions in this

matter even though all funds collected by the IRS would be 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 transaction 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

(continued...)

- 14 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). Several

sections of the Code govern an individual's filing requirements. 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 sections 6012(a) and 932(c) of the Code which,

together with mirror code section 6012(a), governs the tax filing responsibilities 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

"(...continued)

Islands accepted the IRS' position, Virgin Islands residents, after paying taxes to

the VIBIR, would always be "uncertain as to whether they reached a finality with

their government."

- 15 language) exempts both U.S. source income and Virgin Islands source income

from U.S. taxation if all of the requirements 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 purposes of calculating his/her U.S. tax liability.

Respondent contends that petitioner did not satisfy all of the requirements of

section 932(c)(4), and hence he was required to file Federal tax returns pursuant to

section 6012(a)(1)(A) for each of the years at issue."

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

"The residual U.S. tax liability was emphasized by the 1988 amendment 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 subsection (c) "shall file his income tax

return for the taxable year with the Virgin Islands." 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. return." S. Rept. No. 100-445, supra at 315, 1988 U.S.C.C.A.N.

at 4826-4827.

- 16 -

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)." 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

provisions 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 instructions 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. taxpayers 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 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

"As noted elsewhere in this Opinion, respondent concedes that petitioner

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.

- 17 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 citizen of a possession of the United

States"'6 (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 designated 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

16The 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, during 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.

- 18 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 foreign 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 residents of Guam should

use the address of the Guam Department of Revenue and Taxation. Continuing,

the footnote states that "permanent residents of the Virgin Islands should 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 "

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 limitations on assessment commences only when a tax return has been

properly filed. Section 6501(a) governs the period of limitations. It provides:

"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.

- 19 -

"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 determine 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 questions are in the

affirmative, pursuant to section 6501(c)(3) tax may be assessed against petitioner

at any time and petitioner'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

- 20 document filed qualifies as a valid return for purposes of section 6501(a): (1) the

document must contain sufficient data to calculate tax liability; (2) the document

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. Commissioner, 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 inaccuracies."); 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

- 21 -

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 acknowledges that

Intervenor 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 concedes that the Forms

1040 petitioner filed with the VIBIR are returns within the meaning of section

6501(a)(1), sufficient to trigger the running of the period of limitations if properly

filed. We therefore turn our attention to whether 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 general rule a statute of limitations runs

against the United States only when they assent and upon the conditions

prescribed." The Supreme Court concluded that to secure the benefit of the

limitation, there must be "meticulous compliance by the taxpayer with all named

- 22 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 Lucas v. Pilliod Lumber Co., we stated in Winnett v. Commissioner,

96 T.C. 802, 808 (1991):

To "meticulously comply" with the conditions for commencing the

running 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 several occasions that filing

a return with the wrong IRS representative does not constitute "filing" for

purposes of commencing the limitations period. Winnett v. Commissioner, 96

T.C. at 808-809; see Allnutt v. Commissioner, 523 F.3d 406 (holding that

taxpayer's hand delivery of returns to wrong individual does not constitute a

filing); O'Bryan Bros., Inc. v. Commissioner, 127 F.2d 645 (6th Cir. 1942)

(holding that mailing of return to an IRS agent does not constitute a filing), a_ff'g

42 B.T.A. 18 (1940); see also Congelliere v. Commissioner, T.C. Memo. 1990265 (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).

- 23 -

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

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 petitioner, 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 instructions to Form 1040 are explicit: The form

is to be filed with the VIBIR.i®

Respondent acknowledges that section 6091 and the regulations

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

18In 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.

- 24 "instructions do not explicitly take into account the Service's position with regard

to those individuals 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,

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

19See our discussion regarding the Form 1040 instructions supra pp. 17-18.

- 25 [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 reasons. 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 permanent

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

Philadelphia 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

- 26 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

taxpayer to file a protective zero return with a service center to which the taxpayer

was not directed, and where IRS employees were not alerted to expect such

returns, is unreasonable.20

It was only after respondent began investigating the transactions 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

limitations 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 residents who

20Respondent, 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 protect 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 argument 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 "logical" leap respondent requests us to assume they would make.

- 27 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 ResidenceBased 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, s_u_pra, 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 31, 2006, the

rules set forth in Notice 2007-19, supra, would remain effective, if the taxpayer so

- 28 -

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 return with the VIBIR; the instructions made no mention of any other

filing requirements.

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

provisions 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

2iIn 2008, under the authority granted to him in sec. 7654(e), the Secretary

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 operating 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

regulations by Chevron, U.S.A., Inc. v. Nat'l Res. Def. Council, Inc., 467 U.S. 837

(1984).

- 29 Virgin Islands were to file their tax returns with the VIBIR. Retroactive notices

published 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 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 satisfy 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 disagree.

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

- 30 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." Rather, we held only that the United States and the Virgin Islands

are separate taxing jurisdictions within the context of our judicial jurisdiction.

The Virgin Islands, through the VIBIR, administers 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 determined by the

IRS), we held in Huff that we had jurisdiction to hear the case.

Our references to "territorial" in Huff v. Commissioner, 135 T.C. 605

(2010), Huff v. Commissioner, 138 T.C. 258 (2012), and Appleton v.

Commissioner, 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.

- 31 -

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 2007-19, 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."

We agree with respondent's position that if a taxpayer does not meet all of

the section 932(c)(4) requirements, the taxpayer 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

23It is nOt unprecedented for a court 10 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 the 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 Commonwealth 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 "simply 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 counterpart on the mainland, the I.R.S." Id. at 484-485.

- 32 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. Commissioner, 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 section 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

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] corporation tax credit under

- 33 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 regulations 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-

- 34 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 corporate 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 petitioner, an individual,

should have understood that he had an 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 petitioner 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.

042