Opinion
28897-10 5816-11 5817-11
06-16-2023
HARVEY BIRDMAN & DIANE BIRDMAN, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda, Judge
Petitioners Harvey and Diane Birdman have filed a motion to strike a portion of Internal Revenue Service (IRS) Notice 2007-19, 2007-1 C.B. 689, which provides special rules for the operation of the three-year statute of limitations on assessment with respect to taxpayers who claim to be bona fide residents of the U.S. Virgin Islands (USVI). [Doc. 103. The Birdmans contend that the challenged part of the Notice-a monetary cap of $75,000 in gross income that excludes them from favorable treatment-violates the Administrative Procedure Act (APA) and should be excised, leaving the rest to stand. [Id. at 23-78.] We will deny the Birdmans' motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times. "Doc." references are to the documents in the lead case, Docket No. 28897-10, as compiled by the Clerk of this Court.
The facts required to decide the Birdmans' motion are derived from the pleadings and the parties' motion papers. They are stated solely for the purposes of deciding their motion to strike and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
The Birdmans are U.S. citizens who filed joint income tax returns with the Virgin Islands Bureau of Internal Revenue (VIBIR) for their 2003-05 tax years. In 2006, they filed joint federal income tax returns both with the VIBIR and the IRS.
In 2010, the IRS issued notices of deficiency with respect to each of these years, determining sizable deficiencies stemming from its conclusion that the Birdmans were not bona fide residents of the USVI and thus were ineligible for certain tax treatment that they had claimed for each year. The notices of deficiency relating to the Birdmans' 2003-05 tax years were issued more than three years after they had filed those returns with VIBIR, which raises questions about compliance with the three-year statute of limitations on assessment set forth in section 6501(a).
"[I]n order for returns to be considered 'filed' for purposes of setting the period of limitations in motion, the returns must be delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations." Allnutt v. Commissioner , 523 F.3d 406, 413 (4th Cir. 2008), aff'g T.C. Memo. 2002-311. "[A] return does not trigger the running of the statute of limitations unless it is filed in the place required by the statute or regulations." Commissioner v. Estate of Sanders, 834 F.3d 1269, 1274 (11th Cir. 2016), vacating and remanding 144 T.C. 63 (2015). If the filing requirement is not satisfied, the statute of limitations is not triggered and "the tax may be assessed . . . at any time." I.R.C. § 6501(c)(3).
Section 932 establishes that (1) U.S. citizens or residents with income derived from sources in the USVI are required to file tax returns both with VIBIR and the IRS, I.R.C. § 932(a)(1)(A), (a)(2), whereas (2) bona fide USVI residents are required to file returns only with VIBIR, I.R.C. § 932(c)(2). On this front, the IRS has issued guidance providing that, for tax years ending on or before December 31, 2006, the filing of a USVI Form 1040 with VIBIR by a person who (1) "takes the position that he or she is a bona fide resident of the [USVI]," and (2) "has less than $75,000 in gross income for the taxable year" "will be deemed to be [the filing of] a U.S. income tax return of that individual for purposes of section 6501(a)." I.R.S. Notice 2007-19, § 2, 2007-1 C.B. 689, 689. In that situation, the IRS will make no further assessment of income tax after the expiration of the three-year period of limitations. Id.
The Birdmans move to strike the $75,000 cap in Notice 2007-19 as arbitrary and capricious under the APA. They believe that this requirement can and should be severed from the remainder of the Notice, which would effectively mean that, for tax years ending prior to December 31, 2006, the three-year statute of limitations would start whenever a USVI Form 1040 was filed with VIBIR by any person who takes the position that he or she is a bona fide resident irrespective of their gross income. This result ostensibly would render untimely the notices of deficiency issued to the Birdmans for their 2003-05 tax years.
The Birdmans assert in their petition in Docket No. 28897-10 that they filed their 2006 tax returns both with VIBIR and the IRS [Doc. 1, ¶ 1], clarifying in their second amendment to petition that the filing with VIBIR took place on October 15, 2007 [Doc. 37, ¶ vvvv]. The parties agree that the IRS issued the notice of deficiency for tax year 2006 on September 30, 2010. [Doc. 1, ¶ 2 & Ex. A; Doc. 3, ¶ 2]. As this notice was issued within three years of the filing of the Birdmans' 2006 return with VIBIR, their challenge to Notice 2007-19 is of no moment to this year.
Assuming arguendo that Notice 2007-19 violates the APA, we cannot offer the Birdmans the relief they seek, i.e., severance of the monetary requirement. "The APA defines 'agency action' as 'the whole or a part of an agency rule [or] order,' 5 U.S.C. § 551(13) (incorporated by 5 U.S.C. § 701(b)(2)), meaning that we are permitted to sever and set aside an offending portion while keeping intact the rest of the order." Nasdaq Stock Market LLC v. Securities and Exchange Comm'n, 38 F.4th 1126, 1144 (D.C. Cir. 2022) (citing Carlson v. Postal Reg. Comm'n, 938 F.3d 337, 351 (D.C. Cir. 2019)). The exercise of this power comes with two strings attached:
The question of remedy might be seen to bear on the Birdmans' standing to raise their challenge. See Anthony v. Commissioner, 66 T.C. 367, 369-73 (1976) (discussing the doctrine of standing in the Tax Court). "[S]tanding is not dispensed in gross; rather, plaintiffs must demonstrate standing for each claim that they press and for each form of relief that they seek." TransUnion, LLC v. Ramirez, --- U.S. ---, 141 S.Ct. 2190, 2208 (2021). And, of course, standing requires an injury to be redressable. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Massachusetts v. EPA, 549 U.S. 497, 517 (2007). In any event, whether seen as a question of standing or remedy, we believe that the same reasoning requires the denial of the motion to strike.
First, the court must find that "the agency would have adopted the same disposition regarding the unchallenged portion [of the regulation] if the challenged portion were subtracted." Sierra Club v. FERC, 867 F.3d 1357, 1366 (D.C. Cir. 2017). Second, the parts of the regulation that remain must be able to "function sensibly without the stricken provision." Sorenson Commc'ns Inc. v. FCC, 755 F.3d 702, 710 (D.C. Cir. 2014) (quoting MD/DC/DE Broads. Ass'n v. FCC, 236 F.3d 13, 22 (D.C. Cir. 2001)).Carlson, 938 F.3d at 351.
Both conditions weigh against the Birdmans. We see no indication that the IRS was interested in adopting a rule that the filing of a (pre-2006) return with VIBIR by an individual merely claiming to be a bona fide USVI resident should start the running of the statute of limitations on assessment. Oodles of cases and more than a decade of litigation in this Court belie any such conclusion. See, e.g., Tice v. Commissioner, No. 24983-15, 160 T.C., slip op. at 8-11 (Apr. 10, 2023); Cooper v. Commissioner, T.C. Memo. 2015-72, at *22 ("Section 932(c) does not provide that a taxpayer's subjective belief that he/she is a bona fide resident of the Virgin Islands is sufficient to place him/her into that section's single filing regime. More is required."); see also Coffey v. Commissioner, 987 F.3d 808, 812-15 (8th Cir. 2021), rev'g and remanding Hulett v. Commissioner, 150 T.C. 60, 71 (2018); Commissioner v. Estate of Sanders, 834 F.3d at 1278-79.
Moreover, we do not believe that the rule functions sensibly without the stricken provision. Eliminating the financial limitation transforms a benefit tailored for taxpayers who lacked the incentive or ability to exploit that benefit in a financially significant manner into a safe harbor perfectly suited for those taxpayers who sought to game the U.S. - USVI mirror tax system to shield substantial amounts of taxable income. Such a change would hobble the IRS's long-standing enforcement efforts and significantly erode the scheme designed by Congress, which established different filing requirements depending on whether one was a bona fide USVI resident.
We accordingly are left with the conviction that if we were to find an APA violation, as the Birdmans contend, we would be obligated to strike down Notice 2007-19 as a whole and not simply sever the monetary cap. This action would leave the Birdmans in precisely the same position as they are currently. We thus conclude that they have failed to establish that we are likely to provide the requested judicial relief of severance of the monetary requirement.
Given our conclusion in this regard, we do not consider whether the IRS's choice to afford relief to certain taxpayers with less than $75,000 in gross income is reviewable at all, given the APA's prohibition against the judicial review of an action "committed to agency discretion by law." 5 U.S.C. § 701(a)(2); see Heckler v. Chaney, 470 U.S. 821, 828-33 (1985); see also Dep't of Homeland Security v. Regents of the Univ. of Calif., --- U.S. ---, 140 S.Ct. 1891, 1905 (2020); Peterson v. Barr, 965 F.3d 549, 552 (7th Cir. 2020).
Based upon these considerations, it is
ORDERED that the Birdmans' motion to strike, filed June 30, 2022, is denied.