Opinion
990-06 991-06
09-21-2022
RICHARD G. VENTO, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
L. Paige Marvel, Judge.
On July 11, 2014, petitioners in these consolidated cases filed a Motion for Summary Judgment. The Court directed respondent to file a response to petitioners' motion by September 8, 2014. On September 4, 2014, respondent filed his Response to Motion for Summary Judgment.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C, in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In their motion, petitioners advance two primary grounds to support their request for summary judgment. First, petitioners argue that because the U.S. Court of Appeals for the Third Circuit decided that they were bona fide residents of the Virgin Islands for the 2001 taxable year, the notice of deficiency issued to them by the Internal Revenue Service (IRS) for the same year is null or void and the Court therefore lacks jurisdiction. Second, petitioners argue that the IRS is not authorized to assess and collect "residual liability" from a bona fide Virgin Islands taxpayer as a matter of law.
The Third Circuit, the same court to which an appeal would lie in this case absent a stipulation to the contrary, see § 7482(b), held that petitioners were bona fide residents of the Virgin Islands for the 2001 taxable year in Vento v. Dir. of V.I. Bureau of Internal Revenue, 715 F.3d 455 (3d Cir. 2013).
A Virgin Islands taxpayer's "residual liability," a term not used in the Internal Revenue Code, refers generally to a Virgin Islands taxpayer's potential liability for income taxes to the United States, rather than solely to the Virgin Islands, under section 932(c)(4). See Appleton v. Commissioner, 140 T.C. 273, 281-82, 282 n. 14 (2013). Although the scope of a Virgin Islands taxpayer's residual liability for United States federal income taxes has not yet been precisely defined, its existence has been recognized. See Mollison v. Commissioner, 481 F.3d 119, 123 (2d Cir. 2007) (stating, in a case involving an attempt to quash a third-party subpoena, that the IRS subpoena investigating a Virgin Islands tax return was justified by the "residual liability" it could assess and collect under section 932(c)(4)).
Petitioners' arguments have previously been rejected either by the Third Circuit or by this Court. First, the Third Circuit has rejected petitioners' argument that this Court lacks jurisdiction over notices of deficiency concerning United States tax liability if issued to a Virgin Islands resident. Cooper v. Commissioner, 718 F.3d 216, 221-22 (3d Cir. 2013) (holding that the Tax Court, not the District Court of the Virgin Islands, was the sole court that had jurisdiction to hear claims relating to IRS notices of deficiency asserting lack of bona fide Virgin Islands residency and, in the alternative, residual liability under section 932(c)(4), where the IRS was not acting on behalf of the Virgin Islands Bureau of Internal Revenue and the IRS's notices of deficiency were not seeking a redetermination of Virgin Islands tax liability). We have also held that while the District Court of the Virgin Islands has exclusive jurisdiction to redetermine a taxpayer's Virgin Islands tax liabilities, we have jurisdiction to redetermine a taxpayer's United States federal income tax liabilities, even if the taxpayer claims bona fide Virgin Islands residency. Huff v. Commissioner, 135 T.C. 605, 610-11 (2010).
The Third Circuit's precedent is binding on us because an appeal would lie in that court absent a stipulation to the contrary. See § 7482(b); Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Moreover, contrary to petitioners' second argument, this Court has previously stated that Virgin Islands taxpayers need to meet all of the express requirements of section 932(c)(4) to avoid filing and payment obligations in the United States. Huff, 135 T.C. at 608 ("An individual who is a bona fide resident of the Virgin Islands and incurs income tax obligations to both the United States and the Virgin Islands may satisfy his reporting and payment requirements by filing only with, and paying tax only to, the Virgin Islands if he satisfies each of the three requirements of section 932(c)(4). If the individual fails to meet any of these requirements, he must file a Federal income tax return with the Internal Revenue Service. . . . Consequently, an individual failing to satisfy all three requirements of section 932(c)(4) may be required to file an income tax return and be liable for taxes to both the United States and the Virgin Islands."). This conclusion is in accord with the express language of section 932(c)(4), which expressly imposes conditions on the exclusivity of Virgin Islands tax liability even to bona fide Virgin Islands residents. See S. Rep. No. 100-445, at 315 (1988) ("The bill also makes it clear [in section 932(c)(2)] that [an individual seeking the exclusion in section 932(c)(4)] is to file 'an' income tax return with the Virgin Islands, rather than filing 'his' return with the Virgin Islands, 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."). Petitioners' bona fide residency in the Virgin Islands at the close of the 2001 taxable year ensures compliance only with section 932(c)(4)(A) (as in effect in 2001), not section 932(c)(4)(B) or (c)(4)(C). Because compliance with these conditions has not yet been established, summary judgment in favor of petitioners would be inappropriate.
In 2004 Congress amended section 932(c)(4)(A) to require bona fide residency in the Virgin Islands for the entire taxable year rather than solely at the close of a taxable year for a Virgin Islands taxpayer who wished to claim exclusive tax filing and payment obligations to the Virgin Islands. American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 908(c)(2), 118 Stat. 1418, 1656.
Petitioners also make a number of arguments in a similar vein, urging that congressional intent, comity, and the statutory structure of the Virgin Islands tax system counsel in favor of rejecting the existence of Virgin Islands residents' residual liability to the United States or the IRS's ability to assess or collect it. In our view, the clear import of Cooper, Huff, S. Rep. No. 100-445 (1988), and the express language of section 932(c)(4) itself is to foreclose these arguments.
Although today we reject petitioners' arguments that they are entitled to summary judgment on the grounds presented, we do not decide the extent of their residual liability, if any, under section 932(c)(4). That determination (and possibly the necessity for proceedings in this Court at all) will depend on the outcome of the proceedings involving petitioners and their related partnerships in the District Court of the Virgin Islands that the parties have discussed in their status reports. This consideration makes disposition of this case in favor of either party inappropriate at present. However, we do not rule out the possibility that, depending on developments in those proceedings or other events, petitioners or respondent may be presented with other grounds for seeking summary judgment or other relief in the future. Therefore, it is
There is some lack of clarity in the caselaw regarding how residual liability is calculated. Cf. Cooper, 718 F.3d at 225 n.6 (expressing some concern about the possibility of double taxation and noting that the IRS in that case agreed to use the administrative procedure set up by the Tax Implementation Agreement between the United States and the Virgin Islands to attempt to avoid double taxation). That lack of clarity, however, does not extend to the existence of Virgin Islands taxpayers' residual liability to the United States, however calculated or determined.
Because the essential circumstances have not changed since the Court's Order staying the proceedings in this case on September 8, 2014, that Order (as amended by the Court's Order issued April 12, 2016) remains in effect. The Court also intends to continue to order joint status reports at regular intervals.
ORDERED that petitioners' Motion for Summary Judgment is denied without prejudice.