Virgin Islands ‘cover over’ partial return transmittal constitutes IRS filing

The Tax Court finds an assessment is barred by the statute of limitation.
By Maria M. Pirrone, CPA, LL.M.

The Tax Court held that the Virgin Islands Bureau of Internal Revenue's (VIBIR's) sharing of information with the IRS amounted to the filing of a return. Specifically, the transmittal of Form 1040, U.S. Individual Income Tax Return, although without supporting schedules and forms, was sufficient to start the running of the statute of limitation.

Facts: In 1985, the petitioners, James and Judith Coffey, incorporated a publisher's development company, Rainbow Educational Concepts, an S corporation. Judith Coffey was the president until 2003, and James Coffey remained the vice president. The business generated a large profit.

After becoming aware of the advantages of Virgin Islands (V.I.) taxation in 2003, the Coffeys purported to become bona fide V.I. residents by purchasing property there. Judith Coffey ended her relationship with Rainbow Concepts and became a partner in a V.I. partnership providing services to Rainbow Concepts. Additionally, she obtained a V.I. driver's license and became a registered voter.

Judith Coffey took the position that as a bona fide V.I. resident, she was obligated to file with the VIBIR, and not the IRS. For the two years at issue, the Coffeys' Forms 1040 were complete and accepted by the VIBIR. The returns were signed by the Coffeys as well as their tax return preparer. Although the Coffeys did not send anything directly to the IRS, the VIBIR and the IRS shared information pursuant to an agreement as part of the country and territory's "mirror" tax system. The VIBIR forwarded the first two pages of the 2003 and 2004 returns to the IRS.

The IRS audited the partial returns and in 2009 issued a notice of deficiency for both years. The Coffeys timely filed petitions to contest the deficiencies, and the V.I. intervened. The Coffeys and the V.I. moved for summary judgment on the grounds that the statute of limitation barred the IRS from issuing the deficiencies.

The motion was initially denied by the Tax Court because, it held, a material fact was contested — whether the Coffeys were bona fide V.I. residents. A month later, the Coffeys and the V.I. moved for reconsideration on the grounds that they met their filing obligation because of the VIBIR's transmittal of their partial returns to the IRS, and the Tax Court agreed to reconsider on that basis.

Issues: Sec. 932(a)(2) requires U.S. residents with V.I.-source income to file returns with both the IRS and the VIBIR. Sec. 932(c)(4) requires a bona fide V.I. resident to file a return only with the V.I. Sec. 7654(a) requires taxes collected by the IRS to be "covered into the Treasury" of the V.I. when collected from bona fide V.I. residents. When the VIBIR receives a return, it sends a copy of the return (or parts of the return) to the IRS.

Sec. 6501(a) requires the IRS to assess a tax within three years from the date the taxpayer files a return. Sec. 6501(c)(3) provides that the IRS has an unlimited amount of time to make a tax assessment when the taxpayer fails to file a return. The IRS contended that the latter provision applied because the Coffeys were not bona fide V.I. residents and were thus required to have filed their returns with the Service.

The court used the multifactor test in Beard, 82 T.C. 766 (1984), to determine whether the IRS had received a return from the VIBIR. According to Beard, a return must contain sufficient data to calculate tax liability, purport to be a return, be an honest and reasonable attempt to satisfy the requirements of the tax law, and be executed under penalties of perjury.

Holding: The Tax Court held in favor of the Coffeys. It found the IRS's receipt of a return determines its filing, and that the first two pages of the Forms 1040 and attached Forms W-2, Wage and Tax Statement, filed with the V.I. and received by the IRS at the correct service center contained sufficient information to calculate their tax liability. The IRS argued that the Forms 1040 did not purport to be returns because they were territorial, not federal, returns, a distinction the court stated was not supported by the Code. Further, the Coffeys' Forms 1040 showed on their face an honest and reasonable attempt to satisfy their tax obligations, the court found.

Lastly, the court concluded that the Coffeys' Forms 1040 were properly executed under penalties of perjury. The IRS objected in this regard that the transmitted copies lacked original signatures. But the court found that this was not fatal because the IRS allows alternative signing or authentication methods with proper safeguards, which it held were present in the VIBIR's acceptance of the forms as valid returns.

  • Hulett, 150 T.C. No. 4 (2018)

— By Maria M. Pirrone, CPA, LL.M., associate professor of taxation, St. John's University, Queens, N.Y.

 

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