Eighth Circuit Reverses Tax Court; Virgin Islands Tax Return Did Not Trigger Statute of Limitations

(Parker Tax Publishing March 2021)

The Eighth Circuit reversed the Tax Court and held that a taxpayer who was not a bona fide resident of the United States Virgin Islands (USVI) and who filed only USVI tax returns, a portion of which the USVI copied and forwarded to the IRS, did not file her return with the IRS for purposes of the three-year statute of limitations under Code Sec. 6501(a). The court found that the statute of limitations begins running only after a return is filed, and found that the IRS's actual knowledge of the taxpayer's income was not a filing. Coffey v. Comm'r, 2021 PTC 43 (8th Cir. 2021).

Background

The United States and the United States Virgin Islands (USVI) are separate taxing entities. The USVI administers a mirror code of the Internal Revenue Code that substitutes "Virgin Islands" for the "United States." Under the USVI's Economic Development Program (EDP), a credit is available and bona fide USVI residents owe only 10 percent of the income tax on their income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands. Taxpayers with USVI-related income have different reporting requirements depending on their residency. A bona fide USVI resident is required under Code Sec. 932(c) to file an income tax return with the Virgin Islands. Any other taxpayer with USVI-related income must file a return with both the United States and the Virgin Islands.

For both 2003 and 2004, Judith Coffey filed only USVI tax returns, claiming she was a bona fide USVI resident. The returns consisted of completed Forms 1040, her USVI and federal W-2s, and numerous other schedules and forms. The returns claimed the EDP credit for both years. Coffey did not file the returns with the IRS. However, for each year, the USVI's Bureau of Internal Revenue (VIBIR) sent the IRS the first two pages of her returns, along with her USVI and federal W-2s, about five months after receiving these documents. The VIBIR sent these documents to the IRS so that Coffey's prepayments to the IRS could be paid to the USVI, with any overpayment refunded to Coffey. The VIBIR did not send to the IRS any of the schedules that Coffey filed with her returns.

The IRS audited the documents it received from the VIBIR and issued notices of deficiency to Coffey in 2009, more than three years after receiving the documents. The IRS determined that Coffey was never a bona fide USVI resident and therefore could not claim the EDP credit. Coffey challenged the notices in the Tax Court and the USVI intervened. Coffey asserted the three-year statute of limitations under Code Sec. 6501(a) as a defense. In Coffey v. Comm'r, 150 T.C. No. 4 (2018), the Tax Court granted summary judgment for Coffey, holding that the statute of limitations began when the IRS received the documents from the VIBIR.

The IRS appealed to the Eighth Circuit. Coffey moved for summary judgment, assuming as true for purposes of the appeal that she was a USVI nonresident. Coffey argued that the VIBIR sending some of her tax documents to the IRS was a filing that triggered the statute of limitations. Alternatively, Coffey (joined by the USVI) argued that her returns filed with the VIBIR alone met the USVI nonresident filing requirements. Coffey cited In re Colsen, 446 F.3d 836 (8th Cir. 2006), in which the Eighth Circuit held that an imperfect filing triggers the statute of limitations if the taxpayer makes an honest and genuine attempt to satisfy the tax laws. Coffey argued that her filings with the VIBIR were an honest and genuine attempt to comply even though she was mistaken about residency. Coffey further argued that, because the IRS has the authority to audit, assess, and regularly receive returns filed with the VIBIR, USVI returns alone satisfy the nonresidency filing requirements.

Analysis

The Eighth Circuit reversed the Tax Court after finding that Coffey never filed a return with the IRS, but only filed with the VIBIR. The court found that under Comm'r v. Estate of Sanders, 2016 PTC 322 (11th Cir. 2016), returns are "filed" if "delivered, in the appropriate form, to the specific individual or individuals identified in the Code or regulations." The court also noted that

in Heckman v. Comm'r, 2015 PTC 191 (8th Cir. 2015), it held that the IRS's actual knowledge of a taxpayer's income that was not reported on his return did not begin the running of the statute of limitations and that the statute begins only after the taxpayer's "return was filed."

In the court's view, the IRS received actual knowledge of Coffey's return information from the VIBIR, but that information was not a filing and thus the statute of limitations never started running. The court also found that the VIBIR did not "file" Coffey's returns when it sent her documents to the IRS. The court reasoned that, in general, taxpayers themselves must file their return with the IRS, and the court noted that Coffey never authorized the VIBIR to file her documents with the IRS. The court said that it was irrelevant that the IRS actually received the documents, processed, and audited them, since the IRS's actual knowledge did not create a filing and the statute of limitations under Code Sec. 6501(a) begins only when a return is filed.

The Eighth Circuit also rejected Coffey's alternative argument that her filing with VIBIR itself was a filing for purposes of Code Sec. 6501(a). The court noted that the Colsen decision addressed only whether a document was a return, not whether it was filed. In the court's view, Colsen stands for the proposition that a determination of what is an honest and genuine return "does not require inquiry into the circumstances under which a document was filed." But the court found that the honesty and genuineness of Coffey's returns did not affect whether they were filed. The court also disagreed with Coffey's assertion that USVI returns alone satisfy the nonresident filing requirements. The court reasoned that the United States and the USVI are separate taxing entities, and therefore a filing with the USVI is not automatically a filing with the IRS.

Addressing Coffey's contention that she made an honest and genuine attempt to satisfy the tax laws, the court said that, under Code Sec. 932, a taxpayer is either a bona fide resident of the Virgin Islands or is a citizen or resident of the United States, and no exception is provided for a taxpayer's mistaken position about residency. The court found that as a USVI nonresident (for purposes of this appeal), Coffey's position that she actually was a USVI resident was irrelevant. The court concluded that under Estate of Sanders, a failure to file a return with the correct individual, even if done in a mistake of residency, does not create a "filed" return under Code Sec. 6501(a).

For a discussion of the return filing requirements and the statute of limitations, see Parker Tax ¶260,130. For a discussion of the return filing requirements for taxpayers with income from U.S. possessions, see Parker Tax ¶10,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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