Attorney-at-Law

STATUTE OF LIMITATIONS? MAYBE NOT

In Uncategorized on 12/28/2010 at 17:10

I’ll bet few tax professionals who do not have clients in the United States Virgin Islands (USVI) noticed the Tax Court’s decision in Arthur I. Appleton, Jr., 135 T.C. 23, 11/01/2010.

The decision rejects an attempt by the USVI government to intervene in a case where the IRS raises lack of economic substance in transactions reported to the USVI and audited by the USVI Bureau of Internal Revenue (BIR), which took place more than three years prior to the IRS deficiency notice.

Briefly, IRC 932(c)(4) exempts tax returns filed and taxes paid to the USVI Bureau of Internal Revenue (BIR) from Federal income tax, provided taxpayer satisfies residence requirements (then at end of tax year, now for entire tax year), reports and identifies source of all income, and pays entire tax due to BIR.

The USVI income tax structure is a “mirror image” of the IRC.

The decision is a lengthy discussion of the tripartite bases for intervention in Tax Court, and as such is of interest to a pure technician. Tax Court explicitly refuses to hold that Fed. R. Civ P. 24(a)(2) (intervention as of right) applies to Tax Court proceedings, while at the same time setting forth an exhaustive review of that statute. I leave the technical issues aside here; they may serve some law review editor for filler.

Judge Jacobs’ conclusion in Appleton, I submit, is wrong. The Court’s whole reasoning is based on the premise that effective tax administration is a “merely economic interest.” The Court states that the interest of the taxpayer in a speedy resolution outweighs the specific governmental interest of the Virgin Islands Bureau of Internal Revenue in orderly tax administration of the USVI. But these interests are more than a “purely economic interest”, however hard the decision tries to brush aside USVI.

Orderly tax administration, and the right of taxpayers to know that they are secure in their persons and property after a duly conducted audit of their tax liabilities by the lawfully constituted taxing authority, or after the time established by law for the conduct of such audit has passed without audit, are more than “purely economic interests.”

IRS’ position is based upon Notice 2004-45, I.R.B. 2004-28 (7/12/04). That notice announces a crackdown on false claims of USVI residence by taxpayers whose true residence is elsewhere, and sham income recharacterizations, specifically leased-employee schemes where a highly-compensated employee establishes a sham residence in the USVI, buys into a USVI LLC (taxed as a partnership) that leases the employee to a US employer, and distributes the net lease proceeds to the employee as a guaranteed payment. The employee claims a tax credit against USVI for proceeds from USVI investment (see IRC §934).
No problem there: a sham is a sham. But how far back can the IRS go?
Note that the additions to tax in Appleton do not include civil fraud penalties, just failure to file and pay tax, and failure to pay estimated tax. So fraud is off the table here.

So what is the interest of the USVI and the BIR? Simply put, if it ain’t over until the fat lady sings, when does the fat lady sing? As to the USVI, IRS’ answer is: never.

If IRS prevails, every USVI taxpayer is subject to an IRS audit going back to their inception, no matter what they filed with or paid to BIR, or that a BIR audit was concluded years ago. IRS collection proceedings can be brought independently of BIR.

The hockey players know it’s a penalty: too many players on the ice.

But the Tax Court says “play on”, while offering USVI a chance to file a brief amicus, after the trial has been had and without a chance to offer any evidence of the disruption an open statute of limitations would cause.

I am told that USVI has appealed to the Third Circuit. Let’s follow that decision.
Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

%d bloggers like this: