The Virgin Islands, that is, as we come to what seems to be the end of the wannabe Virgins, the daughters of la famille Vento, in Renee Vento, et al, 147 T. C. 7, filed 9/7/16, with Judge James S. (“Big Jim”) Halpern bidding a none-too-fond farewell to the Vento daughters (Renee, Nicolle and Gail). Mom and Dad slid under the IRS tag and got VI residency for the year at issue, courtesy of the USCA Third Cir. and the loosey-goosey rules then in effect.

You’ll remember la famille Vento, surely? No? See my blogposts “The Non-Virgin Islanders,” 3/13/11, “Catching Up,” 9/30/13, and “Competent Authority,” 6/15/15.

Now that you’re caught up, the Ventos, having been stripped of their VI residency, want a foreign tax credit for the money they gave the VIBIR (Virgin Island Bureau of Internal Revenue), wherewith to apply against their US hits. I’m going to give their attorneys a Taishoff “Good Try, Second Class,” for that move.

The Ventos paid US estimateds, but these were sent to the VI when the Ventos claimed VI residency for the year at issue.

Then, when their claims to VI residency unraveled,  one of them filed a 1040X with the VIBIR, asking for her money back, but the VIBIR marked the file “closed” and gave her nothing.

The principle here is the “equality principle.” The idea is to treat VI tax as equivalent to US tax, but for the mirror image rule, which makes VI tax treatment equal to US tax treatment. Thus, a tax paid to VI is equivalent to a tax paid to a US State, so it could get Section 164 deductibility, but not Section 901 credit.

Anyway, what the Ventos paid VIBIR wasn’t a tax, because they weren’t obligated by law to pay VIBIR; they admit they had no VI-sourced income for the year at issue. And whatever their states of mind as regards the uncertainty of the law at that time (pre-2004, when residence rules clamped down on phony Virgins), the USDCVI and Third Cir. had no problem blowing off their claims.

“Petitioners claim that, because ‘there was no clear authority on determining residency in the Virgin Islands for [year at issue]’, the position that they were bona fide residents of the Virgin Islands and thus required to pay Virgin Islands income tax for that year was a ‘reasonable interpretation’ of applicable law.  The absence of clear authority in regard to an issue, however, does not establish the reasonableness of all possible means of resolving it.  The record includes no evidence that petitioners relied on the advice of competent advisers in taking the position that they were bona fide residents of the Virgin Islands….  Neither the U.S. District Court for the District of the Virgin Islands nor the Court of Appeals for the Third Circuit had any apparent difficulty concluding that petitioners were not bona fide residents of the Virgin Islands for [year at issue].  Of course, the courts’ decisions against petitioners do not, by themselves, establish that petitioners’ claims to bona fide Virgin Islands residence for 2001 were not based on reasonable interpretations of the applicable law.  But, as we read their opinions, the courts did not seem to find the decision a close one.” 147 T. C. 7, at 18. (Citations omitted).

And before the SOL ran on the Ventos’ chance to get back the payments they made to VIBIR, the 2004 rules were moving along, giving them a chance to beat the clock. But they didn’t. And Mom and Dad had much better cases than the Ventos, so Mom and Dad getting by proves nothing.

There’s no need to take a foreign tax credit, as whatever is paid to VIBIR for VI-sourced income is applied to the VI tax, and the remainder applied to US tax, so the VI-sourced income is taxed only once.

“A section 932(a) taxpayer (non-Virgin Islands resident) similarly has no need to credit Virgin Islands taxes paid under section 901 to reduce her U.S. tax liability.  Section 932(a) taxpayers, again, compute a single U.S. tax and allocate part of that tax to the Virgin Islands.  Sec. 932(a) and (b).  As a result of the required allocation, a section 932(a) taxpayer effectively pays tax to the Virgin Islands on her Virgin Islands income and pays tax to the United States on her remaining income.  In short, the coordination scheme implemented by section 932 provides sufficient means to prevent the same income from being subject to both U.S. and Virgin Islands tax.” 147 T. C. 7, at pp. 24-25.

Here’s how the Ventos’ lawyers earned their “good try, second class.”

“Petitioners’ rather unusual situation might have given them an opportunity to slip through a crack in the statutory framework.  The literal terms of section 932(a)(3) do not deny petitioners the credits in issue because no petitioner earned as much as a dollar of Virgin Islands income.  We cannot imagine, however, that, while Congress did not intend to allow a foreign tax credit for Virgin Islands taxes paid by bona fide residents of the Virgin Islands or by non-Virgin Islands residents with Virgin Islands income, it nonetheless intended to allow a credit under section 901 for amounts paid as tax to the Virgin Islands by a taxpayer who is not a bona fide resident of the Virgin Islands, has no Virgin Islands income for the year in question, and thus did not actually owe tax to the Virgin Islands for that year.” 147 T. C. 7, at p. 28.

VIBIR should have disgorged, but didn’t. So, while Judge Big Jim has some sympathies that the Ventos are paying twice, their purported move to the VI would have saved them $9 million in taxes if it worked.