U.S. Tax Court Says USVI Residency Claim Must be Supported By Evidence  

By William L. Blum, Esq.

The U.S. Tax Court has been busy lately deciding U.S. Virgin Islands residency cases.  Three cases involving an almost identical issue have been decided or are expected to be decided soon.  The issue is whether a taxpayer who claims USVI residency for a year prior to 2006 – when regulations were finally issued by the IRS after a 19 year delay – and who follows IRS guidance to file a tax return with the Virgin Islands instead of the IRS, may claim that filing the return there commences the running of the statute of limitations against the Service.

In the first of these cases, in late January, the Court decided that the taxpayer had made a legitimate effort to establish residency in the USVI before the end of 2002 and was therefore a bona fide resident of the USVI in that year and the two subsequent years that were in dispute.  Estate of Sanders v. Commissioner (Docket No. 4614-11, 144 T.C. 5) (see our post “Tax Court Decides for USVI Taxpayer where Residency Claim was Disputed by IRS”  for more details).  The result in Sanders was a full win for the taxpayer because the Court concluded that, as a result of his USVI residency, the statute of limitations had commenced on the date the taxpayer filed his return with the USVI Bureau of Internal Revenue.  Therefore the statute had expired by the date the IRS assessed tax in 2010.

Now, in the second case, Cooper v. Commissioner (Docket Nos. 11810-10 and 11811-10, T,C. Memo 2015-72), decided on April 8, 2015, the Court took another step toward establishing an evidentiary standard as it refused to grant the taxpayers summary judgment on their residency argument.  Tax Court Judge Jacobs (who also delivered a pro-taxpayer decision in the first USVI residency case to be decided in the Tax Court, Appleton v. Commissioner, 140 T.C. 273 (2013)), held in Cooper that the taxpayers had “failed to make a proper showing that they were bona fide residents of the Virgin Islands” during the tax years at issue.  Rather than provide evidence of residency, the taxpayers merely asserted that, because each of them (a husband and wife) believed themselves to be a bona fide resident, the IRS was required to accept their belief.  The Court said that was not enough.

According to the Court, because a statute of limitations argument is an affirmative defense, the burden of proof is on the taxpayers.  But it appears that their summary judgment motion did not have adequate evidentiary support for the residency claim since the judge ruled that the taxpayers would need to prove their bona fide residency claim at trial.

This posture was in stark contrast to Sanders where the Court set a fairly low bar for proof of residency – but not one so low as to require no proof at all!

Citing the Third Circuit case of Vento v. Dir. of V.I. Bureau of Internal Revenue, 715 F.3d 455 (3d Cir. 2013), which ruled that four groupings of factors – intent, physical presence, personal and business relationships, and the taxpayer’s representations – should be used to determine territorial residency, in Sanders the Tax Court found the taxpayer had met these four factors and was therefore a bona fide USVI resident.

The Court in Sanders found the tax payer met the four factors in five sentences and without citing very many facts:

“Decedent had the intent to be a bona fide resident because he intended to remain [in the USVI] indefinitely or at least for a substantial period. . . .  He had a physical presence in the USVI and was employed by a USVI business and listed as a partner on their Schedules K-1 for tax years 2002-04.   He conducted banking in the USVI and had checks with a USVI address. Decedent was married in the USVI and reported his address as the USVI on his marriage license. Decedent identified himself as a resident of the USVI and paid USVI taxes.”

But apparently the taxpayers in Cooper either could not meet the Vento factors, as the taxpayer in Sanders was able to do, or they decided to save their proof for trial and tried a shortcut to get a favorable ruling based on their mere assertion of belief in the legitimacy of their bona fide residency claim.  So Cooper stands for the proposition that a taxpayer’s stated belief may be helpful, but alone it is insufficient to establish bona fide residency – perhaps not a very surprising result.

The Tax Court should provide yet more guidance soon, as there is a third case which has been awaiting decision for quite some time.  That case is Coffey v. Commissioner (Docket No. 004720-10) in which a decision on residency issues has been pending since the taxpayer filed a motion for reconsideration of the Court’s denial of summary judgment almost two years ago.  A decision in that case should shed even more light on the Court’s thinking in this regard – which will be important for many other taxpayers’ cases, of which there are believed to be over one hundred still pending at various procedural stages.