Sisters Argue Tax Court Erred by Adopting IRS Rule 155 Computations

RENEE VENTO,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

GAIL VENTO,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

NICOLE MOLLISON,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.

IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

Appeals from the United States Tax Court
(Case Nos. 992-06, 993-06, 1168-06)
Honorable Albert G. Lauber

APPELLANTS' OPENING BRIEF

Joseph M. Erwin
LAW OFFICE OF JOSEPH M. ERWIN
100 Crescent Court, Suite 700
Dallas, Texas 75201
(214) 969-6890
joe@erwintaxlaw.com

Counsel for Appellants
Renee Vento, Gail Vento, Nicole Mollison

CORPORATE DISCLOSURE STATEMENT

Not Applicable.

---

TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT 

TABLE OF AUTHORITIES

SUBJECT MATTER AND APPELLATE JURISDICTION 

STATUTORY AND REGULATORY AUTHORITIES

STATEMENT OF ISSUES PRESENTED FOR REVIEW

STATEMENT OF THE CASE 

STANDARD OF REVIEW 

SUMMARY OF ARGUMENT 

ARGUMENT

CONCLUSION 

STATEMENT OF RELATED CASES 

CERTIFICATE OF COMPLIANCE 

CERTIFICATE OF SERVICE 

ADDENDUM 

TABLE OF AUTHORITIES

Constitution.

U.S. Const. art. IV, §3, cl. 2.

Cases.

Banks v. Int'l Rental and Leasing Corp., 55 V.I. 967 (2011).

Brow v. Farrelly, 994 F.2d 1027 (3d Cir. 1993)

Chicago Bridge & Iron Co. v. Wheatley, 430 F.2d 973 (3rd Cir. 1970), cert. denied, 401 U.S. 910 (1970)

Crystal v. United States, 172 F.3d 1141 (9th Cir. 1999)

Coffey v. Commissioner, Tax Court docket numbers 4720-10 and 4949-10, 150 T.C. 60 (2018), appeal docketed, sub nom. Hullett v. Commissioner, No. 18-3256 (8th Cir. Oct. 23, 2018).

Custom Chrome, Inc. v. Commissioner, 217 F.3d 1117 (9th Cir. 2000)

Government of the Virgin Islands v. Bodle, 427 F.2d 532 (3d Cir. 1970)

Gumataotao v. Director of Dept. of Revenue & Taxation, 236 F.3d 1077 (9th Cir. 2001)

Hongsermeier v. Commissioner, 621 F.3d 890 (9th Cir. 2010).

Kadillak v. Commissioner, 534 F.3d 1197 (9th Cir. 2008).

Knudsen v. Commissioner, 793 F.3d 1030 (9th Cir. 2015).

MK Hillside Partners v. Commissioner, 826 F.3d 1200 (9th Cir. 2016)

Parrott v. Gov't of the Virgin Islands, 230 F.3d 615 (3d Cir. 2000)

Vento v. Director, Bureau of Internal Revenue, 715 F.3d 455 (3rd Cir. 2013)

Virgo Corp. v. Paiewonsky, 384 F.2d 569 (3d Cir. 1967), cert. denied, 390 U.S. 1041, reh'g denied, 392 U.S. 917 (1968)

Wilson v. Kennedy, 232 F.2d 153 (9th Cir. 1956)

Statutes.

I.R.C. § 31

I.R.C. § 901

I.R.C. § 904

I.R.C. § 932

I.R.C. § 6105

I.R.C. §6315

I.R.C. § 6401

I.R.C. § 6651

I.R.C. § 7482

I.R.C. § 7483

I.R.C. § 7502

I.R.C. § 7654

8 U.S.C. §1406, as added by Act of June 27, 1952, c. 477, Title III, ch. 1, §306, 66 Stat. 237

28 U.S.C. §451.

48 U.S.C. §1561

48 U.S.C. §1574

48 U.S.C. §1612(a)

48 U.S.C. §1614(a)

Act of June 22, 1936, ch. 699, § 25, 49 Stat. 1807.

Act to Provide a Temporary Government for the West Indian Islands, ch. 171, sec. 7, 39 Stat. 1132, 1133, Mar. 3, 1917

National Labor Relations Act, 48 U.S.C. §§ 151-168

Naval Services Appropriation Act of 1922, July 12, 1921, c. 44, §1, 42 Stat. 123, amended by Pub. L. 94-392, §5, 90 Stat. 1195, (Aug. 19, 1976), codified at 48 U.S.C. §1397

Revised Organic Act of the Virgin Islands, 68 Stat. 497, ch. 558, §1, July 22, 1954, codified at 48 U.S.C. §§1541 et seq.

Tax Reform Act of 1986, Pub. L. 99-514, §1274(c) (Oct. 22, 1986)

Regulations.

Treas. Regs. § 1.31-1

Treas. Regs.§ 1.31-2

Treas. Reg. § 1.932-1

Treas. Regs. §  301.6315-1

Treas. Regs.§ 301.6401-1.

Treas. Reg. § 1.901-2(e)

Treas. Reg. § 301.7654-1

Rules.

Tax Court Rule 36

Tax Court Rule 39

Tax Court 122

Tax Court Rule 155

Other.

Convention for the Cession of the Danish West Indies, Aug. 4, 1916, U.S.-Denmark, 39 Stat. 1706, T.S. 629

Exec. Order 5566, (Feb. 27, 1931)

I.R.M. 21.8.1.5.8.1 Subsequent Adjustments to Military Cover Over Accounts — U.S. Virgin Islands, CNMI, and American Samoa (03-03-2011)

Tax Implementation Agreement Between the United States of America and the Virgin Islands, 1989-1 C.B. 347 (Feb. 24, 1987)Erwin, T.M. 995-2nd, Business Operations in the Territories and Possessions of the United States (except Puerto Rico) (Bloomberg BNA 2019)

La Isla Virgin, Inc. v. Olive, Docket No. 91-3202 (3d Cir. Dec. 17, 1991), Brief for Appellee — Appendix, p. 899A, quoting Gustav A. Danielson, “Taxation in the United States Virgin Islands,” a privately published booklet

Virgin Islands Hurricane Maria (DR-4340), Initial Notice, Virgin Islands; Major Disaster and Related Determinations, Federal Emergency Management Agency, Sept. 20, 2017

Virgin Islands Hurricane Irma (DR-4335), Initial Notice, Virgin Islands; Major Disaster and Related Determinations, Federal Emergency Management Agency, Sept. 7, 2017.

---

SUBJECT MATTER AND APPELLATE JURISDICTION

The statutory basis for subject matter jurisdiction in the court below, the United States Tax Court, is section 6512 of the Internal Revenue Code of 1986, as amended (“I.R.C.” or the “Code”).

The basis for Appellants' position that the judgment or order appealed from is final or otherwise appealable is that the Order of March 19, 2019, disposed of all claims. The statutory basis for jurisdiction of this Court is I.R.C. § 7482(a).

The date of entry of the judgment or order appealed from is March 19, 2019. The date the notices of appeal were mailed was June 17, 2019, and they were filed on June 24, 2019. The statute under which this appeal is timely is I.R.C. § 7483 and §7502 (timely mailing treated as timely filing).

STATUTORY AND REGULATORY AUTHORITIES

All relevant statutory and regulatory authorities appear in the Addendum to this brief.

STATEMENT OF ISSUES PRESENTED FOR REVIEW

The issues presented for review are:

STATEMENT OF THE CASE

The cases below are based on the issuance of a notice of deficiency by the Internal Revenue Service for the year 2001.¹ Appendix, pp. A-8, AII-644, AII-732 (hereafter “App.”). The question of whether Petitioners-Appellants were residents of the United States or the U.S. Virgin Islands was determined in separate proceedings. In Vento v. Director, Bureau of Internal Revenue, 715 F.3d 455 (3rd Cir. 2013), Renee, Gail, and Nicole were each determined to be a “bona fide resident” of the U.S. Virgin Islands for the 2001 tax year. The United States was a party to that case.

Since the residency of Nicole, Gail, and Renee had been determined and they did not contest any inclusion of income, the only issue for resolution by the Tax Court in these cases was the effect of taxes paid to the Virgin Islands. App., A-414. From their first filing, the Vento Daughters maintained that they were entitled to a credit for amounts paid as income taxes to the Virgin Islands when they filed their 2001 individual income tax returns with the Virgin Islands Bureau of Internal Revenue. App. pp. A-8, AII-644, AII-732.

Nicole, Gail, and Renee made estimated tax payments to the IRS and had tentative credits on their respective accounts for their 2001 tax year with the IRS as follows:

Type of Payment	Date	Nicole	Gail	Renee
Estimated Tax Payment	6/19/2001	$50,000	$50,000	$50,000
Estimated Tax Payment	9/15/2001	50,000	50,000	50,000
Credit From Prior Year	4/14/2001	63,676	62,989	58,941
Credit From Prior Year	12/3/2001	300
Estimated Tax Payment	1/15/2002	20,000	20,000	20,000
Withholding Tax	4/15/2002	2,217	0	1,267
Totals		$185,893	$183,289	$180,208

App. p. A-390. The payments and tentative credits on their IRS accounts for tax year 2001 were transferred to the VIBIR during 2003 through the cover over procedure referenced by I.R.C. § 7654.² App. p. A-390.

By agreement of the parties, the case was submitted under Tax Court Rule 122 on stipulated facts — facts which included the amounts paid by Nicole, Gail, and Renee as estimated tax and tax withheld to the United States and payments of tax shown on the return with the returns filed with VIBIR. App. p. A-371.

After submission of the cases under Tax Court Rule 122, Submission Without Trial, the parties submitted their proposed computation of income tax liability. In his proposed computation submitted under Tax Court Rule 155, Computation by Parties for Entry of Decision, the Commissioner did not give credit for taxes paid by the Daughters to the United States, the first time that position was raised in the case. App. pp. A-523, AII-713, AII-802. This position was shown only by the figures in the computation, giving no credit for the taxes paid by the Daughters to the United States. At no point prior to the filing of his proposed Computation for Entry of Decision had the Commissioner raised the issue that Nicole, Gail, and Renee were not entitled to a credit for amounts paid to the United States as taxes.

In an Order and Decision entered February 6, 2019, and another Order entered February 6, 2019, the Court affirmed its Opinion of September 7, 2016, 147 T.C. 198 (the “FTC Opinion”) App. p. A-483, and its Supplemental Opinion of February 4, 2019, 152 T.C. No. 1 (the “Rule 155 Opinion”) App. p. A-549 (collectively, the “Decision”), and confirmed Petitioners' income tax liability for 2001 based on Respondent's Rule 155 computation.

The FTC Opinion held that Petitioners' payments to the Virgin Islands were not creditable as foreign taxes under I.R.C. § 901 because each petitioner did not prove: the amounts paid were “taxes paid,” that the amounts paid did not exceed the limitations of I.R.C. § 904, and that it was Congress' intent that payments of tax to the Virgin Islands not be creditable under I.R.C. § 901.

The Rule 155 Opinion held that Petitioners could not raise a new issue in a Rule 155 computation. The Rule 155 Opinion ignored the fact that Respondent had raised a new issue in his Rule 155 computation

The amounts of tax the Decision found Nicole, Gail, and Renee owed were $166,979, $159,637, and $160,523, respectively, each less than the amount of federal tax already paid in. App. pp. A-620, AII-724, and AII-814.

STANDARD OF REVIEW

Decisions of the United States Tax Court are reviewed on the same basis as decisions in civil bench trials in the United States District Court. MK Hillside Partners v. Commissioner, 826 F.3d 1200, 1203 (9th Cir. 2016). Thus, the Tax Court's conclusions of law and interpretations of the tax code are reviewed de novo. Knudsen v. Commissioner, 793 F.3d 1030, 1033 (9th Cir. 2015). The Tax Court's interpretation of regulations is also reviewed de novo. Kadillak v. Commissioner, 534 F.3d 1197, 1200 (9th Cir. 2008).

Although a presumption exists that the tax court correctly applied the law, no special deference is given to the Tax Court's decisions. Knudsen, 793 F.3d at 1033; Custom Chrome, Inc. v. Commissioner, 217 F.3d 1117, 1121 (9th Cir. 2000).

The tax court's findings of fact are reviewed for clear error. Knudsen, 793 F.3d at 1033; Hongsermeier v. Commissioner, 621 F.3d 890, 899 (9th Cir. 2010).

SUMMARY OF ARGUMENT

The Tax Court erred when it adopted the tax computation of the Commissioner, a computation which denied Nicole, Gail, and Renee credit against their U.S. income tax liability for taxes paid to the United States and taxes paid to the U.S. Virgin Islands.

The failure to allow credit for taxes paid to the U.S. Virgin Islands ignored the effect of another, controlling statute, the Mirror Code. The Mirror Code requires that the tax systems of the United States and the U.S. Virgin Islands be given equal weight and that there is always just “one tax.” Subsidiary to this issue is the effect of secret “memoranda of understanding” between the Internal Revenue Service and the U.S. Virgin Islands Bureau of Internal Revenue.

The failure to allow credit for taxes paid to the United States also ignored controlling statues which explicitly allow as a credit, taxes paid to the United States. There is no provision disqualifying the payment as a payment of tax depending on what the Commissioner or the U.S. Treasury Department does with the funds after receipt. This issue was raised for the first time in the Commissioner's proposed tax computation, in violation of Tax Court Rule 155.

ARGUMENT.

I. INTRODUCTION: THE VIRGIN ISLANDS OF THE UNITED STATES.

Though this court has experience with territories of the United States, it is appropriate to provide some background on a territory that it has not considered before, the Virgin Islands of the United States.

A. The Territory of the Virgin Islands of the United States.

The islands making up the Danish West Indies were ceded by Denmark to the United States in exchange for $25 million near the beginning of the last century.³ The territory⁴ was placed under the administration of the U.S. Navy until 1931 when administrative responsibility was transferred to the U.S. Department of the Interior.⁵ In 1936, the Organic Act of the Virgin Islands⁶ gave the territorial government its source of law, beginning a slow process of increasing self-government for the populace. The current structure of the U.S. Virgin Islands government is set forth in the Revised Organic Act, passed in by Congress in 1954.⁷

As an unincorporated territory, the U.S. Virgin Islands has the authority and functions of a sovereign, but is subject to the mandate of the U.S. Congress under its plenary authority given by Article IV of the Constitution,⁸ even to the extent of vetoing local legislation.⁹ The government is organized with an elected governor,¹⁰ who has been elected by popular vote since 1970, as head of the executive branch, an elected legislature, and an independent judiciary.

The Legislature of the U.S. Virgin Islands is a unicameral body of 15 representatives, called Senators. The Legislature meets annually (and continuing throughout the year) at its building on the waterfront in Charlotte Amalie, St. Thomas. It has regular legislative authority, can levy a full range of taxes,¹¹ and can alter the amount of customs duties on goods imported into the territory.¹²

Like Guam, the U.S. Virgin Islands has a two-level court system, the federal district court and the territorial courts. The District Court of the U.S. Virgin Islands, though not an Article III court,¹³ has the jurisdiction of a U.S. District Court,¹⁴ with judges appointed by the President for a term of 10 years and confirmed by the U.S. Senate.¹⁵

The Superior Court of the U.S. Virgin Islands, the trial level territorial court, has original jurisdiction over local civil actions, except income tax contests, regardless of the amount in controversy, and local criminal matters.¹⁶ The U.S. Virgin Islands Supreme Court operates in the same manner as the supreme courts of the 50 states and bears the same relationship to the federal court system as those courts do, including responding to certification of questions of law from courts of appeal.¹⁷

All persons born in the Virgin Islands after February 25, 1927, are citizens of the United States at birth.¹⁸ The Revised Organic Act guaranteed Virgin Islanders basic civil rights as in all American jurisdictions,¹⁹ however, those rights may be limited to those parts of the U.S. Constitution that Congress specifically applied to the territory.²⁰ Most U.S. laws apply in the Territory.²¹ As a small territory on the border of the northeast Caribbean Sea and the Atlantic Ocean, the U.S. Virgin Islands is susceptible to very bad weather.²²

B. The Mirror Code.

The tax system of the U.S. Virgin Islands is most like that of Guam, with which this Court has been long familiar. See, e.g., Sayre & Co. v. Riddell, 395 F.2d 407 (9th Cir. 1968)(en banc). Congress created the tax system of the U.S. Virgin Islands by imposing the Internal Revenue Code on the territory in 1921 as part of the Naval Services Appropriation Act (the territory was at that time under the jurisdiction of the U.S. Navy) by the following language:

The income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands . . .²³

Thus began the income tax system for the Virgin Islands that has become known as the “Mirror Code” (or the “Code as mirrored”).²⁴ The difficulties in understanding the practical application of the Mirror Code were remarked upon by a long-time, Virgin Islands tax practitioner in a manner that suggests the metaphysical nature of the subject:

The U.S. Virgin Islands (named by Columbus after St. Ursula and her 11,000 virgins) were purchased from Denmark in 1917. What has happened to her tax system since should not be visited upon the most hardened harlot. To cope with the system one must be adept in “Alice in Wonderland” logic. The “Through the Looking Glass” concept that exists has been adequately rewarded with the sobriquet “mirror theory” being attached to its tax system. The Internal Revenue Code is applied with its full force in a manner not so predictable as in the continental United States. These waters are uncharted and infested with sharks and hidden reefs. Disastrous results are inflicted upon the unwary, who to their dismay learn that the whole trick was done with mirrors. For tax purposes, they may not be citizens under the American flag despite U.S. citizenship. Legitimacy of a well born taxpayer's birth has not yet been questioned, but equally strange interpretations are advanced by the [Internal Revenue] Service under the mirror theory.²⁵

What this means for an individual is that, if he or she is a “bona fide resident” of the U.S. Virgin Islands for income tax purposes, he or she files one income tax return with the U.S. Virgin Islands Bureau of Internal Revenue (“VIBIR”), reporting worldwide income and paying the tax thereon to the U.S. Virgin Islands. I.R.C. §932(a). For U.S. citizens not residing in the Territory but with income from sources there, two income tax returns must be filed, one in the United States with the Internal Revenue Service (“IRS”) and one with VIBIR. I.R.C. § 932(c). Also important is the ability of the United States and the U.S. Virgin Islands to transfer taxes between the two jurisdictions under the “cover over” process without the knowledge, instruction, or consent of the taxpayer as to the application of such funds. See, I.R.C. § 7654.

III. THE TAX COURT FAILED TO GIVE PROPER EFFECT TO AN ACT OF CONGRESS WHEN APPLYING THE FOREIGN TAX CREDIT TO TAXPAYERS WHO PAID TAX TO THE U.S. VIRGIN ISLANDS.

A. The Operation of the Foreign Tax Credit.

The Internal Revenue Code of 1986, as amended and as it applies in the United States (the “Code” or “I.R.C.”),²⁶ allows U.S. citizens a credit for tax paid or accrued to “any foreign country or to any possession of the United States.” I.R.C. §901(b)(1). In addition to other limitations not relevant here, the amount of foreign taxes which may be applied as a credit against U.S. tax is limited to the amount of foreign tax in the proportion which the foreign source income bears to total income. I.R.C. §904(a). Also, Code § 932 provides rules for allocating income and the foreign tax credit specifically to taxpayers who are bona fide residents of the U.S. Virgin Islands or have income from sources there.

B. The FTC Opinion.

The FTC Opinion held that that Renee, Gail, and Nicole were not entitled to a credit for taxes paid to the U.S. Virgin Islands because: they did not show that the amounts in issue were “taxes paid” within the meaning of Treas. Reg. § 1.901-2(e); they did not show that the amounts paid did not exceed the limitations of Code § 904; and “allowance of the claimed credits would be inconsistent with Congress' intent that payments of Virgin Islands tax by U.S. citizens or residents not be creditable under I.R.C. sec. 901.”

C. Under the Code as it Applies in the United States and the Mirror Code, There is But One Tax.

1. The Commissioner's Smoke.

The Tax Court's FTC Opinion supports the Commissioner's view that the foreign tax credit is controlled by mechanical rules embodied in statutes and regulations and that Nicole, Gail, and Renee have failed those tests. However, the proper view is that, when the U.S. Virgin Islands are involved as a source of income, tax residence, or payment of taxes, the picture changes. And just as the old-time Virgin Islands tax practitioner said long ago, smoke and mirrors are involved. And here, the smoke is provided by the Commissioner.

Despite being instructed by Congress to issue regulations under Code § 932 in the Tax Reform Act of 1986,²⁷ the Commissioner issued no regulations regarding the U.S. Virgin Islands until 2005, the post hoc regulations relied on in the FTC Opinion. This absence of guidance in two critical areas would surely have reduced Petitioners-Appellants' confusion; the post hoc regulations certainly enlightened the Tax Court in its FTC Opinion. The lackadaisical approach to guidance for the U.S. territories on the part of the IRS and the Treasury Department is cause for the confusion and adversely effects Petitioners-Appellants.

2. A Single Title 26 Tax.

The Tax Court's interpretation of Code §932 allows for disparate treatment between individuals situated in the U.S. Virgin Islands and those situated in the United States. This is contrary to accepted interpretations of the interaction of the two tax systems. Cases in both the Third and Ninth Circuit have consistently ruled that the operation of a Mirror Code requires consistency between the two taxing jurisdictions. Here, the taxpayers have been deemed to reside in the United States, with only U.S. source income, and paid tax to the U.S. Virgin Islands; they are denied a foreign tax credit by the FTC Opinion. But, under the framework described in the FTC Opinion, a taxpayer residing in the U.S. Virgin Islands, with U.S. Virgin Islands source income, and having paid tax to the United States, would be entitled to a foreign tax credit. This inequality in treatment violates recognized principles of interpreting the interaction of the two tax systems.

Such an interpretation is contrary to what was described in Gumataotao v. Director of Dept. of Revenue & Taxation, 236 F.3d 1077 (9th Cir. 2001), where this Court held that the Mirror Code of Guam did not allow Guam to exempt interest on U.S. bonds from taxation. This Court said that two-way mirroring, where “United States” would be substituted for “State and local” in Guam's mirrored Code §103 (exemption of state and local bond income) “would not avoid disparate tax treatment; in fact, it would create disparity” because under the Code as it applied in the United States, taxpayers do pay tax on interest from federal bonds. 236 F.3d at 1080-1081. The FTC Opinion creates a disparity for U.S. citizens similarly situated.

Application of the Mirror Code requires some judicial finesse; the FTC Opinion was a blunt instrument. In Chicago Bridge & Iron Co. v. Wheatley, 430 F.2d 973 (3rd Cir. 1970), cert. denied, 401 U.S. 910 (1970), the delicacy required to interpret and apply the Mirror Code was illustrated when the Third Circuit held that the U.S. Virgin Islands could not deny a deduction under the Mirror Code that was allowable under the Code as it applied in the United States. 430 F.2d at 976-977. Importantly, Chicago Bridge & Iron, relying on Wilson v. Kennedy, 232 F.2d 153. (9th Cir. 1956), explained the “equality principle” as “substantive equality of treatment . . . under the Virgin Islands mirror system requires that the . . . language be given the same meaning.” 430 F.2d at 977.

The Commissioner will argue that the “equality principle” announced in Chicago Bridge & Iron is a one-way street, it does not apply when interpreting the Code as it applies in the United States. That position is not consistent with giving effect to all applicable law, and the Mirror Code is applicable if it involves taxes paid to the U.S. Virgin Islands because, under the cover over process, the Territory must determine whether the taxpayer is a “bona fide resident” and hence a U.S. Virgin Islands taxpayer. It is too nuanced to apply the blunt instrument of the FTC Opinion. Other cases support the same principle, that there is one tax and the statute and regulations must be read together.

But the Tax Court did recognize that symmetry between the two tax systems was required. In Hulett v. Commissioner, 150 T.C. 60 (2018), that court held that the statute of limitations with regard to the IRS began to run when the U.S. Virgin Islands taxpayer's return, though filed with the VIBIR, somehow made its way to the IRS. Here, the Tax Court seems to have forgotten what it recognized in Hulett, that there is a “single title 26 liability.” 150 T.C. at 73. Hulett indicates that Code §932 and § 7654 tie the two jurisdictions together. Id.

Because there is a “single title 26 tax” by operation of the Code as it applies in the United States and the operation of the Mirror Code, the FTC Opinion's denial of a credit for taxes paid to the U.S. Virgin Islands by Nicole, Gail, and Renee is error.

III. THE TAX COURT ERRONEOUSLY ALLOWED THE COMMISSIONER TO INTRODUCE A NEW ISSUE IN HIS RULE 155 CALCULATION.

A. Introduction.

This issue involves the payment of estimated taxes and taxes withheld for 2001 and credits from a prior year being transferred, at the Commissioner's discretion, from the United States to the U.S. Virgin Islands. Then 12 years later taxpayers are found not to be U.S. Virgin Islands taxpayers, and four years afterwards the Commissioner denies that any U.S. taxes were paid. More smoke, plus mirrors.

The salient fact here is that in his Pretrial Memorandum, the Commissioner admitted he could not assert the failure to file penalty under I.R.C. § 6651(a)(1) because Nicole, Gail, and Renee had paid taxes to the United States, App. p. 127, but changed his position with his Computation for Entry of Decision in contravention of Tax Court Rule 155.

B. Tax Court Rule 155 and the Rule 155 Opinion.

In Tax Court, it's all about what the final number is. That number is usually computed by the parties, either jointly by agreement or the submission of separate computations with the court making the final decision. This process is embodied in Tax Court Rule 155. As relevant here, argument may be had on the computation but it is limited to how the numbers are derived from the issues already decided by the court. No new issues or revisiting issues already disposed of by the court are allowed. Tax Court Rule 155(c).

In no small amount of overkill, the Tax Court's Rule 155 Opinion held in three separate opinions (main and two concurring) that, indeed, you cannot raise new issues in the Rule 155 Computation. What is at issue here is not whether a party can raise a new issue in the Rule 155 computation, but who did it. The Tax Court denied Petitioners-Appellants' attempt, after taking Judge Halpern's hint, to introduce the deductibility of the U.S. Virgin Islands taxes into the computation.²⁸ But the Tax Court completely ignored the introduction of a new issue by Respondent Commissioner, namely, that Nicole, Gail, and Renee were not entitled to credit for taxes paid to the United States because the Commissioner had covered-over the taxes to the U.S. Virgin Islands.

C. Taxes Paid by Nicole, Gail, and Renee and the Statutes Giving Credit.

The record before the Tax Court was clear as to what Nicole, Gail, and Renee had paid and how it was characterized and applied by Respondent Commissioner. App. p. A-124.

Several statutes operate to allow taxpayers a credit for taxes paid. Code §31 provides for a credit for taxes withheld from wages. Code §6315 provides that “[p]ayment of the estimated income tax, or any installment thereof, shall be considered payment on account of the income taxes imposed by subtitle A for the taxable year.” Section 6401 explains how to treat overpayments of tax and credits to a taxpayer's account and, importantly, states that “[a]n amount paid as a tax shall not be considered not to constitute an overpayment solely by reason of the fact that there was no tax liability in respect of which such amount was paid.

None of these statutes require an affirmative act on the part of an individual for them to apply. Some statutes do require an affirmative act in order to be applied to a taxpayer. Code sections 31, 6315, and 6401 do not. The statutes operate as written. There are no conditions which must be met, no taxpayer elections to be made. There is no proviso or “notwithstanding” language. This set of statutes simply says that payments of tax are treated as payments of tax even if there is no tax due. The Commissioner and the Tax Court ignored these provisions. The Commissioner and the Tax Court are bound to give the provisions of the Code effect, not arbitrarily decide they do not apply to particular taxpayers such as Nicole, Gail, and Renee.

And there are no qualifications, conditions, or requirements in the regulations promulgated under these statutes. See, Treas. Regs. §§ 1.31-1, 1.31-2, 301.6315-1. 301.6401-1.

D. Respondent's Rule 155 Computation Raised a New Issue That Was Ignored by the Tax Court.

In his notice of deficiency, on which jurisdiction in the Tax Court is based, the Commissioner asserted a failure to file penalty.²⁹ In the course of the case, partnership items were deleted from the case through the Commissioner's concessions and amendments to his answer. The bona fide residency of Nicole Gail, and Renee was decided after a bench trial in the District Court of the Virgin Islands and an appeal to the U.S. Court of Appeals for the Third Circuit. See, Vento v. Director, 715 F.3d 455. This left only the issue of whether Nicole, Gail, and Renee were entitled to a credit for taxes paid to the U.S. Virgin Islands. See, Pretrial Memorandum for Respondent, App. p. A-114, Opening Brief for Respondent, App. A-382, and Answering Brief for Respondent, App. p. A-440. In none of these filings did the Commissioner assert that the statutes that entitle taxpayers to a credit against U.S. tax liability did not apply. In the Commissioner's Pre-Trial Brief, he described why the failure to file penalty was inapplicable:

In petitioners' cases, Nicole, Gail and Renee did not file income tax returns with the Internal Revenue Service for tax year 2001, but made estimated tax payments to respondent and had allowable tentative credits on their IRS accounts totaling $185,893.00, $183,289.00 and $180,208.00, respectively. For purposes of their Tax Court cases, the Court only has jurisdiction to determine that Nicole, Gail and Renee owe tax deficiencies of approximately $166,983.00, $159,637.00, and $160,523.00, respectively. Thus, because their payments and allowable credits exceed the amounts of tax that can be determined by the Court in these cases, the Court, in these cases, cannot determine that petitioners are subject to an addition to tax under section 6651 (a) (1).

Respondent's Pre-Trial Memorandum, p. 13 (footnotes omitted)(emphasis added), App. p. A-127. The foregoing passage from the Commissioner's own Pretrial Memorandum clearly indicates he thought the amounts paid to the United States were taxes because it prevented him from asserting the failure to pay penalty.

Petitioners-Appellants objected to the Commissioner interjecting a new issue in his Rule 155 computation. Objection was made in Petitioners' Notice of Objection to Computation for Entry of Decision, App. p. A-538, and Motion to Vacate, App. p. A-627.

In his Answer to the Petition, the Commissioner did not affirmatively assert that he was going to take the position that an automatically operable federal statute did not apply. The Tax Court's rules provide that: “The answer shall be drawn so that it will advise the petitioner and the Court fully of the nature of the defense.” Tax Court Rule 36(b). At no point in his original or amended answers does the Commissioner state his position that he was going to assert that Code sections 31, 6315, and 6401 did not apply. See, also, Tax Court Rule 39 Pleading Special Matters. Respondent Commissioner did not raise the issue of the inapplicability of Code sections 31, 6315, and 6401 at any time before his Rule 155 computation.

E. The Commissioner's Mirrors.

Directly effecting the tax liabilities of Nicole, Gail, and Renee was the overt manipulation of the tax credits for Nicole, Gail, and Renee under the guise of the cover-over process whereby the Commissioner transferred the monies Nicole, Gail, and Renee paid him to the U.S. Virgin Islands. This appears to be the basis for denying them the credit for U.S. taxes paid. There is no published procedure for the cover-over process but there is some available information. Currently there are a number of instructions in the Internal Revenue Manual about cover-over of taxes in different scenarios, e.g., I.R.M. 21.8.1.5.8.1 Subsequent Adjustments to Military Cover Over Accounts — U.S. Virgin Islands, CNMI, and American Samoa (03-03-2011), but not so many back in 2001. And we have been repeatedly told that the I.R.M. has no substantive rights for taxpayers. E.g., Crystal v. United States, 172 F.3d 1141, 1147-1148 (9th Cir. 1999).

There is no rule, regulation, or law that states that the character of payments to the IRS change depending on what the IRS does with the money. The only regulation under the cover over statute applies specifically to Guam and the income tax provision of its government structure legislation. But if used as a guide for payments to the U.S. Virgin Islands, the actions of Respondent Commissioner fail to follow its rules as is obvious by his failure to allocate tax paid to the jurisdictional source of the income. See, Treas. Reg. §301.7654-1(b).

Of particular note in understanding the cover-over process is IRS National Office Significant Service Center Advice released in 2000 which opined that there was no statute of limitations between the IRS and the VIBIR with respect to transfers under I.R.C. § 7654. Perhaps what makes this SSCA so “significant” is that it indicates that the transfer of funds by the Commissioner to the U.S. Virgin Islands — before it was determined that Nicole, Gail, and Renee were residents of the U.S. Virgin Islands — was improper. The SSCA states:

Further, there is no authority to "cover over" to the VI under section 7654 taxes of a person who is not an individual and a bonafide resident of a possession. The authority to cover over funds to the VI that is granted by section 7654 relates to individuals that meet the requirements of section 932(c).

IRS Service Center Advice Memoranda 200011044 (Dec. 22, 1999; released March 17, 2000). Thus, under the IRS' own standards, the cover-over of taxes paid to the United States by Nicole, Renee, and Gail was premature — but the Commissioner has made no known attempt to recover the funds, preferring instead to allow them to suffer double taxation.

F. Another Mirror.

Further clouding the operation of the cover-over process and its unfair, adverse effects on taxpayers such as Nicole, Gail, and Renee is the existence of six or more secret “memoranda of understanding” between IRS and VIBIR (“MoUs”), Kazi v. Commissioner, Docket No. 20201-13, 20207-13, Order (Dec. 9, 2019), see Exhibit ___, secret in the sense that they have only been disclosed under seal and protective orders and the IRS treats them as “treaty correspondence” under the Code. Section 6105 of the Code provides that “[t]ax convention information” is not to be disclosed. I.R.C. § 6105(a). The term “tax convention information” means any agreement entered into with the competent authority of one or more foreign governments pursuant to a tax convention, application for relief under a tax convention, background information related to such agreement or application, document implementing such agreement, and other information exchanged pursuant to a tax convention which is treated as confidential or secret under the tax convention. I.R.C. § 6105(c)(1). The Tax Implementation Agreement Between the United States of America and the Virgin Islands, 1989-1 C.B. 347 (Feb. 24, 1987), is probably the “tax convention” on which the secret MoUs are derived. I.R.C. §6105(c)(2). From several reported cases, it appears that the MoUs have a bearing on either the procedural or substantive rights of taxpayers involved with the U.S. Virgin Islands. Coffey (Hulett) v. Commissioner, Tax Court docket numbers 4720-10 and 4949-10, 150 T.C. 60 (2018), appeal docketed, No. 18-3256 (8th Cir. Oct. 23, 2018).³⁰

The reference in Hullett indicates that the MoUs have some significant impact on the tax liability of Nicole, Gail, and Renee.

CONCLUSION

The Tax Court erred when it denied Petitioners-Appellants Gail Vento, Renee Vento, and Nicole Mollison credit against their United States income tax liability for taxes paid to the U.S. Virgin Islands because it did not apply the “equality principle” that there is but a “single title 26 tax” as between the United States and the U.S. Virgin Islands.

The Tax Court also erred when it adopted the tax computation by Respondent-Appellee Commissioner of Internal Revenue which introduced a new issue contrary to Tax Court Rule 155. This error is compounded by the violation of IRS procedures for cover over of taxes paid to the territories and the probable effect of the secret MoUs.

The Decision of the Tax Court should be reversed and remanded with instructions to enter a decision in favour of Petitioners-Appellants allowing credit for taxes paid to the U.S. Virgin Islands and the United States.

Respectfully submitted,

Joseph M. Erwin
LAW OFFICE OF JOSEPH M. ERWIN
100 Crescent Court, Suite 700
Dallas, Texas 75201
(214) 969-6890
joe@erwintaxlaw.com

Counsel for Appellants
Gail Vento, Renee Vento, and Nicole Mollison

Dated: October 15, 2019.