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Sisters Seek Ninth Circuit Rehearing in U.S.V.I. Tax Dispute

APR. 5, 2021

Renee Vento et al. v. Commissioner

DATED APR. 5, 2021
DOCUMENT ATTRIBUTES

Renee Vento et al. v. Commissioner

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' PETITION FOR PANEL REHEARING

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

Counsel for Appellants
Renee Vento, Gail Vento, Nicole Mollison


TABLE OF CONTENTS 

TABLE OF AUTHORITIES

INTRODUCTION

ARGUMENT

I. Decision ignores acts of Congress that directly bear on the issue of whether taxpayers are entitled to credit for income taxes paid to the Virgin Islands

II. The Decision Misstates Facts When It Describes the Tax Court Rule 155 Process in the Case Below

III. The Decision Misapprehends the Effect of the Commissioner's Rule 155 Computation, Namely, That It Contradicts the Law, and the Import of the Facts of Payment of Taxes to the United States

CONCLUSION

SIGNATURE

CERTIFICATE OF SERVICE

CERTIFICATE OF COMPLIANCE (Form 11)

ADDENDUM (filed herewith)

A. Memorandum (DE#74-1) (the “Decision”)

B. Internal Revenue Manual, excerpts of 21.8.1.

C. IRS Significant Service Center Advice, SCA 200011044 (March 17, 2000), 1999 SCA LEXIS 31

TABLE OF AUTHORITIES

Cases.

Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., 710 F.3d 946 (9th Cir. 2013), cert. denied, 571 U.S. 1156 (2014)

Dolan v. U.S. Postal Serv., 546 U.S. 481 (2006)

See, Estate of Kechijian v. Commissioner, 962 F.3d 800 (4th Cir. 2020)

Gail Vento, LLC v. United States, 595 Fed. Appx. 170 (3rd Cir. 2014)                        

Harris v. Boreham, 233 F.2d 110 (3rd Cir. 1956)

Hulett v. Commissioner, 150 T.C. 60 (2018), rev'd on other grounds sub nom. Coffey v. Commissioner, 987 F.3d 808 (8th Cir. 2021), pet. for rehearing and rehearing en banc filed (March 29, 2021)

United States v. Menasche, 348 U.S. 528 (1955)

United States v. Petri, 731 F.3d 833 (9th Cir. 2013)

U.S. Constitution

Article IV, § 3, cl. 2

Statutes.

I.R.C. § 31

I.R.C. § 164

I.R.C. § 901

I.R.C. §§ 901-904

I.R.C. § 932

I.R.C. § 6315

I.R.C. § 6401

I.R.C. § 7654

I.R.C. § 6601

Naval Services Appropriation Act, 1922 ch. 44, § 1, 42 Stat. 123 (July 21, 1921), amended by Pub. L. 94-392, § 5, 90 Stat. 1195 (Aug. 19, 1976), codified to 48 U.S.C. § 1397 (the “Mirror Code”)

Regulations.

Treas. Regs. § 1.31-1 12

Treas. Regs. § 1.31-2.12

Treas. Regs. § 301.6315-1

Treas. Regs. § 301.6401-1

Rules.

Tax Court Rule 39

Tax Court Rule 155

Other

IRS Significant Service Center Advice, SCA 200011044 (March 17, 2000), 1999 SCA LEXIS 31

Internal Revenue Manual


INTRODUCTION

This is a petition for rehearing by the panel which issued the decision in this case on February 18, 2021 (the “Decision”)(DE#74-1), see ADDENDUM A, holding that taxes paid by Appellants Renee Vento, Gail Vento, and Nicole Mollison to the U.S. Virgin Islands were not eligible for the foreign tax credit and the Tax Court did not abuse its discretion in using the Commissioner's tax computation. In counsel's judgment panel rehearing is necessary because material points of fact were overlooked and material points of law were misapprehended in the Decision. Specifically:

I. The Decision misapprehends the application of the credit for income taxes paid to the Virgin Islands by ignoring another section of the Internal Revenue Code,1 specifically, the Decision does not address the effect of I.R.C. § 7654(a) on the operation of I.R.C. §§ 901 – 904.

II. In its cryptic explanation, the Decision mistakenly attributes the Commissioner's misleading and legally wrong Rule 155 computation as being merely in response to that of Appellants. Contrary to that misapprehension of the computation process, Rule 155 contemplates both parties agreeing to a computation and, if they do not agree, then the parties submit separate computations for the Tax Court to choose.

III. The Decision misapprehends the effect of the Tax Court's adoption of the Commissioner's Rule 155 computation. Specifically, the Decision ignores the effect and operation of sections 31, 6315, and 6401 of the Code on Appellants income tax liability.

While the Appellants here have been painted by the Commissioner as abusive taxpayers, they were merely passive and unknowing participants in their father's over-aggressive tax planning. Gail Vento, LLC v. United States, 595 Fed. Appx. 170, 171-173 (3rd Cir. 2014). The Commissioner has also done a fine job of misdirecting the Court's attention to issues that were not raised in the appeal or by mischaracterizing the nature of the issues.

All of the issues raised here were argued in Appellants' Opening Brief and Reply Brief. Oral argument would be helpful.

ARGUMENT

I. THE DECISION IGNORES ACTS OF CONGRESS THAT DIRECTLY BEAR ON THE ISSUE OF WHETHER TAXPAYERS ARE ENTITLED TO CREDIT FOR INCOME TAXES PAID TO THE VIRGIN ISLANDS.

The Decision only describes part of the foreign tax credit mechanism applicable to the Virgin Islands. The Decision completely ignores Code section 7654(a), the cover-over statute.

Appellants' argued that the operation of section 7654(a) affects section 901. Appellants' Opening Brief (DE#15), pp. 4, 14, 19, 26. Consider that there is no analogous “cover-over” statute or treaty provision between the Commissioner and any foreign country as part of the operation of the foreign tax credit; the Decision reads as if the U.S. Virgin Islands was the same as a foreign country with which the United States has an income tax treaty. The Decision ignores the consequence of the Congress having peremptory power over the U.S. Virgin Islands, U.S. Const., Art. IV, § 3, cl. 2, Harris v. Boreham, 233 F.2d 110, 113-114 (3rd Cir. 1956), and that Congress, not some foreign government, imposed the Mirror Code on the territory as its income tax law, Naval Services Appropriation Act, 1922 ch. 44, § 1, 42 Stat. 123 (July 21, 1921), amended by Pub. L. 94-392, § 5, 90 Stat. 1195 (Aug. 19, 1976), codified to 48 U.S.C. § 1397.

The Decision's superficial recital of the operation of the foreign tax credit provisions of the Code completely ignores the important function of Code section 7654(a) in the coordination of the income taxes of the two systems. The Code sections that make the two systems compatible are section 932 (not at issue here) and section 7654(a), which reads:

General rule. The net collection of taxes imposed by chapter 1 [of the Code] for each taxable year with respect to an individual to whom section 931 or 932(c) applies shall be covered into the Treasury of the specified possession of which such individual is a bona fide resident.

I.R.C. § 7654(a). The Virgin Islands is a “specified possession.” I.R.C. § 7654(b)(2). The cover-over process only operates when taxes have been paid to a territory and the taxpayer is determined not to be a resident of the territory, and vice versa.

Section 7654 provides for no less than annual offsets and adjustments for taxes paid to the United States and the U.S. territories, depending on in which jurisdiction the taxpayer is residing. I.R.C. § 7654(a); see, ADDENDUM B, Internal Revenue Manual, 21.8.1 (sections with the current U.S. Virgin Islands cover over process at the IRS indicating procedures for transferring tax payments between the two tax agencies). Importantly, it has long been the IRS' position that there is no statute of limitations on the section 7654 cover-over transfers and offsets with the U.S. Virgin Islands. IRS Significant Service Center Advice, SCA 200011044 (March 17, 2000), 1999 SCA LEXIS 31, reproduced at ADDENDUM C. Therefore, the IRS could claim income tax paid to the Virgin Islands at any time. This feature makes clear that there is but one tax and, if paid to the wrong tax authority, may be transferred to the other tax authority without input from the taxpayer. Indeed, this process is completely out of the control of taxpayers (see ADDENDUM B) and allows, as happened here, taxpayers to be subject to double taxation based on the arbitrary whim of mid-level employees of the Commissioner.

Invoking familiar, longstanding rules of statutory construction is necessary in order to emphasize the omissions in the Decision. The complete disregard for the Mirror Code and Code § 7654(a) violates of number of these rules which are part of the jurisprudence of this Circuit. The principles overlap somewhat but the effect is clear: “It is a well-established rule of statutory construction that courts should not interpret statutes in a way that renders a provision superfluous.” Chubb Custom Ins. Co. v. Space Systems/Loral, Inc., 710 F.3d 946, 966 (9th Cir. 2013), cert. denied, 571 U.S. 1156 (2014). Here, the Decision makes Code section 7654(a) superfluous to the coordination of the two income tax systems. Similarly, “When interpreting a statute, words and phrases must not be read in isolation, but with an eye toward the 'purpose and context of the statute.'” United States v. Petri, 731 F.3d 833, 839 (9th Cir. 2013), quoting Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006). The Decision makes no analysis of the purpose or context of Code section 7654 even though it is titled “Coordination of United States and Certain Possession Individual Income Taxes.” And in summary to this point: “The cardinal principle of statutory construction is to save and not to destroy. . . . It is our duty to 'give effect, if possible, to every clause and word of a statute,' rather than to emasculate an entire section, as the Government's interpretation requires.” United States v. Menasche, 348 U.S. 528, 538-539 (1955) (internal citations omitted). The jurisprudence on this subject in this Circuit is as voluminous as its application to this case is obvious.

The overriding principle at work in U.S. Virgin Islands income tax cases bears repeating: with the interplay of the Mirror Code and the Code as it applies generally, and with the specific operation of Code sections 932 and 7654, there is but one tax for individuals paying taxes to the Virgin Islands. Hulett v. Commissioner, 150 T.C. 60, 73 (2018), rev'd on other grounds sub nom. Coffey v. Commissioner, 987 F.3d 808 (8th Cir. 2021), pet. for rehearing and rehearing en banc filed (March 29, 2021). It is inexplicable that an entire body of law would be ignored in a decision which directly affects the administration of the United States and U.S. Virgin Islands income tax systems. The Decision misapprehends the applicable law and fails to apply the standard rules of statutory construction regarding the operation of the foreign tax credit for persons who have paid taxes to the U.S. Virgin Islands.

II. THE DECISION MISSTATES FACTS WHEN IT DESCRIBES THE TAX COURT RULE 155 PROCESS IN THE CASE BELOW.

The Commissioner did an excellent job of misdirecting the Court's attention away from the Rule 155 issue Nicole, Renee, and Gail appealed. The issue was not their Rule 155 computation, but the Commissioner's. The Vento daughters abandoned their arguments about their Rule 155 computation in the Tax Court. This appeal is about the Commissioner's Rule 155 computation. The Court has simply been confused by the Commissioner's obfuscatory arguments about state taxes, etc. The Decision's language on this point (Decision, p. 4, ¶2) is simply irrelevant to the issue on appeal.

The issue for appeal was the Commissioner's Rule 155 computation. See, Appellants' Opening Brief (DE#15), pp. 2, 20-27. The Decision makes a statement that does not accurately portray the Rule 155 process: “While Taxpayers assert the Commissioner injected a new issue during the Rule 155 computation by rejecting their entitlement to 26 U.S.C. §§ 164 and 31(a) tax credits, the Commissioner was simply responding to the new issues raised by Taxpayers for the first time.” Decision (DE#74-1), p. 4. That is not a fact found in the record or in the decisions of the Tax Court.

A simple reading of Tax Court Rule 155 explains the process:

Unless otherwise directed by the Court, if the parties are in agreement as to the amount to be included in the decision pursuant to the findings and conclusions of the Court, then they, or either of them, shall file with the Court within 90 days of service of the opinion or order an original and one copy of a computation showing the amount and that there is no disagreement that the figures shown are in accordance with the findings and conclusions of the Court.

Tax Court Rule 155(a) (emphasis added).

If the parties are not in agreement as to the amount to be included in the decision in accordance with the findings and conclusions of the Court, then each party shall file with the Court a computation of the amount believed by such party to be in accordance with the Court's findings and conclusions.

Tax Court Rule 155(b) (emphasis added). The sequence of the filing of the competing Rule 155 computations is set out in the Excerpt of Record vol. II, pp. 157-210. Clearly, Petitioners-Appellants were objecting to the Commissioner not allowing a credit for taxes paid to the United States, an issue only raised in the Commissioner's Rule 155 computation (by not including those amounts paid to the United States as a credit). Notice of Objection to Respondent's Computation for Entry of Decision, Excerpts of Record, vol. II, pp. 159-166. This was the issue appealed.

A review of the record will show that as late as the Reply Brief for Respondent (the Commissioner) filed in Tax Court, the Commissioner was taking the position that “Gail, Nicole and Renee each owe income tax liabilities to respondent exceeding the amounts of their estimated tax payments and taxes withheld and paid over to the Internal Revenue Service.” Reply Brief for Respondent, p. 5, ¶3 (May 20, 2015), Excerpt of Record, vol. II, p. 241 (emphasis added). This language indicates that in the latest filing before the Commissioner's Rule 155 computation, the Commissioner was taking a position contrary to his Rule 155 computation, namely, that amount paid to the IRS were creditable taxes withheld and estimated taxes paid. The issue of non-applicability of I.R.C. sections 31, 6315, and 6401 was also not listed in the Commissioner's Pre-Trial Memorandum, Excerpts of Record, vol. III, pp. 565-579. Furthermore, the FTC Decision, Excerpt of Record, vol. I, pp. 40-70, did not deny credit for taxes paid to the United States. Again, that position was first asserted in Respondent's Rule 155 computation.

The Decision is internally inconsistent because it allows the Commissioner to do what it affirms the Appellants cannot do, namely, raise a new issue in the Rule 155 computation. This is wrong as a matter of law. See, Estate of Kechijian v. Commissioner, 962 F.3d 800 (4th Cir. 2020).

III. THE DECISION MISAPPREHENDS THE EFFECT OF THE COMMISSIONER'S RULE 155 COMPUTATION, NAMELY, THAT IT CONTRADICTS THE LAW, AND THE IMPORT OF THE FACTS OF PAYMENT OF TAXES TO THE UNITED STATES.

The effect of the Decision is to allow the Commissioner to deny the operation of I.R.C. sections 31, 6315, 6401. Refusing to allow credit for a payment allowed by law must be specially plead. Tax Court Rule 39. See, Excerpt of Record, vol. II, pp. 161-162. This was not done.

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. It is apparent from the brevity of the Decision that the panel did not appreciate the significance of the following facts:

1. Taxes paid by Appellants to the United States:

Type of Payment

Date

Nicole

Gail

Renee

Estimated Tax Payment

6/19/2001

$50,000

$50,000

$50,000

Estimated Tax Payment

9/15/2011

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

4/15/2001

2,217

 

1,267

Totals

 

$185,893

$183,289

$180,208

Stipulation of Facts, Excerpts of Record, vol. III, p. 330.

2. The Commissioner's Computations for Entry of Decision (December 7, 2016), Excerpts of Record, vol. II, pp. 167-209, the Commissioner's Rule 155 computation, does not allow credit for the foregoing amounts paid to the United States as indicated.

3. The Commissioner's Rule 155 computation is the only place where the Commissioner raised this issue in this case.

The foregoing facts are important because the Decision ignores the application of I.R.C. sections 31, 6315, and 6401 to these facts. These statutes are clear and unambiguous. 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. See, Treas. Regs. §§ 1.31-1, 1.31-2, 301.6315-1. 301.6401-1. 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, the Tax Court, and now this Court in its Decision have ignored these statutes and the Tax Court Rules.

CONCLUSION

Instead of clarifying the tax law applicable to the U.S. Virgin Islands, the Decision reinforces the murkiness attendant to the Mirror Code and the application of the Code as it applies to non-residents who have financial interests in the territory. The people and the government of the U.S. Virgin Islands deserve a better effort than as given in the Decision.

Appellants-Petitioners Gail Vento, Renee Vento, and Nicole Mollison are entitled to a panel rehearing.

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

Counsel for Appellants
Renee Vento, Gail Vento, Nicole Mollison

Date: April 5, 2021.

FOOTNOTES

1All references to the Code or I.R.C. are to the Internal Revenue Code of 1986, as amended and in force at the relevant time.

END FOOTNOTES

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