Individual, Estate File Reply in Statute of Limitations Appeal

JUDITH S. COFFEY, and GOVERNMENT OF THE UNITED STATES
VIRGIN ISLANDS (“V.I. GOVERNMENT”),
Appellees,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant;

ESTATE OF JAMES COFFEY, JUDITH COFFEY EXECUTRIX,
Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE,
Appellant.

IN THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

APPELLEES' REPLY TO APPELLANT'S RESPONSE TO THE COFFEYS' MOTION TO FILE A SUPPLEMENT TO THEIR BRIEF & ORAL ARGUMENT

Appellees, Judith S. Coffey and the Estate of James Coffey, by and through their undersigned counsel, respectfully submit this Reply to Appellant's Response to the Coffeys' Motion to File a Supplement to Their Brief & Oral Argument (“Response”).

INTRODUCTION

On October 14, 2020, Appellees filed a motion for leave to file a supplement to Appellees' Brief. On October 16, 2020, Appellant filed his Response to Appellees' motion. Upon review of the Response, Appellees have determined that Appellant makes certain representations that require response in order to ensure that the record before this Court is clear. Accordingly, Appellees respectfully requests this Court's consideration of this Reply to appropriately address the specific statements Appellant makes in his Response.

1. The Relevancy of Appellant's Latest Admission

Appellant states: “[T]here is no dispute that the return that the Coffeys filed with the USVI is a return required to be filed under the Internal Revenue Code.” Response at 5. (Emphasis added).

Appellant pretends that no such dispute ever existed in this case and that the fact is irrelevant. But the dispute did exist and the fact is relevant. In fact, Appellant's misrepresentation below brought about both the lead opinion and the dissent. Appellant — the taxing authority — told the Tax Court, as a matter of fact, that the return the Coffeys filed with the USVI is not a return required to be filed under the Internal Revenue Code and that he had no access to, authority over, or responsibility to examine such return. See, e.g., SJA 532:14-24; Add. at 51.

Some of the Tax Court Judges took Appellant — the taxing authority — for his word. Judge Marvel believed him and based her dissent on Appellant's fundamental misrepresentation — “Petitioners simply did not file a Federal income tax return, on the facts of this case.” Add. at 73. (Emphasis added). Three other judges joined this dissent. Appellant also misled the Eleventh Circuit panel on this precise point in Commissioner v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016). There, Appellant's misrepresentations caused Judge Anderson to believe that Section 932(c)(2) returns never, in his words, enter the IRS “audit machinery.” SJA at 207-209. Appellant now parades Sanders as if it is dispositive of the issue before this Court.

The Tax Court plurality opinion saw through the government's misrepresentations below. It found as a matter of law what Appellant now concedes as a matter of fact: the return that the Coffeys filed with the USVI is a return required to be filed under the Internal Revenue Code. Add. at 68 and 76-77. Had Appellant admitted below what he admits now, the dissent would have joined the plurality and Judge Holmes would never have had to address Appellant's false claim that he required something more (“protective all zero returns”) to alert him to the fact that a Section 932(c)(2) return was filed. Instead, he stridently warned of a crisis — that taxpayers could file this random document with this random foreign sovereign and start the statute of limitations under Section 6501(a) without Appellant ever knowing it happened or ever having access to or authority over that document. The false claim cast a shadow doubt and concern over the Court, and the Judges justifiably struggled with the alleged problem.

Appellant now admits there was never a crisis at all. The tax returns at issue aren't some documents filed with some foreign sovereign. They are the returns required to be filed under the Internal Revenue Code. This changes everything and belies Appellants' claims to the Tax Court that he couldn't access the returns (while he was accessing them); that he had no authority over them (while he exercised that authority); and that they weren't returns required under the Code (when he knew all along that they were).

2. Appellant Misrepresents the Tax Court's Assumption on Summary Judgment.

Having conceded his factual misrepresentations below, Appellant now misstates the Tax Court's assumption on summary judgment. He claims that the Tax Court assumed as follows: Ms. Coffey was not a bona fide USVI resident and therefore only a Section 932(a)(2) return would start the statute of limitations. The Tax Court made no such assumption.

Judge Holmes expressly states in his opinion that the Court does not assume that a taxpayer filing her return as a bona fide USVI resident under Section 932(c)(2) must also file a Section 932(a)(2) return — i.e., one taking a position that she is not a USVI resident — to start the statute of limitations. Rather, the assumption on summary judgment was only that the Court would find on the facts of the case that Ms. Coffey was not a bona fide USVI resident as required under Section 932(c)(4)(A).¹ Judge Holmes explained that, to start the statute of limitations, the return filed by the taxpayer need only contain “enough information to compute the tax liability they would owe if in fact they turn out not to be bona fide VI residents.” Add. at 51-52 n. 22. Appellant now admits that he has the responsibility and authority to examine the Section 932(c)(2) return and make determinations thereon, including a determination on whether the taxpayer is a bona fide USVI resident under Section 932(c)(4)(A).

The government's position would require all taxpayers filing Section 932(c)(2) returns to also file Section 932(a)(2) returns taking contradictory and inapposite residency positions that would establish two duplicative tax liabilities on the same income for the same year. There is no such requirement in the law. Indeed, Appellant admitted as much below and represented to the Tax Court that a taxpayer cannot file both a Section 932(a)(2) return and a Section 932(c)(2) return. SJA at 540-42.

Accordingly, Appellant's interpretation of the assumption on summary judgement is wrong.

3. Section 932(a)(2) Does Not Mandate Filing Two Separate and Distinct Tax Returns.

Section 932(a)(2) requires that a non-bona fide USVI resident “shall file his income tax return for the taxable year with both the United States and the Virgin Islands.” Appellant claims in his response that this requires the filing of two separate and distinct tax returns — one with the IRS and one with the VIBIR. He argues that, by filing only a Section 932(c)(2) return, Appellees satisfied only half of the Section 932(a)(2) filing requirement.² Response at 5. He is wrong. The returns required under Sections 932(a)(2) and 932(c)(2) are two separate and distinct tax returns reporting two different and mutually exclusive tax liabilities on the same income. They are not two components of one filing requirement.

Under Section 932(a)(2) the taxpayer prepares only one Form 1040 calculating only one tax liability which is allocated between the U.S. and the USVI based upon the proportional share of U.S. and USVI adjusted gross income. The taxpayer calculates and reports this allocation on Form 8689 (Allocation of Individual Income Tax to the U.S. Virgin Islands) attached to the Form 1040. JA at 461. The taxpayer files the original of this Form 1040 with the IRS and a copy of the Form 8689 and Form 1040 with the VIBIR.

The filing of a Section 932(c)(2) return has nothing at all to do with Section 932(a)(2) and is certainly not half of the filing requirements under Section 932(a)(2). Appellant admitted as much below. SJA at 540-541.

4. There Must Exist an Identifiable Return that Starts the Statute, and that Return is the One the Coffeys Filed.

There is one constant in this litigation, which is the agreement of the parties and the Tax Court that there must exist a specific identifiable return that starts the statute of limitations. USVI taxpayers, like all other taxpayers covered under the Internal Revenue Code, are entitled to repose if they file a return required to be filed under the Code. To fail to identify that return, or to make it impossible for a taxpayer to know what that return is, or to suggest that the return can only be determined by hindsight sometime in the future all undermine the purpose of a statute of limitations. As Judge Thornton aptly stated:

If a taxpayer's Virgin Islands filing were insufficient to start the limitations period unless the taxpayer was actually a bona fide resident of the Virgin Islands at the relevant time, then the repose offered by the limitations period would be of doubtful value: Even bona fide residents who filed correct returns would never be free from the threat of a possible IRS challenge and future litigation with respect to their residency status.

In this case, as is generally true of tax cases involving the operation of the statute of limitations, the relevant question is not whether the positions the taxpayers took on their returns were substantively correct, but whether the returns "evince[d] an honest and genuine endeavor to satisfy the law." Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180 (1934).

Add. 70-71.

The Eighth Circuit recognizes what Zellerbach requires “[t]o be a return” and, consistent with Judge Thornton's language above, the law of the Eighth Circuit mandates that “the honesty and genuineness of the filer's attempt to satisfy the tax laws should be determined from the fact of the form itself.” Colsen v. United States (In re Colsen), 446 F.3d 836, 840 (8th Cir. 2006). Judith Coffey, Arthur Appleton, and every single other taxpayer who filed their Forms 1040 with the VIBIR from 1987 until today identified their home address — their residency — on the face of the form as in the USVI. The honesty and genuineness of the attempt to satisfy Sections 932(c)(2) must, under Eighth Circuit law, be determined based on the residence address listed on the face of the form. Appellant now concedes that “[T]he return that the Coffeys filed with the USVI is a return required to be filed under the Internal Revenue Code.” Response at 5. With the facts finally laid bare, Appellant hopes this Court will rule that the return that he admits is a return is not a return because he claims it has an error on it. Such a ruling would be contrary to the law and the agreed facts of this case.

CONCLUSION

After more than a decade of litigation over the proffered and abandoned government positions, it is disheartening and alarming to see that Appellant can now come before this Court, admit facts that should have been admitted long ago, and re-argue disproven and abandoned arguments as if they were never debunked and abandoned at all. Over the past decade, the Coffeys, the Government of the Virgin Islands, and the Tax Court devoted massive time and resources to carefully address Appellant's ever-shifting arguments. The pleadings below tell the story. We respectfully implore this Court to review the entire Tax Court record on summary judgement to understand fully the misrepresentations and omissions below and the gradual development of facts that ultimately compelled Appellant's concessions and admissions before this Court.

Dated: October 26, 2020

Respectfully submitted,

ANDREOZZI BLUESTEIN LLP
Attorneys for Appellees

By: Randall P. Andreozzi, Esq.
9145 Main Street
Clarence, New York 14031
(716) 565-1100
rpa@andreozzibluestein.com

By: Heather L. Marello, Esq.
9145 Main Street
Clarence, New York 14031
(716) 565-1100
hlm@andreozzibluestein.com

By: Michael J. Tedesco, Esq.
9145 Main Street
Clarence, New York 14031
(716) 565-1100
mjt@andreozzibluestein.com