Menu
Tax Notes logo

Government Argues U.S.V.I. Return Didn’t Trigger Limitations Period

OCT. 7, 2019

Judith S. Coffey et al. v. Commissioner

DATED OCT. 7, 2019
DOCUMENT ATTRIBUTES

Judith S. Coffey et al. v. Commissioner

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

ESTATE OF JAMES COFFEY, Judith S. Coffey Executrix,
Petitioner-Appellee,
v
.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

ON APPEAL FROM THE DECISIONS OF
THE UNITED STATES TAX COURT

REPLY BRIEF FOR THE APPELLANT

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
F
RANCESCA UGOLINI (202) 514-1882
J
UDITH A. HAGLEY (202) 514-8126
Attorneys, Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044


TABLE OF CONTENTS

Table of contents

Table of authorities

Glossary

Introduction

Argument

A. Appellees cannot justify the concurring opinion’s failure to enforce §932(a)’s dual-filing requirement

1. The concurrence is irreconcilable with the plain language of the Code

2. The Zellerbach principle addresses return imperfections, not filing errors

3. The Coffeys did not “meticulously comply” with all applicable filing rules

4. The 2008 regulations do not support appellees’ position

5. The IRS and VIBIR are separate taxing authorities

6. The USVI’s policy arguments are irrelevant and exaggerated

B. The Coffeys cannot justify the lead opinion’s treatment of VIBIR’s cover-over requests as the Coffeys’ filing of U.S. tax returns

1. VIBIR’s cover-over transmissions were not tax return “filings”

2. VIBIR’s cover-over requests were not “returns”

C. Appellees have provided this Court no persuasive reason to go into conflict with the Eleventh Circuit

Conclusion

Certificate of compliance

Certificate of service

Statutory Addendum

TABLE OF AUTHORITIES

Cases:

Allnutt v. Commissioner, 523 F.3d 406 (4th Cir. 2008)

Appleton v. Commissioner, 140 T.C. 273 (2013)

Badaracco v. Commissioner, 464 U.S. 386 (1984)

Beard v. Commissioner, 82 T.C. 766 (1984)

Coffey v. Commissioner, 663 F.3d 947 (8th Cir. 2011)

In re Colsen, 446 F.3d 836 (8th Cir. 2006)

Commissioner v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016)

Dudley v. Commissioner, 258 F.2d 182 (3d Cir. 1958)

Emerson v. Steffen, 959 F.2d 119 (8th Cir. 1992)

Fendell v. Commissioner, 906 F.2d 362 (8th Cir. 1990)

Germantown Trust Co. v. Commissioner, 309 U.S. 304 (1940)

Heckman v. Commissioner, 788 F.3d 845 (8th Cir. 2015)

Helvering v. Campbell, 139 F.2d 865 (4th Cir. 1944)

Law Office of John H. Eggertsen P.C. v. Commissioner, 800 F.3d 758 (6th Cir. 2015)

Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930)

McDonald v. United States, 315 F.2d 796 (6th Cir. 1963)

McHenry v. Commissioner, 677 F.3d 214 (4th Cir. 2012)

National Contracting Co. v. Commissioner, 105 F.2d 488 (8th Cir. 1939)

Robinette v. Commissioner, 139 F.2d 285 (6th Cir. 1943)

Estate of Sanders v. Commissioner, 144 T.C. 63 (2015)

Union Pacific R.R. Co. v. United States, 865 F.3d 1045 (8th Cir. 2017)

Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934)

Statutes:

American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 908(c)(2)

Internal Revenue Code (26 U.S.C.):

§ 932

§ 932(a)

§ 932(a)(1)(A)(i)

§ 932(a)(2)

§ 932(c)

§ 932(c)(1)

§ 932(c)(1)(A)

§ 932(c)(2)

§ 932(c)(4)

§ 6011

§ 6012

§ 6091

§ 6091(a)

§ 6501

§ 6501(a)

§ 6501(c)(1)

§ 6501(c)(1)-(10)

§ 6501(c)(3)

§ 6651

§ 7206

§ 7206(1)

§ 7654

§ 7654(e)

Regulations and Notices:

Notice 2004-45, 2004-2 C.B. 33

Notice 2007-19, 2007-1 C.B. 689

Notice 2007-31, 2007-1 C.B. 971

Treasury Regulations (26 C.F.R.):

§ 1.932-1(c)(2)(ii)

§ 1.6091-2(c)

§ 1.6091-3(c)

Miscellaneous:

73 Fed. Reg. 19350, 19356 (2008)

H.R. 3056 §4 (2007)

I.R.M. 4.12.1.3

Joint Committee on Taxation, Federal Tax Law and Issues Related to the U.S. Territories, JCX-41-12 (2012)

S. Rep. 99-313 (1986)

S. Rep. 100-445 (1988)

GLOSSARY

appellees

Judith Coffey, the Estate of James Coffey & the USVI

Add.

addendum to opening brief

 

CIR/Br.

opening brief filed by appellant Commissioner

Coffey/Br.

answering brief filed by the Coffeys

EDP

Economic Development Program

IRS

Internal Revenue Service

JA

unsealed joint appendix

SJA

sealed joint appendix

USVI

United States Virgin Islands

USVI/Br.

answering brief filed by the USVI

VIBIR

USVI Bureau of Internal Revenue


INTRODUCTION

This case involves a tax-avoidance scheme promoted to U.S. taxpayers in the early 2000’s that manipulates the U.S. income-tax rules applicable to bona fide residents of the USVI. See Notice 2004-45, 2004-2 C.B. 33. The scheme purports to convert U.S.-source income (which is subject to federal tax) into USVI-source income that is not subject to federal tax and is eligible for a 90% USVI tax credit. The Treasury Department and Congress identified the scheme as an abusive one that generates unintended tax benefits, and took steps to eliminate it in 2004. See CIR/Br.2-5.

During 2003-2004, taxpayer Judith Coffey engaged in this scheme, funneling U.S. income from her U.S. business through a USVI partnership to avoid 90% of the tax due on that income. The Coffeys did not file federal income-tax returns with the IRS, claiming that Judith Coffey was a bona fide USVI resident and, as such, was not required to do so. See CIR/Br.5-8.

The Commissioner disallowed the scheme and issued notices of deficiency to the Coffeys for tax years 2003 and 2004, determining (as pertinent to this appeal) that Judith Coffey was not a bona fide USVI resident during those years and was required to file income-tax returns with the IRS. In a splintered opinion, the Tax Court held that the Commissioner’s determinations were barred by the Internal Revenue Code’s three-year limitations period for assessment, based on two alternative rationales, neither of which commanded a majority. As demonstrated in our opening brief, and as further demonstrated below, the court’s limitations rulings are wrong as a matter of law.

In response, the Coffeys devote their brief to attacking straw men and wrongly accusing the Government of making false statements to this Court. For the most part, they ignore our actual argument, which was (and is) simple and straightforward. To reorient the Court regarding the issues on appeal, we briefly summarize:

  • As a general rule, all U.S. individuals are required to file income-tax returns with the IRS. Individuals who have USVI-source income, but are not bona fide USVI residents, must file an income-tax return with both the IRS and VIBIR. For such individuals, the limitations period on their federal income-tax liability starts to run only when they file the return with the IRS. See CIR/Br.24-29.

  • For purposes of the summary-judgment posture of this case, it is assumed that Judith Coffey was not a bona fide USVI resident during 2003-2004. See CIR/Br.29-30.

  • It is undisputed that the Coffeys failed to file returns with the IRS. Therefore, as in Commissioner v. Estate ofSanders, 834 F.3d 1269 (11th Cir. 2016) — where the taxpayer also claimed to be a bona fide USVI resident and failed to file returns with the IRS — the statute of limitations for the Coffeys remains open for federal income-tax purposes. See CIR/Br.21-23.

  • The ruling of the lead Tax Court opinion that VIBIR’s cover-over submissions to the IRS satisfied the Coffeys’ federal-filing requirement is erroneous because VIBIR’s submissions (i) do not amount to the “filing” of returns by the Coffeys (and the Commissioner did not concede otherwise), see CIR/Br.30-42, and, alternatively, (ii) do not qualify as “returns” sufficient to start the limitations period, even though they provided the IRS with some information about the Coffeys, see CIR/Br.43-53.

  • The concurring opinion’s ruling that a tax return filed with VIBIR by a taxpayer claiming USVI residency triggers the limitations period for federal income-tax liability conflicts with the Code’s plain language, relies on inapt precedent, erroneously treats the IRS and VIBIR as a single taxing authority, and was expressly rejected in Sanders. See CIR/Br.53-60.

Ignoring our actual argument outlined above, the Coffeys set up an elaborate straw man, contending (Coffey/Br.42-43) that (i) the Commissioner has the “authority and responsibility to examine §932(c) returns filed with VIBIR,” (ii) “[n]ow Appellant denies these facts,” and (iii) “acknowledg[ing] the facts” would eliminate “the factual foundation of his appeal.” This manufactured syllogism is baseless. Nowhere in our opening brief do we deny the Commissioner’s ability to examine returns filed with VIBIR under §932(c). Nor have we “premise[d] [our] entire argument” (Coffey/Br.27) on any such denial. Tellingly, the Coffeys never actually cite to our brief when making this repeated claim (Coffey/Br.3, 5-6, 27, 42-43, 55). But the fact that the Commissioner has access to, or the authority to examine, returns filed with VIBIR under §932(c) in no way excuses the Coffeys’ failure to file a return with the IRS under §932(a) and is wholly irrelevant to our argument (let alone its “foundation” (Coffey/Br.43)).1

The only issue on appeal is whether the Coffeys have filed the return required to trigger their federal limitations period. That the IRS can “access, inspect, classify and examine” returns filed with VIBIR, and “bears responsibilities imposed by Federal statute with respect to those returns” (Coffey/Br.19-20), cannot override §932(a)(2)’s requirement that the Coffeys also file returns with the IRS. Accordingly, the “facts” cited by the Coffeys do not “lead to the inescapable conclusions reached in the Tax Court’s” lead and concurring opinions (Coffey/Br.20). Rather, they have no bearing on those opinions, which is why they were not discussed in our opening brief.2

Tellingly, these purportedly critical facts are not included in the “salient facts” summarized by the USVI (USVI/Br.7-9).

Similarly baseless is the straw-man suggestion that we have argued that the return filed by the Coffeys with VIBIR is “no return at all,” as the Coffeys repeatedly assert (Coffey/Br.20, 45, 49, 54, 58). Rather, we argue that they were required to file returns with the IRS, and filed “no returns with the IRS” (CIR/Br.4, 21). Indeed, the lead and concurring opinions both recognized that we have not challenged whether the returns filed with VIBIR qualify as “returns.” (Add.39 n.19, Add.68.)

Nor do we deny that returns filed with VIBIR are “Federally mandated” (Coffey/Br.6). To the contrary, we acknowledged in our opening brief that the “filing of a Virgin Islands return” is “part of one’s federal-filing obligation” but that the Coffeys were “obliged to file returns with multiple taxing jurisdictions” (CIR/Br.50). To trigger the limitations period, taxpayers must meticulously comply with all applicable filing requirements, and the Coffeys failed to do so. See CIR/Br.24-26.

Finally, our argument does not turn on the “extent of pre-2007 coordination” between the IRS and VIBIR (Coffey/Br.55), a topic the Coffeys discuss at great length (Coffey/Br.10-17). Although the IRS and VIBIR coordinate their tax-enforcement efforts, they are nevertheless “separate taxing” entities, Coffey, 663 F.3d at 949, each entitled to enforce its own filing requirements. Moreover, the IRS’s ability to obtain information about the Coffeys’ tax liability from VIBIR has no bearing on whether the Coffeys have filed the return required to trigger their federal limitations period. See CIR/Br.50-51. As this Court has held, the “statute of limitations [is] tolled by the [taxpayer’s] failure” to file a return with the IRS, even if the IRS is nevertheless able to “examine[ ] the petitioner’s books and ma[k]e a report” regarding the taxpayer’s tax liability. National Contracting Co. v. Commissioner, 105 F.2d 488, 491-492 (8th Cir. 1939). Indeed, §6501(c)(3) expressly provides an unlimited amount of time to assess whenever a taxpayer fails to file a required return, no matter how much information the IRS has (or can obtain) about that taxpayer.

The Tax Court thus erred as a matter of law in allowing the Coffeys’ period of assessment to expire before they meticulously complied with the applicable filing requirements. Whether it was “difficult” for the Commissioner “to find” the Coffeys’ USVI returns (Coffey/Br.47) is irrelevant. Tax enforcement is not a game of hide-and-seek. Given the enormity of the task involved in handling hundreds of millions of tax returns in a system predicated on self-assessment, it is imperative that bright-line filing rules be enforced.

ARGUMENT

The USVI’s answering brief does not analyze the lead opinion. Accordingly, we first address appellees’ defense of the concurrence (§A) before addressing the Coffeys’ defense of the lead opinion (§B) and appellees’ arguments regarding Sanders (§C).

A. Appellees cannot justify the concurring opinion’s failure to enforce §932(a)’s dual-filing requirement

1. The concurrence is irreconcilable with the plain language of the Code

In our opening brief, we demonstrated that the concurrence’s analysis cannot be reconciled with the plain text of §932 or §6501. Section 6501(a) provides that the limitations period is triggered by the filing of “the return required to be filed by the taxpayer.” Section 6501(a) does not provide that the limitations period is triggered by a taxpayer’s honest belief that she need not file a required return.

Section 932, in turn, divides all taxpayers with USVI-source income into two categories, and sets out the separate filing requirements for each category: (i) those who are “bona fide resident[s] of the Virgin Islands” (§932(c)(1)(A)) and (ii) all others with USVI-source income (§932(a)(1)(A)(i)). See CIR/Br.27-28. Congress did not create a third category comprising taxpayers who incorrectly believe themselves to be USVI residents. Since Judith Coffey is presumed (for summary-judgment purposes) to be a taxpayer who is not a USVI resident (Add.11), the applicable filing requirement is in subsection (a) — not subsection (c) — of §932. And §932(a)(2) requires her — without exception — to file a return with “both” the IRS and VIBIR. The concurrence erred by ignoring that statutory mandate and effectively crafting an exception for taxpayers who fail to qualify as a bona fide USVI resident but nevertheless file a return solely with VIBIR claiming to be such a resident.

In response, the USVI contends that “the concurrence did not create a ‘good faith exception’ to §932(c)” (USVI/Br.4 (emphasis added)).

That is not what we argued. Rather, we argued that “there is no good-faith exception to the dual-filing requirement of §932(a)(2)” (CIR/Br.22, 53 (emphasis added)). Pursuant to the express language of §932(c)(1) — entitled “Application of Subsection” — the filing requirement set out in §932(c)(2) does not even “apply” unless a taxpayer actually “is”3 a bona fide USVI resident, §932(c)(1)(A). Ignoring that provision is the fundamental misstep made by the concurrence. The question here is not whether the Coffeys made an “honest attempt to comply with §932(c)” (USVI/Br.39).4 For summary-judgment purposes, Judith Coffey is not a bona fide USVI resident and therefore subsection (c) of §932 cannot apply to her. Subsection (a) applies instead.

The USVI is correct that the concurrence does not actually use the word “exception” (USVI/Br.29). But by excusing the Coffeys’ failure to comply with subsection (a)(2) of §932 — even though it is presumed that Judith Coffey is not a bona fide USVI resident — the concurrence effectively carves out an exception to subsection (a)(2)’s dual-filing requirement for non-resident taxpayers who file returns with VIBIR claiming residency. The USVI is also correct that the concurrence describes its analysis in terms of a taxpayer’s “honest and genuine” — not “good faith” — attempt to comply with the law (USVI/Br.29).5 The precedent cited by the concurrence, however, uses “honest and genuine” and “good faith” interchangeably (Add.70), as the USVI recognizes (USVI/Br.37 & n.7). But whatever terminology is used to describe the concurrence’s analysis, it conflicts with the plain language of the statute, and is not supported by any of the authorities cited by appellees, as discussed below (§A.2).

That the IRS and VIBIR “share information” (USVI/Br.28) cannot override the statute’s plain language. If an individual is not a bona fide USVI resident, but has USVI-source income — and Judith Coffey is presumed to be in this category — she must file two returns. The language of §932(a)(2) is clear and unequivocal. Individuals within that section’s scope “shall file” a return with the “United States and the Virgin Islands,” without regard to information-sharing. §932(a)(2). (emphasis added). To hold otherwise reads §932(a)(2) out of the Code.

The Coffeys, for their part, contend (Coffey/Br.53) that “no such ‘good faith’ exception is required” because the Commissioner has the “authority and responsibility” under §932(c)(4) to examine returns filed with VIBIR for (among other things) erroneous claims of USVI residency. That contention misses the mark. As noted above, that the Commissioner has such authority and responsibility cannot eliminate §932(a)(2)’s requirement that taxpayers who are not USVI residents file returns with the IRS. Indeed, the concurrence does not purport to rely on the IRS’s authority and responsibility under §932(c)(4). (Add.68-78.)

Ignoring the actual text of §932(a), appellees allude to “Congress’ intent” (Coffey/Br.59) and “design” (USVI/Br.40-43). But the clearest expression of Congressional intent and design is the language of the statute itself. See Union Pacific R.R. Co. v. United States, 865 F.3d 1045, 1052 (8th Cir. 2017). Moreover, in claiming Congressional support, appellees ignore Congress’s long-standing concern about the USVI being “used as tax havens.” S. Rep. 99-313, at 478-479 (1986). Indeed, concern that taxpayers “were improperly claiming residence in the U.S. Virgin Islands” prompted “legislative changes in 2004” designed to eliminate that abuse. Joint Committee on Taxation, Federal Tax Law and Issues Related to the U.S. Territories, JCX-41-12, at 28-29 (2012) (citing Notice 2004-45). And in 2007, when the Senate Finance Committee inquired about IRS enforcement regarding Notice 2004-45 transactions, it recognized that taxpayers filing returns with VIBIR had “not fil[ed] a U.S. tax return,” as §932(a)(2) requires. (JA391.) That other Congressional members complained that Treasury’s “technical reading” of §932 produced results they viewed as “unfair” (JA401, JA403-404), as the Coffeys observe (Coffey/Br.22-24), cannot change the statute’s clear language, which the Eleventh Circuit properly followed (and the concurrence inexplicably ignored).6

2. The Zellerbach principle addresses return imperfections, not filing errors

As explained in our opening brief (CIR/Br.24-25), §932(a)’s filing requirements “‘must receive a strict construction in favor of the Government,’” Badaracco v. Commissioner, 464 U.S. 386, 391-92 (1984) (citation omitted), and a “statute of limitation runs against the United States only when [it] assent[s] and upon the conditions prescribed,” Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930). Appellees ignore these fundamental principles and rely instead on Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), Germantown Trust Co. v. Commissioner, 309 U.S. 304 (1940), and similar precedent that the USVI refers to collectively as the “Zellerbach principle” (USVI/Br.30; see Coffey/Br.52). Those cases, however, do not overrule Lucas or Badaracco or address the issue in this case.

The issue in Zellerbach and Germantown was whether documents actually filed with the IRS qualified as “returns” for limitations purposes. See CIR/Br.59-60. In Zellerbach, the Court held that a return filed with the IRS that was subsequently rendered inaccurate by a change in the law was nonetheless a “return.” 293 U.S. at 180-181. Similarly, in Germantown, the Court held that a return filed with the IRS that used the wrong form was nonetheless a “return.” 309 U.S. at 309-310. Both cases address return requirements, not filing requirements.

This Court has recognized as much. “Germantown” and “Zellerbach” (like the Tax Court’s “Beard” decision) address the “appropriate criteria for determining whether a document is a return.” In re Colsen, 446 F.3d 836, 839 (8th Cir. 2006). Contrary to the Coffeys’ suggestion (Coffey/Br.51), Colsen addresses the meaning of “return” — not “filing”; there was no dispute in Colsen that the document at issue had been “filed” with the IRS. Id. at 838. The only question was whether a document filed after tax assessment nevertheless qualified as a “return” and, applying the Zellerbach/Germantown criteria, the Court concluded it did. Id. at 840.

Nor does Colsen stand for the proposition that the “‘face of the form’” (USVI/Br.39-40) determines all limitations questions, including proper-filing questions; it determines only whether a filed document is a “return.” In Colsen, the Court observed that “even admittedly fraudulent returns can be returns” if they appear to be returns “‘on their faces.”” 446 F.3d at 840 (citation omitted). But no one would suggest — and this Court certainly did not — that fraudulent returns that appear honest on their face are thereby subject to the three-year limitations period under §6501(a). Rather, such returns are subject to assessment “at any time” under §6501(c)(1). See Sanders, 834 F.3d at 1277.

Unlike Colsen and the other cases cited by appellees, the issue here is not whether the returns filed with VIBIR are valid returns. We assume they are. But returns filed with VIBIR (perfect or otherwise) cannot satisfy the Coffeys’ filing requirements under §932(a)(2). Our argument regarding the concurrence is premised on the Coffeys having filed no return with the IRS, not an “incomplete” return (USVI/Br.37 n.7). The Zellerbach principle applies only to imperfect returns, not to imperfect — or non-existent — filings. Filings must be “meticulous,” and even returns filed with the IRS, but with the “wrong” IRS office, are insufficient to trigger a limitations period. Appleton v. Commissioner, 140 T.C. 273, 286 (2013) (collecting cases).

The “good faith of the taxpayer in failing to file a return cannot aid them.” McDonald v. United States, 315 F.2d 796, 801 (6th Cir. 1963). This principle is illustrated by the Sixth Circuit’s opinion in Law Office of John H. Eggertsen P.C. v. Commissioner, 800 F.3d 758 (6th Cir. 2015), cited in our opening brief but ignored by appellees. In Eggertsen, the taxpayer “believed it had complied with [the relevant Treasury regulations] and so did not file a Form 5330, the return for the new excise tax.” Id. at 761. That belief was held to be irrelevant to the limitations period, which remained open. As the court explained, “[n]o such form was filed, and no return means no exception.” Id. at 765. The court sympathized with “taxpayer’s lament that it seems strange to let the limitations period run until it files the requisite form, which in this instance merely would have reported ‘no excise tax due,’” but it correctly observed that “Congress may always change the system.” Id.

Helvering v. Campbell, 139 F.2d 865 (4th Cir. 1944) — also cited in our opening brief — applies this same principle to U.S. taxpayers who filed income-tax returns with another then-U.S. territory (the Philippines) but did not file returns with the IRS. There, U.S. citizens residing in the Philippines believed that federal law required them to file income-tax returns with only the Philippines tax collector. Id. at 866. The Fourth Circuit rejected the taxpayers’ argument that filing returns with the Philippines was “sufficient to set the [federal] period of limitations running,” reasoning that a “return must be filed as the statute requires to set the statute of limitations running” and the “statute required” the taxpayers to file returns in “Baltimore.” Id. at 868; accord Robinette v. Commissioner, 139 F.2d 285, 287-288 (6th Cir. 1943).

Campbell cannot be distinguished on the basis that there was no “‘honest and genuine endeavor’ to comply with the tax laws” there (USVI/Br.61). The Fourth Circuit expressly recognized that taxpayers’ failure to file in Baltimore was due to “‘widespread misapprehension’” about the law’s requirements. Campbell, 139 F.2d at 869 (citation omitted). In this regard, the court observed that Congress, when passing a law to relieve similarly situated U.S. taxpayers residing in the Philippines from interest and penalties on their outstanding federal tax liabilities — but not the tax itself — emphasized that “‘the statute of limitations never runs in cases where no returns are filed,’” even where the taxpayer is operating under a “‘widespread misapprehension’” that a return filed with a U.S. territory sufficed. Id. at 869 (emphasis added) (citation omitted).

3. The Coffeys did not “meticulously comply” with all applicable filing rules

As explained in our opening brief (CIR/Br.25-26, 36-38), “in order for returns to be considered ‘filed’ for purposes of setting the period of limitations in motion, the returns must be delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations”; a taxpayer’s “mistaken assumption” regarding his filing cannot trigger the limitations period. Allnutt v. Commissioner, 523 F.3d 406, 413 (4th Cir. 2008). Rather, “meticulous compliance” with “all named conditions” for filing is required. Lucas, 281 U.S. at 249. Appellees have failed to demonstrate that the Coffeys meticulously complied with the applicable filing rules for U.S. citizens with USVI-source income. See USVI/Br.44-49; Coffey/Br.34-37.

As a general rule, all U.S. citizens (who meet a certain minimum income threshold) must file federal income-tax returns with the IRS, and the applicable regulations direct taxpayers where and how to do so. §§6011, 6012, 6091. The regulations in effect when the Coffeys filed their 2003-2004 returns provided that “whenever instructions applicable to income tax returns provide that the returns be filed with a service center, the returns must be so filed in accordance with the instructions.” Treas. Reg. §1.6091-2(c); accord Treas. Reg. §1.6091-3(c) (similar rule for taxpayers residing in a U.S. territory). Whether the Coffeys meticulously complied with IRS instructions during the years at issue depends on the threshold question of whether Judith Coffey was in fact a bona fide USVI resident at the end of 2003 and during the entirety of 20047 because the instructions differed depending on the answer to that question. For summary-judgment purposes, she is presumed to not be a bona fide USVI resident.

The applicable IRS instructions during the 2003-2004 tax years informed taxpayers like Judith Coffey that they had to file federal income-tax returns with the IRS. The instructions for individual taxpayers (Form 1040) advised “nonpermanent residents” of “the [USVI]” to file their federal income-tax returns in Philadelphia, Pennsylvania. (JA423, JA426.) They also advised taxpayers “who lived in or had income from a U.S. possession” to review Publication 570 (“Tax Guide for Individuals with Income from U.S. Possessions”) for their federal-filing instructions. Instructions Form 1040 (2003) at 15 & Instructions Form 1040 (2004) at 12 (available at www.irs.gov).

Consistent with Form 1040’s instructions, Publication 570 (as in effect for 2003-2004) advised taxpayers that, “[i]f you are not a bona fide resident of the [USVI],” but had income from the USVI, then “you must file identical tax returns with the United States and the [USVI].” (JA440, JA457 (emphasis added).) Publication 570 further advised that generally “[y]ou do not have to file with the IRS for any tax year in which you are a bona fide resident of the [USVI].” (Id. (emphasis added).) Nowhere did the IRS suggest that the sufficiency of the filing turned on the taxpayer’s belief that she had self-selected her correct residency “position,” as appellees suggest (USVI/Br.46-48; Coffey/Br.37). To the contrary, the example provided in Publication 570 described taxpayers who actually “qualified as bona fide residents” (JA440 (emphasis added)), not merely took a position in that regard.

The instructions contained in Publication 570 for 2003-2004 were consistent with all prior IRS guidance. Therefore the IRS did not engage in “shifting positions” (USVI/Br.25-26) when it determined that Judith Coffey was not a bona fide resident and thus was required to file a return with the IRS. As the Eleventh Circuit concluded, “the IRS’s guidance on this issue prior to 2007 was consistent, both internally and with the law.” Sanders, 834 F.3d at 1278. Appellees cite nothing that contradicts the court’s conclusion.

The Tax Court’s Appleton opinion — which relied on Form 1040’s filing instructions — does not further appellees’ cause. There, the court held that a “meticulous” bona fide USVI resident “researching his/her filing requirements” would have relied on the 2002-2004 instructions to Form 1040 and followed their “explicit” command to file with “VIBIR.” 140 T.C. at 287 & n.18. But there, unlike here, it was “stipulated” that the taxpayer was a bona fide USVI resident, id. at 274 n.1, as the lead opinion here observed when distinguishing the case (Add.30 n.15). See Sanders, 834 F.3d at 1282 n.9 (distinguishing Appleton). Given the different filing instructions for taxpayers who qualify as bona fide USVI residents and those who do not, and the required assumption here that Judith Coffey did not qualify in 2003-2004, appellees’ reliance on Appleton (USVI/Br.36-37; Coffey/Br.45-46) is unavailing.

4. The 2008 regulations do not support appellees’ position

In 2007, Treasury announced that it would be changing the filing rules on a going-forward basis. Notice 2007-31, 2007-1 C.B. 971. By way of brief background, in 2007, after the years at issue here, Treasury sought to simplify the filing requirements under §932 and began to study “the feasibility of an automatic exchange of information program with [VIBIR] concerning income tax information of individual taxpayers.” Notice 2007-19, 2007-1 C.B. 689. Such a program would allow Treasury to adopt a new rule providing that the filing of certain tax returns with VIBIR would satisfy any requirement to file with the IRS. See CIR/Br.58 n.12. In 2007, the IRS and VIBIR entered into a “new working arrangement for the automatic exchange of information,” and “[b]ecause of this new working arrangement,” the IRS announced “new interim rules” (promulgated as regulations in 2008) providing, on a prospective basis, that returns filed with VIBIR by taxpayers claiming USVI residency would trigger the federal limitations period. Notice 2007-31; Treas. Reg. §1.932-1(c)(2)(ii). But, as this Court has already recognized, this new rule was prospective only and “does not affect Coffey.” Coffey, 663 F.3d at 949-950 n.1.

That Treasury changed the federal-filing instructions on a going forward basis does not mean it “changed” its interpretation of §932 (USVI/Br.50) or “change[d] the Code” (Coffey/Br.59-60). Rather, Treasury simply exercised its discretion under §§6091(a) and 7654(e) to coordinate federal and territorial taxation by designating the filing place for taxpayers claiming USVI residency, and — as long as the working arrangement entered into in 2007 is in place — permitting such taxpayers to satisfy their obligation to file returns with the IRS by filing returns with VIBIR. The Code requires taxpayers who do not satisfy §932(c)’s requirements to file returns with the IRS, but Treasury has the authority to determine how that filing will be satisfied. §§6091(a), 7654(e).

The USVI’s real complaint is not that Treasury shifted positions before 2007, but that the new rule is not retroactive (USVI/Br.49-50, 53).8 Treasury, however, correctly determined that retroactive application of the new rule was inappropriate. (JA386, JA397-398.) Before 2007, IRS agents had no reason to think that a return filed with VIBIR triggered the federal limitations period for taxpayers who were not bona fide USVI residents. The instructions applicable at the time directed such taxpayers to file returns with the IRS. Moreover, before 2007, Treasury did not have in place the new information-exchange arrangement upon which the new rule is expressly conditioned.

In their answering briefs, appellees contend (USVI/Br.52-53; Coffey/Br.25) that the information-exchange arrangement entered into in 2007 was not really new, and that the prior procedures for exchanging information were sufficient for the new rule adopted in the 2008 regulations. That contention is irrelevant — it is up to Treasury to determine what type of arrangement is sufficient for it to change federal-filing instructions.9 Nevertheless, we address their contention because the Coffeys have accused us of making a “false” statement to this Court (Coffey/Br.57 (citing CIR/Br.58 n.12)) and creating a “misleading record” in Sanders (Coffey/Br.57-59) on this issue.

In our opening brief, we noted that “the IRS issued its 2007 guidance only after, and because, it reached ‘a new working arrangement for the automatic exchange of information’ in which the VIBIR routinely transmits full returns to the IRS” (CIR/Br.58 n.12 (quoting Notice 2007-31)). That statement accurately describes the IRS’s contemporaneous reasoning as set out in (i) Notice 2007-31 and the attached 2007 VIBIR-IRS Working Arrangement, (ii) the 2008 regulation, and (iii) IRS’s 2007 letter to the Senate Finance Committee explaining why a retroactive rule should not be adopted by Congress.

i. The Notice’s preamble expressly states that “[b]ecause of this new working arrangement, the notice provides new interim rules.” Notice 2007-31 (emphasis added). That statement is confirmed by the 2007 Working Arrangement itself. According to this document — which was executed by VIBIR — the parties were “establishing a new routine exchange of information” between the two taxing authorities. Attachment to Notice 2007-31 (§III Purpose) (emphasis added). The document confirms that “this Working Arrangement expands the information to be routinely (automatically) exchanged by the [USVI] to the IRS under” prior agreements. Id. (§II Authority) (emphasis added). And the document makes clear that this “new” expansion would not be retroactive but would apply only to taxable years “after December 31, 2006.” Id. (§VIII Taxable Periods).

These express provisions evidence that the VIBIR-IRS information-exchange arrangement had in fact changed. The details of that new arrangement, and exactly how it differed from the parties’ prior arrangement, are not in the record, but our representation that the IRS understood the arrangement to be a new one is unassailably accurate. Appellees’ current claim to the contrary (USVI/Br.52-53; Coffey/Br.57-58) contradicts the express language VIBIR agreed to in 2007.

ii. The statement in our brief is further supported by the 2008 regulations. The regulations’ preamble warns that, if the “working arrangement announced in Notice 2007-31” is “terminated and in the absence of a successor agreement, an individual claiming to be a bona fide resident of the [USVI] generally must file an income tax return with the IRS in order to start the Federal statute of limitations period.” 73 Fed. Reg. 19350, 19356 (2008). Prior information-exchange arrangements — including the 1987 Tax Implementation Agreement (USVI/Br.51) — were deemed insufficient to support the new rule. The 2008 regulation itself reiterates this point: without an information-exchange arrangement “satisfying the requirements of the Commissioner,” the old dual-filing rule applies. Treas. Reg. §1.932-1(c)(2)(ii) (emphasis added).

iii. Finally, the statement in our brief is supported by a 2007 letter from the IRS to the Senate Finance Committee (JA386-398) cited by appellees (USVI/Br.19; Coffey/Br.34). In that letter, the IRS (i) described the 2007 Working Arrangement as providing the IRS a “new ability to obtain quickly USVI income tax returns on an automatic basis” and (ii) explained that this “new ability” supported a “new rule” — effective beginning taxable year 2006 — whereby “the U.S. federal statute of limitations for all U.S. citizens and residents claiming to be bona fide residents of the USVI generally will begin with the filing of an income tax return with [VIBIR] so long as such an exchange-of-information program is operative.” (JA397 (emphasis added).) The USVI’s current claim (USVI/Br.51-52) that the 2007 Working Arrangement was not “materially different” from the prior arrangement conflicts with Treasury’s contemporaneous understanding as expressed to Congress.

This letter to Congress further advised that VIBIR had agreed to provide the IRS “complete copies of income tax returns filed with [VIBIR] by individuals who take the position that they are bona fide USVI residents.” (JA397.) The Coffeys contend that VIBIR has “never” provided the IRS with “every single full §932(c) return filed with VIBIR” (Coffey/Br.25). The record on this issue is limited. We do know that, before the 2007 Working Arrangement, VIBIR did not automatically provide the IRS a complete copy of those returns, as evidenced here and in other pre-2007 cases like Sanders. (Add.16-18, Add.49.) And we know that, after the 2007 Working Arrangement, the IRS understood that it would begin to receive such returns, as it explained to Congress. (JA397.) Whether those expectations have been met by VIBIR is beside the point.

5. The IRS and VIBIR are separate taxing authorities

In our opening brief (CIR/Br.60-61), we argued that the concurrence erred in treating the IRS and VIBIR as the same taxing jurisdiction based on inapposite precedent concerning double jeopardy. Appellees brush this error aside (USVI/Br.41 n.8) and contend that dual filing is not required because returns filed with VIBIR are required by “federal law” (USVI/Br.41; Coffey/Br.70). That contention conflicts with the express language of §932(a)(2). That federal law — §932 — requires that a return be filed with VIBIR does not eliminate the dual-filing requirement for taxpayers — like Judith Coffey — to which §932(a)(2) applies. VIBIR and the IRS are separate tax agencies, and §932(a)(2) expressly directs taxpayers to file a return with “both.”

What the USVI decries as the “IRS’s rigid distinction between returns filed with the Virgin Islands and returns filed with the IRS” (USVI/Br.35) is a distinction mandated by Congress in §932(a)(2). As the Joint Committee on Taxation has explained, “[p]ersons incurring income tax liability in both the United States and the U.S. Virgin Islands are required to file tax returns and pay income tax to both jurisdictions.” JCX-41-12, at 28 n.86. It has long been recognized that “the United States and the Virgin Islands are distinct taxing jurisdictions although their income tax laws arise from an identical statute applicable to each.” Dudley v. Commissioner, 258 F.2d 182, 185 (3d Cir. 1958) (refusing to equate a USVI deficiency notice with an IRS deficiency notice); see Coffey, 663 F.3d at 949. Congress has amended §932 multiple times since the IRS and VIBIR entered into the 1987 Tax Implementation Agreement cited by the USVI (USVI/Br.42) but has never seen fit to eliminate §932’s dual-filing requirement. Indeed, one year after that Agreement was implemented, Congress amended §932(c) and emphasized that “individuals who do not comply with all requirements for U.S. tax exemption will have to file a U.S. return,” even if they had also filed returns with VIBIR.10 S. Rep. 100-445, at 315 (1988).

That the United States prosecutes taxpayers under §7206 for filing fraudulent returns with VIBIR in no way undermines our position here (Coffey/Br.71-73). Section 7206(1) broadly covers “any return” required to be filed by the Internal Revenue Code (which includes returns filed with VIBIR under §932(c)), not just returns filed with the IRS. But recognizing that returns filed with VIBIR have been filed under federal law in no way “concede[s]” our “case” (Coffey/Br.73); our case is premised on the undisputed fact that the Coffeys have not filed a return with the IRS, as §932(a)(2) expressly requires. That the IRS and VIBIR coordinate their tax enforcement, and share information, does not make them a single consolidated taxing authority.

The IRS similarly coordinates with many foreign countries, U.S. territories, and individual states, while remaining a discrete, separate agency. And comparing VIBIR to a “foreign” tax agency for purposes of the Code’s filing requirements is — despite appellees’ complaints (USVI/Br.41; Coffey/Br.27) — fully consistent with Congressional intent. See Joint Committee, JCX-41-12, at 7-16 (“for tax purposes the Code generally treats the U.S. possessions [including the USVI] as foreign countries”).

6. The USVI’s policy arguments are irrelevant and exaggerated

Lacking all legal support, the USVI makes several policy arguments in support of appellees’ limitations position. Those arguments, however, are directed to the wrong branch of the U.S. government. “Courts are not authorized to rewrite a statute because they might deem its effects susceptible of improvement.” Badaracco, 464 U.S. at 398. “This is especially so when courts construe a statute of limitations.” Id. Whatever the merits of the USVI’s complaints about a dual-filing requirement for taxpayers who are not bona fide USVI residents, they cannot alter the statutory scheme that the IRS correctly followed here.

The USVI’s policy arguments also are exaggerated. That taxpayers claiming USVI residency must establish the validity of that claim as a component of their statute-of-limitations defense is not “absurd.” (USVI/Br.62). Statute-of-limitations issues frequently involve such disputes, such as whether a taxpayer has (i) income sufficient to require the filing of a return, (ii) filed a false return, (iii) substantially omitted gross income, or (iv) engaged in certain abusive tax-avoidance transactions without making the requisite disclosures. §6501(c)(1)-(10). Taxpayers taking the position that they do not fall into one of these filing regimes always run the risk that the IRS may disagree.

The USVI also invokes a need for “repose” (USVI/Br.63) but, as the Coffeys acknowledge, the “Code prohibits repose for non-filers” (Coffey/Br.74). Nevertheless, even with non-filers, the Commissioner generally does not initiate tax proceedings over six years after the tax year in question. See I.R.M. 4.12.1.3. The deficiencies issued here in 2009 are consistent with that discretionary policy. Moreover, a taxpayer like Judith Coffey who took the position that she was a bona fide USVI resident, but wanted to trigger the federal limitations period in case she was mistaken, could have filed protective federal returns with the IRS, as explained in Notice 2007-19. Sanders, 834 F.3d at 1277 n.5. That the specific instructions for doing so were published after the Coffeys filed their USVI returns (Coffey/Br.21) in no way prevented them — or their tax advisors (Add.16) — from filing protective returns before or after the 2007 Notice. (JA493, JA499.) Thus, the Coffeys could have obtained “repose” without proving the accuracy of Judith Coffey’s residency claim; they simply chose not to do so.

In any event, this case is a poor vehicle for bending the Code’s limitation rules because the purpose of repose would not be served here. “‘The statute of limitations exists, in part, so that after some time persons can be confident that their affairs are closed and they can dispose of old records.’” Fendell v. Commissioner, 906 F.2d 362, 364 (8th Cir. 1990) (citation omitted). Long before the three-year limitations period purportedly concluded for their 2003-2004 tax years, the Coffeys well knew that they could not close their affairs and dispose of records for those years. Before they filed their 2003 return with VIBIR, the IRS had warned that it would challenge “highly questionable” claims of USVI residency and impose (among other things) “failure to file” penalties under §6651. Notice 2004-45. Then, in 2006, shortly after filing their 2004 return, the Coffeys knew the IRS was challenging their residency claim and appointed a representative for the on-going audit of their 2003-2004 tax years. (JA255, JA260.)

Finally, the USVI’s speculation (USVI/Br.6-7) that the IRS’s limitations position during 2006-2008 chilled participation in its Economic Development Program (EDP) lacks merit. As the Fourth Circuit has explained, the decline in participation “followed Congress’ 2004 alterations to the Tax Code” and “could easily be attributable to the effectiveness of the congressional reforms at countering such tax evasion [related to the EDP].” McHenry v. Commissioner, 677 F.3d 214, 224 n.2 (4th Cir. 2012). In any event, Congress did not intend the EDP to be manipulated so that taxpayers engaging in the Notice 2004-45 abusive tax-avoidance scheme could reduce tax on U.S.-source income (see CIR/Br.3-5). The IRS’s limitations position implements Congressional intent.

B. The Coffeys cannot justify the lead opinion’s treatment of VIBIR’s cover-over requests as the Coffeys’ filing of U.S. tax returns

In our opening brief, we argued that the lead opinion’s holding — “the Coffeys sent their return to the VIBIR, but because the first two pages of it somehow (and without their knowledge or explicit approval) ended up at the Philadelphia office of the IRS, * * * they’re protected by the statute of limitations” (Add.66) — conflicts with binding precedent. See CIR/Br.34-53. The USVI makes no attempt to defend the lead opinion — even though it purports to rely on VIBIR’s actions — and the Coffeys’ defense cannot withstand scrutiny.

The USVI’s silence on this issue is not surprising. Nothing in the Code — or any other authority — permits a taxpayer’s obligation to the United States under §932(a) to be satisfied by VIBIR’s notifying the IRS that the taxpayer has filed a USVI return and requesting that withheld taxes be covered over to the USVI under §7654. And nothing alerted the IRS — or taxpayers — that VIBIR’s cover-over transmissions would trigger the federal limitations period if they included copies of USVI returns (or — as here — excerpts thereof).11 As the USVI understands, its election to use the same Form 1040 that the IRS uses — unlike other U.S. territories, which have modified the form in some way — cannot transform a USVI return into a U.S. return. (JA377.) And that election cannot override federal-filing requirements. See CIR/Br.50. Accordingly, when the IRS received VIBIR’s cover-over requests for the Coffeys’ 2003-2004 withheld taxes, it appropriately treated the Coffeys as non-filers for U.S. tax purposes (JA255).

The Coffeys, for their part, do not challenge our contention (CIR/Br.30-34) that the predicate for the lead opinion’s ruling — that the Commissioner had conceded the proper-filing issue — is erroneous. Accordingly, the only issues remaining for review are whether the IRS’s receipt of VIBIR’s cover-over requests constitutes the “filing” of returns by the Coffeys and whether the cover-over requests qualify as “returns.” The answer to both questions is no.

1. VIBIR’s cover-over transmissions were not tax-return “filings”

As noted in our opening brief (CIR/Br.34-35), it is undisputed that the Coffeys did not prepare any document for, or send any document to, the IRS for the 2003-2004 tax years. Moreover, they acknowledge (Coffey/Br.64) that they “did not authorize VIBIR to transmit their returns” to the IRS. Without those steps, or any other intentional act of filing on their part, the Coffeys cannot — as a matter of law — be deemed to have filed their returns with the IRS. Rather than address this critical fact, or respond to our supporting legal analysis (CIR/Br.35-42), the Coffeys instead raise irrelevant issues that do not justify the lead opinion’s unprecedented ruling.

That the IRS “processed” (Coffey/Br.14-15, 42) VIBIR’s cover-over requests does not mean that it treated them as filed federal tax returns. To the contrary, the IRS treated the Coffeys as non-filers for 2003-2004, (i) listing them as such on the 2003 transcript (Add.23; JA255), (ii) advising the Coffeys’ counsel in 2008 that “no US returns were filed” for 2003-2004 (JA560), and (iii) imposing failure-to-file penalties for those years when it issued deficiency notices in 2009 (JA6-7). To ignore this evidence, and to retroactively rule that government-to-government correspondence regarding the transfer of tax revenue can trigger a taxpayer’s limitations period, creates uncertainty in an area that needs settled rules, as the dissent warned (Add.84).

For the same reason, it is irrelevant that the Commissioner “dictated [the] style and manner” of VIBIR’s cover-over requests (Coffey/Br.64) and that “there was no unauthorized transmittal” of taxpayer information by VIBIR (Coffey/Br.64). Although the Commissioner has an established protocol for cover-over requests from U.S. territories, and VIBIR is authorized to transmit confidential taxpayer information to the IRS when making such requests, the IRS has in no way “dictated” that such requests qualify as the filing of the taxpayer’s federal tax return. As the Coffeys acknowledged in the Tax Court, “the purpose of VIBIR transmittal to the IRS was to facilitate the IRS transfer of the Coffeys’ U.S. W-2 withholding credits to VIBIR coffers and any remainder to the Coffeys.” (JA1147.) The purpose was not to file returns for the Coffeys with the IRS.

In this regard, we do not contend that VIBIR’s cover-over requests were “inadvertent transmittal[s] by some foreign sovereign” (Coffey/Br.66). VIBIR intentionally sought tax revenues held by the U.S. Treasury. But that intentional act by VIBIR under §7654 does not constitute the required intentional filing by the Coffeys under §932(a). In §932(a), Congress directs taxpayers like the Coffeys to file returns with the IRS, and provides no exception for taxpayers for whom the USVI had submitted cover-over requests under §7654. The two Code sections set out two separate obligations, serve two separate purposes, and were improperly conflated by the lead Tax Court opinion.

That the IRS obtained information about the Coffeys when VIBIR transmitted its cover-over requests should have no impact on their limitations period. It is the taxpayer’s filing of the required return, in meticulous compliance with all filing requirements, that triggers the limitations period, not IRS’s receipt of information about the taxpayer, as explained above and in our opening brief (CIR/Br.50-51). The Tax Court’s contrary conclusion is barred by binding precedent. See Heckman v. Commissioner, 788 F.3d 845, 847-848 (8th Cir. 2015) (limitations period runs only from the date “the return was filed,” not the date on which the IRS acquires “actual knowledge” of a taxpayer’s liability in some other way); National Contracting, 105 F.2d at 491-492 (same).

The Coffeys have cited nothing that would have put the IRS on notice that it should treat a cover-over request from VIBIR as the filing of a federal return that triggers the statute of limitation. Following all available guidance (see, above, §A.3), the IRS properly treated the Coffeys as non-filers because neither they — nor anyone acting on their behalf — filed returns with the IRS for 2003-2004.

2. VIBIR’s cover-over requests were not “returns”

Equally lacking merit is the Coffeys’ response to our alternative argument that VIBIR’s two-page cover-over requests do not satisfy the Beard test for a “return.” They fail to address the threshold issue of whether it even makes sense to apply that test — designed to evaluate filed-but-incomplete returns — when the Coffeys filed nothing whatsoever with the IRS. See CIR/Br.44. And they ignore our factor-by-factor Beard analysis demonstrating that VIBIR’s cover-over requests do not purport to be returns showing the Coffeys’ federal income-tax liability, cannot be viewed as honest and genuine attempts to report tax information to the IRS (as opposed to VIBIR), and lack original signatures indicating that the Coffeys were attesting to the accuracy of their federal income-tax liability. See CIR/Br.45-48.

Finally, they do not dispute that the Eleventh Circuit in Sanders had considered and rejected the argument that cover-over requests trigger the limitations period. See CIR/Br.48-49.

Instead of addressing our arguments, the Coffeys again rely on the fact that the IRS “processed” (Coffey/Br.68-69) VIBIR’s cover-over requests, and deemed the two-page excerpts of the Coffeys’ USVI returns to be sufficient for that process. But no one questions whether VIBIR’s cover-over requests were procedurally correct. VIBIR cover-over requests — unlike federal returns — do not require original taxpayer signatures or any of the other Beard criteria for federal returns.

The Coffeys’ reliance on “zero-dollar protective return[s]” (Coffey/Br.69) is also misplaced. Not only are those documents actually filed by taxpayers with the IRS, but they also contain original signatures and purport to be complete and accurate representations of the taxpayer’s federal income-tax liability, unlike VIBIR’s cover-over requests.

C. Appellees have provided this Court no persuasive reason to go into conflict with the Eleventh Circuit

In our opening brief (CIR/Br.22), we explained that the concurring and lead opinions both conflict with the Eleventh Circuit’s Sanders decision. The facts in the two cases are nearly identical. In Sanders, as here, the taxpayer claimed to be a USVI resident and filed returns only with VIBIR, and VIBIR sent two pages of the taxpayer’s 2002 return to the IRS as a cover-over request. (Add.18, Add.35.) The USVI (as intervenor) argued that the taxpayer’s good-faith filing of his returns with VIBIR or, alternatively, VIBIR’s cover-over request, triggered the limitations period under §6501(a). See generally USVI Brief, Commissioner v. Estate of Sanders, No. 15-12582 (11th Cir.) (cited at USVI/Br.58 n.9) (“USVI Sanders Brief”). The Eleventh Circuit disagreed, holding that a return filed with VIBIR triggered a taxpayer’s federal limitations period only if the taxpayer actually was a bona fide USVI resident, and remanded the case for the Tax Court to make that determination. Sanders, 834 F.3d at 1276. This Court should reach the same result.

In response, the Coffeys contend (Coffey/Br.50, 58) that the Eleventh Circuit’s analysis upon which we rely is “dicta.” That is incorrect. That court stated: “We do expressly reject Appellees’ good faith argument and hold that a taxpayer who files a return only with VIBIR does not trigger the statute of limitations unless he actually is a bona fide resident of the USVI.” Sanders, 834 F.3d at 1278–1279 (emphasis added). And that ruling was essential to the court’s decision; but for that ruling, there would have been no need for the Court to remand the case to the Tax Court to determine whether the taxpayer there was — in fact — a bona fide resident for limitations purposes.

Similarly lacking merit is the Coffeys’ accusation (Coffey/Br.55-59) that the Sanders decision was based on a “misleading record” (Coffey/Br.58) because the Eleventh Circuit “incorrectly believed” that the Commissioner had no “examination authority over §932(c)(2) returns” (Coffey/Br.56). In Sanders, the Tax Court expressly found — and the Commissioner did not dispute, see generally Commissioner Reply Brief, Sanders, 2015 WL 7292464 — that “VIBIR will permit the IRS to examine USVI tax returns.” Estate of Sanders v. Commissioner, 144 T.C. 63, 74 (2015). Given that examination authority, the Eleventh Circuit recognized that, in cases where the limitations period were open, the Commissioner could “challenge” returns filed with VIBIR under §932(c)(2) that failed the requirements provided in “§932(c)(4).”12 Sanders, 834 F.3d at 1283 n.9.

Likewise, we did not argue — and the Eleventh Circuit did not assume — that returns filed with VIBIR were “entirely hidden from and inaccessible by” the Commissioner (Coffey/Br.56). See Commissioner Reply Brief, Sanders, 2015 WL 7292464. The Court was aware that the IRS and VIBIR operated “‘interrelated tax systems,’” Sanders, 834 F.3d at 1272 (emphasis added) (citation omitted), and understood the coordinating “protocol in place since 1987” (Coffey/Br.57), which the Tax Court in Sanders had detailed. See Sanders, 144 T.C. at 73-74. Indeed, the USVI specifically explained to the Eleventh Circuit that the “requirement that Virgin Islands residents file exclusively with VIBIR does not leave the IRS in the dark, because VIBIR and the IRS routinely share taxpayer information.” USVI Sanders Brief 12.

The Coffeys’ complaint about the Commissioner’s description in Sanders of the 2007 Working Arrangement (Coffey/Br.55) is baseless, as explained above (§A.4). The description in Sanders, 2015 WL 7292464, at n.6, tracks the description here (CIR/Br.58 n.12), and cites the same Congressional correspondence explaining that the 2007 Working Arrangement was designed to improve VIBIR-IRS information exchanges (JA386-398). In any event, the efficiency of VIBIR-IRS information exchanges is irrelevant to §932(a)(2)’s filing requirements. As such, it did not factor into the Eleventh Circuit’s analysis in Sanders, which properly was predicated on the “language and structure of the statute.” 834 F.3d at 1276.

Finally, the Coffeys’ description of the Sanders oral argument (Coffey/Br.56-57) does not evidence a misled court. Rather, the argument quoted by the Coffeys accurately reflects the critical difference between filing an imperfect return in the right place (the focus of the inapposite Zellerbach principle) and failing to file a return in the right place (the issue here). As the Eleventh Circuit correctly understood, filing a “‘flawed’” return in the right place “‘triggers’” IRS “audit machinery” starting the “‘three years’” limitation period whereas “‘[w]hen you file no return at all in the place you’re supposed to that procedure is not triggered’” (Coffey/Br.56-57). Neither Sanders nor the Coffeys filed returns where they were “supposed to” — with the IRS — and they were accordingly audited by the IRS as non-filers with open limitations periods.

In short, the Coffeys cannot avoid the Eleventh Circuit’s adverse ruling by mischaracterizing the court’s decision or the Commissioner’s argument.

The USVI, for its part, contends (USVI/Br.29) that the Eleventh Circuit’s Sanders decision is “largely irrelevant here” because the court did not “address the key Zellerbach and Beard principles that were the basis for the concurrence’s opinion.” That complaint is ill-founded. We explained to the Eleventh Circuit, as we have explained to this Court, that those cases “do not overrule Lucas or Badaracco or address the issue in this case,” only the separate — and inapt — question whether documents that were actually filed with the IRS “qualified as ‘returns.’” 2015 WL 7292464, at *10. That the Sanders decision addresses pertinent cases such as Lucas, see 834 F.3d at 1277 n.5, rather than the USVI’s inapt authorities, only adds to its relevance here and casts no doubt on its well-reasoned statutory analysis.

CONCLUSION

The decisions of the Tax Court should be reversed, and these cases should be remanded for a trial to determine whether Judith Coffey was a bona fide USVI resident.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney
General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

Judith A. Hagley

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
JUDITH A. HAGLEY (202) 514-8126
Attorneys, Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

OCTOBER 2019

FOOTNOTES

1Similarly, the Commissioner did not inform the Eleventh Circuit in Sanders that he lacked “examination authority over” returns filed with VIBIR (Coffey/Br.56). See, below, §C.

2These issues were discussed in the Tax Court proceedings, where trial counsel for the Commissioner asserted that the IRS had “no authority to audit” returns filed with VIBIR. (JA928.) That statement is correct in the sense that the IRS does not audit such returns for compliance with the “‘mirror code’,” which is administered by VIBIR. Coffey v. Commissioner, 663 F.3d 947, 949 (8th Cir. 2011); JA370. The statement, however, should not be taken to mean that the Commissioner lacks authority to examine such returns for compliance with federal tax law.

3The author of the lead opinion correctly rejected appellees’ reliance on §932(c), observing that their “good faith” argument requires the court to “construe the word ‘is’ to mean ‘believes to be.’” (JA818-819.) Accordingly, the lead opinion assumed, correctly, for summary-judgment purposes that the dual-filing requirement of “Section 932(a)(2)” (Add.27-28; JA945) applied, and then concluded, incorrectly, that the Coffeys made dual filings.

4If this issue were pertinent, a remand would be required because it is disputed (CIR/Br.61-62), notwithstanding any contrary assertion (USVI/Br.34).

5The lead opinion characterizes appellees’ argument as a relying on a “good faith belief” regarding residency (Add.25), and notes that the Eleventh Circuit has rejected that argument (Add.25 n.9). That may explain why the concurrence avoids the phrase.

6The House proposed a bill that would have treated returns filed with VIBIR as if they were returns filed with the IRS, retroactive to 1986. H.R. 3056 §4 (2007). That the proposal never became law supports our reading of the statute. E.g., Emerson v. Steffen, 959 F.2d 119, 123 (8th Cir. 1992).

7In our opening brief (CIR/Br.27 n.5), we erroneously stated that the residency standard for 2003 and 2004 was identical. For tax years ending after October 22, 2004 (which would include the Coffeys’ 2004 tax year), taxpayers must establish residency “during the entire taxable year.” American Jobs Creation Act of 2004, P.L. 108-357, §908(c)(2). That legislative change is irrelevant to the issue on appeal.

8Indeed, the USVI inappropriately seeks to obtain in this litigation what it could not obtain through Treasury or Congress. In 2005, Treasury considered — but ultimately rejected — the USVI’s request that Treasury amend it regulations so that the “good faith” filing of returns with the USVI would trigger the Code’s statute of limitations. (JA566.) Congress declined a similar proposal years later. See, above, n.6.

9Appellees’ contention is also based on disputed evidence that “the Tax Court never resolved” (USVI/Br.53) and thus would (if deemed relevant) require a remand.

10The Agreement itself distinguishes “Federal Return” from “Possession Return.” (JA369.) See also JA377.

11The Coffeys inaccurately describe VIBIR’s cover-over requests as “copies of Appellees’ Forms 1040” (Coffey/Br.60). As the USVI acknowledges (USVI/Br.8-9), VIBIR sent only the “first two pages” of their “Form 1040,” excluding the vast bulk of their lengthy “complex” returns. (Add.16-18.)

12During the Sanders oral argument, the court observed that the IRS did “audit” returns filed with VIBIR but did not “actively” audit such returns “until [it] became aware of” the abusive Notice 2004-45 transaction. (SJA208-209 (cited at Coffey/Br.55).) 

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID