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Sisters Argue Tax Court Erred in U.S.V.I. Foreign Tax Credit Case

JAN. 13, 2020

Renee Vento et al. v. Commissioner

DATED JAN. 13, 2020
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' REPLY BRIEF

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

Counsel for Appellants
Renee Vento, Gail Vento, Nicole Mollison


TABLE OF CONTENTS

TABLE OF AUTHORITIES

ARGUMENT

I. THE TAX COURT FAILED TO APPLY THE MIRROR CODE AND I.R.C. §7654(a) WHEN IT INTERPRETED THE FOREIGN TAX CREDIT FOR THE U.S. VIRGIN ISLANDS

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

SUMMARY

CONCLUSION

STATEMENT OF RELATED CASES

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases.

Abramson Enterprises, Inc. v. Government of the Virgin Islands, 994 F.2d 140 (3rd Cir.), cert. denied, 510 U.S. 965 (1993)

Highland Farms v. Commissioner, 106 T.C. 237(1996)

United States v. 103 Elec. Gambling Devices, 223 F.3d 1091 (9th Cir. 2000)

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

V.I. Derivatives, LLC v. United States, No. 3-06-cv-00012, Order (D.V.I. March 31, 2015), aff'd, Nos. 15-2003, 15-2004 (3rd Cir. 2016) 

Statutes.

I.R.C. § 31

I.R.C. § 901

I.R.C. §6315

I.R.C. § 6401

I.R.C. § 7654

I.R.C. §6601

48 U.S.C. § 1397 (the “Mirror Code”)

Food Stamp Program, 7 U.S.C. §2011 et seq.

National Bank Act, 12 U.S.C. §40

National Labor Relations Act, 29 U.S.C. § 141 et seq. 

Regulations.

Treas. Regs. § 1.31-1

Treas. Regs.§ 1.31-2

Treas. Regs. §301.6315-1

Treas. Regs.§ 301.6401-1

Rules.

Federal Rule of Civil Procedure 9 

Tax Court Rule 39 

Tax Court Rule 155


ARGUMENT

I. THE TAX COURT FAILED TO APPLY THE MIRROR CODE AND I.R.C. §7654(a) WHEN IT INTERPRETED THE FOREIGN TAX CREDIT FOR THE U.S. VIRGIN ISLANDS.

The Commissioner's answering brief appropriately describes the statute and regulations defining the scope of the foreign tax credit and also mentions the “equality principle,” the cover-over statute,1 and the Mirror Code. But he does not explain how the laws work together, merely describing the mechanical rules and requirements in the abstract.

Nicole, Gail, and Renee would have no argument were the other jurisdiction involved a foreign country. In those situations, the U.S. Congress has no interest in the taxes of the foreign jurisdiction. But when the U.S. territories are involved budgets and fiscal measures of the United States and its territories are intertwined — more importantly from the territorial side, to be sure, but directly connected nonetheless. Many U.S. government programs directly benefit the territories, most federal statutes apply there, and a number of agencies have offices there. E.g., National Labor Relations Act, 29 U.S.C. §141 et seq.; Food Stamp Program, 7 U.S.C. §2011 et seq.; National Bank Act, 12 U.S.C. §40 (extension to Virgin Islands). And for this reason, the foreign tax credit provisions of the Internal Revenue Code cannot be read solely from the perspective of the Commissioner. Attention must be given to the words of Congress outside of section 901, particularly, here, section 7654 and the Mirror Code.

The cover-over statute, I.R.C. §7654, ties the fiscs of the two jurisdictions, the United States and the U.S. Virgin Islands, together. It provides that “taxes” collected by the United States from individuals who are bona fide residents of a possession “shall be covered” into the territory's treasury. The Mirror Code, 48 U.S.C. §1397, created the income tax law for the Virgin Islands, a body of law, locally administered and enforced, which clearly imposes duties on individuals resident there to file income tax returns and pay taxes. Abramson Enterprises, Inc. v. Government of the Virgin Islands, 994 F.2d 140, 142 (3rd Cir.), cert. denied, 510 U.S. 965 (1993). The Tax Court's decisions ignore the existence of the Mirror Code and the operation of I.R.C. §7654, contrary to well-established rules of statutory construction. As applicable here, this Court has explained: (i) courts should give effect to both of two statutes covering related or overlapping subjects, . . . and (ii) a specific statute governs a general one. United States v. 103 Elec. Gambling Devices, 223 F.3d 1091, 1102 (9th Cir. 2000). The Tax Court decision ignores both of these principles in that (i) it fails to apply the operation of the overlapping Mirror Code along with the Internal Revenue Code and (ii) ignores the effect of the statute specific to double taxation in the U.S. Virgin Islands, §7654(a), instead relying on the general statute, §901. If the foreign tax credit rules are applied strictly, it makes section 7654 superfluous and completely ignores the imposition of a separate tax law by the same governing authority, Congress.2

The use of the cover over process of §7654 appropriately ameliorates the strict rules of the foreign tax credit by accommodating the “one tax” concept. To illustrate, consider the same facts here with and without recognition of the cover over transfers. Without recognizing the “one tax” under Mirror Code principles, U.S. citizens are subject to double taxation by Congress. The Tax Court has written double taxation into the jurisprudence of the Mirror Code when Congress, by installing the cover-over process, clearly intended to avoid it.

II. THE TAX COURT ALLOWED THE COMMISSIONER TO INTRODUCE A NEW ISSUE IN HIS RULE 155 COMPUTATION.

Both the Tax Court and Commissioner argue that it was Nicole, Gail, and Renee who first raised the issue of credibility of taxes paid to the United States.3 To the contrary, whether taxes paid to the United States can be credited under I.R.C. §§ 31 and 6315 was first made in the Commissioner's Rule 155 computations, EoR (vol. II), pp. 167 - 201, where, for the first time, it was clear that the Commissioner opposed a credit for taxes paid to the United States.4

Sections 31 (wage withholding) and 6315 (estimated tax payments) operate automatically by their own terms without any election or determination by the Commissioner, similar to the liability for interest on deficiencies under §6601 but unlike the myriad requirements and conditions for the applicability of the §901 foreign tax credit. The operative language of these statutes is short and clear:

The amount withheld as tax under chapter 24 [wage withholding] shall be allowed to the recipient of the income as a credit against the tax imposed by this subtitle.

I.R.C. §31(a).

Payment 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.

I.R.C. §6315. The holding of the Tax Court allows the Commissioner to void the operation of these statutes at his arbitrary discretion. There is nothing in any regulation which allows this. See, Treas. Regs. §§ 1.31-1, 1.31-2, 301.6315-1. 301.6401-1.

As a general rule, if the Commissioner is going to raise a special matter, he must plead it. Tax Ct. Rule 39; see also, Fed. R. Civ. P. 9. If the Commissioner rejects the application of a generally applicable rule, he must plead it, as required for any authorized deviation from the regular operation of a statute. E.g., Highland Farms v. Commissioner, 106 T.C. 237 (1996)(statute of limitations must be affirmatively pleaded). There is no averment in the answers or amended answers even alluding to the inapplicability of these statutes. EoR (vol. IV), pp. 631-743; SER pp. 34-37, 67-70, 101-104. It is clear that the Commissioner did not raise the question of the non-applicability of §31 and §6315 until his Rule 155 computation. The Commissioner stipulated to facts which meet the simple requirements of these statutes. First Stipulation of Facts, EoR (vol. III) p. 330. If the Tax Court is going to let the Commissioner avoid the legal effect of stipulated facts, the Commissioner must first allege that the operative statute is, somehow, inoperative.

All the verbiage from the Tax Court about the history of the rule and discussion of the state tax question (the issue Petitioners-Appellants gave up on the court below), merely obfuscate what it did — apply the rule to Nicole, Gail, and Renee but not the Commissioner. It is an abuse of discretion for the Tax Court to apply its rule against not raising new issues in Rule 155 computations to Nicole, Gail, and Renee but blatantly allow the Commissioner a pass.

SUMMARY

Petitioners-Appellants are in the Orwellian situation of being United States taxpayers (determined ten years after the year in issue), having paid amounts to the United States clearly intended as taxes and processed as such by the United States, and then having those payments denied treatment as taxes for determining their United States income tax liability, this lattermost putatively because the amounts were transferred to the U.S. Virgin Islands – even though the Commissioner could recover them from the U.S. Virgin Islands through administrative offset without time constraints. Admittedly, Nicole, Gail, and Renee put themselves in the situation of paying tax to the wrong authority but that does not matter because under the Mirror Code and operation of I.R.C. §7654(a) there is but one tax for United States citizens. The Tax Court's refusal to recognize and give effect to the mandate of these two statutes is clear error and an abuse of discretion.

On the second issue, the Tax Court has allowed the Commissioner to raise a new issue in his Rule 155 computation, namely, that amounts paid to the United States as taxes are not creditable as taxes. At no point in the life of these cases did the Commissioner raise that issue until his Rule 155 computation. And the Tax Court allows it in violation of the clear language of the statute and in disregard of the stipulated facts entitling Nicole, Gail, and Renee to the credits. This is clear error and an abuse of discretion on the part of the Tax Court.

CONCLUSION

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

Respectfully submitted,

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

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

Dated: January 13, 2020.

STATEMENT OF RELATED CASES

Appeals were recently filed for the denial of Petitioners' Motion for Leave to File an Indicative Ruling in the Tax Court for the following cases:

Nicole Mollison v. Commissioner, 20-70067 (9th Cir. Jan. 8, 2020).

Renee Vento v. Commissioner, 20-70068 (9th Cir. Jan. 8, 2020).

Gail Vento v. Commissioner, Tax Ct. Dkt. No. 993-06, Notice of Appeal

filed January 7, 2020 (not yet docketed in Ninth Circuit).

Joseph M. Erwin

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

Counsel for Appellants
Renee Vento, Gail Vento, Nicole Mollison

Date: January 13, 2020.

FOOTNOTES

1Note that the Commissioner covered-over to the U.S. Virgin Islands amounts Gail, Renee, and Nicole paid to the United States as U.S. taxes. EoR (vol. III) p. 331, ¶8. This is in violation of the explicit terms of the statute which allow cover-over only with regard to a bona fide resident of the possession.

2The Commissioner raised the issue too late in the process to allow taxpayers the opportunity to offer evidence of the adverse practical impact on tax administration in the territory.

3As for the payments made by Nicole, Gail, and Renee to the United States, I.R.C. §6401(c) provides: “An amount paid as 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.” So the fact that amounts were paid to the United States for a year for which Nicole, Gail, and Renee thought they were U.S. Virgin Islands taxpayers does not mean those payments were not payments of tax for United States purposes. It has been suggested in the briefs and decisions below that a claim for refund against the Virgin Islands should have been made. Indeed, a cause of action was pending in the District Court of the Virgin Islands involving these same 2001 income tax liabilities but those cases were in 2015 unexpectedly declared final as of 2013 with the decision in Vento v. Director, Virgin Islands Bureau of Internal Revenue, 715 F.3d 455 (3rd Cir. 2013), by V.I. Derivatives, LLC v. United States, No. 3-06-cv-00012, Order (March 31, 2015), aff'd, Nos. 15-2003, 15-2004 (3rd Cir. 2016), even though the only issue that was litigated was residency.

4And these were not a transactions with a third party that could be included or variously characterized on their tax returns at the discretion of the taxpayer; rather they are transactions directly with the Commissioner by Nicole, Gail, and Renee that the Tax Court holds has no meaning.

END FOOTNOTES

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