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Eighth Circuit Spills Coffey Decision

Posted on Feb. 18, 2021

Well, in a case that fractured the Tax Court about as badly as it can be fractured, the Eighth Circuit, after initially projecting harmony and uniformity in its decision, initially appeared to have fractured as well, reversing the decision it rendered a couple months ago overturning the Tax Court’s fully reviewed and fractious opinion.  This latest action briefly reopened the door on the question of adequate filing of a return for purposes of triggering the statute of limitations, before reinstating the original holding through a new opinion by the panel. That new panel opinion can be found here  Our most recent prior post on this case can be found here.  It contains links to prior posts on the Coffey case, the Tax Court opinion and the Eighth Circuit’s original opinion. We anticipate the Coffeys will file a new motion for reconsideration.

To briefly recap the facts in Coffey, the taxpayers claimed that they were residents of the US Virgin Islands in 2003 and 2004 and filed returns with the Virgin Island tax authority. That taxing authority has a symbiotic relationship with the IRS and sent to the IRS some of the documents it received. The IRS took the documents it received and concluded that M/M Coffey should have filed a US tax returns. Based on that conclusion, it sent to the Coffeys a notice of deficiency. The Coffeys argued that the notice of deficiency was sent beyond the statute of limitations on assessment since their filing with the US Virgin Islands tax authority also served as a filing with the IRS starting the normal assessment statute. The government argued that because the Coffeys did not file a return with the US, no statute of limitations on assessment existed. After only eight years, the Tax Court sided with the Coffeys. A mere three years later, the Eighth Circuit reversed in a unanimous three judge panel. –

On February 10, 2021, the Eighth Circuit granted a panel rehearing but denied a rehearing en banc. Disagreements with the outcome of a circuit court usually result in a request for a rehearing en banc rather than a rehearing with the very panel that entered the decision. So, this is a bit of an unusual twist in a case with many twists. After the vacating of the original opinion, the same panel issued a new opinion with some minor differences.

Since the original opinion, the Virgin Islands tax authority had filed its own petition for rehearing, supporting the position of the Coffeys that a return filed with the Virgin Islands acts as a trigger for the starting of the statute of limitations on further assessments by the IRS. The petition focused in part on “a seemingly minor factual mistake” in the panel opinion, namely that the Virgin Islands tax authority “chooses” to use Form 1040 rather than being statutorily required to do so. It is this observation that appears to have encouraged the Eighth Circuit to vacate the original opinion. In the new opinion, the panel clarified this, observing that the Virgin Islands taxing authority “uses the same forms” as the IRS and clarifying that the original holding — that returns filed with the Virgin Islands authority are not returns — applies only to non-residents like the Coffeys.

The result of the Eighth Circuit’s decision allows the IRS to come in many years later to challenge residence of individuals claiming Virgin Islands residence. If the Coffeys had succeeded in this case, the procedural issue would have turned into a substantive victory, since the IRS would not have been able to make an assessment against them for the years at issue.

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