Virgin Islands 'cover over' partial return transmittal constitutes IRS filing: The Tax Court finds an assessment is barred by the statute of limitation.

Author:Pirrone, Maria M.

The Tax Court held that the Virgin Islands Bureau of Internal Revenue's (VIBIR's) sharing of information with the IRS amounted to the filing of a return. Specifically, the transmittal of Form 1040, U.S. Individual Income Tax Return, although without supporting schedules and forms, was sufficient to start the running of the statute of limitation.

Facts: In 1985, the petitioners, James and Judith Coffey, incorporated a publisher's development company, Rainbow Educational Concepts, an S corporation. Judith Coffey was the president until 2003, and James Coffey remained the vice president. The business generated a large profit.

After becoming aware of the advantages of Virgin Islands (V.I.) taxation in 2003, the Coffeys purported to become bona fide V.I. residents by purchasing property there. Judith Coffey ended her relationship with Rainbow Concepts and became a partner in a V.I. partnership providing services to Rainbow Concepts. Additionally, she obtained a V.I. driver's license and became a registered voter.

Judith Coffey took the position that as a bona fide V.I. resident, she was obligated to file with the VIBIR, and not the IRS. For the two years at issue, the Coffeys' Forms 1040 were complete and accepted by the VIBIR. The returns were signed by the Coffeys as well as their tax return preparer. Although the Coffeys did not send anything directly to the IRS, the VIBIR and the IRS shared information pursuant to an agreement as part of the country and territory's "mirror" tax system. The VIBIR forwarded the first two pages of the 2003 and 2004 returns to the IRS.

The IRS audited the partial returns and in 2009 issued a notice of deficiency for both years. The Coffeys timely filed petitions to contest the deficiencies, and the V.I. intervened. The Coffeys and the V.I. moved for summary judgment on the grounds that the statute of limitation barred the IRS from issuing the deficiencies.

The motion was initially denied by the Tax Court because, it held, a material fact was contested--whether the Coffeys were bona fide V.I. residents. A month later, the Coffeys and the V.I. moved for reconsideration on the grounds that they met their filing obligation because of the VIBIR's transmittal of their partial returns to the IRS, and the Tax Court agreed to reconsider on that basis.

Issues: Sec. 932(a)(2) requires U.S. residents with V.I.-source income to file returns with both the IRS and the VIBIR. Sec. 932(c)(4) requires a bona fide V.I. resident to...

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