In a case released by the US Tax Court yesterday, January 29, 2015, the Court handed a victory to a taxpayer utilizing the US Virgin Islands Economic Development Credit (EDC).
In Estate of Sanders, v. Commissioner, 144 T.C. No. 5 (2015) the Court found that the taxpayer was a bona fide resident of the USVI, and that when he filed his USVI tax returns for 2002 through 2004 in lieu of federal tax returns he had complied with all his filing requirements. As such the Notice of Deficiency issued in 2010 was too late based on the statute of limitations, notwithstanding the IRS’ argument that the claimed USVI residency was a sham and therefore no valid returns were ever filed and the SOL never began, i.e. filing of the USVI returns was not a substitute for the federal returns.
Mr. Sanders had become a limited partner of a partnership formed specifically to provide consulting services in the US through those who purchase LP interests. The Service basically took the position that this partnership sold LP interests to individuals such as Mr. Sanders who wished only to contrive a patina of a USVI presence solely to access the 90% USVI economic development credit, and that it otherwise had no true economic substance. Since, in the Commissioner’s view, this was a sham, the residence was not bona fide and any filing of USVI returns in lieu of US federal returns was inadequate and without effect.
The Court rejected this argument, reviewing the 11 factors that it looks to in order to ascertain residency and was satisfied that Mr. Sanders had done all he needed to do.
Decedent had the intent to be a bona fide resident because he intended to remain indefinitely or at least for a substantial period. See Vento, 715 F.3d at 470. He had a physical presence in the USVI and was employed by a USVI business and listed as a partner on their Schedules K-1 for tax years 2002-04. He conducted banking in the USVI and had checks with a USVI address. Decedent was married in the USVI and reported his address as the USVI on his marriage license. Decedent identified himself as a resident of the USVI and paid USVI taxes. At 34.
Thus, having complied with his tax filing requirement, the IRS had only until sometime in 2008 to assess a deficiency; 2010 was way too late.
It seems the Service cherry picked the wrong case.