The Eleventh Circuit vacated the Tax Court's finding that a taxpayer was a bona fide resident of the U.S. Virgin Islands because the facts the Tax Court relied on were insufficient to demonstrate bona fide residency.
Background
In Estate of Sanders, 144 T.C. 63 (2015), the Tax Court, as part of its larger determination that the IRS's notices of deficiency to Travis Sanders for 2002-2004 were time-barred because the statute of limitation on assessment had expired for his U.S. tax returns for those years, found that Sanders was a bona fide resident of the U.S. Virgin Islands in 2002-2004.
In making its decision regarding Sanders's residency, the Tax Court applied the 11 factors set out in Sochurek, 300 F.2d 34 (7th Cir. 1962): (1) intention of the taxpayer; (2) establishment of a home in the foreign country for an indefinite period; (3) participation in activities; (4) physical presence in the foreign country; (5) nature, extent, and reasons for absences from his temporary foreign home; (6) assumption of economic burdens and payment of taxes to the foreign country; (7) status of the resident contrasted to transient or sojourner; (8) treatment accorded his income tax status by his employer; (9) marital status and residence of his family; (10) nature and duration of employment; and (11) good faith in making the trip abroad. The Third Circuit has further grouped these 11 factors into four broad categories: (1) intent; (2) physical presence; (3) social, family, and professional relationships; and (4) the taxpayer's own representations (Vento v. Director of V.I. Bureau of Internal Rev., 715 F.3d 455 (3d Cir. 2013)).
Applying the Sochurek/Vento factors, the Tax Court found that Sanders was a bona fide U.S. Virgin Islands resident, stating:
[Sanders] had the intent to be a bona fide resident because he intended to remain indefinitely or at least for a substantial period. . . . 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. [Sanders] was married in the USVI and reported his address as the USVI on his marriage license. [Sanders] identified himself as a resident of the USVI and paid USVI taxes. . . . Therefore, [Sanders] was a bona fide resident of the USVI for tax years 2002-04 and he properly filed tax returns with the VIBIR for those years.
The IRS appealed the Tax Court's decision to the Eleventh Circuit, arguing again that under the Sochurek/Vento factors, Sanders was not a bona fide resident of the U.S. Virgin Islands.
The Eleventh Circuit's Decision
The Eleventh Circuit vacated the Tax Court's decision and remanded the case for further consideration of whether Sanders was a bona fide resident of the U.S. Virgin Islands. The court held that in the absence of additional findings of subsidiary fact by the Tax Court, the facts it had relied on were insufficient to demonstrate Sanders's bona fide residency.
In its opinion, the Eleventh Circuit discussed each reason the Tax Court gave to support its finding of bona fide residency and why they failed to provide sufficient support for that determination. First, the court stated it agreed with the Tax Court that Sanders had a physical presence in the U.S. Virgin Islands, and stated that this was an especially important factor. However, it averred that what mattered was not the mere fact of physical presence but its nature and extent. Because the parties disputed how much time Sanders had spent on the island in the years in question, and the Tax Court had not resolved the dispute, it had failed to decide the nature and extent of his presence, and could not have properly weighed this factor.
The Eleventh Circuit explained that the fact that Sanders was employed by a U.S. Virgin Islands business, and was listed as a partner in the business, should be accorded little weight in the residency determination because the Tax Court had failed to make findings of fact regarding Sanders's relationship with the business and whether his relationship to it had economic substance. The IRS argued that Sanders's relationship with the business had no economic substance, and thus his activities with respect to it should not be considered contacts. The Eleventh Circuit agreed that the IRS would be correct if Sanders's relationship with the business had no economic substance, but noted that in some situations a taxpayer's activities related to a business might be considered contacts even if the taxpayer's relationship with that business had no economic substance.
The Eleventh Circuit determined that the fact that Sanders conducted banking in the U.S. Virgin Islands and had checks that listed a U.S. Virgin Islands address supported his claim of bona fide U.S. Virgin Islands residency only to a small extent. The court observed that banking in the U.S. Virgin Islands was not a strong indicator of residency because banking can be conducted almost anywhere using modern technology. It found the checks were not compelling evidence because the address on them was for Sanders's business, not for his place of residence. Likewise, the court determined that Sanders's marriage was "fairly unconvincing" evidence of residence, noting that the location of one's wedding is not necessarily any indication of where one resides. It further pointed out that Sanders's wife lived in Florida after their marriage and never claimed residency in the U.S. Virgin Islands.
The Eleventh Circuit did not give much weight to Sanders's self-identification as a U.S. Virgin Islands resident because he had not done so consistently. In certain instances, as in the case of his marriage license, he listed himself as a resident of the U.S. Virgin Islands, but in many others, including some related to his various business entities, he represented himself as a resident of Florida. The court explained that Sanders's representing himself as a resident of Florida on a number of occasions did not render his representations that he was a U.S. Virgin Islands resident meaningless, given the possibility that a person can have multiple residences, but it did considerably weaken the record evidence with respect to his representations regarding a U.S. Virgin Islands residency.
Finally, the Eleventh Circuit addressed Sanders's payment of U.S. Virgin Islands taxes. The court asserted that this could be an indicator of residency, but, if the IRS was correct in its belief that Sanders merely pretended to be a U.S. Virgin islands resident so he could pay taxes there, it would be expected that he would pay taxes there. The Eleventh Circuit found that, given the IRS's allegations, and substantial supporting evidence that Sanders masqueraded as a U.S. Virgin Islands resident so that he could pay taxes there, it should accord his payment of taxes to the U.S. Virgin Islands little weight in the absence of findings favorable to Sanders on the economic substance issue. The appeals court vacated the Tax Court's decision that Sanders was a bona fide U.S. Virgin Islands resident and remanded the case.
Reflections
Although the Tax Court did not discuss the issue, the Sanders estate also argued that that if a taxpayer files a tax return with the U.S. Virgin Islands, but not the IRS, in the good-faith belief that he is a U.S. Virgin islands resident, the limitation period should start to run even if the taxpayer is not, in fact, a bona fide resident. The Eleventh Circuit rejected this argument, finding that it was unlikely that Congress had intended that residency status would turn on the taxpayer's subjective beliefs.
Estate of Sanders, No. 15-12582 (11th Cir. 2016)
