Individuals Denied Credit for Tax Allegedly Paid to Virgin Islands Based on Error as to Residency (Vento, TC)

CCH Tax Day Report

Three individuals, sisters, could not credit against their U.S. tax liabilities payments made with their Virgin Islands (VI) tax returns. In 2013, the Third Circuit Court of Appeals had ruled that the taxpayers’ parents were residents of the VI during the year at issue (VIFX by R.G. Vento, LLC, CA-3, 2013-1 ustc ¶50,281), although the court in that case ruled that the taxpayers were not VI residents for that year. The taxpayers, now conceding that they were not VI residents for that year, had made payments to the VI Bureau of Internal Revenue (BIR), as well as estimated payments to the U.S. Treasury which were “covered over” to the VI Treasury; in this action in the Tax Court, they sought to obtain a credit under Code Sec. 901 for those amounts to apply to their U.S. liability for the year at issue.

None of the taxpayers was able to establish that the amounts submitted with her VI return constituted “taxes paid” within the meaning of Reg. §1.901-2(e), and so those amounts were not creditable under Code Sec. 901. Even if the amounts in issue were otherwise creditable, the limitation of Code Sec. 904 applied to each taxpayer, limiting the creditable amount to the portion of each taxpayer’s precredit U.S. tax liability attributable to foreign source income, zero in this case. More fundamentally, Congress did not intend that VI “taxes paid” by U.S. individuals be creditable under Code Sec. 901, which sets forth the foreign tax credit. Rather, the coordination rules of Code Sec. 932 apply to allow taxpayers to avoid double taxation, and so that section supplants the foreign tax credit regime with respect to amounts paid to the VI.

Comment. The Tax Court observed that, in light of the earlier decision of the Third Circuit, which established that the taxpayers did not owe any tax to the VI for the relevant year, no apparent legal grounds would justify the BIR’s failure to either refund to the taxpayers the amounts paid, or to remit to the U.S. Treasury the amounts it collected from the taxpayers. Nevertheless, this did not alter the fact that the taxpayers were not entitled to the credit which they claimed under Code Sec. 901, and would have to seek a remedy elsewhere.

R. Vento, 147 TC —, No. 7, Dec. 60,688

Other References:

Code Sec. 901

CCH Reference – 2016FED ¶27,826.31

CCH Reference – 2016FED ¶27,826.315

Code Sec. 904

CCH Reference – 2016FED ¶27,901.68

Code Sec. 932

CCH Reference – 2016FED ¶28,281.021

Tax Research Consultant

CCH Reference – TRC INTLOUT: 3,113

AUTHOR

CCHTaxGroup

All stories by: CCHTaxGroup

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