No section 901 credit, amounts paid to Virgin Islands

No section 901 credit, amounts paid to Virgin Islands

The U.S. Tax Court today issued an opinion concluding that individuals who did not file federal income tax returns for 2001—but filed income tax returns with the Virgin Islands Bureau of Internal Revenue—were not allowed to credit the amounts paid as tax to the Virgin Islands against their U.S. income tax liabilities under section 901.

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The case is: Vento v. Commissioner, 147 T.C. No. 7 (September 7, 2016). Read the Tax Court’s opinion [PDF 120 KB]

Summary

The taxpayers—three sisters who ultimately stipulated that they were not bona fide residents of the Virgin Islands during 2001—paid amounts as income tax with their individual territorial income tax returns filed with the Virgin Islands for 2001. They did not file U.S. federal income tax returns.

The Tax Court concluded that:

  • The taxpayers had failed to establish that their determination that they were subject to Virgin Islands tax, rather than U.S. tax, for 2001 was based on a reasonable interpretation of applicable law.
  • The taxpayers had failed to show that they had exhausted all effective and practical means of securing a refund of the amounts paid to the Virgin Islands.
  • The taxpayers did not meet their burden of proving that the amounts in issue were "taxes paid" within the meaning of Reg. section 1.901-2(e).
  • The limitation on foreign tax credits imposed by section 904 applies to taxes paid to the Virgin Islands, and the taxpayers failed to establish that the amounts in issue did not exceed the applicable limitations. 
  • The allowance of the claimed credits would be inconsistent with congressional intent that payments of Virgin Islands tax by U.S. citizens or residents not be creditable under section 901.

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