                                                GEORGE C. HUFF, PETITIONER v. COMMISSIONER                                     OF
                                                       INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 12942–09.                     Filed March 19, 2012.

                                                   Claiming to be a bona fide resident of the U.S. Virgin
                                                Islands (Virgin Islands) and claiming he was qualified for the
                                                gross income tax exclusion provided by I.R.C. sec. 932(c)(4), P,
                                                a U.S. citizen, filed territorial income tax returns with, and
                                                paid income tax to, the Virgin Islands Bureau of Internal Rev-
                                                enue (BIR) for 2002, 2003, and 2004 (years involved). P did
                                                not file Federal income tax returns with, or pay Federal
                                                income tax to, the Internal Revenue Service (IRS) for those
                                                years. P asserts he was a member of NASCO Corporate
                                                Finance Consultants, LLC (NASCO), a Virgin Islands limited
                                                liability company. NASCO filed Virgin Islands partnership
                                                returns with the BIR for the years involved. NASCO did not

                                      258




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                                                file partnership returns with the IRS. Because P did not file
                                                tax returns with the IRS for the years at issue, R conducted
                                                a nonfiler examination. R determined that for the years
                                                involved P did not qualify for the I.R.C. sec. 932(c)(4) income
                                                tax exclusion and therefore was not excused from his Federal
                                                tax filing and tax payment obligations. R mailed P a notice of
                                                deficiency. P maintains that this case involves a partnership
                                                item and therefore R should have issued a notice of final part-
                                                nership administrative adjustment to the tax matters partner
                                                of NASCO pursuant to the procedural rules of the Tax Equity
                                                and Fiscal Responsibility Act of 1982 (TEFRA), as opposed to
                                                issuing P a notice of deficiency. P posits R’s notice of defi-
                                                ciency is invalid, and thus he requests the Court to dismiss
                                                this case for lack of jurisdiction. Held: The procedural rules of
                                                TEFRA do not herein apply in that (1) NASCO did not file a
                                                partnership return with the IRS, and (2) NASCO is not classi-
                                                fied as a partnership for purposes of TEFRA. Held, further,
                                                P’s motion to dismiss for lack of jurisdiction will be denied.

                                        William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo
                                      III, and Marjorie Rawls Roberts, for petitioner.
                                        Daniel N. Price, Ladd Christman Brown, Jr., and Justin L.
                                      Campolieta, for respondent.

                                                                                  OPINION

                                         JACOBS, Judge: This matter is before the Court on peti-
                                      tioner’s motion to dismiss for lack of jurisdiction (petitioner’s
                                      motion), the resolution of which turns on whether respondent
                                      should have issued a notice of final partnership administra-
                                      tive adjustment (FPAA) to the tax matters partner (TMP) of
                                      NASCO Corporate Finance Consultants, LLC (NASCO), pursu-
                                      ant to the procedural rules of the Tax Equity and Fiscal
                                      Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–248, sec.
                                      402(a), 96 Stat. at 648, rather than issue, as respondent did,
                                      a notice of deficiency to petitioner.

                                                                               Background 1
                                      I. Petitioner
                                        Petitioner is a U.S. citizen who claims he was a bona fide
                                      resident of the U.S. Virgin Islands (Virgin Islands) during
                                         1 For additional background information, see Appleton v. Commissioner, 135 T.C. 461 (2010),

                                      rev’d, 430 Fed. Appx. 135 (3d Cir. 2011), Huff v. Commissioner, 135 T.C. 222 (2010), and Huff
                                      v. Commissioner, 135 T.C. 605 (2010).




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                                      2002, 2003, and 2004 (years involved). Respondent disputes
                                      petitioner’s claim.
                                         Petitioner filed territorial income tax returns with, and
                                      paid income tax to, the Virgin Islands Bureau of Internal
                                      Revenue (BIR) for each of the years involved. Petitioner
                                      asserts that during the years involved he was a member of
                                      NASCO, which was established under the laws of the Virgin
                                      Islands as a limited liability company (LLC). 2
                                         Petitioner maintains he qualified for the section 932(c)(4) 3
                                      gross income exclusion for each of the years involved; con-
                                      sequently, he did not file Federal income tax returns or pay
                                      Federal income tax for those years. Because he did not file
                                      returns with the Internal Revenue Service (IRS), respondent
                                      conducted a nonfiler examination for the years involved and
                                      determined that petitioner did not qualify for the income
                                      exclusion under section 932(c)(4).
                                         On February 27, 2009, respondent mailed petitioner a
                                      notice of deficiency. Respondent’s primary position in the
                                      notice of deficiency was that NASCO was not a legitimate
                                      business entity and that petitioner was not a partner in
                                      NASCO. Rather, respondent alleges petitioner used NASCO in
                                      connection with ‘‘a tax avoidance scheme which involved
                                      * * * [petitioner’s] improperly claiming to be a resident of
                                      the USVI and superficially recasting US-source income as
                                      USVI-source income in order to inappropriately and invalidly
                                      claim a tax credit of 90% under the USVI Economic Develop-
                                      ment Program.’’ 4
                                         In contrast, petitioner asserts that (1) NASCO was a valid
                                      LLC organized under the laws of the Virgin Islands, was rec-
                                      ognized as such by the BIR, and should be respected for Fed-
                                      eral tax purposes, and (2) this case involves a partnership
                                      item and hence respondent should have issued an FPAA to
                                      the TMP of NASCO pursuant to the procedural rules of TEFRA,
                                      as opposed to issuing petitioner a notice of deficiency.
                                        2 For purposes of petitioner’s motion, respondent treats NASCO as a legitimate Virgin Islands

                                      business entity. However, respondent’s litigating position is that NASCO is not a legitimate
                                      business entity. We make no determination with respect to the actual status of NASCO.
                                        3 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code)

                                      in effect for the years involved.
                                        4 Respondent asserts alternate positions in the notice of deficiency. As each of these alternate

                                      positions is a variation of respondent’s primary position, we need not discuss them in the con-
                                      text of petitioner’s motion.




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                                      II. NASCO
                                         As noted supra p. 260, NASCO was organized as a Virgin
                                      Islands LLC. In this regard, the Virgin Islands government
                                      issued a certificate of existence to NASCO on June 20, 2001.
                                      Article 8 of NASCO’s articles of organization provides: ‘‘No
                                      member of the Company shall be liable for the debts and
                                      obligations of the Company under Section 1303, Subsection
                                      (c) of the Uniform Limited Liability Act.’’
                                         During each of the years involved NASCO had more than 10
                                      members and at least 1 of its members was neither an indi-
                                      vidual, a C corporation, nor an estate of a deceased person.
                                      For each of the years involved NASCO filed a Virgin Islands
                                      partnership tax return with the BIR.
                                      III. The Virgin Islands
                                         The Virgin Islands is an insular area of the United States;
                                      it is not part of one of the 50 States or the District of
                                      Columbia. The Virgin Islands is generally treated as a for-
                                      eign country, see sec. 7701(a)(9); Huff v. Commissioner, 135
                                      T.C. 222, 224 (2010), and has a ‘‘mirror tax’’ system; i.e., the
                                      Virgin Islands uses as its tax law the tax laws of the United
                                      States. In this regard, 48 U.S.C. sec. 1397 (2006) provides
                                      that the Code is to be used by the Virgin Islands, with the
                                      words ‘‘Virgin Islands’’ being substituted for the words
                                      ‘‘United States’’ and vice versa. The revised version of the
                                      Code is known as the ‘‘mirror code’’.
                                         Virgin Islands residents are required to file territorial
                                      returns with, and pay territorial taxes to, the BIR. Mirror
                                      code secs. 1, 6212(a)(1)(A). Virgin Islands partnerships are
                                      required to file territorial partnership returns with the BIR
                                      pursuant to mirror code section 6031(a).
                                         The BIR does not have its own territorial tax forms; rather,
                                      it uses IRS tax forms for reporting purposes. Thus, resident
                                      Virgin Islands individuals file Form 1040, U.S. Individual
                                      Income Tax Return, with the BIR; Virgin Islands partner-
                                      ships file Form 1065, U.S. Return of Partnership Income,
                                      with the BIR; and Virgin Islands corporations file Form 1120,
                                      U.S. Corporation Income Tax Return, with the BIR.
                                         Section 932(c) coordinates U.S. and Virgin Islands income
                                      tax liability and filing requirements for individuals who are




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                                      subject to U.S. taxation (e.g., U.S. citizens and residents). 5
                                      An individual subject to U.S. taxation who is a bona fide resi-
                                      dent of the Virgin Islands may satisfy his Federal income tax
                                      reporting and payment requirements by filing solely with,
                                      and paying tax to, the BIR, provided the individual satisfies
                                      all of the requirements of section 932(c)(4). If the individual
                                      fails to satisfy all of the section 932(c)(4) requirements, he/
                                      she may be required to file tax returns with, and pay tax to,
                                      both the IRS and the BIR. See S. Rept. No. 100–445, at 315
                                      (1988), 1988 U.S.C.C.A.N. 4515, 4826.
                                         In order to ensure the ‘‘fair implementation’’ of section 932,
                                      the United States and the Virgin Islands entered into an
                                      agreement ‘‘for the exchange of information and mutual
                                      assistance with respect to taxes in order to prevent the eva-
                                      sion or avoidance of United States or Virgin Islands taxes’’.
                                      Tax Implementation Agreement Between the United States
                                      of America and the Virgin Islands (TIA), Feb. 24, 1987, 1989–
                                      1 C.B. 347, 347–348. The TIA applies to (1) all taxes imposed
                                      by the Code, (2) all taxes imposed by the mirror code, and
                                      (3) all local income taxes imposed by the Virgin Islands as
                                      authorized by the Tax Reform Act of 1986. See id. art. 2,
                                      1989–1 C.B. at 348. TIA article 4 governs the exchange of
                                      information between the two governments. Clause 1 thereof
                                      provides that the competent authorities of the United States
                                      and the Virgin Islands shall exchange information to admin-
                                      ister and enforce their respective tax laws. See id. art. 4(1),
                                      1989–1 C.B. at 348.
                                         TIA article 4(2)(b) provides that the Virgin Islands shall
                                      routinely supply to the United States information with
                                      respect to audit changes that disclose information of interest
                                      to the U.S. Government, including, among other matters, (1)
                                      information about the ownership interests of all corporations
                                      subject to Virgin Islands tax having non-Virgin Islands-
                                      source income and which receive a rebate, subsidy, or deduc-
                                      tion of Virgin Islands taxes, as well as (2) information about
                                      any individual subject to Virgin Islands tax who has non-
                                      Virgin Islands-source income and who claims for the first
                                        5 In general, the United States taxes U.S. citizens and alien individuals residing in the United

                                      States on all of their income regardless of the income’s origin (i.e., on their worldwide income).
                                      See Cook v. Tait, 265 U.S. 47, 56 (1924). Gross income for the purpose of calculating taxable
                                      income is defined as ‘‘all income from whatever source derived.’’ Sec. 61(a). Individuals subject
                                      to U.S. tax are generally required to file a tax return if their income exceeds a threshold
                                      amount. Sec. 6012(a)(1)(A). Sec. 932 preempts these general rules.




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                                      time to be a Virgin Islands resident. In addition, TIA article
                                      4(2)(b) provides that the Virgin Islands shall supply to the
                                      United States ‘‘copies of reports of individual, partnership,
                                      corporate, and employment audit changes that disclose
                                      information relevant to the United States.’’ Id. art. 4(2)(b),
                                      1989–1 C.B. at 348–349. To this end, the TIA provides that
                                      the BIR will permit the IRS to examine Virgin Islands tax
                                      returns. Id. app. A, sec. 3.1, 1989–1 C.B. at 352.

                                                                                 Discussion
                                         This Court is a court of limited jurisdiction; we may exer-
                                      cise our jurisdiction only to the extent provided by Congress.
                                      See sec. 7442; see also GAF Corp. & Subs. v. Commissioner,
                                      114 T.C. 519, 521 (2000). We have jurisdiction to redetermine
                                      a deficiency only if a valid notice of deficiency is issued by
                                      the Commissioner and a petition contesting the Commis-
                                      sioner’s deficiency determination is timely filed by the tax-
                                      payer. GAF Corp. & Subs. v. Commissioner, 114 T.C. 519.
                                      Petitioner’s motion is premised on petitioner’s assertion that
                                      respondent’s notice of deficiency is invalid.
                                      I. TEFRA Partnership Proceedings
                                         Partnerships, in general, do not pay Federal income taxes.
                                      Rather, they file annual information returns reporting the
                                      partners’ distributive shares of the partnership’s income,
                                      deductions, and other tax items. Secs. 701, 6031. Each
                                      partner reports his/her respective distributive share of part-
                                      nership income, deductions and credits on his/her income tax
                                      return. Secs. 701–704; sec. 1.702–1(a), Income Tax Regs.
                                      Before the enactment of TEFRA, adjustments of partnership
                                      items were determined at the individual partner level,
                                      resulting in duplication of administrative and judicial
                                      resources and inconsistent results between partners. To
                                      resolve this problem Congress enacted TEFRA, which created
                                      a single unified procedure for determining the tax treatment
                                      of all partnership items. Pursuant to the procedures of
                                      TEFRA, assessments for nonpartnership item adjustments are
                                      subject to deficiency proceedings, secs. 6212(a), 6230(a)(2),
                                      whereas the tax treatment of a partnership item is deter-
                                      mined at the partnership level, sec. 6221.




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                                         Section 761(a) provides that a ‘‘ ‘partnership’ includes a
                                      syndicate, group, pool, joint venture or other unincorporated
                                      organization through or by means of which any business,
                                      financial operation, or venture is carried on’’ and is not a cor-
                                      poration, or a trust or estate. Section 6231(a)(1)(A) provides
                                      that except as provided in section 6031(a)(1)(B) (regarding
                                      ‘‘small partnerships’’) ‘‘the term ‘partnership’ means any
                                      partnership required to file a return under section 6031(a).’’ 6
                                      Thus, an entity falls under the provisions of TEFRA if the
                                      entity is required to file a partnership return. See Wolf v.
                                      Commissioner, T.C. Memo. 1991–212, aff ’d, 4 F.3d 709 (9th
                                      Cir. 1993).
                                         Business entities that are classified as foreign partnerships
                                      for Federal tax purposes are generally exempt from filing
                                      partnership returns and are not subject to the provisions of
                                      TEFRA. Sec. 6031(e)(1). However, foreign partnerships that
                                      earn gross income derived from sources within the United
                                      States or earn gross income that is effectively connected with
                                      the conduct of a trade or business within the United States
                                      are required to file partnership returns and therefore are
                                      within the purview of TEFRA. Sec. 6031(e)(2).
                                      II. Contentions of the Parties
                                         Petitioner asserts that this case should be dismissed for
                                      lack of jurisdiction because respondent failed to follow the
                                      procedural rules of TEFRA. Petitioner maintains that because
                                      NASCO filed territorial partnership returns with the BIR, it in
                                      essence filed Federal partnership returns with the IRS for the
                                      years at issue pursuant to section 6233(a). Consequently,
                                      petitioner reasons the procedural rules of TEFRA apply. Alter-
                                      natively, petitioner posits that NASCO should be classified as
                                      a foreign partnership and was required to file a Federal part-
                                      nership return for each of the years involved because for
                                      such years it had U.S.-source income or income effectively
                                      connected with a U.S. trade or business. Continuing, peti-
                                      tioner maintains that the issues raised in respondent’s notice
                                      of deficiency are, in reality, partnership items and hence,
                                      pursuant to the procedural rules of TEFRA, are determined at
                                      the partnership level. Thus, petitioner concludes respondent
                                        6 Sec. 6031(a) provides that partnerships shall make a return for each taxable year stating

                                      each item of gross income and deduction allowable by subtit. A.




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                                      properly should have issued an FPAA to the TMP of NASCO,
                                      rather than, as respondent did, a notice of deficiency to peti-
                                      tioner. See sec. 6223(a); sec. 301.6223(a)–1, Proced. & Admin.
                                      Regs.
                                         Solely for purposes of disposing of petitioner’s motion,
                                      respondent accepts petitioner’s assertion that NASCO is a
                                      legitimate foreign business entity. Respondent disputes the
                                      remainder of petitioner’s assertions, maintaining: (1) NASCO
                                      never filed Federal partnership returns; and (2) if NASCO is
                                      to be treated as a business entity, it should be classified as
                                      a foreign corporation. Consequently, respondent posits TEFRA
                                      procedures do not apply and the notice of deficiency issued
                                      to petitioner is valid.
                                      III. Whether Filing a Partnership Return With the BIR Con-
                                           stitutes the Filing of a Partnership Return With the IRS
                                         NASCO timely filed 2002, 2003, and 2004 partnership
                                      returns with the BIR using Form 1065; it did not file partner-
                                      ship returns with the IRS. On May 4, 2006, the IRS obtained
                                      copies of the returns filed by NASCO with the BIR pursuant
                                      to the information sharing provisions of the TIA between the
                                      United States and the Virgin Islands.
                                         Petitioner claims that NASCO’s filing of Form 1065 with the
                                      BIR constitutes its filing of a Federal partnership return with
                                      the IRS. In this regard, petitioner asserts that the Virgin
                                      Islands is not an independent sovereign, like a State or a for-
                                      eign country, but rather is an unincorporated territory of the
                                      United States and as such is ‘‘an extension of the federal
                                      government.’’
                                         Petitioner’s claim that for tax return filing purposes the
                                      Virgin Islands ‘‘is an extension of the federal government’’ is
                                      incorrect. Since 1958 courts have noted that the United
                                      States and the Virgin Islands are distinct taxing jurisdic-
                                      tions, although the Virgin Islands income tax laws arise from
                                      an identical statute applicable to each. Dudley v. Commis-
                                      sioner, 258 F.2d 182, 185 (3d Cir. 1958), aff ’g 28 T.C. 992
                                      (1957); see Chase Manhattan Bank v. Gov’t of the V.I., 300
                                      F.3d 320 (3d Cir. 2002); Abramson Enters., Inc. v. Gov’t of the
                                      V.I., 994 F.2d 140, 142 (3d Cir. 1993); Danbury, Inc. v. Olive,
                                      820 F.2d 618 (3d Cir. 1987); Miller v. Quinn, 792 F.2d 392
                                      (3d Cir. 1986); Chi. Bridge & Iron Co. v. Wheatley, 430 F.2d




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                                      973, 976 (3d Cir. 1970). Consistent with this principle, courts
                                      have held that a notice of deficiency issued by the BIR cannot
                                      be petitioned to the Tax Court, Dudley v. Commissioner, 258
                                      F.2d 182, and a notice of deficiency issued by the Commis-
                                      sioner of Internal Revenue cannot be petitioned to the U.S.
                                      District Court, District of the Virgin Islands, McHenry v.
                                      Commissioner, No. 1:10–cv–00021 (D.V.I. July 18, 2011)
                                      (order granting motion to dismiss for lack of jurisdiction).
                                         Petitioner next asserts that even if the filing of a return
                                      with the BIR does not constitute a filing of a return with the
                                      IRS, pursuant to the TIA the BIR should be treated as an
                                      agent of the IRS. And continuing, petitioner posits that
                                      because the BIR should be deemed an agent of the IRS, and
                                      because the BIR forwarded copies of NASCO’s partnership
                                      returns to the IRS, the filing of NASCO’s Virgin Islands part-
                                      nership return with the BIR constitutes the filing of a Federal
                                      partnership return with the IRS. We do not agree with peti-
                                      tioner’s assertion.
                                         An agency relationship is defined as: ‘‘the fiduciary rela-
                                      tionship that arises when one person (a ‘‘principal’’) mani-
                                      fests assent to another person (an ‘‘agent’’) that the agent
                                      shall act on the principal’s behalf and subject to the prin-
                                      cipal’s control, and the agent manifests assent or otherwise
                                      consents so to act.’’ 1 Restatement, Agency 3d, sec. 1.01
                                      (2006). An agency relationship is created when by mutual
                                      consent, either implied or expressed, one party (i.e., the
                                      agent) agrees to act on behalf of the other (i.e., the principal)
                                      and be subject to the principal’s control. This consent is gen-
                                      erally manifested by (1) statements or actions by the prin-
                                      cipal that the agent will act on behalf of the principal, (2) the
                                      agent’s acceptance of such undertaking, and (3) an under-
                                      standing by both parties that the principal is to be in control
                                      of such undertaking. See 2A C.J.S., Agency, sec. 32 (2003).
                                         The TIA does not establish an agency relationship, or sup-
                                      port the existence of such a relationship, between the United
                                      States and the Virgin Islands or their respective tax depart-
                                      ments (i.e., the IRS and the BIR). To the contrary, the TIA is
                                      an agreement between equal parties ‘‘for the exchange of
                                      information and mutual assistance with respect to taxes in
                                      order to prevent the evasion or avoidance of United States or
                                      Virgin Islands taxes’’. TIA, 1989–1 C.B. at 347–348. The BIR
                                      is not under the control of the IRS or vice versa.




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                                        Finally, relying on Beard v. Commissioner, 82 T.C. 766,
                                      777 (1984), aff ’d, 793 F.2d 139 (6th Cir. 1986), petitioner
                                      asserts that the copies of the partnership returns NASCO filed
                                      with the BIR for the years at issue should be treated as
                                      NASCO’s partnership returns for Federal tax purposes. We do
                                      not agree with petitioner’s assertion.
                                        In Beard, we held that within the context of determining
                                      the commencement of the period of limitations with respect
                                      to the filing of one’s Federal income tax return, the document
                                      submitted to the IRS will be considered a valid tax return if:
                                        1. the document contains sufficient data to calculate the
                                      tax liability;
                                        2. the document purports to be a tax return;
                                        3. there is an honest and reasonable attempt by the filer
                                      of the document to satisfy the requirements of the tax law;
                                      and
                                        4. the filer executes the return under penalties of perjury. 7
                                      Id. at 777. Petitioner claims that the returns NASCO filed
                                      with the BIR satisfy all four of the aforementioned criteria
                                      and thus should be treated as Federal partnership returns
                                      filed with the IRS because:
                                      First, the information [on the return filed by NASCO] is sufficient to cal-
                                      culate the tax liability as NASCO used the very form drafted and issued
                                      by the Service. Second, the Form 1065 is by definition a return and claims
                                      to be nothing other than a return. Third, a form drafted and issued by the
                                      Service that taxpayers in turn used must be considered to be an honest
                                      and reasonable attempt to satisfy the requirements of the tax law. Fourth,
                                      the return was signed under penalties of perjury as the jurat provision was
                                      executed.

                                        Petitioner cites Germantown Trust Co. v. Commissioner,
                                      309 U.S. 304 (1940), as the ‘‘seminal case’’ to support his
                                      position. In Germantown Trust Co., the taxpayer filed the
                                      wrong form with the IRS as its tax return. The Supreme
                                      Court held that the filing constituted a tax return because
                                      the taxpayer filed in good faith a return from which its tax
                                      could be computed. Thus, the underlying issue therein was
                                      whether the return filed with the IRS constituted a valid
                                      return. Such is not the case here. The issue here is whether
                                        7 The Commissioner has adopted these four criteria in determining whether the purported tax

                                      return should be respected as such. See Internal Revenue Manual pt. 25.6.1.9.4.1 (Oct. 1, 2007).




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                                      the filing of a return with the BIR constitutes the filing of a
                                      return with the IRS.
                                         The returns NASCO filed with the BIR do not purport to be
                                      Federal returns (as required by criterion 2 of Beard), nor are
                                      those returns an attempt to satisfy the requirements of Fed-
                                      eral tax law (as required by criterion 3 of Beard). NASCO filed
                                      its partnership returns with the BIR in order to comply with
                                      its Virgin Islands filing obligations as opposed to any obliga-
                                      tion under the tax laws of the United States.
                                      IV. Whether NASCO Is Classified as a Partnership
                                         Even though NASCO, an LLC, did not file Federal partner-
                                      ship returns, NASCO may come under the purview of TEFRA
                                      if it can be classified for Federal tax purposes as a partner-
                                      ship that is required to file a Federal partnership return.
                                      Petitioner takes the position that NASCO had a Federal part-
                                      nership return filing obligation and thus should be classified
                                      as a partnership for Federal tax purposes. On the other
                                      hand, respondent contends that NASCO is a corporation for
                                      Federal tax purposes and therefore the procedural rules of
                                      TEFRA do not apply.
                                         Business entities are generally classified for Federal tax
                                      purposes by section 7701 and the ‘‘check-the-box’’ regulations
                                      of sections 301.7701–1 through 301.7701–5, Proced. &
                                      Admin. Regs. 8 The Virgin Islands, and the businesses estab-
                                      lished therein, are generally considered foreign for purposes
                                      of the Code because the Virgin Islands is not one of the 50
                                      States or the District of Columbia. See sec. 7701(a)(4), (5),
                                      (9). 9
                                         Petitioner concedes that NASCO is a foreign entity. Peti-
                                      tioner further concedes that (1) generally, the check-the-box
                                      regulations of section 301.7701–3(b)(2)(i)(B), Proced. &
                                      Admin. Regs., would classify NASCO as a foreign association
                                      taxable as a corporation because it is a foreign ‘‘eligible
                                      entity’’ in which all of its owning members have limited
                                      liability, 10 and (2) generally, in such a situation the provi-
                                           8 The
                                              Virgin Islands classifies business entities with the mirror versions of these sections.
                                           9 Sec.
                                               7701(a)(4) provides that ‘‘domestic’’ when applied to a corporation or partnership gen-
                                      erally means one created or organized in the United States under the law of the United States
                                      or one of the States. Sec. 7701(a)(5) provides that a foreign corporation or partnership is one
                                      that is not domestic. Sec. 7701(a)(9) provides that ‘‘The term ‘United States’ when used in a geo-
                                      graphical sense includes only the States and the District of Columbia.’’
                                        10 A business entity that is not a corporation as defined in sec. 301.7701–2(b), Proced. &




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                                      (258)                            HUFF v. COMMISSIONER                                         269


                                      sions of TEFRA do not apply. However, petitioner argues that
                                      the check-the-box regulations are superseded by section
                                      1.932–1(h)(4), Income Tax Regs., which provides:
                                      Solely for the purpose of determining classification of an eligible entity
                                      under § 301.7701–3(b) of this chapter [the check-the-box regulations] and
                                      under that section as mirrored in the Virgin Islands, an eligible entity sub-
                                      ject to this paragraph (h) will be classified for both Federal and Virgin
                                      Islands tax purposes using the rule that applies to domestic eligible enti-
                                      ties.

                                      Thus, petitioner posits that although NASCO is generally
                                      treated as a foreign entity for purposes of the Code, for pur-
                                      poses of determining whether NASCO is a corporation or a
                                      partnership the Court should treat NASCO as a domestic
                                      eligible entity and use the check-the-box regulations that
                                      apply to such entities. Petitioner reasons that pursuant to
                                      section 301.7701–3(b)(1)(i), Proced. & Admin. Regs., the
                                      domestic eligible entity check-the-box regulations would clas-
                                      sify NASCO as a partnership since it is an entity with two or
                                      more members. We are of the opinion that section 1.932–
                                      1(h)(4), Income Tax Regs., does not apply to NASCO.
                                         Section 1.932–1(h)(2)(i), Income Tax Regs., provides that
                                      section 1.932–1(h), Income Tax Regs., applies to domestic
                                      (i.e., U.S.) business entities that are owned in whole or in
                                      part by bona fide residents of the Virgin Islands or by Virgin
                                      Islands business entities. Section 1.932–1(h)(2)(ii), Income
                                      Tax Regs., applies section 1.932–1(h), Income Tax Regs., to
                                      Virgin Islands business entities that are owned in whole or
                                      in part by U.S. persons, other than bona fide residents of the
                                      Virgin Islands. In this case, NASCO is a Virgin Islands LLC,
                                      and according to petitioner all of the members of NASCO are
                                      bona fide residents of the Virgin Islands. Therefore, the regu-
                                      lations petitioner relies upon do not apply to his situation.
                                      Moreover, section 1.932–1(h)(5)(iv), Income Tax Regs., pro-
                                      vides that ‘‘In the case of an entity created or organized prior
                                      Admin. Regs., is an eligible entity and may elect its classification for Federal tax purposes. Sec.
                                      301.7701–3(a), Proced. & Admin. Regs. If an eligible entity does not make an election for Fed-
                                      eral tax purposes, then the regulations provide for default classifications depending on the at-
                                      tributes of the eligible entity. A foreign eligible entity in which all of its owning members have
                                      limited liability, as apparently is the case with respect to all of the owning members of NASCO,
                                      is classified by the default rules as an association. See sec. 301.7701–3(b)(2)(ii), Proced. &
                                      Admin. Regs., for the definition of ‘‘limited liability’’.
                                         Sec. 301.7701–2(b)(8), Proced. & Admin. Regs., provides a list of foreign business entities that
                                      are corporations and may not elect their classification. In the Virgin Islands, entities that are
                                      established as ‘‘corporations’’ are not eligible entities and may not elect their status.




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                                      270                 138 UNITED STATES TAX COURT REPORTS                                      (258)


                                      to April 11, 2005, paragraph (h)(4) of this section will take
                                      effect for Federal income tax purposes (or Virgin Islands
                                      income tax purposes, as the case may be) as of the first day
                                      of the first taxable year of the entity beginning after April
                                      11, 2005.’’ NASCO operates on a calendar year basis. Hence,
                                      the first year that the classification rules of section 1.932–
                                      1(h)(4), Income Tax Regs., would apply is 2006. But the years
                                      involved are 2002, 2003, and 2004.
                                         Petitioner argues that the regulations should be applied
                                      retroactively regardless of the specific effective date. Peti-
                                      tioner points to the preamble to the temporary regulation,
                                      which states:
                                      To the extent they provide rules under the operative provisions of the Code
                                      relating to the possession, as amended by the 1986 Act and the 2004 Act,
                                      these regulations generally apply to taxable years ending after October 22,
                                      2004. The underlying statutory rules, however, generally apply to taxable
                                      years beginning after December 31, 1986. Accordingly, taxpayers may rely
                                      upon the guidance provided in these regulations with respect to prior years
                                      for which the underlying statutory rules are in effect, provided they do so
                                      consistently. [T.D. 9194, 2005–1 C.B. 1016, 1020. 11]

                                         We apply a regulation according to its plain or ordinary
                                      meaning, unless that interpretation would lead to absurd
                                      results or another construction is supported by unequivocal
                                      evidence of administrative intent. Philips Petroleum Co. v.
                                      Commissioner, 101 T.C. 78, 107 (1993), aff ’d without pub-
                                      lished opinion, 70 F.3d 1282 (10th Cir. 1995). Section 1.932–
                                      1(h)(5)(iv), Income Tax Regs., specifically provides that the
                                      classification rules of section 1.932–1(h)(4), Income Tax
                                      Regs., apply only to tax years beginning after April 11, 2005.
                                      Petitioner does not suggest that the application of the plain
                                      meaning of section 1.932–1(h)(5)(iv), Income Tax Regs., will
                                      lead to an absurd result. Nor does the preamble amount to
                                      unequivocal evidence of administrative intent to retroactively
                                      apply the default classification rule of the regulation.
                                         The preamble discusses how affirmative elections by tax-
                                      payers regarding the classification of entities will be treated
                                      under the regulation. It does not mention taxpayers who
                                      allowed their business entities to be classified under the
                                         11 We are mindful that the language of sec. 1.932–1T(h)(4), Temporary Income Tax Regs., 70

                                      Fed. Reg. 18920, 18933–18934 (Apr. 11, 2005), is identical to the language in the final regula-
                                      tion and that sec. 1.932–1T(h)(5)(iv), Temporary Income Tax Regs., supra, has the same effective
                                      date of April 11, 2005, as the final regulation.




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                                      default rules through their own inaction. Moreover, the pre-
                                      amble to the temporary regulation discusses retroactivity
                                      regarding the temporary regulation’s general effective date of
                                      October 22, 2004. Section 1.932–1(h)(4), Income Tax Regs.,
                                      has its own specific effective date; i.e., effective for tax years
                                      beginning after April 11, 2005. As the temporary regulation’s
                                      preamble does not mention that effective date, it cannot be
                                      said that there is unequivocal evidence of administrative
                                      intent to retroactively apply the default classification rule.
                                      Consequently, section 1.932–1(h)(4), Income Tax Regs., does
                                      not apply. 12
                                         To conclude, because NASCO did not file a Federal partner-
                                      ship return and because NASCO is classified as a foreign cor-
                                      poration for Federal tax purposes, the TEFRA procedural rules
                                      do not apply. Consequently, we hold that (1) respondent was
                                      not required to issue an FPAA, and (2) respondent issued a
                                      valid notice of deficiency. Consistent with the foregoing, peti-
                                      tioner’s motion will be denied.
                                                                                 An appropriate order will be issued.

                                                                               f




                                         12 Because we conclude that NASCO is not classified as a partnership for Federal tax pur-

                                      poses, we need not address the issue of whether NASCO has U.S.-source income or income effec-
                                      tively connected to a U.S. trade or business.




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