222

GEORGE C. HUFF, PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 12942–09. Filed August 17, 2010. 

Claiming to be a bona fide resident of the U.S. Virgin 

Islands at the close of 2002, 2003, and 2004, 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 the Virgin Islands Bureau of Internal Revenue. He did not file Federal income tax returns for those 

years. R determined that P was not a bona fide resident of the 

Virgin Islands and was not qualified for the gross income tax 

exclusion as claimed. Therefore, R issued a notice of deficiency 

determining income tax deficiencies and penalties for 2002, 

2003, and 2004. For protective reasons, P filed a petition in 

this Court but asserts that the deficiency relates to a Virgin 

Islands tax matter over which this Court lacks jurisdiction. 

Held: Although this case involves putative Virgin Islands 

transactions, the notice of deficiency determines deficiencies 

in Federal income tax. Whether P satisfies all the requirements set forth in I.R.C. sec. 932(c)(4), and thus need not file 

a Federal tax return or pay Federal income tax for 2002, 

2003, and 2004, is a matter which this Court has jurisdiction 

to decide. Held, further, P’s motion to dismiss for lack of jurisdiction will be denied.

(222) HUFF v. COMMISSIONER 223

William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo, 

III, and Marjorie Rawls Roberts, for petitioner. 

Daniel N. Price and Ladd Christman Brown, Jr., for 

respondent. 

OPINION 

JACOBS, Judge: This case is before the Court on petitioner’s 

motion to dismiss for lack of jurisdiction. The specific question to be decided is whether this Court has jurisdiction to 

redetermine Federal income tax deficiencies and penalties of 

a U.S. citizen who claims (1) to be a bona fide resident of the 

U.S. Virgin Islands at the close of each of the years at issue 

(i.e., 2002, 2003, and 2004), and (2) to be exempt from U.S. 

tax filing and payment requirements as a consequence of his 

satisfying all the requirements of section 932(c)(4). 

All section references are to the Internal Revenue Code 

(Code) in effect for the years at issue unless otherwise 

indicated. 

Background

Petitioner is a U.S. citizen. He resided in Florida when he 

filed his petition in this Court on May 28, 2009. Claiming to 

be a bona fide resident of the U.S. Virgin Islands (Virgin 

Islands) at the close of 2002, 2003, and 2004, petitioner (1) 

filed territorial income tax returns with the Virgin Islands 

Bureau of Internal Revenue (BIR) for 2002, 2003, and 2004, 

and (2) claimed he was qualified for the section 932(c)(4) 

gross income exclusion and therefore did not have to file a 

Federal income tax return or pay Federal income tax for 

those years. Following an audit of petitioner’s 2002, 2003, 

and 2004 Virgin Islands income tax returns, on February 27, 

2009, respondent issued petitioner a notice of deficiency 

determining the following Federal income tax deficiencies 

and additions to tax:

Additions to tax

Year Deficiency

Sec.

6651(a)(1)

Sec. 

6651(a)(2)

Sec.

6654

2002 $252,687 $55,431.45 $61,590.50 - 0 -

2003 88,350 18,586.35 20,651.50 $2,129.22

2004 77,938 17,271.68 17,271.68 2,196.05

224 135 UNITED STATES TAX COURT REPORTS (222) 

Attached to the notice of deficiency was a Form 4549–A, 

Income Tax Discrepancy Adjustments, which set forth the 

basis for the income tax deficiencies and additions to tax 

involved herein: 

It is determined that during the taxable years 2002 through 2004 you were 

not a bona fide resident of the United States Virgin Islands (USVI). It is 

also determined that you participated in a tax avoidance scheme which 

involved 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 

Development Program. It has also been determined that all transactions 

between NASCO Corporate Finance Consultants, LLC (NASCO) and 

American Benefits Institute, Inc. (ABI), Employers International, Inc. (EI), 

Professional Advisory Group, Inc. (PAG), and George C. Huff, including 

any entity controlled or owned in whole or in part by George C. Huff, are 

part of a series of step/sham transactions devoid of economic substance and 

will not be recognized for US federal income tax purposes. These step/

sham transactions were part of a larger tax avoidance scheme and were 

entered into solely in an attempt to superficially recharacterize US-source 

income as USVI-source income in order to inappropriately and invalidly 

claim a tax credit of 90% under the USVI Economic Development Program. 

See IRS Notice 2004–45. 

On May 28, 2009, petitioner filed a petition in this Court. 

On April 14, 2010, petitioner filed a complaint petition for 

redetermination of income taxes against the Commissioner of 

Internal Revenue in the U.S. District Court, District of the 

Virgin Islands, St. Thomas and St. John Division (District 

Court), case No. 1:10CV00026. On June 1, 2010, petitioner 

filed in this Court the motion in question. 

Discussion

I. The Virgin Islands

The Virgin Islands are an insular area of the United 

States; they are a part of neither one of the 50 States nor 

the District of Columbia. They are generally treated as a foreign country for Federal income tax purposes. See sec. 

7701(a)(9). 

In 1921 Congress made a predecessor of the Code part of 

the internal law of the Virgin Islands. Act of July 12, 1921, 

ch. 44, sec. 1, 42 Stat. 123 (codified as amended at 48 U.S.C. 

sec. 1397 (2006)). 

(222) HUFF v. COMMISSIONER 225

This 1921 statute set up the ‘‘mirror tax’’ system that remains in use: 

‘‘Virgin Islands’’ is in effect substituted for ‘‘United States’’ (and vice versa) 

in the Internal Revenue Code so that, to satisfy Virgin Islands tax obligations, an individual or corporation in the Virgin Islands pays taxes to the 

BIR equivalent to the taxes an individual or corporation under the same 

circumstances in the United States would pay to the Internal Revenue 

Service. * * * [Danbury, Inc. v. Olive, 820 F.2d 618, 620 (3d Cir. 1987).] 

As the law developed under the mirror tax system, the provisions of the Code have been made applicable to the Virgin 

Islands so long as the specific section to be applied is ‘‘ ‘not 

manifestly inapplicable or incompatible’ with a separate 

territorial income tax’’. Chi. Bridge & Iron Co. v. Wheatley, 

430 F.2d 973, 976 (3d Cir. 1970) (quoting Sayre & Co. v. 

Riddell, 395 F.2d 407, 410 (9th Cir. 1968)). 

The Internal Revenue Service (IRS) implemented the 

mirror tax system in 1935. Under the mirror tax system as 

implemented, some taxpayers, both business entities and 

individuals, were required to file two returns. 

For example, a corporation considered ‘‘domestic’’ in the United States but 

doing business in the Virgin Islands was required to submit a return to 

the BIR, paying tax on income from sources in the Virgin Islands, and to 

submit a return to the Internal Revenue Service, paying tax on worldwide 

income, with a foreign tax credit allowed for the tax paid to the Virgin 

Islands. The mirror system, with its two separate taxing jurisdictions, 

operated similarly for citizens of the United States who resided in the 

Virgin Islands. * * * [Danbury, Inc. v. Olive, supra at 621.] 

The 1954 Revised Organic Act of the Virgin Islands (ROA), 

ch. 558, sec. 28, 68 Stat. 508 (1954), modified the administration of the mirror tax system. ROA sec. 28(a) provided that 

the ‘‘proceeds of any taxes levied by the Congress on the 

inhabitants of the Virgin Islands * * * shall be covered into 

the treasury of the Virgin Islands, and shall be available for 

expenditure as the Legislature of the Virgin Islands may provide’’. The section also provided: 

That the term ‘‘inhabitants of the Virgin Islands’’ as used in this section 

shall include all persons whose permanent residence is in the Virgin 

Islands, and such persons shall satisfy their income tax obligations under 

applicable taxing statutes of the United States by paying their tax on 

income derived from all sources both within and outside the Virgin Islands 

into the treasury of the Virgin Islands * * *. [Id.] 

In 1986 the mirror tax system was again modified. Section 

932(c)(4), enacted as part of the Tax Reform Act of 1986 (TRA

226 135 UNITED STATES TAX COURT REPORTS (222) 

1986), Pub. L. 99–514, sec. 1274(a) 100 Stat. 2596, and 

amended in 1988, provides the current rules with respect to 

the taxation and filing requirements of individuals: 

SEC. 932. COORDINATION OF UNITED STATES AND VIRGIN 

ISLANDS INCOME TAXES. 

(c) TREATMENT OF VIRGIN ISLANDS RESIDENTS.—(1) Application of subsection.—This subsection shall apply to an individual for the taxable year 

if—

(A) such individual is a bona fide resident of the Virgin Islands at 

the close of the taxable year, or 

(B) such individual files a joint return for the taxable year with an 

individual described in subparagraph (A). 

(2) FILING REQUIREMENT.—Each individual to whom this subsection 

applies for the taxable year shall file an income tax return for the taxable year with the Virgin Islands. 

* * * * * * *

(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an individual—

(A) who is a bona fide resident of the Virgin Islands at the close of 

the taxable year, 

(B) who, on his return of income tax to the Virgin Islands, reports 

income from all sources and identifies the source of each item shown 

on such return, and 

(C) who fully pays his tax liability referred to in section 934(a) to 

the Virgin Islands with respect to such income,

for purposes of calculating income tax liability to the United States, 

gross income shall not include any amount included in gross income on 

such return, and allocable deductions and credits shall not be taken into 

account. 

Thus, an individual who is a bona fide resident of the 

Virgin Islands and incurs income tax obligations to both the 

United States and the Virgin Islands may satisfy his 

reporting and payment requirements by filing only with, and 

paying tax only to, the Virgin Islands if he satisfies each of 

the three requirements of section 932(c)(4). If the individual 

fails to meet any of these requirements, he must file a Federal income tax return with the IRS. See S. Rept. 100–445, 

at 315 (1988). Consequently, an individual failing to satisfy 

all three requirements of section 932(c)(4) may be required to 

file an income tax return and be liable for taxes in both the 

United States and the Virgin Islands. 

The term ‘‘bona fide resident of the Virgin Islands’’ is not 

defined by the Code. Nor is it given any definition by the 

legislative history. Instead, Congress authorized the SecVerDate 0ct 09 2002 12:45 May 29, 2013 Jkt 372897 PO 20009 Frm 00005 Fmt 2947 Sfmt 2947 V:\FILES\HUFF.135 SHEILA
(222) HUFF v. COMMISSIONER 227

1For the years at issue, regulations have not been promulgated defining a ‘‘bona fide resident 

of the Virgin Islands’’. However, in Notice 2004–45, 2004–2 C.B. 33, 34, the Commissioner states 

that the determination turns on the facts and circumstances and the individual’s intentions with 

respect to the length and nature of his or her stay in the Virgin Islands, citing sec. 1.934–1(c)(2), 

Income Tax Regs., which in turn cites the principles of secs. 1.871–2 through 1.871–5, Income 

Tax Regs. 

retary to promulgate regulations for determining Virgin 

Islands residency. See TRA 1986 sec. 1274(c), 100 Stat. 2598. 1

A Virgin Islands taxpayer may petition the District Court 

to redetermine a Virgin Islands tax deficiency determined by 

the BIR in the same manner as a U.S. taxpayer may petition 

this Court. Secs. 6212, 6213 (mirror code); V.I. Code Ann. tit. 

33, sec. 943 (1994); see WIT Equip. Co. v. Dir., V.I. Bureau 

of Internal Revenue, 185 F. Supp. 2d 500, 510 (D.V.I. 2001). 

The District Court has ‘‘exclusive jurisdiction over * * * the 

income tax laws applicable to the Virgin Islands * * * except 

the ancillary laws relating to the income tax enacted by the 

legislature of the Virgin Islands.’’ 48 U.S.C. sec. 1612(a) 

(2006). 

II. The Virgin Islands Economic Development Program

In order to encourage economic development in the Virgin 

Islands, Congress has explicitly permitted the Virgin Islands 

government to reduce certain taxes. Section 934(b)(1) provides that the Virgin Islands may reduce taxes on ‘‘income 

derived from sources within the Virgin Islands or income 

effectively connected with the conduct of a trade or business 

within the Virgin Islands.’’ 

Pursuant to this grant of authority, the Virgin Islands 

government enacted several investment incentives, including 

the Virgin Islands Industrial Development Program (referred 

to by the parties as the economic development program or 

EDP), currently codified at V.I. Code Ann. tit. 29, secs. 701–

726 (1998 & Supp. 2010). Intended to promote growth and 

the development and diversification of the Virgin Islands’ 

economy, the EDP granted certain industrial development 

benefits to companies that do business in the Virgin Islands. 

See V.I. Code Ann. tit. 29, sec. 701 (1998). Participating 

companies receive substantial benefits including: A 90-percent exemption on local income taxes, a 90-percent exemption 

on the taxation of dividends, and a 100-percent exemption on 

gross receipts taxes. 

228 135 UNITED STATES TAX COURT REPORTS (222) 

III. Notice 2004–45

In 2004 the IRS determined that certain tax advisers were 

encouraging taxpayers ‘‘to take highly questionable, and in 

most cases meritless, positions’’ to claim many of the benefits 

of the EDP. To that end, the IRS issued Notice 2004–45, 2004–

2 C.B. 33 (the notice). According to the notice, the following 

is a typical scenario used by the promoters of those plans: 

Promoters typically approach a taxpayer (Taxpayer) living and working 

in the United States and advise Taxpayer to (i) purport to become a USVI 

resident by establishing certain contacts with the USVI, (ii) purport to 

terminate his or her existing employment relationship with his or her 

employer (Employer) and (iii) purport to become a partner of a Virgin 

Islands limited liability partnership (V.I.LLP) that is treated as a partnership for U.S. tax purposes. V.I.LLP then purports to enter into a contract 

with Employer to provide Employer with substantially the same services 

that were provided by Taxpayer prior to the creation of this arrangement. 

Typically, after entering into the arrangement, Taxpayer continues to provide substantially the same services for Employer that he or she provided 

before entering into the arrangement, but Taxpayer is nominally a partner 

of V.I.LLP instead of an employee of Employer. 

Under this arrangement, Employer makes payments to V.I.LLP for Taxpayer’s services and no longer treats the payments as wages paid to Taxpayer subject to the withholding and payment of employment taxes and 

reporting on Taxpayer’s Form W–2. V.I.LLP, in turn, makes payments to 

Taxpayer for his or her services to Employer. V.I.LLP typically treats these 

payments for tax accounting purposes either as guaranteed payments for 

services or as distributions of Taxpayer’s allocable share of partnership 

income. Under this arrangement, the promoter may be a general partner 

in V.I.LLP and may retain a percentage of the fees received from 

Employer. 

V.I.LLP either has or secures a reduction, up to 90 percent, in USVI 

income tax liability under the Economic Development Program (EDP) of 

the USVI. Taxpayer takes the position that the EDP benefits granted to 

V.I.LLP provide a corresponding reduction in the income tax liability that 

Taxpayer reports on his or her USVI income tax return with respect to 

guaranteed payments from the partnership or distributive shares of the 

partnership’s net income, or both. Taxpayer pays tax to the USVI in an 

amount approximately equal to 10% of the U.S. income tax liability that 

otherwise would be imposed on Taxpayer’s income from performing the 

services. Taxpayer claims that, for purposes of computing his or her U.S. 

income tax liability, gross income does not include guaranteed payments 

received from V.I.LLP or Taxpayer’s distributive share, if any, of the partnership’s net income, or both. 

[Id., 2004–2 C.B. at 33.] 

The IRS stated that the promoters of these plans claim that 

(1) individuals who participate in the plan can continue to 

(222) HUFF v. COMMISSIONER 229

work in the United States and still be a bona fide resident 

of the Virgin Islands; (2) Virgin Islands source income 

includes income from services performed in the United 

States; (3) for purposes of determining the source of income, 

the Virgin Islands includes the United States; and (4) nonVirgin Islands income can be treated as effectively connected 

with the conduct of a trade or business within the Virgin 

Islands even if under equivalent circumstances that type of 

income would not be considered effectively connected with 

the conduct of a U.S. trade or business. Respondent determined that the transactions in which petitioner participated 

were the type of transactions discussed in the notice. 

IV. Jurisdiction

This Court may exercise jurisdiction only to the extent 

authorized by Congress. Naftel v. Commissioner, 85 T.C. 527, 

529 (1985). However, the Court has the authority to determine whether it has jurisdiction over a particular case. 

Kluger v. Commissioner, 83 T.C. 309, 314–315 (1984). 

We have jurisdiction to redetermine deficiencies in income, 

estate, gift, and certain excise taxes when the Commissioner 

makes a determination that a deficiency is due, a valid notice 

of deficiency is issued with respect to that determination, 

and a petition is timely filed in response to the notice of deficiency. See secs. 6211–6215; Kluger v. Commissioner, supra

at 314; Hannan v. Commissioner, 52 T.C. 787, 791 (1969). 

Petitioner maintains that the deficiencies relate to a Virgin 

Islands tax matter over which this Court lacks jurisdiction. 

Petitioner posits that sections 932 and 934, which coordinate 

United States and Virgin Islands income taxes, constitute 

the tax law of the Virgin Islands and therefore jurisdiction 

over the underlying matters properly belongs to the District 

Court pursuant to the provisions of 48 U.S.C. sec. 1612 (a). 

Continuing, petitioner maintains that inasmuch as 48 U.S.C. 

sec. 1612(a) grants ‘‘exclusive’’ jurisdiction to the District 

Court with regard to Virgin Islands income tax laws, this 

Court lacks jurisdiction because ‘‘Congress was removing all 

other courts of any district, jurisdiction, or level from hearing 

cases ‘with respect to the income tax laws applicable to the 

[USVI].’ 48 U.S.C. §1612.’’ Petitioner maintains that even 

though an individual may have both Federal and Virgin 

230 135 UNITED STATES TAX COURT REPORTS (222) 

Islands tax obligations under section 932, this does not affect 

the District Court’s jurisdiction. We do not subscribe to petitioner’s position. 

U.S. citizens are subject to Federal taxation 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). Every individual whose gross income for the taxable 

year equals or exceeds a threshold amount is (with enumerated exceptions not applicable here) required to file a Federal 

income tax return. Sec. 6012(a)(1)(A). 

As a U.S. citizen, petitioner is required to file a Federal 

income tax return and use his worldwide gross income to calculate his Federal income tax. Section 932(c) affects the 

determination of gross income of an individual subject to 

U.S. taxation. If the individual (in this case, petitioner) satisfies all three requirements of section 932(c)(4), then the 

amount of gross income reported on the individual’s Virgin 

Islands tax return (filed under section 932(c)(2)) is not 

includable in determining his gross income for purposes of 

the Federal income tax. Thus, if the amount of petitioner’s 

gross income was that which was reported on his Virgin 

Islands tax return, then petitioner’s gross income for purposes of calculating his income tax liability to the United 

States would be zero. In such a case, because petitioner 

would have no gross income for Federal income tax purposes, 

he would not need to file a Federal income tax return. But 

if petitioner does not satisfy all three requirements, as 

respondent alleges, then for each of the years at issue he will 

be required to file a Federal income tax return even if he 

filed a Virgin Islands tax return. See sec. 932(a)(2). 

Although this case involves putative Virgin Islands transactions, the notice of deficiency determines deficiencies in 

petitioner’s Federal income tax. Petitioner filed a timely petition for redetermination with this Court pursuant to section 

6213(a). Whether petitioner satisfies all the requirements 

under section 932(c)(4), and thus need not file a Federal tax 

return or pay Federal income tax for 2002, 2003, and 2004, 

is in dispute and is a matter which this Court has jurisdiction to decide. Because the subject matter herein is within 

(222) HUFF v. COMMISSIONER 231

the Court’s jurisdiction, we shall deny petitioner’s motion to 

dismiss for lack of jurisdiction. 

fAn appropriate order will be issued.