TAX COURT OPINION

Case: Scott Ayers
Docket Number: 5336-24
Judge: Toro
Opinion Type: bench
Filed: 03/13/2026
Pages: 19

mntteb ~tates max <ttourt Washington, DC 20217 SCOTT AYERS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5336-24. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is hereby ORDERED that the Clerk of the Court shall transmit to petitioner and respondent a copy of the pages of the transcript of the trial in this case held before Judge Emin Toro at Phoenix, Arizona, containing the Court's Oral Findings of Fact and Opinion rendered at the trial session at which this case was heard. In accordance with the Oral Findings of Fact and Opinion, a decision will be entered for petitioner with respect to the penalties under section 6662(a) and for respondent with respect to the deficiency and the addition to tax under section 6651(a)(l). (Signed) Emin Toro Judge Served 03/13/26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge Emin Toro March 4, 2026 Scott Ayers v. Commissioner of Internal Revenue Docket No. 5336-24 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. In this deficiency case, the principal question we address is whether petitioner Scott Ayers, who moved to Puerto Rico in June 2021 and moved away from Puerto Rico in the Fall of 2022, qualified as a bona fide resident of Puerto Rico in 2021 so as to be entitled to exclude from gross income amounts derived from sources within Puerto llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 Rico during that year. Answering this question requires 4 us to apply intricate rules under sections 933 and 937 and related regulations. As we will explain in greater detail, Mr. Ayers was not a bona fide resident of Puerto Rico during the entire taxable year 2021. He was therefore not entitled to exclude his Puerto Rico-source income from his gross income in that year. We also determine that Mr. Ayers is liable for an addition to tax under section 6651(a)(1) for failure to timely file his return. On the evidence before us, and using the burden- of-proof principles explained below, the Court finds the 13 following facts: 14 15 16 17 18 19 20 21 22 23 24 25 FINDINGS OF FACT The following facts are derived from the parties' pleadings, the Stipulation of Facts with an attached Exhibit, and the testimony and Exhibits admitted into evidence at trial. I. Mr. Ayers's Whereabouts in 2021 and Later Years From January 1, 2021, to about June 1, 2021, Mr. Ayers lived in Gilbert, Arizona, where he owned a home with his wife through a revocable trust. On or about June 1, 2021, Mr. Ayers relocated to Puerto Rico. He stayed in a series of rentals, purchased a truck, and obtained a Puerto Rico driver's license. Mr. Ayers lived in Puerto llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net Rico until the Fall of 2022. 5 In the Fall of 2022, Mr. Ayers moved to Japan. Mr. Ayers's father-in-law, who is Japanese, had suffered a heart attack and it was unclear whether he would recover. Mr. Ayers did not return to Puerto Rico for the rest of 2022, in 2023, or in 2024. Mr. Ayers never purchased real property in Puerto Rico, but continued to own his Arizona home with his wife through the revocable trust. He did, however, the maintain a mailbox and store certain household items and a JT truck in Puerto Rico after his departure. At the time Mr. Ayers filed his Petition and at the time of trial, Mr. Ayers continued to live in Japan. II. Mr. Ayers's 2021 Receipts During the taxable year 2021, Mr. Ayers realized short-term capital gain in the amount of $933,782. He did not report this gain as income on his 2021 U.S. federal income tax return. In the same year, Mr. Ayers received a distribution of $1,650 from a health savings account (HSA). He did not report the distribution as income on 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 his 2021 return. 23 24 25 Mr. Ayers also received $30 of interest income during the 2021 taxable year. He did not report the interest income on his 2021 return. llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 III. Tax Return and Examination 6 Pursuant to a timely filed extension, Mr. Ayers's federal income tax return for 2021 was due October 15, 2022. Mr. Ayers filed his return on November 28, 2022. The Commissioner examined Mr. Ayers's return and issued to him a Notice of Deficiency on January 8, 2024. In the Notice of Deficiency, the Commissioner determined that Mr. Ayers was liable for (1) an income tax deficiency of $332,594 arising from his unreported short-term capital gain, the distribution from his HSA, and interest income; (2) an addition to tax of $33,260 under section 6651(a)(1) for failure to timely file a return; and (3) an accuracy- related penalty of $66,519 under section 6662(a), which the Commissioner has since conceded. Mr. Ayers timely petitioned this Court for a redetermination. We tried this case in person on March 2, 2026, during the Court's Phoenix, Arizona, trial session. I. Burden of Proof OPINION The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving those determinations erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Jombo v. Commissioner, 398 F.3d 661, 663 llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net (D.C. Cir. 2005), aff'g T.C. Memo. 2002-273; Walquist v. 7 Commissioner, 152 T.C. 61, 67 (2019). In unreported income cases, the Commissioner must make a "minimal evidentiary showing" connecting the taxpayer with the alleged income-producing activity or demonstrate that the taxpayer actually received unreported income. See Walquist, 152 T.C. at 67. "Once the Commissioner makes the required threshold showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the Commissioner's determinations are arbitrary or erroneous." Id. at 67-68 (collecting 1 2 3 4 5 6 7 8 9 10 11 12 authorities). 13 14 15 16 17 18 19 20 21 22 23 24 25 In this case, because the parties have agreed to the items of income by stipulation or concession, the Commissioner has made the required threshold showing with respect to his determinations of unreported income. So, Mr. Ayers bears the burden of proof with respect to whether he was entitled to the benefits of section 933(1). II. Applicable Legal Principles Before turning to Mr. Ayers's situation, we begin with a general discussion of the section 933 exclusion and the rules governing whether a taxpayer is a bona fide resident of Puerto Rico. A. The Section 933 Exclusion Section 933(1) provides that income from sources llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 within Puerto Rico will be excluded from gross income (and 8 be exempt from taxation under subtitle A of the Code) in the case of "an individual who is a bona fide resident of Puerto Rico during the entire taxable year[.]" Courts interpreting this provision have held that an individual who takes up residence in Puerto Rico during the course of a taxable year does not qualify for the statutory exclusion for that year. See Bergersen v. Commissioner, 109 F.3d 56, 59 (1st Cir. 1997) ("It is common ground that section 933 excludes Puerto Rico source income from U.S. income tax only where the taxpayer is a resident of Puerto Rico for the entire year in question."); Vasquez v. Commissioner, T.C. Memo. 1993-368, 1993 WL 315404, at *1 ("An individual who takes up residence in Puerto Rico during the course of the taxable year is not entitled to the exclusion for that year."); see also Motion v. Commissioner, T.C. Memo. 1975-43, 34 T.C.M. (CCH) 286, 287 (holding that a taxpayer who moved to Puerto Rico in March 1970 was not entitled to the section 933 exclusion for 20 1970). 21 B. The Section 937 Bona Fide Residence Requirement 22 23 24 25 Section 937, which was enacted in 2004, see P.L. 108-357, § 908(a), 118 Stat. at 1655, provides a general definition of the term "bona fide resident." According to the statute, a bona fide resident is a person who is llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net present for at least 183 days during the taxable year in 9 (as relevant here) Puerto Rico, who does not have a tax home outside of Puerto Rico during the taxable year, and who does not have a "closer connection" to the United States or a foreign country than to Puerto Rico. I.R.C. § 937(a). The statute notes that exceptions may be provided by regulation. Id.; see also Treas. Reg. § 1.933-1(d)(1) ("The rules of § 1.937-1 will apply for determining whether an individual is a bona fide resident of Puerto Rico."). The regulations under section 937 are technical and detailed, but generally track the statutory rule. They state that "[a]n individual qualifies as a bona fide resident of the relevant possession if such individual satisfies the requirements of paragraphs (c) through (e) of this section with respect to such possession." Treas. Reg. § 1.937-1(b)(1). Paragraph (c) sets out a multi-part test for whether the taxpayer was present in a possession during the taxable year, incorporating the 183-day rule as one method of satisfying the test. See Treas. Reg. § 1.937- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 1(c)(1)(i). 23 24 25 Paragraphs (d) and (e) mirror the tax home and "closer connection" elements of the statutory definition. Paragraph (d) requires that an individual "not have a tax llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 home outside the relevant possession during any part of 10 the taxable year." Treas. Reg. § 1.937-1(d)(1). Paragraph (e) requires that the individual not have "a closer connection to the United States or a foreign country than to the relevant possession during any part of the taxable year." Treas. Reg. § 1.937-1(e)(1). Each provision, however, is subject to a taxpayer-favorable rule applicable to the year in which a taxpayer moves to the possession. Treas. Reg. § 1.937-1(d)(2)(i), (e)(2). For the year in which a taxpayer's residence changes to a possession, the taxpayer is deemed to satisfy the requirements of paragraphs (d) and (e) of Treasury Regulation § 1.937-1 if three conditions are met. First, "[f]or each of the 3 taxable years immediately preceding the taxable year of the change of residence, the individual is not a bona fide resident of the relevant possession." Treas. Reg. § 1.937-1(f)(1)(i). Second, "[f]or each of the last 183 days of the taxable year of the change of residence, the individual does not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession[.]" Treas. Reg. § 1.937-1(f)(1)(ii). Third, "[f]or each of the 3 taxable years immediately following the taxable year of the change of llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net residence, the individual is a bona fide resident of the 11 relevant possession." Treas. Reg. § 1.937-1(f)(1)(iii). III. Application to Mr. Ayers We now consider how Mr. Ayers's moves from Arizona to Puerto Rico and from Puerto Rico to Japan fit within the principles just discussed. A. Statutory Test for Bona Fide Residency Under the plain language of sections 933 and 937, Mr. Ayers was not a bona fide resident of Puerto Rico during the entire taxable year 2021. For an individual to qualify as a bona fide resident, section 937(a)(2) requires that the taxpayer "not have a tax home . . . outside [Puerto Rico] during the taxable year . . . ." And section 933(1) requires that bona fide resident status be maintained "during the entire taxable year." Mr. Ayers does not dispute that he had a tax home in Arizona (i.e., outside Puerto Rico) for approximately five months in 2021 before he moved to Puerto Rico. Because Mr. Ayers had a U.S. tax home in 2021, he cannot satisfy the requirement of section 937(a)(2). Thus, considering only the plain text of the statute, he cannot be a bona fide resident of Puerto Rico for the taxable year 2021. And because he cannot be a bona fide resident of Puerto Rico at all for 2021, let alone "during the entire taxable year," he is not entitled 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 to the benefit provided by section 933(1) under the 12 statutory analysis. 3 B. Regulatory Tests 4 5 6 7 8 9 10 But the statutory analysis does not complete our inquiry. This is so because the residency test set out in section 937 applies "except as provided in regulations[.]" I.R.C. § 937(a). So we must consult the regulations as well to see if they change the outcome we have just described. As we now explain, they do not. 1. General Regulatory Test for Bona Fide 11 Residency 12 13 14 15 16 We consider first the general regulatory test for bona fide residency. As we have already explained, the regulations (like the statute) address three areas: (1) physical presence, (2) a person's tax home, and (3) the person's "closer connections." The tax home test is 17 dispositive here. 18 19 20 21 22 23 24 25 Treasury Regulation § 1.937-1(d)(1) mirrors the tax home requirement of section 937(a)(2), providing that an individual must not have had "a tax home outside the relevant possession during any part of the taxable year." Because Mr. Ayers had a tax home in Arizona for a part of 2021, he does not satisfy this regulatory requirement and therefore fails the general regulatory test. 2. Year-of-Move Exception Under the llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Regulations 13 But the regulations also provide a special rule for the year in which a taxpayer moves to a possession. So we must consider whether Mr. Ayers gets a reprieve under this rule. As we will see, he does not. Unfortunately for Mr. Ayers, his subsequent move to Japan makes this exception unavailable. Treasury Regulation § 1.937-1(f)(1)(iii) provides that, for an individual to qualify as a bona fide resident of a possession in the year in which his residence changes to that possession (here Puerto Rico), he must continue to be a bona fide resident of that possession (i.e., Puerto Rico) for each of the three taxable years following the year of the move. Mr. Ayers moved to Japan in the Fall of 2022 and did not return to Puerto Rico for the remainder of the year. He continued to live in Japan thereafter and was not in Puerto Rico at any time during 2023 or 2024. He therefore could not have been a bona fide resident of Puerto Rico for either 2023 or 2024. See, e.g., Treas. Reg. § 1.937-1(e)(1) (providing that an individual must not have a closer connection to the United States or a foreign country than to the relevant possession). After he left Puerto Rico in 2022, Mr. Ayers resided with family in Japan, continued to own a home with his wife in llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net Arizona, and spent no time in Puerto Rico. Thus, in all 14 of 2023 and 2024, Mr. Ayers had a closer connection with places outside Puerto Rico than he did with Puerto Rico. See Treas. Reg. § 1.937-1(e)(1)(ii) ("An individual's connections to the relevant possession are compared to the aggregate of the individual's connections with the United States and foreign country."). countries JT Mr. Ayers maintained a mailbox and stored household possessions and a truck in Puerto Rico during the relevant period. But that does not come anywhere close to outweighing his full-time residence, family relationships, and ownership of real property elsewhere. Thus, Mr. Ayers does not meet the three-year residence requirement from Treasury Regulation § 1.937-1(f)(1)(iii) and does not qualify as a bona fide resident of Puerto Rico for 2021 under the regulation's exception for the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 year of his move. 18 19 20 21 22 23 24 25 Having analyzed the statutory and regulatory definitions of a bona fide resident, we conclude Mr. Ayers was not a bona fide resident of Puerto Rico during the entire 2021 taxable year. As a result, he was not entitled to exclude his Puerto Rico-source income from his U.S. gross income for that year. C. Mr. Ayers's Other Arguments Mr. Ayers maintains that his intent when leaving llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Puerto Rico in the Fall of 2022 was to return and that 15 even now he intends to return to Puerto Rico. At trial, he maintained that the purpose behind section 933 was to provide a tax exemption to individuals who moved to Puerto Rico, intended to stay, and engaged in economic activity beneficial to the possession. He did so, he argues, and therefore should be allowed the benefits of section 933(1). But the text of section 933(1) clearly requires that an individual be a "bona fide resident of Puerto Rico during the entire taxable year" to qualify for its benefits. And, to determine whether an individual was a bona fide resident of Puerto Rico, section 937 and the regulations thereunder provide tests that do not turn on the individual's intent. "It is well established that, when the statutory language is plain, we must enforce it according to its terms." Jimenez v. Quarterman, 555 U.S. 113, 118 (2009). The texts of sections 933 and 937, and of the related regulations, plainly do not consider the intent of an individual to become or remain a resident of Puerto Rico. Mr. Ayers's argument regarding his intent to remain a resident of Puerto Rico therefore does not change our conclusion that he was not a bona fide resident of Puerto Rico during the entire taxable year 2021. llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Nor does Mr. Ayers's argument about his 16 unfortunate circumstances affect the analysis. Mr. Ayers observed at trial that his move away from Puerto Rico to Japan was motivated by his father-in-law's medical condition and a subsequent reversal in Mr. Ayers's financial fortunes. Mr. Ayers did not expect these changes; but that does not alter what the statute and the regulations require. Indeed, the fact that Mr. Ayers first went to Japan as a result of his father-in-law's health circumstances and then decided to stay there rather than returning to Puerto Rico reinforces the conclusion that his closer connection was not with Puerto Rico. Finally, during trial, Mr. Ayers appeared at times to question the validity of the regulations under section 937, particularly the year-of-move exception, with a passing reference to Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). We are puzzled by this 18 argument. 19 20 21 22 23 24 25 As we have explained at length, under the circumstances here, the plain text of the statute dooms Mr. Ayers's position. His only hope would seem to be in the regulations, which offer regulatory relief that Congress did not see fit to provide statutorily. But if, as Mr. Ayers seems to suggest, the regulations are somehow invalid, then his battle is lost. All Mr. Ayers would llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 have would be the statute, and under the statute alone he 17 cannot prevail. Perhaps Mr. Ayers means to say the regulations are insufficiently generous and that the Department of the Treasury and the Commissioner should have adopted rules that permitted the benefit he seeks. But if that is Mr. Ayers's claim, we fail to see how it has any basis in the text of the statute, which plainly does not provide relief for income earned in the year of the move, as courts have uniformly recognized. See Bergersen, supra; Vasquez, supra; Motion, supra. Mr. Ayers also observes that nothing in the text of the statute requires consideration of events that occur after the tax year at issue. In his words, there is no "forward-looking requirement" in the statute. That is true, but again does not help Mr. Ayers. The reason section 933 does not consider what happens after the year at issue is because, with respect to a taxpayer who moves to Puerto Rico midyear, section 933(1) by its terms offers no benefit-the taxpayer has not been a Puerto Rico resident "during the entire taxable year." Thus, it makes no difference under the statute what happens afterwards. There is no benefit to be clawed back, so to speak. The same is true under section 937 with respect llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to a person who had a tax home in the U.S. for part of the 18 year. That person too cannot be a Puerto Rico resident under the statutory rules. So, again, the statute does not inquire as to what happens after the fact. The "forward-looking requirement" becomes relevant only because the regulations offer a benefit that does not exist under the statute. And the regulations condition that benefit on the satisfaction of certain requirements (including the three-year residency rule). A taxpayer who wishes to claim the benefit of the regulations faces an all-or-nothing deal; he must take the bitter (residency for three years after the move) with the sweet (exemption for the year of the move). He cannot pick and choose by claiming refuge in the statute. In short, we see no merit in Mr. Ayers's regulation invalidity arguments. IV. Addition to Tax for Failure to Timely File Finally, we must determine whether Mr. Ayers is liable for the addition to tax under section 6651(a)(1) for failure to timely file a return. Section 6651(a)(1) imposes an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and not willful neglect. Wheeler v. Commissioner, 127 T.C. 200, 207 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Under section 7491(c), the Commissioner bears 19 the burden of production with respect to the liability of any individual for an addition to tax. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). In this case, the parties have stipulated that Mr. Ayers's return was due on October 15, 2022, and that it was not filed until November 28, 2022. So, the Commissioner's burden of production under section 7491(c) is met. Mr. Ayers has not proven that his failure to timely file was due to reasonable cause and not willful neglect. At trial, Mr. Ayers noted his father-in-law's health emergency and explained that it was why he moved to Japan in the Fall of 2022. But he did not connect these events to his failure to timely file his 2021 tax return or offer any other explanation for the late filing. Mr. Ayers is therefore liable for the addition to tax under section 6651(a)(1). 18 V. Conclusion 19 20 21 22 23 24 25 For the reasons described above, we conclude that Mr. Ayers was not a bona fide resident of Puerto Rico during the entire 2021 tax year, and therefore he is not entitled to the exclusion under section 933(1). Moreover, Mr. Ayers is liable for the addition to tax under section 6651(a)(1) for failure to timely file a return. To reflect the foregoing, llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net Decision will be entered for petitioner with 20 respect to the penalties under section 6662(a) and for respondent with respect to the deficiency and the addition to tax under section 6651(a)(1). This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 1:31 p.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 llii•SH r'}7 3) 406-2 250 I operations~ escribers.net I www.escribers.net