The Tax Court has held that taxpayers couldn’t use Tax Court Rule 155 to raise new issues in litigation where they were denied foreign tax credits under Code Sec. 901 for amounts paid to the U.S. Virgin Islands. Their motion to reopen the record in support of these issues was also denied.
Background. Where the parties have made mutual concessions resolving certain issues, the Tax Court normally directs that decisions will be entered under Tax Court Rule 155(a). It provides that, “[w]here the Court has filed…its opinion…determining the issues in a case, it may withhold entry of its decision for the purpose of permitting the parties to submit computations…showing the correct amount to be included in the decision.”
Rule 155 computations are designed to ascertain the bottom-line tax effect of the determinations made in the Court’s opinion. If the parties’ computations are not in agreement, the Court has discretion under Rule 155(b) to afford them an opportunity to be heard on these disagreements.
Rule 155(c), captioned “Limit on Argument,” outlines the permissible scope of such argument. It provides that “[a]ny argument under this Rule will be confined strictly to consideration of the correct computation of the amount to be included in the decision resulting from the findings and conclusions made by the Court.” A party may not use a Rule 155 computation to seek reconsideration of the issues or matters disposed of by the Court’s findings and conclusions. And, no argument will be heard upon or consideration given to any new issues.
The Rule 155 computation process is not intended to be one by which a party may raise for the first time issues which had not previously been addressed. Rule 155 computations commonly include mathematical adjustments triggered by the change of taxable income or adjusted gross income, for example, adjustments attributable to the percentage limit on contributions or medical deductions. A new issue is generally an issue other than a purely mathematically generated computational item of this sort. (Home Grp., Inc., (1988) 91 TC 265)
Facts. In a previous decision, the Tax Court held that the three sisters, Renee and Gail C. Vento, and Nicole Mollison (the taxpayers), were not entitled to foreign tax credits under Code Sec. 901 for certain amounts paid to the U.S. Virgin Islands. (Renee Vento, et al, (2016) 147 TC 198, see Taxpayers who conceded they weren’t bona fide VI residents couldn’t credit VI taxes paid)
At issue in these cases were two categories of payments received by the Virgin Islands Bureau of Internal Revenue (VIBIR) on their behalf during 2001 and 2002: (1) payments made directly to VIBIR by them or their agents that accompanied their territorial tax returns filed with VIBIR; and (2) payments (estimated tax payments to IRS and had Federal income tax withheld from their wages) that were “covered into” the Treasury of the Virgin Islands pursuant to Code Sec. 7654(a), which provides that the net collection of Federal income tax for each tax year with respect to an individual who is a bona fide resident of a U.S. possession will be covered into the Treasury of the specified possession of which such individual is a bona fide resident.
IRS and the taxpayers had executed stipulations of settled issues that resolved all but one of the issues involved in these cases. Shortly thereafter, they filed, and the Tax Court granted, a motion for leave to submit the cases for decision without trial under Rule 122. In that motion, the taxpayers agreed that the only issue that remained for resolution was whether they were entitled to a foreign tax credit for any payments made to the U.S. Virgin Islands for 2001. The taxpayers agreed that these cases did not require a trial for the submission of evidence because the parties had stipulated all evidence needed to resolve this issue.
In its opinion, the Tax Court ultimately rejected the taxpayers argument. First, it held that they had failed to show that the amounts in question constituted “taxes paid” under Code Sec. 901(b)(1). Income taxes paid to foreign jurisdictions or U.S. possessions are creditable only to the extent that they are compulsory amounts paid in satisfaction of legal obligations. The taxpayers had conceded that they were not bona fide residents of the Virgin Islands in 2001 and that they had no Virgin-Islands source income for 2001. Because they had no legal obligation to pay Virgin Islands income tax, the amounts paid to VIBIR did not constitute creditable foreign taxes.
Second, assuming for argument’s sake that the taxpayers had paid taxes to the Virgin Islands, the Tax Court held that any credit for 2001 would be barred by the Code Sec. 904 limitation, which generally limits the foreign tax credit to the U.S. tax imposed on the taxpayer’s foreign-source income. As the taxpayers had failed to establish that they had any taxable foreign source income for 2001, their Code Sec. 904 limitation was zero.
Finally, the Tax Court explained that the overall statutory scheme demonstrates that Congress did not intend that Virgin Islands taxes paid by U.S. citizens or residents be creditable under Code Sec. 901. Accordingly, the taxpayers were not entitled to the claimed tax credits.
In the litigation, the parties were ordered to submit computations for entry of decision under Tax Court Rule 155. However, their computations were not in agreement. IRS’s computations matched almost exactly the deficiencies that the taxpayers had agreed would be due in the event the Court rejected their position concerning the claimed foreign tax credits. On the other hand, the taxpayers submitted computations showing deficiencies about 60% smaller than those calculated by IRS. These differences reflected the taxpayers’ contention that the amounts paid to VIBIR in 2001 and 2002, which the Court had held were not “taxes paid” for purposes of Code Sec. 901, constituted State or local income taxes for which deductions should be allowed under Code Sec. 164(a). The taxpayers had not advanced this alternative contention at any prior point in the litigation.
The taxpayers moved for leave to amend their petitions under Tax Court Rule 41(b)(1), setting forth another new legal argument and asserting that both new issues had been tried by consent. The taxpayers then filed a motion to reopen the record to permit the introduction of new evidence relating to their second new legal theory.
The Tax Court denied the taxpayer’s motion for leave to amend, essentially on the ground that their proposed amendments would be futile. Further, with respect to the second category of payments—those “covered into” VIBIR—the Court noted the existence of a jurisdictional question. Because the payments for which the taxpayers claimed withholding and related credits had been made more than three years before the mailing of the notices of deficiency, Code Sec. 6512(b) arguably deprived the Tax Court of jurisdiction to determine overpayments.
In their response to the Court’s order to show cause why the Court should not enter decisions consistent with IRS’s computations, the taxpayers urged that the Court would have jurisdiction to consider their new claims for withholding and related credits. And the taxpayers challenged IRS’s position that these payments, once “covered into” VIBIR, were no longer available to offset their U.S. tax liabilities. The taxpayers alleged that “secret agreements” existed between IRS and VIBIR governing such payments and that these agreements could be related to the tax law merits of their position. The taxpayers moved to reopen the record.
In response, IRS denied that either of the new issues that the taxpayers sought to raise had been tried by consent, stating that it “did not expressly or implicitly consent to trial of the new matters raised in petitioners’ motion for leave to amend.” IRS further contended that the taxpayers’ motion should be denied in any event because it was futile. IRS noted that the taxpayers were cash basis taxpayers and that the payments their agents had made directly to VIBIR were made in 2002. Thus, those payments could not possibly give rise to deductions for 2001, the tax year in issue. And IRS contended that the payments that IRS had “covered into” VIBIR, once removed from the taxpayers’ 2001 accounts, were no longer available to offset their 2001 U.S. income tax liabilities.
Court’s conclusion. The Tax Court held that the taxpayers could not raise new issues in a Rule 155 proceeding, and that their motion to reopen the record was accordingly denied.
The Court stated that when the taxpayers submitted these cases for decision without trial under Rule 122, they joined IRS in representing that the only issue remaining for resolution was whether they were entitled to a foreign tax credit for any payments made to the U.S. Virgin Islands for 2001. That was the only legal issue addressed by the parties in their briefs or by the Tax Court in its opinion.
In submitting Rule 155 computations, the parties were directed to calculate the tax deficiencies that flowed from the Tax Court’s rejection of the taxpayers’ claimed foreign tax credits, taking into account other concessions each party had made. IRS in its computations did exactly that. The Tax Court concluded that the taxpayers, by contrast, sought to use their Rule 155 computations to raise first one, and then two, legal issues that they had not advanced at any prior point in the litigation. Both of these were “new issues” within the meaning of Rule 155(c).
The Court reasoned that if a matter was neither placed in issue by the pleadings, addressed as an issue at trial, nor discussed by the Tax Court in its prior opinion, or if it would necessitate retrial or reconsideration, that matter may not be raised in the context of a Rule 155 computation. A matter qualifies as a “new issue” for purposes of Rule 155 where, to decide the issue, the Court would have to reopen the record and conduct further proceedings to admit additional evidence. Proper judicial administration demands that there be an end to litigation and that bifurcated trials be avoided.
Rule 155 is not an opportunity for either party to get adjustments for issues not raised in the deficiency notice, in the pleadings, in the pre-trial memoranda, or at trial. The Tax Court noted that it has rigorously enforced the bar against raising new issues in a Rule 155 proceeding. The Court has found that a matter may be deemed a “new issue” in the Rule 155 context even if it has computational aspects. For example, it has treated as “new issues” in a Rule 155 proceeding such questions as entitlement to a net operating loss carryback, the ability to use income averaging, a change to the useful life of a depreciable asset, and the application of an accounting treatment.
The Court held that decisions was to be entered consistent with IRS’s Rule 155 computations.
There were two concurring opinion (one in result only) in this decision.
References: For Rule 155 computation by parties for entry of decision in Tax Court cases, see FTC 2d/FIN ¶U-3409. For the foreign tax credit, see FTC 2d/FIN ¶O-4000 et seq.; United States Tax Reporter ¶9014.