George C. Huff, Petitioner and The Government of the United States Virgin Islands, Intervenor, Petitioners

138 T.C. No. 11 s UNITED STATES TAX COURT 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 inconhe tax exclusion pi.ovided by I.R.C. sec. 932(c)(4), P, a U.S. citizen, filed territorial income tax returns with, and paid income tax to, he Virgin Islands Bureau of Internal Revenue (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 SERVED MAR. 1 9 2012 BIR for the years involved. NASCO did not file partnership returns with the IRS.

Because P did not file tax returns with the IRS for the ye rs at issue, R condùcted a nonfiler examination. R determined that for the years inv lved P did not qualify for the I.R.C. sec. 932(c)(4) income tax exclusion and therefore was not excused from his Fèderal tax filing and ta payment obligations.

R mailed P a notice of deficiency. P maintains that this case involves a partn rship item and therefore R should have issued a notice of f'mal partnership administrative adjustment to the tax matters partner of NASCO pursuant to the procedural rules of the Tax Equity and Fiscal Resp nsibility Act of 1982 (TEFRA), as opposed to!issuing P a notice of deficiency. P posits R's notice of deficiency is invalid, and thus he requests the Court to dismiss this case for lack ofjurisdiction.

Held: Th procedural rules of TEFRA do not herein apply in that (1) NASC did not file a partnership return with the IRS, and (2)NASCO is not classified as a partnership for purposes of TEFRA.

Held, further, P's motion to dismiss for lack ofjurisdicti n will be denied.

William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo III and Marjorie Rawls Robeits, 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 petitioner's motion to dismiss for lack ofjuqisdiction (petitioner's motion), the resolution of which tums on whether respondent hould have issued a notice of final partnership administrative adjustäient (FPAA) to the tax matters partner (TMP) of NASCO Corporate Finance Consultants, LLC (NASCO), pursuant to the procedural rules of the Tax Equity an Fisc 1 Responsibility Act of 1982 (TEFRA , Pub. L. No. 97- 248, sec. 402(a), 96 tat. at 648, rather than issue, as respondent did a notice of deficiency to petitioner.

I. Petitioner Background1

Petitioner is a .S. citizen who claims he was a bona fide resident of the U.S. Virgin Islands (Virgin Islands) during 2002, 2003, and 2004 (y ars involved).

Respondent disputes petitioner's claim.

Petitioner filed territorial income tax returns with, and paid income tax to, the Virgin Islands B reau of Internal Revenue (BIR) for each of years involved.

1For 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).

Petitioner asserts that during the years involved he was a member of 1 ASCO, which was established under the laws of the Virgin Islands as a limited liability company (LLC).2 Petitioner maint ins he qualified for the section 932(c)(4)3 gross income exclusion for each of the years involved; consequently, he did not file Federal income tax returns or lhay Federal income tax for those years. Because he did not file returns with the In ernal Revenue Service (IRS), respondent cond eted a nonfiler examination r 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 N SCO was not a legitimate busin ss entity and that petitioner was not a partner i NASC .

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- 2For purposes qf 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 mak no determination with re ject to the actual status öf NASCO.

3Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years involved.

- 5 source income in ord r to inappropriately and invalidly claim a tax c edit of 9.0% under the USVI Economic Development Program."4 In contrast, petitioner asserts that (1) NASCO was a valid LLC organized under the laws of the Virgin Islands, was recognized as such by the IR, and should be respected f r Federal tax purposes, and (2) this case involves a partnership item and ence respondent should have issued an FPAA to the TMP of NASCO pursuant to he procedural rules of TEFRA, as opposed to issuing petitioner a notice of deficiency.

II. NASCO

As noted supr p. 4, NASCO was organized as a Virgin Islands LLC.

In this regard, the Virgin Islands government issued a certificate of exi tence to .

NASCO on June 20, 2001. Article 8 of NASCO's articles of organikation provides: "No member of the Company shall be liable for the debts and obligations of the Company under Section 1303, Subsection (c) of tl e Uniform Limited Liability Act."

During each o the years involved NASCO had more than 10 nembers and at least 1 of its mem ers was neither an individual, a C corporation, nor an estate 4Respondent asserts alternate positions in the notice of deficiency. As each of these alternate po itions are variations of respondent's primary position, we need not discuss them in the context of petitioner's motion.

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

Isla ds 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 i generally treated as a foreign country, see sec. 7701(a)(9); Huff v. Commission r 135 T.C.

222, 224 (2010), and has a "mirroì. tax" system; i.e., the Virgin Islands uses ás its tax law the tax laws of the United States.

In this regard, 48 U.S.C. seb. 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 yice versa.

The revised version of the Code is known as the "mirror code".

Virgin Islands r sidents are required to file territorial returns with, and pay territorial taxes to, the BIR. Mirror code secs. 1, 6212(a)(1)(A). Vir in Islands partnerships are requi ed to file territorial partnership returns with th BIR pursuant to mirror code section 6031(a).

The BIR does ot 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 partnerships file Forni 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 f r individuals who are 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 resident of the Virgin Islands may satisfy his Federal income tax reporting and payment requirement by filing solely with, and paying tax to, the BIR, provided the individual satisfies all of the requirements of section 932(c)(4). Íf 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 ensúre the "fair implementation" of section 932, the United States and the Virgin Islands entered into an agreement "for the exchange of information and mut al assistance with respect to taxes in order to prevent the evasion or avoidance of United States or Virgin Islands taxes". Tax 5In general, th 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 ëorldwide income). See Cook v. Tait, 265 U.S 47, 56. Gross income for the purpose of calculating taxable income is defined as "all income Individuals subject to U.S. tax are from whatever source derived." Sec. 61(a). generally required to file a tax return if their income exceeds a threshold amount. ec. 932 preempts these general rules. Sec. 6012(a)(1)(A).

Implementation Agreernent Between the United States of America and the Virgin Islands (TIA), Feb. 24, 1987, 1989-1 C.B. 347, 347-348. The TIA apþlies to (1) all taxes imposed by tl e Code, (2) all taxes imposed by the mirror code, and (3) all local income taxes imposed by the Virgin Islands as authorized by th Tax Reform Act of 1986. See id. aft. 2, 1989-1 C.B. at 348. TIA article 4 governs the exchange of informati n between the two governments. Clause 1 the eof provides that the competent aut orities of the United States and the Virgin Islands shall exchange information o administer and enforce their respective tax ldws. See id.

art. 4(1), 1989-1 C.B. at 348.

TIA article 4(2) b) provides that the Virgin Islands shall routin ly supply to the United States information with respect to audit changes that disclose information of interes to the U.S. Government, including, among other matters, (1) information about the ownership interests of all corporations subj ct to Virgin .

Islands tax having no -Virgin Islands-source income and which receive a rebate, subsidy, or deduction bf Virgin Islands taxes, as well as (2) information about any individual subject to irgin Islands tax who has non-Virgin Islands-source income and who claims for the first time to be a Vifgin Islands resident. In afldition, TIA article 4(2)(b) provid s that the Virgin Islands shall supply to the Un ted States "copies of reports of individual, partnership, corporate, and employn ent audit changes that disclose inforniation relevant to the United States." Id. art. 4(2)(b), 1989-1 C.B. at 348-3 9. To this eñd, the TIA provides that the BIR Ñill permit the IRS to examine Virgin Islands tax returns. ¼ app. A, sec..3.1, 1989-1 C.B. at 352.

Discussion This Court is a court of limited jurisdiction; we may exercise 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 defi iency only if a valid notice of deficiency is issued by the Commissioner and a petition contesting the Commissioner's deficieiicy determination is timely filed by the taxpayer. GAF Corp. & Subs. v.

Commissioner, 114 1.C. 519. Petitioner's motion is premised on petitioner's (cid:16)042 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 r turns 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 partnership inpome, 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 unifie procedure for determining the tax treatment of all partnership items. Pursuant to the procedures of TEFRA,·assessments for nonpartnership item a justments are subject to deficiency proceedings, secs.

(cid:16)042 6212(a), 6230(a)(2), hereas the tax treatment of a partnership item i deteñnined at the partnership level, sec. 6221.

(cid:16)042 :

.

Section 761(a) provides that a "'partnership' includes a syndicate, group, pool, joint venture or ther unincorporated organization through or by means of which any business, financial operation, or venture is carried on" and issnot a corporation, 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 a y partnership required to file a return under section 6031(a)."' Thus, an ntity falls uñder the provisions of TEFRA if the entity is 6Sec. 6031(a) provides that partnerships shall make a return for each taxable year stating each item of gross income and deduction allowable by subtitle A.

required to file a part ership return. See Wolf v. Commissioner, T.C. Memo.

1991-212, aff'd, 4 F. d 709 (9th Cir. 1993).

Business entitiés that are classified as foreign partnerships for Federal tax purposes are generally exempt from filing partnership returns and ar 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 gro(cid:0)541s income that is effecti ely 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 TEFlá. Sec. 6031(e)(2).

II. Contentions of thh Parties

Petitioner asserts that this case should be dismissed for lack ofjurisdiction because respondent failed to follow the procedural rules of TEFRA. Petitioner maintains that becau(cid:0)541eNASCO filed territorial partnership returns v ith the BIR, it in essence filed Federal partnership returns with the IRS for the yea s at issue pursuant to section 6233(a). Consequently, petitioner reasons the p ocedural rules of TEFRA apply. Alternatively, petitioner posits that NASCO shou d be classified as a foreign partnership and was required to file a Federal partnership return for each year at issue beòause for such years it had U.S.-source mcome or mcome effectively connected with a U.S. trade or business. Continuing, petitioner 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 partriership level. Thus, petitioner concludes respondent properly should have i sued an FPAA to the TMP of NASCO, rather han, as respondent did, a notice of deficiency to petitioner. See sec. 6223(a) sec.

301.6223(a)-1, Proced. & Admin. Regs.

Solely for purposes of disposing of petitioner's motion, respon ent 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 F deral 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 TE RA procedures do not apply and the notice of eficiency issued to petitioner is alid.

III. Whether

Filing a Partnership Return with the BIR Constitutes thb 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 pa nership returns with the IRS. Ori May 4, 2006, the IRS obtained copies of the returns filed by NASCO with the BIR pursuant to the information shari g provisions of the TIA between the United St tes and the Virgin Islands.

Petitioner clair is that NASCO's filing of Form 1065 with the BIR constitutes its filing f a Federal partnership return with the IRS.

In this regard, petitioner asserts that the Virgin Islands is not an independent sover ign, like a State or a foreign co ntry, 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 fede¼al government" is incorrect. Since 1958 courts have noted that the United States and the Virgin Islands are distinct taxing jurisdictions, although the Virgin Islands income tax laws arise from an identical tatute applicable to each. I udley v. Commissioner, 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. 20 2); Abramson Enters., Inc. v. Gov't of the V.I. 994 F.2d 140, 142 (3d Cir. 1993); I anbury, Inc. v. Olive, 820 F.2d 618 (3d Cir. 1987); Miller v.

Ouinn, 792 F.2d 392 (3d Cir. 1986); Chi. Bridge & Iron Co. v. Wheatley, 430 F.2d 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, (cid:16)042 Dudley v. Commissioner, 258 F.2d 182, and a notice of deficiency issued by the Commissioner of Inte al Revenue cannot be petitioned to the U.S. District Court, District of the Virgin Islands, McHenry v. Commissioner, No. 1:10-c -00021 (D.

V.I. July 18, 201.1) (order granting motion to dismiss for lack ofjurisdiction).

Petitioner next dsserts 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 p rtnership returns to the IRS, the filing of NASCO's Virgin Islands partnership return with the BIR constitutes the filing of a Fedèral partnership return witl¹ the IRS. We do not agree with petitioner's as ertion.

An agency relationship is defined as: "the fiduciary relationship that arises when one person (a " rincipal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act."

his consent is generally manifested by (1) statements or actions by the principal that the agent will act on behalf of the principal, (2) the agent's acceptance of such undertaking,,and (3) an understanding 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 support he existence of such a relationship between the United States and the Virgin Isladds or their respective tax departrñents (i.e., the IRS and the .BIR). To the contra ; the TIA is an agreement betweerï equal;parties "for the exchange of information and mutual assistance with respect to taxes in order to prevent the evasion or avdidance of the United States or Virgin Islands taxes". TIA supragl989-1 C.B. at 347-348. The BIR is not under the control of the IRS or vice versa.

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 partnershi returns for Federal tax purposes. We do not a ree with petitioner's assertion.

In Beard, we h Id that within the context of determining the commencement of the period of limit tions with respect to the filing of one's Federal income tax ret,urn, the document submitted to the IRS will be considered a valid tax return if:

1.

2.

3.

the docun ent contains sufficient data to calculate one's t x liability; the docun tent purports to be a tax return; there is a honest and reasonable attempt by the filer of the document to satisfy the requirements of the tax law; arid 4.

the filer e ecutes the return uñder penalties of perjury.⁷ Id. at 777: Petitioner claims that fhe returns NASCO filed with the BIR satisfy all four of the aforementioned criteria and thus should be ti·eated as Federal partnership returns fil d with thè IRS because:

First, the inforn ation [on the return filed by NASCO] is sufficient tò calculate the taÊ liability as NASCO used the very form drafted and issued by the Service. Second, the Form 1065 is by definition a 1:eturn and claims to be nothing other than a return. Third, a form drafted and issµed by the Service that taxpayers in turn used must be considered to be an honest and reasonable atterlipt to satisfy the requirements of the tax law. Fourth, the return was signed under penalties of perjury as the5jurat provision was executed.

Petitioner cites ermantown Trust Co. v. Commissioner, 309 .S. 304 (1940), as the "semindl case" to support his position.

In Germantown Trust Co., the taxpayer filed the ong form with the IRS as its tax return. The Supreme Court held that the filing constituted a tax return because the taxpayér filed in 7The 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).

good faith a return from which its tax could be:computed; Thus, the underlying issue therein was wh ther the return filed with the IRS constituted a alid return. " Such is not the case h re. Thè issue here is whether the filing of a r rn with the BIR constitutes the filing of a return with the IRS.

The returns N SCO filed with the BIR do not purport to be Federal returns (as required by criteri n 2 of Beard), nor are such returns an attempt to satisfy the requirements of Fede al tax law (as required by criterioi¹³ of Beard) NASCO filed its partnership returns with the BIR in order to comply with its Virgin Islands filing obligations as pposed to any:obligation 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 partnership returns, NASCO may come under the purview of TEFRA if it can be classified for Federal tax purposes as a partnership that is required to file a Federal partnership return.

Petitioner takes the påsition that NASCO had a Federal partnership retÈrn filing obligation and thus sl ould]>e classified as a partnership for Federal tax purposes.

On thè other hand, re pondent contends that NASCO is a corporation foi Federal tax purposes and ther fore the procedural rules of TEFRA do not apply.

Business entitie are generally classified for Federal tax purpos s by section 7701 and the "check-t e-box" regulations of sections 301.7701-1 through 301.7701-5, Proced. & Admin. Regs.⁸ The Virgin Islands, and the bu inesses established therein, ar generally considered foreign for purposes of the Code because the Virgin Isl nds is not one of the 50 States or the District of Columbia.

See sec. 7701(a)(4), (5), (9).9 Petitioner conc des that NASCO is a foreign entity. Petitioner 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 ei1tity" in which all of its owning members have limited liability ° and (2) generally, in such 8The Virgin Isl nds classifies business entities with the mirror versions of these sections.

9Sec. 7701(a)(4) provides that "domestic" when applied to a e rporation or partnership generally 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) prdvides that a foreign corporation o partnership is one that is not domestic. Sec. 7701(a)(9) provides that "The te includes only the States and the District of Columbia."

'United States' when used in a geographical sense 1°A business e tity that is not a corporation as defined in sec. 301.7701-2(b), Proced. & 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 Federal tax purposes, then the regulations provide for default classifications depending on the attributes of the eligible entity. (continued...)

a situation the provisibns of TEFRA do not apply. However, petitioner argues that the check-the-box re ulations are superseded by section 1.932-1(h)( ), Income Tax Regs., which pro ides:

Solely for the purpose of determining classification of an eligihle entity under sec. 301I/701-3(b) of this chapter [the check-the-box regulations] and under that section as mirrored in the Virgin Islands, an eligiblé entity subject to this liaragraph (h) will be classified for both Federal and Virgin Islands tax purposes using the rule that applies to domestic eligible entities.

Thus, petitioner posits that although NASCO is generally treated as á foreign· entity for purposes of the Code, for purposes of determining whether NASCO is a corporation or a partiiership the Court should treat NASCO as a doniestic 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. & Adn in. Regs., the domestic eligible entity check-the-box regulations would classify NASCO as a 1°(...continued) A foreign eligible entity in which all of its owning members have liriiited liability, as apparently is the case with respect to all of the owning members òf NASCO, is classified by the default rules as an association. See sec. 301.7701-3(b)(2)(ii), Proced. & Admin. R gs., for the definition of "limited liability".

Sec. 301.770112(b)(8), Proced. & Admin. Regs., provides. a li(cid:0)541tof foreign business entities that lare corporations and may not elect their classification. Virgin Islands, entities that are established as "corporations" are not eligible entities and may not Élect their status.

In the partnership since it is Ln 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 secti n 1.932- 1(h), Income Tax Reg ., 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 entiti s. Section 1.932-1(h)(2)(ii), Income Tax Regs., applies section 1.932-1(h), Inéome Tak Regs., to Virgin Islands business entities that are owned in whole or in þart 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 m mbers of NASCO are bona fide residents of the Virgin Islands. Therefore, the regulations petitioner relies upon do not appl to his situation. Moreover, section 1.932-1(h)(5)(iv), Income Tax Regs., p3ovides that "In the case of an enti created or organized prior to April 11, 2005,iparagraph (h)(4) of this section ill take effect for Federal income tax purposes (or Virgin Islands income tax pu oses, as the case may be) as of the first day of the first taxable year of the entity beginning after April 11; 2005." NASCO óperates on a calendar year basis. I ence, the fir(cid:0)541tyear that the classification rulesiof section 1.932-1(h)(4), Income Tax Regs., would apply is 2006. But the years involved are 2002, 2003, and 2004.

Petitioner argu s that the regulations should be applied retroactively regardless of the specific effective date. Petitioner pomts to the preaaible to the temporary regulation, which states To the extent they provide rules under the operative provisions of the Code relating to the l(cid:16)040ossession,as amended by the 1986 Act and the 2004 Act, these regulations generally apply to taxable years ending after October 22, 2004. The undÒrlying statutory rules, however, generally apply to taxable years beginninfafter December 31, 1986. Accordingly, taxpayers may rely upon the guida¼ce 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.

. 1016, 1020.

We apply a regulation according to its plain or ordinary meani1g, unless that interpretation wo ld 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 published opinion,

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 taxpayers: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 default rules through their own inaction. Moreover, the preamble 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."

To conclude, bêcause NASCO did not file a Federal partnership return and because NASCO is classified as a foreign corporation for Federal tax purposes, the Because we conclude that NASCO is not classified as a partnership for Federal tax purposes, we need not address the issue of whether NASCO has U.S.- source income or income effectively connected to a U.S. trade or business.

TEFRA procedural rules do not apply. Consequently, we hold that ( ) respondent was not required to issue an FPAA, and (2) respondent issued a valid notice of deficiency. Consiste with the foregoing, petitioner's motion will be denied.

An appropriate order will be issued.

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.
70. F.3d 1282 (10th Cir. 1995). Section 1.932-1(h)(5)(iv), Income Tax Regs., specifically provides hat the classification rules of section 1.932-1( )(4), Income Tax Regs., apply on¹ to tax years beginning after April 11, 2005. Petitioner does We a e mindf 1 that the language of sec. 1.932-1T(h)(4), Teriporary Income Tax Regs., 7Ø Fed. Reg. 18920, 18933-18934 (Apr. 11, 200 ), is identical ),eTemporary to the language in the final regulation and that sec. 1 932-1T(h)(5)(i Income Tax Regs., supra, has the same effective date of April 11, 20 5; as the . . final regulation.