* * * *

(b) Filing Requirement. --

(1) In general. -- Each individual to whom this section applies for the taxable year shall file his income tax return for the taxable year --

(c) Extent of Income Tax Liability. -- In the case of any individual to whom this section applies for the taxable year --

* * * *

(3) such individual is hereby relieved of liability for income tax for such year to1990 U.S. Tax Ct. LEXIS 110">*120 the jurisdiction (the United States or Guam [CNMI]) other than the jurisdiction with which he is required to file under subsection (b).

Section 601(b) of the covenant expressly adopted the single filing system of section 935 for use in CNMI. Thus, citizens of the United States residing in CNMI would be relieved of the liability of filing income tax returns in the United States and instead would file income tax returns with CNMI.

Section 935 did not provide specific definitions for residency and citizenship. However, the legislative history states that "The rules under present law which are used to determine residency of individuals" are to apply for purposes of determining residency in the United States or Guam [CNMI]. H. Rept. 92-1479, supra1990 U.S. Tax Ct. LEXIS 110">*121 , 1972-2 C.B. at 762. At the time of the enactment of section 935, the test used to determine residency was a facts and circumstances test set forth in sections 1.871-2 through 1.871-5, Income Tax Regs. The legislative history also states, in effect, that for purposes of section 935 a citizen of Guam who is not otherwise a citizen of the United States is an individual born or naturalized in Guam (even though by virtue thereof he is also a citizen of the United States.) H. Rept. 92-1479, supra, 1972-2 C.B. at 762. See section 4 of the Organic Act of Guam, Pub. L. 81-630, 64 Stat. 384 (1950); H. Rept. 92-1479, supra, 1972-2 C.B. at 761 n. 3.

Consistent with the foregoing, the Secretary prescribed section 1.935-1(a)(3), Income Tax Regs., which provided:

(3) Determination of residence and citizenship. For purposes of this section, determinations of residence and citizenship for a taxable year shall be made (except as provided to the contrary in paragraph (d)(1) and (2) of this section) as of the close of the taxable year. A citizen of the United States is any individual who is a citizen within1990 U.S. Tax Ct. LEXIS 110">*122 the meaning of paragraph (c) of section 1.1-1, except that the term does not include an individual who is a citizen of Guam [CNMI] but not otherwise a citizen of the United States. An individual who is a citizen of Guam [CNMI] but not otherwise a citizen of the United States is any individual who has 95 T.C. 594">*601 become a citizen of the United States by birth or naturalization in Guam [CNMI]. Whether an individual is a resident of Guam [CNMI] or a resident of the United States shall generally be determined by applying to the facts and circumstances in each case the principles of sections 1.871-2 through 1.871-5 relating to what constitutes residence or nonresidence, as the case may be, in the United States in the case of an alien individual. * * * [Emphasis added.]

Thus, for purposes of section 935, residency determinations would be made by examining the facts and circumstances of the particular case.

To ensure that the mirror system would function as intended, section 935(c) provided that, except for purposes of section 935, the United States and Guam [CNMI] would be treated as one jurisdiction (in both a geographical and governmental sense). See section 1.935-1(c)(1)(i), 1990 U.S. Tax Ct. LEXIS 110">*123 Income Tax Regs. The House Report reveals that this provision would, among other things, prevent a U.S. taxpayer from claiming a foreign tax credit for his Guam [CNMI] source income. H. Rept. 92-1479, supra, 1972-2 C.B. at 762.

Section 7701(b) was codified by section 138 of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 672, effective for taxable years beginning after December 31, 1984. Section 7701(b) provides in pertinent part:

SEC. 7701(b). Definition of Resident Alien and Nonresident Alien. --

(1) In general. -- For purposes of this title * * *

(A) Resident alien. -- An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):

* * * *

* * * *

Substantial presence test. --

(A) In general. -- Except as otherwise provided in this paragraph, an individual meets the substantial presence test of this paragraph with respect to any calendar year (hereinafter in this subsection1990 U.S. Tax Ct. LEXIS 110">*124 referred to as the "current year") if --

The substantial presence test of section 7701(b)(3)(A) provides an objective test for determining whether a citizen of France, for example, is a resident of the United States. Generally, an alien will be considered a resident of the United States with respect to any year in which the alien is present in the United States at least 31 days during the current year and a sum of 183 days, calculated pursuant to a weighted formula, during the current year and the 2 preceding years. Section 7701(b)(3)(A) was intended to replace the more complex facts and circumstances test of section 1.871-2, Income Tax Regs., for purposes of determining1990 U.S. Tax Ct. LEXIS 110">*125 whether an alien was a resident of the United States. H. Rept. 98-432, vol. 1 at 222 (1983).

Petitioners maintain that section 7701(b)(3)(A) provides the standard for determining whether they were residents of CNMI in the year at issue. Specifically, petitioners contend that: (1) Section 7701(b)(3)(A) applies within the context of CNMI's mirror code to determine whether aliens are residents of CNMI; (2) U.S. citizens are aliens of CNMI; and (3) section 7701(b)(3)(A) was intended to repeal the facts and circumstances test for determining residence for purposes of the single filing rule of section 935.

Respondent does not dispute that section 7701(b)(3)(A) may be applied to determine whether an alien in the traditional sense, e.g., a citizen of France, is a resident of CNMI. Respondent argues, however, that section 7701(b)(3)(A) does not apply to determine whether U.S. citizens, such as petitioners, are residents of CNMI. Respondent argues that: (1) U.S. citizens are not aliens of CNMI; and (2) in enacting section 7701(b), Congress did not intend 95 T.C. 594">*603 to repeal either section 1.935-1(a)(3) or section 1.871-2, Income Tax Regs., to the extent those provisions mandated that residency1990 U.S. Tax Ct. LEXIS 110">*126 of U.S. citizens in Guam [CNMI] would be determined under the facts and circumstances test.

Petitioners cite Great Cruz Bay, Inc., St. John, Virgin Islands v. Wheatley, 495 F.2d 301">495 F.2d 301 (3d Cir. 1974), and the brief filed by the Government in Manning v. Blaz, 479 F.2d 333">479 F.2d 333 (9th Cir. 1973), in support of their contention that U.S. citizens are aliens of CNMI.

In Great Cruz Bay, a corporation organized in the Virgin Islands, with U.S. citizens as shareholders, attempted to make a subchapter S election. The Government argued that a subchapter S election was not available to the corporation by virtue of section 932(a). (The Virgin Islands was a mirror code jurisdiction.) At the time, section 932(a) provided:

SEC. 932(a). General Rule. -- Any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States shall be subject to taxation under this subtitle in the same manner and subject to the same conditions as in the case of a nonresident alien individual. This section shall have no application in the case of a citizen of 1990 U.S. Tax Ct. LEXIS 110">*127 Puerto Rico.

Applying section 932(a) under the Virgin Islands mirror code, the Third Circuit held that the corporation did not qualify for the subchapter S election because the shareholders from the United States were nonresident aliens of the Virgin Islands. 495 F.2d 301">Great Cruz Bay Inc., St. John, Virgin Islands v. Wheatley, supra at 306.

In so holding, the Third Circuit declined to follow a holding to the contrary by the Ninth Circuit on parallel facts in 479 F.2d 333">Manning v. Blaz, supra, involving the Guamanian mirror code. However, the Third Circuit noted that shortly before the Ninth Circuit considered the appeal in the Manning case, Congress enacted a statute (presumably amended section 932(a)) which eliminated for Guam the problem with which the Third Circuit was concerned in Great Cruz Bay. The Manning court held that a corporation organized in Guam with U.S. citizens as shareholders was entitled to make a subchapter S election since the U.S. resident shareholders were not nonresident aliens of Guam. 479 F.2d 333">Manning v. Blaz, supra at 334-335.

95 T.C. 594">*604 Petitioners' reliance on Great Cruz Bay1990 U.S. Tax Ct. LEXIS 110">*128 and the Government's position in Manning is misplaced. In particular, section 932(a) was amended (as a part of the legislation enacting section 935) to provide that section 932(a) "shall have no application in the case of a citizen of * * * Guam [CNMI]." See H. Rept. 92-1479, supra, 1972-2 C.B. at 764. (Section 1(f)(2) of Pub. L. 92-606, 86 Stat. 1497, amended section 932(a) effective with respect to taxable years beginning after December 31, 1972. As was the case with section 935, section 932 was repealed by the Tax Reform Act of 1986. See section 1272(d)(1) of Pub. L. 99-514, 100 Stat. 2594.) In light of the amendment of section 932(a), and by applying CNMI's mirror code, neither Great Cruz Bay nor the Government's position in Manning supports petitioners' contention that a citizen of the United States is an alien of CNMI. See Holmes v. Dir. of Rev. & Tax., Government of Guam, 827 F.2d 1243">827 F.2d 1243, 827 F.2d 1243">1245 (9th Cir. 1987).

The Ninth Circuit in Holmes held that a CNMI subchapter S corporation had no nonresident aliens among its shareholders who included residents of the continental United States, Guam, and CNMI. 1990 U.S. Tax Ct. LEXIS 110">*129 To reach this result, the court applied to the Guamanian mirror code that part of section 1.871-2(a), Income Tax Regs., which provides that "the term 'nonresident alien individual' means an individual whose residence is not within the United States, and who is not a citizen of the United States." The court held that:

By its terms, the regulation excludes the corporation's U.S. resident shareholder from the definition of nonresident alien and, through the mirroring provisions of the Code and Covenant, it also excludes the Guamanian and CNMI resident shareholders. [827 F.2d 1243">827 F.2d at 1245.]

We observe that in deciding Holmes under Guamanian law, the circuit court applied U.S. law, as expressed in the quoted regulation, to a U.S. citizen shareholder (and a resident of the continental United States) and applied the Guamanian mirror code to shareholders who were residents of Guam and CNMI, respectively. We also note that the provisions of the regulation, which the circuit court applied to a 1980 tax year, are almost identical to those of section 7701(b)(1)(B) which, as noted above (85 T.C. 527">supra p. 601), was enacted effective for taxable years beginning after1990 U.S. Tax Ct. LEXIS 110">*130 December 31, 1984. Whether the circuit court would have applied 95 T.C. 594">*605 the statute in the same way it applied the regulation can only remain a subject for speculation, in which we decline to engage.

Petitioners next assert that U.S. citizens are aliens of CNMI because the United States and Guam [CNMI] were treated as separate jurisdictions for purposes of applying section 935. Petitioners rely on section 935(c) which provided in pertinent part:

SEC. 935(c). Extent of Income Tax Liability. -- In the case of any individual to whom this section applies for the taxable year --

(1) for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the United States shall be treated as including Guam [CNMI], [emphasis added]

(2) for purposes of the Guam [CNMI] territorial income tax, Guam [CNMI] shall be treated as including the United States, * * *.

Petitioners suggest that because the United States and Guam [CNMI] were treated as separate jurisdictions for purposes of section 935, the citizens of one jurisdiction were aliens of the other jurisdiction. From1990 U.S. Tax Ct. LEXIS 110">*131 an abstract, definitional perspective, petitioners' argument has appeal. However, a definitional approach to the question ignores the fact that section 935(c) was not codified for the purpose of classifying U.S. citizens as aliens of Guam [CNMI]. Rather, segregation of the United States and Guam [CNMI] was necessary in order to craft and apply standards for determining the citizenship and residence of taxpayers so that the single filing provisions could be implemented in an orderly fashion.

Specifically, the two jurisdictions had to be considered independently in order to segregate for single filing purposes citizens born or naturalized in Guam [CNMI] who, by virtue thereof, are also citizens of the United States. Sec. 1.935-1(a)(3), Income Tax Regs. Likewise, the two jurisdictions had to be considered independently to evaluate the factors pertinent to a facts and circumstances analysis for determining residency. Sec. 1.935-1(a)(3), Income Tax Regs. Thus, while the United States and Guam [CNMI] were treated separately for purposes of section 935, the section was not intended to classify U.S. citizens as aliens of Guam95 T.C. 594">*606 [CNMI] nor does the House Report support such a1990 U.S. Tax Ct. LEXIS 110">*132 classification. In this light, petitioners cannot rely on section 935(c) to establish that U.S. citizens are aliens of CNMI.

As we see it, ambiguities inherent in the application of CNMI's mirror system of taxation preclude a purely definitional approach to theissue at hand. Such an approach does not ensure that the provisions in question will be interpreted in a practical way. In construing statutes, the object and policy of the whole law are to be given effect. See Fehlhaber v. Commissioner, 94 T.C. 863">94 T.C. 863, 94 T.C. 863">865-866 (1990). Because the statutory language is not dispositive as to whether U.S. citizens are aliens of CNMI, see United States v. Goodyear Tire and Rubber Co., 493 U.S. 132">493 U.S. 132,     (1989), petitioners must establish that section 7701(b)(3)(A) was intended to apply to U.S. citizens in the context of CNMI's mirror code.

Petitioners contend that the substantial presence test of section 7701(b)(3)(A) was intended to repeal the facts and circumstances test for purposes of determining residency under section 935. Petitioners do not cite any authority within section 7701(b) or the regulations to support their contention. 1990 U.S. Tax Ct. LEXIS 110">*133 Petitioners do assert, however, that the lack of any mention of section 935 in the legislative history of section 7701(b) shows that Congress intended that the substantial presence test was to apply for purposes of section 935. Petitioners contend that Congress implicitly repealed a facts and circumstances test when section 7701(b)(3)(A) was enacted.

Respondent counters that the lack of any reference to section 935 in the legislative history to section 7701(b) supports his position that Congress did not intend to abandon a facts and circumstances test as the standard for determining residency of U.S. citizens for purposes of section 935. We agree with respondent.

First, we return briefly to the legislative history of section 935. We find it significant that the House Report discussing the enactment of section 935 makes specific reference to application of "the rules under present law" to determine questions of residency. H. Rept. 92-1479, supra, 1972-2 C.B. at 762. (Emphasis added.) As previously noted, when section 935 was enacted, the facts and circumstances 95 T.C. 594">*607 test controlled determinations of residency. Consistent with legislative1990 U.S. Tax Ct. LEXIS 110">*134 intent, section 1.935-1(a)(3), Income Tax Regs., provides that the facts and circumstances test is to be applied to determine residency for purposes of section 935.

In contrast, there is no mention of section 935 in the legislative history of section 7701(b). Rather, the Conference Report merely states:

The conference agreement allows the Secretary to prescribe regulations to carry out the purpose of this subsection. In particular, the conferees understand that regulations may be necessary to coordinate U.S. taxing jurisdiction with the taxing jurisdictions of U.S. possessions the basis of whose tax law is the Internal Revenue Code. [H. Rept. 98-861 (Conf.), at 968 (1984), 1984-3 C.B. (Vol. 2) 222.]

In our view, the legislative history of section 7701(b) suggest that Congress at least implicitly left open the question of the applicability of the facts and circumstances test to the extent that the test was to be utilized to determine the residency of U.S. citizens for purposes of section 935. This is particularly apparent in light of Congress' express adoption of the test "under present law" in the legislative history of section 935. Consequently, 1990 U.S. Tax Ct. LEXIS 110">*135 it is reasonable to presume that the facts and circumstances test, as applied for purposes of section 935, was not repealed by implication. See 1A Sutherland, Statutory Construction, section 23.10 (4th ed. 1985).

We also note that petitioners' view of the application of the substantial presence test is contrary to the anti-abuse policy reflected in section 7701(b)(10). Section 7701(b)(10) provides that an alien who is a resident for 3 consecutive years and interrupts his U.S. residency for fewer than 3 years will be subject to tax under section 877 during the interim period of nonresidence. Section 7701(b)(10) was enacted to alleviate concerns that under the substantial presence test long-time U.S. residents would leave the United States for a short period, dispose of assets free of Federal taxes, and then resume their residency in the United States. See H. Rept. 98-861 (Conf.), at 967 (1984), 1984-3 C.B. (Vol. 2) 221.

Contrary to the anti-abuse policy articulated in section 7701(b)(10), petitioners admit that the principal motivating factor for moving to CNMI was to obtain the tax savings 95 T.C. 594">*608 associated with the CNMI 95-percent territorial income1990 U.S. Tax Ct. LEXIS 110">*136 tax rebate for CNMI source income. Petitioners moved to CNMI during 1985 and remained in CNMI only long enough to satisfy the mechanical test for residency under section 7701(b)(3)(A). In 1986, petitioners moved back to the United States. Petitioners effectively concede that they were attempting to use the substantial presence test of section 7701(b)(3)(A) to manipulate their residency for tax-avoidance purposes.

Congress further restricted the scope of section 7701(b)(3)(A) by stating:

The Committee, in changing the definition of U.S. residence for U.S. tax purposes, is not changing the definition of foreign residence for U.S. tax purposes. Therefore, the term "bona fide resident of a foreign country" for the purposes of the tax benefits for foreign earned income will retain its current meaning (sec. 911(d)(1)(A)). Therefore, a U.S. citizen who is present in a foreign country for 183 days during a calendar year will not automatically be a "bona fide resident" of that country. [H. Rept. 98-432, vol. 1 at 227 (1983).]

In sum, the House Report states that section 7701(b) does not apply for purposes of determining foreign residency. A facts and circumstances test was retained1990 U.S. Tax Ct. LEXIS 110">*137 for purposes of determining residency under section 911(d)(1)(A). This shows that in enacting section 7701(b)Congress did not intend that the substantial presence test would replace a facts and circumstances test for all purposes.

By retaining the facts and circumstances test for determining the residency of a U.S. citizen present in a foreign country, Congress made clear that U.S. citizens would be subjected to a stricter scrutiny than that contemplated for aliens under the substantial presence test. This stricter scrutiny for U.S. citizens living abroad further ensured that the substantial presence test would not be used for tax avoidance purposes. Consistent with the treatment of U.S. citizens living abroad, and absent any indication to the contrary, we conclude that Congress likewise intended that the facts and circumstances test would continue to be applied in the case of U.S. citizens attempting to establish residency in a U.S. territory or possession.

Finally, we reject petitioners' contention that it is inequitable to apply one standard to determine the residency of 95 T.C. 594">*609 aliens present in the United States and another to determine the residency of U.S. citizens present1990 U.S. Tax Ct. LEXIS 110">*138 in CNMI. Petitioners ignore the divergent interests of the United States in taxing aliens present in the United States as opposed to U.S. citizens residing outside of the United States. As noted by this Court in Nelson v. Commissioner, 30 T.C. 1151">30 T.C. 1151, 30 T.C. 1151">1154 (1958):

Exemptions as well as deductions are matters of legislative grace, and a taxpayer seeking either must show that he comes squarely within the terms of the law conferring the benefit sought. * * * [It] is quite possible that an alien may be found to be a resident of the United States while a citizen may be found not to have been a resident of a foreign country or countries, under very similar facts, the ultimate result in both cases consisting of the denial of a special benefit, i.e., exemption from income tax, not clearly shown to be applicable. * * *

In light of the foregoing, we are compelled to conclude that petitioners cannot utilize the substantial presence test to establish residency in CNMI. Rather, the facts and circumstances test, referred to in the legislative history to section 935 and in section 1.935-1(a)(3), Income Tax Regs., provides the standard for determining whether petitioners1990 U.S. Tax Ct. LEXIS 110">*139 were residents of CNMI in the year at issue.

Petitioners' alternative contention that they were residents of CNMI under the facts and circumstances test does not lend itself to summary adjudication. Section 1.871-2(b), Income Tax Regs., provides in pertinent part:

Sec. 1.871-2(b). Residence defined. An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient is determined by his intentions with regard to the length and nature of his stay. * * * [Emphasis added.]

The regulation provides that an alien's residence is determined by examining his intention with regard to the length and nature of his stay. An alien's intention with regard to the length and nature of his stay is determined by considering the facts and circumstances of the case. Sochurek v. Commissioner, 300 F.2d 34">300 F.2d 34, 300 F.2d 34">37-38 (7th Cir. 1962); Schoneberger v. Commissioner, 74 T.C. 1016">74 T.C. 1016, 74 T.C. 1016">1022-1023 (1980). In Shiosaki v. Commissioner, 61 T.C. 861">61 T.C. 861, 61 T.C. 861">863-864 (1974), we stated:

95 T.C. 594">*610 Ordinarily, summary1990 U.S. Tax Ct. LEXIS 110">*140 judgment should not be granted in a case in which intent is an issue. [Citation omitted.] A conclusion as to [a taxpayer's] intent should not be reached without the benefit of a trial in which his demeanor can be observed and his credibility can be weighed.

Thus, the issue of whether petitioners were actual residents of CNMI under the facts and circumstances test is not appropriate for summary adjudication.

To reflect the foregoing,

An appropriate order will be issued.