CHICAGO BRIDGE & IRON COMPANY v. Wheatley

• Decision Date: 03 February 1969
• Docket Number: Civ. No. 237-1967.
• Citation: 295 F. Supp. 240
• Parties: CHICAGO BRIDGE & IRON COMPANY, Ltd., Petitioner, v. Reuben B. WHEATLEY, Commissioner of Finance, Respondent.
• Court: U.S. District Court — Virgin Islands

295 F. Supp. 240

CHICAGO BRIDGE & IRON COMPANY, Ltd., Petitioner, v. Reuben B. WHEATLEY, Commissioner of Finance, Respondent.

Civ. No. 237-1967.

District Court, Virgin Islands, D. St. Thomas and St. John.

February 3, 1969.

Bailey, Wood & Rosenberg, Charlotte Amalie, V. I. (William W. Bailey, Charlotte Amalie, V. I., of counsel), for petitioner.

Peter J. O'Dea, First Asst. Atty. Gen. of the Virgin Islands, for respondent.

ACTION FOR REDETERMINATION OF INCOME TAX LIABILITY

OPINION

STALEY, Circuit Judge (sitting by designation).

This motion for judgment on the pleadings comes before the court as a result of Chicago Bridge & Iron Company's suit for redetermination of its tax liability to the Virgin Islands for the year 1965. Respondent, Reuben B. Wheatley, Commissioner of Finance, disallowed to petitioner the Western Hemisphere Trade Corporation special deduction (Int.Rev.Code of 1954, § 922)¹ of $869.96 claimed by petitioner on its income tax return on the ground that such deduction is not allowable in determining Virgin Islands' income tax to corporations which are not incorporated in (i. e., domestic corporations of) the Virgin Islands.

Under § 921 of the Internal Revenue Code of 1954, the § 922 deduction is available to

"* * * a domestic corporation all of whose business (other than incidental purchases) is done in any country or countries in North, Central, or South America, or in the West Indies, and which satisfies the following conditions:

"(1) if 95 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources without the United States; and

"(2) if 90 percent or more of its gross income for such period or such part thereof was derived from the active conduct of a trade or business. * * *"

There is no dispute here that, for United States income tax purposes, petitioner, a Delaware corporation, is a domestic corporation within the meaning of § 921, since the Int.Rev.Code of 1954, § 7701-(a) (4) provides:

"The term `domestic' when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State or Territory."

The critical question is whether petitioner is a domestic corporation within the meaning of § 921 for Virgin Islands tax purposes. This requires an understanding of the structure and etiology of the Virgin Islands tax law.

When Congress enacted the Naval Appropriation Act of July 12, 1921,² it provided:

"* * * the income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands."

The effect of this statute was to create a "mirror" system of taxation whereby the United States tax law was reflected by the Virgin Islands tax law. As noted in Dudley v. Commissioner of Internal Revenue, 258 F.2d 182, 185 (C.A.3, 1958), the statute set up two distinct taxing jurisdictions having as their basic law an identical statute applicable to each. Under this system, a United States corporation doing business in the Virgin Islands had to file two tax returns: one in the Virgin Islands which had jurisdiction to tax all income from sources within the Virgin Islands, and one in the United States which had jurisdiction to tax all income from any source, including the Virgin Islands. Double taxation from the same income was avoided by allowing the taxpayer, in reporting to one taxing jurisdiction, to take a foreign tax credit for any taxes paid to the other taxing jurisdiction. See Int.Rev.Code of 1939, § 131(a) (1); Int.Rev.Code of 1954, § 901(b) (1); I.T. 2946, XIV-2 Cum.Bull. 109 (1935); I.T. 3690, 1944 Cum.Bull. 164.

This dual system of taxation was perpetuated by the Virgin Islands Government, when in 1957, it enacted 33 V.I.C. § 1931(15), which provides:

"`Virgin Islands income tax law' means so much of the United States Internal Revenue Code as was made applicable in the Virgin Islands by the Act of Congress entitled `An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes', approved July 12, 1921 (48 U.S.C. § 1397)."

It is petitioner's contention that under the mirror system of taxation, a United States corporation, such as petitioner, is required to pay to the Virgin Islands only the same amount of tax on its Virgin Islands source income as would be due the United States on that same income. Thus, it is argued that since petitioner can claim the § 922 deduction on its United States income tax return, it should also be able to claim the same deduction on its Virgin Islands tax return. The court believes that this is an improper view of the dual taxing system. Cf. Jennings v. United States, 168 F. Supp. 781, 144 Ct.Cl. 28 (1958).

As early as 1935, the Internal Revenue Service recognized in I.T. 2946, XIV-2 Cum.Bull. 109, that since the United States and the Virgin Islands are separate taxing jurisdictions,

"* * * it will, of course, be necessary in some sections of the law to substitute the words `Virgin Islands' for the words `United States,' in order to give the law proper effect in those islands * * *"

This substitution approach has been followed by the district court of Guam in tax problems arising in that jurisdiction. Wilson v. Kennedy, 123 F.Supp. 156, 159 (Guam 1954), aff'd 232 F.2d 153 (C.A.9, 1956); Government of Guam v. Kaanehe, 124 F.Supp. 15, 17 (Guam 1954). The same approach will be followed in the instant case because the court believes that under the mirror system of taxation, if the § 922 special deduction is available to corporations filing Virgin Islands income tax returns, it is only available to Virgin Islands "domestic" corporations within the meaning of 33 V.I.C. § 1931(2), which provides:

"`domestic' when applied to a corporation or partnership means created or organized in the Virgin Islands."

Petitioner was incorporated in Delaware, not the Virgin Islands; it is a United States domestic corporation under the Internal Revenue Code of 1954, § 7701(a...