Abramson Enterprises, Inc. v. Government of Virgin Islands of U.S.

• Decision Date: 28 May 1993
• Docket Number: No. 1989-112,V,No. 92-7381,No. 1991-289,1991-289,1989-112,92-7381
• Citation: 994 F.2d 140
• Parties: -2054, 93-1 USTC P 50,321 ABRAMSON ENTERPRISES, INC. v. GOVERNMENT OF THE VIRGIN ISLANDS of THE UNITED STATES; Anthony Olive, Director, V.I. Bureau of Internal Revenue, ABRAMSON ENTERPRISES, INC. v. GOVERNMENT OF THE V.I. OF U.S.; Edward Thomas, Director, V.I. Bureau of Internal Revenue; Alexander Farrelly, Governor of the United States Virgin Islands, Edward E. Thomas, Director as named defendant inand as successor in office inirgin Islands Bureau of Internal Revenue, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 140

994 F.2d 140

71 A.F.T.R.2d 93-2054, 93-1 USTC P 50,321

ABRAMSON ENTERPRISES, INC. v. GOVERNMENT OF THE VIRGIN ISLANDS of THE UNITED STATES;

Anthony Olive, Director, V.I. Bureau of Internal Revenue, ABRAMSON ENTERPRISES, INC. v. GOVERNMENT OF THE V.I. OF U.S.; Edward Thomas, Director,

V.I. Bureau of Internal Revenue; Alexander Farrelly,

Governor of the United States Virgin Islands, Edward E.

Thomas, Director as named defendant in No. 1991-289 and as

successor in office in No. 1989-112, Virgin Islands Bureau

of Internal Revenue, Appellant.

No. 92-7381.

United States Court of Appeals Third Circuit.

Argued April 26, 1993.

Decided May 28, 1993.

Rosalie Simmonds Ballentine, Atty. Gen. of the Virgin Islands, Roy E. Parrot, Sol. Gen., Joseph M. Erwin, Asst. Atty. Gen. (Tax) (Argued), Office of the Atty. Gen. of the Virgin Islands, Dept. of Justice, Charlotte Amalie, U.S. Virgin Islands, for appellant.

George W. Cannon, Jr., Law Offices of Ross & Cannon, Frederiksted, St. Croix, U.S. Virgin Islands, Dennis L. Wills (Argued), Raynor, Rensch & Pfeiffer, Omaha, NE, for appellee.

Before: GREENBERG, SCIRICA and GARTH, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge:

This appeal concerns the narrow question of whether the corporate surtax imposed on Virgin Islands taxpayers pursuant to V.I.Code Ann. tit. 33, § 581 (Supp.1990) ("s 581") is deductible from Virgin Islands taxable income under § 164 of the Internal Revenue Code ("s 164") as applied to the Virgin Islands under the "mirror system" of taxation. We conclude that the surtax is non-deductible and, accordingly, we will reverse the judgment of the district court and direct that judgment be entered in favor of the Virgin Islands Bureau of Internal Revenue.

I.

The relevant facts are not in dispute. The instant appeal encompasses two related actions, consolidated below, which arose when appellants, Virgin Islands Bureau of Internal Revenue and its Directors of record for the relevant periods (collectively, "VIBIR"), assessed tax deficiencies against appellee, Abramson Enterprises, Inc. ("Abramson"), for the years 1986, 1987 and 1988. Abramson had paid the 10% corporate surtax on income imposed by the Virgin Islands and had then deducted the amount of the surtax from its Virgin Islands taxable income.

As the disposition of the case unfolded, the district court first heard the case involving Abramson's 1986 return and issued a memorandum opinion holding that the surtax was not deductible. However, on consideration of the alleged deficiencies for tax years 1987 and 1988, the district court reconsidered the 1986 case as well. After a bench trial, the district court retracted its earlier conclusion and, in a Memorandum and Order dated March 23, 1992, held that the corporate surtax imposed by the Virgin Islands is deductible from the taxable income of Virgin Islands corporations. The district court therefore concluded that the notices of deficiency, to the extent that they were related to Abramson's deductions of corporate surtax for the tax years 1986-88, were invalid. VIBIR appeals that decision.

II.

All facts giving rise to this appeal were stipulated by the parties, and because our holding turns only on a matter of law, our review of the district court's order of March 23, 1992 is plenary. We preface our review with a brief discussion of the relevant statutory framework. The Internal Revenue Code of the United States is made applicable to the Virgin Islands pursuant to the Naval Service Appropriation Act of 1922, 48 U.S.C.A. § 1397 (1987):

The income-tax laws in force in the United States of America and those which may hereinafter 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....

Id.

The result of this statute has been to create a "mirror system" of taxation under which Virgin Islands residents discharge their United States tax liability by paying all income taxes directly to the Treasury of the Virgin Islands. The "mirror system" has been applied through rules of construction promulgated by the Internal Revenue Service, VIBIR and the courts. These rules were summarized by this court in Johnson v. Quinn, 821 F.2d 212 (3d Cir.1987):

The Internal Revenue Service has stated that in construing the IRC as in force in the Virgin Islands it is "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 Sayre & Co. v. Riddell, 395 F.2d 407 (9th Cir.1968), a case cited with approval by this circuit ... the court, construing Guam's comparable mirror code, noted Congress's codification of the word substitution rule in 42 U.S.C. § 1421(e), which states that "except where it is manifestly otherwise required, the applicable provisions of the Internal Revenue Code ... shall be read so as to substitute 'Guam' for 'United States.' " 395 F.2d at 412-13.

Id. at 214.

As the law has developed under the mirror system, the provisions of the Internal Revenue Code are applicable to the Virgin Islands so long as the specific section to be applied is not "manifestly inapplicable or incompatible with a separate territorial income tax." Chicago Bridge and Iron Co. v. Wheatley, 430 F.2d 973, 976 (3d Cir.1970) (citations omitted). Moreover, under the "equality principle" discussed in Johnson v. Quinn, 821 F.2d 212 (3d Cir.1987), " '[t]he tax to be paid [to the Virgin Islands] ordinarily is measured by the amount of income tax the taxpayer would be required to pay to the United States of America if the taxpayer were residing in the continental United States.' " Id. at 214 (quoting Chicago Bridge, 430 F.2d at 975-76).

III.

A.

The instant case concerns the applicability of I.R.C. § 164 to income tax paid by Virgin Islands corporations to VIBIR. Section 164(a)(3) states:

Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:

. . . . .

State and local ... taxes.

I.R.C. § 164(a)(3) (West Supp.1993). Section 164(b)(2) defines a "state or local tax" as:

... a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia.

I.R.C. § 164(b)(2) (West Supp.1993).

The applicability of § 164 to Virgin Islands taxpayers is presently being challenged as a result of a corporate surcharge that the Virgin Islands has levied against corporations over and above taxes due under the Internal Revenue Code. This surcharge was first authorized in 1976 when, in order to compensate the Virgin Islands for expected lost revenues due to the Tax Reduction Act of 1975, Congress amended 48 U.S.C. § 1397 to allow the Virgin Islands legislature to impose a surtax of up to 10% on federal income taxes, payable to the treasury of the Virgin Islands. The new language read in pertinent part: "... notwithstanding any other provision of law, the Legislature of the Virgin Islands is authorized to levy a surtax on all taxpayers in an amount not to exceed 10 per centum of their annual tax obligation to the government of the Virgin Islands." 48 U.S.C.A. § 1397 (1987).

The Virgin Islands legislature, however, chose not to take advantage of its newfound taxing authority until ten years later when it imposed a 10% corporate surtax:

There is hereby imposed on all corporations that have a liability to pay Virgin Islands income tax a surcharge of ten percent (10%) of each such corporation's total income tax liability, defined as "Total Tax Liability."....

33 V.I.C. § 581(a) (Supp.1990).

Relying on the "equality principle" articulated in Johnson, see supra at 142, Abramson asserts that § 164 must also apply to the corporate surtax paid by a Virgin Islands taxpayer in order to impose on that taxpayer a tax obligation equivalent to one for which a United States taxpayer would be responsible. Abramson argues:

The Surtax is equivalent to an income tax enacted by a state legislature since it was enacted by the Virgin Islands legislature pursuant to authority granted it by the Congress. If [Abramson] was an United States taxpayer and had paid the Surtax to [VIBIR], there is no doubt that it would be entitled to a deduction for the tax under Internal Revenue Code § 164.

Abramson's Brief at 11. ¹

Although Abramson does not dispute that the surtax in question was imposed pursuant to the authority granted the Virgin Islands in 1976 under § 1397, Abramson nevertheless looks to the legislative history of the Tax Reduction Act of 1986 ("TRA") in order to support its contention that the surtax is deductible pursuant to § 164. Enacted in 1986 after the surtax had been implemented by the Virgin Islands Legislature, TRA § 1274(b) amends 26 U.S.C. § 932 and allows the Virgin Islands to impose local income taxes without regard to the 10% limitation imposed under § 1397:

(b) Authority to impose nondiscriminatory local income taxes.--Nothing in any provision of Federal law shall prevent the Virgin Islands from imposing on any person nondiscriminatory local income taxes. Any taxes so imposed shall be treated in the same manner as State and local income taxes under section 164 of the Internal Revenue Code of 1954 [section 164 of this title] and shall not be treated as taxes to which section 901 of such Code [section 901 of this title] applies.

TRA § 1274(b) of Pub.L. 99-514, as amended Pub.L. 100-647, Title I, § 1012(w)(4), Nov. 10, 1988, 102 stat. 3530. ²

In addition to the authority it grants the Virgin Islands to implement "nondiscriminatory local income taxes," Abramson asserts that, on its face, the language of § 1274(b) mandates that any corporate surtax imposed by the Virgin Islands must be deductible as a "state or local tax." ³ In fact, Abramson insists that even were we to hold that the nature of the surtax (local or...