Appleton v. Comm'r of Internal Revenue
| Decision Date | 05 November 2010 |
| Docket Number | No. 7717–10.,7717–10. |
| Citation | 135 T.C. No. 23,135 T.C. 461 |
| Parties | Arthur I. APPLETON, Jr., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Asserting it has a vital interest in a key aspect of this case, M filed a motion to intervene pursuant to Rule 1(b), Tax Court Rules of Practice and Procedure, and under Fed.R.Civ.P. 24.
Held: M's interest does not satisfy the direct, substantial, and legally protectable requirements of Fed.R.Civ.P. 24(a)(2).
Held, further, Because (i) P has raised the issue in which M asserts an interest as a matter central to his case and presumably the issue will be fully vetted during the course of these proceedings, and (ii) M's intervention could result in trial complications as well as delay the resolution of the issue in which M asserts an interest, M will not be permitted to intervene pursuant to Fed.R.Civ.P. 24(b)(2).
Held, further, as an alternative to intervention, M will be permitted to file an amicus curiae brief.
Randall P. Andreozzi, Edward Doyle Fickess, Ryan M. Murphy, and Teia M. Bui, for petitioner.
Barry J. Hart, for proposed intervenor.
Justin L. Campolieta, for respondent.
Asserting that it has a vital interest in a key aspect of this case, the Government of the U.S. Virgin Islands (movant) filed a motion to intervene pursuant to Rule 1(b). Petitioner has no objection to movant's proposed intervention; respondent does.
Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code as amended for the years at issue. At the time he filed his petition, petitioner resided in the U.S. Virgin Islands.
Petitioner, a U.S. citizen, was a bona fide resident of the U.S. Virgin Islands (Virgin Islands) for all years at issue (i.e., 2002, 2003, and 2004). Petitioner (i) filed territorial income tax returns with the Virgin Islands Bureau of Internal Revenue (BIR) for 2002, 2003, and 2004 pursuant to section 932(c)(2), and (ii) claimed he qualified for the gross income exclusion provided by section 932(c)(4) and therefore did not have to file Federal income tax returns or pay Federal income taxes for such years. The BIR audited petitioner's Virgin Islands territorial income tax returns for 2002, 2003, and 2004, and proposed no adjustments.
Respondent subsequently audited petitioner's 2002, 2003, and 2004 Virgin Islands territorial income tax returns and on November 25, 2009, issued petitioner a notice of deficiency, determining the following Federal income tax deficiencies and additions to tax:
+---------------------------------------------------------+
¦ ¦ ¦Additions to Tax ¦
+----+----------+-----------------------------------------¦
¦Year¦Deficiency¦Sec. 6651(a)(1)¦Sec. 6651(a)(2)¦Sec. 6654¦
+----+----------+---------------+---------------+---------¦
¦2002¦$283,555 ¦$35,563.73 ¦$39,515.25 ¦$9,045.50¦
+----+----------+---------------+---------------+---------¦
¦2003¦789,518 ¦147,943.58 ¦164,381.75 ¦20,370.53¦
+----+----------+---------------+---------------+---------¦
¦2004¦280,241 ¦56,728.35 ¦63,031.50 ¦8,030.86 ¦
+---------------------------------------------------------+
On April 1, 2010, petitioner filed a petition in this Court for redetermination of the deficiencies and additions to tax determined by the Internal Revenue Service (IRS), asserting, inter alia, that the period of limitations for assessing tax had expired. On May 26, 2010, respondent filed an answer to the petition asserting, inter alia, that the period of limitations for assessing tax was still open. On June 18, 2010, movant filed its motion to intervene.
Although part of the United States, the Virgin Islands are a separate and distinct taxing jurisdiction. Congress established the “mirror tax system” as the tax law of the Virgin Islands. Act of July 12, 1921, ch. 44, sec. 1, 42 Stat. 122 (). Under the mirror tax system, the Virgin Islands uses the Internal Revenue Code with “Virgin Islands” effectively substituted for any reference to the “United States” (and vice versa). See Danbury, Inc. v. Olive, 820 F.2d 618, 620 (3d Cir.1987). As the law developed, the provisions of the Internal Revenue Code have been made 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 .” Chi. Bridge & Iron Co. v. Wheatley, 430 F.2d 973, 976 (3d Cir.1970) (quoting 48 U.S.C. sec. 1421i(d)(1) (1964)).
The provisions applicable for 2002, 2003, and 2004, under which individuals file income tax returns and pay tax in the Virgin Islands, were enacted as part of the Tax Reform Act of 1986, Pub.L. 99–514, sec. 1274(a), 100 Stat. 2596, and amended in the Technical and Miscellaneous Revenue Act of 1988, Pub.L. 100–647, sec 1012(w), 102 Stat. 3530. Virgin Islands residents were generally exempted from Federal income tax obligations if they met the requirements of section 932(c)(4):
for purposes of calculating income tax liability to the United States, gross income shall not include any amount included in gross income on such return, and allocable deductions and credits shall not be taken into account.1
Thus, an individual who satisfied the three requirements of section 932(c)(4) and incurred income tax obligations to both the United States and the Virgin Islands could satisfy his reporting and payment requirements by filing only with, and paying tax only to, the Virgin Islands. If the individual failed to meet any of these requirements, he was required to file a Federal income tax return with the IRS. See S. Rept. 100–445, at 315 (1988). Consequently, an individual failing to satisfy any of the three requirements of section 932(c)(4) could be required to file an income tax return and be liable for taxes in both the United States and the Virgin Islands.
To encourage economic development in the Virgin Islands, Congress has explicitly permitted the Virgin Islands government to reduce certain taxes. Section 934(b)(1) provides that the Virgin Islands may reduce taxes on “income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands.”
Pursuant to this grant of authority, the Virgin Islands government enacted several investment incentives, including the Virgin Islands Industrial Development Program (referred to by the parties as the economic development program or EDP), currently codified at V.I.Code Ann. tit. 29, secs. 701–726 (1998 & Supp.2010). Intended to promote growth and the development and diversification of the Virgin Islands' economy, the EDP granted certain industrial development benefits to companies that do business in the Virgin Islands. See V.I.Code Ann. tit. 29, sec. 701 (1998). Qualifying companies receive substantial benefits including: A 90–percent exemption on local income taxes, a 90–percent exemption on the taxation of dividends, and a 100–percent exemption on gross receipts taxes.
Attached to respondent's notice of deficiency was a Form 4549–A, Income Tax Discrepancy Adjustments, which set forth the basis for the income tax deficiencies and additions to tax. Although respondent acknowledged that petitioner was a resident of the Virgin Islands at the close of 2002, 2003, and 2004 (thus meeting the first requirement of section 932(c)(4)), Form 4549–A stated:
You do not, however, qualify for the gross income exclusion under section 932(c)(4) of the Internal Revenue Code (I.R.C.) for any of those taxable years. During each of the taxable years 2002, 2003, and 2004, you actively participated in an arrangement that lacks economic purpose and economic substance that was created to improperly claim a 90% credit against your income tax liabilities in a scheme similar to those described in Notice 2004–45 Meritless Position Based on Sections 932(c)(4) and 934(b), resulting in your failure to properly report and identify the source of each item of income shown on the return of income tax you filed with the USVI for each of those years.
Notice 2004–45, 2004–2 C.B. 33, was issued to advise taxpayers that the IRS intended to challenge “highly questionable, and in most cases meritless, positions” of certain U.S. citizens who claim to be residents of the Virgin Islands in order to claim substantial tax benefits (including the above referenced 90–percent income tax credit) of the Virgin Islands EDP.
Respondent asserts that since petitioner did not satisfy the second and third requirements of section 932(c)(4), petitioner was required to file Federal income tax returns in 2002, 2003, and 2004 and pay any tax reported thereon. Because petitioner did not file Federal income tax returns for 2002, 2003, and 2004, respondent asserts that the 3–year period of limitations on assessment provided by section 6501(a) has not yet begun to run. Thus, according to respondent, petitioner's 2002, 2003, and 2004 tax years remain open.
Petitioner, in contrast, asserts that the section 6501(a) period of limitations for assessing Federal taxes began to run when he filed his Virgin Islands territorial income tax returns with the BIR. Petitioner never agreed to an extension of the period of limitations as provided in section...
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