Barclay Assocs., Inc. v. Internal Revenue Serv.
| Decision Date | 31 March 2012 |
| Docket Number | Civil No.: 2010-140 |
| Parties | BARCLAY ASSOCIATES, INC., KINGSBRIDGE ASSOCIATES, INC., WARWICK ASSOCIATES, INC., HARVEY BIRDMAN, DIANE BIRDMAN, HERBERT HIRSCH, BONITA HIRSCH Plaintiff, v. INTERNAL REVENUE SERVICE, COMISSIONER OF THE INTERNAL REVENUE SERVICE, DOUGLAS H. SHULMAN, in his official capacity, GOVERNMENT of the VIRGIN ISLANDS, VIRGIN ISLANDS BUREAU of INTERNAL REVENUE, CLAUDETTE WATSON-ANDERSON, in her official capacity, GOVERNOR JOHN P. DEJONGH, in his official capacity, LOUIS M. WILLIS, in his official capacity, and in his individual capacity. Defendants. |
| Court | U.S. District Court — Virgin Islands |
ATTORNEYS:
Joseph A. DiRuzzo, III Esq.
St. Thomas, U.S.V.I.
For the plaintiffs.
St. Thomas, U.S.V.I.
For Louis M. Willis in his official and individual
capacity, Governor John P. DeJongh, Claudette Watson-
Anderson, and Virgin Islands Bureau of Internal Revenue.
Washington, D.C.
For the Internal Revenue Service, and the Commissioner of
Before the Court are the motions of the defendants the Virgin Islands Bureau of Internal Revenue (the "VIBIR"), Claudette Watson-Anderson ("Anderson"), and Louis M. Willis ("Willis") to dismiss this matter for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. The United States also moves to dismiss this matter for lack of subject matter jurisdiction.
Plaintiffs Harvey and Diane Birdman ("the Birdmans") are married.1 Plaintiffs Herbert and Bonita Hirsch ("the Hirsches") are also married.
Harvey Birdman and Herbert Hirsch own and operate businesses in the Virgin Islands and the United States mainland. During tax years 2003, 2004, 2005, and 2006, their source of income was from corporations, Barclay Associates, Inc. ("Barclay"), Warwick Associates, Inc. ("Warwick"), and Kingsbridge Associates, Inc. ("Kingsbridge").
The Birdmans contend that they filed their income tax returns for calendar years 2003, 2004, 2005, and 2006 with the VIBIR.
On September 30, 2010, the Internal Revenue Service ("IRS") sent the Birdmans each a letter captioned "Notice of Deficiency." The notice of deficiency informed the Birdmans that they owed taxes in the amount of $11,272,322 for the 2006 tax year.
Thereafter, on December 31, 2010, the Birdmans filed an amended income tax return with the VIBIR for tax year 2006. On their amended return, the Birdmans requested that the VIBIR refund their taxes because the IRS issued a statutory notice of deficiency to them. The VIBIR denied the refund claim for calendar year 2006.
On February 22, 2011, the IRS sent the Birdmans each a notice of deficiency for calendar years 2003, 2004, and 2005. Harvey Birdman's notice of deficiency alleges that he owed the IRS $2,123,438.37 for tax year 2003; $9,556,620.17 for tax year 2004; and $18,109,508.78 for tax year 2005. Diane Birdman's notice of deficiency stated that she owed the IRS $145,044.94
for tax year 2003; $426,777.68 for tax year 2004; and $1,038,031.19 for tax year 2005.
On April 4, 2011, the Birdmans filed amended tax returns for calendar years 2003, 2004, and 2005 with the VIBIR. On their amended returns the Birdmans requested that the VIBIR refund their taxes because the IRS issued a statutory notice of deficiency to them. The VIBIR denied the refund claims for calendar years 2003, 2004, and 2005.
The Birdmans have also filed a petition for determination of deficiency of income tax liability for calendar years 2003, 2004, 2005, and 2006 in the United States Tax Court.
The Hirsches contend that they filed their income tax returns for calendar years 2003, 2004, 2005, and 2006 with the VIBIR.
On September 30, 2010, the IRS sent the Hirsches each a letter captioned "Notice of Deficiency." The notice of deficiency informed the Hirsches that they owed the IRS $10,924,954.25 for calendar year 2006.
Subsequently, the Hirsches amended their income tax return for calendar year 2006. On their amended return the Hirsches requested that the VIBIR refund their taxes because the IRS issued a statutory notice of deficiency. The VIBIR denied the refund claim for calendar year 2006.
On December 15, 2010, the IRS sent the Hirsches each a notice of income tax deficiency for calendar years 2003, 2004, and 2005. Herbert Hirsch's notice of deficiency stated he owed the IRS $2,148,779.69 for calendar year 2003; $9,152,836.73 for calendar year 2004; and $18,204,893.41 for calendar year 2005. Bonita Hirsch's notice of deficiency asserted that she owed the IRS $173,655.23 for calendar year 2003; $720,003.62 for calendar year 2004; and $1,224,799.60 for calendar year 2005.
On April 4, 2011, the Hirsches filed amended income tax returns for calendar years 2003, 2004, and 2005 with the VIBIR. On their amended returns the Hirsches requested that the VIBIR refund their taxes because the IRS issued a statutory notice of deficiency to them. The VIBIR denied the refund claim for calendar years 2003, 2004, and 2005.
The Hirsches have also filed a petition for determination of deficiency of income tax liability for calendar years 2003, 2004, 2005, and 2006 in the United States Tax Court.
Barclay alleges that it is a United States Virgin Islands ("USVI") corporation. It asserts that it filed its corporate income tax return, Form 1120, for calendar years 2004, 2005, and 2006 with the VIBIR. Subsequently, the IRS issued statutory notices of deficiency for calendar years 2004, 2005 and 2006 toBarclay. The notices of deficiency state that Barclay's income was not USVI sourced. Barclay then amended its income tax return for tax years 2004, 2005, and 2006. On the amended returns, Barclay requested that the VIBIR refund its tax payments for calendar years 2004, 2005, and 2006. The VIBIR denied the refund claims.
Kingsbridge alleges that it is a USVI corporation. It asserts that it filed its corporate income tax return for calendar years 2003, 2004, 2005, and 2006 with the VIBIR. Subsequently, the IRS issued statutory notices of deficiency to Kingsbridge for calendar years 2003, 2004, 2005, and 2006. The notices of deficiency state that Kingsbridge's income was not USVI sourced. Kingsbridge then filed amended returns for 2003, 2004, 2005, and 2006. On the amended returns Kingsbridge requested that the VIBIR refund its tax payments for 2003, 2004, 2005, and 2006. The VIBIR denied the refund claims.
Warwick alleges that it is a USVI corporation. Warwick filed its corporate income tax returns for calendar years 2003 and 2004 with the VIBIR. Subsequently, the IRS issued statutory notices of deficiency to Warwick for calendar 2003 and 2004. The notices of deficiency state that Warwick's income was notUSVI sourced. On March 11, 2011, Warwick filed amended income tax returns for tax years 2003 and 2004 with the VIBIR. On its amended return Warwick requested that the VIBIR refund its taxes because the IRS issued a statutory notice of deficiency to it. The VIBIR denied the refund claims.
The Birdmans, the Hirsches, Barclays, Kingsbridge, and Warwick (collectively the "Plaintiffs") assert that the VIBIR and the IRS entered into a secret agreement in 2004 ("secret agreement"). The Plaintiffs contend that this agreement was entered into without approval from the Governor of the Virgin Islands.
The Plaintiffs state pursuant to this secret agreement, the IRS agreed that if an Economic Development Program ("EDP") beneficiary is found not to be a bona fide resident of the Virgin Islands the VIBIR would be permitted to keep any funds paid by those taxpayers.
The Plaintiffs further maintain that the VIBIR and IRS executed this agreement through a collaborative auditing system. They assert that the VIBIR provides a list of approved EDP beneficiaries to the IRS. From this list, the IRS informs the VIBIR which entities it plans to select to audit. Based on this information, the VIBIR will withhold processing income tax refunds to the entities chosen for audits. The Plaintiffs statethat the VIBIR, and specifically Anderson, has a policy of not paying refunds until after an IRS audit is completed.
They argue that the IRS is "gaming the system" by maintaining that filing an income tax return with the VIBIR does not begin the running of the statute of limitations for an assessment under 26 U.S.C. § 6501. (Amend. Compl. ¶ 197). They further contend that all the while, the VIBIR maintains that the statute of limitations for an income tax refund under 26 U.S.C. § 6511 does apply. The Plaintiffs contend that the alleged arrangement between the IRS and the VIBIR infringes on the Plaintiffs "right[s] guaranteed under the Due Process Clause the 5th Amendment of the Constitution", "the Equal Protection Clause of the 14th Amendment as subsumed by the Due Process Clause of the 5th Amendment." (Amend. Compl. ¶ 200, 203, and 197).
On September 29, 2010, the Birdmans, the Hirsches, Kingsbridge, Barclays, and Warwick (the "Plaintiffs") filed a Twenty-Two Count complaint. In Counts One through Seven the Birdmans and Hirsches dispute the IRS's assessment of their tax deficiency and petition the Court for a redetermination of their income tax liability. In Counts Eight through Sixteen the Plaintiffs assert refund claims against the Virgin Islands Government and the VIBIR. In Counts Seventeen through Twenty-Two the Plaintiffs assert constitutional violations against thedefendants. In Count Seventeen the Plaintiffs assert violations of due process against the IRS; the Commissioner of the IRS ("Commissioner") in his official capacity; the Virgin Islands Government; the VIBIR; Anderson in her official capacity; Governor John P. DeJongh, in his official capacity; and Louis M. Willis ("Willis"), in his official capacity (collectively the "Defendants"), under 42...
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