Bizcap, Inc. v. Olive, 89-3199

• Decision Date: 30 January 1990
• Docket Number: No. 89-3199,89-3199
• Citation: 892 F.2d 1163
• Parties: -710, 90-1 USTC P 50,238 BIZCAP, INC. v. Anthony OLIVE, Director of Internal Revenue, and the Government of the Virgin Islands. Appeal of Anthony P. OLIVE, Director of Bureau of Internal Revenue and the Government of the Virgin Islands, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 1163

892 F.2d 1163

65 A.F.T.R.2d 90-710, 90-1 USTC P 50,238

BIZCAP, INC. v. Anthony OLIVE, Director of Internal Revenue, and the Government of the Virgin Islands Appeal of Anthony P. OLIVE, Director of Bureau of Internal Revenue and the Government of the Virgin Islands Appellants.

No. 89-3199.

United States Court of Appeals Third Circuit.

Argued Dec. 6, 1989.

Decided Dec. 29, 1989.

Rehearing and Rehearing In Banc Denied Jan. 30, 1990.

Joanne E. Bozzuto (argued), Asst. Atty. Gen. (Tax), V.I. Dept. of Justice, Charlotte Amalie, St. Thomas, U.S.V.I., for appellants.

Todd H. Newman, Nichols, Newman and Silverlight, Christiansted, St. Croix, U.S.V.I., Fred F. Fielding (argued), Wiley, Rein and Fielding, Washington, D.C., Ronald D. Hinds, Dallas, Tex., for appellee.

Before GIBBONS, Chief Judge, and MANSMANN and NYGAARD, Circuit Judges.

OPINION OF THE COURT

MANSMANN, Circuit Judge.

We are faced here with the confusion which results when an erroneously decided opinion is legislatively corrected prior to its ultimate reversal by the court of appeals. Thus, we must decide whether a Virgin Islands corporation, which lobbied for an exception to the Tax Reform Act of 1986, won a hollow victory and found itself, though not liable to the United States Internal Revenue Service for tax on its stateside income, nevertheless liable to the Virgin Islands Bureau of Internal Revenue. We conclude that the exception in § 1277(c)(2)(D) of the Tax Reform Act of 1986 exempts Bizcap, Inc., from the retroactive effect of the Act with respect to pre-1987 open years. However, the result is to hold Bizcap liable to the BIR for the pre-1987 tax years for which the BIR filed a deficiency notice within the statute of limitations. Since the district court entered summary judgment for Bizcap and found that Bizcap was not liable for any deficiency, either to the IRS or the BIR, we will reverse the decision of the district court.

I.

Caribbean Marine, Inc., a/k/a Bizcap, Inc., a Delaware corporation since March 31, 1983, is considered an inhabitant of the Virgin Islands for purposes of § 28(a) of the Revised Organic Act, Act of July 22, 1954, c. 558, § 28(a), 68 Stat. 508, codified at 48 U.S.C.A. § 1642 (West 1987). ¹ Bizcap filed United States income tax returns of a foreign corporation with the Bureau of Internal Revenue in the Virgin Islands ("BIR") for Bizcap's tax years ending May 1983 and 1984. Bizcap filed no forms with the U.S. Internal Revenue Service ("IRS") for the same tax years.

Bizcap's 1982 1120F Form (foreign corporation) for 1983 listed non-Virgin Islands source income of over $15 million, and its 1983 1120F Form for 1984 listed non-Virgin Islands source income of $1.6 million. Bizcap's 1982 1120F for Virgin Islands source income listed a loss of $36,052, while the 1983 1120F Form listed Bizcap's Virgin Islands source income as $18,979. Consequently, Bizcap paid $157 in income tax to the BIR on the Virgin Islands source income. Bizcap paid no tax to the IRS on its $16.9 million income from stateside sources.

On November 7, 1985, the BIR issued a deficiency notice to Bizcap, determining that Bizcap owed $4,467,439 in tax and $670,116 in penalty for 1983 as well as $650,319 in tax and $97,548 in penalty for 1984. Bizcap filed a petition for redetermination of tax liability in the District Court of the Virgin Islands.

On October 22, 1986, Congress passed the 1986 Tax Reform Act which included a section granting an exception from IRS taxation to two Virgin Islands inhabitant corporations, one of which is Bizcap. On November 10, 1986, Bizcap filed a motion for summary judgment claiming it owed no taxes in light of the exception in § 1277(c)(2)(D) of the Tax Reform Act. The district court issued a memorandum and order granting judgment to Bizcap and concluding that Bizcap owed no tax deficiencies for the years 1983 and 1984. The Director of the BIR appeals, contending that, while Bizcap does not owe taxes to the IRS, it nevertheless owes them to the BIR.

II.

While the facts of this appeal are relatively straight-forward, the issues can become complex unless the evolution of Virgin Islands tax law is set forth. After the Virgin Islands were ceded to the United States by Denmark in 1917, Congress passed the Act of March 3, 1917, ch. 171, § 4, 39 Stat. 1133, which continued in effect all of the local laws imposing taxes until Congress provided otherwise. In 1921, as part of the Naval Service Appropriations Act of 1921, Congress passed a statute which created a separate taxing structure mirroring the provisions of the federal tax code. Act of July 12, 1921, c. 44, § 1, 42 Stat. 123, [as amended, found at 48 U.S.C.A. § 1397 (West 1987) ]. The result of the passage of the legislation was to substitute "Virgin Islands" for "United States" in the Internal Revenue Code, 26 U.S.C. § 1 et seq. Thus, to satisfy its obligations to the Virgin Islands, an individual or corporation pays the same amount of taxes to the BIR as it would pay under the same situation in the United States to the IRS. However, until 1935, the IRS and the United States Treasury treated the Virgin Islands as a collection district for United States taxes, rather than recognizing the distinct tax jurisdiction of the Virgin Islands. See Danbury, Inc. v. Olive, 820 F.2d 618 (3d Cir.1987). "Under the collection district approach, all taxpayers with attachments to both locations filed only one return, either in the Virgin Islands or the United States, depending upon where the taxpayer resided on the last day of the tax year." Danbury, 820 F.2d at 621.

After 1935, when the mirror tax system was actually implemented, some individuals had to file two returns. For example, a United States corporation doing business in the Virgin Islands would have to file a return with the IRS declaring its tax on stateside or worldwide income as well as file a return with the BIR on its Virgin Island source income. Id. The passage of § 28(a) of the 1954 Revised Organic Act of the Virgin Islands changed the law again. Section 28(a) provides in pertinent part:

The proceeds of customs duties, the proceeds of the United States income tax, the proceeds of any taxes levied by the Congress on the inhabitants of the Virgin Islands, ... shall be covered into the treasury of the Virgin Islands, and shall be available for expenditure as the Legislature of the Virgin Islands may provide: Provided that the terms "inhabitants of the Virgin Islands" as used in this section shall include all persons whose permanent residence is in the Virgin Islands, and such persons shall satisfy their income tax obligations under applicable statutes of the United States by paying their tax on income derived from all sources both within and outside the Virgin Islands into the treasury of the Virgin Islands.

Act of July 22, 1954, c. 558, § 28(a), 68 Stat. 508, codified at 48 U.S.C.A. § 1642 (West 1987) (emphasis added). In addition, Congress enacted 26 U.S.C. § 7651(5)(B) of the Internal Revenue Code which stated that "For the purposes of this title ... section 28(a) of the Revised Organic Act of the Virgin Islands shall be effective as if such section had been enacted subsequent to the enactment of this title." 26 U.S.C.A. § 7651(5)(B) (West 1967). Section 28(a), which came to be known as the "inhabitant rule," eliminated the need for an individual to file two returns. Instead, an inhabitant of the Virgin Islands could file one form and report all income earned, both Virgin Islands and worldwide sources, to the BIR and pay taxes to the BIR.

On January 24, 1986, the district court for the Virgin Islands issued a decision in Danbury, Inc. v. Olive, 627 F.Supp. 513 (D.V.I.1986) which created a tax loophole. The district court reasoned, albeit erroneously, as follows. Danbury considered itself both a foreign corporation and an inhabitant of the Virgin Islands. Section 882 of the Internal Revenue Code states that a non-inhabitant foreign corporation is liable only for taxes on income derived from a trade or business connected with the Virgin Islands. As a general rule, income that a foreign corporation derives from stateside or worldwide income cannot be taxed by the Virgin Islands. 26 U.S.C. § 882. Thus, the district court concluded, as a foreign corporation, Danbury could not be taxed by the BIR on stateside income. Since Danbury was an inhabitant of the Virgin Islands, it was to pay its taxes to the BIR and not to the IRS. Consequently, the district court reasoned, Danbury had to pay only the taxes due on its Virgin Islands source income and the income from stateside business was exempt.

The creation of the tax loophole by the district court in Danbury was rectified in two ways. First, the BIR appealed to us, and second, changes were made to the mirror code system in the Tax Reform Act of 1986, Pub.L. No. 99-514, 100 Stat. 2085. Because the Tax Reform Act occurred before we reviewed Danbury, we will discuss it first. The Act contains a provision entitled "Clarification of Treatment of the Virgin Islands Inhabitants" found at § 1275(b) which amends 26 U.S.C. § 7651(5)(B) to read:

For purposes of this title, section 28(a) of the Revised Organic Act of the Virgin Islands shall be effective as if such section 28(a) had been enacted before the enactment of this title and such section 28(a) shall have no effect on the amount of income tax liability required to be paid by any person to the United States.

26 U.S.C.A. § 7651(5)(B) (West Supp.1987). As a result of § 1275(b), the Virgin Islands tax system returned to the pre-1954 system where a foreign corporation doing business in the Virgin Islands must file two returns; one return to the IRS for its stateside income and one to the BIR for Virgin Islands source income.

Section 1277(c)(2) of the Act outlined the date of implementation of the Act.

(A) In General.--The amendment made by section 1275(b) shall apply with respect to--

(i) any taxable year beginning...