Coffey v. Comm'r of Internal Revenue

• Decision Date: 02 December 2011
• Docket Number: No. 11–1362.,11–1362.
• Citation: 108 A.F.T.R.2d 2011,2011 USTC P 50742,663 F.3d 947
• Parties: Judith S. COFFEY, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellee, v. Government of the United States Virgin Islands, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

108 A.F.T.R.2d 2011-7350
2011-2 USTC P 50,742
663 F.3d 947

Judith S. COFFEY, Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE, Appellee,
v.
Government of the United States Virgin Islands, Appellant.

No. 11–1362.

United States Court of Appeals, Eighth Circuit.

Submitted: Sept. 20, 2011.Filed: Dec. 2, 2011.

[663 F.3d 949]

Gene C. Schaerr, argued, Washington, DC, Andrew Curtis Nichols, Barry J. Hart, Peter N. Hiebert, Adele H. Auxier, Washington, DC, Vincent F. Frazer, Attorney General, U.S. Virgin Islands DOJ, on the brief, for appellant.

Jennifer Marie Rubin, argued, Kenneth L. Greene, on the brief, Tax Division, DOJ, Washington, DC, for appellee.

Before MELLOY, SMITH and BENTON, Circuit Judges.

BENTON, Circuit Judge.

In 2009, Judith S. Coffey received a notice of deficiency from the Internal Revenue Service. She contested the assessments, asserting the time bar in 26 U.S.C. § 6501(a). Claiming an interest in this issue, the government of the United States Virgin Islands (USVI) sought to intervene, either as of right under Civil Rule 24(a)(2), or permissively under Civil Rule 24(b)(2). The tax court denied intervention. The USVI appeals. Having jurisdiction under 26 U.S.C. § 7482(a)(1), this court reverses and remands.

Although a U.S. territory, the USVI is a separate taxing entity. In 1922, Congress authorized USVI taxpayers to pay their income tax to the territory's Bureau of Internal Revenue, rather than to the IRS. The IRS retains audit and assessment powers. The USVI receives the taxes paid and administers a “mirror code” of the Internal Revenue Code that substitutes “Virgin Islands” for “United States.” 26 U.S.C. §§ 932(c)(2), 7654(a); 48 U.S.C. § 1397. By paying their income tax directly to the USVI, USVI residents discharge their U.S. tax liability. 26 U.S.C. §§ 932(c)(4), 6012.

Congress has authorized a unique economic development program for the USVI. Under the EDP, USVI residents may exempt from income tax 90 percent of their “income derived from sources within the Virgin Islands or income effectively connected with the conduct of a trade or business within the Virgin Islands.” 26 U.S.C. § 934; 29 V.I.C. § 713b(b).

Coffey worked in the USVI from 2003 to 2006. She filed tax returns with the USVI each year, claiming the EDP credit. On September 28, 2009, the IRS issued a notice of deficiency to Coffey for tax years 2003 and 2004. According to the IRS, Coffey failed to pay taxes to the IRS for those tax years and improperly claimed the EDP credit. She disagreed, invoking the three-year statute of limitations. The IRS relied on its 2006 announcement that the three-year statute of limitations is triggered only by filing a return with the IRS, not by filing a return with the USVI.¹

[663 F.3d 950]

The USVI moved to intervene only on the statute-of-limitations issue, either as of right or permissively. The USVI contended that an IRS victory on that issue would devastate its EDP and significantly hamper the USVI's ability to administer its tax laws. The tax court denied the USVI's motion, citing its decision in another case.² See Appleton v. Comm'r, 135 T.C. 461, 2010 WL 4457634 (2010), rev'd, 430 Fed.Appx. 135 (3d Cir.2011). The USVI appeals.

This is an issue of first impression for this court. The Third Circuit addressed this issue, reversing the tax court's decision in Appleton. Id. See also Cooper v. Comm'r, No. 11810–10 (T.C.), No. 11–10617 (11th Cir.) (appeal pending); Huff v. Comm'r, No. 12942–09 (T.C.), No. 11–10608 (11th Cir.) (appeal pending); McGrogan v. Comm'r, No. 456–10 (T.C.), No. 11–11526 (4th Cir.) (appeal pending); McHenry v. Comm'r, No. 7568–10 (T.C.) No. 11–1366 (4th Cir.) (appeal pending).

The IRS asserts that the USVI lacks standing to intervene. “Article III standing is a prerequisite for intervention in a federal lawsuit.” Standard Heating & Air Conditioning Co. v. City of Minneapolis, 137 F.3d 567, 570 (8th Cir.1998). Constitutional standing requires a showing of: (1) an injury in fact, which is an invasion of a legally protected interest that is concrete, particularized, and either actual or imminent; (2) causation; and (3) redressability. Curry v. Regents of Univ. of Minn., 167 F.3d 420, 422 (8th Cir.1999), citing Mausolf v. Babbitt, 85 F.3d 1295, 1301 (8th Cir.1996).

The IRS does not dispute the last two elements, but argues that the USVI lacks injury to a legally protectable interest. The IRS contends the USVI's interest in the EDP is “hypothetical,” because the USVI can administer the EDP regardless of the tax court's ruling on the statute of limitations.

To the contrary, Congress gives the USVI unique statutory...