Cooper v. Comm'r of Internal Revenue

• Decision Date: 17 May 2013
• Docket Number: 11–3491,Nos. 11–3490,11–3561,11–3562.,s. 11–3490
• Citation: 58 V.I. 804,718 F.3d 216
• Parties: Barry COOPER; Sandra Cooper, Appellants in 11–3490 v. COMMISSIONER OF INTERNAL REVENUE; Bureau Of Internal Revenue, Patrick A. McGrogan, Appellant in 11–3491 v. Commissioner of Internal Revenue; Virgin Islands Bureau of Internal Revenue, Emmit J. McHenry, Appellant in 11–3561 v. Commissioner of Internal Revenue; Virgin Islands Bureau of Internal Revenue, George C. Huff, Appellant in 11–3562 v. Commissioner of Internal Revenue; Bureau of Internal Revenue.
• Court: U.S. Court of Appeals — Third Circuit

718 F.3d 216

58 V.I. 804

Barry COOPER; Sandra Cooper, Appellants in 11–3490

v.COMMISSIONER OF INTERNAL REVENUE; Bureau Of Internal Revenue, Patrick A. McGrogan, Appellant in 11–3491

v.Commissioner of Internal Revenue; Virgin Islands Bureau of Internal Revenue, Emmit J. McHenry, Appellant in 11–3561

v.Commissioner of Internal Revenue; Virgin Islands Bureau of Internal Revenue, George C. Huff, Appellant in 11–3562

v.Commissioner of Internal Revenue; Bureau of Internal Revenue.

Nos. 11–3490, 11–3491, 11–3561, 11–3562.

United States Court of Appeals,Third Circuit.

Argued on Dec. 4, 2012.

Opinion filed: May 17, 2013.

Joseph A. DiRuzzo, III, Esquire (Argued), Fuerst Ittleman, Miami, FL, for Appellants.

Kathryn Keneally, Esquire, Assistant Attorney General, Kenneth L. Greene, Esquire, Jennifer M. Rubin, Esquire (Argued), Robert W. Metzler, Esquire, Christopher D. Belen, Esquire, Tax Division, United States Department of Justice, Washington, DC, for Appellee Commissioner of Internal Revenue.

Vincent Frazer, Esquire, Attorney General, Bernard M. VanSluytman, Esquire, Solicitor General, Paul J. Paquin, Esquire, Deputy Solicitor General, Tamika M. Archer, Esquire (Argued), Tiffany V. Monrose, Esquire, Pamela R. Tepper, Esquire, Anquannette Chinnery–Montell, Esquire, Office of Attorney General of Virgin Islands, Department of Justice, St. Thomas, VI, for Appellee Virgin Islands Bureau of Internal Revenue.

Before: SMITH, HARDIMAN, and ROTH, Circuit Judges.

OPINION

ROTH, Circuit Judge:

I. Introduction

In this consolidated appeal, appellants, Barry Cooper, Sandra Cooper, Emmit McHenry, George Huff, and Patrick McGrogan (collectively Taxpayers), filed suits in the District Court of the Virgin Islands seeking redeterminations of their tax liability from the Internal Revenue Service (IRS) and tax refunds from the Virgin Islands Bureau of Internal Revenue (VIBIR). In separate proceedings, the courts below dismissed Taxpayers' claims against the IRS for lack of subject matter jurisdiction. McGrogan also filed a claim against the VIBIR that was dismissed due to the expiration of the statute of limitations. For the reasons that follow, we will affirm the decisions below.

II. BackgroundA. Framework

This case is about Taxpayers' attempt to lawfully reduce their income tax liability by claiming certain tax benefits afforded exclusively to bona fide residents of the United States Virgin Islands. The Virgin Islands ¹ is a territory of the United States. As a territory, the Virgin Islands does not share the same sovereign independence as the states of the union; rather, the power to pass rules and regulations governing territories like the Virgin Islands rests with Congress. U.S. Const. Art. IV § 3, cl. 2; Bluebeard's Castle v. Gov't of the Virgin Islands, 321 F.3d 394, 400 (3d Cir.2003).

In the Naval Service Appropriation Act of 1922, Congress passed legislation applying the Internal Revenue Code of the United States to the Virgin Islands. See Pub. L. 94–932 (codified at 48 U.S.C. § 1397); Chase Manhattan Bank, NA. v. Gov't of the Virgin Islands, 300 F.3d 320, 322 (3d Cir.2002). This legislation provides that “[t]he income-tax laws in force in the United States of America and those which may hereafter 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.” 48 U.S.C. § 1397. This statutory scheme has come to be known as the “mirror code” because Congress designed Virgin Islands tax law to mirror the tax laws in effect on the mainland. Chase Manhattan Bank, 300 F.3d at 322. As a result of this legislation, the words “Virgin Islands” are substituted for the words “United States” throughout the Internal Revenue Code. Bizcap, Inc. v. Olive, 892 F.2d 1163, 1165 (3d Cir.1989).

Congress has crafted special rules governing the taxation of Virgin Islands residents. One of these rules states that any “bona fide resident of the Virgin Islands” will be granted a full exemption from paying her federal income taxes—and therefore will not be required to pay taxes to the federal government, so long as she files a territorial tax return that fully reports her income and then fully pays her territorial taxes to the VIBIR.²SeeI.R.C. § 932(c); Abramson Enters., Inc. v. Gov't of the Virgin Islands, 994 F.2d 140, 142 (3d Cir.1993). This exemption is significant because Congress authorized the Virgin Islands government to create an Economic Development Program granting substantial tax incentives to certain Virgin Islands taxpayers. SeeI.R.C. § 934(b) (Congressional authorization); 29 V.I.C. § 708(b) (bona fide residency requirement); 29 V.I.C. § 713b (income tax reduction). As applied to this case, Taxpayers might have realized considerable tax savings under the Economic Development Program, but only if they qualified as bona fide residents of the Virgin Islands.

B. Procedural Posture

Between 2001 and 2004 Taxpayers claimed bona fide residency in the Virgin Islands and eligibility for the tax benefits granted by the Economic Development Program.³ Consequently, Taxpayers filed tax returns with the VIBIR and paid their taxes only to the Virgin Islands government. Taxpayers did not file federal income tax returns.

1. Claims Against the IRS

In late 2009 and early 2010, Taxpayers were issued tax prepayment deficiency notices by the IRS challenging their claims of bona fide residency in the Virgin Islands. In separate proceedings, Taxpayers challenged the deficiency notices in the District Court of the Virgin Islands. The District Court granted the IRS's motion to dismiss on the grounds that the Tax Court was the only proper forum for their suits against the IRS and therefore the District Court of the Virgin Islands lacked subject matter jurisdiction to adjudicate the dispute.⁴

Each Taxpayer has also filed redetermination petitions in the Tax Court. Those proceedings are currently pending.

2. Claims against the VIBIR

After receiving deficiency notices from the IRS in late 2009, McGrogan, in an effort to avoid double taxation, filed a petition in the District Court of the Virgin Islands in February 2010 seeking a refund of taxes paid to the VIBIR. The District Court granted the VIBIR's motion to dismiss McGrogan's refund petition because McGrogan filed his claim outside the statute of limitations. SeeI.R.C. § 6511(a) (statute of limitations for a refund petition expires either three years after the time of filing an income tax return or two years after the time of payment of the tax owed, whichever expires last).

The Coopers, McHenry, and Huff also filed refund claims against the VIBIR. These claims are still pending before the District Court and are not at issue in this appeal.

III. Discussion⁵A. Taxpayers' Claims Against the IRS

The District Courts correctly held that the Tax Court is the only venue for Taxpayers' claims against the IRS because Congress has designated the Tax Court as the only court with jurisdiction to adjudicate a tax prepayment deficiency dispute. Under the doctrine of sovereign immunity, the United States “is immune from suit save as it consents to be sued ... and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.” United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 47 L.Ed.2d 114 (1976) (citation and internal quotation marks omitted). “A waiver of the Federal Government's sovereign immunity must be unequivocally expressed in statutory text, and will not be implied.” Lane v. Pena, 518 U.S. 187, 192, 116 S.Ct. 2092, 135 L.Ed.2d 486 (1996) (citation omitted). The sovereign immunity doctrine applies to the IRS because it is an agency of the United States. See Beneficial Consumer Disc. Co. v. Poltonowicz, 47 F.3d 91, 94 (3d Cir.1995).

Section 6213 of the Internal Revenue Code provides the sole waiver to sovereignimmunity that authorizes a taxpayer to challenge a federal income tax prepayment deficiency notice. Under this section, a taxpayer who receives a tax prepayment deficiency notice has but one venue to seek a redetermination: the Tax Court. SeeI.R.C. § 6213(a). Federal law does not permit a taxpayer to file a challenge to a deficiency notice in a federal district court unless the taxpayer pays the contested amount in full before filing suit. See United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 7–8, 128 S.Ct. 1511, 170 L.Ed.2d 392 (2008). Here, Taxpayers did not pay the contested amount in full before filing suit in the District Court. Therefore, as the courts held, the Tax Court has exclusive jurisdiction over Taxpayers' redetermination petitions.

Taxpayers assert that the sovereign immunity bar does not apply and that their claims were properly brought in the District Court of the Virgin Islands for three reasons: (1) by enacting 48 U.S.C. § 1612(a), Congress purportedly waived sovereign immunity by vesting exclusive subject matter jurisdiction over all federal tax claims applicable to the Virgin Islands with the District Court of the Virgin Islands; (2) the deficiency notices issued by the IRS were actually deficiency notices issued by the VIBIR, and therefore the District Court of the Virgin Islands has jurisdiction over this dispute under 48 U.S.C. § 1612(a); and (3) public policy necessitates a finding of subject matter jurisdiction in the District Court of the Virgin Islands. Each argument is without merit.

1. Waiver of Sovereign Immunity in 48 U.S.C. § 1612(a)

Taxpayers assert that 48 U.S.C. § 1612(a) serves as a waiver of sovereign immunity. This argument is unavailing. Section 1612(a) states that “[t]he District Court of the Virgin Islands shall have exclusive jurisdiction over all criminal and civil proceedings in the Virgin Islands with respect to the income tax laws applicable to the Virgin Islands, regardless of the degree of the offense or of the amount involved....” 48 U.S.C. § 1612(a). Taxpayers thus argue that the statute...