Danbury, Inc. v. Olive
| Decision Date | 24 January 1986 |
| Docket Number | Civ. No. 1985/269. |
| Citation | 627 F. Supp. 513 |
| Parties | DANBURY, INC. A Nevada Corporation Petitioner, v. Anthony OLIVE, Director Bureau of Internal Revenue Government of the Virgin Islands Respondent. |
| Court | U.S. District Court — Virgin Islands |
Todd Newman, St. Croix, V.I. and William A. Seligmann, Nelson, Seligmann & Wright, P.C., Los Angeles, Cal., for petitioner.
Meno W. Piliaris, Asst. Atty. Gen. (Tax), St. Croix, V.I., for respondent.
We are presented here with the prospect of the ultimate tax shelter. Can a United States corporation headquartered in the Virgin Islands avoid paying income tax to both governments? Under the facts of this case, we hold that, by the use of a loophole in the taxing statutes, it can.
Before discussing the specifics of this case, an initial introduction is needed to provide an understanding of the Court's approach to interpretation of tax statutes, as well as a further understanding of the relationship of the United States Internal Revenue Code to the Virgin Islands.
It is a cardinal rule of statutory construction that when the language of a statute is clear, a court should look no farther than those words in interpreting the statute. E.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976). The United States Supreme Court has long applied this rule with equal force to matters involving the Internal Revenue Code ("I.R.C."). In Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211 (1917), the Court stated:
In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen. (Citations omitted).
Thus, we are constrained to interpret and enforce the tax laws as Congress has enacted them. We may neither rewrite the statutes nor divine an interpretation that is inconsistent with their clear language. And this rule applies despite the most absurd results. White v. United States, 305 U.S. 281, 292, 59 S.Ct. 179, 184, 83 L.Ed. 172 (1938); Estate of Cowser v. Commissioner of Internal Revenue, 736 F.2d 1168, 1171 (7th Cir.1984). Accord Commonwealth Edison Company v. Montana, 453 U.S. 609, 628, 101 S.Ct. 2946, 2959, 69 L.Ed.2d 884 (1981); United States v. Noall, 587 F.2d 123, 126 (2d Cir.1978) cert denied 441 U.S. 923, 99 S.Ct. 2031, 60 L.Ed.2d 396 (1979).
The Virgin Islands tax code is a mirror image of the I.R.C. The genesis of this system is the Naval Service Appropriation Act of 1922, 48 U.S.C. § 1397 (Supp.1985) which provides:
Income tax laws of the United States in force; payment of proceeds; levy of surtax on all taxpayers The 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....
This law established the Virgin Islands as a separate tax jurisdiction. Vitco, Inc. v. Government of the Virgin Islands, 560 F.2d 180, 181-82 (3d Cir.1977) cert denied 435 U.S. 980, 98 S.Ct. 1630, 56 L.Ed.2d 72 (1978); Chicago Bridge and Iron Co. v. Wheatley, 430 F.2d 973, 975-76 (3d Cir. 1970) cert denied 401 U.S. 910, 91 S.Ct. 873, 27 L.Ed.2d 809 (1971). The I.R.C. and its regulations are adapted by substituting "Virgin Islands" in place of "United States". Vitco, supra at 181-82; Chicago Bridge, supra at 974-75. Apart from making non-substantive changes in nomenclature, however, the Virgin Islands has no power to enact tax laws or amend the I.R.C.. Chicago Bridge, supra at 975-76.
Consequently, our analysis is limited to the provisions of the I.R.C. as amended under the mirror theory.1
The petitioner, Danbury, Inc., is an investment corporation owned equally by two shareholders, John M. Aschieris and M. Douglas. Since its creation in 1980, Danbury has acted solely as a holding company for the shareholders' investments. It was organized under the laws of Nevada and, consequently, is a foreign corporation for Virgin Islands tax purposes.2 As is required by its certificate of incorporation, Danbury is headquartered and maintains its only office in the Virgin Islands. Until its records were seized by federal treasury agents in May, 1984, all corporate documents were maintained here. Additionally Danbury has a local bank account and, pursuant to its bylaws, holds its shareholder and director meetings in the Virgin Islands.
This corporate presence qualifies Danbury as a Virgin Islands inhabitant for tax purposes.3 It also distinguishes it from the post office box variety shell corporation.
Danbury reported gross earnings of $782,175.55 to the Virgin Islands for the 1981-82 tax years.4 The income was attributed to:
1981 1982
Limited partnership distributions $203,528.00 $355,655.00
Interest income 52,590.00 168,826.05
Loss from sale of diamonds -- (1,576.50)
___________ ___________
total $256,118.00 $526,057.55
Both sources of income are located in the United States. Danbury claimed that all but $96,985.00 of its 1982 earnings was exempt and paid a $26,243.00 tax. It paid no tax on the 1981 income. The Government, however, found that the income in both years was taxable in its entirety and assessed deficiencies against Danbury of $97,750.00 and $240,607.00 for the respective years.
Danbury now moves for summary judgment. Its tax shelter is simply explained. Danbury is both a foreign corporation and an inhabitant of the Virgin Islands because it is not organized under the territory's laws but maintains its headquarters here. As an inhabitant it must pay tax on its world-wide income to the Virgin Islands' treasury. Foreign corporations, however, are taxed only on income derived in the Virgin Islands. Since Danbury's income is wholly generated from foreign sources, it owes no tax to the Virgin Islands. And because its United States obligations are satisfied under the Virgin Islands tax code, it owes no tax to the federal government.5
On the basis of this scheme, Danbury requests that we invalidate the deficiencies.
The Government, in its cross-motion for summary judgment, argues that Danbury should be treated as a domestic corporation and taxed on its world-wide income.
The Virgin Islands collects taxes from two sources: inhabitants and non-inhabitant foreign entities. Inhabitants are taxed under the authority of 48 U.S.C. § 1642 (Supp.1985) which provides:
Simply stated, permanent residents pay tax on their world-wide income to the territory and in so doing they fulfill their federal tax obligations. See Vitco, supra at 182.
Non-inhabitant foreign entities, on the other hand, are taxed only on the income they derive in the Virgin Islands. By substituting "Virgin Islands" for the "United States" as required under the mirror theory, 26 U.S.C. § 882 provides in pertinent part:
Corporations organized in the 50 states pay tax on their world-wide income to the federal treasury but, to avoid double taxation, they receive a foreign tax credit for the taxes paid to the Virgin Islands. Chicago Bridge, supra at 974.
As a hybrid, Danbury claims the benefits of both § 1642 and § 882. The result, of course, is that its income is tax exempt. We will examine each claim separately.
As a general rule, the income that a foreign corporation derives from stateside sources cannot be taxed by the Virgin Islands.6 Section 882 provides that a corporation will be taxed, however, on income derived from a locally conducted trade or business or any other local source. And otherwise exempt income will be taxed, nevertheless, if the...
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