Vitco, Inc. v. Government of Virgin Islands
| Decision Date | 26 July 1977 |
| Docket Number | No. 77-1065,77-1065 |
| Parties | 77-2 USTC P 9578 VITCO, INC., Appellant, v. GOVERNMENT OF the VIRGIN ISLANDS and Reuben Wheatley, Commissioner of Finance. |
| Court | U.S. Court of Appeals — Third Circuit |
Before VAN DUSEN, WEIS and GARTH, Circuit Judges.
One may argue that the mirror system of taxation is not always the fairest of them all, but it does reflect the congressional intent to implement some degree of uniformity. In this appeal, we conclude that not only must statutory language be transposed but so must authorized implementing regulations as well. Accordingly, we hold that a Virgin Islands corporation must pay its tax obligations on all of its income to the Virgin Islands despite minimal contacts there. In addition, the withholding provisions relating to dividends paid to a mainland corporation do not apply since a similar provision in the United States Code does not cover income paid to a Virgin Islands corporation by a United States corporation.
Appellant Vitco is a corporation chartered in the Virgin Islands and is a wholly owned subsidiary of Chase Instruments Corporation, a New York corporation. Vitco's business consists primarily of leasing machinery and equipment, some of which was located in the Virgin Islands and some in the continental United States during the 1970-1972 period. Most of the company's revenues were attributable to the equipment located in the continental United States, and it was there that Vitco physically received its machinery rental and interest income from all sources. Having neither an office nor any employees in the Virgin Islands, Vitco maintained its place of business in Lindenhurst, New Jersey, in the same city as its parent. On its tax returns, however, Vitco lists its address as "P.O. Box 2488, St. Thomas, Virgin Islands."
For the years 1970, 1971 and 1972, Vitco submitted corporate tax returns and paid the amounts due to the United States government. The company also filed income tax returns with the Commissioner of Finance of the Virgin Islands for the same years, claiming as foreign tax credits the amounts paid to the United States.
The respondent Commissioner of Finance issued a deficiency notice, asserting that Vitco's taxes should have been paid to the Virgin Islands rather than the United States. Further, the Commissioner sought an additional amount allegedly due the Virgin Islands a 30% "withholding" tax on the gross dividends paid by Vitco to its parent, Chase Instruments Corporation. The Virgin Islands based this latter assessment upon § 1442 of the Internal Revenue Code, 26 U.S.C. § 1442, which provides for the withholding of a 30% tax upon what might be termed "passive" income paid to a foreign corporation. Since Chase is a United States corporation, it is considered as "foreign" for Virgin Islands tax purposes.
The district court, agreeing with the Commissioner, determined that Vitco was required to pay taxes on its entire income to the Virgin Islands, rather than to the United States, and to withhold taxes due on the dividends payable to Chase.
As we have explained in the earlier cases, Congess neither passed a separate income tax law for the Virgin Islands nor permitted its legislature to do so. Instead, Congress provided that the provisions of United States income tax law should be used in the tax code of the Virgin Islands with necessary nomenclature changes to make them effective, that is, "Virgin Islands" should be substituted for "United States" whenever appropriate. The United States and the Virgin Islands are two separate and distinct taxing authorities, and the revenue due the Virgin Islands is paid into its treasury. This resulted in what has been called the "mirror system" of taxation. For a history and general description of its operation, see Dudley v. Commissioner of Internal Revenue, 258 F.2d 182, 3 V.I. 685 (3d Cir. 1958); Chicago Bridge and Iron Co. v. Wheatley, 430 F.2d 973, 7 V.I. 555 (3d Cir. 1970), cert. denied, 401 U.S. 910, 91 S.Ct. 873, 27 L.Ed.2d 809 (1971); and Great Cruz Bay, Inc., St. John, Virgin Islands v. Wheatley, 495 F.2d 301, 11 V.I. 189 (3d Cir. 1974).
As a matter of policy, Congress determined that the Virgin Islands should collect the tax on all income of Virgin Islands residents, including any received from sources in the United States. 1954 Revised Organic Act of the Virgin Islands, § 28(a), 48 U.S.C. § 1642. The statute provides:
" . . . the term '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 taxing 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 . . . ."
"Inhabitants" includes corporations as well as natural persons, Chicago Bridge and Iron Co. v. Wheatley, supra.
The legislative history of the Act is illuminating. The Senate draft of the bill stated that:
"United States citizens residing in the Virgin Islands may satisfy their United States income tax obligations by paying their tax to the Virgin Islands, regardless of the source of their income." (emphasis added) 1
In a letter to the Senate Committee, the Assistant Secretary of the Interior said:
2 (emphasis added)
When the bill went to a Conference Committee, certain significant changes were made:
3 (emphasis added)
Thus, the Senate agreed that the 1954 Act should apply to "persons" as opposed to "citizens," and that they "shall" pay the taxes to the Virgin Islands, rather than "may."
The first issue presented for review is whether the appellant, not having employees, bank accounts, or an office in the Virgin Islands, but being chartered and maintaining a post office address there, is included as "a permanent resident" within the phrase, "inhabitant of the Virgin Islands." We conclude that for tax purposes it is.
It is important to realize that we are concerned, not with concepts of jurisdiction to adjudicate, forum non conveniens, venue, or service of process, but rather with the power to tax. Precedents bearing on other areas of the law are not necessarily controlling, particularly in this situation where Congress has authority to tax both United States and Virgin Islands corporations.
A basic premise is that the state of incorporation does have the power to tax the income of a corporation chartered by it, even if the company owns no property within the state, so long as interstate or foreign commerce is not hampered. No such limitations are asserted here. 14 W. Fletcher, Cyclopedia Corporations §§ 6887, 6970.1 (1975); 2 T. Cooley, Taxation § 456 (4th ed.); cf. Cream of Wheat Co. v. Grand Forks, 253 U.S. 325, 40 S.Ct. 558, 64 L.Ed. 931 (1920); Shaffer v. Carter, 252 U.S. 37, 40 S.Ct. 221, 64 L.Ed. 445 (1920); U.S. Glue Co. v. Oak Creek, 247 U.S. 321, 38 S.Ct. 499, 62 L.Ed. 1135 (1918). Definitions in the Internal Revenue Code are also instructive. 26 U.S.C. § 7701 categorizes corporations as "domestic and foreign."
Treasury Regulation 26 C.F.R. § 301.7701-5 states in part:
"A domestic corporation is a resident corporation even though it does no business and owns no property in the United States."
Further support is found in § 11(a) of the Code, 26 U.S.C. § 11(a) and Treas.Reg. § 1.11-1(a):
"It is immaterial that a domestic corporation . . . may derive no income from sources within the United States."
In Chicago Bridge and Iron Co. v. Wheatley, supra, we held that Virgin Islands corporations are not United States...
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