Wit Equipment Co. v. Director, Virgin Islands Bur.

• Decision Date: 29 September 2001
• Docket Number: No. Civ.A. 96-62.,Civ.A. 96-62.
• Citation: 185 F.Supp.2d 500
• Parties: WIT EQUIPMENT COMPANY, INC., Petitioner, v. DIRECTOR, VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE, Respondent.
• Court: U.S. District Court — Virgin Islands

185 F.Supp.2d 500

WIT EQUIPMENT COMPANY, INC., Petitioner, v. DIRECTOR, VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE, Respondent.

No. Civ.A. 96-62.

District Court, Virgin Islands, D. St. Thomas and St. John.

September 29, 2001.

Lawrence Hill, Richard Nessler, White & Case LLP, New York, NY, for Petitioner.

David A. Bornn, The Bornn Handy Law Firm, St. Thomas, USVI, for Petitioner.

Richard M. Prendergast, Assistant Attorney General, Virgin Islands Department of Justice, Christiansted, St. Croix, USVI, for Respondent.

OPINION ON MOTIONS TO DISMISS AND FOR SUMMARY JUDGMENT

BROTMAN, District Judge.

This case is one of six related actions brought by W. James Oelsner, his wife, Carol, and two Oelsner-affiliated companies, WIT Equipment, Inc. ("WIT") and West Indies Transport, Inc. ("West Indies"), challenging tax assessments issued by the Virgin Islands Bureau of Internal Revenue ("BIR"). The other five matters having been dismissed per stipulation of the parties, only WIT's petition for redetermination of its tax deficiency remains for disposition. Before the Court are (a) WIT's motion to dismiss its petition for lack of subject matter jurisdiction, which would effectively bar collection of the disputed tax liability; (b) the Government of the Virgin Islands' motion for summary judgment; and (c) WIT's cross-motion for summary judgment. The Court held oral argument on these motions on June 1, 2001, and herein issues its decision.

I. VIRGIN ISLANDS TAX SYSTEM

Because tax jurisprudence in the U.S. Virgin Islands has several distinctive characteristics, a brief introduction is in order. Congress made the Internal Revenue Code ("I.R.C.") applicable to the Virgin Islands through the Naval Service Appropriation Act of 1922, which provides:

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....

48 U.S.C. § 1397. The effect of section 1397 is to create a "mirror system" of taxation in which Virgin Islands residents discharge their tax liability by paying income taxes directly to the Treasury of the Virgin Islands. See generally Abramson v. Gov't of the Virgin Islands, 994 F.2d 140 (3d Cir.1993); Johnson v. Quinn, 821 F.2d 212 (3d Cir.1987); Great Cruz Bay, Inc. v. Wheatley, 495 F.2d 301 (3d Cir.1974); Chicago Bridge & Iron Co. v. Wheatley, 430 F.2d 973 (3d Cir.1970), cert. denied, 401 U.S. 910, 91 S.Ct. 873, 27 L.Ed.2d 809 (1971); Dudley v. Comm'r, 258 F.2d 182 (3d Cir.1958). The statute establishes the Virgin Islands as a separate tax jurisdiction with authority parallel to that of the U.S. Treasury Department. Olive v. Isherwood, Hunter & Diehm, 656 F.Supp. 1171, 1173 n. 3 (D.Vi.1987); Danbury, Inc. v. Olive, 627 F.Supp. 513, 515 (D.Vi.1986), rev'd on other grounds, 820 F.2d 618 (3d Cir.1987).¹

The mirror system operates through a rule of construction applied by the Internal Revenue Service, the Government of the Virgin Islands, and the courts. The I.R.C. and its regulations are adapted by substituting the words "Virgin Islands" for the words "United States." Johnson v. Quinn, 821 F.2d at 214 (citing Rev. Rul. 73-315, 1973-2 C.B. 226). In many cases, the adapted I.R.C. provisions have been enacted as sections within title 33 of the Virgin Islands Code ("V.I.C."). Whether codified locally or not, however, all provisions of the I.R.C. have force in the Virgin Islands unless they are "manifestly inapplicable or incompatible with a separate territorial income tax." Abramson, 994 F.2d at 142; Chicago Bridge, 430 F.2d at 976; see also 33 V.I.C. § 1931(15) (defining "Virgin Islands income tax law" as "so much of the United States Internal Revenue Code as was made applicable in the Virgin Islands by ... Act of Congress").

Like all other U.S. taxpayers, Virgin Islands residents may litigate the amount of their income tax liability in two ways. First, the taxpayer may pay the deficiency and then bring a "refund" action in federal district court for the amount of the claimed overpayment. I.R.C. § 7422; 33 V.I.C. § 1692. Second, the taxpayer may bring a pre-payment action to redetermine the amount of the asserted deficiency. I.R.C. § 6213; 33 V.I.C. § 943. Under the federal code, the U.S. Tax Court has jurisdiction over redetermination actions. I.R.C. § 6213. Petitions for redetermination of Virgin Islands tax deficiencies, however, must be brought in the District Court of the Virgin Islands. 33 V.I.C. § 943(a); see also Dudley v. Comm'r, 258 F.2d 182 (3d Cir.1958) (holding that the Tax Court does not have jurisdiction to review a deficiency claimed by the Government of the Virgin Islands).² Nonetheless, "judicial review in the district court of asserted deficiencies ... [is] analogous to review in the tax court." Pan Am. World Airways, Inc. v. Duly Authorized Gov't of Virgin Islands, 459 F.2d 387, 391 n. 2 (3d Cir.1972). As is the case with other aspects of the federal and territorial tax codes, the Virgin Islands statutes governing redetermination of deficiencies substantially mirror their I.R.C. counterparts. Compare 33 V.I.C. §§ 942, 943 with I.R.C. §§ 6212, 6213. It follows that case law applying sections 6212 and 6213 is persuasive in Virgin Islands tax matters. Additionally, the District Court of the Virgin Islands has adopted a subset of the Tax Court Rules as its own local rules applicable to redetermination cases. L. Civ. R. 71A.1 (incorporating by reference Tax Court rules governing, inter alia, pleadings and the burden of proof).

II. BACKGROUND

A. Criminal Case and Subsequent Tax Litigation

This tax litigation springs from information gleaned during a 1996 criminal proceeding against James Oelsner, West Indies, and WIT. Oelsner and the two companies were convicted and sentenced in this Court on sixteen counts of visa fraud, environmental crimes, conspiracy and racketeering. See United States v. West Indies Transp., Inc., 127 F.3d 299 (3d Cir.1997) (affirming convictions and sentences), cert. denied, 522 U.S. 1052, 118 S.Ct. 700, 139 L.Ed.2d 644 (1998). The convictions concerned WIT and West Indies' labor practices in their dry dock, ship repair, and barge towing businesses at Krum Bay, St. Thomas, as well as those operations' pollution of the bay. Id. at 303-04. Oelsner was West Indies' chief operating officer, id. at 303, and the sole operator of WIT (Oelsner Aff. ¶ 1).³

During the criminal trial, the United States adduced evidence that West Indies had employed illegal immigrants as dock-workers, allowing a significant reduction in expenses for wages and wage taxes. Id. at 304. At sentencing, Oelsner represented that he had limited assets with which to satisfy a monetary judgment. Relying on a report by the Price Waterhouse accounting firm ("Price Waterhouse report") which concluded that Oelsner in fact controlled several corporations-including WIT and West Indies-with significant assets (see Prendergast Suppl. Decl. Ex. Q), the Court ordered all three defendants to pay substantial fines and restitution, id. at 315. On the basis of the Price Waterhouse report and the evidence of tax avoidance, the BIR initiated audits of the Oelsners, West Indies, and WIT.

In letters dated December 21, 1995, the BIR notified the Oelsners, West Indies, and WIT that it would make immediate "jeopardy assessments," pursuant to I.R.C. sections 6861 and 6862, to recover amounts owed by each taxpayer. A jeopardy assessment may be collected without awaiting the outcome of any challenge brought by the taxpayer in tax court. I.R.C. § 6861.⁴ The procedure is available "in cases where the more routine methods for collection of taxes may be ... `jeopardized' to some degree if collection efforts are delayed." Garzon v. United States, 605 F.Supp. 738, 741 (S.D.Fla.1985). The BIR apparently believed, on the basis of the Price Waterhouse report, that the Oelsners, West Indies, and WIT would try to avoid collection by shielding their assets. Soon after issuing the jeopardy assessment notices, on January 12, 1996, the BIR sent each of the three taxpayers a "notice of deficiency" indicating their tax liability, as required by V.I.C. title 33, section 942.⁵ Following an administrative hearing on February 29, 1996, the Bureau's director found that each of the jeopardy assessments was reasonable and that the claimed deficiencies were appropriate. (Prendergast Decl. Ex. H.) Thereafter, in April and May 1996, the Oelsners and the two companies brought separate challenges to each jeopardy assessment and notice of deficiency.

All but one of those challenges has been resolved. On August 4, 2000, this Court dismissed the two Oelsner cases, based on the BIR's stipulation that there was in fact no tax deficiency.⁶ On June 1, 2001, the Court likewise dismissed, per agreement of the parties, both West Indies cases and WIT's challenge to the jeopardy determination. The jeopardy assessment cases were dismissed because there was no evidence that the Government had actually made the assessments, rendering West Indies and WIT's challenges moot. The West Indies notice of deficiency case was dismissed for mootness as well as lack of jurisdiction. West Indies allegedly owed wage withholding taxes,⁷ which generally are summarily assessable and do not require a notice of deficiency. I.R.C. § 6212 (notice of deficiency procedures apply to income, gift, estate, and certain excise taxes); 33 V.I.C. § 942 (procedures apply to income taxes); Marvel v. United States, 719 F.2d 1507, 1514 (10th Cir.1983). As discussed infra, employment withholding taxes generally are not within the jurisdiction of the Tax Court. Additionally, the Government conceded that while it had the power to immediately collect the withholding taxes, it had failed to do so and was now time-barred from making the assessment. The only remaining matter for disposition,...