The U.S. Court of Appeals for the Eleventh Circuit sided with the Government of the Virgin Islands Thursday, allowing the territory to intervene in a consolidated set of tax cases involving V.I. taxpayers, according to a statement issued Saturday by Government House.
The appeals court ordered the U.S. Tax Court [see decision here] to allow the V.I. government to act as a party in the proceedings to defend the territory’s interests in its Economic Development Commission program.
The V.I. Government sought to intervene in the cases of Huff v. Commissioner, Cooper v. Commissioner and McGrogan v. Commissioner. The federal Internal Revenue Service had issued tax deficiency notices in these cases, alleging that the taxpayers either were not V.I. residents or had underpaid their taxes to the V.I., or both, and thus should have filed their tax returns with the IRS instead of the Virgin Islands Bureau of Internal Revenue.
The V.I. Government, in order to protect its taxing authority, insisted that taxpayers who have duly filed and reported their income to the BIR are subject to a three-year statute of limitations and that the IRS notices in the cases are thus time-barred. The U.S. Tax Court had denied the territory’s motion to intervene in these and other cases.
Gov. John deJongh Jr. instructed Attorney General Vincent Frazer to seek intervention in these tax cases to protect the integrity of the EDC program from IRS challenge. In Saturday’s announcement, deJohng said the Eleventh Circuit decision validated the territory’s strategy and signaled that the federal appellate courts were sympathetic to the territory’s concerns.
"Our success in these rulings gives an assurance to not only those that participate in our economic development programs, but to every resident of the Virgin Islands," the governor said. "It further ensures that there is equity in how our system operates and is evaluated. Our engagement in this arena was not our first choice, but it became a necessary action to ensure fairness.”
In a unanimous decision by a three-judge panel, the Eleventh Circuit held that the Virgin Islands Government had a “direct and substantial interest” in the tax cases that was “legally” protectable under the court’s rules.
The federal appeals panel found that the IRS’ arguments to block the Virgin Islands from seeking to intervene in U.S. Tax Court cases involving its own taxpayers, while advancing contrary arguments to intervene in tax cases in the Virgin Islands courts, was “bordering on disingenuous.” The panel also found that “the IRS’s opposition to the Virgin Islands participation is made more untenable by the fact that its attempt to collect taxes beyond the normal three-year period” limits the ability of the territorial government to establish certainty with respect to the residency and source of income of its taxpayers. The panel reasoned that the IRS’ preferred legal theory "would effectively deny all Virgin Islands taxpayers the benefit" of the statute of limitations, allowing the IRS to go beyond the three-year time limit by simply alleging at any time that a Virgin Islands taxpayer made a mistake on his V.I. tax return.
In rejecting the IRS’ theory, the panel concluded that if “the IRS is permitted to issue deficiency notices in perpetuity based on its unilateral determinations regarding a taxpayer’s residency and the source of his income, and the Virgin Islands has no way of defending the BIR’s opposite determinations, the clear message to Virgin Islands taxpayers and the BIR is that BIR findings are merely provisional – subject to reversal at the IRS’s whim. The implications for the Virgin Islands ability to effectively administer its system of taxation and provide tax incentives to its residents [would be] ruinous.”
The panel further noted that “the IRS seeks to participate in the Virgin Islands tax system as a Monday morning quarterback … We doubt that Congress had such a scenario in mind in fashioning" the Virgin Islands’ tax rules.
