The 11th Circuit Court of Appeals Reverses Tax Court Ruling on Intervention in USVI Cases

On February 20, 2014, the United States Court of Appeals for the Eleventh Circuit released an opinion allowing the Government of the United States Virgin Islands (“USVI”) to intervene in three cases consolidated for appeal.  The Eleventh Circuit reversed the U.S. Tax Court’s denial of the USVI’s motions to intervene in the three cases.

In each case, the taxpayers, each of whom are U.S. citizens, claimed to be “bona fide” residents of the USVI in tax years at issue.  In an attempt to satisfy their income tax liabilities pursuant to the relevant statutory requirements under I.R.C. § 932(c), each taxpayer filed their return with the Virgin Islands Bureau of Internal Revenue (“VIBIR”).  When a USVI bona fide resident files their tax return with the VIBIR, the return includes their worldwide income.  Taxpayers filing with the VIBIR pay all tax due to the USVI.  Asserting that the taxpayers were not bona fide residents of the USVI, the IRS issued deficiency notices to each of the taxpayers for the tax years in question. They claimed that the taxpayers should have filed returns with both the IRS and USVI and paid taxes to both the United States and USVI.  Internal Revenue Code (“IRC”) Section 6501(a) bars the IRS from assessing tax more than three years after “the return required to be filed” is actually filed.  The IRS’s defense against the three year statute of limitations is that since the returns at issue were filed with the VIBIR, the statute of limitations never began to run against the IRS[1].

The USVI moved to intervene in the Tax Court cases under Fed. R. Civ. P. 24(a)(2), intervention as a matter of right, and Fed. R. Civ. P. 24(b)(2), permissive intervention[2].  The Tax Court based its ruling in these three cases on the opinion issued in Appleton v. Commissioner, 135 T.C. 461 (2010) (Appleton I).  In Appleton I, the Tax Court determined that the USVI did not have a qualifying interest sufficient for intervention under Fed. R. civ. P. 24(a)(2); and that the USVI did not meet the requirements of permissive intervention under Fed. R. Civ. P. 24(b)(2) because the Court believed that as petitioner had already identified the statute of limitations argument, the USVI’s presence as a party would be redundant.

In reversing the Tax Court’s decisions in this consolidated appeal, the Eleventh Circuit called the IRS’s argument against intervention “unpersuasive [and] boarding on disingenuous.”   The Court went on to note that the IRS’s position that USVI taxpayers would only receive the “benefit” of the 3 year statute of limitations in Section 6501(a) by disproving the IRS’s allegations in Tax Court litigation was flawed:

“If the Taxpayers disprove[d] the IRS’s claims . . . they [would] not need the statute of limitations’ protection because they will have won on the merits.  So, the IRS’s preferred application of Section 6501 would effectively deny all Virgin Islands taxpayers the benefit of the limitations period – the IRS would be able to go beyond the three-year time limit by simply alleging that a Virgin Islands taxpayer made a mistake.  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 any time 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 appear ruinous.”

Ultimately, the Court held that the USVI would be “practically disadvantaged” should they be excluded from Tax Court cases and thus had a qualifying interest under Rule 24(a)(2).

 


[1] In Appleton v. Comm., 140 T.C. No. 14 (2013), the Tax Court held that the filing of a tax return with the BIR met the requirements of I.R.C. § 6501(a) for a taxpayer whose bona fide USVI residency was accepted by the IRS.

[2] Rule 24(a)(2) allows third party interveners as a matter of right if the party has “an interest relating to the property or transaction that is the subject of the action, and is so situated that the disposing of the action may as a practical matter impair or impede the movant’s ability to protect its interest, unless existing parties adequately represent that interest.” Under Rule 24(b)(2), the court is given discretion to permit a government entity to intervene if either party’s claim or defense is rooted in a statute or regulation administered by that entity.

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