Huff v. Commissioner

GEORGE C. HUFF, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 12942–09. Filed December 22, 2010.

Claiming to be a bona fide resident of the U.S. Virgin

Islands (the Virgin Islands) during 2002, 2003, and 2004, and

claiming he was qualified for the gross income tax exclusion

provided by I.R.C. sec. 932(c)(4), P, a U.S. citizen, filed terri-

605

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606 135 UNITED STATES TAX COURT REPORTS (605)

torial income tax returns with, and paid income tax to, the

Virgin Islands. He did not file Federal income tax returns or

pay Federal income tax for those years. R determined that P

was not a bona fide resident of the Virgin Islands and was not

qualified for the gross income tax exclusion as claimed. P

moves to interplead the Virgin Islands in this proceeding,

asserting that the U.S. and the Virgin Islands have ‘‘adverse

and independent claims’’ under Fed. R. Civ. P. 22(a)(1)(A) for

tax on the same income. Held: Because this Court lacks juris-

diction to redetermine P’s Virgin Islands tax liabilities, P will

not be permitted to interplead the Virgin Islands.

William M. Sharp, Lawrence R. Kemm, Joseph A. DiRuzzo,

III, and Marjorie Rawls Roberts, for petitioner.

Daniel N. Price, Ladd Christman Brown, Jr., and Justin L.

Campolieta, for respondent.

OPINION

JACOBS, Judge: This matter is before the Court on peti-

tioner’s motion to interplead the Government of the U.S.

Virgin Islands (Virgin Islands) in this proceeding. For the

reasons set forth infra, we shall deny petitioner’s motion.

Background

I. Procedural Background

The basic facts in this case are set forth in Huff v.

Commissioner, 135 T.C. 222 (2010). We thus recite only those

facts required to resolve the motion before us.

Petitioner is a U.S. citizen who claims he was a bona fide

resident of the Virgin Islands during 2002, 2003, and 2004.

Petitioner filed territorial income tax returns with, and paid

income tax to, the Virgin Islands Bureau of Internal Revenue

(BIR) for each of these years. Petitioner claimed he qualified

for the section 932(c)(4) gross income exclusion; consequently,

he did not file Federal income tax returns or pay Federal

income tax. 1 Respondent determined that petitioner did not

meet the requirements of section 932(c)(4) and therefore

should have filed tax returns with, and paid income tax to,

the United States.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect

for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Proce-

dure.

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(605) HUFF v. COMMISSIONER 607

II. The Virgin Islands

The Virgin Islands are an insular area of the United

States; they are not part of one of the 50 States or the Dis-

trict of Columbia. They are generally treated as a foreign

country, having a ‘‘mirror tax’’ system for U.S. tax purposes;

i.e., the Virgin Islands use as their tax law the tax laws of

the United States. In this regard, 48 U.S.C. sec. 1397 (2006)

provides that the U.S. Internal Revenue Code is to be used

by the Virgin Islands, with ‘‘Virgin Islands’’ substituted for

‘‘United States’’ and vice versa.

Section 932(c) provides the taxation and filing require-

ments for individuals. For tax years 2002 and 2003, that sec-

tion provided as follows:

SEC. 932. COORDINATION OF UNITED STATES AND VIRGIN

ISLANDS INCOME TAXES.

(c) TREATMENT OF VIRGIN ISLANDS RESIDENTS.—

(1) APPLICATION OF SUBSECTION.—This subsection shall apply to an

individual for the taxable year if—

(A) such individual is a bona fide resident of the Virgin Islands at

the close of the taxable year, or

(B) such individual files a joint return for the taxable year with an

individual described in subparagraph (A).

(2) FILING REQUIREMENT.—Each individual to whom this subsection

applies for the taxable year shall file an income tax return for the tax-

able year with the Virgin Islands.

* * * * * * *

(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an individual—

(A) who is a bona fide resident of the Virgin Islands at the close of

the taxable year,

(B) who, on his return of income tax to the Virgin Islands, reports

income from all sources and identifies the source of each item shown

on such return, and

(C) who fully pays his tax liability referred to in section 934(a) to

the Virgin Islands with respect to such income,

for purposes of calculating income tax liability to the United States,

gross income shall not include any amount included in gross income on

such return, and allocable deductions and credits shall not be taken into

account.

In 2004 the statute was amended by striking ‘‘at the close of

the taxable year’’ and inserting ‘‘during the entire taxable

year’’ each place it appears, effective for tax years ending

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608 135 UNITED STATES TAX COURT REPORTS (605)

after October 22, 2004. American Jobs Creation Act of 2004,

Pub. L. 108–357, sec. 908(c)(2), (d), 118 Stat. 1656, 1657.

An individual who is a bona fide resident of the Virgin

Islands and incurs income tax obligations to both the United

States and the Virgin Islands may satisfy his reporting and

payment requirements by filing only with, and paying tax

only to, the Virgin Islands if he satisfies each of the three

requirements of section 932(c)(4). If the individual fails to

meet any of these requirements, he must file a Federal

income tax return with the Internal Revenue Service. See S.

Rept. 100–445, at 315 (1988). Consequently, an individual

failing to satisfy all three requirements of section 932(c)(4)

may be required to file an income tax return and be liable

for taxes to both the United States and the Virgin Islands.

To redetermine a Virgin Islands tax deficiency determined

by the BIR, a Virgin Islands taxpayer may petition the U.S.

District Court, District of the Virgin Islands, in the same

manner as a U.S. taxpayer may petition this Court. Secs.

6212, 6213 (mirror code); V.I. Code Ann. tit. 33 sec. 943

(1994); see WIT Equip. Co. v. Dir., V.I. Bureau of Internal

Revenue, 185 F. Supp. 2d 500, 510 (D.V.I. 2001). The U.S.

District Court, District of the Virgin Islands, has ‘‘exclusive

jurisdiction over * * * the income tax laws applicable to the

Virgin Islands * * * except the ancillary laws relating to the

income tax enacted by the legislature of the Virgin Islands.’’

48 U.S.C. sec. 1612(a) (2006).

Discussion

The sole issue before us is whether petitioner may

interplead the Government of the Virgin Islands. In general,

our Rules do not provide for interpleading a third party. In

the absence of an express Rule, Rule 1(b) provides that the

Court ‘‘may prescribe the procedure, giving particular weight

to the Federal Rules of Civil Procedure to the extent that

they are suitably adaptable to govern the matter at hand.’’

See Intermountain Ins. Serv. of Vail, LLC v. Commissioner,

134 T.C. 211, 215 (2010); Estate of Proctor v. Commis-

sioner, T.C. Memo. 1994–208; see also Appleton v. Com-

missioner, 135 T.C. 461 (2010) (denying intervention by a

third party).

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(605) HUFF v. COMMISSIONER 609

Petitioner relies on rule 22 of the Federal Rules of Civil

Procedure, 2 which governs interpleading a third party in

much of the Federal court system. Rule 22(a)(1) of the Fed-

eral Rules of Civil Procedure provides:

Rule 22. Interpleader

(a) Grounds.

(1) By a Plaintiff. Persons with claims that may expose a plaintiff to

double or multiple liability maybe joined as defendants and required to

interplead. Joinder for interpleader is proper even though:

(A) the claims of the several claimants, or the titles on which their

claims depend, lack a common origin or are adverse and independent

rather than identical; or

(B) the plaintiff denies liability in whole or in part to any or all of the

claimants.

The purpose of interpleading a third party is to allow:

‘‘a party who fears being exposed to the vexation of defending multiple

claims to a limited fund or property that is under his control a procedure

to settle the controversy and satisfy his obligation in a single proceeding.’’

7 Charles Allen Wright & Arthur R. Miller, Federal Practice & Procedure

§1704 (3d ed. 2001), at 540–41 (‘‘Wright & Miller’’). Accordingly, inter-

pleader allows a stakeholder who ‘‘admits it is liable to one of the claim-

ants, but fears the prospect of multiple liability[,] . . . to file suit, deposit

the property with the court, and withdraw from the proceedings.’’ Metro

Life Ins. Co. v. Price, 501 F.3d 271, 275 (3d Cir. 2007). The result is that

‘‘[t]he competing claimants are left to litigate between themselves,’’ while

the stakeholder is discharged from any further liability with respect to the

subject of the dispute. Id. [Prudential Ins. Co. of Am. v. Hovis, 553 F.3d

258, 262 (3d Cir. 2009).]

Interpleading a third party ‘‘forces the claimants to contest

what essentially is a controversy between them without

embroiling the stakeholder in the litigation over the merits

of the respective claims.’’ 7 Wright et al., Federal Practice

and Procedure, sec. 1702, at 534 (3d ed. 2001).

Petitioner asserts that

The case at bar is the exact type of case in which this Court should exer-

cise its discretion to interplead the Government of the * * * [Virgin

Islands] under Rule 22(a)(1). That is because Respondent as the taxing

authority for the United States Government has asserted that Petitioner

is liable for unpaid taxes * * * based on the same items of income that

the * * * [Virgin Islands] has already taxed and has already collected

2 Petitioner does not seek to interplead the Government of the Virgin Islands through the stat-

utory interpleader provisions of 28 U.S.C. sec. 1335 (2006), 28 U.S.C. sec. 1397 (2006), and 28

U.S.C. sec. 2361 (2006). Consequently, we need not and do not address those provisions.

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610 135 UNITED STATES TAX COURT REPORTS (605)

from Petitioner. Consequently, Petitioner’s income may be subject to

double taxation, which by definition is a double liability. A double tax

liability is a situation that Rule 22 seeks to address.

Petitioner further asserts that (1) the United States and

the Virgin Islands have ‘‘adverse and independent’’ claims

under rule 22(a)(1)(A) of the Federal Rules of Civil Proce-

dure, and (2) should respondent ultimately prevail in the

case, petitioner would have a claim against the Virgin

Islands for appropriate tax refunds. 3 Thus, petitioner posits

that

Although, during the pendency of the instant litigation the potential claim

against the * * * [Virgin Islands] may be in doubt (if Petitioner is deter-

mined to have been a bona fide * * * [Virgin Islands] resident or if the

statute of limitations prevents Respondent from assessing against Peti-

tioner, he will dismiss any outstanding actions against the * * * [Virgin

Islands]), interpleading the * * * [Virgin Islands] Government is still

appropriate because it will avoid multiple legal actions and relieving [sic]

Petitioner from having to anticipate the strength of the * * * [Virgin

Islands’] claims.

By moving to interplead the Virgin Islands, petitioner in

essence asks this Court to redetermine his Virgin Islands tax

liability. We do not have jurisdiction to make that redeter-

mination.

This Court is a court of limited jurisdiction, and we may

exercise jurisdiction only to the extent expressly authorized

by Congress. Sec. 7442; Naftel v. Commissioner, 85 T.C. 527,

529 (1985). We lack authority to enlarge upon that statutory

jurisdiction, Breman v. Commissioner, 66 T.C. 61, 66 (1976),

and petitioner’s invocation of rule 22(a)(1) of the Federal

Rules of Civil Procedure cannot expand our jurisdiction, see,

e.g., Fed. R. Civ. P. 82 (‘‘These rules do not extend or limit

the jurisdiction of the district courts or the venue of actions

in those courts.’’); 7 Wright et al., supra sec. 1710. As we

noted in Estate of Forgey v. Commissioner, 115 T.C. 142, 146

(2000), we have jurisdiction to redetermine deficiencies in

Federal income, estate, gift, and certain excise taxes. See

secs. 6211–6215; Rule 13. We also have jurisdiction over cer-

tain other Federal tax issues (e.g., section 6512(b) refund

actions regarding overpayments determined by the Court in

3 Petitioner in his motion states he will rely on the doctrines of statutory mitigation and equi-

table recoupment in his proposed refund action against the Government of the Virgin Islands

since the period of limitations has closed for the years at issue.

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(605) HUFF v. COMMISSIONER 611

certain circumstances; section 7436(a) determination of

employment status actions). In sum, we are limited to the

adjudication of Federal tax matters; i.e., in this case, we may

only redetermine the correct amounts of petitioner’s Federal

income tax liabilities for 2002, 2003, and 2004.

We have found no authority, and petitioner has cited none,

which would permit us to redetermine petitioner’s Virgin

Islands tax liabilities or the disposition of moneys which peti-

tioner has paid to the Virgin Islands. Should respondent ulti-

mately prevail in this case, we would have no jurisdiction to

(1) discharge petitioner from liabilities determined by the

Government of the Virgin Islands; (2) direct the Virgin

Islands to refund to petitioner the amount of taxes petitioner

paid to the BIR; or (3) order the Virgin Islands to pay any

moneys to the United States.

As noted supra p. 608, 48 U.S.C. sec. 1612(a) explicitly pro-

vides that the U.S. District Court, District of the Virgin

Islands, is the sole court that may determine the correct

amount of petitioner’s Virgin Islands tax liabilities for 2002,

2003, and 2004. Petitioner would have to appear before that

court to seek refunds from the Virgin Islands.

Consistent with the foregoing, petitioner’s motion will be

denied.

To reflect the aforesaid,

An appropriate order will be issued.

f

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