Patrick McGrogan v. Commissioner of Internal Reven

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 11-3490, 11-3491, 11-3561 & 11-3562

BARRY COOPER; SANDRA COOPER,

Appellants in 11-3490

v.

COMMISSIONER OF INTERNAL REVENUE;

BUREAU OF INTERNAL REVENUE

PATRICK A. MCGROGAN,

Appellant in 11-3491

v.

COMMISSIONER OF INTERNAL REVENUE;

VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE

EMMIT J. MCHENRY,

Appellant in 11-3561

v.

COMMISSIONER OF INTERNAL REVENUE;

VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE

GEORGE C. HUFF,

Appellant in 11-3562

v.

COMMISSIONER OF INTERNAL REVENUE;

BUREAU OF INTERNAL REVENUE

On Appeal from the District Court of the Virgin Islands

(Division of St. Thomas and St. Croix)

(D. C. Nos. 1-10-cv-00040; 3-09-cv-00167; 1-10-cv-00021;

1-10-cv-00026)

District Judges: Honorable Raymond L. Finch and

Honorable Curtis V. Gomez

Argued on December 4, 2012

Before: SMITH, HARDIMAN, and ROTH, Circuit Judges

(Opinion filed: May 17, 2013)

Joseph A. DiRuzzo, III, Esquire (Argued)

Fuerst Ittleman

1001 Brickell Bay Drive

32nd Floor

Miami, FL 33131

Counsel for Appellants

2

Kathryn Keneally, Esquire

Assistant Attorney General

Kenneth L. Greene, Esquire

Jennifer M. Rubin, Esquire (Argued)

Robert W. Metzler, Esquire

Tax Division

United States Department of Justice

950 Pennsylvania Avenue, N.W.

P. O. Box 502

Washington, DC 20044

Christopher D. Belen, Esquire

Tax Division

United States Department of Justice

P. O. Box 227

Ben Franklin Station

Washington, DC 20044

Counsel for Appellee Commissioner of Internal

Revenue

Vincent Frazer, Esquire

Attorney General

Bernard M. VanSluytman, Esquire

Solicitor General

Paul J. Paquin, Esquire

Deputy Solicitor General

Tamika M. Archer, Esquire (Argued)

Tiffany V. Monrose, Esquire

Pamela R. Tepper, Esquire

Anquannette Chinnery-Montell, Esquire

Office of Attorney General of Virgin Islands

3

Department of Justice

34-38 Kronprindsens Gade

GERS Bldg., 2nd Floor

St. Thomas, Virgin Islands 00802

Counsel for Appellee Virgin Islands Bureau of Internal

Revenue

OPINION

ROTH, Circuit Judge:

I. Introduction

In this consolidated appeal, appellants, Barry Cooper,

Sandra Cooper, Emmit McHenry, George Huff, and Patrick

McGrogan (collectively Taxpayers), filed suits in the District

Court of the Virgin Islands seeking redeterminations of their

tax liability from the Internal Revenue Service (IRS) and tax

refunds from the Virgin Islands Bureau of Internal Revenue

(VIBIR). In separate proceedings, the courts below dismissed

Taxpayers‘ claims against the IRS for lack of subject matter

jurisdiction. McGrogan also filed a claim against the VIBIR

that was dismissed due to the expiration of the statute of

limitations. For the reasons that follow, we will affirm the

decisions below.

4

II. Background

A. Framework

This case is about Taxpayers‘ attempt to lawfully

reduce their income tax liability by claiming certain tax

benefits afforded exclusively to bona fide residents of the

United States Virgin Islands. The Virgin Islands1 is a

territory of the United States. As a territory, the Virgin

Islands does not share the same sovereign independence as

the states of the union; rather, the power to pass rules and

regulations governing territories like the Virgin Islands rests

with Congress. U.S. Const. Art. IV § 3, cl. 2; Bluebeard’s

Castle v. Gov’t of the Virgin Islands, 321 F.3d 394, 400 (3d

Cir. 2003).

In the Naval Service Appropriation Act of 1922,

Congress passed legislation applying the Internal Revenue

Code of the United States to the Virgin Islands. See Pub. L.

94-932 (codified at 48 U.S.C. § 1397); Chase Manhattan

Bank, N.A. v. Gov’t of the Virgin Islands, 300 F.3d 320, 322

(3d Cir. 2002). This legislation provides that ―[t]he 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. This statutory scheme has

come to be known as the ―mirror code‖ because Congress

designed Virgin Islands tax law to mirror the tax laws in

effect on the mainland. Chase Manhattan Bank, 300 F.3d at

1

Unless otherwise designated in this opinion, the term

―Virgin Islands‖ refers to the United States Virgin Islands.

5

322. As a result of this legislation, the words ―Virgin

Islands‖ are substituted for the words ―United States‖

throughout the Internal Revenue Code. Bizcap, Inc. v. Olive,

892 F.2d 1163, 1165 (3d Cir. 1989).

Congress has crafted special rules governing the

taxation of Virgin Islands residents. One of these rules states

that any ―bona fide resident of the Virgin Islands‖ will be

granted a full exemption from paying her federal income

taxes—and therefore will not be required to pay taxes to the

federal government, so long as she files a territorial tax return

that fully reports her income and then fully pays her territorial

taxes to the VIBIR.2 See I.R.C. § 932(c); Abramson Enters.,

Inc. v. Gov’t of the Virgin Islands, 994 F.2d 140, 142 (3d Cir.

1993). This exemption is significant because Congress

authorized the Virgin Islands government to create an

Economic Development Program granting substantial tax

incentives to certain Virgin Islands taxpayers. See I.R.C.

§ 934(b) (Congressional authorization); 29 V.I.C. § 708(b)

(bona fide residency requirement); 29 V.I.C. § 713b (income

tax reduction). As applied to this case, Taxpayers might have

realized considerable tax savings under the Economic

Development Program, but only if they qualified as bona fide

residents of the Virgin Islands.

2

Before 2004, I.R.C. § 932(c) required only that the taxpayer

claim bona fide residency in the Virgin Islands ―at the close

of the taxable year.‖ I.R.C. § 932(c) (West 2003). The

statute was amended in 2004 and changed the requirement to

―during the entire taxable year.‖ I.R.C. § 932(c) (West 2004).

These amendments, however, are not relevant in this appeal.

6

B. Procedural Posture

Between 2001 and 2004 Taxpayers claimed bona fide

residency in the Virgin Islands and eligibility for the tax

benefits granted by the Economic Development Program.3

Consequently, Taxpayers filed tax returns with the VIBIR and

paid their taxes only to the Virgin Islands government.

Taxpayers did not file federal income tax returns.

1. Claims Against the IRS

In late 2009 and early 2010, Taxpayers were issued tax

prepayment deficiency notices by the IRS challenging their

claims of bona fide residency in the Virgin Islands. In

separate proceedings, Taxpayers challenged the deficiency

notices in the District Court of the Virgin Islands. The

District Court granted the IRS‘s motion to dismiss on the

grounds that the Tax Court was the only proper forum for

their suits against the IRS and therefore the District Court of

the Virgin Islands lacked subject matter jurisdiction to

adjudicate the dispute.4

3

McHenry claimed bona fide residency in 2001 and 2002.

The Coopers claimed bona fide residency in 2002 and 2003.

McGrogan and Huff claimed bona fide residency in 2002,

2003, and 2004.

4

The courts below issued certifications of final judgments

under Federal Rule of Civil Procedure 54(b) as to the

dismissals of the claims against the IRS brought by the

Coopers, McHenry, and Huff.

7

Each Taxpayer has also filed redetermination petitions

in the Tax Court. Those proceedings are currently pending.

2. Claims against the VIBIR

After receiving deficiency notices from the IRS in late

2009, McGrogan, in an effort to avoid double taxation, filed a

petition in the District Court of the Virgin Islands in February

2010 seeking a refund of taxes paid to the VIBIR. The

District Court granted the VIBIR‘s motion to dismiss

McGrogan‘s refund petition because McGrogan filed his

claim outside the statute of limitations. See I.R.C. § 6511(a)

(statute of limitations for a refund petition expires either three

years after the time of filing an income tax return or two years

after the time of payment of the tax owed, whichever expires

last).

The Coopers, McHenry, and Huff also filed refund

claims against the VIBIR. These claims are still pending

before the District Court and are not at issue in this appeal.

8

III. Discussion5

A. Taxpayers’ Claims Against the IRS

The District Courts correctly held that the Tax Court is

the only venue for Taxpayers‘ claims against the IRS because

Congress has designated the Tax Court as the only court with

jurisdiction to adjudicate a tax prepayment deficiency dispute.

Under the doctrine of sovereign immunity, the United States

―is immune from suit save as it consents to be sued . . . and

the terms of its consent to be sued in any court define that

court‘s jurisdiction to entertain the suit.‖ United States v.

Testan, 424 U.S. 392, 399 (1976) (citation and internal

quotation marks omitted). ―A waiver of the Federal

Government‘s sovereign immunity must be unequivocally

expressed in statutory text, and will not be implied.‖ Lane v.

Pena, 518 U.S. 187, 192 (1996) (citation omitted). The

sovereign immunity doctrine applies to the IRS because it is

an agency of the United States. See Beneficial Consumer

Disc. Co. v. Poltonowicz, 47 F.3d 91, 94 (3d Cir. 1995).

Section 6213 of the Internal Revenue Code provides

the sole waiver to sovereign immunity that authorizes a

taxpayer to challenge a federal income tax prepayment

5

We have appellate jurisdiction over McGrogan‘s appeal

under 28 U.S.C. § 1291. In light of the Rule 54(b)

certifications of final judgments as to the claims brought by

the Coopers, McHenry, and Huff against the IRS, we have

appellate jurisdiction over those claims under 28 U.S.C. §

1291. We exercise plenary review over a district court‘s

grant of a motion to dismiss. Grier v. Klem, 591 F.3d 672,

676 (3d Cir. 2010).

9

deficiency notice. Under this section, a taxpayer who

receives a tax prepayment deficiency notice has but one

venue to seek a redetermination: the Tax Court. See I.R.C. §

1613(a). Federal law does not permit a taxpayer to file a

challenge to a deficiency notice in a federal district court

unless the taxpayer pays the contested amount in full before

filing suit. See United States v. Clintwood Elkhorn Mining

Co., 553 U.S. 1, 7-8 (2008). Here, Taxpayers did not pay the

contested amount in full before filing suit in the District

Court. Therefore, as the courts held, the Tax Court has

exclusive jurisdiction over Taxpayers‘ redetermination

petitions.

Taxpayers assert that the sovereign immunity bar does

not apply and that their claims were properly brought in the

District Court of the Virgin Islands for three reasons: (1) by

enacting 48 U.S.C. § 1612(a), Congress purportedly waived

sovereign immunity by vesting exclusive subject matter

jurisdiction over all federal tax claims applicable to the Virgin

Islands with the District Court of the Virgin Islands; (2) the

deficiency notices issued by the IRS were actually deficiency

notices issued by the VIBIR, and therefore the District Court

of the Virgin Islands has jurisdiction over this dispute under

48 U.S.C. § 1612(a); and (3) public policy necessitates a

finding of subject matter jurisdiction in the District Court of

the Virgin Islands. Each argument is without merit.

1. Waiver of Sovereign Immunity in 48 U.S.C. §

1612(a)

Taxpayers assert that 48 U.S.C. § 1612(a) serves as a

waiver of sovereign immunity. This argument is unavailing.

10

Section 1612(a) states that ―[t]he District Court of the Virgin

Islands shall have exclusive jurisdiction over all criminal and

civil proceedings in the Virgin Islands with respect to the

income tax laws applicable to the Virgin Islands, regardless

of the degree of the offense or the amount involved . . ..‖ 48

U.S.C. § 1612(a). Taxpayers thus argue that the statute vests

exclusive jurisdiction over their redetermination petitions in

the District Court of the Virgin Islands because their claims

are civil proceedings with respect to the income tax laws

applicable to the Virgin Islands. However, as Taxpayers

acknowledge, we rejected this very argument in Birdman v.

Office of the Governor, 677 F.3d 167 (3d Cir. 2012).

In Birdman, we held that the grant of exclusive

jurisdiction contained in Section 1612(a) is merely a

―geographic limitation.‖ Id. at 176. Thus, the District Court

of the Virgin Islands‘ jurisdiction is ―‗exclusive‘ only against

other courts ‗in the Virgin Islands.‘‖ Id. Consequently, if

there were a question as to whether the District Court of the

Virgin Islands or another court in the Virgin Islands had

jurisdiction over a tax dispute, Section 1612(a) would vest

jurisdiction over that dispute in the District Court of the

Virgin Islands. Id. The statute does not grant the District

Court of the Virgin Islands exclusive jurisdiction over all

matters that implicate the tax laws applicable in the Virgin

Islands. Id. A redetermination petition must be brought in

the Tax Court even if it involves issues relating to the Virgin

Islands. See WIT Equip. Co. v. Director, Virgin Islands

Bureau of Internal Revenue, 185 F. Supp. 2d 500, 503 (D.V.I.

2001).

We remain bound by Birdman unless the decision is

reversed by the Supreme Court or by this Court sitting en

11

banc. In re Lemington Home for Aged, 659 F.3d 282, 294 n.6

(3d Cir. 2011). Consequently, we agree that the courts below

correctly interpreted I.R.C. § 6213(a) and 48 U.S.C. § 1612(a)

and will affirm their holdings that the District Court of the

Virgin Islands lacks jurisdiction over Taxpayers‘ challenges

to the deficiency notices they received from the IRS.

2. Coordination Between the IRS and VIBIR

Notwithstanding the sovereign immunity bar and our

decision in Birdman, Taxpayers argue in the alternative that

the District Court of the Virgin Islands has an independent

source of subject matter jurisdiction over their

redetermination petition under 48 U.S.C. § 1612(a) because

the notices of deficiency sent by the IRS to Taxpayers were

actually issued on behalf of the VIBIR. The basis for this

contention is that two alternative positions in the deficiency

notices sent to Taxpayers by the IRS state ―you failed to fully

pay your income tax liability to the USVI.‖

Taxpayers assert that the language of the deficiency

notices is evidence that the IRS stepped into the shoes of the

VIBIR and was acting on behalf of the VIBIR in an attempt

to collect taxes for the Virgin Islands government.

Consequently, Taxpayers state that under this theory the

District Court of the Virgin Islands has jurisdiction to hear

their claim because redetermination petitions filed against the

VIBIR are properly brought in the District Court of the Virgin

Islands. See 48 U.S.C. § 1612(a) (stating that the District

Court of the Virgin Islands has exclusive jurisdiction with

respect to the income tax laws applicable to the Virgin

Islands); 33 V.I.C. § 943 (stating that redetermination

12

petitions filed against the VIBIR must be brought in the

District Court of the Virgin Islands).

The IRS has a different explanation as to the meaning

and purpose of the deficiency notices: the IRS sought to

collect taxes owed to the federal government, a fact that was

indicated in the notices the IRS sent to Taxpayers. The

primary position of the IRS was that Taxpayers were not bona

fide residents of the Virgin Islands under I.R.C. § 932(c)(4).

If this primary position failed, Taxpayers‘ tax liability to the

Virgin Islands Government would become relevant because

the IRS would argue in the alternative that Taxpayers were

liable to pay taxes to both the United States Government and

Virgin Islands Government. As a result, the IRS needed to

include the statement that Taxpayers failed to fully pay their

taxes to the VIBIR as an alternate position to preserve the

issue if it arose during litigation.

Ultimately, there is no basis in law or fact suggesting

that the IRS could act or was acting on behalf of the VIBIR.

Although the IRS and the VIBIR coordinate tax policy, the

IRS is responsible for enforcing federal tax laws and the

VIBIR is responsible for enforcing territorial tax laws. The

IRS and VIBIR are therefore separate, distinct, and

independent taxing authorities. See McHenry v. C.I.R., 677

F.3d 214, 220-21 (4th Cir. 2012). Furthermore, even if the

IRS could step into the shoes of the VIBIR, Taxpayers‘

theory is unsupported by the factual record. The deficiency

notices were issued by the IRS, not the VIBIR. The notices

asserted a federal tax deficiency, not a Virgin Islands tax

deficiency. In fact, the tax redetermination petitions filed by

Taxpayers acknowledge that the deficiency notices were

issued by the IRS. Moreover, Taxpayers‘ redetermination

13

petitions stated that they were challenging the position of the

IRS, not the VIBIR.

The IRS‘s explanation of the deficiency notices and

the documentary record makes plain that the IRS was not

acting on behalf of the VIBIR and that the notices were not

seeking a determination of Virgin Islands tax liability. As a

result, the District Courts correctly rejected the argument that

the redetermination petitions had been filed by the IRS acting

on behalf of the VIBIR.

3. Taxpayers’ Policy Arguments

Taxpayers point to the possibility of inconsistent

results and double taxation if the cases against the IRS filed in

the Tax Court reach different outcomes than the cases filed

against the VIBIR in the District Court of the Virgin Islands.

Taxpayers further state that allowing the District Court of the

Virgin Islands to resolve the entire dispute would improve

judicial economy by allowing one court to resolve the related

issues in the redetermination petitions brought against the IRS

and the VIBIR. Consequently, Taxpayers argue that these

considerations support a finding that the entire litigation

should be before one court: the District Court of the Virgin

Islands.

Although we are mindful of the possibility of

inconsistent results and double taxation, Taxpayers‘ claims

must proceed under the jurisdictional framework established

by Congress. The Tax Court has jurisdiction over federal tax

deficiency proceedings under I.R.C. §§ 6213 and 6214,

federal district courts have jurisdiction over tax refund

proceedings under I.R.C. § 7422, and the District Court of the

14

Virgin Islands has jurisdiction over proceedings implicating

territorial tax law under 48 U.S.C. § 1612(a). In light of the

unambiguous statutory scheme established by Congress

governing the adjudication of tax disputes and the firm

sovereign immunity bar, Taxpayers‘ policy arguments are

unpersuasive. See United States v. Craig, 694 F.3d 509, 512

(3d Cir. 2012) (―[N]either fairness considerations nor rules

applicable to private disputes can alone provide grounds for

abrogating sovereign immunity.‖ (citation and internal

quotation marks omitted)).

Additionally, Taxpayers‘ fear of being subject to

double taxation without a remedy appears to be misplaced

because the United States and the Virgin Islands have

established an administrative procedure that could grant them

relief in the event of double taxation. See Tax

Implementation Agreement between the United States of

America and the Virgin Islands, 1989-1 C.B. 347, Art. 6

(1989). Nonetheless, even if Taxpayers might be unfairly

subjected to double taxation, this equitable consideration does

not override the sovereign immunity bar that may only be

waived by Congress.

B. McGrogan’s Claims Against the VIBIR

As noted above, the only claims against the VIBIR that

we are being asked to consider are McGrogan‘s requests for

refunds for tax years 2002, 2003, and 2004. The District

Court correctly granted the VIBIR‘s motion to dismiss

because the statute of limitations barred his claims against the

VIBIR.

Federal courts lack jurisdiction to entertain refund

claims brought outside of the statute of limitations. See

15

Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 350, 353-

54 (3d Cir. 2000). The applicable statute of limitations

provides that a taxpayer seeking a refund must file a claim for

a refund within either three years from the time he filed his

income tax return or two years from the time he paid the tax

owed, whichever period expires last. See I.R.C. § 6511(a).

McGrogan concedes that he filed his refund petition outside

of this period, so the District Court did not have jurisdiction

to adjudicate McGrogan‘s claims against the VIBIR due to

the expiration of the statute of limitations.

McGrogan advances three arguments in an attempt to

overcome this jurisdictional bar: (1) the mitigation provisions

contained in I.R.C. §§ 1311-14 permit his untimely claim; (2)

the statute of limitations was equitably tolled; and (3) the

doctrine of equitable recoupment permits his untimely claim.

Each of these arguments is without merit.

1. Mitigation Provisions

The mitigation provisions in the Internal Revenue

Code allow qualifying taxpayers to bring refund claims that

would otherwise be barred by the statute of limitations. See

I.R.C. § 1311(a); TLI, Inc. v. United States, 100 F.3d 424,

427-28 (5th Cir. 2012). Mitigation applies only if: (1) there

has been a final determination under § 1313; (2) there has

been a ―circumstance of adjustment‖ under § 1312; and (3)

one of the ―conditions necessary for adjustment‖ in § 1311(b)

has been met. See Kappel’s Estate v. C.I.R, 615 F.2d 91, 94

(3d Cir. 1980). ―The relief provided by the mitigation

statutes is limited to defined circumstances, and does not

purport to permit the correction of all errors and inequities.‖

Fruit of the Loom, Inc. v. C.I.R., 72 F.3d 1338, 1341 (7th Cir.

16

1996) (citations and internal quotation marks omitted). The

mitigation provisions should be given a liberal interpretation.

See Koss v. United States, 69 F.3d 705, 709 (3d Cir. 2005).

The taxpayer bears the burden of proving that each of the

three mitigation provisions applies. Id.

The mitigation provisions do not afford relief to

McGrogan because he cannot show that a ―circumstance of

adjustment‖ has occurred. McGrogan claims a circumstance

of adjustment for the double inclusion of income. However,

the Internal Revenue Code permits mitigation for the double

inclusion of income only if the taxpayer‘s claim involves ―an

item which was erroneously included in the gross income of

the taxpayer for another taxable year or in the gross income of

a related taxpayer.‖ I.R.C. § 1312(1). Such a double

inclusion has not occurred in this case. McGrogan does not

allege having erroneously paid taxes in an incorrect tax year

nor has he claimed to have erroneously paid taxes for a

related taxpayer. Rather, McGrogan‘s overpayment of taxes

is a situation not contemplated by the mitigation statute:

payment to the wrong taxing entity. Although we should

liberally interpret the mitigation statute, we may not rewrite

its terms. As a result, the mitigation statute does not apply

because the circumstance of adjustment claimed by

McGrogan is outside the ambit of I.R.C. § 1312(1).

Even though McGrogan‘s claim falls outside the scope

of the mitigation statute, he seeks an exception to it because

of the special relationship between the United States and the

Virgin Islands and the purportedly collusive coordination of

tax policy between the IRS and the VIBIR. McGrogan also

points to a possibility of double taxation. Again, while we are

cognizant of the equitable concerns presented in this case,

17

these policy arguments still do not change the fact that

McGrogan‘s claims fall outside of the mitigation scheme

established by Congress. We are powerless to create a

judicial exception to the mitigation statute to accommodate

him. See, e.g., United States v. Dalm, 494 U.S. 596, 602

(1990) (absent a statutory exception, when statute of

limitations is expired, ―a suit for refund, regardless of whether

the tax is alleged to have been ‗erroneously,‘ ‗illegally,‘ or

‗wrongfully collected,‘ may not be maintained in any court.‖).

For these reasons, McGrogan may not use the mitigation

statute to avoid the statute of limitations bar.

2. Equitable Tolling

McGrogan argues that the doctrine of equitable tolling

should allow him to proceed with his untimely claim. This

argument overlooks the settled rule that I.R.C. § 6511

prohibits equitable tolling in refund cases. See United States

v. Brockamp, 519 U.S. 347, 352 (1997) (―Section 6511‘s

detail, its technical language, the iteration of the limitations in

both procedural and substantive forms, and the explicit listing

of exceptions, taken together, indicate to us that Congress did

not intend courts to read other unmentioned, open-ended

‗equitable‘ exceptions into the statute that it wrote.‖).

Although Congress has amended Section 6511 since

Brockamp, none of the exceptions listed in the statute of

limitations apply to McGrogan‘s situation. We see no reason

to depart from the Supreme Court‘s instructions in Brockamp

and therefore reject McGrogan‘s argument that equitable

tolling affords him an exception to the statute of limitations.

18

3. Equitable Recoupment

McGrogan‘s assertion of the doctrine of equitable

recoupment is also unpersuasive. When applicable, equitable

recoupment may allow a taxpayer to receive a credit for a tax

overpayment in a subsequent tax year. See In re Pransky, 318

F.3d 536, 544-45 (3d Cir. 2003). However, equitable

recoupment is not an independent source of subject matter

jurisdiction. See Dalm, 494 U.S. at 608. As noted above,

unless an exception like mitigation applies, the federal courts

lack jurisdiction to adjudicate refund petitions brought after

the expiration of the statute of limitations. See

Wolckenhauer, 215 F.3d at 353-54. As a result, because the

District Court had no independent source of jurisdiction, the

doctrine of equitable recoupment does not affect the outcome

of this case.6

6

We continue to be concerned about the possibility of double

payment of taxation to the IRS and to the VIBIR in cases

such as the ones at issue here. The IRS assured us at oral

argument it was willing to participate in the administrative

procedure set up by the Tax Implementation Agreement:

Ms. RUBIN: At this point I don‘t believe there‘s any

sign that there would be double taxation. We‘ve indicated –

the IRS has indicated its willingness to participate in competent

authority once it is determined how much taxes are owed.

Obviously, if a particular taxpayer wins on their

challenge, if they prove that they‘re bon[a] fide Virgin Islands

residents and they prove that the income in question was

Virgin Islands income, there won‘t be any double taxation

because there won‘t be any residual U.S. tax liability. But if,

19

instead, there is determined that, yes, there is U.S. tax liability

here because these were not Virgin Islands residents, or their

income was not Virgin Islands income and, therefore, not

subject to the EDP benefits, then we‘ve indicated, as shown in

the record cites I gave you for the Cooper notices of

deficiency, that we‘re willing to go in a competent authority at

that point to determine which tax authorities should be getting

the money.

The IRS then qualified the above statement:

Ms. RUBIN: I‘m not entirely certain what the

remedy would be in a situation where someone, unlike

the Coopers, failed to do a protective refund claim,

failed to take that step to protect their right to go and get

money back from the Virgin Islands BIR if, in fact, it is

determined that they should have instead paid all of

their taxes to [the IRS].

Counsel for the Taxpayers replied to the IRS‘s

argument by pointing out that the protective mechanism of a

refund claim was set up in 2006, after the time to file a

protective income tax return for calendar years 2001 and 2002

had already closed. Therefore, McHenry and McGrogan

could not have taken the protective actions advocated by the

IRS.

In view of the statement by the IRS that negotiation

would be initiated to prevent double taxation – in the situation

we could envisage if, for instance, McGrogan lost his pending

case in the Tax Court – we trust that the IRS will live up to its

commitment to prevent double taxation.

20

IV. Conclusion

For the foregoing reasons, we will affirm the judgment

of the District Courts.

21