UNITED STATES TAX COURT

135 T.C. No. 23

UNITED STATES TAX COURT

ARTHUR I. APPLETON, JR., Peititioner y_.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

7717-10 .

Filed November 1,

2010 .

Asserting it has a vital interest in a key aspect

of this case, M filed a motiion to intervene pursuant

to Rule l(b), Tax Court Rules of Practice and Procedure,

and under Fed. R. Civ. P. 24.

Held: M's interest -does not satisfy the direct,

substantial, and legally protectable requirements of

Fed. R. Civ. P. 24(a) (2).

Held, further, Because (i) P has raised the issue

in which M asserts an interest as a matter central to

his case and presumably the issue will be fully vetted

during the course of these proceedings, and (ii) M's

intervention could result in trial complications as

well as delay phe resolution of the issue in which M

asserts an interest, M will- not be permitted

to intervene pursuant to Fed. R. Civ. P. 24 (b) (2) .

Held, further, as an alternative to intervention,

M will be permitted to file an amicus curiae brief.

SERVED NOV - 1 2010

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Randall P. Andreozzi, Edward Doyle Fickess, Ryan M. Murphy,

and Teia M. Bui, for petitioner.

Barry J. Hart,

for proposed intervenor.

Justin L. Campolieta, for respondent.

OPINION

JACOBS, Judge:

Asserting that it has a vital interest in a

key aspect of this case, the, Government of the U.S. Virgin

Islands (movant)

1(b).

filed a motion to intervene pursuant to Rule

Petitioner has no objection to movant's proposed

intervention; respondent does.

Unless otherwise indicated, Rule references are to the Tax

Court Rules of Practice and Procedure, and section references are

to the Internal Revenue Code as amended for the years at issue.

At the time he filed his petition, petitioner resided in New

York.

Background

Petitioner, a U.S. citizen, was a bona fide resident of the

U.S. Virgin Islands (Virgin Islands)

(i.e., 2002, 2003, and 2004).

for all years at issue

Petit oner. (i)

filed territorial

income tax returns with the Virgin Islands Bureau of Internal

Revenue (BIR)

for 2002, 2003, and 2004 pursuant to section

932(c) (2), and (ii)

claimed he qualified for the gross income

exclusion provided by section 932(c) (4) and therefore did not

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have to file Federal income tax returns or pay Federal income

taxes for such years.

The BIR audited petitioner's Virgin

Islands territorial income tax returns for 2002,~ 2003, and 2004,

and proposed no adjustments.

Respondent subsequently audited petitioner's 2002, 2003, and

2004 Virgin Islands territorial income tax returns and on

November 25, 2009, issued petitioner a notice of deficiency,

determining the following Federal income tax deficiencies and

additions to tax:

Additions to Tax Year

Deficiency

2002

2003

2004

$283,555

789,518

280,241

Sec.

6651(a) (1)

$35,563.73

147,943.58

56,728.35

Sec.

6651(a) (2)

$39,515.25

164,381.75

63,031.50

Sec.

6654

$9,045.50

20,370.53

8,030.86

On April 1, 2010, petitioner filed a petition in this Court

for redetermination of the deficiencies and additions to tax

determined by the Internal Revenue Service (IRS), asserting,

inter alia, that the period of limitations for assessing tax had

expired.

On May 26, 2010, respondent filed an answer to the

petition asserting,

inter alia, that the period of limitations

for assessing tax was still open.

On June 18, 2010, movant filed

its motion to intervene.

I.

The Virgin Islands

Although part'of the United States, the Virgin Islands are a

separate and distinct taxing jurisdiction.

Congress established

the "mirror tax system" as the tax law of the Virgin Islands.

Act of July 12,

1921, ch. 44, sec. 1, 42 Stat. 122

amended at 48 U.S.C. sec. 1397 (2006)).

(codified as

Under the mirror tax

system, the Virgin Islands uses the Internal Revenue Code with

"Virgin Islands" effectively substituted for any reference to the

"United States"

820 F.2d 618,

(and vice versa).

620

(3d Cir.

1987).

See Danbury, Inc. v. Olive,

As the law developed, the

provisions of the Internal Revenue Code have been made applicable

to the Virgin Islands so long as the specific section to be

applied is "'not manifestly inapplicable or incompatible' with a

separate territorial income tax."

Wheatley,

sec.

430 F.2d 973,

1421i(d) (1)

976

Chi. Bridge & Iron Co. v.

(3d Cir.

1970)

(quoting 48 U.S.C.

(1964)).

The provisions applicable for 2002, 2003, and 2004, under

which individuals file income tax returns and pay tax in the

Virgin Islands, were enacted as part of the Tax Reform Act of

1986, Pub. L.

99-514, sec.

1274(a),

100 Stat. 2596, and amended

in the Technical and Miscellaneous Revenue Act of 1988, Pub. L.

100-647, sec 1012(w), 102 Stat. 3530.

Virgin Islands residents

were generally exempted from Federal income tax obligations if

they met the requirements of section 932 (c) (4):

(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

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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.1

Thus, an individual who satisfied the three requirements of

section 932(c) (4) and incurred income tax obligations to both the

United States and the.Virgin Islands could satisfy his reporting

and payment requirements'by filing only with, and paying tax only

to, the Virgin Islands.

If the individual failed to meet any of

these requirements, he was required to file a Federal income tax

return with the IRS.

See S. Rept-. 100-445,'at 315

(1988).

Consequently, an individual failing to satisfy any of the three

requirements of section 932 (c) (4) could be required to file an

income tax return and be liable for taxes in both -the United

States and the Virgin Islands.

II.

The Virgin Islands Economic Development Program

To encourage economic development in the.Virgin Islands,

Congress has explicitly.permitted the Virgin -Islands government

to reduce.certain taxes.

Section 934(b) (1) provides that the

ASec. 932(c) (4) (A) was amended.by the American Jobs Creation

Act of 2004, Pub. L.

108-357,

sec. 908 (c) (2),

118 Stat. 1656.

The amendment, which is effective for tax years ending after Oct.

22, 2004, changed "at the close of the taxable year" to "during

the entire taxable year".

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Virgin Islands may reduce taxes on "income derived from sources

within the Virgin Islands or income effectively connected with

the conduct of a trade or business within the Virgin Islands."

Pursuant to this grant of authority, the Virgin Islands

government enacted several investment incentives, including the

Virgin Islands Industrial Development Program (referred to by the

parties as the economic development program or EDP), currently

codified at V.I: Code Ann. tit. 29, secs. 701-726 (1998 & Supp.

2010).

Intended to promote growth and the development and

diversification of the Virgin Islands' economy,, the EDP granted

certain industrial development benefits to companies that do

business in the Virgin Islands.

701

See V.I. Code Ann. tit. 29, sec.

(1998).

Qualifying companies receive substantial benefits

including:

A 90-percent exemption on local income taxes, a 90-

percent exemption on the taxation of dividends, and a 100-percent

exemption on gross receipts taxes.

III.

Respondent's Notice of Deficiency

Attached to respondent's notice of deficiency was a Form

4549-A, Income Tax Discrepancy Adjustments, which set forth the

basis for the income tax deficiencies and additions to tax.

Although respondent acknowledged that petitioner was a resident

of the Virgin Islands at the close of 2002, -2003, and 2004

(thus

meeting the first requirement of section 932(c) (.4)), Form 4549-A

stated:

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You do not, however, qualify forithe gross income exclusion

under section 932(c) (4) of the Internal Revenue Code

(I.R.C.) for any of those taxable years.

During each of the

taxable years 2002, 2003, and 2004, you actively

participated incan arrangement that lacks economic purpose

and economic substance that was created to improperly claim

a 90% credit against your income tax liabilities in a scheme

similar to those described in Notice 2004-45 Meritless

Position Based on Sections 932(c) (4) and 934 (b), resulting

in your failure to properly report and identify the source

of each item of incoáe shown on the return of income tax you

filed with the USVI for each of those years.

Notice 2004-45, 2004-2 C.B. 33, was issued to advise

taxpayers that the IRS intended to challenge "highly

questionable, and in most cases meritless, positions" of certain

U.S. citizens who claim to be residents of the Virgin.Islands in

order to claim substantial tax benefits (including the above

referenced 90-percent income tax credit) of the Virgin Islands

EDP.

Respondent asserts that since petitioner did not satisfy the

second and third requirements of section 932 (c) (4), petitioner

was required to file Federal income tax returns in 2002, 2003,

and 2004 and pay any tax reported thereon.

Because petitioner

did not file Federal income tax returns for 2002, 2003, and 2004,

respondent asserts that the 3-year'period of limitations on

assessment provided by section 6501(a) has'not yet begun to run.

Thus, according to respondent, petitioner's 2002, 2003, and 2004

tax years remain open:

Petitioner, in contrast, asserts that the" section 6501(a)

period of limitations for assessing Federal taxes began to run

- 8 when he filed his Virgin Islands territorial income tax returns

with the BIR.

Petitioner never agreed to an extension of the

period of limitations as provided in section 6501(c) (4).

Thus,

petitioner argues, the period of limitations on assessment has

expired.

Movant agrees with petitioner with respect to thelexpiration

of the section 6501(a) period of limitations on the assessment of

Federal taxes.

Movant maintains that respondent's position

threatens the Virgin Islands' taxing autonomy and fiscal

sovereignty and significantly impairs the BIR's ability to

administer the tax law of the Virgin Islands.

Movant thus seeks

to intervene for the purpose of protecting its rights and

interests regarding the period of limitations issue.

Discussion

The sole issue before us is whether movant may intervene in

this matter.2

In general, our Rules do not provide for third-

party intervention.3

In the absence of an express Rule, Rule

2In Cincinnati Transit, Inc. v. Commissioner, 55 T.C. 879

(1971), affd. 455 F.2d 220 (6th Cir. 1972),.we held that a third

party to whom a notice of deficiency had not been issued may not

join in the proceeding as a party petitioner.

However, we

recognized there "is a sound distinction between permitting a

third party to 'intervene' or file an,amicus brief to protect its

interests, which we think would be discretionary at best under

these circumstances, and permitting a party to join as a party

petitioner in a proceeding to redetermine someone else's tax ~

liability." Id. at 883.

3There are limited exceptions for third-party intervention,

(continued...)

1(b) provides that the Court "may presczibe 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. Servs. of Vail, L.L.C. v.

Commissioner,

134 T.C.

,

'

(2010)

(slip- op. at 8) ; Estate of

Proctor v. Commissioner, T.C. Memo. 1994-208.

Movant relies on tule 24 of the Federal Rules of Civil

Procedure (Fed. R. Civ. P.) which governs third-party

intervention in much of the Federal court system.

Movant asserts

that it is entitled to intervene as a matter of right under Fed.

R. Civ. P. 24(a) (2) as well as under the permissive intervention

rules of Fed. R. Civ. P. 24(b) (2).

Movant indicates that if

permitted to intervene, it will file a motion for summary

judgment asserting that respondent is time barred from assessing

deficiencies under section 6501(a) with respect to petitioner's

2002, 2003, and 2004 tax years.

3(...continued)

namely:

(1) Rule 216(a), permitting intervention by the Pension

Benefit Guaranty Corporation and/or the Secretary of Labor in

certain retirement plan actions; (2) Rule 225, permitting

interventions in actions with respect to sec. 6110 written

determinations open to-public inspection; (3) Rule 245(a),

permitting intervention by tax matters partners in actions for

readjustment of partnership items brought by another partner or

partners; and (4) Rule 325(b), permitting intervention by the

nonelecting spouse with respect to claims for relief from spousal

joint and several liability.

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I.

Intervention Under Fed. R. Civ. P. 24(a) (2)

Movant first argues that it should be permitted to intervene

as a matter of right pursuant to Fed. R. Civ. P. 24(a) (2), which

provides that a court must permit anyone to intervene who:

(2) claims an interest relating to the property or

transaction that is the subject of the action, and is so

situated that 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.

A review of this Court's jurisprudence reveals that the

Court has never recognized intervention of a third party as a

matter of right pursuant to Fed. R. Civ. P. 24(a) (2).

Because we

find that movant has not satisfied the requirements of Fed. R.

Civ. P. 24(a) (2), we need not and do not decide herein whether

Fed. R. Civ. P. 24(a) (2) applies to proceedings in this Court.

To intervene pursuant to Fed. R. Civ. P. 24(a) (2), the

proposed intervenor must:

(1) Timely file an application,

show an interest in the litigation,

(2)

(3) demonstrate that the

interest may be impaired by the disposition of the action, and

(4)

show that the interest is not adequately protected by the

parties to the action.

See Kaliski v. Bacot (In re Bank of N.Y.

Derivative Litig.), 320 F.3d 291,

v. U.S. Forest Serv.,

300

157 F.3d 964,

(2d Cir. 2003); Kleissler

969

(3d Cir.

1998).

The

Supreme Court has held that Fed. R. Civ. P. 24(a) (2) requires a

"significantly protectable interest."

States, 400 U.S. 517, 531

(1971).

Donaldson v. United

Specifically, the intervenor's

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interest must be "direct, substantial, and legally protectable "

Waàh. Elec. Coop.,

F.2d 92,

97

Inc. v. Mass. Mun. Wholesale Elec. Co., 922

(2d Cir.

1990); see New-Orleans Pub. -Serv.,

United Gas Pipe Line Co.,

732 F.2d 452, 464

(5th Cir.

Inc. v.

1984)

(en

banc).

An economic interest in the outcome' of the litigation

standing alone is not sufficient to support a motion to

intervene.

Mountain Top Condo." Association v. 'Dave 'Stabbert

Master Builder,' Inc.,

72 F.3d 361

366

United States v. Alcan Aluminum,' Inc.,

Cir.

(3d Cir -1995) ;

25 F.3d 1174,

see, e.g.,

1185

(3d

1994) - ("Some courts-have stated a purely economic interest

is insufficient to support a motion to intérvene."); New Orleans

Pub. Serv., Inc. v. United Gas Pipeline Co., supra at 464 ("it is

plain that something more than an economic interest is

necessary.").

Moreover,

"An interest that is remote from the

subject matter of the proceeding, or that is contingent upon the

occurrence of a sequence of events before it becomes colorable,

will not satisfy the rule."

Wash; Elec. Coop., Inc. v. Mass.

Mun. Wholesale Elec. Co., supra at 97; see also Kleissler v. U.S.

Forest Serv.,

supra at 972 ("Nonetheless, the- polestar for

evaluating a claim for intervention is always whether the

proposed intervenor's interest is direct or femote.").

The

determination as to whether the proposed intervenor's interest is

sufficient to satisfy the "direct, substantial, and legally

- -12 protectable" requirement is made on the basis of an examination

of all the facts and circumstances present in the matter.

See

Cascade Natural Gas Corp. v. El Paso Natural Gas Co., 386 U.S.

129,

133-134

(1967); Kleissler v. U.S. Forest Serv.,

supra at

970.

Movant maintains that it has the requisite interest to

intervene as a matter of right, asserting that respondent's

determination both_impinges on its sovereign authority to

administer its own tax-laws through the BIR and undermines

movant's economic policies.

Movant further asserts that

respondent's position that.the period of -limitations on

assessment of income taxes provided in section 6501(a), remains

open for petitioner (and other similarly situated taxpayers) has

caused a number of companies to leave the -Virgin Islands; hass

undermined its economic development program, and has adversely

impacted movant's tax revenues. - We do not subscribe to ·this

argument.

Resolution of the 3-year period of limitations issue will

not undermine movant's.taxing authority or discourage legitimate

economic development in the Virgin Islands pursuant to movant's

EDP.

Regardless of the outcome of the 3-year period of-

limitations issue, movant will still retain the authority to

offer and administer its economic development program.

Movant's

assertions relate to movant's economic interest-,(specifically the

- 13 Virgin Islands ' bus ines s - cliríate ) ein the sout come of the

litigation between petitioner and respondent; and as previously

noted supra p

11, an economic interest is not sufficient to

permit intervention.A Moreover, movant's sinterest in this

proceeding (1)

is- remote from the subject amatter of the

controversÿ between petitioner and-respondent (i.e , petitioner's

participation in~an activity yhich respondent"alleges lacks

economic purpòse and economic substance) , and (2) will be

impaired and colorable only upon the occurrence of a sequence of

events. - See Wash. Elec

Coop., Inc. v. Mass. Mun. Wholesale

Elec. Co., supra at 97.

-Hence; movant's interest does~not

satisfy the direct, substantial, and'legally protectable

requirements of Fed.' R

Civ. P. 24(a) (2).

See Wash. Elec. Coop.,

Inc. vi. Mass. Ñun. Í#ñolesale Elec. Co., suprar at 97

II.

'Intervention Under Fed. R. Civ. P. 24(b) (2)

Alternatively,' movant asserts it should be allowed to

intervene pursuant to the - permissive intervention rules of Fed.

R. Civ. P. 24 (b) (2) ; whereby a Federal or State government

of f.icer or agency may be permitted- to intervene if a pardy to the

litigation's cl'aim or defense is-based on:

"(A) a statute or

executive order administered by the officer or agency; or (B)

any regulation

order, requirements, or agreement issued or made

under the statute or executive order "

Movant .posits: that

petitioner's case centers on sections

32(c)" and 934(b), swhich

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under the mirror tax system are administered by the BIR.

Movant

argues that if its request to intervene is granted, the filing of

a motion for summary judgment will not delay or obstruct the

adjudication of the matter in this Court.

movant falls within paragraph (A) or (B)

Assuming arguendo that

of Fed. R. Civ. P.

24 (b) (2), movant has neither demonstrated that its participation

as a party is necessary to advocate for an unaddressed issue nor

shown that its intervention will not delay the resolution of this

matter.

Intervention pursuant to Fed. R. Civ. P. 24(b)

the discretion of the Court.

is left to

In Estate of Proctor v.

Commissioner, T.C. Memo. 1994-208, we stated:

Under rule 24(b) of the Federal Rules of Civil Procedure

(rule 24 (b)) a trial court has discretion to permit

intervention by third parties. Rule 24(b) also permits the

trial court to restrict the scope of intervention by third

parties and to condition such intervention in any manner it

believes is necessary for the efficient conduct of the

proceedings. Wright et al., Federal Practice and Procedure:

Civil 2d,

secs.

1913,

1922

(1986 & Supp. 1993).

Federal

courts generally consider the following factors when

deciding whether to grant a party's motion to intervene:

(1) Whether the presence of a.third party in the proceeding

will prejudice the original parties; (2) whether allowing

intervention by a third party will unduly delay the

adjudication; (3) whether the movíng party is or may become

a party to another proceeding in which the moving party's

rights will be determined; or (4) whether there is some

other adequate remedy available to the moving.party. Wright

et al., supra sec. 1913, at 379-388.

Generally, once the

court permits a third party to intervene in the proceeding,

the intervenor is treated as an original party and has equal

standing with the original partie.s, subject to any of the

conditions the court may impose.

See Ross v. Bernhard, 396

U.S.4531,-541 n.15

(1970).

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Like other Federal" courts, this Court may permit '

intervention where the ends of justice so require.

Commissioner v. Revere Land Co.,

1948), revg.

7 T.C.

1061

169 F.2d 469, 479 (3d Cir.

(1946); see also Sampson v.

Commissioner, 710 F.2d 262

to permit,

- Id.; see

(6th Cir. 1983)

(Tax Court has power

in its discretion, intervention by persons or entities

who have not. been served with a notice of deficiency).

In its reply to respondent's objection, movant states:

"the

V.I. Government merely seeks this -Court's interpretation of

Section 6501(a) as it applies to USVI residents who filted, in

good faith, a return with the Bureau" and that that this determination may be made via a motion for summary judgment.

Movant takes the position that:the filing of a territorial income

ta

return with the BIR by a resident~of the Virgin Islands

triggers the running of the period of limitations for both Virgin

Islands and U.S. -tax return filing purposes.

Petitioner, who is represented,by counsel, has made the

expiration of the section 6501(a) period of limitations a cornerstone of his scase.

In his petition, petitioner alleges

that he properly and timely filed his 2002, 2003, and 2004 Virgin

Islands territorial income tax~returns with the BIR (a statement

movant concurs in), that the BIR informed the IRS of petitioner's

return information pursuant to information sharing agreements·

between the two.agencies, and that the IRS' examination of

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petitioner's -2002, 2003, and 2004 tax years commenced well before

the expiration of the period of limitations.

states:

The petition

"The Commissioner.spent several years examining

Petitioner's 2002 through 2004 taxable years, including

significant amounts of time with little or no examination

activity, and never reguested an extension of the statutes of

limitations for any of these years."

states:

Further, the petition

"The statute of limitations under I.R.C. § 6501 for the

2002, 2003 and 2004 taxable years had expired well prior to the

time the Commissioner issued his Statutory Notice of Deficiency,

on November 25,

2009."

Petitioner has raised the period of limitations issue, and

we presume the matter will be fully vetted during the normal

course of thesesproceedings.

For movant to participate.in this

case as+a party.solely to make an argument that petitioner has

already identified as a matter central to his case would

introduce a redundancy into the proceedings.

Adjudication of the period of limitations issue may require

us to make factual determinations.

Were we to grant the motion

to intervene, movant would become a.party to the proceeding in

this Court and have the right to introduce documentary evidence,

call its own witnesses, and cross-examine witnesses of the other

parties.

Such participation, as a practical matter, could result

in trial complications as well as delay the resolution of the

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issue in which movant asserts an interest.4

Consequently, we

shall deny movant's motion to intervene.

There is, however, another remedy (i.e., the filing of an

amicus curaie brief) available to movant through which it may

adequately represent its interest in the outcome of this case.

Thus, as an alternative to intervention, we will permit movant to

'In its supplement to the reply to respondent's objection to

movant's motion to intervene, movant cites Karr v. Castle, 768 F.

Supp. 1087 (D. Del. 1991), to support its position. That case

involved the filing of a civil rights action by Karr, a former

Delaware National Guard member, against Castle, the governor of

the State of Delaware, and various Delaware Army National Guard.

officers challenging the constitutionality of Karr's involuntary

separation from military.service. At issue was the validity of a

National Guard Bureau regulation governing separation from

service (i.e., whether the regulation failed to provide Karr with

sufficient procedural due process).

The United States moved to

intervene in order to defend the constitutionality of the

regulation inasmuch as the regulation was promulgated by the

National Guard Bureau, a joint bureau of the U.S. Department of

the Army and the U.S. Department of the Air Force.

The United

States asserted that its interest would, as a practical matter,

be impaired by prosecution of Karr's lawsuit because of the

potential stare decisis effect on future challenges to the

regulations (i.e., declaring the regulations invalid would have a

widespread effect upon the National Guard of the several States).

The court denied the United States' motion to intervene as

of right pursuant to Fed. R. Civ. P. 24(a) (2), but granted

permissive intervention under Fed. R. Civ. P. 24(b).

The court

found the validity of the regulation in question sufficient to

give the United States an intent in common with the litigation.

In so holding, the court found that intervention by the United

States would "not unduly delay or prejudice the adjudication of

the rights of the original parties".

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file an amicus curiae brief in order to enable us to view the

matter from its perspective.

An appropriate order will

be issued.