Petition — Government of the Virgin Islands v. Vitco, Inc.
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Supreme Court, U. S, \
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IN THE ! DEC 28 19TT
Supreme Court of the Anithdtatesie. cur
OCTOBER TERM, 1977
"77-910
GOVERNMENT OF THE VIRGIN ISLANDS and
LEROY A. QUINN, Commissioner of Finance,
Petitioners,
VITCO, INC.,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
CHARLES S. RHYNE
WILLIAM S. RHYNE
DONALD A. CARR
Suite 800
1000 Connecticut Ave., N.W.
Washington, D.C. 20036
CHARLES H. BURTON
CARL F. BAUERSFELD
EDGAR D. ROSS 7101 Wisconsin Avenue
Attorney General Bethesda, Maryland 20014
THOMAS M. UTTERBACK Attorneys for Petitioners
Assistant Attorney General
Department of Law
P.O. Box 280
St. Thomas, Virgin Islands 00801
Washington, D.C. e CLB PUBLISHERS « LAW PRINTING CO. @ (202) 393-0625
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TABLE OF CONTENTS
Page
i eb ce eae es beh seen se 1-2
ee eR ia ng Jen es ea ue ee 2
GPU PUUUNED vec rcv cces: -sesces 2-3
STATUTES AND REGULATIONS INVOLVED ........... 3
DE GE EEE ck checclececestiectesues 3
REASONS FOR GRANTING THE WRIT .............. 6
1. The Judgment of the Court of Appeals, if
Allowed to Stand, Will Have a Disastrous
Effect on the Level of Government Services
Provided to the Citizens of the Virgin Islands ...... 6
2. The Judgment of the Court of Appeals, Based
on Its Own Judicial Notions of “the Desirabil-
ity of Tax Equality” Between the United States
and the Virgin Islands as Taxing Sovereigns,
Is Manifestly Contrary to the Intent of Congress ........ 7
a. The Court of Appeals Sacrificed the Plain
Meaning of the Relevant Statutes ............. 8
b. Congress Has Specifically Declined to
Eliminate the Favorable Taxing Powers the
Court of Appeals Thought So Inequitable .......... 10
FCC ETT ETOCS TE CLE TT eT eT Te 14
APPENDICES:
Opinion of the Court of Appeals ...............5. la
Se Ge GE Se Gn vc eee ee acecesseos ib
PPT E TTT TTC TL TE TEL TT Ic
Letter, dated August 28, 1967, from John W. S.
Littleton, Director, Income Tax Division,
United States Internal Revenue Service to
Virgin Islands Technical Tax Advisor ............ Id
Letter, dated June 4, 1973, from R.L. Plate,
Director, International Operations, United
States Internal Revenue Service to Max
Kirchner, Virgin Islands Technical Tax Advisor...... le
Affidavit of Terence Todman, Assistant Secretary
of State for Inter-American Affairs, U.S. State
ie ie eat eee ce Sl id ain If
(ii)
TABLE OF AUTHORITIES
Page
Cases:
Chicago Bridge and Iron Co. vy. Wheatley, 430 F.2d
973 (3d Cir. 1970), cert. denied, 401 USS. 910
cote, MELE T eee are i ee 8.9
Commissioner of Internal Revenue v. Kowalski,
U.S. » 46 US.L.W. 4015 (Nov. 21,
EWEN bh ODAC Wne GEE Ou weden eat iuussoenuc.. 13
Sayre and Company v. Riddell, 395 F.2d 407 (9th
CO ee en eee 10,11
Statutes and Regulations:
The Naval Appropriations Act of 1922, as amended,
OM 5h wes nob bee une ucewsncccce: 3,7
The Internal Revenue Code of 1954
WU OE iad wile Sav cs ees ee ease. 4,8,10,11,12
Oe OTE sk as wide ee eneuesevnscucucceces., 9
MATS Rees 548 odo xk xn nn<esveactncc.. 9
OD sans oe sseswsedeceseecenveccecc, 12
SMT 65555 Ki oon es cow cevnceincsccc., 4
a mira, veer CCC TEER CEET CCT Tees 4,8,11.12
5 TRS is eds shdeedeecu..... 89
The Revised Organic Act of the Virgin Islands of
1954, as amended, 48 U.S.C. 88154] et seq. ......... 9
peceiisi-w- ek sessing CCE ECCT OTe 6
swslberss one, sinned ERECT Pe 6
secboutesipnadl, inestiomglllt REECE Te 6
PEE 000 bsA d eas eweecceucccc.. 9.10
Treasury Regulations
sl hehe 9,10
I.T. 2946, XIV-2 C.B. 109 ee ee 4
Rev. Rul. 73-315, 1973-2 CB. 225 .................. 4
Rev. Rul. 56-616, 1956-2C.B.589 ......0.. 8
>
:
s
7
:
(iii)
Page
Legislative Materials:
S. Rep. 92-437, 92d Cong., Ist Sess. (1971) .-.----+--- 9
H.R. Rep. 92-533, 92d Cong., Ist Sess. (1971) .-....--- 3,9
H.R. Rep. No. 1603, 83d Cong., 2d Sess. (1954) ........ 10
H.R. Rep. 92-1479, 92d Cong., 2d a a) eee :
61 Cong. Rec. 1725 (1921) 2. eee eee eee eee eee ees
i . Dec.
121 Cong. Rec. H. 11780, 11843-45, (daily ed. Dec ~—
"a RR ie OR ba a a ee eee
ee
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IN THE
Supreme Court of the United States
OCTOBER TERM, 1977
No.
GOVERNMENT OF THE VIRGIN ISLANDS and
LEROY A. QUINN, Commissioner of Finance,
Petitioners,
VITCO, INC.,
Respondent.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Petitioners pray that a writ of certiorari issue to
review the judgment of the United States Court of
Appeals for the Third Circuit dated July 26, 1977.
OPINIONS BELOW
The opinion of the Court of Appeals is reported at
560 F.2d 180 and is printed in Appendix A, infra, p.
la.
to
The opinion of the District Court of the Virgin
Islands is unreported. The opinion of the District Court
is printed in Appendix B, infra, p. 1b.
JURISDICTION
The judgment of the Court of Appeals was entered
July 26, 1977. The jurisdiction of this Court is invoked
under 28 USC §1254. A Motion for Permission to File
Suggestion for Rehearing En Bane Out of Time was
filed on August 17, 1977. The Order of the Court of
Appeals denying Petitioners’ Motion for Rehearing En
Bane was entered September 14, 1977. On October 13,
1977, Petitioner filed an Application for Extension of
Time within which to File a Petition for Certiorari. On
October 14, 1977, Mr. Justice Brennan as Circuit Justice
entered an Order Extending Time to File Petition for
Certiorari to December 23, 1977.
QUESTIONS PRESENTED
1. Whether the mirror system of taxation, by which
Congress has provided that the United States Internal
Revenue Code is the tax code of the Virgin Islands
with appropriate nomenclature changes substituting
“Virgin Islands” as the taxing sovereign, is properly
construed to require mirrored application of an
Internal Revenue Service regulation favoring direction
of taxes to the Virgin Islands, even where the Internal
Revenue Service does not consider the regulation
applicable to the Virgin Islands as a taxing sovereign.
a
BE ee
2. Whether the mirror system of taxation is properly
construed in accordance with the Court of Appeals’
notions of ‘tax equality” and fairness to defeat the
collection by the Virgin Islands of tax revenues
which Congress plainly intends for the Virgin Islands
to collect.
STATUTES AND REGULATIONS
INVOLVED
The Statutes involved are Naval Service Appropria-
tions act of 1922, as amended, 48 U.S.C. §1397 (1970)
Revised Organic Act of the Virgin Islands 48 U.S.C.
$1541 et. seq. (1970); Internal Revenue Code of 1954,
§§881, 1441, 1442, 7701(a)(4) and (a)(S). See Appendix
C, infra.
The Regulations involved are Treasury Regulations
§§ 1.1441, and 1.1441-4(d). See Appendix C, infra.
STATEMENT OF THE CASE
This case involves questions of the proper operation
of the “mirror” tax system which Congress has devised
for the United States Virgin Islands. Succinctly stated,
under this system the Virgin Islands applies the
provisions of the Internal Revenue Code, substituting
the words “Virgin Islands” for the words “United
States,” wherever they appear. Naval Service Ap-
propriations Act of 1922, as amended, 48 USC.
§1397 (1970). H.R. Rep. 92-533, 92d Cong., 2d Sess.
(Sept. 29, 1971); 1971 U.S. Code Cong. and Admin.
News at 1863; S. Rep. 92-437, 92d Cong., 2d Sess.
(Nov. 9, 1971); 1971 U.S. Code Cong. and Admin.
4
News at 1976; I.T. 2946, XIV-2 C.B. 109 (1935); Rev.
Rul. 73-315, 1973-2 C.B. 225.
Respondent Vitco, Inc. (Vitco) is a Virgin Islands
corporation and a wholly-owned subsidiary of Chase
Instruments Corp. (Chase), a New York corporation.
Shortly after its incorporation in 1958, Vitco, which
then was in the business of manufacturing _ ther-
mometers, received a ten-year grant of tax and fee
exemptions and other subsidies from the Virgin Islands
government, under a program designed to attract
industry which would create jobs, stimulate the
economy and ultimately increase tax revenues. Through
that program the Virgin Islands government rebated to
Vitco 90% of all excise taxes, 90% of all customs
duties, 100% of all gross receipts taxes and 75% of all
income taxes. The total benefit accorded to Vitco
between 1958 and 1968 amounted to more than
$268,000 and its retained earnings reached $513,251.82
in 1968, cia
| By 1967, Vitco was deriving less than one-half of its
income from manufacturing business. By 1970, Vitco’s
business consisted primarily of leasing machinery and
equipment, and loaning money to its parent, Chase
Instruments Corp., and other United States corpora-
tions. By 1970, Vitco had no employees in the Virgin
Islands.
In 1970, 1971 and 1972, Vitco paid dividends of
$25,000, $50,000 and $50,000, respectively, to Chase
Instruments Corp.
Petitioner, the Commissioner of the Virgin Islands
Department of Finance, issued a notice of deficiency
asserting that under Sections 881, 1441 and 1442 of
the Internal Revenue Code as mirrored Vitco should have
withheld and remitted to the Virgin Islands government
30% of the dividends paid in order to satisfy the 30% tax
imposed on the United States (foreign) corporate payee.
Vitco filed an action for a redetermination of the tax
deficiency in the United States District Court for the
Virgin Islands. The District Court ruled that under the
plain meaning of the relevant statutes Vitco should have
withheld the tax. [fhe United States Court of Appeals
for the Third Circuit reversed, holding that it would be
contrary to its judicial principle of “tax equality’ to
require Virgin Islands sources to withhold the 30% tax
on dividend payments to United States taxpayers
because the Internal Revenue Service has by regulation
maximized the tax revenue flow to the Virgin Islands by
exempting United States sources from withholding
requirements on dividend payments to Virgin Islands
taxpayers. While the Court of Appeals purported to
limit its ruling to the issue of whether Vitco, Inc. may
be required to withhold the tax imposed on Chase
Instruments Corp., the effect of the Court of Appeals
decision is to render collection of the tax from Chase
Instruments Corp. impossible.
The Virgin Islands has collected from taxpayers
identically situated with Respondent Vitco, Inc. some
$18,000,000 to $20,000,000 of the withholding tax
which is at issue in this litigation. If the decision of the
Court of Appeals is not reversed, the Virgin Islands will
be subject to refund claims for that amount. The
withholding tax presently generates from $4,000,000
and $6,000,000 per year in revenues to the Virgin
Islands.
REASONS FOR GRANTING THE WRIT
The Court of Appeals improperly substituted its
judgment of the equitableness of the tax-here in issue.
for that of the Congress. The Court of Appeals
decision denies to the Virgin Islands a very substantial
percentage of its revenues and will have an enormous
adverse impact upon the fiscal stability of the
Government of the Virgin !slands.
1. The judgment of the Court of Appeals, if
allowed to stand, will have a disastrous effect
on the level of government services provided
to the citizens of the Virgin Islands.
The Government of the United States Virgin Islands
provides services to its citizens from a revenue base
which is largely defined and limited by taxing
provisions enacted by the United States Congress.
Congress has by 48 U.S.C. §§1574, 1574a and 1574b
prohibited any deficit spending by the Virgin Islands
Government.
The current operating budget of the Virgin Islands is
approximately $137,000,000. Because of the limited
revenue base, the budget has of necessity remained at
virtually the same level since fiscal year 1975, despite
nsing inflation. The Governor of the Virgin Islands, in
transmitting the current budget to the Virgin Islands
Legislature, stated that it ‘“‘support[s] only a minimally
acceptable level of services,” but that this was
compelled by “a restrained and realistic allocation of
limited resources.” Budget Message of the Governor of
the United States Virgin Islands, June 16, 1977, at 2. 7.
Mie to weiner
Approximately eighiy percent (80%) of the operating
budget is allocatec toward the provision of social
services, primarily in the areas of education (30%),
health (14.5%), social welfare (5.3%), and public safety
(9.5%).
The revenue loss due to the Court of Appeals de-
cision in this case, in this fiscal year alone, in refunds
and uncollected revenue, will approach $25,000,000, or
between 15% and 20% of the operating budget.
The strategic importance of this diversion uncount-
enanced by Congress is as set forth in Appendix F, infra.
It is inevitable that such a revenue loss would dictate
drastic reductions in governmental services, particularly
in the above-mentioned areas of education, health,
welfare and police and fire protection. In addition,
substantial layoffs of government employees would
occur in an economy already heavily impacted by
unemployment. The judgment of the Court of Appeals
therefore unquestionably threatens the fiscal stability of
the Government of the Virgin Islands.
2. The judgment of the Court of Appeals, based
on its own judicial notions of “the desirabil-
ity of tax equality” between the United States
and the Virgin Islands as taxing sovereigns, is
manifestly contrary to the intent of Congress.
Congress means for the Virgin Islands to have the tax
revenue which is at issue in this litigation.
The Naval Appropriations Act of 1922, as amended,
48 U.S.C. §1397 (1970), established the separate
“mirror” taxing structure for the Virgin Islands by
providing that the Virgin Islands should apply the
income tax laws in force in the United States and
receive the proceeds into iis treasuries. The legislative
history reveals that the purpose of this measure was to
8
make the Virgin Islands government financially self-
sufficient, thereby avoiding the need for Congress to
make special appropriations for its Support. 6! Cong.
Rec. 1725 (1921),
Section 881 of the Internal Revenue Code imposes a
tax of thirty percent (30%) on so-called passive income
(embracing interest, rents and dividends) received by
“foreign” corporations from sources within the United
States. Section 1442 of the Code requires that the
domestic source or payor of the income must withhoid
30% of the interest, rent or dividend in order to satisfy
the Section 881 tax.
By the definitions of “foreign” and “domestic”
contained in I.R.C. Sections 7701(a)(4) and (a(S), a
corporation chartered in a United States possession such
as the Virgin Islands is a foreign corporation as to
the United States, and a United States corporation is a2
foreign corporation as to the Virgin Islands. Rev. Rul.
56-616, 1956-2 C.B. 589, Dividends paid by a Virgin
Islands corporation to its United States parent are
therefore clearly subject to Sections 88] and 1442, as
those provisions are applicable in the Virgin Islands.
a. The Court of Appeals sacrificed the plain meaning of
the relevant statutes.
The Court of Appeals recognized (App. A, p. 9a)
that the plain meaning of these provisions commanded
withholding of the 30% tax by Vitco on its payments
to Chase. Nevertheless, the Court of Appeals, relying on
dicta to its decision in Chicago Bridge and Iron Co, Y,
Wheatley, 430 F.2d 973 (3d Cir. 1970), cert. denied,
9
401 U.S. 910 (1971), erroneously held (App. A, p. 12a)
that the mirror tax system is governed by an
“equality principle” under which the Virgin Islands may
not collect more tax than the United States would
collect on the same income in the absence of the mirror
system. The Court of Appeals ruled that because an
Internal Revenue Service regulation, Reg. §1.1441-4(d),
exempts United States payors from withholding on
dividend payments to Virgin Islands taxpayers, there
can be no withholding requirement in the opposite
direction. (App. A, p. 10a). The sum and substance of
the Court of Appeals decision is that Court’s view that
Congress’ unequivocally expressed tax policy is unfair to
American corporations with subsidiaries in the Virgin
Islands.
Reg. §1.1441-4(d) was promulgated in 1956 to
implement the Congressional design in the Revised
Organic Act of the Virgin Islands, 48 U.S.C. §1541 et
seq., passed in 1954, Section 28(a) of that Act, 48
U.S.C. §1642, provides that permanent residents of the
'There, the Third Circuit decided that the Virgin Islands
could not deny to a United States corporation the “Western
Hemisphere trade corporation” deduction which would be
available to it under I.R.C. §922 on a United States tax return.
The decision was clearly inconsistent with the plain meaning of
IL.R.C. §§922 and 7701(a), as mirrored. Shortly after the
decision, Congress eliminated the Western Hemisphere trade
corporation deduction for purposes of application of the Internal
Revenue Code in the Virgin Islands, in order to prevent a
substantial loss of revenues by the Virgin Islands. Revenue Act of
1971, §307, IRC. §921. H. R. Rep. 92-533, 92d Cong.,
Ist Sess. (1971); 1971 U.S. Code Cong. and Admin. News at
1863-64; S. Rep. 92-437, 92d Cong., Ist Sess. (1971); 1971 U.S.
Code Cong. and Admin. News at 1976-77.
10
Virgin Islands, including Virgin Islands domestic corpor-
ations, have no tax liability to the United States on any
United States source income they might have; it directs
that they pay tax on all their world-wide income to the
Virgin Islands. The purpose of that section was to give
the Virgin Islands greater economic autonomy and
seli-sufficiency by allocating to it revenues which had
prior to that time gone into the United States Treasury.
H.R. Rep. No. 1603, 83d Cong., 2d Sess. 13 (1954),
The Court of Appeals’ notion of a reciprocal exemption
to United States recipients of Virgin Islands source
passive income is clearly and completely antithetical to
Congress’ intent in that legislation.
Reg. §1.1441-4(d) merely states a common-sense rule
that the payor of the dividends should not be required
to withhold where the payee has no liability for the
30% tax under I.R.C. §881. The regulation has no
proper application here, where’ the payee Chase
Instruments Corp., is indisputably liable for the tax
under the plain meaning of the statute. The Internal
Revenue Service has twice advised that Reg.
§1.1441-4(d) does not preclude the Virgin Islands from
requiring withholding on dividends paid by Virgin
Islands payors to United States payees. (App. D, App. E)
b. Congress has specifically declined to eliminate the
favorable taxing powers the Court of Appeals thought
so inequitable.
In Sayre and Company v, Riddell, 395 F.2d 407 (9th
Cir. 1968), the Court of Appeals for the Ninth Circuit
dealt with the identical claim raised by Vitco in this
RO A NE 28 RR ee eo lh ee
Ae Re ae Lee
2. a.
1]
litigation, in the analogous context of the “mirror” tax
structure which Congress had also provided for Guam.
The Ninth Circuit there concluded that since a United
States corporation was a foreign corporation as to
Guam, the plain meaning of Sections 881 and 1442
dictated that a Guam sole proprietorship had to
withhold the 30% tax on interest and commission
payments it made to a corporation chartered in Hawaii.
In rejecting the taxpayer’s argument that this result was
so unfair as to discourage American investment in
Guam, the Ninth Circuit stated:
“We may not adopt a construction inconsistent
with [the plain meaning of the statute] ..., simply
because we consider the result more equitable.
Deviations from the intended dual structure by
substantive revision of the basic scheme of the
Code as applied to Guam must be left to
Congress.”” 395 F.2d at 412-13.
In 1972, Congress did determine that the enforce-
ment by Guam of Sections 8&1 and 1442 was bad tax
policy, because it...“had the effect of seriously
retarding investment by U.S. corporations in Guam.”
H.R. Rep. 92-1479, 92d Cong., 2d Sess. 3 (1972): 1972
U.S. Code Cong. and Admin. News 5402-5403.
Congress therefore added new language in Sections 88]
and 1442 to provide specifically that Guam should not
collect the tax. 26 U.S.C. §§881(b), 1442(c); Pub. L.
92-606, October 31, 1972.
The Court of Appeals in the instant case divined
from Pub, L. 92-606 a Congressional adoption of its
across-the-board “equality principle’? under which the
Virgin Islands may not collect more tax than the
United States collects on the same income. (App. A,
pp. | la-12a).To the contrary, Pub. L. 92-606 shows that
12
Congress will act to correct whatever tax disparities in
the operation of the mirror system it thinks should be
changed.
If Congress had meant to bar the Virgin Islands as
well as Guam, from enforcing Sections 881 and 1442, it
would have so provided in Pub. L. 92-606 — “‘expresio
unius est exclusio alterius.” Congress obviously was not
as concerned about any disincentive or unfairness to
American investors in the Virgin Islands, as it was with
respect to Guam. Congress is well aware of the
enormous subsidies provided by the Virgin Islands to
American investors. Indeed. Congress has acted to limit
those subsidies. 26 U.S.C. § §934(a) and (b): Pub. L.
86-779, §4(a), Sept. 14, 1960. There was no record of
similarly extensive subsidies paid by Guam. See H.R.
Rep. 92-1479, 924 Cong., 2d Sess. (1972); 1972
Code Cong. and Admin. News at 5401.
In its desire to superimpose its “equality principle”
on the mirror system of taxation, the Court of Appeals
grossly misinterpreted Public Law 92-606. Congress
certainly does not believe that that law (Or any prior
enactment) removed the Virgin Islands’ authority to
enforce Sections 881 or 1442. In fact, in its
consideration of Section 1041 of H.R. 10612, the Tax
Reform Act of 1975, which would have repealed the
United States’ authority to levy the 30% tax on United
States-source interest and dividend income earned by
foreign corporate investors, Congress provided that the
Virgin Islands could still continue to collect the tax.
121 Cong. Rec. H. 11780 (daily ed. Dec. 4, 1975). The
repealer provision was amended ut of the bill because
it would have cost the United States $165,000,000 per
year in tax revenues, a proportionately smaller amount
13
that the Virgin Islands stands to lose under the decision
of the Court of Appeals. 121 Cong. Rec. H. 11843-45
(daily ed. Dec. 4, 1975).
As this Court has recently emphasized, where
Congress’ allocation of tax revenues is clearly stated,
the Circuit Courts of Appeals are not free to scrap this
clear expression in the false pursuit of their notions of
“tax equity.” Commissioner of Internal Revenue vy.
Kowalski, ____. US. , 46 U.S.L.W. 4015, 4021
(Nov. 21, 1977).
14
CONCLUSION
The Court of Appeals decision will have the most
dire effect upon the fiscal stability of the Government
of the Virgin Islands, and upon its ability to provide
services to its citizens. That decision deprives the Virgin
Islands of millions of dollars of annual revenues which
Congress undeniably meant the Virgin Islands to
receive. A writ of certiorari should issue to the United
States Court of Appeals for the Third Circuit.
EDGAR D. ROSS
Attorney General
Respectfully submitted,
CHARLES S. RHYNE
WILLIAM S. RHYNE
DONALD A. CARR
Suite 800
1000 Connecticut Ave., N.W.
Washington, D.C. 20036
CHARLES H. BURTON
CARL F. BAUERSFELD
7101 Wisconsin Avenue
Bethesda, Maryland 20014
Attorneys for Petitioners
THOMAS M. UTTERBACK
Assistant Attorney General
Department of Law
P.O. Box 280
St. Thomas, Virgin Islands
00801
APPENDIX
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 77-1065
VITCO, INC..,
Appellant
v.
GOVERNMENT OF THE VIRGIN ISLANDS and
REUBEN B. WHEATLEY, Commissioner of Finance,
ON APPEAL FROM THE DISTRICT COURT OF THE
VIRGIN ISLANDS DIVISION OF ST. THOMAS
AND ST. JOHN (D.C. Civil No. 74-628)
Argued April 27, 1977
Before: VAN DUSEN, WEIS and GARTH.
Circuit Judges.
Of Counsel: Richard E. Grunert, Esq.
David A. Ferdinand, Esq. Grunert, Stout, Hymes & Mayer
Strauss & Ferdinand 24-25 Kongensgade
9 East 46th Street St. Thomas, Virgin Islands 00801
New York, N.Y. 10017 Attorneys for Appellant
John A. Corry, Esq. ©
Charles E. Stiver, Jr., Esq.
Davis, Polk & Wardwell
One Chase Manhattan Plaza
New York, N.Y. 10005
2a
Edgar D. Ross, Esq.
Attorney General of the Virgin Islands
Paul B. Kertman, Esq.
Assistant Attorney General
of the Virgin Islands
P.O. Box 1074
Christiansted, St. Croix
U.S. Virgin Islands 00820
Attorneys for Appellee
OPINION OF THE COURT
(Filed JULY 26, 1977)
WEIS, Circuit Judge.
One may argue that the mirror system of taxation is
not always the fairest of them all, but it does reflect
the congressional intent to implement some degree of
uniformity. In this appeal, we conclude that not only
must statutory language be transposed but so must
authorized implementing regulations as well. Accord-
ingly, we hold that a Virgin Islands corporation must
pay its tax obligations on all of its income to the Virgin
Islands despite minimal contacts there. In addition, the
withholding provisions relating to dividends paid to a
mainland corporation do not apply since a similar
provision in the United States Code does not cover
income paid to a Virgin Islands corporation by a United
States corporation.
——
3a
Appellant Vitco is a corporation chartered in the
Virgin Islands and is a wholly owned subsidiary of
Chase Instruments Corporation, a New York corpora-
tion. Vitco’s business consists primarily of leasing
machinery and equipment, some of which was located
in the Virgin Islands and some in the continental
United States during the 1970-1972 period. Most of the
company’s revenues were attributable to the equipment
located in the continental United States, and it was
there that Vitco physically received its machinery rental
and interest income from all sources. Having neither an
office nor any employees in the Virgin Islands, Vitco
maintained its place of business in Lindenhurst, New
Jersey, in the same city as its parent. On its tax returns,
however, Vitco lists its address as “P.O. Box 2488, St.
Thomas, Virgin Islands,”
For the years 1970, 1971 and 1972, Vitco submitted
corporate tax returns and paid the amounts due to the
United States government. The company also filed
income tax returns with the Commissioner of Finance
of the Virgin Islands for the same years, claiming as
foreign tax credits the amounts paid to the United
States.
The respondent Commissioner of Finance issued a
deficiency notice, asserting that Vitco’s taxes should
have been paid to the Virgin Islands rather than the
United States. Further, the Commissioner sought an
additional amount allegedly due the Virgin Islands — a
30% “withholding” tax on the gross dividends paid by
Vitco to its parent, Chase Instruments Corporation. The
Virgin Islands based this latter assessment upon §1442
of the Internal Revenue Code, 26 U.S.C. § 1442, which
provides for the withholding of a 30% tax upon what
4a
might be termed “passive” income paid to a foreign
corporation. Since Chase is a United States Corporation,
it is considered as “foreign” for Virgin Islands tax
purposes,
The district court, agreeing with the Commissioner,
determined that Vitco was required to pay taxes On its
entire income to the Virgin Islands, rather than to the
United States, and to withhold taxes due on the
dividends payable to Chase.
As we have explained in the earlier cases, Congress
neither passed a separate income tax law for the Virgin
Islands nor permitted its legislature to do so. Instead,
Congress provided that the provisions of United States
income tax law should be used in the tax code of the
Virgin Islands with necessary nomenclature changes to
make them effective, that is, “Virgin Islands” should be
substituted for “United States’ whenever appropriate.
The United States and the Virgin Islands are two separate
and distinct taxing authorities, and the revenue due the
Virgin Islands is paid into its treasury. This resulted in
what has been called the “mirror system” of taxation.
For a history and general description of its Operation,
see Dudley v. Commissioner, 3 V.1. 685, 258 F.2d 182
(3d Cir. 1958); Chicago Bridge and Iron Co. v. Wheatley,
7 V.I. 555, 430 F.2d 973 (3d Cir. 1970), cert. denied,
401 U.S. 910 (1971); and Great Cruz Bay, Inc., St.
John, Virgin Islands v. Wheatley, 11 V.1. 189, 495 F.2d
301 (3d Cir. 1974),
As a matter of policy, Congress determined that the
Virgin Islands should collect tke tax on all income of
Virgin Islands residents, including any received from
sources in the United States. 1954 Revised Organic Act
of the Virgin Islands, §28(a), 48 U.S.C. § 1642. The
statute provides:
Sa
“,.. the term ‘inhabitants of the Virgin Islands’ as
used in this section shall include all persons whose
permanent residence is in the Virgin Islands, and
such persons shall satisfy their income tax
obligations under applicable taxing statutes of the
United States by paying their tax on income
derived from all sources both within and outside
the Virgin Islands into the treasury of the Virgin
Islands... .”
“Inhabitants” includes corporations as well as natural
persons, Chicago Bridge and Iron Co. y. Wheatley,
supra.
The legislative history of the Act is illuminating. The
Senate draft of the bill stated that:
“United States citizens residing in the Virgin
Islands may satisfy their United States income tax
Obligations by paying their tax to the Virgin
Islands, regardless of the source of their income.”
{emphasis added]!
In a letter to the Senate Committee, the Assistant
Secretary of the Interior said:
“The Department bill, like the present organic act,
provides that proceeds of customs duties, United
States income taxes, any taxes levied by Congress
on inhabitants of the Virgin Islands, and the
proceeds of certain fees shall be covered into the
Virgin Islands treasury. In addition, the Depart-
ment bill would provide for the return to the
Virgin Islands treasury of proceeds of United
States internal-revenue taxes collected on articles
produced in the Virgin Islands and transported to
the United States. The chamber of commerce bill
contains the same provisions, but in addition, it
‘U.S. Code Cong. & Admin. News, p. 2595 (1954).
6a
would also provide that the proceeds of any local
income tax enacted in lieu of the United States
income tax shall be covered into the Territorial
treasury, and that a resident of the Virgin Islands
may satisfy his income-tax obligation under
applicable tax laws of the United States by paying
his tax on income derived from all sources, both
within and outside the Virgin Islands, into the
treasury of the Virgin Islands.’’? [emphasis added]
When the bill went to a Conference Committee,
certain significant changes were made:
“This section further provides that all persons
whose permanent residence is in the Virgin Islands
shall satisfy their United States income-tax obliga-
tions by paying their tax to the Virgin Islands
regardless of their source of income. The conferees
agreed to accept the wording of the House version
that the term ‘inhabitants of the Virgin Islands’
shall include all persons whose permanent resi-
dence is in the Virgin Islands, in lieu of the Senate
Stipulation that ‘inhabitants of the Virgin Islands’
shall include all citizens of the United States
whose permanent residence is in the United
States.”’? [emphasis added]
Thus, the Senate agreed that the 1954 Act should apply
to “persons” as opposed to “citizens,” and that they
7a
“a permanent resident” within the phrase, “inhabitant
of the Virgin Islands.”” We conclude that for tax
purposes it is.
It is important to realize that we are concerned, not
with concepts of jurisdiction to adjudicate, forum non
conveniens, venue, or service of process, but rather with
the power to tax. Precedents bearing on other areas of
the law are not necessarily controlling, particularly in
this situation where Congress has authority to tax both
United States and Virgin Islands corporations.
A basic premise is that the state of incorporation
does have the power to tax the income of a corporation
chartered by it, even if the company owns no property
within the state, so long as interstate or foreign
commerce is not hampered. No such limitations are
asserted here. 14 W. FLETCHER, CYCLOPEDIA
CORPORATIONS §§6887, 6970.1 (1975); 2 T.
COOLEY, TAXATION §456 (4th ed.); cf Cream of
Wheat Co. v. Grand Forks, 253 U.S. 325 (1920);
Shaffer v. Carter, 252 U.S. 37 (1920); U.S. Glue Co. ».
Oak Creek, 247 U.S. 321 (1918). Definitions in the
Internal Revenue Code are also instructive. 26 U.S.C.
§7701 categorizes corporations as “domestic and
foreign.”
“shall” pay the taxes to the Virgin Islands, rather than
“may.”
The first issue presented for review is whether the
appellant, not having employees, bank accounts, or an
Office in the Virgin Islands, but being chartered and
maintaining a post office address there, is included as
Id. 2597, 2600.
$id. 2625.
‘(4) Domestic -— The term ‘domestic’ when
applied to a corporation... means created or
organized in the United States or under the law of
the United States or of any state....
“(5) Foreign — The term ‘foreign’ when applied to
a corporation ... means a corporation... which is
not domestic.”
Treasury Regulation 26 C.F.R. §301.7701-5S states in
part:
8a
‘““A domestic corporation is a resident corporation
even though it does no business and owns no
property in the United States.”
Further support is found in §11(a) of the Code, 26
U.S.C. §11(a) and Treas. Reg. §1.11-1(a):
“It is immaterial that a domestic corpora-
tion... may derive no income from sources within
the United States.”
In Chicago Bridge and Iron Co. v. Wheatley, supra,
we held that Virgin Islands corporations are not United
States domestic corporations but are considered foreign
corporations for purposes of the Internal Revenue
Code. See also Rev. Rul. 56-616, 1956-2 CUM. BULL.
589. Using the mirror technique, therefore, we may
transpose the language in the statute and treasury
regulations to provide that a corporation chartered in
the Virgin Islands is a domestic corporation as to that
jurisdiction even though it does no business and owns
no property in the Islands.
The Internal Revenue Code demonstrates an_ in-
tention to tax a corporation which has been chartered
by the United States/Virgin Islands despite the fact that
it does no business and owns no property in the United
States/Virgin Islands. Consistent with this statutory
intent, therefore, §28(a) of the Revised Organic Act
must be interpreted to include as a “permanent
resident” and therefore an “inhabitant,” a corporation
chartered by the Virgin Islands and to subject its
income from all sources to tax by the Virgin Islands.
We conclude, therefore, that Vitco is liable to pay tax
on all of its income to the Virgin Islands.4
4In light of our conclusion, we need not consider the
applicability of 26 U.S.C. §906 (foreign tax credit) since under
§28(a) of the Revised Organic Act, Vitco’s tax liability is to the
Virgin Islands, not the United States. See Dudley v. Commis-
sioner, supra; Great Cruz Bay, Inc. v. Wheatley, supra.
9a
The second issue confronting us is whether Vitco
should have withheld the 30% tax on the dividends
payable to Chase. In this connection, we must give
some consideration to Chase’s status since the claim is
that its dividend income is subject to the tax under
§881, although Vitco has the duty to withhold under
§ 1442.
26 U.S.C. §1442 provides for withholding of a 30%
tax on the gross amount of specified income received
by foreign corporations from sources within the United
States. The income affected includes interest and
dividends, among other forms.* Using the mirror
technique, the statute, standing alone, would appear to
authorize the Virgin Islands to require Vitco, a Virgin
Islands source, to withhold 30% of the dividends
payable to Chase, a foreign corporation. However,
Treas. Reg. §1.1441-4(d) makes special provision for
inhabitants of the Virgin Islands. It reads:
“Inhabitants of Virgin Islands —
(1) Allowance of exemption. No withholding is
required under §1.1441-1 upon any item of
income paid to any person who at the time of
payment reasonably expects to satisfy his income
tax obligations with respect to that item under
§28(a) of the Revised Organic Act of the Virgin
Islands (48 U.S.C. §1642). That section provides
‘Section 1442 refers to the type of income listed in Section
1441(b) which reads as follows:
“(b) Income items. — The items of income referred to in
subsection (a) are interest, dividends, rent, salaries, wages,
premiums, annuities, compensations, remunerations, emolu-
ments, or other fixed or determinable annual or periodical
gains, profits, and income... .”
10a
that all persons whose permanent residence is in
the Virgin Islands ‘shall satisfy their income tax
obligations under applicable taxing statutes of the
United Stdtes by paying their tax on income
derived from all sources both within and outside
the Virgin Islands into the Treasury of the Virgin
Islands.’ For the purpose of this paragraph the
term ‘person’ shall include an individual, partner-
ship, and corporation.’ (emphasis supplied)
Thus, while the statute facially would allow the 30%
tax on dividends received by a Virgin Islands
corporation from United States sources to be withheld,
the regulation provides a special exemption which
negates the apparent effect of the statute. Ordinarily,
regulations may not have this effect, but in this
instance the regulation is in harmony with the
congressional intent underlying the Revised Organic Act
of the Virgin Islands — an Act which is effective as if it
had been enacted subsequent ‘ce the Internal Revenue
Code, 26 US.C. §7651. We hold, therefore, that the
regulation is a valid application of the statute and, thus,
there is no withholding on dividends paid by a United
States domestic corporation to a Virgin Islands (foreign)
corporation. Therefore, if the regulation as well as the
underlying statute is mirrored, there can be no
withholding on dividend income paid by a Virgin
Islands corporation to a United States (foreign)
corporation.
The Commissioner contends that (1) the mirroring
technique does not provide for a two-way substitution,
§1441, it also applies to withholding under 26 U.S.C. §1442.
See 26 C.F.R. §§1.1442-1, 1.1441-1.
lla
i.e.; “Virgin Islands’? may be substituted for ‘United
States,” but not vice versa, and (2) the result would be
contrary to congressional intention. We are unable to
accept either argument. The treasury regulation modify-
ing the thrust of the statute must be mirrored as well as
the statute itself; otherwise, there would not be a true
reflection. Moreover, the Commissioner’s ‘“‘one-way”
mirroring technique is simply contrary to Congress’
understanding of this technique. An _ illustration is
provided by legislation enacted for Guam. Though far
removed geographically, Guam encountered a problem
quite close to the one at hand, and the resolution is
instructive.
In Sayre and Company vy. Riddell, 395 F.2d 407 (9th
Cir. 1968), the Court of Appeals for the Ninth Circuit
determined that under §881 as mirrored, Guam could
impose the 30% tax on interest received by a Hawaiian
corporation (considered a United States corporation for
this tax purpose) from a Guam sole proprietorship.
A'though under this construction the United States
corporation could, in some circumstances, pay a greater
tax on the interest than if the same amount had been
derived from a United States source, the court noted
that Congress could readily provide relief appropriate to
Guam without distorting the basic tax structure.
Congress accepted the suggestion and, in 1972,
amended the Internal Revenue Code to prevent Guam
from taxing a United States corporation’s “passive”
income or withholding such tax. It accomplished this
result not by amending the Organic Act of Guam, but
by amending the United States Internal Revenue Code,
§ §881 and 1442. Congress added to them a provision
that Guamanian corporations were not to be treated as
foreign corporations. By application of the mirror
system, United States corporations would be treated as
domestic corporations by Guam and, hence, would not
be liable for the tax. The congressional reason for the
amendment was set out in the legislative history:
“Since no deductions are allowed, the tax on this
income, in many cases, is higher than the regular
comporate [sic] tax would be if deductions were
allowed.... The fact that this income now is
usually taxes at a higher rate than similar income
earned in the United States has had the effect of
seriously retarding investments by U.S. corpora-
tions in Guam.” 1972 U.S. Code Cong. & Adm.
News 5402-5403.
Concluding that disparate tax treatment by Guam was
undesirable, Congress changed the policy by inserting
language in the United States tax law knowing that the
mirror effect would change Guamanian law. Obviously,
Congress intended a “two-way” mirroring.
This court recognized the desirability of tax equality
in Chicago Bridge and Iron Co, v, Wheatley, supra. In
discussing a deduction allowable to a United States
corporation on the mainland, but not in the Virgin
Islands, we said:
“Therefore, substantive equality of treatment in
determining the deduction under the Virgin Islands
mirror sytem requires that the quoted language be
given the same meaning. Such identity of treat-
ment imposes no _ unfairness and creates no
distortion. The scheme of the statute is to impose
a tax obligation to the Virgin Islands equivalent to
what the United States would collect on the same
income, but for the mirror system. Cf. Sayre &
Co. v. Riddell, supra at 410-411. To disallow the
deduction as the Virgin Islands has done is to
ms - a PC ete ese.
ee
13a
claim for the territory a larger tax than the United
States would have collected in the absence of the
mirror system.
~ * *
“More basically Congress has aided the Virgin
Islands by giving them the same tax, nor more,
than the United States would otherwise collect on
Virgin Islands business.” 430 F.2d at 977-978.
Guided by the equality principle for which Chicago |
Bridge and Iron stands, we hold that the Virgin Islands
may not require withholding of the tax under $1442.
The implication of Regulation 1.1441-4(d) allows no
other conclusion.’
Citing the argument of the losing taxpayer in Great
Cruz Bay, supra, the Commissioner argues that case
undermined the equality emphasis of Chicago Bridge
and Iron, supra. But Great Cruz Bay is distinguishable.
The exemption sought under the statutory provisions
pertaining to subchapter (S), which were under
consideration there, was to be narrowly construed and
no treasury regulation, such as 1.1441-4(d), entered
into the decision. Accordingly, there is no conflict
between that case and the one sub judice.
The judgment of the district court will be affirmed
insofar as it requires Vitco to pay tax on its income to
the Virgin Islands; the judgment will be vacated to the
extent thy: it found an obligation on the part of Vitco
7This appeal is concerned only with the assessment against
Vitco. The tax liability of Chase Instruments Corporation is not
before us.
'
14a | UNITED STATES COURT OF APPEALS
| FOR THE THIRD CIRCUIT
to withhold a tax on the dividends payable to Chase
Instruments Corporation. | No. 77-1065
Please file the foregoing opinion. Appellant
vs.
/s/Joseph Weis, Jr.
Circuit Judge GOVERNMENT OF THE VIRGIN ISLANDS and
REUBEN WHEATLEY, Commissioner of finance
(D.C. Civil No. 74-628)
ON APPEAL FROM THE DISTRICT COURT OF THE
VIRGIN ISLANDS DIVISION OF ST. THOMAS
AND ST. JOHN
Present: VAN DUSEN, WEIS and GARTH, Circuit
Judges
JUDGMENT
This cause came on to be heard on the record from
the District Court of the Virgin Islands, Division of St.
Thomas and St. John and was argued by counsel on
April 27, 1977.
On consideration whereof, it is now here ordered and
adjudged by this Court that the judgment of the said
District Court, entered November 11, 1976, be, and the
same is hereby affirmed insofar as it requires Vitco to
pay tax on its income to the Virgin Islands and vacated
insofar as it found an obligation on the part of Vitco to
withhold a tax on the dividends payable to Chase
Instruments Corporation, all in accordance with the
opinion of this Court.
ATTEST:
/s/ [illegible]
Clerk
- J 26, 1977
SS ee 2 Or eee
Ib
APPENDIX B
iN THE DISTRICT COURT OF THE
VIRGIN ISLANDS DIVISION OF
ST. THOMAS & ST. JOHN
CIVIL NO. 74/628
REDETERMINATION OF TAX DEFICIENCY
VITCO, INC.
Plaintiff
vs.
GOVERNMENT OF THE VIRGIN ISLANDS and
REUBEN WHEATLEY, Commissioner of Finance
Defendant
OPINION
This petition for redetermination of a tax deficiency
is before the Court on stipulated facts. Operative facts,
contained in the stipulation of the parties, and of high
pertinence hereto are as follows:
1. The petitioner, Vitco, Inc., is a Virgin Islands
corporation and is a wholly-owned subsidiary of Chase
Instruments Corp., a New York corporation.
2. The respondent, Reuben Wheatley, was Commis-
sioner of the Virgin Islands Department of Finance
during all times pertinent to this proceeding and was
the official who made the determination of the
deficiency that is the subject matter of this proceeding.
2b
3. At all times pertinent to this proceeding, the
petitioner maintained a place of business at Linden-
hurst, New York, and did not maintain a place of
business in the Virgin Islands; all moneys paid to the
petitioner for machine rentals and interest were
physically received by it in the continental United
States and were deposited in its bank accounts
maintained in the continental United States.
4. During the years 1970, 1971 and 1972, the
petitioner had no employees, office, or bank account in
the Virgin Islands.
5. During the years 1970, 1971 and 1972, the
business of the petitioner consisted solely of the leasing
of machinery and equipment and the lending of money
to Chase Instruments Corp., and another wholly-owned
subsidiary of Chase Instruments Corp.
6. The petitioner earned income for rentals of
machinery and equipment located in the continental
United States and the Virgin Islands, as follows:
Continental
United States Virgin Islands
1970 $17,421.00 $ 3,119.00
1971 26,243.00 4,102.00
1972 39,507.00 1,374.00
7. The petitioner earned income for interest from
loans to corporations doing business in the continental
United States and the Virgin Islands as follows:
Continental
United States Virgin Islands
1970 $ 7,895.00 $13,495.00
1971 12,932.00 7,603.00
1972 14,309.00 1,571.00
HA eee Vt met tae
3b
8. During the calendar years 1971 and 1972, the
petitioner purchased tangible personal property in the
continental United States in the amount of $54,447.56
and $43,754.50, respectively, none of which was
located in the Virgin islands, and the proper computa-
tion of a seven per cent investment credit against
petitioner’s income taxes for those years is in the
amounts of $3,811.33 and $3,062.82, respectively, if
the petitioner is entitled to such investment credit.
9. The petitioner properly took deductions for
depreciation of tangible personal property used in its
business in the amounts of $13,277.05, $16,140.83,
and $26,434.86 for the calendar years 1970, 1971, and
1972, respectively, in computing its income taxes under
the Internal Revenue Code.
10. The petitioner paid dividends in the amounts of
$25,000.00, $50,000.00, and $50,000.00 to its parent,
Chase Instruments Corp., for the calendar years 1970,
1971 and 1972, respectively.
11. Within the appropriate times provided by law
during each year, the petitioner duly caused to be filed
with the Treasurer of the United States income tax
returns for the tax years 1970, 1971, and 1972 and
paid the taxes shown thereon to be due to the
Treasurer of the United States.
12. Within the appropriate times provided by law
during each year, the petitioner caused to be filed with
the Commissioner of Finance of the Virgin Islands
income tax returns for the years 1970, 1971 and
1971 ...and claimed thereon as foreign tax credits the
income taxes paid to the Treasurer of the United
States.
13. The respondent Government of the Virgin
Islands, under date of July 17, 1974, forwarded to the
petitioner a notice of deficiency....
4b
In the notice of deficiency three basic justifications
for its issuance were noted. First was the assertion of
the Commjssioner of Finance for the United States
Virgin Islands (‘“‘the Commissioner’) that all of the tax
on Vitco, Inc.’s (“Vitco”) income, from whatever
source, should have been returned to the treasury of
the Virgin Islands. Second was the Commissioner’s
premise that depreciation deductions for the subject
years were improperly taken, by reason of Vitco’s
failure to particularize the costs and the nature of the
item for which entitlement to a depreciation deduction
was claimed. Lastly, the Commissioner stated that, for
each of the years in issue, Vitco, pursuant to IRC
§1442, 26 U.S.C. §1442, should have withheld 30
percent of the dividends which it distributed to its
United States based parent.
The depreciation issue, as noted, has been resolved
by stipulation. Moreover, Vitco’s claim that it should
properly have been accorded a seven per cent
investment credit, due to its purchase of depreciable
property in 1971 and 1972, has been acknowledged by
the Commissioner, in his brief, to be justified. The only
questions remaining for decision, then, are (a) whether
Vitco properly satisfied all its income tax obligation in
the United States, and (b) whether Vitco was correct in
not withholding the aforementioned 30 per cent of the
dividends which it distributed to its mainland parent.
Before proceeding to a resolution of the remaining
issues, | pause to make mention of the fact that the
Virgin Islands, as an unincorporated territory of the
United States, is a separate taxing jurisdiction. See
Chicago Bridge & Iron Co., Ltd. v. Wheatley, 430 F. 2d
973, 974 (3rd Cir. 1970): 48 U.S.C. §1541(a). Yet all
Sb
the income tax laws of the United States are made
applicable to the Virgin Islands by virtue of 48 U.S.C.
§1397 (July 12, 1921) c.44, §1, 42 Stat. 123'. A
further indication of the special status of the Virgin
Islands is found in the following language appearing in
§28(a) of the Virgin Islands Revised Organic Act of
1954, 48 U.S.C. § 1642:
The proceeds of customs duties, the proceeds of
the United States income tax, the proceeds of any
taxes levied by the Congress on the inhabitants of
the Virgin Islands...shall be covered into the
treasury of the Virgin Islands.... Provided, That
the term ‘inhabitants of the Virgin Islands’ as used
in this section shall include all persons whose
permanent residence is in the Virgin Islands, and
such persons shall satisfy their income tax
obligations under applicable taxing statutes of the
United States by paying their tax on income
derived from all sources both within and outside
the Virgin Islands into the treasury of the Virgin
Islands. .. .
The import of the quoted provision is clear. No matter
where the income may have been earned, a permanent
resident of the Virgin Islands must pay the tax on all
such income into the coffers of the Government of the
Virgin Islands.
Vitco has no quarrel with that interpretation of the
statute. Rather, it contends that, despite the fact that it
'“The 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”. This was part of the Naval Service
Appropriations Act of 1922.
6b
is a Virgin Islands corporation, it can no longer be
characterized as a “permanent resident” within the
meaning of §28(a) of the Revised Organic Act. It
reasons that since it did not maintain a place of
business in the Virgin Islands but did have an office in
New York; had no bank accounts, employees, or offices
in the Virgin Islands; physically received its income and
depositied it in bank accounts in the United States; and
carried on the bulk of its activities in the United States,
it has somehow shifted its residency from the Virgin
Islands to the United States.
Such reasoning, the respondents declare, flies
squarely into the face of the teaching of Chicago Bridge
& /ron Company, supra at 974, fn. 1:
In 1954, Congress provided that permanent
residents of the Virgin Islands (including Virgin
Islands corporations) must return and pay taxes to
the Virgin Islands on income from all sources... .
However, corporations domiciled on the mainland
and United States citizens not residing perma-
nently in the Virgin Islands must still file two tax
returns, One reporting and paying taxes to the
Virgin Islands on Virgin Islands income, and the
other reporting and paying taxes to the United
States on income from all sources, with a credit
for taxes paid to the Virgin Islands.
The petitioner characterizes the above as mere dicta,
not necessary for a determination of the _ issues
presented in the case before the Court of Appeals.
Therefore, it argues, in the instant case this Court,
unfettered by the strictures of judicial precedent, may
determine that Vitco, although having been “born” in
the Virgin Islands, has so clearly severed its connections
with the Virgin Islands that it must now be deemed a
A cl ty
Oe ee ee eee ee
7b
resident of the United States for income tax purposes.
1 am una ie to accept this contention for the reasons
which follow.
As noted, it has been stipulated by the parties that
petitioner is a Virgin Islands corporation. As such, it is
subject to our General Corporation Law, appearing at
Title 13 of the Virgin Islands Code. That statute
requires all corporations organized pursuant thereto to
maintain a principal office or place of business in the
Virgin Islands, to have a resident agent in the Virgin
Islands? and to include the location of its principal
office and the name of its resident agent in its articles
of incorporation. It appears that these particular
statutory imposts are intended to serve the purpose of
achieving some manner of permanence with regard to
the relationship between a Virgin Islands corporation
and the Virgin Islands,* A fortiori, it would seem that
something more than the mere carrying on of business
in another jurisdiction is necessary for a domestic
corporation to sever the ties so cemented to the Virgin
Islands. This record is devoid of any indication that any
such act was undertaken. Thus, despite the fact that
213 V.LC. §51.
313 V.LC. §2.
4 [S]tatutes in many of the jurisdictions require both a
principal office and a registered agent, one or both of which
must be listed in the articles of incorporation or in another
document separately filed with the secretary of state.... Such
requirements are written into the statute in order to secure
service of process, determine venue, and for the purpose of
general jurisdiction and taxation... . 8 Fletcher Cyc Corp. (Perm
Ed. 1966), 84046 pp. 482-483.
8b
during the relevant years Vitco did not maintain an
office or place of business in the Virgin Islands, but did
conduct business in the State of New York, in the
absence of any showing that it formally and completely
terminated its corporate status in the Virgin Islands, I
find that Vitco, as a domestic corporation, retained its
principal place of business (if only for the purpose of
the Virgin Islands corporation law) in this jurisdiction.
Therefore, as observed by the Court of Appeals for the
Third Circuit in Chicago Bridge & Iron Company, supra,
Vitco, as a permanent resident of the Virgin Islands,
and pursuant to §28(a) of the Revised Organic Act of
1954, was obliged to pay tax on all its income,
wherever earned, to the Virgin Islands Government.
The above conclusion is further buttressed by §11(a)
of the Internal Revenue Code of 1954 which provides
for a tax upon corporations. The pertinent Treasury
Regulations establish that the tax is payable on
corporate income from any source, as
{i]t is immaterial that a domestic corpora-
tion... may derive no income from sources within
the United States... 26 C.F.R. §1.11-1(a).
Substituting the words “Virgin Islands” for ‘United
States” in accordance with the “mirror theory’, |
‘According to the “mirror theory” implemented when
interpreting the Virgin Islands income tax structure, and whereby
the words “Virgin Islands” are to be substituted in appropriate
places throughout the Internal Revenue Code, Vitco, as a Virgin
Islands domestic corporation, was obliged to report all its income
to the Virgin Islands rather than to the United States. 48 U.S.C.
§1397 supra; 26 C.F.R. §301; 7701-5; See also, Dudley v.
C.ILR., 258 F.2d 1820 (3rd Cir. 1958); Chicago Bridge & Iron
Company v. Wheatley, supra; Great Cruz Bay, Inc. v. Wheatley,
495 F.2d 301 (3rd Cir. 1974).
ee ren ae aw
Je ate A nS Oe cre
9b
cannot but conclude that Vitco’s petition for redetermi-
nation, insofar as it relates to the issue of the taxability
by the Government of the Virgin Islands of all Vitco’s
income, must be denied.°®
Shifting now to a consideration of the withholding
issue, I find that this facet of Vitco’s petition must also
fall.
The petitioner has stipulated that it made dividend
distributions to its parent, Chase Instruments Corpora-
tion (“CIC”), a New York corporation, during the
subject years. Under 26 U.S.C. §881(a) (and again,
pursuant to the “mirror” theory) there is an annual tax
imposed by the Virgin Islands of 30 per cent of the
amounts received by a foreign corporation from sources
within the Virgin Islands.
As pointed out by counsel for the respondents,
Treasury Regulations §1.861-3(a)(2) defines a dividend
from a domestic corporation as income from a source
within the Virgin Islands. It is required that the tax be
withheld at its source by the payer of the dividend. 26
U.S.C. §1441(a). As applied to the facts of this case,
these provisions imposed upon Vitco the duty to
*I so hold despite the fact that, pursuant to I.R.C. §864 and
882, petitioner had tax liability to the United States on the
income it earned which was “effectively connected” with the
United States. It appears to me that the proper course for Vitco
to have taken in view of the special provisions of §28(a) of the
Revised Organic Act would have been to take a foreign tax credit
on its United States returns for the taxes owed to the Virgin
Islands Government, which, of course, would have effectively
negated Vitco’s liability to the United States. In all likelihood
Vitco still has the opportunity to rectify the situation by the
filing of amended returns.
10b
withhold 30 per cent of the dividends it paid to its
“foreign” parent, for the purpose of remitting such
funds to the Government of the Virgin Islands.
Petitioner maintains its parent is exempt from such a
tax by reading 26 C.F.R. §1.1441-4(d)(1), as qualified
by the “mirror” theory. That regulation states, in
pertinent part, that
{[n]o withholding is required... upon any item of
income paid to any person who at the time of
payment reasonably expects to satisfy his income
tax obligations with respect to that item under
§ 28(a) of the Revised Organic Act of the Virgin
Islands (48 U.S.C. §1642)...For the purpose of
this paragraph, the term “person” shall include an
individual, partnership, and corporation.
It is Vitco’s contention that implementation of the
“mirror” theory is necessary in this context with the
result that C.1.C., the payee of the dividends from
Vitco in the subject years, was exempt from the
withholding tax. The petitioner reasons that since its
corporate parent would satisfy its tax obligations with
respect to the dividends to the United States, the C.1.C.
within the intended coverage of Treasury Regulations
§1.1441-4(d)1 and therefore escapes liability for the
withholding tax. The weakness of this argument is
patent.
The “mirror” theory is not a principle to be
inflexibly and rigidly applied; rather, it should be
resorted to only in appropriate situations. As it makes
specific reference to the Virgin Islands and to §28(a) of
the Revised Organic Act, Treasury’ Regulation
§1.1441(d)!i is clearly intended to provide relief only
to permanent residents of this territory. The directness
and clarity of the language used permits no alternative
Sa a Om es te i
_ tle il Mam
1lb
interpretation. Accordingly, I find and conclude that
Chase Instruments Corporation, as a foreign corpora-
tion, was obliged to pay the 26 U.S.C.A. §881(a) tax,
and petitioner was charged with the responsibility of
withholding it for payment to the Virgin Islands.
As for sums due from petitioner in light of my
conclusions on both of the issues considered in this
opinion, I see no reason to alter the amounts stipulated
to by the parties. The income tax liability of Vitco
therefore is as follows:
1970 $ 8,084.80
1971 7,275.93
1972 6,007.61
The withholding tax liability of petitioner is
1970 $ 7,500.00
1971 15,000.00
1972 15,000.00
Let judgment enter accordingly.
Dated at Charlotte Amalie, St. Thomas, U.S. Virgin
Islands this 14th day of October, 1976.
ENTER: /s/ Almeric L. Christian
ALMERIC L. CHRISTIAN
Chief Judge
ATTEST:
Signed
Clerk of Court
nD ay lt ie
ee ee
POS ee Oe an MF eae es ewe et Same ER Ni Ae ee a ee
Ic
APPENDIX C
Naval Service Appropriation Act, 1922
42 Stat. 123, 48 U.S.C. §1397
§ 1397. Income tax laws of United States in force;
payment of proceeds; levy of surtax on all taxpayers
The income-tax laws in force in the United States
of America and those which may hereafter bé
enacted shall be held to be likewise in force in the
Virgin Islands to the United States, except that the
proceeds of such taxes shall be paid into the
treasuries of said islands: Provided further, That,
notwithstanding any other provision of law, the
Legislature of the Virgin Islands is authorized to levy
a surtax on all taxpayers in an amount not to exceed
10 per centum of their annual income tax obligation
to the government of the Virgin Islands.
Revised Organic Act of the Virgin Islands
§ 28(a), 68 Stat. 508, 48 U.S.C. §1642
§ 1642. Use of certain proceeds for expenditure;
income tax obligations of inhabitants
The proceeds of customs duties, the proceeds of
the United States income tax, the proceeds of any
taxes levied by the Congress on the inhabitants of
the Virgin Islands, and the proceeds of all quarantine,
passport, immigration, and naturalization fees ‘col-
lected in the Virgin Islands, less the cost of collecting
all of said duties, taxes, and fees, shal! be covered
into the treasury of the Virgin Islands, and shall be
available for expenditure as the Legislature of the
Virgin Islands may provide: Provided, That the term
“inhabitants of the Virgin Islands’ as used in this
section shall include all persons whose permanent
residence is in the Virgin Islands, and such persons
shall satisfy their income tax obligations under
2c
applicable taxing statutes of the United States by
paying their tax on income derived from all sources
both within and outside the Virgin Islands into the
treasury of the Virgin Islands: Provided further, That
nothing in this chapter, sections 104 and 111 of Title
21, and section 3350(c) of Title 26 shall be
construed to apply to any tax specified in section
3811 of Title 26. July 22, 1954, c. 558, § 28(a), 68
Stat. 508.
Internal Revenue Code of 1954
SEC. 881. TAX ON INCOME OF FOREIGN CORPO-
RATIONS NOT CONNECTED WITH UNITED STATES
BUSINESS.
(a) Imposition of Tax.—There is hereby imposed for
each taxable year a tax of 30 percent of the amount
received from sources within the United States by a
foreign corporation as—
(1) interest, (other than original issue discount as
defined in section 1232(b)), dividends, rents, salaries,
wages, premiums, annuities, compensations, remune-
ration, emoluments, and other fixed or determinable
annual or periodical gains, profits, and income,
(2) gains described in section 631(b) or (c),
(3) in the case of—
(A) bonds or other evidences of indebtedness
issued after September 28, 1965, and before April
1, 1972, amounts which under section 1232(a)(2)
(B) are considered as ordinary income, and, in the
case of corporate obligations issued after May 27,
1969, and before April 1, 1972, amounts which
would be so considered but for the fact the
obligations were issued after May 27, 1969,
Se OR OK Cee ev
was Cpe hme. eos Noe:
a
3c
(B) bonds or other evidences of indebtedness
issued after March 31, 1972, and payable more
than 6 months from the date of original issue
(without regard to the period held by the
taxpayer), amounts which under section 1232(a)
(2)(B) would be considered as ordinary income but
for the fact such obligations were issued after May
27, 1969, and
(C) the payment of interest on an obligation
described in subparagraph (B), an amount equal to
the original issue discount (but not in excess of
such interest less the tax imposed by paragraph (1)
thereon) accrued on such obligation since the last
payment of interest thereon, and
(4) gains from the sale or exchange after October
4, 1966, of patents, copyrights, secret processes and
formulas, good will, trademarks, trade brands,
franchises, and other like property, or of any interest
in any such property, to the extent such gains are
from payments which are contingent on _ the
productivity, use, or disposition of the property or
interest sold or exchanged, or from payments which
are treated as being so contingent under section
87 1(e),
but only to the extent the amount so received is not
effectively connected with the conduct of a trade or
business within the United States.
(b) Exception for Guam Corporations.—For purposes
of this section, the term “foreign corporation” does not
include a corporation created or organized in Guam or
under the law of Guam.
4c
SEC. 1441. WITHHOLDING OF TAX ON NONRESI-
DENT ALIENS.
(a) Géneral Rule.—Except as otherwise provided in
subsection (c), all persons, in whatever capacity acting
(including lessees or mortgagors of real or personal
property, fiduciaries, employers, and all officers and
employees of the United States) having the control,
receipt, custody, disposal, or payment of any of the
items of income specified in subsection (b) (to the
extent that any of such items constitute gross income
from sources within the United States), of any
nonresident alien individual, or of any foreign-
partnership shall (except in the cases provided for in
section 1451 and except as otherwise provided in
regulations prescribed by the Secretary under section
874) deduct and withhold from such items a tax equal
to 30 percent thereof, except that in the case of any
item of income specified in the second sentence of
subsection (b), the tax shall be equal to 14 percent of
such item.
(b) Income Items.—The items of income referred to
in subsection (a) are interest (other than original issue
discount as defined in section 1232(b)), dividends, rent,
salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or deter-
minable annual or periodical gains, profits, and income,
gains described in section 402(a)(2), 403(a)(2), or 631
(b) or (c), amounts subject to tax under section
871(aX1 MC), gains subject to tax under section
871(a)(1)(D), and gains on transfers described in section
1235 made on or before October 4, 1966. The items of
income referred to in subsection (a) from which tax
shall be deducted and withheld at the rate of 14
percent are—
Sc
(1) that portion of any scholarship or fellowship
grant which is received by a non-resident alien
individual who is temporarily present in the United
States as a nonimmigrant under subparagraph (F) or
(J) of section 101(a)(15) of the Immigration and
Nationality Act, as amended, and which is not
excluded from gross income under section 117(a)(1)
solely by reason of section 117(b)(2)(B); and
(2) amounts described in subparagraphs (A), (B),
(C), and (D) of section 117(a)(2) which are received
by any such nonresident alien individual and which
are incident to a scholarship or fellowship grant to
which section 117(a)(1) applies, but only to the
extent such amounts are includible in gross income.
In the case of a nonresident alien individual who is a
member of a domestic partnership, the items of
income referred to in subsection (a) shall be treated
as referring to items specified in this subsection
included in his distributive share of the income of
such partnership.
(c) Exceptions.—
(1) Income connected with United States busi-
ness.—-No deduction or withholding under subsection
(a) shall be required in the case of any item of
income (other than compensation for personal
services) which is effectively connected with the
conduct of a trade or business within the United
States and which is included in the gross income of
the recipient under section 871(b)(2) for the taxable
year.
x* * * * *
6c
SEC. 1442. WITHHOLDING OF TAX ON FOREIGN
CORPORATIONS.
(a) General Rule.—In the case of foreign corporations
subject to taxation under this subtitle, there shall be
deducted and withheld at the source in the same
manner and on the same items of income as is provided
in section 1441 or section 1451 a tax equal to 30
percent thereof; except that, in the case of interest
described in section 1451 (relating to tax-free covenant
bonds), the deduction and withholding shall be at the
rate specified therein. For purposes of the preceding
sentence, the references in section 1441(b) to sections
871(a)(1)(C) and (D) shall be treated as referring to
sections 881(a)(3) and (4), the reference in section
1441(c)(1) to section 871(b)(2) shall be treated as
referring to section 842 or section 882(a)(2), as the
case may be, the reference in section 1441(c)(5) to
section 871(a)(1)(D) shall be treated as referring to
section 881(a)(4), and the reference in_ section
1441(c)(8) to section 871(a)(1)(C) shall be treated as
referring to section 881(a)(3).
(b) Exemption.—Subject to such terms and condi-
tions as may be provided by regulations prescribed by
the Secretary, subsection (a) shall not apply in the case
of a foreign corporation engaged in trade or business
within the United States if the Secretary determines
that the requirements of subsection (a) impose an
undue administrative burden and that the collection of
the tax imposed by section 881 on such corporation
will not be jeopardized by the exemption.
(c) Exception for Guam Corporations.—For purposes
of this section, the term “foreign corporation” does not
Tc
include a corporation created or organized in Guam or
under the law of Guam.
* * * * *
SEC. 7701. DEFINITIONS.
(a) When used in this title, where not otherwise dis-
tinctly expressed or manifestly incompatible with the
intent thereof—
*x** * * *
(4) Domestic — The term “domestic” when applied
to a corporation or partnership means created or organ-
ized in the United States or under the law of the United
States or of any State or Territory.
(5) Foreign — The term “foreign” when applied to a
corporation or partnership means a corporation or
partnership which is not domestic.
** **
TREASURY REGULATIONS
§ 1.1441-1 Requirement for withholding of tax on
nonresident aliens, foreign partnerships, and foreign
corporations.
Except as otherwise provided in §§1.1441-3,
1.1441-4, and 1.1441-6, to the extent that the items
specified in §1.1441-2 constitute gross income from
sources within the United States, withholding of a tax
of 30 percent is required in the case of items of income
specified in paragraphs (a) and (b) of §1.1441-2 when
such income is paid to a nonresident alien individual, a
foreign partnership, or a foreign corporation, except
that with respect to payments made after March 4,
1964, withholding of a tax of 14 percent is required in
the case of items of income specified in paragraph (c)
of §1.1441-2. The rate of 30 percent or 14 percent
8c
shall be reduced as may be provided by a treaty with
any country. See section 894 and §1.1441-6, relating
to income, affected by treaty. For purposes of this
section, the term “nonresident alien individual” includes
an alien resident of Puerto Rico.
§ 1.14414 Exemptions from withholding.
* * * * *
(d) Inhabitants of Virgin Islands—(1) Allowance of
exemption. No withholding is required under §1.1441-1
upon any item of income paid to any person who at
the time of payment reasonably expects to satisfy his
income tax obligations with respect to that item under
section 28(a) of the Revised Organic Act of the Virgin
Islands (48 U.S.C. 1642). That section provides that all
persons whose permanent residence is in the Virgin
Islands “‘shall satisfy their income tax obligations under
applicable taxing statutes of the United States by
paying their tax on income derived from all sources
both within and outside the Virgin Islands into the
Treasury of the Virgin Islands.” For the purpose of this
paragraph, the term “person” shall include an indi-
vidual, partnership, and corporation.
(2) Claiming exemption. To avoid withholding of tax
at source under §1.1441-1, the payee of the income
shall notify the withholding agent by letter in duplicate
that he expects to satisfy his income tax obligations
under section 28(a) of the Revised Organic Act of the
Virgin Islands with respect to all income to be paid to
him by the withholding agent during the current
calendar year. This letter of notification shall constitute
authorization to the payer of the income to pay income
to the payee during that year without deduction of the
tax at source under §1.1441-1.
9c
(3) Disposition of letter. The duplicate copy of each
letter of notification filed pursuant to subparagraph (2)
of this paragraph shall be forwarded with a letter of
transmittal to the Director of International Operations,
Internal Revenue Service, Washington, D.C. 20225.
* * * *
§ 1.1442-1 Withholding of tax on foreign corporations.
For regulations respecting the withholding of tax at
source under section 1442 in the case of foreign
corporations, see § §1.1441-1 and 1.1451-1.
oy
ee ed ee ee ee oe ee
ld
APPENDIX D
(Stamped)
Director of International Operations Aug. 28, 1967
Director, Income Tax Division T:1:C:2:3
Taxation of a United States citizen who resided in the
United States and derived income from Virgin Islands
sources.
Attention: CP:10:63MM
This is in reply to your memorandum of January 17,
1967, identified as above. You request consideration of
the possibility of inequities in the total income taxes,
U.S. and Virgin Islands (V.I.), which could be payable
under interpretations of the applicable statutes as being
made by the V.I. tax authorities.
The inequities referred to are established, you stated,
by U.S. resident citizens being required to file U.S.
returns covering V.I. income and activities even though
they have sustained overall (U.S. and V.I.) net losses.
Also, you have learned that V.I. tax officials are giving
consideration to the possibility of withholding at 30%
under sections 1441 and 1442 from _ V.lI.-source
dividends paid to U.S. resident citizens and domestic
corporations as if these were nonresident alien entities
for purposes of V.I. taxation. ©
As your memorandum indicates, income taxation in
the V.I., a possession of the U.S., is governed by the
income tax laws of the U.S. by reason of the Naval
Appropriations Act approved July 12, 1921 (42 Stat.
1224) and the Organic Act of the Virgin Islands
2d
approved June 22, 1936 (49 Stat. 1807). Under rulings
1.T. 2946, C.B. XIV-2, 109 and I.T. 3690, C.B. 1944,
164, the so-called “mirror” system was adopted with
respect to taxation of U.S. citizens having V.I. income.
It required generally that such U.S. citizens file returns
both in the U.S. and in the V.I. Those (1) who were
permanent residents of the V.I. reported income from
all sources in both returns whereas those (2) not
permanently residing in the V.I. reported only V.L-
source income in the V.I. return.
The requirement for the filing of two returns was
eliminated with respect to category (1), above, by Rev.
Rul. 60-291, C.B. 1960-2, 407, based on the provisions
of the Revised Organic Act of the Virgin Islands
approved July 22, 1954 (48 U.S.C. Supp. V. 1642),
C.B. 1954-2, 595, a V.I. return only being required.
It is your suggestion that this revision pertaining to
taxpayers in category (1) carries a strong implication
that the other side of the coin is also applicable, i.e.,
that category (2) taxpayers should be required to file
only a U.S. return. A question regarding this situation
has been previously considered by this office at the
request of the V.I. Government. Our ruling dated
January 26, 1965, addressed to Mr. Reuben B.
Wheatley, Assistant Commissioner of Finance, Charlotte
Amalie, St. Thomas, held in effect that two returns are
still required. Copy of that letter was furnished to your
office.
We have given further careful consideration to the
effect, if any, of the Revised Organic Act of the Virgin
Islands on category (2) taxpayers. However, we can find
no basis for departure from the “mirror” system of
dual filings.
3d
The possibility that the V.I. taxing authorities may
require withholding at 30% under sections 1441 and
1442 of the 1954 Code from V.lI.-source dividends paid
to U.S. citizens and domestic corporations as if those
were nonresidents alien entities for purposes of V.1.
taxation is noted. You point out that some legal basis
for the V.I. viewpoint could be found in I.T. 2946,
referred to above. Actually, the latter ruling contains
the very definite statement that “From the viewpoint
of the Virgin Islands * * * citizens of the United States
not residing in the Virgin Islands must be treated as
nonresident aliens.’’ (emphasis ours.) While this state-
ment is keyed to a construction of the Revenue Act of
1934, it is equally applicable under the Internal
Revenue Code of 1954 unless a basis exists for
differentiation or for a change in position. A study of
the question has not disclosed any such basis.
Although we recognize and are sympathetic toward
the inequities presented, there are no remedies available
under existing law.
(Signed) John W. S. Littleton
Director, Income Tax Division
le
APPENDIX E
INTERNAL REVENUE SERVICE
June 4, 1973
In reply refer to: CP:10:63:JJZ
Mr. Max Kirchner
Government of the Virgin Islands
of the United States
Charlotte Amalie,
St. Thomas, Virgin Islands
Dear Mr. Kirchner:
This is in reply to your letter dated March 13, 1972,
concerning the tax treatment of dividends paid by a
corporation operating in the Virgin Islands to its United
States parent corporation. We regret that we were not
able to give you the technical assistance sooner.
The fact pattern submitted by you is as follows:
A Corporation is a wholly-owned subsidiary of B
Corporation. Both corporations are organized in the
United States pursuant to the laws of the State of
Delaware.
A Corporation’s sole source of income is from
services rendered in the Virgin Islands. It files its
income tax return with, and pays all of the tax
shown due thereon, to the Virgin Islands Govern-
ment, It maintains its offices in the Virgin Islands
and all off its employees work there. It has no
offices in the United States.
B Corporation’s offices are in the United States. It
has no income from sources within the Virgin Islands
2e
apart from the dividend income described in the
following paragraph. B owns all of the issued and
outstandjng stock of A Corporation.
In 1967, 1968 and 1969, A Corporation declared
dividends of $200,000 payable in each of these years.
B Corporation received $200,000 in each of these
years by way of dividends from A Corporation. All
dividends were paid out of current earnings.
The primary issue to be resolved is whether these
dividends are taxable by the Virgin Islands to B
Corporation and, if so, whether this tax is to be
collected by A Corporation as the withholding agent.
The Internal Revenue Code of the United States
was made applicable in the Virgin Islands by the
Naval Service Appropriation Act of 1922, 48 U.S.C.
1397 (1970): :
“The 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 such islands.”
Section 881 of the Internal Revenue Code provides,
in relevant part, for the imposition of a tax of 30
percent of the amount received from sources within the
United States by a foreign corporation as dividends.
Sections 1441 and 1442 of the Code provide, in
relevant part, that in the case of foreign corporations
subject to taxation, there shall be deducted and
withheld at the source a tax equal to 30 percent.
The above United States Internal Revenue Code
provisions would likewise be in force in the Virgin
Islands of the United States and would allow the Virgin
3e
Islands to withhold a tax of 30 percent on the
dividends from the Virgin Islands subsidiary to the
United States parent. For a similar result with respect
to Guam, which also has a dual or “mirror” system of
taxation in effect, see Sayre & Co., Ltd. v. Riddell, 395
F. 2d 407 (1968), reversing 378 F. 2d 372 (1967) and
affirming D.C. Guam per curiam December 6, 1965, ©
Section 28(a) of the Revised Organic Act of the
Virgin Islands provides, in part, that persons whose
permanent residence is in the Virgin Islands shall satisfy
their income tax obligations under applicable taxing
statutes of the United States by paying their tax on
income derived from all sources both within and
outside the Virgin Islands into the treasury of the
Virgin Islands. As a _ corollary to _ this, section
1.1441-4(d) of the Income Tax Regulations provides an
exemption from United States withholding requirements
in the case of any item of income paid to any person,
including a corporation, who at the time of payment
reasonably expects to satisfy his income tax obligations
with respect to that item under section 28(a) of the
Revised Organic Act of the Virgin Islands.
The mirror system was designed to provide the Virgin
Islands with its own separate tax system by duplicating
provisions of the United States tax laws in all
substantive particulars. But the Revised Organic Act of
the Virgin Islands was enacted specifically for the
Virgin Islands and is not a general provision of the
United States income tax laws to be acquired by the
Virgin Islands through the mirror system. Cf. section
934 of the Code. It would be inconsistent with
legislative intent to interpret the Revised Organic Act of
the Virgin Islands in a manner that would eliminate the
4e
right of the Virgin Islands to tax the income of United
States persons from sources within the Virgin Islands.
See H.R. Rep. No. 1603, 83d Cong., 2d Sess. (1954).
See also Chicago Bridge & Iron Co. v, Wheatley, 430 F.
2d 973, 974 (3d Cir. 1970). This conclusion is not
affected by section 1.1441-4(d) of the Income Tax
Regulations, which merely conforms tax withholding
requirements to section 28(a) of the Revised Organic
Act of the Virgin Islands without extending or altering
the application of that statute.
Accordingly, B Corporation would be subject to tax
by the Virgin Islands on dividends derived from sources
within the Virgin Islands and a tax should therefore be
collected by A Corporation as the withholding agent. B
does not, by provision of section 28(a) of the Revised
Organic Act of the Virgin Islands, satisfy its tax liability
to the Virgin Islands by paying its tax on income from
the Virgin Islands into the treasury of the United
States.
Sincerely yours,
/s/ R. L. PLATE
Director,
International Operations
lf
APPENDIX F
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1977
GOVERNMENT OF THE VIRGIN ISLANDS
and
REUBEN B. WHEATLEY, Commissioner of Finance,
Petitioners
v.
VITCO, INC.,
Respondent
AFFIDAVIT
I, TERENCE A. TODMAN, first being duly sworn, de-
pose and state:
1.1 am the Assistant Secretary of State for Inter-
American Affairs in the State Department of the United
States Government.
2.In my capacity as Assistant Secretary of State,
I am responsible for the oversight and development of
United States foreign folicy in Latin America and the
Caribbean.
3. The economic and financial welfare of the United
States Virgin Islands is important to United States
foreign policy in the Caribbean area.
4.The State Department considers strengthening
the fiscal and economic viability of the Caribbean re-
gion as a whole highly important to U.S. national inter-
ests in this hemisphere, and is now engaged in a major
ar
effort in cooperation with the other countries of the
region to attain this objective.
5. Any. substantial impairment of the fiscal stability
of the United States Virgin Islands would have an adverse
effect upon United States foreign policy in the Carib-
bean area.
/s/ Terence A. Todman
Terence A. Todman
Subscribed and sworn to before me this 16th day of
December, 1977, at Washington, D.C.
/s/Irene Ingalls
Notary Public
My commission Expires June 14, 1979
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.