Opinion ID: 868140
Heading Depth: 4
Heading Rank: 2

Heading: Coordination Between the IRS and VIBIR

Text: Notwithstanding the sovereign immunity bar and our decision in Birdman, Taxpayers argue in the alternative that the District Court of the Virgin Islands has an independent source of subject matter jurisdiction over their redetermination petition under 48 U.S.C. § 1612(a) because the notices of deficiency sent by the IRS to Taxpayers were actually issued on behalf of the VIBIR. The basis for this contention is that two alternative positions in the deficiency notices sent to Taxpayers by the IRS state ―you failed to fully pay your income tax liability to the USVI.‖ Taxpayers assert that the language of the deficiency notices is evidence that the IRS stepped into the shoes of the VIBIR and was acting on behalf of the VIBIR in an attempt to collect taxes for the Virgin Islands government. Consequently, Taxpayers state that under this theory the District Court of the Virgin Islands has jurisdiction to hear their claim because redetermination petitions filed against the VIBIR are properly brought in the District Court of the Virgin Islands. See 48 U.S.C. § 1612(a) (stating that the District Court of the Virgin Islands has exclusive jurisdiction with respect to the income tax laws applicable to the Virgin Islands); 33 V.I.C. § 943 (stating that redetermination 12 petitions filed against the VIBIR must be brought in the District Court of the Virgin Islands). The IRS has a different explanation as to the meaning and purpose of the deficiency notices: the IRS sought to collect taxes owed to the federal government, a fact that was indicated in the notices the IRS sent to Taxpayers. The primary position of the IRS was that Taxpayers were not bona fide residents of the Virgin Islands under I.R.C. § 932(c)(4). If this primary position failed, Taxpayers‘ tax liability to the Virgin Islands Government would become relevant because the IRS would argue in the alternative that Taxpayers were liable to pay taxes to both the United States Government and Virgin Islands Government. As a result, the IRS needed to include the statement that Taxpayers failed to fully pay their taxes to the VIBIR as an alternate position to preserve the issue if it arose during litigation. Ultimately, there is no basis in law or fact suggesting that the IRS could act or was acting on behalf of the VIBIR. Although the IRS and the VIBIR coordinate tax policy, the IRS is responsible for enforcing federal tax laws and the VIBIR is responsible for enforcing territorial tax laws. The IRS and VIBIR are therefore separate, distinct, and independent taxing authorities. See McHenry v. C.I.R., 677 F.3d 214, 220-21 (4th Cir. 2012). Furthermore, even if the IRS could step into the shoes of the VIBIR, Taxpayers‘ theory is unsupported by the factual record. The deficiency notices were issued by the IRS, not the VIBIR. The notices asserted a federal tax deficiency, not a Virgin Islands tax deficiency. In fact, the tax redetermination petitions filed by Taxpayers acknowledge that the deficiency notices were issued by the IRS. Moreover, Taxpayers‘ redetermination 13 petitions stated that they were challenging the position of the IRS, not the VIBIR. The IRS‘s explanation of the deficiency notices and the documentary record makes plain that the IRS was not acting on behalf of the VIBIR and that the notices were not seeking a determination of Virgin Islands tax liability. As a result, the District Courts correctly rejected the argument that the redetermination petitions had been filed by the IRS acting on behalf of the VIBIR.