Opinion ID: 868140
Heading Depth: 3
Heading Rank: 1

Heading: Taxpayers’ Claims Against the IRS

Text: The District Courts correctly held that the Tax Court is the only venue for Taxpayers‘ claims against the IRS because Congress has designated the Tax Court as the only court with jurisdiction to adjudicate a tax prepayment deficiency dispute. Under the doctrine of sovereign immunity, the United States ―is immune from suit save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court‘s jurisdiction to entertain the suit.‖ United States v. Testan, 424 U.S. 392, 399 (1976) (citation and internal quotation marks omitted). ―A waiver of the Federal Government‘s sovereign immunity must be unequivocally expressed in statutory text, and will not be implied.‖ Lane v. Pena, 518 U.S. 187, 192 (1996) (citation omitted). The sovereign immunity doctrine applies to the IRS because it is an agency of the United States. See Beneficial Consumer Disc. Co. v. Poltonowicz, 47 F.3d 91, 94 (3d Cir. 1995). Section 6213 of the Internal Revenue Code provides the sole waiver to sovereign immunity that authorizes a taxpayer to challenge a federal income tax prepayment 5 We have appellate jurisdiction over McGrogan‘s appeal under 28 U.S.C. § 1291. In light of the Rule 54(b) certifications of final judgments as to the claims brought by the Coopers, McHenry, and Huff against the IRS, we have appellate jurisdiction over those claims under 28 U.S.C. § 1291. We exercise plenary review over a district court‘s grant of a motion to dismiss. Grier v. Klem, 591 F.3d 672, 676 (3d Cir. 2010). 9 deficiency notice. Under this section, a taxpayer who receives a tax prepayment deficiency notice has but one venue to seek a redetermination: the Tax Court. See I.R.C. § 1613(a). Federal law does not permit a taxpayer to file a challenge to a deficiency notice in a federal district court unless the taxpayer pays the contested amount in full before filing suit. See United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 7-8 (2008). Here, Taxpayers did not pay the contested amount in full before filing suit in the District Court. Therefore, as the courts held, the Tax Court has exclusive jurisdiction over Taxpayers‘ redetermination petitions. Taxpayers assert that the sovereign immunity bar does not apply and that their claims were properly brought in the District Court of the Virgin Islands for three reasons: (1) by enacting 48 U.S.C. § 1612(a), Congress purportedly waived sovereign immunity by vesting exclusive subject matter jurisdiction over all federal tax claims applicable to the Virgin Islands with the District Court of the Virgin Islands; (2) the deficiency notices issued by the IRS were actually deficiency notices issued by the VIBIR, and therefore the District Court of the Virgin Islands has jurisdiction over this dispute under 48 U.S.C. § 1612(a); and (3) public policy necessitates a finding of subject matter jurisdiction in the District Court of the Virgin Islands. Each argument is without merit.
1612(a) Taxpayers assert that 48 U.S.C. § 1612(a) serves as a waiver of sovereign immunity. This argument is unavailing. 10 Section 1612(a) states that ―[t]he District Court of the Virgin Islands shall have exclusive jurisdiction over all criminal and civil proceedings in the Virgin Islands with respect to the income tax laws applicable to the Virgin Islands, regardless of the degree of the offense or the amount involved . . ..‖ 48 U.S.C. § 1612(a). Taxpayers thus argue that the statute vests exclusive jurisdiction over their redetermination petitions in the District Court of the Virgin Islands because their claims are civil proceedings with respect to the income tax laws applicable to the Virgin Islands. However, as Taxpayers acknowledge, we rejected this very argument in Birdman v. Office of the Governor, 677 F.3d 167 (3d Cir. 2012). In Birdman, we held that the grant of exclusive jurisdiction contained in Section 1612(a) is merely a ―geographic limitation.‖ Id. at 176. Thus, the District Court of the Virgin Islands‘ jurisdiction is ―‗exclusive‘ only against other courts ‗in the Virgin Islands.‘‖ Id. Consequently, if there were a question as to whether the District Court of the Virgin Islands or another court in the Virgin Islands had jurisdiction over a tax dispute, Section 1612(a) would vest jurisdiction over that dispute in the District Court of the Virgin Islands. Id. The statute does not grant the District Court of the Virgin Islands exclusive jurisdiction over all matters that implicate the tax laws applicable in the Virgin Islands. Id. A redetermination petition must be brought in the Tax Court even if it involves issues relating to the Virgin Islands. See WIT Equip. Co. v. Director, Virgin Islands Bureau of Internal Revenue, 185 F. Supp. 2d 500, 503 (D.V.I. 2001). We remain bound by Birdman unless the decision is reversed by the Supreme Court or by this Court sitting en 11 banc. In re Lemington Home for Aged, 659 F.3d 282, 294 n.6 (3d Cir. 2011). Consequently, we agree that the courts below correctly interpreted I.R.C. § 6213(a) and 48 U.S.C. § 1612(a) and will affirm their holdings that the District Court of the Virgin Islands lacks jurisdiction over Taxpayers‘ challenges to the deficiency notices they received from the IRS.
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.
Taxpayers point to the possibility of inconsistent results and double taxation if the cases against the IRS filed in the Tax Court reach different outcomes than the cases filed against the VIBIR in the District Court of the Virgin Islands. Taxpayers further state that allowing the District Court of the Virgin Islands to resolve the entire dispute would improve judicial economy by allowing one court to resolve the related issues in the redetermination petitions brought against the IRS and the VIBIR. Consequently, Taxpayers argue that these considerations support a finding that the entire litigation should be before one court: the District Court of the Virgin Islands. Although we are mindful of the possibility of inconsistent results and double taxation, Taxpayers‘ claims must proceed under the jurisdictional framework established by Congress. The Tax Court has jurisdiction over federal tax deficiency proceedings under I.R.C. §§ 6213 and 6214, federal district courts have jurisdiction over tax refund proceedings under I.R.C. § 7422, and the District Court of the 14 Virgin Islands has jurisdiction over proceedings implicating territorial tax law under 48 U.S.C. § 1612(a). In light of the unambiguous statutory scheme established by Congress governing the adjudication of tax disputes and the firm sovereign immunity bar, Taxpayers‘ policy arguments are unpersuasive. See United States v. Craig, 694 F.3d 509, 512 (3d Cir. 2012) (―[N]either fairness considerations nor rules applicable to private disputes can alone provide grounds for abrogating sovereign immunity.‖ (citation and internal quotation marks omitted)). Additionally, Taxpayers‘ fear of being subject to double taxation without a remedy appears to be misplaced because the United States and the Virgin Islands have established an administrative procedure that could grant them relief in the event of double taxation. See Tax Implementation Agreement between the United States of America and the Virgin Islands, 1989-1 C.B. 347, Art. 6 (1989). Nonetheless, even if Taxpayers might be unfairly subjected to double taxation, this equitable consideration does not override the sovereign immunity bar that may only be waived by Congress.