Court Opinion

ID: 8173902
Source: CourtListenerOpinion
Date Created: 2022-09-09 21:31:51.89247+00
Date Added: 2024-06-11T16:39:51.488758
License: Public Domain

GREENBERG, Circuit Judge,
dissenting.
As is clear from my departure from the majority's view and from the district court's change of position over the course of this litigation, reasonable minds can differ — indeed, the same reasonable mind can be in doubt — as to whether the Virgin Islands corporate surtax is a "local" tax within the meaning of 26 U.S.C. § 164. Because I believe the surtax is such a local tax, I would affirm the district court's holding that Abramson Enterprises may deduct the surtax from its taxable income for the years 1986, 1987 and 1988.
To place the issue in a practical perspective, I would note that while Congress authorized the 10% surtax to replace Virgin Islands revenues which might have been lost due to the Tax Reduction Act of 1975, Congress subsequently has given the Virgin Islands legislature broader authority to enact a local income tax in any amount the territorial legislature may find necessary. See Tax Reform Act of *3961986, P.L. 99-514, Section 1274(b). Apparently the Virgin Islands legislature has not enacted any taxes as authorized under the Tax Reform Act of 1986, but continues to rely on the 10% corporate surtax enacted pursuant to 48 U.S.C. § 1397. However, it is clear that in the event the deductibility of the surtax would impair Virgin Islands tax revenues significantly, the territorial legislature is empowered to replace or augment the surtax by enacting a new local income tax pursuant to Section 1274(b) of the Tax Reform Act.
One of the majority's chief reasons for finding the surtax nondeductible is that "because the corporate surtax is a tax on income authorized by Congress it has a federal quality that other taxes imposed by the Virgin Islands legislature may not share." [Supra, typescript at 11.] The hesitant "may not" reveals the crux of my disagreement, because in fact all taxes imposed by the Virgin Islands legislature must be authorized by Congress, and therefore all such taxes do share, necessarily, the "federal quality" of the surtax. While I would agree that one cannot reverse-engineer the "local" nature of the surtax from the text or the legislative history of the subsequent Tax Reform Act of 1986,1 would point out that Section 1274(b) of the Tax Reform Act is identical to 48 U.S.C. § 1397 insofar as each is a Congressional authorization for the Virgin Islands legislature to enact taxes. In neither case does the tax actually arise unless the territorial legislature itself enacts the tax that is only permitted, and not imposed, by the act of Congress. The Virgin Islands income tax permitted under the Tax Reform Act is, as the majority notes, decidedly deductible by its very terms under I.R.C. § 164. Thus, the corporate surtax does not have any "federal quality" in its structure which the clearly deductible tax of Section 1274(b) does not share. While Section 1274(b) does not in itself "prove" that the earlier surtax should be deductible, it certainly establishes that congressional authorization — which is necessary for virtually any act of the Virgin Islands legislature — does not render the enactments of the territorial legislature any less "local" in character.
The second major point relied upon by the majority is that deductibility of the surtax would mean that the Virgin Islands could not get the full 10% enhancement of the stated maximum surtax rate. However, as Abramson argued explicitly to the district court (App. at 116-117), such partially offsetting effects appear elsewhere in the Internal Revenue Code. (See, e.g., 26 U.S.C. § 401(c)(2)(A)(v), *397offsetting "earned income" by deductible pension contributions.) Therefore, the existence of offsetting effects in itself indicates nothing about congressional intent. We simply cannot say from the statute or the legislative history, whether Congress wanted the Virgin Islands to accomplish a full 10% revenue enhancement through the surtax, or whether Congress was satisfied to authorize some lesser percentage of revenue enhancement. As a practical matter, it is clear that the Virgin Islands legislature did not view a maximum enhancement as necessary, because it waited nearly 10 years to enact a surtax, and even then, levied the surtax only upon corporate income, and not, as it had been authorized to do by Congress, upon all income. If the complexity of the offset calculation is bothersome, this could easily be remedied by a regulation providing that a surtax paid in a given tax year is not to be deducted until the following tax year.
Altogether, I am persuaded by Abramson's argument that in this case, statutory construction is not much aided by legislative history (appellee's brief at 12), and the court should fall back on the plain language of the relevant statutes and the overall structure of the Virgin Islands taxing scheme. In this regard, I would conclude that the basic "mirror" tax of 48 U.S.C. § 1397, in place since 1921, is a tax "federal" in character because it is imposed by Congress without further action by the Virgin Islands legislature. In contrast, the 10% surtax, added to Section 1397 in 1976, is, like the "local income tax" of Section 1274(b) of the Tax Reform Act of 1986, authorized by Congress but imposed only by an independent enactment of the territorial legislature. Therefore, I believe that the surtax is as much a "local" tax as a tax imposed by a state. I would hold that the surtax of 48 U.S.C. § 1397 is a deductible "local" tax within the meaning of 26 U.S.C. § 164.