Chase Manhattan Bank v. Govt of VI

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit

8-13-2002

Chase Manhattan Bank v. Govt of VI
Precedential or Non-Precedential: Precedential

Docket No. 01-4317

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"Chase Manhattan Bank v. Govt of VI" (2002). 2002 Decisions. Paper 492.
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PRECEDENTIAL

Filed August 13, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-4317

CHASE MANHATTAN BANK, N.A.

v.

GOVERNMENT OF THE VIRGIN ISLANDS,
BUREAU OF INTERNAL REVENUE,

Appellant

Appeal from the District Court of the Virgin Islands
Division of St. Thomas
(D.C. Civil Action No. 00-cv-00234)
District Judge: Honorable Thomas K. Moore

Argued May 13, 2002

Before: AMBRO, FUENTES and GARTH, Circuit Judg es

(Opinion filed: August 13, 2002)

Iver A. Stridiron
Attorney General
Elliott McIver Davis
Solicitor General
Joanne E. Bozzuto (Argued)
Special Assistant Attorney General
Office of Attorney General of
Virgin Islands
Department of Justice
48B-50C Kronprindsens Gade,
GERS Building, 2nd Floor
Charlotte Amalie, St. Thomas
USVI, 00802

Richard M. Prendergast
Assistant Attorney General
Office of Attorney General of
Virgin Islands
6040 Castle Coakley
Christiansted, St. Croix
USVI, 00820
Attorneys for Appellant
Government of the Virgin Islands

Lawrence M. Hill, Esquire (Argued)
Michael I. Saltzman, Esquire
Richard A. Nessler, Esquire
White & Case LLP
 1155 Avenue of the Americas
New York, NY 10036
Attorneys for Appellee
Chase Manhattan Bank, N.A.

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William G. Myers III, Solicitor
U.S. Department of the Interior
David L. Atkinson
United States Attorney
Eileen J. O’Connor
Assistant Attorney General
David Carmack, Esquire
Thomas J. Sawyer, Esquire
United States Department of Justice
Tax Division
P.O. Box 502
Washington, DC 20044
Attorneys for Amicus-Appellant
United States of America

OPINION OF THE COURT

AMBRO, Circuit Judge:

At issue in this case is the interest rate that should apply
to the overpayment of income tax owed to the Virgin
Islands’ taxing authority. The Virgin Islands Bureau of
Internal Revenue (the "VIBIR") appeals the District Court of
the Virgin Islands’ application of the Virgin Islands Code
rate of 12%, rather than the lower federal rate. We reverse.

I. Background

The facts of this case are not contested. Chase
Manhattan Bank, N.A. ("Chase") overpaid its income taxes
for the years 1989, 1990, and 1991. In 1994 Chase and the
VIBIR agreed that Chase was owed a refund of $3,869,888,
and that the VIBIR would accordingly allow Chase a $2
million tax credit for both tax years 1994 and 1995. This
amount included an interest component, calculated at the
federal statutory rate. To the extent that Chase owed less
than $2 million in taxes in either year, the VIBIR would
either carry over the balance or remit it to Chase. Until
Chase received full payment, interest would continue to
accrue at "the appropriate Bureau statutory rate and
method for paying interest on overpayments."

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Chase brought suit in the District Court because it
alleged that the VIBIR incorrectly calculated the interest on
the overpayments using the rate specified by the Internal
Revenue Code (the "IRC") of the United States rather than
using the higher rate set by the Virgin Islands Code. The
IRC provides that "[i]nterest shall be allowed and paid upon
any overpayment in respect of any internal revenue tax at
the overpayment rate established under section 6621." 26
U.S.C. S 6611(a). Section 6621 fixes the interest rate on
overpayments at "the Federal short-term rate . . . plus . . .
2 percentage points in the case of a corporation." 26 U.S.C.
S 6621(a)(1). It further provides that "[t]o the extent that an
overpayment of tax by a corporation for any taxable period
. . . exceeds $10,000," the corporate rate is only "0.5
percentage point" above the federal short term rate, rather
than "2 percentage points." Id. The Virgin Islands Code
provides that "[i]nterest shall be allowed and paid upon any
overpayment in respect of any internal revenue tax at the
rate of 12 percent per annum." 33 V.I.C. S 1251. The Virgin
Islands Code defines "internal revenue tax" as"any tax
imposed by this subtitle . . . and the Virgin Islands tax
law." 33 V.I.C. S 1931(7). "Virgin Islands tax law" is defined
as "so much of the United States Internal Revenue Code as
was made applicable in the Virgin Islands by the Act of
Congress entitled ‘An Act making appropriations for the
naval service . . . (48 U.S.C. S 1937).’ " 33 V.I.C. S 1931(15).

The District Court held that only the substantive tax
provisions of the IRC apply to Virgin Islands income tax
law. Mem. Op. at 6. Because the Court found interest rates
on taxpayers’ overpayments to be nonsubstantive, it held
that the Virgin Islands Code’s 12% interest rate governed.

The District Court’s order granting Chase’s motion for
summary judgment, and denying the VIBIR’s cross-motion
for summary judgment, was a final one. We have
jurisdiction under 28 U.S.C. S 1291. Our review is plenary.
Am. Med. Imaging Corp. v. St. Paul Fire & Marine Ins., 949
F.2d 690 (3d Cir. 1991).

II. Discussion

Virgin Island income tax law generally tracks U.S. federal
income tax law:

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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.

48 U.S.C. S 1397. This relationship is known as the "mirror
code" because Virgin Islands law is statutorily designed to
mirror stateside law. Danbury, Inc. v. Olive, 820 F.2d 618,
620-21 (3d Cir. 1987) ("Congress create[d] a separate taxing
structure for the Virgin Islands ‘mirroring’ the provisions of
the federal tax code except as to those provisions which are
incompatible with such a separate tax structure.") (citation
omitted). The Virgin Islands legislature retains the power to
"amend, alter, modify, or repeal any local law or ordinance
. . . and to enact new laws not inconsistent with any law of
the United States applicable to the Virgin Islands." 48
U.S.C. S 1574. Virgin Islands residents fulfill their U.S. tax
obligations by paying all income taxes to the Treasury of
the Virgin Islands. Abramson Enters. v. Gov’t of the V.I., 994
F.2d 140, 142 (3d Cir. 1993).

Cracks sometimes appear when one jurisdiction’s laws
mirror another’s, and courts have developed three rules of
construction to guide the mirroring mechanism. The
simplest is the substitution principle, whereby the words
"Virgin Islands" are substituted for "United States."
Abramson, 994 F.2d at 142. Second, the equality principle
dictates that the tax burden on individuals in the Virgin
Islands be equivalent to what the United States would
collect on the same income if the taxpayer resided in the
United States. Id. (citing Johnson v. Quinn, 821 F.2d 212,
214 (3d Cir. 1987)). Finally, the manifest incompatibility
principle requires that the IRC should not apply to Virgin
Islands tax law if the result is "manifestly inapplicable or
incompatible with a separate territorial income tax." Id.
(quoting Chicago Bridge & Iron Co. v. Wheatley , 430 F.2d
973, 976 (3d Cir. 1970)).

The mirror code unambiguously applies "[t]he income-tax
laws in force in the United States of America and those
which may hereafter be enacted" to the Virgin Islands tax
law. 48 U.S.C. S 1397. Because the IRC assigns to

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overpayments of interest the federal short-term rate plus
0.5% to corporations owed payments of over $10,000, that
is the rate at which Chase’s interest accrues. This does not
render S 1251’s 12% rate void, however. The Virgin Islands
legislature has the power "to enact new laws not
inconsistent with any law of the United States applicable to
the Virgin Islands." 48 U.S.C. S 1574. Section 1251’s 12%
rate applies to all "internal revenue" taxes of the Virgin
Islands aside from income tax, i.e., local taxes such as
property taxes, excise taxes, and inheritance taxes. 33
V.I.C. S 1251. As to overpayments of income tax, however,
the mirror code calls for the federal interest rate to apply.1
26 U.S.C. S 6611(a).

The District Court’s distinction between substantive and
nonsubstantive law is unsupported by case law. To apply it
would violate the equality principle because corporations in
the Virgin Islands would be entitled to a greater
overpayment than those organized within the mainland
United States. But more to the point, most of our cases do
not apply "nonsubstantive" tax provisions as the District
Court did. Abramson, 994 F.2d at 140; Johnson, 821 F.2d
at 214; Danbury, 820 F.2d at 618; Vitco, Inc. v. Government
of the Virgin Islands, 560 F.2d 180 (3d Cir. 1977); HMW
Indus. v. Wheatley, 504 F.2d 146 (3d Cir. 1974). The
District Court relied on the language in two cases, Chicago
Bridge & Iron Co. v. Wheatley, 430 F.2d 973 (3d Cir. 1970),
and Dudley v. Commissioner, 258 F.2d 182 (3d Cir. 1958),
but overlooked contextual differences that distinguish them
from the current case.
Chicago Bridge arose from a complication with the
substitution principle. Section 922 of the IRC of 1954
contained a "special deduction" for "Western Hemisphere
trade corporations," a term defined as "domestic"
corporations all of whose business is done in several
countries, including the West Indies. 430 F.2d at 974. A
mainland corporation doing business in the Virgin Islands
should therefore qualify for the deduction. The taxpayer in
_________________________________________________________________

1. Additionally, the 1994 agreement between Chase and the VIBIR itself
anticipated this result. The interest component built into its $3,869,888
refund amount was calculated at the federal rate, not at 12%.

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Chicago Bridge was such a mainland corporation. However,
the Commissioner of Finance for the Virgin Islands applied
S 922’s term "domestic" literally and disallowed a Western
Hemisphere special deduction to the corporation in its
Virgin Islands tax return, reasoning that the taxpayer was
not "a domestic corporation" to the Virgin Islands because
it was a mainland corporation. "Relying upon this
definition, the district court ruled that only Virgin Islands
corporations, and not mainland corporations like the
taxpayer, are entitled to the special deduction allowed by
section 922 when computing their income tax liability to
the Virgin Islands." Id. at 975.

We applied the equality principle to resolve the issue, and
concluded that the statute allowed the corporate taxpayer’s
deduction. In holding this, we observed that "the literal
terms of the Internal Revenue Code should be modified only
by those nonsubstantive changes in nomenclature as are
necessary to avoid confusion as to the taxing jurisdiction
involved." Id. at 976 (emphasis added) (citation omitted).
Second, we cited Sayre & Co. v. Riddell, 395 F.2d 407, 410
(9th Cir. 1968), a similar Ninth Circuit case involving
Guam, and observed that although changes in
nomenclature were appropriate "where necessary to effect
the intent" of the law, "the purpose of the amended statute
was to give Guam a separate, integral tax system, which
would duplicate the United States’ tax system in all
substantive particulars." Chicago Bridge , 430 F.2d 976
(emphasis added). Third, we stated in a footnote that "the
substantive provisions of the Internal Revenue Code were
made applicable in the Virgin Islands by congressional
enactment in the Naval Service Appropriation Act of 1922."
430 F.2d at 975 n.2 (emphasis added).

Chicago Bridge’s language must be read in context. The
opinion juxtaposes "substantive" provisions with
"nonsubstantive changes in nomenclature . . . necessary to
avoid confusion as to the taxing jurisdiction involved." 430
F.2d at 976 (emphasis added). It nowhere suggests that
only substantive, and not procedural, income tax law is to
be mirrored. If anything, it equates nonsubstantive with
jurisdictional, using the term "substantive" to ensure that
the "intent" of federal law is carried over into the Virgin
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Islands system by treating the mainland corporation as if it
were filing in the United States.

In Dudley, the taxpayer received a notice of deficiency
that informed him that he could appeal to the District
Court of the Virgin Islands. 258 F.2d at 183. However, he
filed a petition for redetermination in the Tax Court of the
United States. We concluded that the Tax Court has limited
jurisdiction, and is authorized only to hear petitions for
redetermination after the Secretary of the Treasury of the
United States (or his or her delegate) issues a deficiency
notice. Id. Because it was the Head of the Tax Division of
the Department of Finance of the Government of the Virgin
Islands (not a delegate of the U.S. Secretary of the
Treasury) that issued the deficiency notice, the Tax Court
had no jurisdiction. Id. at 184.

The Dudley Court cited S 3811 of the then extant IRC of
1939, which provided:

All provisions of the laws of the United States
applicable to the administration, collection, and
enforcement of the tax imposed by subchapter E of
chapter 1 (including the provisions relating to The Tax
Court of the United States) . . . shall, in respect to such
tax, extend to and be applicable in the Virgin Islands
in the same manner and to the same extent as if the
Virgin Islands were a State, and as if the term‘United
States’ when used in a geographical sense included the
Virgin Islands.

258 F.2d at 186-87. We concluded: "It thus appears from
section 3811 that Congress understood that the provisions
of the internal revenue laws of the United States relating to
tax administration and enforcement, especially those
relating to the Tax Court, were without application to the
Virgin Islands." 258 F.2d at 187. The District Court cited
this last sentence, omitting the phrase about the Tax Court,
to argue that we articulated the
nonsubstantive/substantive distinction, and only apply the
mirror code to substantive income tax provisions. However,
the reference in Dudley to "provisions of the internal
revenue laws of the United States relating to tax
administration and enforcement" described the

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jurisdictional problem of appeal to the incorrect court. It
did not announce a wholesale division between substantive
and procedural law. Like Chicago Bridge, at heart Dudley
dealt with jurisdictional confusion.

In this context, the District Court’s reading of our case
law missed the mark. As detailed above, it isolated stray
phrases in two opinions to infer a distinction between
substantive and nonsubstantive provisions. But, as noted,
Chicago Bridge counterposed substantive tax law provisions
to mere changes in nomenclature to avoid jurisdictional
confusion. 430 F.2d at 975-76. Dudley held that on the
particular jurisdictional issue--which was the proper court
of appeal--Virgin Islands law was applicable. 258 F.2d at
187. We have never enunciated a rule that only substantive
U.S. income tax law is mirrored in the tax laws of the Virgin
Islands. The Virgin Islands Code is to mirror the IRC,
except where to mirror literally would lead to jurisdictional
confusion, manifest incompatibility, or a violation of the
equality principle. None is applicable here.

Furthermore, to adopt a distinction between substantive
and nonsubstantive in the rarefied and rule-based world of
income tax law simply invites confusion. To parse
substance from procedure in this context is a chimeral
endeavor. The law does not require such feats of us. 2

*****

No distinction exists in our case law between substantive
and nonsubstantive provisions of the U.S. income tax law
in the context of the mirror code, which dictates that we
apply IRC S 6621’s interest rate for overpayments rather
than the 12% rate of the Virgin Islands Code. Accordingly,
we reverse the District Court’s order granting Chase’s
motion for summary judgment and denying the VIBIR’s
_________________________________________________________________

2. Because we hold that it is the federal rate that governs, we need not
reach the issue of whether Chase breached its 1994 agreement with the
VIBIR. Chase contends that the agreement was not a closing agreement
(and therefore that it could not be in breach). It also correctly points out
that the VIBIR did not raise the issue of the agreement before the
District Court, so we should not consider it. See United States v.
Gilchrist, 215 F.3d 333, 339 (3d Cir. 2000).

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cross-motion, and remand with instructions to enter
summary judgment in favor of the VIBIR.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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