Appleton v. Commissioner

ARTHUR I. APPLETON, JR., PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 7717–10. Filed November 1, 2010.

Asserting it has a vital interest in a key aspect of this case,
M filed a motion to intervene pursuant to Rule 1(b), Tax
Court Rules of Practice and Procedure, and under Fed. R. Civ.
P. 24. Held: M’s interest does not satisfy the ‘‘direct, substan-
tial, and legally protectable’’ requirement of Fed. R. Civ. P.
24(a)(2). Held, further, because (i) P has raised the issue in
which M asserts an interest as a matter central to his case
and presumably the issue will be fully vetted during the
course of these proceedings, and (ii) M’s intervention could
result in trial complications as well as delay the resolution of
the issue in which M asserts an interest, M will not be per-
mitted to intervene pursuant to Fed. R. Civ. P. 24(b)(2). Held,
further, as an alternative to intervention, M will be permitted
to file an amicus curiae brief.

Randall P. Andreozzi, Edward Doyle Fickess, Ryan M.
Murphy, and Teia M. Bui, for petitioner.
Barry J. Hart, for proposed intervenor.
Justin L. Campolieta, for respondent.

OPINION

JACOBS, Judge: Asserting that it has a vital interest in a
key aspect of this case, the Government of the U.S. Virgin
Islands (movant) filed a motion to intervene pursuant to Rule
1(b). Petitioner has no objection to movant’s proposed inter-
vention; respondent does.
Unless otherwise indicated, Rule references are to the Tax
Court Rules of Practice and Procedure, and section references
are to the Internal Revenue Code as amended for the years
at issue. At the time he filed his petition, petitioner resided
in the U.S. Virgin Islands.
461

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 462 135 UNITED STATES TAX COURT REPORTS (461)

Background
Petitioner, a U.S. citizen, was a bona fide resident of the
U.S. Virgin Islands (Virgin Islands) for all years at issue (i.e.,
2002, 2003, and 2004). Petitioner (i) filed territorial income
tax returns with the Virgin Islands Bureau of Internal Rev-
enue (BIR) for 2002, 2003, and 2004 pursuant to section
932(c)(2), and (ii) claimed he qualified for the gross income
exclusion provided by section 932(c)(4) and therefore did not
have to file Federal income tax returns or pay Federal
income taxes for such years. The BIR audited petitioner’s
Virgin Islands territorial income tax returns for 2002, 2003,
and 2004 and proposed no adjustments.
Respondent subsequently audited petitioner’s 2002, 2003,
and 2004 Virgin Islands territorial income tax returns and
on November 25, 2009, issued petitioner a notice of defi-
ciency, determining the following Federal income tax defi-
ciencies and additions to tax:

Additions to tax

Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654

2002 $283,555 $35,563.73 $39,515.25 $9,045.50
2003 789,518 147,943.58 164,381.75 20,370.53
2004 280,241 56,728.35 63,031.50 8,030.86

On April 1, 2010, petitioner filed a petition in this Court
for redetermination of the deficiencies and additions to tax
determined by the Internal Revenue Service (IRS), asserting,
inter alia, that the period of limitations for assessing tax had
expired. On May 26, 2010, respondent filed an answer to the
petition asserting, inter alia, that the period of limitations for
assessing tax was still open. On June 18, 2010, movant filed
its motion to intervene.
I. The Virgin Islands
Although part of the United States, the Virgin Islands are
a separate and distinct taxing jurisdiction. Congress estab-
lished the ‘‘mirror tax system’’ as the tax law of the Virgin
Islands. Act of July 12, 1921, ch. 44, sec. 1, 42 Stat. 122
(codified as amended at 48 U.S.C. sec. 1397 (2006)). Under
the mirror tax system, the Virgin Islands uses the Internal
Revenue Code with ‘‘Virgin Islands’’ effectively substituted

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 (461) APPLETON v. COMMISSIONER 463

for any reference to the ‘‘United States’’ (and vice versa). See
Danbury, Inc. v. Olive, 820 F.2d 618, 620 (3d Cir. 1987). As
the law developed, the provisions of the Internal Revenue
Code have been made applicable to the Virgin Islands so long
as the specific section to be applied is ‘‘ ‘not manifestly inap-
plicable or incompatible’ with a separate territorial income
tax.’’ Chi. Bridge & Iron Co. v. Wheatley, 430 F.2d 973, 976
(3d Cir. 1970) (quoting 48 U.S.C. sec. 1421i(d)(1) (1964)).
The provisions applicable for 2002, 2003, and 2004 under
which individuals file income tax returns and pay tax in the
Virgin Islands were enacted as part of the Tax Reform Act
of 1986, Pub. L. 99–514, sec. 1274(a), 100 Stat. 2596, and
amended in the Technical and Miscellaneous Revenue Act of
1988, Pub. L. 100–647, sec 1012(w), 102 Stat. 3530. Virgin
Islands residents were generally exempted from Federal
income tax obligations if they met the requirements of sec-
tion 932(c)(4): 1
(4) RESIDENTS OF THE VIRGIN ISLANDS.—In the case of an individual—
(A) who is a bona fide resident of the Virgin Islands at the close of
the taxable year,
(B) who, on his return of income tax to the Virgin Islands, reports
income from all sources and identifies the source of each item shown on
such return, and
(C) who fully pays his tax liability referred to in section 934(a) to the
Virgin Islands with respect to such income,
for purposes of calculating income tax liability to the United States, gross
income shall not include any amount included in gross income on such
return, and allocable deductions and credits shall not be taken into
account.

Thus, an individual who satisfied the three requirements
of section 932(c)(4) and incurred income tax obligations to
both the United States and the Virgin Islands could satisfy
his reporting and payment requirements by filing only with,
and paying tax only to, the Virgin Islands. If the individual
failed to meet any of these requirements, he was required to
file a Federal income tax return with the IRS. See S. Rept.
100–445, at 315 (1988). Consequently, an individual failing
to satisfy any of the three requirements of section 932(c)(4)
1 Sec. 932(c)(4)(A) was amended by the American Jobs Creation Act of 2004, Pub. L. 108–357,

sec. 908(c)(2), 118 Stat. 1656. The amendment, which is effective for tax years ending after Oct.
22, 2004, changed ‘‘at the close of the taxable year’’ to ‘‘during the entire taxable year’’.

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 464 135 UNITED STATES TAX COURT REPORTS (461)

could be required to file an income tax return and be liable
for taxes in both the United States and the Virgin Islands.
II. The Virgin Islands Economic Development Program
To encourage economic development in the Virgin Islands,
Congress has explicitly permitted the Virgin Islands govern-
ment to reduce certain taxes. Section 934(b)(1) provides that
the Virgin Islands may reduce taxes on ‘‘income derived from
sources within the Virgin Islands or income effectively con-
nected with the conduct of a trade or business within the
Virgin Islands.’’
Pursuant to this grant of authority, the Virgin Islands
government enacted several investment incentives, including
the Virgin Islands Industrial Development Program (referred
to by the parties as the economic development program or
EDP), currently codified at V.I. Code Ann. tit. 29, secs. 701–
726 (1998 & Supp. 2010). Intended to promote growth and
the development and diversification of the Virgin Islands’
economy, the EDP granted certain industrial development
benefits to companies that do business in the Virgin Islands.
See V.I. Code Ann. tit. 29, sec. 701 (1998). Qualifying compa-
nies receive substantial benefits including: A 90-percent
exemption on local income taxes, a 90-percent exemption on
the taxation of dividends, and a 100-percent exemption on
gross receipts taxes.
III. Respondent’s Notice of Deficiency
Attached to respondent’s notice of deficiency was a Form
4549–A, Income Tax Discrepancy Adjustments, which set
forth the basis for the income tax deficiencies and additions
to tax. Although respondent acknowledged that petitioner
was a resident of the Virgin Islands at the close of 2002,
2003, and 2004 (thus meeting the first requirement of section
932(c)(4)), Form 4549–A stated:
You do not, however, qualify for the gross income exclusion under section
932(c)(4) of the Internal Revenue Code (I.R.C.) for any of those taxable
years. During each of the taxable years 2002, 2003, and 2004, you actively
participated in an arrangement that lacks economic purpose and economic
substance that was created to improperly claim a 90% credit against your
income tax liabilities in a scheme similar to those described in Notice
2004–45 Meritless Position Based on Sections 932(c)(4) and 934(b),
resulting in your failure to properly report and identify the source of each

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 (461) APPLETON v. COMMISSIONER 465

item of income shown on the return of income tax you filed with the USVI
for each of those years.

Notice 2004–45, 2004–2 C.B. 33, was issued to advise tax-
payers that the IRS intended to challenge ‘‘highly question-
able, and in most cases meritless, positions’’ of certain U.S.
citizens who claim to be residents of the Virgin Islands in
order to claim substantial tax benefits (including the above
referenced 90-percent income tax credit) of the Virgin Islands
EDP.
Respondent asserts that since petitioner did not satisfy the
second and third requirements of section 932(c)(4), petitioner
was required to file Federal income tax returns in 2002,
2003, and 2004 and pay any tax reported thereon. Because
petitioner did not file Federal income tax returns for 2002,
2003, and 2004, respondent asserts that the 3-year period of
limitations on assessment provided by section 6501(a) has
not yet begun to run. Thus, according to respondent, peti-
tioner’s 2002, 2003, and 2004 tax years remain open.
Petitioner, in contrast, asserts that the section 6501(a)
period of limitations for assessing Federal taxes began to run
when he filed his Virgin Islands territorial income tax
returns with the BIR. Petitioner never agreed to an extension
of the period of limitations as provided in section 6501(c)(4).
Thus, petitioner argues, the period of limitations on assess-
ment has expired.
Movant agrees with petitioner with respect to the expira-
tion of the section 6501(a) period of limitations on the assess-
ment of Federal taxes. Movant maintains that respondent’s
position threatens the Virgin Islands’ taxing autonomy and
fiscal sovereignty and significantly impairs the BIR’s ability
to administer the tax law of the Virgin Islands. Movant thus
seeks to intervene for the purpose of protecting its rights and
interests regarding the period of limitations issue.

Discussion
The sole issue before us is whether movant may intervene
in this matter. 2 In general, our Rules do not provide for
2 In Cincinnati Transit, Inc. v. Commissioner, 55 T.C. 879 (1971), affd. 455 F.2d 220 (6th Cir.

1972), we held that a third party to whom a notice of deficiency had not been issued may not
join in the proceeding as a party petitioner. However, we recognized there ‘‘is a sound distinction
between permitting a third party to ‘intervene’ or file an amicus brief to protect its interests,
Continued

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 466 135 UNITED STATES TAX COURT REPORTS (461)

third-party intervention. 3 In the absence of an express rule,
Rule 1(b) provides that the Court ‘‘may prescribe the proce-
dure, giving particular weight to the Federal Rules of Civil
Procedure to the extent that they are suitably adaptable to
govern the matter at hand.’’ See Intermountain Ins. Servs. of
Vail, L.L.C. v. Commissioner, 134 T.C. 211, 215 (2010);
Estate of Proctor v. Commissioner, T.C. Memo. 1994–208.
Movant relies on rule 24 of the Federal Rules of Civil
Procedure (Fed. R. Civ. P.) which governs third-party inter-
vention in much of the Federal court system. Movant asserts
that it is entitled to intervene as a matter of right under Fed.
R. Civ. P. 24(a)(2) as well as under the permissive interven-
tion rules of Fed. R. Civ. P. 24(b)(2). Movant indicates that
if permitted to intervene, it will file a motion for summary
judgment asserting that respondent is time barred from
assessing deficiencies under section 6501(a) with respect to
petitioner’s 2002, 2003, and 2004 tax years.
I. Intervention Under Fed. R. Civ. P. 24(a)(2)
Movant first argues that it should be permitted to inter-
vene as a matter of right pursuant to Fed. R. Civ. P. 24(a)(2),
which provides that a court must permit anyone to intervene
who:
(2) claims an interest relating to the property or transaction that is the
subject of the action, and is so situated that disposing of the action may
as a practical matter impair or impede the movant’s ability to protect its
interest, unless existing parties adequately represent that interest.

A review of this Court’s jurisprudence reveals that the
Court has never recognized intervention of a third party as
a matter of right pursuant to Fed. R. Civ. P. 24(a)(2).
Because we find that movant has not satisfied the require-
ments of Fed. R. Civ. P. 24(a)(2), we need not and do not
which we think would be discretionary at best under these circumstances, and permitting a
party to join as a party petitioner in a proceeding to redetermine someone else’s tax liability.’’
Id. at 883.
3 There are limited exceptions for third-party intervention; namely: (1) Rule 216(a), permitting

intervention by the Pension Benefit Guaranty Corporation and/or the Secretary of Labor in cer-
tain retirement plan actions; (2) Rule 225, permitting interventions in actions with respect to
sec. 6110 written determinations open to public inspection; (3) Rule 245(a), permitting interven-
tion by tax matters partners in actions for readjustment of partnership items brought by an-
other partner or partners; and (4) Rule 325(b), permitting intervention by the nonelecting spouse
with respect to claims for relief from spousal joint and several liability.

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 (461) APPLETON v. COMMISSIONER 467

decide herein whether Fed. R. Civ. P. 24(a)(2) applies to pro-
ceedings in this Court.
To intervene pursuant to Fed. R. Civ. P. 24(a)(2), the pro-
posed intervenor must: (1) Timely file an application, (2)
show an interest in the litigation, (3) demonstrate that the
interest may be impaired by the disposition of the action, and
(4) show that the interest is not adequately protected by the
parties to the action. See Kaliski v. Bacot (In re Bank of N.Y.
Derivative Litig.), 320 F.3d 291, 300 (2d Cir. 2003); Kleissler
v. U.S. Forest Serv., 157 F.3d 964, 969 (3d Cir. 1998). The
Supreme Court has held that Fed. R. Civ. P. 24(a)(2) requires
a ‘‘significantly protectable interest.’’ Donaldson v. United
States, 400 U.S. 517, 531 (1971). Specifically, the intervenor’s
interest must be ‘‘direct, substantial, and legally protectable.’’
Wash. Elec. Coop., Inc. v. Mass. Mun. Wholesale Elec. Co.,
922 F.2d 92, 97 (2d Cir. 1990); see New Orleans Pub. Serv.,
Inc. v. United Gas Pipe Line Co., 732 F.2d 452, 464 (5th Cir.
1984) (en banc).
An economic interest in the outcome of the litigation
standing alone is not sufficient to support a motion to inter-
vene. Mountain Top Condo. Association v. Dave Stabbert
Master Builder, Inc., 72 F.3d 361, 366 (3d Cir. 1995); see,
e.g., United States v. Alcan Aluminum, Inc., 25 F.3d 1174,
1185 (3d Cir. 1994) (‘‘Some courts have stated a purely eco-
nomic interest is insufficient to support a motion to inter-
vene.’’); New Orleans Pub. Serv., Inc. v. United Gas Pipeline
Co., supra at 464 (‘‘it is plain that something more than an
economic interest is necessary.’’). Moreover, ‘‘An interest that
is remote from the subject matter of the proceeding, or that
is contingent upon the occurrence of a sequence of events
before it becomes colorable, will not satisfy the rule.’’ Wash.
Elec. Coop., Inc. v. Mass. Mun. Wholesale Elec. Co., supra at
97; see also Kleissler v. U.S. Forest Serv., supra at 972
(‘‘Nonetheless, the polestar for evaluating a claim for inter-
vention is always whether the proposed intervenor’s interest
is direct or remote.’’). The determination as to whether the
proposed intervenor’s interest is sufficient to satisfy the
‘‘direct, substantial, and legally protectable’’ requirement is
made on the basis of an examination of all the facts and cir-
cumstances present in the matter. See Cascade Natural Gas
Corp. v. El Paso Natural Gas Co., 386 U.S. 129, 133–134
(1967); Kleissler v. U.S. Forest Serv., supra at 970.

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 468 135 UNITED STATES TAX COURT REPORTS (461)

Movant maintains that it has the requisite interest to
intervene as a matter of right, asserting that respondent’s
determination both impinges on its sovereign authority to
administer its own tax laws through the BIR and undermines
movant’s economic policies. Movant further asserts that
respondent’s position that the period of limitations on assess-
ment of income taxes provided in section 6501(a) remains
open for petitioner (and other similarly situated taxpayers)
has caused a number of companies to leave the Virgin
Islands, has undermined its economic development program,
and has adversely impacted movant’s tax revenues. We do
not subscribe to this argument.
Resolution of the 3-year period of limitations issue will not
undermine movant’s taxing authority or discourage legiti-
mate economic development in the Virgin Islands pursuant
to movant’s EDP. Regardless of the outcome of the 3-year
period of limitations issue, movant will still retain the
authority to offer and administer its economic development
program. Movant’s assertions relate to movant’s economic
interest (specifically the Virgin Islands’ business climate) in
the outcome of the litigation between petitioner and
respondent; and as previously noted supra p. 467, an eco-
nomic interest is not sufficient to permit intervention. More-
over, movant’s interest in this proceeding (1) is remote from
the subject matter of the controversy between petitioner and
respondent (i.e., petitioner’s participation in an activity
which respondent alleges lacks economic purpose and eco-
nomic substance), and (2) will be impaired and colorable only
upon the occurrence of a sequence of events. See Wash. Elec.
Coop., Inc. v. Mass. Mun. Wholesale Elec. Co., supra at 97.
Hence, movant’s interest does not satisfy the ‘‘direct,
substantial, and legally protectable’’ requirements of Fed. R.
Civ. P. 24(a)(2). See id.
II. Intervention Under Fed. R. Civ. P. 24(b)(2)
Alternatively, movant asserts it should be allowed to inter-
vene pursuant to the permissive intervention rules of Fed. R.
Civ. P. 24(b)(2), whereby a Federal or State government
officer or agency may be permitted to intervene if a party to
the litigation’s claim or defense is based on: ‘‘(A) a statute or
executive order administered by the officer or agency; or (B)

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 (461) APPLETON v. COMMISSIONER 469

any regulation, order, requirements, or agreement issued or
made under the statute or executive order.’’ Movant posits
that petitioner’s case centers on sections 932(c) and 934(b),
which under the mirror tax system are administered by the
BIR. Movant argues that if its request to intervene is granted,
the filing of a motion for summary judgment will not delay
or obstruct the adjudication of the matter in this Court.
Assuming arguendo that movant falls within paragraph (A)
or (B) of Fed. R. Civ. P. 24(b)(2), movant has neither dem-
onstrated that its participation as a party is necessary to
advocate for an unaddressed issue nor shown that its inter-
vention will not delay the resolution of this matter.
Intervention pursuant to Fed. R. Civ. P. 24(b) is left to the
discretion of the Court. In Estate of Proctor v. Commissioner,
T.C. Memo. 1994–208, we stated:
Under rule 24(b) of the Federal Rules of Civil Procedure (rule 24(b)) a trial
court has discretion to permit intervention by third parties. Rule 24(b) also
permits the trial court to restrict the scope of intervention by third parties
and to condition such intervention in any manner it believes is necessary
for the efficient conduct of the proceedings. Wright et al., Federal Practice
and Procedure: Civil 2d, secs. 1913, 1922 (1986 & Supp. 1993). Federal
courts generally consider the following factors when deciding whether to
grant a party’s motion to intervene: (1) Whether the presence of a third
party in the proceeding will prejudice the original parties; (2) whether
allowing intervention by a third party will unduly delay the adjudication;
(3) whether the moving party is or may become a party to another pro-
ceeding in which the moving party’s rights will be determined; or (4)
whether there is some other adequate remedy available to the moving
party. Wright et al., supra sec. 1913, at 379–388. Generally, once the court
permits a third party to intervene in the proceeding, the intervenor is
treated as an original party and has equal standing with the original par-
ties, subject to any of the conditions the court may impose. See Ross v.
Bernhard, 396 U.S. 531, 541 n.15 (1970).

Like other Federal courts, this Court may permit interven-
tion where the ends of justice so require. Id.; see Commis-
sioner v. Revere Land Co., 169 F.2d 469, 479 (3d Cir. 1948),
revg. 7 T.C. 1061 (1946); see also Sampson v. Commissioner,
710 F.2d 262 (6th Cir. 1983) (Tax Court has power to permit,
in its discretion, intervention by persons or entities who have
not been served with a notice of deficiency).
In its reply to respondent’s objection, movant states: ‘‘the
V.I. Government merely seeks this Court’s interpretation of
Section 6501(a) as it applies to USVI residents who filed, in

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 470 135 UNITED STATES TAX COURT REPORTS (461)

good faith, a return with the Bureau’’ and that this deter-
mination may be made via a motion for summary judgment.
Movant takes the position that the filing of a territorial
income tax return with the BIR by a resident of the Virgin
Islands triggers the running of the period of limitations for
both Virgin Islands and U.S. tax return filing purposes.
Petitioner, who is represented by counsel, has made the
expiration of the section 6501(a) period of limitations a
cornerstone of his case. In his petition, petitioner alleges that
he properly and timely filed his 2002, 2003, and 2004 Virgin
Islands territorial income tax returns with the BIR (a state-
ment movant concurs in), that the BIR informed the IRS of
petitioner’s return information pursuant to information
sharing agreements between the two agencies, and that the
IRS’ examination of petitioner’s 2002, 2003, and 2004 tax
years commenced well before the expiration of the period of
limitations. The petition states: ‘‘The Commissioner spent
several years examining Petitioner’s 2002 through 2004 tax-
able years, including significant amounts of time with little
or no examination activity, and never requested an extension
of the statutes of limitations for any of these years.’’ Further,
the petition states: ‘‘The statute of limitations under I.R.C. §
6501 for the 2002, 2003 and 2004 taxable years had expired
well prior to the time the Commissioner issued his Statutory
Notice of Deficiency on November 25, 2009.’’
Petitioner has raised the period of limitations issue, and
we presume the matter will be fully vetted during the normal
course of these proceedings. For movant to participate in this
case as a party solely to make an argument that petitioner
has already identified as a matter central to his case would
introduce a redundancy into the proceedings.
Adjudication of the period of limitations issue may require
us to make factual determinations. Were we to grant the
motion to intervene, movant would become a party to the
proceeding in this Court and have the right to introduce
documentary evidence, call its own witnesses, and cross-
examine witnesses of the other parties. Such participation, as
a practical matter, could result in trial complications as well
as delay the resolution of the issue in which movant asserts

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 (461) APPLETON v. COMMISSIONER 471

an interest. 4 Consequently, we shall deny movant’s motion to
intervene.
There is, however, another remedy (i.e., the filing of an
amicus curaie brief) available to movant through which it
may adequately represent its interest in the outcome of this
case. Thus, as an alternative to intervention, we will permit
movant to file an amicus curiae brief in order to enable us
to view the matter from its perspective.
An appropriate order will be issued.

f

4 In its supplement to the reply to respondent’s objection to movant’s motion to intervene,

movant cites Karr v. Castle, 768 F. Supp. 1087 (D. Del. 1991), to support its position. That case
involved the filing of a civil rights action by Karr, a former Delaware National Guard member,
against Castle, the Governor of the State of Delaware, and various Delaware Army National
Guard officers challenging the constitutionality of Karr’s involuntary separation from military
service. At issue was the validity of a National Guard Bureau regulation governing separation
from service (i.e., whether the regulation failed to provide Karr with sufficient procedural due
process). The United States moved to intervene in order to defend the constitutionality of the
regulation inasmuch as the regulation was promulgated by the National Guard Bureau, a joint
bureau of the U.S. Department of the Army and the U.S. Department of the Air Force. The
United States asserted that its interest would, as a practical matter, be impaired by prosecution
of Karr’s lawsuit because of the potential stare decisis effect on future challenges to the regula-
tions (i.e., declaring the regulations invalid would have a widespread effect upon the National
Guard of the several States).
The court denied the United States’ motion to intervene as of right pursuant to Fed. R. Civ.
P. 24(a)(2), but granted permissive intervention under Fed. R. Civ. P. 24(b). The court found
the validity of the regulation in question sufficient to give the United States an intent in com-
mon with the litigation. In so holding, the court found that intervention by the United States
would ‘‘not unduly delay or prejudice the adjudication of the rights of the original parties’’.

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