PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
EMMIT J. MCHENRY,
Petitioner-Intervenor,
and
GOVERNMENT OF THE UNITED STATES
VIRGIN ISLANDS,
No. 11-1239
Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
EMMIT J. MCHENRY,
Petitioner-Appellant,
v.
No. 11-1366
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
Appeals from the United States Tax Court.
(Tax. Ct. No. 10-7568)
Argued: January 25, 2012
Decided: April 16, 2012
Before WILKINSON, NIEMEYER, and SHEDD,
Circuit Judges.
2 MCHENRY v. CIR
Affirmed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Wilkinson joined. Judge Shedd wrote
an opinion concurring in Parts I, II.A., and III.
COUNSEL
ARGUED: Gene C. Schaerr, WINSTON & STRAWN, LLP,
Washington, D.C., for the Government of the United States
Virgin Islands. Joseph Andrew DiRuzzo, III, FUERST
ITTLEMAN, PL, Miami, Florida, for Emmit J. McHenry.
Jennifer Marie Rubin, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for the Commissioner of
Internal Revenue. ON BRIEF: Vincent F. Frazer, Attorney
General, VIRGIN ISLANDS DEPARTMENT OF JUSTICE,
St. Thomas, U.S. Virgin Islands; Peter N. Hiebert, Barry J.
Hart, Andrew C. Nichols, Adele H. Auxier, WINSTON &
STRAWN, LLP, Washington, D.C., for the Government of
the United States Virgin Islands. Gilbert S. Rothenberg, Act-
ing Deputy Assistant Attorney General, Kenneth L. Greene,
UNITED STATES DEPARTMENT OF JUSTICE, Washing-
ton, D.C., for the Commissioner of Internal Revenue.
OPINION
NIEMEYER, Circuit Judge:
The question presented in these appeals is whether the Tax
Court abused its discretion in denying the motion of the Gov-
ernment of the United States Virgin Islands ("Virgin Islands")
to intervene in this tax case, which was filed in response to
a notice of deficiency issued by the IRS to Emmit McHenry
for not paying U.S. income taxes. The IRS asserted that
McHenry had participated in a tax avoidance scheme to take
advantage of the lower taxes in the Virgin Islands. In seeking
to intervene, the Virgin Islands asserted that McHenry was
MCHENRY v. CIR 3
but one of many identified by the IRS for tax enforcement
under the U.S. tax laws pursuant to an IRS change of position
in applying those laws and that a Tax Court decision against
McHenry in the circumstances would chill entrepreneurs like
McHenry from coming to the U.S. Virgin Islands, as they
were encouraged to do under the Virgin Islands’ Economic
Development Program adopted pursuant to the authorization
afforded by the U.S. tax laws.
The Tax Court has issued no rules of procedure for third-
party intervention into Tax Court cases, but it is authorized,
under Tax Court Rule 1(b), to prescribe such a procedure,
"giving particular weight to the Federal Rules of Civil Proce-
dure to the extent that they are suitably adaptable to govern
the matter at hand." Tax Ct. R. Proc. 1(b). The Tax Court has
never adopted a procedure such as is prescribed in Civil Rule
24(a) for intervention as a matter of right, and it was not pre-
pared to do so in this case. And while it has applied Civil Rule
24(b) for permissive intervention and did indeed consider the
Virgin Islands’ motion by looking to that rule, it determined
as a matter of discretion to deny permissive intervention. It
concluded that intervention by the Virgin Islands would com-
plicate McHenry’s deficiency case and would introduce
redundancy into the proceedings, explaining that the Virgin
Islands would "have the right to introduce documentary evi-
dence, call its own witnesses, and cross-examine witnesses of
the other parties, which could result in delay."
We affirm the Tax Court’s order denying intervention.
Because Tax Court Rule 1(b) gives the Tax Court broad dis-
cretion in deciding whether and to what extent to follow Fed-
eral Rule of Civil Procedure 24 governing intervention and
because Civil Rule 24 itself confers broad discretion on a trial
court, we give great deference to a Tax Court’s decision to
deny intervention, reviewing only for a clear abuse of discre-
tion. Because the Tax Court’s concerns over the consequences
of granting the Virgin Islands’ motion to intervene are not
4 MCHENRY v. CIR
unreasonable, we do not find a clear abuse of the Tax Court’s
especially broad discretion.
I
To encourage economic development, Congress authorized
the Virgin Islands to reduce its income taxes on "income from
sources within the Virgin Islands or income effectively con-
nected with the conduct of trade or business within the Virgin
Islands." I.R.C. § 934(b)(1). Acting on this authorization, the
Virgin Islands adopted an Economic Development Program to
promote economic growth in the Virgin Islands by granting
substantial tax benefits to those who do business in the Virgin
Islands. To qualify under the program, a person must, among
other things, be a bona fide resident of the Virgin Islands and
must file tax returns with the Virgin Islands Bureau of Inter-
nal Revenue.
In 2000, Emmit McHenry sought to take advantage of the
Virgin Islands tax benefits, and for the tax years 2001, 2002,
and 2003, he filed tax returns with the Virgin Islands Bureau
of Internal Revenue, paying taxes at the reduced amount pay-
able under the Virgin Islands Tax Code. He did not file U.S.
tax returns with the IRS for those three years.
In 2009, the IRS issued a deficiency notice to McHenry for
the tax years 2001, 2002, and 2003, stating that he owed a
total of $841,230 in U.S. taxes and $845,378 in penalties. The
IRS had determined that McHenry was not a bona fide resi-
dent of the Virgin Islands during those tax years and that he
had "participated in a tax avoidance scheme . . . which
involved improperly claiming to be a resident of the [Virgin
Islands] and superficially recasting income from sources
within the United States as income from sources within the
[Virgin Islands] or as income effectively connected to a trade
or business within the [Virgin Islands] in order to inappropri-
ately and invalidly claim a tax credit of 90% under the [Virgin
Islands] economic development program." The deficiency
MCHENRY v. CIR 5
notice stated that "all transactions entered into pursuant to any
arrangement" between McHenry and his Virgin Islands corpo-
rate entities would be "disregarded for federal tax purposes"
because they were "devoid of economic purpose and eco-
nomic substance and were engaged in for no purpose other
than to avoid or evade tax." Finally, the IRS determined,
based on the grounds given for the deficiency notice, that
McHenry had been "required to file a U.S. individual income
tax return with the [IRS] for tax years 2001 and 2002 and had
failed to do so," a failure that was alleged to be due to fraud.
McHenry commenced this action in the Tax Court for a
redetermination of the deficiency, making numerous argu-
ments. Relevant to this appeal, he contended that he filed his
tax returns for the years 2001, 2002, and 2003 with the Virgin
Islands Bureau of Revenue and that the IRS’s effort now to
assess deficiencies were time barred by the three-year statute
of limitations set forth in I.R.C. § 6501(a). Section 6501(a)
provides that taxes imposed by the Internal Revenue Code
"shall be assessed within 3 years after the return was filed."
McHenry claimed that his Virgin Islands filings commenced
this limitations period and that the IRS was therefore barred
from pursuing him for the tax years in question. The IRS con-
tended, however, that because McHenry did not file returns
with the IRS for the tax years 2001, 2002, and 2003, the stat-
ute of limitations has not yet begun to run.
The Virgin Islands filed a motion to intervene in the Tax
Court proceedings because the IRS’s current construction and
application of I.R.C. § 6501(a) reverses the IRS’s earlier
internal understanding of the provision, under which the IRS
considered the filing of a Virgin Islands tax return to com-
mence the running of the limitations period under I.R.C.
§ 6501(a). The Virgin Islands claimed that the IRS’s new
position "threatens the V.I. Government’s taxing autonomy
and fiscal sovereignty, and impairs the Bureau’s [Virgin
Islands Bureau of Internal Revenue] ability to administer the
tax laws of the Virgin Islands." The change in course, it
6 MCHENRY v. CIR
argued, undermines the reasonable expectations of individual
Virgin Islands taxpayers in filing their tax returns with the
Virgin Islands Bureau of Internal Revenue. It asserted that
McHenry is just one of many taxpayers adversely affected by
"the IRS’s unreasonable position on the statute of limita-
tions." To support intervention procedurally, the Virgin
Islands invoked Tax Court Rule 1(b), which authorizes the
Tax Court to apply the Federal Rules of Civil Procedure,
including Rules 24(a)(2) (Intervention of Right) and 24(b)(2)
(Permissive Intervention).
The Tax Court denied the Virgin Islands’ motion to inter-
vene by order dated March 2, 2011, stating:
The issues in this case are similar to those presented
in Appleton v. Comm’r, 135 T.C. 461 (2010), filed
November 1, 2010, wherein the Court declined to
permit the Virgin Islands to intervene. We believe
that because intervention by the Virgin Islands could
result in trial complications, and for other reasons set
forth in Appleton, intervention is not the method
which the Virgin Islands should use to express its
position.
In Appleton (hereafter, "Appleton I"),1 the Tax Court reasoned
that allowing the Virgin Islands to intervene "solely to make
1
Appleton I was later reversed on appeal by a 2-1 decision of the Third
Circuit. See Appleton v. Comm’r, 430 F. App’x 135 (3d Cir. 2011)
("Appleton II"). The Virgin Islands urges that we follow Appleton II here,
while the IRS argues that Appleton II was incorrectly decided in conclud-
ing that the Virgin Islands "administers" a statute, order, or regulation
involved in this Tax Court proceeding and in concluding that applying
Civil Rule 24(b)(3) required the Tax Court to include a finding of "undue"
delay and prejudice. See IRS Announcement Relating to Appleton, 2011-
47 I.R.B. 789 (2011) (noting that the IRS was not acquiescing in the Third
Circuit’s opinion). The IRS also notes that Appleton II never addressed
intervention as a matter of right. See also Coffey v. Comm’r, 663 F.3d 947
(8th Cir. 2011) (following Appleton II).
MCHENRY v. CIR 7
an argument that petitioner has already identified as a matter
central to his case would introduce redundancy to the pro-
ceeding." 135 T.C. at 470. Further, the Tax Court noted that
if it were to grant the motion to intervene, the Virgin Islands
would "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 an interest." Id. at 470-71.
From the Tax Court’s order, the Virgin Islands filed this
appeal, arguing that the Tax Court abused its discretion in
denying its motion to intervene.
II. Permissive Intervention
The Virgin Islands contends first that the Tax Court abused
its discretion in denying permissive intervention under Fed-
eral Rule of Civil Procedure 24(b)(2) by improperly constru-
ing the rule. It argues that the Tax Court "never seriously
considered the question" of "whether intervention would
cause ‘undue’ delay," and that the Tax Court inappropriately
"imposed a requirement that the [Virgin Islands] had to show
‘that its participation as a party [was] necessary to advocate
for an unaddressed issue.’"
The IRS contends that the Virgin Islands does not even
qualify for permissive intervention because it was unable to
satisfy the requirement of Rule 24(b)(2) that the Virgin
Islands "administer the statutory provisions implicated in the
statute-of-limitations issue," which forms the basis of McHen-
ry’s defense. The IRS also argues that the Tax Court "cor-
rectly found that the Virgin Islands seeks to raise an issue that
is a cornerstone of the taxpayer’s defense and on which the
Virgin Islands and the taxpayer completely agree, and that
allowing the Virgin Islands to intervene would unduly delay
the case." Finally, the IRS urges that we defer to the broad
discretion given to the Tax Court to determine and apply its
8 MCHENRY v. CIR
own procedures under Tax Court Rule 1(b), as well as the
broad discretion given to district courts under Civil Rule
24(b). It concludes that the Tax Court acted well within this
double layer of broad discretion in denying permissive inter-
vention.
The Tax Court’s rules make no provision for intervention
by third persons in Tax Court proceedings, whether permis-
sive or as of right, and the Federal Rules of Civil Procedure
are not applicable to Tax Court proceedings. See I.R.C.
§ 7453 ("[T]he proceedings of the Tax Court and its divisions
shall be conducted in accordance with such rules of practice
and procedure (other than rules of evidence) as the Tax Court
may prescribe"); Lasky v. Comm’r, 235 F.2d 97, 98 (9th Cir.
1956) aff’d 352 U.S. 1027 (1957). Tax Court Rule 1(b), how-
ever, grants the Tax Court broad discretion to borrow proce-
dures from the Federal Rules of Civil Procedure. Rule 1(b)
provides:
These rules govern the practice and procedure in all
cases and proceedings before the Court. Where in
any instance there is no applicable rule of procedure,
the Court or the Judge before whom the matter is
pending may prescribe the procedure, giving particu-
lar weight to the Federal Rules of Civil Procedure to
the extent that they are suitably adaptable to govern
the matter at hand.
Relying on Rule 1(b), the Tax Court has concluded that it,
"like other Federal courts, may permit intervention by third
parties in those unique situations where the ends of justice so
require." Estate of Proctor v. Comm’r, T.C. Memo. 1994-208,
1994 WL 184400, at *9 (1994). And when applying Civil
Rule 24(b), the court has delineated the manner in which the
Tax Court will assimilate the rule:
[I]f the moving party has a stake in the outcome of
the litigation before the Court which cannot be ade-
MCHENRY v. CIR 9
quately protected by the parties currently before the
Court, and permitting intervention will lead to a
more complete presentation of the legal issues to be
decided, we are more inclined to grant the party’s
motion to intervene. Motions to intervene have been
denied where the moving party fails to demonstrate
to the Court that the party-petitioner was taking a
position that was contrary to the moving party’s
interests in the litigation before the Court.
Estate of Proctor, 1994 WL 184400, at *9. Thus, while
employing Civil Rule 24(b) for Tax Court proceedings, the
Tax Court takes into account "[t]he nature of the intervenor’s
status in light of the Tax Court’s limited jurisdiction." Estate
of Smith v. Comm’r, 77 T.C. 326, 329 (1981).
In sum, the Tax Court does apply its Rule 1(b) to allow per-
missive intervention, giving particular weight to Civil Rule
24(b), but it only applies Civil Rule 24(b) when (1) "the ends
of justice so require"; (2) the moving party has a stake in the
outcome of the Tax Court litigation "which cannot be ade-
quately protected by the parties currently before the court";
and (3) "permitting the intervention will lead to a more com-
plete presentation of the legal issues to be decided." Estate of
Proctor, 1994 WL 184400 at *9.
Our review of any court’s order denying permissive inter-
vention under Civil Rule 24(b) is "particularly deferential,"
United States v. City of New York, 198 F.3d 360, 367 (2d Cir.
1999), and a challenge to the court’s discretionary decision to
deny leave to intervene must demonstrate a "clear abuse of
discretion in denying the motion," New Orleans Pub. Serv.,
Inc. v. United Gas Pipeline Co., 732 F.2d 452, 471 (5th Cir.
1984) (emphasis added); see also Allen Calculators, Inc. v.
Nat’l Cash Register Co., 322 U.S. 137, 142 (1944) ("The
exercise of discretion in [denying permissive intervention] is
not reviewable by an appellate court unless clear abuse is
shown" (emphasis added)); South Dakota v. U.S. Dep’t of
10 MCHENRY v. CIR
Interior, 317 F.3d 783, 787 (8th Cir. 2003) ("[W]e grant great
deference to the district court’s decision to deny a Rule 24(b)
motion, reviewing it only for a clear abuse of discretion" and
the "[r]eversal of a decision denying permissive intervention
is extremely rare, bordering on nonexistent" (emphasis
added)); Charles Alan Wright, Arthur R. Miller, & Mary Kay
Kane, 7C Federal Practice and Procedure § 1923, (3d ed.
2007).
With these principles in hand, we turn first to whether the
Virgin Islands demonstrated to the Tax Court that it adminis-
ters a statute or regulation on which McHenry’s limitations
defense is based, as required by Civil Rule 24(b)(2), and then
to the Tax Court’s consideration of whether the Virgin Islands
demonstrated that its intervention would not cause undue
delay or prejudice, as required by Civil Rule 24(b)(3).
A
Civil Rule 24(b)(2) authorizes a court to grant a govern-
mental officer or agency permissive intervention if a party’s
claim or defense is based on a statute or regulation "adminis-
tered by the officer or agency." Fed. R. Civ. P. 24(b)(2). The
IRS contends that the Virgin Islands has totally failed to sat-
isfy this requirement, as it does not administer I.R.C.
§ 6501(a), which establishes the statute of limitations on
which McHenry bases his defense.
The Virgin Islands does not claim that it directly adminis-
ters I.R.C. § 6501(a). But it argues that it has an interest in the
IRS’s enforcement of § 6501(a) which is sufficient to satisfy
the "administer" requirement of Civil Rule 24(b)(2). It argues:
The [Virgin Islands’] interest is based on its desire
to protect the Virgin Islands’ tax structure, or more
accurately, the Economic Development Program. In
this sense, while the issue that concerns both the
[Virgin Islands] and McHenry is the same, namely,
MCHENRY v. CIR 11
the statute of limitations, the Virgin Islands’ interest
in the proceedings is certainly different from
McHenry’s interest in dealing with this one-time tax
adjustment.
***
In cases like [McHenry’s]—which will turn largely
on the interpretation of the Economic Development
Program regulations, [U.S. Tax] Code Sections 932
and 934, and the Statute of Limitations in [U.S. Tax]
Code Section 6501—the [Virgin Islands’] interest in
how the courts interpret these laws is yet another
powerful factor weighing in favor of permissive
intervention.
In short, the Virgin Islands argues that the IRS’s interpretation
of the U.S. Tax Code’s statute of limitations affects the
enforcement of I.R.C. §§ 932(c) and 934, in which it has a
direct interest, inasmuch as § 934 authorizes the Virgin
Islands to reduce taxes as part of its Economic Development
Program.
To be clear, however, I.R.C. § 6501 is a provision of the
U.S. Tax Code, establishing a statute of limitations for impos-
ing U.S. income tax assessments, and in no manner does it
confer administrative responsibilities on the Virgin Islands.
Similarly, I.R.C. § 932(c) is a provision of the U.S. Tax Code
that provides that bona fide residents of the Virgin Islands
who file their tax returns with the Virgin Islands need not
include the gross income stated on their Virgin Islands tax
returns in any United States gross income. Finally, I.R.C.
§ 934 is a provision of the U.S. Tax Code, which authorizes
the Virgin Islands to reduce taxes from sources within the
Virgin Islands and on income effectively connected with the
conduct of a trade or business within the Virgin Islands, thus
enabling the creation of the Virgin Islands’ Economic Devel-
opment Program. While it might be true that these provisions
12 MCHENRY v. CIR
of the United States Tax Code impact the policies of the Vir-
gin Islands in the same way that U.S. tax law impacts many
state laws, the Virgin Islands cannot legitimately claim to be
administering any of these provisions of the U.S. Tax Code.
To satisfy the requirement that it administers the statute on
which McHenry bases his defense, i.e., I.R.C. § 6501(a), the
Virgin Islands must demonstrate that it manages, directs, or
supervises the application of I.R.C. § 6501(a). See Lopez v.
Monterey Cnty., 525 U.S. 266, 278 (1999) (defining "adminis-
ter" as "to manage the affairs of," "to direct or superintend the
execution, use, or conduct of," "to manage (affairs, a govern-
ment, etc.); have executive charge of," "[t]o manage or con-
duct"). Yet, the Virgin Islands does not, and cannot, claim
that it has this type of control over these U.S. Tax Code provi-
sions, or over any other U.S. Tax Code provisions. Rather, it
only claims that it has an interest in the IRS’s policies in
enforcing the U.S. Tax Code in that the Virgin Islands dis-
agrees with the IRS’s change in policy, which has affected its
Economic Development Program. But claiming an interest
arising from this disagreement with the IRS over enforcement
of the U.S. Tax Code is quite distinct from claiming that the
Virgin Islands administers any provision of the U.S. Tax
Code.
Indeed, proof of the matter is revealed by the IRS’s reac-
tion to McHenry’s alleged tax evasion techniques. As numer-
ous persons were taking advantage of the Virgin Islands
Economic Development Program to avoid U.S. taxes, the IRS
and Congress, not the Virgin Islands, acted in their respective
capacities as administrators of the U.S. Tax Code—
particularly I.R.C. §§ 932, 934, and 6501—to alter the
requirements and make evasion of U.S. taxes more difficult.
In 2004, the IRS issued notice 2004-45, 2004-2 C.V. 33
(2004), entitled "Meritless Filing Position Based on Sections
932(c) and 934(b)," which it cited in the deficiency sent to
McHenry. Notice 2004 notified taxpayers "that certain pro-
moters are advising taxpayers to take highly questionable, and
MCHENRY v. CIR 13
in most cases, meritless positions . . . in order to avoid U.S.
taxation and claim a tax benefit under the laws of United
States Virgin Islands." The Notice stated that "the Service
intends to challenge these positions in appropriate cases" and
"impose civil penalties on taxpayers or persons who partici-
pated in the promotion or reporting of these positions." Fur-
ther, to combat this type of tax evasion, Congress, in 2004, (1)
added I.R.C. § 937(a), which provided a stricter definition of
"bona fide residency" of U.S. possessions; (2) added § 937(b),
which imposed more stringent rules for determining whether
income is derived from or connected with the conduct of busi-
ness in a territory such as the Virgin Islands; and (3) changed
the residency requirement in § 932(c)(4) to read "resident . . .
during the entire taxable year," rather than "resident . . . at the
close of the taxable year." American Jobs Creation Act of
2004, Pub. L. No. 108-357, § 908 (2004). These 2004 changes
to the U.S. Tax Code were accomplished by the IRS and Con-
gress, not by the Virgin Islands.
The Third Circuit in Appleton II, on which the Virgin
Islands relies heavily, stated conclusorily that Rule 24(b)(2)’s
requirement that the Virgin Islands administer the statute at
issue "appears to be satisfied, as Appleton’s tax assessments
are based on an income calculation which takes into account
credits created pursuant to 26 U.S.C. § 934, under the [Virgin
Islands’ Economic Development Program]." 430 F. App’x at
138. The first flaw in this analysis, however, is that the Virgin
Islands did not move to intervene in the Appleton I case or in
this case on the calculation of the taxpayer’s Virgin Islands
tax assessment under I.R.C. § 934 and the Virgin Islands’
Economic Development Program, nor did it move to inter-
vene on the question of the taxpayer’s Virgin Islands resi-
dency or income classification under § 932(c). Rather, the
Virgin Islands moved to intervene solely on the issue of
whether the statute of limitations applicable to U.S. tax liabil-
ity, I.R.C. § 6501(a), provides the taxpayer a defense to the
asserted tax deficiency. The Virgin Islands, however, does not
"administer" I.R.C. § 6501(a), which is part of the U.S. Tax
14 MCHENRY v. CIR
Code and administered solely by the IRS. And Appleton II
never addressed the question of whether the Virgin Islands
administers I.R.C. § 6501(a), the provision at issue here. Most
certainly, it could not have concluded that the Virgin Islands
administered that statute, as required under Civil Rule
24(b)(2).
Moreover, we conclude that the Third Circuit was incorrect
in assuming that the tax credits claimed by Appleton were
"credits created pursuant to I.R.C. § 934." Appleton II, 430 F.
App’x. at 138. Instead, they were credits created by the Virgin
Islands for taxes payable to the Virgin Islands pursuant to the
Economic Development Program and the Virgin Islands’ tax
laws. Those Virgin Islands credits were in no way implicated
in Appleton’s statute of limitations defense under U.S. tax
laws, nor are they in McHenry’s defense. Section 934 simply
defined the limitations for purposes of U.S. taxation to which
those credits had to adhere.
While we can recognize that the IRS’s interpretations of the
U.S. tax laws that it administers may have an impact on the
Virgin Islands and its Economic Development Program, the
evidence of this impact in no way supports a claim that the
Virgin Islands administers what are indisputably provisions of
the U.S. Tax Code.
Accordingly, we agree with the IRS that Virgin Islands has
not satisfied this basic and essential requirement of permissive
intervention by a government officer or agency, as required
by Civil Rule 24(b)(2).
B
Even as it failed to satisfy Civil Rule 24(b)(2), the Virgin
Islands nonetheless contends that the Tax Court abused its
discretion in denying Virgin Islands’ motion to intervene also
because the Tax Court misconstrued or misapplied the criteria
MCHENRY v. CIR 15
to be considered for permissive intervention, as stated in Civil
Rule 24(b)(3). That rule provides:
In exercising its discretion [on a motion for permis-
sive intervention], the court must consider whether
the intervention will unduly delay or prejudice the
adjudication of the original parties’ rights.
This language is directive, instructing courts to consider the
factors of undue delay and prejudice in exercising their dis-
cretion about permissive intervention, but findings on those
factors are not determinative of or sufficient to decide a per-
missive intervention motion. Regardless of what a court con-
cludes in considering these factors, it may still either grant or
deny intervention.
The Virgin Islands elevates Civil Rule 24(b)(3) to serve as
a gateway to intervention and, consistent with that approach,
focuses on whether the Tax Court specifically found "undue
delay" in haec verba. Because the Tax Court did not use the
term "undue" and, in addition, because it considered whether
the Virgin Islands’ intervention was "necessary" to the pre-
sentation of McHenry’s defense—a term not contained in
Civil Rule 24(b)(3)—the Virgin Islands argues that the Tax
Court misapplied Rule 24(b)(3) and therefore abused its dis-
cretion.
In making this argument, the Virgin Islands focuses almost
entirely on whether the Tax Court used the word "undue," not
whether the Tax Court was substantively reacting to a possi-
bility of undue delay. We decline, however, to impose a
requirement that a district court or, in this case, the Tax Court,
must, in making the discretionary decision under Rule
24(b)(2), use particular words or phrases. The Virgin Islands
has cited no case prior to Appleton II where a court of
appeals, reviewing the denial of permissive intervention,
imposed the kind of strict procedural and semantic require-
ments on a district court it asks us to impose here.
16 MCHENRY v. CIR
In fact, a review of other courts of appeals’ decisions
reveals just the opposite, a profound reluctance to curb a dis-
trict court’s discretion under Rule 24(b) based on technicali-
ties or semantics. See, e.g., South Dakota, 317 F.3d at 787-88
(upholding a denial of permissive intervention because the
district court "articulated a legitimate reason" for denying the
motion even though it "did not determine whether the pro-
posed intervention would cause undue delay or prejudice");
Ingebretsen v. Jackson Pub. Sch. Dist., 88 F.3d 274, 281 (5th
Cir. 1996) (noting the "exceedingly deferential" standard of
review and upholding the district court’s denial of permissive
intervention because of "delay"); New York News Inc. v.
Kheel, 972 F.2d 482, 487 (2nd Cir. 1992), affirming New York
News Inc. v. Newspaper & Mail Deliverers’ Union of N.Y.,
139 F.R.D. 291 (S.D.N.Y. 1991) (finding the district court
had "properly considered" "undue delay" even though the dis-
trict court never used the word "undue"); Southmark Corp. v.
Cagan, 950 F.2d 416, 419 (7th Cir. 1991) (finding undue
delay even though the district court did not use those words
because the issues raised by the prospective intervenor were
"collateral" to the litigation); ManaSota-88, Inc. v. Tidwell,
896 F.2d 1318, 1323 (11th Cir. 1990) ("Appellant urges
reversal because the district court apparently did not consider
whether intervention will unduly delay or prejudice the rights
of other parties . . . . Although the trial court did not specifi-
cally articulate its reasons for denying permissive interven-
tion, we can find no abuse of discretion in the court’s denial
of [the] motion").
In reviewing substantively whether the Tax Court consid-
ered undue delay, we note at the outset some ambivalence in
the Virgin Islands’ position. In its motion to intervene, it indi-
cated that it was filing a motion to intervene because of its
"vital interest in the proper resolution of one key aspect of the
dispute: the IRS’s position that the usual 3-year statute of lim-
itations for assessing tax under Section 6501(a) of the Internal
Revenue Code of 1986 . . . does not apply to income tax
returns filed with the Virgin Islands government’s Bureau of
MCHENRY v. CIR 17
Internal Revenue." (Emphasis added). It assured the Tax
Court that it had no intention of "delaying the resolution of
this case" and indicated an intent not "to put on any of its own
evidence." In the same motion, however, the Virgin Islands
also indicated that while it "concurs fully with McHenry’s
position on the statute of limitations issue, and does not take
issue with any of his other positions," its interests "cannot be
adequately represented by McHenry . . . as he is not responsi-
ble for the public welfare, the effectiveness of the Economic
Development Program, the Bureau’s administration of the
mirror code or, most importantly, the integrity of the Virgin
Islands’ government fisc." It then argued:
Unless it becomes a litigant, the Virgin Islands will
have no right to present evidence of the many Virgin
Islanders who may face the threat of double taxation
or other harms, or of the cost to the Virgin Islands’
economy of the IRS’s novel and unprecedented
interpretation of the Section 6501(c) statute of limi-
tations as applied to returns received and processed
by the Bureau pursuant to Section 932(c).
In its brief on appeal, the Virgin Islands has confirmed its
purpose for seeking intervention to be able "to demonstrate,
through appropriate evidence, the actual workings of its tax
administration system or the injury to scores of citizens," as
well as "to present evidence showing the harm to the economy
of the Virgin Islands caused by the IRS’s capricious rule
changes." (Emphasis added).
Thus, on the one hand, it has promised not to present evi-
dence to delay the case, but on the other, it has forecast a Tax
Court deficiency proceeding far broader than would have
been required to resolve the issue of McHenry’s U.S. income
tax deficiency.
The Tax Court, however, appears to have dealt with both
arguments, finding neither persuasive. It first pointed out that
18 MCHENRY v. CIR
McHenry, the taxpayer, will fully be able to present the stat-
ute of limitations argument during the course of proceedings,
and thus "for movant to participate in this case as a party
solely to make an argument that the petitioner has already
identified as a matter central to his case would introduce a
redundancy into the proceedings." But then it also recognized
that if the motion to intervene were granted, the Virgin
Islands 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 par-
ties. Such participation, as a practical matter, could result in
trial complications as well as delay the resolution of the issue
in which the movant asserts an interest." (Emphasis added).
While the Tax Court may not have used the word "undue,"
there can be no doubt that it was most concerned with undue
delay based on the Virgin Islands’ forecast if it were permit-
ted to intervene. In its motion to the Tax Court, the Virgin
Islands’ core argument rested on its view that McHenry could
not adequately protect the Virgin Islands’ interests in protect-
ing its Economic Development Program and "in the public
welfare."
Moreover, the Virgin Islands attached to its motion to inter-
vene several documents defining the scope of what it intended
to show, which included an affidavit detailing the type of evi-
dence that it would likely introduce. In the affidavit, the Chief
Executive Officer of the Economic Development Authority
related how, citing statistics, the success of the program has
been affected by the IRS’s enforcement of the U.S. Tax Code.
He indicated that as a result, "many economic development
program participants have left the U.S. Virgin Islands and
returned to the United States, and many more potential busi-
ness owners have been deterred from participating all
together." Indeed, he stated that new applications submitted to
the Economic Development Commission fell from 74 in 2003
to 21 in 2005 and to 12 in 2009.2 Also attached to the motion
2
As the dissent in Appleton II recognized, this decline also followed
Congress’ 2004 alterations to the Tax Code and the IRS’s efforts to curb
MCHENRY v. CIR 19
to intervene were documents outlining the historical coopera-
tive efforts between the Virgin Islands and the IRS, including
an implementation agreement signed in 1987. In short, he
addressed points that McHenry would not make and that
would substantially expand the scope of the tax case.
Thus, the Tax Court knew that as a party, the Virgin Islands
would likely introduce documentary evidence, call its own
witnesses, and cross-examine witnesses of the parties on
issues not before the court, thus introducing "trial complica-
tions as well as delay" to the resolution of the statute of limi-
tations defense raised by McHenry. The Tax Court justifiably
recognized the differing interests of McHenry and the inter-
vening party to conclude that complications and delay would
result. These are the core considerations delineated for con-
sideration by Rule 24(b)(3). On this point, we agree with the
dissent’s observation in Appleton II:
Although it did not use the precise phrases "undue
delay" and "prejudice," the Tax Court concluded that
the [Virgin Islands’] intervention would result in just
that. Thus, a careful reading of the Tax Court’s opin-
ion refutes the majority’s conclusion that "[t]here is
no support for the notion that any delay here would
be ‘undue,’ or that the [Virgin Islands’] arguments
. . . would prejudice . . . the IRS." . . . [I]t concluded
that the redundancy, complications, and delay arising
from the [Virgin Islands’] intervention would be
undue, and would prejudice the IRS.
Appleton II, 430 F. App’x at 139-40 (Ambro, J., dissenting).
Of course, if the Virgin Islands were only to advocate
McHenry’s narrow position, without complicating or delaying
the use of the Virgin Islands as a tax haven and could easily be attributable
to the effectiveness of the congressional reforms at countering such tax
evasion. See Appleton II, 430 F. App’x at 140 (Ambro, J., dissenting).
20 MCHENRY v. CIR
the trial, as it suggested in the early portion of its motion to
intervene, then the Virgin Islands’ intervention would not be
necessary to a fair and complete adjudication of McHenry’s
deficiency and would therefore simply be redundant, also an
observation made by the Tax Court.
The Virgin Islands criticizes this "necessity" observation,
suggesting that it is a consideration beyond that stated in Rule
24(b)(3). But it fails to recognize that the observation is sim-
ply another legitimate factor adopted by the Tax Court in con-
sidering the desirability of permitting intervention. See Estate
of Proctor, 1994 WL 184400, at *9.
We conclude that the Tax Court’s concerns were reason-
able, and in such circumstances we defer to its especially
broad discretion, given at two levels under Tax Court Rule
1(b) and Civil Rule 24(b). The Tax Court was justifiably con-
cerned about the transformation of a garden variety tax defi-
ciency case, in which the court would have to decide a statute
of limitations issue, into a policy battle between the Economic
Development Authority of the Virgin Islands and the IRS. As
the Supreme Court has instructed with respect to 24(b), we
must not disturb the Tax Court’s ruling unless there is a clear
abuse of discretion. See Allen Calculators, 322 U.S. at 142.
In this case, we do not so conclude and therefore affirm the
Tax Court’s order denying intervention.
III. Intervention of Right
The Virgin Islands also contends that the Tax Court abused
its discretion "in refusing to order mandatory intervention" by
"constructing the [Virgin Islands’] interest in narrow, formal
terms." Virgin Islands asserts that it "will be impaired in pro-
tecting [its economic] interests if it cannot intervene in this lit-
igation."
The IRS contends that the Virgin Islands lacks standing to
intervene as a matter of right, as provided in Civil Rule
MCHENRY v. CIR 21
24(a)(2), because it is "neither named in a deficiency notice
nor has a specific statutory right to intervene in a deficiency
proceeding, in light of the Tax Court’s limited jurisdiction."
In addition, the IRS contends that the Virgin Islands does not
assert an interest in McHenry’s lawsuit that is direct insofar
as it has "not demonstrated that its hypothetical interest would
be harmed by a ruling in favor of the Commissioner."
The Tax Court rejected the Virgin Islands’ argument that it
was entitled, as a matter of right, to intervene under Civil
Rule 24(a)(2), giving as its reasons those set forth in Appleton
I. In Appleton I, the Tax Court observed first that it "has never
recognized intervention of a third party as a matter of right
pursuant to [Federal Rule of Civil Procedure] 24(a)(2)." 135
T.C. at 466. Moreover, it continued, it was not deciding
whether Civil Rule 24(a) was even applicable to proceedings
in the Tax Court because Virgin Islands did not make its case
that it even qualified for the right to intervene as afforded by
Civil Rule 24(a)(2). See id. at 466-67. The Tax Court rea-
soned that the Virgin Islands’ interest in the taxpayer’s defi-
ciency proceeding was not "direct, substantial, and legally
protectable" and that the Virgin Islands’ general economic
interest was simply insufficient. Id. at 468. It explained:
Resolution of the 3-year period of limitations issue
will not undermine [Virgin Islands’] taxing authority
or discourage legitimate economic development in
the Virgin Islands pursuant to [Virgin Islands’ Eco-
nomic Development Program]. Regardless of the
outcome of the 3-year period of limitations issue,
[the Virgin Islands] will still retain the authority to
offer and administer its economic development pro-
gram.
Id.
Tax Rule 1(b) provides that the Tax Court "may prescribe"
the rules and procedures applicable to Tax Court proceedings
22 MCHENRY v. CIR
and requires only that the Court give weight to the Civil Rules
"to the extent that they are suitably adaptable to govern the
matter at hand." As far as we can determine, the Tax Court
has never prescribed a procedure for intervention as a matter
of right and has never applied Civil Rule 24(a)(2) to authorize
a non-taxpayer third party to intervene as of right in a tax
deficiency proceeding.
While the Virgin Islands does not challenge the Tax
Court’s exercise of discretion in refusing to prescribe Civil
Rule 24(a)(2) as applicable to a Tax Court proceeding, were
it to have attempted to demonstrate an abuse of discretion, it
would be faced with the Tax Court’s own perception of its
limited jurisdiction. Only the taxpayer named in a deficiency
notice has a right to petition for redetermination in the Tax
Court under I.R.C. § 6213(a). See Cincinnati Transit, Inc. v.
Comm’r, 55 T.C. 879, 882-83 (1971), aff’d, 455 F.2d 220 (6th
Cir. 1972). Thus, the Virgin Islands would have to demon-
strate the error in the Tax Court’s observation that a non-
taxpayer, governmental entity may never have a "right" to
intervene in a tax deficiency proceeding in the Tax Court.
This it has not done, and we have found no authority to sup-
port the Virgin Islands’ position.
But even moving beyond that issue, we would not, in any
event, be authorized to mandate Tax Court procedure to gov-
ern intervention of right even if we thought it would be useful.
That is left exclusively to the Tax Court. See I.R.C. § 7453.
In addition, the Tax Court indicated that it was not even
faced with the decision of whether to look to Civil Rule
24(a)(2) because the Virgin Islands failed to demonstrate that
it qualified under that rule for intervention as a matter of right.
We agree with that conclusion also.
Civil Rule 24(a)(2) mandates that a court "must permit any-
one to intervene" if the party is "so situated that disposing of
the action may as a practical matter impair or impede the
MCHENRY v. CIR 23
movant’s ability to protect its interest, unless the existing par-
ties adequately represent that interest." Fed. R. Civ. P.
24(a)(2). In light of our discussion above, in which we noted
the limited nature of the Tax Court proceeding and the
broader and much different nature of the interest that the Vir-
gin Islands has sought to vindicate, we agree with the Tax
Court that the Virgin Islands cannot demonstrate that resolu-
tion of McHenry’s statute of limitations defense will impede
the Virgin Islands’ ability to protect its interests. No matter
what the outcome of the tax deficiency case, the Virgin
Islands will retain the same authority to administer its Eco-
nomic Development Program, and any views it has on the
IRS’s interpretation of the U.S. Tax Code can easily be
expressed in an amicus brief, which the Tax Court has indi-
cated it will allow, or in some other forum more suited to such
policy arguments.
In sum, we affirm the Tax Court’s decision denying the
Virgin Islands’ motion to intervene as a matter of right.
IV
The Tax Court in this case is faced with McHenry’s peti-
tion for redetermination of the U.S. income tax deficiency
issued to him by the IRS, and McHenry has based his primary
defense on the U.S. Tax Code’s statute of limitations for mak-
ing tax assessments, stated in I.R.C. § 6501(a). That issue will
be determined by when the statute of limitations begins to
run. The IRS asserts that it has not yet begun to run because,
under § 6501(a), the three-year limitations period begins to
run from when the taxpayer files his return, and McHenry has
not yet filed U.S. tax returns for the years 2001, 2002, and
2003. McHenry argues that while he did not file U.S. tax
returns with the IRS for the years in question, he did file
returns with the Virgin Islands Bureau of Internal Revenue,
and that the Virgin Islands’ filing commences the running of
the limitations period under I.R.C. § 6501(a).
24 MCHENRY v. CIR
This is a limited legal issue that will be resolved within the
jurisdiction of the Tax Court, according to U.S. tax law.
Claiming that the IRS enforcement against McHenry is part
of a larger "war" between the IRS and the Virgin Islands’
Economic Development Authority, the Virgin Islands seeks to
wage this war in a limited deficiency proceeding by interven-
ing to present its evidence about the IRS’s policies and prac-
tices, about how they have changed, and about how they
adversely affect the Virgin Islands’ economic development.
Undoubtedly, if allowed to intervene, the Virgin Islands
would transform the deficiency case into some proceeding far
larger, far more complex, and far more protracted. In these
circumstances, we conclude that the Tax Court acted well
within its broad discretion to deny Virgin Islands’ motion.
But we note that the Virgin Islands is not without a medium
for communicating its concerns to the Tax Court and the IRS.
Apart from traditional political avenues, the Virgin Islands
has a right to participate as an amicus. In Appleton I, the Tax
Court noted that it would "permit [the Virgin Islands] to file
an amicus brief in order to enable [the Tax Court] to view the
matter from its perspective." 135 T.C. at 471. And the Tax
Court adopted Appleton I as its reasons for denying the Virgin
Islands’ motion in this case. Numerous cases support the
proposition that allowing a proposed intervenor to file an
amicus brief is an adequate alternative to permissive interven-
tion. See Ruthardt v. United States, 303 F.3d 375, 386 (1st
Cir. 2002); Mumford Cove Ass’n v. Town of Groton, 786 F.2d
530, 535 (2d Cir. 1986); Bush v. Viterna, 740 F.2d 350, 359
(5th Cir. 1984); Brewer v. Republic Steel Corp., 513 F.2d
1222, 1225 (6th Cir. 1975).
For the reasons given, we affirm the Tax Court’s order of
March 2, 2011, denying the Virgin Islands’ motion to inter-
vene.
AFFIRMED
MCHENRY v. CIR 25
SHEDD, Circuit Judge, concurring:
I concur in Parts I, II.A., and III of the majority opinion. I
would not reach the issue decided in Part II.B.