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Johnson v. Quinn

argued: April 28, 1987.


Appeal from the District Court of the Virgin Islands, St. Thomas, D.C. Civil No. 82-233.

Seitz, Higginbotham, and Rosenn, Circuit Judges.

Author: Rosenn


ROSENN, Circuit Judge.

This appeal presents the question whether Virgin Islands residents who have paid income tax to a state of the United States are entitled to a foreign tax credit against their Virgin Islands tax or only to an itemized deduction in calculating their Virgin Islands tax liability. As we agree with the Commissioner that the equality principle of construction of the Virgin Islands "mirror" tax code and Treasury Regulation § 1.901-1(g)(5) compel the conclusion that the taxpayers may claim only a deduction, we affirm the district court's judgment of deficiency.


The facts in this case are simple and undisputed. Rupert Brent Johnson and Ada Marie Johnson (the taxpayers) are United States citizens and residents of the Virgin Islands. They filed a joint income tax return in the Virgin Islands reporting their worldwide income for 1978. In the return, the taxpayers claimed a foreign tax credit of $71,337 for income taxes paid to the State of California.

The Commissioner of the Virgin Islands Department of Finance issued a notice of deficiency for $173,921, disallowing the foreign tax credit and four other unrelated deductions, but allowing the taxpayers to treat the California tax as an itemized deduction. The taxpayers filed a petition for redetermination in the district court and moved for partial summary judgment on the issue of the foreign tax credit. The district court denied the motion, stating that the taxpayers' claimed credit was barred both by mirror theory policy and by federal regulation. Johnson v. Quinn, 589 F. Supp. 810 (D.V.I. 1984).

The parties resolved all issues other than that of the claimed foreign tax credit by stipulation. In that stipulation, the parties agreed that the total amount of the deficiency would be $38,984 if the taxpayers were entitled only to a deduction, not a credit, and only $4,310 if, on appeal, this court reversed the district court's denial of summary judgment for the taxpayers. The disputed amount is thus $34,674. The district court entered judgment for the Commissioner based on that stipulation agreement.*fn1


Virgin Islands taxpayers are subject to the Virgin Islands "mirror" tax system, under which the federal Internal Revenue Code (IRC) is adopted as the Virgin Islands code, with some substitution of language. This court has described the mirror system as follows:

As we have explained in the earlier cases, Congress neither passed a separate income tax law for the Virgin Islands nor permitted its legislature to do so. Instead, Congress provided that the provisions of United States income tax law should be used in the tax code of the Virgin Islands with necessary nomenclature changes to make them effective, that is, "Virgin Islands" should be substituted for "United States" whenever appropriate. The United States and the Virgin Islands are two separate and distinct taxing authorities, and the revenue due the Virgin Islands is paid into its treasury. This resulted in what has been called the "mirror system" of taxation. For a history and general description of its operation, see Dudley v. Commissioner of Internal Revenue, 258 F.2d 182, 3 V.I. 685 (3d Cir. 1958); Chicago Bridge and Iron Co. v. Wheatley, 430 F.2d 973, 7 V.I. 555 (3d Cir. 1970), cert. denied, 401 U.S. 910, 91 S. Ct. 873, 27 L. Ed. 2d 809 (1971); and Great Cruz Bay, Inc., St. John, Virgin Islands v. Wheatley, 495 F.2d 301, 11 V.I. 189 (3d Cir. 1974).

Vitco, Inc. v. Government of the Virgin Islands, 560 F.2d 180, 181-82 (3d Cir. 1977), cert. denied, 435 U.S. 980, 56 L. Ed. 2d 72, 98 S. Ct. 1630 (1978). Virgin Islands residents discharge their United States tax liability by payment of all income taxes to the Virgin Islands, under section 28(a) of Revised Organic Act of 1954, 48 U.S.C. § 1642, which provides in pertinent part,

The proceeds of the United States income tax . . . shall be covered into the treasury of the Virgin Islands, and shall be available for expenditure as the Legislature of the Virgin Islands may provide: Provided, That the term "inhabitants of the Virgin Islands" as used in this section shall include all persons whose permanent residence is in the Virgin Islands, and such persons shall satisfy their income tax obligations under applicable taxing statutes of the United States by paying their ...

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