Arthur Appleton, Jr. v. Commissioner of IRS , 430 F. App'x 135 ( 2011 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 10-4522
_____________
ARTHUR I. APPLETON, JR.
v.
COMMISSIONER OF INTERNAL REVENUE
*GOVERNMENT OF THE
UNITED STATES VIRGIN ISLANDS,
Appellant
*(Pursuant to Rule 12(a), Fed. R. App. P)
_____________
Appeal from the United States Tax Court
(Tax Court No. 10-7717)
Tax Court Judge: Honorable Julian I. Jacobs
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Argued April 27, 2011
Before: SCIRICA, RENDELL and AMBRO, Circuit Judges
(Opinion Filed: June 10, 2011)
_____________
Vincent F. Frazer
Office of Attorney General of Virgin Islands
Department of Justice
34-38 Kronprindsens Gade,
GERS Complex, 2nd Floor
Charlotte Amalie
St. Thomas, VI 00802
Barry J. Hart, Esq.
Peter N. Hiebert, Esq.
Gene C. Schaerr, Esq. [Argued]
Winston & Strawn
1700 K Street, N.W.
Washington, DC 20006
Counsel for Appellant
Randall P. Andreozzi, Esq.
Teia M. Bui, Esq.
Edward Doyle Fickess, Esq.
Ryan M. Murphy, Esq.
Andreozzi Fickess
9145 Main Street
Clarence, NY 14031
Counsel for Appellee
Arthur I. Appleton, Jr.
Justin L. Campolieta, Esq.
Internal Revenue Service
33 Maiden Lane, 12th Floor
New York, NY 10038
John DiCicco, Esq.
Kenneth L. Greene, Esq.
Jennifer M. Rubin, Esq. [Argued]
U.S. Department of Justice Tax Division
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, DC 20044
William J. Wilkins, Esq.
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Counsel for Appellee
Commissioner of Internal Revenue
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OPINION OF THE COURT
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RENDELL, Circuit Judge.
The Government of the United States Virgin Islands (“Government”) brings this
challenge to the United States Tax Court’s denial of the Government’s motion to
2
intervene pursuant to Rule 1(b) of the Tax Court Rules of Practice and Procedure, and
under Rule 24 of the Federal Rules of Civil Procedure. We have jurisdiction to review
this matter pursuant to 26 U.S.C. § 7482(a)(1). 1 We conclude that the Tax Court abused
its discretion when it denied the Government permission to intervene pursuant to Rule
24(b)(2). We will remand to the Tax Court for further proceedings consistent with this
opinion.
On April 1, 2010, Appleton filed a timely Tax Court Petition to challenge as void
the tax assessments leveled against him by the Internal Revenue Service (“IRS”) because,
inter alia, the assessments were imposed after the expiration of the statute of limitations,
26 U.S.C. § 6501(a). Under Section 932 of the Internal Revenue Code, Virgin Islands
residents, like Appleton, are required to pay income tax directly to the Bureau of Internal
Revenue (“BIR”), not the IRS, pursuant to the “mirror code”, where the term “Virgin
Islands” is substituted for the “United States” in the Internal Revenue Code. Yet, the IRS
retains audit and assessment powers. Congress also enacted a specific provision directing
that if a taxpayer’s income is “derived from sources within the Virgin Islands or income
effectively connected with the conduct of a trade or business within the Virgin Islands,”
the taxpayer is entitled to certain tax credits pursuant to the Virgin Islands Economic
Development Program (“EDP”), which is authorized by 26 U.S.C. § 934.
Appleton took advantage of the credits available through the EDP when
calculating his income tax payable to the BIR for the tax years 2002-2004. On November
1
Venue is appropriate in this Court under 26 U.S.C. § 7482(b)(1)(A), as Arthur
Appleton, the Petitioner in the underlying Tax Court proceedings, is a legal resident of
the Virgin Islands.
3
25, 2009, the IRS delivered a notice of deficiency to Appleton in relation to these tax
years, despite the existence of § 6501(a), the three-year statute of limitations on
assessments. The IRS has taken the position, pursuant to a “Chief Counsel Advice”
memorandum, that the “statute of limitations on assessment in section 6501(a) does not
begin to run until a return is filed with the IRS,” not the BIR. It is this position by the
IRS, and the resulting assessments on Virgin Islands taxpayers, that caused the
Government to file a motion, dated June 18, 2010, seeking to intervene for the purposes
of the statute of limitations issue, either as of right pursuant to Rule 24(a)(2), or in the
alternative, permissively, pursuant to Rule 24(b)(2). The Government argued that a
ruling in favor of the IRS on the statute of limitations issue would have a chilling effect
on the EDP, as it leaves open to question and subject to audit the tax returns of those
taking advantage of the program for an extended period of time. On November 1, 2010,
the Tax Court denied the Government’s motion by memorandum opinion and order. The
Tax Court reasoned that the Government’s interest was insufficient to warrant
intervention of right, and, because the statute of limitations issue is a cornerstone of
Appleton’s defense, permitting the Government to intervene would be redundant and
would risk delay. As alternative relief, the Tax Court did grant the Government the right
to file an amicus brief. Despite this, on November 23, 2010, the Government appealed to
this Court.
We need not rule on the issue of intervention of right because we conclude that, at
the very least, the Government should have been permitted to intervene under Rule
24(b)(2).
4
Under Rule 1(b) of the United States Tax Court Rules of Practice and Procedure,
in the absence of express rule, the Tax Court “may proscribe the procedure, giving
particular weight to the Federal Rules of Civil Procedure to the extent that they are
suitably adaptable to govern the matter at hand.” We can discern no reason why
permissive intervention pursuant to Rule 24(b)(2) should not be available to parties in the
Tax Court. Sampson v. Commissioner, 710 F.2d 262, 264 (6th Cir. 1983); Estate of
Dixon v. Commissioner, 666 F.2d 386, 388 (9th Cir. 1982). Rule 24(b)(2) requires:
On timely motion, the court may permit a federal or state governmental
officer or agency to intervene if a party's claim or defense is based on:
(A) a statute or executive order administered by the officer or agency; or
(B) any regulation, order, requirement, or agreement issued or made under
the statute or executive order.
Additionally, the Tax Court is directed by Rule 24(b)(3) that, when “exercising its
discretion, the court must consider whether the intervention will unduly delay or
prejudice the adjudication of the original parties' rights.” Thus, permissive intervention
under Rule 24 requires (1) the motion to be timely, (2) the potential intervener be a
“federal or state governmental officer or agency”, (3) the issue must be based on a
statute, executive order, or regulation which is administered by the entity, and (4) the
intervention may not cause undue delay or prejudice to the original parties’ rights.
The first and second requirements are easily satisfied here. The third requirement
also 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 Government’s EDP. It is, thus, the last requirement that is at issue, namely the Tax
Court’s conclusion that the Government’s request should be denied due to what in its
view would amount to a redundancy of the issues and a resulting delay in the resolution
5
of the underlying matter. Specifically, the Tax Court noted in its opinion that the
“movant has neither demonstrated that its participation as a party is necessary to advocate
for an unaddressed issue nor shown that its intervention will not delay the resolution of
this matter.” 2 This, however, is not the appropriate standard to consider when deciding to
allow a party to permissively intervene.
While any intervention could potentially cause delay, Rule 24(b) requires the court
to consider whether this intervention will cause “undue delay,” or “prejudice the
adjudication of the original parties rights.” The redundancy noted by the Tax Court due
to identity of interest should only be a bar to intervention when it has the adverse effect
of “undue delay” or “prejudice.” See Hoots v. Commonwealth of Pa., 672 F.2d 1133,
1136 (3d Cir. 1982)( “[W]here … the interests of the applicant in every manner match
those of an existing party and the party's representation is deemed adequate, [a court] is
well within its discretion in deciding that the applicant's contributions to the proceedings
would be superfluous and that any resulting delay would be “undue.”). That is not the
case here. There is no support for the notion that any delay here would be “undue,” or
that the Government’s arguments would prejudice either Appleton or the IRS. While the
issue that concerns both the Government and Appleton is the same, namely, the statute of
limitations, the Government’s interest in the proceedings is certainly different from
Appleton’s interest in dealing with this one-time tax adjustment. The fact that the
Government’s interest is somewhat different detracts from the argument that the
proceedings will be “redundant.” To the contrary, they will be complementary and the
2
The IRS’ fear that this litigation will be delayed lies in stark contrast to its own desire to
delay the commencement of proceedings by doing away with the statute of limitations.
6
Government’s interest will bolster Appleton’s argument. As to the “delay,” any
introduction of an intervener in a case will necessitate its being permitted to actively
participate, which will inevitably cause some “delay.” “Undue” means not normal or
appropriate. Webster’s II New Riverside University Dictionary 1259 (1988). Here, there
may be additional discovery needed due to the Government’s being in the case, but it
would seem to be highly appropriate that time be allowed in order to consider the
evidence it brings forth regarding this issue of importance not only to Appleton, but to
others, including the Government.
While we do not decide the “right” of the Government to intervene, we cannot
ignore its interest. The Government’s interest is based on its desire to protect the Virgin
Islands tax structure, or more accurately, the EDP. This interest was granted by Congress
to give the Virgin Islands a mechanism to improve its economy. The Government urges
that its interest, and the potential harm from the IRS’s audits, is great, citing statistics that
the EDP amounted to 20% of the Virgin Islands budget and 8% of its employment prior
to the commencement of the delayed audits and assessments. Moreover, the Appleton
case could set a precedent as to future statute of limitation challenges if the IRS is
successful in the Tax Court on the issue. Rule 24(b)(2) specifically provides for
governments to protect their interests in matters in litigation; here, that interest is very
real and is different from Appleton’s, and any delay caused by their participation in the
case will inure to Appleton’s benefit, not prejudice. Moreover, the IRS has not asserted
that its ability to adjudicate its rights would be prejudiced.
7
Accordingly, it is clear to us that the Tax Court abused its discretion by not
considering whether the Government’s intervention would cause “undue delay” or
“prejudice.” Additionally, as Congress thought it important enough to afford the
Government this mechanism to improve its economy, and the Rule permits it to protect
its interest through intervention, we will direct the Tax Court to allow the Government of
the Virgin Islands to intervene in Appleton’s proceedings pursuant to Rule 24(b)(2).
Therefore, we will remand this matter to the Tax Court, and require that the Government
of the Virgin Islands be permitted to intervene pursuant to Fed. R. Civ. P. 24(b)(2).
8
Arthur Appleton, Jr. v. Commissioner of IRS
No. 10-4522
AMBRO, Circuit Judge, dissenting
I agree with my colleagues’ conclusion that the Tax Court has the discretion to
allow permissive intervention pursuant to Rule 24(b)(2), but disagree that the Tax Court
abused its discretion in denying permissive intervention here.
As the majority points out, permissive intervention under Rule 24 requires (1) a
timely motion to intervene by (2) a federal or state governmental officer or agency (3)
raising an issue that is based on a statute, executive order, or regulation that is
administered by the entity; in addition, (4) intervention must not cause undue delay or
prejudice to the initial parties’ rights. I agree that the first two requirements are easily
satisfied here. Contrary to my colleagues’ view, the third requirement was contested by
the Internal Revenue Service. 1 However, I shall assume (as did the Tax Court) that the
V.I. Government meets the third requirement, as my disagreement is with the majority’s
1
The majority states that Appleton’s tax assessments incorporate credits pursuant to 26
U.S.C. § 934, which falls under the Virgin Islands’ Economic Development Program, and
thus is administered by the V.I. Government. The IRS argues that this is irrelevant and
incorrect. It is irrelevant because the statute of limitations question does not implicate
§ 934, which states that the V.I. Government may only reduce tax liability if it is
attributable to income connected with a V.I. trade or business. It is incorrect because
§ 934 is not in the “mirror code” (the version of the Internal Revenue Code that applies to
V.I. residents, in which the term “Virgin Islands” is substituted for “United States”), and
subsection 934(b) says that the Secretary of the United States Treasury shall promulgate
regulations to define whether income is derived from sources in the V.I. or connected
with a V.I. trade or business. As the IRS notes, “[w]hile I.R.C. § 934 may provide the
[V.I.] with guidance as to its tax structure, the Commissioner—not the [V.I.
Government]—administers the provisions of that provision.” IRS Br. 64.
analysis of the fourth.
Although it did not use the precise phrases “undue delay” and “prejudice,” the Tax
Court concluded that the V.I. Government’s intervention would result in just that. Thus,
a careful reading of the Tax Court’s opinion refutes the majority’s conclusion that
“[t]here is no support for the notion that any delay here would be ‘undue,’ or that the
[V.I.] Government’s arguments . . . would prejudice . . . the IRS.” As the Tax Court
reasoned,
[Appleton] has raised the period of limitations issue, and we
presume the matter will be fully vetted during the normal course of
these proceedings. For [the V.I. Government] to participate in this
case as a party solely to make an argument that [Appleton] has
already identified as a matter central to his case would introduce a
redundancy into the proceedings. . . . Were we to grant the motion
to intervene, [the V.I. Government] 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 this issue in
which [the V.I. Government] asserts an interest.
A20 -21. Because the Court found that the V.I. Government’s interests would be well
represented by Appleton, who has counsel and “has made the expiration of the section
6501(a) period of limitations a cornerstone of his case,” it concluded that the redundancy,
complications, and delay arising from the V.I. Government’s intervention would be
undue, and would prejudice the IRS. Id. at 19. When viewed together with the fact that
the Tax Court permitted the V.I. Government to file an amicus curiae brief, I do not
believe this was an abuse of discretion.
2
My colleagues characterize the V.I. Government’s interest in this case as a desire
to protect legitimate, congressionally sanctioned use of its Economic Development
Program (“EDP”). I am skeptical. They cite the V.I. Government’s statistics that the
EDP accounted for 20% of its budget and 8% of employment in the V.I. prior to the IRS’
delayed audits and assessments. But they fail to mention that the IRS only began audits
after it discovered widespread abuse of the EDP. Thus, we cannot attribute a decline in
participation to a fear of endless audits, as opposed to the IRS’ investigation of possible
fraudulent use of the program.
My colleagues also fail to mention that in 2006 the IRS promulgated a regulation
that “fixes” the statute of limitations problem of which the V.I. Government complains.
Under Treas. Reg. § 1.932-1(c)(2)(ii), the IRS allowed the filing of territorial income tax
returns to trigger the start of the limitations period under § 6501. 2 Thus, the issue about
which the V.I. Government expresses ongoing alarm no longer exists.
It is true, as the majority states, that “Rule 24(b)(2) specifically provides for
governments to protect their interests in matters in litigation . . . .” However, by allowing
the V.I. Government to submit an amicus curiae brief, I believe the Tax Court provided it
2
This regulation treats territorial returns as federal returns for statute of limitations
purposes, provided that the United States Government and the V.I. Government have
entered into an agreement allowing for the routine exchange of income tax information,
which they have. See I.R.S. Notice 2007-31, 2001-1 C.B. 971. I cannot help but wonder
if, prior to the IRS’ audits, the V.I. Government declined to share territorial returns with
the IRS. If that were the case, the V.I. Government’s position would mean that the IRS
was prevented practically from auditing Virgin Islands taxpayers before expiration of the
limitations period. Surely we can all agree that the IRS has the right, and indeed the
obligation, to investigate illegitimate use of tax incentives.
3
sufficient opportunity to do so. In sum, because I disagree that the Tax Court failed to
consider, or erred by concluding, that the Government’s intervention would cause undue
delay, I respectfully dissent.
4