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Chicago Bridge and Iron Co. v. Wheatley

decided: July 13, 1970.


Hastie, Chief Judge, and Ganey and Stahl,*fn* Circuit Judges.

Author: Hastie


HASTIE, Chief Judge:

The basic issue presented on this appeal is whether a Delaware corporation is entitled to use the Western Hemisphere trade corporation deduction to reduce its income tax liability to the Virgin Islands.

The Internal Revenue Code of the United States was made applicable in the Virgin Islands by the Naval Service Appropriation Act of 1922, 48 U.S.C. § 1397 (1964):

"The income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said islands."

Beyond merely extending the geographic coverage of the Internal Revenue Code, this statute in effect created a separate territorial income tax measured by that Code and to be collected by the Government of the Virgin Islands. Dudley v. Commissioner of Internal Revenue, 3d Cir. 1958, 258 F.2d 182, 185.

The Virgin Islands has jurisdiction to tax corporations of mainland domicile on income from sources within the Virgin Islands. At the same time the United States has jurisdiction to tax the income of such corporations regardless of source, and does so. Double taxation was avoided by granting a foreign tax credit to such corporations for taxes paid to the Virgin Islands. See I.T. 2946, XIV-2 Cum. Bull. 109, 110 (1935).*fn1

Section 922 of the Internal Revenue Code of 1954 provides a special deduction for "Western Hemisphere trade corporations" in computing taxable income, and section 921 defines corporations entitled to the special deduction:

"For purposes of this subtitle, the term 'Western Hemisphere trade corporation' means a domestic corporation all of whose business (other than incidental purchases) is done in any country or countries in North, Central, or South America, or in the West Indies, and which satisfies the following conditions:

(1) if 95 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources without the United States; and

(2) if 90 percent or more of its gross income for such period or such part thereof was derived from the active conduct of a trade or business.

The Virgin Islands are considered to be a "country * * * in the West Indies" and a source of income "without the United States" in the administration of this special provision. Rev. Rul. 55-105, 1955-1 Cum. Bull. 94; I.T. 4067, 1951-2 Cum. Bull. 55-56. In addition, section 7701(a)(4) of the 1954 Code defines a "domestic" corporation as one "created or organized in the United States or under the law of the United States or of any State or Territory." But Virgin Islands corporations are not "domestic" under the definition in section 7701(a)(4) because the term "Territory" in that section includes only incorporated territories, such as Alaska and Hawaii before they were admitted to the Union. See Treas. Reg. § 301.7701-5 (1960). The Virgin Islands are an unincorporated territory, 48 U.S.C. § 1541(a) (1964), and a Virgin Islands corporation is treated as "foreign" for purposes of the United States income tax. See Rev. Rul. 56-616, 1956-2 Cum. Bull. 589-90.

It is undisputed, therefore, that the taxpayer would be entitled to the special deduction of section 922 on its United States income tax return, since the taxpayer is a domestic corporation of the United States and satisfies the conditions of clauses (1) and (2) of section 921 for the taxable year at issue. However, the Commissioner of Finance disallowed the Western Hemisphere trade corporation deduction claimed in the taxpayer's Virgin Islands income tax return and determined a deficiency on the ground that the deduction is not allowable in a Virgin Islands return to corporations that are not "domestic" in relation to that taxing authority. On the taxpayer's suit for redetermination, the district court reached the same result as the Commissioner by reading a definition of "domestic" found in the Virgin Islands Code, 33 V.I.C. § 1931(2)(1967), into the Internal Revenue Code's definition of a Western Hemisphere trade corporation. The local statute defines "domestic" when applied to a corporation to mean "created or organized in the Virgin Islands." Relying upon this definition, the district court ruled that ...

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