On Appeal from the District Court of the Virgin Islands, Civil No. 86-0260.
Gibbons, Chief Judge, Mansmann and Nygaard, Circuit Judges.
Business Ventures International, Inc. (the taxpayer) appeals from a judgment of the District Court for the Virgin Islands affirming in part deficiency notices issued by the Virgin Islands Bureau of Internal Revenue for the taxpayer's tax years ending November 30, 1982 and November 30, 1983. The Bureau of Internal Revenue cross appeals from the same judgment with respect to certain penalties which it assessed but which the district court disallowed. We will affirm in part and reverse in part.
The taxpayer was incorporated in Delaware on October 5, 1981, and shortly thereafter qualified as a Virgin Islands inhabitant foreign corporation. On November 30, 1981 the taxpayer's shareholders transferred to it a 64 unit apartment building located in North Dakota in exchange for the taxpayer's only issued stock. On December 1, 1981 the taxpayer sold the apartment building by a contract of sale which provided for payments over a five year period. The sale price was $975,000. The taxpayer had a carry-over basis of $234,416, under sections 351 and 358 of the Internal Revenue Code, 26 U.S.C.A. §§ 351-358 (West 1978 & Supp. 1988). Thus the taxpayer had a gain of $740,584.
The taxpayer filed with the Bureau of Internal Revenue income tax returns for the fiscal years ending November 30, 1982 and November 30, 1983. It had established a local business in the Virgin Islands, and on its forms 1120F it listed as income only income whose source was the Virgin Islands. For the year ending November 30, 1982 it disclosed on Schedule M-1 $807,377 as "foreign income" on which it paid no taxes. This sum included the $740,584 gain on the sale of the apartment building. For the year ending November 30, 1983 it listed on Schedule M-1 as "foreign income" the sum of $106,930. Schedule M-1 is a schedule of "Reconciliation of Income Per Books With Income Per Return."
On June 27, 1986 the Bureau of Internal Revenue issued a statutory notice of deficiency with respect to the taxpayer's income tax liability for the two years in issue. The Bureau of Internal Revenue asserted that the taxpayer should have paid tax to the Virgin Islands both on income whose source was there and on income whose source was elsewhere. On July 21, 1986 the taxpayer filed in the District Court for the Virgin Islands a Petition for Redetermination of Income Tax Liability for both years, in which it contended that as a Virgin Islands inhabitant foreign corporation it was not liable to the Virgin Islands for income tax on income unconnected with activities there. The Petition for Redetermination was stayed pending resolution in this court of the appeal in Danbury, Inc. v. Olive, 820 F.2d 618 (3d Cir.) cert. denied, 484 U.S. 964, 108 S. Ct. 453, 98 L. Ed. 2d 393 (1987) (Danbury).
In Danbury this court held that prior to the enactment of section 1275(b) of the Tax Reform Act of 1986, 26 U.S.C.A. § 7651(5)(B) (West 1989), Virgin Islands inhabitant foreign corporations were required to pay to the Virgin Islands income tax both on Virgin Islands source income under the "mirrored" tax code applicable to such income and on outside income under the non-mirrored Internal Revenue Code. Thus Danbury rejected the taxpayer's theory of tax liability. After the Danbury decision the taxpayer filed an amended Petition for Redetermination, claiming: (1) that the district court had no jurisdiction "to hear a petition for redetermination of United States tax liability;" and (2) that the Bureau of Internal Revenue lacked authority "to issue deficiency notices with respect to United States income taxes." At trial the taxpayer contended that the income from the sale of the apartment building should be treated as a long term capital gain; that the income tax should be paid on an installment basis; and that none of the penalties assessed by the Bureau of Internal Revenue were proper. Implicitly rejecting the taxpayer's jurisdictional challenge to its authority and that of the Bureau of Internal Revenue, the district court held: (1) that the income on the sale of the apartment building was not eligible for long term capital gain treatment; (2) that the taxpayer had not elected out of having that gain taxed as an installment sale; (3) that the negligence penalty imposed by the Bureau of Internal Revenue would be disallowed; and (4) that a late filing penalty for the year ending November 30, 1982 would be allowed, but a similar penalty for the year ending November 30, 1983 would be disallowed. This appeal and cross-appeal followed.
The taxpayer contends that Danbury was erroneously decided, but recognizes that a panel of this court may not disregard that precedent. Alternatively the taxpayer contends that the challenges which it makes to the jurisdiction of the district court and to the authority of the Bureau of Internal Revenue over United States Income Tax Liability were not addressed by the Danbury panel, and thus may be considered by this panel. But while the Danbury opinion did not specifically deal with the authority of the Bureau of Internal Revenue to assess taxes on the income of Virgin Islands inhabitant foreign corporations from non-Virgin Islands sources, and did not specifically deal with the jurisdiction of the district court to redetermine deficiencies in such income tax, both questions were necessarily decided. The linguistic niceties on which the taxpayer relies to conduct its argument that the several interrelated statutes preclude assessment of the taxes in issue by the Virgin Islands all are based on the assumption that a tax on non-Virgin Islands income is a United States income tax and not a Virgin Islands income tax. The Danbury court held otherwise. That decision necessarily held that, prior to the Tax Reform Act of 1986, income tax owed by a Virgin Islands inhabitant foreign corporation on its non-Virgin Islands income fell within 48 U.S.C.A. § 1612(a) (1987); and within 33 V.I. Code Ann. tit. 33, § 942 (1967 & Supp. 1989). See Danbury, 820 F.2d at 623, 626.
The Tax Reform Act of 1986, however, changed the law with respect to the liability of Virgin Islands inhabitants for income tax on non-Virgin Islands source income. While the amount of tax owed by a corporation such as the taxpayer was not changed, the place of filing and payment was. Under the Tax Reform Act two returns are filed, one covering Virgin Islands source income with the Bureau of Internal Revenue, and one covering other source income with the Internal Revenue Service. Tax Reform Act of 1986, Pub. L. No. 99-514, § 1257(b), 100 Stat. 2598 (1986), codified at 26 U.S.C.A. § 7651(5)(B) (West. 1988); Danbury, 820 F.2d at 625-26. The amendment applies to "(i) any taxable year beginning after December 31, 1986, and (ii) any pre-1987 open year." Tax Reform Act of 1986, Pub.L.No. 99-514, § 1277(c)(2)(A), reprinted as note after 26 U.S.C.A. § 931 (West 1988). "The term 'pre-1987 open year' means any taxable year beginning before January 1, 1987, if on the date of the enactment of this Act [Oct. 22, 1986] the assessment of a deficiency of income tax for such taxable year is not barred by any law ...