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E-Alert Case Updates

Tax Court’s Denial of Virgin Islands’ Motion to Intervene Upheld by the Fourth Circuit

Emmit McHenry and Government of the United State Virgin Islands v. Commissioner of Internal Revenue
Appeal No. 11-1239 & No. 11-1366, (United States Court of Appeals for the Fourth Circuit)

by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (

In this recently issued Opinion from the United States Court of Appeals for the Fourth Circuit, the Court upheld the United States Tax Court’s decision denying the Government of the Virgin Islands’ request to intervene in a single individual’s tax deficiency case.

Prior to the year 2000, Congress authorized the Virgin Islands to reduce its income taxes on “income from sources within the Virgin Islands” in order to encourage economic development. See I.R.C. § 934(b)(1). The Virgin Islands adopted an Economic Development Program under this authorization by providing substantial tax benefits. In order to qualify, an individual had to be a bona fide resident of the Virgin Islands and was required to file tax returns with the Virgin Islands Bureau of Internal Revenue.

Appellant Emmit McHenry sought to take advantage of the tax benefits, and in 2001, 2002, and 2003, he filed tax returns with the Virgin Islands Bureau of Internal Revenue. This resulted in paying reduced taxes under the Virgin Islands Tax Code. Mr. McHenry did not file U.S. tax returns with the IRS for those three years. In 2009, the IRS asserted that McHenry’s actions in 2001-2003 were fraudulent and part of a tax avoidance scheme, and issued to him a deficiency notice stating that he owed a total of $841,230 in U.S. taxes and $845,378 in penalties.

A main component of Mr. McHenry’s defense to the deficiency was the statute of limitations provided by the Internal Revenue Code. I.R.C. § 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 filing of tax returns with the Virgin Islands began the three (3) year limitations period, and as such the deficiency action was barred. Conversely, the IRS argued that because McHenry did not file returns with the IRS for the tax years 2001, 2002, and 2003, the statute of limitations never began to run.

The Virgin Islands sought to intervene in the Tax Court action arguing that this IRS position could have a chilling effect on entrepreneurs like McHenry coming to the Virgin Islands to do business under the Economic Development Program. The Virgin Islands asserted that the IRS position on the limitations provision was also a reversal of the IRS’s earlier internal understanding of the provision, under which the IRS considered the filing of a Virgin Islands tax return to commence the running of the limitations period.

The U.S. Tax Court denied the Virgin Islands’ Motion to Intervene, finding that inclusion of the Virgin Islands as a party in the matter could result in trial complications and delay. (citing a prior Tax Court ruling denying intervention, Appleton v. Comm’r, 135 T.C. 461 (2010)).

The Fourth Circuit reviewed the Tax Court’s denial of the motion only for abuse of discretion. The Court noted first that the Tax Court is not bound by the Federal Rules of Civil Procedure, but under Tax Court Rule 1(b), has broad discretion to borrow from those rules. The Virgin Islands argued for permissive intervention under FED. R. CIV. PROC. 24(b)(2).

The Fourth Circuit noted that Rule 24(b)(2) authorizes a court to grant a governmental officer or agency permissive intervention if a party’s claim or defense is based on a statute or regulation “administered by the officer or agency.” The Court then discussed at length that while the Internal Revenue Code provision at issue might very well affect the Virgin Islands, there was simply no question that the Virgin Islands does not “administer” the Internal Revenue Code or its provisions. As such, the Virgin Islands could not meet the requirement for permissive intervention, and the Tax Court had not abused its discretion in so holding.