OPINION ON MOTIONS TO DISMISS AND FOR SUMMARY JUDGMENT
This сase is one of six related actions brought by W. James Oelsner, his wife, Carol, and two Oelsner-affiliated companies, WIT Equipment, Inc. (“WIT”) and West Indies Transport, Inc. (“West Indies”), challenging tax assessments issued by the Virgin Islands Bureau of Internal Revenue (“BIR”). The other five matters having been dismissed per stipulation of the parties, only WIT’s petition for rede-termination of its tax deficiency remains for disposition. Before the Court are (a) WIT’s motion to dismiss its petition for lack of subject matter jurisdiction, which would effectively bar collection of the disputed tax liability; (b) the Government of the Virgin Islands’ motion for summary judgment; and (c) WIT’s cross-motion for summary judgment. The Court held oral argument on these motions on June 1, 2001, and herein issues its decision.
I. VIRGIN ISLANDS TAX SYSTEM
Because tax jurisprudence in the U.S. Virgin Islands has several distinctive characteristics, a brief introduction is in order. Congress made the Internal Revenue Code (“I.R.C.”) applicable to the Virgin Islands through the Naval Service Appropriation Act of 1922, which provides:
The income-tax laws in force in the United States of America and those which may hereafter be enacted shall bе 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....
48 U.S.C. § 1397. The effect of section 1397 is to create a “mirror system” of taxation in which Virgin Islands residents discharge their tax Lability by paying income taxes directly to the Treasury of the Virgin Islands. See generally Abramson v. Gov’t of the Virgin Islands,
Like all other U.S. taxpayers, Virgin Islands residents may litigate the amount of their income tax liability in two ways. First, the taxpayer may pay the deficiency and then bring a “refund” action in federal district court for the amount of the claimed overpayment. I.R.C. § 7422; 33 V.I.C. § 1692. Second, the taxpayer may bring a pre-payment action to redetermine the amount of the asserted deficiency. I.R.C. § 6213; 33 V.I.C. § 943. Under the federal code, the U.S. Tax Court has jurisdiction over redetermination actions. 1.R.C. § 6213. Petitions for redetermination of Virgin Islands tax deficiencies, however, must be brought in the District Court of the Virgin Islands. 33 V.I.C. § 943(a); see also Dudley v. Comm’r,
II. BACKGROUND
A. Criminal Case and Subsequent Tax Litigation
This tax litigation springs from information gleaned during a 1996 criminal proceeding against James Oelsner, West Indies, and WIT. Oelsner and the two companies were convicted and sentenced in this Court on sixteen counts of visa fraud, environmental crimes, conspiracy,
During the criminal trial, the United States adduced evidence that West Indies had employed illegal immigrants as dockworkers, allowing a significant reduction in expenses for wages and wage taxes. Id. at 304. At sentencing, Oelsner representеd that he had limited assets with which to satisfy a monetary judgment. Relying on a report by the Price Waterhouse accounting firm (“Price Waterhouse report”) which concluded that Oelsner in fact controlled several corporations-including WIT and West Indies-with significant assets (see Prendergast Suppl. Decl. Ex. Q), the Court ordered all three defendants to pay substantial fines and restitution, id. at 315. On the basis of the Price Waterhouse report and the evidence of tax avoidance, the BIR initiated audits of the Oelsners, West Indies, and WIT.
In letters dated December 21, 1995, the BIR notified the Oelsners, West Indies, and WIT that it would make immediate “jeopardy assessments,” pursuant to I.R.C. sections 6861 and 6862, to recover amounts owed by each taxpayer. A jeopardy assessment may be collected without awaiting the outcome of any challenge brought by the taxpayer in tax court. I.R.C. § 6861.
B. BIR’s Explanation of WIT Deficiency
The BIR determined that WIT owed taxes in the amount of $788,054-and a total of $1,464,466, inclusive of penalties and interest-for its fiscal years 1989 through 1992, as set forth in thе table below.
Year Tax Penalty Interest Total
FY1989 $330,379.80 $82,594.95 $242,791.80 $655,766.65
FY1990 359,390.70 89,847.68 199,173.46 648,411.84
FY1991 82,784.70 20,696.18 33,061.02 136,541.90
FY1992 15,498.60 3,874.65 4,372.71 23,745.96
(Prendergast Decl. Exs. D at 1 (notice of jeopardy assessment), E at 1 (notice of deficiency).)
The record of BIR’s dealings with WIT admits of three potential grounds upon which the Bureau originally might have relied. The first is I.R.C. section 3402, which requires employers to deduct and withhold taxes from thе wages paid to all employees. I.R.C. § 3402(a)(1). The second possibility, I.R.C. section 1442, reflects the view now pressed by the Government. A third ground, similar to the second, is I.R.C. section 1441, which requires withholding of income, including wages, paid to nonresident aliens. I.R.C. § 1441.
The notice of deficiency that WIT received well demonstrates the opacity of the Government’s original position. In the first paragraph, the word “income” has been crossed out and the word “withholding” inserted, so that the letter opens as follows: “This letter is to notify you-as required by law-that we have determined your withholding tax liability as shown above.” (Prendergast Decl. Ex. D. at 1 (emphasis added).) At no point does the notice distinguish between employment withholding and income withholding. The notice does cite I.R.C. section 3402, the general wage withholding statute, as the basis for the tax assessment. Unfortunately, any clarity afforded by this citation is negated by the thirty-percent tax rate applied in both the deficiency notice and the earlier notice of jeopardy assessment.
Thirty percent is, however, the rate applied under the foreign payments provisions, and tax returns filed by the Government on behalf of WIT indeed suggest that the Bureau intended to rely on either section 1441 or 1442.
A December 19, 1995, memorandum written by Agent Hodge, who investigated WIT, again fails to explicitly identify the basis for WIT’s tax liability:
The taxpayers showed me records and information pertaining to withholding taxes because that was the focus of the examination.... No information was shown for WIT Equipment Company, Inc. Mr. Oelsner said that the WIT Equipment Company, Inc. was a Pa-nanmanian [sic] Company plus the employees were from Panama and no withholding was necessary. On the WIT Equipment Company, Inc., I asked about the costs of Goods sold voyage expense. Mr. Oelsner answer [sic] was that Wit [sic] Equipment Company paid ninety five percent (95%) of income to the Panamanian Company that takes care of its own barge expenses such as labor.
For the WIT Equipment Company, Inc. the withholding was calculated for the entire cost of goods sold (the voyage expense) at thirty percent (30%) rate.
(Prendergast Decl. Ex. B.) While the memorandum does not distinguish between employment and income withholding, Agent Hodge testified at his deposition that the BIR audited WIT because it did not deduct any salaries or wages on its corporate tax return, and that he considered the voyage expenses to be “mainly for wages.” (Oelsner Aff. Ex. 13 at 23, 53-54.) Hodge’s focus on wages and application of the thirty-percent rate suggest reliance on section 1441.
In contrast to the ambiguity of earlier documents, two BIR letters sent to WIT in early 1996 clearly identify employment withholding as the basis for the company’s liability. One letter, dated February 29 and offered in explanation of the BIR’s calculations, refers explicitly to section 1441: “WIT Equipment — The examiner used the figures given as voyager’s expenses ... as the base figure for salaries. Voyager expenses multiplied by 30% (IRC § 1441) was [sic] used to arrive at the withholding amount due to the Bureau .... ” (Prendergast Decl. Ex. F.) A letter dated April 2, 1996, denying West Indies and WIT’s administrative appeals, states: “The jeopardy assessment was reasonable under the circumstances. The principal figure in both corporations, James Oelsner, was convicted for employing illegal aliens. The Bureau assessed withholding taxes against these corporations that employed workers in the Virgin Islands.” (Id. Ex. H.) Notably, however,
The first references to I.R.C. section 1442 are found in two requests for information sent by the Bureau to WIT in 1997. In a letter dated July 21, 1997, the BIR requested, along with any documents related to employment of foreign workers by West Indies and WIT, the following discovery:
Any documents that demonstrate that Antilles Marine Services Co., Inc. is subject to taxation by the United States or by the U.S. Virgin Islands, or that otherwise demonstrate that the payments made by WIT Equipment Company to Antilles Marine Services Co., Inc. were not subject to withholding under Title 26 U.S.C. § 1442, as provided in the regulations found at 26 C.F.R. § 1.1441-1 et seq.
(Prendergast Deck Ex. K.) Identical language is found in interrogatories the Government filed on November 24, 1997. (Prendergast Decl. Ex. M.) As discussed infra, Antilles Marine Services Company, Inc. (“AMSCO”), was the actual recipient of the voyage-expense payments.
C. WIT’s Explanation of Voyage Expenses
Throughout this litigation, WIT has contended that the voyage expenses were not wages paid to nonresident aliens, but freight revenues paid to AMSCO, the owner of vessels for which WIT acted as thе chartering agent. In 1988, WIT and AM-SCO, a Panamanian corporation, entered into an agreement whereby WIT would contract with third parties to charter AM-SCO vessels for shipping, towing, and salvage operations in the U.S. Virgin Islands. (Oelsner Aff. ¶ 6.) By its own terms, the purpose of the agreement was to allow AMSCO vessels to be used in the Virgin Islands without requiring AMSCO itself to do business in the United States. (Pren-dergast Aff. Ex. 0.) Under the agreement, all operating expenses, including crew wages, were to be paid by AMSCO or the customers. (Id.) Customers would pay freight charges to WIT, which would retain five percent of the revenue in exchange for its services. WIT would forward the remaining ninety-five percent of the revenue to AMSCO. (Id.) The voyage-expense deductions, WIT maintains, reflect freight revenues paid to AMSCO from 1989 through 1992.
Although the I.R.C. provides a number of exemptions from the obligation under section 1442 to withhold tax on payments to foreign corporations, WIT apparently made no effort, prior to briefing and argument on the instant motions, to demonstrate that it qualified for an exemption.
D. Government’s Current Position
Whatever the Government’s original position, the BIR currently agrees with WIT’s explanation of the voyage expenses and contends that the payments are subject to the requirements of section 1442. While affirming that WIT owes a deficiency in income withholding taxes, however, the BIR now concedes that the notice also contained mistakes in the calculation of the deficiency. The notice implicitly applied a thirty-percent withholding rate to arrive at a deficiency of $788,054, exclusive of statutory penalties and interest. Although thirty percent is the withholding rate applicable to U.S. source income under section 1442, payments of Virgin Islands source income to foreign corporations are subject to a withholding rate of only ten percent. 33 V.I.C. § 542; see also I.R.C. § 934 (authorizing departures from I.R.C. tax rates in the case of Virgin Islands income). Additionally, the Bureau asserts that it should have calculated the deficiency on a calendar-year basis, since WIT was required to prepare and file a withholding tax return, Form 1042, on a calendar-year basis. Treas. Reg. §§ 1.1461-l(b), 1.1461 — 2(b). Recalculating the deficiency at a ten percent rate and for calendar years, the Bureau arrives at a total of $235,153-again exclusive оf penalties and interest-as set forth in the table below:
Year Tax
1989 $112,544.22
1990 96,746.46
1991 21,987.78
1992 3,874.68
(Mem. Supp. Resp’t’s Mot. Summ. J. at 25.)
III. PETITIONER’S MOTION TO DISMISS
Petitioner’s motion to dismiss presents two main arguments. First, Petitioner contends that this Court, as the Virgin Islands analog of the Tax Court, lacks jurisdiction because the notice of deficiency invokes I.R.C. section 3402, a wage-withholding statute. Second, Petitioner argues that even if the notice confers jurisdiction, the matter nonetheless should be dismissed because Respondent is estopped from presenting any theory other than wage withholding as the basis for the deficiency.
As the Tax Court, this Court has only the limited jurisdiction provided for in I.R.C. section 7442. This jurisdiction consists of taxes imposed by subtitle A (income taxes), subtitle B (estate and gift taxes), and chapters 41 through 45 of the I.R.C. (certain excise taxes), all of which are subject to the notice of deficiency requirements. I.R.C. §§ 6212, 6213; 33 V.I.C. §§ 942, 943; see also Medeiros v. Comm’r,
When the IRS-or, in the case of the Virgin Islands, the BIR-determines that a taxpayer has not paid all of the income tax due, the agency sends the taxpayer a notice of deficiency by certified or registered mail. I.R.C. § 6212; 33 V.I.C. § 942. Once the notice has been mailed, the taxpayer has ninety days to file a petition for redetermination of the deficiency. I.R.C. § 6213; 33 V.I.C. § 943. The notice of deficiency is the taxpayer’s “ticket to the Tax Court” and is a prerequisite for Tax Court jurisdiction. Robinson v. United States,
These procedural benefits also accrue to those taxpayers, such as WIT, that dispute the Tax Court’s jurisdiction. Petitioning for redetermination and subsequently moving to dismiss for lack of subject matter jurisdiction is a means of seeking a determination that the notice is invalid and thus that the deficiency may not be collected. Cf, e.g., Roots v. Comm’r, No. 14438-98,
As a number of decisions have noted, the I.R.C. does not specify the form that notices of deficiency must take or what information they must contain. See, e.g. Geiselman v. United States,
In cases involving errors or inconsistencies in the deficiency notice, the outcome has likewise hinged on whether the notice accomplished its limited purpose of apprising the taxpayer of the year and amount of the deficiency. For example, a notice may be invalid if it is misaddressed, but only if the taxpayer did not actually receive the notice. Compare, e.g., Council v. Burke,
On the basis of the above discussion, it is apparent that the WIT notice of deficiency would have been valid had it contained no statutory reference whatsoever. The notice accomplished its purpose by stating a claimed deficiency of $1.46 million for Petitioner’s fiscal years 1989 through 1992. Nor does the inclusion of a gratuitous, erroneous reference to I.R.C. section 3402 invalidate the notice, since the
Because the notice’s reference to section 3402 was merely an error, and because that error did not compromise the effectiveness of the notice in any relevant way, the Court finds that it has jurisdiction over the WIT deficiency.
B. Estoppel
It is clear that of the three statutes relied upon at various times by the BIR, only section 1442, which requires withholding on payments of income to foreign corporations, is a potential basis for the claimed deficiency. Section 3402 is inapplicable since the “voyage expenses” WIT paid to AMSCO were non-wage income; section 1441 has no bearing because the payments were made to a company, not an individual nonresident alien. WIT argues that the BIR should be estopped from basing the deficiency on section 1442 because the Bureau did not indicate that it would rely on that statute until well after WIT had filed its petition for redetermination. Operation of estoppel, in turn, would require dismissal, since the Bureau would
Since the question was first addressed in the 1930s, courts generally have refused to bar the Government from supporting a deficiency with a particular theory, even if that theory was not includеd in the notice of deficiency and may not have been introduced until late in the proceedings. In Helvering v. Gowran,
The ultimate question before the [Circuit Court of Appeals] was whether ... the Board had erred in affirming the Commissioner’s determination that the additional taxes were due. If the Commissioner was right in his determination, the Board properly affirmed it, even if the reasons which he had assigned were wrong. And, likewise, if the Commissioner’s determination was right, the Board’s affirmance of it should have been sustained by the Court of Appeals, even if the Board gave a wrong reason for its action. By this rule the government was entitled to urge in the Court of Appeals that on the undisputed facts the Board’s decision was correct because of the [new] theory.
Id.; see also Hormel v. Helvering,
To be sure, courts have recognized that allowing the Government to present new reasons for a deficiency may prejudice the taxpayer, and have suggested that under certain circumstances they would bar introduction of those new theories. The fullest exposition of this concern is found in Commissioner v. Transport Manufacturing and Equipment Co.,
If a violation of a particular Internal Revenue Code section, Treasury regulation, or theory based on sections or regulations is involved, the Commissioner should notify the taxpayer of that section, regulation or theory. The failure to advise the taxpayer of such information is extremely prejudicial. Deficiency assessments are usually presumptively correct, and the taxpayer has the burden to prove them wrong. The taxpayer works at an extreme disadvantage in trying to invalidate deficiency assessments if he does not specifically know why the Commissioner is challenging the taxpayer. If the notice of deficiency does not state the reason for the deficiency, the Commissioner should then inform the taxpayer of the Code sections and theories in his answer....
Id. at 735 (footnotes and citations omitted) (emphasis added). The court went on to
Petitioner has rather disingenuously argued that “the Government should not at this late date be permitted to raise Code Section 1442, an entirely new basis for the issuance of the deficiency notice.” (Mem. Supp. Pet’r’s Mot. Dismiss & Cross-Mot. Summ. J. at 21.) It is true that the BIR failed to raise section 1442 in either the deficiency notice or its answer to WIT’s petition for redetermination. (Prendergast Decl. Ex. D; Oelsner Aff. Ex. 12.) But WIT received discovery requests from the Bureau in July and November 1997 that clearly identified section 1442 as a potential basis for withholding tax liability. (Prendergast Decl. Exs. K, M.) These requests, propounded more than three years before briefing on the instant motions began, certainly fulfill the requirement that WIT be apprised of all issues before a decision on the merits. Nor can Petitioner credibly argue that it was surprised or disadvantaged by the Government’s reliance on section 1442 after taking full advantage of the opportunity to address this theory in its motion briefs. The Court therefore concludes that the BIR is free to present section 1442 as the basis for WIT’s tax deficiency.
IV. MOTIONS FOR SUMMARY JUDGMENT
Both parties have moved for summary judgment with respect to the Government’s claim that WIT’s voyage expenses are subject to withholding as payments of income to a foreign corporation. The crux of the dispute is whether those payments are exempt from taxation as income derived from international shipping.
The I.R.C. imposes a thirty-percent tax on income received by foreign corporations from sources within the United States. I.R.C. § 881. Section 1442 of the I.R.C. requires U.S. payors of such income to deduct and withhold that amount of tax. As noted supra, in the case of Virgin Islands source income, the withholding rate is limited to ten percent. 33 V.I.C. § 542. Section 1442 contains a number of exceptions to this withholding requirement, none of which are relevant here. Exceptions are also contained in other sections of the tax code, including I.R.C. section 883.
Petitioner does not appear to dispute that the withholding requirement of section 1442 is facially applicable to the voyage-expense payments. WIT contends, however, that the payments are exempted from income under section 883, and therefore that there was no income to withhold under section 1442. The parties disagree not only regarding the sufficiency of the evidence regarding the exemption but also with respect to which side bears the burden of proof.
A. Burden of Proof
The District Court of the Virgin Islands has not adopted Tax Court Rule 121, which establishes the Tax Court’s summary judgment standard. However, that standard is virtually identical to that contained in Federal Rule of Civil Procedure 56, which provides that summary judgment may be granted only when materials of record “show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Serbin v. Bora Corp.,
Tax Court Rule 142, which has been adopted by this Court, see L. Civ. R. 71A.1, provides that the burden of proof at trial generally is on the petitioner. T.C.R. 142(a). The determination of a deficiency is afforded a presumption of correctness, Sullivan v. United States,
A new theory that is presented to sustain a deficiency is treated as a new matter when it either alters the original deficiency or requires the presentation of different evidence. A new theory which merely clarifies or develops the original determination is not a new matter in respect of which respondent bears the burden of proof.
Shea v. Comm’r,
The Court agrees with Petitioner that the BIR’s section 1442 theory constitutes a “new matter” with respect to which Respondent must bear the burden of proof. Although the erroneous citation of I.R.C. section 3402 in the deficiency notice does not operate as a jurisdictional bar, the error is not without consequence. Unlike the jurisdictional questions, the "“new matter” analysis does not consider whether the taxpayer was sufficiently apprised of the deficiency or surprised or disadvantaged by the new theory. If the new theory requires the presentation of different evidence, that is sufficient to shift the burden. WIT’s defense under section 3402 would have required proof that the company did not pay wages to nonresident aliens. WIT’s defense under section 1442 requires entirely different evidence-viz., that AM-SCO did not receive income from a Virgin Islands source, or that the income meets the requirements for an exemption, such as the international shipping exemption of section 883. The BIR mischaracterizes the test when it argues that the notice “was legally sufficient to give fair warning of what was in issue” and that the correct theory was “patently obvious from the context of the notice.” (Resp’t’s Reply Mem. Supp. Summ. J. at 6.) Because the Government’s current theоry differs in evidentia-ry terms from the basis cited, albeit erroneously, in the notice, the Government must bear the burden of proof at trial. The effect of this finding at the summary judgment stage is that, in opposing WIT’s motion, the BIR must establish a question of fact on every element of its case-including the unavailability of the section 883 exemption. See Celotex,
B. Availability of Exemption
Petitioner’s reliance on the section 883 shipping exemption places at issue the following factual determinations: (a) whether more than fifty percent of the value of AMSCO, a Panamanian corporation, is owned by residents of Panama; (b) whether the payments of income to AMSCO were derived from the international operation of ships; and (c) whether Panama grants an equivalent exemption to U.S.
Petitioner has relied solely upon James Oelsner’s affidavit to establish that AM-SCO is owned by Panamanian friends of Oelsner’s, the Janson family. (Oelsner Aff. ¶ 7.) The BIR has presented almost no contrary evidence, merely asserting in its briefs that Oelsner’s statements concerning AMSCO’s ownership are not to be believed. It being very much in Oelsner’s self-interest to attest to foreign ownership of AMSCO, the Bureau argues that Oelsner’s uncorroborated affidavit is insufficient to entitle WIT to summary judgment. Case law in the Third Circuit is not entirely clear on this issue. On the one hand, the Circuit held in Demkowicz v. Commissioner,
The Court is hesitant to engage, at the summary judgment stage, in the sua sponte credibility analysis that Demkowicz seems to allow. Fortunately, a review of the record eliminates the need for such an analysis, at least regarding the ownership question. Although the Government has not provided specific evidence on the ownership of AMSCO, it has placed in the record evidence casting doubt on Oelsner’s assertions concerning ownership of any the companies with which he is affiliated. The Price Waterhouse report, prepared in connection with the criminal proceeding against Oelsner, contains findings that Oelsner was the controlling individual in a number of corporations of which he had denied ownership. (Pren-dergast Suppl. Decl. Ex. Q.) Among the findings is that Oelsner used another Panamanian company, Oceanic and Finance Corporation, to hide his ownership of U.S. corporations with millions of dollars in assets. (Id. at 4-6.) Although only indirectly relevant, this evidence is sufficient to create a question of fact concerning the actual ownership of AMSCO, including whether the company is owned by residents of Panama. Accordingly, Petitioner’s motion for summary judgment must be denied. Of course, the BIR has by no means been able to rule out that AMSCO is Panamaniаn-owned; the Bureau’s motion for summary judgment must therefore be denied as well.
The remaining issue with respect to the section 883 exemption is whether AMSCO derived its income from the international operation of ships. Oelsner’s affidavit represents at one point that “AMSCO is the time charterer of “various shipping vessels” but then states that [a]ll operating expenses and costs associated with the charter vessels, including hiring and paying crew members, were incurred and paid directly by the bareboat charterer or AM-SCO.” (Oelsner Aff. ¶¶ 5, 6 (emphasis added).) Whether AMSCO’s vessels were time- or bareboat-chartered, or whether the business involved some combination of the two, may well be important.
Historically, the IRS has drawn a distinction between the types of charters for purposes of section 883. Rev. Rul. 74-170, 1974-1 C.B.1975. Under a time or voyage
[t]he decision whether the owner of a bareboat chartered vessel ... is entitled to the exclusion must be made on a case by ease basis and will depend upon such factors as the duration of the charter ..., the frequency with which the taxpayer engages in such leasing activities, and other circumstances tending to demonstrate whether such activities are incidental to the shipping business of the taxpayer or are a separate investment or business of the taxpayer.
Id. A more recent private letter ruling by the IRS, however, makes no mentiоn of this distinction and explicitly states that bareboat charters fall within the section 883 exemption. Priv. Ltr. Rul. 9447024,
V. CONCLUSION
For the reasons stated herein, the Court denies Petitioner’s motion to dismiss for lack of subject matter jurisdiction, and also denies Respondent and Petitioner’s respective motions for summary judgment. An appropriate order follows.
ORDER ON MOTIONS TO DISMISS AND FOR SUMMARY JUDGMENT
THIS MATTER having come before the Court on Petitioner’s motion to dismiss for lack of subject matter jurisdiction, Respondent’s motion for summary judgment, and Petitioner’s cross-motion for summary judgment; and
The Court having heard oral argument in this matter on June 1, 2001; and
The Court having reviewed the record and the submissions of the parties; and
For the reasons set forth in the Court’s Opinion of this date;
IT IS this 29th day of September, 2001, HEREBY
IT IS FURTHER ORDERED that Respondent’s motion for summary judgment is DENIED; and
IT IS FURTHER ORDERED that Petitioner’s motion for summary judgment is DENIED; and
The parties are further directed to include in their trial briefs a discussion of (a) the appropriate interpretation of the phrase “[gjross income derived ... from the international operation of a ship or ships” in section 883, and (b) the application of that interpretation to WIT and AMSCO’s chartering business.
No costs.
Notes
. The mirror system not only creates two separate taxatiоn authorities, but also implicitly recognizes Virgin Islands residents’ liability to both. The federal tax liability is discharged only to the extent that the resident properly reports all income and pays his or her Virgin Islands tax obligation. See 26 U.S.C. § 932(c)(4) (excluding from federal gross income all income reported on the taxpayer’s Virgin Islands return); Gov’t of Virgin Islands v. O’Brien,
. The district court's jurisdiction over both refund and redetermination actions reflects the understanding that "the provisions of the internal revenue laws of the United States relating to tax administration and enforcement, especially those relating to the Tax Court, [are] without application to the Virgin Islands.” Dudley,
. By Oelsner’s own description, WIT was engaged in the business of acting on behalf of foreign investors as the nominee owner of U.S. vessels. In some cases, the company would merely take and hold title to the vessel until the U.S. Maritime Administration approved the transfer of the vessel to a foreign corporation. (Oelsner Aff. ¶ 2.)
. Section 6861 makes the following provision for the recovery of income, estate, gift, and certain excise taxes:
If the [Treasury] Secretary believes that the assessment or collection of a deficiency ... will be jeopardized by delay, he shall ... immediately assess such deficiency (together with all interest, additional amounts, and additions to the tax provided for by law), and notice and demand shall be made by the Secretary for the payment thereof.
I.R.C. § 6861. Section 6862 makes similar provision for the collection of any other taxes authorized under the federal code. I.R.C. § 6862. These sections of the I.R.C. are mirrored in V.I.C. title 33, sections 1361 and 1362.
.The Virgin Islаnds’ notice of deficiency requirement mirrors I.R.C. section 6212.
. The government originally claimed that the Oelsners owed an additional $711,327 for the 1993 tax year. In their jeopardy assessment and deficiency challenges, which were later consolidated, the Oelsners claimed that the BIR had erred in calculating their income and in disallowing a deduction for a bad debt.
. The Government claimed in the notice of jeopardy assessment and notice of deficiency that West Indies owed $200,731 in wage withholding taxes for fiscal years 1989 through 1993.
.The tax years in question cover a period running from October 1, 1998, to September 30, 1992. (Oelsner Aff. Exs. 3, 4, 6.) The notice of jeopardy assessment and notice of deficiency both identify the tax periods with numbers such as ‘'8912'' and "9012,” suggesting that the periods end in December-in other words, that the periods are calendar years. It is clear, however, that the deficiencies are based on WIT's fiscal year, since, as discussed infra, the deficiency amounts correspond with the "cost of goods sold” line items on WIT’s fiscal-year tax returns. (Id.)
. As used throughout this Opinion, "employment withholding” refers to wages taxed at their source; "income withholding” refers to collection of taxes on non-wage income.
. Section 3402 and the foreign payments provisions impose burdens that are mutually exclusive rather than cumulative. Withholding from the nonresident alien’s U.S. wages is not required under sections 1441 and 1442 if those wages are subject to withholding under section 3402. Treas. Reg. § 1.1441 — 4(b)(1).
. So, too, does section 1442, but it is difficult to imagine payment of a salary or wages to a corporation. By their express terms, section 1442 applies only to foreign corporations and section 1441 only to nonresident individuals. I.R.C. §§ 1441, 1442.
.The thirty-percent tax rate is not explicit in the two notices, which only state the amount of the deficiency ($788,054). (Prendergast Decl. Exs. D, E.) The rate can be inferred, however, from WIT's $2,626,846 in voyage-expense deductions, which the parties understood to be the amount that triggered the alleged tax liability. That the BIR applied a thirty-percent rate to the voyage expenses is confirmed in other correspondence. (See, e.g., Prendergast Decl. Ex. B (Hodge inter-agency memorandum of Dec. 19, 1995); id. Ex. E (BIR letter of Feb. 29, 1996, to Petitioner’s counsel).)
.As discussed infra, thirty-percent is the incorrect rate even if section 1441 or section 1442 is the basis for the tax liability. The V.I.C. provides an exception to the generally applicable rate, taxing Virgin Islands source income at ten percent. 33 V.I.C. §§ 541, 542.
. The U.S. payor, referred to in the regulations as the "withholding agent,” must also submit, for each foreign recipient of U.S. source income, an informational return documenting the amounts paid. Treas. Reg. § 1.1461 — 1(c).
. Although WIT has consistently argued that tire voyage expenses were revenues paid to AMSCO, one paragraph of its petition inexplicably refers to wages:
The facts upon which the Taxpayer relies are[ ] (a) the wages paid by Taxpayer were paid to nonresident aliens in its capacity as agent for a foreign corporation; [and] (b) the nonresident aliens were seamen serving aboard vessels under foreign flag not engaged in a trade or business in the United States or the U.S. Virgin Islands.
(Petition for Review of Income Tax Deficiencies ¶ 6.)
. The Bureau made this calculation as follows. It first applied a ten percent tax ratе to the voyage expenses listed in WIT’s tax returns. Then it divided each fiscal year’s deficiency by twelve to arrive at a monthly amount. Next, it added three months from fiscal year 1990 to nine months from fiscal year 1989 to come up with an amount for calendar year 1989, three months from fiscal year 1991 and nine months from fiscal year 1990 to calculate an amount for calendar year 1990, and so on. Calendar year 1992's amount reflects only nine month’s worth of withholding, because the last fiscal year in the notice of deficiency ended Sept. 30, 1992. CM.)
. Petitioner has also contended that the Court should look to the West Indies deficiency notice as a basis for dismissing this action. The BIR having conceded that the Court lacks jurisdiction in the West Indies case, so the argument runs, the Bureau cannot now argue that the Court has jurisdiction over the virtually identical WIT notice. It is true that both notices cite I.R.C. section 3402 and vary only with respect to the tax year and claimed amount of the deficiency. Were the positions taken on the basis of these two notices manifestly at odds with one another, judicial estop-, pel might well bar the BIR from asserting its current position. See, e.g., Reynolds v. Comm’r,
. The "surprised or disadvantaged” standard is wholly consistent with the cases Petitioner has cited for the proposition that issues not pleaded will not be considered. See, e.g., Markwardt v. Comm’r,
"This Court has held on numerous occasions that it will not consider issues which have not been pleaded. Whether an issue has been properly raised depends upon whether the opposing party has been given fair notice of the matter in controversy. We must determine whether the Commissioner was surprised and put at a disadvantage when the ... issue was raised.”
Id. at 997,
. Notwithstanding the finding that the Government bears the burden of proof at trial, the Court is cognizant that WIT’s failure to cooperate with discovery requests should be taken into consideration. Cf, e.g., Chilcutt v. United States,