McGrogan v. Comm’r of Internal Revenue

The Virgin Islands, a U.S. territory, does not share the same sovereign independence as the states; the power to pass rules and regulations governing territories rests with Congress. Congress passed legislation applying the Internal Revenue Code to the Virgin Islands, 48 U.S.C. 1397, “except that the proceeds of such taxes shall be paid into the treasuries of said islands.” Bona fide VI residents are granted a full exemption from paying federal income taxes if they file a territorial tax return and fully pay territorial taxes to the Virgin Islands Bureau of Internal Revenue (VIBIR), I.R.C. 932(c). This exemption is significant because Congress authorized the VI government to create an Economic Development Program granting substantial tax incentives to certain taxpayers. Between 2001 and 2004 Taxpayers claimed bona fide VI residency and eligibility for the tax benefits granted by the Economic Development Program; they filed tax returns with the VIBIR and paid taxes only to the VI government. Taxpayers did not file federal income tax returns. In late 2009-2010, Taxpayers were issued IRS tax prepayment deficiency notices challenging their claims of residency. The district court dismissed Taxpayers’ challenges on grounds that the Tax Court was the only proper forum. The Third Circuit affirmed. View "McGrogan v. Comm'r of Internal Revenue" on Justia Law