McHenry v. Comm’r. of Internal Revenue, Nos. 11-1239 & 11-1366

Decided: April 16, 2012

The government of the Virgin Islands appealed the Tax Court’s denial of its motion to intervene in a tax deficiency case.  The motion was denied on the basis that intervention would essentially create redundancy and delay resolution of the case.  The Fourth Circuit affirmed the Tax Court’s denial of the Virgin Islands’ motion to intervene.

Emmit McHenry sought to take advantage of substantial tax benefits offered by the Virgin Islands by filing tax returns for 2001, 2002, and 2003 only in the Virgin Islands, rather than with the IRS.  In 2009, the IRS issued a deficiency notice to McHenry stating that he was required to file tax returns with the IRS.  McHenry claimed that the IRS’s efforts to assess deficiencies were barred by a three year statute of limitations in I.R.C. § 6501(a), as the limitations period began when he filed income tax returns in the Virgin Islands.

The Virgin Islands filed a motion to intervene, contending that  the IRS’s construction and application of I.R.C. § 6501(a) reversed the IRS’s earlier interpretation — that filing an income tax return in the Virgin Islands commenced the limitations period.  The IRS’s new position not only threatened the government’s taxing autonomy and fiscal sovereignty, but also impaired the government’s ability to administer the tax laws.  Additionally, a decision against McHenry would discourage entrepreneurs from conducting business in the Virgin Islands.

The Tax Court denied permissive intervention under Rule 24(b)(2), which the Virgin Islands argued was an abuse of discretion, as the Tax Court never seriously considered the question of whether intervention would cause undue delay and inappropriately imposed a requirement that the Virgin Islands had to show its participation as a party was necessary to decide an otherwise unaddressed issue.  The Tax Court rules have no provisions regarding intervention by third parties.  “Borrowing” from the Federal Rules of Civil Procedure, the Tax Court previously concluded that it may permit third party intervention under Rule 24(b)(2) in unique situations where justice so requires.  Specifically, intervention may be granted where the moving party has a stake in the outcome of the case that will not be adequately protected by the current parties and intervention will lead to a more complete resolution of the issues.

Rule 24(b)(2) authorizes permissive intervention by a government office or agency if a party’s claim or defense is based on a statute or regulation administered by the officer or agency.  The Virgin Islands does not claim to administer I.R.C. § 6501(a), but rather claims that its interest in enforcement of the statute in order to protect the Virgin Islands tax structure and Economic Development Program  is sufficient to satisfy the requirement.  Furthermore, no other pertinent provision of the I.R.C. is administered by the Virgin Islands, as the Virgin Islands does not manage, direct, or supervise the application of the provisions of the I.R.C.   The mere fact that the IRS’s interpretation of tax laws impacts the Virgin Islands does not mean that the Virgin Islands administer the tax code.  Accordingly, the Tax Court was within its discretion in denying permissive intervention under Rule 24(b)(2)

The Virgin Islands next argued that the Tax Court abused its discretion in denying its motion to intervene because the Tax Court misconstrued the criteria for permissive intervention in Rule 24(b)(3), providing that the court “must consider whether the intervention will unduly delay or prejudice the adjudication of the original parties’ rights.”  The Virgin Islands focused on the Tax Court’s failure to use the term “undue,” but the Fourth Circuit found that the Tax Court did not have to use particular words in making a discretionary decision under 24(b)(2).  Instead, the assessment is substantive in nature.  The Tax Court found that the Virgin Islands intended to present evidence of the potential injury to its citizens and economy would complicate and delay the trial, thus the Tax Court was within its discretion in denying permissive intervention.

The Tax Court held that the Virgin Islands was not entitled to intervention as a matter of right under Rule 24(a)(2) because the Tax Court has not previously recognized third party intervention as a matter of right.  The court of appeals cannot grant intervention as a matter of right because it has no authority to create rules governing the Tax Court.  Additionally, the Tax Court found that the Virgin Island’s interest in McHenry’s deficiency proceeding was not direct, substantial, and legally cognizable, as, regardless of the outcome of McHenry’s case, the Virgin Islands would retain the right to administer its own Economic Development Program.  Because the Virgin Islands failed to demonstrate that it qualified for intervention as a matter of right, the Tax Court’s decision to deny intervention as a matter of right is affirmed.  The government of the Virgin Islands is not left without recourse, however, as it can still file an amicus brief to express its views on the IRS’s interpretation of the applicable Tax Code provisions.

Full Opinion

-Michelle Theret

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