Judith Coffey v. Commissioner of IRS

Filing

OPINION FILED - THE COURT: MICHAEL J. MELLOY, LAVENSKI R. SMITH and DUANE BENTON. Duane Benton, Authoring Judge (PUBLISHED) [3855298] [11-1362]

United States Court of Appeals
FOR THE EIGHTH CIRCUIT

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No. 11-1362
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Judith S. Coffey,
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Appellee,
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v.
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Commissioner of Internal Revenue,
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Appeal from the
Appellee,
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United States Tax Court.
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v.
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Government of the United States
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Virgin Islands,
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Appellant.
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Submitted: September 20, 2011
Filed: December 2, 2011
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Before MELLOY, SMITH and BENTON, Circuit Judges.
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BENTON, Circuit Judge.
In 2009, Judith S. Coffey received a notice of deficiency from the Internal
Revenue Service. She contested the assessments, asserting the time bar in 26 U.S.C.
§ 6501(a). Claiming an interest in this issue, the government of the United States
Virgin Islands (USVI) sought to intervene, either as of right under Civil Rule
24(a)(2), or permissively under Civil Rule 24(b)(2). The tax court denied

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intervention. The USVI appeals. Having jurisdiction under 26 U.S.C. § 7482(a)(1),
this court reverses and remands.
Although a U.S. territory, the USVI is a separate taxing entity. In 1922,
Congress authorized USVI taxpayers to pay their income tax to the territory’s Bureau
of Internal Revenue, rather than to the IRS. The IRS retains audit and assessment
powers. The USVI receives the taxes paid and administers a “mirror code” of the
Internal Revenue Code that substitutes “Virgin Islands” for “United States.” 26
U.S.C. §§ 932(c)(2), 7654(a); 48 U.S.C. § 1397. By paying their income tax directly
to the USVI, USVI residents discharge their U.S. tax liability. 26 U.S.C. §§
932(c)(4), 6012.
Congress has authorized a unique economic development program for the
USVI. Under the EDP, USVI residents may exempt from income tax 90 percent of
their “income derived from sources within the Virgin Islands or income effectively
connected with the conduct of a trade or business within the Virgin Islands.” 26
U.S.C. § 934; 29 V.I.C. § 713(b).
Coffey worked in the USVI from 2003 to 2006. She filed tax returns with the
USVI each year, claiming the EDP credit. On September 28, 2009, the IRS issued a
notice of deficiency to Coffey for tax years 2003 and 2004. According to the IRS,
Coffey failed to pay taxes to the IRS for those tax years and improperly claimed the
EDP credit. She disagreed, invoking the three-year statute of limitations. The IRS
relied on its 2006 announcement that the three-year statute of limitations is triggered
only by filing a return with the IRS, not by filing a return with the USVI.1
1

The IRS has since announced that for tax years ending on or after December
31, 2006, returns filed with the USVI by a USVI resident trigger the three-year statute
of limitations. See Treas. Reg. § 1.932-1(c)(2)(ii) (2011), amending and
supplementing Chief Counsel Advice Mem. 200624002, Notice 2007-31, 2007-16
I.R.B. 971 (Apr. 16, 2007). This announcement does not affect Coffey.
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The USVI moved to intervene only on the statute-of-limitations issue, either
as of right or permissively. The USVI contended that an IRS victory on that issue
would devastate its EDP and significantly hamper the USVI’s ability to administer
its tax laws. The tax court denied the USVI’s motion, citing its decision in another
case.2 See Appleton v. Comm’r, 135 T.C. 461 (2010), rev’d, 430 Fed. Appx. 135 (3d
Cir. 2011). The USVI appeals.
This is an issue of first impression for this court. The Third Circuit addressed
this issue, reversing the tax court’s decision in Appleton. Id. See also Cooper v.
Comm’r, No. 11810-10 (T.C.), No. 11-10617 (11th Cir.) (appeal pending); Huff v.
Comm’r, No. 12942-09 (T.C.), No. 11-10608 (11th Cir.) (appeal pending);
McGrogan v. Comm’r, No. 456-10 (T.C.), No. 11-11526 (4th Cir.) (appeal pending);
McHenry v. Comm’r, No. 7568-10 (T.C.) No. 11-1366 (4th Cir.) (appeal pending).
The IRS asserts that the USVI lacks standing to intervene. “Article III standing
is a prerequisite for intervention in a federal lawsuit.” Standard Heating & Air
Conditioning Co. v. City of Minneapolis, 137 F.3d 567, 570 (8th Cir. 1998).
Constitutional standing requires a showing of: (1) an injury in fact, which is an
invasion of a legally protected interest that is concrete, particularized, and either
actual or imminent; (2) causation; and (3) redressability. Curry v. Regents of Univ.
of Minn., 167 F.3d 420, 422 (8th Cir. 1999), citing Mausolf v. Babbitt, 85 F.3d 1295,
1301 (8th Cir. 1996).
The IRS does not dispute the last two elements, but argues that the USVI lacks
injury to a legally protectable interest. The IRS contends the USVI’s interest in the

2

Appleton is nearly identical to this case, except that the taxpayer there
continues to reside in the USVI and the IRS does not contest his residency. In this
case, the IRS contests Coffey’s bona fide USVI residency for tax years 2003 and
2004. At the intervention stage, this distinction is irrelevant.
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EDP is “hypothetical,” because the USVI can administer the EDP regardless of the
tax court’s ruling on the statute of limitations.
To the contrary, Congress gives the USVI unique statutory authority to create,
define the scope of, and effectuate the EDP that is fueled by the income tax
exemption. 26 U.S.C. § 934(b); see also Tax Implementation Agreement, § 1277,
100 Stat. 2085 (1986) (statute requiring the IRS and the USVI’s Bureau of Internal
Revenue to exchange information and coordinate their administration of Sections 932
and 934). Where Congress has been “most deliberate” in giving territorial law the
effect of federal law, “courts may not be insensitive to the request by the official
charged with administering the [territory’s] laws to appear as a party to urge the
construction of the federal statute that he claims is necessary to secure the [territory’s]
interests, and hence the congressional objectives.” Nuesse v. Camp, 385 F.2d 694,
701 (D.C. Cir. 1967) (allowing a state banking commissioner to intervene in a suit by
a state-chartered bank against the U.S. Comptroller, about the interpretation of federal
laws that gave “national legal force” to state law). The USVI has a legally protected
interest in an effectual EDP, which could be concretely and particularly impacted by
the tax court’s interpretation of the statute of limitations. Based on the statutory
authority, the USVI has presented sufficient evidence of an injury in fact.
This court reviews the denial of permissive intervention for abuse of discretion.
Medical Liability Mut. Ins. Co. v. Alan Curtis LLC, 485 F.3d 1006, 1009 (8th Cir.
2007). Reversal of a decision denying permissive intervention is “extremely rare,”
reserved for situations when the district court clearly abused its discretion and failed
to “articulate[] a legitimate reason for denying the Rule 24(b) motion.” South Dakota
ex rel. Barnett v. United States Dep’t of Interior, 317 F.3d 783, 787-88 (8th Cir.
2003). Nevertheless, a district court by definition abuses its discretion when it makes
an error of law. McCabe v. Parker, 608 F.3d 1068, 1082 (8th Cir. 2010), citing
United States v. Gonzalez-Lopez, 403 F.3d 558, 564 (8th Cir. 2005) (internal
quotations omitted).
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Rule 24(b)(2)-(3) provides that:
On timely motion, the court may permit a federal or state governmental
officer or agency to intervene if a party’s claim or defense is based on:
a statute or executive order administered by the officer or agency; or any
regulation, order, requirement, or agreement issued or made under the
statute or executive order. In exercising its discretion, the court must
consider whether the intervention will unduly delay or prejudice the
adjudication of the original parties’ rights.
Rule 24(b) requires a proposed intervenor to (1) file a timely motion, (2) be a federal
or state governmental officer or agency, (3) administer the statute, executive order,
or regulation at issue, and (4) not cause undue delay or prejudice to the original
parties’ rights, if allowed to (permissively) intervene. Appleton, 430 Appx. at 137
(applying Rule 24(b)(2) to tax court proceedings).
This court agrees with the Third Circuit’s analysis in the Appleton case. The
USVI easily satisfies the first two requirements of Rule 24(b)(2) of timely filing and
governmental status; the USVI also meets the third requirement, as it administers the
EDP. Id. The only issue is whether intervention will unduly delay or prejudice the
original parties’ rights.
The tax court here, as in Appleton, concluded that the USVI “has neither
demonstrated that its participation as a party is necessary to advocate for an
unaddressed issue nor shown that its intervention will not delay resolution of this
matter.” Appleton v. Comm’r, 135 T.C. 461, 469 (2010), adopted by Coffey v.
Comm’r, No. 4720-10 (T.C. order of Jan. 12, 2011). The tax court further noted that
the USVI’s proposed participation in the lawsuit “could result in trial complications
as well as delay the resolution of the issue in which movant asserts an interest.” Id.

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As the Third Circuit said, whether the proposed intervenor’s participation is
“necessary to advocate for an unaddressed issue” is not the correct standard.
Appleton, 430 Fed. Appx. at 138. Instead, the standard is whether the intervention
will cause “undue delay” or “prejudice the adjudication of the original parties’
rights.” Fed. R. Civ. P. 24(b)(3). This inquiry is “the principal consideration in
ruling on a Rule 24(b) motion.” South Dakota, 317 F.3d at 787, citing United States
v. Pitney Bowes, Inc., 25 F.3d 66, 73 (2d Cir. 1994); 7C Wright, Miller & Kane,
Federal Practice and Procedure § 1913 at 379 (2011). The tax court erred by
ignoring this principal consideration – whether the USVI’s intervention would cause
undue delay or prejudice.
“Trial complications” would bar the USVI’s intervention only when it causes
undue delay or prejudice. Appleton, 430 Fed. Appx. at 138. The tax court did not
find that any potential delay from the USVI’s intervention would be “undue.” Nor
did the tax court rule that the USVI’s arguments would prejudice Coffey or the IRS.
Accordingly, the tax court abused its discretion by using an incorrect legal standard
to deny permissive intervention.3
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The judgment of the tax court is reversed, and the case remanded.
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Like the Appleton court, this court need not rule on the issue of intervention
as of right.
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