Section of Taxation Publications
  VOL. 56
NO. 3
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Equality Principle for Virgin Islands Tax Clarified by the Third Circuit: Chase Manhattan Bank v. Governor of the Virgin Islands
Mary Kay Dunning


In Chase Manhattan Bank v. Government of the Virgin Islands, the Court of Appeals for the Third Circuit held that interest on overpayments of income taxes owed by the taxpayer to the Virgin Islands Bureau of Internal Revenue (VIBIR) should accrue at rates applicable under the Internal Revenue Code, rather than at the higher rate set by the Virgin Islands Code. The decision is significant because the court refused to make a distinction between substantive and nonsubstantive (or procedural) provisions of the U.S. income tax law in the context of the mirror code, and the court confirmed the relevance of the mirror theory, which requires that all Virgin Islands tax provisions mirror federal income tax provisions, with rare exceptions. Although the Third Circuit correctly rejected the distinction between substantive and nonsubstantive tax provisions in the U.S. income tax law when applying the mirror theory to the Virgin Islands Code, the court expanded the scope of the equality principle. Under the equality principle as traditionally defined, the tax burden on Virgin Islands taxpayers must be equivalent to what the United States would collect on the same income if the taxpayer resided in the United States. The Third Circuit interpreted this principle as requiring that the amount of interest on overpayments owed by the Virgin Islands government should be equivalent to the amount of interest owed by the U.S. government. The court did not, however, elaborate on why a requirement of equality in tax payment in the Virgin Islands and the mainland United States translated into a requirement of equality in overpayment interest rates in the two jurisdictions.

Part I of this Note explains the history of the Virgin Islands tax laws, their relationship to U.S. income tax laws, and the mirror code. Part II describes the factual basis of the Chase case and analyzes the district court’s and Third Circuit’s opinions. Part III demonstrates how the Third Circuit extended the traditional interpretation of the equality principle and offers a possible explanation for it. Part III also discusses the practical tax-planning implications of the Third Circuit’s holding. Part IV concludes that although the Third Circuit broadened the scope of the equality principle, the court nevertheless provided clear guidance for resolving disputes arising from conflicts between U.S. income tax laws and Virgin Islands income tax laws.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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