Perkins v. Director of the Virgin Islands Bureau of Internal Revenue, No. 3:25-cv-00002 (D.V.I. Sept. 18, 2026)

Territorial tax administration frequently presents complex jurisdictional and statutory coordination questions under the “mirror code” framework. In Perkins v. Director of the Virgin Islands Bureau of Internal Revenue, the District Court of the Virgin Islands directly addressed whether the Virgin Islands Bureau of Internal Revenue (VIBIR) possesses authority to assess the 3.8% Net Investment Income Tax (NIIT) under Internal Revenue Code (I.R.C.) § 1411 against a bona fide resident of the U.S. Virgin Islands (USVI).

Resolving a motion for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c), the court held that the VIBIR’s assessment was ultra vires and void as a matter of law. This decision re-anchors territorial tax enforcement to fundamental principles of federal territorial power, administrative law, and binding Treasury regulations. For CPAs and Enrolled Agents advising high-net-worth individuals and entity structures in USVI or other mirror-code territories (such as Guam and the Commonwealth of the Northern Mariana Islands), Perkins serves as a crucial authority on the non-applicability of Chapter 2A un-mirrored taxes and the absolute binding nature of Treasury Department legislative regulations on territorial tax authorities.

Background and Factual Context

The petitioner, William O. Perkins, III (“Perkins”), was a bona fide resident of the U.S. Virgin Islands during the tax year in question. In October 2024, the VIBIR issued a Notice of Deficiency to Perkins for the 2020 tax year, asserting a total tax deficiency exceeding $3.97 million. Included in this proposed adjustment was a line-item assessment of $673,032.00 specifically attributable to the Net Investment Income Tax under I.R.C. § 1411 (Form 1040, line 8c adjustment).

In response to the Notice of Deficiency, Perkins petitioned the District Court of the Virgin Islands for a redetermination of the deficiency. Original and exclusive jurisdiction over Virgin Islands territorial income tax matters is vested in the District Court of the Virgin Islands pursuant to Section 22 of the Revised Organic Act of 1954, codified at 48 U.S.C. § 1612(a). As established in Dudley v. Commissioner, 258 F.2d 182 (3d Cir. 1958), the U.S. Tax Court lacks jurisdiction over territorial tax liabilities, leaving the federal district court in the territory as the sole forum for deficiency redeterminations.

Rather than awaiting full trial on all contested audit issues, Perkins moved for partial judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c), raising a pure question of law: whether the VIBIR has legal authority under the mirror tax system to assess the NIIT against a bona fide resident of the USVI.

Taxpayer Request for Relief and Procedural Standard

Perkins sought an order invalidating the $673,032.00 NIIT adjustment set forth in the Notice of Deficiency. His motion rested on the explicit command of Treasury Regulation 26 C.F.R. § 1.1411-2(a)(2)(vi)(A), which provides that bona fide residents of U.S. territories are exempt from the NIIT unless required to file a federal income tax return with the United States under I.R.C. §§ 931, 932, 933, or 935. Because a bona fide USVI resident who fully reports income and pays tax to the VIBIR satisfies all federal tax obligations under I.R.C. § 932(c)(4) and is not required to file a U.S. federal Form 1040, Perkins contended that the NIIT does not apply to him.

Under Federal Rule of Civil Procedure 12(c), a court may grant judgment on the pleadings only when the moving party clearly demonstrates that no material issue of fact remains to be resolved and that the party is entitled to judgment as a matter of law. Citing Third Circuit precedent, the court noted: “Under Rule 12(c), judgment will not be granted unless the movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law. In reviewing the grant of a Rule 12(c) motion, we must view the facts presented in the pleadings and the inferences to be drawn therefrom in the light most favorable to the nonmoving party.”

Because the material facts—Perkins’ status as a bona fide USVI resident and the VIBIR’s line-item assessment of NIIT—were uncontested in the pleadings, the motion presented solely a legal determination.

Judicial Analysis of Constitutional Authority and the Mirror System

The court began its legal analysis by establishing the constitutional source of territorial taxation. Under Article IV, Section 3, Clause 2 of the United States Constitution (the Territorial Clause), Congress exercises plenary legislative authority over federal territories. The court emphasized that because the U.S. Virgin Islands is “not a sovereign state but . . . a territory,” it possesses no inherent power to tax as an attribute of sovereignty. Consequently, as held in H.D. Hettinger & Co. v. Municipality of St. Thomas & St. John, 187 F.2d 774, 776 (3d Cir. 1951), any local taxing authority “must come as a grant from Congress.”

Congress established the Virgin Islands tax architecture via the Naval Service Appropriations Act of 1921, codified at 48 U.S.C. § 1397. This statute created the “mirror code” system, under which the income tax laws of the United States are applied in the USVI by substituting “Virgin Islands” for “United States” where appropriate to translate federal tax provisions to local territorial administration.

Furthermore, under the Revised Organic Act of 1954, 48 U.S.C. § 1574, local legislative power extends only to “rightful subjects of legislation not inconsistent with the laws of the United States made applicable to the Virgin Islands.” While the Virgin Islands Legislature possesses specific congressionally delegated powers—such as the authority to grant tax reductions on local source income under I.R.C. § 934(b)(1) (e.g., the Economic Development Program), levy a 10% income tax surcharge under 48 U.S.C. § 1397, or enact an independent income tax system to replace the mirror code under Section 1271 of the Tax Reform Act of 1986 (a power the USVI has never exercised)—it has no power to expand the scope of federal mirror taxes or create un-mirrored federal liabilities unilaterally.

Statutory Purpose and the Non-Applicability of Chapter 2A Taxes

The court examined the statutory origin and structure of the Net Investment Income Tax. Enacted as part of the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152) to supplement the Patient Protection and Affordable Care Act (ACA) (Pub. L. No. 111-148), the NIIT is codified in Chapter 2A of Subtitle A of the Internal Revenue Code (I.R.C. § 1411). The tax imposes a 3.8% levy on net investment income (such as interest, dividends, capital gains, rents, and royalties) exceeding specified threshold amounts.

Crucially, the court highlighted that the NIIT was enacted specifically to fund ACA healthcare programs—programs that Congress explicitly excluded from applying in U.S. territories. Under I.R.C. § 5000A(f)(4), territorial residents are exempt from individual mandate requirements, and Department of Health and Human Services (HHS) administrative guidance has consistently confirmed that key ACA market reforms do not apply in the territories. Framing the fundamental incongruity of the VIBIR’s assessment, the court posed and answered two central questions: “Are bona fide Virgin Islands residents required to pay a tax meant to fund a program that does not exist in the Virgin Islands? This is undoubtedly a critical question for Perkins—a taxpayer facing a demand from the Virgin Islands government exceeding $670,000.00. The answer to that question is an unequivocal ‘no.’ But the Court believes that an even more fundamental issue is at stake: In administering the mirror tax system, is the government of the Virgin Islands obliged to follow the law as set forth in Treasury Department regulations? The answer to that question is an unequivocal ‘yes.’”

Treasury Regulations as Binding Legislative Rules

Although the text of I.R.C. § 1411 itself is silent on its application to territorial residents, Congress specifically empowered the Secretary of the Treasury under I.R.C. § 7805(a) and the Tax Reform Act of 1986 to specify which provisions of the Internal Revenue Code apply or do not apply for territorial tax liability purposes. As reflected in the Senate Report accompanying the 1986 Act, Congress granted Treasury express authority to specify “the extent to which provisions in the Internal Revenue Code shall not apply for purposes of determining tax liability to the Virgin Islands” (S. Rep. No. 99-313, at 483 (1986)).

Exercising this delegated statutory authority, the Treasury Department issued proposed regulations in 2012 (77 Fed. Reg. 72,612, 72,617) and ultimately promulgated final Treasury Regulation 26 C.F.R. § 1.1411-2(a)(2)(vi)(A). The regulation states explicitly: “An individual who is a bona fide resident of a United States territory is subject to the tax imposed by section 1411(a)(1) only if the individual is required to file an income tax return with the United States upon application of section 931, 932, 933, or 935 and the regulations thereunder.”

The court rejected the VIBIR’s argument that Treasury regulations are merely “interpretative” soft law that a territorial authority may disregard. Citing Supreme Court doctrine in Chrysler Corp. v. Brown, 441 U.S. 281, 302–03 (1979), the court emphasized that substantive regulations issued pursuant to statutory delegation carry the full force and effect of law: “The legislative power of the United States is vested in the Congress, and the exercise of quasi-legislative authority by governmental departments and agencies must be rooted in a grant of such power by the Congress and subject to limitations which that body imposes. Legislative, or substantive, regulations are issued by an agency pursuant to statutory authority . . . and have the force and effect of law.”

Furthermore, as the Third Circuit held in Vitco, Inc. v. Government of the Virgin Islands, 560 F.2d 180, 181 (3d Cir. 1977), in a mirror code jurisdiction, “not only must statutory language be transposed but so must authorized implementing regulations as well.” Consequently, Treasury Regulations govern territorial tax administration with the same binding authority as federal statutory text.

Rejection of Agency Deference Arguments and Application of the Accardi Doctrine

In defending its assessment, the VIBIR argued that under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), its own long-standing administrative practice and tax season press releases claiming NIIT authority were entitled to judicial deference or persuasive weight.

The court dismissed this contention as fundamentally flawed. Under Kisor v. Wilkie, 588 U.S. 558, 575–76 (2019), judicial deference to agency positions is relevant only where an underlying regulation contains genuine ambiguity: “If uncertainty does not exist, there is no plausible reason for deference. The regulation then just means what it means—and the court must give it effect, as the court would any law . . . [and] if there is only one reasonable construction of a regulation—then a court has no business deferring to any other reading, no matter how much the agency insists it would make more sense.”

Finding 26 C.F.R. § 1.1411-2(a)(2)(vi)(A) clear and unambiguous, the court held that no deference was owed to the local tax agency’s contradictory reading.

More severely, the court concluded that the VIBIR had acted ultra vires. Invoking the Accardi doctrine (United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)), which holds that an administrative agency is bound by its governing regulations, the court underscored that the VIBIR lacks independent rulemaking power to create tax liabilities contrary to Treasury regulations: “In this instance, because the VIBIR lacks the legal authority to write its own tax regulations, it is bound by the duly promulgated legislative regulations of the United States Treasury. These regulations are not a menu at an all-you-can-eat buffet, from which the VIBIR can pick and choose which provisions to enforce and which to ignore. Without a statutory grant of authority from the Virgin Islands Legislature and in direct violation of clear, binding Treasury Regulations, the VIBIR’s assessment of the NIIT against Perkins is ultra vires and void as a matter of law.”

Addressing the VIBIR’s defense that it had consistently collected the NIIT for years, the court reaffirmed a foundational principle of administrative law: “The VIBIR cannot acquire lawful authority to do something merely by doing it unlawfully for a long time.”

Application of the Law to the Facts and Final Conclusions

Applying these legal determinations to the pleadings in Perkins, the court arrived at unambiguous conclusions:

Under 26 U.S.C. § 932(c)(4), a bona fide resident of the U.S. Virgin Islands who reports all income and satisfies their territorial income tax obligation to the VIBIR incurs no federal income tax return filing requirement with the United States IRS.
Under 26 C.F.R. § 1.1411-2(a)(2)(vi)(A), because Perkins was a bona fide resident of the USVI with no U.S. Form 1040 filing obligation under Section 932, he was legally exempt from the Net Investment Income Tax.
The VIBIR lacks legislative authority to mirror Chapter 2A taxes independently or override binding federal Treasury regulations.
Accordingly, the court granted Perkins’ motion for partial judgment on the pleadings under Rule 12(c) and held the $673,032.00 NIIT adjustment in the Notice of Deficiency to be ultra vires, null, and void as a matter of law.

For tax practitioners representing clients in USVI or other mirror-code jurisdictions, Perkins offers clear technical guidance: territorial tax administrators remain strictly bound by Treasury regulations. Audits or notices of deficiency attempting to assess non-mirrored federal Chapter 2A taxes against bona fide territorial residents should be vigorously challenged on statutory and regulatory grounds.

Prepared with assistance from Gemini Notebook.