                        T.C. Memo. 2000-69



                      UNITED STATES TAX COURT



                  FALSTONE, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2206-88.                  Filed March 2, 2000.



     Michael D. Savage, for petitioner.

     Michael H. Salama and Patrick W. Lucas, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   The instant case is before us on cross-

motions for partial summary judgment pursuant to Rule 121(a).1

The issue to be decided is whether, during the years in issue,



1
     Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -

petitioner, a corporation that was an inhabitant of the United

States Virgin Islands (USVI) within the meaning of section 28(a)

of the Revised Organic Act of the Virgin Islands (Revised Organic

Act), 48 U.S.C. sec. 1642 (1994), was required to pay tax to the

United States on its worldwide income.

       Summary judgment may be granted if the pleadings and other

materials demonstrate that no genuine issue exists as to any

material fact and that a decision may be entered as a matter of

law.    See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).    Partial

summary judgment may be granted with regard to a single issue if

the conditions for summary judgment are otherwise satisfied,

notwithstanding that all of the issues in the case are not

concluded.    See Rule 121(b); U.S. Bancorp v. Commissioner, 111

T.C. 231, 236 (1998).    The record shows and the parties do not

dispute that there is no genuine issue as to any material fact

with respect to the issue presented by the parties' motions for

partial summary judgment.    Accordingly, we may render judgment on

the issue as a matter of law.    See Rule 121(b).

       For the purpose of ruling on the parties' motions, we adopt

the following facts set forth in the parties' moving papers.

Petitioner was incorporated in Delaware on January 23, 1984.     At

the time it filed its petition in the instant case, petitioner's

principal place of business was in Carson City, Nevada.    During
                               - 3 -

the years in issue, petitioner was an "inhabitant" of the USVI

within the meaning of section 28(a) of the Revised Organic Act.

     Through the Naval Appropriations Act, ch. 44, 42 Stat. 122

(1921), Congress made the United States income tax laws

applicable to the USVI.   See Danbury, Inc. v. Olive, 820 F.2d

618, 620 (3d Cir. 1987); Condor Intl., Inc. v. Commissioner, 98

T.C. 203, 211 (1992), affd. in part and revd. in part on other

grounds 78 F.3d 1355 (9th Cir. 1996).   The Naval Appropriations

Act created a separate territorial income tax which the USVI

Government would collect by applying the United States income tax

laws with necessary changes where appropriate.   See Bizcap, Inc.

v. Olive, 892 F.2d 1163, 1165 (3d Cir. 1989); Condor Intl., Inc.

v. Commissioner, supra.   A "mirror" system of taxation was

created by substituting "Virgin Islands" for "United States", in

the Internal Revenue Code.   See Bizcap, Inc. v. Olive, supra;

Condor Intl., Inc. v. Commissioner, supra.   To satisfy a USVI tax

obligation, a corporation inhabiting the USVI was required to pay

the same amount of taxes to the USVI Bureau of Internal Revenue

(BIR) as a domestic U.S. corporation would be required to pay to

the Internal Revenue Service (IRS) under the same circumstances.

See Bizcap, Inc. v. Olive, supra; Condor Intl., Inc. v.

Commissioner, supra.

     The Naval Appropriations Act required some corporations to

file two returns.   For example, a domestic U.S. corporation doing
                              - 4 -

business in the USVI would have to file a return with the IRS

declaring its worldwide income, as well as a return with the BIR

declaring its USVI source income.     See Bizcap, Inc. v. Olive,

supra; Condor Intl., Inc. v. Commissioner, supra.

     Section 28(a) of the Revised Organic Act amended the Naval

Appropriations Act regarding dual return requirements and

provided as follows:

     SEC. 28. (a) The proceeds of customs duties, the
     proceeds of the United States income tax, the proceeds
     of any taxes levied by the Congress on the inhabitants
     of the Virgin Islands, * * * shall be covered into the
     treasury of the Virgin Islands, and shall be available
     for expenditure as the Legislature of the Virgin
     Islands may provide: Provided, That the term
     "inhabitants of the Virgin Islands" as used in this
     section shall include all persons whose permanent
     residence is in the Virgin Islands, and such persons
     shall satisfy their income tax obligations under
     applicable taxing statutes of the United States by
     paying their tax on income derived from all sources
     both within and outside the Virgin Islands into the
     treasury of the Virgin Islands: * * * [Emphasis
     added.]

The foregoing provision, which became known as the "inhabitant

rule", allowed taxpayers such as petitioner to satisfy their

obligation with respect to both United States and USVI taxes by

filing one income tax return, reporting all income earned, with

the BIR and by paying to the BIR the appropriate amount of tax.

See Bizcap, Inc. v. Olive, supra; Condor Intl., Inc. v.

Commissioner, supra.

     During 1986, Congress enacted the Tax Reform Act of 1986

(TRA 1986), Pub. L. 99-514, 100 Stat. 2085.    Section 1275(b) of
                              - 5 -

TRA 1986 repealed the "inhabitant rule" and required U.S.

corporations that were inhabitants of the USVI to report and pay

tax on their worldwide income to the IRS.2   Section 1277(c)(2)(A)

of TRA 1986 applied the amendments of section 1275(b) of TRA 1986

not only to any taxable year beginning after the effective date

of TRA 1986 but also to any "pre-1987 open year."   Section

1277(c)(2)(C) of TRA 1986 defines a "pre-1987 open year" as "any

taxable year beginning before January 1, 1987, if on the date of

the enactment of this Act the assessment of a deficiency of

income tax for such taxable year is not barred by any law or rule

of law."

     Respondent determined that 1984 and 1985 are "pre-1987 open

years" within the meaning of section 1277(c)(2)(C) of TRA 1986

and, accordingly, contends that petitioner is required to pay tax

to the United States on its worldwide income during those years.

Petitioner does not dispute respondent's position with regard to



2
     The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1275(b),
100 Stat. 2085, provides:

          SEC. 1275(b) Clarification of Treatment of Virgin
     Islands Inhabitants.-–Subparagraph (B) of section
     7651(5) (relating to the Virgin Islands) is amended to
     read as follows:
               (B) For purposes of this title, section 28(a)
          of the Revised Organic Act of the Virgin Islands
          shall be effective as if such section 28(a) had
          been enacted before the enactment of this title
          and such section 28(a) shall have no effect on the
          amount of income tax liability required to be paid
          by any person to the United States.
                              - 6 -

whether the years in issue are "pre-1987 open years."    Instead,

petitioner argues that sections 1275 and 1277 of TRA 1986 create

a retroactive tax in violation of the United States Constitution.

Additionally, petitioner contends that section 1277(c)(2)

violates the Due Process and Equal Protection Clauses of the

Fifth Amendment to the Constitution because it specifically

exempts from the application of section 1275(b) two corporations

similarly situated to petitioner.3

     Condor Intl., Inc. v. Commissioner, 98 T.C. at 215, involved



3
     The relevant portions of sec. 1277(c)(2) provide:

          (D) Exception.-–In the case of any pre-1987 open
     year, the amendment made by section 1275(b) shall not
     apply to any domestic corporation if–-

               (i) during the fiscal year which ended
          May 31, 1986, such corporation was actively
          engaged directly or through a subsidiary in
          the conduct of a trade or business in the
          Virgin Islands and such trade or business
          consists of business related to marine
          activities, and

               (ii) such corporation was incorporated
          on March 31, 1983, in Delaware.

          (E) Exception for certain transactions.--

               (i) In general.-–In the case of any pre-1987
          open year, the amendment made by section 1275(b)
          shall not apply to any income derived from
          transactions described in clause (ii) by 1 or more
          corporations which were formed in Delaware on or
          about March 6, 1981, and which have owned 1 or
          more office buildings in St. Thomas, United States
          Virgin Islands, for at least 5 years before the
          date of the enactment * * *
                               - 7 -

a corporate taxpayer that was an inhabitant of the USVI.   On

August 14, 1984, the taxpayer filed its Federal income tax return

with the BIR for its taxable year which ended on May 31, 1984.

See id. at 208.   On September 8, 1987, the IRS mailed a notice of

deficiency to the taxpayer.   See id.   In Condor Intl., we held

that the notice of deficiency was timely because the taxpayer's

taxable year that ended on May 31, 1984, was a "pre-1987 open

year" within the meaning of section 1277(c)(2)(C) of TRA 1986.

See id. at 217.   Additionally, we held that sections 1275(b) and

1277(c)(2) of TRA 1986 do not retroactively tax USVI inhabitants

because the amount of tax owed by any taxpayer is not altered.

See id. at 218.   In reaching that conclusion, we held that, prior

to the enactment of TRA 1986, an inhabitant of the USVI would be

required to pay tax on its worldwide income to the BIR.    See id.;

accord Danbury, Inc. v. Olive, 820 F.2d 618, 626 n.4 (3d Cir.

1987).   We also held that there was no violation of the Due

Process Clause of the Fifth Amendment to the Constitution because

the only difference between taxpayers that were specifically

exempted from the application of section 1275(b) of TRA 1986 by

section 1277(c)(2) of TRA 1986 and taxpayers that were not so

exempted was the agency to which each taxpayer was required to

pay tax.   See Condor Intl., Inc. v. Commissioner, supra at 218.

In reaching that conclusion, we relied on the case of Bizcap,

Inc. v. Olive, 892 F.2d at 1167, in which the Court of Appeals
                                 - 8 -

for the Third Circuit held that a corporate taxpayer that was

specifically exempted from the application of section 1275(b) of

TRA 1986 by section 1277(c)(2)(D) of TRA 1986 remained liable to

the BIR for tax on its worldwide income.       The Court of Appeals

for the Ninth Circuit affirmed our decision with respect to the

timeliness of the notice of deficiency.4       See Condor Intl., Inc.

v. Commissioner, 78 F.3d at 1258-1359.       Petitioner has not

advanced any argument that would cause us not to follow our prior

holding in Condor Intl., Inc. v. Commissioner, supra, or that of

the Court of Appeals for the Ninth Circuit to which the instant

case is appealable, absent stipulation to the contrary.

Accordingly we shall grant respondent's motion for partial

summary judgment and deny petitioner's motion for partial summary

judgment.

     We have considered the parties' remaining arguments and find

them irrelevant or unnecessary to reach.

     To reflect the foregoing,


                                         An appropriate order will be

                                 issued.



4
     The Court of Appeals for the Ninth Circuit reversed the
decision of this Court with regard to the imposition of additions
to tax. See Condor Intl., Inc. v. Commissioner, 78 F.3d 1355,
1360 (9th Cir. 1996), affg. in part and revg. in part 98 T.c. 203
(1992). In the instant case, respondent has conceded that
petitioner is not liable for any of the additions to tax set
forth in the notice of deficiency.
