Rev. Proc. 81-20

SECTION 1. PURPOSE

The purpose of this revenue procedure is to set forth those procedures to be followed by United States withholding agents and by persons who expect to satisfy their federal income tax obligations by the payment of taxes to the Virgin Islands under section 28(a) of the Revised Organic Act of the Virgin Islands (the Act), 48 U.S.C. section 1642 (Supp. 1979).

SEC. 2. BACKGROUND

.01 Section 28(a) of the Act provides that United States taxpayers inhabitant (permanently residing) in the Virgin Islands shall satisfy their United States income tax obligations by paying taxes on their worldwide income to the Virgin Islands treasury.

.02 The Naval Service Appropriation Act of 1921 (Naval Act), 48 U.S.C. section 1397 (Supp. 1979), created a "mirror" system of taxation by providing "the income-tax laws in force in the United States of America and those which may hereafter be enacted shall be held to be likewise in force in the Virgin Islands of the United States, except that the proceeds of such taxes shall be paid into the treasuries of said Islands." However, the Revised Organic Act of the Virgin Islands is not an "income-tax law in force in the United States" within the meaning of the Naval Act, and there is no provision in the statutes of the United States providing that United States residents satisfy Virgin Islands tax liability on their Virgin Islands source income by paying tax to the United States.

.03 Prior to its revocation, section 1.1441-4(d) of the Income Tax Regulations provided instructions to United States persons, who are inhabitants of the Virgin Islands, and to United States withholding agents, making payments to such persons, that such payments were exempt from the withholding of tax at source under section 1.1441-1.

.04 In Vitco, Inc. v. Government of the Virgin Islands, 560 F.2d 180 (3rd Cir. 1977), cert. denied, 435 U.S. 980 (1978), the United States Court of Appeals for the Third Circuit held that not merely the Code, but also regulations under the Code, must be mirrored. Therefore, the Third Circuit mirrored section 1.1441-4(d) of the regulations to exempt from withholding payments from Virgin Islands sources to United States payees. Section 1.1441-4(d) has been revoked.

SEC. 3. APPLICATION

.01 Pursuant to section 28(a) of the Act, no withholding is required upon any item of income paid to any person who, at the time of payment, reasonably expects to satisfy the United States income tax obligation with respect to that item of income under section 28(a) of the Act. For the purpose of this revenue procedure, the term "person" shall include an individual, partnership, and corporation.

.02 To avoid withholding of tax at source under this revenue procedure, the beneficial owner of the income shall notify the United States withholding agent, as determined in section 1441(a) of the Code, by letter in duplicate that such person expects to satisfy the United States income tax obligation under section 28(a) of the Revised Organic Act of the Virgin Islands with respect to all income to be paid to such person by the withholding agent during the current calendar year. This letter of notification shall constitute authorization to the withholding agent to pay income to such person during that year without deduction of the tax at source.

.03 The duplicate copy of each letter of notification filed with the withholding agent pursuant to subsection 3.02 above shall be forwarded by the withholding agent with a letter of transmittal to the Director of International Operations, Attention CP:0I0:3, Internal Revenue Service, 1325 K Street, N.W., Washington, D.C. 20225.

.04 Taxpayers who have complied with the requirements of section 1.1441-4(d) of the regulations by submitting a leter in duplicate for their taxable year ending on or after June 22, 1981, need not resubmit the letter required in subsection .02 above. The letter submitted under the requirements of section 1.1441-4(d) will be valid for the taxable year for which it was filed.

SEC. 4. INQUIRIES

Inquiries in regard to this revenue procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention: T:C:C:3, 1111 Constitution Ave., N.W., Washington, D.C. 20224.

SEC. 5. EFFECTIVE DATE

The provisions of this revenue procedure are effective for taxable years beginning on or after June 22, 1981.