By Gina Passarella, From The Legal Intelligencer

Fox Rothschild has withdrawn a request for a temporary restraining order against the U.S. Virgin Islands after the U.S. territory agreed to halt its tax collection efforts against the firm until a dispute over the validity of the taxes is resolved.

The move canceled a hearing on the TRO that had been set for Wednesday and will give the Virgin Islands until Oct. 12 to respond to Fox Rothschild’s allegations that it doesn’t owe the territory nearly $400,000 in taxes on fees the firm earned handling a bankruptcy matter in the islands. The firm has also alleged that the defendants unlawfully disclosed taxpayer information.

Fox Rothschild sued last month the U.S. Virgin Islands as well as its Bureau of Internal Revenue and Does 1-5. According to the complaint in Fox Rothschild v. The United States Virgin Islands, the law firm has argued the territory’s attempts to collect gross receipts tax is a restraint on interstate commerce and a tax assessment with no nexus to the jurisdiction seeking the payments.

Fox Rothschild was approved to represent the Chapter 7 trustee in a bankruptcy case involving telecommunications mogul Jeffrey Prosser. The law firm’s lawyers were admitted on a pro hac vice basis to the U.S. Virgin Islands District Court, which handled the bankruptcy case, and most of the work done on the matter was handled in Fox Rothschild’s Philadelphia and New York offices, the firm said.

And because the islands have no permanent bankruptcy judge and the judge assigned to the case was from the U.S. District Court for the Western District of Pennsylvania, most of the hearings were held in Pennsylvania, according to the complaint. The firm said it estimates less than 7 percent of its work over the four-year representation was done in the Virgin Islands.

Fox Rothschild alleged in the complaint that the BIR was informed that entities opposed to Prosser may owe the Virgin Islands taxes and the BIR instituted an investigation as a result, including an investigation of Fox Rothschild.

According to the complaint, Prosser’s attorney, Norman Abood, sent the firm a letter in September 2014 stating that the firm had owed taxes to the U.S. Virgin Islands and that if the firm didn’t bring it to the attention of the court overseeing the bankruptcy, Abood would. That letter was attached as an exhibit to Fox Rothschild’s complaint.

While the firm was aware of an investigation by the BIR, Fox Rothschild said it was not aware of any specific tax assessment against it. The firm reached out to its contact at the BIR asking about the Abood letter and expressing concerns that someone outside the agency would have the firm’s confidential taxpayer information. A few days later, Fox Rothschild was assessed nearly $400,000 in gross receipts taxes. In a November telephone call, the BIR informed Fox Rothschild that it conducted an investigation into any disclosure of taxpayer information and all BIR employees were cleared of any wrongdoing, according to the complaint.

In December 2014, Fox Rothschild submitted a formal protest of the tax assessment and, as of the filing of the complaint, had not received a response from the BIR, according to the complaint. In January 2015, according to the complaint, a Virgin Islands news website published an article stating Fox Rothschild owed $8 million in taxes, citing bankruptcy and other public documents. Fox Rothschild said it knows of no such documents, according to its court filing.

Fox Rothschild alleged in its complaint that there was not a sufficient nexus between the firm’s work on the bankruptcy matter and the Virgin Islands for the territory to seek taxes against the firm. It also argued that the taxes assessed were done improperly, using the firm’s quarterly reports to the bankruptcy court in the Prosser matter to assess how much fees the firm earned regardless of where that work was done.

Fox Rothschild said a lien against the firm operates as a “cloud” over the title of the firm’s property in the Eastern District of Pennsylvania, where the firm’s suit against the Virgin Islands was filed.

Aside from seeking a declaratory judgment that the tax assessment was improper, Fox Rothschild sought damages for the disclosure of taxpayer information.

“As evidenced by the Abood letter, Abood knew of the existence of a tax assessment in the USVI prior to the BIR’s mailing of the [gross receipts tax] assessments to [Fox Rothschild], and prior to [the firm’s] own knowledge of such assessment,” Fox Rothschild said in the complaint.

In outlining its damages from the alleged improper disclosure, Fox Rothschild alleged the Abood letter had the potential to harm the relationship between the law firm and the trustee, according to the complaint. That relationship was worth several million dollars to the firm, according to the complaint. Fox Rothschild is seeking no more than $100,000 in damages, however, under that count of unauthorized disclosure of tax information.

Hugh J. Hutchison of Leonard Sciolla Hutchison Leonard & Tinari in Philadelphia is representing the USVI. William Stassen of Fox Rothschild is representing his firm in the matter. Neither attorney responded to requests for comment.

For more on this story go to: http://www.thelegalintelligencer.com/id=1202736877543/Fox-Rothschild-Virgin-Islands-Reach-Temporary-Deal-in-Tax-Beef#ixzz3lRlmPygJ