In a victory for the territory’s Economic Development Program, on Wednesday the U.S. Third Circuit Court of Appeals reversed a lower court ruling and affirmed the bona fide residency of a V.I. taxpayer who moved here for Economic Development Commission tax breaks, according to Government House.
The ruling affected a set of cases involving the tax residency of Richard and Lana Vento (See related link below). The Third Circuit ruled Wednesday that “while the Ventos undoubtedly were motivated to live in the Virgin Islands because of its relatively favorable tax system, there is nothing unlawful or deceitful about choosing to reside in a state or territory because of its low taxes. Therefore, the District Court erred when it held that those motivations counseled against the Ventos’ bona fide residency claims.”
Rejecting the arguments of the Internal Revenue Service and the U.S. Department of Justice, the court cited Supreme Court precedent that it is “well settled that ‘[t]he legal rights of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted.” The court distinguished “tax avoidance,” which is lawful, from “tax evasion,” which is not.
The court affirmed the lawful motives of the Ventos’ in moving to the Virgin Islands in order to participate in the territory’s EDC Program and found no evidence of tax evasion in their doing so.
The court held the purpose of the federal law authorizing the EDC Program to give tax breaks was to “assist the [Virgin] Islands in becoming self-supporting …”
In the ruling, the court said: “Our decision will likely carry significant precedential value for other taxpayers, particularly for other taxpayers who moved to the territory prior to 2004.”
That year is when Congress enacted the American Jobs Creation Act, changing the rules for determining Virgin Islands tax residency.
Gov. John deJongh Jr. lauded the decision, saying in a statement it “will have extremely beneficial effects for the territory’s Economic Development Program and entire economy.”
“There were fundamental principles of tax law at issue in this case, which I was and am committed to defend,” deJongh said.” These include principles which are vital to the integrity and future of our EDC Program.”
“The decision by the Third Circuit will affect scores of tax cases where the BIR and the IRS disagree as to whether a taxpayer owes his or her tax liability to the federal government or to the territorial government,” he said.
The legal dispute between the territory and federal government began in 2005 when the V.I. Bureau of Internal Revenue issued a notice of tax deficiency and filed suit in V.I. District Court against St. Thomas residents, Richard and Lana Vento, other family members and some of his businesses for the 2001 tax year, the year in which the Ventos first moved to the territory, according to Government House.
The IRS intervened, claiming Vento and family were not bona fide V.I. residents for that year and asserting any tax deficiencies would be owed to the IRS, not the BIR. The V.I. District Court ruled for the IRS in April 2011 and the V.I. Government filed an appeal to the Third Circuit shortly thereafter.