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If you have clients who are lucky enough to have millions in the bank and a home in the Virgin Islands, you might want to brush up on a recent tax ruling from the Third Circuit Court of Appeals about residency requirements.
Residents of the Virgin Islands pay income taxes to the Virgin Islands Bureau of Internal Revenue (VIBIR) rather than the Internal Revenue Service (IRS). Appellants Richard and Lana Vento (the Ventos) filed a joint 2001 income tax return with the VIBIR. Their three daughters also filed their 2001 income tax returns with the VIBIR. The United States claims that the Ventos and their daughters should have filed those returns with the IRS instead.
The proper tax jurisdiction depends on whether they were bona fide residents of the Virgin Islands as of December 31, 2001. Here, there were multiple answers to that question.
Richard Vento, an entrepeneur, co-founded a technology company called Objective Systems Integrators, Inc. (OSI). When OSI was sold, the Ventos, their daughters, and various Vento-controlled entities realized $180 million in capital gains for the 2001 tax year.
While the Vento family has homes, cars, pets, and artwork scattered throughout a variety of luxurious locations, they celebrated the sale of OSI by taking to the seas and visiting the Virgin Islands.
In May 2001, the Ventos (through a limited liability company they controlled) contracted to buy Estate Frydendahl, a residential property on St. Thomas, for $7.2 million. Estate Frydendahl was sold furnished, and the transaction closed on August 1, 2001. For the Ventos, Estate Frydendahl was a “fixer-upper” in which they would ultimately invest another $20 million.
In addition to purchasing the estate, the Ventos registered to vote in the Virgin Islands and obtained drivers’ licenses.
A $27 million estate, a driver’s license, and voter registration: What else do you need to be a resident of the Virgin Islands? Apparently, it helps to reside at your palatial island getaway. Or at least bring some of your fancy art or pets there. (The appellate court specifically noted that one of the daughters only visited three times, engaged in tourist activities, and never relocated her pets or personal property from the mainland.)
The Third Circuit explains that the meaning of residency “may vary according to context.” In the tax context, residency requires “far less than domicile.” Unlike domicile, residency does not require “an intent to make a fixed and permanent home.” But, while residency requires far fewer contacts than domicile, a bona fide resident still must be “more than a transient or sojourner.” Physical presence alone is not sufficient to establish bona fide residency.
Here, the Third Circuit found that the Ventos’ adult daughters failed to meet the requisite intent requirement for Virgin Islands residency. (They mainly stayed on the mainland, and they didn’t move their stuff to the Virgin Islands.) Richard and Lana Vento, on the other hand, satisfied the requirement by throwing $20 million into property improvements at the estate and establishing business interests in the Virgin Islands.