U.S. Virgin Islands residents pay income taxes to the Virgin Islands Bureau of Internal Revenue (VIBIR) rather than the Internal Revenue Service (IRS). The appellants in the recently decided case, Vento v. Director of Virgin Islands Bureau of Internal Revenue, (C.A. 3 April 17, 2013). Richard and Lana Vento filed a joint 2001 income tax return with the VIBIR, as did their three adult daughters. The United States argued that Richard and Lana Vento and their daughters (collectively, "The Ventos") were required to file those returns with the IRS instead. The proper tax jurisdiction depended upon whether they were bona fide residents of the U.S. Virgin Islands as of December 31, 2001.

Richard Vento sold his company, and the Ventos realized $180 million in capital gains for the 2001 tax year. The VIBIR issued Notices of Deficiency and Final Partnership Administrative Adjustments (FPAAs) to the Ventos of over $31 million against the Richard and Lana and roughly $6.3 million against each of the daughters. That same year, the IRS issued similar FPAAs to the Ventos. As a result of the types of taxes levied, the IRS assessed deficiencies and penalties against the Ventos totaled over $9 million more than those assessed by the VIBIR. The Ventos challenged these taxes by the VIBIR’s and IRS—the only issue at trial was whether they were bona fide residents of the U.S. Virgin Islands as of December 31, 2001. The District Court held that they were not, and the Ventos, joined by the VIBIR, appealed.

Richard and Lana Vento were married and filed a joint 2001 tax return. They lived from 1995-2000 in Incline Village, Nevada, but also owned homes in Hawaii, California, and Utah.  Their eldest daughter, Nicole, lived in Incline Village, Nevada with her husband and children; the second child, Gail, lived in Colorado; and their youngest daughter, Renee, lived in San Diego. The Ventos also maintained a family office in Incline Village.

After the sale of the company and a vacation in U.S. Virgin Islands, the Vento family started looking for homes in the U.S. Virgin Islands. In May 2001, they bought a home in Estate Frydendahl. The Ventos began to split their time between the U.S. Virgin Islands and the mainland. They obtained U.S. Virgin Islands driver’s licenses and registered to vote there in the fall of 2001. The Ventos created only a post office box for their business, which they listed as their billing address when they established utilities at their new home.

The law states that a bona fide U.S. Virgin Islands resident who fully reports their income and satisfies their obligations to the VIBIR do not pay taxes to the IRS. This is true even if the bona fide U.S. Virgin Islands resident is also a resident of the mainland United States. 

On appeal, United States Third Circuit Judge Thomas Hardiman wrote that the meaning of residency may vary based on its context. As far as residency in the tax realm, the judge said that it required far less than domicile, and that while an individual can have only one domicile, he can be a resident of multiple places at the same time. The District Court, Judge Hardiman recalled, at the parties’ urging, applied the Sochurek test to this case. The Third Circuit said it would do the same. The judge stated that courts that apply Sochurek are to consider these various factors to determine whether a taxpayer’s claimed residency is bona fide:

  1. Inntent of the taxpayer;
  2. The establishment of their home temporarily in the foreign country for an indefinite period ("Obviously, the U.S. Virgin Islands is not a “foreign country,” but, as the parties and the District Court agreed, Sochurek applies nonetheless");
  3. Participation in the activities of their chosen community on social and cultural levels, identification with the daily lives of the people and, in general, assimilation into the foreign environment;
  4. Physical presence in the foreign country consistent with their employment;
  5. The nature, extent and reasons for temporary absences from his temporary foreign home;
  6. The assumption of economic burdens and payment of taxes to the foreign country;
  7. The status of resident contrasted to that of transient or sojourner;
  8. The treatment accorded their income tax status by their employer;
  9. The marital status and residence of their family;
  10. The nature and duration of their employment; whether their assignment abroad could be promptly accomplished within a definite or specified time;
  11. The good faith in making their trip abroad; whether for purpose of tax evasion.

Sochurek said that “[w]hile all such factors may not be present in every situation, those appropriate should be properly considered and weighed.”

Judge Hardiman said that the 11 Sochurek factors could be grouped into four broad categories: intent, physical presence, relationships, and the taxpayer’s representations. First, in considering the taxpayer’s intent, the taxpayer should intend to remain in a place for an indefinite or at least substantial period of time in order to support a finding of residency in that place. Evidence can be the establishment of a long-term home, a long-term employment assignment, or other evidence indicating an intent to become more than a mere transient. Second, a taxpayer’s sustained physical presence in a place will support a finding of bona fide residency. A taxpayer who is present at a home they have established and maintain year-round will have a stronger claim to bona fide residency than one who is present without such a home.

Third, in examining a taxpayer’s social, family, and professional relationships, a claim of bona fide residency will be supported if they assimilate into the locale by building social and professional ties with the local community. The same is true if their spouse and any dependent family members also live there. Finally, if a taxpayer self-identifies as a resident of a place, by paying taxes there and observing the other economic burdens, civic obligations, and legal formalities of residency, that would support a finding of bona fide residency.

Judge Hardiman applied these criteria to the Ventos and decided the following: the Ventos’ purchase and costly renovation of their Estate Frydendahl home shows that, by the end of 2001, they planned to remain on St. Thomas “at least for a substantial period.” Richard Vento’s establishment of business interests in the U.S. Virgin Islands supported his claim of bona fide residency. At the end of 2001, the Ventos’ social ties to the U.S. Virgin Islands were limited, but the judge explained that community social relationships are not the only type of relationships that factor into the residency determination. Professional, marital, and family relationships matter as well. In those areas, he said, the Ventos had a stronger case. Richard developed professional relationships by having discussions with the University of the Virgin Islands in order to collaborate on developing a physics department. The Ventos spent a significant amount of time with each other on St. Thomas, where they lived together at their home. The Ventos’ professional and family relationships, Judge Hardiman determined, did not undermine their claim of bona fide residency.

The Court of Appeals also said that the Ventos self-identified as residents of the U.S. Virgin Islands at the end of 2001 and observed all the legal formalities of residency. Richard and Lana attempted to pay their 2001 income taxes to the VIBIR. They also obtained U.S. Virgin Islands driver’s licenses and registered to vote there. As such, this weighs in favor of finding bona fide residency. Taken as a whole, the judge wrote, the Sochurek factors indicated that the Ventos were bona fide residents of the U.S. Virgin Islands. Although the District Court erred in holding that Richard and Lana Vento were not bona fide residents of the Territory as of December 31, 2001, the Third Circuit did agree that none of the Vento daughters were bona fide resident at that time.

Applying the Sochurek factors to Nicole, it is clear that she did not intend to become a U.S. Virgin Islands resident by the end of 2001. Nicole did not have a sufficient physical presence in the Territory. Gail was not a bona fide resident of the U.S. Virgin Islands at the end of 2001, as she did not intend to become a resident of the Territory by that time. Gail herself testified that she moved to the U.S. Virgin Islands in 2002. Renee was not a bona fide resident of the U.S. Virgin Islands at the end of 2001, in that she visited only three times that year.

The Third Circuit reversed the District Court’s judgment with respect to Richard and Lana Vento and held that they were bona fide residents of the U.S. Virgin Islands on December 31, 2001, but affirmed the judgment that Nicole Mollison, Gail Vento, and Renee Vento, the Vento daughters, were not bona fide residents of the U.S. Virgin Islands on December 31, 2001. 

If you have specific questions about the VIBIR, this new Third Circuit decision, Vento v. Director of Virgin Islands Bureau of Internal Revenue and how it may affects your company or your tax status contact the attorneys in the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC.  BoltNagi PC  has skilled attorneys with years of experience and success assisting companies in  relocating  to the U.S. Virgin Islands to take advantage of its various tax abatement programs.  Please contact BoltNagi PC today.