Paul L. Caron

Saturday, March 7, 2009

IRS Loses Major Virgin Islands Tax Shelter Case

Auffenberg Illinois car dealer James Auffenberg was acquitted on Wednesday by a federal district court jury in the Virgin Islands of all tax fraud charges. United States v. Auffenberg, No. 2007-0047 (D.C. V.I. Mar. 4, 2009) The case involved the much publicized 90% Virgin Islands tax credit.  Here is how the Department of Justice described the tax shelter transaction in announcing Mr. Auffenberg's indictment almost two years ago:

The indictment alleges that Mr. Auffenberg joined a partnership, Kapok Management, L.P., which was created and promoted by Ferguson and Fagan in the U.S. Virgin Islands. As part of the scheme, Kapok Management fraudulently used a Virgin Islands economic development program (EDP), designed to promote the development and diversification of the local economy and establish employment opportunities for island residents. Businesses which participated in the EDP, like Kapok Management, received a “beneficiary certificate” which granted them a 90% tax credit on federal and 100% exemption on local taxes. In order to claim the tax credit, the certificate holder had to earn income “effectively connected” with the conduct of a trade or a business in the Virgin Islands and be a bona fide resident of the U.S. Virgin Islands.

In 2004, the Treasury Department and IRS began a crackdown on these tax shelters (JS-1743; Notice 2004-45) and Congress later that year in the American Jobs Creation Act required that U.S. taxpayers live in the Virgin islands for at least 183 days in a year in order to take advantage of the credit (§ 937(a)(1)). 

For coverage of Mr. Auffenberg's acquittal, see:

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