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The Virgin Islands’ Litigation and Tax law of the United States

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The Virgin Islands’ Litigation and Tax law of the United States

The Virgin Islands’ Litigation and Tax law of the United States

The Virgin Island, in addition to the Islands of Saint Thomas, Saint John, and Saint Croix is among the unique purviews in the United States to exercise tax law and involve in tax litigation.

What is the reason for a unique purview for tax prosecution in Virgin Island? The question of whether the Virgin Islands is a state or a territory being about perplexing issues of taxation among new individuals. Virgin Islands’ Economic Development program which was intended to encourage “economic development” by the Congress of the United States is another unique thing about Virgin Island. The Economic Development program has prompted a downpour of a case between program members, the IRS, and the Virgin Islands Bureau of Internal Revenue.

Upon the acquisition of Virgin Island in 1917 from Denmark by the United States, the income tax regulation of the United States was made applicable by Congress in 1921, resulting in the similarity of the income tax law between the United States and the Virgin Islands. The only difference in income tax law is that residents of Virgin Island pay duty to the Virgin Island but not the United States.

The income tax law that is applicable or which will be constituted in future in the United States of America is or will be applicable in the Virgin Island of United States with the revenue collected paid to the mentioned Islands’ treasuries: On condition, that, despite other requirements of the law, the senate of the Virgin Island is permitted to impose an extra tax of not more than 10 per centum on all the taxable individuals yearly income tax obligation of the Virgin Islands’ government

To be able to affect the Naval Service Appropriation Act,



The courts have legislatively devised the “Mirror Code” wherein an instance of the words “Virgin Islands” one can substitute “United States” under the Internal Revenue Code to bring to affect the Naval Service Appropriation Act. Moreover, the Treasury Regulations, to the degree they might be pertinent under the Internal Revenue Code as it applies in the Virgin Islands, are likewise “Mirrored.” Yet, some requirements of the Internal Revenue Code are not “Mirrored” because these requirements are fully applicable to the Virgin Islands and her residents. Through an explanation, section 932 and 934 of the Internal Revenue Code are “the income duty laws pertinent” to the Virgin Islands since this two usable section defines a native of the Virgin Islands, determine which individual files return with the Virgin Islands, the sum of money indebted to the Virgin Islands and the exact amount, in case of any, the Virgin Islands can decrease the duty liabilities indebted to it.

According to the mirror framework ” any modification to, explanation of, guidelines and tax decree on and court’s explanation of firm requirements of tax of the Internal Revenue Code apply to Virgin Islands duty cases since the specific requirement at issue is not inapplicable or incongruent with a different territory’s income tax.

Congress constituted I.R.C. § 932, concerning the 1986 Tax Reform Act, which clarifies individuals who are rightly residents of the Virgin Islands and those that are not. An individual resident of the United States that receives income from the Virgin Islands but who is not a rightly resident. This kind of person pays duty on the source salary to the Virgin Islands and duty on non-Virgin Islands source salary to the IRS. While a rightly resident of Virgin Islands files return specifically to the BIR and pays duty on all salary, despite its source, to the Virgin Islands. By making the payment to the BIR on all global salary a rightly resident of the Virgin Island is excused of any duty liability to the United States, notwithstanding non-Virgin Islands source salary.

The BIR would make available all information to IRS about the residents of Virgin Islands as a result of the constitution of I.R.C. § 932 by the congress, that provides a report of non-Virgin Islands tax:

A resident of the Virgin Islands getting gross salary from sources, not within Virgin Island is required to provide details of this kind of earnings on his or her file return of Virgin Island. The details constituted in these returns will be put together by the Bureau of Internal Revenue of Virgin Islands and sent to the Internal Revenue Service to loosen up implementation assistance

Paying close attention, the Tax Enforcement Agreement of the United States and the Virgin Islands brought about sharing of data and collaborative assistance about taxes to curb duty evasion between themselves. The United States consented to “routinely provide” to the Virgin Islands with “duplicates of reports of individual, association, corporate, and business review changes that disclose data applicable to the Virgin Islands” and “duplicates of Schedule K-1 and review results, when the organization return is analyzed and it seems that the examination may affect returns of taxable individuals of Virgin Islands. In return, the Virgin Island consented to “routinely provide” the United States with details about taxpayers prone to Virgin Islands duty with sources of earnings not from within the Virgin Islands who file salary duty return with them and claims to be a resident of Virgin Islands.

Economic Development Program of The Virgin Island

The same laws that are applicable in the Virgin Islands have also permitted to reduce the duty liability of some taxable individuals of the Virgin Islands. The policy was put in place since 1921, to encourage Investments in, Industrial development of, the Virgin Islands. This very policy was again championed by congress in 1960 with the constitution of I.R.C. § 934 (Pub. L. No. 86-779 (1960)), which provided the Virgin Island with power to reduce tax indebted to it.

Economic Development was established about fifty years ago by the U.S Congress and the Virgin Islands to attract individuals involved in business to set up new ventures in Virgin Island. To oversee the development program, the Virgin Islands established the Economic Development Commission. The Economic Development Program presents an opportunity for endorsed recipients to get a personal expense credit, as per I.R.C. § 934.

Because of the tax and other motivators offered by the Virgin Islands, the Virgin Island has been encouraged, by the Interior Department of the U.S. together with EDC of the VIRGIN ISLANDS to be a suitable place to set up businesses. Progressions in current media of communications, the web, and upgrades in the Virgin Islands’ resources, have allowed taxable individuals to work remotely from the Virgin Islands. With these enhancements, the Virgin Islands effectively requested people and businesses to move to the Virgin Islands to exploit the congressionally approved reduced tax. As a result of increased participation in the Development Program by the majority of people who have moved to the Virgin Islands, many have become examined by the IRS. Our tax lawyers have always represented customers in allegations involving duty and law and duty litigation against the IRS of Virgin Islands.

Failure of the Department of Treasury to issue Regulations

Since 1921 the Tax Reform Act of 1986, changed the framework through which tax was carried out in the Virgin Islands. Specifically, TRA changed how residents of the U.S and the Virgin Islands were handled. The 1954 Revised Organic Act of the Virgin Islands was treated as though it were sanctioned before the Internal Revenue Code as provided by TRA. The TRA carried on the handling of tax on individuals of the Virgin Islands as required by the ROA. Nonetheless, under I.R.C. § 932, as included by the TRA, a person who is a “rightly resident of the Virgin Islands” at the end of the taxable year and who reports pay from, and pays charge on, their overall earnings to the VIRGIN ISLANDS, is assuaged of the obligation to file and pay duty to the United States together with duty on earnings from U.S. sources and the U.S effectively associated earnings. According to the TRA, to figure out the residents’ tax liability, the United States is handled as involving the Virgin Islands with the intention of getting about duty liability, the Virgin Island as well is handled to involve the United States for intentions of getting about Virgin Islands duty liability.

The TRA brought also about the expansion of the classes of earning entitled to reduction of tax and other incentives sanctioned by the VIRGIN ISLANDS. Before the sanctioning of the TRA, the VIRGIN ISLANDS was mandated to diminish the duty liability on organizations only with relation to non-U.S. earning sources.; also, the VIRGIN ISLANDS was approved to decrease the tax obligation for rightly resident individuals of the Virgin Islands only with relation to his or her Virgin Islands earning source. As revised by the TRA, I.R.C. § 934(b)(1) approves the VIRGIN ISLANDS to diminish the tax on earnings which is (1) Virgin Islands source earning, or (2) earning which is “adequately associated” with the lead of a Virgin Islands exchange or business despite the sources of such earning. The TRA likewise gave in new I.R.C. § 934(b)(2) that the extended expert in I.R.C. § 934(b)(1) isn’t accessible to decrease the duty obligation of U.S. residents or inhabitants who are not rightly residents of Virgin Islands.

The TRA nonetheless did not define a true resident of Virgin Islands, “The Virgin Islands earning source,” or effectively associated Virgin Islands earnings,” neither do the TRA legislative history offer any directives with relation to those terms. The Department of Treasury was required by Congress to proclaim guidelines for deciding residency of Virgin Islands according to I.R.C. § 932 and Virgin Islands source and Virgin Islands viably associated earnings as per I.R.C. § 934. Nonetheless, the Department of Treasury did not.

It is against this background of an absence of administrative guidelines that one is required to view Notice 2004-45, and the resulting sanctioning of the American Jobs Creation Act of the year 2004. Before the sanctioning of I.R.C. § 937, without an administrative guideline of a “rightly resident of Virgin Islands,” and without administrative guidance of “Virgin generated earning,” ” or “earning adequately associated with a Virgin Islands exchange or business,” taxable individuals taking part in the EDC depended on the then-existing guideline of a rightly resident and source of earning by alluding to I.R.C. §§ 871 and 864 and the regulation put down by Treasury. 

Regulations of Treasury are declared as:

A stranger present in the United States who is not a temporary transient or sojourner is an inhabitant of the United States for reasons of the earning tax. Whether he is a transient is dictated by his motives as to the length and nature of his stay. A minor motive, inconclusive as to time, to come back to another nation isn’t adequate to comprise him a transient. If he lives in the United States and has a pure motive, he is a resident. One who goes to the United States for an unequivocal reason which in its inclination might be immediately practiced is transient; however, if his motivation is of such a nature, that a long visit might be important for its achievement, and to that end, the outsider make [sic] his home incidentally in the United States, he turns into a citizen, however, it might be his expectation consistently to come back to his remote home when the reason for which he came has been fulfilled or deserted. A stranger whose living in the U.S. is restricted to a certain time by the immigration law is not a citizen of the U.S in accordance to the meaning portrayed in this context, in the absence of exceeding situations. However, the regulations of Treasury is applied in deciding whether a person is a citizen of the U.S., the same meaning is used to decide whether a person is a citizen of the Virgin Islands under the income duty laws appropriate to the Virgin Islands by activities of the replacement plan of the Mirror Code. Consequently, a person who is in the Virgin Islands ” who is not there temporarily” is a citizen of the Virgin Islands for income duty purposes.

The IRS started questioning U.S. residents who lived in the Virgin Islands and filed tax returns for earnings with BIR in the late year of 2003 or early the year of 2004. This was to establish whether they were rightly residents of Virgin Islands if the taxable individuals had correctly alleged a Development Program duty credit and if the taxable individuals’ earnings were sourced in rightly associated with a Virgin Island exchange or business. IRS’s tool of decision has been doubtable in its fight against members of the program. Notice 2007-19 declares that:

[A]n earning duty return filed with the U.S Virgin Islands a resident of U.S. or citizen alien will be considered to be a U.S. income duty return of that person for the intention of section 6501(a), on condition that the person is covered, individual. The phrase “covered person” means an alien resident or citizen of the U.S. Virgin Islands, and has a minimum of $75,000 of overall total earning for the taxable year.

Notice 2007-19 at § 2. With this recently discovered weapon in the IRS’ armory, the IRS continued with its Virgin Islands venture by examining program members for apparently wearisome timeframes. Although the IRS was ineffective in Appleton and the Government of the United States Virgin Islands v. Commissioner of Internal Revenue, in convincing the United States Court involved with tax charges that its utilization of the legal time limit was right, the Tax Court’s choice was constrained to situations where the IRS surrendered the genuine residency of the citizen. A copy of the Appleton decision can be read here. The danger of the legal time limit issue awaits all other program members.


The Virgin Islands’ Litigation and Tax law of the United States

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