Vento v. Director of Virgin Islands Bureau of Internal Revenue , 715 F.3d 455 ( 2013 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 11-2318, 11-2319, 11-2320, 11-2321, 11-2322,
11-2603, 11-2618, 11-2619, 11-2620, 11-2621, 11-2622, 11-
2623,
11-2624, 11-2625, 12-1416 and 12-1417
___________
GAIL VENTO,
Appellant in 11-2318
RICHARD VENTO,
Appellant in 11-2319
RENEE VENTO,
Appellant in 11-2320
NICOLE MOLLISON,
Appellant in 11-2321
LANA VENTO,
Appellant in 11-2322
VI DERIVATIVES LLC BY VIFX LLC ITS TAX
MATTERS PARTNER
BY RICHARD G. VENTO ITS TAX MATTER PARTNER,
Appellant in 12-1416
VIFX BY RICHARD G. VENTO ITS TAX MATTER
PARTNER,
Appellant in 12-1417
v.
DIRECTOR OF VIRGIN ISLANDS BUREAU OF
INTERNAL REVENUE
Appellant in
11-2603 and
11-2618
through 11-2625
UNITED STATES OF AMERICA,
Intervenor-Defendant-Appellee
(D.C. V.I. No. 3-06-cv-00003, 04, 05, 06,
07, 08, 09, 10, 12, 13)
__________
On Appeal from the District Court
of the Virgin Islands
(D.C. No. 06-cv-0006)
District Judge: Honorable Juan R. Sanchez
___________
Argued December 5, 2012
Before: SMITH, HARDIMAN and ROTH, Circuit Judges.
(Filed: April 17, 2013)
2
Robert L. Byer, Esq.
Susan G. Schwochau, Esq.
Duane Morris
600 Grant Street
Suite 5010
Pittsburgh, PA 15219
Nathan Z. Dershowitz, Esq. [ARGUED]
Victoria B. Eiger, Esq.
Dershowitz, Eiger & Adelson
220 Fifth Avenue
Suite 300
New York, NY 10001
Joseph M. Erwin, Esq.
Suite 700
100 Crescent Court
Dallas, TX 75201
Robert M. Palumbos, Esq.
Duane Morris
30 South 17th Street
United Plaza
Philadelphia, PA 19103
Attorneys for Appellants Gail Vento, Richard Vento,
Renee Vento, Nicole Mollison and Lana Vento
Jennifer M. Rubin, Esq. [ARGUED]
Kenneth L. Greene, Esq.
3
United States Department of Justice
Tax Division
P.O. Box 227
Ben Franklin Station
Washington, DC 20044-0000
Attorneys for Appellee United States of America
Tiffany V. Monrose, Esq.
Office of Attorney General of Virgin Islands
Department of Justice
34-38 Kronprindsens Gade, GERS Complex, 2nd Floor
St. Thomas, VI 00802
Gene C. Schaerr, Esq. [ARGUED]
Winston & Strawn
1700 K Street, N.W.
Washington, DC 20006-0000
Attorneys for Appellee Director of Virgin Islands
Bureau of Internal Revenue
____________
OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge.
These consolidated appeals are of great importance to
the tax regimes of the United States and the U.S. Virgin
Islands. Residents of the Virgin Islands pay income taxes to
the Virgin Islands Bureau of Internal Revenue (VIBIR) rather
4
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 (collectively,
Taxpayers) should have filed those returns with the IRS
instead. The proper tax jurisdiction depends on whether the
Taxpayers were bona fide residents of the Virgin Islands as of
December 31, 2001.
I
A successful entrepreneur, Richard Vento 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. Not surprisingly, this
boon caused the Ventos to consult a financial professional to
advise them regarding their capital gains.
Whatever advice the Ventos received and however
they acted upon it, the Taxpayers have become embroiled in
numerous tax disputes in various courts.1 The dispute at issue
1
See, e.g., Mollison v. United States, 568 F.3d 1073(9th Cir. 2009); Mollison v. United States, 481 F.3d 119 (2d
Cir. 2007); Richard Vento v. Comm’r, No. 18741-08 (Tax Ct.
Sept. 18, 2012) (stipulated decision); Lana Vento v. Comm’r,
No. 18742-08 (Tax Ct. Sept. 18, 2012) (stipulated decision);
DTLV, LLC v. Comm’r, No. 742-09 (Tax Ct. filed Jan. 8,
2009); DTDV, LLC v. Comm’r, No. 741-09 (Tax Ct. filed Jan.
8, 2009); Gail Vento v. Comm’r, No. 23527-08 (Tax Ct. filed
Sept. 24, 2008); Renee Vento v. Comm’r, 23540-08 (Tax Ct.
filed Sept. 24, 2008); Mollison v. Comm’r, No. 23600-08
5
in the consolidated appeals now before us began in 2005,
when the VIBIR issued Notices of Deficiency and Final
Partnership Administrative Adjustments (FPAAs) to the
Taxpayers and partnerships they controlled, assessing a
deficiency and penalties of over $31 million against the
Ventos and approximately $6.3 million against each of their
three daughters. The VIBIR also concluded that two Vento-
owned partnerships, VI Derivatives, LLC and VIFX, LLC,2
were shams and disregarded them for tax purposes.
That same year, the IRS issued FPAAs to the
Taxpayers that were nearly identical to those issued by the
VIBIR. Significantly, however, the IRS issued FPAAs to two
other Vento-controlled partnerships—DTDV, LLC and
(Tax Ct. filed Sept. 24, 2008); Richard Vento v. Comm’r, No.
18740-08 (Tax Ct. filed July 31, 2008); Lana Vento v.
Comm’r, No. 18739-08 (Tax Ct. filed July 31, 2008); Gail
Vento v. Comm’r, No. 993-06 (Tax Ct. filed Jan. 12, 2006);
Renee Vento v. Comm’r, No. 992-06 (Tax Ct. filed Jan. 12,
2006); Lana Vento v. Comm’r, No. 991-06 (Tax Ct. filed Jan.
12, 2006); Richard Vento v. Comm’r, No. 990-06 (Tax Ct.
filed Jan. 12, 2006). Several of these cases remain inactive
pending our decision in this case.
2
Unless they elect to be treated as corporations,
limited liability companies are treated as partnerships for tax
purposes. See 26 U.S.C. §§ 702, 761(a); Historic Boardwalk
Hall, LLC v. Comm’r, 694 F.3d 425, 429 n.1 (3d Cir. 2012).
For the sake of simplicity, we will refer to the Vento LLCs
subject to FPAAs as partnerships.
6
DTLV, LLC—that were unchallenged by the VIBIR.3
Consequently, the IRS assessed deficiencies and penalties
against the Taxpayers that totaled over $9 million more than
those assessed by the VIBIR.
The Taxpayers challenged the VIBIR‘s and IRS‘s
Notices of Deficiency and FPAAs in several separate
proceedings in the District Court of the Virgin Islands. The
United States moved to intervene in the cases between the
Taxpayers and the VIBIR, arguing that the Taxpayers should
have filed and paid their 2001 taxes to the IRS instead of the
VIBIR because they were not bona fide residents of the
Virgin Islands.4 Following the intervention of the United
States, the cases were consolidated in the District Court,
which had subject matter jurisdiction under 48 U.S.C.
§ 1612(a).
In June 2010, the District Court conducted a bench
trial. The sole issue at trial was whether the Taxpayers were
bona fide residents of the Virgin Islands as of December 31,
2001. The District Court held that they were not, and the
Taxpayers, joined by the VIBIR, appealed. We have
3
These two FPAAs are the subject of litigation in the
U.S. Tax Court that has remained dormant since August
2012. See DTLV, LLC v. Comm’r, No. 742-09 (Tax Ct. filed
Jan. 8, 2009); DTDV, LLC v. Comm’r, No. 741-09 (Tax Ct.
filed Jan. 8, 2009).
4
Except where otherwise indicated, ―Virgin Islands‖
refers only to the United States Virgin Islands.
7
appellate jurisdiction over the consolidated appeals under 28
U.S.C § 1291.5
II
The parties largely agree on the facts and the
governing law. Their arguments revolve around a few
disputed facts and their competing applications of the law to
the facts. Our review of the facts adopts those found by the
District Court, except where we indicate otherwise.
A
Richard and Lana Vento are married and filed a joint
2001 tax return. From 1995 through 2000, the Ventos lived
in Incline Village, Nevada, on the north shore of Lake Tahoe.
That home was fully furnished and contained more than
$500,000 worth of artwork. In 2000 and 2001, the Ventos
also owned two homes in Hawaii, two homes on the south
shore of Lake Tahoe in California, and a condominium in
Utah. The Ventos kept approximately twenty automobiles in
Nevada and California.
The Ventos have three daughters, all of whom were
adults in 2001. In early 2001, the Ventos‘ eldest daughter,
Nicole Mollison, lived in a separate home in Incline Village
5
The VIBIR attempted to appeal the final order filed
in the litigation between VI Derivatives, LLC and the United
States, No. 3:06-cv-00012. Although the VIBIR was not a
party to that case, VI Derivatives, LLC also appealed the final
order, and its appeal is the basis of our jurisdiction under 28
U.S.C. § 1291.
8
with her husband and three children. The Ventos‘ second
child, Gail, lived in Boulder, Colorado, while their youngest
daughter, Renee, lived in San Diego, California. The Ventos
also maintained a family office in Incline Village.
After the sale of OSI, the Ventos and their daughters
took a family vacation in March 2001 during which they
chartered a yacht and visited approximately ten of the British
and U.S. Virgin Islands. Prior to this trip, no member of the
Vento family had ever been to the Virgin Islands or
considered moving there.
Soon after cruising the islands, the Ventos began
searching for residential property in the Virgin Islands. Their
daughters were not involved in the search. 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—which
included a five-bedroom main house and several outlying
buildings, including three two-bedroom cottages with
kitchens—was sold furnished, and the transaction closed on
August 1, 2001. At the time of purchase, the sellers were
living in some of the outlying buildings, but the main house
was vacant.
Once the Ventos had Estate Frydendahl under contract,
they hired professional home inspector Adrian Bishop to
inspect the property. Bishop‘s report concluded that Estate
Frydendahl was a ―magnificent house and property,‖ and was
―substantially built, but . . . suffering from deferred
maintenance.‖ Bishop summarized his findings:
There are no major structural deficiencies on
the property. There are some places where
9
deficiencies exist, and all the structures suffer
from deferred maintenance to varying degrees.
The electrical system has many deficiencies, the
plumbing system is quite sophisticated but
suffering from 46 (or so) years of existence, and
the roofs are in various states of repair.
Based on Bishop‘s report, the Ventos‘ attorney concluded that
there were ―$50,000 to $64,000 worth of items which . . .
should be addressed immediately upon closing.‖ Most of that
sum was attributable to repairs to the roofs, gutters, and
electrical system. As a result of Bishop‘s report, the purchase
price of Estate Frydendahl was reduced to $6.75 million.
In addition to the repairs recommended by Bishop, the
Ventos desired other significant improvements to Estate
Frydendahl. At trial, Richard testified that, although his wife
wanted to keep ―the rock walls and the lignum vitae floor,‖
they ―had to redo all the rest of it‖ including the ―roof, . . . air
conditioning, electricity, plumbing. Everything.‖ The Ventos
ultimately spent more than $20 million over and above the
original purchase price improving Estate Frydendahl.
In November 2001, Richard retained a general
contractor, RR Caribbean, Inc., to make improvements.
However, their agreement did not specify any particular work
to be done. Rather, it merely created ―a baseline contractual
relationship.‖ The November agreement had an initial term
of two years and would renew annually unless either party
cancelled it in writing. RR Caribbean performed ―some
minor construction work‖ in 2001, but major work did not
begin until 2002.
10
The Ventos hoped that renovations to Estate
Frydendahl could be completed in time for them to move in
by Christmas 2001. Progress was slow, however, and the
Ventos grew frustrated. Consequently, in the late fall of
2001, Lana Vento brought in Dave Thomas, a construction
manager whom she had previously hired to work in Hawaii,
to supervise the project. In December 2001, Thomas
travelled to the Virgin Islands and concluded that the main
house at Estate Frydendahl was ―50 percent livable, where
you could live there. But the normal amenities did not work
properly or consistently, including water, electricity.‖ In
particular, Thomas testified that, although the main house
―was livable, to the point where you had electricity, lights,
stove,‖ the entrance gate did not work, the house was very
warm because the ceiling fans and air conditioning did not
work, the dock was dilapidated and very dangerous, there was
no source of potable water because the water purification
system did not work, some of the toilets did not work, and the
power supply was inadequate. Thomas also testified that the
three outlying cottages were ―pretty much, flat out‖ unlivable.
Thomas began working on improving Estate Frydendahl in
January 2002. He stayed there until ―Christmas of 2003,‖ at
which point the Ventos ―had their whole family and friends‖
there and ―had things up and running.‖ Nevertheless, work
on Estate Frydendahl continued for six more years.
In August 2001, the Ventos began planning a
Christmas party at Estate Frydendahl. Lana furnished certain
rooms and ordered a pool table. She also hired a designer to
decorate both the Estate and her Incline Village house for
Christmas. For the Christmas party itself, the Ventos invited
seventeen family members to Estate Frydendahl. They also
paid for Lana‘s brother, Raleigh Pribanich, and his family to
11
fly from California to St. Thomas. Between December 25,
2001, and January 1, 2002, Pribanich took many photographs
of the Vento family members and their guests.6 Following
the Christmas party, the Ventos‘ designer took down the
decorations and moved the furniture from the main house to
one of the cottages.
Although Nicole Mollison returned to Nevada with her
husband and children on December 26, 2001, the other Vento
family members and guests stayed on St. Thomas through
New Year‘s Eve. Afterwards, the Ventos began to split their
time between the Virgin Islands and the mainland. Lana
visited the Virgin Islands most frequently because she was
overseeing the construction efforts at Estate Frydendahl. She
would spend between one and six weeks at a time there, then
leave for another six weeks. During the first five months of
2002, Richard spent 35 days in St. Thomas, 23 days in San
Francisco, and 41 days in Nevada. Richard also spent
considerable time in Hawaii in 2002. He filed his 2001 tax
return from Hawaii and requested Honolulu as the place of
trial in a separate legal dispute with the IRS.
In addition to purchasing Estate Frydendahl, Richard
became interested in participating in the Virgin Islands‘s
Economic Development Program (EDP), which offers very
favorable tax treatment to certain approved Virgin Islands
companies. See 29 V.I.C. § 713b. Richard received financial
6
Because of the financial ties between the Ventos and
the Pribanichs and the circumstances surrounding the
photographs, the District Court concluded that several of
them were taken for the purpose of portraying the Ventos as
Virgin Islands residents.
12
and legal advice regarding the EDP and, between May 2001
and August 2001, he founded three companies in the Virgin
Islands: (1) Virgin Islands Microsystems, which was to
perform nanotechnology research; (2) Edge Access, which
was to build internet access devices; and (3) VI Derivatives,
LLC, which the VIBIR and IRS later deemed a sham
partnership. Ultimately, only Virgin Islands Microsystems
was approved to receive EDP benefits, and that approval did
not occur until 2002.
The Ventos obtained Virgin Islands driver‘s licenses
and registered to vote there in the fall of 2001. However,
they moved none of their art collection and ―very little‖ of
their personal property to St. Thomas. Nor did the Ventos
maintain a post office box in St. Thomas, despite the fact that
mail service was unavailable at Estate Frydendahl. The
Ventos did, however, create a post office box for their
business, which they listed as their billing address when they
set up utilities at Estate Frydendahl.
Throughout the early 2000s, the Ventos also engaged
in real estate transactions on the mainland. In October 2000,
they listed the Incline Village house for sale, contingent upon
their purchase of a 2.2-acre property containing an old cottage
on the north shore of Lake Tahoe. In May 2001, the Ventos
purchased that Lake Tahoe property for $13.5 million. They
planned to build a new home containing a 22-car garage and a
tennis court there, but that plan was ultimately abandoned in
2007.
As of December 2001, the Ventos had not sold the
Incline Village house. They calculated that they would save
money by donating the house to charity and utilizing the tax
deduction, rather than selling it. Consequently, on December
13
28, 2001, the Ventos purported to donate the Incline Village
house by quitclaim deed to the Dick & Lana Charitable
Support Organization (Support Organization), a Virgin
Islands organization.7
The Ventos purchased an insurance policy in their
names on the Incline Village house for calendar years 2001
and 2002, and more than $3 million of their personal property
remained there. The Incline Village house was finally sold in
March 2002.
In April 2002, the Ventos purchased a furnished two-
bedroom condominium in Incline Village. They purchased it
in the name of the Support Organization and then leased it to
themselves for $3,500 per month for three years, though they
paid no rent for the first four months of the lease term. In
April 2002, the Support Organization held a meeting, the
minutes of which stated: ―Will live in the Condo until the new
house is built.‖ The District Court interpreted that line to
mean that the Ventos would live in the Incline Village
condominium until the planned Lake Tahoe house was built.
B
As of December 31, 2001, the three Vento daughters
were all adults. The eldest, Nicole, was at all relevant times
7
At the time of this purported donation, the Support
Organization did not actually exist because its formation
documents were not signed until March 2002. The legitimacy
of the donation is currently the subject of other litigation
between the Ventos and the IRS. See Richard Vento v.
Comm’r, No. 990-06 (Tax Ct. filed Jan. 12, 2006).
14
married to Peter Mollison. In 2001, Nicole and Peter were
the parents of three children, though they adopted a fourth
child in 2003. In 1995, the Mollisons moved into a home in
Nevada that was titled to Nicole Vento, LLC. They hired
contractors to remodel that home during 2000, 2001, and
2002. In 2006, the Mollisons moved to a new home in San
Anselmo, California, where they were living as of February
2011.
In 2001, the Mollisons visited St. Thomas three times,
each time staying at Estate Frydendahl and engaging ―in
tourist activities.‖ The Mollisons never moved any of their
pets or personal property to St. Thomas. Nicole never
obtained a Virgin Islands driver‘s license or voter registration.
She listed her address on her 2001 tax return as a mail drop in
St. Thomas. Although Nicole testified that she moved into a
two-room suite at Estate Frydendahl, the District Court found
her testimony ―not credible given her evasive demeanor on
cross-examination, her family‘s continuing ties to Nevada
. . . , and the lack of safe and comfortable accommodations
for the Mollison family at [Estate Frydendahl].‖
In 2003, Nicole studied to become a teacher at Sierra
Nevada College in Incline Village, Nevada. She eventually
became licensed to teach in Nevada and California, but not in
the Virgin Islands. From 2000 through the 2005–06 school
year, all of Nicole‘s children attended school in Nevada,
although they were enrolled in a St. Thomas school for a few
weeks in 2004. During their 2003 adoption proceedings, the
Mollisons swore under oath that they were residents of
Washoe County, Nevada. Nicole did not tell the Nevada
court or social worker that she had a Virgin Islands residence.
15
The Ventos‘ second daughter, Gail, was enrolled as a
full-time student at the University of Colorado at Boulder
from 1998 until December 2002. In 2000, Gail bought a
2,800-square foot house in Boulder, where she lived with her
boyfriend, Eric Walker, for the remainder of her college
career. Gail visited St. Thomas twice in 2001—for the family
cruise in March and for the Christmas party—during which
she stayed in a bedroom in the main house at Estate
Frydendahl and engaged in ―tourist-type activities.‖ Other
than some clothing, Gail brought no personal property to St.
Thomas.
By the end of 2001, Gail had neither obtained a Virgin
Islands driver‘s license nor registered to vote there. In May
2003, Gail purchased a house in Nevada. In September of
that year, she and Eric Walker married. Following their
marriage, they moved into one of the cottages at Estate
Frydendahl, where they lived until they moved into a new
home on St. Thomas in 2008. At trial, Gail testified that she
moved to the Virgin Islands in 2002.
The youngest Vento daughter, Renee, graduated from
San Diego State University in June 2001. After graduation,
she took a trip to the Virgin Islands and stayed at a hotel on
St. Thomas. Renee traveled again to St. Thomas in
September 2001, when she stayed in a room in the main
house at Estate Frydendahl. She also traveled to St. Thomas
for the Christmas party, but returned to Nevada in early
January 2002. The only personal property Renee had in St.
Thomas were ―easily movable items,‖ such as clothing,
camera equipment, and a laptop.
At the end of 2001, Renee had neither obtained a
Virgin Islands driver‘s license nor registered to vote there.
16
She obtained a Virgin Islands driver‘s license in March 2002
but kept her Nevada license as well. At some point, Renee
lost her Virgin Islands driver‘s license but did not replace it.
In 2005, she renewed her Nevada driver‘s license. Renee
never opened a bank account in the Virgin Islands.
From summer 2001 until spring 2002, Renee lived at
Lake Tahoe and was employed in her family‘s home office,
for which she was paid around $14 per hour to perform
administrative tasks. In January 2002, Renee applied to the
Brooks Institute of Photography in California, listing her
address as a post office box in Nevada. She enrolled at the
Brooks Institute in 2002 and lived in California.
III
Having described the procedural history and facts of
these appeals, we turn to the applicable law. Our exposition
begins with an overview of the special relationship between
the Virgin Islands and the United States.
A
The United States acquired the Virgin Islands from the
King of Denmark in 1916. See 48 U.S.C. § 1541. After the
acquisition, the local tax laws remained in force until
Congress enacted the Naval Service Appropriations Act of
1921, currently codified at 48 U.S.C. § 1397. See Bizcap,
Inc. v. Olive, 892 F.2d 1163, 1165 (3d Cir. 1989) (reviewing
history). That statute provides:
The income-tax laws in force in the United
States of America and those which may
hereafter be enacted shall be held to be likewise
17
in force in the Virgin Islands of the United
States, except that the proceeds of such taxes
shall be paid into the treasuries of said islands.
48 U.S.C. § 1397. This statutory scheme is known as the
―mirror code,‖ under which the Internal Revenue Code is
applied to the Virgin Islands merely by substituting ―Virgin
Islands‖ for ―United States‖ throughout. See Bizcap, 892
F.2d at 1165; Chicago Bridge & Iron Co. v. Wheatley, 430
F.2d 973, 975 & n.3 (3d Cir. 1970).
According to this statutory scheme, Virgin Islands
residents are subject to different tax filing requirements than
other United States citizens. Under the version of 26 U.S.C.
§ 932(c) applicable in these appeals, taxpayers who are ―bona
fide resident[s] of the Virgin Islands at the close of the
taxable year‖8 are required to ―file an income tax return for
the taxable year with the Virgin Islands.‖ 26 U.S.C. § 932(c)
(1986). If the taxpayer ―on his return of income tax to the
Virgin Islands, reports income from all sources and identifies
the source of each item shown on such return‖ and ―fully pays
his tax liability . . . to the Virgin Islands with respect to such
income,‖ then ―for purposes of calculating income tax
liability to the United States, gross income shall not include
any amount included in gross income on such return.‖ 26
U.S.C. § 932(c)(4). Thus, bona fide Virgin Islands residents
who fully report their income and satisfy their obligations to
8
In 2004, § 932(c) was amended to require taxpayers
to be ―bona fide resident[s] of the Virgin Islands during the
entire taxable year.‖ 26 U.S.C. § 932(c)(4)(A) (2004). That
amendment does not apply to these appeals because it was not
retroactive.
18
the VIBIR do not pay taxes to the IRS. See Abramson
Enters., Inc. v. Gov’t of Virgin Islands, 994 F.2d 140, 144 (3d
Cir. 1993). This is true even if the bona fide Virgin Islands
resident is also a resident of the mainland United States. As
we will discuss later, taxpayers may have multiple
residencies, and § 932(c) requires only that taxpayers have a
bona fide residency in the Virgin Islands, not that they lack
bona fide residencies elsewhere.
Although Virgin Islands residents who satisfy the
requirements of § 932(c) pay their taxes to the VIBIR rather
than the IRS, the Virgin Islands‘s ability to engage in tax
competition with the United States is limited by 26 U.S.C.
§ 934, which provides that ―[t]ax liability incurred to the
Virgin Islands pursuant to [the mirror code] . . . shall not be
reduced or remitted in any way, directly or indirectly, whether
by grant, subsidy, or other similar payment, by any law
enacted in the Virgin Islands, except to the extent provided in
subsection (b).‖ 26 U.S.C. § 934(a).9 Subsection (b), in turn,
provides a limited exception for Virgin Islands residents‘ tax
liability ―attributable to income derived from sources within
the Virgin Islands or income effectively connected with the
conduct of a trade or business within the Virgin Islands.‖ 26
U.S.C. § 934(b). Thus, Virgin Islands residents pay the same
taxes at the same rates on their non-Virgin Islands-source
income as non-Virgin Islands residents, though the taxes on
Virgin Islands-source income may differ. See United States
9
26 U.S.C. § 934 was cosmetically amended in 2004.
Compare 26 U.S.C. § 934(b)(4) (1986), with 26 U.S.C.
§ 934(b)(4) (2004). Because the 2004 amendments are not
retroactive, the 1986 version of § 934 applies in this case.
19
v. Auffenberg, 2008 WL 4115997, at *2 (D.V.I. Aug. 26,
2008).
As authorized by 26 U.S.C. § 934(b), the Virgin
Islands enacted the Economic Development Program to
promote local economic activity. Pursuant to the EDP, bona
fide residents of the Virgin Islands can receive a 90% tax
reduction on certain approved Virgin Islands-source income.
See 29 V.I.C. § 708(b) (bona fide residency requirement); 29
V.I.C. § 713b (income tax reduction).
B
The meaning of residency ―may vary according to
context.‖ Martinez v. Bynum, 461 U.S. 321, 330 (1983). In
the tax context, residency requires ―far less than domicile.‖
Sochurek v. Comm’r, 300 F.2d 34, 38 (7th Cir. 1962); see
also Croyle v. Comm’r, 41 T.C.M. 339 (1980) (―[T]he
citizen need not be domiciled in a foreign country . . . in order
to be classed as a resident for Federal income tax purposes.‖).
Unlike domicile, residency does not require ―an intent to
make a fixed and permanent home.‖10 Sochurek, 300 F.2d at
10
―‗[R]esidence‘ generally requires both physical
presence and an intention to remain.‖ Martinez, 461 U.S. at
330. In the tax context, however, although courts consider
intent as a factor in determining residency, they are divided
over whether intent is absolutely required for residency.
Compare Weible v. United States, 244 F.2d 158, 163 (9th Cir.
1957) (―‗Residence‘ simply requires bodily presence as an
inhabitant in a given place.‖), with Bergersen v. Comm’r, 109
F.3d 56, 61 (1st Cir. 1997) (―‗[R]esidence‘ implies that the
individual has established his or her residential base, planning
to remain indefinitely or at least for a substantial period.‖). In
20
38. Furthermore, while a person can have only one domicile,
he can be a resident of multiple places at the same time. See
Downs v. Comm’r, 166 F.2d 504, 508 (9th Cir. 1948); see
also Martinez, 461 U.S. at 339–40 (Marshall, J., dissenting)
(noting the rule that an individual can have ―but one domicile
and several residences‖); Hill v. City of Scranton, 411 F.3d
118, 128 (3d Cir. 2005).
Although residency requires far fewer contacts than
domicile, a bona fide resident still must be more than a
transient or sojourner. See Sochurek, 300 F.2d at 38. ―[M]ere
physical presence in a foreign country is not sufficient to
establish bona fide residency.‖ Croyle, 41 T.C.M.
339.
The District Court, at the parties‘ behest, applied
Sochurek to this dispute, and we will do so as well. Courts
applying Sochurek consider the following factors to
determine whether a taxpayer‘s claimed residency is bona
fide:
(1) intention of the taxpayer;
Sochurek, which the parties and the District Court all agreed
provides the applicable test, the Seventh Circuit considered
the ―intention of the taxpayer‖ as a factor in determining
residency, but did not suggest that such intent was a
prerequisite. 300 F.2d at 38. Because we conclude that the
Ventos had the intent to reside in the Virgin Islands on
December 31, 2001, we need not decide whether intent is
always required for a taxpayer to prove residency.
21
(2) establishment of his home temporarily in the
foreign country for an indefinite period;11
(3) participation in the activities of his 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 his employment;
(5) nature, extent and reasons for temporary
absences from his temporary foreign home;
(6) assumption of economic burdens and
payment of taxes to the foreign country;
(7) status of resident contrasted to that of
transient or sojourner;
(8) treatment accorded his income tax status by
his employer;
(9) marital status and residence of his family;
(10) nature and duration of his employment;
whether his assignment abroad could be
11
Obviously, the Virgin Islands is not a ―foreign
country,‖ but, as the parties and the District Court agreed,
Sochurek applies nonetheless. See Bergersen, 109 F.3d at 61
(citing Sochurek in discussing whether taxpayers were bona
fide Puerto Rico residents).
22
promptly accomplished within a definite or
specified time;
(11) good faith in making his trip abroad;
whether for purpose of tax evasion.
Sochurek, 300 F.2d at 38. ―While all such factors may not be
present in every situation, those appropriate should be
properly considered and weighed.‖ Id.
The eleven Sochurek factors can be grouped into four
broad categories for purposes of our analysis. First, we will
consider the taxpayer‘s intent, which encompasses factors (1),
(2), (7), (10), and (11). A taxpayer‘s intent to remain in a
place for an indefinite or at least substantial period of time
will support a finding of residency in that place. See
Bergersen v. Comm’r, 109 F.3d 56, 61 (1st Cir. 1997). This
intent can be evidenced by 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 or
sojourner. See Sochurek, 300 F.2d at 38. On the other hand,
if a taxpayer has only temporary housing and employment
arrangements in the claimed place of residency, and an intent
to depart at the end of those arrangements, bona fide
residency probably will not be found. See id. at 38–39
(discussing ―war-worker‖ cases in which courts have rejected
claims of bona fide residency for taxpayers who went abroad
―for some specific purpose incident to the war effort,‖ whose
employment was ―limited by contract or by the duration of
the war,‖ and who worked and lived on military bases, where
their movements and interactions with the local population
were ―severely circumscribed‖). In addition, a taxpayer‘s
intent to engage in unlawful tax evasion will counsel against a
finding of bona fide residency because it indicates that the
23
taxpayer does not in good faith intend to become a resident,
but rather intends to perpetrate a sham. See id. As we shall
discuss in more detail, however, a taxpayer‘s lawful tax
avoidance motives will not weigh against finding bona fide
residency.
Second, we consider the taxpayer‘s physical presence,
which encompasses Sochurek factors (2), (4), (5), and (7). A
taxpayer‘s sustained physical presence in a place will support
a finding of bona fide residency there. See id. On the other
hand, extensive absences will negate a finding of bona fide
residency, unless those absences are justified by good-faith
reasons, such as the travel requirements of the taxpayer‘s
profession. See id. at 39. In addition to the extent of the
taxpayer‘s physical presence, the nature of that presence is
relevant as well. A taxpayer who is present at a home he has
established and maintains year-round will have a stronger
claim to bona fide residency than one who is present without
such a home. See id.
Third, we consider the taxpayer‘s social, family, and
professional relationships, which implicate Sochurek factors
(3) and (9). A taxpayer‘s claim of bona fide residency will be
supported if he assimilates into the locale by building social
and professional ties with the local community. See id. at 38.
The same is true if his spouse and any dependent family
members also live there. See id. at 38–39. On the other hand,
if a taxpayer has not assimilated into the claimed place of
residency and maintains most of his social, family, and
professional relationships elsewhere, that would counsel
against a finding of bona fide residency.
Finally, we consider the taxpayer‘s own
representations, which implicate Sochurek factors (6) and (8).
24
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.12 On the other hand,
a taxpayer who does not self-identify as a resident will have a
hard time proving he is one.
C
We review the District Court‘s factual findings,
including its credibility determinations, for clear error. See
Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985);
Gordon v. Lewistown Hosp., 423 F.3d 184, 201 (3d Cir.
2005). Under that standard, we may overturn the District
Court‘s findings only if ―we are left with a definite and firm
conviction that a mistake has been committed.‖ Gordon, 423
F.3d at 201.
We review the District Court‘s ultimate residency
determination de novo because it ―is a conclusion of law or at
least a determination of a mixed question of law and fact.‖
Jones v. Comm’r, 927 F.2d 849, 852 (5th Cir. 1991); see also
Bergersen, 109 F.3d at 61 (residency determination is ―mixed
question of fact and law‖); Sochurek, 300 F.2d at 37 (tax
12
Likewise, if the taxpayer‘s employer treats him as a
resident of a place, that too would support a finding of bona
fide residency. See Sochurek, 300 F.2d at 38. However, that
factor is not implicated here because the Ventos do not have
employers.
25
court‘s ―conclusion of residency is reviewable by this court as
a question of law‖).13
13
The United States, citing Bergersen, argues that the
residency question is a mixed question of fact and law and
that the District Court‘s determination is entitled to ―some
deference.‖ See Bergersen, 109 F.3d at 61. Deference to the
District Court is appropriate in mixed question cases where
answering the question will have little precedential value,
where the question does not require much legal reasoning
once the applicable test is stated, or where witness credibility
is determinative. See United States v. Brown, 631 F.3d 638,
643–44 (3d Cir. 2011). In the consolidated cases before us,
our decision will likely carry significant precedential value
for other taxpayers, particularly other taxpayers who moved
to the Virgin Islands prior to 2004. See McHenry v. Comm’r,
677 F.3d 214, 215–16 (4th Cir. 2012) (discussing IRS
challenges to the residencies of taxpayers who claimed to
have moved to the Virgin Islands prior to 2004). In addition,
our few disagreements with the District Court are based not
on its credibility determinations or factual findings, but rather
on its legal analysis—for example, it required more physical
presence of the Taxpayers than is appropriate under § 932(c)
and placed undue weight on their tax avoidance motivations.
Therefore, deference to the District Court is not appropriate in
this case. We note that most of the other courts of appeals
reviewing tax residency determinations have also reviewed
those determinations de novo. See, e.g., Jones, 927 F.2d at
852; Sochurek, 300 F.2d at 37; Weible, 244 F.2d at 161;
Comm’r v. Swent, 155 F.2d 513, 514 (4th Cir. 1946). But see
Bergersen, 109 F.3d at 61.
26
IV
The Taxpayers and the VIBIR raise two broad
challenges to the District Court‘s analysis and several
arguments against the District Court‘s weighing of the
evidence. We will first address the global challenges and
then weigh the evidence de novo using the Sochurek factors.
A
The Taxpayers first argue that, because Congress set a
lower bar for proving Virgin Islands residency under 26
U.S.C. § 932 than proving foreign residency generally under
26 U.S.C. § 911, the District Court should have applied a
standard more favorable to them in its residency analysis.
It is true that the pre-2004 version of § 932 is easier to
satisfy than § 911. Under § 911, a taxpayer seeking to prove
foreign residency must prove, ―to the satisfaction of the
Secretary,‖ that: (1) he was a bona fide resident of a foreign
country for the entire taxable year; and (2) that his ―tax
home‖ is in that foreign country. 26 U.S.C. § 911(d)(1). By
contrast, § 932 merely requires that a taxpayer be a bona fide
resident of the Virgin Islands at the end of the taxable year
and contains no requirement that a taxpayer‘s ―tax home‖ be
in the Virgin Islands or that the taxpayer prove his case ―to
the satisfaction of the Secretary.‖ See id. § 932(c) (1986).
Consistent with the text of § 932, the Taxpayers need
not prove that they were residents of the Virgin Islands for all
of 2001 or that they had their tax home in the Virgin Islands.
Nonetheless, the Taxpayers still have to prove that they were
bona fide residents of the Virgin Islands on December 31,
2001. The fact that § 932 is easier to satisfy than § 911 in
27
three particular respects does not mean that § 932 is not
susceptible to analysis pursuant to the Sochurek factors. The
Taxpayers themselves argued for the application of Sochurek
in the District Court. We too will follow Sochurek and apply
the same standard to the Taxpayers‘ Virgin Islands residency
claims as we would apply to any other claim of foreign
residency under § 911.
The Taxpayers next argue that the United States
should bear the burden of proof. This argument was waived
because it was not raised before the District Court. See
Belitskus v. Pizzingrilli, 343 F.3d 632, 645 (3d Cir. 2003).
The Taxpayers and the VIBIR argue that the issue was
not waived, pointing to a lone statement by the VIBIR‘s trial
counsel: ―I submit that the U.S. had a burden to establish the
residence in the U.S. that the Ventos were residing in, and at
the latter half of 2001, and they failed to do so.‖ App. 1273.
However, because a person can be a resident of more than
one place at the same time, see Downs, 166 F.2d at 508, the
argument that the United States had to show that the Ventos
had a specific residence within the mainland is different from
the argument that the United States was required to show that
the Ventos did not reside in the Virgin Islands. Indeed, the
VIBIR‘s trial briefs seem to acknowledge that the Ventos had
the burden of proof. See VIBIR Memorandum of Fact and
Law on the Issue of Residency at 28, VI Derivatives, LLC v.
United States, No. 3:06-cv-00012-JRS-RM (D.V.I. May 17,
2010), ECF No. 75 (―The taxpayer must establish that he had
an intention to be more than a mere transient or sojourner.‖).
The Taxpayers also argue that the burden of proof
argument was not waived because it was ―inherent in the
parties‘ positions throughout th[e] case.‖ See Huber v.
28
Taylor, 469 F.3d 67, 74–75 (3d Cir. 2006). In Huber, we
held that the plaintiffs did not waive a choice of law issue
because it was ―inherent in the parties‘ positions‖ when the
plaintiffs and the defendants were arguing for the application
of the law of different states. Id. at 75. In that case, the fact
that the parties were arguing for the application of different
laws necessarily implied that they were raising a choice of
law question. By contrast, the parties‘ disagreement about the
Ventos‘ residency here does not necessarily imply a
disagreement about the burden of proof. See Donahue v.
Consol. Rail Corp., 224 F.3d 226, 230 (3d Cir. 2000) (finding
burden of proof argument waived).
The Taxpayers also argue that we should exercise our
discretion to hear the burden of proof issue because it is a
pure question of law. See Huber, 469 F.3d at 74–75. We
―may consider a pure question of law even if not raised below
where refusal to reach the issue would result in a miscarriage
of justice or where the issue‘s resolution is of public
importance.‖ Id. (emphasis added). Here, the parties are
sophisticated and were represented by able counsel.
Moreover, the burden of proof issue is immaterial to our
ultimate ruling. Therefore, no miscarriage of justice or issue
of public importance is implicated and we will not exercise
our discretion to adjudicate the issue.14
14
The VIBIR also argues that the District Court
violated Federal Rule of Evidence 404(b)(2) by refusing to
consider evidence of the Taxpayers‘ post-2001 activities. But
it has failed to cite to a single instance where the District
Court sustained an objection to evidence of the Taxpayers‘
post-2001 activities. Therefore, the VIBIR‘s Rule 404(b)(2)
29
B
Having rejected the Taxpayers‘ global challenges to
the District Court‘s analysis, we turn to their arguments
against the District Court‘s weighing of the evidence. We
begin by applying the Sochurek factors to Richard and Lana
Vento.15
1. Intent16
argument is really a challenge to the District Court‘s
weighing of the evidence.
15
Because 26 U.S.C. § 932(c) applies not only to bona
fide residents of the Virgin Islands, but also to individuals
filing jointly with bona fide residents of the Virgin Islands, a
finding that either Richard or Lana was a bona fide resident
authorizes them to file their joint return with the VIBIR in
lieu of the IRS. See 26 U.S.C. § 932(c)(1)(B).
16
Intent is ordinarily considered a question of fact,
where we defer to the District Court‘s determination. See
Peterson v. Crown Fin. Corp., 661 F.2d 287, 291 (3d Cir.
1981). Here, it is unclear whether the District Court made a
factual finding as to the Ventos‘ intent to become residents.
In its discussion section, the District Court opined that ―[t]he
Ventos‘ testimony that they intended to become Virgin
Islands residents by the end of 2001 is undermined by the
objective facts.‖ VI Derivatives, LLC v. United States, 2011
WL 703835, at *15 (D.V.I. Feb. 18, 2011). In its findings of
fact section, however, the District Court did not mention the
Ventos‘ lack of intent—in fact, it found that ―[t]he Ventos
had initially hoped the renovations could be completed in
30
The intent to become a resident is not the intent to
―make a fixed and permanent home.‖ Sochurek, 300 F.2d at
38. Rather, it is the intent to ―remain indefinitely or at least
for a substantial period‖ in the new location. Bergersen, 109
F.3d at 61. Both Richard and Lana Vento intended to become
Virgin Islands residents as of December 31, 2001. That intent
is evidenced by their purchase of Estate Frydendahl and their
ongoing business interests in the Virgin Islands. And 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
time to move into the main house for Christmas in 2001.‖ Id.
at *4. Thus, we read the District Court‘s opinion as treating
intent as an analytical construct rather than a historical fact.
Alternatively, even if the District Court‘s intent determination
were read as a determination of fact, its analysis of intent was
legally erroneous for the reasons discussed in this section.
Therefore, we may reverse it. See Weible, 244 F.2d 158(finding that taxpayer was bona fide resident even though trial
court found that taxpayer never intended to become a resident
(reversing Weible v. United States, 1956 WL 10566 (S.D.
Cal. Apr. 6, 1956))); see also Sochurek, 300 F.2d at 39
(finding ―as a matter of law‖ that taxpayer was a bona fide
resident even though trial court found that taxpayer did not
―intend[] to reside there within the scope and intendment of
the statute‖ (reversing Sochurek v. Comm’r, 36 T.C. 131, 139
(1961))); cf. United States v. Lloyd, 566 F.3d 341, 344 (3d
Cir. 2009) (explaining that reliability of hearsay
determinations are generally reviewed for abuse of discretion,
but are reviewed de novo if the district court‘s analysis is
legally incorrect).
31
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.
First, the Ventos‘ purchase and renovation of Estate
Frydendahl shows that, by the end of 2001, they planned to
remain in St. Thomas ―at least for a substantial period.‖
Months before the end of 2001, the Ventos purchased Estate
Frydendahl for $6.75 million, and began a renovation process
that would eventually cost them another $20 million. This
substantial outlay, approximately three times the size of the
tax controversy in this case, is strong evidence that the Ventos
were not purchasing a sham property to avoid paying taxes,
but rather that they had a bona fide intent to ―remain
indefinitely or at least for a substantial period‖ in the Virgin
Islands. See Bergersen, 109 F.3d at 61 (finding that taxpayers
claiming Puerto Rico residency ―clearly‖ demonstrated the
requisite intent because ―they embarked on construction of a
very expensive house in 1984, before the tax years in dispute‖
(emphasis omitted)). Indeed, the United States itself argued
at trial that the Ventos bought Estate Frydendahl ―with the
intent of renovating it and using it as a home.‖ App. 575.
Although the renovations took longer than expected, that does
not defeat the Ventos‘ intent to move in by the end of 2001.
As the District Court found, ―[t]he Ventos had initially hoped
the renovations could be completed in time to move into the
main house for Christmas in 2001.‖ VI Derivatives, LLC v.
United States, 2011 WL 703835, at *4 (D.V.I. Feb. 18, 2011).
Second, Richard Vento‘s establishment of business
interests in the Virgin Islands supports his claim of bona fide
residency. Richard formed three companies in the Virgin
Islands in 2001: Virgin Islands Microsystems in May, Edge
32
Access in June, and VI Derivatives, LLC in August.17
Although VI Derivatives has since been declared an invalid
tax shelter, both Virgin Islands Microsystems and Edge
Access are bona fide companies with non-tax, business
purposes—nanotechnology research and internet access
device manufacture, respectively. Richard decided to found
the companies in the Virgin Islands to take advantage of the
Virgin Islands‘s Economic Development Program. The
process for applying for EDP benefits was ―quite lengthy.‖
Ultimately, in 2002, only Virgin Islands Microsystems was
approved to receive EDP benefits. Richard also had
discussions with the University of the Virgin Islands about
collaborating to develop a physics department that would
become a source of employees for the companies. Richard‘s
ambitious goals could not have been ―promptly‖ achieved in a
―definite or specified time.‖ See Sochurek, 300 F.2d at 38.
Thus, they support his claim of bona fide residency.
Finally, the Ventos‘ desire to avoid taxes does not
undermine their claims of bona fide residency. Under
Sochurek, a taxpayer‘s unlawful ―tax evasion‖ motives can be
considered evidence against bona fide residency. See id. at
38. However, Sochurek did not mention lawful tax
17
The District Court found that these companies were
not ―up and running by the end of 2001.‖ VI Derivatives,
2011 WL 703835, at *15. However, the fact that Richard
began establishing these companies—Edge Access was
incorporated in the Virgin Islands in June 2001—is probative
of his intention to remain in the Virgin Islands long-term,
even if the companies were not yet fully operative by the end
of 2001.
33
avoidance, and the distinction between tax evasion and tax
avoidance is a critical one. See id. at 34.
The reason tax evasion motivations are relevant under
Sochurek is that they are probative of the taxpayer‘s ―good
faith in making his trip abroad.‖ See id. at 38. If a taxpayer
does not in good faith intend to change his residency, but
rather intends only to dupe the taxing authorities, that
intention undermines the taxpayer‘s claim that his residency
is bona fide. On the other hand, a taxpayer‘s sincere desire to
change his residency in order to take advantage of lawful tax
incentives does not undermine his claim of bona fide
residency. If anything, such a motivation would support the
taxpayer‘s intent to establish bona fide residency, which is a
prerequisite for taking advantage of the lawful tax incentives.
The United States concedes that there is no evidence of
tax evasion in this case,18 but argues that ―Richard Vento
18
This concession first appeared in a post-trial brief
filed in the District Court that read: ―While there is no
evidence of tax evasion here, there is undisputed evidence
that Richard Vento affirmatively sought to prevent the IRS
from learning of his receipt of more than $100 million in
income from the sale of OSI stock.‖ United States Br. 68–69
(quoting United States Proposed Findings of Fact and
Conclusions of Law on Residence Issue at 52, VI Derivatives,
LLC v. United States, No. 3:06-cv-00012-JRS-RM (D.V.I.
May 17, 2010), ECF No. 96-1). On appeal, the United States
repeated the concession but then reversed course, citing
certain notes that allegedly support a tax evasion motive.
These notes are dehors the record, however. On November
17, 2011, the District Court issued an order stating that the
record consisted of documents filed prior to May 16, 2011,
34
affirmatively sought to prevent the IRS from learning of his
receipt of more than $100 million in income from the sale of
the OSI stock,‖ which the United States argues is ―plainly . . .
a tax motivation that is relevant.‖ United States Br. 68–69.
In support of its position, the United States cites Bergersen
and Croyle to argue that ―tax motivations and activities
falling short of ‗tax evasion‘ are relevant‖ to the residency
analysis. Id. at 68. However, both cases only weakly support
that position.
In Bergersen, the First Circuit acknowledged that ―[a]
tax avoidance motive is often included in the laundry list of
factors bearing on bona fide residency, so it is not surprising
that the Tax Court mentioned it in passing.‖ 109 F.3d at 62
(citing Sochurek, 300 F.2d at 38). In the very next sentence,
however, the court stated that ―the Bergersens were perfectly
free to consider tax advantages in moving their residence to
Puerto Rico.‖ Id. The court also conducted a harmless error-
like analysis:
The Bergersens imply that the Tax Court erred
as a matter of law by giving weight, in deciding
the residency issue, to an alleged tax avoidance
motive. The Tax Court made one reference to
tax avoidance as a relevant concern (the other
and exhibits submitted during the June 2010 bench trial. The
notes were submitted on November 7, 2011, in support of a
motion for summary judgment in a case involving the Ventos‘
partnerships on an issue unrelated to the Ventos‘ residency.
Because the notes are not part of the record, we may not
consider them. See Fassett v. Delta Kappa Epsilon (N.Y.),
807 F.2d 1150, 1165 (3d Cir. 1986).
35
reference was to an argument by the
government). But in the very same passage, the
Tax Court made clear that it was the time of the
move to Puerto Rico, judged by objective
factors, that was decisive. We reach the same
result, giving no weight to the alleged motive.
Id. (internal citation omitted and emphasis added). Thus,
contrary to the United States‘s position, the First Circuit in
Bergersen expressed doubt as to whether it would be proper
to consider tax avoidance motives and upheld the Tax Court‘s
decision while ―giving no weight‖ to the tax avoidance
motive. And while Croyle found that tax avoidance motives
could be considered in determining whether a taxpayer
became a bona fide resident of France, it performed no
analysis as to why that was so. See 41 T.C.M. 339.
Cutting against the position of the United States is the
well-settled proposition that ―[t]he legal right of a taxpayer to
decrease the amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law permits,
cannot be doubted.‖ Gregory v. Helvering, 293 U.S. 465, 469
(1935); see also Weible, 244 F.2d at 170 (―The income tax
law has spread its tentacles into everyone‘s life, and into
every phase of life. . . . Humble citizen to multi-millioned
corporation has the right to assert and take every benefit
available. This without stigma attached.‖). In Gregory v.
Helvering, the Supreme Court noted that if a transaction ―in
reality was effected within the meaning of [the relevant
statute], the ulterior purpose [of tax avoidance] will be
disregarded,‖ unless ―the transaction upon its face lies outside
the plain intent of the statute.‖ 293 U.S. at 469–70. Thus,
under Gregory, if a transaction on its face is within the intent
of the tax laws—in other words, if the transaction is not a
36
sham devoid of substance, see Lerman v. Comm’r, 939 F.2d
44, 45 (3d Cir. 1991)—a taxpayer‘s legitimate tax avoidance
motives should not be held against him.
Here, the District Court found that the Ventos wanted
to move to the Virgin Islands so they ―would be able to file
tax returns with the VIBIR and not the IRS.‖ App. 44. But
that is precisely what Congress intended. The purpose of 26
U.S.C. § 932(c) is to ―assist the [Virgin] Islands in becoming
self-supporting‖ by ―providing for local imposition upon the
inhabitants of the Virgin Islands of a territorial income tax,
payable directly into the Virgin Islands treasury.‖ Dudley v.
Comm’r, 258 F.2d 182, 185 (3d Cir. 1958). If a taxpayer
decides to move to the Virgin Islands because he would
prefer to file his taxes with the VIBIR rather than the IRS,
that taxpayer is helping the Virgin Islands become self-
supporting, so his move does not ―upon its face lie[] outside
the plain intent of [§ 932(c)].‖ Gregory, 293 U.S. at 470.
The Ventos certainly decided to move to the Virgin
Islands—Richard Vento spent $6.75 million purchasing a
property and over $20 million improving it.19 In addition, he
19
Trial counsel for the United States argued that the
Ventos intended to make their home at Estate Frydendahl
eventually, and the ―real question before the Court‖ was
merely ―at what point did they make that residence their
home‖—with the United States arguing that the point was
―sometime in the year 2002,‖ and the Ventos arguing that it
was in 2001. App. 575–76. Although the argument of
counsel does not conclusively establish the fact that the
Ventos desired to make Estate Frydendahl their home, it is
probative of the fact that the Ventos‘ move was not devoid of
37
founded two legitimate companies in the Virgin Islands.
Thus, the Ventos‘ decision to file taxes with the VIBIR was
consistent with the intent of § 932(c). The Ventos were
plainly interested in the advantages of filing their taxes with
the VIBIR when they decided to move to the Virgin Islands.
But using their desire to subject themselves to the mirror code
as evidence that they did not intend to comply with it would
be both incongruous and contrary to the Congressional
scheme.20
substance and was therefore consistent with the purpose of §
932(c).
20
This is true even if, as the United States claims, the
reason the Ventos wanted to file their taxes with the VIBIR
was to reduce the chance that they would be penalized for
certain tax shelter transactions. We generally do not consider
a taxpayer‘s reasons for seeking a tax exclusion when
evaluating its legitimacy. The United States is essentially
asking us to consider how aggressively a jurisdiction applies
its tax laws as a factor in determining whether a taxpayer‘s
claimed residency there is bona fide. There is no authority
for this proposition. Indeed, the authority is to the contrary.
Several federal courts have found taxpayers to be bona fide
residents of places where they were subject to no income
taxes. See, e.g., Sochurek, 300 F.2d at 36, 39; Scott v. United
States, 432 F.2d 1388, 1397 (Ct. Cl. 1970) (―[I]f one is truly a
‗resident‘ in the ordinary meaning . . . non-subjection to the
local income tax will not throw the scale the other way.‖);
Meals v. United States, 110 F. Supp. 658, 662 (N.D. Cal.
1953) (―[T]he failure of an American to pay income tax to a
foreign country in which he is living is of little significance in
38
Unlike in Bergersen, here the District Court‘s
consideration of the Ventos‘ tax avoidance motives was not
harmless. The Ventos possess significant other indicia of
residency. Absent consideration of their tax avoidance
motives, those indicia demonstrate that they were bona fide
residents of the Virgin Islands at the end of 2001.
2. Physical Presence
Both the extent and nature of the Ventos‘ physical
presence in the Virgin Islands are sufficient to support their
claim of bona fide residency. In assessing the amount of time
the Ventos spent in the Virgin Islands, we must first note the
unique statutory scheme applicable to the Virgin Islands,
which serves to distinguish the Ventos‘ case from other cases
in which courts have analyzed how much time a taxpayer
spent at a claimed place of residence. See, e.g., Bergersen,
109 F.3d at 61–62 (taxpayers were not bona fide residents of
Puerto Rico under 26 U.S.C. § 933 when they spent 93 days
there compared to 138 days in Illinois); Johansson, 336 F.2d
at 812 (taxpayer was not bona fide resident of Switzerland
under 26 U.S.C. § 911 when he spent only 79 days there,
compared to 120 days in Sweden and 218 in the United
States); Sochurek, 300 F.2d at 36 (taxpayer was bona fide
resident of Singapore under § 911 even though he spent only
25 days a year there because he maintained his home in
Singapore for the whole year and his absences ―were solely in
pursuit of his broad professional assignments,‖ id. at 39).
determining whether he is a bona fide resident there.‖); Rose
v. Comm’r, 16 T.C. 232, 238 (1951).
39
Both § 933, the statute governing Puerto Rico
residency at issue in Bergersen, and § 911, the statute
governing foreign residency generally at issue in Johansson
and Sochurek, require that a taxpayer show that he had a bona
fide foreign residency for an ―entire taxable year.‖ 26 U.S.C.
§ 933(1); id. § 911(d)(1)(A). In fact, § 911 is even stricter
because it requires that a taxpayer be a bona fide foreign
resident for ―an uninterrupted period which includes an entire
taxable year.‖ Id. § 911(d)(1)(A).
In stark contrast to those statutes, the version of § 932
applicable to these appeals requires merely that a taxpayer be
―a bona fide resident of the Virgin Islands at the close of the
taxable year.‖ Id. § 932(c)(1)(A) (1986). Under the terms of
§ 932, a taxpayer can take advantage of its provisions even if
he became a bona fide resident of the Virgin Islands only on
the last day of the taxable year. Therefore, the Ventos‘
presence or lack thereof in the Virgin Islands in the first part
of 2001 sheds little light on their eligibility for § 932(c),
which requires only that they be bona fide residents of the
Virgin Islands at the end of 2001.
Examining the time period around the end of 2001, the
evidence demonstrates that the Ventos had a sufficient
physical presence in the Virgin Islands to support their claim
of bona fide residency. According to credit card records,
Lana was present in the Virgin Islands for more than half of
the days in December 2001, and Richard appears to have been
there for the whole month of December 2001. Thus, in light
of § 932‘s mandate that we examine a taxpayer‘s status as of
the end of the taxable year, we find that the Ventos had a
sufficient physical presence in the Virgin Islands to weigh
somewhat in favor of finding residency.
40
It is true that the Ventos were away from the Virgin
Islands for much of late 2001 and early 2002. But substantial
absences by themselves will not weigh against a taxpayer
unless the ―nature‖ and ―reasons‖ for those absences suggest
that the taxpayer‘s claimed residence was not bona fide. In
Sochurek, the Seventh Circuit implied that this factor did not
weigh against a taxpayer who spent only twenty-five days a
year in his claimed residency of Singapore when ―his
absences from his temporary home were solely in pursuit of
his broad professional assignments.‖ 300 F.2d at 39. The
taxpayer in that case was a foreign correspondent whose
occupation ―required him to travel extensively within his area
of operations‖ to places ―from [Taiwan] to Indonesia.‖ Id. at
36. Because the taxpayer had legitimate reasons for his
absences, he was still deemed a bona fide resident of
Singapore despite being away for over 90% of the year. See
id. at 39.
Here, the Ventos‘ absences from the Virgin Islands,
while substantial, are not suspicious because they are
consistent with their highly mobile lifestyle. A person may
have multiple legal residences at the same time. See Downs,
166 F.2d at 508; see also Hill, 411 F.3d at 128. Because the
Ventos owned homes in Nevada, Utah, California, and
Hawaii, in addition to Estate Frydendahl, they could not have
spent a majority of the year in each place. They traveled
constantly among those places and elsewhere—credit card
records show that between August 15, 2001 and November 7,
2001, Richard paid for lodging in California, Hawaii, Florida,
Arizona, and Texas. During that time, he also made
purchases in Maryland, Nevada, Virginia, California, Hawaii,
and Utah. Similarly, between August 18, 2001 and October
41
30, 2001, Lana made purchases in California, Hawaii,
Nevada, and Italy.
In fact, the Ventos spent more time at Estate
Frydendahl than they did at many of their other homes. The
District Court found that, for the first five months of 2002,
Richard spent 35 days in St. Thomas, 23 days in San
Francisco, and 41 days in Nevada. Adding December 2001
into that calculation means that Richard spent more time in
the Virgin Islands than in Nevada for the months surrounding
December 31, 2001. Yet Richard was undoubtedly a bona
fide resident of Nevada during that time.
Although the foreign correspondent‘s travels in
Sochurek were required by his occupation, we see no reason
to exalt travel for employment over other kinds of travel.
Like the taxpayer in Sochurek, the Ventos had a consistent
pattern of and explanation for their travel, which tends to
negate the claim that their residency is a sham. Thus, the
Ventos‘ absences from the Virgin Islands, while substantial,
weigh little, if at all, against their bona fide residency claims.
The nature of the Ventos‘ presence also supports their
claims of bona fide residency because it was more consistent
with that of a resident than a sojourner. In May 2001,
Richard and Lana contracted to purchase Estate Frydendahl,
which was sold furnished, and closing occurred in August
2001.21 The Ventos lived in Estate Frydendahl for parts of
21
To be sure, Estate Frydendahl was in poor condition
and the Ventos wanted to make significant repairs. Richard
testified that his wife wanted to remove everything except
―the rock walls and the lignum vitae floor‖ and that they
would have to ―redo all the rest‖ of Estate Frydendahl,
42
2001, including the Christmas Holiday, which they spent with
their daughters at the Estate. The District Court found that
Richard spent December 2001 and 35 days in the first five
months of 2002 in St. Thomas, and there is no evidence that
he stayed in a hotel during that time. While the Ventos
wanted to make significant improvements to Estate
Frydendahl, that desire actually supports their case because it
shows that they had the committed physical presence that one
would expect from a bona fide resident. See Sochurek, 300
F.2d at 39 (fact that taxpayer maintained a home in Singapore
year-round supported claim of bona fide Singapore residency
even though taxpayer was not physically present in Singapore
year-round). And although Estate Frydendahl was a work in
progress at the end of 2001, it was still more of an established
home than those possessed by other taxpayers who have been
found to have bona fide residencies. See, e.g., Swenson v.
Thomas, 164 F.2d 783, 784 (5th Cir. 1947)
(―[N]otwithstanding the fact that he established no fixed
home in Colombia, or even a settled place of abode . . . it
remains true that he was always living in Colombia, attending
to his business there; and that we think constitutes residence
there.‖).
including the ―roof, . . . air conditioning, electricity,
plumbing. Everything.‖ App. 694. Although Estate
Frydendahl was in poor condition, it was not unlivable, and
the District Court‘s finding to the contrary was clear error.
The seller, Patti Birch, was living at Estate Frydendahl at the
time it was sold to the Ventos. In addition, ―two gentlemen
from New York‖ and Birch‘s caretaker also lived on the
property. Simply stated, Estate Frydendahl was not unlivable
in 2001 because people were living there.
43
3. Relationships
At the end of 2001, the Ventos‘ social ties to the
Virgin Islands were limited. The District Court found that
―there is no evidence to show [the Ventos] were involved in
community activities in the Virgin Islands or had
‗assimilat[ed]‘ into the islands‘ culture; Richard testified the
family joined the St. Thomas Yacht Club, but they did not
become members until 2002.‖ VI Derivatives, 2011 WL
703835, at *15. The District Court reasoned that ―[t]he lack
of community involvement during 2001 is unsurprising, given
that Richard and Lana were rarely present in St. Thomas
during the year.‖ Id. This finding was not clearly erroneous.
Richard testified that he threw two parties at Estate
Frydendahl—a closing party with the seller Patti Birch and a
―football party.‖ Richard also testified that he participated in
a fundraiser for the Yacht Club. And Nicole Mollison
testified that the Ventos went to Friday night dinners at the
Yacht Club. However, the Ventos provided no evidence of
their social involvement apart from their own self-interested
testimony, which the District Court was free to discredit. See
Anderson, 470 U.S. at 573. This is particularly true because
Richard‘s testimony about the ―football party‖ was vague,
because there was no documentation about any of the Yacht
Club events, and because the District Court found that Nicole
had significant credibility issues. Therefore, we agree with
the District Court that the Ventos‘ lack of community ties
weighs against finding bona fide residency.
However, community social relationships are not the
only type of relationships that factor into the residency
calculus—professional, marital, and family relationships
matter as well. In those areas, the Ventos have a stronger
44
case. Richard began developing professional relationships in
the Virgin Islands 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 Estate Frydendahl. The fact that their adult
daughters lived elsewhere is to be expected. Therefore, the
Ventos‘ professional and family relationships do not
undermine their claim of bona fide residency. See Sochurek,
300 F.2d at 39 (fact that taxpayer ―was unmarried with no
dependents living elsewhere‖ suggested that his foreign
residency was bona fide).
4. Self-Identification
The Ventos self-identified as residents of the 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. In addition, they
obtained Virgin Islands driver‘s licenses and registered to
vote there. Accordingly, this factor weighs in favor of
finding bona fide residency.
* * *
Taken as a whole, the Sochurek factors indicate that
the Ventos were bona fide residents of the Virgin Islands. By
the summer of 2001, they had developed the intention to live
in the Virgin Islands ―indefinitely or at least for a substantial
period,‖ as evidenced by their purchase of and renovation of a
home and establishment of business interests. See Bergersen,
109 F.3d at 61. They were physically present in the Virgin
Islands for much of the period surrounding the end of 2001,
and the nature of that presence was more consistent with what
45
would be expected of a resident as opposed to a sojourner.
And although they did not establish many social ties in the
community by the end of 2001, they lived together in the
Virgin Islands and represented themselves as residents
thereof. For these reasons, we hold that the Ventos were bona
fide residents of the Virgin Islands on December 31, 2001.
C
Although the District Court erred in holding that
Richard and Lana Vento were not bona fide residents of the
Virgin Islands as of December 31, 2001, we readily agree
with the District Court that none of the Vento daughters was a
bona fide resident at that time.
Applying the Sochurek factors to Nicole Mollison, it is
clear that she did not intend to become a Virgin Islands
resident by the end of 2001. Nicole never established a home
in the Virgin Islands, even as she hired contractors to remodel
her Nevada home in 2000, 2001, and 2002. Nor did she
establish a profession in the Virgin Islands—she studied to
become a teacher in Nevada and eventually became licensed
to teach in Nevada and California, but not in the Virgin
Islands. Nicole‘s only evidence of intent was her own self-
serving testimony, which the District Court found not credible
because of her ―evasive demeanor on cross-examination, her
family‘s continuing ties to Nevada . . . , and the lack of safe
and comfortable accommodations for the Mollison family at
[Estate Frydendahl].‖ See VI Derivatives, 2011 WL 703835,
at *10 n.38. We defer to these credibility determinations,
which are the province of the factfinder. See Anderson, 470
U.S. at 573.
46
Likewise, Nicole did not have a sufficient physical
presence in the Virgin Islands. She visited there only three
times during 2001, each time engaging in ―tourist activities.‖
Nicole did not move any personal property to St. Thomas and
was not even physically present on December 31, 2001,
having returned to Nevada the day after Christmas.
Third, Nicole‘s ties and relationships mostly remained
with the mainland. From 2000 until at least 2003, all of
Nicole‘s children attended school in Nevada. Her husband,
from whom she was never separated, lived in Nevada and
listed a Nevada address on his 2001 tax return.
Finally, Nicole never identified herself as a resident of
the Virgin Islands. Although she filed tax returns with the
VIBIR in 2001, she never obtained a Virgin Islands driver‘s
license. During her 2003 adoption proceeding, Nicole swore
under oath that she was a resident of Nevada, and that she
resided there continuously since 1995. Nicole never told the
Nevada court or social worker that she had a Virgin Islands
residency.
Likewise, Gail Vento was not a bona fide resident of
the Virgin Islands at the end of 2001. Gail did not intend to
become a Virgin Islands resident by the end of 2001—she did
not establish a home in the Virgin Islands by the end of 2001
but rather lived in her own house in Colorado. Gail herself
testified that she moved to the Virgin Islands in 2002.
Gail also had a minimal physical presence in the
Virgin Islands. She visited St. Thomas only twice in 2001—
for the family cruise in March and for the Christmas party,
during which she stayed in a bedroom in the main house at
Estate Frydendahl and engaged in ―tourist-type activities.‖
47
She brought no personal property other than clothing to the
Virgin Islands. Although Gail was physically present at
Estate Frydendahl on December 31, 2001, she was not there
as a resident but rather as a vacationer and guest of her
parents.
Gail‘s primary professional and family ties also
remained with the mainland—from 1998 until December
2002, she was enrolled as a full-time student at the University
of Colorado. Her boyfriend, whom she has since married,
also lived with her in Colorado at the end of 2001. Although
Gail filed her 2001 tax returns with the VIBIR, she had not,
as of December 31, 2001, observed other formalities of
residency such as obtaining a Virgin Islands driver‘s license
or registering to vote there.
Like her sisters, Renee was not a bona fide resident of
the Virgin Islands at the end of 2001. She visited the Virgin
Islands only three times that year—once after she graduated
from college, once in September, and once for the Christmas
party. Renee stayed at a hotel during her first visit and at
Estate Frydendahl during her second and third visits. The
only personal property she had in the Virgin Islands were
―easily movable items,‖ such as clothing, cameras, and a
laptop. Although Renee was physically present at Estate
Frydendahl on December 31, 2001, she was there as a
vacationer and guest of her parents, not as a resident.
Meanwhile, most of Renee‘s ties remained with the
mainland. From the summer of 2001 until the spring of 2002,
Renee was employed in her family‘s home office in Nevada
while living at Lake Tahoe. In January 2002, she applied to a
photography school in California, listing her address as a post
office box in Nevada. Renee enrolled in the photography
48
school in 2002 and lived in California. Although she filed her
2001 taxes with the VIBIR, Renee had not obtained a Virgin
Islands driver‘s license, voter registration, or bank account by
the end of 2001.
The Taxpayers argue, somewhat in passing, that the
residency of the Vento daughters follows that of their parents.
They cite no authority for this proposition, and we are
unaware of any. In fact, § 932(c) requires that each
―individual‖ taking advantage of the statute either be ―a bona
fide resident of the Virgin Islands‖ or ―file[] a joint return‖
with a bona fide Virgin Islands resident. 26 U.S.C. § 932(c).
All three adult daughters filed their own tax returns, and none
was a dependent of their parents. Because the daughters were
not themselves bona fide residents of the Virgin Islands at the
end of 2001 and did not file joint tax returns with their
parents, their 2001 taxes were due to the United States.
V
For the foregoing reasons, we will reverse the District
Court‘s judgment with respect to Richard and Lana Vento and
hold that they were bona fide residents of the Virgin Islands
on December 31, 2001. We will affirm the District Court‘s
judgment that Nicole Mollison, Gail Vento, and Renee Vento
were not bona fide residents of the Virgin Islands on
December 31, 2001.22
22
The District Court made no findings with respect to
the Vento partnerships. Because those partnerships are pass-
through entities, see Historic Boardwalk Hall, 694 F.3d at
429 n.1, they do not have residencies separate from their
owners.
49