Or, Little Pigs, Big Pigs

I gratefully acknowledge the assistance of Stuart D. Gibson, Esq., Senior Litigation Counsel, Tax Division, DOJ, who brilliantly shredded taxpayer’s experts in Stobie (see my posting of 1/10/11), and who provided the raw materials for this column. Of course, all the interpretations, errors and omissions herein are mine alone.

He and I must agree to disagree about the result in Appleton (see my posting of 12/28/10). In any event, still waiting for Third Circuit to tell us all.

However, the assault on the Virgin Islands non-virgins goes on apace, and Mr. Gibson kindly sent me Judge Sanchez’s memorandum decision in VI District Court in VI Derivatives v. Com’r, Civil 06-12, decided 2/18/10.

The background is the usual. Mr. Vento made fortune from an IT start-up in which he had minimal basis, but sold for millions in 2000, just before that bubble burst. Mr. Vento faced an astronomical taxable capital gain. Now comes the usual consultant with the tax dodge du jour: save millions by residing in the VI as of 12/31/01, as a result of Congress’ unguided largesse toward our broke but beautiful Islands in the Sun. Move there, invest in some business, and your tax bill shrinks like cheap boiled blue jeans. (Section 932, the dispenser of largesse, was since amended to require a full year residency.)

Mr Vento thither bends his joyful footsteps, buys a dilapidated compound that cannot be rendered fit for human habitation for two years, and celebrates Christmas 2001 en famille with his daughters and their families, significant others, and such hangers-on as he needs to restore his not exactly island paradise.

Having gifted pieces of his IT empire to the daughters aforesaid, Mr Vento decides that they too shall be beneficiaries of Congress’ unguided largesse. The daughters claim VI residency as well on the magic date, notwithstanding their sworn statements before and since, and actions speaking far louder in Judge Sanchez’s ears than the arguments of their counsel.

The residency arguments evaporated. It isn’t that one can’t have a residence, or even residences, different to one’s domicile, and the test for residency is clearly less precise than that for domicile. A recent Presidential candidate took flak because his spouse owned and maintained seven different residences, but on emotional grounds, for there is nothing illegal in having more than one residence. But Mr Vento and family fail the ultimate test–good faith.

Judge Sanchez lists the eleven factors of Sochurek v. Com’r, 300 F.2d 34 (CA 7, 1962). He individually weighs Mr Vento and spouse, and each daughter, in the Sochurek balance and finds each one wanting. Especially significant is the dilapidated condition of the “residence”; no air conditioning, no running water, abundant physical hazards. Mr Vento left his art collection behind in Nevada. The entire family did not move any possessions except some clothing to the “residence”. And they spent virtually no time at this “residence”.

It may be the Judge Sanchez imposed a tougher test, akin to a domicile rather than residence test, even though giving lip service to Sochurek, because Mr Vento had created a dubious charitable foundation, whose main function seemed to be to afford Mr Vento a charitable deduction for contributing his old house in Nevada, while his new house, costing double what he paid for the VI “residence”, was a-building.

And the move to the VI was so clearly tax-driven.

The takeaway for tax advisers is that it isn’t enough to give clients a good idea. You have to follow up and build the record–tell them to get the drivers’ licenses, get a library card, join the local social scene (deadly dull though it may be), open a bank account, hang out, hang around–and remember: little pigs go back to the trough, but big pigs get slaughtered.