U.S. Citizen Was Bona Fide U.S. Virgin Islands Resident for Two of Three Years (Sanders Est., TCM)

A U.S. citizen was a bona fide U.S. Virgin Islands resident for two of three tax years at issue. For those two years, the individual had the intent, physical presence, social relationships, and personal representations to show that he was a bona fide resident.

Activities in the U.S. Virgin Islands

The individual built his own company to manufacture and distribute surge suppression devices. The company was located in Florida. His attorney and other individuals formed a company in the Virgin Islands to take advantage of certain economic incentives offered by the Virgin Islands. Then, they asked the taxpayer to join their business as a consultant and limited partner. The individual’s employment agreement required that he become a Virgin Islands resident. For the three years at issue, on the advice of his accountant and his attorney, the individual filed tax returns with the Virgin Islands Bureau of Internal Revenue (VIBIR). But, he did not file any returns with the IRS.

The IRS prepared substitute returns for the individual. Then, it issued him a notice of deficiency for the years at issue. The IRS determined that:

  • the individual was not a Virgin Islands resident;
  • all transactions between the individual and the Virgin Islands company lacked economic substance;
  • the individual could not exclude his gross income; and
  • the individual had to file returns with the IRS and
  • he was liable for penalties.

Bona Fide U.S. Virgin Islands Resident

A bona fide resident of the U.S. Virgin Islands must file income tax returns with the U.S. Virgin Islands tax authorities. A bona fide resident does not report gross income to the IRS as long as:

  • he properly reports all income;
  • he identifies the source of the income; and
  • he pays the tax.

The tax code generally defines a “bona fide resident” as a person who:

  • is present for at least 183 days during the tax year in the Virgin Islands;
  • does not have a tax home outside the Virgin Islands during the tax year and
  • does not have a closer connection to the U.S. or a foreign country than to the possession.

However, this definition of “bona fide resident” did not apply to the tax years at issue in this case. Instead, the court analyzed four broad categories to determine whether the taxpayer was a bona fide resident:

  1. the taxpayer’s intent;
  2. his physical presence;
  3. his social, family, and professional relationships; and
  4. the taxpayer’s own representations.

Bona Fide Resident for Two of Three Years

For the first of the three tax years, the individual was not a bona fide resident of the Virgin Islands. He was in the Virgin Islands for eight days over the course of three visits. He did not have a permanent residence at the end of the tax year. In addition, he did not spend enough time in the Virgin Islands to establish social connections.

For the second tax year, the individual intended to be a resident at the close of the year. His credit card and bank transaction history placed him in the Virgin Islands for 50 days, and in Florida for 149 days. At the end of the year he was present in the Virgin Islands for 11 days and in Florida for seven days.

However, the individual had a Virgin Islands driver’s license and a residence to which he financially contributed. In addition, he worked for his businesses while he was in the Virgin Islands. He had a consistent physical presence in the Virgin Islands during the year. And, his family was a part of his life there.

For the third tax year, the individual’s credit card and bank transaction history placed him in the Virgin Islands for 77 days, but in Florida for 99 days. However, he was in the Virgin Islands for a part of each of 10 of the 12 months of the year.

Also, the individual spent more time in the Virgin Islands and less time in Florida during that year than the previous year. Therefore, based on the totality of the circumstances, the individual was more than a “transient” or a “sojourner” for the third tax year.

T.L. Sanders Est., TC Memo. 2018-104, Dec. 61,215(M)


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All stories by: CCHTaxGroup