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March 05, 2006

Virgin Islands Are at Center of Dispute on Tax Break

So the NY Times is now in the loop:

The United States Virgin Islands and several wealthy financiers who own homes there are working to persuade Congress to drop a new requirement that at least half the year be spent in the islands in order to get a tax break intended to spur their economic development.

The economic development program allows an effective federal income tax rate of just 3.5 percent for bona fide residents of the Virgin Islands. It has drawn wealthy Americans from the mainland and kindled an economic boom.

But the program, whose benefits have been available for decades, has also allowed some homeowners who spend little time in the islands to avoid federal taxes estimated at $400 million. At least one person, who lived in the islands less than one month a year and nonetheless claimed the program's benefits for income he generated selling insurance in Massachusetts, has pleaded guilty to tax fraud.

The new requirement, adopted by the Internal Revenue Service under legislation enacted by Congress in 2004, is intended to crack down on the practice. The legislation followed articles that exposed how little time some of the beneficiaries spent in the islands and how little of their income was derived there.

The program has long required individuals who benefit from the tax break, as well as companies that do so, to commit $100,000 of capital, employ 10 local residents, buy goods and services from local suppliers and promise to make charitable donations. But until Jan. 31, when the new restriction took effect, there was no explicit residency requirement; the I.R.S. instead used a "facts and circumstances" test to assess eligibility. As a result of the change, individuals claiming the benefit must now prove that they have spent 183 days in the Virgin Islands during the year.

In response, the Virgin Islands Tax Working Group, which represents people who benefit from the break, paid $200,000 last year for lobbyists, according to records compiled by Political Money Line, a nonpartisan campaign finance tracking service. At least one senator, Gordon H. Smith, Republican of Oregon, has been saluted in the islands at a fund-raiser on his behalf attended by several beneficiaries of the program.

The government of the Virgin Islands is just as eager as the beneficiaries to have the new restriction eased. Donna M. Christensen, the islands' delegate to Congress, acknowledged problems with the program in written testimony submitted at a hearing held Wednesday by the Senate Energy and Natural Resources Committee, which oversees the Interior Department and thus territorial affairs. But she asked committee members to lobby for a lightening of the residency requirement.

Ms. Christensen, describing the rule as onerous, wants Congress to reduce the requirement to 122 days over three years, or an average of a little more than a month annually.

"This is the No. 1 issue for us in terms of our economic prosperity going forward," she said.

The rule's opponents, whose efforts were first reported in The New York Sun, have asked Senator Michael D. Crapo, an Idaho Republican on the Senate Finance Committee, to propose an amendment in tax legislation now being negotiated. In a letter to Senator Pete V. Domenici, the New Mexico Republican who heads the energy committee, Mr. Crapo said the specific tax rules governing beneficiaries of the program had been changed without legislative hearings and without consulting the Virgin Islands government.

"As a result, we now see that the changes may have gone too far," Mr. Crapo wrote. "While the bad actors have been successfully removed from the program, these changes are also disrupting legitimate businesses and causing fiscal hardship."

Chris Matthews, a spokesman for Senator Smith, who sits on both the energy committee and the Finance Committee, confirmed that the senator attended a fund-raiser for him in the Virgin Islands last year. Mr. Matthews said Mr. Smith had subsequently chatted with some of his colleagues about his concerns that the tighter regulations were hurting law-abiding businesses.

You have to think the feds will eventually all but kill this program - unless they can be lobbied effectively by the multi-millionaires who are abusing the system.

Posted by afinta at March 5, 2006 01:02 PM

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