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HomeNewsArchivesIRS AGENTS SHUT DOWN EDC BENEFICIARY KAPOK

IRS AGENTS SHUT DOWN EDC BENEFICIARY KAPOK

Editor's note: The Source earlier reported that Frank Schulterbrandt, chief executive officer of the Economic Development Authority, had said he knew about the Kapok investigation from the time he came on board with the EDA. Schulterbrandt said Wednesday the Source was mistaken in saying he had known about the investigation, prior to the raids. "I had no knowledge of a criminal investigative. I found out about when the U.S. attorney called me Tuesday."
May 20, 2003 – Federal Internal Revenue Service agents executed search warrants Tuesday against Kapok Management LP, a financial services company on St. Croix that receives tax benefits as an Economic Development Commission beneficiary, shutting the company down.
Frank Schulterbrandt, chief executive officer of the Economic Development Authority, under which the EDC falls, referred questions about the nature of and reason for the investigation to the Internal Revenue Service. Schulterbrandt said no immediate show cause hearing had been scheduled for Kapok, despite concerns, because procedure for such a hearing requires that a compliance audit be completed first.
He said Kapok's audit was not completed.
Schulterbrandt did say Tuesday afternoon that Kapok, which had held an executed EDC certificate since March 2000, employed "19 non-partner employees and 59 partner employees."
Kapok's compliance terms include employing no fewer than 10 full-time employees, 80 percent of whom must be V.I. residents.
Beneficiaries are required to be V.I. residents, too, which is where the benefit to the local treasury comes from. It is also, according to one beneficiary, where a lot of confusion lies.
Sources said on Tuesday that the Kapok investigation has to do with residency requirements that are ill defined. Residency of the partners is said to be at issue.
There is no clear-cut definition of what constitutes residency where the EDC program is concerned, according to the beneficiary, who pointed out that the Motor Vehicles Bureau driver's manual says 90 days, the Board of Elections says 60-plus-one days and the Bureau of Internal Revenue says residency is determined by where you reside on Dec. 31.
In exchange for exemption for a stated time period of 90 percent of corporate income taxes and 100 percent of gross receipts taxes, excise taxes and property taxes, the owners of EDC companies pay their personal income taxes plus 10 percent of their corporate taxes into the V.I. coffers.
Those are the short-term gains. In the long term, wealthy investors with excess capital, whose companies are prohibited from competing with local companies, can and do invest in local businesses; and when they do, they pay the same taxes on those as anyone else. EDC companies also are required to make charitable and educational contributions to local not-for-profit agencies.
Schulterbrandt couldn't say what the economic loss from just one company — Kapok — might be to the territory, but one informed source estimated it could be as much as $40 million to $50 million.
There also was speculation that the investigation could sour other potential investors from coming to the Virgin Islands.
However, Schulterbrandt said he wasn't worried about that. "One of the greatest things about this investigation is that it shows we are maintaining the integrity of the program," he said. Every tax incentive program is "subject to games," he said, but the Kapok investigation "should in no way impact on the growth" of the EDC program.
As long as beneficiaries "comply with the law," he said, "it should be no problem."
However, several people with understanding of the program did express concern. One beneficiary who agreed to speak on condition of anonymity said he expected the action to "suspend the approval of any new certificates until it is understood what has taken place here."
He said it is going to be hard to convince investors to buy into the program until it is crystal clear was the expectations are. And apparently confusion over residency is only one confounding issue.
One person said it took more than a year from the time of his EDC hearing until he held an executed EDC certificate in his hand. While awaiting the duly executed document, he said, he had asked, wanting to comply with the program's requirement, what he should consider as his company's start-up date.
He said he was given three different answers, which all made sense; but one of them put him out of compliance with his EDC agreement. His immediate concern, given the raid on Kapok, is that beneficiaries are "subject to arbitrary and conflicting guidance and interpretation." He added that it is often "impossible to comply, no matter how hard you try."
The federal IRS officials who raided Kapok did not seek assistance from local enforcement agencies, nor did they inform local agencies about the impending action until Monday night, according to one source, also speaking on condition of anonymity.
Schulterbrandt expressed concern about the immediate blow to St. Croix of the closing. Kapok, he said, is one of the biggest companies on the island. However, he said, the raid "sends a signal to the U.S. government that we intend to carry out the intent of the program."
It also sends a message, according to one financial analyst, that until the guidelines of the program are more clear-cut, investors will likely "defer consideration" on investing in the Virgin Islands. That could be more economic bad news for a jurisdiction that has relied heavily on EDC investment to save the territory in the wake of a lagging tourism economy.

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Editor's note: The Source earlier reported that Frank Schulterbrandt, chief executive officer of the Economic Development Authority, had said he knew about the Kapok investigation from the time he came on board with the EDA. Schulterbrandt said Wednesday the Source was mistaken in saying he had known about the investigation, prior to the raids. "I had no knowledge of a criminal investigative. I found out about when the U.S. attorney called me Tuesday."
May 20, 2003 - Federal Internal Revenue Service agents executed search warrants Tuesday against Kapok Management LP, a financial services company on St. Croix that receives tax benefits as an Economic Development Commission beneficiary, shutting the company down.
Frank Schulterbrandt, chief executive officer of the Economic Development Authority, under which the EDC falls, referred questions about the nature of and reason for the investigation to the Internal Revenue Service. Schulterbrandt said no immediate show cause hearing had been scheduled for Kapok, despite concerns, because procedure for such a hearing requires that a compliance audit be completed first.
He said Kapok's audit was not completed.
Schulterbrandt did say Tuesday afternoon that Kapok, which had held an executed EDC certificate since March 2000, employed "19 non-partner employees and 59 partner employees."
Kapok's compliance terms include employing no fewer than 10 full-time employees, 80 percent of whom must be V.I. residents.
Beneficiaries are required to be V.I. residents, too, which is where the benefit to the local treasury comes from. It is also, according to one beneficiary, where a lot of confusion lies.
Sources said on Tuesday that the Kapok investigation has to do with residency requirements that are ill defined. Residency of the partners is said to be at issue.
There is no clear-cut definition of what constitutes residency where the EDC program is concerned, according to the beneficiary, who pointed out that the Motor Vehicles Bureau driver's manual says 90 days, the Board of Elections says 60-plus-one days and the Bureau of Internal Revenue says residency is determined by where you reside on Dec. 31.
In exchange for exemption for a stated time period of 90 percent of corporate income taxes and 100 percent of gross receipts taxes, excise taxes and property taxes, the owners of EDC companies pay their personal income taxes plus 10 percent of their corporate taxes into the V.I. coffers.
Those are the short-term gains. In the long term, wealthy investors with excess capital, whose companies are prohibited from competing with local companies, can and do invest in local businesses; and when they do, they pay the same taxes on those as anyone else. EDC companies also are required to make charitable and educational contributions to local not-for-profit agencies.
Schulterbrandt couldn't say what the economic loss from just one company -- Kapok -- might be to the territory, but one informed source estimated it could be as much as $40 million to $50 million.
There also was speculation that the investigation could sour other potential investors from coming to the Virgin Islands.
However, Schulterbrandt said he wasn't worried about that. "One of the greatest things about this investigation is that it shows we are maintaining the integrity of the program," he said. Every tax incentive program is "subject to games," he said, but the Kapok investigation "should in no way impact on the growth" of the EDC program.
As long as beneficiaries "comply with the law," he said, "it should be no problem."
However, several people with understanding of the program did express concern. One beneficiary who agreed to speak on condition of anonymity said he expected the action to "suspend the approval of any new certificates until it is understood what has taken place here."
He said it is going to be hard to convince investors to buy into the program until it is crystal clear was the expectations are. And apparently confusion over residency is only one confounding issue.
One person said it took more than a year from the time of his EDC hearing until he held an executed EDC certificate in his hand. While awaiting the duly executed document, he said, he had asked, wanting to comply with the program's requirement, what he should consider as his company's start-up date.
He said he was given three different answers, which all made sense; but one of them put him out of compliance with his EDC agreement. His immediate concern, given the raid on Kapok, is that beneficiaries are "subject to arbitrary and conflicting guidance and interpretation." He added that it is often "impossible to comply, no matter how hard you try."
The federal IRS officials who raided Kapok did not seek assistance from local enforcement agencies, nor did they inform local agencies about the impending action until Monday night, according to one source, also speaking on condition of anonymity.
Schulterbrandt expressed concern about the immediate blow to St. Croix of the closing. Kapok, he said, is one of the biggest companies on the island. However, he said, the raid "sends a signal to the U.S. government that we intend to carry out the intent of the program."
It also sends a message, according to one financial analyst, that until the guidelines of the program are more clear-cut, investors will likely "defer consideration" on investing in the Virgin Islands. That could be more economic bad news for a jurisdiction that has relied heavily on EDC investment to save the territory in the wake of a lagging tourism economy.

Publisher's note : Like the St. John Source now? Find out how you can love us twice as much -- and show your support for the islands' free and independent news voice ... click here.