March 26, 2007 — A grand jury has indicted four men on charges they used the V.I. Economic Development Program to illegally dodge paying taxes on money earned on the mainland, officials said Monday.
The men — hailing from Texas and Illinois — illegally claimed a 90-percent federal tax break on more than $300 million funneled through the St. Croix-based company Kapok Management, L.P., the U.S. Department of Justice said.
V.I. companies that qualify under the Economic Development Program can legally avoid local and federal taxes if the owners live in the islands. Money eligible for tax credits has to be generated by the V.I.-based company.
According to the 21-count indictment, James A. Auffenberg Jr., a prominent car dealer in Swansea, Ill., illegally avoided more than $74 million in taxes from 1999 to 2002 by joining Kapok as a partner and shipping money to Kapok, run by Peter G. Fagan of De Leon, Texas; James W. Ferguson III of Amarillo, Texas; and J. David Jackson of St. Croix.
In return, Kapok kept five percent of Auffenberg's money in exchange for bogus management fees, the indictment said.
Auffenberg runs at least two car dealerships in Southern Illinois. He also serves on the Board of Directors of the United Way of Greater St. Louis.
Messages left at his office Monday were not immediately returned.
"The government has identified numerous variations of tax-fraud schemes, but they all have one thing in common: to conceal income," said Eileen C. Mayer, the IRS criminal investigation chief. "Today's indictment is a clear signal that IRS criminal investigators will continue to pursue both the promoters and the investors involved in tax-fraud schemes."
It was the second indictment against Kapok partners.
Insurance salesman Gary J. Payne pleaded guilty to tax fraud in 2004 after claiming Economic Development tax credits on money generated in Massachusetts. He also never lived in the islands full time.
Widespread media coverage of the Payne debacle prompted Congress to tighten the Economic Development Program, imposing strict rules.
V.I. lawmakers — most notably Delegate Donna M. Christensen — still hope to loosen those new rules to dissuade misuse of the program without scaring off investors.
Gov. John deJongh Jr. said the territory would aid efforts to uncover any wrongdoing within the program, and that it "should and will be used only to stimulate economic opportunities for our residents as both employees and owners of businesses contributing to our economic growth."
He continued, "It must at all times be strictly regulated and fully compliant with all applicable laws. Whatever steps need be taken by the local government to safeguard this program — which is essential to our economic future — will be taken, and wrongdoing will be investigated and prosecuted by the appropriate government, local or federal."
In the recent indictment, the men and their companies — including Auffenberg Enterprises of Ill., Inc.; Kapok Inc.; Kapok Management L.P.; St. Clair I LLC; and St. Clair II Holdings VI LLC — were charged with conspiracy; income-tax evasion; filing, aiding and assisting in the filing of false individual and corporate income-tax returns; and wire fraud. The indictment also seeks the forfeiture of approximately $16.2 million in cash.
If convicted, the defendants face the following maximum potential sentences: On the conspiracy charge, five years imprisonment followed by up to three years supervised release and a $250,000 fine; on each income-tax-evasion charge, five years imprisonment, followed by up to three years supervised release, a $250,000 fine and costs of prosecution; on each false income-tax-return charge, three years imprisonment, followed by up to three years supervised release, a $250,000 fine and costs of prosecution; and on the wire-fraud charge, five years imprisonment followed by up to three years supervised release and a fine of up to $32,475,285.
Initial reports did not make it clear when they might appear in court.
The defendants are innocent until proven guilty, noted the Department of Justice’s Tax Division and the U.S. Attorney’s Offices for the Southern District of Illinois and the U.S. Virgin Islands.
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