Oct. 18, 2007 — The men accused of using the Virgin Islands EDC program as an illegal tax shelter were indicted in federal court on St. Croix Thursday, officials said.
The 35-count indictment handed down in U.S. District Court charges James A. Auffenberg, Jr. of Swansea, Illinois; Peter G. Fagan of De Leon, Texas; James W. Ferguson, III of Amarillo, Texas, and Jonathan D. Jackson of St. Croix with criminal violations of both federal and Virgin Islands Income Tax Codes.
The charges include conspiracy, tax evasion, filing false individual and corporate income tax returns, aiding and assisting in the preparation of such returns, wire fraud, and money laundering, under U.S. law, as well as conspiracy, making false statements to officials of the Virgin Islands Government, filing false tax returns with the Virgin Islands Bureau of Internal Revenue, and gross receipts tax evasion, in violation of the Virgin Islands Code.
The indictment also seeks the forfeiture of approximately $17 million in cash. In addition to the individuals charged, the indictment names their related entities, including Auffenberg Enterprises of Illinois, Inc.; Kapok, Inc.; Kapok Management, L.P.; St. Clair I, LLC, and St. Clair II Holdings VI, LLC.
Fagan, Fergusen and Jackson allegedly created Kapok, Inc. with the purpose of getting mainland companies to use the EDC as a way to avoid taxes, while never actually doing business in the territory, the indictment states.
Auffenberg's car dealership, Auffenberg Enterprises of Illinois, Inc., was alleged to have illegally avoided more than $74 million in taxes from 1999 to 2002 by joining Kapok as a partner and shipping money to Kapok.
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.
"This awkward fiction was created for the purpose of evading United States taxes on that income," the indictment said.
The indictment charged that Auffenberg and some of the other limited partners claimed to be U.S. Virgin Islands residents, but never actually became residents, as required to be a part of the EDC program, which give up to 90 percent tax breaks for qualified businesses. Instead, they continued to reside on the mainland United States and run their businesses as they had before joining Kapok, thereby generating income from the conduct of business within the mainland U.S.
According to the indictment, Jackson, Kapok, Inc. and Kapok Management, L.P. made false statements in a special hearing before the Economic Development Commission, which had issued an Order to Show Cause why the tax benefits given to Kapok should not be taken away. In addition, the indictment alleges that Fagan, Ferguson and Jackson filed false tax returns with the Bureau of Internal Revenue for the years 2000, 2001 and 2002 by falsely claiming a tax credit to which they knew they were not entitled
According to the indictment, between 1999 and 2002, Mr. Auffenberg and other limited partners paid bogus management fees totaling approximately $317 million and fraudulently claimed tax credits of approximately $74 million on U.S. Virgin Islands tax returns.
The defendants were originally brought up on federal charges by a grand jury in the Southern District of Illinois in an indictment returned on March 23, 2007. On July 5, 2007, the case was transferred by the U.S. District Court for the Southern District of Illinois to the U.S. District Court in the U.S. Virgin Islands.
The new indictment adds charges under the Virgin Islands Code.
If convicted, the defendants could face dozens of years in jail and fines in the millions of dollars.
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 V.I..
Widespread media coverage of the Payne debacle may have contributed to the IRS-driven tightening of the guidelines that governed the V.I. Economic Development Authority tax incentive program, causing several companies to leave the territory.
V.I. lawmakers, most notably Delegate Donna M. Christensen, still hope to loosen those new rules to dissuade misuse without scaring off investors.
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