March 5, 2009 — In a case widely followed for its potential impact on investment in the territory, James A. Auffenberg Jr. and three other men charged with evading federal taxes and filing false income tax returns were found not guilty of all charges by a jury on St. Croix this week.
The U.S. Department of Justice had alleged the four men 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 four were charged at the result of an IRS undercover operation.
Appearing before visiting U.S. District Court Judge Harvey Bartle, the prosecution argued that Auffenberg, 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, the charges alleged Kapok kept five percent of Auffenberg's money in exchange for bogus management fees. (See: ""Feds: Auffenberg and Accomplices Nailed by IRS Sting.")
The defense successfully countered Auffenberg and partners acted in good faith, trying to follow the rules of the EDC program without guidance or oversight from the Internal Revenue Service.
The four were charged in Illinois on March 23, 2007, but the case was moved to Virgin Islands District Court at the request of Jackson's attorneys in August on the grounds that Jackson lives here and the case is about activities involving a V.I. program and residents.
The EDC confers substantial tax benefits on select new businesses that open in the Virgin Islands, reducing most taxes to zero. In exchange, individuals and companies must commit $100,000 of capital, employ 10 local residents, buy goods and services from local suppliers and promise to make charitable donations. They must also establish residency, and are advised to buy or lease a house and car, obtain a local driver's license and join local clubs, among other things.
This is the second indictment against Kapok partners. In the prior case, in 2004 insurance salesman Gary J. Payne pleaded guilty to tax fraud after claiming Economic Development tax credits on money generated in Massachusetts. Widespread media coverage of the Payne case 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. (See: "Tax-Evasion Case Moved to Territory.")
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