In a decision with major ramifications for V.I. Economic Development Commission tax incentive programs, U.S. Tax Court in Washington, D.C., on Wednesday ruled the federal statute of limitations applies to V.I. taxpayers who file locally, even if the U.S. Internal Revenue Service disputes the amount of taxes.
According to Government House, in a case involving Arthur Appleton, a Virgin Islands resident and an EDC beneficiary, the IRS challenged the amount of EDC tax credits claimed by the taxpayer for tax years that fell outside of the normal three-year statute of limitations and filed a notice of tax deficiency against the taxpayer totaling hundreds of thousands of dollars.
The taxpayer challenged the IRS action on the grounds that he duly filed his tax returns with the Bureau of Internal Revenue which triggered the federal statute of limitations and thus barred the IRS efforts to assess additional taxes.
Because the case touched on the scope and boundaries of the territory’s taxing jurisdiction, Gov. John deJongh Jr. instructed Attorney General Vincent Frazer to intervene in the Appleton case in late 2010, according to a statement from Government House. After several rounds of briefings and oral arguments which were held in Washington last October, the tax court issued its ruling in favor of the V.I. government and the taxpayer Wednesday.
“This is a huge win for the Virgin Islands Economic Development program and for all Virgin Islands taxpayers,” deJongh said in a statement Thursday. “The court’s decision sends a strong message to the IRS that our EDC program is a lawful, congressionally sanctioned program that must be afforded respect, and that our taxpayers are guaranteed the same due process and procedural protections that are regularly provided to taxpayers on the U.S. mainland,” deJongh said.
DeJongh said the tax court decision would have “ripple effects far beyond the ultimate tax liability of a single taxpayer.”
In recent years the IRS had “instituted hundreds of extensive and costly tax audits of individuals who participated in the territory’s EDC program for years that far exceeded the statute of limitations, putting enormous pressure on our taxpayers and on the EDC program itself,” he said.
Many EDC beneficiaries left the Virgin Islands as a result and many individuals who were interested in relocating and investing in the territory decided not to come, deJongh said, adding that the result was less investment, fewer jobs and falling tax revenues for the territory.
