US Treasury Warns Against Virgin Islands Tax Reduction Scheme

by Mike Godfrey, Tax-News.com, Washington

28 June 2004

The US Treasury Department and the Internal Revenue Service on Thursday issued a notice warning US taxpayers against promoters who market arrangements that purportedly provide reductions in federal taxation as a result of the special rules applicable to the US Virgin Islands.

These arrangements involve taking positions that are highly questionable with respect to claims that the taxpayer resides in the US Virgin Islands and that the taxpayer's income is from sources in the US Virgin Islands or is connected with a US Virgin Islands business.

The notice describes a form of arrangement that has been promoted and that involves running a taxpayer's salary or business income through a US Virgin Islands entity such as a limited partnership. The notice warns, however, that these questionable positions may also be promoted through other forms of arrangements and with respect to US possessions other than the US Virgin Islands.

Acting Assistant Secretary for Tax Policy Greg Jenner explained that:

"This notice is another example of our ongoing efforts to prevent promoters and taxpayers from making highly questionable arguments, and setting up dubious arrangements, in an attempt to avoid paying their fair share of taxes."

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