Many people change their residences to take advantage of lower tax rates. In fact, many states entice retirees with lower income tax or inheritance tax. Others lure businesses with tax exemptions and holidays.
In a recent case (VIFX by R.G. Vento, CA-3, April 17, 2013), the Court of Appeals for the Third Circuit had to decide whether a married couple and their adult children were residents of the United States or the U.S. Virgin Islands.
A federal district court had previously ruled that the couple were not bona fide residents of the U.S. Virgin Islands because their decision to change residency was tax-motivated. Reversing the district court, the court of appeals found that a sincere desire of taxpayers to change their residency to take advantage of lawful tax incentives does not undermine their claim of bona fide residency.
In this case, Richard and Lana Vento proved their intent to become Virgin Islands residents for an indefinite period by purchasing an estate and spending a considerable amount to renovate it. The court found that their decision to reside in a low-tax state or territory was not deceitful or unlawful.
The Ventos discussed collaborating with Virgin Islands University to develop a physics department that would become a source of employees for the couple’s newly established companies. Finally, the Ventos self-identified as residents of the Virgin Islands, obtained driver’s licenses and registered to vote.
However, the couple’s three daughters were not bona fide residents of the Virgin Islands. The daughters did not establish a home or a profession and had minimal physical presence in the Virgin Islands. Their professional and family ties also remained on the U.S. mainland, and they did not identify themselves as residents of the Virgin Islands.
Therefore, the daughters did not qualify as bona fide residents of the Virgin Islands. Although the daughters claimed that their residency followed with their parents residency, they filed their own tax returns and were not dependents of their parents.