Vento v. Dir. of Virgin Islands Bureau of Internal Revenue

• Decision Date: 17 April 2013
• Docket Number: 11–2625,11–2603,11–2622,11–2619,11–2618,11–2621,11–2620,11–2321,12–1417.,Nos. 11–2318,11–2319,11–2623,11–2320,11–2322,12–1416,11–2624,s. 11–2318
• Citation: 715 F.3d 455,58 V.I. 753
• Parties: Gail VENTO, Appellant in 11–2318 Richard Vento, Appellant in 11–2319 Renee Vento, Appellant in 11–2320 Nicole Mollison, Appellant in 11–2321 Lana Vento, Appellant in 11–2322 VI Derivatives LLC by VIFX LLC its Tax Matters Partner by Richard G. Vento its Tax Matter Partner, Appellant in 12–1416 VIFX by Richard G. Vento its Tax Matter Partner, Appellant in 12–1417 v. DIRECTOR OF VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE, Appellant in 11–2603 and 11–2618 through 11–2625 United States of America, Intervenor–Defendant–Appellee.
• Court: U.S. Court of Appeals — Third Circuit

715 F.3d 455

58 V.I. 753

Gail VENTO, Appellant in 11–2318

Richard Vento, Appellant in 11–2319

Renee Vento, Appellant in 11–2320

Nicole Mollison, Appellant in 11–2321

Lana Vento, Appellant in 11–2322

VI Derivatives LLC by VIFX LLC its Tax Matters Partner by Richard G. Vento its Tax Matter Partner, Appellant in 12–1416

VIFX by Richard G. Vento its Tax Matter Partner, Appellant in 12–1417

v.DIRECTOR OF VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE, Appellant in 11–2603 and 11–2618 through 11–2625

United States of America, Intervenor–Defendant–Appellee.

Nos. 11–2318, 11–2319, 11–2320, 11–2321, 11–2322, 11–2603, 11–2618, 11–2619, 11–2620, 11–2621, 11–2622, 11–2623, 11–2624, 11–2625, 12–1416, 12–1417.

United States Court of Appeals,Third Circuit.

Argued Dec. 5, 2012.

Filed: April 17, 2013.

Robert L. Byer, Esq., Susan G. Schwochau, Esq., Duane Morris, Pittsburgh, PA, Nathan Z. Dershowitz, Esq. [argued], Victoria B. Eiger, Esq., Dershowitz, Eiger & Adelson, New York, NY, Joseph M. Erwin, Esq., Dallas, TX, Robert M. Palumbos, Esq., Duane Morris, Philadelphia, PA, for Appellants Gail Vento, Richard Vento, Renee Vento, Nicole Mollison and Lana Vento.

Jennifer M. Rubin, Esq. [argued], Kenneth L. Greene, Esq., United States Department of Justice, Tax Division, Washington, DC, for Appellee United States of America.

Tiffany V. Monrose, Esq., Office of Attorney General of Virgin Islands, Department of Justice, St. Thomas, VI, Gene C. Schaerr, Esq. [argued], Winston & Strawn, Washington, DC, for Appellee Director of

Virgin Islands Bureau of Internal Revenue.

Before: SMITH, HARDIMAN and ROTH, Circuit Judges.

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

These consolidated appeals are of great importance to the tax regimes of the United States and the U.S. Virgin Islands. Residents of the Virgin Islands pay income taxes to the Virgin Islands Bureau of Internal Revenue (VIBIR) rather than the Internal Revenue Service (IRS). Appellants Richard and Lana Vento (the Ventos) filed a joint 2001 income tax return with the VIBIR. Their three daughters also filed their 2001 income tax returns with the VIBIR. The United States claims that the Ventos and their daughters (collectively, Taxpayers) should have filed those returns with the IRS instead. The proper tax jurisdiction depends on whether the Taxpayers were bona fide residents of the Virgin Islands as of December 31, 2001.

I

A successful entrepreneur, Richard Vento co-founded a technology company called Objective Systems Integrators, Inc. (OSI). When OSI was sold, the Ventos, their daughters, and various Vento-controlled entities realized $180 million in capital gains for the 2001 tax year. Not surprisingly, this boon caused the Ventos to consult a financial professional to advise them regarding their capital gains.

Whatever advice the Ventos received and however they acted upon it, the Taxpayers have become embroiled in numerous tax disputes in various courts. ¹ The dispute at issue in the consolidated appeals now before us began in 2005, when the VIBIR issued Notices of Deficiency and Final Partnership Administrative Adjustments (FPAAs) to the Taxpayers and partnerships they controlled, assessing a deficiency and penalties of over $31 million against the Ventos and approximately $6.3 million against each of their three daughters. The VIBIR also concluded that two Vento-owned partnerships, VI Derivatives, LLC and VIFX, LLC,² were shams and disregarded them for tax purposes.

That same year, the IRS issued FPAAs to the Taxpayers that were nearly identical to those issued by the VIBIR. Significantly, however, the IRS issued FPAAs to two other Vento-controlled partnerships—DTDV, LLC and DTLV, LLC—that were unchallenged by the VIBIR.³ Consequently, the IRS assessed deficiencies and penalties against the Taxpayers that totaled over $9 million more than those assessed by the VIBIR.

The Taxpayers challenged the VIBIR's and IRS's Notices of Deficiency and FPAAs in several separate proceedings in the District Court of the Virgin Islands. The United States moved to intervene in the cases between the Taxpayers and the VIBIR, arguing that the Taxpayers should have filed and paid their 2001 taxes to the IRS instead of the VIBIR because they were not bona fide residents of the Virgin Islands.⁴ Following the intervention of the United States, the cases were consolidated in the District Court, which had subject matter jurisdiction under 48 U.S.C. § 1612(a).

In June 2010, the District Court conducted a bench trial. The sole issue at trial was whether the Taxpayers were bona fide residents of the Virgin Islands as of December 31, 2001. The District Court held that they were not, and the Taxpayers, joined by the VIBIR, appealed. We have appellate jurisdiction over the consolidated appeals under 28 U.S.C. § 1291.⁵

II

The parties largely agree on the facts and the governing law. Their arguments revolve around a few disputed facts and their competing applications of the law to the facts. Our review of the facts adopts those found by the District Court, except where we indicate otherwise.

A

Richard and Lana Vento are married and filed a joint 2001 tax return. From 1995 through 2000, the Ventos lived in Incline Village, Nevada, on the north shore of Lake Tahoe. That home was fully furnished and contained more than $500,000 worth of artwork. In 2000 and 2001, the Ventos also owned two homes in Hawaii, two homes on the south shore of Lake Tahoe in California, and a condominium in Utah. The Ventos kept approximately twenty automobiles in Nevada and California.

The Ventos have three daughters, all of whom were adults in 2001. In early 2001, the Ventos' eldest daughter, Nicole Mollison, lived in a separate home in Incline Village with her husband and three children. The Ventos' second child, Gail, lived in Boulder, Colorado, while their youngest daughter, Renee, lived in San Diego, California. The Ventos also maintained a family office in Incline Village.

After the sale of OSI, the Ventos and their daughters took a family vacation in March 2001 during which they chartered a yacht and visited approximately ten of the British and U.S. Virgin Islands. Prior to this trip, no member of the Vento family had ever been to the Virgin Islands or considered moving there.

Soon after cruising the islands, the Ventos began searching for residential propertyin the Virgin Islands. Their daughters were not involved in the search. In May 2001, the Ventos (through a limited liability company they controlled) contracted to buy Estate Frydendahl, a residential property on St. Thomas, for $7.2 million. Estate Frydendahl—which included a five-bedroom main house and several outlying buildings, including three two-bedroom cottages with kitchens—was sold furnished, and the transaction closed on August 1, 2001. At the time of purchase, the sellers were living in some of the outlying buildings, but the main house was vacant.

Once the Ventos had Estate Frydendahl under contract, they hired professional home inspector Adrian Bishop to inspect the property. Bishop's report concluded that Estate Frydendahl was a “magnificent house and property,” and was “substantially built, but ... suffering from deferred maintenance.” Bishop summarized his findings:

There are no major structural deficiencies on the property. There are some places where deficiencies exist, and all the structures suffer from deferred maintenance to varying degrees. The electrical system has many deficiencies, the plumbing system is quite sophisticated but suffering from 46 (or so) years of existence, and the roofs are in various states of repair.

Based on Bishop's report, the Ventos' attorney concluded that there were “$50,000 to $64,000 worth of items which ... should be addressed immediately upon closing.” Most of that sum was attributable to repairs to the roofs, gutters, and electrical system. As a result of Bishop's report, the purchase price of Estate Frydendahl was reduced to $6.75 million.

In addition to the repairs recommended by Bishop, the Ventos desired other significant improvements to Estate Frydendahl. At trial, Richard testified that, although his wife wanted to keep “the rock walls and the lignum vitae floor,” they “had to redo all the rest of it” including the “roof, ... air conditioning, electricity, plumbing. Everything.” The Ventos ultimately spent more than $20 million over and above the original purchase price improving Estate Frydendahl.

In November 2001, Richard retained a general contractor, RR Caribbean, Inc., to make improvements. However, their agreement did not specify any particular work to be done. Rather, it merely created “a baseline contractual relationship.” The November agreement had an initial term of two years and would renew annually unless either party cancelled it in writing. RR Caribbean performed “some minor construction work” in 2001, but major work did not begin until 2002.

The Ventos hoped that renovations to Estate Frydendahl could be completed in time for them to move in by Christmas 2001. Progress was slow, however, and the Ventos grew frustrated. Consequently, in the late fall of 2001, Lana Vento brought in Dave Thomas, a construction manager whom she had previously hired to work in Hawaii, to supervise the project. In December 2001, Thomas travelled to the Virgin Islands and concluded that the main house at Estate Frydendahl was “50 percent livable, where you could live there. But the normal amenities did not work properly or consistently, including water, electricity.” In particular, Thomas testified that, although the main house “was livable, to the point where you had electricity, lights, stove,” the entrance gate did not work, the house was very warm because the ceiling fans and air conditioning did not work, the dock was dilapidated and very dangerous, there was no source of potable water because the water purification system did not work, some of the toilets did not work, and the power supply was inadequate. Thomas...