On Appeal from the District Court of the Virgin Islands (D.C. No. 06-cv-0006) (D.C. V.I. No. 3-06-cv-00003, 04, 05, 06, 07, 08, 09, 10, 12, 13) District Judge: Honorable Juan R. Sanchez
The opinion of the court was delivered by: Hardiman, Circuit Judge.
Before: SMITH, HARDIMAN and ROTH, Circuit Judges.
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.
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.*fn1 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 Ventoowned partnerships, VI Derivatives, LLC and VIFX, LLC,*fn2 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.*fn3 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.*fn4 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.*fn5
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.
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 property in 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 also testified that the three outlying cottages were ―pretty much, flat out‖ unlivable. Thomas began working on improving Estate Frydendahl in January 2002. He stayed there until ―Christmas of 2003,‖ at which point the Ventos ―had their whole family and friends‖ there and ―had things up and running.‖ Nevertheless, work on Estate Frydendahl continued for six more years.
In August 2001, the Ventos began planning a Christmas party at Estate Frydendahl. Lana furnished certain rooms and ordered a pool table. She also hired a designer to decorate both the Estate and her Incline Village house for Christmas. For the Christmas party itself, the Ventos invited seventeen family members to Estate Frydendahl. They also paid for Lana's brother, Raleigh Pribanich, and his family to fly from California to St. Thomas. Between December 25, 2001, and January 1, 2002, Pribanich took many photographs of the Vento family members and their guests.*fn6 Following the Christmas party, the Ventos' designer took down the decorations and moved the furniture from the main house to one of the cottages.
Although Nicole Mollison returned to Nevada with her husband and children on December 26, 2001, the other Vento family members and guests stayed on St. Thomas through New Year's Eve. Afterwards, the Ventos began to split their time between the Virgin Islands and the mainland. Lana visited the Virgin Islands most frequently because she was overseeing the construction efforts at Estate Frydendahl. She would spend between one and six weeks at a time there, then leave for another six weeks. During the first five months of 2002, Richard spent 35 days in St. Thomas, 23 days in San Francisco, and 41 days in Nevada. Richard also spent considerable time in Hawaii in 2002. He filed his 2001 tax return from Hawaii and requested Honolulu as the place of trial in a separate legal dispute with the IRS.
In addition to purchasing Estate Frydendahl, Richard became interested in participating in the Virgin Islands's Economic Development Program (EDP), which offers very favorable tax treatment to certain approved Virgin Islands companies. See 29 V.I.C. § 713b. Richard received financial and legal advice regarding the EDP and, between May 2001 and August 2001, he founded three companies in the Virgin Islands: (1) Virgin Islands Microsystems, which was to perform nanotechnology research; (2) Edge Access, which was to build internet access devices; and (3) VI Derivatives, LLC, which the VIBIR and IRS later deemed a sham partnership. Ultimately, only Virgin Islands Microsystems was approved to receive EDP benefits, and that approval did not occur until 2002.
The Ventos obtained Virgin Islands driver's licenses and registered to vote there in the fall of 2001. However, they moved none of their art collection and ―very little‖ of their personal property to St. Thomas. Nor did the Ventos maintain a post office box in St. Thomas, despite the fact that mail service was unavailable at Estate Frydendahl. The Ventos did, however, create a post office box for their business, which they listed as their billing address when they set up utilities at Estate Frydendahl.
Throughout the early 2000s, the Ventos also engaged in real estate transactions on the mainland. In October 2000, they listed the Incline Village house for sale, contingent upon their purchase of a 2.2-acre property containing an old cottage on the north shore of Lake Tahoe. In May 2001, the Ventos purchased that Lake Tahoe property for $13.5 million. They planned to build a new home containing a 22-car garage and a tennis court there, but that plan was ultimately abandoned in 2007.
As of December 2001, the Ventos had not sold the Incline Village house. They calculated that they would save money by donating the house to charity and utilizing the tax deduction, rather than selling it. Consequently, on December 28, 2001, the Ventos purported to donate the Incline Village house by quitclaim deed to the Dick & Lana Charitable Support Organization (Support Organization), a Virgin Islands organization.*fn7
The Ventos purchased an insurance policy in their names on the Incline Village house for calendar years 2001 and 2002, and more than $3 million of their personal property remained there. The Incline Village house was finally sold in March 2002.
In April 2002, the Ventos purchased a furnished two- bedroom condominium in Incline Village. They purchased it in the name of the Support Organization and then leased it to themselves for $3,500 per month for three years, though they paid no rent for the first four months of the lease term. In April 2002, the Support Organization held a meeting, the minutes of which stated: ―Will live in the Condo until the new house is built.‖ The District Court interpreted that line to mean that the Ventos would live in the Incline Village condominium until the planned Lake Tahoe house was built.
As of December 31, 2001, the three Vento daughters were all adults. The eldest, Nicole, was at all relevant times married to Peter Mollison. In 2001, Nicole and Peter were the parents of three children, though they adopted a fourth child in 2003. In 1995, the Mollisons moved into a home in Nevada that was titled to Nicole Vento, LLC. They hired contractors to remodel that home during 2000, 2001, and 2002. In 2006, the Mollisons moved to a new home in San Anselmo, California, where they were living as of February 2011.
In 2001, the Mollisons visited St. Thomas three times, each time staying at Estate Frydendahl and engaging ―in tourist activities.‖ The Mollisons never moved any of their pets or personal property to St. Thomas. Nicole never obtained a Virgin Islands driver's license or voter registration. She listed her address on her 2001 tax return as a mail drop in St. Thomas. Although Nicole testified that she moved into a two-room suite at Estate Frydendahl, the District Court found her testimony ―not credible given her evasive demeanor on cross-examination, her family's continuing ties to Nevada . . . , and the lack of safe and comfortable accommodations for the Mollison family at [Estate Frydendahl].‖
In 2003, Nicole studied to become a teacher at Sierra Nevada College in Incline Village, Nevada. She eventually became licensed to teach in Nevada and California, but not in the Virgin Islands. From 2000 through the 2005-06 school year, all of Nicole's children attended school in Nevada, although they were enrolled in a St. Thomas school for a few weeks in 2004. During their 2003 adoption proceedings, the Mollisons swore under oath that they were residents of Washoe County, Nevada. Nicole did not tell the Nevada court or social worker that she had a Virgin Islands residence.
The Ventos' second daughter, Gail, was enrolled as a full-time student at the University of Colorado at Boulder from 1998 until December 2002. In 2000, Gail bought a 2,800-square foot house in Boulder, where she lived with her boyfriend, Eric Walker, for the remainder of her college career. Gail visited St. Thomas twice in 2001--for the family cruise in March and for the Christmas party--during which she stayed in a bedroom in the main house at Estate Frydendahl and engaged in ―tourist-type activities.‖ Other than some clothing, Gail brought no personal property to St. Thomas.
By the end of 2001, Gail had neither obtained a Virgin Islands driver's license nor registered to vote there. In May 2003, Gail purchased a house in Nevada. In September of that year, she and Eric Walker married. Following their marriage, they moved into one of the cottages at Estate Frydendahl, where they lived until they moved into a new home on St. Thomas in 2008. At trial, Gail testified that she moved to the Virgin Islands in 2002.
The youngest Vento daughter, Renee, graduated from San Diego State University in June 2001. After graduation, she took a trip to the Virgin Islands and stayed at a hotel on St. Thomas. Renee traveled again to St. Thomas in September 2001, when she stayed in a room in the main house at Estate Frydendahl. She also traveled to St. Thomas for the Christmas party, but returned to Nevada in early January 2002. The only personal property Renee had in St. Thomas were ―easily movable items,‖ such as clothing, camera equipment, and a laptop.
At the end of 2001, Renee had neither obtained a Virgin Islands driver's license nor registered to vote there.
She obtained a Virgin Islands driver's license in March 2002 but kept her Nevada license as well. At some point, Renee lost her Virgin Islands driver's license but did not replace it. In 2005, she renewed her Nevada driver's ...