by Lawrence R. Barusch & Marjorie Rawls Roberts

World Offshore Convention
San Juan Puerto Rico

Birth Or Naturalization In The U.S. Virgin Islands Provides Special Estate And Gift Tax Benefits

General Rule: The Internal Revenue Code (IRC or Code) imposes estate taxes on the value of estates transferred at death and gift taxes on the value of gifts transferred during life. These taxes are collectively known as transfer taxes. These taxes are imposed on U.S. citizens and residents and on all transfers of assets at death and of tangible assets by gift by nonresident non-citizens of property located in the United States. Persons who obtain their U.S. citizenship by reasons of their birth or naturalization in the U.S. Virgin Islands or one of the other U.S. possessions are treated for U.S. transfer tax purposes as non-citizens not resident in the United States when they are resident in one of the possessions at the time a gift is made or are resident in one of the possessions at the time of death.

Specifically, for Federal estate tax purposes, section 2209 of the Code provides that a person who acquires U.S. citizenship solely by reason of (1) being a citizen of a U.S. possession or (2) birth or residence within such possession, is treated as a nonresident not a citizen of the United States if he or she resides in a possession at the time of his or her death. For Federal gift tax purposes Code section 2501(c) provides a person meeting these same requirements is treated as a nonresident if he or she resides in a possession at the time of making the gift.

Federal Estate Taxation of a Nonresident Not a Citizen: For the estates of decedents dying after November 10, 1988, the estate tax rates applicable to U.S. citizens are also applicable to the estates of nonresident aliens. However, only the part of the gross estate that is located in the United States is subject to estate tax under section 2103 of the Code. For purposes of the determining location of assets in respect of Federal estate and gift taxes, the "United States" includes the 50 states and the District of Columbia, but not U.S. possessions.

For a nonresident non-citizen who resides in a U.S. possession and was a U.S. citizen because of birth, residence, or citizenship in the possession, section 2102(c) of the Code provides that the taxpayer's estate qualifies for a credit that is the greater of U.S. $13,000 or U.S. $46,800 multiplied by the ratio that the value, at death, of the part of the decedent's gross estate that is located in the United States bears to the entire value of the decedent's gross estate.

For gifts made by nonresident non-citizens, the Federal gift tax applies to a transfer only if the property is situated in the United States, pursuant to section 2511(a) of the Code. For such gifts, the U.S. $11,000 annual exclusion (2001), etc., provisions apply.

How to Take Advantage of the Special Possession Rules: A person who can meet both the possession residency and the birth or naturalization requirements may be able to reduce his or her Federal estate and gift tax liabilities. Although it is always too late to advise a client where he or she should be born, the client can have some control over his or her naturalization. Accordingly, a person who seeks U.S. citizenship and who has assets located outside the United States should consider being naturalized through the Immigration and Naturalization Service (INS) Office in the U.S. Virgin Islands or another possession instead of through an INS Office in one of the 50 states or the District of Columbia.

Treasury Regulation section 20.2209-1 sets out five examples of situations that constitute being a citizen of a U.S. possession or acquiring citizenship solely by birth or residence within a U.S. possession as follows:

• A person who acquired his U.S. citizenship under section 5 of the Act of March 2, 1917 by reason of his being a citizen of Puerto Rico, died in Puerto Rico on October 1, 1960, while domiciled therein. He is considered to have acquired his U.S. citizenship solely by reason of his being a citizen of Puerto Rico.
• A person who is born in the U.S. Virgin Islands is considered to have acquired U.S. citizenship solely by reason of birth in the U.S. Virgin Islands pursuant to section 306 of the Immigration and Nationality Act, even though the person's parents were U.S. citizens by reason of their birth in Boston.
• A former French citizen who acquired his U.S. citizenship through naturalization proceedings in a U.S. Virgin Islands court after having qualified for citizenship by residing in the U.S. Virgin Islands for five years was considered to have received U.S. citizenship solely by reason of residence within the U.S. Virgin Islands.
• A person who acquired U.S. citizenship by reason of being a native of the Virgin Islands and a resident thereof on June 28, 1932, died on October 1, 1960 while domiciled in the Virgin Islands. The person is considered to have acquired his U.S. citizenship solely by reason of his birth or residence in the Virgin Islands.
• A former Danish citizen who, on January 17, 1917, resided in the Virgin Islands, made the declaration to preserve his Danish citizenship acquired by Article 6 of the treaty entered into on August 4, 1916, between the United States and Denmark. Subsequently the person acquired U.S. citizenship when he renounced such declaration before a court of record. He died on October 1, 1960, while domiciled in the Virgin Islands. The person is considered to have acquired his U.S. citizenship solely by reason of his birth or residence in the Virgin Islands.

In contrast, Treasury Regulation section 20.2208-1 makes it clear that a person who did not acquire his U.S. citizenship solely by reason of his being a citizen of such possession or by reason of his birth or residence in such possession is considered a "citizen of the United States" even though the decedent was domiciled in a U.S. possession at the time of his death by setting out the following example:

A citizen of the United States by reason of his birth in the United States at San Francisco established residence in Puerto Rico and acquired a Puerto Rican citizenship. The person died on September 4, 1958, while a citizen and domiciliary of Puerto Rico. The persons estate is, by reason of the provisions of Code section 2208, subject to the tax imposed by Code section 2001 inasmuch as his U.S. citizenship is based on birth in the United States and is not based solely on being a citizen of a possession or solely on birth or residence in a possession.

The Revenue Ruling and Private Letter Rulings dealing with determinations as to whether a person is a nonresident not a citizen for Federal gift and/or estate tax purposes are summarized below in chronological order.

Revenue Ruling 74-25 Held that a Person Born in One Possession Who Dies While a Resident of Another Possession is Treated as Nonresident Not a Citizen: The IRS has generally adopted an expansive approach when determining whether a person is considered to be a nonresident not a citizen for Federal estate and gift tax purposes. Twenty-one years ago the IRS issued Revenue Ruling 74-25, which held that a decedent who acquired his U.S. citizenship solely by virtue of his birth in Puerto Rico and who was a resident of the U.S. Virgin Islands at the time of his death was considered to be a nonresident not a citizen of the United States under section 2209 of the Code. The ruling noted that, despite the literal language of the statute, there was no indication in the legislative history underlying Code section 2209 that the U.S. Congress intended to distinguish between possession citizens who were residents at the time of their death of the possession through which they derived citizenship, and those who were residents of a possession other than the one through which they derived citizenship.

In Private Letter Ruling 9119049, the IRS Determined That a U.S. Citizen Residing in Puerto Rico Was Exempt from U.S. Gift Tax on Transfer of Mutual Fund Units: On February 12, 1991, the IRS issued a private letter ruling, LTR 9119049, which held that a U.S. citizen who was born in Puerto Rico who resides in Puerto Rico can transfer units in a mutual fund, which is administered in the United States and established under the laws of New York, to his child without being subject to gift tax on the transfer. As previously indicated, Federal gift tax is not imposed on gifts of intangibles transferred by nonresident aliens, and shares in a mutual fund were held to be an intangible.

In Private Letter Ruling 9302026, the IRS Determined That Since a Couple's Citizenship was Based on Their Permanent Resident Status Gained in Puerto Rico, They Were Considered Nonresidents, Not Citizens of the United States for U.S. Gift and Estate Tax Purposes: On October 20, 1992, the IRS issued a private letter ruling, LTR 9302026, which held that a couple were considered to be nonresidents, not citizens of the United States for gift and estate tax purposes where their qualification for U.S. citizenship was based on their permanent resident status gained in Puerto Rico.

The facts underlying the IRS' determination are as follows. In 1961 the taxpayers left their country of citizenship and resided in Miami, Florida, until September 1961, when they moved to Puerto Rico. The taxpayers went to Martinique in 1965 and applied to become permanent residents of Puerto Rico. They also filed a declaration of intent to become United States citizens. The taxpayers became U.S. citizens in 1970, based on their five years as permanent residents of Puerto Rico (from 1965 to 1970).

In explaining its determination, the ruling stated that "[g]enerally, when a citizen of the United States, born in the United States or naturalized by permanent residence in the United States, not a possession, for 5 years, moves to a possession of the United States, the move does not change the citizen's status for gift and estate tax purposes." The ruling continued that "if the same person was born in a possession of the United States or naturalized by permanent residence in a possession of the United States, the gift and estate tax provisions are generally applied to that person as if they were a nonresident not a citizen of the United States." The ruling did not deal with a situation when a person was naturalized in a U.S. possession after a period of permanent residence that combines time spent in the United States, not a U.S. possession, and in a U.S. possession.

In Private Letter Ruling 9403009 the IRS Determined that Cuban-Born U.S. Citizen Born to U.S. Citizen is Nonresident Not a U.S. Citizen for Estate Tax Purposes: On October 20, 1993, the IRS issued a private letter ruling, LTR 9403009, which held that a person born in Cuba to an alien mother and a father born in Puerto Rico is considered to be a nonresident not a citizen of the United States for Federal estate and gift purposes if she resides in the U.S. Virgin Islands.

The facts underlying the IRS' determination are as follows. The Taxpayer's father was born in Puerto Rico in 1896 and he resided in Puerto Rico until 1916, when he moved to Cuba. The taxpayer was born in Cuba in 1922. The taxpayer moved to Maryland in 1962. Two years later, she applied for a Certificate of Citizenship issued under section 241 of the Immigration and Nationality Act. The Report and Recommendation section of the application, which was completed by the immigration officer, concluded that the taxpayer did acquire U.S. citizenship at birth through her father, who became a citizen of the United States through collective naturalization of citizens of Puerto Rico under the Act of March 2, 1917. The Certificate of Citizenship, as issued, states that the taxpayer established to the satisfaction of the Immigration and Naturalization Service that she was a U.S. citizen from the date of her birth. In 1967 the taxpayer moved to the U.S. Virgin Islands, where she continues to reside. The taxpayer represents that she will continue to reside in the U.S. Virgin Islands until the time of her death.

The IRS pointed out that the taxpayer's father had acquired his citizenship solely by reason of his being a citizen of a possession of the United States. Under section 7 of the Foraker Act , all Spanish subjects who resided in Puerto Rico on April 11, 1899, and continued to reside there through April 12, 1900, and their children born subsequent thereto, who did not file a declaration of Spanish allegiance prior to April 11, 1900, were deemed to be citizens of Puerto Rico. The taxpayer's father met these requirements. Subsequently, section 5 of the Jones Act conferred U.S. citizenship upon all persons who became citizens of Puerto Rico under the Foraker Act, effective March 2, 1917.

In addition, the IRS pointed to section 1401(g) of Title 8 of the U.S. Code, which provides that a person is a U.S. citizen where that person is born outside the geographical limits of the United States and its outlying possessions and where one of the person's parents is an alien and the other is a citizen of the United States who, prior to the birth of such person, was physically present in the United States or its outlying possessions for periods totaling not less than five years, at least two of which were after attaining the age of 14 years. Since the taxpayer's father lived in Puerto Rico from the time of his birth until he was 20, she also met this requirement for citizenship.

In holding that the taxpayer was a nonresident not a citizen of the United States for Federal estate and gift tax purposes, the IRS stressed that the taxpayer's U.S. citizenship was derived solely from her father, who was a U.S. citizen solely by reason of his Puerto Rican citizenship, which in turn was obtained by his birth and residency in Puerto Rico. Under these circumstances, the IRS found that the taxpayer's citizenship was derived solely from a U.S. possession for purposes of applying sections 2209 and 2501(c) of the Code, and that she would continue to be considered a nonresident not a citizen of the United States as long as she remains a resident of the U.S. Virgin Islands (or presumably, another possession).

In Private Letter Ruling 9522033, the IRS Held That a Cuban-Born Person Whose Parent was Naturalized While Person Was a Minor is Nonresident Not a Citizen for U.S. Estate Tax Purposes: On March 3, 1995, the IRS issued a private Letter ruling, LTR 9522033, which held that a person born in Cuba in 1926 to then-Cuban parents is considered to be a nonresident, non-citizen of the United States for federal estate and gift purposes, where the taxpayer's mother became a naturalized citizen of the United States in Puerto Rico in 1936, when the taxpayer was ten years old. (The taxpayer's father never became a U.S. citizen.) The taxpayer moved to Maryland to attend school and in 1944, when the taxpayer was 18 years old, obtained a certificate of U.S. citizenship. According to this certificate, her citizenship is "derivative" and had been acquired as of 1936, when her mother became a U.S. citizen. The taxpayer returned to Puerto Rico after finishing her studies and continues to reside there. She requested the ruling in connection with a proposed gift in excess of $10,000 to her children.

In determining that the taxpayer was a nonresident, non-citizen for transfer tax purposes, the IRS pointed to Example (5) of Treasury Regulation section 20.2209-1, which held that a French citizen who acquired his U.S. citizenship through naturalization proceedings in the Virgin Islands after residing in the Virgin Islands for five years was considered to have acquired his U.S. citizenship solely by reason or his birth or residence in the Virgin Islands. The IRS then pointed to Section 1433(a) of Title 8 (Aliens and Nationality) of the U.S.C., which provides in pertinent part that:

a child born outside of the United States, one or both of whose parents is at the time of applying for the naturalization of the child, a citizen of the United States either by birth or naturalization, may be naturalized if under the age of 19 years and not otherwise disqualified from becoming a citizen ... and if residing permanently in the United States, with a citizen parent pursuant to a lawful admission for permanent residence on the application of such citizen parent, upon compliance with all of the provisions of this title, except that no particular period of residence or physical presence in the United States shall be required.

Section 1101(a)(38) of the Immigration and Nationality Act of 1952 defines the term "United States" to mean the continental United States, Alaska, Hawaii, Puerto Rico, Guam, and the U.S. Virgin Islands.

In this case, the taxpayer obtained her certificate of U.S. citizenship in 1944 while residing in Maryland. The certificate indicated that her citizenship was "derivative" and was acquired as of 1936, when her mother became a naturalized citizen of the United States and a citizen of Puerto Rico after having lived in Puerto Rico for more than five years. Thus, the IRS held, for purposes of section 2501(c) of the Code the taxpayer acquired her U.S. citizenship solely by reason of her residence within a possession of the United States (i.e. her residence in Puerto Rico during the five years preceding 1936). Accordingly the taxpayer satisfied the requirements of Code section 2501(c) and for federal gift tax purposes is treated as a nonresident not a citizen of the United States. If at the time of her death the taxpayer is a resident of Puerto Rico, she will similarly be treated as a nonresident, not a citizen of the Untied States for federal estate tax purposes.

Private Letter Ruling 9522033 goes beyond the prior rulings in several respects. First, it holds that a taxpayer born in a foreign country (here, Cuba) who obtained her citizenship by virtue of a parent's naturalization in Puerto Rico and subsequent application for the naturalization of the minor was treated as a nonresident, not a citizen by reason of her residence within such possession of the United States. In the prior rulings the taxpayers were born in Puerto Rico (Revenue Ruling 74-25) and born to a person who was born in a Puerto Rico and acquired citizenship through collective naturalization prior to the taxpayer's birth (PLR 9403009), so that each taxpayer was a U.S. citizen from birth. Second, the ruling looks to the place where the parent obtained citizenship, Puerto Rico, and not to the place where the taxpayer obtained her certificate of U.S. citizenship, Maryland, in determining that the taxpayer acquired her citizenship "solely by reason of her residence within a possession of the United States."

In Private Letter Ruling 9720029, the IRS ruled that a donor who was born to Puerto Rican parents outside of the U.S. possession but who has resided there since 1935 will not be subject to U.S. estate and gift taxes: In PLR 9720029 the IRS examined the situation where a donor's parents were born in Puerto Rico in 1895 and 1896 respectively, and both acquired their U.S. citizenship under the Foraker Act. The parents lived their entire lives in Puerto Rico, except from 1924 through 1935 when they lived in two other countries. The donor was born in one of those other countries. Since 1935 the donor has resided in Puerto Rico. He now proposes to transfer property to his children and consequently sought a ruling from the IRS as to whether he is subject to U.S. estate and gift taxes.

The IRS held that the donor derived his U.S. citizenship by virtue of his Puerto Rican citizenship that he acquired under the Foraker Act through his parents and, thus, his U.S. citizenship is derived "solely from [his] citizenship with respect to a U.S. possession" for estate and gift tax purposes.

Private Letter Ruling 9725015 emphasizes that an taxpayer who qualified for naturalized U.S. citizenship by residency in a U.S. possession remains a "nonresident not a citizen of the United States" while living in a U.S. possession for estate and gift tax purposes even though the individual also qualified for naturalization under another basis. A month later the IRS issued a ruling that a taxpayer who resides in a U.S. possession is currently and will continue to be "a nonresident not a citizen of the United States" even though she qualified for citizenship on two bases, one of which would not exempt her from transfer taxes. She was not born in the United States and her parents were not United States citizens. In 1962, when was 11 years old, she and her parents moved into a U.S. possession. She received permanent resident status in 1964 and moved into the United States in 1969 to attend college. She married a man believed to be a U.S. citizen in 1971. In 1973 while residing in and attending college in one of the United States she applied for and became a naturalized U.S. citizen. She thus qualified for citizenship both as a permanent resident alien based on her residency in the U.S. possession from 1962 thru 1969, and as the U.S. resident wife of a U.S. citizen for three years. She then divorced, finished college, and returned to the U.S. possession in 1975. The IRS ruled that she had resided in the U.S. possession for seven years before going into the United States to attend college. Thus, when she married she was already eligible for U.S. citizenship based on residency. The IRS concluded that the taxpayer's U.S. citizenship was derived solely from her residency within the U.S. possession.

Private Letter Ruling 9748004 ruled on the types of mutual funds which are "not situated in the United States" for purposes of transfer taxes. On August 19, 1997 the IRS analyzed the holdings in four mutual funds held by a decedent nonresident not a citizen of the United States. The four funds were: (1) a New York unit investment trust which qualified as an association not taxable as a corporation and which invested in long term debt obligations of United States sited public utilities; (2) a Massachusetts business trust qualifying as a regulated investment company which invested in U.S. Government guaranteed securities; (3) a regulated investment company which invested in U.S. Government short term direct obligations; and (4)a Maryland corporation qualifying as a regulated investment company which invested in long term corporate bonds.

The fund qualifying as a "unit investment trust " which treated the income of the holders of interests as income of grantors under the grantor trust rules and which income consisted of long term debt obligations was not a "person," the income of the fund was not taxable to the United States since it was "portfolio interest" and the shares were not includible in the decedent's gross estate under the property not situated in the United States exemption to the extent that the fund held debt obligations that generated portfolio interest.

However, the shares of the three funds which intended to qualify as regulated investment companies, which qualification requires that they be domestic corporations, were property situated within the United States and thus estate tax taxable under IRC section 2103 as shares issued by a domestic corporation.

Private Letter Ruling 200105048 ruled that a U.S. citizen and resident of Puerto Rico, who became a U.S. citizen due to his residence in Puerto Rico, is considered a "nonresident not a citizen of the United States" for transfer tax purposes. Taxpayer became a Puerto Rican citizen under the Foraker Act, 48 USC 733 (1988) and U.S. citizen under the Jones Act 39 Stat. 951, 953 (1917) due to his and his ancestors' residence in Puerto Rico. Therefore he is a "nonresident not a citizen of the United States" for purposes of applying sections 2209 and 2501(c) of the IRC.

Individual Residency in the U.S. Virgin Islands is Determined under Section 932(c) of the Code for Tax Purposes

U.S. Virgin Islands residency for income tax purposes is determined under Section 932(c) of the Internal Revenue Code of 1986, which provides that a person is taxed as a U.S. Virgin Islands resident if he or she is a bona fide resident of the U.S. Virgin Islands as of the last day of his or her tax year, generally December 31. Thus an individual could move to the U.S. Virgin Islands in December of a given year and be taxed for income tax purposes as a U.S. Virgin Islands resident for that year.

Under section 932(c) of the Code, an individual who is a bona fide resident of the U.S. Virgin Islands at the close of his or her taxable year is required to file an income tax return for the taxable year with the U.S. Virgin Islands, reporting his or her worldwide income on the return and paying tax on the income to the U.S. Virgin Islands. If a taxpayer does so, the taxpayer has no filing obligation with the United States.

The IRS has prepared draft Treasury Regulations to use in determining who is a U.S. Virgin Islands resident. However, these regulations have not yet been released for public comment.

The Marital Deduction

A U.S. citizen who marries a possessions citizen has the opportunity to pass her entire estate through her spouse to her children (who need not be his) free of federal estate and gift taxation.

In computing the estate tax, a deduction is allowed for bequests to a surviving spouse. This applies to U.S. citizens and residents under Code section 2056 and to non-resident aliens to the extent of their taxable estates under Code section 2106(a)(3) if the estate tax return is properly prepared and filed. Similar rules apply for gift tax purposes under Code section 2523. Since 1981 the deduction has been unlimited. Prior to that time it was limited to half of the estate.

Qualified Domestic Trusts

Prior to 1981 a U.S. citizen married to a non-resident alien could pass half of his estate to his spouse, with the result that no estate tax might ever be due on that half, but the other half would be taxed on his death. There is no indication that this rough justice was seen as an abuse. With the advent of the unlimited marital deduction in 1981, it became possible for the entire estate to escape taxation. This perceived loophole was addressed in 1988, by eliminating the marital deduction in this situation except for bequests to a Qualified Domestic Trust under which distributions to the surviving spouse during his life are subject to what is, in effect, the estate tax, and the remainder is taxed on his death.

Citizens of Possessions

The disallowance of the marital deduction for estate and gift tax purposes applies only to an individual who "is not a citizen of the United States" under Code sections 2056(d)(1) and 2523(i). The possessions citizens discussed in this work ARE citizens of the United States; therefore the disallowance does not apply. This permits a U.S. citizen to transfer her entire estate to her possessions citizen spouse during life or upon death without tax or restriction. On the death of the spouse, tax is imposed only on U.S. property as discussed above.

The result seems anomalous. However, Code sections 2208 and 2209 only treat DECEDENTS who are possession citizens as non-resident aliens. Similarly sections 2501(b) and (c) apply only to DONORS. The spouse in these situations is neither donor nor decedent. Had Congress wished these provisions to apply to all individuals, Congress could have said so. Congress did not, for, when these provisions were enacted in 1958 and 1960, the problem did not exist. Any flaw in the Code dates from 1988, but it is impossible to interpret the language then added to preclude this result.

Perhaps Congress overlooked this area in 1988. However the failure to change the rule over the intervening fourteen years is significant. Disallowing marital deductions for possession spouses raises constitutional questions. Tom and Don are married to Mary and Sirena. All are U.S. citizens residing in the Virgin Islands, but Sirena is a possessions citizen. Tom and Don die the same day, leaving their entire estates to their wives. No estate tax is due on any amount Mary receives. Every penny paid to Sirena (above the exemption amount) is subject to estate tax. Having a Qualified Domestic Trust would only have delayed the date of payment. Sirena is likely to be of a different nationality from Mary. Whether such a result would ultimately be held unconstitutional is not the issue; this possibility goes far toward explaining current law.

A Person Seeking a Green Card Leading to U.S. Citizenship Can Invest in the U.S. Virgin Islands as an Immigrant Investor

The Immigration Act of 1990 ("IMMACT 90") created a new investor/employment-creation category of immigrant visa. Section 121(a) of IMMACT 90 provides a yearly maximum of 10,000 visas for applicants with U.S. $1 million to invest in a new commercial enterprise employing at least ten full-time U.S. workers. To qualify under this category, the new enterprise must have been:

• established by the alien;
• one in which the alien has invested, or is in the process of investing, at least U.S. $1 million (for St. Thomas/St. John) or U.S. $500,000 (for St. Croix); and
• one which will benefit the U.S. economy and create full-time employment for not fewer than ten U.S. workers, exclusive of the immigrant, the immigrant's spouse, sons, or daughters, and in which the alien takes at least a policy making role.

The investor/employment-creation visas are issued conditionally for a two-year period. After two years, the applicant must file a Petition with INS to Remove Conditions, at which time the INS must determine whether the applicant has established a commercial enterprise complying with investor/employment-creation category guidelines before removing the conditional status.

A single new commercial enterprise may be used for investor/employment-creation classification by more than one investor, provided each petitioning investor has invested (or is actively in the process of investing) the required amount, and each investment results in the creation of at least ten full-time positions for qualifying employees. In fact, a new commercial enterprise may be used for investor/employment-creation classification even though there are several owners of the enterprise, including persons not seeking classification, if the sources of all capital invested is identified and all invested capital has been derived by lawful means. However, an alien investor must maintain more than a passive role in the new enterprise serving as the subject of the petition. The investor immigrant must either be involved in the day-to-day managerial control of the commercial enterprise or manage through policy formulation.

An enterprise can qualify as a single new commercial enterprise in one of four ways. First, an investor can create an original business. Second, an investor can purchase and structure an existing business. Third, an investor can expand an existing business, thereby substantially changing the net worth or number of employees in a business. Finally, an investor can invest in a troubled business, so that there is a 40 percent change in net worth or number of employees. Any for-profit entity formed for the ongoing conduct of lawful business may serve as a commercial enterprise. This includes sole proprietorships, general and limited partnerships, holding companies, joint ventures, corporations, business trusts, or other publicly or privately owned entities. A holding company and its wholly-owned subsidiaries can also constitute a new commercial enterprise if each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business. However, the term "new commercial enterprise" does not include noncommercial activity, such as owning and operating a personal residence.

The enterprise can also receive tax benefits from the U.S. Virgin Islands Industrial Development Commission.

Naturalization in the U.S. Virgin Islands Requires Short-Term Residency in the U.S. Virgin Islands

Even if a person has acquired his or her permanent resident ("green card") status through a means other than as an immigrant investor in the U.S. Virgin Islands, the person can apply for naturalization in the U.S. Virgin Islands. The IRS has not specifically ruled on how long a person must reside in a possession in order to acquire citizenship "solely by residence within a U.S. possession." To become naturalized in the U.S. Virgin Islands, a person who has already attained permanent resident alien status must meet all of the usual requirements for naturalization in the United States and must have actual residence in the U.S. Virgin Islands or Puerto Rico (which are in the same INS district) for at least the three months immediately preceding the filing of the application for naturalization. The usual requirements for naturalization are that the permanent resident alien must:

• have continuous residence in the United States for at least the five years preceding the application;
• be physically present in the United States for at least one-half of the time of continuous residence;
• reside continuously within the United States from the date the application is filed until the date of admission to citizenship; and
• be a person of good moral character.

A person who meets the above requirements may file his or her naturalization petition with one of the INS offices in the U.S. Virgin Islands and become naturalized there once the application is approved.

"Residence" for the purposes of these naturalization rules means a person's principal actual dwelling place in fact, without regard to intent. The duration of residence in a particular location begins from the moment it is established at that location. "Continuous residence" as used above does not necessarily mean continuous physical presence. In fact, absences from the United States of up to six months (and in some cases, longer) are allowed so long as "residence" is maintained.

At the time of submitting the application, or later, the applicant may be required to submit evidence of residence in the U.S. Virgin Islands or Puerto Rico for the three-month period preceding the application. Actual physical presence during the entire three months is not required, however.

U.S. Virgin Islands Law exempts U.S. Virgin Islands Residents from Inheritance and Gift Taxes

A resident of the U.S. Virgin Islands is exempt from U.S. Virgin Islands inheritance tax pursuant to section 5, Chapter 1, Title 33, Virgin Islands Code. Specifically, section 5 provides in pertinent part that "[a]n inheritance is exempt from the payment of inheritance taxes if the decedent, when living, would have been considered a ?nonresident not a citizen of the United States' under 26 U.S.C. section 2501(c), or if the decedent was a resident of the Virgin Islands ... at the time of his death." Although the U.S. Virgin Islands inheritance tax is still codified in U.S. Virgin Islands law, as a practical matter no U.S. Virgin Islands inheritance tax is imposed on inheritances.

Similarly, a U.S. Virgin Islands resident is exempt from U.S. Virgin Islands gift tax under section 31, Chapter 2, Title 33, Virgin Islands Code. Section 31 provides that a "person is exempt from the payment of gift taxes ... if that person is considered a ?nonresident not a citizen of the United States' under 26 U.S.C. section 2501(c), or if the person was a resident of the Virgin Islands at the time the gift was made." Again, although the U.S. Virgin Islands gift tax is still on the books, essentially all gifts are exempt.