Revenuers Probe Virgin Islands Residencies

by Carl D. Holcombe  on Monday, Apr. 19, 2004 12:00 am  

When Theodore C. "Ted" Skokos resigned as chairman of the Arkansas State Bank Board last year, it was because he bought a house on the isle of St. John and become a resident of the U.S. Virgin Islands.

He's one of an unknown number of affluent Arkansans who are enjoying the sugary beaches, bath-temperature Caribbean waters and enormous income tax breaks available in the USVI.

Some of them could be starting to sweat from more than the tropical sun.

The Arkansas Department of Finance & Administration is winding up yearlong audits of two former Arkansans who have claimed Virgin Islands residency on tax returns. More USVI tax filers who were previously taxed in Arkansas — a total of fewer than 10 — are currently under investigation, DF&A officials told Arkansas Business.

"(But) that number is growing every day," said John Theis, assistant revenue commissioner.

Over the next several weeks, DF&A will begin crunching data received from the Internal Revenue Service that identifies about 300 businesses and individuals that may be improperly claiming Virgin Islands residency in order to enjoy enormous tax benefits, Theis said. That number is rough and probably includes residents of other Caribbean nations known as tax and financial havens.

"You don't find poor Arkansans claiming residency in the Virgin Islands," Theis said. "We're talking about people of considerable means."

The USVI does not levy its own income tax; instead, tax filers submit federal tax returns to the U.S. Virgin Islands Bureau of Internal Revenue. The return and taxes due stop there and don't go on to the IRS, as a result of the territory's special status.

Special business ownership incentives and residency rules allow businesses certified by the Virgin Islands Economic Development Commission and people who claim an ownership stake in them to avoid 90 percent of federal income taxes, both business and personal.

Of just over 100 different corporations that have qualified for the special tax benefits, at least three are operated by people from Little Rock.

The federally authorized practice is supposed to stimulate job and business growth in the tiny trio of islands whose economy is primarily dependent on tourists. But it has also generated intense scrutiny from the U.S. Treasury, the IRS and, increasingly, state taxing authorities who suspect abuse and phony residency claims.

A long-term federal investigation, which included armed raids of the business office of Kapok Management LP on the largest of the territory's islands, St. Croix, generated its first conviction last month. Gary Payne, an insurance salesman for a Danvers, Mass., company, pleaded guilty to evading federal income taxes in 2000 and 2001 by shifting $500,000 to an EDC-certified entity called Kapok Management LP and claiming residency.

That's just "the tip of the iceberg," said Ellie Michaud, a spokesman for the IRS in Washington, D.C. The IRS has provided information on about 25,000 tax filers to state-level taxing authorities across the country, according to Florida IRS spokesman Michael L. Dobzinski.

State officials are unsure how much tax revenue Arkansas may lose annually due to the Virgin Islands migration. Using 2001 data for private and public companies, DF&A has estimated that Arkansas lost about $94 million in corporate income tax due to tax sheltering, including about $34 million through offshore income transfers.

Naming Names

Arkansas officials won't name names in their investigation, and neither will federal authorities. Being a candidate for an audit doesn't necessarily mean anything illegal or inappropriate has been done, Theis stressed.

"There's nothing in and of itself that's inappropriate about moving to the Virgin Islands," Theis said.

However, Arkansas Business has confirmed the identities of five members of the Little Rock business community who are doing business in the USVI and have claimed it as their legal residence. They are lawyer and businessman Ted Skokos; former Little Rock business owner Phil Whisenhunt; entrepreneur Mark Diggs, who recently reclaimed his Arkansas residency; Little Rock tax attorney Stanley D. Miller, co-owner of an EDC-certified company called IFW St. Croix Group LLP; and Mike Baldridge, CEO of Miller's company.

Skokos' tax attorney son, Theodore C. "Teddy" Skokos Jr., and Little Rock accountant Lance Talkington confirmed that they are partners in an EDC-certified business called Clearwater Consulting Concepts LLC, but they wouldn't say where they now claim legal residence.

Timothy Lance Waters and his wife, Suzanne W. Waters, who are listed in the 2004 Little Rock telephone directory, are the president and COO of a Virgin Islands company called International Asset Management Inc. IAM, which is EDC-certified, is also linked to Lance Waters' father, Russ Waters. The Waterses' residency status is unclear.

Those islanders that would talk uniformly said business is great, they aren't worried about state or federal tax investigations, they've done nothing wrong and are simply enjoying the benefits of a business-friendly territory they've fallen in love with.

Whisenhunt, for example, said he simply wanted to enjoy a "pretty good lifestyle" in a place with "significant tax advantages."

But few would discuss their businesses or other Arkansans who are involved with them. Diggs said there were "a number" of Arkansans taking advantage of the business climate in the USVI, but he declined to identify any.

Whisenhunt, a resident of the USVI since 2001, when he sold Communica-tions Management Specialists of Little Rock, said he co-owns a limited liability company on St. Thomas. But he wouldn't give the name of his company.

"I can tell you we're not interested in an interview," Lance Waters said, reached in Little Rock.

Lance Waters, Russ Waters, Diggs, Whisenhunt, Teddy Skokos, Talkington and Miller were all in Arkansas when reached by Arkansas Business.

Miller

Stan Miller was forthcoming about his Virgin Islands activity. He claimed USVI residency in 2002 after moving there in January of that year to launch IFW St. Croix Group LLLP.

He said he got the idea from a friend.

By September 2002, IFW was certified by the U.S. Virgin Islands Economic Development Commission, making it one of just over 100 companies which enjoy reductions of up to 90 percent in federal income taxes for up to 15 years.

"There are great tax incentives if you're a resident and (have) an EDC company," Miller said. "We figured out how to make (the tax program) work. It's more than just moving to the islands. And to be honest, there has been a fair amount of IRS scrutiny. But we're very careful. When it works, when the scenarios fit, it's really, really attractive."

IFW has 15 partners, about a dozen employees and strong Arkansas connections — including CEO Baldridge and partners Michael Prince and Judy Coffey, formerly of Jonesboro, according to Miller.

IFW is recruiting more Arkansans, but who becomes a partner depends on their skills and abilities, and their buy-in cost depends on those factors as well, he said.

The firm specializes in management, investment banking and wealth planning and is getting into setting up hedge funds, Miller said.

"All these people have settled there (from the mainland)," Miller said. "Even though you think you're on a dot in the Caribbean, it turns out there is a high concentration of people with wealth and influence ... The ability to network is remarkable."

One client is Wealth Counsel LLC, in which IFW also owns an interest. Miller's Little Rock law partner, D. Scott Schrader, is also a principal in Wealth Counsel. The company provides education programs and software for law firms. Miller teaches and does content editing on materials.

Miller's 21-year-old son, Matthew Carter Miller, died April 4, from injuries sustained in an April 2 auto accident on St. Croix. Matt had moved to the Virgin Islands in December with a Little Rock friend, Jordan Theis, 21, and they set up Team Blue Marketing LLC and Trident Innovations LLC.

(Despite the identical spelling of their last names, Jordan Theis and DF&A's John Theis pronounce their names differently and are not related. Jordan is the son of David Theis, administrator of the Arkansas State Hospital.)

Neither of the young men's companies was EDC-certified. Stan Miller said there was no plan to seek certification, but Jordan Theis said that was the long-range plan. IFW was invested in Team Blue, according to Miller.

Miller said Team Blue recently contracted with Rainmakers Forum, a Michigan business development consulting firm, to market Rainmakers' wealth management program to lawyers, accountants and financial advisers.

Through Trident — which was originally incorporated in Little Rock in August — Matt Miller and Jordan Theis had developed a consumer cosmetics product and had met with a retired L'Oreal president about further developing the product, Stan Miller said.

"They came up with a product that they treated like a state secret," Miller said. "They were afraid someone would steal their idea."

Jordan Theis said Trident was also "looking at high-yield bond investing."

Waters

Miller's willingness to talk about his Virgin Islands business interests made him the exception to the rule.

Lance Waters refused to say what International Asset Management Inc. does or who owns it. He said the only ties he and Suzanne have in Arkansas are family and friends whom they occasionally visit.

"I've been there many, many years ... I don't live in Little Rock anymore," Lance Waters said. "I run the company, but I'm not an owner. I just get a salary."

Lance and Suzanne Waters are listed in the 2004 Little Rock telephone directory with a west Little Rock apartment complex as their address. That phone number, however, has been disconnected. They sold a Little Rock house in 2001 and don't appear to own property in Pulaski County now.

Russ Waters, Lance's father, declined to be interviewed last week and said he was leaving the United States for a month.

According to its Web site, Inter-national Asset Management was formed in 1995 by a small group of consultants. By 2002, it had more than 30 consultants.

Skokos and Talkington

Clearwater Consulting Concepts was set up on St. Thomas in August 2002 by Ted Skokos, Teddy Skokos and Coloradan Kirk Boeger, who said he arrived in the USVI in 1991. The elder Skokos has since left the company, and Teddy Skokos now is its managing partner.

Teddy Skokos wouldn't say how many employees Clearwater has, how many partners there are or who they are, or how someone becomes a partner. And he wouldn't say whether he, like his father, has become a resident of the USVI.

He wouldn't say how frequently he goes to the islands, how long he stays or whether he owns a home there.

But he did say that the business was healthy.

"Word of mouth has been pretty good to us," Skokos said. "A closely held business, like us, expands by word of mouth or through friends."

Skokos wouldn't say how many of his tax law clients are involved with Clearwater, other territory businesses or are USVI residents.

"Our opinion is that we're the best at what we do," Skokos told Arkansas Business.

But exactly what it is that Clearwater does so well is another question.

"It would be hard to describe unless you're a client," Skokos said. "A general statement on what we do would be impossible to do."

Similarly, Lance Talkington declined to describe Clearwater's business plan.

"I can't discuss any business operations related to business down there," he said. "That goes to (Clearwater's) business structure (and) strategy. There's nothing that I want in a public forum."

Mark Diggs, who said he was involved with Teddy Skokos and Talkington during the 18 months he was a USVI resident, said EDC-certified companies "like Clearwater" allow individuals to take advantage of the available tax benefits by buying into the company and operating their own businesses as divisions of the company.

Most companies were formed as limited liability entities so there was "no liability if the (other) partners screw up," Diggs said.

He wouldn't say what buying into such a company would cost, but he said the investment could vary. Partners or co-owners would primarily seek to do business with clients outside of the USVI because revenue from clients inside the territory is subject to much higher taxation.

Lawyers and Accountants

John Theis said USVI tax shelter arrangements are being marketed to high-income individuals who may not be told of the risks they are assuming.

"At the bottom of the schemes, somewhere, there's an accountant and a lawyer crafting and selling (tax shelter) devices to tax filers," Theis said. "They're selling products, and they entice taxpayers to take steps beyond the limits of the law.

"(They) need a lawyer to write a letter saying it's perfectly legal."

Teddy Skokos and Lance Talkington denied that they recruit clients to the Virgin Islands, but Talkington said he had referred some of his accounting clients to a USVI attorney named Marjorie "Jorie" Roberts to help determine whether they can relocate.

Roberts, chief counsel of the Virgin Islands Bureau of Internal Revenue from 1988 to 1995, said she handled Clearwater's certification application to the EDC.

"It has to start with her," Talkington said.

Talkington said businesses that are mobile, such as professional and consulting services, were a better fit for the Virgin Islands and EDC certification.

Boeger, one of the co-founders of Clearwater, also said that "Teddy and Lance have nothing to do with whether people are residents of the Virgin Islands. Local attorneys handle that."

Talkington said he had some accounting clients who became involved with Clearwater but declined to say how many. He said he provides tax planning services to clients outside the territory and has worked out of the Virgin Islands for about 18 months.

But he wouldn't say where his residency is, whether he owns a USVI home or how often and for how long he goes to the territory.

"I'm down there a lot," Talkington said.

And when he goes to the USVI, "it's work," he said. "I've provided my services to EDC companies down there ... My main services are for Clearwater to service clients outside the territory."

Miller said he knew Teddy Skokos, but there was little interaction as Miller's business is based on St. Croix and Skokos' on St. Thomas.

"They're our friendly competitors," Miller said.

Whisenhunt said the Skokoses aren't involved in his unidentified business and they never run into each other. He prefers to live closer to the main government offices on St. Thomas, he said, while the Skokoses live a half-hour ferry ride away on St. John.

Teddy Skokos' father, Ted, was the "Little Rock-based executive" who at one time allegedly avoided paying federal capital gains taxes on the $9.99 million he received from the 1996 sale of Cellular One of Little Rock with the help of Little Rock attorney Keith Moser.

Moser was apprehended on Madagascar last month after skipping out on a date to plead guilty to tax fraud and other charges unrelated to that sale. Ted Skokos was never charged. The tax fraud charge related to the Skokos deal has been dismissed, but new charges against Moser are pending.

Teddy Skokos worked for Moser's Little Rock law firm in the mid-1990s, but he and Talkington both denied any involvement between Moser and Clearwater. DF&A officials declined to comment on whether the Skokoses or Moser are being investigated.

"We certainly will follow the prosecution of Moser to learn what we can from the situation," Theis said.

U.S. Virgin Islands Tax Benefits*

Corporate
• 90 percent federal income tax exemption
• 90 percent exemption on dividends
• 100 percent exemption on gross receipts taxes
• 100 percent exemption on property taxes
• 100 percent exemption on excise taxes
• 1 percent custom duties

Individual
• 90 percent federal income tax exemption

*For companies certified by the U.S. Virgin Islands Economic Development Commission and shareholders, stockholders, partners or co-owners of a certified company.
Source: U.S. Virgin Islands Economic Development Association

More on the Virgin Islands

•?The definition of residency in the U.S. Virgin Islands can be very squishy.
•?A U.S. Virgin Islands senator questions whether massive tax breaks are working for the benefit of the territory.

 

 

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