Federal court rejects BIR's 3.8% investment-tax assessment

The District Court of the Virgin Islands has ruled that the V.I. Bureau of Internal Revenue lacked authority to assess the 3.8 percent federal Net Investment Income Tax against a bona fide Virgin Islands resident. Judge Evan Rikhye granted William O. Perkins III partial judgment on the pleadings and invalidated a $673,032 NIIT adjustment for tax year 2020.

The court concluded that the tax, located in Chapter 2A of the Internal Revenue Code, is outside the federal income-tax provisions mirrored into the territory. It also held that BIR must follow the Treasury regulation addressing bona fide territorial residents rather than treat that regulation as optional guidance.

The ruling is narrower than Perkins' full tax dispute. It does not decide the rest of BIR's nearly $4 million deficiency notice, enter judgment for taxpayers in other cases or order automatic refunds to people who previously paid the tax. Any broader application could depend on further proceedings, possible appellate review and individual filing deadlines.

The decision conflicts with BIR guidance telling bona fide residents to file and pay the tax locally. BIR had not published revised public instructions when this briefing was prepared. Taxpayers considering a return amendment or refund claim should use the filed opinion as the primary record and obtain advice about their own deadlines and circumstances.