A Millionaire Businessman And His Island Tax Shelter

Posted: April 11, 1988

In the summer of 1986, IRS auditors in the United States and their counterparts in the U.S. Virgin Islands were deep into independent investigations of a Caribbean-based company that had avoided payment of millions of dollars in income taxes.

The company, called La Isla Virgen Inc., was the creation of a politically well-connected California millionaire, William M. Lansdale. In fact, in March of that year, Lansdale and his wife, Marianthi, had attended a White House state dinner for Canadian Prime Minister Brian Mulroney.

In May 1986, the Virgin Islands Bureau of Internal Revenue issued a deficiency notice, claiming that La Isla Virgen owed $4.5 million in unpaid income taxes and penalties for 1982 and 1983.

Three months later, in August, the Internal Revenue Service, as part of its own wide-ranging audit, issued summonses for "all books, records, contracts, documents and workpapers which were used to determine the income and expenses of La Isla Virgen Inc. for the periods of 1981 through 1986 . . ."

The agencies were moving to close a loophole in U.S. and Virgin Islands tax laws that the company had used to shelter income earned in the United States

from being taxed in either place.

As it turned out, though, there was no cause for concern on the part of Lansdale.

While tax investigators were bearing down on La Isla Virgen, Lansdale, or someone on his behalf, was bearing down on Capitol Hill.

The same month that the IRS issued its summonses, Sen. Bob Packwood (R., Ore.) and Rep. Dan Rostenkowski (D., Ill.), the chairmen of Congress' powerful tax-writing committees, approved a special tax dispensation that absolved La Isla Virgen from paying back taxes.

The tax concession - arranged by a friendly colleague whom they refused to identify - was then incorporated in the Tax Reform Act of 1986, which was passed by Congress in September of that year and signed into law by the President the next month.

Of the dozens of American companies that had taken advantage of the Virgin Islands loophole, only two managed to secure a private law from Congress waiving taxes owed. One was La Isla Virgen.

The other was Bizcap Inc., a company controlled by a millionaire businessman in Dallas who is a contributor to, and supporter of, conservative candidates and causes, including President Reagan's Star Wars defense system.

But, for Lansdale, once was not enough.

The following year, sometime in the summer or fall of 1987, Lansdale's La Isla Virgen, seeking to build on its earlier success, went after its second custom-tailored tax break.

With the assistance once again of a sympathetic congressman, Capitol Hill's tax-law writers drafted yet another provision excusing La Isla Virgen from the payment of income taxes.

That provision, along with scores like it, is waiting to be spliced into technical-corrections legislation that Congress is expected to take up in coming weeks.

About the same time that Capitol Hill tax writers were wrapping up work on drafting Lansdale's second tax preference, President Reagan appointed Lansdale's wife to the National Advisory Council on Women's Educational Programs.

In making the appointment, the White House took note of Marianthi Lansdale's business background, pointing out that since 1961 she has been ''vice president of the Lansdale Co. and president of Marina Pacifica Oil Co. in Seal Beach, Calif."

As was the case with the 1986 tax concession, the pending one is written in a way that conceals the identity of the beneficiary. It says that a company will be excused from paying taxes that others will be obliged to pay if it satisfies certain narrow requirements:

In the case of any pre-1987 open year, neither the United States nor the Virgin Islands shall impose an income tax on non-Virgin Island source income derived from transactions described in clause (ii) by one or more corporations which were formed in Delaware on or about March 6, 1981, and which have owned one or more office buildings in St. Thomas, United States Virgin Islands, for at least five years before enactment of this Act. Each such corporation shall be considered an inhabitant of the Virgin Islands . . .

The provision is phrased in such a way as to suggest that more than one company may benefit, although each would have to have been incorporated about the same date in Delaware and to have purchased an office building about the same time in St. Thomas.

The staffs of the three congressional tax-writing committees - the Senate Finance Committee, the House Ways and Means Committee and the Joint Committee on Taxation - all have declined to comment on the exemptions, as has Lansdale

himself.

But there is no question that La Isla Virgen meets the precise requirements spelled out in the special provision.

Records of the Delaware Secretary of State's Office show that the company was incorporated on March 6, 1981. And St. Thomas land records show that the company acquired a bank building on the island in September 1981 - five years before enactment of the tax law.

Why is Lansdale's company seeking a second private tax law?

The 1986 provision was intended to allow La Isla Virgen to avoid payment of at least $4.5 million in income taxes and penalties - and possibly much more - that tax authorities say the company owes.

The second Lansdale provision appears to be an insurance policy - a guarantee, if you will - just in case the 1986 provision did not grant the complete immunity from tax payments sought by La Isla Virgen.

As The Inquirer reported yesterday, Congress currently is working on scores of custom-tailored provisions that will allow lucky beneficiaries to escape taxes that ordinary citizens and companies must pay.

Lawmakers plan to weave these private tax provisions through technical- corrections legislation that is intended, in theory, to remedy typographical and clerical errors made in the massive Tax Reform Act of 1986, which radically revised the U.S. tax system.

There is, for example, the "special rule for . . . a financial institution whose predecessor was incorporated in New York on April 19, 1871" and which wants to sell "the stock of a corporation incorporated in Switzerland on April 22, 1873 . . ."

That description just happens to fit the Irving Trust Co. of New York. If enacted, it would allow the bank to avoid payment of millions of dollars in income taxes arising from its stock holdings in the Banca della Svizzera Italiana, a Swiss bank.

To be sure, no mention is made of Irving Trust in the proposed law. For just as in 1986, the provisions are written in obscure language that conceals the identity of the individuals and corporations that secured them.

MOST IN CONGRESS DON'T KNOW

In fact, most members of Congress, in keeping with a long-standing Capitol Hill practice, are unaware of which individuals and businesses are receiving the tax exemptions.

Rep. Philip M. Crane (R., Ill.) put it this way just prior to voting on the 1986 legislation:

"Even if you go through this bill, unless you are a Sherlock Holmes, you cannot necessarily know what all these references are alluding to. I do not know how much may be in there. I am sure tax sleuths will work their way through that bill at some future date and we may find all kinds of unrevealed goodies and dispensations for certain interests that found their way into the bill."

What was true in 1986 is equally true in 1988.

In the largest tax giveaway in the history of the federal income tax, Congress in 1986 granted at least 650 exemptions worth upward of $10.6 billion to thousands of wealthy individuals and hundreds of businesses. This at the same time that Congress raised taxes for millions of low- and middle- income individuals and families.

Since the 1988 exceptions are still being written, the final price tag for them remains unknown, although it is already heading into the multibillion- dollar range.

Whatever the final figure, William M. Lansdale is one of those making a repeat appearance.

*

One of California's low-profile millionaires, William Lansdale, 68, maintains homes in Orange County, on the southern border of Los Angeles, and in Palm Springs, where he is a neighbor of entertainer Bob Hope. The Palm Springs house alone is valued at more than $1 million.

His real estate interests have ranged from housing and condominium projects to the Marina Pacifica Mall in Long Beach, an open, two-story mall with courtyards. There are $150,000 yachts moored in an adjoining waterway, enabling weekend sailors to step from their boats into a boutique or restaurant.

OIL AND GAS INVESTMENTS

He also has invested in oil and gas properties, including leases on land owned by the federal government. Records in Los Angeles County Superior Court show that he has transferred some leases to and from La Isla Virgen, and that the company has owned "certain pipelines, pumps, drilling and production equipment . . ."

Lansdale has been a major campaign contributor to the Republican Party on the national, state and local levels - he gave at least $13,000 to GOP committees in 1984.

He supported California Gov. George Deukmejian during the Republican governor's 1982 election campaign, when Deukmejian edged out Los Angeles Mayor Tom Bradley, who sought to become the nation's first elected black governor.

According to published reports at the time, Deukmejian used Lansdale's private jet during the campaign. Following the election, Lansdale served on an advisory committee that screened statewide appointments, and he himself was named to the California Horse Racing Board.

His wife, Marianthi, was named to the board of trustees of the California State University System, the governing body for 19 state campuses with more than a quarter-million students.

While Lansdale has shunned publicity over the years, he has been embroiled in a protracted and bitter family legal struggle over control of his mother's estate, court records show. The estate is valued at more than $8 million.

Among the holdings are a home in Newport Beach, Calif., worth upward of $2 million and assorted oil and gas properties. Says a lawyer familiar with the proceedings, who requested anonymity:

"This is one of those real stories that makes Dallas or the Colbys (Dynasty) pale in comparison."

Orange County Superior Court Judge James A. Jackman, who has heard the case, made a similar observation in court:

"It's one of these unfortunate things where we see brother calling brother untrustworthy, to put it mildly, and grandchildren calling uncles and so on, or children calling uncles untrustworthy. That's all very sad, but it's true."

At the center of the dispute, until her death in August 1986 at the age of 96, was Arlyne Lansdale, the family matriarch, who was regarded as a shrewd lawyer and businesswoman.

Arlyne Lansdale, the lawyer recalled, "graduated from law school well into her marriage and raising her two sons. I think it was around 1933. That was quite an accomplishment in itself for a woman at that time.

"She practiced law for about 32 years while being involved in other businesses, the most lucrative of which was the very first water company in Orange County.

"After her so-called retirement at age 65, she spent the next 20-odd years devoted to the oil business and multiplied her fortune."

In 1982, when she was 92 years old, the rivalry between her two sons spilled over into the courtroom in a fight over control of a trust.

On one side was William Mangum Lansdale, who was born in 1919 and had made his own millions in real estate. Lansdale, known as Bit (the license plate on his wife's Rolls-Royce Corniche was BITSGRL), estimated in 1982 that he was worth "considerably more" than his mother.

On the other side was his older brother, Ludwell Dyson Lansdale 2d, known as Dyke, who was born in 1915, and two of his children, Ludwell Dyson 3d, called Dykie, and Joanne Lansdale Harrold.

Dyke had failed to achieve the same financial success of his younger brother. "He can't even count his own money," his mother once said during a court proceeding, adding, "he gives it to Pete Jones and Tom Smith and everybody but himself."

Dyke's daughter, Joanne Harrold, who was elected a municipal court judge in Orange County in a 1982 landslide, was the first jurist in California history to be removed from the bench because of a residency dispute.

In June 1982, William Lansdale accused his brother and his brother's children of attempting to "influence and coerce" his mother into transferring money and property to them, including the $2-million-plus home in Newport Beach.

At the time, William Lansdale said in legal papers, his mother "suffered

from lapses of memory and often became confused and disoriented, particularly with respect to her business affairs."

Joanne Harrold, on the other hand, accused William Lansdale in court papers of delivering "forged signature cards" to a bank so that he could have access to his mother's accounts.

She said that Arlyne Lansdale had removed William Lansdale as one of the three trustees - she and Arlyne were the other two - from a trust established in 1978.

She also alleged that William Lansdale once "entered the residence with police officers and an unknown individual and demanded that (his mother) execute certain loan guarantee documents, which he said were necessary in that he required certain bank loans which he could not obtain since the bank required that she sign as a guarantor."

"After (his mother) refused to sign the loan guarantee documents," Harrold said, Lansdale "then demanded that she execute a power of attorney, which she again refused to sign."

The mother's assets had been placed in the Arlyne Lansdale Living Trust,

from which she was to receive income for the rest of her life. Royalty payments from oil leases alone generated annual revenue of $600,000.

Attorneys who had represented Arlyne Lansdale accused William Lansdale of ''misfeasance, malfeasance and self-dealing as trustee of the trust."

In court papers, they said that he "has engaged in various transactions and activities in the name of the trust, has acquired or come into custody, possession or control of various assets and monies of the trust, and has received payments from funds belonging to the trust . . . and was using and attempting to use his powers as trustee to his own benefit and advantage."

During one of the court hearings, Judge Jackman noted that while Arlyne Lansdale was not mentally capable of managing her business interests, "she's not so incompetent as to not know whether it's day or night or whether or not she's in the company of other people.

"It's far from that. And here is a woman who says, wait a minute, the one person I don't want getting his hands on the estate, and it's her money, is her son, William."

In September 1986, one month after Arlyne Lansdale died, two separate wills were filed in Orange County Superior Court in Santa Ana.

The first, a two-page typewritten document dated March 10, 1980, bequeathed all remaining real and personal property to the Arlyne Lansdale Living Trust.

Upon her death, the trust was to be divided into two equal shares that would form the basis of two new trusts, one for the benefit of Dyke Lansdale, the other for William Lansdale.

A second will, a seven-page typewritten document dated Oct. 22, 1982, bequeathed jewelry, automobiles, household furnishings and any other property not already part of the trust to Joanne Harrold. More significantly, it disinherited William Lansdale.

William Lansdale maintained that the second will was invalid because his mother signed it when she "was suffering from senile dementia and a mind impaired by great physical weakness."

He also said that his brother and his brother's children falsely told his mother that "he had been dishonest in his dealing with her, that he had stolen, and was continuing to steal money and property from the . . . trust, and that he did not care about (her) but was only interested in her money."

Throughout the protracted legal proceedings - which remain unresolved - William Lansdale's Caribbean company, La Isla Virgen, continued to prosper. Shortly before the family court battle broke out, La Isla Virgen had been incorporated in Delaware, the first step in a process that created the kind of company a federal judge once labeled as "the ultimate tax shelter." Some of Lansdale's California investments found their way into the Virgin Islands' company.

Franchise records in Delaware and the Virgin Islands describe the nature of La Isla Virgen's business as "real estate and investments" and list Gustav A. Danielson, a St. Thomas lawyer and accountant, as the first president and registered agent.

Directors were John Foster, a St. Thomas real estate agent; Rex Danielson, a St. Thomas accountant and son of Gustav Danielson, and William M. Lansdale, Box 27, Seal Beach, Calif.

The company reported only one investment in the islands. It was the three- story Banco Popular Building on the waterfront in Charlotte Amalie, in sight of hundreds of yachts and cruise ships that reflect St. Thomas' allure as one of the Caribbean's sparkling commercial meccas. The company acquired the building in September 1981.

The Virgin Islands telephone directory lists a number for La Isla Virgen at the Peoples Bank Building, which is the Banco Popular Building.

But the building directory does not indicate which, if any, office La Isla Virgen maintains. Instead, it lists the names of 19 occupants, mostly insurance and investment companies, on the second and third floors above the bank. Repeated telephone calls to the number went unanswered.

Indeed, the business affairs of La Isla Virgen have been as closely guarded as its tax accommodations.

Foreign corporation reports filed in the Virgin Islands give the company's principal local office as 42 Norre Gade, which happened to be the real estate office of John Foster.

Foster said that he only looks after the bank building and has no interest in La Isla Virgen. "We're a real estate agency. We simply manage his (Lansdale's) property for him," he said. Foster, like Gustav Danielson, said that Lansdale owned La Isla Virgen.

The company's annual reports show that other than income from the bank building, La Isla Virgen derived its revenue from investments in the United States, notably California.

Therein rested its attraction.

To understand that appeal, it is necessary to look at the section of tax law that led to the creation of companies like La Isla Virgen.

Residents of the Virgin Islands, a U.S. territory about 1,100 miles southeast of Miami, are subject to U.S. tax laws, but not quite in the same manner as residents of the states.

The islands are a separate jurisdiction and operate under a tax code that is identical to the U.S. Internal Revenue Code, except the words "Virgin Islands" are substituted for "United States" wherever that term appears. All the provisions in the Internal Revenue Code - tax rates, deductions, filing deadlines - are the same in the islands.

The difference is that U.S. residents and corporations in the islands must file their tax returns with the Virgin Islands Bureau of Internal Revenue, and pay taxes to the Virgin Islands treasury, rather than to the IRS.

Within the overlapping and sometimes confusing interplay of the two systems, tax-shelter promoters refined a loophole for enterprising Americans to avoid tax on income earned in the United States.

Here is how it worked:

A company incorporated in the United States and established headquarters in the Virgin Islands. Requirements for a headquarters were minimal.

There had to be an office, but it could be a desk, say, in a local real estate office. Some tax specialists said a post-office box would do. There had to be an account in a local bank, and shareholders were required to hold annual meetings there.

The latter requirement was less than onerous, since it enabled the officers of a closely held corporation to deduct expenses incurred while traveling to and meeting in the islands, whose powdery beaches, turquoise water, spectacular scenery and unexcelled sailing attract more than a million tourists annually.

"Every board meeting he (the stockholder) attended, and every time he came to St. Thomas, he would have a legitimate business expense," explained Anthony P. Olive, director of the islands' Bureau of Internal Revenue.

Olive said that "in some cases it (the deductibility of expenses) would go so far as away-from-home living expenses (in the islands). These guys are smart."

With these few conditions satisfied, a U.S. corporation qualified as an ''inhabitant" of the Virgin Islands. As such, it was required to file its federal tax return solely with the Virgin Islands.

In the minds of the loophole's supporters, because the company was incorporated in the United States it was looked upon as a "foreign" corporation in the islands, and thus owed taxes only on income produced in the islands.

Earnings from investments, bank deposits, limited partnerships or other sources in the United States were considered exempt from Virgin Islands taxes.

Finally, because the company was an "inhabitant" of the Virgin Islands, the loophole's advocates maintained that it was under no obligation to file a tax return with the IRS.

Tax officials in both the Virgin Islands and the U.S. Treasury Department contended that it was never Congress' intention to allow a loophole of such magnitude.

But that is precisely what had been happening for years. The House Ways and Means Committee said in December 1985 that the "inhabitant rule" had ''fostered tax avoidance and tax-evasion schemes."

There are no figures on the number of these companies, dubbed by tax professionals as 28 (a) corporations, a name drawn from the section in the U.S. statute governing the Virgin Islands.

Court records and other documents indicate that they numbered in the dozens and the tax loss ran into the tens of millions of dollars each year.

In many, if not most cases, the ultimate beneficiaries of the corporations' ability to escape taxation were wealthy investors and business people in the United States.

Beginning in the mid-1980s, the Virgin Islands Bureau of Internal Revenue sought to close the loophole on its own by issuing deficiency notices for back taxes, contending that all income, wherever earned, was subject to taxation by the islands.

Among those hit was La Isla Virgen, which Virgin Islands tax authorities said owed $4,191,559 in taxes and $267,794 in penalties.

La Isla Virgen and other corporations challenged the tax claims. The first case that went to trial involved Danbury Inc., a Nevada holding company formed by two investors.

For 1981 and 1982, Danbury reported earnings of $782,176, virtually all

from partnerships and other investments in the United States. The company paid $26,243 in tax to the Virgin Islands.

The company filed no return with, and paid no tax to, the IRS. It also maintained that earnings produced outside the Virgin Islands were exempt from the islands' income tax.

In an opinion handed down in January 1986 in the Danbury case, Judge David V. O'Brien of the U.S. District Court in the Virgin Islands agreed. The judge wrote:

"We are presented here with the prospect of the ultimate tax shelter. Can a United States corporation headquartered in the Virgin Islands avoid paying income tax to both governments? Under the facts of this case, we hold that, by the use of a loophole in the taxing statutes, it can."

Judge O'Brien concluded that Congress created the loophole and it was up to Congress to close it. "We cannot legislate the closing of this loophole by judicial fiat," he said.

The Virgin Islands Bureau of Internal Revenue appealed the decision. Last June, the Third Circuit Court of Appeals in Philadelphia overturned the lower court ruling, declaring that the loophole did not exist.

Danbury appealed that decision to the U.S. Supreme Court, which declined to hear the appeal last fall, thereby leaving the appellate court decision intact.

Even so, the legal issues and the prior tax liability of these companies are far from settled, according to Gustav Danielson, the lawyer who helped Lansdale and others establish the companies.

"There are jurisdictional fights going on as a result of the Danbury decision" that have left it unclear where taxpayers should seek redress, he said.

"Once that issue is determined," he said, "we'll see where we go from there. But the door is anything but closed on those companies because of the jurisdictional dispute. And until the courts determine that, we'll just see what happens. I would imagine the matter will go on for several years now."

Congress, which did not want to take any chances on how the courts might rule, closed the loophole - which the Treasury Department and other tax and legal authorities never believed existed - in the Tax Reform Act of 1986.

Congress did so retroactively, meaning that any companies whose returns were being audited and who subsequently were found to owe the tax would have to pay it.

Some lawmakers fretted about making the law apply to past years, even if the intent was to close a loophole that permitted hundreds of millions of

dollars in income to go untaxed annually.

Among them was Sen. Bob Dole (R., Kan.). "I am concerned," Dole said during debate on the tax bill, "that the retroactive changes . . . may create hardships for some taxpayers . . ."

Nonetheless, Congress made the law retroactive, saying that all the companies would have to pay the taxes that revenue authorities said they owed. With the two exceptions of La Isla Virgen and Bizcap.

For La Isla Virgen, the company's assets have grown considerably since it was created in 1981.

From 1982 to 1985, according to the company's annual reports, they rose

from $8.6 million to $17.3 million, a 102 percent increase. During the same period, the percentage of those assets in the Virgin Islands fell from 13 percent to 6.5 percent.

In other words, of the $17.3 million in assets in 1985, 93.5 percent represented U.S. holdings which generated income that under ordinary circumstances would be subject to the federal income tax. The assets included $10 million in certificates of deposit and a $5.7 million note from "Marina Pacifica," which is not otherwise identified.

Lansdale was involved in developing the Marina Pacifica Mall in Long Beach. He also has invested in a California limited partnership by the same name, according to documents filed with the Los Angeles County Recorder's Office. And the White House press release on Marianthi Lansdale's presidential appointment identified her as president of the Marina Pacifica Oil Co.

While the value of La Isla Virgen's assets rose steadily from 1982 to 1985, net income fluctuated from one year to the next. It totaled $7.9 million in 1982, trailed off to $1.1 million in 1983, rose to $7.9 million in 1984, and fell off again to $1.4 million in 1985.

For the four years, profits added up to $18.3 million. About two-thirds of the income came from two sources, franchise tax reports in the Virgin Islands show: "Gain on redemption of limited partnership interests" in 1982 and ''gain on redemption of oil property interests" in 1984. Neither transaction is explained further.

The $7.9 million profit in 1984 gave Lansdale, La Isla Virgen's chief shareholder, a spectacular 63 percent return on his investment. That far surpasses the 23 percent return on equity achieved that same year by IBM, one of the world's largest, wealthiest and most profitable companies. And it dwarfs the 14 percent median return posted by the Fortune 500 largest industrial corporations.

The 63 percent return - akin to placing $1 million in the bank in January and taking out $1.63 million in December - is due in part to the fact that the company paid no federal income taxes in the United States.

And in the Virgin Islands, of course, it paid only token taxes because of the comparatively small percentage of income produced there.

In addition to minimal federal or territorial taxes, La Isla Virgen also incurred relatively few expenses. For the four years, expenses added up to $747,000 - or 3.9 percent of total revenue of $19.1 million.

Of that figure, utilities, interest, California taxes and depreciation expenses amounted to $492,000 - or 66 percent of the total. There were no full-time employees. Total salaries amounted to $9,000.

While the specific business deals that produced La Isla Virgen's profits are unknown, what is clear from the records is that William Lansdale's island company, like similar corporations in the Caribbean, excluded U.S. earnings

from its taxable income in both the United States and the Virgin Islands.

On May 13, 1986, the Virgin Islands Bureau of Internal Revenue notified La Isla Virgen that the company owed $3,609,398 in additional taxes for 1982, and $582,161 for 1983.

The notice grew out of an audit by the Virgin Islands authorities that disclosed that La Isla Virgen had foreign, or non-Virgin Islands source income, of $7,884,093 for 1982 and $1,308,688 for 1983.

In the notice, the Virgin Islands bureau also levied penalties of $180,470 for 1982 and $87,324 for 1983, saying that "the entire understatement of tax is . . . due to negligence of intentional disregard of rules and regulations."

That brought the total taxes and penalties due for the two years to $4,459,353. If the tax claim ultimately is upheld by the courts, interest will be added to the figure.

La Isla Virgen filed a lawsuit in U.S. District Court in St. Thomas on July 21, 1986, asking the court to redetermine the amount owed, saying the tax claim was "without merit and not legally justified."

The company maintained that the Bureau of Internal Revenue for the islands was seeking to tax income "received from foreign sources" that was "not effectively connected with the conduct of a Virgin Islands trade or business," and therefore was not taxable.

It should be noted that Virgin Islands tax authorities did not single out La Isla Virgen in a select audit. Rather, they issued deficiency notices for back taxes against dozens of similar corporations reporting untaxed income

from the United States.

Anthony Olive, director of the islands' Bureau of Internal Revenue, told The Inquirer that while "some taxpayers have made payments to us," many are contesting the deficiency notices.

Although in La Isla Virgen's case the deficiency notice makes no mention of 1984 and 1985, it is believed that if the claims for the earlier years are upheld that the Virgin Islands bureau also will seek payment of taxes for the later years.

If so, that could bring the total tax bill for Lansdale's company to an estimated $8 million - none of which it would have to pay as a result of the amnesty provision it secured in the 1986 Tax Reform Act.

At the same time that tax agents on the islands were preparing their cases, IRS agents back in the States also were at work.

On Aug. 1, 1986, an IRS office at Santa Ana, Calif., issued a summons to Gustav Danielson in St. Thomas, to produce all financial, tax and corporate records, including accountants' workpapers, for La Isla Virgen from 1981 to 1986.

The three-page request for documents covered all records relating to securities and stocks "transferred to La Isla Virgen," all "communications files between the Virgin Islands office and the U.S. corporate office," as well as the personal tax returns of shareholders.

Like their counterparts on the islands, the IRS agents were not concentrating on La Isla Virgen and its shareholders alone.

Estimates of the total number of summonses issued to Virgin Islands companies, according to conflicting legal documents, vary from a minimum of 47 to "several hundred." Similarly, estimates on the number of corporations served vary from at least 34 to "well over 100." Twelve summonses were served on Gustav Danielson.

La Isla Virgen responded by filing a petition in U.S. District Court in St. Thomas on Aug. 25, 1987. Seeking to have the summons quashed, the company argued that "it has no obligation to file income tax returns with, or pay income taxes to, the (IRS)."

The company said that because it "is an inhabitant of the Virgin Islands," the IRS "has no jurisdiction in the determination of, administration of and collection of (La Isla Virgen's) income tax liability."

The company also said that the summons should be quashed because the ''demand for production of records is solely to harass (La Isla Virgen) and third parties and cause undue hardship . . ."

So how did a company created to avoid taxes secure a provision in a tax reform act to enable it to avoid taxes?

As might be expected, no one is talking.

Repeated efforts to interview William Lansdale, the chief stockholder in La Isla Virgen, were unsuccessful. A secretary in his Seal Beach, Calif., office said he would not be available for any interviews.

Rufus V. Rhoades, a Los Angeles lawyer who in legal documents is described as the "U.S. counsel for La Isla Virgen," declined to even acknowledge that he knew Lansdale or represented the company.

He told an Inquirer reporter:

"I am not in the habit of disclosing to anybody who my clients may or may not be. . . . You can speak to me, but I will not speak to you. As I say, I do not discuss who my clients are or what their business may be. . . . I am a lawyer and the element of confidentiality surrounding everything I do is sacrosanct to me."

This exchange followed:

Reporter - Obviously, it's not something you will discuss.

Rhoades - I will be delighted to tell you that it's a very pleasant day here in Los Angeles, if you would like to discuss the weather. . . . It's not something I will discuss, whether I know anything or not. I am not even telling you I know anything about it. As a matter of policy in this firm we do not discuss any matters pertaining even to who our clients may or may not be. What was the name of that fellow again?

Reporter - Lansdale.

Rhoades - OK. So I'm sorry I can't be much help.

Other people connected with the company either declined to be interviewed or did not know the circumstances surrounding the tax break.

One of the latter was Gustav Danielson, the St. Thomas tax lawyer and accountant who set up La Isla Virgen, and other similar companies. Danielson, who takes credit for inventing the Virgin Islands loophole years ago, spoke at length about it.

But he said he did not know how La Isla Virgen obtained its exemption from the tax law. None of the other companies he represents, he said, was accorded similar treatment.

Asked if he had any notion of how La Isla Virgen arranged its provision, Danielson replied:

"I would trust that they got in touch with the right people."

The staffs of the tax-writing committees - who know the identity of all ''the right people" - are not talking either. All refused comment to Inquirer reporters.

James M. Jaffe, a staff member of the House Ways and Means Committee, summed up the prevailing attitude on Capitol Hill:

"We don't talk. We have people who clearly know, but who have yet to talk to a reporter - ever."

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