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A federal judge has ruled that the V.I. Bureau of Internal Revenue had no legal authority to impose the 3.8 percent Net Investment Income Tax on bona fide Virgin Islands residents, striking a $673,032 assessment against taxpayer William O. Perkins III and directly rejecting a tax position BIR has publicly instructed residents to follow for years.
In a 13-page opinion filed Friday, U.S. District Judge Evan Rikhye concluded that the Net Investment Income Tax, commonly known as the NIIT, is not a tax mirrored into the Virgin Islands and therefore cannot be collected by BIR from bona fide territorial residents. The judge further held that BIR is bound by Treasury Department regulations expressly addressing the issue and declared the assessment against Mr. Perkins “ultra vires and void as a matter of law.”
The NIIT is a 3.8 percent tax that generally applies to certain investment income — including interest, dividends, rents, royalties and capital gains — once a taxpayer exceeds specified income thresholds. Congress enacted the tax in 2010 as part of legislation accompanying the Affordable Care Act, with the tax taking effect in 2013. Judge Rikhye noted that the statute itself does not expressly state whether bona fide Virgin Islands residents must pay it.
The dispute arose from an October 2024 notice of deficiency in which BIR asserted that Mr. Perkins owed an additional $3,970,397 for tax year 2020. The ruling does not resolve that entire deficiency. Instead, it addresses one discrete component: BIR's $673,032 NIIT adjustment. Mr. Perkins sought partial judgment on the pleadings, arguing that BIR lacked authority as a matter of law to impose the tax.
There was no dispute over how BIR calculated the $673,032 or over the underlying facts relevant to that particular assessment. The question before the court was strictly legal: whether the Virgin Islands government possessed authority to assess the NIIT against a bona fide resident. Judge Rikhye described the matter as one of first impression for the District Court of the Virgin Islands and answered that question in Mr. Perkins's favor.
At the center of the dispute is the Virgin Islands' unusual “mirror” income-tax system. Under a federal law dating to 1921, U.S. income-tax laws are generally applied in the territory, with tax proceeds paid into the Virgin Islands treasury rather than the U.S. Treasury. Bona fide Virgin Islands residents generally satisfy their income-tax obligations by filing with BIR rather than the Internal Revenue Service. Federal law continues to describe U.S. income-tax laws as being “likewise in force” in the Virgin Islands.
But Judge Rikhye concluded that the NIIT falls outside the portion of federal tax law incorporated through that system. He emphasized that Congress has specifically defined the scope of Virgin Islands taxing authority and that the territorial Legislature may create independent local taxes when authorized to do so. The opinion notes that although the Legislature has exercised federal authority in other areas — including tax reductions for qualifying Economic Development Program beneficiaries and a corporate surtax — it has never enacted the NIIT as a separate territorial tax.
The court found even stronger support in Treasury Department regulations dealing specifically with territorial residents. Under 26 C.F.R. § 1.1411-2, a bona fide resident of a U.S. territory is subject to the federal NIIT only when that individual is required to file an income-tax return with the United States under the applicable territorial provisions of the Internal Revenue Code. The regulation expressly includes the U.S. Virgin Islands within its definition of U.S. territories.
Treasury had signaled that interpretation before the regulation became final. In its 2012 rulemaking, the department explained that bona fide residents of mirror-code territories generally owe no U.S. income tax when they properly report and pay income tax to their territorial government and that, for that reason, the NIIT generally does not apply to them. Judge Rikhye concluded that Treasury issued the final regulation pursuant to authority delegated by Congress and that the regulation carries the force of law.
BIR took the opposite position. According to the opinion, the bureau argued that because the underlying federal NIIT statute applies to mainland taxpayers, the Virgin Islands mirror system likewise authorized BIR to impose it locally. BIR also contended that the Treasury regulation was merely interpretive and therefore did not bind the territorial government. Judge Rikhye rejected both arguments.
The court also rejected BIR's reliance on its longstanding administrative practice of collecting the tax and on annual public statements telling residents that the NIIT applies. Judge Rikhye found the Treasury regulation unambiguous and said there was consequently no basis to defer to BIR's competing interpretation.
The opinion became particularly pointed on that issue. Because BIR cannot write its own federal income-tax regulations, the judge said it must follow the regulations issued by Treasury. Those regulations, he wrote, are not “a menu at an all-you-can-eat buffet” from which BIR may choose which provisions to follow. He concluded that imposing the NIIT without statutory authority and contrary to the Treasury regulation was an ultra vires act.
Judge Rikhye similarly dismissed BIR's argument that its position deserved weight because the bureau had consistently imposed the tax over time. “The VIBIR cannot acquire lawful authority to do something merely by doing it unlawfully for a long time,” the judge wrote. He noted that Treasury regulations addressing the matter have existed for approximately 14 years and that the Virgin Islands Legislature had not independently enacted the NIIT during the years since Congress created it.
That portion of the ruling places the court in direct conflict with guidance BIR has repeatedly provided to Virgin Islands taxpayers. In an April 2025 tax-filing notice, BIR Director Joel Lee told the public that bona fide Virgin Islands residents “are required to file and pay” the Net Investment Income Tax to BIR and warned that taxpayers who failed to include the tax on their Form 1040 would face penalties and interest.
BIR had issued similar guidance years earlier. In October 2022, the bureau specifically reminded residents that the NIIT applied to bona fide Virgin Islanders and described the 3.8 percent tax as applying to qualifying investment income, including interest, dividends, capital gains, rental income and royalties.
Federal guidance has been notably more cautious. The IRS's current Publication 570 states that because bona fide residents of Guam, the Northern Mariana Islands and the U.S. Virgin Islands generally have no federal income-tax filing obligation, the NIIT generally does not apply to them directly through the IRS. The publication nevertheless has told those residents to consult their territorial tax departments concerning the “possible mirrored application” of the tax.
The dispute has been known in national tax circles for more than a decade. In 2014, the American Institute of Certified Public Accountants, the Virgin Islands Society of Certified Public Accountants and the Guam Society of Certified Public Accountants jointly sought congressional clarification over whether the NIIT could be mirrored and collected by territorial tax agencies.
The Perkins matter is also not the only pending Virgin Islands case challenging BIR's NIIT position. Philip and Erica Arcidi filed a federal lawsuit in 2024 after BIR increased their 2019 tax liability by $98,551 to include the investment tax. According to a review published by The Tax Adviser, the couple had omitted the NIIT based on the same Treasury regulation that Judge Rikhye has now found controlling. Their lawsuit argues that BIR lacked authority to make the assessment.
The Arcidi case was filed in the District Court of the Virgin Islands as a tax-refund action and remains a separate proceeding. Friday's Perkins ruling does not itself enter judgment for the Arcidis, but its interpretation of the same federal statutes and Treasury regulation creates significant new authority within the district on the central legal question raised in their case.
The ruling could also raise broader questions for Virgin Islands taxpayers who previously paid NIIT to BIR under the bureau's published instructions. The decision does not automatically order refunds to other taxpayers, nor was the Perkins case brought as a class action. Its direct legal effect is to invalidate Mr. Perkins's $673,032 assessment, although the court's reasoning broadly concludes that NIIT does not apply to bona fide Virgin Islands residents.
Any taxpayers seeking repayment of previously paid amounts could also face statutory deadlines and other procedural requirements. Federal law generally requires a tax refund claim to be filed within three years from the time a return was filed or two years from the time the tax was paid, whichever period expires later, subject to particular rules and exceptions. The full financial exposure to the Virgin Islands government is not immediately clear because publicly available BIR collection reports do not isolate NIIT receipts in a way that establishes how much has been collected under the policy over the years.
Friday's ruling is the latest development in a broader series of disputes between Mr. Perkins and the territorial tax agency. The Consortium reported in August that Mr. Perkins separately sued Gov. Albert Bryan Jr. and several BIR officials, alleging they retaliated against him after he sued for a tax refund by conducting a narrowly focused audit and disallowing nearly $3 million in Research and Technology Park tax credits.
Those allegations remain separate from the decision issued Friday. Judge Rikhye did not decide whether the RTPark credit was properly disallowed, whether the balance of the nearly $4 million deficiency is valid, or whether BIR officials retaliated against Mr. Perkins. The court decided only the legal validity of the $673,032 NIIT adjustment.
Still, the opinion reaches a question substantially larger than that single assessment. Judge Rikhye opened the ruling by asking whether bona fide Virgin Islands residents may be required to pay a tax associated with a federal program that does not operate in the territory and answered with an “unequivocal ‘no.’” He then identified what he considered an even more fundamental issue: whether the Virgin Islands government, while administering the mirror tax system, must comply with Treasury Department regulations. His answer to that question was also an unequivocal yes.
The court therefore granted Mr. Perkins's motion for partial judgment on the pleadings. The remaining portions of his challenge to BIR's 2020 deficiency are not resolved by the opinion, and any eventual appellate review would occur through the U.S. Court of Appeals for the Third Circuit as the underlying litigation proceeds.
