Mr. PAIEWONSKY. I would not be participating in the operation. I have no part of the operation, even at the present time. At the present time, my sister-in-law operates the gift shop, and my brother operates the liquor store, and my aunt is in full charge of the stationery

store.

But we are contemplating that the next business that we would dispose of, because of conditions of health and so forth, might be the stationery store, which my aunt operates, and then gradually to get out of the others.

Senator BURDICK. Then your testimony is that you-and when I say "you," I mean either a corporation you are involved in or a member of your family or someone intend to dispose of the gift shop and this liquor store that you referred to a while ago, and the stationery store, within a period of 10 years?

Mr. PAIEWONSKY. Yes, sir. That was our overall basic plan.

Senator BURDICK. And you will probably continue to operate these enterprises during the time that you are Governor?

Mr. PAIEWONSKY. Yes, sir. The family would continue to operate them.

Senator BURDICK. In which you have an interest.

Mr. PAIEWONSKY. In which I have an interest.

In other words, we have not been guided by the desire or principle of building a vast commercial empire.

On the contrary, our family has been guided by the principle of pioneering in new fields and then turning over the enterprise, when established, to new hands to carry on.

We have found this profitable, to be sure. But we also believe that this basic approach is not mere family empire building, but rather using our zest and initiative to broaden the range of activity, and we further believe that this has been good for the islands.

As to our real estate interests, we have been in the forefront of the movement to restore and retain the Old World atmosphere and charm provided by the Danish architecture. We have restored a number of old buildings in this fashion, and these, too, have been leased to tenants who are now full-time residents of the Virgin Islands.

To go to another field, banking, I was in large part responsible for establishing, in 1953, a new bank in the Virgin Islands, the West Indies Bank & Trust Co.

At that time there was only one bank, the Virgin Islands National Bank, and I was the largest single stockholder.

But I felt that the competition of a new bank would stimulate the economic growth of the islands and in fact of both banks. And that is what happened. Total bank resources rose from $6 million in 1953 to over $35 million today.

Senator ALLOTT. Mr. Paiewonsky, at that point: It is a fact, is it not, that the people in the Virgin Islands have at the present time a very substantial advantage with respect to taxes over the residents of the continental limits of the United States?

Mr. PAIEWONSKY. Yes; we do have an advantage, because I think under the treaty agreement with Denmark, it was provided for that the people of the Virgin Islands would not be placed in any less advantageous position than they enjoyed under the Danish regime. And at that time the islands were a free port. There was a duty of 6 percent. And that has been continued in force and effect.

Mr. LEVENTHAL (Harold Leventhal, attorney, Washington, D.C.). Pardon me, Senator, I am Harold Leventhal, Mr. Paiewonsky's

counsel.

Senator ALLOTT. What is your address, Mr. Leventhal?

Mr. LEVENTHAL. 1632 K Street NW., Washington.

Your question was relating to income tax, was it not? Senator ALLOTT. I will get to that in a moment; but he has brought up the other angle of it, and I will take them one by one.

So that actually the Virgin Islands, although they enjoy all the privileges of being a member of the United States-that is, our public housing, our public assistance programs, all of those, are in effect in the Virgin Islands; but the Virgin Islands receive a favored tariff situation-which is not the result of your doing; I understand that but whereas our tariff regulations may run up high, your imports come into the Virgin Islands at 6 percent?

Mr. PAIEWONSKY. That is quite true.

Senator ALLOTT. That is, the imports of the Virgin Islands?
Mr. PAIEWONSKY. That is quite true.

Senator ALLOTT. And there is no tax-or is there on the items coming from the Virgin Islands to the United States?

Mr. PAIEWONSKY. Well, the answer can be given in two parts. Products that are manufactured in the Virgin Islands come into the United States duty free.

Senator ALLOTT. They do not have to be manufactured in the Virgin Islands, do they? Any product which is partially fabricated in the Virgin Islands, if part of the fabrication occurs there, comes into the United States under that exemption, does it not?

Mr. PAIEWONSKY. Under the revised Organic Act of 1954, it was provided that in order to stimulate the growth of industries in the islands, any product manufactured in the Virgin Islands that contains less than 50 percent of its value of foreign materials, can be entered into the United States without the payment of duty.

Prior to that amendment, there was a law providing for 20 percent, but under the 20-percent clause quite a number of the small factories that were there were unable to manufacture any merchandise and ship it in under this provision. So this was expanded to try and develop little industries in the islands to give work to the people of the Virgin Islands.

Senator ALLOTT. So that if more than 50 percent of its value, then, accrues in the Virgin Islands, it comes into the United States tariff free?

Mr. PAIEWONSKY. That is correct. But it has to be a manufactured article, and it has to meet certain specifications in the island.

Senator ALLOTT. Now, what do you mean by "certain specifications?"

Mr. PAIEWONSKY. Well, it has to lose its identity, so to speak. It has to be a completely new type product, resulting from the use of the raw materials in the product.

Senator ALLOTT. This is under regulation by the Tariff Commission?

Mr. PAIEWONSKY. I think it is under the regulations by the Bureau of Customs. They have their people, their inspectors, and the local government, and products have to comply. They have to issue a

certificate of origin. And in order to become a Virgin Island product, it has to have an identity.

Senator ALLOTT. We have covered the first phase, then, that the Virgin Islands operates not quite as a tax-free port, or as a free port, as it is commonly known, but under a situation where their import tariffs are limited to 6 percent across the board.

Mr. PAIEWONSKY. That is correct.

Senator ALLOTT. And they receive a favored treatment in their exports to the United States, where 50 percent or more of the value of the article occurs by fabrication in the islands.

Mr. PAIEWONSKY. That is correct, sir.

Senator ALLOTT. Now, let us take up the other phase, which your counsel brought up.

Mr. PAIEWONSKY. The other phase is that the Virgin Islands are outside the customs laws of the United States, and therefore a tourist going into the Virgin Islands will have the same privilege in returning to bring back $200 worth of foreign materials purchased in the Virgin Islands if he has been in the Virgin Islands 48 hours or longer, or if he has been there for 12 days or more, he may bring back $500, provided he has not claimed such exemption for 6 months previously. Senator ALLOTT. I believe, Mr. Chairman, this is in accordance with the general law; so that the situation in the Virgin Islands in this respect is no different from Canada.

Mr. PAIEWONSKY. We are in the heart, so to speak, of a group of foreign islands. We have a British island 3 miles away. We have French, Dutch, and other islands. And we are all competing for the same type of tourist trade. And unless the Virgin Islands are considered this way, even though they are under the American flag, that they can compete with these foreign islands in the Caribbean, we would lose that trade, and the American dollar would be spent in the foreign islands.

Senator ALLOTT. Now, let us get over to the other angle of this, and that is the income tax advantage that the islands enjoy. There is a tremendous income tax advantage that residents of the Virgin Islands enjoy over residents of the mainland. Is this not correct?

Mr. PAIEWONSKY. We pay the same Federal income tax. The same income tax laws and rates are applicable to the Virgin Islands and the United States. However, revenues are deposited into the local treasury. The citizens of the Virgin Islands pay their income tax on the same basis as other American citizens everywhere else except in Puerto Rico. But the funds collected are retained in the treasury of the Virgin Islands.

Senator ALLOTT. So that the money you pay, although you pay at the same rate, is retained in the territorial treasury and spent there for the benefit of the Virgin Islands?

Mr. PAIEWONSKY. That is quite true.

Senator ALLOTT. Now, let us get to the matter of inheritance taxes. What about the situation for inheritance taxes?

Mr. PAIEWONSKY. The inheritance, estate, and gift laws of the United States were not applicable to the Virgin Islands until a part of it was made applicable last fall by the Williams amendment. That provision applies only insofar as property owned by American citizens residing in the Virgin Islands and is property located in the United

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States. What is owned in the Virgin Islands is treated as if it were in a foreign country, which would be outside of the Federal estate laws. What is owned in the United States, whether it is stocks and bonds or actual real property-that is included and subject to the full Federal estate taxes.

Senator ALLOTT. Mr. Leventhal, I presume you have gone into this, and I realize that he is not a lawyer, although he is a very capable businessman. If he should misstate this, I hope you will feel free to modify it or interject your own comments.

As I understand it, then, with respect to inheritance taxes, any resident of the Virgin Islands is required to pay inheritance taxes on such stocks, such properties, as he owns within the United States, but he would not have to pay with respect to any property owned within the Virgin Islands.

Mr. PAIEWONSKY. That is my understanding, sir.

Senator ALLOTT. That is my recollection, too, sir. I just wanted to make it a part of the record.

So that, getting back to your statement, now, between 1953 and the present time, is it not a fact that there has been a great influx of people from the United States to the Virgin Islands in order to take advantage of the inheritance tax provisions?

Mr. PAIEWONSKY. I do not think the record would substantiate the statement that there has been a great influx for that purpose, Senator. I think we have had a number of people making their homes in the Virgin Islands, retiring and making their homes there. But I think that was mostly due to the excellence of our climate, business opportunities, and other conditions in the islands. Some still retain their holdings in the United States.

Senator ALLOTT. Mr. Paiewonsky, you may recall that I visited the Virgin Islands some 3 years ago or a little over that, and I only want to say that there were a number of people who contacted me about this, not only to retain the present provisions of the inheritance tax, but also to expand them to the place where they would not have to pay inheritance tax upon property held in the United States. I would have to disagree with your statement. I think that it has been a major impetus for people to move to the Virgin Islands.

That is a difference of opinion.

Senator JACKSON. Would the Senator yield at that point, just for clarification?

I believe and I may be in error-that we have a Federal estate tax, not an inheritance tax.

It is an estate tax, is it not?

Mr. PAIEWONSKY. An estate tax.

Senator JACKSON. So there is a little difference in the situation as it actually works out.

I merely mention that. And I thought you might ask, on that particular point, whether they have an inheritance tax in the Virgin Islands.

Mr. PAIEWONSKY. We do have.

Senator ALLOTT. All right. I will get to that in just a moment.
What is the inheritance tax in the Virgin Islands?

Mr. PAIEWONSKY. I think the rates are 2, 4, 8, and I think the maximum is 14 percent. I am not quite sure on the rates.

Senator ALLOTT. I wonder, Mr. Carver, if we could have that supplied?

Mr. CARVER. Yes, we will furnish that.

Senator ALLOTT. At this point; together with the exemptions.

Mr. CARVER. We will furnish you with a copy of the law, if that is satisfactory.

(Mr. Carver subsequently supplied the following:)

SUBTITLE 1. MISCELLANEOUS INTERNAL REVENUE TAXES

SECTION ANALYSIS

PART I. NORMAL TAXES AND SURTAXES

Chapter 1. Inheritance Tax

1. Tax on inheritances to and from lineal relatives.

2. Tax on inheritances to brothers and sisters.

3. Tax on inheritances to distant relatives and strangers.

CROSS REFERENCES

For penalties and other general administrative provisions applicable to this chapter, see Part II of this subtitle.

§ 1. Tax on inheritances to and from lineal relatives

A tax of 2% is hereby imposed on inheritances exceeding $200 which fall from husband to wife, from wife to husband, from ascendants to descendants or from children to parents.

HISTORY

Revision note: Based on Ord. Mun. C. St. T. and St. J. app. July 16, 1952 (Bill no. 154), eff. July 1, 1952; and Ord. Mun. C. St. C. app. June 30, 1952 (Bill no. 52), eff. July 1, 1952. Section is derived from subdivision (1) of the above-cited ordinances. The remainder of such ordinances are carried into the other sections of this chapter. Changes were made in form and phraseology.

ANNOTATIONS

1. Federal estate tax: Decedent, a citizen of the United States domiciled for 12 years and at his death in the Virgin Islands, was not a citizen of the United States within the meaning of section 802, Internal Revenue Code, for federal estate tax purposes. Estate of Arthur S. Fairchild v. Commissioner of Internal Revenue, Tax Court of U.S. 1955, 24 TC. No. 45.

2. Foreign assets: Bank deposits in Denmark and Sweden of a person who died domiciled in the Virgin Islands were subject to former inheritance tax of the Virgin Islands. In re Estate of Nilsson, D.C.V.I. Dec. 18, 1928, No. 122-1928.

3. Life estate by Curtesy: Ord. Col. C. St. C. app. Sept. 29, 1876, as amended by Ord. Col. C. St. C. app. Oct. 19, 1896, section 2(e), which exempted pensions from the inheritance tax, was construed to apply to the life estate which the serviving spouse acquired by virtue of the 1921 Code, Title I, chapter 12, § 1, dealing with curtesy (abolished in this Code), in the property owned separately by his deceased wife. In re Estate of Dwyer, D.C.V.I. July 23, 1945, Prob. 12-1944.

Ord. Col. S. St. C. app. Sept. 29, 1876, as amended by Ord. Col. C. St. C. app. Oct. 19, 1896, section 2(c), which exempted pensions from the inheritance tax, was construed to apply to the life estate which the surviving spouse acquired by virtue of the 1921 Code, Title I, chapter 12, § 1, dealing with curtesy (abolished in this Code), in his deceased wife's half of community property. Id.

4. Remainder-Calculation of tax on: The value of a remainder, for purposes of calculating the inheritance tax, is to be calculated by deducting the amount it would cost the life tenant for a life annuity of the amount of the life estate. In re Estate of Dyer, D.C. V.I. July 23, 1945, Prob. 12-1944.

5.- Time payment of tax: The inheritance tax due on a vested remainder is to be paid upon the close of the estate and not when the life tenant dies. In re Estate of Dyer, D.C. VI. July 23, 1945, Prob. 12-1944.

§ 2. Tax on inheritances to brothers and sisters

A tax of 8% is hereby imposed on inheritances exceeding $100 which fall to brothers and sisters and their issue, irrespective of their being sole heirs or inheriting jointly with one of their parents.

HISTORY

Revision note: Based on Ord. Mun. C. St. T. and St. J. app. July 16, 1952 (Bill no. 154), eff. July 1, 1952; and Ord. Mun. C. St. C. app. June 30, 1952 (Bill no. 52), eff. July 1, 1952.