New Sweat Law Targets Business Assets Even Before a Finding of Labor/Wage Law Wrongdoing

A recent article in the New York Times, “Workers Find Winning a Wage Judgment Can Be an Empty Victory” (April 13, 2017), discusses a proposed new law that would allow a lien against a business accused of improperly withholding wages from its workers.  The law is known as a sweat law or securing wages earned against theft law.

The problem: the theft is merely alleged, not proven.  If the law is passed, employees with grievances against their employers – – irrespective of whether the grievances are valid or frivolous, retaliatory or vexatious, and before any finding of wrongdoing – – will be able to tie up the employers financially.  This would be crippling for the employers and could lead to significant cash flow and credit issues.  Such consequences could happen on the basis of a mere claim against the employer, however flimsy or unfounded.  As the New York Times stated, the proposed law “would essentially enable employees who accuse an employer of wage theft to have a lien placed on the employer’s assets while the outcome is being determined.”

Existing law is hesitant to allow for such crippling consequences before a court or government agency finds any wrongdoing.  Such a “pre-judgment remedy” is very rare.  Pre-judgment remedies are allowed in limited circumstances, such as when a litigant can demonstrate that his adversary may flee the court’s jurisdiction and take assets with him.

In the U.S. Supreme Court case Grupo Mexicano v. Alliance Bond Fund (1999), the highest Court held that the law does not allow for a preliminary injunction preventing defendants from disposing of their assets pending a court deciding the creditor’s claim.  For a court to grant creditors such preliminary injunctions “could radically alter the balance between debtors’ and creditors’ rights,” the late Justice Scalia wrote, and “might induce creditors to engage in a race to the courthouse . . . which might prove financially fatal to the struggling debtor.”  In other words, the creditor had to first obtain a judgment from the court in order to prevent the defendant from doing something with his assets.  The proposed “sweat” law seems to run directly counter to the Grupo Mexicano opinion by the U.S. Supreme Court.

The New York Times article does point out that certain business owners have lost employment litigations and then have undertaken questionable actions, such as “selling off houses and businesses – sometimes for a nominal sum, and frequently to a relative – and declaring bankruptcy . . . to avoid paying back wages, overtime or damages, usually as a result of a court order.”  However, the law already has remedies for such actions.  For one thing, such sales to insiders, without fair market consideration, can be reversed by a court as a “fraudulent conveyance”.  In addition, the Bankruptcy Code allows a bankruptcy trustee to void any such transfer within ten years of the bankruptcy filing.  The NYT article also notes that when one business, say a restaurant, is sued and loses, that business then changes its name but carries on business as usual.  However, the law also does allow for “successor liability” for the “new” business when the new business is substantially the same as the old.

Irrespective of whether the proposed “sweat” law is passed, the threats to business owners are clear and immediate.  An entire industry of lawyers has arisen to bring litigations against business owners based on alleged labor and wage violations under the Fair Labor Standards Act (FLSA).  Business owners and investors are personally liable for labor law violations, which means that even if the business is owned in an LLC or corporation, the owner’s personal assets are vulnerable.

The lesson is that business owners should protect their personal and business assets BEFORE a claim is filed.  AFTER may soon be too late.  Proper asset protection, in conjunction with compliance with labor and wage laws, is the best pre-emptive defense, and often discourages the predatory lawsuits in the first place.  Proper asset protection strategies offer business owners peace of mind and provide the protection their assets need to withstand the inevitable attacks.

Please contact us with any questions or to schedule a consultation on how to protect assets from labor and wage claims.

New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

This month, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.

Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016. Shortly after that the IRS will publish final regulations which will take effect within thirty days after publication.

These proposed regulations were expected.  We have previously written about them here and here.

While we do not venture into political discussion, we point out that Hillary Clinton has stated that she will reduce the estate tax exclusion from $5,450,000 per person ($10,900,000 for a married couple) currently in effect, to $3,500,000 per person ($7,000,000 for a married couple) and reduce the gift tax exemption from $5,450,000 per person to $1,000,000 per person.  She will also increase the gift/estate tax to 45%.  (Donald Trump has proposed to eliminate the gift/estate tax entirely.)

Readers who have not yet completed their estate planning are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.

Please see our related articles:

Family Limited Partnerships & Discounting

Historic Opportunity to Avoid Tax on Over $10 Million+ of Assets

Year-End 2015 Tax Planning: Take Advantage of Gifting to Lower Estate Tax – Before the Law Changes

LLC/FLP Discounting and Leveraged Gifting to Lower Estate Tax May Soon Be Limited

Please contact us with any questions.

The Panama Papers:  Effective Asset Protection Should Not Be Compromised by Lack of Banking Secrecy

The “Panama Papers” purportedly show how one law firm in Panama City with branches from Switzerland to Hong Kong utilized offshore entities and bank accounts to hide money for a world-wide clientele of wealthy people, including political leaders in various governments.  While foreign entities and bank accounts are legal, it is against the laws of many countries to hide income from taxation, to launder bribe money and other proceeds of corruption and criminal activities.  If the reports are true, the Panamanian law firm of Mossack Fonseca participated in tax evasion and money laundering on a global scale.

The “Panama Papers” raise issues, not for the first time, about foreign tax havens, banking secrecy and offshore asset protection.

In 2012, I visited Panama and met with trustees, attorneys and bankers, all eager for business and client referrals.  While I was witness to the explosion of Panama’s banking industry, and I knew that Panama banks were a gateway for doing business in Central and South America, I have not sent a single client to Panama nor recommended Panama as an asset protection jurisdiction.  Years earlier, we had made the decision that we preferred other jurisdictions for asset protection, for reasons including:  the strength of local laws, the degree of difficulty for outsiders to challenge those laws and asset protection structures, and our contacts and experience with other jurisdictions.

One of the factors that we look for in an asset protection jurisdiction is the social, economic and political stability of that country.  Panama was ruled by a military dictatorship from 1969 to 1989.  In 1989, within recent memory, U.S. troops entered Panama to arrest its president, who was also a military general and drug dealer.  While the Panamanian banking system developed since those years, and Panama City skyscrapers soared, the prior history made us hesitant.  Other jurisdictions offered better laws, a better record of political stability, and lawyers, trustees and bankers who we already knew to be professional and honest.

The “Panama Papers” is apparently the second time that a whistleblower has offered Mossack Fonseca documents to tax authorities.  The first instance resulted in raids and tax fraud prosecutions in Germany, and the information was then shared with the UK and U.S. governments.  The current situation arose as a result of a hacker penetrating Mossack Fonseca’s computer system and transferring millions of documents to the International Consortium of Investigative Journalists (ICIJ), which released the documents earlier this year.

In the “computer age”, nothing is immune from hacking and therefore there is no real secrecy.  Four days before the Panama Papers were made public, the Wall Street Journal reported that elite New York law firms Cravath, Swaine & Moore and Weil, Gothal & Manges were hacked.  J.P. Morgan Chase, the biggest bank in the U.S., was hacked in 2014.

Hacking, leaks and whistleblowers can happen anywhere, not only in Panama.  In 2013, ICIJ, the same group that released the Panama Papers, released a trove of offshore account details based on confidential documents obtained from the British Virgin Islands and Singapore.  In 2008, an HSBC tech employee in France stole banking records and handed them over to the French government, which then shared the information with other governments, leading to investigations and prosecutions of many Europeans for tax fraud.  In 2006, an employee at LGT Bank in Liechtenstein (once the most secret of tax havens) sold confidential banking records to the German government for millions of Euros.  The German government shared that data with other governments, including the U.S.  When foreign governments pay millions for stolen banking data (which they have done again and again), it creates an incentive for theft.

It may be said that the entire unraveling of Swiss banking secrecy can be attributed to a single causative event:  UBS employee Bradley Birkenfeld revealing to the U.S. Government how UBS lured wealthy Americans to open accounts in Switzerland, how UBS advised on keeping the accounts secret from the IRS, and how the bank earned high fees for managing the accounts.  So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, revealing the names of some 5,000 Americans with non-compliant accounts, and the end of Swiss banking secrecy.

While hacking, theft by bank employees and whistleblowers are universal, Panama is being singled out today due to the size of this latest leak of data, the historical scope (thirty to forty years) as well as the details of illegality.  What makes the “Panama Papers” leak different are the revelations of illegality: banks apparently willing to open accounts for entities without knowing the true beneficial owner of the corporation or trust, or knowing the beneficial owner to be connected to a rogue government but looking the other way; attorneys offering bearer share corporations (which most of the rest of the world no longer does and is illegal in all fifty U.S. states), and attorneys willing to backdate documents.

In better jurisdictions, these practices should not exist.  I personally have not seen a bearer share corporation in about a decade and a half.  Lawyers, banks and trust companies with whom we work around the world have strict “know your client” and due diligence requirements to vet and protect against money laundering and other illegal activities.  We disclose the beneficial owners of foreign accounts, because legitimate banks and U.S. laws require this.  Our asset protection clients are not looking to hide behind sham entities, and our clients do not rely on banking secrecy, because our clients understand that sham entities are ineffective and, where disclosure to tax authorities is involved, bank secrecy has been proven to be extinct.

Of course, another crucial difference is that despots, criminals and tax evaders need a jurisdiction like Panama, where attorneys and bankers look the other way.  Simply put, money laundering and tax evasion requires banking secrecy and the cooperation, or at least the “willful blindness”, of attorneys at Mossack Fonseca.  Asset protection of legitimately earned and tax compliant money does not require banking secrecy.  In that light, Panama is simply offering the very same services that got Switzerland in trouble.

The UBS, HSBC, LGT, Mossack Fonseca and other leaks clearly demonstrate that banking secrecy can be compromised by hackers and renegade bank employees.  Further, the success of the U.S. Department of Justice in penetrating Swiss banks and obliterating Swiss banking secrecy, the adoption of the Foreign Account Tax Compliance Act (FACTA) by banks and governments around the globe, and a host of Mutual Legal Assistance Treaties and Tax Information Exchange Agreements signed between governments, all point toward the conclusion that banking secrecy, at least as it relates to government mandated disclosure, has been effectively destroyed.

Good asset protection does not rely upon banking secrecy.  Foreign banking secrecy has been compromised by hackers, whistleblower employees, investigations and prosecutions of foreign banks and bankers, treaties and governments cooperating with each other and sharing banking information.  In addition, foreign accounts, and foreign trusts and corporations which own foreign accounts, must be disclosed to the IRS.  Even in civil litigation, tax returns are often discoverable by one’s adversaries.  Again, reliance on secrecy to protect offshore assets is no longer a viable strategy in today’s world.

Instead, our clients rely on full compliance with tax and disclosure laws, but they achieve effective asset protection from civil creditors through the use of time-tested asset protection laws in safe and stable jurisdictions.

As we have long-counseled, any of the threats to banking secrecy, whether by governmental agreements, weakened bank secrecy laws, hackers or renegade bank employees, is not material if the funds are legitimately earned and the foreign account is tax-compliant.  It is completely legal to have funds offshore, for many reasons (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy.  If the offshore accounts are tax-compliant, then the threat of information sharing – – from whatever source, governmental or individual – – is eliminated.  As the window of banking secrecy closes further, those people whose foreign assets do not rely on secrecy and are tax-compliant need not worry.

Switzerland Defeated, the U.S. Turns Against Accounts in Other Countries

Recently, the last Swiss banks to seek non-prosecution agreements with the U.S. Department of Justice (DOJ) have paid their fines and revealed the identities of their U.S. account holders.  The U.S. Government is able to credibly announce that Swiss banking secrecy has been thoroughly defeated.  Contemporaneous with the victory over Swiss banks, the U.S. has turned its attention to hidden bank accounts in other tax haven jurisdictions.

On March 9, 2016, two Cayman Islands financial institutions, Cayman National Securities (CNS) and Cayman National Trust Co. (CNT) pled guilty in federal court in New York to conspiring with American account holders to hide accounts and evade U.S. taxes.  These guilty pleas are the first from financial institutions outside of Switzerland.  The pleas included details of CNS and CNT creating “sham” corporations and trusts for their U.S. clients to obscure the true beneficial owners of the accounts.  DOJ also pointed out that CNS and CNT continued to provide “secret” banking services even after 2008, when it was publicly known that DOJ was investigating and prosecuting UBS for facilitating the same type of tax fraud.  The Cayman institutions will pay a penalty of $6 million.

The guilty pleas revealed that “[f]rom 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.”  That doesn’t seem to be much of a return on the illicit activity, especially amortized over that ten year period.  It is especially surprising that the Cayman institutions, on notice since 2008 of the DOJ investigation and prosecution of UBS, made the business decision to continue to offer the very same “secret” banking services when the return was so low and the risk was so high.

Pursuant to a treaty request, CNS and CNT have already disclosed twenty percent of their U.S. clientele to DOJ, and will now reveal ninety to ninety five percent of their U.S. clientele.  For U.S. taxpayers who have not already come forward and voluntarily disclosed their accounts at CNS and CNT to the IRS, a pre-emptive disclosure is now too late.  Those taxpayers can now expect IRS investigations and criminal prosecutions.

Two weeks prior to the Cayman guilty pleas in New York, in a different offshore banking prosecution in Miami, DOJ requested that a federal court issue a “Bank of Nova Scotia” summons to UBS in Miami.  The summons demanded the records of a UBS account in Singapore belonging to a U.S. taxpayer in China.  In the past, DOJ has repeatedly used “John Doe” summonses against foreign banks (including in Switzerland, Belize, India and the Caribbean) to obtain information about a broad class of U.S. taxpayers unknown by specific name.  “Bank of Nova Scotia” summonses have not been used as frequently until now.  They derive from a court case where a U.S. court compelled a branch of Scotiabank in Miami to disclose information to DOJ regarding a Scotia branch in the Cayman Islands, notwithstanding Cayman’s secrecy laws.

In the present case, UBS will argue that Singapore’s bank secrecy laws prevent UBS from providing the account records to DOJ.  The parallel argument applied, of course, to accounts at UBS in Switzerland when DOJ prosecuted UBS in 2008.  And yet, Swiss bank secrecy failed for UBS (and its U.S. clients) in 2009.  Because of UBS’ substantial presence in the U.S., it was forced to settle with DOJ or else face penalties against UBS’ banking licenses and assets within the United States.  For the same reason, we can expect that, just like the Swiss account records, the UBS Singapore account records will ultimately be handed over to DOJ.

Notwithstanding UBS’ vulnerability with respect to its U.S. assets, it is unlikely that the state of Singapore would risk its financial reputation to protect non-compliant accounts.  Singapore makes a significant amount of money from legitimate international banking and finance and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago.  To this end, in 2014 Singapore signed FATCA, whereby Singapore financial institutions report information about U.S. account owners to the Inland Revenue Authority of Singapore, which in turns furnishes the data to the IRS.  In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them.  Failure to abide by this new law will result in criminal charges for the Singaporean bankers.

It is of course no surprise that DOJ and the IRS are pursuing undisclosed accounts in Cayman and Singapore.  The U.S. has not limited its enforcement activity to non-compliant accounts in Switzerland alone.  Within the last couple of years, DOJ has moved against banks and financial institutions in the Caribbean (CIBC First Caribbean, Stanford Bank and Butterfield Bank in the Bahamas, Barbados and elsewhere), Belize (Belize Bank International Limited and Belize Bank Limited), Panama (Sovereign Management) and India (HSBC India).  We expect that other financial institutions, in other jurisdictions, are being investigated as well.

The settlement by some one hundred Swiss banks with DOJ, whereby in exchange for paying fines and naming U.S. account holders the banks avoid prosecution, has now freed up manifold resources at DOJ and IRS to examine and prosecute other financial institutions beyond Switzerland.  Moreover, the account information handed over by the Swiss banks when settling with DOJ provided DOJ with a road map of funds leaving Switzerland and where these funds went, the so-called “leaver accounts”.  DOJ and IRS are especially driven to investigate and prosecute these account holders, as they show an added level of intent to deceive the IRS.  Many of the leaver accounts went to jurisdictions like Dubai, Israel, Singapore, Hong Kong and Panama.  These jurisdictions are now targets of DOJ investigation.

There is still an opportunity to bring foreign accounts into IRS compliance, via the IRS Offshore Voluntary Disclosure Program (OVDP) and, for less egregious non-willful infractions, the Streamlined disclosure procedures.  However, it has been some eight years since the 2008 DOJ prosecution of UBS signaled the end of Swiss banking secrecy.  There have been recent hints by the IRS that, given the amount of time that has elapsed, the opportunity to voluntarily disclose the accounts to the IRS in return for lower penalties may be closing.  U.S. taxpayers who still have non-compliant offshore accounts would be well advised to seek competent legal assistance in addressing how to best come into compliance, and they should do this before the IRS finds them.

For additional information, please read our articles below:

Foreign Accounts: the Best Way Toward US Tax Compliance, and Assessing Eligibility for the Streamlined Disclosure Program

Should Everyone with Undeclared Foreign Assets Make a Voluntary Disclosure to the IRS? Are there Less Costly Alternatives to a Voluntary Disclosure?

Regarding Foreign Accounts, Are You Willful? Or, Should You Apply for the Streamlined Disclosure Procedures?

 

Foreign Assets and IRS Reporting: A Primer for Tax Season

It’s tax season once again and we take this opportunity to remind readers of important ongoing tax reporting requirements that must be met with respect to foreign financial assets.  Whether you have been properly reporting your foreign financial assets to the IRS regularly, or you have recently come into compliance via a Voluntary Disclosure or FBAR submission, you must ensure ongoing tax compliance.  And if you’re just beginning to learn about IRS filing requirements for foreign financial assets, you need to know of some filing deadlines that are right around the corner.  You’ll have to move fast to report foreign financial assets properly and carefully, or else face yet another tax year of non-compliance.

  1. “Check the Box” on IRS Form 1040, Schedule B

If you maintained foreign financial account totaling more than $10,000 in the aggregate at any time during 2015, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7.  This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country.  Even if you closed the accounts during 2015, you must still “check the box” if you maintained the accounts during any part of 2015.  If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file form 3520.

  1. Report Foreign Income

In addition to “checking the box” on IRS Form 1040, beneficial owners of foreign accounts must report all income (including interest, capital gains and dividends) realized during 2015 in the foreign accounts, on IRS Form 1040.  If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2015 (e.g., IRS Form 8621).  If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it.  You may be eligible to deduct real estate expenses and real estate taxes.  In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid.  Even so, all foreign income should be declared.

  1. IRS Form 8938

IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies).  IRS Form 8938 is due with your annual tax return (usually April 15, but April 18 this year, unless you obtain an extension).

  1. Additional Forms for Entities (Foreign Trusts, Corporations, etc.)

If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2015 you received assets from such a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A.  If you had an interest in a foreign corporation, and such foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due.  These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2016).

  1. The FBAR – due June 30, 2016

The FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), must be filed by June 30, 2016 for calendar year 2015.  The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2015.  The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products.  Recent authority also extends the FBAR to on-line gambling/gaming accounts.  If the accounts existed at any point during 2015, then the FBAR must be submitted by June 30, 2016.  Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically.  There are no extensions for the 2015 FBAR, even if you obtain an extension to file your annual income tax returns (e.g. Form 1040).

  1. Strategic Concerns

If you have not yet filed an application for the OVDP or Streamlined program, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2015 tax returns.

You may request an extension by filing IRS Form 4868.  Note that this is an extension to file the tax return, not pay tax due.  You still need to pay your tax liability by April 18, 2016, while you have until October 17, 2016 to file your tax return.

Note that there are no extensions for your 2016 FBAR form.  This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR.

 

If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2015 FBAR, please feel free to contact us.

 

 

 

 

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