Watch Asher Rubinstein Interviewed on Bloomberg about Offshore Banking:
What’s Next for Swiss Banking Secrecy?
The following is a question-and-answer exchange between Asher Rubinstein and a journalist from Switzerland, regarding recent developments effecting Swiss banking, exchange of confidential bank account data, the US Government litigation against UBS, and the German Government’s purchase of confidential bank account data. The journalist’s questions appear first, followed by Asher Rubinstein’s comments.
The question I will be attempting to answer is: “Can Switzerland hold out in their efforts to protect banking secrecy – and the connected legal distinction between tax evasion and fraud?”
I believe that the events of 2009 (IRS v. UBS litigation, anti-tax haven offensive by the Organization for Economic Cooperation and Development (OECD), multiple Tax Information Exchange (TIE) Agreements with “tax haven” nations, etc.) have demonstrated that banking secrecy vis-a-vis governmental tax authorities is no more. While banking privacy and asset protection vis-a-vis private civil creditors may be ongoing, there can be no expectation of banking secrecy in the context of tax reporting and disclosure.
With respect to the Swiss distinction between tax evasion and tax fraud, I likewise think that the distinction has limited ongoing viability. Under the new Swiss-U.S. TIE signed in 2009, Switzerland would be obligated to disclose information to US authorities in connection with a US audit or investigation, whether civil or criminal. The tax fraud / tax evasion distinction under Swiss law would not be relevant to Switzerland’s obligation under the TIE to provide information to US authorities.
How will the US respond if the UBS deal falls flat on a Swiss legal technicality?
If UBS takes the position that Swiss law (i.e., the recent court ruling) prevents disclosure of the account information, the US would argue that UBS is in violation of the settlement agreement. The US might also argue that UBS is in contempt of court, and the US would move to re-open the civil litigation against UBS in US Federal Court in Miami. UBS’ defense to the contempt of court charge would be impossibility of performance, i.e., that it is impossible for UBS to comply and hand over account information, because the Swiss court ruling prevents UBS from complying.
I am not certain that impossibility of performance would be a persuasive argument to the US Federal Judge. Inability to hand over confidential banking data, because of Swiss law, has been UBS’ position all along, even before the settlement. Thus, the argument that UBS’ hands are tied is not new. We have had a hint as to the Judge’s possible response when, prior to the settlement, he asked attorneys for the US government whether they would be prepared to enforce a ruling by seizing UBS assets within the US.
UBS’ presence in the US gives rise to another vulnerability, independently of the legal proceeding. The US government could revoke UBS’ banking license, which would have far-reaching effects for UBS, its customers, and the international banking system.
Could we expect demands for data from other Swiss banks in the future?
Absolutely. We believe that the UBS is the “tip of the iceberg”. The 15,000 US taxpayers who have already made voluntary disclosure to the IRS about their foreign accounts, and the US taxpayers who have been indicted for tax fraud and have been cooperating, have provided the IRS with much information about other banks, in Switzerland and other countries, which have aided and facilitated tax non-compliance by US taxpayers. The IRS will not stop with UBS, but will use its public relations victory against UBS as leverage to pursue other banks. We know that other banks, including HSBC and Julius Baer, are already the subjects of investigation.
How does the issue of Germany buying bank data change the international tax evasion landscape?
There is no absolute banking secrecy. Theft of banking data by a bank employee is one threat, and it’s not a new threat. Multiple threats to banking secrecy exist, on many levels.
The first level is institutional; for example, a bank like UBS disclosing account information to a tax authority like the IRS. The second level is governmental: the relaxation of banking secrecy laws, TIEs and increased transparency of former tax havens like Switzerland, Liechtenstein, etc.
A third level is the individual level: renegade bank employees looking to sell confidential bank data for a price. But this is nothing new. In 1999, the head of Guardian Bank in Cayman provided banking data to the US government in return for leniency in his criminal prosecution. In 2008, an employee of LGT bank in Liechtenstein sold banking information to Germany. In 2009, an HSBC employee provided banking data to France.
Thus, a foreign government purchasing once-confidential banking data is not a new development. Rather, it highlights yet another threat to banking secrecy.
Is it justified for country A to flagrantly break laws because country B is encouraging people to violate country A’s criminal code?
This question seems more a moral question than a legal question, but the law does shed some light. Under the law in the US, stealing from a thief is still theft. In other words, focusing on the second crime, i.e., the purchasing of stolen bank data, is merely a distraction from the first crime, i.e., facilitating the violation of tax law. The focus on country A’s actions do not undo the first issue, which is country B’s encouragement of tax violations.
Is there any chance that this issue will blow over if Switzerland sits tight?
I don’t think so. The IRS obtained tremendous public relations in bringing UBS to settlement, and scared thousands of Americans to come forward and voluntarily disclose their offshore accounts. The recent Swiss court decision has undercut that momentum, and I don’t see the IRS allowing that situation to continue. Rather than “blowing over”, I think there will be tremendous diplomatic activity between the US and Switzerland. I also think that it is likely that the IRS will re-commence the litigation against UBS in federal court in Miami, in order to try to get additional leverage. This will continue to be an ongoing diplomatic and judicial issue.
Renegade Bank Employees Further Erode Offshore Banking Secrecy
Renegade Bank Employees Further Erode Offshore Banking Secrecy
by Asher Rubinstein, Esq.
In an article from December 2009, titled “Get Ready for a One-Two Punch: More Taxes and More IRS Audits” , I wrote the following:
Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.
Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Island Bank, was charged with money laundering involving his Cayman bank. When Mr. Mathewson was arrested, he gave Federal investigators computer records which he had stolen from the bank and brought to the U.S. These computer records contained information regarding American depositors at the bank who evaded U.S. tax obligations. In that case, the motivation for sharing banking data was not money, but cooperation in criminal prosecution and leniency in sentencing.
In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for a few million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world.
In 2009, an employee of HSBC shared bank account data with the French government.
In January 2010, it was reported that an employee of a Swiss bank offered confidential client banking data to the German government in exchange for a multi-million Euro payment. As of today, indications are that the German government will again purchase the banking data in order to investigate tax fraud by German citizens.
An article in Bloomberg, “Swiss Banks Achilles Heel Is Workers Selling Data” , echoes our warnings.
As the events of last year have shown, Swiss banking secrecy laws caved under pressure from the IRS, resulted in the disclosure of account information once thought to be sacrosanct, and led to prosecution of many US taxpayers for tax fraud.
In addition to weakening secrecy laws and greater information exchange among governments, we must add one more threat: the threat by bank employees looking to deliver confidential banking information in return for payment. Thus, last week’s Swiss court ruling that the UBS-IRS settlement violated Swiss law becomes only a secondary issue if the underlying foreign account data is sold by a renegade bank employee. Exchange of account information at the governmental level is sidelined when an inner employee of the bank poses a more immediate and direct threat to banking secrecy.
As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, or from renegade bank employees – – is not material if the foreign account is tax-compliant. It is completely legal to have funds offshore, for many reasons, so long as the funds are disclosed and taxes are paid on the income. If the accounts are compliant, the threat of information sharing, from whatever source, is eliminated. The lesson: if you have assets in foreign banks, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry.
Asher Rubinstein Interviewed on Bloomberg TV about Offshore Banking Secrecy
Asher Rubinstein Interviewed on Bloomberg TV about Offshore Banking Secrecy.
Kenneth Rubinstein’s article, “An Asset Protection Epiphany”, published on MyLegal.com
Kenneth Rubinstein’s article, “An Asset Protection Epiphany”,
published on MyLegal.com
We live in the most litigious society on the planet and at the most litigious time in our history. The current recession has eliminated the opportunity for many people to get rich. Some of those people are looking for alternatives to achieve wealth. An increasingly appealing alternative is to find a rich target and sue him, or at least, threaten to sue him, and get a fat settlement. According to statistics, one out of five of us will be sued during our lifetime. Most of us will settle rather than incur heavy legal fees.
The purpose of this article is to show you how to discourage lawsuits and thereby avoid legal fees and coercive settlements. This article can be summarized in four words:
Don’t Become A Target.
Many of us are already targets. Doctors, lawyers and other professionals are targets because our malpractice laws subject them to a higher standard of liability than other service providers. Real estate owners and developers are targets because our negligence laws and landlord-tenant laws subject them to greater liability than ordinary citizens. Businessmen are targets because our product liability, environmental protection and labor laws make them potentially liable to customers, visitors, employees and almost everyone else. Stockbrokers, investment advisors and promoters are targets because our securities laws and contract laws expose them to claims of liability from dissatisfied investors and partners.
All this liability exposure is magnified exponentially by our unique contingency fee system. In America you can sue anybody at no cost to yourself. The plaintiff risks nothing – providing he agrees to give a portion of the winnings to his lawyer. If he loses, he pays nothing. “Heads I win, tails I break even.” So why not sue?
However, most lawyers won’t take a case unless there is a reasonable chance that there will be some winnings to share. But “winning” means not just a court award of damages but also settlement proceeds. Thus, even if the case is not winnable, a lawyer will take it for its nuisance value – the likelihood that you will settle the case to get rid of it and avoid the legal fees.
Why does our legal system work this way? Because of our Constitution; specifically, the 14th Amendment, which guarantees to all citizens equal protection under the law. Equal protection also means equal access to our courts. If people would have to pay to sue, or if, as in other countries, the loser pays the winner’s legal costs, poor people would be effectively shut out of our courts. Therefore, our system allows you to sue without it costing
you a dime.
Now that we know how the system works and why it works that way, how do we protect ourselves from its abusers? The answer lies in understanding why we are targets and how we can use the very same legal system to erase the bull’s-eye from our backs.
We need to understand that we are not targets because of our professions or because of the liability laws mentioned earlier in this article. They are merely the tools used and abused by those who want to get rich by suing us. We are targets because we are wealthy. Generally, nobody sues a poor doctor, poor businessman or poor anything. The reason is simple – it doesn’t pay.
Now here is the most important point of this article: To avoid being a target, become poor! “No thank you, I’ll take my chances with the lawsuits.” Ah, dear reader, you need to understand how our laws define “poor”. Under our legal system a judgment creditor can take pretty much whatever you own. If you don’t own it, he can’t take it.
Our laws also exclude certain assets from a creditor’s reach even if you own them. The laws vary from state to state as to what assets are excluded. However, one asset is excluded in every state: ownership interest in a limited partnership or limited liability company.
Thus, if you transfer your assets (your home, your money, your business) into a limited partnership, you won’t own those assets and a judgment creditor will not be able to take them. If you have an ownership interest in that limited partnership, it will also be exempt from the creditor’s grasp under state law. If your ownership interest is a controlling partnership interest, you will control all the assets (home, money, business) in the partnership, but you won’t own them.
Thus, here’s the epiphany: To avoid getting sued, don’t be a target. To avoid being a target, own nothing but control everything!
Now that you understand the essence of asset protection, how can you use this information to discourage lawsuits? The answer is: Don’t keep it a secret. Whenever someone threatens a lawsuit, at the first opportunity tell him or, more importantly, his lawyer: “I have no attachable assets; all of my assets are owned by limited partnerships, not by me.” The claimant will realize that he is wasting his effort. More importantly, his lawyer will realize that his share of zero, no matter how large, will still be zero. The lawsuit will be discouraged and for a change, our legal system will have worked for you, instead of against you. Don’t you feel lighter without a bull’s eye on your back?
Kenneth Rubinstein is the senior partner at Rubinstein and Rubinstein, LLP. Mr. Rubinstein received a Bachelor of Business Administration, with Honors, from the City College of New York, Bernard M. Baruch School of Business and Public Administration in 1968, and he received his Juris Doctor degree from the New York University School of Law in 1979. Mr. Rubinstein lectures extensively in the areas of Estate and Tax Planning, and Domestic and International Asset Protection. Mr. Rubinstein can be reached at 212-888-6600, extension 207 or via email at Kenneth.rubinstein@assetlawyer.com or www.assetlawyer.com
This article was published on www.mylegal.com, and can be viewed here.
Asher Rubinstein on "Squawk Box" – CNBC Asia, discussing foreign investments and offshore asset protection
Asher Rubinstein on “Squawk Box” – CNBC Asia, discussing foreign investments and offshore asset protection.
Asher Rubinstein's Recent Media Appearances on Offshore Tax and Asset Protection
Asher Rubinstein’s Recent Media Appearances on Offshore Tax and Asset Protection
First, Asher was interviewed on the Swissinfo News website, the international news portal of the Swiss Broadcasting Corporation, and was quoted in a November 19, 2009 article regarding offshore tax evasion.
Second, Asher was interviewed by The Wealth Net (Wealthnet.com) and appeared in a November 23, 2009 article regarding offshore tax compliance.
Finally, Asher’s article titled “Creating a Safety Net for Landlords and Property Owners”, regarding asset protection for real estate owners and investors, was published in the December 3, 2009 issue of Real Estate Business OnLine.
Contact us for copies or to discuss.
2009 Year-End Memo
2009 Year-End Memo
As the year comes to a close, we take this opportunity to remind clients of several important issues that might impact upon their estate, tax and asset protection planning and to reflect upon a few of our significant accomplishments in 2009.
I. Reduce Your Estate Taxes Via 2009 Gifting
Every year, we begin this memo by reminding clients that year-end gifting is an easy, tax-efficient way to reduce their taxable estate. This year, the message is all the more significant because legislation that is currently pending in Congress would limit the tax benefit of such gifting.
The amount that an individual may gift to another individual, without tax consequences, is now $13,000. Gifting is an effective strategy to utilize in reducing estate tax liability. For example, if a husband and wife each gift $13,000 to three children, the value of the couple’s estate is decreased by $78,000.
Additionally, you may utilize your unified lifetime credit to avoid gift taxes and make one or more gifts of limited partnership interests equal in value to $1,000,000 (total value for all gifts). You will be required to file a gift tax return, but the gift taxes will be offset by your $1,000,000 unified lifetime credit. A husband and wife, together, may make joint gifts equal in total value to $2,000,000 in this manner.
Clients with Family Limited Partnerships should consider gifting an equivalent amount of limited partnership interests, so as to decrease the value of their estate. Clients have until December 31, 2009 to effectuate a gift for calendar year 2009. Clients should, in fact, make annual gifts of limited partnership interests, so that the value of their estates, over time, will decrease for estate tax purposes. As general partner, however, clients will continue to control all assets within their partnership.
Gifting of partnership interests works hand-in-hand with the principal of discounting of those interests. Once discounted, more FLP interests can be gifted tax-free to the next generation, which results in more assets passing out of an individual’s taxable estate and thus decreased estate taxes.
One short example may clarify how discounting and annual gifting work together to lower estate tax liability. If a client owns real property valued at $130,000, the client might gift the property to his or her child over a ten year period ($13,000 annual gift tax exclusion, over ten years). However, if the same property is owned by an FLP, the client may claim a 50% discount in the value of the limited partnership interests (for lack of marketability and lack of control). Now, with a discounted value of limited partnership interests of $65,000 (50% discount on $130,000), via annual gifts of $13,000 worth of partnership interests, it would take the client only five years to gift away her partnership interests and eliminate estate taxes due on that property. This is because a $13,000 gift equals 10% of the non-discounted FLP value ($13,000 = 10% of $130,000), but $13,000 equals 20% of the discounted FLP value ($13,000 = 20% of $65,000).
Further, in the current recessionary economy, now is the time to consider gifting assets that are presently at abnormally low values. The severe decline in the stock and real estate markets have created further built-in discounts for many assets. When the economy rebounds, these assets will begin to increase in value, and that future appreciation will occur outside your estate.
Furthermore, it is likely that the federal government will initiate unfavorable changes to the estate and gift tax laws in order to compensate for government deficits. If passed by Congress, pending legislation will eliminate the ability to discount the value of FLP gifts. Clients should consider taking advantage of current favorable laws while they still exist.
We realize that these are not simple concepts, and we welcome your questions. We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you, as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).
II. Offshore Considerations
This year was dramatic in the offshore world. The IRS’ success against UBS eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax complaint.
A. Erosion of Offshore Tax Secrecy
- Facing a criminal indictment for encouraging and facilitating tax fraud, UBS settled with the US Government and paid a $780 million fine in 2009. The US then served a “John Doe” summons in a parallel civil case, and UBS settled again, revealing the names of some 4,500 Americans with accounts they were assured were “secret”.
- The IRS is also investigating HSBC, Credit Suisse, Bank Julius Baer and others. Banks in other countries will also be targeted. The IRS announced that it is establishing field offices in Panama, Australia and China.
- The OECD (Organization for Economic Co-Operation and Development), a multi-governmental organization based in Europe, is pursuing its own campaign against “tax havens”. In March, 2009, virtually all of the formerly “secret” tax haven jurisdictions, including Switzerland, Liechtenstein and Monaco, agreed to the exchange of banking information with foreign governments, including the US. This ends decades and in some cases centuries of banking secrecy.
- Domestically, President Obama and prominent Senators have introduced proposed legislation targeting foreign accounts and Americans who own them. President Obama’s legislation seeks to increase the IRS budget and manpower to pursue undeclared money offshore, including hiring 800 IRS special agents to investigate foreign accounts.
- Government officials of Caribbean and Central American jurisdictions have advised us that the Obama administration has already indicated to them that Tax Information Exchange Agreements (TIEs) are on the way and are non-negotiable. Under these TIEs, the US Treasury Department can request assistance directly from foreign banks in cases of IRS civil audits.
B. Offshore Asset Protection And Complaint Tax Planning Is Still Legal And Effective
We have long counseled that non reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection. Indeed, we have always emphasized that effective asset protection does not rely on secrecy; it is based on the careful use of domestic and foreign asset protection laws.
Although “secret tax havens” no longer exist for non-compliant accounts, politically, socially and economically stable and secure jurisdictions do exist for tax-compliant asset protection planning and for tax-compliant strategies to minimize US taxation on foreign income. Foreign annuities, international insurance, offshore non grantor trusts and other international vehicles still serve as the centerpieces of effective tax minimization plans that comply with US and foreign tax laws.
We have various tax-compliant offshore strategies to accomplish both asset protection and tax minimization benefits. These strategies do not rely upon secrecy. Rather, the strategies involve complete disclosure, compliance and safety in utilizing well-credentialed offshore institutions. In a 2008 ruling, U.S. v. Boulware, 128 S. Ct. 1168, the U.S. Supreme Court reaffirmed the position that it is the legal right of a taxpayer to decrease the amount of his taxes by means which the law permits. Clients can be assured that their offshore assets, and the tax-favorable profits that they earn, may be absolutely legally protected. We will be pleased to answer your questions regarding tax compliant offshore planning.
A 2009 decision by the highest court in Liechtenstein, in favor of one of our clients’ Liechtenstein trust, established that offshore asset protection is still sound, legal and totally effective. The trust funds were administered and controlled by a licensed, bonded, qualified and reputable trustee in Liechtenstein. The trustee and the trust assets were outside the reach of US jurisdiction. The client’s creditor was forced to commence a new lawsuit in Liechtenstein, at great effort and expense. That creditor ultimately lost. Our client’s assets remain absolutely safe and secure in her Liechtenstein trust.
C. What If You Still Have A Non-Disclosed Foreign Account?
The deadline for the IRS Voluntary Disclosure Program for foreign accounts expired on October 15, 2009. If you are the owner of a foreign account, and you did not come forward under the Voluntary Disclosure Program, what are your options?
Option One: come forward now. The IRS will still welcome your voluntary disclosure, even after October 15. In fact, the IRS has welcomed voluntary disclosures long before the most recent, widely publicized program for foreign accounts. The difference is that after October 15, the penalties are higher. Still, criminal prosecution is usually avoided if you come forward before you are caught. Thus, if you did not enter the Voluntary Disclosure Program, you may still come forward; you will pay penalties higher than those before October 15, but they will still be significantly lower than if you dont come forward and the IRS catches you. In that case, jail time for criminal tax fraud is also a frightening possibility.
But some people will not voluntarily come forward. They do not want to disclose their offshore accounts, and they do not want to give any portion of their foreign assets to the IRS. What can they do?
Option Two: convert your account to a tax-compliant structure. We have long counseled the use of tax-compliant strategies to minimize U.S. taxation of foreign accounts. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients regarding the proper steps to transform a non-compliant offshore account into one that complies with current US laws. Although we cannot erase a non-compliant past, we can ensure full compliance going forward. Such steps may significantly reduce the risk of prosecution for previous violations.
Option Three: do nothing and hope that the IRS does not discover your account. You would be relying on past banking secrecy as a means of future protection. However, as the events of 2009 have proven (see II.A. above), foreign banking secrecy no longer exists. We need only look to UBS’ disclosure of thousands of names of Americans with accounts they thought were protected under so-called Swiss banking secrecy, or the proliferation of TIEs between the US and numerous foreign tax havens. In light of this new world order, sooner or later the IRS will likely find your foreign account and then it will be too late. This do nothing strategy is not recommended.
Failing to remedy a non-compliant offshore account by voluntary disclosure (even now) or by converting to a tax-compliant structure, puts you at serious risk of harsh penalties in the event of discovery, including IRS criminal prosecution. As recent events have proven, discovery is very likely. Contact us before the IRS finds you.
D. Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein Become Law In 2009
In February 2009, the Antigua International Trust Act, International Foundations Act and International LLC act – – all of which were drafted by Rubinstein & Rubinstein – – became law.
The new laws offer the world’s most secure and confidential environment for offshore asset protection, wealth preservation and tax minimization. The new laws make it nearly impossible for foreign creditors to reach assets protected by Antigua trusts or foundations. The statutes include a very short statute of limitations for creditor claims and limit a creditor’s ability to prove fraudulent conveyance claims. In addition, the legislation contains strong protections against asset repatriation, which prevent foreign courts and creditors from reaching assets protected in Antigua. As a result, Antigua has become the world’s premier jurisdiction for offshore asset protection.
While we are proud of our achievement in having drafted legislation that was debated, discussed and ultimately passed by the Government of Antigua, we would be remiss in not discussing the Stanford matter which unfortunately was centered in Antigua and came to light in 2009. Stanford’s alleged Ponzi scheme is unrelated to the laws we drafted, and to the stability and safety of Antigua as an asset protection jurisdiction. None of our clients had an account at Stanford or was invented in a Stanford financial product. Moreover, at last count, some 130 banks have failed in the US during 2009, while the banks in Antigua which hold our client assets continue to operate, unaffected by mortgage backed securities, credit default swaps and other speculative derivatives. In short, Stanford’s rougue criminality is unrelated to the laws we wrote for Antigua, nor to the stability and safety of Antigua as an asset protection jurisdiction.
E. 2009 Asset Protection Victories: Foreign Trust Survives Creditor Challenge
Our clients have enjoyed more than a few significant victories in the areas of domestic and offshore asset protection. Here is one noteworthy example.
In 2004, our client established an irrevocable asset protection trust in Liechtenstein with funds totaling $1.2 million. The client filed all required IRS forms relating to the funding of the trust and paid US tax annually on all trust income. In 2006, a US creditor obtained a judgment against the client. However, the client had minimal attachable assets in the U.S.
In 2008, the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust. Every Liechtenstein court, from the trial court all the way up to the highest court of Liechtenstein, ruled against the creditor and determined that the Liechtenstein courts lacked jurisdiction over our client. Thus, the trust assets could not be taken to satisfy the creditor’s judgment. Our client’s assets will remain safe in Liechtenstein.
This case proves that offshore asset protection, when done properly and lawfully and with complete disclosure to the IRS, is completely legal and 100% effective.
III. Asset Protection For Physicians, Property Owners And Other Professionals
Medical practitioners should be aware of several 2009 developments which mandate having a proper asset protection plan in place.
A. Doctors: Protect Your Assets Because Insurance Fees Will Soon Go Higher
In March of 2009, New York State Governor Patterson and the NY legislature agreed to remove the limitations on legal fees for medical malpractice attorneys. This will result in larger legal fee awards for plaintiff lawyers who target doctors, hospitals and other medical professionals. Insurance companies will soon be paying bigger legal fee awards, which will cause medical malpractice insurance rates to rise, yet again.
Plaintiffs already have an incentive to sue a doctor: doctors are perceived as wealthy deep pockets. Moreover, plaintiffs often believe that a doctor’s insurance company will offer some money in settlement to make the case go away. Now, after the legislative change removing the maximum legal fee awards, plaintiffs attorneys have similar incentives to sue doctors.
Doctors must take steps to protect themselves from lawsuits.
Domestic asset protection (for example, a family limited partnership) will, if done properly, be 100% effective against all future claims, and should serve to discourage future lawsuits. Tax compliant offshore asset protection will absolutely protect assets against all claims.
Asset protection is designed to give defendants (including doctors and any other professional in a high-liability industry) leverage to force a favorable settlement within the parameters of their malpractice coverage. One caveat: it is imperative that physicians protect themselves before the commencement of a lawsuit.
B. Doctors: Not Collecting Co-Payments Could Mean Lawsuits
In 2009, doctors witnessed a new threat to their assets: now, insurers are claiming that a physician’s failure to collect co-payments or deductibles from patients constitutes insurance fraud.
Horizon Blue Cross Blue Shield of New Jersey recently sent a letter to non-participating physicians, which condemns practitioners “routinely waiving applicable patient liability amounts (i.e., deductibles, co-payment and coinsurance amounts, and the difference between the submitted charges and our plan payment).” Horizon Blue Cross Blue Shield further states that it has filed lawsuits, alleging that waiving such member liabilities is fraud. Further, “the Office of Inspector General has already identified the waiver of co-payments and deductibles as a potential violation of the Medicare and Medicaid Anti-Kickback Law.”
Thus, in addition to routine and minor billing errors constituting “fraud”, now a medical service provider who neglects to collect a co-payment of $20 can expect a State and Federal lawsuit.
Doctors have always been “deep pocket” targets. Now, doctors can expect additional threats to their business and personal assets .
Doctors are well advised to protect their business and personal assets from all external threats, whether from patients, patients’ lawyers, insurers or the government.
C. Asset Protection for Landlords and Property Owners
Landlords are facing substantial increases in liability exposure as a result of a 2008 New York Court of Appeals decision, Sanatass v. Consolidated Investing Co., which expanded the scope of the “scaffold law”. Now, property owners are absolutely liable for elevation-related injuries (those involving the use of ladders, scaffolding, hoists, etc.) on their property. The case held that a property owner was liable even when the contractor was hired by a tenant in direct violation of a lease provision prohibiting the tenant from altering the premises without the property owner’s permission. Most importantly, this liability is absolute; i.e., the owner is liable even if, as in this case, he did nothing wrong!
With the new broad and absolute interpretation of the “scaffold law”, owners of real property can expect more lawsuits resulting from elevation-related injuries. This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges from slips and falls, lead paint, mold, asbestos, fiberglass, Chinese drywall and other lawsuits. In addition, the current recession, the decline in property values and the increase in vacancy rates create an increased risk of lawsuits from lenders, regulators and unhappy investors. Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take proactive steps to protect their assets.
Effective asset protection will discourage lawsuits and offer security against future creditors. It will also allow landlords, doctors and other professionals to reduce the amount of liability insurance they must carry to normal, affordable levels.
IV. Protecting Assets From Divorce: New Law Requires Anticipatory Planning
In New York, under a 2009 court rule and a parallel new state law, a couple’s assets are automatically frozen upon the filing or receipt of a summons in a matrimonial action. This new regime necessitates advance asset protection planning if divorce is contemplated.
In the past, if one spouse wanted to protect assets from impending divorce, she could do so, provided she had not already received a Restraining Order from a court. Under the new law, as soon as a spouse files an action for divorce, marital assets are automatically frozen. The new rule restraining asset transfers is binding on a plaintiff immediately when the summons is filed, and on a defendant upon receipt of service of the summons. Thus, persons facing the threat of divorce must plan ahead. The bottom line: Don’t wait for a divorce; if the marriage is shaky, protect your assets well in advance.
V. Rubinstein & Rubinstein Star Exemption Court Victory Now Codified as Law
Rubinstein & Rubinstein’s 2003 court victory against a New York State municipality that had denied the STAR exemption for personal residences owned by Family Limited Partnerships has been codified as law in New York. Last year, the New York State Legislature amended section 425 of the Real Property Tax Law to include dwellings owned by qualified limited partnerships, including FLPs, as eligible for the STAR exemption.
There is an opportunity here for clients interested in pursuing refunds based upon an improper denial of the STAR exemption in past years. If you are interested in pursuing the opportunity of refunds for past denials, please contact our office.
VI. Looking Ahead to 2010
The current state of the economy, the election of a new government, as well as other recent changes, will make 2010 a pivotal year for taxpayers:
A. Tax Increases
The new administration is raising income and capital gains taxes. It will also amend the tax laws to eliminate some favorable tax planning strategies. Clients are therefore advised to engage in tax planning now, in order to have the benefit of “grandfathering” current beneficial tax strategies before changes in the tax law. Further, with the current estate tax structure set to expire in 2010, changes are inevitably on the horizon. For many taxpayers, the impact may be significant. We can help explain these changes, how they may effect your specific situation, and how to legally minimize your taxes.
There are various steps that taxpayers should consider now for effective tax minimization:
- Sell appreciated property before loss of capital gains treatment and avoid tax via Charitable Remainder Trusts and international tax planning strategies (e.g. tax advantaged foreign annuities and foreign private placement life insurance).
- Convert 401(k)s to Charitable Remainder Unitrust IRAs before the new administration taxes 401(k)s.
- Clients should also consider taking income in 2009, rather than deferring income to 2010 with its likely higher tax rates. As a corollary, clients may wish to defer losses to 2010 to offset expected 2010 income at higher tax rates.
- Engage in income tax planning via tax complaint strategies that take advantage of favorable reciprocal tax treaties before the new administration raises taxes.
Please call our office to discuss any of these tax minimization strategies.
B. More Tax Audits and More IRS Scrutiny
In addition to raising taxes, the government is also more aggressively enforcing tax laws, tightening or closing loopholes and pursuing tax evaders. The IRS is stepping up its investigations of possible tax abuse and tax evasion, pursuing improper “tax shelters” and other abusive transactions, and increasing audits and tax investigations.
The government’s need for cash, and its pursuit of tax dollars, has been well-publicized. See, for example, “IRS Brings New Focus to Auditing the Rich”, The Wall Street Journal, October 28, 2009 (stating that the IRS is not only looking at the 1040 returns filed by wealthy Americans, but “the entire economic picture of the enterprise controlled by the wealthy individual”); “New York, Needing Cash, Pursuing Tax Delinquents”, New York Times, November 10, 2009 (discussing the hundreds of thousands of tax warrants filed, across a diverse spectrum of individuals and businesses, and the millions of open and active tax cases by the New York State Tax Department); “IRS Begins Major Initiative To Audit 6,000 Companies”, Mondaq, November 24, 2009 (“all companies, large and small, as well as for-profit and not-for-profit, are within the potential scope of the IRS’ new initiative”).
What should you do?
First, work with competent, experienced tax counsel, who utilize proven, tax-complaint strategies.
Second, have tax counsel conduct a “friendly audit” – review your financial activities, bookkeeping and record keeping procedures, and accounting practices to uncover and correct sensitive areas before they are discovered in an IRS audit. Become essentially “audit proof”.
We have earned a reputation for experience, expertise and creativity in the development of sophisticated tax-complaint domestic and offshore tax strategies, designed to maximize asset preservation and to minimize taxes. We have been instrumental in the development of creative, tax compliant domestic and offshore strategies for the elimination, deferral or minimization of capital gains tax, income tax and estate tax.
If you being audited or investigated by the IRS or a state tax authority, hire legal counsel with a proven track record of success against the government.
Rubinstein & Rubinstein, LLP has been advocating on behalf of taxpayers for close to twenty years. Our attorneys have extensive experience in representing clients before the IRS and before state tax departments.
C. Continued IRS Offensive Against Non-Compliant Foreign Accounts
Following its success against UBS (see II.A., above), we expect the IRS to pursue offshore tax fraud investigations of other banks and in other countries. If you have a non-compliant or undeclared foreign account, we can help you bring it into compliance. If you are being investigated by the IRS, we can represent you, defend you and negotiate for lower fines and penalties.
VII. Website/Media Attention
In 2009, our new website and blog went “live”. We continue to update both regularly, alerting clients to legal developments in the asset protection and tax worlds. We encourage you to check in regularly and we welcome your questions, comments and suggestions.
Finally, we take a moment to alert you that our performance and expertise has been recognized by media around the world. In 2009, Ken and Asher Rubinstein were both interviewed, appeared and were published in: Bloomberg TV, CNBC (US, Europe and Asia), Yahoo! Finance, CNN.Money, Dow Jones/Wall Street Journal, The Jerusalem Post, Swiss TV (Schweizer Fernsehen), Swedish TV, Reuters, The Times of London, Fortune.com, Forbes, National Public Radio (NPR), Investment News, Wealth Briefing, World Wide Tax Daily, Tax Notes International, Financial Times, The Antigua Sun, The Journal of Taxation and Regulation of Financial Institutions, Hedge Fund Alert, Hedge Fund Law Report, Hedge Co. and others. We are very proud and humbled by this favorable recognition, and hope that you, our clients, see it as an endorsement of the quality of our legal services on your behalf.
We at Rubinstein & Rubinstein, LLP wish you a happy and healthy holiday season and a happy, prosperous and well-protected new year.
New Jersey Offshore Voluntary Disclosure Program
New Jersey Offshore Voluntary Disclosure Program
Following the lead of the IRS Offshore Voluntary Disclosure Program, New Jersey recently established an Offshore Voluntary Disclosure Program of its own. Rather than advising clients to summarily apply to the New Jersey Voluntary Disclosure Program, we investigated whether New Jersey had a legal basis to tax foreign income, as opposed solely to income within the State.
On the federal level, the Internal Revenue Code (IRC) contains a blanket, wide-reaching statute which states that “all income from whatever source derived” is considered gross income and is subject to taxation (IRC §61). On this basis, the IRC taxes all income, global, offshore sources included. Thus, offshore income is subject to federal tax.
There is no similar all-encompassing statute in the statutes of New Jersey. Title 54A of the New Jersey Statutes, New Jersey Gross Income Tax Act, Section 54A:2 1 states: “Imposition of tax. There is hereby imposed a tax for each taxable year . . . on the New Jersey gross income as herein defined of every individual.” [Emphasis supplied] Chapter 5, Section 54A:5-1, defines “New Jersey gross income” as:
- (c) Net gains or income from disposition of property. Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property, including real or personal, whether tangible or intangible as determined in accordance with the method of accounting allowed for federal income tax purposes. (1) For the purpose of determining gain or loss, the basis of property shall be the adjusted basis used for federal income tax purposes.
- (e) Interest, except interest [such as municipal bond interest excluded]
- (f) Dividends, “Dividends” means any distribution in cash or property made by a corporation ….
The above definition does not specifically include income earned outside of New Jersey.
Chapter 6 of the New Jersey Statutes contains specific exclusions from “New Jersey gross income”. However, none of the specific exclusions in Chapter 6 cover foreign income.
Thus, the law is unclear because New Jersey Statutes do not expressly include foreign income, nor do they specifically exclude foreign income, from taxation.
Clients wishing to be sure that they are not running afoul of the (vague) law may decide to enter the New Jersey Voluntary Disclosure Program, and declare and pay tax, interest and a 5% voluntary disclosure penalty(2) on offshore income. Other clients may elect to challenge New Jersey’s taxation of foreign income.
Inasmuch as the IRS routinely shares information with various state tax departments, if you have made voluntary disclosure to the IRS regarding an offshore account, and do not disclose that account to the New Jersey Division of Taxation, it is likely that New Jersey will learn about the account from the IRS, in which case you might face significant fines and penalties.
Based on the above, and in light of the lack of clarity with respect to whether foreign income is properly taxable by New Jersey, we suggest that New Jersey clients with offshore accounts should participate in the New Jersey Voluntary Disclosure Program and disclose their foreign accounts to New Jersey. The New Jersey Division of Taxation has set December 31, 2009 as the deadline to submit a letter stating:
- The taxpayer’s name and address;
- Tax identification number(s) (state and federal);
- Type of tax, years affected and an estimate of tax due;
- Explanation of the circumstances;
- Whether the taxpayer applied to the IRS Voluntary Disclosure Program;
- A certification that the taxpayer will cooperate with the Division of Taxation to establish the correct tax liability and pay all taxes, interest and the 5% voluntary disclosure penalty;
- Appointment of Representative Form M-5088-R.
If you would like us to represent you in connection with the New Jersey Voluntary Disclosure Program under the same terms and conditions as our representation before the IRS, we request that you contact us, sign and return the M-5088-R form to us as soon as possible.
* * *
1. The linkage between New Jersey and the federal tax system is further established in NJ Stat. §54A:8-3, Accounting periods and methods, which sets the taxable year and accounting methods for New Jersey income tax purposes the same as under the IRC.
2. Otherwise, the penalty for tax fraud may be as high as 50%, as well as the likelihood of criminal prosecution.