Asher Rubinstein on NPR regarding the IRS Voluntary Disclosure Program for Offshore Accounts
http://www.npr.org/templates/story/story.php?storyId=113816639
Asher Rubinstein to be interviewed regarding the IRS Voluntary Disclosure Program for Offshore Accounts.
Asher Rubinstein to be interviewed regarding the IRS Voluntary Disclosure Program for Offshore Accounts
On NPR (radio), “Morning Edition” and www.npr.org Thursday, October 15, and On KPCC (National Public Radio) in Los Angeles and www.KPCC.org, Thursday, October 15, 2:26pm EST and 11:26am PST, and On Bloomberg TV, Thursday, October 15, at 4:30pm EST, and Asher’s article on the Voluntary Disclosure Program will soon be published in Forbes.
Please contact us for more information.
Protecting Assets from Divorce: New Law Requires Anticipatory Planning
In New York, under a new court rule and a parallel 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 what he or she perceived as an impending divorce action, he or she could do so, such as by transfering assets to an offshore asset protection trust, provided he or she had not already received a Temporary Restraining Order (TRO) from a court. Now, under the new law, the other spouse need not serve a TRO; the other spouse need only file an action for divorce and marital assets are automatically frozen without a TRO. The new rule prohibiting 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 and the threat of a spouse depleting, sequestering or making a claim for assets, must plan ahead. Whereas in the past, asset protection would be rendered impossible once a court issued a TRO, now the mere commencement of a divorce action will serve to freeze all vulnerable assets and render asset protection effectively impossible and unlawful. The bottom line: Don’t wait for a divorce; if the marriage is shaky, protect your assets well in advance.
Ken Rubinstein quoted in Investment News regarding Hedge Fund Taxation
Ken Rubinstein quoted in Investment News regarding Hedge Fund Taxation
Tax hikes may spell trouble for hedge funds
Emphasis on short-term returns leaves them vulnerable
By Jeff Benjamin
October 4, 2009
The Achilles heel of hedge funds . tax inefficiency . could soon send investors limping toward other options.
“If investors feel they are getting less after-tax income, they will find other alternative investments,” said Ken Rubinstein, senior partner at the law firm Rubinstein & Rubinstein LLP, which specializes in hedge funds.
Historically, investors have overlooked the tax consequences of hedge fund investing because the funds have outperformed other asset classes. But last year hedge funds lost 18% of their value, on average, which although better than the 38.5% decline in the S&P 500 stock index, demonstrated that they are not invincible.
If tax rates rise, as most ob-servers expect given the ballooning federal deficit, hedge funds may find themselves in a structural bind should investors become more conscious of after-tax returns.
“The nature of what hedge funds do doesn’t lead to a lot of tax efficiency,” said Jeffrey Mindlin, chief operating officer at Advanced Equities Asset Management Inc.
Hedge funds are characterized by high portfolio turnover, which leads to lots of short-term gains taxed at ordinary income rates. But managing a portfolio to avoid short-term gains can adversely affect performance and hedge fund manager income.
“Why should a hedge fund manager care about tax efficiency if he doesn’t get anything out of it?” said Maury Cartine, a partner at the accounting firm Marcum LLP, which specializes in hedge fund services.
Consider what happens when a manager sells a stock held for 11 months.
If the sale generates a $50 profit, a shareholder’s tax bill would be $17.50. But if the stock were sold a month later, the capital gain would be considered long term and the tax bill, based on the 15% long-term rate, would drop to $7.50.
But, if during that one-month wait the stock price fell and profits dropped to $40, the manager would see a significant decline in his or her performance fee, which typically ranges from 10% to 20% of profits.
“There are lots of examples of how a manager can do himself a disservice by trying to be more tax-efficient,” Mr. Cartine said. “Basically, providing tax efficiency to investors in a hedge fund comes with a cost that has to be absorbed by the manager.”
The tax-versus-performance dilemma can get even stickier when it comes to master feeder funds, which involve managing the same strategy for both offshore and domestic hedge fund investors.
Because most offshore investors are not subject to U.S. taxes, a hedge fund manager could be charged with shirking his fiduciary duty by managing for tax efficiency over performance.
Mr. Mindlin, whose firm oversees $500 million in separately managed account portfolios, has started focusing on alternatives to hedge funds in order to reduce the tax hit, even if those other choices are not a perfect replacement.
Several strategies use simple instruments such as mutual funds to mimic the return stream of a broad hedge fund index. Such replicators, including The Goldman Sachs Group Inc.’s Absolute Return Tracker Fund, which simulates the average return of 4,000 hedge funds, can be more tax-efficient than a pure hedge fund but aren’t nearly as nimble or precise as the hedge funds themselves.
Some structured notes also can be a more tax-friendly alternative to certain hedge fund strategies, but that introduces a risk that the issuer could go belly up like Lehman Brothers Holdings Inc. did last year.
“The problem is, anytime you start playing around with engineered products to try and avoid taxes, you lose in the long run because the IRS will find a way to block it,” said Charles Gradante, managing director at Hennessee Group LLC, a hedge fund advisory firm.
“Most clients criticize hedge funds for generating a lot of short-term profits that are taxed as ordinary income,” he added. “But over a long period of time, we think it’s still more beneficial to own hedge funds.”
Some advisers also prefer to stick with hedge funds despite their tax flaws.
“First and foremost, we’re using hedge funds to reduce risk and enhance returns, and I would welcome moretax-efficient strategies, but not at the expense of performance,” said Thomas Orecchio, principal at Modera Wealth Management Inc., which has $450 million under advisement.
In the meantime, advisers such as Mr. Mindlin are trying to help clients by investing in hedge funds through qualified retirement accounts.
But that channel can be narrow since most hedge funds, in an effort to avoid additional regulatory oversight, try to limit qualified assets to less than 25% of the fund.
“Going forward in an environment where capital gains taxes are likely to go up, it seems like the time is right for some tax efficiency in the hedge funds space,” Mr. Mindlin said.
Marc LoPresti, a partner in Tagliaferro & LoPresti LLP, shares that point of view. “Investors would love to see more tax efficiency, but I don’t know anybody who has come up with a secret sauce.” he said.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
Wealth Briefing quotes Asher Rubinstein at length on the IRS/UBS litigation
US Tax Victory Against UBS Signals Further Evasion Crackdown
14 September, 2009
Tom Burroughes, Editor in London
A lawyer acting for UBS clients in the US has told WealthBriefing why they are entitled to get information explaining why their details were handed over to US judicial authorities in February.
As reported last week, the Swiss Financial Market Supervisory Authority was told by a judge in Bern, Switzerland, that it must hand over redacted copies on its findings and court filings to three account holders. The judge is examining complaints by customers identified only as W, H and K that the regulator shouldn’t have ordered account details to be sent to the US Internal Revenue Service in February.
“It is not surprising that UBS account holders are challenging Finma’s order to release information about those accounts. Swiss law provides a mechanism whereby account holders may challenge such disclosure of information – before it is disclosed. Also, Swiss law provides for a right of appeal,” Asher Rubinstein, a partner at Rubinstein & Rubinstein, told WealthBriefing in an emailed comment.
“In other words, there exist two levels for challenging the release of information. Yet, in the UBS criminal case, it appears that Finma summarily, unilaterally and without appeal ordered the disclosure of information related to these UBS accounts,” Mr Rubinstein said.
Finma had ordered UBS to send information on some US account holders as part of the bank’s February settlement of a criminal case with the US Justice Department. Details on about 250 clients were sent. The case is separate from the civil case, settled last month, in which around 4,450 client account details will be handed to US authorities.
“From the perspective of Swiss account holders who are facing issues of non-compliance with tax laws, it would have been beneficial to know the criteria by which Switzerland will disclose account information,” Mr Rubinstein said.
“There are many people with non-compliant accounts at UBS, and all of them would like to know the criteria by which UBS will disclose the 4,500 accounts as settlement of the civil litigation. If, for instance, there is a $1 million threshold, then people with accounts less than $1 million might breathe a sigh of relief. But it is precisely for that reason that the IRS is not divulging the criteria, so that all account holders will remain nervous,” he said.
“So too with Finma, account holders are eager to learn of Finma’s criteria for divulging information. The Swiss court ordered that Finma documents be released, but the details of Finma’s decion making, the details of Finma’s criteria of which accounts should be given up, will be redacted,” he continued.
“Like the UBS settlement criteria, Finma’s criteria, at least for now, remain secret. The end result is that account holders cannot rest easy. Of course, the Voluntary Disclosure Program may offer such account holders much better terms than if they are found out otherwise. On the issue of Finma’s criteria, an open question is whether Swiss account holders have a legal right to know what Finma’s criteria are, but that is an issue for Swiss constitutional lawyers to analyze,” he added.
The legal case continues.
Asher Rubinstein quoted in Wall Street Journal / Dow Jones about the US-Switzerland Tax Treaty
3rd UPDATE: US And Switzerland Sign Revised Tax Treaty
By Darrell A. Hughes and Martin Vaughan Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)–U.S. Treasury Secretary Timothy Geithner on Wednesday signed an updated taxation treaty with the Swiss government, a move the U.S. hopes will help it combat offshore tax evasion by U.S. citizens.
The treaty, signed by Geithner and Switzerland Ambassador Urs Ziswiler, provides the U.S. Internal Revenue Service with greater access to information on U.S. account holders at Swiss banks. However, the U.S. must be able to clearly identify the suspected account holder, along with the Swiss bank, according to details the Swiss Finance Ministry released earlier this week.
Another new provision in the treaty would ensure that U.S. holders of individual retirement accounts that include Swiss companies in their portfolio won’t be taxed until the income from that account is distributed. A Treasury official said pension funds are already exempt from withholding taxes, and the revised treaty would extend that treatment to IRAs.
The treaty, effective from Wednesday, is still subject to a lengthy ratification process that includes a review by parliament and interest groups such as business associations. It must also be ratified by the U.S. Senate.
The U.S. pact effectively represents Switzerland’s 11th such agreement, and, together with a 12th with an undisclosed country expected to be signed Thursday, means the alpine nation is close to being removed from a grey list drawn up by the Organization for Economic Cooperation and Development, or OECD.
Earlier this year, Switzerland was included on the OECD’s grey list of countries, such as Austria, Chile and Singapore, that hadn’t yet implemented a key article of the OECD Model Tax Convention aimed at combating tax evasion. In the wake of the financial crisis, increasingly indebted governments have come down harder on tax evaders and the lack of financial transparency associated with tax havens.
Tax evasion isn’t solely an American issue, Geithner said. “It is a global issue requiring global coordination.”
He later added that the agreement “strengthens our longstanding relationship with Switzerland and will help serve as an example for others around the world.”
The treaty revisions were negotiated in the midst of a legal battle over the identities of UBS AG (UBS) clients who are suspected of evading U.S. taxes through secret Swiss accounts.
The U.S. has been trying to pierce the veil of Swiss banking secrecy to get the identities of U.S. tax cheats who used Swiss accounts to dodge taxes. In a settlement agreement reached in August, UBS, with the blessing of the Swiss government, agreed to provide the IRS with names of roughly 4,450 of its American clients.
The IRS was initially seeking access to data on more than 50,000 UBS clients.
Geithner said the revised treaty will help resolve disputes between U.S. and Swiss tax authorities by “providing binding mandatory arbitration in cases where tax authorities have been unable to find a resolution after a reasonable period of time.”
With world leaders convening in Pittsburgh for the G20 summit, Geithner plans to highlight the progress being made, with hopes of “building on this progress in the coming months and years,” he said.
The new U.S.-Swiss treaty is based on model language from the OECD, which some transparency advocates criticize as too lenient on secrecy jurisdictions.
Heather Lowe, Legal Counsel at advocacy group Global Financial Integrity, said the treaty still stipulates that very specific information on suspected tax evaders be provided by the country requesting information. And it explicitly states that the agreement doesn’t commit the parties to automatically or spontaneously turn over information.
But Lowe said the agreement makes progress on preventing Switzerland from falling back on its national laws – under which tax evasion is not a crime – to shield information. It includes a clause, not found in the OECD language, stating that authorities shall have power to enforce disclosure of information required by the treaty “notwithstanding…any contrary provisions in its domestic laws.”
Despite the symbolic importance for Switzerland, some observers questioned how much the strengthened agreement will add to the ability of the U.S. to catch tax evaders.
“In light of the UBS settlement, the treaty is almost superfluous,” said Asher Rubinstein, a partner in the law firm of Rubinstein & Rubinstein.
While the treaty requires the U.S. to provide specific information about suspected tax evaders in information requests, a John Doe summons can be used by the Justice Department without any information on individuals. “The U.S. doesn’t need the treaty if it can just issue another John Doe summons,” Rubinstein said.
-By Darrell A. Hughes, Dow Jones Newswires; 202-862-6684;
IRS Extends Deadline for Foreign Bank Account Disclosure . . . or Not?
IRS Extends Deadline for Foreign Bank Account Disclosure . . . or Not?
by Asher Rubinstein, Esq.
Rubinstein and Rubinstein separates itself from other attorneys by our attention to detail and committment to our clients. Thus, when we read today’s news report that the IRS has extended the deadline for application to the Foreign Account Voluntary Disclosure Program, we noted that many other practioners added that the FBAR deadline was extended as well. That is not precise and not correct. The FBAR deadline is extened to October 15, but only for taxpayers who have already reported foreign income and already paid tax on that foreign income. For many people, their foreign account was not reported, and tax not paid, which means that they now have until October 15 to apply for the Voluntary Disclosure Program, but the FBARs are still due by September 23!
While it would have made more sense had the IRS made a uniform extension for both Voluntary Disclosure and the FBAR, it is our job to work within the regulations as they exist, to advise clients accordingly, and to pay special attention to IRS inconsistencies that can lead to costly client errors.
Our recommendation remains: if you have a non-compliant foreign bank account, you should enter the Voluntary Disclosure Program and file the FBARs. Be guided by the correct deadlines, and which deadline applies to your particular facts. Contact us for more information.
Expatriation to Avoid Taxation: New “exit tax” is a deterrent, but there are legal ways to minimize the exit tax
We’ve noticed an interesting trend lately: more and more clients are asking about EXPATRIATION options. They feel that they are paying too much in taxes, their taxes will keep increasing, and the benefits of U.S. citizenship or a green card just aren’t worth the burden of taxes. Cognizant that many foreign countries are excellent places to live, and don’t have tax regimes as onerous as that of the U.S., clients envision a low-tax lifestyle in Europe, the Caribbean or elsewhere.
Renouncing U.S. citizenship is relatively easy. All that is required is a formal declaration and surrender of passport. But the tax consequences may be immediate and severe.
If your total world-wide assets are more than $2 million, or your average annual tax liability was more than $139,000 per year during the past five years, then:
The IRS will deem that you sold all of your appreciated assets at fair market value, on the day before you expatriate, and will impose a tax on that deemed sale. In other words, expatriation will result in an immediate capital gains realization on all your appreciated assets, also known as a “mark to market” tax. Let’s make it clear: you will pay tax as if you sold your home, your bank and brokerage accounts, and all of your appreciated property, even if none of these assets are actually sold. Moreover, the tax applies to worldwide assets, not only those within the U.S. Consider it an “exit tax” for renouncing U.S. citizenship.
But it’s not all bad. The first $600,000 in gains from the deemed sale are not taxed.
What if you expatriate, leave the country and don’t pay the tax? Have you escaped the IRS? No. If you don’t pay the exit tax, then the IRS will take the tax from any assets you leave behind. The IRA or 401(k) that still sits at a US brokerage house, while probably exempt from the reach of a private creditor under state law, would be seized by the IRS under federal law and used to pay the exit tax that you thought you escaped.
Moreover, if you expatriate, the new law will tax any gift or bequest you make to any beneficiary in the U.S. The highest gift or estate tax rate will be imposed, on the recipient of your gift or bequest. You also lose the exemption from gift tax ($1 million) and the exemption from estate tax ($3.5 million).
For some clients, expatriation may remain a viable option even after the new exit tax. We can help you investigate whether it makes legal and financial sense to expatriate.
We can also suggest tax-compliant strategies to help mitigate or eliminate expatriation taxes. One such strategy is the exchange of appreciated assets for a foreign deferred variable annuity (DVA) policy. After the exchange, you will own an annuity policy with a value equal to the assets which were exchanged. Thereafter, those assets are now owned by the annuity company, and any future appreciation will not be taxable to you. The annuity policy would not be subject to the new expatriation tax, because the annuity policy, like a life insurance policy, is not an appreciated asset. Thus, if you exchange appreciated assets for a DVA prior to expatriation, your new annuity policy is not taxable, and future appreciation of the underlying assets is not taxable either.
Please contact us to discuss expatriation options and tax planning strategies.
Asher Rubinstein again quoted in Dow Jones and the Wall Street Journal about Offshore Accounts and the Ramifications of the UBS Settlement
Swiss Ruling May Foreshadow Lawsuits Against UBS
– By Arden Dale; Dow Jones Newswires;
NEW YORK (Dow Jones)–A court ruling ordering the Swiss financial regulator to turn over documents to U.S. customers of UBS AG (UBS) could be the precursor to lawsuits against the bank.
The Swiss Financial Market Supervisory Authority must turn over redacted copies of its findings and court filings to three UBS account holders, according to the ruling, Bloomberg reported.
The ruling is the latest development in an effort by global authorities to crack down on people who use secret bank accounts to evade taxes. A suit by the U.S. Justice Department against UBS has been a key part of that initiative. The UBS case was settled in August; as part of it, the Internal Revenue Service will get information on 4,450 accounts that held as much as $18 billion at one time.
In the ruling Wednesday, Judge Francesco Brentani in Bern, said Finma must give the documents to three UBS account holders, identified only as W, H and K, Bloomberg reported. The judge is reviewing complaints that the regulator shouldn’t have ordered account details to be sent to the Internal Revenue Service in February.
Finma ordered UBS to provide information on some U.S. account holders as part of a February settlement between the DOJ and UBS.
Asher Rubinstein, a partner at law firm Rubinstein & Rubinstein, LLP, said information in the documents theoretically could be used in lawsuits by UBS customers against the bank.
The bank is “going to be heading for quite a number of suits by Americans” he adds. Such suits could charge that the bank “aided and abetted customers’ tax fraud” by encouraging them to set up secret accounts and hide the income from them from U.S. tax authorities.
UBS declined to comment on the ruling.