Theft and Fraud is a Casualty Tax Loss

May 22, 2017  |   Posted by :   |   Theft Loss   |   0 Comments

In 2017, major news stories surfaced of celebrity theft/fraud & casualty losses:

Actor Dustin Hoffman and son Jacob were apparently defrauded of millions of dollars in a real estate investment with Paul Manafort’s son-in-law.

Alanis Morisette had millions of dollars embezzled by her business manager, and in a separate in incident, lost several millions dollars of jewels stolen from her home.

Under IRC Sec. 165 losses of assets from casualties/theft (including fraud) are subject to an ordinary income tax loss deduction (not a capital loss).

Both casualties (e.g. theft, fire, hurricanes) and investor fraud (a form of theft in California see Cal Penal Code Sec. 484 (a) may enable the victim to declare a tax loss in the amount of the lost property.

In the federal case of Gerstell v. Commr. “theft loss” is determined under state law so in California and New York criminal statutes which include fraud as theft give rise to a tax loss for defrauded investors for loss of their investment.

Taxpayers who declare the casualty (theft) tax loss on their personal tax returns may gain the following tax benefits:

1. Tax Refunds: the taxpayer can amend personal tax returns, carry the tax loss back for 3 years and seek tax refunds (up to the amount of tax previously paid)

2. Tax Free Income: the taxpayer can carry the loss forward for up to 20 years and offset taxable income (up to the amount of the declared tax loss).

Please visit our Casualty Theft Tax Loss webpage for a concise summary of Federal/California Law.

A more detailed explanation can be found in my book, The IRS and Defrauded Investors: Theft Tax Loss, available as an ebook on Amazon.

By using this tax planning I was able to save a celebrity musician over $5m. See testimonial from “B” on home page.

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IRS Wealth Tax Squad – Update

May 17, 2017  |   Posted by :   |   High Net Worth Investor,IRS Tax Audits   |   0 Comments

The IRS released audit stats on their audits of high-wealth taxpayers (over $10 income or assets) by their recently formed special IRS tax unit, The Wealth Squad. For Tax year 2015, 450 IRS Wealth Squad audits were initiated.

These IRS audits are expensive, and time consuming starting with an expansive IRS document request, which will be disclosure of not just the individual’s income and related assets & investments but the tax returns of entities they control (more than 50% ownership).

The IRS audits are also intensive and require meticulous tax records. At the outset, the Taxpayer should view what evidentiary exclusions to notice as a reason for non-response to question(s) or document requests.

Objections may include: attorney-client privilege, documents not in taxpayer possession, taxpayer does not “control” the entity (by either voting power or equity ownership i.e. less than 50%).

IRS Tax Audit Rates: Tax Year 2016

In 2016, the IRS audited .7% of individual tax returns (less than 1%), which is the lowest audit rate since 2003 (1 of every 143 tax returns). Only 29% of the audits were conducted in the field (71% by correspondence i.e. mail).

The IRS confirmed that the biggest factor that triggered audits were income levels:

1) Income over $10m had an 18.8 % audit rate (nearly 1 in 5)

2) Income over $5m had a 10.46% audit rate (more than 1 in 10)

3) Income over $1m had 4.6% audit rate (almost 1 in 20)

4) Income over $500k was 2.06% (more than 1 in 50)

5) Income over $200k had an audit rate of 1.01% (1 of 100)

Additional IRS tax audit triggers included:

1) Self-Employment Income: Schedule C/Self-Employment Income audit rate was 2.2% more than 3x non-business tax returns;

2) Unreported Income: Undeclared W-2/ 1099 income trigger audits since the IRS receives notices

3) Math errors from paper tax returns (electronic software tax returns do not have these risks)

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Global HNW Investors: Stock-Bond Investment Portfolios

May 15, 2017  |   Posted by :   |   High Net Worth Investor   |   0 Comments

In my recent article Global High Net Worth Investors: US Investments, Immigration & Tax Planning I cited the L-1 Visa US immigration strategy as explained by my colleague, and co-author Mark Ivener, Esq. (pre-eminent US immigration attorney) as a tax efficient immigration and investment strategy (I have redacted Mark’s immigration explanation of the L-1 Visa, and include herein, see below).

Global High Net Worth Investors who are considering immigration to the US should carefully review US tax issues as part of their US Pre-Immigration Planning otherwise they may be in for a rude awakening since many countries have a “Territorial Tax-Based System” which exempts tax on foreign income (assets) which are taxed where earned. In contrast, the US has a worldwide tax system where income is taxed no matter where it is earned (as well as estate and gift taxes on assets worldwide for those investors who establish a US domicile i.e. they intend to live in the US permanently).

Many investors who immigrate to the US are unaware that once they get a green card, or an EB5 Visa (with a conditional green card) that they are not only subject to worldwide income tax but also US estate and gift tax on their worldwide holdings (in 2017 they have $5.49m exempt from estate/gift tax with a 40% tax for amounts over that threshold amount).

The income tax is not only potentially very expensive (in CA/US the top blended tax rate for high earners may be 55%), but subjects them to invasive asset reporting worldwide (under the annual filed FinCen Form 114 known as the “FBAR filing”, US income taxpayers must disclose all foreign bank and financial accounts over $10k or risk civil penalties which may be up to 50% of account balance per year; up to 300% of account balance for the 6 year statute of limitations.

In the case of Florida taxpayer, Carl Zwerner who failed to file the FBAR and wound up go to trial with the IRS, lost and was assessed a nearly 150% penalty on his unreported Swiss bank account i.e. penalty of nearly $2.4m on account with $1.6m). In addition there are severe criminal penalties of 10 years in jail per each year of non-disclosure for “willful failure to file the FBARs” (in addition to the 50% civil penalty for willful failure to file the FBAR).

Under the Foreign Account Tax Compliance Act (“FATCA”, enacted March 2010, effective for tax years thereafter starting with tax reporting in 2011, all foreign financial assets over $50k must be reported on Form 8938 (attached to Form 1040, filed annually) or risk additional civil and criminal penalties.

In addition, the failure to file these tax forms (Form 8938, FinCen form 114), or disclose the foreign accounts (or formation of foreign trust or foreign trust distributions received) may suspend the IRS statute of limitations for civil tax audits (normally 3 years from the date of filing unless 25% of gross income omitted/or more than $5000 of foreign income omitted then 6 year statute).

So what should the foreign investor do for US tax planning for their investment portfolios prior to immigration to the US:

1. Establish an irrevocable trust offshore and transfer all assets over $5.49m (2017); $10.98m Husband and Wife. These assets if transferred pre-immigration will be exempt from US Estate and Gift Tax (at 40 % Tax Rate). Otherwise, at death a 40% US Estate and Gift Tax may be imposed and assets may have to be sold (at depressed prices) to pay the estate tax. In addition, once the foreign investor move to the US although the assets in the Irrevocable Trust may be excluded from the 40% US Estate and Gift Tax the trust will be classified as a US Grantor trust and the income will be taxed to the foreign investor who becomes a US taxpayer

2. The assets in the irrevocable offshore trust may not be subject to 3rdparty creditor attachment, absent a fraudulent conveyance (keep in mind that annually over 1 million lawsuits are filed in California and another nearly 300,000 lawsuits are filed in Federal Courts throughout the United States)

3. For the investment portfolio assets (stocks/bonds) use the Private Annuity/Private Placement Life Insurance Policy investment tax planning which is fully described in my article for Lorman Education; Doubling Net ROI on Investments (see link). This type of tax planning (endorsed by METLIFE who does similar planning but with a restricted menu of investments) uses a private annuity to fund life insurance premiums. As described in the article, this type of planning may either defer (or completely exempt tax on the investment earnings) minimize risk of tax audit (since income is not reported when earned, not until later upon distribution), and provide “bullet proof asset” protection (under the recommended governing law, Puerto Rico, annuities and life insurance are exempt from 3rd party creditor attachment).

The value of the L-1 Visa is multiple:

1. No minimum or maximum investment thresholds;

2. Initial 3 year immigration for investor (and family) may be extend well past ten years based on the following scenario: under US immigration rules, on which Mark Ivener, is a nationally recognized expert and may confirm upon e-mail request, there is a pro-ration for the length of the L-1 Visa. The total time for the L-1 Visa is 7 years, however, if it is extended to 14 years if the investor is in the US for ½ of each year, and may be up to 21 years if the investor is in the US for 1/3 of each year.

The 1/2 year and 1/3 limitations are the key to the US income tax planning. Under the substantial presence test as long as an investor is not in the US for over 183 days in one year, or 122 days per year over 3 years there is no US income tax imposed or worldwide disclosure of foreign/offshore income or assets.

As long as the investor and family maintain a foreign domicile (either in their country or other country which is nearby but not in US e.g Canada, Mexico or the Caribbean) there is no US estate and gift tax due.

3. The investor’s family may stay in the US, the investor limits their time in the US and the spouses file separate tax returns (the non-working spouse may file a US tax return if in the US for more than ½ the year or 1/3 the year for 3 year period declaring minimal income) while the investor income may be not be subject to US income tax. These tax rules are quite intricate and should be both carefully investigated and researched on a case by case basis before the immigration is complete. I recommend both a review of all relevant US-Investor Home Country Tax Treaties, thorough research of the applicable US tax laws and a tax opinion citing the relevant legal authority upon which the investor relies for their tax planning pre-US immigration.

Mark Ivener, a pre-eminent world renowned immigration expert who is my co-author on books and articles has prepared the following summary of the requirements for L-1 Visas.

L-1A Visas For Intracompany Transferees can lead to a Green Card

Who is Eligible

Employees being transferred from a foreign company to a U.S. company require an L-1 visa.  The employee must be an executive, manager or a person with specialized knowledge with at least one year of experience with a foreign company.  The requirements for an L-1 visa include proof of continuous foreign employment for one year in the previous three years immediately prior to the application.  The foreign employment requirement is satisfied even if there is a valid interruption in the performance of duties for the foreign company.  If an L-1 beneficiary enters in the U.S. in his or her capacity as an employee of the organization on some other type of visa, the time spent working in the U.S. under a valid visa will not be counted as applicable to the one-year previous foreign employment.

L-1A Executives and Managers

An executive is one who directs the management of an organization or a major component or function of the organization.  He or she establishes goals and policies and exercises wide latitude in discretionary decision making, receiving only general supervision or direction from higher level executives, the board of directors, or stockholders of the organization.  A manager is one who has supervision and control over the work of other supervisors, professionals or managerial employees, or who manages an essential function, department or subdivision of an organization.  A manager has the authority to execute or recommend personnel actions if others are directly supervised.  If no other employees are supervised, he or she must function at a senior level within the organization or with respect to the function managed, and must exercise discretion over the day-to-day operations of the organization or function managed.  An L-1A employee can apply for an Intracompany Transferee Green Card (EB-1) after the US business has been operating with sufficient employees for at least 1 year.  An EB-1 case takes approximately 1- ½ years to process for a Green Card.

The L-1 Employer

The petitioning employer must be a subsidiary, affiliate or branch office, and there must be a relationship between the foreign and U.S. companies in which there is either more than 50% stock control, or a 50/50 joint venture with joint veto power, or the same person owns over 50% of both companies.  The relationship between companies is demonstrated either by showing that the corporations are the same or that one is a subsidiary, affiliate or branch office of the other.

Duration of the Visa

For a business that is just starting, an L-1 visa is valid for one year; for a business that has been doing business in the United States for a year or longer, the visa is valid for three years with two-year extensions available for a total of up to 7 years for an executive or manager.  Any time out of the U.S. maybe added to extensions to get more than 7 years.  For example, if the L-1 executive is out of the U.S. for 3 years out of the 7, he can apply for 10 years. L-1 extensions have to be filed in the U.S. at the USCIS Regional Center serving the area where the business is located.

Where to Apply

An L-1 visa application for foreign nationals must be filed through an USCIS Regional Service Center except for Canadians who may file through an immigration Class A port of entry airport or land border a U.S. or pre-flight inspection airport in Canada.  The USCIS for everyone except Canadians then sends the approval notice to a U.S. Consulate where the applicant obtains the L-1 visa.

Status of Spouse and Minor Children

The foreign national spouse or unmarried minor children of a foreign national with an L-1 visa are entitled to the same nonimmigrant classification, for the same length of stay, as the employee.  The foreign national’s spouse and children are admitted with L-2 visas.  The employee’s spouse may seek employment authorization from USCIS.  Minor children cannot accept employment in the United States, but can attend school.  Domestic workers of an L-1 visa holder can receive a B-1 visa with work authorization.

Make yourself at home.

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Global High Net Worth Investors: Asset Protection Strategy

May 04, 2017  |   Posted by :   |   Asset Protection   |   0 Comments

In a 2006 Wall Street Journal article it was revealed that high net worth investors had an investment tax planning “secret strategy”: they used private placement life insurance as a “tax free wrapper” for their liquid investment portfolios (stocks and bonds).

The strategy has been cited as follows in an October 18, 2006 Wall St. Journal article, Insuring Against Hedge-Fund Taxes, by Rachel Emma Silverman:

“A small but growing number of wealthy investors have discovered a legal way to invest in hedge funds without paying income taxes on the gains. It’s called ‘private placement’ life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes – as is the payout upon death. What’s more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy….

“Private-placement insurance policies are essentially variable insurance policies, which allow policyholders to invest a portion of their premiums in separate investment accounts…”

“The strategy’s chief advantage is the tax benefits that all life insurance policies offer: Assets inside a life insurance policy can grow tax-free, and the death benefit can also be paid out free of income tax…”

Asset Protection for High Net Worth Investors

One of the most effective ways to preserve assets is by effecting international structuring that is at once legitimate and compliant (from a reporting and tax perspective) but distances asset ownership from the client and would-be creditors. Yet in a non-adversarial way with solid economic rationale. A key element in this structure is international variable life insurance that is offered in a variety of credible financial jurisdictions like Bermuda, Bahamas, The Cayman Islands, The Isle of Man and others.

Such policies are akin to their domestic counterparts by adhering to the same US tax code (7702 et al) but offer distinct advantages. First the similarities:

• Policies may be funded with single or multiple premiums
• Policy assets are invested in client chosen investments- mainly a set menu of mutual funds
• Growth of such assets are income tax exempted during lifetime
• Policy death benefits are income tax exempt at death
• The policy’s cash surrender value (CSV) may be accessed during lifetime also income tax exempted

Now the dissimilarities and thus advantages that apply to some, if not all, international carriers:
• Policies may be bought with premium in-kind i.e. assets
• Clients may choose their own investment manager to manage policy investments
• The manager may choose virtually any investment class including stocks, bonds, mutual funds, hedge funds, private equity etc.
• Generally, fees are fractional compared to domestic offerings

In terms of asset protection, some jurisdictions (like some US States) exempt insurance polices from the claims of creditors; most notably Bahamas and the Cayman Islands. In fact Cayman has recently updated their insurance legislation such that it fully protects the premium(s), the growth on the premium and the death benefit from the claim of creditors putting the greatest clarity in this section of the applicable law of any jurisdiction. In addition the Cayman Segregated Account Statute (7 (8) c) legally segregates the assets of one policy from another, while also keeping them legally distinct from the insurance company’s general assets and liabilities; yet further protection.

Interestingly, Puerto Rico, as a quasi-US/offshore jurisdiction has recently enacted law (2011) that immediately exempts assets placed into a policy issued by an international P.R. carrier, provided that those assets or monies were not subject to any prior or current claim. This offers very substantial, statutorily provided protection that must be respected by every other U.S. State Court and judge. Also as a U.S jurisdiction for reporting/information purposes, a U.S. taxpayer would also be free from any additional FBAR reporting obligations in owning a PR issued contract.

Regardless of the jurisdiction of issuance, such policies are very often held by trusts for estate planning and dispositive reasons. The domicile of the trust can also be an additional layer of protection for the reason that most jurisdictions have a “fraudulent disposition” period to help establish objectively if the assets settled in trust were done so purposely to defraud creditors of the settlor. The Bahamas by example has a 2-year conveyancing Statute. What this means, in the case of the Bahamas, is that if the assets have been in the trust for +2 years, it’s presumed that they were not placed there purposely to defraud a creditor.

Can a creditor still come forward and lay claim after 2 years? Yes- but the burden of proof is heavily on that creditor.

What happens if the trust is challenged before the 2-year period? The burden of proof, though somewhat lower, is still on the creditor to establish that those assets (in particular) were placed in trust and are rightly his or hers.

In either case under certain tracing claim actions the trust may be permeated. It can happen. In this situation, the courts could award the trust assets to the creditor. That is, specifically it would order non-exempted assets to the creditor. In the Bahamas, as we have noted earlier, insurance is such an exempted asset and therefore the courts would be unable to assign it to the creditor.

The other relevant point is that in court, the debtor now has a cogent, commercial argument for having established the structure in the first place; to make and hold international investments in the most tax efficient manor that is at once both transparent and compliant. This, as opposed to other structures where the intent is clearly to avoid or even evades liabilities- contingent or otherwise.

Asset Protection: The Ultimate Strategy

Investors concerned about third party creditor attachment may seek “ultimate asset protection” for their assets through a Puerto Rico life insurance policy owned by a U.S. Grantor Trust domiciled in the Bahamas.

This ultimate asset protection strategy has three “key ingredients”:
1) Under Puerto Rico law, the cash value benefits of a life insurance policy are expressly exempt from seizure by creditors (absent fraudulent conveyance funding of the policy). See: Puerto Rico Act No. 399 of 9/22/04, as amended by Act No. 98 (6/20/11). Under Act. No. 98 (6/20/11), the policy owner and policy beneficiary are statutorily protected from seizure.

2) In the Bahamas under Bahamian law, insurance is exempt from creditor claims, provided that premiums used to fund the policy are not subject to any prior claim at the time of transfer (See: Bahamas Insurance Act, Chapter 347, Section 17, effective 6/1/70).

3) In the Bahamas under the Fraudulent Dispositions Act of 1991 (effective date 4/5/91), Chapter 78, Section 4:

Every disposition of property made with an intent to defraud shall be voidable at the instance of a creditor thereby prejudiced;

The burden of establishing an intent to defraud shall be upon the creditor seeking to set aside the disposition;

No action or proceedings shall be commenced pursuant to this act unless commenced within two years of the date of the relevant disposition.

4) In the Bahamas, under the Banks and Trust Compliance Regulation Act (2000), (effective 12/29/2000), Chapter 316, Section 19(1): no person shall without the customer consent disclose to any person, any such information relating to the identity, assets, liabilities, transactions or accounts of a customer. Any person guilty of an offense shall be liable or summary conviction to a fine not exceeding $25,000, or to a term of imprisonment not exceeding two years, or both.

For those investors with investment portfolios, pre-emptive planning may fully exempt all assets from creditor attachment. The strategy:

1) Transfer all liquid assets (i.e. cash, stock or bonds) to a Nassau Trust (which is a U.S. grantor trust, i.e., IRC Sec. 679), which trust may be amendable or revocable so there is no completed gift (and no gift tax due on Form 709: U.S. gift tax return required);

2) The Nassau Trust capitalizes a Puerto Rico variable life insurance policy, which owns an underlying company (a Nassau International Business Company; i.e. an “IBC”);

3) The “IBC” holds title to all investment assets (the IBC is owned by the life insurance policy separate investment account; i.e. “cash value account” which is comprised of premiums paid and earnings on the premiums paid).

Since the investment portfolio is ultimately owned by the Puerto Rico variable life insurance policy, the policy acts as a “tax-free wrapper”; i.e., tax-free gains inside the policy (e.g., annual earnings/capital gains are shielded from income taxes). Assets inside the policy grow and compound income tax-free. The death benefit is paid income tax-free (IRC Section 101).

IRS income tax audits may be pre-empted on investment portfolio income since there is neither income tax due, nor any tax reporting due on the investment portfolio income.

Absent a fraudulent conveyance, investment portfolio assets are immediately exempt from creditor seizure once held by the policy. Investment portfolio assets receive the following creditor protection:

1) Under Puerto Rico law (the governing law for the Puerto Rico Variable Life Insurance Policy), the policy owner and beneficiary are statutorily protected from seizure;

2) Under Bahamas law (the governing law for the trust that owns the policy), insurance is exempt from creditor claims and client financial assets may not be disclosed or be subject to a criminal offense of up to two years in jail. In addition, an “attaching creditor” must initiate an action (in the Bahamas) to set aside a “fraudulent conveyance” within two years from the date of transfer or they will be “time-barred”.

Under the “Ultimate Asset Protection” strategy, IRS tax audits are pre-empted (since no tax is due and there is no tax reporting), both Bahamas and Puerto Rican laws exempt from creditor attachment the “cash value” component of the life insurance policy (which owns the investment portfolio assets), the Bahamas fraudulent conveyance laws “time bar” creditors after two years, and the Bahamas “Bank Secrecy law/criminalize third party disclosures of client “asset information”.

If the investments perform in accordance with the S&P 500 historic yields (10.6% over the last 30 years, cumulative with dividends) or hedge fund yields (projected 15% annually), the portfolios will grow “income tax free” but will be subject to U.S. estate (and gift) tax on death (or transfers) for U.S. citizens, estate/gift tax residents; i.e. U.S. domicile). The U.S. estate tax may be satisfied by a U.S. life insurance policy, held in an U.S. irrevocable life insurance trust, so the death benefit proceeds may be paid on a “leveraged basis” (by insurance premiums), and excluded from U.S. estate tax (by the life insurance trust).

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Global High Net Worth Investors: Tax Evasion & Money Laundering (US/UK)

May 03, 2017  |   Posted by :   |   International Investors,International Tax Planning,Tax Evasion   |   0 Comments

In an unprecedented event, the United Kingdom is passing laws to seize real estate in London and the entire United Kingdom (over 2000 properties may be affected).

Currently, billions of dollars of real estate have been purchased through offshore companies with undisclosed beneficial owners hiding illegal funds including tax evasion, bribes and massive thefts by kleptocrats and dictators.

For more info please see 5/2/17 article, “UK Cracks Down on Money Laundering With New Bill to Target ‘Unexplained” Wealth

I have written extensively on this subject in the past. Please see the following articles.

US Treasury Dept. Expanding Hunt for Money Laundering in Real Estate

On 7/27/16 the US Treasury Dept. expanded its hunt for international criminals who launder money through all cash US real estate purchases.

Beginning August 2016, the US Treasury has ordered title companies to report all cash buyers’ identities for expensive US residential real estate (homes, condos) in major US cities. The Treasury Program, seeking to unmask the individuals behind shell companies that buy US real estate, commenced in January 2016 for Manhattan and Miami-Dade County Florida.

Effective August 2016 the program is expanded to require reporting for all cash purchases at the following sales prices:

1) New York City: $3m (Manhattan); $1.5m other NYC boroughs

2) Florida: Miami-Dade County, Broward and Pam Beach counties ($1m)

3) California: Los Angeles, San Francisco Bay Area and San Diego ($2m)

4) Texas: San Antonio ($500k).

As stated by US Treasury Dept. Financial Crimes Enforcement Network (FINCEN) Acting Director, Jamal El-Hindi: “”By expanding to other major cities we will learn more about the money-laundering risks in the national real estate markets”.

For more info see: FinCEN Expands Reach of Real Estate “Geographic Targeting Orders” Beyond Manhattan and Miami

Tax Evasion and Money Laundering: US Real Estate

On 1/13/16 the New York Times reported that the US Treasury Department will start tracking secret buyers of luxury real estate in New York City (residences over $3m) and Miami-Dade County (residences over $1m) under a new US Treasury Dept initiative effective March 2016-August 2016. If Treasury Dept finds many sales involving suspicious money they would develop permanent reporting requirements across America.

The Treasury Dept initiative is intended to disclose the real owners who make all-cash purchases thru shell companies that shield purchaser identities (shell cos. include: limited liability cos., partnerships and other entities). It is part of a broader US effort to increase the focus on money laundering in real estate.

According to the Treasury Dept. foreign (and other) purchasers use shell companies, pay all-cash, for luxury real estate, which becomes “a safe haven in the US for their money”.

The US Government is requiring title insurance companies (which are involved in virtually all sales) to discover the identities of buyers and submit the information to the Treasury, which will then put the information into a database for law enforcement. According to the New York Times investigation, real estate professionals (especially in the luxury market) know little about their buyers and until now, were not legally required to identify them.

According to the NY Times, nearly 1/2 of the homes nationwide are purchased using shell companies (and in Manhattan and Los Angeles the figure is higher).

According to the NY Times, condominiums at Time Warner Center were found to have a number of hidden owners, who had been subject of investigations including: Russian Senators, British Financier(s), a Former Governor from Colombia, a businessman tied to the Malaysia Prime Minister and in Boca Raton, Florida a condominium tied to Mexico’s top housing official (now running for Governing of the Mexico Southern State of Oaxaca).

Money Laundering

Money Laundering is the disguise of the nature or other origin of funds. It includes the transmutation of tax evasion proceeds into personal assets or 3rd party distributions. Money laundering is a felony with a 20-year jail term (18 USC 1956, 1957. If the funds are transferred by wire transfer or mail, each is a separate 20-year felony (wire fraud 18 USC 1341, mail fraud 18 USC 1341).

Taxpayers who either commit tax crimes 4 separate felonies for tax evasion/ total 16 years in jail ( see IRC 7201 tax evasion, 5 years in jail, IRC Sec. 7212 obstruct tax collection, 3 years in jail, 18 USC 371 conspiracy to commit tax evasion, 5 years in jail, or fail to intentionally file tax returns IRC 7206 ,3 years in jail) or who conspire to commit tax evasion with another (known as a Klein conspiracy) face 5 years in jail.

The tax involved may be any tax due: income, employment, estate, gift or excise taxes (see US Dept of Justice, Criminal Tax Manual Chapter 25, 25.03(2)(a). Under the money laundering statutes the IRS is authorized to assess a penalty in an amount equal to the greater of the financial proceeds received from the fraudulent activity or $10, 000 (18 USC 1956 (b). This authority is granted by statute to the IRS and is enforced either by civil penalty or civil lawsuit.

Violation of statutes for mail fraud, wire fraud, and money laundering are punishable by monetary penalties, as well as civil and criminal forfeitures (See 18 USC 981 (a) (1) (A) which permits property involved in a transaction that violates the money laundering statutes 1956, 1957, 1960 to be civilly forfeited).

For those US taxpayers who either commit tax evasion, are involved with international tax evasion (with foreign persons) and money laundering (i.e. use the tax evasion proceeds to buy assets e.g.. real estate) they face criminal prosecution for tax evasion (16 years in jail for tax crimes i.e. 4 separate tax felonies), money laundering (20 years in jail), and wire/mail fraud (20 years in jail each).

In the US Supreme Court case Pasquantino (544 US 349/2005), the Court held that a foreign government has a valuable property right in collecting taxes, and that if the tax evasion proceeds are used to purchase assets the parties involved face criminal prosecution for tax crimes and money laundering, wire/mail fraud.

Under US laws, a violation of the money laundering statutes includes a financial transaction involving the proceeds of a specified unlawful activity (SUA), i.e. a “predicate offense” with the intent to:

1) Promote that activity;

2) Violate IRC sec. 7201 (willful attempt to evade tax);

3) Violate IRC sec. 7206 (which criminalizes false and fraudulent statements made to the IRS).

Under Pasquantino, the court held that “international tax evasion” (taxes due to a foreign governments) is a predicate offense (as well as taxes due the US or State governments), for money laundering and may be criminal prosecuted for all of the above (i.e. tax evasion, money laundering, mail/wire fraud). In Pasquantino the unpaid Canadian excise taxes and the purchase of assets (with those proceeds) are tax fraud, which satisfy the SUA requirement for money laundering and may include criminal prosecution for wire/mail fraud.

See: NY Times 1/13/16 article by Louise Story, “US Will Start Tracking Secret Buyers of Luxury Real Estate

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