Tax Planning for Texas and Other States: Post-Hurricane Harvey

September 06, 2017  |   Posted by :   |   Casualty Loss   |   0 Comments

As a Californian, I normally do not consider tax planning for Texas. Due to the horrors of Hurricane Harvey, I have decided to “stretch” and offer Tax Planning Advice for our American Brothers and Sisters devastated by the widespread destruction caused by Hurricane Harvey including: homes, cars, jewelry, personal property, heirlooms, art and clothing whether in Texas, or other states. In addition, damages to their businesses, as well.

What do you do in the face of catastrophe? Act quickly, be smart and protect yourselves and your family. If you are in Texas or neighboring states that are storm & flood ravaged and worry about survival take comfort in these truths: All things must pass (George Harrison got it right), insurance may pay for much of your losses, what is not covered by insurance may be recouped thru tax refunds or tax free future income. Money can solve many problems but not if you lack a plan or give up hope.

Tax Plan

Simply put use your casualty loss from the Texas storms to save taxes and get tax refunds. With the current federal income tax rate up to 45% (39.6% top tax rate, plus 3.8% Medicare tax, with additional tax due from the phase out of personal exemptions and itemized deductions) every $1 lost can bring in up to 45 cents in tax refunds or tax free income (which when combined with insurance recovery may make the “pain of loss” recede and in time be replaced by new choices).

The federal government has a special rule for storm losses. Under IRC Sec. 165 (a): “Any loss sustained during the taxable year may be deducted if it is not compensated by insurance or otherwise. The losses are limited to losses from “fire, STORM, shipwreck, or other casualty, or from theft”. Taxpayers may receive a trifecta of tax breaks: reimbursement by tax planning for storm related damages, any thefts of property from lawlessness, and non-taxable insurance recovery.

The math is simple: Losses = All Hurricane Harvey storm & related losses. Getting back to “even” may include insurance recovery, tax refunds or tax-free income. If not “able to get back to 100% even”, then every $1 recouped is a “win”.

How to Proceed

First, make up a list of all losses. If you have no receipts to confirm purchase do a timeline of the dates purchased (oldest one on top) with description of the property, amount paid (to the best of your recollection) and put this information in a sworn affidavit or a declaration under penalty of perjury.

Second, attach this article to your affidavit or declaration as a legal basis to take these tax losses, which you were first made aware of by this article. Third, request your CPA to prepare IRS Form 4864, attach it to Form 1040 (2017) and file any time after January 1, 2018 declaring the amount of the loss (with any records, appraisals or other evidence of value attached to the Affidavit or Declaration in support).

A Special Tax rule applies for disaster area losses (e.g. Texas). A taxpayer that sustains a loss occurring in a disaster area and attributable to a federally declared disaster can either (1) deduct the loss on the tax return for the year in which the loss occurred or (2) elect to deduct the loss on the return for the preceding tax year (IRC 165(i); Treas. Reg. Sec. 1.165-11.

The election to deduct a disaster area loss in the tax year prior to the loss year is made by filing a return, an amended return, or a refund claim and the election applies to the entire loss sustained by the taxpayer in the disaster area during the disaster period.

The IRS has a special rule for personal residences, which is treated as a disaster loss if the personal residence is rendered unsafe by a disaster in an area determined by the President (US) to warrant federal government assistance. The taxpayer must have been ordered by the state or local government within 120 days after the area is declared a disaster area to demolish or relocate the residence (IRC 165(k). The amount of the deduction is reduced for state partial payments made for disaster aid.

A casualty loss is an ordinary loss and offsets ordinary income, including wages and investment earnings. If your loss is $1m and the federal income tax rate is the maximum 45%, you are entitled to a tax refund of $450,000 (subject to tax audit so be complete and thorough in your loss calculation and include all available records which support the claim).

Under IRC 165(c)(3) an individual may deduct a loss from non-business property (e.g. home, car, furniture) only if it arises from “fire, storm, shipwreck, or other casualty or from theft”. The deduction for a personal casualty loss is limited to the amount that the loss from each casualty (or theft) is in excess of $100 (IRC 165(h)(1); Treas. Reg. Sec. 1.165-7(b)(4). The $100 floor applies only once against the sum of the allowable losses (the aggregate of all items lost).

Under IRC 165(h)(2) if a taxpayer’s personal casualty loss exceed their income, the excess may be deductible only to the extent it exceeds 10% of their adjusted gross income (AGI) for the year.  The $100 floor and 10% of the AGI limit do not apply to a business or income-producing property. The amount of a casualty loss which may be deducted for income-producing property, business property or non-business property is the lesser of:

1. The Fair Market Value of the property immediately before the casualty reduced by its FMV immediately after the casualty, or

2. The Adjusted Basis of the property immediately before the casualty (Treas. Reg. Sec. 1.165-7(b).

If business or income-producing property is totally destroyed, the casualty loss is the adjusted basis of the property if the property FMV immediately before the casualty is less than its adjusted basis.

A Casualty Loss is generally deductible only for the tax year in which the loss is sustained (Treas. Reg. Sec. 1.165-7(a)(1). If the damages cannot be reasonably ascertained in the year of occurrence, the deduction can be taken in later year when the extent of the damage is known. If the loss is in a federally declared disaster area the loss a special election allows the loss to be deducted in the immediately preceding tax year.

Insurance and Casualty Losses are linked. A Casualty loss is reduced by any insurance or other compensation received by the taxpayer. The loss is also reduced by any salvage value. An individual cannot claim a personal casualty loss to the extent the loss is covered by insurance unless a timely insurance claim is filed with respect to the loss (IRC 165(h)(4)(E).

A Casualty Loss can generate a Net Operating Loss, which for the tax year is the excess of allowable deductions over gross income (IRC 172(c); Treas. Reg. 1.172-1).

If the Casualty Losses from Hurricane Harvey exceed gross income the taxpayer will have a Net Operating Loss. An NOL from a trade or business may be claimed as a deduction to the current tax year equal to the aggregate amount of NOLs carried back or carried forward from other tax years (IRC 172(a); Treas. Reg. 1.172-1)

An NOL deduction may not exceed the amount of taxable income for the year of the deduction. An NOL arises in any tax year when the taxpayer’s deductible expenses for the year exceed its gross income.

Generally, a Net Operating Loss must be carried back to the two years preceding the loss year and then carried forward 20 years following the loss year. A special rule applies for casualty losses and disasters, which allows for a 3-year carryback period for an NOL arising from a casualty (e.g. Storm).

The IRS offers excellent guidance in Pub 584, 584B for individuals and businesses.

For now, the rules for Texans and other Americans ravaged by Hurricane Harvey are as follows:

1. Prepare your lists/schedules of lost property and amounts lost.

2. Submit insurance claims.

3. Work with your CPA to prepare the Form 4864 to confirm your losses and provide necessary Affidavits, Declarations and other Supporting Documentation in either your possession or from third parties.

4. File the Form 4864 with your Form 1040 for either tax year 2017 (in Jan 2018 or later) or if appropriate as a Federal Disaster Area file the claim for tax year 2016.

The key decisions are whether to carryback losses for 3 years and seek tax refunds as required (which is only viable if taxes were paid those tax years), and carrying the losses forward for 20 years eliminating tax due on income up to the amount of losses. For wage earners, review reduced federal income tax withholding for carry forward years. For investors and business owners reduce estimate tax payments based on tax projections from your tax advisors.

Most importantly remember America, our great country was fought for and earned by heroic men and women who built the freest, wealthiest most prosperous democracy in history. You are part of a great country whose values of life, liberty and the pursuit of happiness should be your bulwark in dark times. Get on with your life, celebrate your freedom (which is unlike many other countries), get back on your feet and pursue your happiness.

Lastly, since Texans are huge football fans, I leave you with words of wisdom from the great coach, Vince Lombardi, “It is not whether you get knocked down but whether you get back up”. Words to live by.

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The US and World Wide Tax Evasion

August 31, 2017  |   Posted by :   |   FATCA/FBAR,Tax Evasion   |   0 Comments

Although with the implementation of the Foreign Account Tax Compliance Act (FATCA), America has taken the lead in attacking US taxpayers who evade taxes by hiding assets offshore (held thru anonymous companies) in 2017 America has become the world’s biggest tax haven. In America, today 14 states allow US Companies to be formed without the need to disclose or identify the names of shareholders, directors or officers. At the same time, foreign investors hold nearly $17 Trillion ($16.75 Trillion as of 2013) in foreign owned assets held in the US with another $3 Trillion in foreign direct investment in the US.

While on the one hand combatting tax evasion, money laundering and foreign corrupt practices (e.g. bribery), America greatly profits from these tax and other crimes (which are serious felonies with jail time). According to the 3/17 Report from the European Parliament title “The Role of the US as a Tax Haven; Implications for Europe.” The US has built a huge cottage industry offering financial services to non-residents HNW global investors and maintains 20% of the global market for financial services.

The recent OECD/CRS rules take effect 9/17 and by 9/18 over 100+ countries worldwide will automatically and digitally share respective taxpayer bank account information for those accounts held outside their country of origin (or citizenship/residence). The US has declined to participate and is not a signatory to the CRS rules preferring that their 113 FATCA tax treaties remain their sole tax compliance method for undisclosed offshore assets and earnings from those assets.

Tax evasion bankrupts cities, states and countries (CA major cities have gone bankrupt, Detroit went bankrupt, the State of Illinois is insolvent, while internationally Greece imploded after 89% of their taxes assessed were never paid, while Spain, Italy and other countries face similar fates). With 2017 a new era has commenced where cross-border taxpayer information sharing will be the new “digital rule” which may be the final straw that destroys centuries of offshore tax evasion by the wealthiest taxpayers, who could well afford to contribute to their country revenues but chose to instead violate the tax laws. For many years, their risk of apprehension was slight which made their “bet worthwhile”.

Seems like that story has now changed for good with the exception of 14 US states including Delaware, Nevada, Wyoming, South Dakota who still are open for “business” for international tax cheats, money launderers and gangsters of all types who continue to cheat and get away with it while their facilitators (banks, professionals) get well paid. America must address this tax issue or they will continue to be part of the problem (and not the solution).

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California Real Estate and Cannabis

August 14, 2017  |   Posted by :   |   International Investors   |   0 Comments

In January 2018, California is preparing to license the cannabis businesses. Investors view cannabis (aka “pot” or marijuana) as a “Pot of Gold”. Real estate values explain why: currently, in Sonoma County an acre of planted wine grapes according to realtor, John Bergman is valued at no more than $200,000. In contrast CNBC reports in an 8/13/17 article that an acre of planted cannabis is valued at more than $1m.

To put in perspective, currently  two of the world’s leading wine regions (and California) are Napa Valley where the per square foot price of an acre of land is approximately $7 per square foot and Paso Robles where the per square foot price of an acre of land is as little as $1 per square foot (due to drought and other factors). In 2016 Paso Robles was voted the best wine town in 13 western states (ahead of Napa) by industry leader Sunset Magazine. So in 2017, the land in Napa is worth 7x that of Paso Robles.

In 2017, Sonoma land (a 3rd winemaking capital) is valued at $200,000 per acre of planted wine ($4.6 per square foot) while the same land planted with Cannabis is worth nearly $23 per square foot. Appears that Cannabis is a “gold rush” for both land and the product which has multiple uses from consumer ingestion, to foods, to medicinal research. Related industries include: consumer products (eg. hemp), wellness facilities, and research centers.

If this “good math” holds true, in January 2018 a new gold rush begins, California is the epi-center and it all starts with the land which is viewed as highly favorable for the growth of cannabis due to the propitious California Mediterranean climate which is both lucrative for wine and cannabis production. Stands to reason that once investors do the math, any land undervalued wineries (due to drought, over-saturation of the market for wine or other reasons) may be converted to richly rewarding cannabis farms, so stay tuned.

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Offshore Tax Evasion & Compliance: OECD/CRS and FATCA

August 07, 2017  |   Posted by :   |   International Tax Planning,Tax Evasion   |   0 Comments

For foreign investors who become EB-5 Visa holders or other US green card they will be subject to annual US world wide tax reporting for income and disclosure of all offshore financial accounts over $10,000 that they own or control (FBAR filing: FinCen Form 114) and foreign financial assets over $50,000 (FATCA/Form 8938 attached to Form 1040/US Income Tax Return) or risk serious civil and criminal penalties.

The penalties may include a civil penalty for up to 50% of the account balance yearly for FBAR violations (which is computed annually; in the case of Florida Taxpayer Carl Zwerner he had a 150% penalty imposed after he lost at trial so his $1.6m account cost him nearly $2.4m under the FBAR civil penalty). In addition a criminal penalty of up to 10 years in jail for each year the FBAR is not filed

Under FATCA, which was enacted as law in March 2010, as of 2017 over 100,000 foreign financial institutions in over 80 countries are reciprocally exchanging tax information with the US government (Treasury Dept/IRS). If the offshore account has a US owner unless they supply their taxpayer ID information to the offshore bank, the US will withhold 30% of any US source dividends or interest at the source and 30% of gross sales of securities (i.e. 30% of the sales proceeds are withheld with no calculation for any taxpayer basis or other capital gain issues).

A foreign investor who immigrates to the US is subject to worldwide US income, estate and gift taxes and related tax filings which are subject to IRS audit with both tax, interest and civil and criminal penalties due for tax non-compliance. Unlike China, the IRS is a very powerful tax agency with nearly 100,000 employees, an over $10B annual budget while they collect over $3 trillion per year in US taxes due.

As of September 2018, there will be 101 signatories to the Organization of Economic Development digital exchange of tax information between countries known as the Common Reporting Standards (CRS) which has even more expansive tax compliance required including bank balances and income related to insurance products.

My colleague and co-author, David Richardson (international tax consultant, Mid-Ocean Consulting) has written the following superb summary of the complex new tax rules for the OECD/CRS reporting due to begin in Sept 2017 (for over 50 countries and in Sept 2018 another 50+ countries total countries: 101 as of Sept 2018). For international investors who are dual tax residents with the US (and their country of origin or other 3rd party country) their world-wide investments may be subject to dual tax compliance under both the US/Foreign Account Tax Compliance Act (for US source interest, dividends and capital gains) currently in effect and the OECD/CRS greater tax compliance requirements including bank account balances, and payments from the accounts (effective Sept 2017 forward).

David’s article is as follows:


CRS Advisory- Updated; August 2017

As many will already know, the automatic exchange of information for tax law enforcement purposes started first in Europe with the EU Savings Tax Directive, went international with the US Foreign Accounts Tax Compliance Act, and, from 2017, went global with the recently agreed; Common Reporting Standard or “CRS”. The CRS provides for annual automatic exchange between governments of financial account information. CRS sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Background To The CRS

As an attack against “tax avoidance and evasion” facilitated by tax planning techniques purportedly used by some wealthy individuals and corporations in “tax havens” around the world, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013.

On October 29, 2014, 51 jurisdictions (the “early adopters”), 39 of which were represented at ministerial level, signed a multilateral competent authority agreement to automatically exchange information based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Subsequent signatures of the agreement, including a signing ceremony on the margins of the OECD Ministerial meeting of June 2015, brought the total number of jurisdictions to 61 (see below). This agreement specifies the details of what information will be exchanged and when.

Countries that have signed up to the CRS will exchange information “automatically” with one another. The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.

Reportable accounts include those held by individuals and entities (which includes companies, trusts and foundations), and the standard includes a requirement that financial institutions “look through” passive entities to report on the relevant controlling persons. The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies.

What Countries Will Be Subject to CRS

The total number of signatories as at June 4, 2015, was 61, including the following countries and territories:
Albania, Anguilla, Argentina, Aruba, Australia, Austria, Belgium, Bermuda, British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Ghana, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turks and Caicos Islands, and the United Kingdom.

Now over 100 jurisdictions* have committed to sign have endorsed the CRS, and the number is continuing to grow by some signing on effective in 2018. Critically, data began being collected on 1/1/2016 for OECD countries, with 50 countries starting automatic data sharing in 2017, and the balance (notably China and Brazil) coming on line next year. This means that clients with traditional “offshore” structures will forever lose their privacy if they did not restructure their global estate by Dec 31, 2015.
Or, see exceptions below

Pre-Existing Insurance Exception.

The CRS rules, however, provided the following significant exception:

“Accounts Not Required to be Reviewed, Identified, or Reported. A Preexisting Individual Account that is a Cash Value Insurance Contract or an Annuity Contract is not required to be reviewed, identified or reported, provided the Reporting Financial Institution is effectively prevented by law from selling such Contract to residents of a Reportable Jurisdiction.”

This was an important carve-out for an otherwise legitimate and compliant financial instrument. Not a loophole, insurance is an “intended result”, that is being recognized for what it is; one of the few financial structures that offers substance to the form.

In terms of policy design, “death benefit only” policies (no- cash value) add significant further protection as there is no account value to report on as defined in the CRS regulations (similar again to FATCA). The goal may therefore be in designing international no-cash value policies with substantial death benefit, to fully satisfy a client’s local applicable tax and insurance rules- and may also be simultaneously US compliant, should a client or his or her beneficiaries/heirs move to the United States.

STRATEGY: Use of a Puerto Rico as a jurisdiction

A number of jurisdictions offer international life insurance that can at the same time qualify as both tax-exempt and not subject to reporting under the CRS regime, but we wanted to focus on one jurisdiction that is uniquely situated to offer reporting relief to not only U.S. policy holders, as it does now, but to the rest of the world given CRS. That jurisdiction is Puerto Rico.

Puerto Rico is a US Commonwealth Territory that offers a progressive legal structure in the context of financial services with offshore-like flexibility but without the “haven” taint.

And, not unlike a number of US States, Puerto Rico has a clearly articulated segregated statute which holds the assets of a policy legally distinct from any other policy- and from the general account assets and liabilities of the insurance company itself. Thus making the assets of such a policy bankruptcy remote, and never at risk to the carrier. Traditional insurance company grading metrics like “A-ratings” are now somewhat irrelevant.

Asset protection is also very often a factor, and Puerto Rico has very clearly articulated laws that prevent any creditor of a policy owner (or policy beneficiary) from attacking a PR issued policy (provided the funding of the policy itself was not a fraudulent conveyance).

From a reporting perspective, as far as the U.S. is concerned U.S. policyholders are exempted from FBAR reporting and PR resident institutions free from FATCA obligations- in that Puerto Rico is a US territory and deemed to be US for this FATCA purposes. Now for non-US clients, Puerto Rico as a US Territory is off the CRS grid, as it is not currently, nor likely to be, a direct party to CRS.

Returning then to the focus on insurance itself, life insurers in Puerto Rico are NAIC US and Puerto Rican Regulator supervised. Carriers there are not legally licensed to sell insurance locally in Europe, Canada or Latin America, but the exception seems to be on-point availability given the right fact situations. This therefore presumes policy acquisition by a non-native person or entity e.g. a Chilean national cannot take direct ownership of an international policy.

Given that a policy cannot legally be sold to residents of Chile or potentially other countries that are CRS signees, clients will likely use an entity that acquires and takes ownership of the policy. Assuming so, there may or may not be CRS reporting issues for that entity depending on its domicile.

For clients that already have and wish to maintain companies or trusts in jurisdictions that will be required to make the CRS reporting, the use of a death benefit only (no cash value) policy provides effective CRS protection as the policy has no reporting value for CRS purposes. Thus, if the policy was issued prior to January 2016, the pre-existing insurance contract exception discussed above should apply.


International private placement variable life insurance policy can compliantly provide lifetime tax deferral and an income tax-free death benefit upon the death of the life insured- under the tax laws of the United States as well as now many other countries around the world. Such a policy also provides ongoing client confidentiality, as the insurance company – rather than the client – is the deemed owner of the underlying policy reserve assets.

In general terms, international private placement variable life insurance, if issued before December 31, 2015, should be grandfathered from any future CRS reporting. A death benefit only policy (which can be US tax compliant under the IRC 7702 cash value accumulation test) would further buttress this position, as it has no cash value for CRS or FATCA reporting purposes. Meaning that even if the policy was deemed not to be grandfathered and was otherwise subject to CRS reporting, there is no value to report.

In addition to the aforementioned, such a policy, if issued from a Puerto Rican based insurer (regardless of its design) would be free from CRS reporting post the December 2015 grandfathering date, as Puerto Rico is altogether exempted as a U.S. Territory.

David Richardson- Managing Director

David E. Richardson is CEO of Mid-Ocean Consulting Ltd., in Nassau, Bahamas, which guides both institutions and individuals on sophisticated international structuring and private placement insurance related strategies. Additionally, he sits on the board of a number of private foundations and a wide variety of private companies including several that are SEC registered in the United States. He is a graduate
of the ABA sponsored National Trust School at Northwestern University.

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Panama Papers Update: Pakistan Prime Minister Resigns

July 31, 2017  |   Posted by :   |   Panama Papers,Tax Evasion   |   0 Comments

As reported on 7/28/17 by the NY Times Nawaz Sharif, Pakistan Prime Minister, resigned after the Pakistan Supreme Court ordered his removal for corruption.

In 2016, the Panama Papers disclosed that Sharif and 3 of his children owned expensive residential real estate in London held anonymously thru offshore companies.

The Court held that Sharif was not honest, and disqualified to be a member of Parliament. The Court ordered the opening of criminal investigations against the Sharif family who were found to be living beyond their means, failed to present a paper trail of the money they used to purchase the London apartments and falsified records in support of their purchases.

Sharif is the second Prime Minister to now be forced to resign due to disclosures in the Panama Papers. In 2016, the Iceland Prime Minister and his spouse concealed millions of dollars worth of investments in an offshore company, which was disclosed and forced his resignation.

The Panama Papers financial fallout has now claimed two prominent politicians and is now expanding to include soccer stars that used offshore company to conceal income received from monetization of Celebrity Image Rights (name and likeness).

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