Asset Protection BLOG - Mark Nestmann

What the Heck is a "Controlled Foreign Corporation?"

U.S. shareholders in foreign corporations are subject to some of the most complex and confusing tax rules in the entire Tax Code.  I'll be attending a workshop (see below) in Las Vegas Dec. 7, 2007 designed to help U.S. shareholders in foreign corporations, and their advisors, understand these rules and avoid the many "tax traps" that accompany them.

The most severe tax traps are reserved for what the Tax Code calls "controlled foreign corporations."  Here's a highly simplified summary of the rules:

If "U.S. shareholders" own 50% or more of the shares in a foreign corporation (e.g., an international business company or IBC), by vote or value, the foreign corporation is classified as a CFC.  U.S. shareholders are defined as any U.S. natural persons, partnerships, corporations, trusts, and estates who own, respectively, a 10% or greater interest in the foreign corporation.

If you're a U.S. shareholder in a CFC, and it generates what the IRS calls "subpart F" income,  you won't be able to defer tax on that income, even if it's not distributed as a dividend.    Subpart F income includes passive investment income, income from personal service contracts, income from transactions with related U.S. persons or entities and income from certain industries such as insurance, banking, mining and others.   

Naturally, various exceptions apply to many of these general rules.

If that's not enough, if your foreign corporation is classified as a CFC:

• The 15% income tax rate on capital gains and dividends isn't available;
• Losses on investments can't be allocated against gains until the corporation is liquidated;
• Any investments in the United States may result in double taxation;
• The basis of the stock does not step-up to its fair market value at the death of a shareholder for estate tax purposes; and
• Complex reporting requirements also apply.

Confused? You have a right to be.  The CFC provisions are designed to prevent multi-national corporations from indefinitely deferring income on their offshore operations, but they also affect the smallest international business operated by a start-up entrepreneur.

The CFC "Boot Camp" in Las Vegas is designed to shed some clarity on the complex CFC rules.  It's will provide a non-technical briefing on CFCs, along with creative ways to avoid CFC tax traps, and will be taught by leading experts in the field of international tax:

• J. Richard Duke, JD, LL.M;
• Thomas P. McQueen, CPA;
• Joel M. Gross, Esq.; and
• Vernon Jacobs, CPA.

For more information on this event, click here.  Hope to see you there!

Copyright © 2007 by Mark Nestmann

The Unique Benefits of Offshore Life Insurance

Life insurance enjoys uniquely preferential treatment under U.S. tax law:

• All earnings accumulate free of taxes until withdrawal;
• The death benefit can pass to beneficiaries tax-free;
• Tax-free loans are possible;
• Tax-free exchanges are possible; and
• With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes. 

Only life insurance can claim these five advantages.  Essentially, you avoid the impact of tax on portfolio income and transactions (depending on portfolio turnover, anywhere from 20% to 50% of the annual pre-tax returns) in exchange for the cost of insurance; approximately 1-3% per year. 

The most flexible policies are variable universal life insurance (VUL) policies.  Instead of a cash value guaranteed by the insurance company, there a separate account that may consist of may consist of a securities portfolio.  The value of the account is determined by the performance of investments within it.

VUL policies are available in the United States.  However, VUL policies written by non-U.S. companies offer a number of advantages in comparison with U.S. companies:

• Enhanced asset protection;
• Greater privacy;
• Tax-deferred access to offshore securities markets;
• Potential avoidance of foreign exchange controls; and
• Lower taxes, regulatory costs, and distribution costs

Another advantage of dealing with a non-U.S. company is that the world's largest reinsurers are located outside the United States.  Especially for large policies, insurance companies often contract with reinsurers to help pay death benefits upon the death of the insured person. 

The most innovative offshore life insurance products are known as "private placement variable universal life" (PPVUL) policies. It may be possible for the investment manager of the PPVUL policy to place a portion of the underlying account values not only in a portfolio of foreign securities, but also in a foreign corporation or other entity that operates an ongoing international business, with all profits accumulating free of tax. 

Offshore PPVUL policies are worth considering if you're seeking a flexible, tax-advantaged, and comprehensive estate plan providing tax efficiency and access to a wide selection of international asset management options.  Since it requires expert tax advice to set up properly, and requires ongoing maintenance to insure tax compliance, it's most cost effective if you can invest US$1 million or more in the policy.

I'll be addressing offshore life insurance policies in one of my presentations at the Sovereign Society's "Offshore Advantage Academy seminar" November 6-10 in The Bahamas. For more information on this event, just click on the "Offshore Advantage Academy" link on the right side of this page. In the meantime, if you have questions about PPVUL policies, please feel free to contact me at assetpro@nestmann.com. 

Copyright © 2007 by Mark Nestmann

Tax and Reporting Traps in Offshore Investments

Offshore investments are an indispensable component of a globally balanced portfolio.  But unfortunately, Congress has placed numerous obstacles in the way of Americans who venture offshore. 

Probably the most obscene tax traps relate to U.S. taxpayers who invest in offshore mutual funds.  When you sell—or are deemed to sell—your interest in most offshore funds, all income and gains are taxed at the highest ordinary income rate bracket that applies (presently 35%), not your actual tax bracket.  What's more, an interest charge (currently around 8%/year) applies for each year tax was deferred on these gains.  And if you lose money on your offshore fund investments, you can't deduct these losses. 

In some cases, it's possible to avoid these tax traps, but you have to make sure the offshore funds you purchase qualify for the statutory exemptions to these draconian rules.  That's a job for an offshore tax expert.  For most U.S. investors, the safest course is to only purchase offshore funds through a tax-sheltered vehicle—an offshore variable annuity or life insurance policy, for instance—or through a retirement plan.

There are additional tax traps in the reporting rules for offshore investments.  Penalties for failing to file a form with the IRS or the U.S. Treasury on or before the due date are typically US$10,000 for each late form.  These penalties may be imposed even if you haven't made any profit and there is thus no "tax loss" to the U.S. Treasury. 

A failure to file a timely return for a foreign trust can cost you a staggering 35% of the assets in the trust.  Let's say you have a foreign trust containing about US$10 million in assets.  You're a single day late in mailing a required reporting form.  In this situation, the IRS has the statutory right to impose a US$3.5 million penalty.  I know of numerous examples where the IRS has sought to impose this penalty.  While it can be removed for good cause, it may take numerous letters from your tax advisor to the IRS to resolve the problem—if it can be resolved at all.

There are many other examples….my point isn't to scare you away from offshore investments.  It's to help insure that when you go offshore, that you do it right. 

The Sovereign Society can provide significant assistance in this regard.  In fact, we're sponsoring a four-day "Offshore Advantage Academy seminar" November 6-10 in The Bahamas that will focus on the "nuts and bolts" of offshore investment.  I'm one of the "professors" at this event, and you won't want to miss my presentation on how to legally avoid taxes offshore, while fully complying with IRS tax and reporting rules.

For more information, just click on the "Offshore Advantage Academy" link on the right side of this page.

Hope to see you there!

Copyright © 2007 by Mark Nestmann

We're All Prisoners Now (Part II)

Last year, I wrote here that if Uncle Sam gets its way, we’d all be on no-fly lists, unless the government gives us permission to leave—or re-enter—the United States. 

Now, the Transportation Safety Administration (TSA) has proposed a similar system for travel on commercial airlines WITHIN the United States.  Both systems will come into effect Feb. 19, 2008.

Under the TSA's ¨Advance Passenger Information System (APIS),¨ initiative, you'll need to obtain permission from the U.S. government to travel on any commercial airliner or ship that goes to or from the United States.  You won't receive your boarding pass until you are cleared by APIS.  You'll also need permission to travel through the United States (e.g., if you're changing planes at a U.S. airport on a trip between two foreign countries).  It doesn't matter if you're a U.S. citizen or permanent resident.  Everyone will need permission to enter—or leave—the United States.

Then, on Aug. 23, 2007, the TSA issued proposed regulations for its "Secure Flight" program. The TSA wants commercial airlines to submit passenger information through a single DHS portal for both the Secure Flight and APIS programs. This would result in one DHS system responsible for watch list matching for all aviation passengers.

Naturally, the entire process—for both domestic and international travel—will occur in total secrecy.  If you're denied permission to travel, you won't be able to appeal the decision to any court.  Your only recourse will through the TSA bureaucracy.  Essentially, you'll be reduced to pleading with the TSA to say something like, "pretty please, give me a boarding pass." 

What this amounts to is essentially a reprise of the infamous "internal passport" system in effect in the former Soviet Union.  In 1933, Soviet dictator Josef Stalin introduced "internal passports" that prohibited Soviet citizens from leaving their place of residence without permission.  Over time, the internal passport became the prime instrument of Soviet oppression over its citizens.

It's bad enough needing to ask Uncle Sam for permission to leave the United States, and to reenter it.  But an internal passport is a blueprint for totalitarianism.

If you don't like the idea of having to obtain permission from Uncle Sam to travel domestically, you have until Oct. 22, 2007 to submit written comments to TSA for consideration before the final rule is issued.  To do so, go to the "Federal e-Rulemaking Portal" at www.regulations.gov and follow the instructions for submitting comments. Submissions must include docket number "TSA-2007-28572."

Since Sept. 11, 2001, it's become difficult to travel without subjecting yourself to intrusive surveillance.  However, it's still possible to travel privately, and in some cases, virtually anonymously.  Click here to learn how.

Copyright © 2007 by Mark Nestmann

Now Your Property is Presumed Guilty in Canada

For years, I've warned about the dangers of civil forfeiture laws that permit police to seize your property, without accusing you of any crime. 

The legal theory behind civil forfeiture is that your property is somehow “guilty” of a crime.  Prosecutors accuse your property, not you, of that crime.  And, if your property is found to have somehow been involved in or facilitated a crime, you lose it. 

Because civil forfeiture is a civil procedure, none of the protections that would apply to a criminal defendant apply.  Essentially, your property is “presumed guilty,” and if you can’t prove that it’s “innocent,” you can lose it.

In the United States, civil forfeiture is a gravy train for local police and the federal government.  Each year, billions of dollars of assets are confiscated from owners who in many cases are never charged with any crime.  The proceeds of the forfeiture need not be disbursed to the alleged "victims" of the crime your property supposedly was involved in.  Instead, police get to keep it.  This sets up an insidious bounty hunter mentality where instead of focusing on preventing crime, law enforcement agencies focus on seizing the richest, legally undefended assets they can find.

The attractions of a legal procedure like civil forfeiture to law enforcement agencies are obvious.  And because of the "success" of civil forfeiture laws in the United States, other countries are bringing them into effect.

Case in point: Canada.  In Ontario, a civil forfeiture law enacted in 2001 to be used against "organized crime" permits the province to seize assets if it can show on the balance of probabilities the assets were acquired directly or indirectly “in whole or in part” as a result of any illegal activity.  Now that the law has been upheld by the Ontario Court of Appeal, the attorney general of Ontario predicts “exponential growth” in the use of the seizure powers.

Only, the law isn't being used against organized crime. Instead, it's mostly been used to confiscate "grow houses" where marijuana is cultivated.  In numerous cases, the owner of the house has claimed not to be aware of the illegal activity.  But innocence is no defense in a civil forfeiture, as the Court of Appeal decision held that the Canadian Charter of Rights—which guarantees that a person is innocent until proven guilty—doesn't protect property rights.

A recent report from the Ontario attorney general’s office states that C$3.6 million in property has been seized in the past four years in 170 proceedings.  Nearly C$1 million of these funds have been transferred to municipal police forces.  And based on these results, lawmakers in five other provinces have introduced similar legislation. 

If you live or do business in Canada—particularly if you own rental property—the proliferation of civil forfeiture laws should be a grave concern.  Policing for profit is a burgeoning enterprise in Ontario, and may soon be a reality in most other provinces as well. 

How can you protect yourself?  The easiest strategy is simply to keep your property heavily mortgaged.  If there's little or no equity in the property, police have very little incentive to seize it.  It's also a good idea to periodically inspect your property to make sure your tenants aren't using it illegally.  Ontario law is typical in this regard: you may enter a leased residence you own if you give your tenant 24 hours written notice of entry.

Learn dozens more strategies to protect your property from "legal theft"—click here.

Copyright © 2007 by Mark Nestmann

You Can Sue Anyone…Even God

With earthquakes, tsunamis, and hurricanes increasing in severity, not to mention war and pestilence, there must be someone to blame.  And more important, someone to sue.

Now, the state of Nebraska's Sen. Ernie Chambers has filed a lawsuit against who he believes is responsible for these calamities: God.

Yes, God.  Chambers' lawsuit, filed in Douglas County, alleges that God is violating his constitutional rights.  The lawsuit not only accuses God of making terrorist threats against Chambers and his constituents, but also of causing "widespread death, destruction and terrorization of millions upon millions of the Earth's inhabitants."  It asks for a permanent injunction ordering God to "cease certain harmful activities and the making of terroristic threats."

Some naysayers might have doubts about whether the Nebraska courts have jurisdiction over God.  However, Chambers bases his ability to sue God, as, "that Defendant, being omnipresent, is personally present in Douglas County."

While Chambers' lawsuit blames God for causing natural disasters and making terrorist threats, others might blame Satan.  Or even sue him.  In a Pennsylvania lawsuit filed in 1971, Gerald Mayo alleged that Satan had caused him misery and made unwarranted threats against him, in addition to placing deliberate obstacles in his path that caused his downfall.  Like Sen. Chambers, Mr. Mayo alleged that Satan had deprived him of his constitutional rights.  Unfortunately for Mayo, the court rejected his lawsuit.  And in a ruling that bodes ill for Chambers' lawsuit, the judge questioned whether Mayo would be able to obtain personal jurisdiction over Satan. 

Not to be outdone, Satan himself—or perhaps a Satanic impersonator—can also demand his day in court.  In a 1990 case, someone claiming to be "the beast 666 of the Lord of Hosts" filed a lawsuit claiming that his civil rights had been violated in a series of incidents arising out of "a peaceful non demonstration demonstration" in the city of Lansing, Michigan.  Unfortunately for Satan, or his earthly representative, the lawsuit was again dismissed.

And what, patient reader, does this discussion prove?  If nothing else, it demonstrates that in the United States, you can indeed sue anyone—or any being—under whatever absurd cause of action you can dream up.  If you're the target of a harebrained plaintiff who is out to "get" you, you must defend yourself in court, no matter how dubious the merits of the lawsuit.  That costs money—and time. 

Frivolous lawsuits are a way of life in the United States.  As Ernie Chambers' lawsuit against God demonstrates, they're not going away anytime soon.  To protect yourself, follow the steps you've read about in my blog and in other Sovereign Society publications, including maximizing your holdings of "exempt assets" (property that can't be seized if you lose a lawsuit).  Also, consider relocating assets to offshore jurisdictions where a lawsuit against God, or against Satan, would not only be thrown out of court, but result in severe sanctions against whatever plaintiff was crazed enough to file it.

Copyright © 2007 by Mark Nestmann

Who Can Read Your Stored E-Mail? Almost Anyone!

If you have the quaint idea that the e-mails stored in your Yahoo!, G-Mail, Hotmail or other "Webmail" accounts are somehow private, think again.  With one exception (see below), U.S. government investigators can read them, and now, private companies can do so as well in the name of "copyright protection."

It wasn't supposed to be this way.  Back in 1986, Congress passed a bill called the Electronic Communications Privacy Act (ECPA).  It was intended to extend the privacy protections that applied to telephone conversations on ordinary "land-line" telephones to e-mail, cellular phones, and computers. 

Naturally, like most other privacy laws in the United States, the ECPA has lots of exceptions.  One of the most glaring exceptions applies to e-mail or voice messages stored on an your Internet service provider's or telephone company's computers.  To read your stored emails or listen to your stored voice messages, police only have to demonstrate that the information it is seeking is relevant to an investigation.  They don't have to establish that there's probable cause of any crime.  (If you live in the states of Kentucky, Michigan, Ohio, or Tennessee, your stored e-mails have greater protection.  See my blog posting here)

An even broader exception may apply in civil cases involving copyright infringement.  In August, a U.S. District Court ruled that in a copyright dispute, the party alleging infringement can conduct ongoing surveillance of another party's stored e-mail messages, without their consent or other legal authorization, and not violate federal wiretap laws.  Indeed, the broad language of this decision makes it appear that it's legally impossible to intercept e-mail in a way that violates federal wiretap laws. 

I highly recommend that you go to any Webmail accounts you have and delete any messages that don't demand an immediate response. Make sure to empty your trash folder, as well.  If you want to keep a permanent record, keep one on your own PC, not online.

That advice applies no matter where you live, if you're using a U.S.-based Webmail service.  Since the servers are based in the United States, if police in the United States (other than in these four states) want to read your e-mail without a warrant, they can do so. That's true even if your country's law requires a warrant to read them.

Another good idea is to set up a free account at Hushmail (http://www.hushmail.com).  This company's servers aren't U.S.-based, so it's not subject to U.S. jurisdiction.   Plus, it's possible to send encrypted e-mails to other Hushmail users. 

And speaking of encryption...if you really want to protect your e-mail, encrypt any messages you wouldn't want published on the front page of The New York Times.  Unless someone manages to get hold of your encryption keys, and passphrase, anyone trying to read your messages will only see undecipherable gibberish.  PGP Desktop (http://www.pgp.com) is an excellent choice. 

For more information on protecting your privacy, on and off the Internet, click here.

Copyright © by Mark Nestmann

Why are You REALLY Investing Offshore?

I tried to open my first offshore bank account in 1986, at the Chicago office of a major Swiss bank (NOT something I would recommend today).  After being ushered into a conference room, an attractive 30-something woman came in and introduced herself.

"What makes you interested in a Swiss bank account,?" she asked me.

I wasn't prepared for the question.  But I told her that I was interested in holding Swiss francs as a hedge against the declining value of the U.S. dollar, and potentially make investments in other currencies.  I didn't mention anything about my desire to protect financial privacy.

Nonetheless, I was still turned down, although for a more prosaic reason—lack of funds.  I wanted to open a US$20,000 account, but the minimum at the time was US$100,000. 

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Introducing the foreign country...

Where Your Banker Tells Anyone Snooping into Your Account to "Take a Hike!"
I'll give you a hint...it's not Switzerland. It's not Panama. It's not even Liechtenstein.

But this country's bankers have steadily and quietly maintained their clients' financial privacy for the more than half a century!

And those "in the know" don't even think of this country as an "offshore haven."

So it's the last place private investigators, contingency lawyers or nosy relatives will look for your wealth. Click here to learn more about this fascinating country.

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I was reminded of this incident last week, when a reader—I'll call her Sue—who told me of an incident she recently experienced at an offshore bank.  When asked the same questions I was asked 20 years ago, Sue told the representative that she wanted an offshore bank account because of privacy concerns.  Her major concern was being targeted for a frivolous lawsuit because of her vulnerability and the ease of retrieving financial information in the United States.  Sue also told the banker that she wanted to learn about foreign investments through the bank account.  Finally, she mentioned that she was concerned about the possibility of being wrongly targeted for asset seizure due to some trumped up charge.

Sue was told that the offshore bank did not offer accounts for the reasons she had stated.  The banker's decision could be appealed to a manager, but only if Sue sent the bank certified copies of:

·    A reference letter from her U.S. bank,
·    A letter from her personal lawyer,
·    A letter from her employer verifying employment and length of service, and
·    A letter from her accountant certifying that her U.S. taxes were in order.

This was in addition to information Sue had already provided, including copies of her passport, a utility bill (to verify her residential address), and a notarized statement stipulating that all funds that she would be depositing into the account had a legitimate source.  The additional information was needed, the banker stated, in order to comply with the bank's anti-money laundering policies. 

Learn more about offshore investments, offshore banking, offshore bank secrecy, and offshore asset protection by clicking here.

Copyright © 2007 by Mark Nestmann

The U.S. Citizenship Through Bribery Program

It's not well known, but if the U.S. government wants a foreign citizen to testify in a U.S. legal proceeding, it can offer that person the promise of U.S. citizenship and passport.  Plus a substantial "incentive payment." 

Naturally, this isn't officially considered bribery.  It's perfectly legal, and indeed, judges routinely instruct juries not to consider such compensation as affecting the truthfulness of the testimony offered. 

A case in point is the trial now underway in New York of 83-year-old Oscar Wyatt, the founder of Houston's Coastal Corp.  Wyatt, a living legend in the oil business, stands accused of complying with a demand from former Iraqi dictator Saddam Hussein to pay surcharges on oil exported from Iraq in connection with the United Nations "Oil for Food" program. 

This program, in effect from 1995-2003, allowed Iraq to sell oil on the world market in exchange for food, medicine, and related items.  It was designed to provide Iraqi citizens with living necessities without allowing Saddam Hussein to rebuild his military. 

Throughout its existence, critics accused U.N. officials and others of helping to unlawfully divert oil-for-food revenues to the Iraqi government.  These payments occurred on a massive scale: a 2005 report from a commission headed by former Federal Reserve Chairman Paul Volcker concluded that approximately 2,000 firms paid bribes and surcharges.  As a result, the Iraqi government received an estimated US$1.8 billion in "illegal"—non-U.N. approved—revenues.

Very few executives of these 2,000 firms been indicted for as much as petty larceny.  Oscar Wyatt is by far the highest-profile defendant yet to be placed on trial.  Now, the Bush administration is determined to put Wyatt in prison for the remainder of his life for doing what thousands of other executives are alleged to have done, without having been prosecuted.  And they're pulling out all the stops to do it. 

The feds have already paid US$115,000 to Mubdir Al-Khudhair, a former official of Iraq's State Oil Marketing Organization, in exchange for testifying against Wyatt.  They've also promised Al-Khudhair, his wife, and his son eventual U.S. citizenship.  Prosecutors also paid  US$150,000 to Yacoub Yacoub, a former SOMO accountant, and have likewise promised Yacoub and his family eventual U.S. citizenship.  Their testimony is crucial to the government's case, because they reportedly have inside knowledge of the kickbacks Saddam allegedly received from Wyatt. 

Why are the feds out to "get" Wyatt, a World War II hero and the confidant of presidents Kennedy, Johnson, Nixon, Reagan, and Clinton?  No doubt, Wyatt is a controversial figure.  Starting his oil business out of the trunk of his car, Wyatt grew it into a petrochemical giant with US$20 billion in assets, more than 18,000 miles of pipeline, and four world-class refineries.

But Wyatt made many enemies along the way, among them George Bush, Sr.  Not only did he successfully compete against the Bush family in the Texas oil-patch, but Wyatt, a life-long Democrat, supported many of the Bushes' political rivals.  Then in 1990, when George Bush, Sr. was president, Wyatt personally negotiated with Saddam Hussein to win the release of 21 U.S hostages held in Iraq.  Wyatt's success in obtaining the hostages release, after months of fruitless negotiations by the Bush administration, deeply embarrassed George Sr., and earned Wyatt the lifelong enmity of the Bush family. 

Now it's payback time.  The U.S. government, with George Bush, Jr. as president, is spending millions of dollars and promising U.S. citizenship to paid informants to insure that a sick old man spends the remainder of his life in prison. 

Regardless of what you think about Oscar Wyatt, is it proper to cheapen the value of U.S. citizenship by promising it to paid snitches in selective prosecution of political enemies of the president's family?  On the sixth anniversary of the tragic events of Sept. 11, 2001, I think that's a question worth examining.

Copyright © 2007 by Mark Nestmann

New Firewall Recommendation: Comodo

Several months ago, I criticized ZoneAlarm here for tricking users of its superb free firewall into downloading what they're told was version 7.0 of the program, but what was actually trial version for a paid program, ZoneAlarm Security Suite.

Since then, I've been searching for a replacement for ZoneAlarm.  I've finally found one which I like even better: the Comodo free firewall (http://www.comodo.com). 

Comodo has a look and feel quite similar to ZoneAlarm Pro, the paid version of the free ZoneAlarm firewall.  It alerts you whenever your PC tries to make a connection to the Internet, and permits you to accept or deny the connection. 

Crucially, and unlike the free version of ZoneAlarm, Comodo also alerts you when a program you've approved to connect to the Internet appears to be connecting on behalf of another process.  Since Trojan Horse programs that take over your PC often hijack other applications to connect to the Internet, this is an important function.  It also resists being terminated by viruses or other malware that try to turn off your firewall so they can connect to the Internet without detection.

Comodo was easy for me to set up—I was up and running in about 10 minutes. 

Comodo free firewall offers excellent protection, on a par with ZoneAlarm Pro.  Highly recommended if you don't already have firewall protection installed, or if you're relying on the inadequate firewall built into Windows XP.

Copyright © by Mark Nestmann