Steering Into the Storm:Amplification of Captive Insurance Company Compliance Issues in the Offshore Tax Crackdown

Beckett G. Cantley*

The final version of this article is published at 12 Hous. Bus. & Tax L.J. 224 (2012)

TABLE OF CONTENTS

I.          Introduction

II.         Captive Insurance Companies

A.         In General

B.         Captive Insurance Company Benefits

1.         Tax Benefits of a CIC

2.         Other Benefits of a CIC

C.         IRC § 831(b) CIC Requirements

1.         Operating as an Insurance Company

2.         Risk Shifting

3.         Risk Distribution

D.         Current IRC § 831(b) CIC Compliance Risks

1.         Improper Use of Risk Shifting and/or Risk Distribution

2.         CIC Investments in Life Insurance

3.         Loan Backs to CIC Shareholder and/or Insured

4.         Estate Planning Ownership Structures

III.      The IRS Offshore Attack

A.          The Wyly Brothers’ Senate Hearing

B.          The Voluntary Disclose Initiative

C.          The Qualified Intermediary Regime

D.          Proposed Legislation

E.          Increased Offshore Audits

F.           Unreported Foreign Bank Accounts

G.          The U.S.-Swiss Tax Information Exchange Agreement Revisions

H.          The UBS Case

I.           US Taxpayer Criminal Prosecutions

J.           Foreign Bank Criminal Deferred Prosecution Agreements

1.         Credit Suisse

2.         Wegelin

3.         HSBC and Asia

4.         Israeli Banks

K.         Advisor Criminal Prosecutions

IV.        Offshore Captive Insurance Companies

A.         Exposure to the U.S. Tax System

1.         IRC § 953(d) Election

2.         The Federal Excise Tax

            B.         Capitalization Burden

C.         Investment Flexibility

D.         Asset Protection

V.         Conclusion: CIC Compliance Issues Amplified by the Offshore Tax Crackdown

 

I.          Introduction

A CIC is a corporation created to offer insurance to companies that are related parties to the CIC, either in a parent (CIC) – subsidiary (insured) relationship or where the CIC owners also own the insured company.[1]  The non-tax benefits of a CIC include premium cost stabilization; elimination or reduction of brokerage commissions and marketing expenses; lower administrative costs;[2] the ability to provide niche coverage for a unique or specific risk that would not otherwise be transferable in the commercial insurance market; and the potential to control certain CIC investment decisions and portfolio management.[3] The tax benefit of an IRC § 831(b) CIC are extensive.  Premiums paid to a CIC by its shareholder insured are generally deductible, similar to the deductibility of premiums paid on commercial insurance.[4]  IRC § 162(a) provides that there shall be allowed deductions on necessary and ordinary expenses incurred in carrying on a business,[5] and Treas. Reg. 1.162-1(a) states that business expenses include insurance premiums on policies covering certain business losses.[6]  IRC § 831(b) provides that certain electing insurance companies may receive tax-free annual premiums up to $1.2 million,[7] although the CIC would still be liable for tax on its investment earnings.  As such, the shareholder insured deducts the premium payments, the CIC receives the premium payments tax-free, and will not be taxed on the premiums until the CIC makes a dividend distribution or the CIC stock is sold – either of which would be at long-term capital gains rates (15%)[8] instead of ordinary income rates (35%).[9]  However, to achieve these tax benefits, a CIC must be considered an “insurance company” and the arrangement must be considered an “insurance contract”.[10]

To meet the above-referenced “insurance” requirements, each CIC with U.S. shareholders must use IRS safe harbors or otherwise to both show: (i) that it has properly shifted the risk of economic loss (“risk shifting”) from the insured to the insurer; and (ii) that the insurer has adequately distributed the risk among several insurance companies (or other unrelated entities) so that no particular insurance company (or entity) has all the risk for an economic loss.[11]  The IRS is also aware of certain less-prevalent IRC § 831(b) CIC tax-motivated compliance problems, that include: (i) the use of life insurance on the CIC owner’s life as a major investment of the CIC; (ii) engaging in tax motivated loan back arrangements between the CIC and its owners; and (iii) structuring the CIC ownership in the name of a children’s trust (or other entity) to avoid Federal Estate and Gift Taxes.  A CIC engaging in any of these compliance issues are likely to eventually come under significant scrutiny by the IRS and face serious consequences if done non-compliantly.

An important decision when forming an IRC § 831(b) CIC is whether to be governed by the laws of a U.S. state or a foreign jurisdiction.  The factors that CIC shareholder must review several factors before making this decision, including: (1) exposure to the U.S. tax system; (2) the capitalization burden at formation; (3) the investment flexibility afforded the CIC; and (4) the asset protection afforded the U.S. shareholders of the CIC.  As discussed below, these factors do not weigh in a significant way for U.S. taxpayers to choose to form in a foreign jurisdiction.  However, any IRC § 831(b) CIC choosing to form offshore may end up compounding all the above-described potential compliance risks by virtue of ending up eventually in the middle of the ongoing IRS offshore tax crackdown.

The IRS and DOJ have used various investigatory and compliance devices to gather significant information on offshore tax activities of U.S. taxpayers, including but not limited to: holding Congressional hearings; the VDI programs; the Qualified Intermediary regime; increased offshore audits; and international tax treaties.  The DOJ has used the information to launch civil and criminal tax cases against U.S. domestic and offshore clients, advisors, and banks – warning that U.S. tax avoidance overseas will receive serious scrutiny.[12]  Negative consequences for non-compliance offshore may include large civil and criminal tax penalties, including indictments for tax evasion, conspiracy to defraud, money laundering, wire fraud, and violations of the RICO Act.[13]  This IRS and DOJ offshore tax crackdown appears as if it will continue to increase in size and scope for the foreseeable future.  As the offshore tax enforcement push expands, compliance and audit costs for even a fully compliant foreign CIC may rise significantly.  The fact that a tax beneficial entity (like a CIC) is formed and maintained in a foreign jurisdiction may end up making it a more attractive target for an IRS audit, and the scrutiny received in such an IRS audit may be significantly heightened by virtue of the anti-offshore bias derived from the current international enforcement push.  Thus, the choice to be an offshore CIC may result in its compliance costs being prohibitive (if compliant) at best, or it may find itself the target of serious penalties (if non-compliant) at worst.

This article provides: (i) an overview of the benefits and requirements of an IRC § 831(b) CIC; (ii) the compliance issues surrounding such a CIC; (iii) a detailed discussion of the progression of the IRS offshore crackdown; (iv) an analysis of the rationales for choosing an offshore jurisdiction for forming a CIC; and (v) a discussion of the IRS crackdown’s potential negative effect on the choice to utilize an offshore IRC § 831(b) CIC.   

II.         Captive Insurance Companies

A.         In General

A CIC is a corporation created to offer insurance to companies that are related parties to the CIC, either in a parent (CIC) – subsidiary (insured) relationship or where the CIC owners also own the insured company.[14]  Most major US corporations currently legitimately use a CIC for valid insurance purposes.[15]  The organizational structure of a CIC is quite similar to a mutual insurance company for a very limited number of participants.[16]  However, a CIC is subject to heightened IRS regulations and scrutiny, due to the valuable preferential tax benefits afforded a CIC (addressed below) and the unusually close relationship that generally exists between a CIC and the insured.[17]  The IRS may “challenge certain captive insurance transactions based on the ‘facts and circumstances’ of each case.”[18]  Revenue rulings issued in 2002 and 2005 subsequently provided guidance on what “facts and circumstances” the IRS would scrutinize.[19]  This article discusses CIC arrangements that are covered by IRC § 831(b), so the reader should infer that all references below to a CIC are to an IRC § 831(b) CIC, unless otherwise noted.

B.         Captive Insurance Company Benefits

  1. Tax Benefits of a CIC

A parent corporation that wishes to self-insure against certain risks may face taxation on reserve investment income at the highest corporate rate.[20]  In the corporate shareholder context, a CIC may operate as a subsidiary corporation formed to insure the risks of a parent corporation without incurring the income tax problems associated with self-insurance.  Of course, a CIC can also be set up with non-corporate shareholders, who may also be the shareholders of the insured entity.  Premiums paid to a CIC by its insured entity are generally deductible, similar to the deductibility of premiums paid on commercial insurance.[21]  IRC § 162(a) provides that there shall be allowed deductions on necessary and ordinary expenses incurred in carrying on a business.[22]  Treas. Reg. 1.162-1(a) states that business expenses include insurance premiums on policies covering fire, storm, theft, accident, or similar losses in the course of business.[23]  However, in order for premiums paid to a CIC to be considered tax-deductible under Treas. Reg. 1.162-1(a), a CIC must be considered an “insurance company” and the arrangement must be considered an “insurance contract” (See subsection below for a discussion of CIC requirements).[24]

IRC § 831(a) provides that tax shall be imposed under IRC § 11 on the taxable income of any insurance company other than life insurance companies.[25]  However, IRC § 831(b) provides that a non-life or property and casualty insurance company, which receives annual premiums not to exceed $1.2 million, can elect to receive this premium tax-free.[26]  Therefore, as long as a CIC maintains business operations that aggregate less than $1.2 million in annual premiums paid, the CIC would incur no tax on underwriting income earned on premiums paid.[27]  The CIC would still be liable for tax on its investment earnings, but the CIC could eliminate these taxes by investing in tax-free investments (such as municipal bonds).

In this scenario, the shareholder insured deducts the premium payments, the premium payments are received tax-free by the CIC, the CIC earns investment returns tax-free on pre-tax dollars, and is only taxed when either the CIC makes a dividend distribution or the CIC stock is sold.  In either of these cases, the dividend or sale would be taxed at the long-term capital gains rates, under current law, rather than at the rate applicable to ordinary income.[28]  Since the value of the premiums paid tax deduction to the parent is likely at least thirty-five percent (35%),[29] the fifteen percent (15%) rate[30] creates quite a large tax arbitrage.

Essentially, the use of a CIC may defer the realization of ordinary income and may even re-characterize ordinary income as capital gain to the parent corporation.[31]  Also, a CIC may allow a company that self-insures to accelerate the tax deduction that would otherwise accrue at the time the self-insurance contingency occurs.[32]  Obviously, these various tax breaks cumulatively act to create a significant tax reduction opportunity for companies that have certain significant insurance needs that fit a CIC structure.  In addition to these tax benefits, there are several financial and insurance benefits afforded a CIC that also make a CIC attractive to its owners (discussed immediately below).

2.         Other Benefits of a CIC

A CIC offers its owners many non-tax benefits.  For example, a CIC may be used as a means of cost stabilization for an insured that has grown tired of paying increased rates in the commercial insurance market.  Furthermore, avoiding the commercial insurance market can eliminate or reduce brokerage commissions, marketing expenses, and administrative costs.[33]  Administrative costs may include the cost savings from preventing litigation and controlling the claims review process to reduce incidents of insurance fraud.  If the CIC has a positive claims experience, essentially “winning its gamble” with the insured, then the CIC stands to generate tremendous underwriting profit for the CIC owners, which would otherwise be lost to a commercial insurer.[34]  In addition, a CIC can provide niche coverage for a unique or specific risk that would not otherwise be transferable in the commercial insurance market.

Lastly, the premiums paid into a CIC may be invested, which may increase the surplus of funds in the CIC.  Furthermore, the parent entity may generally exercise some control over the investment decisions and portfolio of the CIC.[35]  All of these tax and non-tax benefits are available to IRC § 831(b) CIC owners, provided the statutory requirements are met, as discussed in the next section of this article.

C.         IRC § 831(b) CIC Requirements

The premiums paid to a CIC are non-deductible and non-excludable from income under IRC § 831(b) where a CIC is not considered an “insurance company” or an arrangement is not considered “insurance” for federal income tax purposes.[36]  The IRS will examine CIC arrangements closely and may attack a CIC based upon the individual facts and circumstances present.[37]

  1. Operating as an Insurance Company

If a CIC does not meet the definition of an “insurance company,” the entity will not be granted the favorable tax treatment allowed for insurance companies and may incur C corporation double taxation on all of the entity’s income.[38]  In order for a CIC to be considered an insurance company, the CIC must be operated in a manner consistent with being primarily in the business of insurance.  Treas. Reg. 1.801-3(a) provides that an insurance company is a company whose primary and predominant business activity is the issuance of insurance or annuity contracts, or the reinsuring of risks underwritten by insurance companies.[39]  IRC § 816(a) defines “insurance company” as any company more than half the business of which is the issuing of insurance or annuity contracts, or the reinsuring of risks underwritten by an insurance company.[40]

A CIC will not be considered a bona fide insurance company where the CIC charges commercially unreasonable premiums or engages in other non-arms length transactions.[41]  The existence of underwriting and management fees payable to the CIC is indicative of the existence of a bona fide “insurance company.”[42]  However, arms length dealing and the existence of separate management and underwriting fees are not dispositive—the CIC must be operated as an insurance company in various other facets as well.[43]  The CIC should employ licensed professionals to handle management, underwriting, accounting, and audit roles.[44]  Furthermore, the CIC must meet local licensing and capital requirements for insurance companies.[45]  These requirements vary by jurisdiction, but are oftentimes minimal in “offshore” jurisdictions, such as Bermuda or the Cayman Islands.[46]  Of course, a CIC may be formed under the laws of any number of domestic State jurisdictions as well, including but not limited to Delaware, Vermont, Utah and South Carolina.

In order for a CIC to be an “insurance company” it must issue “insurance” through “insurance contracts.”[47]  The IRC does not define what constitutes “insurance” or an “insurance contract.”  Generally, in order to be considered insurance for federal income tax purposes, an arrangement must transfer the risk of economic loss,[48] must contemplate the occurrence of a stated contingency,[49] and must constitute more than simply an investment or business risk.[50]  The Supreme Court of the United States (“Supreme Court”) has held, in Helvering v. LeGierse, that in order for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present.[51]

In Helvering, an elderly taxpayer, who was uninsurable, purchased a life policy and a life-only annuity policy one month before the taxpayer’s death.[52]  By purchasing the annuity policy from the same insurer, the taxpayer effectively offset the insurer’s risk.[53]  The taxpayer’s primary purpose for purchasing the life insurance policy was to obtain preferable estate tax advantages offered.[54]  The Court decided that there was no risk shifting in this case because the life insurance policy and the life-only annuity contract offset one another.[55]  As a result, the taxpayer was in the same economic position before and after purchasing the policies.[56]  The Helvering case illustrates the need for risk shifting in a proper insurance policy, which is discussed next, below.

  1. Risk Shifting

Risk shifting must occur in any arrangement for the arrangement to be considered insurance.[57]  Risk shifting occurs where a party facing the risk of a large economic loss transfers some (or all) of the financial consequences of such potential loss to the insured.[58]  Risk shifting generally requires: enforceable written insurance contracts; premiums negotiated and actually paid at arms-length; and the insurance company to be a separate entity capable of meeting its obligations and formed under the laws of the applicable jurisdiction.[59]  The test for risk shifting is whether the premium paying party has truly transferred risk of loss.[60]

In Humana, Inc. v. C.I.R.,[61] the Supreme Court held that an arrangement solely between a parent company and a subsidiary insurance company did not constitute “insurance” for federal tax purposes because risk shifting was not present.[62]  The Humana court noted that the comparison between an arrangement between a parent entity and a wholly owned CIC and a reserve for self-insurance cannot be ignored.[63]  The court further reasoned that the economic reality of the situation was that the parent entity did not truly transfer risk of loss to the CIC since any loss would be incurred by the parent entity as the only CIC owner.[64]

However, in Humana, the Supreme Court also held that an arrangement between a subsidiary insurance company and several dozen other subsidiaries of the parent corporation constituted insurance, since elements of risk shifting were present.[65]  The Humana court reasoned that arrangements between a CIC subsidiary of a parent entity and other subsidiaries of a parent entity did not entail the same risk of loss arguments as does an arrangement directly between a CIC and the parent entity.[66]  The court implied that a loss suffered by the CIC would not necessarily translate into a loss suffered by the subsidiary insured since there would be other claims histories involved to counteract the effect of a CIC loss on the assets of the subsidiary insured.[67]

The Humana court noted that the doctrine of substance over form could be used to challenge the existence of separate and distinct entities, which are required to ensure the existence of risk shifting.  The Humana court noted, however, that this doctrine will only be applied where there exists no valid business purpose for the transactions or where there exists a clear Congressional intent to curtail the transactions in question.  The Humana court noted that Congress has not yet manifested a intent to disregard the separate corporate entity in the context of captive insurers.  Furthermore, a CIC can almost always display a valid business purpose for maintaining separate entities with proper planning.  Therefore, the substance over form argument used to challenge the existence of risk shifting is generally fruitless, unless the transaction is found to be devoid of economic substance aside from mere tax benefits (discussed further below, infra).

Since Humana, the IRS has provided broad “safe harbor” rulings.  The main “safe harbor” provision is found in Rev. Rul. 2002-90.  In Rev. Rul. 2002-90, the IRS explained that an arrangement of at least 12 subsidiaries paying premiums to an affiliated CIC constitutes effective risk shifting where each subsidiary has no more than 15% and no less than 5% of the total risk insured and none of the claimed twelve subsidiaries are disregarded entities.[68]

Following the promulgation of broad “safe harbor” provisions, the IRS only appears eager to challenge a CIC on the grounds of risk shifting in the most egregious and abusive of circumstances.[69]  Characteristics of risk shifting may also be lacking where guarantees exist to remove the presence of a CIC risk of loss and where contracts are not entered into at arms length.[70]  Lastly, the IRS may consider other factors in a risk shifting challenge, such as: whether the insured parties truly face hazard of economic risk in an amount which justifies premium payments made at commercially reasonable rates; whether the validity of claims was established before insurance claims were paid; and whether the CIC business operations and assets are kept segregated from the business operations and assets of the parent company.[71]

  1. Risk Distribution

Risk distribution is also required for an arrangement to be considered insurance.[72]  Risk distribution utilizes the law of large numbers.  The idea is that the risk that a single costly claim will exceed premium payments for a given time decreases over longer periods of time, and with a greater number of insured’s in a given pool.[73]  Risk distribution involves the pooling of insurance premiums from separate entities so that the insured is not paying for a significant part of its own risks.[74]

The focus of a risk distribution analysis is broader than that of a risk shifting analysis.[75]  A risk distribution analysis looks more to the insurer as to whether the risk insured against can be distributed over a larger group, rather than the relationship between the insurer and any single insured.[76]  Unfortunately, there exists little authority, which adequately addresses what constitutes risk distribution once risk shifting has been found.[77]  However, in Humana, the court found that an arrangement, in which a CIC insures multiple subsidiary insureds from a single affiliated group, constitutes valid risk distribution since the premiums paid by each insured may be used to offset the CIC losses as a whole.[78]  The courts have never established a floor for sufficient unrelated business to constitute risk distribution, but the courts have ruled that 2% is insufficient and that 30% is sufficient.[79]

The benefits of a CIC are clear.  IRS safe harbors provide formation and operational compliance guidance.  Next, this article provides an overview of some of the compliance issues that are brewing for every IRC § 831(b), although this list is in no way exhaustive.  The reason for outlining these compliance risks is to illustrate examples of things that may be compounded by making use of an offshore jurisdiction for a CIC.  As the compliance hot button list grows, even a fully compliant CIC may see its compliance and audit costs rise substantially when it is located in a foreign jurisdiction by virtue of the IRS’ current bias against U.S. taxpayers doing tax avoidance transactions outside of the U.S.

D.         Current IRC § 831(b) CIC Compliance Risks

In addition to the above risk shifting and risk distribution requirements applicable to every CIC, there are currently a few specific CIC activities that are of particular interest as compliance issues to the IRS.  While most IRC § 831(b) CIC arrangements avoid these compliance issues, a growing number of CICs are either exposed to or undertake these problematic additions to their CIC planning.   One of these compliance issues involves the use of life insurance on the CIC owner’s life as a major investment of the CIC (discussed immediately below).

1.         CIC Investments in Life Insurance

The life insurance industry has, numerous times, attempted to construct an arrangement to garner tax-deductible life insurance premiums or to provide tax-deductible financing for the purpose of purchasing life insurance.  These arrangements have included but not been limited to Company Owned Life Insurance (“COLI”) plans;[80] IRC § 419 plans;[81] IRC § 412(i) plans;[82] and Producer Owned Reinsurance Companies (“PORCs”).[83]  However, in each of these arrangements, the IRS has quickly closed the tax loopholes by designating these transactions as “listed transactions.”[84]  The end result for taxpayer participants in such arrangements has been expensive litigation, generally unfavorable results, and even accuracy-related taxpayer penalties.[85]

The life insurance industry’s latest attempt to provide an income tax incentive for the purchase of life insurance is setting up an IRC § 831(b) CIC and having the CIC invest in life insurance on the CIC/business owner’s life.[86]  The theory behind this arrangement is that the small business owner’s funding of the CIC may be treated as an ordinary and necessary business expense under IRC § 162.  An ordinary and necessary business expense is tax deductible, so the CIC premiums are made tax-free.[87]  In the context of an IRC § 831(b) CIC, such business-risk insurance premiums may be deductible up to $1.2 million per year, and these premiums are also not included in the taxable income of the CIC.[88]  Theoretically, the CIC could then purchase life insurance on the small business owner’s life with pre-tax dollars as an investment.[89]  Although these separate steps each meet the formalities of the IRC, the IRS may still attack these arrangements as a whole under various judicial doctrines designed to combat abusive tax structures.[90]  These judicial doctrines include, but are not limited to, the “sham transaction doctrine;” the “economic substance doctrine;” the “step transaction doctrine,” and the doctrine of “substance over form.”

Congress intended that premiums paid on personal life insurance be non-deductible.[91]  Life insurance purchased by a small-business owner’s CIC may appear to be for business purposes, but this insurance does not benefit anyone other than the small business owner and their family.  The IRS has a long history of successfully attacking life insurance arrangements that alter the form of transactions for the purpose of garnering tax benefits, and small business owners would be wise to take notice of the inherent risks involved with participation in such an arrangement.

This subject matter is explored in detail in another law review article by the author of this article.  That article discusses (i) the purpose of tax benefits for the purchase of life insurance; (ii) the historical attempts to provide income tax incentives for the purchase of life insurance; (iii) how the IRS has used several judicial tax doctrines to combat such programs; and (iv) how these judicial tax doctrines are likely to be extended to the current use of a CIC as such an income tax incentivized program for the sale of life insurance.   While the life insurance issue is a significant CIC compliance issue, it is not the only one.  The CIC “loan back” problem is discussed immediately below.

2.         Loan Backs to CIC Shareholder and/or Insured

Some aggressive planners may attempt to engage in tax motivated loan back arrangements between an IRC § 831(b) CIC and the CIC owners.  In such an arrangement, the owners would find loan backs from a CIC beneficial because the owners could make use of the funds while enjoying a deferral of the realization of insurance underwriting income.  The IRS and the U.S. Department of Justice (“DOJ”) have historically challenged schemes wherein a taxpayer engages in a non-taxable loan back transactions from a tax-deferred investment vehicle,[92] viewing such an arrangement as inherently fraudulent.[93]  If a shareholder of the CIC is able to make use of the funds while enjoying tax benefits Congressionally intended only for certain true investment vehicles, the IRS and DOJ may assert that the arrangement is solely a tax-motivated transaction.  IRC §§ 6662 and 6663 impose accuracy-related penalties of between 20% and 75% of the underpayment amount of income tax where one or more of certain factors are present,[94] including where the transaction lacks economic substance,[95] or is deemed fraudulent.[96]  Of course, the DOJ may also bring criminal charges of defrauding the US and/or conspiracy to defraud the US of tax revenue where the arrangement is found to constitute fraudulent tax evasion.[97]  Thus, it is important for taxpayers to be aware under what circumstances the IRS and DOJ may assert that a loan back arrangement is actually, in substance, a tax-motivated or fraudulent transaction.

The government has yet to specifically address the validity of CIC loan back arrangements either civilly or criminally.  As such, reviewing the historical non-CIC loan back and fraudulent related party loan cases currently provide the best guide for predicting how the IRS and DOJ may view CIC loan back transactions.  The structures in several of these prior cases are factually and legally very similar to a CIC loan back arrangement, so the legal attacks and consequences are likely a fair analogy to how a CIC loan back case would proceed.  The most common judicial and codified doctrines, as exemplified in the analogous loan cases discussed immediately above, are that the IRS and DOJ utilize to argue a transaction is a tax scheme are (i) the lack of bona fide indebtedness; (ii) the sham transaction doctrine; and (iii) the economic substance doctrine.  In some cases, the facts of the transaction may lead to an argument that the arrangement additionally constitutes criminal fraud.[98]

The above CIC loan back issue is discussed in detail in another law review article by the author of this article.  That article discusses (i) the structure of a CIC loan back; (ii) the general law of related party loans; (iii) the case law related to certain judicial doctrines; (iv) the civil and criminal penalty regimes that may be applicable to CIC loan backs; (v) the potential application of the historical civil and criminal tax cases that involve tax motivated lending arrangements to future CIC loan back challenged from the IRS and DOJ; and (vi) specifically tying the application of the bona fide indebtedness, sham transaction, and economic substance doctrines to lending arrangements with circular cash flows and/or transactions where the borrower is not actually liable for repayment of the loan.  A less problematic, but still complicating addition to certain CIC arrangements, is the use of a children’s trust to own the CIC shares for estate planning purposes (discussed below).

3.         Estate Planning Ownership Structures

Another CIC compliance issue that is likely to become a source of focus at the IRS is the recent growth in utilizing a CIC for avoiding Federal transfer taxes.  In particular, the planning community is arguing that by having the CIC owned ab initio by a trust (or other entity) that benefits the descendants of the person who owns the premium paying insured entity, the resulting transfer of premium into the CIC will shift the CIC profits to the next generation without liability for Federal Estate or Gift Taxes.   A detailed analysis of this type of transaction is provided in another law review article written by the author of this current paper.

While this transaction likely is technically compliant with the Federal Estate and Gift Tax provisions of the IRC, it may run afoul of the judicial and codified doctrines.  Specifically, it may be difficult to explain the business purpose for having a business owner’s children be the beneficial owners of an insurance company that insures the business of the father-owner.  A court may have a difficult time finding that a father would actually shift real risk to his children’s trust, which may make the court determine that the likelihood of a good faith insurance claim being made seem remote.  In addition, a court may also determine that the real purpose of the arrangement was primarily to transfer wealth in a tax efficient manner to the next generation, not the insurance of business risks.  Thus, it seems relatively certain that the IRS and DOJ may put the parties in interest in the difficult position of reconciling the seemingly contradictory goals of obtaining a real insurance policy for serious business risks, and the preservation of wealth for your children’s beneficial interest.

Now that this article has discussed several of the potential special compliance issues relevant to certain IRC § 831(b) CIC arrangements, the next section describes the broad IRS attack on offshore tax and financial arrangements.

III.       The IRS Offshore Attack

Sen. Carl Levin has been leading investigations of offshore tax evasion for several years, in his role as Chairman of the PSI.  The PSI has heard testimony that these offshore schemes drastically reduce the U.S. government’s ability to monitor its citizens’ financial situations, and significantly add to the “tax gap” that exists between what tax is collected and what tax is actually owed.[99]  As such, the U.S. government has a strong interest in uncovering these schemes to collect the billions in lost in tax revenue.[100]  According to Sen. Levin, these tax schemes shift the tax burden from high-income individuals and large companies onto the backs of middle and working class families.[101]  Additionally, certain countries (such as Switzerland) have strict offshore secrecy rules that can assist unscrupulous taxpayers in committing illicit activity with little fear of getting caught.[102]  These laws are often used as shields for foreign banks to conceal the identities and financial information of U.S. taxpayer accounts from U.S. regulatory authorities.[103] Countries such as the United Kingdom, France and Germany also seek to pressure worldwide financial centers to modify bank secrecy laws.[104]

This part of this article will focus on the U.S. reasons for exerting such pressure, including the billionaire brothers whose scheme gave credence to the concerns outlined in the 2006 PSI investigation[105], the government’s attempt to reign in tax evaders through various versions of the Voluntary Disclosure Initiative (“VDI”)[106], other offshore enforcement issues[107], and non-filers with foreign bank accounts.[108]  This section of the article covers a great deal of ground and detail.  The point of this extensive discussion on the offshore crackdown is to provide a picture of the history and direction of the offshore crackdown, to provide perspective on how broad the scope of the government’s activities are and will likely continue to be in this area.

A.         The Wyly Brothers’ Senate Hearing

In 2005 and in 2006, federal and state agencies investigated brothers Samuel and Charles Wyly for tax evasion.[109]  The 2006 PSI report described a potential tax evasion scheme of the Wylys involving fifty-eight unreported offshore trusts and corporations.[110]  The Wylys transferred over $190 million in stock options they had received from several U.S. publicly traded companies to the offshore entities.[111]  The brothers claimed that the options are not currently taxed because the option transfers were made in a proper exchange for future deferred private annuity payments to be paid by the offshore entities to the Wylys.[112]  In the interim, the brothers proceeded to direct the offshore entities to cash in stock options and start investing the money.[113]  These offshore stock transactions were not disclosed to the U.S. SEC despite the brothers’ positions as directors and major shareholders in the relevant companies.[114]  The PSI was able to trace more than $600 million in untaxed stock option proceeds that Sam and Charles Wyly invested in the various ventures they controlled, including two hedge funds, an energy company, and an offshore insurance firm.[115]

The Wyly brothers ostensibly got away with these avoidant and arguably manipulative tax maneuvers because of the offshore country’s secrecy laws.[116] Although the funds were offshore, the brothers controlled all the account and assets by communicating their directives to a “trust protector,” who relayed directions to offshore trustees.[117]  The PSI investigations revealed that these trustees never once rejected a Wyly order and never initiated an action without direct Wyly approval.[118]  Sen. Levin explained how simple it was for these billionaire brothers to take advantage of a practice dubbed the “Foreign Trust Loophole.”[119]  The PSI called the Wyly brothers in 2006 and they each invoked their Fifth Amendment right and were never asked to testify.[120]  Regardless, the damage was done – the Wyly brothers’ activities had been the ignition spark for a six-year (and counting) extensive offshore tax evasion crackdown.  The first wave of the crackdown would be giving U.S. taxpayers a chance to come clean by voluntarily revealing their illegal activities – the Voluntary Disclosure Initiative.

B.         The Voluntary Disclosure Initiatives

On March 23, 2009 the IRS introduced the first Voluntary Disclosure Initiative (“2009 VDI”).[121]  The 2009 VDI lowered penalties for individuals and companies that voluntarily disclosed previously unreported offshore accounts.[122]  Taxpayers with legal sources of income that made timely and accurate disclosures and paid (or made arrangements to pay) taxes due qualified for the 2009 VDI.[123] By introducing the 2009 VDI, the IRS hoped to create an incentive for noncompliant taxpayers to become compliant by setting forth a circumscribed and favorable penalty framework.[124]  The IRS also hoped to recover lost tax revenue.[125]

The IRS policy goals for the 2009 VDI included creating a mechanism for dealing with a large group of noncompliant taxpayers using offshore accounts.  The IRS hoped to reduce or eliminate the difficulties of obtaining information from offshore banking countries, and to satisfy the requests for certainty from practicing tax attorneys and accountants.[126]  IRS personnel applied the penalty framework to voluntary disclosure requests for previously unreported offshore accounts.[127]  Under the 2009 VDI, taxpayers were required to file or amend all returns for the prior six years and as well as an IRS form called Reports on Foreign Bank and Financial Accounts (“FBAR”).[128]  The IRS agreed to only assess a penalty of 20% of the amount in foreign bank accounts or entities in the year with the highest aggregate account or asset value.[129]  The penalty could be reduced to 5% in the case of certain inherited accounts.[130]  While the program did not guarantee immunity from prosecution, it was the most effective way to avoid criminal penalties.[131]  IRS stated policy is that agents will pursue the maximum for both criminal and civil penalties for taxpayer cases of offshore income not reported to the IRS via the 2009 VDI.[132] The 2009 VDI led to about 15,000 voluntary disclosures and about 3,000 more after the deadline had passed.[133]  The IRS has seen closures of about 95% of the cases from the 2009 VDI program.[134]

In 2011, The IRS introduced a second VDI (“2011 VDI”).[135]  Just as in the 2009 VDI, the 2011 VDI created an incentive to come forward with disclosures in order to avoid penalties enforced as a result of IRS detection.[136]  However, the 2011 VDI included several changes to the 2009 initiative.[137]  Mainly, the penalties for the 2011 VDI were higher than the penalties in 2009 VDI, because the IRS did not want to reward taxpayers for waiting to disclose information.[138]  Since the close of the 2011 VDI last September, hundreds of taxpayers have come forward.[139]  The combination of the 2009 VDI and 2011 VDI produced a total of 33,000 disclosures.[140]

The IRS announced this month that it plans to introduce a third VDI (“2012 VDI”).[141] The overall penalty structure is vey similar to the 2011 VDI,[142] but taxpayers in the highest penalty category will pay a higher penalty (27.5%, up from 25% in 2011).[143]  Another difference between the 2012 VDI and the 2011 VDI is that the new program does not have a set deadline for taxpayers to apply.[144]  Additionally, the IRS has stated that they reserve the right to change the 2012 VDI at any moment going forward and plan to keep the 2012 VDI very open-ended.[145]

The IRS is taking a carrot-and-stick approach to enforcement.[146]  The “stick” is the increased IRS enforcement for those who hide their money offshore and do not report it.[147]  The “carrot” is the reduced penalty for those who come forward.[148]  The IRS is dedicated to increasing the penalty with each new VDI, as seen from the changes in the initiatives from 2009 to 2011 and 2011 to the new 2012 initiative.[149]  The “stick” also includes the new open-ended nature of the 2012 VDI mentioned above.[150]  Jeffrey A. Neiman (“Neiman”), Assistant U.S. Attorney who led the prosecution of UBS, stated the open-ended deadlines “puts pressure on American with oversees accounts to come in now.”[151]

The fact that the IRS has undertaken three separate VDI programs, each with a more draconian penalty regime, shows how seriously the IRS is invested in its offshore crackdown.  The amount of time and resources necessary to implement these programs is extensive, and is very likely the precursor to an even more serious enforcement push against non-compliant taxpayers who have not taken part in any of the VDI programs.[152]

C.         The Qualified Intermediary Regime

The IRS understands that tax evasion involving offshore entities is difficult to detect and prosecute.[153]  Abusive and evasive offshore tax schemes present many challenges to tax enforcement[154] including the time constraint the IRS faces conducting examinations of offshore tax issues.[155]  A 2009 U.S. Government Accountability Office (“GAO”) report shows offshore examinations can take an average of 500 more calendar days to investigate than domestic audits, due to complexity and difficulty accessing information from offshore sources.[156]  Additionally, the three-year statute of limitations, which is the same as domestic investigations, limits the IRS from assessing taxes or penalties from offshore investigations.[157]  The result is that the IRS is deterred from opening examinations or forced to end examinations early – despite evidence of likely noncompliance.[158]  The U.S. is currently taking several actions to make the best use of the three-year statute of limitations period, including increasing the amount of information available to the IRS.  One such newly enacted legislation passed to improve on the information available to the IRS from offshore activity is the Qualified Intermediary (“QI”) program.[159]

The QI program requires that certain offshore financial institutions report income to the IRS.[160]  However, a low percentage of U.S. source income sent offshore flows through a QI.[161]  The U.S. source income that does not flow through any QI flows through U.S. withholding agents, who are permitted to accept account owners’ self-certification of their identities at face value – leading to a greater chance of improper withholding due to misinformation or fraud.[162]  Irrespective of the holes inherent in the QI reporting regime, the fact that Congress has deemed it necessary to enact and implement an entirely new set of reporting requirements for foreign financial institutions is indicative of the seriousness attacked to the offshore tax evasion crackdown underway.

D.         Proposed Legislation

Congress continues to propose new legislation to aid the IRS in its battle with offshore tax evasion.  For example, Sen. Levin has introduced the Stop Tax Havens Abuse Act, a comprehensive bill to combat offshore abuses, for the fifth time in the 112th Congress.[163]  In addition, legislators have introduced the Foreign Account Compliance Act (“FACTA”) that imposes both (i) new filing requirements for taxpayers with foreign accounts, and (ii) new penalties on foreign financial institutions that do not disclose holdings by U.S. citizens.[164]  Moreover, Congress proposed the Geithner Penalty Waiver Act that sought to alter the penalty for VDI disclosures.[165]  Sen. Levin and other legislators have also introduced the Hedge Fund Transparency Act of 2009, seeking to increase the transparency of the offshore operations of U.S.-based hedge funds.[166]  Lastly, the Senate proposed Senate Bill 73, to modify the statute of limitations period for investigations involving offshore secrecy jurisdictions.[167]  These are only a few of the numerous congressional offshore crackdown proposals that have been introduced since the original Wyly brothers hearings in 2006.  The scope and frequency of offshore crackdown legislation is unlikely to abate any time soon, and taxpayers who choose to make use of foreign jurisdictions in their tax planning should count on dealing with an ever-changing and perilous compliance burden.   This is especially true, given the increase in IRS audits involving international entities, discussed below.

E.         Increased Offshore Audits

The IRS has increased the number of audits involving international entities since November 2008 and prioritized the stepped-up hiring of international experts and investigators.[168]  The IRS is also looking for ways to improve information reporting and sharing in this area.[169]  In 2011, the IRS audited one out of every eight millionaires, about 12.5% of taxpayers earning $1 million dollars or more.[170]  This was the highest enforcement rate since 2004.[171]  The IRS claims the increase in audits can be attributed to the offshore crackdown.[172]  It is also evident that the IRS will make good use of the information gathered through the new QI program in these audits, and will continue to look closely at how to improve the QI program for these purposes.[173]   One major target of these audits is clearly the uncovering of unreported foreign bank accounts, as outlined in detail below.

F.         Unreported Foreign Bank Accounts

The reporting requirements for U.S. taxpayers with foreign bank accounts are extensive.  If one or more of a taxpayer’s foreign bank account(s) reach an aggregate balance of over $10,000 within the year, the taxpayer is obligated to file a report with the United States Department of Treasury listing all foreign accounts, Form TD F 90-22.1.[174]  This includes a citizen or resident of the U.S.; a domestic partnership a domestic corporation; or a domestic estate or trust.[175]  “Financial accounts” include bank accounts[176], security/brokerage accounts, mutual funds, securities, derivatives, or financial instrument accounts, debit and prepaid credit cards maintained with a financial institution, and certain types of annuities or pension accounts.[177] U.S. investors in offshore hedge funds and private equity funds are also required to file a FBAR.[178]

The failure to file a FBAR or disclose foreign accounts can lead to significant civil and criminal penalties.[179]  Civil penalties can be $10,000 for non-willful noncompliance and $100,000 or 50% of the amount of the underlying account’s balance at the time of the violation if the IRS determines the noncompliance to be willful.[180]  Criminal penalties can include a $250,000 fine and imprisonment for five years or, if the taxpayer violated another U.S. law in addition to failure to file a FBAR (or disclose foreign accounts), the individual will be fined $500,000 and imprisoned for ten years.[181]  The penalties are also applicable if a U.S. person supplies false information or is information is omitted.[182]

The IRS appears to be in a continuous process of revising and increasing the compliance requirements for doing business offshore.  These changes are not limited to the U.S. reporting requirements discussed above, but also include changes to U.S. treaties with foreign countries (as outlined below).  As such, taxpayers who may be considering doing business overseas, especially with a foreign entity and/or bank account, likely will have to operate very compliantly and stay focused on how these laws are revised.  Otherwise, such taxpayers will find it difficult to avoid the risk of serious penalties and/or criminal charges for non-compliance.

G.         The U.S.-Swiss Tax Information Exchange Agreement Revisions

Even before the Senate Wyly brothers hearing kicked off the current offshore tax evasion crackdown, the IRS had seen the potential for non-compliance inherent in the Swiss bank secrecy laws.  In an attempt to neutralize this possibility, the U.S. sought changes to the U.S.-Swiss Tax Information Exchange Agreement (“TIEA”) to enhance tax enforcement cooperation between the two countries.   A TIEA is a bilateral agreement between two sovereign countries governing the mutual exchange of information.[183]  The U.S. initiated a tax information exchange program to assure accurate assessment and collection of taxes, to prevent fraud and evasion and to improve sources for tax matters.[184]  The U.S. and Switzerland entered a TIEA, U.S.-Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (“Convention”) in 1997.[185]

The Convention required the exchange of tax information, for both criminal and civil matters, as is necessary for the “prevention of tax fraud or the like in relation to taxes”.[186]  However, the U.S. and Switzerland differ with respect to the definition of fraud.[187]  Swiss law generally defines tax fraud as the use of forged or falsified documents or a scheme of lies to deceive tax authorities.[188]  However, the U.S. definition has the more liberal view that non-filing or the omission of certain income from tax returns constitutes tax fraud.[189]  The changes made in 2003 to the mutual agreement favor the more liberal American view.[190]

In 2003, a mutual agreement between the U.S. and Swiss authorities established new guidelines on implementing the Convention.[191]  The new guidelines were to clarify the behaviors constituting “tax fraud” through a short list of hypothetical situations where recognized tax fraud occurs.[192]  This list was meant to be non-exhaustive and was to only provide basic guidelines..[193]  The countries also agreed upon renewed efforts to work together to support the tax administration of both countries and application of the requesting party’s statute of limitations.[194]  Additionally, the countries agreed upon the understanding that information may be requested for both criminal and civil penalties, and information may be requested if it is believed or suspected that there is tax fraud being committed.[195]  Finally, the countries agreed to the understanding that the preceding examples will constitute tax fraud under Article 26 of the Convention.[196]

A TIEA is advantageous because[197]many countries (including the U.S.) believe that Switzerland is prone to abusive tax avoidance, and Swiss secrecy laws present issues for countries attempting to combat tax fraud.[198]  Rather than prosecuting offshore fund holders, updates to the mutual agreement can create a renewed faith in the Swiss banking system and allow Switzerland to maintain its status quo as an epicenter of banking.[199]  The updates to the Convention can help the U.S. increase its surveillance abilities, potentially eliminate the tax gap, and recover lost tax revenue.[200]  The 2003 changes to the TIEA set the table for the first serious extension of the offshore tax crackdown to a sovereign foreign country’s internal bank secrecy laws – the case against the Swiss bank UBS AG.           

            H.         The UBS Case

UBS AG (“UBS”), one of the largest financial institutions in the world, voluntarily entered into a QI agreement with the IRS in 2001.[201]  The QI Agreement required UBS to disclose its U.S. client names to the IRS, withhold their U.S. client taxes, and maintain related records on U.S. clients.[202]  A John Doe summons was issued to UBS seeking the names of as many as 20,000 U.S. citizen UBS clients.[203]

To avoid possible criminal conspiracy and fraud liability for its U.S. client activity,[204] UBS agreed to pay $780 million in fines, penalties, interest and restitution by way of a Deferred Prosecution Agreement (“DPA”) with the U.S. Department of Justice.[205]  To facilitate this disclosure, the Swiss Financial Markets Supervisor Authority broke with its banking secrecy tradition by disclosing about 250 U.S. UBS clients to the U.S. government, including the client identities and account information.[206]  However, ending the criminal liability did not end UBS’ problems, because the U.S. retained the ability to pursue UBS in a civil court matter.

The day after the U.S. entered into the DPA, the U.S. filed a civil conspiracy and fraud suit against UBS to force disclosure of all the remaining undisclosed 52,000 U.S. customers.[207]  The civil lawsuit alleged conspiracy between the bank and the customers to defraud the IRS and the U.S. Federal Government of legitimately owed tax revenue.[208]  In addition to the suit, the U.S. requested enforcement of the John Doe summons.[209]  UBS claimed that the IRS’s summons sought information protected by Swiss financial privacy laws.[210]  In order to comply with the John Doe Summons, Swiss UBS employees would have to violate domestic law because breaching confidentiality is against the law in Switzerland.[211]  In response to the summons, the Swiss’s People’s Party called for retaliation against the U.S..”[212]  This did not prevent the U.S. from continuing to seek information from UBS.[213]

The Swiss Financial Market Supervisory Authority, or Finma, “proceeded on the assumption that if this data hadn’t been disclosed, the U.S. Department of Justice would have filed an indictment against UBS, which would arguably have caused the bank’s ruin and consequently have had serious repercussions for the Swiss economy.”[214]  On August 12, 2009, the U.S. and UBS negotiators came to a substantive agreement.[215]  Over time, the settlement could end up disclosing more than 10,000 names of American clients suspected of using offshore accounts to evade taxes.[216]  Additionally, the agreement carved out an exception for fraud to the Swiss secrecy laws allowing bank authorities to disclose the names of investors without breaking the law.[217]  Ultimately, UBS avoided Swiss secrecy laws in order to comply with the U.S.’s requests.  Of course, obtaining the taxpayer names from UBS was only the first step in the U.S. prosecutorial process of undisclosed offshore account holders – the next step is discussed below.

  1. US Taxpayer Criminal Prosecutions

The information derived from the UBS case led to several criminal prosecutions of UBS offshore account holders,[218] including the recent indictment by the DOJ of three former UBS clients on charges of hiding millions of dollars from the IRS in offshore accounts.[219]  These UBS clients are obviously not the first the IRS has indicted and definitely will not be the last.[220]  In addition to the UBS data, the VDI programs have generated a “gold mine of data” regarding undisclosed offshore accounts for the IRS Criminal Investigation Division and the DOJ.[221]  The list of names and account information derived from the various VDI programs are compiled in a database (“VDI Database”), which may be used by the DOJ as a powerful tool against offshore account holders and banks.[222]  The IRS has used this information (and continues to use it) to take criminal action against U.S. taxpayers with offshore accounts used to evade taxes.[223]  Within the past few years, the IRS indicted more than 40 U.S. taxpayers,[224] and has several unreported individuals that are still under investigation.[225]

While the UBS and VDI matters have resulted in the disclosure of many taxpayer offshore account holder names, the IRS continues to pursue more information from additional financial institutions in multiple foreign jurisdictions.  Since the initial disclosure of names by UBS, the U.S. has opened new investigations seeking U.S. taxpayer offshore account holders from Swiss banks Wegelin & Co. and Credit Suisse, as well as seeking U.S. account holders with accounts in India from HSBC.[226]  The IRS and DOJ show no sign of abating these types of investigations as the offshore tax crackdown continues.  These investigations have also led to criminal investigations and deferred prosecution agreements with some of these financial institutions, as outlined in the next section of this article.

J.          Foreign Bank Criminal Deferred Prosecution Agreements

Following its success with UBS, the U.S. has opened criminal investigations into the activities of several additional offshore banks.  Unlike UBS, there is no guarantee that these investigations will be settled without a criminal conviction of the targeted banks.  The IRS seems to more vehemently attack and prosecute arrangements in which intermediary entities, such as foreign trusts and corporations, are used in order to obscure the true beneficial ownership of the underlying foreign bank account.[227]  The IRS has attacked these noncompliant foreign arrangements, large and small banks and accounts alike, for transaction amounts as low as $200,000.[228]  Large banks, like UBS for instance, were forced to settle the tax fraud charges because the alternative was to face seizure of U.S. held assets and banking licenses.[229]  Smaller banks that do not have a substantial U.S. presence are not as vulnerable to U.S. prosecution because the U.S. may not threaten seizure of assets and licenses and may not otherwise be susceptible to U.S. jurisdiction and court orders.[230]

1.         Credit Suisse

In the case of Swiss bank Credit Suisse, the DOJ threatened to indict the bank if the DOJ did not receive proper cooperation with U.S. disclosure requests.[231]  If Credit Suisse were to be indicted, the bank could be forced to forfeit the U.S. located bank assets and the bank’s U.S. banking license.[232]  The DOJ seemed likely to see anything short of disclosing names of U.S. taxpayers as insufficient cooperation.[233]  Since Credit Suisse Group AG faced U.S. indictment for aiding in tax evasion, so it moved to enter into a deferred prosecution agreement with DOJ prosecutors.  The deal called for admitting wrongdoing and paying a penalty in excess of $1 billion, as reported by Bloomberg.[234]  Commentators opined that Credit Suisse AG simply has too much to lose by fighting the DOJ and risking indictments.[235]

The U.S. also filed a civil lawsuit seeking data on another 52,000 secret Swiss accounts, mostly from Credit Suisse account-holders.[236]  The Swiss and U.S. governments negotiated an agreement for the bank to surrender the names of 4,450 clients.[237]  The Swiss Parliament later ratified that agreement, demonstrating the high-stakes game of poker occurring between the U.S. and Switzerland, with Credit Suisse in the middle of it all and Swiss banking secrecy hanging in the balance.[238]

2.         Wegelin

In the wake of ongoing investigations, the DOJ suspects that UBS lost business directly to other offshore banks, including Wegelin and HSBC.[239]  Wegelin and HSBC likely assured customers they would not disclose information to the U.S. government and claimed they were less vulnerable to investigation than UBS.[240]  However, the assurances may not pan out since the DOJ has indicted Wegelin, a private Swiss bank, for conspiracy to conceal assets and evade taxes.[241]  The Wegelin indictment marked the first time the U.S. government has indicted a foreign bank for facilitating criminal tax fraud.[242]  If found guilty, Wegelin faces a fine of $500,000 or twice the gross monetary gain derived from the offense, whichever is greater.[243]

Wegelin, Switzerland’s oldest bank, is alleged to have conspired to hide more than $1.2 billion in secret accounts in order to evade U.S. income taxation on any resulting income derived therefrom.[244]  As of the end of 2010, the bank held $25 billion in assets under management, but operated no branches outside of Switzerland.[245]  Even though Wegelin does not operate branches outside of Switzerlandf, Wegelin can access the U.S. banking system via correspondent accounts.[246]  U.S. law enforcement authorities seized roughly $16 million from a correspondent account operated out of the UBS Stanford, Connecticut branch.[247]  This forfeiture complaint to seize Wegelin correspondent accounts demonstrates that the U.S. does have some remedies even against institutions that have no physical presence in the United States.[248]

3.         HSBC and Asia

Following the erosion of Swiss bank secrecy, funds flowed quickly into other jurisdictions such as Singapore.  The DOJ followed the money from Europe to Asia amid the Swiss banking crackdown and appears intent on staging similar crackdowns upon new-found Asian tax havens.[249]  In 2010, the DOJ began investigating HSBC and account holders in HSBC for criminal tax fraud in relation to accounts held in India and Singapore.[250]  The DOJ used the same “John Doe” summons strategy against HSBC India as the DOJ used against UBS.[251]  The DOJ also used the same investigation strategy of going through all U.S. citizen accounts above $10,000 and further investigating any accounts that have not made a FBAR filing.[252]  After a court trial, a father and son were convicted and sentenced to ten years in prison.[253]  The DOJ has threatened indictments of HSBC India and appear prepared to seek a similar criminal deferred prosecution agreement as entered into with Credit Suisse AG.  The DOJ threatened the seizure of HSBC’s U.S. based assets and licenses in order to pressure HSBC for a settlement and the turnover of client identities.[254]

Following the DOJ’s investigation into HSBC India, private banks across Asia have braced for similar investigations into the concealment of assets for U.S. taxpayers.[255]  These crackdowns have caused several large private banks in Singapore to refuse all U.S. clients, due to the high risk of becoming involved in similar investigations.[256]  The summonses placed pressure on the banks and HSBC decided to suspend private offshore banking services to U.S. customers, fearing HSBC and its customers would face additional criminal charges.[257]  The HSBC U.S. Branch is now the branch serving U.S. residents.[258]  The large Asian banks that continue to take U.S. clients generally impose tight restrictions on the types of products that can be sold to U.S. clients.[259]  Singapore has also since taken steps to become more financially transparent and to enter into a double-taxation treaty with the U.S.[260]

HSBC specifically targeted Indian-American clients and offered offshore banking services in India and Singapore, which will assuredly warrant heightened scrutiny.[261]  However, the information DOJ has in the HSBC India probe is clearly deeper than what it had at the outset of the UBS probe.  In the UBS probe, UBS advised its American clients that the IRS might scrutinize their accounts.  However, Americans with accounts at HSBC in India received letters directly from the DOJ in 2010 – prior to any HSBC communications.  Thus, it is clear that the DOJ already had their names.[262]  It appears that some stolen LGT bank data purchased by the German government was also shared with the government of India.[263]  In 2010, India was in the process of negotiating tax treaties with 65 countries.[264]  But even in the absence of such a treaty, the LGT information is almost certainly already in the possession of the IRS as well and may lead to future prosecutions of account holders.[265]

4.         Israeli Banks

The DOJ is likely to heavily scrutinize many other offshore financial institutions, including, but not limited to, institutions in Israel.[266]  If settlement agreements similar to the 2009 agreement between the U.S. government and UBS do not pan out, it is likely these financial institutions will face criminal charges.[267]

Some Americans feel mistakenly comfortable not disclosing their Israeli bank accounts to the IRS because of Israel’s close ties with the U.S.[268]  Israel is in a unique situation because of ties between Israel and Jews around the world, including Jews who have inherited “Holocaust accounts.”[269]  The original “Holocaust account” was established in Switzerland by European Jews prior to the Holocaust, to protect their assets from the rise of Nazi Germany.[270]  Holocaust survivors established another type of “Holocaust account” after World War II, to receive German reparation payments.[271]  In both of these cases, there existed no tax avoidance motive for creating the accounts.[272]  Now, many Holocaust account descendants who have inherited these accounts are unintentionally in non-compliance because of their unawareness of the necessity to annually report these accounts to the Treasury Department.[273]  That being said, it is highly unlikely that the IRS and DOJ are specifically targeting “Holocaust accounts.”[274]  For example, the IRS offered a lower Voluntary Disclosure penalty of merely 5% on “Holocaust accounts.”[275]

Pursuing undisclosed accounts in Israel will not require nearly as much cost and effort as pursuing information on undisclosed accounts in Switzerland, historically.[276]  An existing tax treaty between the U.S. and Israel enables the two countries to “exchange such information as is pertinent to [prosecute] . . . fraud or fiscal evasion in relation to the taxes.”[277]  According to the Israeli Ministry of Justice, “the [Israeli Government] will cooperate with requests from U.S. law enforcement in matters of financial crime.”[278]  The Israeli Minister of Justice’s statement refers to Israel’s fight against money laundering; however, it is likely that the Ministry would cooperate with requests from the IRS in matters related to undisclosed bank accounts.[279]  Furthermore, the U.S. and Israel give each other legal assistance via a Mutual Legal Assistance Treaty (MLAT), which expressly applies to criminal tax offenses.[280]

The DOJ and IRS actually believe that there are large values of undeclared assets in Israel, particularly in the lucrative jewel trade.[281]  Due to these suspicions, Israel’s largest bank, Leumi, took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS in 2010.[282]  Amid heightened scrutiny, such as the implementation of the Foreign Account Tax Compliance Act which penalizes all foreign banks for non-accountability on U.S. client accounts, Leumi is asking its clients to either declare that they are not U.S. clients or to reveal their accounts to U.S. authorities.[283]    Leumi is particularly worried and vulnerable to IRS and DOJ scrutiny since Leumi has a physical presence in the U.S.  Thus, the U.S. may utilize the full range of enforcement vehicles, including the threatened seizure of bank U.S. assets and licenses.[284]

K.         Advisor Criminal Prosecutions

The U.S. has not limited its criminal investigations to U.S. taxpayers and banks.  Rather, the U.S. has indicted several advisors for activities associated with U.S. citizen’s undeclared offshore assets, including bankers, lawyers, and consultants.[285]  Over the last three years, the DOJ has brought criminal charges against 13 bankers and 2 attorneys as facilitators of offshore tax fraud.[286]  The DOJ has successfully argued for convictions of one banker and one advisor on these charges.[287]  In these circumstances, attorney client privilege and CPA privilege will not protect communications with advisors and their clients in the IRS’s criminal investigations.[288]  In recent years, the U.S. has indicted at least 24 advisers for contributing to taxpayers’ attempts to use offshore accounts to avoid taxation.[289]  Each new bank indictments leads to more names of advisors who have facilitated tax evasion by U.S. taxpayers.[290]

For example, the Wegelin investigation not only led the bank’s indictment, but also led to a superseding indictment for conspiracy to evade taxes against three Wegelin financial advisors.  The three advisors, Berlinks, Frei, and Keller, allegedly advised clients to evade U.S. taxes through undisclosed Swiss bank accounts linked to a chain of private foundations and sham corporations in Liechtenstein, Panama, Hong Kong, and other jurisdictions.[291]  The individual Wegelin advisors face separate charges that could result in jail time and/or monetary fines.[292]

Similarly, seven Credit Suisse AG bankers and advisors, including the head of North American offshore banking, Markus Walder, were personally indicted on July 21, 2011 on charges of helping U.S. clients evade taxes through secret accounts.[293]  Walder, a Swiss resident, supervised teams of private bankers in Geneva and Zurich who worked in an unregistered private banking business in the U.S.[294] The indictments claimed that managers and bankers working in the cross-border business knew or should have known that they were aiding and abetting U.S. customers in evading their U.S. income taxes.[295]

The bank disclosures are the primary method the IRS uses to discover advisers who have facilitated in U.S. taxpayer offshore tax evasion.[296]  As such, as more banks undergo investigation for facilitating offshore tax evasion, additional adviser indictments are likely to result.  The advisors, banks, and clients of the banks, have all been caught up in an extensive and growing IRS and DOJ crackdown of international tax non-compliance.  The next section of this article discusses how the heightened enforcement of tax matters involving U.S. taxpayers doing business offshore may intersect with captive insurance companies domiciled in foreign jurisdictions.

IV.        Offshore Captive Insurance Companies         

A CIC can be formed under the laws of either a domestic U.S. state, or of a foreign country.  The decision as to whether to form the CIC domestically or offshore is effected by many factors, including but not limited to: (1) exposure to the U.S. tax system; (2) the capitalization burden at formation; (3) the investment flexibility afforded the CIC; and (4) the asset protection afforded the U.S. shareholders of the CIC.  Each of these issues is outlined below in detail.

A.         Exposure to the U.S. Tax System

The U.S. tax and compliance burden on a CIC and its shareholders may effect the decision whether to form a CIC domestically or offshore.  As a preliminary matter, it is clear that organizing a CIC in an offshore jurisdiction does not prevent the IRS from exercising its extensive reach in assessing and collecting U.S. tax.[297]  Thus, any analysis of whether to form in a foreign jurisdiction should be governed by reporting burdens and taxation that a CIC would be exposed to, without any concern for the capability of the IRS to enforce such taxation.

Every CIC, both domestic and offshore, are subject to U.S. income taxation.[298]  If the foreign CIC makes an IRC § 953(d) election (discussed in detail, below), then the CIC will be taxed as an U.S. entity.  If the CIC does not make an IRC § 953(d) election, then assuming that the offshore CIC has more than 25% U.S. shareholder ownership,[299] the CIC would be considered a controlled foreign corporation (“CFC”).[300] As a CFC, the CIC income (unless directly attributable to contracts issued on risks outside of the United States)[301] would be currently taxable to the CIC U.S. shareholders,[302] irrespective of the timing of the distributions.[303]  Thus, the U.S. shareholders of an offshore CIC CFC would be required to currently include all CIC profits in the CIC owner’s taxable income.[304]  In any event, the CIC and/or its shareholders will be subject to U.S. income taxation, and how that taxation is within its own control, as determined by the tax election the CIC makes.

Of course, one consideration that should be taken into account in making a decision to form a foreign CIC is the possibility that the IRS offshore crackdown will increase the compliance burden of the CIC.  Given that the IRS is expending a great deal of resources and personnel time on all of the civil and criminal activities (as outlined above), choosing to create a CIC offshore may increase the chances of an intrusive audit, simply by virtue of being an offshore entity that receives tax deductible payments.  Since the IRS has not yet publicly announced any specific focus on offshore CICs, there is no empirical way to prove that this will occur.  However, it is clear that the IRS and DOJ are very focused on tax compliance in the offshore world, so it is certainly possible that the IRS will eventually broaden its focus in the offshore crackdown to launch a coordinated attack on foreign captive insurance companies – if it has not done so already in a non-public manner.

1.         IRC § 953(d) Election

To calm the nerves of U.S. taxpayers who read about the IRS offshore crackdown, some advisors who advocate forming an offshore CIC have raised making an IRC § 953(d) election as a compliance panacea.  Under IRC § 953(d), an offshore CIC may elect to be treated as a domestic company for U.S. federal tax purposes.[305]  These electing companies would then be directly subject to U.S. federal income tax on all income earned globally, rather than indirectly through the U.S. shareholders of the CIC under subchapter F of the IRC.[306]  The advantages of a U.S.-owned offshore CIC making an IRC § 953(d) election include exemption from the federal excise tax (“FET”), and simplification of compliance and administration.[307]  Once made, the IRC § 953(d) election is irrevocable without IRS consent.[308]  Theoretically, making this election would communicate to the IRS that the offshore CIC is not something that the IRS offshore crackdown need be focused on.

The problem with this theory is that the CIC is still a tax-advantaged entity that is operating under the laws of a foreign country.  Thus, regardless of any election that has been made, the IRS may still put the CIC in the suspect offshore entity class that is currently subject to such heightened scrutiny.  In fact, the presence of an IRC § 953(d) election may actually allow the IRS to easily locate each offshore CIC for audit.   Should the IRS choose to start auditing offshore CIC arrangements, it is would not be difficult to screen all IRC § 953(d) elections that also have tax characteristics of a captive insurance company.  The bottom line is that the IRC § 953(d) election is unlikely to cure any perceived offshore taint that may be attached to the foreign CIC, in the eyes of the IRS.

2.         The Federal Excise Tax

In certain circumstance, the IRS may also impose a federal excise tax (“FET”) upon insurance policy premiums paid by an U.S. insured to an offshore CIC.[309]  An offshore CIC arrangement is likely to be viewed as the “importation” of a service since the offshore CIC essentially provides insurance, actuarial, and management services to its shareholders.[310]  The importation of a foreign service to the U.S. is subject to the FET.[311]  Premiums for property/casualty exposures paid by U.S. payers to an offshore CIC are subject to a FET of 4% for original insurance transactions[312] and 1% for reinsurance transactions.[313]  As such, the shareholders of an offshore CIC may be exposed to additional U.S. taxation in the form of the FET, that shareholders of a domestic CIC are generally not exposed.  Of course, some domestic state jurisdictions also charge premium taxes, so avoiding such taxes would require the CIC to choose a premium tax-free domestic state.  Regardless, choosing a domestic state domicile that does not require premium taxes would have a clear advantage over formation in a foreign jurisdiction that is subject to premium taxes.

B.         Capitalization Burden

The minimum capitalization requirements for formation of a CIC in domestic jurisdictions have traditionally been between $250,000[314] and $1 million,[315] with the variation depending factors such as the type of CIC, the proposed coverage offered by the CIC, and the relation between the CIC and the insured.[316]  The general public, and even some experienced tax and insurance advisors, perceive that a CIC formed in an offshore jurisdiction is subject to relaxed rules and regulations relating to capitalization requirements.[317]  This is because offshore jurisdictions typically have lower minimum capital requirements for insurance companies organized within the offshore jurisdiction,[318] and do not generally perform regulatory examinations, but instead rely on independent CPA verifications.[319]

Of course, a CIC must still be considered an insurance company, and the policies must still reflect an insurance arrangement, in order for premiums to be deductible under IRC § 162 and for the CIC to receive the tax benefits of IRC § 831(b).[320]  To be considered an insurance arrangement, there must be a finding that the parent transferred the risk of economic loss to the CIC—risk shifting.[321]  Adequate capitalization is an especially important factor in determining whether risk shifting has occurred between a CIC and the insured, because without it the CIC may not have proper reserves to pay insured claims.[322]  Therefore, in order for the CIC to avail itself of tax benefits provided to insurance companies under the U.S., a CIC may be required to maintain capital in substantial excess of the capital required by the minimum capitalization requirements of the offshore jurisdiction’s insurance regulations.[323]

Finally, it is also noteworthy that the minimum capitalization requirements in certain U.S. states have become more manageable in recent years.  For example, in Delaware, the minimum capitalization rules have been reduced to $250,000 for combining capitalization among separate CIC limited liability companies that all are formed and are administered as part of the same series.[324]  Thus, provided the remainder of the CIC law is followed properly, a group of individual CIC arrangements may share the same capitalization – making the requirements very reasonable, while maintaining the amounts necessary for proper risk shifting.   As such, the capitalization rationale for choosing an offshore jurisdiction over a domestic state to form a CIC has been significantly diminished.

C.         Investment Flexibility

Certain foreign CIC jurisdictions permit more flexibility in the types of investments that the CIC may invest in with surplus CIC funds.[325]  Surplus is defined as the amount of premiums or income that is retained by a CIC in excess of the funds needed by the CIC for current claims payments.[326]  Certain foreign jurisdictions allow a CIC to invest surplus in any investment vehicle, so long as such investment does not impair the capital base, undermine any foundational requirements related to the insurance arrangement,[327] including making unreasonably illiquid investments that may prevent payment of its actuarially anticipated claims.[328]  As previously discussed, a CIC that does not maintain its solvency requirements would not be considered a valid insurance company for any purposes, since the ability to satisfy claims as they accrue is the primary responsibility of any insurance company.  As such, any use of an offshore jurisdiction’s looser CIC investment rules, requires that the CIC not run afoul of the IRC rules about what is required for an arrangement to be deemed insurance.   A CIC would not be considered an insurance company where the CIC is not primarily engaged in the business of underwriting insurance or reinsurance activities.[329]  While CIC compliance with the foreign jurisdiction’s local insurance rules and regulations is significant in determining whether a CIC is primarily engaged in the insurance business, the character of the business actually done in the taxable year is the controlling factor in analyzing whether a company qualifies as an insurance company.[330]

The IRS has also issued pronouncements warning about the non-compliant nature of certain insurance arrangements where the insurance business is outweighed by its investment activities.  Some of this guidance appears in the context of life insurance – something that a CIC may not insure.  However, the problems raised that are applicable to a life insurance company should be equally applicable to insurance of risks other than life.  In IRS Notice 2003-34, the IRS warned taxpayers about investing in certain U.S. shareholder-owned purported offshore life insurance companies[331] to defer recognition of ordinary income (or to characterize ordinary income as a capital gain).[332] The IRS stated that these (and similar) arrangements are used to invest in hedge funds or investments in which hedge funds typically invest.[333]  Under such an arrangement, the actual insurance activities of the offshore entity are generally relatively small in comparison with the offshore entity’s investment activities.[334]

Instead, the offshore entity’s portfolio of investment income, particularly in hedge funds or similar investment vehicles, will substantially exceed the offshore entity’s ordinary insurance business needs.[335]  The shareholder will typically not receive any current distribution under such an arrangement, and will instead claim that the appreciation constitutes capital gain (rather than ordinary income) since the appreciation involves the conduct of insurance business rather than mere passive investment income.[336]  The IRS explained that, while the business of an insurance company will almost always require substantial investment activities, genuine insurance companies use their investment earnings to pay claims, support writing more business, and fund distributions to the company’s owners.[337]  The IRS further noted that the mere qualification of an offshore company as an insurance company under the rules and regulations of a foreign jurisdiction does not render the offshore company an insurance company for federal income tax purposes.  This is especially true where the company is not primarily and predominantly engaged in the issuance or reinsurance of insurance or annuities.[338]  An insurance company only exists, for federal income tax purposes, where the entity uses its capital primarily in the earnings of income from insurance underwriting.[339]  The IRS will analyze an entity’s total operations and sources of income in making this analysis.[340]

An offshore CIC would not be considered an insurance company, for federal tax purposes, where the offshore CIC is primarily used as a vehicle in which to make a hedge fund investment.  Such as offshore CIC would instead be subject to taxation under the Passive Foreign Investment Company (“PFIC”) rules.[341]  The PFIC rules, under IRC §§ 1291 through 1298, impose current U.S. taxation on U.S. persons that earn passive income through a foreign corporation.[342]   IRC § 1297(a) provides that a foreign corporation is a PFIC if: (1) 75% or more of the corporation’s gross income is passive income, or (2) at least 50% of the corporation’s assets, on average, produce passive income or are held for the production of passive income.[343]  The PFIC rules do not apply to a corporation which is predominantly engaged in the active conduct of insurance business, since the corporation would otherwise be subject to federal income tax under the U.S. life insurance company rules found in IRC subchapter L.[344] In IRS Notice 2003-34, the IRS clearly stated its intent to challenge the validity of these types of investment schemes – by applying the PFIC rules where the IRS determines that a foreign corporation is not an insurance company for federal tax purposes.[345]  Thus, while an offshore jurisdiction may allow a CIC to invest under very liberal rules, IRS Notice 2003-34 make it clear that a CIC whose investment activities exceed its insurance business activities will be challenged as a PFIC.

D.         Asset Protection

Many offshore jurisdictions claim that their CIC regulators and corporate registrars keep CIC company information on assets in strict confidence, for the purpose of permitting the CIC to be formed and operated in secrecy.[346]  Many people also believe that a valid IRC § 953(d) election can create a situation in which the identity of the parent entity does not have to be reported to the IRS.[347]  Secrecy from both foreign and domestic records may be viewed as a valuable characteristic of offshore CIC arrangements since such secrecy makes it difficult for creditors to follow the money.[348]  The inability of a creditor to follow the money may act as an effective asset protection tool because a creditor may prove to be less willing to undertake expensive and prolonged litigation where the creditor is unsure whether the debtor is “judgment proof.”[349]

More importantly, an IRC § 953(d) election could also potentially allow a CIC to effectively choose the applicable law and venue in which a creditor may sue the CIC by forcing a creditor to bring all actions against the CIC in the chosen offshore domicile’s courts.[350]  This is possible due to the fact that a valid IRC § 953(d) election only applies to the IRC and not to any other titles of the U.S. Code.[351]   Since an offshore CIC election for treatment as a domestic corporation does not apply to the Federal Code of Civil Procedure, the creditor may not argue that the corporation is domiciled in the U.S.  Since the corporation is not domiciled in the U.S. for civil procedure purposes, U.S. courts would only exercise proper personal jurisdiction over the CIC if it can be shown that the CIC had minimum contacts or purposefully availed itself of U.S. court jurisdiction.[352]   Of course, a foreign CIC that insures a U.S. insured in exchange for a substantial premium may very well have established such minimal contacts as to be considered subject to a U.S. court’s jurisdiction.  Assuming that the U.S. courts were found not to have personal jurisdiction over an offshore CIC, then it is likely that a creditor may only sue the CIC in the offshore jurisdiction of formation.  Effectively forcing creditors to sue in a foreign domicile’s courts, using foreign domicile’s law could impose a formidable obstacle upon any creditor, particularly where the jurisdiction has particularly stringent asset protection and account secrecy laws.[353]  Furthermore, some commentators have noted that, even if U.S. courts are found to have jurisdiction over an offshore CIC, the foreign jurisdiction may be unwilling to enforce the U.S. judgment (which may be quite significant if the debtor has very little in onshore assets.[354]

Once a U.S. court has rendered a judgment against a U.S. citizen, it is always possible that a U.S. court will nullify an offshore transfer at its source as illegal or invalid, rather than simply abdicating jurisdiction over a perceived fraudulent attempt to defeat creditors of the transferor.[355]  This is especially true where a creditor manages to position the transferor into a bankruptcy action.  U.S. bankruptcy courts have very broad powers to invalidate and set aside transfers that have the effect of delaying or hindering a creditor’s claim satisfaction,[356] and often these powers are exercised by using the U.S. bankruptcy laws[357] to thwart offshore asset protection arrangements.[358]  For instance, a debtor may seek to become insolvent by transferring significant assets abroad (perhaps in the form of a policy premium payment to a foreign CIC) and outside of the debtor’s control and beneficial enjoyment.[359]  The creditors could force the debtor into bankruptcy if the debtor is shown to be insolvent.[360]  In bankruptcy, the bankruptcy trustee would take charge of the debtor’s estate.[361]  A bankruptcy trustee may have the ability to force a waiver of the attorney-client privilege in order to obtain confidential information provided by an asset protection attorney to the debtor.[362]  This means that a bankruptcy trustee would likely be able to obtain documents and other information to expose the whereabouts of a debtor’s foreign assets.[363]  In the CIC context, such documents likely would include all of the non-public accounting of where the CIC assets are held.  This valuable information would make it a simple process for the bankruptcy trustee to undo an asset protection scheme that renders a debtor insolvent and reclaim the assets for the benefit of the creditors.[364]  In a foreign CIC arrangement, this may involve repatriating the premiums, or the assets that have been purchased with the premiums, so that these assets may be used to satisfy the creditor’s claims.

U.S. courts have also stated that enforcement of the laws of a foreign country is against public policy where those foreign laws violate settled principles of U.S. law.[365]  The laws of foreign jurisdictions notorious for asset protection are unlikely able to withstand an attack on public policy grounds since these foreign laws were oftentimes intentionally drafted to contradict U.S. law that would otherwise apply—it is highly unlikely that a U.S. judge would choose to apply such intentionally contradictory foreign law.[366]  Thus, a U.S. court may unwind a foreign CIC arrangement where it determines that the foreign laws are being utilized in a manner that violates public policy.

In sum, a creditor of a U.S. related party (shareholder or insured) to a foreign CIC may succeed in voiding a transfer (capitalization or premium payment) of funds from the U.S. party to the CIC, by arguing that the transfers were actually made for improper asset protection purposes.[367]  As outlined above, a creditor’s success in making this argument is more likely once the U.S. debtor is in U.S. bankruptcy court, due to the broad powers and reach that bankruptcy courts have in collecting funds for the bankruptcy estate.  Regardless, if the IRS and DOJ can show that the ulterior reason for forming a forming CIC was asset protection, it may also undermine the contention that the CIC has been formed and is being administered as an insurance company at all.

V.         Conclusion: CIC Compliance Issues Amplified by the Offshore Tax Crackdown

The IRS and DOJ have used various investigatory and compliance devices to gather significant information on offshore tax activities of U.S. taxpayers, including but not limited to: holding Congressional hearings; the VDI programs; the Qualified Intermediary regime; increased offshore audits; and international tax treaties.  The DOJ has also made use of the information to bring civil and criminal tax cases to send a message as to the importance of such offshore tax compliance, including but not limited to cases against: UBS; Wegelin; Credit Suisse; and HSBC.  The domestic U.S. and offshore client, advisor, and banking communities have been warned that U.S. tax avoidance overseas will be highly scrutinized, and punished severely where appropriate.[368]  The negative consequences may include significant civil tax penalties, as well as stricter enforcement of criminal penalties for tax evasion, conspiracy to defraud, money laundering, wire fraud, and violations of the RICO Act.[369]

The penalties for the above U.S. criminal offenses are generally very harsh, risking the liberties and fortunes of U.S. taxpayers, advisors, bankers, accountants, and attorneys involved in non-compliant offshore investment arrangements.[370]  Furthermore, even if an individual or entity is not subject to the jurisdiction of U.S. authorities, the U.S. government has displayed broad powers to enforce its will abroad through other means.[371]  These broad powers include seizing an individual or entity’s U.S. assets.  In the banking sector, the seized assets can include banking licenses, as well as the offending client’s funds from an offshore bank’s U.S. correspondent accounts.[372]  In Wegelin, the U.S, government seized roughly $16 million from UBS clients’ correspondent accounts operated out of the UBS Stanford, Connecticut branch.[373]  Such seizures often put tremendous pressure on offshore entities and individuals to reach an agreement with U.S. authorities.[374]  For instance, the U.S. government forced the Swiss Bank UBS to settle claims of aiding and abetting U.S. tax evasion and to turn over names of U.S. account holders by threatening the seizure of UBS’s U.S. held assets and banking licenses.[375]  Following the precedent set by the Wegelin court in seizing client accounts, the U.S. government could attempt to seize onshore assets of the U.S. owners in order to ensure the compliance of an offshore CIC.[376]   This IRS and DOJ offshore tax crackdown does not show any sign of abetting any time soon.  Thus, any offshore CIC (even one with no CIC onshore assets) should be very concerned with U.S. tax and regulatory compliance.

To be U.S. tax compliant, all domestic and foreign captive insurance companies with U.S. shareholders must satisfy IRS risk shifting and risk distribution requirements to be considered insurance.[377]  As discussed above, risk shifting exists when an insured transfers an economic risk of loss to an insurance company,[378] while risk distribution occurs where several insurance companies (or other unrelated entities) pool insurance premiums so that the no particular insurance company (or entity) has all the risk for an economic loss.[379]  There now exist IRS safe harbors for satisfying risk shifting and risk distribution requirements.  In addition to these fundamental requirements, the IRS also is aware of certain less-prevalent IRC § 831(b) CIC tax-motivated compliance problems.  These issues include: (i) the use of life insurance on the CIC owner’s life as a major investment of the CIC; (ii) engaging in tax motivated loan back arrangements between the CIC and its owners; and (iii) structuring the CIC ownership in the name of a children’s trust (or other entity) to avoid Federal Estate and Gift Taxes.  While these compliance issues are not present in a majority of IRC § 831(b) CIC arrangements, the potential downside of non-compliance for those that do partake in them is significant.  Obviously, the best way to avoid a negative compliance audit outcome is to utilize the safe harbors for risk shifting and risk distribution, and choosing not to participate in any of the above-described tax-motivated specific activities.  That being said, any CIC that does not follow this course of tax compliance, would likely be best served to avoid any additional unnecessary audit risks.

Since a CIC can be formed either under the laws of a U.S. state or a foreign jurisdiction, a prospective CIC shareholder must review several factors before making this decision, including: (1) exposure to the U.S. tax system; (2) the capitalization burden at formation; (3) the investment flexibility afforded the CIC; and (4) the asset protection afforded the U.S. shareholders of the CIC.   As outlined above, on balance these factors do not dictate a significant reason – even under the best of circumstances – for U.S. taxpayers to choose to form in a foreign jurisdiction.  As a result, any IRC § 831(b) CIC choosing to form offshore may end up compounding all these compliance risks by virtue of ending up eventually in the middle of the IRS offshore tax crackdown.  As the offshore tax crackdown expands, compliance and audit costs for even a fully compliant foreign CIC may rise significantly.  The fact that a tax beneficial entity (the CIC) is organized and operated from a foreign jurisdiction may become cost prohibitive (if compliant) or the target of serious penalties (if non-compliant) by virtue of the IRS’ current bias against U.S. taxpayers doing tax avoidance transactions overseas.


* Beckett G. Cantley (University of California, Berkley, B.A. 1989, Southwestern University School of Law, J.D. cum laude, 1995; and University of Florida, College of Law, LL.M. in Taxation, 1997) is an Associate Professor of Law at Atlanta’s John Marshall Law School. Prof. Cantley would like to thank Jenna Melton for her assistance as a Research Assistant on this article.

 

[1] Jay Adkisson, Bad Financial Medicine for Year-End 2008: Physicians, Captive Insurance Companies and Cash-Value Life Insurance, Risser Adkisson LLP, http://www.captiveinsurancecompanies.com/captive_insurance_life_insurance.htm [hereinafter Bad Financial Medicine].

[2] See id.

[3] See id.

[4] See IRC § 162(a) (2006); Treas. Reg. §1.162-1(a)(as amended in 1993).

[5] IRC § 162(a).

[6] Treas. Reg. §1.162-1(a).

[7] See IRC § 831(b)(2) (2006).

[8] CIC underwriting income that has been held by the CIC for at least one year would be taxed to the parent entity, upon distribution, at the long-term capital gains rate, which is currently 15%.  See Rev. Proc. 2008-66, 2008-45 I.R.B. 1107 (2008).

[9] See I.R.C. § 162 (2006); See also  I.R.C. § 11(b) (2006).

[10] See Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 838 (6th Cir. 1995); Treas. Reg. 1.162-1(a).

[11] Humana, Inc. v. C.I.R., 881 F.2d 247 (6th Cir. 1989).

[12] See Jeremiah Coder & Lee A. Sheppard, Banks Beware: IRS Criminal Investigations Expanding, Tax Analysts, 2012 TNT 35-4 (February 22, 2012) [hereinafter Banks Beware: IRS Criminal Investigations Expanding]; Robert Goulder, U.S. Government Indicts Swiss Bank for Aiding Tax Fraud; Seizes Assets, Tax Analysts, 2012 TNT 23-1 (Feb. 3, 2012); Staff of the Joint Committee on Taxation, Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, Mar. 30, 2009, (JCX-23-09); Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS: Hearing Before the S. Comm. on Finance, 111th Cong. (2009) (statement of Michael Brostek, Director of Strategic Issues Team), in U.S. Gov’t Accountability Office, GAO-09-478T (Mar. 17, 2009), at 1, available at http://www.gao.gov/new.items/d09478t.pdf [hereinafter Tax Compliance--Offshore Financial Activity Creates Enforcement Issues for the IRS: Hearing Before the S. Comm. on Finance]; Rachel Armstrong & Chris Vellacott, HSBC Case Alerts Asia Banks for U.S. Tax Probes, Reuters (April 12, 2011), available at http://www.reuters.com/article/2011/04/12/tax-banks-idUSLDE73B14B20110412 [hereinafter HSBC Case Alerts Asia Banks for U.S. Tax Probes]; Marie Sapirie, Practitioners Assess Offshore Initiative as Deadline Approaches, Tax Analysts, Aug. 11, 2011 (Doc 2011-17418)[hereinafter Practitioners Assess Offshore Initiative as Deadline Approaches].

[13] See Banks Beware: IRS Criminal Investigations Expanding, supra note 12; 18 U.S.C. §§ 1961-1962 (2006); 18 U.S.C. § 1956 (2006).

[14] Bad Financial Medicine, supra note 1.

 

[16] William P. Elliot, A Guide to Captive Insurance Companies (Part 1), 16 JITAX 22 (April 2005).

[17] Bunting, Kirkpatrick & Kurtz, Possibilities and Pitfalls with Captive Insurance Companies, 38 ESTPLN 03 (August 2011).

[18] Rev. Rul. 2001-31, 2001-1 C.B. 1348 (2001).

[19] Rev. Rul. 2002-89, 2002-2 C.B. 984 (2002); Rev. Rul. 2002-90, 2002-2 C.B. 985 (2002); Rev. Rul. 2005-40, 2005-2 C.B. 4 (2005).

[20] Richard M. Columbik, Captive Insurance Companies, Inc. (Aug. 13, 2008), available at http://www.inc.com/law-and-taxation/2008/08/captive_insurance_companies.html.

[21] See IRC § 162(a) (2006); Treas. Reg. § 1.162-1(a)

[22] IRC § 162(a).

[23] Treas. Reg. 1.162-1(a).

[24] See Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 838 (6th Cir. 1995); Treas. Reg. 1.162-1(a).

[25] See IRC § 831(b)(1) (2006); IRC § 11 (2006).

[26] See IRC § 831(b)(2).

[27] See IRC § 831(b) (2006).

[28] See I.R.C. § 1(h) (2006).

[29] See I.R.C. § 162 (2006); See I.R.C. § 11(b) (2006).

[30] See Rev. Proc. 2008-66, 2008-45 I.R.B. 1107 (2008).

[31] See IRC § 831(b); Richard M. Columbik, supra note 20; Bad Financial Medicine, supra note 1.

[32] See IRC § 162; Richard M. Columbik, supra note 20.

[33] See Bad Financial Medicine, supra note 1.

[34] See id.

[35] See id.

[36] Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 838 (6th Cir. 1995).

[37] Rev. Rul. 2001-31, 2001-1 C.B. 1348.

[38] Jay Adkisson, Running a Captive Correctly, Risser Adkisson LLP, http://www.captiveinsurancecompanies.com/captive_insurance_taxation.htm [hereinafter Running a Captive Correctly].

[39] Treas. Reg. § 1.801-3(a).

[40] IRC § 816(a) (2006).

[41]  Running a Captive Correctly, supra note 38.

[42] Id.

[43] Id.

[44] Id.

[45] Id.

[46] Id.

[47] Running a Captive Correctly, supra note 38.

[48] Allied Fidelity Corp. v. C.I.R., 572 F.2d 1190, 1193 (7th Cir. 1978).

[49]See C.I.R. v. Treganowan, 183 F.2d 288, 290-291 (2nd Cir. 1950).

[50] Helvering v. LeGierse, 312 U.S. 531, 542 (1941); Rev. Rul. 89-96, 1989-2 C.B. 114 (1989).

[51] Helvering, 312 U.S. at  539.

[52] Id.

[53] Id.

[54] Id.

[55] Id.

[56] Id.

[57] Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).

[58] Bobbe Hirsh & Alan Lederman, The Service Clarifies the Facts & Circumstances Approach to Captive Insurance Companies, 100 JTAX 168 (March 2004)[hereinafter The Service Clarifies the Facts & Circumstances Approach to Captive Insurance Companies].

[59] Id.

[60] Clougherty Packing Co. v. C.I.R., 84 T.C. 948 (1985), decision aff’d, 811 F.2d 1297 (9th Cir. 1987).

[61] Humana, Inc. v. C.I.R., 881 F.2d 247 (6th Cir. 1989).

[62] Id.

[63] Id.

[64] Id.

[65] Id.

[66] Id.

[67] Humana, Inc. v. C.I.R., 881 F.2d 247, 257-259 (6th Cir. 1989).

[68] Rev. Rul. 2005-40; Rev. Rul. 2002-90.

[69] Crawford Fitting Co. v. U.S., 606 F. Supp. 136, 143 (N.D. Ohio 1985).

[70] See Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 840-841 (6th Cir. 1995); Rev. Rul. 2002-90.

[71] Ocean Drilling & Exploration Co. v. U.S., 988 F.2d 1135, 1151 (Fed. Cir. 1993).

[72] Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).

[73] Clougherty Packing Co. v. C.I.R., 811 F.2d 1297, 1300 (9th Cir. 1987).

[74] Humana, Inc. v. C.I.R., 881 F.2d 247 (6th Cir. 1989).

[75] Id.

[76] Id.

[77] Id.

[78] Id.

[79] See Gulf Oil Corp. v. Commissioner, 89 T.C. 1010 (1987); Sears, Roebuck, and Co. v. Commissioner, 972 F.2d 858 (7th Cir. 1992); Amerco, Inc. v. Commissioner, 979 F.2d 162 (9th Cir. 1992); Harper Group v. Commissioner, 979 F.2d 1341 (9th Cir. 1992).

[80] See IRC § 101(j) (2006).

[81] See IRC § 419A (2006).

[82] See 26 C.F.R. § 1.412(i)-1.

[83] See Internal Revenue Service, Notice 2002-70.

[84] See Sherwin P. Simmons & Stephan R. Leimberg, Prop. Regs. Address Abusive Transactions Involving Life Insurance in Qualified Plans, 31 ESTPLN 163 (2004).

[85] Internal Revenue Service, Ann. 2002-96, Termination of Appeals Settlement Initiative for Corporate Owned Life Insurance (COLI) Cases (2002); Neonatology Associates, P.A. v. C.I.R., 115 T.C. 43, 51 (2000).

[86] See Bad Financial Medicine, supra note 1.

[87] Bad Financial Medicine, supra note 1.

[88] I.R.C. § 831(b).

[89] Bad Financial Medicine, supra note 1.

[90] Id.

[91] Howard Zaritsky & Stephan Leimberg, Deductibility of Life Insurance Premiums, Tax Planning with Life Insurance: Analysis with Forms § 2.08 (2011).

[92] See Steven Meyerowitz, Court Finds ‘HedgeLoan’ Transactions Were Taxable Stock Sales Disguised As Loans, Financial Fraud Law (June 16, 2011), available at http://www.financialfraudlaw.com/lawblog/court-finds-‘hedgeloan’-transactions-were-taxable-stock-sales-disguised-loans/2426; William D. Hartsock, Esq., Six Defendents Convicted in $120 Million International Tax Shelter Case (2009), available at http://www.taxlawfirm.net/audit-international/international_tax_shelter.htm.

[93] See Meyerowitz, supra note 96; Hartsock, supra note 96.

[94] A substantial valuation misstatement exists if the value or adjusted basis of any property claimed on a return is 150% or more of the amount determined to be the correct amount of the value or adjusted basis.  See IRC § 6662(e)(1) (2006).

[95] IRC § 6662 (2006).

[96] IRC § 6663(a) (2006).

[97] See Hartsock, supra note 96; Shannon P. Duffy, Attorney Indicted for Helping Clients Avoid $4.6M in Taxes, The Legal Intelligencer (Nov. 29, 2007), available at http://www.judicialaccountability.org/articles/lawyersinthenewsthree.htm; Press Release, United States Department of Justice, Utah-Based Tax Shelter Operators Plead Guilty in $200 Million Tax Fraud (October 26, 2009), available at http://www.justice.gov/opa/pr/2009/October/09-tax-1155.html; Jonathan D. Glater, Former Banker Pleads Guilty in Tax Shelter Case, New York Times (August 12, 2005), available at http://www.nytimes.com/2005/08/12/business/12tax.html?pagewanted=all; IRS Notice 97-24, 1997-1 C.B. 409 (1997).

[98] See Hartsock, supra note 96; Duffy, supra note 97; Utah-Based Tax Shelter Operators Plead Guilty in $200 Million Tax Fraud, supra note 101; Glater, supra note 101.

[99] Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS: Hearing Before the S. Comm. on Finance, supra note 12.

[100] See id.

[101]  See Senator Carl Levin, Chairman, Permanent Subcommittee on Investigations, Statement Introducing the Stop Tax Haven Abuse Act, Part 1 (Feb. 17, 2007), in Tax Analysts (Doc. 2007-4503), Feb. 12, 2007, at 36 [hereinafter Statement Introducing the Stop Haven Abuse Act, Part I]

[102] Id. at 36-37.

[103] Id. at 37.

[104] Diana Erbsen, Alan W. Granwell, Ellis L. Reemer, & Peter R. Zeidenberg, IRS Issues Voluntary Disclosure Guidance for Unreported Offshore Accounts and Entities, Tax Update (Int’l Tax Newsletter), Mar. 31, 2009, at 2, available at http://www.dlapiper.com/files/Publication/95e03d3b-7060-4562-b72d-a46fea0aa4b5/Presentation/PublicationAttachment/5e2a2645-f236-4863-8e9e-c85fec262f48/DomTax0409.pdf [hereinafter IRS Issues Voluntary Disclosure Guidance for Unreported Offshore Accounts and Entities].

[105] See U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Abuses: The Enablers, The Tools, and Secrecy, Minority & Majority Staff Report, 113-360, Aug. 1, 2006 available at http://www.levin.senate.gov/imo/media/doc/supporting/2006/PSI.taxhavenabuses.080106.pdf [hereinafter Tax Haven Abuses: The Enablers, The Tools, and Secrecy] (released in conjunction with the Permanent Subcommittee on Investigations Aug. 1, 2006 Hearing).

[106] Kristen A. Parillo, IRS Streamlines Offshore Disclosure Process, Tax Analysts, July 30, 2009 (Doc. 2009-17268) [hereinafter IRS Streamlines Offshore Disclosure Process].

[107] See Tax ComplianceOffshore Financial Activity Creates Enforcement Issues for the IRS, supra note 12, at 7-11.

[108] Press Release, Internal Revenue Service, FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts (June 29, 2009) (on file with agency).

[109] Press Release, Democratic National Committee, Another Bad Batch of Bush Money (June 6, 2005) (on file with the Committee); Eric Torbenson & Brendan M. Case, SEC Accuses Sam, Charles Wyly of Secrecy, Insider Trading, The Dallas Morning News, July 30, 2010, available at http://www.dallasnews.com/business/headlines/20100729-SEC-accuses-Sam-Charles-Wyly-3129.ece (stating that the brothers are being investigated by the SEC, a grand jury in Dallas, and a grand jury in New York).

[110] See Statement Introducing the Stop Haven Abuse Act, Part I, supra note 105, at 2.

[111] Id.

[112] Id. at 2-3.

[113] Id. at 3.

[114] Id.

[115] Id.; See Tax Haven Abuses: The Enablers, The Tools, and Secrecy, supra note 109, at 118.

[116] Tax Haven Abuses: The Enablers, The Tools, and Secrecy, supra note 109, at 118.

[117] See Statement Introducing the Stop Haven Abuse Act, Part I, supra note 105, at 3-4.

[118] Id.

[119] Id. at 8-9; Nebraska Democrats, Taxes? We Don’t Need to Pay No Stinkin’ Taxes! The Dallas Morning News, June 8, 2005, available at http://www.dallasnews.com/

 

(“First a public company grants stock options to a senior executive.  The executive then transfers the options to a trust or partnership controlled by the executive’s family.  The parties then structure the transfer as a ‘sale’ and the trust then ‘pays’ the executive for the options with a long-term or deferred note…Shortly after then options are transferred, the trust exercises the stock options and sells the stock in an open market. The executive then takes the position that tax is not owed until the date of the deferred payment…although the executive has access to the partnership assets.”).

 

[120] See David Cay Johnston, Tax Cheats Called Out of Control, N.Y. Times, Aug. 1, 2006, at C1, available at http://www.nytimes.com/2006/08/01/business/01tax.html.

[121] IRS Streamlines Offshore Disclosure Process, supra note 110.

[122] See id.

[123] IRS Issues Voluntary Disclosure Guidance for Unreported Offshore Accounts and Entities, supra note 108, at 2; IRM § 9.5.11.9 (West 2009)

 

(“(3) A voluntary disclosure occurs when the communication is truthful, timely, complete, and when: (a) a taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his/her correct tax liability.  (b) The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, the interest, and any penalties determined by the IRS to be applicable.

(4) A disclosure is timely if it received before: (a) The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified taxpayer it intends to commence such an examination.  (b) The IRS has received information from a [3rd] party (e.g. informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance.  (c) IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer.  (d) The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g. search warrant, grand jury subpoena).”).

 

[124]  See IRS Issues Voluntary Disclosure Guidance for Unreported Offshore Accounts and Entities, supra note 108.

[125] Id.

[126] See id.

[127] Id.

[128] Id. (Providing an exception where an account or entity was formed or acquired within the six-year “look back” period. In these cases, the taxes and interest will be assessed starting with the earliest year in which the account was created or acquired, or the entity was formed.).

[129] Id.

[130] Id. (providing the requisite conditions are satisfied before qualifying for a reduction, including (1) the taxpayer did not open or cause any accounts to be opened or entities formed; (2) there has been no activity in any account or entity; and (3) all applicable U.S. taxes have been paid on the funds deposited in the accounts or transferred to the entities (except for taxes on income or earnings of the account of entity)).

[131] See id.; I.R.M § 9.5.11.9(2) (this does not apply to a taxpayer with illegal income source).

[132] Statement, Douglas Shulman, Commissioner, Internal Revenue Service, Conference Call re Voluntary Disclosure Initiative, Mar. 26, 2009 (“Those who truly come in voluntarily will pay back taxes, interest, and a significant penalty, but can avoid jail time.”).

[133]Press Release, Internal Revenue Service, IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens (Jan. 9, 2012) available at http://www.irs.gov/newsroom/article/0,,id=252162,00.html.

[134] Id.

[135] Press Release, Internal Revenue Service, Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 Deadline (Feb. 8, 2011) available at http://www.irs.gov/newsroom/article/0,,id=235695,00.html.

 [136] Id.

[137] Id.

[138] See id.

[139] Id.

[140] Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 Deadline, supra note 139.

[141] IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens, supra note 137.

[142] Id.; Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 deadline, supra note 139.

[143] IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens, supra note 137.

[144] Id.

[145] Id.

[146] See Thomas E. Zehnle, Rethinking the Approach to Voluntary Disclosures, Tax Analyst (Jan. 17, 2012), available at http://www.millerchevalier.com/Publications/PublishedArticles?find=73302.

[147] Id.

[148] Id.

[149] Id.

[150] Sally P. Schreiber, IRS Announces Open-Ended Third Offshore Voluntary Disclosure Program, Tax Analysts (Jan. 9, 2012), available at http://www.journalofaccountancy.com/Web/20124984.htm.

[151] Id.

[152] See id.

[153] Tax ComplianceOffshore Financial Activity Creates Enforcement Issues for the IRS, supra note 12, at 7.

[154] Id.

[155] Id at 9.

[156] Id.

[157] Id.

[158] Id.

[159] See Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS, supra note 12, at 7; Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12, at 22-25 (“A QI is defined as a foreign financial institution or a foreign clearing organization, other than a U.S. branch or U.S. office of such institution or organization, which has entered into a withholding and reporting agreement (‘QI agreement’) with the IRS.  In exchange for entering into a QI agreement, the QI is able to shield the identities of its customers from the IRS and other intermediaries in certain circumstances and is subject to reduced information reporting duties compared to those that would be imposed in the absence of the agreement. This ability to shield customer information is limited, however, with respect to U.S. persons, because the QI is required to furnish Forms 1099 to its U.S. customers if it has assumed primary withholdings responsibility for these accounts, or to provide Forms W-9 to the withholding agent in cases in which the QI has not assumed such responsibility.”).

[160] Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12, at 22-25.

[161] Id.

[162] Id. (stating the UBS cases – discussed later in this paper – demonstrate how QIs are insufficient in eliminating offshore tax evasion).

[163] See generally Senator Carl Levin, Chairman, Permanent Subcommittee on Investigations, Summary of the Stop Tax Haven Abuse Act (July 12, 2011), available at http://levin.senate.gov/newsroom/press/release/summary-of-the-stop-tax-haven-abuse-act-of-2011/?section=alltypes (Senate Bill 506 and House Bill 1265, proposing to (1) allow the Department of Treasury to impose the same penalties used when an institution, foreign jurisdiction, or individual is found to be laundering money to any transaction or entity that the Treasury finds to be impeding on U.S. tax enforcement; (2) authorizing the Secretary of the Treasury to add or remove countries from the list of offshore secrecy jurisdictions, which are viewed as having secrecy laws or practices that unreasonably restrict U.S. tax authorities from obtaining necessary information; (3) cause certain non-U.S. corporations, which are managed and controlled within the U.S., to be treated as domestic corporations and liable for U.S. corporate income tax; and (4) apply withholding tax to payments with respect to stock of U.S. corporations to non-U.S. persons of dividend equivalent amounts and substituted dividends, which are, arguably, not subject to the 30% withholding tax on dividends paid to non-U.S. investors).

[164] See Press Release, U.S. Congress, Baucus, Rangel, Kerry, Neal Improve Plan to Tackle Offshore Tax Abuse Through Increased Transparency, Enhanced Reporting and Stronger Penalties (Oct. 27, 2009) available at http://finance.senate.gov/newsroom/chairman/release/?id=c661a192-81e8-4bdf-8502-242615963f71 (“…the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.”)

[165] Jeremy Scott, News Analysis: Republicans Demand Taxpayers receive ‘Geithner Deal’, Tax Analysts, Dec. 3, 2009 (Doc. 2009-265202) (“…taxpayers who avoided tax; See H.R. 4172, 111th Cong. (2009).

obligations on overseas accounts for years could come forward and pay only back taxes and interest…”).

[166] Joann M. Weiner, News Analysis: Trouble Brewing Offshore with New U.S. Lending Initiative, Tax Analysts, Feb. 17, 2009 (Doc 2009-3299); See S. 344, 11th Cong. (2009).

[167] See S. 1973, 110th Cong. (2007).

[168] Doug Shulman, Commissioner, Internal Revenue Service, Testimony before the Senate Finance Committee on Tax Issues Related to Ponzi Schemes and an Update on Offshore Evasion Legislation, (Mar. 17, 2009), available at http://finance.senate.gov/hearings/hearing/?id=d82f4597-e246-be50-240b-6056c6a2a678.

[169] See id.

[170] Blake Ellis, IRS audited 1 in 8 millionaires, CNN Money (Jan. 5, 2012), http://money.cnn.com/2012/01/05/pf/taxes/irs_audit/index.htm.

[171] Id.

[172] Id.

[173] Id. (stating these enhancements include expanding information reporting requirements to include sources of income for U.S. persons with accounts at QI banks, strengthening documentation rules to ensure that the program is delivering on its original intent, and requiring withholding accounts with documentation that is considered insufficient).

[174] Memorandum, Internal Revenue Service, Report on Foreign Bank and Financial Accounts (June 30, 2009) (on file with the agency), available at http://www.irs.gov/businesses/small/article/0,,id=148849,00.html.

[175] Id.; William & Thomas Sykes, Recent Developments Encourage Voluntary Correction to Foreign Financial Bank Account Reporting Violations, McDermott Newsletter (McDermott Will & Emery LLP, Int’l.), Apr. 14, 2009, available at http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/6eb0672c-de23-4242-9312-888af6760b4b.cfm (Stating that a U.S. person has financial interest in each account for which each person is the owner of record or has legal title, regardless of whether the account is maintained for the persons’ own benefit or for the benefit of others, including non U.S. persons. Instructions on Form TD F 90-22.1 now provide that the owner of record or holder of legal title includes a corporation in which the U.S. person directly or indirectly owns more than fifty percent of the total value or more than fifty percent of the voting power of all shares of stock, and a partnership in which the U.S. person owns an interest in more than fifty percent of the profits or more than fifty percent of the capital of the partnership.).

[176] William & Thomas Sykes, Recent Developments Encourage Voluntary Correction to Foreign Financial Bank Account Reporting Violations, McDermott Newsletter (McDermott Will & Emery LLP, Int’l.), Apr. 14, 2009, available at http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/6eb0672c-de23-4242-9312-888af6760b4b.cfm (stating this includes savings, demand, checking, deposit, or any other account maintained with a financial institution); See id.  (Stating that individual bonds, notes or stock certificates and unsecured loans to foreign trade or business that is not a financial institution is not a financial account.  Correspondent or “nostro” accounts – international interbank transfer accounts – maintained by banks that are used solely for the purpose of bank-to-bank settlement is also not a financial account.).

[177] Id.

[178] Kristen A. Parillo, Hedge Fund, Private Equity Investors Must File FBAR, IRS Confirms, Tax Analysts, June 29, 2009 (Doc. 2009-14609) (stating there has been confusion over the rules in recent years).

[179] Dan Meehan & Bill Morrow, Foreign Account Disclosure – Possible June 30 Filing Obligation for Certain Funds and LPs, Tax Update (Cooley Godward Kronish LLP, Int’l.), June 2009, available at http://www.cooley.com/62717.

[180] See id.

[181] See id.

[182] See id.

[183] See Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12, 7 at 54.

[184] See id.

[185] See generally Memorandum, President of the United States, Convention between The United States of America and The Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, Signed at Washington, October 2, 1996, Together with a Protocol to The Convention, May 29, 1997.

[186]  Id.

[187] Id.

[188] Id.

[189] See id.

[190] See id.; see generally Mutual Agreement of January 23, 2003, Regarding Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Income Tax Convention of October 2, 1996, U.S.-Switz., Jan. 23, 2003, available at http://www.taxjustice.net/cms/upload/pdf/ch_us_convention.pdf.

[191] Press Release, U.S. Dept. of Treasury, Treasury Announces Mutual Agreement with Switzerland Regarding Tax Information Exchange (Jan. 24, 2003) (on file with department).

[192] See Mutual Agreement of January 23, 2003, Regarding Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Income Tax Convention of October 2, 1996, supra  note 194, at 3-10.

[193] See id.; see generally Treasury Announces Mutual Agreement with Switzerland Regarding Tax Information Exchange, supra note 195.

[194] See Mutual Agreement of January 23, 2003, Regarding Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Income Tax Convention of October 2, 1996 supra note 194, at 1-2.

[195] See id. at 2; Convention between The United States of America and The Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, Signed at Washington, October 2, 1996, Together with a Protocol to The Convention supra note 189 (these examples include (1) conduct established to defraud individuals or companies, even though the aim of the behavior may not be to commit tax fraud; (2) conduct that involves destruction or non-production of records, or the failure to prepare or maintain correct and complete records; and (3) conduct by a person subject to tax in the requesting State that involves the failure to file a tax return that such person is under a legal duty to file, or an affirmative act that has the effect of deceiving the tax authorities).

[196] See Mutual Agreement of January 23, 2003, Regarding Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Income Tax Convention of October 2, 1996, supra note 194, at 2.

[197] See generally Treasury Announces Mutual Agreement with Switzerland Regarding Tax Information Exchange, supra note 195.

[198] See generally Andrea Coombes, UBS Case Could be Major Victory for IRS, Fox Business, July 11, 2009, http://www.foxbusiness.com/story/markets/industries/finance/ubs-case-major-victory-irs/.

[199] Id.

[200] See id.

[201] See Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12, at 2, 31; Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS, supra note 12, at 10.

[202] Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12.

[203] See Statement Introducing the Stop Haven Abuse Act, Part I, supra note 105, at 17.  (Explaining a John Doe summons is tool used by the IRS in recent years to uncover taxpayers in offshore tax schemes. It is an administrative IRS summons used to request information in cases where the identity of the taxpayer is unknown. To obtain approval of the summons, due to the IRS’s inability to serve the taxpayer, the IRS must show the court, in public filings to be resolved in open court, that: (1) the summons relates to a particular person or ascertainable class of persons, (2) there is a reasonable basis for concluding that there is a tax compliance issue involving that person or class of persons, and (3) the information sought is not readily available from other sources.).

[204] See, Tax Haven Banks and U.S. Tax Compliance – Obtaining the Names of U.S. Clients with Swiss Accounts: Statement Before the Permanent S. Subcomm. on Investigations on Homeland Security and Governmental Affairs, 111th Cong. (Mar. 4, 2009) (statement of John DiCicco, Acting Asst. Att’y Gen., Tax Division, U. S. Dept. of Justice) .

[205] See Tax ComplianceOffshore Financial Activity Creates Enforcement Issues for the IRS, supra note 12, at 10; see generally See generally U.S. v. UBS AG (09-600333-CR-COHN); Press Release, U.S. Dept. of Justice, Office of Public Affairs, UBS Enters into Deferred Prosecution Agreement (Feb. 18, 2009) (on file with the DOJ), available at www.usdoj.gov/opa/pr/2009/February/09-tax-136.html.

[206] See UBS Enters into Deferred Prosecution Agreement, supra note 209.

[207] Fed Sues UBS for All American Customers Names, DealB%k (Feb. 19, 2009, 2:42 PM), http://dealbook.blogs.nytimes.com/2009/02/19/us-sues-ubs-to-disclose-customer-names/.

[208] Id.

[209] See Lynnley Browning, UBS Pressed for 52,000 Names in 2nd Inquiry, NYTimes, February 19, 2009, at B1, available at http://www.nytimes.com/2009/02/20/business/worldbusiness/20ubs.html.

[210] See Response for UBS AG’s to the IRS’s June 30, 2009 Submission, U.S. v. UBS AG, (July 8, 2009) (No. 1:09-CV-20423-Gold/McAliley).

[211] See id at 2; Katharina Bart, Swiss Meet on UBS Tax Case, Wall St. J. Aug. 11, 2009.

[212] Emma Thomasson, Swiss Party Wants to Punish U.S. for UBS Probe, Reuters, Feb. 21, 2009, available at http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSTHO15017420090221.

[213] See generally Lynnley Browning, U.S. Extends Its Inquiry of Offshore Tax Fraud, N.Y. Times, Mar. 18, 2009, at B3, available at www.nytimes.com/2009/03/19/business/19tax.html.

[214] David Voreacos, Credit Suisse May Settle U.S. Probe by Admitting Wrongdoing, Paying Fine, Bloomberg (Aug. 15, 2011), available at http://www.bloomberg.com/news/2011-08-15/credit-suisse-likely-to-settle-u-s-probe-than-risk-charges-lawyers-say.html.

[215] See Pascal Fletcher & Lisa Jucca, UBS, U.S. Settle Tax Evasion Case, Reuters, Aug. 12, 2009, available at http://www.reuters.com/article/2009/08/12/us-ubs-tax-idUSTRE57B2CF20090812.

[216] See id.

[217] See David Stewart, Officials Report ‘Agreement in Principle’ in UBS Dispute, Tax Analysts, Jul. 31, 2009 (Doc. 2009 -17337).

[218] Charles Gnaedinger, U.S. Has ‘More than 250’ Tax Evader Names, Seeks More John Doe Summonses, Tax Analysts, April 28, 2009 (Doc 2009-9500).

[219] Darrin Mish, Three Indicted of Tax Evasion Using UBS, JDSUPRA, February 3, 2012 available at http://www.jdsupra.com/post/documentViewer.aspx?fid=ed381d4c-0792-4911-a4ef-62a3ffef3064.

[220] Id.

[221] Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[222] See id.

[223] See generally Gnaedinger, supra note 222.

[224] Charles P. Rettig, Evaluation of an IRS Undisclosed Offshore Accounts, Tax Analysts, Nov. 10, 2011 (Doc 2011-20536).

[225] Id.

[226] See Gnaedinger, supra note 222; Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[227] Asher Rubinstein, Esq., The IRS Offensive Against Offshore Accounts: New Attacks and New Relief (2009), available at http://www.assetlawyer.com/irs-offensive-against-offshore-accounts.htm.

[228] Id.

[229] Id.

[230] Id.

[231] Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[232] Credit Suisse May Settle U.S. Probe by Admitting Wrongdoing, Paying Fine, supra note 218.

[233] Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[234] Credit Suisse May Settle U.S. Probe by Admitting Wrongdoing, Paying Fine, supra note 218.

[235] Id.

[236] Id.

[237] Id.

[238] Id.

[239] See DOJ Announces Tax Indictment Against Swiss Bank, Tax Analysts, Feb. 2, 2012 (Doc 2012-2175); Stephanie Song Johnston, HSBC India Client Indicted for U.S. Tax Evasion, Tax Analysts, Nov. 18, 2011 (Doc 2011-24335) [hereinafter HSBC India Client Indicted for U.S. Tax Evasion].

[240] See DOJ Announces Tax Indictment Against Swiss Bank, supra note 243; Bruce Zagaris, International Tax Enforcement Continues to Rise, Tax Analysts, Nov. 8, 2011 (Doc 2011-23212); See also David D. Stewart, U.S. Offshore Enforcement Likely to Focus on Asia, Practitioners Say, Tax Analysts, Apr. 5, 2010 (Doc 2010-7405) (“bankers … considered their financial institutions to be insulated from the controversies taking place with banks in Switzerland and Liechtenstein…”).

[241]Kevin McCoy, Swiss Bank Indictment Details Tax Evasion Ploys, USA Today, Feb. 3, 2012 available at http://www.usatoday.com/money/industries/banking/story/2012-02-03/swiss-bank-charged-wegelin/52953452/1; Goulder, supra note 12.

[242] Goulder, supra note 12.

[243] Id.

[244] Id.

[245] Id.

[246] Id.

[247] Id.

[248] Goulder, supra note 12.

[249] HSBC Case Alerts Asia Banks for U.S. Tax Probes, supra note 12.

[250] Rubinstein, supra note 231.

[251] HSBC Case Alerts Asia Banks for U.S. Tax Probes, supra note 12.

[252] Id.

[253] Rubinstein, supra note 231.

[254] HSBC Case Alerts Asia Banks for U.S. Tax Probes, supra note 12.

[255] Id.

[256] Id.

[257] See HSBC India Client Indicted for U.S. Tax Evasion, supra note 243.

[258] Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[259] HSBC Case Alerts Asia Banks for U.S. Tax Probes, supra note 12.

[260] Rubinstein, supra note 231.

[261] Id.

[262] Id.

[263] Id.

[264] Id.

[265] Id.

[266] Rubinstein, supra note 231.

[267] Randall Jackson, U.S. Offers 11 Swiss Banks Deal to End Tax Evasion Investigation, Tax Analysts, Dec. 20, 2011 (Doc 2011-26723).

[268] Rubinstein, supra note 231.

[269] Id.

[270] Id.

[271]Id.

[272] Id.

[273] Id.

[274] Rubinstein, supra note 231.

[275] Id.

[276] Id.

[277] Id.

[278] Id.

[279] Id.

[280] Rubinstein, supra note 231.

[281] Id.

[282] Id.

[283] Leumi to U.S. Taxpayers: Disclose Accounts, Reuters (Nov. 4, 2010), available at http://www.ynetnews.com/articles/0,7340,L-3978607,00.html.

[284] Id.

[285] Rettig, supra note 228.

[286] Jeffrey Locke & Richard Kando, Turning Up the Heat on Offshore Account Holders, N.Y.L.J. (Feb. 14, 2012), available at http://www.newyorklawjournal.com/PubArticleFriendlyNY.jsp?id=1202541972683&slreturn=1.

[287] Jeffrey Locke and Richard Kando, Turning Up the Heat on Offshore Account Holders, New York Law Journal (Feb. 14, 2012), available at http://www.newyorklawjournal.com/PubArticleFriendlyNY.jsp?id=1202541972683&slreturn=1.

[288] See generally Jack Townsend, Court Addresses Attorney-Client Privilege in Suit Against Tax Shelter Promoters, Federal Tax Crimes, (Sept. 1, 2010), http://federaltaxcrimes.blogspot.com/2010/09/court-addresses-attorney-client.html.

[289] Rettig, supra note 228; Mish, supra note 223.

[290] McCoy, supra note 245.

[291] Goulder, supra note 12.

[292] Id.

[293] Credit Suisse May Settle U.S. Probe by Admitting Wrongdoing, Paying Fine, supra note 218.

[294] Id.

[295] Id.

[296] See Brian Mahany, Lawyer Indicted for Helping Clients Set up Offshore Swiss Bank Accounts, Due Diligence, (Feb. 2, 2012, 11:57 PM), http://www.mahanyertl.com/mahanyertl/lawyer-indicted-for-helping-clients-set-up-offshore-swiss-bank-accounts/1383/.

[297] Julie Goosman & Christine Lug, Captivating! Captive Insurance Arrangements are Alive and Well, 35 WGL-CTAX 25 (Thompson/RIA 2008) [hereinafter Captivating! Captive Insurance Arrangements are Alive and Well].

[298] Id.

[299] IRC § 951(b) )(2006).

[300] IRC § 953(c) (2006).

[301] IRC § 953(e) (2006).

[302] This is due to the U.S. government’s installment of anti-avoidance regimes, most particularly in the arena of CICs.  The net effect is that the profits of a company in a low-tax jurisdiction are included in the taxable income of the shareholders resident in the high-tax jurisdiction.  Since the shareholders are subject to tax, not the company, tax treaty protection may not be afforded.

[303] Captivating! Captive Insurance Arrangements are Alive and Well, supra note 301.

[304] Id.

[305] See IRC § 953(d) (2006).

[306] See id.; Captivating! Captive Insurance Arrangements are Alive and Well, supra  note 301.

[307] See IRC § 953(d); Captivating! Captive Insurance Arrangements are Alive and Well, supra note 301.

[308] See IRC § 953(d); Captivating! Captive Insurance Arrangements are Alive and Well, supra note 301.

[309] IRC § 4371 (2006).

[310] See id.

[311] See id.

[312] IRC § 4371(1) (2006).

[313] See IRC § 4371(3) (2006).

[314] Utah Code § 31A-37-603.

[315] S.C. Code Ann. § 38-90-45

[316] Phillip England, Isaac Druker & Mark Keenan, Captive Insurance Companies: A Growing Alternative Method of Risk Financing, J. of Payment Systems Law (June 2007), available at http://www.andersonkill.com/webpdfext/cic-riskfinancing.pdf [hereinafter Captive Insurance Companies: A Growing Alternative Method of Risk Financing].

[317] Id.

[318] Running a Captive Correctly, supra note 38.

[319] Captive Insurance Companies: A Growing Alternative Method of Risk Financing, supra note 320.

[320] Running a Captive Correctly, supra note 38.

[321] See Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 840-1 (6th Cir. 1995); Rev. Rul. 2002-90.

[322] See Malone & Hyde, Inc., 62 F.3d at 840-1 (6th Cir. 1995); Rev. Rul. 2002-90; Running a Captive Correctly, supra note 38.

[323] See Malone & Hyde, Inc. v. C.I.R., 62 F.3d 835, 840-1 (6th Cir. 1995); Rev. Rul. 2002-90; Running a Captive Correctly, available at http://www.captiveinsurancecompanies.com/captive_insurance_taxation.htm.

[324] 18 Del. C. § 6905

[325] Captive Insurance Companies: A Growing Alternative Method of Risk Financing, supra note 292.

[326] Id.

[327] Id.

[328] Id.

[329] Treas. Reg. § 1.801-3(a).

[330] Id.

[331] IRS Notice 2003-34; Howard M. Zaritsky & Stephan R. Leimberg, Offshore Life Insurance Companies, Tax Plan. Life Ins. § 1.15 (Thomson/RIA 2012) [hereinafter Offshore Life Insurance Companies].

[332] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[333] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[334] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[335] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[336] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[337] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[338] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[339] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[340] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[341] IRS Notice 2003-34.

[342] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[343] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[344] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[345] IRS Notice 2003-34; Offshore Life Insurance Companies, supra note 335.

[346] See SEC v. Merrill Scott and Associates, Ltd., 2009 WL 2984043 (D. Utah, Sept. 17, 2009).

[347] Certain offshore insurance companies may make an election under IRC § 953(d) to be treated as a domestic corporation for federal income tax purposes, which may eliminate the FET requirement that is extremely unfavorable to transactions offshore CICs and U.S. parent entities.  Since an IRC § 953(d) CIC is itself a U.S. taxpayer and owner of all CIC assets, the “U.S. Person” in terms of any W-9 or FBAR forms is the CIC and not the parent shareholder entity.  The fact that the CIC is itself the “U.S. Person” could make it much more difficult for creditors to discover the existence of a relationship between an onshore debtor and an offshore CIC.

[348] See generally Merrill Scott & Associates, 2009 WL 2984043.

[349] See id.

[350] Captivating! Captive Insurance Arrangements are Alive and Well, supra note 301.

[351] IRC § 953(d); Captivating! Captive Insurance Arrangements are Alive and Well, supra note 301.

[352] See International Shoe Co. v. Washington, 326 U.S. 310 (1945); Burger King v. Rudzewicz, 471 U.S. 462 (1985).

[353] IRC § 953(d); Captivating! Captive Insurance Arrangements are Alive and Wellsupra note 301.

[354] Duncan E. Osborne & Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011) [hereinafter Asset Protection Trust Planning].

[355] Id.

[356] See Uniform Fraudulent Transfer Act § 4(b), 7A U.L.A. 639, 653 (1984); Asset Protection Trust Planning, supra note 358.

[357] A bankruptcy judge recently even ruled that the court had the power to cancel a debtor’s stock ownership in several corporations.  The court canceled the stock and then ordered new stock issued to the creditors.

[358] Asset Protection Trust Planning, supra note 358.

[359] Id.

[360] Id.

[361] Id.

[362] Id.

[363] Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[364] Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[365] See generally Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[366] Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[367] See generally Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[368] See Banks Beware: IRS Criminal Investigations Expanding, supra note 12; Goulder, supra note 12; Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12; Tax Compliance – Official Financial Activity Creates Enforcement Issue for the IRS, supra note 12; HSBC Case Alerts Asia Banks for U.S. Tax Probes, supra note 12; Practitioners Assess Offshore Initiative as Deadline Approaches, supra note 12.

[369] See Banks Beware: IRS Criminal Investigations Expanding, supra note 12.

[370] See Jeremiah Coder and Lee A. Sheppard, Banks Beware: IRS Criminal Investigations Expanding, Tax Analysts, 2012 TNT 35-4 (February 22, 2012); 18 U.S.C. 1961 et seq; 18 U.S.C. 1956.

[371] See generally Uniform Fraudulent Transfer Act § 4(b), 7A U.L.A. 639, 653 (1984); Duncan E. Osborne and Mark E. Osborne, Asset Protection Trust Planning, ST022 ALI-ABA 1 (ALI 2011).

[372] See Goulder, supra note 12; Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12; Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS: Hearing Before the S. Comm. on Finance, supra note 12.

[373] Goulder, supra note 12.

[374] See generally Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities, supra note 12; Tax Compliance–Offshore Financial Activity Creates Enforcement Issues for the IRS: Hearing Before the S. Comm. on Finance, supra note 12.

[375] Rubinstein, supra note 231.

[376] See Goulder, supra note 12.

[377] Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).

[378] The Service Clarifies the Facts & Circumstances Approach to Captive Insurance Companies, supra note 58.

[379] Humana, Inc. v. C.I.R., 881 F.2d 247 (6th Cir. 1989).