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Thread: this could cause a FUNDAMENTAL change ...

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    Default this could cause a FUNDAMENTAL change ...

    (snip)"Published on Tuesday, August 1, 2006 by the New York Times
    Tax Cheats Called Out of Control
    by David Cay Johnston

    So many superrich Americans evade taxes using offshore accounts that law enforcement cannot control the growing misconduct, according to a Senate report that provides the most detailed look ever at high-level tax schemes.
    Among the billionaires cited in the report are the owner of the New York Jets football team, Robert Wood Johnson IV; the producer of the “Mighty Morphin Power Rangers” children’s show, Haim Saban; and two Texas businessmen, Charles and Sam Wyly, who the Center for Public Integrity found in 2000 were the ninth-largest contributors to President Bush.

    Mr. Johnson and Mr. Saban, who are portrayed as victims in the report, are scheduled to testify today before the Senate Permanent Investigations subcommittee. They are expected to say that professional advisers assured them their deals to avoid taxes were more likely lawful than not. The Wyly brothers told the committee that they would invoke their Fifth Amendment right against self-incrimination and thus were not called to testify. The report characterizes them as active participants in tax schemes.

    Cheating now equals about 7 cents out of each dollar paid by honest taxpayers, as much as $70 billion a year, the report estimated.

    “The universe of offshore tax cheating has become so large that no one, not even the United States government, could go after all of it,” said Senator Carl Levin, the Michigan Democrat whose staff ran the investigation.

    Senator Norm Coleman, the Minnesota Republican who is chairman of the subcommittee, adopted the minority report on Sunday as the product of the full committee.

    The report details how the Quellos Group, a tax shelter boutique based in Seattle, “concocted a tax shelter” using $9.6 billion “worth of fake securities transactions that were used to generate billions of dollars of fake capital losses.”

    Senator Levin said that when investigators asked for trading records they were first told the trades were private, over-the-counter transactions. He said investigators asked for trading tickets or other evidence of who owned the $9.6 billion worth of stock and were told the stocks were never owned by the parties involved.

    “They just wrote down numbers on paper and claimed losses,” he said. “It was just like fantasy baseball, except the taxes not paid were for real.”

    Quellos, in a statement, said, “we fundamentally disagree with the report, which presents a one-sided view.” It said the transactions, which the Senate committee describes as fabrications, were real and involved “a significant possibility of economic gain and loss.”

    The investigation, which took 18 months, involved 74 subpoenas, 80 interviews and the collection of more than two million documents, and yet Senator Levin said “the six cases we present are just examples, just a pinhole look.”

    The 400-page report recommends eight changes, some of them aimed at going after the law and accounting firms, banks and investment advisers that the report says enable tax schemes that rely on complexity, secrecy and compartmentalizing information so that advisers can claim they had no idea that the overall transaction was a fraud.

    “We need to significantly strengthen the aiding and abetting statutes to get at the lawyers and accountants and other advisers who enable this cheating,” Senator Levin said, adding that “we need major changes in law to stop the use of tax havens” by tax cheats.

    It also recommends new rules that strip away the underlying legal presumptions that make offshore tax havens like the Cayman Islands, Nevis, the Isle of Man and Panama attractive places for Americans to hide assets and income from the Internal Revenue Service.

    Senator Levin said the law “should assume that any transaction in a tax haven is a sham.”

    He said that during the investigation he grew angry as he learned how common cheating had become and how existing government rules aided tax cheats. He said that complex schemes were broken into discrete pieces, allowing professional advisers working on each piece to assert that they had no idea that, taken as a whole, a scheme was improper.

    “I get incensed by people who use tax havens to not pay their taxes while the average guy has to pay his taxes because they are taken out of his pay before he gets it,” he said.

    Both Mr. Johnson, the football team owner and scion of the Johnson & Johnson health care fortune, and Mr. Saban, the television mogul, are portrayed in the report as victims.

    The two men, through representatives, said yesterday that they relied on professional advisers who told them the transactions were lawful, and that they were now settling with the Internal Revenue Service.

    Mr. Johnson, known as Woody, told Senate investigators two weeks ago that to buy the Jets in 1999 he had to sell assets, incurring the 20 percent tax on long-term capital gains in effect at the time. He said that a way to defer the tax was proposed by Larry B. Scheinfeld, who had been his accountant at KPMG until he joined Quellos, where he worked closely with Chuck Wilk, a tax lawyer.

    The technique involved a complex set of circular transactions using what the Senate report characterized as sham corporations in the Isle of Man with shell corporations given names like Jackstones. Their ownership was kept secret.

    “Ain’t capitalism great!” Mr. Wilk wrote to Mr. Scheinfeld in an e-mail message extolling the tax benefits of the Johnson deal. Three weeks later, when the deal was set, Mr. Scheinfeld wrote back: “I just hope Woody doesn’t get cold feet or have the I.R.S. select his return for an audit!”

    The report details a scheme created for Mr. Saban to avoid more than $300 million in taxes from sale of his half interest in the Family Channel and related properties.

    Mr. Saban told Senate investigators that he never understood the transactions but undertook them after asking two questions of Mr. Wilk and his personal tax lawyer, Matthew Krane.

    Mr. Saban said he asked whether the deals were legal and whether a major law firm would certify them as proper. The two lawyers, Mr. Saban said, answered “yes to both,” so he went ahead.

    Later, when Mr. Saban learned that he had paid $54 million in fees to Quellos; Cravath Swaine & Moore, a New York law firm; and others for what turned out to be what the report described as fake transactions, he said he felt “misled, lied to and cheated.”

    Lewis R. Steinberg, who as a Cravath Swaine partner helped design the deal and wrote an opinion letter attesting that it was more likely than not to work as a tax shelter, told Senate investigators last week that he relied on assurances from Quellos and Mr. Johnson that real transactions took place, not fake trades. Mr. Steinberg, who is now at UBS Securities, another firm named in the report, is a prominent tax lawyer and in 2004 was chairman of the tax section of the American Bar Association.

    The report also dissects deals by the Wyly brothers of Texas, showing how they made at least $190 million through stock option exercises offshore but had yet to pay taxes on most of the money. They then borrowed against their offshore accounts to buy jewelry, pay for portraits of family members, buy homes and operate properties named Rosemary’s Circle R Ranch, LL Ranch, Stargate Horse Farm, Cottonwood Galleries and 36 Malibu Colony.

    Senator Levin said he might propose limiting or barring the transferring of executive stock options to others, as well as more disclosure when they are exercised.

    The report says that Credit Suisse First Boston, Lehman Brothers and Bank of America “all knew that the offshore entities” for which they made trades were associated with the Wylys, but ignored rules requiring disclosure of these transactions and helped them hide the true ownership of the assets. Only when Robert M. Morgenthau, the New York District attorney, issued subpoenas in 2004 did Bank of America close the Wyly accounts."(snip)

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    Senior Member Blackstone's Avatar
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    Default Re: this could cause a FUNDAMENTAL change ...

    2 years on and nothing has changed

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    Default Re: this could cause a FUNDAMENTAL change ...

    It doesn't surprise me, Levin, the senator of a state that is broke, is involved in this. He needs the money!

    If the tax law was a little more straightforward, it might be harder to be so clever about it.

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    Default Re: this could cause a FUNDAMENTAL change ...

    yes but finally, 2 years later, things are beginning to happen for real ...



    (snip)"Last Updated: June 20, 2008: 5:48 PM EDT

    GENEVA (AP) -- Swiss bank UBS AG said Friday that it will disclose any instances in which rich American clients may have broken U.S. tax reporting rules by channeling assets through offshore shell companies.

    The disclosure comes after the Zurich-based bank said it was cooperating with a U.S. investigation into whether its employees helped clients evade taxes from 2000 to 2007.

    The investigation centers on 20,000 UBS clients in the United States who are required to fill out a supplementary tax form giving foreign banks their American tax identification number if they hold any U.S. securities in their accounts abroad.

    "A fraction" of those customers are being investigated for possibly breaching the rules by using offshore companies to hold U.S. assets without filling in the supplementary form, known as W-9, UBS spokesman Serge Steiner said.

    UBS said in a statement that it is working with Swiss and U.S. authorities to "promptly provide information concerning instances in which the establishment and operation of such offshore entities and their UBS securities accounts appears to have been part of a scheme to defraud U.S. tax authorities."

    "UBS is treating these investigations with the utmost seriousness and will appropriately and responsibly address and correct any issues raised in the investigations, including taking appropriate disciplinary action," it added.

    Ongoing investigation: UBS disclosed in May that the U.S. Justice Department is investigating whether the bank was helping clients evade taxes from 2000 to 2007. The bank said at the time it was cooperating with the investigation and a separate probe into whether its bankers failed to meet registration rules set by the U.S. Securities and Exchange Commission.

    Swiss law prevents banks from divulging the names and details of their clients except in cases of outright tax fraud. Tax evasion or non-reporting is not considered sufficient grounds for the Swiss government to aid another government's investigation.

    Last week U.S. authorities sent a request for legal assistance to their Swiss counterparts to lift the anonymity of certain clients.

    Meanwhile, a spokesman for the Justice Ministry in Bern confirmed media reports that a Swiss government delegation is to meet with U.S. federal authorities in the United States on Friday to discuss the case against UBS.

    The U.S. investigation has already affected the Swiss bank's operations in the United States, where it manages some $710 billion for American clients.

    Last November UBS told some private banking clients they would in future have to travel to Switzerland if they want to speak with their advisers. Swiss media have reported that UBS was concerned its employees could face arrest if they travel to the United States. The bank has declined to comment on the reports, but acknowledged that a senior UBS manager was detained in the United States last month as a material witness in a case being heard in Florida.

    The case concerns a former UBS executive, Bradley Birkenfeld, who pleaded guilty before a federal court in Fort Lauderdale on Thursday to helping clients hide hundreds of millions of dollars and evade U.S. taxes."(snip)

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    Default Re: this could cause a FUNDAMENTAL change ...

    I bet UBS is working "real hard" to provide this information.

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    Default Re: this could cause a FUNDAMENTAL change ...

    ^^^ apparently UBS is working real hard to make sure that none of their European employees travel to US soil for any reason ... because if/when they did they would be subject to arrest as 'material witnesses'. They have also stopped international communications with US private banking clients to avoid US surveillance, now requiring US private banking clients to travel to a european city with a UBS office in order to make plans / transactions in person.

    However, the point still remains that where in the past it was taken as a given that Americans earning serious money (i.e. 1 million plus per year) could easily avoid paying a huge amount of taxes by shuffling their money through European bank / investment accounts, doing so with impugnity in the future is becoming increasingly doubtful. THIS is the fundamental change I referred to in the thread title.

    Again not wanting to get excessively political in Dollar Den, but in the past Americans earning 1 million dollars plus per year really didn't care what the 'official' IRS tax rates were, because they knew that they could shield a large percentage of their income from actually becoming subject to that tax. Offshore private banking was one of the major options along these lines, because it allowed the 'rich' American investor to put their money into 'regular company' stocks and bonds and still avoid having to pay most of the 'official' cap gains taxes due.

    However, if the offshore private banking option is being highly scrutinized, 'rich' American investors are likely to pull their money out of 'regular company' stocks and bonds, and instead invest that money in (totally legal) tax free municipal bonds, in (totally legal) gov't subsidized industries offering big tax credits (like ethanol / wind / solar) etc. if they want their money to stay in the USA. However, the option also exists for 'rich' investors to commit to permanently transferring their money offshore. Either way this will make the 'cost of capital' for US companies (both banks and any other type of business) more expensive.

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    Default Re: this could cause a FUNDAMENTAL change ...

    Melonie, do you think that we'll see many rich US individuals move not only their money but also relocate themselves to other countries where they won't be subject of US survelliance and taxation? If that's the case and many rich people do end up leaving, who is going to invest in the US? Even if the intrest rates were raised to 20% to defend the dollar, the banks would not see huge inflow of the capital since most Americans don't have any savings! Add future higher taxes, jobs losses, hige national debt and you can see we are on the road to bankruptcy. Fast.

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    Default Re: this could cause a FUNDAMENTAL change ...

    ^^^ you should probably ask Wesley Snipes that question ... as he narrowly escaped a 16 year prison sentence -

    I suppose that this will ultimately boil down to the types of new 'tax shelter' or 'offshore secret stash' schemes that the high horsepower lawyers and accountants can come up with - thus how much money could be 'saved' by becoming an expatriate. Of course there's also the possibility of the rich Americans staying but their money leaving permanently (with future profits on foreign money thus being less available for IRS tracking).

    Ultimately the result is the same in terms of availability of capital to American businesses. Whether the foreign money is actually owned by rich Americans or rich Europeans or rich Middle Easterners, they all take the 'risks' of high taxes and potential currency exchange rate losses versus other investment options elsewhere in the world if they choose to invest in the USA. As you point out, even a 20% interest rate isn't all that attractive if subject to a 30% US cap gains tax plus potential currency losses.

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    Default Re: this could cause a FUNDAMENTAL change ...

    You know a few years ago I interviewed with UBS in Europe for a position in Singapore.

    Qualifications and experience wise I was fine. But they only look to hire wealth managers or private bankers that can transfer a portfolio of high net worth clients. At the time they expected their new hires to be able to bring $50 million of investment portfolios with them within the first year. That amazed me.

    They basically set their standards soooo high that they only got great clients. Neat strategy, but not easy to find staff I imagine.

    Where I am taking this is that UBS probably has got clients that are at the very top - or next to it - in income and net worth, when compared to many other private banks etc.

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    Default Re: this could cause a FUNDAMENTAL change ...

    Quote Originally Posted by Melonie View Post
    if they want their money to stay in the USA.
    It is also worth pointing out that whilst the world appears to be clamping down on dual nationality and 2nd passports, if you have the means - and the super rich do - changing nationality isn't that hard. It takes time, effort and a little money. Once that is done, it'll be hard to tax income earned on the super yacht...

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    Default Re: this could cause a FUNDAMENTAL change ...

    it would now appear that the IRS has 'smelled blood' ...

    (snip)"IRS Taps Audit Firms to Probe Foreign Bank Role in Tax Cases

    By Ryan J. Donmoyer

    July 3 (Bloomberg) -- The Internal Revenue Service summoned six of the biggest accounting firms to help detect foreign banks whose U.S. customers may be evading taxes through secret accounts, expanding an investigation that yielded a guilty plea by a former banker for UBS AG.

    The IRS scheduled a July 8 conference call with the auditors to discuss how they can aid the agency in uncovering foreign banks that break their promise to report U.S. customers' identities and earnings in their accounts.

    ``We are concerned generally by what we are seeing and hearing'' about the conduct of some foreign banks, Barry B. Shott, a deputy IRS commissioner in charge of international taxes, wrote in an e-mail to the firms. A copy of the e-mail was read to Bloomberg News yesterday by an executive at one of the accounting firms.

    A U.S. judge on July 1 granted the IRS power to issue a summons demanding that Zurich-based UBS reveal the names of U.S. customers who may have used secret accounts at the bank to avoid taxes. Last month, former UBS private banker Bradley Birkenfeld pleaded guilty to conspiracy and said the bank helped wealthy U.S. citizens conceal $20 billion in assets.

    The IRS scheduled next week's conference call with the auditors to discuss the so-called Qualified Intermediary program adopted in 2000 to help the agency keep track of U.S. customers' money in foreign banks.

    Under the program, foreign banks agree to confirm U.S. depositors' identities and notify the IRS of income earned in the accounts. In exchange, the banks can withhold taxes at favorable rates. Without the agreement, they would be required to withhold 30 percent.

    IRS-Approved Auditors

    Banks participating in the program also must agree to be examined by external auditors approved by the IRS.

    About 5,000 foreign banks in 70 countries participated in the program in 2005, according to a December 2007 report by the Government Accountability Office, the investigative agency for Congress.

    About $5 billion in taxes was withheld from U.S. citizens out of $293 billion in offshore income under the program in 2003, the most recent year for which data was available, the GAO said.

    The GAO said auditors ``are not responsible for following up on possible indications of fraud or illegal acts.'' The IRS said that's because fraud laws vary among the 70 countries. The GAO recommended giving the external auditors more power to report possible fraud.

    The e-mail was sent to accounting firms Ernst & Young LLP, PricewaterhouseCoopers LLP, KPMG LLP, Deloitte & Touche LLP, Grant Thornton LLP and BDO Seidman LLP, the executive said.

    IRS spokesman Bruce Friedland declined to make Shott available for an interview.

    Two Categories

    In the UBS case, IRS agent Daniel Reeves said in court papers that the bank divided U.S. customers into two categories: those who were willing to submit proper IRS paperwork and those who chose to remain ``undeclared.''

    UBS spokeswoman Rohini Pragasam said July 1 that the bank ``takes this matter very seriously and is working diligently with both Swiss and U.S. government authorities.''

    The IRS summons would direct UBS to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007 and who kept their accounts hidden from the IRS. "(snip)

    from


    Reading between the lines, it would appear that thanks to the precedent setting US court decision, the IRS first tried to 'intimidate' international banks into turning over US account holder info ... which essentially accomplished nothing since the international banks said 'prove tax fraud' to the IRS and also directed any employees who might actually be able to provide such proof to stay clear of US borders. As a result, the IRS has now cranked the inquiry up a notch ... attempting to force 'certified auditing firms' of the US divisions of these international banks to provide the offshore US account holder info as part of their legally mandated annual audit.

    The likely end result ... uber-rich Americans will move their money out of international banks that have branches in the USA, and will move their money into international banks that do NOT have branches in the USA ... thus no legal requirement for an annual audit by a 'US approved auditor' ! Or viewed another way, this IRS action has 'driven the first nail' towards the eventual decline of Wall Street banks due to loss of their current leadership role in the global financial industry.

    if you have the means - and the super rich do - changing nationality isn't that hard. It takes time, effort and a little money. Once that is done, it'll be hard to tax income earned on the super yacht...
    another likely possibility !

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    Default Re: this could cause a FUNDAMENTAL change ...

    Do other countries monitor their citizents' accounts in such matter? I don't hear a lot of stories about European governments trying to discover the source of every euro deposited in a European or offshore bank.

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    Default Re: this could cause a FUNDAMENTAL change ...

    ... to answer your question, until very recently there was apparrently very little scrutiny in regard to money 'hidden' in Lichtenstein ! But with all socialized governments now facing huge (and rising) social costs, and with the American IRS leading the assault, a lot of governments now want to get on the bandwagon themselves.

    The 'tin foil hat' crowd would tell you that the number of people and the dollar amounts mentioned in the above links are only the tip of the proverbial iceberg. However, that iceberg is now beginning to be chipped away one piece at a time, so to speak ! And when that happens, the 'fundamental change' I refer to will finally take place ... i.e. rich residents of socialized countries actually being personally affected by the 'official' tax rates their countries impose, as opposed to their current ability to support policies that require high taxation while personally escaping that higher tax burden themselves. When that happens, the present 'do as I say, not as I do' situation will end.

    Of course, nobody has been able to crack the vaults yet in places like the Cayman Islands ...

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