educational

Offshore Tax Shelters

David Houston
Tax shelters, especially the intricate, hard-to-trace, offshore ones, are like pornography: They are best enjoyed in the privacy of one's own home or office, away from the prying eyes of outsiders.

So it is not surprising that accountants and lawyers from some of the biggest law firms in the country politely but firmly decline to expound on the joys of their numbers wizardry when queried by an outsider.

"You'll have a hard time getting people to own up to that," Mitchell M. Gaswirth, of Proskauer Rose law firm in Los Angeles, said. "These days, tax shelters are sort of a dirty word."

But those who follow such things say that, despite a crackdown by federal and state authorities after the Enron mess, complex corporations and trusts typically rooted on a sunny island remain a popular way to reduce, or eliminate altogether, the tax bills of big corporations and wealthy individuals.

"If you have a stash of cash, you have two choices: You can buy a business that you don't know how to run or you can run your treasury operations as a profit center," said Lee Sheppard of the tax law publication Tax Notes.

Sheppard is a good-government type who hates tax shelters. She believes corporations and wealthy individuals should pay more taxes, not less. But she knows why tax shelters are so appealing to so many.

"They don't want to pay taxes — is the usual reason," Sheppard said.

Los Angeles tax lawyer William K. Norman advises companies and individuals how to set up legal situations that will get them a lower tax rate. He was willing to describe what he does, but first had a correction:

"Shelters," Norman said, "is not really the right word."

He prefers to describe what he does as helping companies and wealthy individuals "carry on business effectively and profitably and be subject to the lowest tax rate."

For corporations, these situations typically involve setting up a subsidiary in a place like Singapore, which charges no corporate taxes, or Ireland, which has a 12.5 percent tax rate. By comparison, corporations based in Los Angeles County typically pay 42 percent of their earnings to the state and federal governments.

Picking The Right Country
Norman cautioned that picking the right country to place your assets is tricky. Latvia, for instance, has no tax rate but does have rampant corruption. One could end up paying more in bribes than savings in U.S. taxes. Whenever money is returned to the United States, taxes must be paid on the dividends, Norman said.

Under a new law that President Bush signed earlier 2004, corporations can return that money to the United States within a year of moving it offshore and pay roughly 5 percent in federal taxes plus the nearly 9 percent they would pay in California taxes.

"So it gets you [a] 14 percent [tax rate] instead of 42 percent," Norman explained.

Corporations also can move their headquarters to a place like Bermuda, which has no taxes, but if they're doing business in the United States, they must explain to the IRS how the Bermuda entity is more than a tax shelter, which can be hard to do, Norman said.

For individuals, offshore tax shelters are more limited, Norman said. Most of them involve buying insurance from an offshore company through a foreign trust.

"Some are acceptable, some are not defensible at all," he said.

The adult film industry is, by conservative estimates, a $5 billion business that is growing rapidly. Experts say that, if they haven't already, the big adult industry companies likely will seek offshore tax shelters to protect their assets from the taxman.

Calls to Wicked Pictures were unreturned. Jackie Marcum, a publicist for Vivid Video declined to discuss the subject.

"I don't think that's something anyone [at Vivid] would want to talk about," Marcum said.

But experts also predict a stunning rise in the use of tax shelters. In quick succession, the federal government lost high-profile cases against corporations accused of hiding money in illegal tax shelters.

In November, TIFD III-E Inc., a subsidiary of General Election Corp. not only beat back allegations that its tax shelters were illegal it also got a federal judge to order the Internal Revenue Service to return $62 million plus interest — money seized by the government.

Coltec Industries Inc., which makes aircraft-landing systems, was refunded more than $82 million and Black & Decker Corp. got a $57 million check.

Tax Shelter Offender
In fact, the only successful prosecution in recent months of tax shelter offenders was that of Jerome Schneider in San Francisco. Schneider, a Canadian author of "Hiding Your Money" and "How to Own Your Own Private International Bank," advised dozens of wealthy individuals on how to avoid paying taxes by stashing their money offshore in places like the Cayman and Cook islands.

Schneider was sentenced Dec. 6 to six months in prison but he could have gotten five years. Apparently in need of a high-profile win, the U.S. Attorney's Office in San Francisco agreed to a sentence reduction if Schneider agreed in writing to give a series of interviews to major news outlets warning people of tax shelters.

In a move other prosecutors say is highly unusual, federal agents went so far as to set up the interviews themselves with the New York Times, the Los Angeles Times, the Wall Street Journal, Associated Press and ABC News.

Still, experts believe this high profile flogging is proof the IRS knows forcing companies and wealthy individuals to avoid tax shelters is a lost battle.

"People might stop doing it for a while but will they stop doing it forever? No. No. No," Sheppard said. "There's too much money involved."

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