Case in point: On May 9, 2014, various federal agencies announced that their criminal investigation of Swisspartners Group had come to an end with Swisspartners and its 3 subsidiaries agreeing to a Non-Prosecution Agreement (“NPA”). Under the NPA, Swisspartners is to pay $4.4 million in fines (not a big deal) and turn over files on 110 of its U.S. taxpayer clients (a very, very big deal). It is likely that these 110 U.S. taxpayers will be losing a lot of sleep and paying a lot of money to their criminal defense attorneys in their attempts to stay out of jail.
What did these taxpayers do with the assistance of Swisspartners? They got overly aggressive with a foreign private placement life insurance strategy whereby they placed their profitable, closely held businesses into foreign life insurance policy wrappers. The strategy takes advantage of the fact that internal life insurance investment earnings avoid income taxes when realized, and can be accessed through tax-free loans. The taxpayers hoped to shelter their business income from income taxation this way. Of course, many rules exist to prevent life insurance from investing in related party businesses, and there are several additional legal theories which could also be used to prohibit this type of transaction. This did not stop Swisspartners, since its strategy mostly relied on its clients’ dealings being invisible to the U.S. government. Now that Switzerland’s walls of secrecy have come down, the light is shining on these transactions, and they will likely fail. Swisspartners’ clients will probably end up owing massive amounts of taxes, penalties and interest, and possibly even serving time in jail.
What was the biggest mistake made by these parties? They believed they could do as they pleased, despite the law, as long as they could stay invisible to the U.S. government, and they believed they could stay invisible forever.
At Morgan & DiSalvo, we believe that any planning strategies we recommend must be able to survive in the light of day, whether under IRS or court scrutiny. The IRS does sometimes take aggressive positions that we do not believe will hold up in court. In those cases, we have no problem taking positions against the unsupportable or poorly supported IRS positions. The key is to make sure that our legal positions are as good as or better than those of the IRS, and that our clients are aware of their options and the risks of each. We do not base our recommendations on the ability to remain invisible. If any advisor tries to sell you a strategy where success is based on the transaction not being discovered, my advice is: run, do not walk, to the nearest exit!
