Heav'n has no Rage, like Love to Hatred turn'd

Reading the facts of the United States v. $4,656,085.10 in bank funds, a claim filed by the U.S. government on the 9^th of February of 2012 in the Southern Division of the U.S. District Court for the Central District of California (“Claim”), left me wondering why medical doctors so often get themselves in tax doo doo.   One would think that a medical professional earning a substantially high income would surround him or herself with capable legal/tax advisors, accountants and bankers.  They often don't.  Dr. Brandner, the star of the action brought by the U.S. government, is one of those medical doctors who never contemplated hiring a good family law practitioner before marrying so as to address a separation of assets in the events of a divorce or contemplated entering into a discussion with a tax lawyer on the possible legal repercussions of his actions.  It is not that he could not afford  to retain advisors – it could be that he thought he knew better ….  And it is because of this neglect to hire a tax advisor, Dr. Brandon stands the risk of losing $4,656,085.10.

It is the U.S. government's position that it has the right to seize the funds that are currently deposited with a bank in California due to Dr. Brandon's failure to file an information return under the Report of Foreign Bank and Financial Account.  I know dear Reader, California is part of the United States.  Well the U.S. government's argument in the Claim is that the funds now deposited in California were at one time deposited in Panama.  And when the funds were in Panama, the depositor of the funds, Dr. Brandon, failed to file an FBAR information return.  The U.S. is thus arguing that the FBAR rules apply as the funds currently can be traced to funds that at one time were deposited offshore.


Now how and why did Dr. Brandon get into this mess?  Well the thought that his soon to be ex-wife could be awarded some of his millions in divorce court drove Dr. Brandon to actually drive from all the way from Alaska to Panama in May of 2008.  Looking at the map, Dr. Brandon drove from Alaska, through Canada, through the United States, through Mexico, through Guatamala, through Honduras, through Nicaragua, through Costa Rica and finally arriving in Panama.  Yes you read that correctly – I can only imagine the fury in him to drive all that distance.  His pockets or suitcase were filled with cashier checks totalling $3,250,000.  This could be an advertisement on the safety of the Pan-American Highway.  Yes dear reader plastic surgery must pay well in Alaska and Dr. Brandner was determined that his spouse, soon to be ex-spouse, would not have access to the funds.  Once back in Alaska the doctor transferred $1,264,700 held in his IRA from Alaska to an account in California held by him and from there to his Panamanian account thus carefully trying to cover a trace to Panama from Alaska.  An FBAR return was never filed by the doctor.  After all if he filed an FBAR, his spouse would have been able to track the funds to Panama.

Panama in the past did not have a tax treaty or a tax information agreement with the United States and as such was deemed by the un-sophisticated as a good place to stash ones assets away from the prying eyes of the tax authorities in the United States.  In April 2011, Panama however entered into a Tax Information Agreement with the United States. However Dr. Brandner's activities came to the U.S. government's attention long before the Information Exchange Agreement came into force.  As Dr. Brandner's luck would have it or maybe it was karma dealing him a lesson, it turns out that his Panamanian banker at some point after 2008 became a co-operating witness for the U.S. government.  The banker was in trouble with the U.S. government for stock fraud.  In an attempt to save his neck, the Panamanian banker probably offered up all his U.S. depositors head on a plate.  

Asked in a taped conversation in May, 2011 with the Panamanian banker about his intent with regards to the funds held in Panama, the good doctor’ response was predictable.  The doctor responded that “my intention is not to hand it over to the courts”.  Informed of the tax information agreement between the United States and Panama, the good doctor and the good banker, decide to have the doctor set up a Non-U.S. corporation with a bank account in California.  The doctor’s name would not show up on the bank account.  All funds held in Panama were transferred to California and this is how the funds ended up in California.  


The U.S. Government is alleging that these funds are traceable to funds that were not disclosed under the FBAR requirement and have filed the claim in California for seizure of the entire funds. It is not clear whether legislation under the FBAR rules will allow the Government to seize the funds on the grounds that an FBAR report was not filed.  However the Government in the Claim is citing criminal as well as civil penalties and it may well be that the criminal penalties allow for seizure of the funds.  Do note that seizure of funds is available to the Government where the funds are proceeds from a crimes such a money laundering.  

This case matters to us here in Canada as many Canadians hold a green card or were born in the United States or hold U.S. citizenship and as such have U.S. tax/information filing obligations.  The case is a reminder to keep compliant with the U.S. rules if you have filing obligations in the U.S.  It is also a reminder to always seek advice before attempting a self- implemented asset protection plan regardless of level of education and income.

Craig - Stare Decisis

Tomorrow on March 23rd, the Supreme Court of Canada will hear the Department of Justice`s appeal to Craig (2011 FCA 22).  Darcy MacPherson and myself wrote an article on Stare Decisis which is what the Court will be addressing.  The article was first published in the Canadian Tax Highlights volume 20, number 2, 2012 edition.  The Canadian Tax Highlights is a Canadian Tax Foundation publication.  I reproduced this article here with permission from the Canadian Tax Foundation.  It is a very exciting topic - you must admit my dear reader.  


In case you wish the view the live submissions tomorrow at the Supreme Court of Canada in Ottawa please see http://www.scc-csc.gc.ca/case-dossier/cms-sgd/webcasts-webdiffusions-eng.aspx .  This link also has provides access to later archived decisions (webcasts).


Craig and Stare Decisis
The term "stare decisis" is an abbreviated version of the phrase "stare decisis et non quieta movere," which can be translated as "to stand by decisions and not to disturb settled matters." At least three interrelated policy rationales exist for the principle: (1) perhaps most clearly, the doctrine is tied to the need to maintain the hierarchy of the Canadian courts, in which a lower court should follow and not ignore the decisions of higher courts (vertical stare decisis) or its own earlier decisions (horizontal stare decisis); (2) failure to follow that first rule can lead to uncertainty, which encourages further litigation and increases the cost of dispute resolution; and (3) following precedent ensures fairness--like cases are treated alike--and maintains respect for the courts and the rule of law.


Section 31--one of the most litigated sections in the Act--restricts the deduction of farming losses against other-source income "where a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income." The terms "chief source of income" and "combination of farming and some other source of income" are not defined. The SCC said in Moldowan ([1978] 1 SCR 480) that under section 31 a taxpayer could only combine farming income and some other, subordinate source of income. In Gunn (2006 FCA 281), the FCA allowed the taxpayer to offset farming losses against professional income even though, on the facts, farming was a subordinate source of income relative to the professional income.


Section 31 was recently revisited by the FCA in Craig (2011 FCA 22). In a unanimous decision, the court relied on horizontal stare decisis: "a decision by a panel of [the FCA] on the precedential effect of a prior decision by the [SCC] deserves as much respect from a subsequent panel of [the FCA] as a decision by a previous panel on any other question of law." The FCA seems fully aware of the potential conflict within the doctrine of stare decisis: vertical stare decisis clearly favours following the SCC in Moldowan, and horizontal stare decisis favours following the FCA's earlier decision in Gunn. The FCA in Craig followed its holding in Miller (2002 FCA 370) that the general principle of horizontal stare decisis does not apply if the previous decision (Gunn) was "made without regard to a decision that it ought to have followed. . . . This is not the case here. . . . [Gunn] considered Moldowan at length and largely adopted its analytical framework. 


However, [Gunn] departed from the aspect of Moldowan in question here." The FCA in Gunn fully justified its decision and "relied on post-Moldowan pronouncements by the [SCC] on statutory interpretation, particularly warnings against reading words into a statutory text." The FCA in Craig also pointed out that judge-made rules relating to precedent are not like other legal rules, in the sense that the [SCC] does not reverse the decision of an intermediate appellate court on the ground that it failed to follow the principle of stare decisis. Rather, when the [SCC] grants leave to appeal, the question before the Court will be whether the lower court's decision is consistent with substantive law.


Common law seems to recognize that no judgment is ever completely unassailable, and that even an SCC judgment may need rethinking once in a while. Diplock LJ said in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. ([1961] EWCA Civ. 7): "The common law evolves not merely by breeding new principles but also, when they are fully grown, by burying their ancestors." The evolution of case law is deliberate; it is both purposeful and slow in order to allow a more thorough appreciation of the policy and social implications. (See, for example, London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 SCR 299.) In Barnett v. Harrison ([1976] 2 SCR 531), the SCC majority refused to change the law but recognized its discretion to do so in appropriate circumstances:
Finally, the rule . . . has been in effect since 1959, and has been applied many times. In the interests of certainty and predictability in the law, the rule should endure unless compelling reason for change be shown. If in any case the parties agree that the rule shall not apply, that can be readily written into the agreement.


In both those SCC cases, vertical stare decisis was not at issue. Is it necessary to wait for the SCC to make any incremental change? Even the SCC must work from the factual record established by the trial court. Moreover, not all cases of importance make it to the SCC because of the requirement to apply for leave to appeal and more generally because of financial and time costs to both the system and the litigant of a trial and at least two levels of appeal. Those costs may skew in favour of wealthy litigants the cases that go forward in an attempt to change the law. The question remains whether and when a lower court should decide to effect incremental change without ignoring stare decisis. The following considerations may be taken into account.


• Stare decisis is not an absolute rule of law; it may be analogous to a rebuttable presumption. The underlying values--court cohesiveness, certainty, and fairness--favour both vertical and horizontal stare decisis over a change in the law. But in some circumstances a lower court may (correctly) believe that the application of stare decisis is inappropriate and should yield to other values, such as the need to advance the common law, whether or not the interpretation of a statutory provision is involved. The pull of stare decisis is stronger when a statute is involved that is clear and unambiguous: the court generally gives effect to the plain meaning of the words. But there is a middle ground where, as in section 31, the words are capable of more than one reasonable interpretation, and then stare decisis is not so great a barrier to incremental change.


• The pull of stare decisis is stronger if the parties have decided between themselves that the rule should apply, and their silence on the issue may be a strong indication to the court of that intention. But stare decisis exerts a lesser pull if the parties have no ability to structure the transaction and avoid the principle's application.


• Not all higher court precedents carry equal weight. This particular point has a variety of applications. The issue in question may fall closer to or further from the central theme of a higher or earlier decision and thus strengthen or weaken the pull of stare decisis. If a higher court judgment is directly on point and has fully and unequivocally considered the issue and all its policy and legal implications, those are strong indicators that only the higher court itself should reconsider the issue. At the other extreme, a cursory or brief consideration of the issue is arguably seldom enough to make stare decisis alone a brake on a fuller consideration by a lower court.


If the higher court openly struggled with interpreting a section, the judgment is less likely to have settled the issue for the purposes of stare decisis, because the section is clearly susceptible of more than one interpretation. Moldowan is a good example: the court there said that section 31 was "awkwardly worded and intractable . . . and the source of much debate." Stare decisis also declines in value if subsequent developments in the law cast doubt on the principles underlying the earlier precedent. Moldowan appeared to rest heavily on the "reasonable expectation of profit" test, which remains an important element, but no longer a necessary component, in the finding that a business exists (Stewart v. Canada, 2002 SCC 46).


• Subsequent jurisprudence may clarify a principle in issue, and thus the level and consistency of subsequent case law can strengthen the force of stare decisis. Conversely, abundant inconsistent application of the principle works against stare decisis. The lower courts may be led to find a thread that may not conform to all decisions of higher courts but nonetheless improves the clarity of the law. When all or a majority of lower court cases have consistently established a particular view for years, the desire for certainty may make a court reluctant to overturn those decisions even if they are arguably based on a misinterpretation of an earlier decision by the higher court.


• Stare decisis loses strength if vertical and horizontal stare decisis point in different directions. Craig exemplifies the conflict between two irreconcilable forces: horizontal stare decisis (follow Gunn) and vertical stare decisis (follow Moldowan).


Sunita Doobay TaxChambers, Toronto
Darcy L. MacPherson University of Manitoba, Winnipeg

Legacy planning – The Wisdom of John J. Jodrey

Yesterday, the Globe and Mail featured in their obituary section John J. Jodrey who passed away on the 19^th of February of this year at the age of 98.  What is remarkable of John Jodrey is not only that he loved roses and that he was humble and that he loved to dance and was incredibly successful at business but his wisdom.  Dear reader what I meant about his wisdom is that he had the foresight rarely seen in practice of overseeing the division of his family business empire prior to his death.  I will be honest -  I have not seen this in practice – a business leader with the wisdom to ensure that the empire he or she oversaw and built will continue though not as one entity but as separate entities. 

Businesses leaders tend to focus on growing their empires and assume that their empires will continue to flourish after their deaths and that their heirs will act as one unit.  Sadly to say this rarely happens. And dear reader I speak from experience.   If I look at my personal history – my grandmother’s brothers kept the litigation bar in Georgetown very busy.  They were always suing each other but at least they were civilized and utilized the courts.  In the Indian diaspora in the early 1920’s my grandmother’s brothers inherited 10 plantations (there were four brothers).  

My grandmother and her sisters each received a cow and no plantations.  Although the brothers inherited considerable wealth, they could never be in the same room and loathed the sight of each other.  If one brother was visiting my grandmother and another was at the front door, the visiting brother would leave through the back door.  The loathing was due to what they considered an unfair divvying up of the plantations amongst themselves.  After all not all the plantations were of equal size, good locations or equally productive. 

Blood sadly does not equate love.  In our family the cost of litigation took a toll and there is no evidence of the absurd wealth that existed in my grandmother’s time amongst the relatives descended from her brothers’ arm of the family.  This is why I admire John Jodrey.  He ensured his family’s wealth and legacy would survive by overseeing the division of his empire prior to his death.  Under the guidance of John Jodrey the Jodrey family were able to achieve a bloodless division of assets which the McCains, the Waxmans to name a few were not able to achieve.  For a good description of the wisdom of the Jodrey family please see  http://www.ctv.ca/generic/generated/static/business/article2251253.html .  And coming back to my family – if we had an ounce of the Jodrey wisdom –  my grandmother’s father should have diversified the wealth during his life time allowing for an easier division of assets with the division occurring during his life time and yes of course allowing  for his daughters to inherit more than a cow.

Curaçao – Memories

In October of 2011, the parliament of Curaçao approved legislation allowing for the establishment of an Anglo-Saxon trust.  Now I have to fully disclose – as a child my step father always entertained me with bedside stories on how to plan a breakfast menu or how to decorate a hotel room with decorations a tourist would not abscond with.  He and his then wife Truus van den Plas in the fifties (yes the 1950s) owned the Avila Hotel in Curaçao.  Although he lost his share of the hotel in his divorce from Truus, he managed to instill in me a great love for Willemstad.  So it was with great delight that I read that an Anglo-Saxon trust was now available on Curaçao. 

The 1960s – some of you reading this blog will remember the days when there was a tax treaty between the United States and the Netherlands Antilles (Curaçao was part of the Netherlands Antilles) and where such treaty did not contain a Limitation on Benefits (LOB) clause or in other words an anti-treaty shopping clause.  The absence of a LOB clause allowed foreign investors from countries, where there was no treaty with the U.S., to set up a structure allowing dividends from their U.S. operations to be paid to a corporation situated in Curaçao.  Under the then treaty the U.S. only levied a 15% withholding tax on dividends to an entity in Curaçao reducing 30% withholding tax rate of the Internal Revenue Code.  Royalty and Interest payments were not subject to withholding taxes under the Treaty.  Furthermore the income tax rate back then in the Netherlands Antilles was between 2.4% to 3%.  The U.S. of course was livid as it was losing tax revenue to corporations who were unfairly benefitting from a treaty in a jurisdiction to which they did had no connection.  The U.S. soon abandoned their treaty with the Netherlands Antilles and started renegotiating their existing tax treaties with the insistence the addition of a limitation of benefits clause.  Of course the U.S. was not able to renegotiate all their treaties at once so tax practitioners were always searching for the treaty that did not contain an LOB clause – for e.g. in the late nineties the Hungarian treaty had not yet been renegotiated and brisk planning was done through Hungary for corporations from a jurisdiction which did not have a tax treaty with the United States.  Iceland was also a favourite – its treaty with the United States was as recently renegotiated – 2007 – to include a LOB clause.

I was not able to locate the legislation for the Anglo Saxon trust in Curaçao.  An Anglo Saxon trust is one where the transfer of property is absolute and the trust is irrevocable and no vested interest in the property is retained by the settlor of the trust.  As such for individuals seeking to credit proof their assets such a trust is good thing. But such a statement has to be clarified as I don’t know whether the Courts in Curaçao will respect the transfer of assets when challenged or whether they will deem the transfer to be fraudulent and therefore not effective.  Challenges can come from creditors and from spouses of the settlors and of the beneficiaries.  Certain jurisdictions will deem an asset protection trust to be penetrable within two years from the transfer of assets and some jurisdictions will treat the trust as iron clad and not challengeable.  As this legislation is so new – it has not been tested in the courts of Curaçao I have no idea how iron clad it is.  I am also unsure whether the rule against perpetuity applies to an Anglo Saxon trust in Curaçao.  Jersey (Channel Island) for example does not have the rule against perpetuity and as such one does not have to worry about planning for the deemed disposition of the trust assets every 21 years as mandated by the rule against perpetuity.

How to ensure you are not writing a check to a Madoff

As a tax advisor I often assist my clients with legacy planning.  However the most tax efficient structure is worthless if the financial advisor assisting with the planning is a Madoff impersonation.  I know I am hung up on Madoff and that now we have the flamboyant billionaire Mr. Allen Stanford of Texas, Mr. Kautilya Pruthi of London, England (http://www.telegraph.co.uk/finance/financial-crime/9130175/Mastermind-behind-Britains-biggest-ever-Ponzi-scheme-Kautilya-Pruthi-faces-14-years-in-jail.html)  and in our own backyard Mr. Weizhen Tang of Toronto and Mr. Earl Jones of Montreal but humour me while I continue to lump them all as Madoff.


One of my questions as such is always to ask the advisor about the segregation of the funds – in other words – are the funds held by a third-party custodian?  Personally I like to see a large financial institution as custodian and safe guards in place so as to prevent the advisor from helping him or herself to the funds.  Safeguards such as not providing the advisor with the power to write a check or to move the funds from the institution.  Of course dear reader nothing is iron clad but this doesn’t mean that preventative measures should not be taken.  After all every little hurdle to prevent a new Madoff from rising is a good thing.  It was therefore with delight that I saw Rob Carrick’s article this morning in the Globe and Mail titled “How to spot a crooked adviser” see http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/how-to-spot-a-crooked-adviser/article2369576/ .  Rob consults with Stephen Horan, head of private wealth management at the Charlottesville, Virginia based Chartered Financial Analyst (CFA) Institute.  The tips offered by Stephen Horan and Rob are invaluable and include checking the advisor’s registration with the Ontario Securities Commission for Ontario based advisors and with the Canadian Securities Commission for all other advisors in Canada.  However I want to emphasize to the busy reader that merely checking the registry status of the advisor is not sufficient as Mr. Madoff in New York was audited several times by the security commission and passed with flying colours.


Update April 18, 2012


Even when a good advisor is found - one still needs to be  cautious.  The news today focussed on two Toronto investment advisors admitting to forging their client signatures for more than a decade.  No financial harm came to the clients of these investment advisors as the signatures were forged not for personal gain or for fraudulent purposes but merely to avoid the clients from the hassle of having to come to the offices of the investment advisors to sign.  I can only shudder - in this day and age to allow forgery of signatures is unthinkable.  A Madoff did not happen but could have easily.  The advisors will be able to serve their one year suspension in two six months stint as long at it completed by October 15, 2014 thereby allowing them to return to work.  Mr. Rotstein will  pay a $250,000 fine to the Investment industry Regulatory Organization of Canada (IIROC). Ms. Zackheim will pay a fine of $50,000, and the pair will also pay $10,000 in costs.

Directorship – A Word of Caution

Recently there have been more and more articles on the under representation of women and minorities as directors in boardrooms.  For e.g. see http://www.theglobeandmail.com/report-on-business/careers/management/few-women-in-leadership-roles-in-toronto-study-finds/article2362298/ . The Globe and Mail cites a study from Ryerson University’s Diversity group which found only 17% of the Greater Toronto Area boardrooms had female representatives.  Now before any of my fellow sisters decide to plunge into the board room arena I would like to offer a few words of caution.  These words of caution may temper one’s enthusiasm in accepting a directorship offer but the old adage of it is better to be safe than sorry applies here.

When accepting a directorship please note that where a corporation has failed to deduct, withhold taxes or fail to remit source deductions under the Income Tax Act RSC 1985, c. 1 (5th Supp.), as amended, the Excise Tax Act RSC 1985, c. E-15, as amended, the Employment Insurance Act SC 1996, c. 23 as amended, the Canada Pension Plan Act RSC 1985, c. C-8, as amended  and the Ontario Retail Sales Tax Act RSO 1990, c. R.31, as amended, the directors of such a corporation will be personally liable for the unpaid and unremitted amount.  One does not have to formally have accepted a directorship offer.  These penalizing provisions will also apply to an officer of the corporation or anyone who manages the corporation and holds him or herself out as a director.  Also note that the government does not have to attempt collection from the corporation first.  Case law has established that the Government can collect from the directors before attempting collection from the corporation – see Seng Chin Siow (2011 TCC 301).

 

 

Dear reader you may dispute what I have just stated by stating that director liability insurance will protect you as director from any collection process.  This may be so or it may not be where for e.g. there was fraud committed by the corporation when it applied for director liability insurance.  As such when accepting a directorship it is advisable to tread carefully and to be fully cognizant of the exposure of your personal assets to potential collection activity at the federal and at the provincial level.

Ownership of Shares - Let's not forget economic ownership

In the March 11^th, 2012 edition of the NY Times Business section the following article caught my eye.  http://www.nytimes.com/2012/03/11/business/fairfax-financials-400-million-tax-break-revisited.html?_r=1&scp=1&sq=Revisiting%20a%20%24400%20million%20tax%20break&st=cse .This article discussed a consolidated return filing where in 2003 a Canadian Insurance company’s U.S. group filed a consolidated corporate income tax return wherein losses were sought to offset income of a more profitable subsidiary.  The consolidated filing resulted in a $400 million tax benefit spanned over three years, 2003 to 2006.  Note to the Canadian reader – consolidated corporate income tax filings are not part of the Canadian taxation landscape.  In the U.S. the common parent files the consolidated return with consent from its subsidiaries.  The common parent must also own 80% of the vote and value of all the subsidiaries.

Although the IRS has not objected to the consolidated return filed for 2003, a complaint has been lodged with the IRS Whistleblower Office on the basis that the 2003 consolidated return was erroneous due to the fact that the common parent of the consolidated group did not have true economic ownership of the profitable Odyssey Re shares.  In 2003 Fairfax losses were offset against the profitable reinsurer Odyssey Re Holdings Corporation whose shares were acquired through a $78 million I.O.U. maturing in 2010.  The I.O.U. was made out by Fairfax to the Bank of America in the Cayman Islands.  The Bank thereupon borrowed $78 million of Odyssey Re Holdings Corporation’s shares and transferred such shares to Fairfax which reimbursed the bank for its costs.  This transaction resulted in a $400 million tax benefit to the Fairfax group for the taxation years 2003 to 2006.  A well written article which discusses economic benefit and true ownership is found in Hedge Funds, Insiders, and Empty Voting: Decoupling of Economic and Voting Ownership in Public Companies written by Henry T.C. Hu of the University of Texas Law School and Bernard Black, University of Texas, Law School and McCombs School of Businesses and can be found at http://www.law.yale.edu/documents/pdf/cbl/AM3PM5Black.pdf .  In the article the authors illustrate how to decouple votes from economic ownership.   One way is where an investor “borrows” shares from another.    Under the shareholder loan agreement, the borrower acquires voting rights but no economic ownership, while the lender has economic ownership without voting rights.  I guess the simple days where a voting share meant just that - ownership and a vote are over and I miss those simple days.