Back in May, we wrote about an abusive tax shelter masquerading as a sophisticated private placed life insurance (PPLI) product. One of the companies marketing the product, SwissPartners, entered into a non prosecution agreement with the U.S. Department of Justice. Except for any audits of the dozens of American clients who purchased their PPLI products, we thought the product was dead.
Apparently not. Two prominent asset protection lawyers report that sham promoters are now attempting to sell similar products. Unfortunately for customers who purchase these products, the results will probably be the same. Disaster.
If you missed our first post, the scam works like this:
First, a promoter sells you a highly specialized cash value life insurance policy. This won’t be something by your local insurance agent. Rather, there are a just a handful of agents offering these. Most promoters are Internet or offshore based. The insurance product itself is almost always offshore.
Instead of plunking down a lot of cash for the policy, you “sell” your business to the policy. The policy has no cash on hand so it gives your business a note. (Any cash that you pay will go to the high commissions and fees charged by the promoter that helped you set up the plan.)
Now comes the fun part. As your business makes money, the profits flow to the life insurance policy which is conveniently located offshore. That means you don’t have to pay income tax on those profits. (At least that’s the flawed theory.)
Some readers are probably asking how the profits are repatriated so they can be spent. The promoter has an answer for that too. You borrow against the cash in the policy.
In simple terms, your PPLI allows you to never pay income tax.
There is one problem. The IRS says these policies are an abusive tax shelter. Not only will you be subject to huge penalties but its possible that you could also be indicted for tax evasion.
Although SwissPartners avoided prosecution, they agreed to pay a $4.4 million fine and turn over the names of their customers. SwissPartners notified all of their clients 16 months before turning over the client names. They also acted swiftly to discontinue certain product lines when the IRS clarified their regulations. Not all companies are that reputable.
One attorney recently reported in Forbes that he was approached by a SwissPartners rep who said, “Here’s how we’ll have your client’s SwissPartner’s life insurance policy buy their business and sponge up all the taxable distributions.” [Ed. Note: After originally posting this story on October 13, Swiss Partners contacted us through their legal counsel. They indicate the above conversation took place prior to 2003 and a critical change in IRS revenue procedures.]
After posting the original warning back in May, we hoped that the scam promoters would pack up their tents and peddle their snake oil elsewhere. Recent press suggests that others have simply moved into the PPLI void created when SwissPartners left the market. (For the record, the promoters and parties involved in the IRS and Justice Department non prosecution agreement are SwissPartners Investment Network AG and its affiliates SwissPartners Insurance Company, SwissPartners Wealth Management and SwissPartners Vericherung. Our problem isn’t with SwissPartners as much as it is with the true scam promoters and their unvetted look alike products.)
If you are approached by a promoter promising you can avoid paying income tax through the use of an offshore private placed life insurance product be very skeptical. We have not seen one yet that will pass IRS muster. The IRS has codified an “economic substance doctrine” and these PPLI transactions miserably fail. Like similar 419 plans, the IRS considers them to be listed transactions and abusive tax shelters.
When the non prosecution agreement was announced in May, the IRS criminal investigations division issued a statement saying,
“Anyone who is hiding money or assets offshore with the intent of committing tax evasion will be found and prosecuted. It’s not a matter of ‘if,’ it’s a matter of ‘when.’”
If you already find yourself with one of these plans, seek the help of an experienced IRS tax lawyer immediately. It’s always better to be proactive than to wait for the IRS to find you. It may also be possible to bring an accounting or legal malpractice action against the person who blessed or sold you the policy. (We have seen many policies sold by accountants or sold by promoters but later reviewed and approved by local tax lawyers and CPAs.) If the person selling you the policy is located in the U.S. it may be possible to pursue them as well.