Senate Committee Takes Aim at Offshore Companies

Posted on August 1, 2006

The New York Times reports on Congress' latest target: businessmen who (legally) use offshore companies and bank accounts to lessen or avoid paying U.S. income taxes. The Senate Permanent Investigations Committe, headed Senator Levin, has approved a report which basically takes aim at any offshore transactions done in the Caymen Islands, Nevis, the Isle of Man and Panama.

In a clear indicator that the joy of doing business offshore is about to become a nightmare, the report suggested that the underlying legal assumption that transactions are legal be overturned. Senator Levin said the law "should assume that any transaction in a tax haven is a sham." That would be a sea change in the tax law, if implemented.

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.
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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.
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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.

So, what's this really all about? It's about a government that has a huge deficit because of the war in Iraq. When the deficit gets this big, Congress starts looking for targets. The new target is going to be any business person who sets up a company in an offshore tax haven, or uses those havens to (legally) avoid taxes. Because, if the Committee has its way, then the new rule will be "If you do business off shore, you're a crook. And you're going to spend millions of dollars defending yourself to the IRS, no matter how many law firms and accountants told you it was legal."

As the war in Iraq becomes more and more expensive, as oil becomes more expensive and the deficit grows ever larger, Congress will target more and more transactions and industries that -- if audited -- could possibly turn up some revenue for the ailing U.S. treasury.