Forming an I.B.C. with a Nominee Owner By Vernon K. Jacobs, CPA  & J. Richard Duke, J.D., LLM

A U.S. person (or his offshore grantor trust) forms an international business corporation ("IBC"), and the shares of stock are issued to a nominee owner who resides in a foreign jurisdiction.  The promoters say the U.S. person (including the U.S. grantor of an offshore trust) is not taxed on the earnings until distributed by the IBC because a foreign person (the trust) is the owner of the IBC. Practitioners in the international arena are aware that promoters in the U. S., and especially those in tax haven financial centers, have promoted and continue to promote "bearer share" corporations. The implementation of this structure involving a nominee entity is accomplished as follows: A U. S. person transfers cash or other assets to an International Business Company (IBC) that is established by a foreign person. The IBC is a "bearer share" corporation with the certificates placed in the hands of the foreign person or entity. This corporation legally belongs to the person who physically possesses the stock certificates, with no official record of ownership. Generally, the person or entity establishing the IBC names himself and others as officers and directors of this IBC. The U. S. person, however, is the "beneficial owner" of the account in the name of the IBC. The U. S. person is the sole signatory on the account and generally fills out a form at a bank identifying himself as the beneficial owner of this IBC. Also, the foreign persons who are acting as directors will follow the advice of the U. S. person with respect to where to invest the money and when to make distributions. Generally, a debit card is also issued on the account in the U. S. person's name. In such a structure, there is no question that the U. S. person is subject to tax reporting requirements and income taxation on all subpart F earnings of the IBC. (Subpart F earnings include all forms of investment income.) Those who make claims to the contrary are either seriously uninformed or are outright charlatans. As beneficial owner, the U. S. person is required to indicate his "financial interest in, or signatory or other authority over, a bank, securities, or other financial account in the foreign country" by checking "yes" to Schedule B, Part III of his U.S. Form 1040. In addition, the Bank Secrecy Act of 1970 requires his filing a Form TD F 90-22.1 (for financial accounts of more than $10,000 in cash or assets outside the U. S.). This form requires checking a "yes" as to the existence of assets outside the U. S. over which the U.S. person has any authority,  and further requires the U. S. person to "enter the name of the foreign country" to which he has transferred the assets. The Form 1040 instructions also require a "yes" to the foreign bank account questions (Schedule B, Part III) if the U. S. person: (1) at any time during the year had "an interest in or signatory or other authority over a financial account in a foreign country;" or (2) the U. S. person owns more than 50% of the stock in any corporation that owns one or more of such accounts. Two things can occur here. First, the promoter, whether inside or outside the U. S., can be a target of the IRS. If the target is being watched, the IRS can learn about the clients who have established such a structure who are not disclosing the foreign account and not reporting income. The targeted promoter can also be indicted followed by the IRS subpoenaing the promoter's records (his clients). Secondly, a simple random audit of the U. S. person can cause extreme problems for both the U. S. person and his professional advisor or advisors. In a random audit, the U. S. person may disclose to the professional advisor that he has a "secret" foreign account. The professional advisor, after learning the facts, then becomes aware of the fact that a false return (Form 1040) has been filed since Schedule B, Part III has not been checked "yes" (indicating an interest in a foreign account). The professional advisor is then faced with a dilemma. If this fact is disclosed to the IRS, it will place the IRS on notice that a foreign account has been established and the taxes have not been paid. This can result in criminal as well as civil fraud charges by the IRS. On the other hand, if the professional advisor fails to advise the IRS of the failure of the client to appropriately answer the question on the Form 1040, the professional advisor may be subjecting himself to criminal (tax) conspiracy. If the professional advisor is not a practicing attorney, the attorney-client privilege may be lost, since there are generally legal issues outside the strict tax privilege available to accountants. It appears that the only solution for the lawyer representing the client is to advise the client to take the Fifth Amendment privilege against self-incrimination. The client may then decline to answer the foreign bank account question by claiming the Fifth Amendment privilege. The client also has to deal with the failure to file the Form TD F 90-22.1. However, there are several courts that have rejected the Fifth Amendment privilege as a basis for the non-filing of bank secrecy act forms. As the above indicates, there is no "good" scenario with respect to someone who has been "caught" with an IBC/bearer share structure where income is not being reported and tax return and Bank Secrecy Act forms are not being properly completed and filed. For those who are in such a scenario and now wish they could get out, they must seek legal counsel from a tax attorney. Generally, a tax attorney who is a planning and structuring attorney (transactional attorney) must engage a criminal tax attorney or refer the client to such an attorney. A criminal tax attorney is one who spends most of his time handling criminal and civil fraud litigation rather than planning and structuring. It is possible that working through a criminal tax attorney, the U. S. person desiring to "come clean" can work out an arrangement with the IRS to file the appropriate tax returns, pay the taxes, penalties and interest and avoid criminal charges by the IRS. Planning and structuring attorneys do not usually understand the nuances of the Fifth Amendment privilege against self-incrimination, as do criminal tax attorneys. There is one additional serious legal problem with respect to the IBC/bearer share arrangement (as a nominee). Financial centers have two corporate laws: (a) corporate law for residents and (b) corporate law for non-residents (IBCs). A resident cannot own an IBC. If the resident who is in possession of the stock certificate is considered the owner, a non-resident did not form and does not own the IBC. This is a legal issue, however. This legal issue is raised simply to show the "pitiful" planning of many offshore promoters. An excellent article regarding the seriousness of this structure and of a random audit is: Scott D. Michel, "Advising a Client With Secret Offshore Accounts-Current Filing and Reporting Problems," 91 Journal of Taxation 158 (Warren, Gorham and Lamont), September 1999. The author specializes in criminal tax matters. Vernon Jacobs & Richard Duke Reprinted in part from The Offshore Tax Seminar Manual Copyright, 2002, All rights reserved. Co-authors of The Offshore Tax Seminar Manual http://www.offshorepress.com/offshoretaxmanual.htm

About the authors: Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests. He edits and publishes the online International Wealth Protection Reports ..  J. Richard Duke , JD, LLM is an attorney who specializes in international tax law and is an Adjunct J. Richard Duke is a Professor of international tax law. and a practicing attorney in the international specialty.  He is a Consulting Editor for the online International Wealth Protection Reports Sponsored by Offshore Press, Inc .., Copyright, 2002, all rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone (913) 362-9667. Email to Offshore Press   Vernon K. Jacobs, Webauthor ..