Sunday, November 17, 2013

US CFC Rules: What Income Is Included?

The CFC rules regarding income inclusion have to thread a very small needle.  On one hand, they need to prevent US taxpayers from moving offshore, thereby taking advantage of a technical reading of the US tax code that prevents taxation of non-US (foreign) corporations (see discussion here).  On the other hand, they can't be so restrictive they prevent US corporations from  expanding internationally, thereby hindering legitimate business development.  In effect, the rules need to exclude income derived from "legitimate" business expansion but include evasion.

Before moving forward, be advised: below is a general summation of the CFC income inclusion rules: there are many nuanced ins and outs to these rules that are far beyond the scope of a blog post.  

So -- if a corporation is a CFC, what income do we include in the US taxpayer's income for the taxable year?  Under section 951(a)(1)(A)(i) we include the taxpayers "pro rate share of sub-part F income" which is more completely defined in section 954 and the accompanying treasury regulations.  The code defines Subpart F income as being  "foreign base company income" which is further broken down "foreign personal holding company income," "foreign base company sales income" and "foreign base company services income."  Let's look at each one of these sub-sections as defined in the treasury regulations.

Foreign personal holding company income is designed to include the income from offshore investment accounts.  As such it includes dividends, capital gains, interest, commodities and currencies transactions and all other manner of standard investment transactions.  In short, if a US person wants to move his investment account to the Cayman's and place it into a corporation, this provision would include all the trading income from the account in his income for the taxable year. 

Foreign base company sales income "consist of gross income (whether in the form of profits, commissions, fees or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person."  

In general, here's what the rules are trying to prevent: using an offshore entity to act as a sales agent for a US company and then structuring transactions with that sales company to effectively transfer income to this low-tax entity.  

There are two very important exclusions to this rules which are:

Foreign base company sales income does not include income derived in connection with the purchase and sale of personal property .... if the property is manufactured, produced, constructed, grown, or extracted in the country under the laws of which the controlled foreign corporation which purchases and sells the property (or acts on behalf of a related person) is created or organized.


Foreign base company sales income does not include income derived in connection with the purchase and sale of personal property .... if the property is sold for use, consumption, or disposition in the country under the laws of which the controlled foreign corporation which purchases and sells the property (or sells on behalf of a related person) is created or organized or (b), where the property is purchased by the controlled foreign corporation on behalf of a related person, 

So -- the definitions exclude income if the company is not simply forming an offshore sales agent but instead is looking to actually develop a market in the company of incorporation.

And finally, we exclude "foreign base company services income", which is 

... income of a controlled foreign corporation, whether in the form of compensation, commissions, fees, or otherwise, derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which—
(1) Are performed for, or on behalf of a related person, and

(2) Are performed outside the country under the laws of which the controlled foreign corporation is created or organized.

Put more generally, a company can't transfer it's human capital offshore and then trap the profits earned by the human capital offshore.

Remember that the above rules generally summarize the big points of the CFC income inclusion rules; there are many nuanced points contained in the treasury regulations that go far beyond the confines a blog post.  But, the above inclusions do provide a good start for outlining the broad strokes of the law.


Saturday, November 9, 2013

US CFC Rules: What Is A US Shareholder?

Like most subparts in the US tax code (the CFC rules are a sub-part to sub-chapter N in the code), the CFC rules have specific concepts and definitions that apply only to this particular sub-part.  The most important definition is that of a "US shareholder."  In addition, like most sections in the code, the CFC rules require us to reference multiple sections to get a complete definition.

Let's start with section 957, which states:

For purposes of this subpart, the term “controlled foreign corporation” means any foreign corporation if more than 50 percent of—
     (1) the total combined voting power of all classes of stock of such corporation entitled to      vote, or
     (2) the total value of the stock of such corporation,
is owned (within the meaning of section 958 (a)), or is considered as owned by applying the rules of ownership of section 958 (b), by United States shareholders on any day during the taxable year of such foreign corporation.

Remember that under the tax code's definitions section (section 7701), a "foreign" corporation is one not formed in the US.  So, according to the CFC definition, a non-US company that is owned by a "US shareholder" is a CFC.  This, of course, leads us to define a "US shareholder" which is defined in section 951(b):

For purposes of this subpart, the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957 (c)) who owns (within the meaning of section 958 (a)), or is considered as owning by applying the rules of ownership of section 958 (b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.

And finally, attribution rules from section 318 apply under section 358, preventing a US resident from diversifying his ownership over several companies and or family members to theoretically prevent technical ownership while still actually remaining in control.
Putting these two sections together, we arrive at the following definition:  if more than 50% of the combined voting power of a foreign (non-US company) is owned by a "US shareholder(s) (individuals who each own at least 10% of the stock)" we have a controlled  foreign corporation, thereby requiring us to include certain types of income from that company in each shareholder's gross income on a pro-rata basis. 

It's very important to note that we have two ownership thresholds to meet in this definition.  First, we have to establish majority control by "US shareholders."  This means that if the foreign corporation is majority owned by foreigners (non-US individuals), a CFC does not exist.  In addition, we only have to include certain types of income in the personal gross income of US residents who own more than 10% of the company. 

Next, we'll start to look at what types of income we need to include.

Friday, November 1, 2013

The US Controlled Foreign Corporation (CFC Rules): An Introduction

     Commentators and practitioners often refer to the US controlled foreign corporation statute (or "CFC") as extremely complex and Byzantine in their construction and application.  I would agree with this assessment to a point; if someone is simply trying to learn the pure mechanics of the statute then, yes, it is very difficult to fathom.  However, when one looks at the rules after understanding the underlying policy for their implementation and overall effect, the statutory scheme becomes easier to comprehend.  So, let's begin with an explanation of why the US (and other developed, OECD countries) put these types of rules into place.

     To begin we will need to know a few definitions from section 7701.   A domestic corporation is one "created or organized in the United States or under the law of the United States or of any State" while a foreign corporation is "one that is "is not domestic."  Moving one step further, a foreign corporation is taxed by the US on income that is either connected with a "United States business" or is derived from sources within the United States.  Putting all of these definitions together into a workable (and far more user friendly) statement, the US taxes a foreign corporation when that corporation either formally engages in a trade or business within US borders or derives some type of profit from an activity within the US.  While this all may seem a bit obvious, knowledge of these definitions is key to understanding why the US implemented CFC rules.

     Next, it's important to remember the US taxes US corporations and individuals on world wide income (income from "whatever source derived").  But given the above definitions, it would be possible for a US person to transfer his assets to a foreign company thereby removing the income from the US taxation, as that company would have no taxing nexus with the US -- they were not conducting a trade or business within the US or engaging in any non-business related transaction.  And as the entity was not a partnership, the income would not pass through to the individual. And this is exactly what was happening to a larger extent in the 1950s -- US corporations and individuals would form foreign corporations outside the US' taxing jurisdiction while still living and residing in the US.  This creates a "free rider" problem: people or companies who live/reside in the US receive all the benefits of taxpayer funded programs (the interstate system, public education, a judiciary to name a few) without funding them through taxes.  And it is that behavior which the CFC rules were designed to prevent.

     In general, the CFC rules attribute offshore corporate income to US shareholders when the perceived purpose of the offshore corporation is not to engage in legitimate foreign business (such as opening a "bricks and mortar" branch to sell products) but instead to divert income to a low-tax jurisdiction with the sole intent of removing it from the US tax base.  As we move forward into a general overview of the CFC mechanics, keep this concept in mind as it helps to clarify the underlying CFC policy and makes the overall rules that much easier to understand.


Saturday, October 19, 2013

Captives And Life Insurance: A Bad Combination

     No topic splits the captive insurance world more than the issue of life insurance — or, more specifically, whether or not a captive can purchase a whole life policy as part of its investment portfolio. Those in favor point to the stable returns offered by whole life and the fact that banks are allowed to purchase BOLI as primary reasons for favoring the practice. Those against the practice cite anti-avoidance law along with the IRS’s long history of successfully attacking more aggressive life insurance plans as negative factors. Adding further fuel to the fire is the lack of any formal guidance from the IRS on the issue, leaving both camps with enough legal wiggle room to claim validation.

     I have always fallen in the negative camp, largely based on anti-avoidance law concerns. By way of quick background, anti-avoidance law is a series of judicial doctrines used by the courts and the IRS to attack transactions largely on “substance over form” grounds. This doctrine has a long and extremely convoluted legal history, which can be traced to the Gregory v. Helvering case, and stretches to well over 1,000 citations in cases, law review articles and legal treatise. Highly questionable annuity and life insurance transactions are at the center of several of the more famous citations, such as Knetsch (which involves and annuity transaction) and In Re CM Holdings (which is one of four COLI cases from the 1900s and early 2000s).

     Firmly hardening my antagonism to this transaction is a recent law review article by Beckett Cantley, law professor at John Marshall School of Law in Atlanta. His piece, "Historical IRS Policy Weapons to Combat CIC Deductible Purchases of Life Insurance, provides the most in-depth treatment of this transaction, highlighting the IRS’ successful attacks on more aggressive life insurance planning, the policy reasons behind those attacks and the application of the reasoning of those successful prosecutions to captive purchases of life insurance.

     He concludes, “The IRS will likely view an arrangement where a small business owner funds a CIC for the primary purpose of obtaining deductions on life insurance premium payments (“Insurance Transaction”) as similarly abusive to prior listed transactions involving I.R.C. § 419 plans, I.R.C. § 412(e)(3) plans, and I.R.C. § 831(b) PORCs.”

     Professor Cantley outlines the basic argument that would allow the IRS to successfully challenge these transactions.

     The starting point is section 264(a) of the tax code, which states: “No deduction shall be allowed for—(1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.”

     The underlying policy reason for this is to prevent tax free accumulation of income, which would disproportionately benefit high-net-worth individuals. If this deduction were allowed, a high-net-worth business owner would be able to purchase vast amounts of life insurance coverage, deduct those premiums as a trade or business expense, and then have the tax-free proceeds benefit his family on his death.

     The next step is the premium payment from the parent company to the captive, which is tax deductible under 162(a) as a trade or business expense. This is followed by the captive’s purchase of life insurance, which benefits the captive owner by either naming his family or business as a beneficiary. Note what’s transpired with this transaction: The business owner has deducted the premium payment for a property and casualty policy, the proceeds of which have been used to purchase a life insurance policy that in some way benefits him. He has done indirectly (purchased life insurance via some type of deductible payment) what he can’t do directly (take a deduction for a life insurance payment via 264(a)). A general underlying concept in tax law is a taxpayer cannot do indirectly what he can't do directly. However, here, he has done just that.

     In addition, there are several basic anti-avoidance law theories which would underlie the services attacks; these involve application of the step transaction doctrine, the economic substance doctrine, general form over substance and the sham transaction doctrine. Professor Cantley outlines these arguments in far more detail in a forthcoming law review article titled, “Relearning the Lesson: IRS Judicial Doctrine Attacks on the Captive Insurance Company Tax Deductible Line Insurance tax Shelter.”  His analysis for all doctrines is very convincing, and indicates the Service has multiple avenues to successfully challenge this transaction.  

     One of the more unfortunate aspects of practicing law is we are forced to read the legal tea leaves when there is no formal guidance from the relevant authorities. However, in-depth research and a broad knowledge of the law often suffice where lack of guidance exists. Here, the history of anti-avoidance law, the general tax policy of preventing a tax deduction (either directly or indirectly) for purchases of life insurance and the IRS’s long and successful history of challenging aggressive life insurance transactions provide a clear picture: Purchasing life insurance as a portfolio investment in a captive insurance company should be avoided.  

Wednesday, October 16, 2013

Double Irish Loophole to Close

Ireland's finance minister, Michael Noonan, said Tuesday that he will work to close a legal loophole that allowed Apple Inc. AAPL +0.56% to sidestep big tax payments, the Financial Times reported on Wednesday. Noonan said he will publish leglislation that ensures companies registered in Ireland declare a tax residency in another jurisdiction or become liable for a 12.5% corporate tax rate in 2015.

Thursday, October 10, 2013

Cadbury's Tax Plan and Inverse Mergers: More Corporate Tax Planning Enters the Spotlight

     One of the more interesting business reporting trends over the last few years is the focus on corporate tax planning.  I believe this started in conjunction with the investigations by the US and other OECD countries into offshore/tax haven planning mechanisms which has led to some embarrassing tax disclosures.  Regardless of the cause, we are seeing far more actual disclosure about aggressive corporate tax planning techniques.  For example, the Financial Times has recently issued a two part report on Cadbury's tax planning.  

Cadbury, the British confectionery maker that became a cause célèbre for tax justice campaigners after it was acquired by US food group Kraft in 2010, engaged in aggressive tax avoidance schemes before the takeover that were designed to slash its UK tax bill by more than a third.

A Financial Times investigation into the tax affairs of the company – established in 1824 by Quakers and known for its philanthropic ethos – has uncovered tax avoidance schemes former senior executives admit were “highly aggressive”.
Like many multinationals, Cadbury reduced its corporation tax bill by loading operations in high tax countries, such as the UK and US, with debt, while using equity to fund its growth through low tax jurisdictions such as Ireland.

But it went even further by devising schemes to engineer interest charges that could be deducted from its gross profits and reduce UK tax.

     And the New York Times Deal Book recently published an article on the increased use of international mergers as a way to cut corporate tax bills:

From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.

“It’s almost like the holy grail,” said Andrew M. Short, a partner in the tax department of Paul Hastings, which advises a number of American corporations on deals. “We spend all of our time working for multinationals, thinking about how we’re going to expand their business internationally and keep the taxation of those activities offshore,” he added.

Reincorporating in low-tax havens like Bermuda, the Cayman Islands or Ireland — known as “inversions” — has been going on for decades. But as regulation has made the process more onerous over the years, companies can no longer simply open a new office abroad or move to a country where they already do substantial business.

Instead, most inversions today are achieved through multibillion-dollar cross-border mergers and acquisitions. Robert Willens, a corporate tax adviser, estimates there have been about 50 inversions over all. Of those, 20 occurred in the last year and a half, and most of those were done through mergers.

Thursday, October 3, 2013

OECD v. Tax Havens Part V: Intra-Company Transfers

     The IRS (nor any other taxing authority) does not like intra-company transfers. This is a prime reason for section 482 of the US tax code, which reads:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.  In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.

The accompanying Treasury Regulations provide guidance on US transfer pricing rules.  The OECD has issued its transfer pricing guidelines, which can be accessed here.  Both organizations are extremely concerned that related organizations will use their relationship to manipulate their respective earnings.

     This is an issue at the forefront of the new OECD list of potential actions to prevent BEPS -- base erosion and profit shifting.  One of their first concerns is the use of interest deductions between related companies.  Action point 3 states:

Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.

One of their primary concerns is the use of a conduit company in an offshore haven to hold financial assets, which in turn makes a loan to the parent company to drain corporate profits form a high tax environment to a non-tax environment. 

     But there are other concerns related to intra-company transfers.  Action point 8 is to "develop rules to prevent BEPS by moving intangibles among group members," while action point 9 is meant to "develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members."  Action 10 states: "develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties."  And finally there is action point 14 to "develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business."

     Central to all of these concerns is the creation of a wide corporate structure encompassing many jurisdictions and then using the inter-relationships between the companies to manipulate earnings in a manner not intended or envisioned by the code.  All of the recommendations point to new rounds of intensive scrutiny on the part of the OECD.


Sunday, September 29, 2013

The OECD v. Tax Havens: Pt IV The Digital Economy

     The current tax rules underpinning practically every tax code around the globe are derived from a "bricks and mortar" or manufacturing based economy.  What this means is the underlying concepts were developed when all world economies were based on building physical products that were bought and sold (think industrial revolution).  For example, the tax treaty phrase "permanent establishment" was actually developed by League of Nation's negotiators during their preliminary discussions to develop a working tax treaty framework.  Compare this to today's digital economy where "products" are actually multiple lines of computer code that exist in cyber-space (or a trademark or patented item) or where a "store front" (the old "permanent establishment") is in fact a web site located halfway around the globe on a server in a tax haven.  This mismatch between the underlying concepts of the old tax code and the new economy have allowed tax planners to devise tax plans that exploit the inherent conceptual incongruity between the underlying tax code and actual business being taxed.

     The original OECD model tax treaty attempted to deal with some of the problems created by this situation in their electronic commerce section of the OECD model tax treaty commentary (paragraphs 42.1-42.10).  Paragraph 42.8 of that section concluded:

Where, however, such functions form in themselves an essential and significant part of the business activity of the enterprise as a whole, or where other core functions of the enterprise are carried on through the computer equipment, these would go beyond the activities covered by paragraph 4 and if the equipment constituted a fixed place of business of the enterprise (as discussed in paragraphs 42.2 to 42.6 above), there would be a permanent establishment.

(for further explanation, you may also wish to see this presentation available on slideshare)

     However, this solution is rather narrow; serious exploitation of the old rules when applied to a more modern business is still part and parcel of modern international tax planning.  As such, this is an area which the OECD recommendations target for change, including a targeting of the following areas:
  1. the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, 
  2. the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services,
  3. the characterisation of income derived from new business models, 
  4. the application of related source rules, and 
  5. how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.
Each of these areas is a topic onto itself, but suffice it to say that breadth of the potential changes is incredibly broad.

Tuesday, September 24, 2013

The OECD v. Tax Havens: Pt III New Concerns

On July 13, the OECD issued a new paper titled, Action Plan on Base Erosion and Profit Shifting.  The purpose of this paper was to outline the OECD's new round of concerns regarding tax havens and their use in international tax planning.  It's first important to understand what is behind the issuing of this new report:

Over time, the current rules have also revealed weaknesses that create opportunities for BEPS. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. 

One of the central purposes of the OECD's original tax treaty was to divide taxing rights and privileges between the two sovereigns that sign a particular treaty.  Essentially, each country can tax transactions which occur within their borders (hence the residence requirements of section 1, the residency stipulations of section 4 and the permanent establishment/business profits interaction in sections 5 and 7 of the OECD model treaty).  However, through the interaction of two different tax systems, planners have come to exploit situations so no taxation occursHence the issue of "double non-taxation."  

In addition, less than single taxation is also possible.  While this term may seem a misnomer, in fact it's not.  One of the central ideas both of accounting and taxation is to effectively align income and expenses.  For example, when a company produces a product, it is allowed under most tax and accounting systems to deduct expenses incurred in production of that product.  This is sometimes referred to as the matching principal.  Less than single taxation occurs when a company manipulates transfer pricing rules to drain money away from the location where the expense should occur to a lower tax jurisdiction.  One of the most common examples is placing intellectual property in a low-tax jurisdiction and paying royalties to that jurisdiction for use of the property, even though the production of that IP occurred in the higher tax jurisdiction. 

This point leads nicely into the third primary concern of the OECD:

The spread of the digital economy also poses challenges for international taxation. The digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs. This raises fundamental questions as to how enterprises in the digital economy add value and make their profits, and how the digital economy relates to the concepts of source and residence or the characterisation of income for tax purposes. At the same time, the fact that new ways of doing business may result in a relocation of core business functions and, consequently, a different distribution of taxing rights which may lead to low taxation is not per se an indicator of defects in the existing system. It is important to examine closely how enterprises of the digital economy add value and make their profits in order to determine whether and to what extent it may be necessary to adapt the current rules in order to take into account the specific features of that industry and to prevent BEPS.

Over the last 6-9 months, the tax planning of Apple, Google, Amazon and Adobe have been publicized in a negative light.  Because these companies all utilize IP, they are able to send their valuable assets to offshore low-tax jurisdictions and use these venues as "hubs" which collect vast sums of money in a low tax manner.  The OECD is concerned that these structures remove money from higher tax jurisdictions in a manner that does not reasonably employ matching concepts.  The OECD expresses their concern thusly:

It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. In other words, what creates tax policy concerns is that, due to gaps in the interaction of different tax systems, and in some cases because of the application of bilateral tax treaties, income from cross-border activities may go untaxed anywhere, or be only unduly lowly taxed.


Wednesday, September 18, 2013

The OECD v. Tax Havens, Part II: Initial Recomendations

As discussed in the previous post, the OECD originally went after tax havens in a 1998 document titled, Harmful Tax Competition, An Emerging Global Issue.  They defined a tax haven as a low or no tax jurisdiction that employs secrecy and does not exchange information with other taxing officials.  To counter-act the effect of havens, the OECD proposed a number of options.  There are several that stand out.

Recommendation concerning Controlled Foreign Corporations (CFC) or equivalent rules: that countries that do not have such rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices.

Most advanced economies have some form of CFC rules, the purpose of which is to attribute offshore income to onshore shareholders.  The US adopted its rules in the early 1960s, as did most of the larger European countries.  

Recommendation concerning foreign information reporting rules: that countries that do not have rules concerning reporting of international transactions and foreign operations of resident taxpayers consider adopting such rules and that countries exchange information obtained under these rules.

The US tax system -- as with most other tax systems -- is a self-reporting system.  Taxpayers annually report their income, and the threat of an audit prevents abuse.  However, in the age of electronic banking, it's very easy for people to open an account and then fund it in an un-reportable manner.  This led to the passage and implementation of FATCA rules.

Recommendation concerning greater and more efficient use of exchanges of information: that countries should undertake programs to intensify exchange of relevant information concerning transactions in tax havens and preferential tax regimes constituting harmful tax competition.

While the OECD Model Tax Treaty contains an exchange of information section, after the organization published the Harmful Tax Competition document, they began to encourage the signing of mutual assistance treaties between countries that focused exclusively on the exchange of relevant information.  A report issued in 2007 noted the progress that had been made:

The 2006 Report showed that both OECD and non-OECD countries had implemented or made considerable progress towards implementing the transparency and effective exchange of information standards that the Global Forum wishes to see achieved. It also showed that further progress is needed if a global level playing field is to be achieved. Thus, the Statement of Outcomes issued after the Global Forum meeting in Melbourne on 15-16 November 2005 outlined a series of steps involving individual, bilateral and collective actions which would be needed to both achieve and maintain the goal of a level playing field.

Countries continue to sign mutual assistance treaties. 

The report contained other recommendations; those listed above are simply the more important proposals.

Saturday, September 14, 2013

The OECD v. Tax Havens, Part I: What Is A Tax Haven?

Recently, the OECD ramped up its conflict with tax havens by issuing a report titled, Action Plan on Base Erosion and Profit Sharing.  Obviously, the purpose of this report is to provide a set of options that OECD countries can enact to counter the negative impact of tax base erosion, or the shifting of tax revenue away from developed/higher tax countries to lower tax/tax havens.  But before I get to the report, a bit of background is necessary to provide some context to the conflict.

First, let's classify countries geographically.  If you look at a map of the world and then look at the tax rates of most countries, the small countries -- typically islands -- have low to non-existent tax rates.  The reason is actually pretty simple: they have small populations and small geographic areas.  Hence, their need for tax revenue is greatly reduced (they don't have a social safety net to pay for and they don't have a great deal of infrastructure needs).  This is why the islands in the Caribbean have become tax havens -- a development made far easier because of electronic banking.  And when low tax rates are combined with bank-secrecy laws, an entire industry is now born -- offshore banking.

While these countries were bit players for the first half of the 20th century, their importance has increased as electronic commerce makes it far easier to form and manage companies from a distance and transfer certain types of assets through electronic or paper means.  As the world economy become more integrated, these jurisdictions increased in importance, slowly draining tax revenue out of higher tax countries.

In response to this cash drain,  the OECD issued a report called Harmful Tax Competition, An Emerging Global Issue in 1998.  The report noted that as the modern economy developed, certain types of economic activities could be moved from higher tax to lower tax countries.  Some of the more common structures include the following:

1.) Intellectual property centers: all IP is stored in an offshore company that is located in a low tax environment.  The company's branches pay royalties to the company, thereby draining cash from high tax countries to low tax countries.

2.) International finance centers: companies place all of their liquid financial assets in an offshore company which then provides financing to branches.  Interest payments allow money to move from high tax countries to low tax countries.

3.) Offshore transportation registry: Companies with transportation sections place all of their transportation assets into an offshore company which then owns the various boats, planes and the like.

4.) Offshore e-commerce: a website located on a server is considered a permanent establishment for tax treaty purposes.  Therefore, companies will house their websites on servers located in tax havens, creating a point of sale in the low tax jurisdiction and trapping profit there.

There are or course, many variations on the above along with others concepts.

The report also had to define a tax haven.  They settled on with the following criteria.  

1.) A low tax or no tax environment: this is an obvious main point that must exist.  If the territory has 0% tax rate or a very low tax rate (say less than 10%), then it's a good bet it's a tax haven.

2.) Are there laws that prevent the effective exchange of information? If the home country can't find out about a company's activities in a jurisdiction, it's highly likely that the company doesn't want to have its activities discovered.  This requirement also ties into another qualification: an overall lack of transparency.  Secrecy also encourages certain types of activities such as money laundering and terrorist financing.

3.) The absence of a requirement that the activity be substantial.  By now, we've all heard about the Cayman Island street address that is actually the home of over 1,000 companies.  Obviously, no actual business is transacted at these locations; no meetings are held, no votes are taken no decisions are actually made.  Instead, these companies only exist on paper, usually to house highly mobile company asset.  The fact that no substantive business has to occur at these locations is very important, as it allows MNEs to create numerous paper companies.

4.) Does the jurisdiction hold itself out as a tax haven?  Some places have an international reputation as an offshore tax haven.   If a country says it is, it's probably true.

5.) While the report notes that "failure to adhere to international transfer pricing principles" is an "other" factor, I would argue it's a primary qualification -- and one that exists in all tax havens.  

There is hardly anything controversial in the above statements.  

Next, we'll look at the new report issued by the OECD.

Thursday, September 12, 2013

More Signs Of An International Tax Evasion Clampdown

In 1998, the OECD issued a document titled Harmful Tax Competition: An Emerging Global Issue.  This was the first shot in a war between developed countries and offshore tax havens.  Over the ensuing 15 years offshore havens have become far more cooperative with higher tax countries -- at least in the compliance area; many have signed mutual assistance treaties which allow the exchange of information.  And the US has aggressively clamped down on certain evasion structures, specifically targeting UBS and Switzerland.  

The US is not alone in its efforts.  Over the last 6-12 months, we've seen the OECD and EU adopt a more aggressive posture towards advanced tax planning strategies.  The latest news is reported by the Financial Times:

Brussels is probing Ireland, Luxembourg and the Netherlands over their tax deals with multinationals paving the way potentially for a formal investigation into illegal sweeteners.

Europe’s top competition authority has asked the governments to explain their system of tax rulings and give details of assurances given to several specific companies – including Apple and Starbucks – according to people who have seen the request.

Wednesday, September 11, 2013

How Not To Create Corporate Substance; the Flowers Case

As we approach the end of the year, the annual tax scam circus will start coming around.  Expect promoters to make pitches for numerous half-baked schemes.  A good example of same is the Flowers case from 1983 (80 T.C. 914).  The case's facts are still a great example of how to not create corporate substance, thereby making the whole transaction suspect.

The facts are very simple: the promoters sought to form a limited partnership which invested in the record business by buying the rights to four "albums" and then selling the right to use the copyrights (The judge went so far as to describe all music albums as poorly performed and recorded).  Unfortunately for the taxpayers, the transaction was an utter sham as shown by the following facts:

The promoters had no experience in the business -- absolutely none: While this alone is not fatal to their business venture, they also didn't seek the input of people who did have the experience.  All businesses require a special skill set in order to make money.  Some -- such as the music business -- are especially skill specific.  When no one involved in the transaction has any expertise, its a sure bet there's something wrote.

There was no arms length negotiation: The promoters purchased four master recordings from a recording studio who simply named their price.  There was no second hand evaluation of product to determine if the valuation was in any way realistic.

The promotional literature was heavy on the promoter CYA and tax benefits:  Essentially the promoters wrote the package to escape all liability.  There assumed no responsibility for the potential sales of the product and stated that the shelter could be audited by the IRS.  In addition, the sales brochures were heavy on promoting the tax benefits.

The promoters were completely unaware of their responsibilities as managing partners: When questioned at trial, it became apparent the promoters had no idea what a general partner in a limited partnership was supposed to do.  And after forming the limited partnership, the promoters simply walked away.  They did not hold meetings nor they did not keep any corporate records.

There was no physical business: the limited partnership had no fixed address, no phone and no equipment.  There was literally nothing save a state level filing to prove the business even existed.

Fantastical business projections: the individuals who sold the albums projected all four would be rise to platinum level status (over 1 million units sold).  The promoters did not challenge these projections nor did they seek a second opinion. 

Like all tax plans, if it sounds too good to be true, it probably is.  

Saturday, September 7, 2013

The OECD Model Treaty, Business Profits and Transfer Pricing

One of the key benefits to international transactions is the ability to utilize a network of inter-related corporate entities to shift profits to lower tax regions.  In tax vernacular, this is  referred to as transfer pricing.  While a complete discussion of this discipline is far beyond the scope of this post, it's important to understand the OECD model treaty grants broad authority to taxing authorities to recast the economic terms of a transaction to better reflect arms-length principles.

The granting of authority starts in paragraph 2 of Section 7:

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

This section ties directly into Section 9, which is titled "Associated Enterprises," and states the following:

1. Where

a)  an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

b)  the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The granting of authority is developed and explained over several sections of the commentary.

1.) The starting place for the analysis is the company's books and records.  Paragraph 12 of the commentary to section 7 states:  In the great majority of cases, trading accounts of the permanent establishment -- which are commonly available if only because a well-run business organisation is normally concerned to know what is the profitability of its various branches -- will be used by the taxation authorities concerned to ascertain the profit properly attributable to that establishment.

2.) However, the taxing authority does not have to take these accounts at face value.  Paragraph 12.1 of the commentary to section 7 states: However, where trading accounts are based on internal agreements that reflect purely artificial arrangements instead of the real economic functions of the different parts of the enterprise, these agreements should simply be ignored and the accounts corrected accordingly.

3.) The related commentaries give the taxing authorities broad authority to re-write internal accounts if they do not reflect economic reality.  Paragraph 2 of the commentary to section nine states: "This paragraph provides that the taxation authorities of a Contracting State may, for the purpose of calculating tax liabilities of associated enterprises, re-write the accounts of the enterprises if, as a result of the special relations between the enterprises, the accounts do not show the true taxable profits arising in that State."

So, the taxing authority will start by looking at the company's records.  If these appear to be fine, then the analysis stops there.  But if there's a problem, they can dig deeper and if warranted completely rewrite the transactions if the original terms to not reflect "economic reality."

Saturday, August 31, 2013

Moline Properties and The Separate Nature of the Corporation

Moline Properties’ facts are straightforward. An individual who owned commercial real estate placed a single building into a corporation and subsequently placed the corporate shares with a voting trustee for the benefit of the mortgagee.2 When the corporation sold the property three years later, the single shareholder attempted to claim the sale as individual income rather than corporate income.3 The court ruled against the taxpayer, writing this now famous conclusion:

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.4

The broad range of reasons given by the court to justify incorporation is striking. The incorporator can be “seeking to take advantage under the law,” the most obvious of which is the corporation’s limited liability shield. In addition, he can be seeking to comply with creditor demands as in this case or do so merely for his “convenience.” Regardless of the actual reason, it’s possible to read practically any legally cognizable justification into the above cited sentence.

But just as importantly, ample reasons existed for the court to not recognize the separate nature of the company. The taxpayer in Moline Properties was less than diligent in maintaining the required corporate formalities as the corporation kept no books or records.5 These are factors often cited as reasons for piercing the corporate veil (see discussion below), which the court could arguably have done in this case. Also note the corporation was hardly a hot bed of corporate activity:
Until 1933 the business done by the corporation consisted of the assumption of a certain obligation of Thompson to the original creditor, the defense of certain condemnation proceedings and the institution of a suit to remove restrictions imposed on the property by a prior deed. The expenses of this suit were paid by Thompson. In 1934 a portion of the property was leased for use as a parking lot for a rental of $ 1,000. Petitioner has transacted no business since the sale of its last holdings in 1936 but has not been dissolved. 6
While the corporation was a petitioner in a lawsuit, it did not pay for its own legal expenses. This factor in combination with the lack of corporate formalities would give most courts ample reason for veil piercing or, at minimum, non-recognition of the corporate form. Yet the court chose not to do so, instead ruling sufficient substance existed for the separate nature of the corporation.
To this day, Moline Properties is cited as a primary authority for the proposition that courts must accept the separate nature of a properly incorporated entity. It has been cited approvingly in all but the 10th judicial circuit. More importantly, it has been citing approvingly by the U.S. Tax Court 30 times and 26 times by various IRS materials, including Chief Counsel Memorandum,7 General Counsel Memos,8 Private

2 Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 437 (1943)
3 Id
4 Id at 438-439
5 Id at 437-438
6 Id
7 IRS CCA 201123027, 2011 IRS CCA LEXIS 119 (I.R.S. 2011)
8 Gen. Couns. Mem. 35481 (1973)
Letter Rulings,9 and Field Service Advance Memos.10 While none of the IRS materials cited are binding, they amply demonstrate the IRS’ knowledge of this well-settled legal doctrine.

Sunday, August 25, 2013

Court Denies Motion for Summary Judgement in Bancroft Case

The following is the court's ruling on the motion for summary judgement in one of the Bancroft cases.  It proves that courts indeed have a sense of humor:

The Court has amply telegraphed its belief that Bancroft’s “Premium Lite” “insurance” program is, at best, a scheme, and at worst, a scam. This Court has on multiple occasions [Dkt. Nos. 76, 94, 140] dealt with the factual underpinnings of Plaintiff’s Motion for Partial Summary Judgment [Dkt. #160]. No matter how the parties reformulate the questions, the answer is the same: “That’ll be DENIED.” The Court does not believe the parties. The Court does not believe the lawyers. This matter will be resolved once and for all in the crucibles of trial. Credibility issues alone prevent summary adjudication of core issues in this case.

Wednesday, August 7, 2013

UK Doubles the Amount of Tax Evasion Cases

The number of criminal prosecutions for tax evasion more than doubled last year, as the government stepped up its crackdown on individuals suspected of defrauding the Exchequer. 

Tax evasion prosecutions rose from 302 in 2011-12 to 617 in 2012-13, according to figures obtained by Pinsent Masons, an international law firm. The increase reflects the Treasury’s pledge in 2010 to quintuple the number of tax prosecutions in an effort to create a more robust deterrent against evasion.

Practically all tax systems are based on self-reporting -- meaning that each taxpayer reports his level of income to the appropriate governmental authority.  This of course encourages the non-reporting of income along with various practices which makes income untraceable.  

The threat of prosecution keeps most taxpayers this side of to the compliance line.  However, a dearth of prosecutions encourages taxpayers to play "audit roulette" -- not complying with the law in the hopes they won't get caught.  In a low prosecution environment, this is actually a well-reasoned strategy (although as an attorney I would advise against it). 

The US recently went through a period of heightened audits for high net worth individuals as well.  I would expect more of the same over the next few years.

Thursday, July 25, 2013

Is A New Round Of International Tax Regulation Coming?

Over the last few years, large corporation's tax bills have come into more and more public focus.  Both Google and Apple have been called in front of Congress to explain their low rate and the overall tax plan of both corporations has become public knowledge.  These revelations are occurring at a time when the global tax base is being eroded as companies are shifting more and more of their income and assets to low-tax countries.  As a result, the OECD has issued a report titled, "Action Plan on Base Erosion and Profit Shifting." 

Let's first look at a brief history of the OECD-tax haven conflict to provide historical perspective, starting with this question: why are the tax rates in tax havens so low?  There are two inter-related answers: they have a tiny geography and small population.  The Cayman Islands is a mere 264 square km in size with a population of 53,737.  Looking at these two inter-related factors from a governing perspective, there is little need for a massive infrastructure system or social safety net programs and hence, little to no need to tax.  The exact opposite is true for OECD countries, who have large land masses and large populations.

Compounding this difference between large, populous countries and small less populated island nations is that businesses which require far more paper-work than physical product are easily moved to tax havens.  The first and most obvious example of this is financial services, an industry dominated by ledgers and accounts, not physical products.  The digital age has exacerbated this phenomena as web pages replace physical storefronts, thus enabling transactions to occur in cyberspace which can be located on a computer server rather than a bricks and mortar locale.  We can also place non-physical assets such as intellectual property into corporations located in these offshore jurisdictions and establish an intra-company payment system where a company will pay its offshore subdivision for usage of the company's intellectual property.  As a result of all these developments, more and more actual economic activity can be moved to these low-tax jurisdictions, thereby eroding the tax base of larger countries.

The OECD started to target offshore activity in the late 1990s with the issuance of the report "Harmful Tax Competition: An Emerging Global Issue."  In effect, the report argued the combination of banking secrecy and low taxes was eroding the OECD's tax base, leading the group to begin a lobbying campaign with these jurisdictions to both lift the secrecy veil and raise their taxes.  Little happened on this front until 9/11, which added further strength to the OECDs anti-secrecy arguments.  Now, more and more offshore jurisdiction are signing "mutual assistance" treaties which allow coordination of tax prosecutions with treaty signatories in certain situations.  From a macro perspective, these developments are leading to a slow end to the age of banking secrecy, which will probably disappear for the most part by the end of my lifetime.  

However, the issue of offshore tax arbitrage is still alive and well, hence the talk of a new global crackdown:

Finance ministers from the Group of 20 leading nations plan to launch a new phase of the international crackdown on corporate tax avoidance this week even as UK business leaders are warning their government to resist “radical new solutions” to profit shifting by multinationals.

Britain has taken a lead in pressing for reform of the international tax rules after a wave of public anger over the low tax bills paid by some large multinationals. An action plan on tackling base erosion and profit shifting is due to be presented to the G20 by the Paris-based Organisation for Economic Co-operation and Development on Friday.

We have no idea where this will end -- or if it will get anywhere in the first place.  However, I do think with the heightened spotlight on low multi-national  tax bills and increasing number of cross-border tax arrangements, this might have legs.


Tuesday, July 16, 2013

What Does a Tax Scam Look Like?

Planners have offered questionable ways to "minimize" tax since the implementation of the tax code.  Attesting to this are the first assignment of income cases which tested the validity and strength of the grantor trust rules when first established (see code sections 671-679).  In fact, a thorough reading of anti-avoidance case law shows there were several important periods in tax scams: the 1950s brought attempts to create phantom "interest" deductions, the 1970s and early 1980s brought limited partnership plans and the 1990s saw the creation of an entire industry encompassing the accounting, legal and financial professional industry.  

But while the long history of this industry could lead to the impression there is a vast difference regarding these plans, there is in fact a remarkable amount of similarity to the way they were structured.  What follows are some of the more common elements.

A hyper-technical reading of the tax code: this is probably one of the most common traits of tax shelters across the time periods listed above.  While the ability to comprehend particular sections of the tax code is obviously a prime requirement for a tax attorney, that knowledge has to be placed in the context of the legislative intent of the code in general.  For example, a common tax shelter in the 1990s involved the contingent liability section of the tax code, which would shift the gains of a transaction to a tax neutral participant (a party for whom income was immaterial) while it shifted the losses to a party that was trying to offset capital gains (usually a US taxpayer).  While these transactions complied with the technical aspects of the contingent liability section of the code, they had no substance, meaning there was no meaningful business purpose for the transaction, save sheltering taxable income.

Ground up tax planning: Most legitimate tax planning starts with a company approaching their attorney with one of four basic needs: the need to increase income (such as expanding into a new market), the need to lower expenses (combining subsidiaries; lowering taxes alone is not a legitimate reason), the need to raise capital or the need to lower risk.  But all four of these transactions starts at a high level and are motivated by a legitimate business need.  In contrast, most tax shelters are transactions in search of a client -- that is, a tax promoter will develop a transaction (usually involving a hyper-technical reading of the tax code) and then sell it to a client, one who is usually looking to offset income or capital gain.  When a transaction starts at a low level it has a difficult time establishing business purpose.  For a further explanation of this issue, see the Senate's Report on tax shelters.

Multiple, pre-planned steps: most transactions are actually very simple: company X buys company Y; company X forms an accounts receivable sub-division; company X divests itself of a subsidiary; company X issues stock, etc...   In contrast, most tax shelters use multiple, pre-planned steps to arrive at a particular destination.  For example, company X and company Y form an offshore partnership.  After 30 days, they purchase short-term notes.  After 35 days, they sell notes to received a contingent liability note.  After 12 months, company Y leaves the partnership ... you get the idea.  Pre-planned steps are a big warning sign that something is probably amiss.

Offshore: first of all, about 30% of my practice involves international tax planning, so I'm obviously not against the practice.  However, tax shelter promoters typically use an offshore jurisdiction for one reason: secrecy, a trait shared by many offshore jurisdictions (although this practice is changing).  This has obvious benefits if the participants are attempting to lower their tax burden in a questionable manner. 

Business Entities with a short life span: how long should a business enterprise exist?  Ideally in perpetuity -- which is one of the primary advantages of the corporate form.  And while businesses do go bankrupt or are sold, thereby ending their corporate life, most business owners want their business to exists for as long as possible as this indicates the company is a viable, ongoing concern.  In contrast, short duration corporations or partnerships are common in tax shelters, some of which contain entities with a life span of no more than 18 months.  While some could argue that joint ventures are an exception to the rule, most of these short-term combinations still have expected corporate an life expectancy of multiple years.

The above points cover most of the basic problems seen in tax shelters.  If you can think of others, please post them in the comments section.


Friday, July 5, 2013

How Reality Severely Limits My Vast Legal Super-Powers

The highly skilled lawyer who saves the protagonist from certain impending legal doom is one of the most iconic images in popular media.  Perry Mason of course stands out as one of the first characters that fit this bill, although others such as the cast of LA Law (a college favorite), The Practice and Law and Order stand out as well.  Real life examples include Clarence Darrow (who was portrayed wonderfully by Spencer Tracey in Inherit the Wind) and Johnny Cochran ("If the glove does not fit, you must acquit!").  These real and fictional individuals have given the public the impression that lawyers are super men who can always overcome disadvantageous odds to secure victory.

Sadly, realty often intrudes into real life expectations.  For while I would love to tell clients that I am one of these supermen of yore, I am in fact greatly hampered by three elements: the facts and circumstances of a particular case, the law as it is (not as we want it to be) and the legal code of ethics.  Let me explain each of these in more detail.

Hypothetically, suppose I'm a defense attorney, called in to defend an accused murderer.   On the other side of the court sits the prosecution who has four witnesses, all of whom are nuns with 20/20 vision and perfect recall memory, none of whom were more than 10 feet from the incident when it occurred.  Three video tapes of the crime also exist (all of which can be substantiated at trial), all with a good angle to witness the event.  While the TV or movie lawyer would be able to overcome these facts, the real attorney would merely be trying to keep his client out of the execution chamber (assuming the state had the death penalty).  Although these facts are deliberately extreme, they illustrate a key point: we are always limited by the facts and circumstances of the case we are given.  On a far more mundane (and far more realistic) note, consider a potential client who wants to form a captive insurance company, but who is also in the middle of a lawsuit.  Under the Uniform Fraudulent Transfer Act, I can't do anything because this transaction could easily be construed as an attempt to "hinder, delay or defraud" a potential creditor.  As these illustrations highlight, the facts and circumstances of a particular fact pattern can severely limit my legal options.

The law as it exists (not how we theoretically want it to be) is another element that can provide a fair amount of constraint for legal representation.  Suppose a client wants to transfer money to an offshore jurisdiction that has very tight secrecy laws with the intent of not paying US income taxes.  The clients states this is his goal.  At this point, I have to advise him that 1.) going offshore to hide money is illegal, 2.) he will have to file an informational return to comply with US law, regardless of what he wants to do, and 3.) as the US has a world wide taxation regime, he'll have to pay taxes on his offshore funds.  The preceding three statements highlight the law as it is, so, as an attorney, I would have to tell the client that his motivation runs afoul of the law.  It also means I probably won't be representing this client.

As a first corollary to the preceding point, it's also important to note that I can't fix your behavior after it occurs so that it complies with the law.  Like most people, potential clients regularly "shoot first and ask questions later."  And while I don't expect to be consulted on mundane issues, being aware of a bigger decision before it's made to discuss its legal ramifications helps to prevent bigger problems from developing.  Regrettably, attorneys are usually the last people consulted on decisions.

Finally, there is the legal code of ethics, with the biggest prohibition I face as an attorney:

(a) A lawyer shall not knowingly:

(1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;
(3) offer evidence that the lawyer knows to be false. If a lawyer, the lawyer’s client, or a witness called by the lawyer, has offered material evidence and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal. A lawyer may refuse to offer evidence, other than the testimony of a defendant in a criminal matter, that the lawyer reasonably believes is false.

I realize it may sound like a joke that an attorney can't lie, nor can he coach others to lie.  But there it is, plain as day in the model code of conduct.  And it's something that I and other lawyers whom I know take very seriously.  There is also new formal guidance for attorneys regarding representation and its relationship to money laundering -- rules which are very similar to the "know your client" rules.

So, what exactly can I do?  Within the confines of the above stated concepts, a great deal.  First, I can develop and implement a strategy that is compliant with the law as it exists.  Unlike the impression given by such services as Legal Zoom, the law is not merely a series of interlocking forms; each element of a form has legal ramifications and is derived from a substantive area of law that must be understood.  Second, I can keep this plan compliant with the law at it develops.  Remember, the law is always changing, sometimes in substantive ways.   Third, I can keep you out of trouble so long as you consult me on big decisions.     

So, the above three points are really my vast legal super powers as they exist in the real world.