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Old 02-20-2013, 08:34 PM  
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This is the type of tax evasion/avoidance, that needs to be stopped.

This is the type of loophole/evasion that needs to be ended immediately. This and the abuses of transfer pricing are two of the biggest gaping holes that should be closed.

http://www.bloomberg.com/news/2013-0...lionaires.html
Paulson Leads Funds to Bermuda Tax Dodge Aiding Billionaires
By Zachary R. Mider - Feb 19, 2013

Last year, about $450 million belonging to top executives at billionaire hedge fund manager John Paulson’s New York firm took a quick round trip to Bermuda.

In April, the executives sent the money to a reinsurance company that they’d set up on the island 650 miles off the North Carolina coast. By June, the Bermuda company, which has no employees and sells far less reinsurance than the industry norm, had sent all the cash back to New York, to be invested in Paulson & Co. funds.

By recycling the funds through Bermuda-based Pacre Ltd., the Paulson executives are positioned to legally exploit a little-known tax loophole, reduce their personal income taxes and delay paying the bill for years.

“These types of reinsurance companies are permitting U.S. taxpayers to defer -- indefinitely -- U.S. tax,” said David S. Miller, a tax lawyer at Cadwalader Wickersham & Taft LLP. For some, he said, it’s “an unjustified benefit.”

A decade after the U.S. Internal Revenue Service threatened to crack down on what it said were abuses by hedge-fund backed reinsurers, more high-profile money managers are setting up shop in tax havens. Paulson, SAC Capital Advisors LP’s Steven A. Cohen and Third Point LLC’s Daniel Loeb have started Bermuda reinsurance companies since 2011, following a similar Cayman Islands venture by Greenlight Capital Inc.’s David Einhorn.

Because reinsurers, which sell coverage to other insurers, manage large pools of capital, they’re a handy way to funnel a U.S. hedge fund investment through a tax haven.

Some Loopholes

At a time when the Obama administration and Congressional leaders of both parties are calling for a corporate tax overhaul that includes eliminating some loopholes, the reinsurance tax dodge is gaining popularity among hedge funds. The three new reinsurers backed by U.S. hedge fund managers put a combined $1.7 billion back into the managers’ hands.

Other top money managers, including some in London, are hiring advisers to explore setting up reinsurance companies in Bermuda, said Timothy Faries, an insurance lawyer at Appleby, one of the island’s largest law firms.

Fund managers are “trying to find a way to have a vehicle that can go offshore and avoid paying taxes,” said William Berkley, founder of W.R. Berkley Corp., a Greenwich, Connecticut-based insurer. “You have one company that does it and nobody pays attention. You now have four or five and it’s likely to get more people’s attention.”

Tax Management

Those involved in establishing reinsurers defend the strategy. “Given the world we’re in, it’s just good tax management,” said Robert Cooney, who served as chief executive officer of one of the first hedge-fund-backed reinsurers from 1999 to 2006.

Tax avoidance isn’t the only advantage to establishing a Bermuda reinsurer, insurance executives said. It means creating a large, fee-paying client that is unlikely to take its money out of a hedge fund after a bad year. Moreover, insurance companies get to invest customers’ premiums for months or years before they pay out claims.

Cohen’s, Loeb’s and Einhorn’s reinsurance firms are better designed to reap those non-tax benefits than Paulson’s company, Pacre, which has just one outside investor. The white, steel- and-glass complex overlooking Bermuda’s capital of Hamilton, which is listed as its legal address, is the office of another reinsurer to which it outsources its underwriting.

Insurance Sales

Pacre sold about $8 million of reinsurance coverage from April to December, or 1.6 percent of its $500 million in initial shareholders’ equity. That’s far below the average of 47 percent for 15 publicly traded Bermuda insurers during their most recent nine months.

Cohen’s and Loeb’s reinsurers employ underwriting staff and have set targets of insurance sales equivalent to 30 percent and 19 percent, respectively, of their equity in their first full year, according to disclosures to reinsurance brokers.

Paulson, 57, declined to say whether he plans to get a tax benefit from Pacre.

“That’s never been a portion of the business we’ve ever commented on,” said Armel Leslie, a spokesman for Paulson’s hedge fund.

The companies set up by Paulson, Cohen and Loeb are located within a half-mile of each other in the narrow streets ringing Hamilton. The pastel-hued business district overlooks a harbor where Russian billionaire Roman Abramovich docked the world’s largest luxury yacht last month.

No Tax

Bermuda, which imposes no corporate income tax, is the global center of the reinsurance industry. Since it emerged in the 1980s, the reinsurance business has lifted Bermuda’s economy, creating jobs for underwriters, actuaries, lawyers and accountants.

The companies backed by hedge funds -- lightly regulated funds available only to institutions and wealthy individuals -- are no less welcome. A 2001 presentation by a group of business leaders to encourage development in Bermuda touted the tax benefits of what it called “reinsurance wrapped around a hedge fund.”

After Paulson set up the Pacre venture last year, Wayne Furbert, then the minister of business development, called it “a strong vote of confidence in Bermuda as a leading financial jurisdiction,” according to the local newspaper, the Royal Gazette.

IRS Rules

By setting up reinsurance companies there, money managers can take advantage of a loophole in IRS rules. Ordinarily, when hedge fund managers invest in their funds, they pay either the 39.6 percent rate for ordinary income or the 20 percent long- term capital gains rate, depending on how frequently securities are traded, plus an extra 3.8 percent health-law surcharge. If they were to move the hedge funds to tax havens, they would incur IRS penalties on earnings from what the agency calls “passive foreign investment companies.”

Here’s the catch: The IRS doesn’t penalize earnings from insurance companies, which it considers to be “active” businesses. As a result, by routing money through a Bermuda reinsurer, which in turn puts its assets back into their own hedge funds, fund managers can defer any taxes until selling the stake. They then pay only the lower capital gains tax rate.

In the meantime, the money grows tax-free, and the savings add up. Investing $100 million in a hedge fund that returns 15 percent annually, and paying the top marginal ordinary income rate on profit, results in a $50 million profit after taxes after five years. If the investment is taxed like a Bermuda reinsurer, the gain is $77 million.

$64,000 Question

To qualify as an active company and avoid the tax penalty, the IRS says firms can’t have a pool of capital that’s far greater than what they need to back the insurance they sell.

But the IRS has never specified exactly how much is too much.

“The $64,000 question is how big a reserve can you have?” said Robert Cudd, a tax lawyer at Morrison & Foerster LLP in San Francisco. “There’s no easy answer to that.”

The IRS in 2001 disclosed plans to clarify its definition of insurance companies, a move that might prevent abuses by hedge funds, Cadwalader’s Miller said. He said it never followed through.

The fact that Pacre and the other startups trust virtually all their assets to one hedge fund manager may allow them to argue to tax authorities that they can’t afford to take on the extra risk of selling much reinsurance, Miller said.

“Under the current law, so long as Pacre’s reserves are not excessive -- and they probably aren’t -- this probably works,” he said. “I think you need a change in law.”

First Fund

The first prominent hedge fund to set up a large Bermuda reinsurer was Louis Moore Bacon’s New York-based Moore Capital Management LP, in 1999. He originally planned for Max Re Capital Ltd. to invest all its assets in his funds, and shares were marketed in part as a tax-efficient way to invest in a hedge fund, said Cooney, a career insurance underwriter who was Max Re’s first CEO. Forbes estimated Bacon’s net worth at $1.3 billion as of September 2012.

As it turned out, Max never invested more than 40 percent of its assets in hedge funds and now puts less than 5 percent in them. Still, the tax-avoiding aspect of Max Re was highlighted in a 2001 article in Institutional Investor magazine, titled “The Great Hedge Fund Reinsurance Tax Game.” Two years later, the IRS threatened to scrutinize the practice.

Phony Insurance

The IRS said some of the offshore arrangements were shams, either because they weren’t selling enough insurance or because the insurance they reported selling was phony. The IRS “will challenge the claimed tax treatment,” government lawyers wrote.

The IRS has rarely if ever done so. Tax lawyers and insurance executives said they were unaware of any company targeted by the IRS, even in private.

“Nobody’s been challenged, so nobody knows whether it’s ironclad or not,” said Faries, the Bermuda lawyer. The IRS declined to comment.

A year after the IRS notice, Greenlight Capital Inc.’s Einhorn started laying the groundwork for another reinsurer in a tax haven. Greenlight Capital Re Ltd., which opened in 2006 in the Cayman Islands, put 100 percent of its assets under Einhorn’s control. Einhorn, 44, whose net worth is estimated by Forbes at $1.2 billion as of last September, took the reinsurer public in 2007.

Third Point

Third Point’s Loeb, 51, was next in 2011 with Third Point Reinsurance Ltd., which raised about $785 million, including $75 million of Loeb’s own money. Forbes magazine estimated his personal fortune at $1.3 billion as of September.

And last year, SAC’s Cohen, 56, whose net worth Bloomberg estimates at about $9.5 billion, put $125 million of his own money into a $500 million reinsurance company called SAC Re.

Both Cohen and Loeb followed the Greenlight model: hire a handful of local employees to sell reinsurance while relying on the hedge fund firm to manage the assets.

A stable pool of capital to invest may be particularly welcome at SAC Capital, whose outside investors this month asked to withdraw $1.7 billion amid a U.S. government insider-trading investigation. Outside money accounts for less than half of SAC Capital’s $15 billion under management; the rest belongs to Cohen and his employees.

Cohen and SAC haven’t been accused of any wrongdoing and believe they’ve acted appropriately, a spokesman said in November. They declined to comment for this article.

Third Point Re said in a statement last year that it located in Bermuda because of the island’s “respected regulatory regime” and talented workforce. It hired John Berger, a career insurance executive, as CEO.

Tax Advantage

As for the tax benefits, Berger said in an interview, “Anybody in Bermuda has a tax advantage.”

Hedge fund-backed reinsurers turn the traditional business model on its head. Reinsurers help insurance companies cushion big risks, such as a California earthquake or a wave of lawsuits against asbestos makers.

A typical reinsurer invests its capital conservatively, in investments that are unlikely to decline in value and are available to pay claims on short notice. It might invest in Treasuries and investment-grade corporate bonds, and focus on making money through selling as much profitable coverage as possible.

By contrast, the hedge fund-backed reinsurers seek big returns from investing and more stable results from underwriting.

Fewer Policies

A.M. Best, which gauges insurers’ financial strength, has given “A-” ratings to the companies set up by Paulson, Cohen, Loeb and Einhorn with the understanding that they compensate for volatile investments by selling fewer policies than their competitors.

Paulson’s firm, Pacre, takes that approach the farthest. Pacre helps protect insurers against natural catastrophes such as Florida hurricanes. While traditional reinsurers have far more exposure, Pacre won’t risk more than $170 million, or about one-third of its capital, according to Edward Noonan, chief executive of Bermuda reinsurer Validus Holdings Ltd., which handles Pacre’s underwriting.

That loss would happen only if it had to pay out every single policy in full at the same time -- “in the event the end of the world happened,” Noonan said on an April conference call.

Pacre’s Capital

When it was established in April, Pacre’s startup capital included $450 million from the “principals” of Paulson’s hedge fund, according to A.M. Best. While A.M. Best didn’t name the principals, Paulson owns about 53 percent of his firm’s assets under management, according to the Bloomberg Billionaires Index, and at least 75 percent of the firm. No other officer of the firm owns even 5 percent, according to a filing with the Securities & Exchange Commission last year.

Bloomberg estimates Paulson’s net worth at $11.2 billion. He opened his money management firm in 1994, and rose to fame in 2007 after a wager against the collapsing U.S. subprime mortgage market generated billions in profits. Paulson told a Congressional hearing in 2008 that all of his personal investments were with Paulson & Co., which now manages about $18 billion in assets. He announced plans last year to donate $100 million to conserve Manhattan’s Central Park, steps from his six-story townhouse.

The other $50 million for Pacre came from Validus, to which Pacre outsources its underwriting. Validus sold premiums worth 32 percent of its equity in the most recent nine months.

Pacre invested the entire $500 million in startup capital in four Paulson & Co. hedge funds. Through December, those investments have lost about $19 million in value. Since the funds lost money, the Paulson investors wouldn’t have owed income taxes anyway.
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Old 02-21-2013, 12:41 AM   #31
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You need thicker skin, muchacho.

Saying that you have a political hostility towards the entitlement state is not a personal attack. It's a remark/criticism of your political position.
...and that's not what you said. Again, own your behavior. You were trolling.
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Old 02-21-2013, 12:44 AM   #32
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Nope. Not at all. Those loopholes are built into the system to attempt to control what wealthy people do with their money. It's the government's way of saying, "If you don't make decisions with your money that we agree with, then we are just going to take it from you." I tend not to feel sorry for someone based on how much money they have. I believe that there are much more important things in life than your material wealth. But I do support helping those that honestly can't help themselves and I don't agree with penalizing the successful.
I seriously can't tell what your position on the OP's loophole is. From the above post, I'm assuming you think it's smart policymaking, and under a Listo Presidency you'd prefer it to stay. Again, correct me if I'm wrong.

The problem I have with the reasoning in the above post is the final three words of it:

"penalizing the successful"

That's how you see closing a corporate loophole, which allows many of the most gigantic businesses to pay a lower tax rate than many middle class Americans. As punishment.

The ending of an unjust favor, provided exclusively to curry favor with the super-wealthy. "Punishment."
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Old 02-21-2013, 12:45 AM   #33
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...and that's not what you said.
Sure it is. How is it any different from how I just characterized it.
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Old 02-21-2013, 12:54 AM   #34
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I seriously can't tell what your position on the OP's loophole is. From the above post, I'm assuming you think it's smart policymaking, and under a Listo Presidency you'd prefer it to stay. Again, correct me if I'm wrong.

The problem I have with the reasoning in the above post is the final three words of it:

"penalizing the successful"

That's how you see closing a corporate loophole, which allows many of the most gigantic one to pay a lower tax rate than many middle class Americans. As punishment.

The ending of an unjust favor, provided exclusively to curry favor with the super-wealthy. "Punishment."

You are still missing a piece of the puzzle apparently. The loopholes are part of a broken system. It's a system built on higher tax rates for wealthier people. These rates skyrocket at the higher levels of wealth to the point of ridiculousness. To the point of being punitive. I don't blame the very wealthy for taking advantage of these loopholes. Just like I don't blame the helpless for seeking help. If you are really bothered by these loopholes, support a tax system that doesn't require them.
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Old 02-21-2013, 12:55 AM   #35
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Sure it is. How is it any different from how I just characterized it.
Go back and read what you posted. You were trolling.
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Old 02-21-2013, 12:58 AM   #36
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You are still missing a piece of the puzzle apparently. The loopholes are part of a broken system. It's a system built on higher tax rates for wealthier people. These rates skyrocket at the higher levels of wealth to the point of ridiculousness. To the point of being punitive. I don't blame the very wealthy for taking advantage of these loopholes.
Please state your position on the loophole in the OP. Do you believe it should be stopped, or not?

My understanding of your position: it should not be stopped under our current tax system, but under your preferred tax system (a FAIR tax type arrangement), it would be stopped.
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Old 02-21-2013, 12:59 AM   #37
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Go back and read what you posted. You were trolling.
Shrug. Don't see it.

Saying "listo hates poor people" is a personal attack.

Saying "listo hates food stamp programs for poor people" is a political criticism.

Am I wrong?
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Old 02-21-2013, 01:01 AM   #38
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Please state your position on the loophole in the OP. Do you believe it should be stopped, or not?

My understanding of your position: it should not be stopped under our current tax system, but under your preferred tax system (a FAIR tax type arrangement), it would be stopped.
Nope. I don't believe that it should be stopped under our current tax system.

I favor a consumption tax as opposed to an income tax, although I understand that a consumption/income mix might be more effective. Either as a transitional stage or a final compromise.
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Old 02-21-2013, 01:03 AM   #39
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Nope. I don't believe that it should be stopped under our current tax system.

I favor a consumption tax as opposed to an income tax, although I understand that a consumption/income mix might be more effective. Either as a transitional stage or a final compromise.
That's about what I figured.

And as for closing loopholes that allow gigantic corporations to pay lower tax rates than middle class families, that's punishment of the successful, right?
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Old 02-21-2013, 01:03 AM   #40
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Shrug. Don't see it.

Saying "listo hates poor people" is a personal attack.

Saying "listo hates food stamp programs for poor people" is a political criticism.

Am I wrong?
Yes, you are. Because you stated that I scorn people who are trying to get government aid to feed themselves. It's a personal attack, and it's not true.
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Old 02-21-2013, 01:04 AM   #41
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That's about what I figured.

And as for closing loopholes that allow gigantic corporations to pay lower tax rates than middle class families, that's punishment of the successful, right?
Why do you suppose that that particular loophole was implemented?
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Old 02-21-2013, 01:06 AM   #42
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Why do you suppose that that particular loophole was implemented?
To curry favor with incredibly wealthy people. Do you disagree?
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Old 02-21-2013, 01:09 AM   #43
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To curry favor with incredibly wealthy people. Do you disagree?
Yes, I do. I think it was created as an incentive to move wealth. Unfortunately the article doesn't give much information about the causes or effects of the loophole. It's slanted away from that aspect of the issue.
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Old 02-21-2013, 01:18 AM   #44
Direckshun Direckshun is offline
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Yes, I do. I think it was created as an incentive to move wealth.
Well, yeah. It's an incentive, no doubt, but for incredibly wealthy to move their money and avoid taxes in order to curry favor with them.
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Old 02-21-2013, 01:22 AM   #45
listopencil listopencil is online now
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Originally Posted by Direckshun View Post
Well, yeah. It's an incentive, no doubt, but for incredibly wealthy to move their money and avoid taxes in order to curry favor with them.
I think you have it backwards. It's an incentive for the wealthy to do with their money what the federal government wants them to.
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