This is the type of tax evasion/avoidance, that needs to be stopped.

[KC native]

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.

[Direckshun]

Originally Posted by listopencil

I think you have it backwards. It's an incentive for the wealthy to do with their money what Congressmen looking to curry favor with them want them to.

FYP

Honestly, listo. And to think people call me naive on this forum.

You think this has nothing to do with appeasing the super-wealthy for their political and financial support?

[listopencil]

Originally Posted by Direckshun

FYP

Honestly, listo. And to think people call me naive on this forum.

You think this has nothing to do with appeasing the super-wealthy for their political and financial support?

The loophole itself? I think it exists to control the flow of wealth. Like I said, the system is broken.

[KC native]

Originally Posted by listopencil

The loophole itself? I think it exists to control the flow of wealth. Like I said, the system is broken.

No, this one exists because some highly paid lawyers figured out another way to dance on the knife's edge of legality. Hedge funders have been warned about this possibly not being legal and now that everyone is piling into it, we'll probably see the IRS go after that.

Also, (not just replying to this post) the wealthy have the lowest tax rates ever. Our system isn't punitive. It's riddled with holes after decades of tinkering. No wealthy people are in danger of paying anywhere close to half their income in tax. This loophole is also converting what should be income for the hedge fund managers int capital gains thus lowering their tax burden even more. This is tax evasion.

A dramatic simplification while retaining a progressive structure is what our tax system needs. We don't need a flat tax that allows the wealthy to pull even farther away from everyone else.

[Direckshun]

Originally Posted by listopencil

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.

I don't know how I missed this gem.

But sorry, no. That's still a political criticism. The clear point being made was that you exhibit a political animosity towards "moochers" of the state.

Whether that's true or not, that's clearly a political criticism, and you need some thicker skin.

[listopencil]

Originally Posted by Direckshun

I don't know how I missed this gem.

But sorry, no. That's still a political criticism. The clear point being made was that you exhibit a political animosity towards "moochers" of the state.

Whether that's true or not, that's clearly a political criticism, and you need some thicker skin.

No actually it's not. You used the term "scorn." It has nothing to to with politics. Like I said, own your behavior. You were obviously trolling. You obviously used a personal attack. Contrary to your stated opinion it didn't upset me. I'm just pointing out that you're full of shit again.

[Direckshun]

Originally Posted by listopencil

No actually it's not. You used the term "scorn." It has nothing to to with politics.

Yes, scorn has nothing to do with politics. Well played.

[listopencil]

Originally Posted by KC native

No, this one exists because some highly paid lawyers figured out another way to dance on the knife's edge of legality. Hedge funders have been warned about this possibly not being legal and now that everyone is piling into it, we'll probably see the IRS go after that.

Also, (not just replying to this post) the wealthy have the lowest tax rates ever. Our system isn't punitive. It's riddled with holes after decades of tinkering. No wealthy people are in danger of paying anywhere close to half their income in tax. This loophole is also converting what should be income for the hedge fund managers int capital gains thus lowering their tax burden even more. This is tax evasion.

A dramatic simplification while retaining a progressive structure is what our tax system needs. We don't need a flat tax that allows the wealthy to pull even farther away from everyone else.

It's in their best interest to keep as much of their money out of the government's hands as they possibly can. I agree with you that the system is broken, and needs to be simplified.

[listopencil]

Originally Posted by Direckshun

Yes, scorn has nothing to do with politics. Well played.

You're the one who used the term. Like I have said many times, own your behavior.

[KC native]

Originally Posted by listopencil

It's in their best interest to keep as much of their money out of the government's hands as they possibly can. I agree with you that the system is broken, and needs to be simplified.

I have no problem with minimizing your tax burden. I do have a problem with techniques like this that are blatant tax evasion.

[listopencil]

Originally Posted by KC native

I have no problem with minimizing your tax burden. I do have a problem with techniques like this that are blatant tax evasion.

I think the solution, as you said, is to simplify it.

[Direckshun]

Originally Posted by listopencil

You're the one who used the term. Like I have said many times, own your behavior.

I'm very comfortable with calling out contempt for the welfare state and those who depend on it, something that's rampant on this forum.

Example: you still haven't answered my question.

If you had to choose between the two in order to reduce the deficit, would you close the OP's loophole, or would you make cuts in the food stamp program.

[listopencil]

Originally Posted by Direckshun

I'm very comfortable with calling out contempt for the welfare state and those who depend on it, something that's rampant on this forum.

All you've done in this thread in that regard is to accuse me of something that's not true. It has nothing to do with politics. You made a personal attack against me even though, by your own admission, you had no idea what my political stance on the issue was at the time. You didn't call anyone out on anything. You just shot your mouth off in what is typically your fashion. Own your behavior.

Example: you still haven't answered my question.

If you had to choose between the two in order to reduce the deficit, would you close the OP's loophole, or would you make cuts in the food stamp program.

Because it's a silly question based in a manufactured reality. This loophole doesn't have to be closed in order to maintain the food stamp program. I just did a quick look on wikipedia (take it for what it's worth) and the article states that the 2012 budget for SNAP (food stamps) was $74.6 billion.

[listopencil]

Direckshun: For the last 18 years I have been active in the Exchange Club, Cub Scouts/Boy Scouts, the Girl Scout program and the local Head Start program. I have been fighting poverty, hunger, lack of education, child abuse, violence against women and spousal abuse. I have been doing this for my county and the two adjacent counties. It's not just me though. I am part of a giant social network of parents and grandparents who are committed to these social issues.

We do it with canned food drives, voluntary fund raisers like catering large meals to donor organizations and spaghetti feeds for the general public, impromptu "flea markets" in public parks using donated goods along with games and rides that members have built themselves. We do it by volunteering our time in Head Start classrooms to provide leadership and adult role models for kids who don't have them. We do it by volunteering our time in the scouts as leaders and administrators to positively impact youth and help parents that live in crisis conditions.

Previous to the last 18 years, when I was employed by Taco Bell Corp. in a different location two hours South of here, I worked to help pregnant teens and the Children's Miracle Network. I was able to convince Taco Bell (the corporate office in Irvine, CA) to use its resources in our area.

The SNAP program is one of many vital tools available that help people I care very much for, and have worked my ass off to help. What have you done? Besides complain about rich people on an internet message board?

[CoMoChief]

You guys hopefully can read some of this and finally realize that the global elite don't have to pay taxes while they raise taxes on us and destroy our economy.



THESE GUYS ARE CROOKS THAT DESERVE PRISON TIME.

[listopencil]

Originally Posted by CoMoChief

You guys hopefully can read some of this and finally realize that the global elite don't have to pay taxes while they raise taxes on us and destroy our economy. THESE GUYS ARE CROOKS THAT DESERVE PRISON TIME.

So is it your assertion that the wealthy people of this country contribute less money to the tax system than the people in the middle and lower economic brackets?