Quatloos! > Investment
Fraud > Financial
Planning > Asset
Protection Scams > Bearer
Shares
Introduction
"I'll use bearer shares which nobody owns to
own my corporation." -- The use of bearer shares by a U.S. citizen
to obfuscate corporate ownership, where the corporation is receiving income,
making investments, etc., is tax evasion, and anyone who tells you differently
is probably lying. We see this varietal A LOT. Unfortunately, the IRS has
been wise to this technique for about the last 30 years, and if they catch
you using bearer shares (whether you hold them or not) to hide a corporation
which is keeping assets or taking in income you will spend some serious
Club Fed time.
But, you say, how will the IRS ever find out? There
are a bunch of ways the IRS finds out, from spouses who were once trusted
but now are mad, to disgruntled secretaries and staff, to folks who are
just too dumb than to know better than to use their home or business telephone
to call overseas, or to receive offshore bank statements at their home,
or who are using someone offshore who is inept or can be bribed, or who
fail to realize that all ATM machines use time-dated videocameras to .
. . well you get the picture. There are a zillion possible ways
for the IRS to find out about your offshore corporation, and they only
need one. So just don't use them, period.
We
regularly deal with the very best licensed planners in the U.S., and they
will all tell you that the use of bearer shares is a very, very
bad idea. If someone suggests the use of bearer shares to you RUN-FAST-!-!-!- for
they really don't have the first clue about what they are doing, and are
suggesting an act so amateurish as to belie even a hint of real competence
on their part.
Notably,
many of the offshore trust companies and offshore company formations company
will advocate the use of bearer shares (so much so that even when we form
a fully-disclosed offshore corporation and have specified the shareholders,
that they will sometimes send us bearer shares simply because they are
in the habit of sending bearer shares to their other clients). Keep in
mind that these offshore "professionals" have no real knowledge
of U.S. tax law, any more than a plumber understands a nuclear reactor
because it has a lot of pipes. That they tell you bearer shares will protect
you, will not keep you from going to the Big House.
Needless
to say, we -- and every other knowledgeable and experienced U.S. planner
we know -- avoids the use of bearer shares.
Background
Bearer shares are corporation stock certificates
which are owned simply by the person who holds them, the "Bearer".
When corporations first came into existence, most
shares were bearer shares. If you wanted to protect your interest in the
corporation, you had to protect your bearer share certificates. To protect
against theft and fraud, corporations starting keeping a register of the
owners of the bearer shares which were issued, and notice had to be sent
to the secretary of the corporation to record the change in ownership.
Eventually, the corporation's stock ledger determined ownership, and shares
only facilitated the transfer of ownership (and, indeed, today few people
ever see the stock shares they own). Eventually, most U.S. states even
dropped the provisions allowing bearer shares.
But recently they have made a comeback, spurred on
by the so-called asset protection sector and those seeking privacy. Nevada,
for instance, has built a healthy incorporation industry because Nevada
corporation law allows bearer shares.
And the offshore jurisdictions have always allowed
bearer shares; indeed, almost all the offshore corporation providers presume that
offshore corporations will be issued with bearer shares only (and often
send our clients corporations with bearer shares even when we specifically
request otherwise).
But does the fact that you can get a corporation
with bearer shares both in the U.S. and in the offshore jurisdictions mean
that you should use bearer shares? No -- except in very specific circumstances
you should avoid them like the plague.
For
bearer shares suffer from a couple of very serious defects.
Presumption
of Ownership -- Asset Protection
Of course, most structures utilizing bearer shares
are for tax avoidance/evasion (or as Denver attorney Barry Engel says, "avoision")
purposes, and asset protection only plays a secondary role (if at all).
However, sometimes bearer shares are utilized primarily for asset protection
purposes.
In either case, this is discouraged. Our real-world
experience both in attacking and defending bearer share structures is that
judges eventually gravitate towards the position that if they can't figure
out who owns the corporation, they will presume that the defendant
owns the corporation -- then the bearer shares become counterproductive
because the burden is on the defendant to prove that someone else owns
the corporation.
The Upshot: You are much better off having some identifiable
person own the corporation (even if only in a nominee capacity) than you
are to have nobody own the corporation.
Presumption
of Ownership -- Income Tax
The first horrible tax trap for bearer shares is
the IRS's ability to make a jeopardy assessment that the entire
value of a bearer instrument is income, if the IRS catches you in possession
of the instrument and you have denied ownership.
For
instance, let's assume that you make $10 million on a stock deal, and like
a good taxpayer pay your capital gains tax in that year. But then -- because
you fear divorce -- you take your $10 million and you put it into a Bahamas
IBC which is owned by bearer shares. The $10 million grow to $20 million
in a couple of years. Unfortunately, your wife gets into your safe deposit
box, and the IRS finds out about the bearer shares. Under IRC 6867, the
IRS simply taxes the entire amount (not just the growth) at 39.6% plus
penalties. And you will probably spend the remaining amount for criminal
defense attorneys to fight the subsequent charges of tax evasion.
Gift
Taxes
The second horrible tax trap is this: Every time
bearer shares are handed over to and from a U.S. person -- except
for a bona fide sale for value -- gift taxes must be paid! And,
of course, if there is a sale then capital gains taxes must be paid.
For
example, let's say you have $10 million in the Bahamas IBC as set forth
above. You think you are about to get divorced, so you give the shares
to your brother to hold for awhile. In the divorce proceedings, you answer "no" when
asked if you own any foreign stock interests. After the divorce proceedings
are over, your brother gives the shares back to you. Easy enough, eh?
Not
quite. From a federal gift tax standpoint, in approximate numbers here's
what happened:
-
First,
when you gave the bearer shares to your brother, you triggered a 55%
gift tax, meaning that you now owe $5.5 million to Uncle Sam.
-
Second,
when your brother gave the bearer shares back, he triggered a 55% gift
tax (again on the $10 million value), meaning that he now owes $5.5
million to Uncle Sam.
-
Thus,
your simple little transfer to your brother and back triggered a total
of $11 million in federal gift tax liability to you and your
brother -- meaning that you and your brother are now $1 million in
the hole! Needless to say, you would have done much better to split
the $10 million with your ex-spouse in the divorce proceedings.
And
if you don't report and pay the taxes generated by handing these shares
back-and-forth it is big-time tax evasion. So, if you hear someone
talk about bearer shares, ask them whether giving the shares to someone
triggers federal gift taxes. If they say either "no" or that
they don't know, then they have sufficiently displayed their ignorance
in this area such that you should be quickly running away from them.
Foreign
Transaction Reporting
Additionally,
the unreported transfer of bearer shares across the U.S. border can be
argued to violate the Treasury Department requirements for transactions
in excess of $10,000, i.e., if you hold bearer shares for a corporation
having more than $10,000 in value, you must report the shares when you
bring them into or take them out of the country, or else face steep fines
and possible criminal penalties.
Bearer
Shares Are A Tool
Notwithstanding
the foregoing, bearer shares are a tool and in certain circumstances can
serve their purposes. But they should be avoided most planning purposes,
and when they are utilized the downside should be carefully discerned in
advance.
Terms
-
Bearer Shares
Shares which are owned by and give all their rights to the holder
(the "bearer"), which ownership is not recorded on the company's books.
Because of their primary uses for money laundering and tax evasion, nearly
all jurisdictions have abolished bearer shares in favor of registered shares,
the ownership of which are recorded on the company's books so that physical
issuance of the shares is in many ways superfluous.
