QUESTION: I have a foreign grantor trust, but from what I have read I have to file a FBAR report when I exceep $10,000 a year. Would the same be true if I had a Panama Foundation? I was told that since I wouldn't own it then I wouldn't have to list it, in fact I could make the PF the beneficiary of my trust.
REPLY: For some reason that escapes me, there seems to be a huge amount of mis-information about the U.S. tax treatment of U.S. persons who are the founders and/or beneficiaries of a Panama Foundation.
As a reminder, the U.S. and the IRS do not have any jurisdiction over a foreign foundation, trust or corporation -- BUT -- they do have legal jurisdiction over the U.S. persons or entities that are the founders, investors, grantors or beneficiaries of these foreign entities.
Without digressing into a long distertation about how the IRS and the U.S. courts decide on the tax treatment of an entity or its owners/beneficiaries, they will use the "duck theory". If it looks like a duck, walks like a duck and quacks like a duck they will tax it like a duck.
Based on this esoteric legal principle, they will treat a Panama or other foreign foundation as a trust if it functions like a trust that has a grantor and beneficiaries and a primary function of managing investments. But if the foreign foundation is structured so that it resembles a business corporation with shareholders, a board of directors and transferability of ownership, they will treat it as a corporation. And, in those few cases when a foreign foundation resembles a charitable foundation, they will treat it as a foreign charity.
Once they have decided how the foreign foundation should be treated for U.S. tax purposes, they then impose various taxes and reporting obligations on the shareholders (if it's treated as a corporation) or the grantor (if it is treated as a trust.) A failure to comply with their rules results in penalties and interest in the event of an audit and a persistent failure could result in some time in their free hotel.
If the foreign foundation is treated like a trust, the U.S. grantor of the trust will be required to file the FBAR (Foreign Bank Account Report) report. If the foreign foundation is treated as a foreign corporation, the U.S. officers and directors of the foreign corporation (including certain owners) will be required to file the FBAR report.
For those who disagree with the IRS on these matters, there are three basic choices. (1) Dispute the issue in court if you can find a lawyer willing to argue the matter for you. (2) Expatriate so that you are no longer subject to the U.S. tax laws on future income. (3) Take your chances on whether the IRS will find you. But with respect to that last alternative, you might want to read my article on why secrecy doesn't work anymore. (www.offshorepress.com/secrecy-myth.htm )
Vern Jacobs
P.S. The preceding explanation is not one that you will find in the Internal Revene Code or the IRS Regulations and should therefore not be construed to be an authoritative source of information.
