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October 31, 2017

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Two lessons about shell corporations from the Manafort case

Shell corporations get a bad rap. There are situations when a shell corporation is not just legal, but makes good financial sense. Navigating through the legal intricacies that distinguish the legitimate use of a shell corporation from the illegal can be difficult. A recent case provides an example of an individual that allegedly failed to make this distinction.

The case involves President Donald Trump’s former campaign chairman, Paul Manafort. He is accused of using shell corporations in Cyprus, Seychelles, St. Vincent and the Grenadines to conceal assets from the Internal Revenue Service (IRS) and avoid tax obligations in the United States. 

Although Manafort’s case involves the use of foreign shell corporations, the entities are not always foreign. Some are set up here in the United States. Popular states used for this purpose include Delaware and Nevada. This is generally because these states often do not require disclosure of the owner of the shell corporation. This anonymity can be a draw for clients.

For those who are considering putting together a shell corporation or who already make use of these entities, the case noted above provides some valuable lessons.

  • Claim foreign assets. If the shell corporation operates in a foreign country the assets held within would likely require disclosure with specific tax forms. This could include disclosing the presence of the account on Schedule B of Form 1040 and filing a Foreign Bank Account Reporting (FBAR) form. A failure to do so can lead to serious penalties, including steep fines and potential imprisonment.
  • Keep an eye on changing law. It is possible that Congress will pass a law requiring banks and other financial institutions within the United States provide “beneficial owner” information for shell corporations. This would aim to remove the anonymity that is a draw for many owners.

Those who make use of these corporations and are contacted by the IRS are wise to seek legal counsel. An experienced tax attorney can represent your interests in dealings with this federal agency.

Tax Evasion