Selection Of a Tax Favored Jurisdiction For U.S. Investment: Analyzing the Protections And the Costs." International Estate Planning Principles and Strategies. Ed. Kozusko, Donald

8/6/2019 Selection Of a Tax Favored Jurisdiction For U.S. Investment: Analyzing the Protections And the Costs." International

1/22

SELJECTION OF A TAX FAVORED JURISDICTION FOR U.S.INVESTMENT: ANALYZING THE PROTECTIONS AND 'THE COSTS

Christopher S. Armstrong

HeU'er,Ehrman, White & McAuliffeSan Francisco, California

I. TAX FAVORED JURISDICTION (UTFJN)CO ST-BENEFIT ANALYSIS

A. lEach TFJ has its own personality, its own strengths and ,its ownweaknesses .~ there is no one jurisdiction that will be best for all

foreign persons investing in the U.S. in all circumstances.

B. Assuming that the foreign investor will either be a non-resident ali'enindividual with respect to the U.S. or a foreign corporation

controlled by a small group of non-resid.ent alien individuals('hereinafter reterred to as liNRAil), the following preliminary issues

might be addressed:

1. What Ikind of U.S. investment does ~heNRA plan -- a simpleinvestment in publicly traded securities or a complex

investment in assets which might include responsibility for

management?

2. How important wi'll it be to the NRA to have indigenous

professional support in the TFJ either for the purpose of

actually administering the entity situated in the TFJ or for thepurpose of [lending substance to such entity for tax

purposes?

3. What are the income tax consequences for the NRA of

interposinq a TFJI between himself and his U.S. investment,

having reference both to U.S. revenue laws and to the

revenue laws of the NRA's tax residence?

4. How concerned is the NRA about the risk of U.S. estate tax

(the immediate reaction of the NRA might be significantly

influenced by his age and his personal predHections with


2/22

regard to the subject of mortality, but it should beemphasized that the 55% estate tax rate is applied by theUnited States whether one dies in his youth or at the end of

a long life)?

5. Does the NRA have any concern that his heirs might,

endeavor to upset his estate plan (although the laws of the,U.S. and the laws of many of the British influenced TFJ'soffer their own domiciliaries substantial freedom with regardto testamentary disposition, such freedom is not entirely

untrammeled and casual assumptions regarding whose lawmight apply are dangerous)?

6. Does the NRA have concerns about either (a) politicalproblems in his own jurisdiction, (b) political problemsbetween the U.S. and his home jurisdiction, (c) politicalproblems in the TFJ or (d) political problems between theTFJ and the U.S. -- each scenario can present a different set

, of problems and formats for potential resolution?

C. Events Affecting a TFJ Can Conspire to Make the NRA's SituationWorse.1.' Unexpected TFJ Taxes

(a) See Exxon Chemical International Supply S.A. v.Commissioner of Inland Revenue (Hong KongSupreme Court, 1989) [Middleman profits of a

Panamanian company are sourced in Hong Kong and

subjected to a 16.5% Hong Kong profits tax byreason of the mere booking of purchases and sales in

Hong Kong].

2. Confiscation By a TFJ Institution(a) See Plesch v. Banque Nationale De La Republique

D'Haiti, 273 App. Div. 224, 77 N.Y.S.2d 43 (1948), ,aff'd. 298 N.Y. 573, 81 N.E. 2d 106 (1948)[Government of Haiti confiscates securities left with a


3/22

Haitian National Bank for "safekeeping" on the groundthat the depositor, a stateless Hungarian born refugeeof the Second World War, is an enemy of theRepublic of Haiti; New York courts determine that theHaitian government's action has a New York situsand, comparing such action to the actions of "thievesor marauders," orders recovery for the refugee out ofU.S. based assets of the Haitian bank].

3. Exotic TFJ Legal Theory(a) See Representation of Viscount Wimborne

(unpublished decision, Royal Court [Jersey] circa1984) [Jersey Deputy ,Bailiff questions whether theorigins of Jersey Trust Law were more French thanEnglish and suggests in_dicta that an old Normanmaxim governing the dlsposltlon of personalty knownas "donner et retenir ne vaut (rien)" may be invokedwith respect to a trust over which a settlor hasretained certain controls during his lifetime for the

purpose of avoiding the trust's terms for dispositionafter his death. Note: A recent amendment to Jerseystatute law has speCifically addressed and cured thisproblem.]

4. TFJ Acquires Bad PoliticalTaint(a) ~ Fillmanv. The United States, 355 F.2d 632 (Ct. CI.

1966) [Swiss father determines in 1939 at the outsetof 'the Second World War to create two Argentinian

holding companies for the purpose of investing inU.S. portfolio securities; war ends in favor of the

'United States; father's child, who manages 'hisproperty, fearing that the U.S. Alien Property

Custodian suspicious of Nazi ownership might seizethe assets of an Argentinian corporation, describessuch corporations as mere custodians for a Swissciti1zenust prior to his father's death in 1948; as a


4/22


5/22

3. If the NRA (or his counsel) asks the right questions and does

not blithely assume that the interposition of a TFJ entity

excuses the need for sound planning, he will significantly

reduce the potential for unpleasant surprises (or at least

understand the nature of the risks being accepted for the

purpose of resolving other perceived problems).

II. USE OF 'rFJ ENTITIES TO AVOID U.S. ESTA'rE TAX

A. NRA domiciled outside of the United States at the time of his

decease is subject to federal estate tax only upon assets having a

situs in the United States. Interposition of a TFJ corporation

between a NRA and his U.S. situs assets is frequentlyrecommended for the purpose of sheltering the NRA from potential

federal estate tax.

1. Section 2104(a) of the Internal Revenue Code of 1986 as

amended (IRC) provides that shares issued by a corporation

chartered outside of the United States have a foreign situs.

Legislative history for certain Federal estate tax provisionsand the writings of several commentators support the

proposition that the estate of a NRA decedent is not subject

to federal estate tax upon the underlying U.S. assets of a

TFJ corporation which he owns at the moment of death.

See. e.g. Ross, United States Taxation of Aliens and Foreign

Corporations: The Foreign Investors Tax Act of, 1966 and

Related Developments, 22 Tax Law Review 279, 359-360

(1967).

2. A tension exists between the situs rules contained in IRC

2104(a) and the "aggregation provisions" of IRC 2036

et seq. which sweep back into a decedent's estate those

assets over which he maintains a species of dominion or

control or with respect to which he enjoys some interest at

the moment of death. Swan v. The Commissioner, 24 T.e.829 (1955) has been cited by one commentator as a

potential basis for Internal Revenue Service challenge to

445


6/22

estate tax immunity premised upon the interposition of a TFJ

corporation. See Lawrence, International Tax and Estate

Pianning, Ch. 3.020)(2) 186-191 (1983).

3. The scope of estate freeze prrovisions may in select

circumstances defeat the protectiqns normall'y conferred by

the interposition of a TFJ corporation. See Gilberti,

Canadian Estates and the New U.S. "Anti-Freeze" Provisions,

17 Tax Mgmt tnt'! J 563 (12/9/88).

B. "After-the-Fact" Estate Tax Planning1. Prior to the Foreign Investment in Real Property Tax Act of

1980, the NRA who acquired U.S. real property in his own

name or through a domestic corporation could remedy the

estate tax planning oversight by dropping the property into a

TFJ without incurring any federal income tax liability. FIRPTA

plus the strict limits placed upon the circumstances under

which a NRA might rely upon a treaty of conveniencebetween the U.S. and a TFJ for the purpose of effecting a

"domestic election" pursuant to the provisions of IRC 897(i)

have severely circumscribed the NRA's options for "after-the-

fact" estate planning with respect to appreciated U.S. real

property interests.

446

2. For many NRAs, the bilateral income treaty between theUnited States and Barbados may be the only alternative for

interposing a TFJ between the NRA and appreciated U.S.

real property interests previously acquired by the NRA. See

Income Tax Treaty between Barbados and U.S., Art. 24 [not

limited by Art. 23]; Treas. Dept. Tech. Explanation of the

U.S.-Barbados Income Tax Treaty, Art. 24, 1 CCH Tax

Treaties 579KK.

Caveat: Temp. Reg. 1.897-6T(b)(2)(ii) which defines ao

exception to paragraph (a)(1) by reference to "... a foreign

corporation that maintains an income tax treaty with the


7/22

United States that contains an lntorrnation exchangeprovision ..." is not intended to permit tax free restructuringof a U.S. real property interest using a TFJ which enjoys onlY

a tax information sharing treaty with the United States or aIlimited income tax. treaty (e.g., Conventiion Between the

United States and Bermuda Relating to Taxation ofInsurance Enterprises and Tax Information Sharing).

C. The Lure of Non-Corporate Options

1. The Tax ReformAct of 1986 which (a) reduced the maximum

individual tax rate bellowthe standard corporate tax rate and( ib ) mtroduced a branch profits tax created a si,gnificantdisincentive to hold properties in corporate solution if suchproperties would be likely to generate income subject to U.S.

tax.

2. In response to the anti-corporate bias of the 1986 tax

legislation, some commentators have urged NRAs toconsider non-corporate vehicles for their U.S. investmentSee. e.q. Hudson, Post-1989 Tax Planning] For ForeignDirect Investment in the United States: The Era of the Non-Corporate Vehicle?, 19 Tax Mgmt tnt'! J. 47 (February 9,

1990): and Masek, Foreign Investors: Using a U.S. Grantor

Trust, 45 Busine ss L awye r 539 (1990).

3. A trust may be treated as an association and taxed as acorporation if it has among its objects a stated purpose ofcarrying on a business (even if no business is in fact carried

on) and if the trust is maJnta.inedfor the benefit of those

persons who have funded (or cause to be funded) the trust.

~ee tim Street Realtv Trust v. Commissioner, 76 T.C. 803

(1981): but. g Bede'llv. CommissiQoer,86 T.C. 1207 (1986).See also Hudson, supra, 47, 48 ["Most investors wHialso bereluctant to use the trust form ... because of the tax risks of atrust with business activities being characterized as an

"association taxable as a corporation" ..."]. In addition a

447


8/22

foreign trust administered in a TFJ will not by itself shelter the

NRA from U.S. estate tax with respect to that portion of the

trust estate constituting U.S. situs assets unless all controls

over, and interests in, the trust are surrendered by the NRA.Ct. Swan v. Commissioner, supra.

4. Clear cut rules do not exist for determining whether a NRA's

interest in a partnership organized under the laws of a TFJ

might be construed as a U.S. situs asset for purposes of

determining estate tax liability. Conservative analysis

suggests that. the place where the partnership is managed

and carries on its business will determine its situs for estate

tax purposes. See Rev. Ru!. 55-701, 1955-2 C.B. 836. To

bolster the argument that a partnership interest does not

have a U.S. situs, it is advisable to organize the partnership

under the laws of a TFJ jurisdiction, but TFJs often have

archaic partnership laws and relatively little experience with

partnerships. Schemes to designed to avoid the import of

Rev. Rul. 55-701 are not for the faint of heart.

III. AVOIDANCE OR MITIGATION OF U.S. INCOME TAX THROUGH THEUSE OF A TFJ ENrlTY

A. Avoidance of Secondary Tax Upon Fixed or Determinable Annual

or Periodic ("FDApl). Income

1. The unilateral termination by the U.S. of most of the old

bilateral tax conventions between the U.S. and TFJs coupledwith (a) the inclusion of anti-treaty shopping provisions in

new bilateral tax conventions with TFJs and (b) the

aggressive extension of look-through concepts first

enunciated in Aiken Industries Inc., supra, has severely

restricted the utility of TFJs for the purpose of avoiding or

reducing secondary tax on FDAP income.

448

2. Technically, a planning opportunity continues to exist with

respect to interest payments falling within the ambit of both


9/22

the U.S. - Netherlands Income Tax Treaty, Article VIIIand theU.S. - Netherlands Income Tax Treaty (as extended to theNetherlands Antilles), Article VIII. But see Rev. Rul. 84-152,

1984-2C.B. 381 and Rev.Rul. 89-110, 1989-37 I.R.S.16.

3. Dividend payments made by a U.S. subsidiary to aNetherlands parent company may still enjoy a significantreduction in the rate of federal tax from 30% to either 15% or5%, but this advantage has been partly mitigated by the

imposition since 1985 of a Dutch withholding tax on dividend

remittances from the Dutch parent company to the Antillesgrandparent company at a rate of 7-1/2% (or 5% if a 5-1/2%rate is elected in the Antilles). See Van Raad, 150-5th T.M.,Business Operations in the Netherlands A-50.

B. Avoidance of Tax Upon Capital Gains Realized By Widely HeldPartnerships1. As a general rule, profrts realized by a TFJ investing or

trading in U.S. securities or commodities are not subject totax regardless of the volume of trading or the brevity of the

holding period between trades. See IRC 864(b)(2) andTreas. Reg. S1.864-2(c)(2)(i). There is, however, anexception to this rule in the case of such profits when they

are derived through a participation in a widely held

partnership. See Treas. Reg. S1.864-2(c}(2}(ii).

2. There is an "exception to the exception" for widely heldpartnerships if the principal office of such partnership isoutside of the United States. For the purpose of determining

whether such principal office is outside of the United States,

see the to-part test described in Treas. Reg. 1.864-2(c)(2)(iii). To provide substance to the claim that theprincipal office of a partnership is outside the United States,

it is often considered prudent to organize the partnership

under the laws of foreign jurisdiction in which theadministrative activities of the partnership are to be cited.

449


10/22

3. Siting a partnership in a TFJ jurisdiction requires (a) anexamination of the tacilitres available in the TFJ fordischarging the duties described in the above referenced1a-part test and of the TFJ registration requirements whichmust be satisfied to ensure limited liability for passiveinvestment partners, (b) working with TFJ partnershipstatutes which are often somewhat archaic and frequentlyrestrictivewith respect to capital withdrawal requirements (bycontrast, most TFJs have modernized their corporate laws to

address this problem) and (c) insuring in some casesthrough a tax ruling that the partnership will not be taxed bythe TFJ as a separately constituted entity.

4. Merely because a partnership is organized under TFJ laws,owned (both as to capital and profits) by a high percentageof non-U.S. persons and not engaged in trade or business(by reason by IRC S864) does not mean that the partnershipwill escape the necessity for filing on IRS Form 1065. If aforeign partnership has any U.S. source income, it is obliged

to file even if it has no U.S. partners. See Prop. Reg.S1.6031-1(d)(1). No exception exists for a foreignpartnership's exempt or fully withheld U.S. source income

which is comparable to the exceptions for such incomewhen paid to individuals and corporations. See also Temp.Reg. S301.6231(f)-1T for sanctions on a U.S. partner of aforeign partnership which maintains its books outside theU.S. and fails to file on IRSForm 1065.

5. Caveat: California has never adopted the general exception

to the definition of trade or business for transactions insecurities and commodities found in IRC 864. It isaccordingly possible for a NRA who is a member of even aclosely held foreign (Le. non-California) partnership tobecome subject to California tax at a rate of 9.3% by reasonof the activities of a general partner or its agent advisor in


11/22

the State of California. See Appeal of Robert M. and Ann T.Bass, Calif. State Board of Equalization, 89 SBE-004 (Jan 25,1989) [Held (by a divided Board) that taxpayer was not

engaged in trade or business in California primarily becausethe average holding period of stocks bought and sold by theTexas limited partnership (whose main office was located inCalifornia) was 5.78 years.] See also Calif. Franchise TaxBoard Legal Ruling, No. 179 (Dec. 5, 1958).

IV . TFJ TREATMENT OF A FORCED HEIRSHIP CLAIM

A. In many parts of the world (not simply continental Europe), heirs ofa decedent are awarded "forced shares" of the decedent's estate

regardless of the personal wishes of the decedent. See,~.Lawrence, supra, Appendix A [summarizing the forced heirshiprules of several Western European jurisdictions]: Civil Code of thePhillipines (Annotated), Art. 886 (10th ed., 1981), Comment (1) ["...The system of legitime is preserved in the new code. It is in voguein almost all countries of Europe and Latin America. China hasrealized that legitime is essential ..' ,]: Coulson, Succession in the

Muslim Fam ily1-2 (1971) [The power of the deceased to disposeof his property by will is recognized but is basically restricted to

one-third of hls net assets. Only where the legal heirs are prepared

voluntarily to forego their rights will testamentary disposition in

excess of this limit be operative ... this approach stands in sharpcontrast, for example, with that of English law ..."].

B. American states (save for- Louisiana) having been stronglyinfluenced by British concepts (and in some cases Spanish

concepts), have demonstrated substantial solicitousness for the

rights of a surviving spouse but little or no concern for thedisinherited adult descendent.

1. Forty-one American states adhering to common lawconcepts offer the surviving spouse a right of election. Thegenerosity of such provision varies from state to state, a

451


12/22

factor which occasionally breeds litigation. See In Re Clark,21 N.Y.2d 478, 236 N.E.2d 152 (1968).

2. Nine states (in the Western and Southwestern regions of theUnited States) have adopted flexible community property law

concepts. California, for example , grants California spouses

community property rights but permits such spouses to electout of community property rights provided the election is inwriting. See Calif. Civ. Code 5110; See generally Lay,

Transmutation of Community Property, 18 S. Carolina L. Rev.

755 (1966).

3. California allows unmarried couples who have cohabited fora period of time to make contractual claims against eachother for the value of services of a non-meretricious nature.See Marvin v. Marvin, 18 Cal. 3d 660 (1976); Jones v. Daley,

122 Cal. App. 3d 500 (1981). Recent California court

pronouncements have, however, confirmed a strongreluctance to accept claims to marital rights in the absence

of a lawful marriage. See Centinela Hospital Medical Centerv. Superior Gourt of Los Angeles (Re: Jesse Willis), 215 Cal.App. 3d 971 (1989).

C. Several U.S. states now have laws (which are patterned on the

Uniform Probate Code) permitting a testator to elect to have thelocal laws of such jurisdiction apply to all dispositions of personal

property made by his will provided the rights of a surviving spouse,the forum state's family maintenance requirements and the forum.

state's public policy are not offended by the chosen law. See. e.g.Cal. Probate Code 6141; See also 16 Calif. Law Revision-

Commission 2328 (1982). New York has been the leader in the_development and the interpretation of choice of law statutes -forgratuitous dispositions. As a result of a somewhat recent New Yorkcase interpreting N.Y. EPTL 3-5.1(h), it now seems likely thatAmerican state courts will uphold testamentary dispositions --ofJ

personal property within their own jurisdictions even if they are,'" ~

452


13/22

claim he held untrammeled ownership of an asset at themoment of settlement. Second, if the assets of a TFJ trustare not legally situate in the TFJ, there is a question whether

the jurisdiction in which the assets are situate would becooperative with an application of TFJ law favoring freedom

of testamentary disposition. C !. comments, infra, at VI.Bregarding circumstances in which law of the situs mightgovern the determination of who owns a share certificate.On balance, the TFJ "Iocal law" statutes patterned on theconcepts embodied in N.Y. EPTL S3-5.1 (h) should be seen

as materially improving the likelihood of a NRA's TFJ trustbeing enforced in accordance with its terms.

V . THE TFJ ASSET PROTECTION TRUST

A. Several TFJs are currently marketing the concept of an "assetprotection trust" as a means whereby law abiding tax payingprofessionals, property developers and others (fearful of futurecatastrophic malpractice claims or business reverses which mightdestroy the well-being of their families) might find solace from theperils of fraudulent conveyance provisions tracing their antecedentsto the Statute of Elizabeth, 1571.

1. As a product, the asset protection trust appears intendedmore for the use of U.S. citizens and residents than for theuse of foreign investors in the U.S. but d. the explanation

that asset protection legislation as enacted by some TFJs isintended to prevent disappointed heirs from making an "endrun" upon anti-forced heirship provisions by posing as

defeated creditors.

2. ' One may surmise that TFJs hope that the asset protectiontrust will, among other things, bring back some of the U.S.originated business driven away by a succession of changes

in federal tax law designed to discourage or eliminate theuse of offshore trusts by U.S. citizens and residents.

454


14/22

B. The Statutory Approach to the Asset Protection Trust

1. Some TFJs seek to establish a hospitable environment for

an asset protection trust by enacting leg;islati:on,he principalprecepts of which would include (a) allowance of a creditorrecovery only if the creditor's obl:igation existed at or before

the time of the settlor's absolute disposition in trust,(b) creation of a malicious intent (to defeat creditors) testwith respect to the debtor settlor, (c) elimination of the void

ab initio concept with respect to the insolvent settlor's trust in

favor of a voidable concept, (d) preservation of the rights oftrustees and non-collusive beneficiaries to costs and benefitsenjoyed in advance of a set-aside provided, in the case ofthe trustee, that it 'has acted prudently in establishing theso'lvency of the settlor and (e) limitation of any set-aside tothe amount of the debtor's disposition necessary to satisfythe obligation of the petitioning creditor.

2. Query whether it is logical for TFJ law to give an individual

creditor of a bankrupt standing to bring his own claim for setaside in the court of a "fFJ (and potentially gain full recovery)when lit would be impermissible for such creditor to act

aqainst theinso'lvent settlor other than through the insolvent

settlor's trustee in bankruptcy in the home jurisdiction of the

bankrupt. Query also whether, if such creditor succeeds inhis recovery effort 'in the TFJ, he is thereafter obliged to

share his funds with other general, creditors under theapportionment principles established by the jurisdiction ofthe bankrupt settlor.

3. R one assumes that a TFJ asset protection trust settled by a

U.S. person will be subject to IRC S679 in most instances,because it will have U.S. beneficiaries, how will the settlorand such beneficiaries deal with U.S. tax claims predicatedupon the trust's treatment as a "grantor trust".

455


15/22

4. TFJ practitioners have correctly observed that assetprotection trust statutes cannot be relied upon to protectassets not legally situate in the TFJ. An inability to get

directly at an insolvent individual might encourage greaterefforts to attack directly the U.S. situs assets of corporations

which the insolvent party has dominated and controlled. Ct.

Valley Finance. Inc. v U.S., 629 F.2d 162, 172 (D.C.Cir 1980)[Court upholds IRS right to seize assets of a corporationwholly owned by taxpayer to satisfy taxpayer's federal taxobligation.]

, C. The TFJ Jurisdictional Impediment Approach

1. At least one TFJ has held itself out as a suitablelocus for theasset protection trust on the ground that it would be difficultor impossible for a creditor to either (a) obtain enforcementof a foreign judgment against a TFJ trustee for the purpose

of recovering a settlor's debt or (b) obtain leave from a TFJcourt to bring an action against a non-TFJ settlor for the

purpose of obtaining a local judgment in the TFJ.

2. If the settlor of the TFJ trust should become bankrupt. querywhether the TFJ court in this special instance would not

grant leave for a foreign bankruptcy trustee to bring an

action in a TFJ court against the trustee of the bankrupt

settlor's trust. It is understood that the TFJ which has

previously espoused the jurisdictional impediment approachis now considering adoption of the statutory approach.

VI. HOW DOES THE TFJ IMPACT RESOLUTION OF THE NRA'5POLITICAL PROBLEMS

A. As a general rule. the United States does not look favorably uponthe seizure of a private person's property for political ends absent. 8,

grant of adequate compensation to such person. Alt~oug.t-ldeference may be paid to the defenses of sovereign immunity and.~

45 6


16/22

act of state, these doctrines will not assist the expropriatinggovernment when the NRA's property is located within thejurisdiction of the United States. See. e.g. Republic of Iraq v. The

First National City Bank, 353 F.2d 47 (2d Cir. 1965) cert. denied,382 U.S. 1027 (1966) and Bandes v. Harlow & Jones. Inc., 852 F.2d

661(2d Cir. 1988).

1. If the offending foreign jurisdiction seizes the shares of aforeign corporation holding U.S. situs assets, U.S. courtshave demonstrated a willingness to ignore corporate

formalities for the purpose of doing economic justice to thedispossessed NRAshareholders. See. e.g. Vishipco Line v.Chase Manhattan Bank N.A., 660 F.2d 854 (2d Cir. 1981)and Bandes v. Harlow & Jones. Inc., supra 852 F.2d 661,670 ("If Nicaragua had tried to conflscate the sum held byH&J through nationalization, no court would have giveneffect to its efforts. Nicaragua is now seeking to obtain thesame results through the back door -- by confiscating INCA[a Nicaraguan steel company] and then collecting its

extraterritorial debts. United States policy demands that ourcourt refuse that convolution.") See also Lubasch, U.S.Court Rejects Nicaraguan Claim, New York Times, p. A-3

(7/20/88).

2. Even in those circumstances in which tangible property is

situated within the jurisdiction of the expropriatinggovernment at the time of seizure, U.S. court have beenwilling to devise exceptions to the "act of state doctrine" (thepremise of which doctrine is that the judicial branch will notexamine the validity of a taking of property within the territoryof a foreign sovereign government, extant and recognizedby the United States at the time of the suit, notwithstanding

an allegation that the taking violates customary internationallaw). Such exceptions include the so-called "Bernsteinexception" (State Department clearance for suit), the

"commercial exception" suggested by Alfred Dunhill of

45 7


17/22

London. Inc. v. The Republic of Cuba, 425 U.S. 682, 695-706(1976) and the treaty exception descr:ibed in KalamazooSpice Extraction Co. v. Provisional Militarv Government ofSocialist Ethiopia, 729 F.2d 422,425 (6th Cir. 1984).

3. In some circumstances, the actions of a foreign governmentwill constitute "creeping expropriation" accomplishedthrough actions more subtle than an outright seizure (e.g.,exchange controls, restrictions of imports of necessarymaterials, price controls, manipulation of citizenship laws,compulsory investment of profits in the host state, etc.). Ithas previously been assumed that U.S. courts might bereluctant to inquire into the intent or motive of theexpropriating state because such would be embarrassingand would exacerbate international tensions. See Pedersen,Expropriation in International Law - Strategies of Avoidance

and Redress, 10 To/edo Law Review 73, 79-80 (1978); butsee W.S. Kirkpatrick & Co. v. Environmental TectonicsCorporation, 493 U.S. _, 107 L . Ed.2d 816 (1990) [U.S.

Supreme Court holds that inquiring into the motive of aforeign sovereign is not barred by the act of state doctrine ...the act of state doctrine does not establish an exception for

cases and controversies that may embarrass foreign

governments.]

B. The interposition of a TFJ company between the NRA and his U.S.investments may alter the analysis of protections typically conferredby U.S. law upon the victim of an uncompensated seizure.

1. If share certificates of a TFJ company (which in turn holds

U.S. assets) are located in the United States at the time of anattempted seizure by the NRA's home government, a U.S.

court might determine the rights of the parties by simply

assuming that TFJ law would be the same as U.S. law on thesubject of expropriations. See Republic of Iraq v. The First

National City Bank, supra, 353 F.2d 47, n.3 at 51.


18/22

2. If the shares of the interposed TFJ company are issued inbearer form and are situated in the United States, there isclear precedent for applying the law of the United States to adetermination of ownership. See Disconto-Gesellschaft v.U.S. Steel Co., 267 U.S. 22 (1925); see also RestatementConflict of Laws Second, 64(3).

C. If the claim by the confiscating government should be brought inthe jurisdiction of the TFJ and if the property sought by theconfiscating government should be legally situate in the TFJ, TFJlaw would apply to the determination of the respective rights of the

expropriating government and the NRA (subject in theory to apossible refusal by the U.S. courts to sanction an indirect seizure ofU.S. property invoking the look-through doctrine described in theVishipco case and the 8andes case even if the TFJ court should

sanction the seizure).

1. There is not an abundance of judicial precedent in the TFJs

(apart from the Netherlands which is special species of TFJ)regarding rights of foreign nationals whose assets becomethe subject of an expropriation attempt by their homejurisdiction. It is felt, however, by TFJ practitioners that thelaws of those jurisdictions to which the TFJs trace theirjudicial antecedents would be of persuasive authority.

2. Because the actions of a foreign state in seizing propertyeither through expropriation or "creepinq expropriation" areintensely political, it should not be assumed that a TFJ willnecessarily react in the same fashion to a specific set of facts

as its former Western European mentor might act. It mightalso be assumed that in some circumstances the high courtof a TFJ would be less prepared to embarrass a foreign

sovereign than the U.S. Supreme Court. Cf. the W.S.Kirkpatrick & Co. case, supra.

459


19/22

- 1 . Is it required that a TFJ corporation have an annual audit or that 'i,tfile an annual income tax return wrth the -rFJgovernment?

g. Date of last major revision to TFJ partnership law.

h. In the case of a venture capital style partnership, 'is lit possible toreconcile restrictions on capital withdrawal (if any) contained in theTFJ's law with a general partner's undertaking, to pay back the fullcapital investment of limited partners before commencing apercentage sharing between the general partner's carried interest

and the limited partners' passive investment interest.

TRUSTS

a. Date of last major revision to TFJ trusts law.

b. Does any TFJ statute law or judicial precedent clearly establish that

local substantive law shall determine whether a settlor's dispositiveplan shall prevail over legitime (forced heirship) rules in force in

settlor's domici'le; if such statute law exists, has it been tested in aTFJIcourt?

c. In the case of a fully revocable trust, does the perpetuities periodfor TFJ law purposes commence to run (1) as from date of

settlement or (2) as from date when settlor ceases to hold the rilghtto revoke the trust?

d. Is there any practical risk that a trust, which by its terms (and infact) remains revocabl.euntil the moment o f a settlor's death, might

be held void by a TFJ court on anyone of such grounds as (1)agency ratber than trust, (2) "donner et retenir ne vaut rein," (3)

failure to comply with formalities required of a testamentaryinstrument?

e. Does TFJ statute law or judicial precedent permit a trust to makeprovision for future issue who might be born out of wedlock?

461


20/22

c. Has the international news media fairly portrayed political and

economic conditions in the TFJ during the period 1987-1990? If

not, what specific evidence can you give of more (or less) favorable

conditions in the TFJ than such media coverage would suggest?

46 3


21/22

DONALD D.KoZUSKOJEFFREY A. SCHOENBLUM

EDITORS

SECTION O:F REAL PROPERTY, PRO,BATE AND TRUST LAWSECTION OF INTERNATIONAL LAW AND PRACTICE

AMEIRfCAN BAR ASSOCIATION


22/22

MEDIA/BOOK PRODUCTS COMMITTEE

Raymond Kerr, ChairRobert M. ZinmanKathleen Ford BayPatrick A. Randolph Jr.Michael D. WeinbergJohn S. HollyfieldMax Gutierrez, Jr.

The material contained herein represents the opinions of the authorsand editors and should not be construed to be the action of theAmerican Bar Association, the Section of Real Property, Probate andTrust Law, or the Section of International Law and Practice unlessadopted pursuant to the Bylaws of the Association.

Nothing contained in this book is to be considered as the renderingof legal advice for specific cases, and readers are responsible forobtaining such advice from their own legal counsel. This book andany forms and agreements herein are intended for educational andinformational purposes only.

c 1991 American Bar Association. All rights reserved.

Printed in the United States of America.

Library of Congress Catalog Card Number 91-55490

ISBN 0-89707-691-5

Discounts are available for books ordered in bulk. Specialconsideration is given to state bars, CLE programs, and otherbar-related organizations. Inquire at Publications Planning &Marketing, American Bar Association, 750 North Lake Shore Drive,Chicago, Illinois 60611.

96 95 94 93 92 5 4 3 2 1

Documents

Selection Of a Tax Favored Jurisdiction For U.S. Investment: Analyzing the Protections And the Costs." International Estate Planning Principles and Strategies. Ed. Kozusko, Donald