Sean King

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San Juan, Puerto Rico, United States

Sunday, July 15, 2012

Jay Adkisson...res ipsa loquiter

It's been a while since I've had an opportunity to heckle attorney Jay Adkisson, but fate smiled on me today when I stumbled across one of his old newsletters. For those who don't know, Jay (who is self-admittedly not a tax attorney) is a lawyer of a peculiar variety. Back in November of 2009 I called him out for his deceptive and unprofessional marketing practices which rely heavily on scare tactics. I did so again in September of 2011. In October of 2011 I caught Jay warning the public (in Chicken Little fashion) against the very transactions and structures that he often privately promotes, such warnings being intended to leave the public believing that only Jay has the skills, knowledge and experience to do these deals right and keep the public out of jail. And one day latter I provided additional damning evidence of Jay's hypocrisy--once again he was involved in privately promoting the very techniques and structures that he publicly criticizes. (By "public", I mean to end-user consumers and by "private" I mean to select non-specialist professionals and advisors).

And now, today, I stumble across one of his newsletters from 2006 that wraps everything up on one nice little bow. I've had this particular letter for years and years, but had forgotten about it and just came across it again today. It focuses on "Developments in Asset Protection and Wealth Preservation", and it's classic Jay. It was clearly meant for non-specialist attorneys, CPA's and other professionals (who might refer Jay business) rather than the general public or specialist advisors. And it contains all the usual Adkisson elements--subtle and not-so-subtle contempt for the work of other specialist professionals and advisors, lots scare tactics, and loads and loads of hypocrisy and cynicism. So, with that introduction, let's dive right in.

Other than its title, the newsletter really doesn't get interesting until we get to page 5. To put page 5 in context, the reader should recall that Jay, who is not a tax attorney, has been highly and publicly critical of lawyers and other professionals (other than himself) for using captive insurance companies for income tax planning purposes, calling such arrangements "scams" and "tax shelters" and their advocates "promoters" and "shills" and "shysters". He has heaped particular scorn on captive arrangements that were established late in the year (presumably to meet some tax deadline), where the "promoters" advocated planning (in advance) for the eventual demise and unwinding of the captive on a tax-preferred basis, and/or where the amount of captive coverage (and therefore premium) was determined by reference to business needs (such as desired tax deduction, profitability targets, etc.) rather than purely the actuarially determined cost of the "needed" insurance coverage. See the links above for some actual Jay Adkisson quotes on these points.

 So, imagine my surprise when I get to the top of page 5 of his 2006 newsletter and see the heading "PLAN NOW FOR YEAR-END TAXES" with the very first thing discussed thereafter being "831(b) CAPTIVE INSURANCE COMPANIES"! It's quite clear that Jay is marketing captives as a tax strategy, is it not? Oh, to be sure, he's sly enough to cover his tracks by throwing out a few "non-tax" reasons why people do captives right up front, but the tax angle is all too clear, isn't it? For instance, Jay (who is not a tax attorney) explains:
The 831(b) provision allows an insurance company to take in up to $1.2 million in premium income every year without the company being taxed on that income. Taking into account IRS requirements under Rev.Ruling 2005-40 and otherwise, this means that an 831(b) captive has the potential to transfer up to $1.2 million in premiums out of the operating companies (giving it a deduction for the premiums paid) and into the insurance company without any corresponding tax being paid.
He even includes a caption under a diagram that reiterates the point, just to make sure it's not missed:
Up to $1.2 million in premiums are paid to the insurance company and deductible by the businesses – but the insurance company pays no corresponding taxes on those premium payments.
But, that's not all. He also specifically advocates planning on the front end for the eventual tax-efficient unwinding of the captive down the road:
The real difficulty is in running the insurance company and internally managing taxes on the investment income, while also creating a game plan for later winding the insurance company down on a tax efficient basis if that need arises because of unforeseen economic problems, sale of the operating business, death of the owner, or changes in the Internal Revenue Code.
And, he's apparently okay setting up captives late in the year to obtain the desired deduction (provided that he's the one who does the work, he doesn't say) since he warns of the tax deadline:
As a captive insurance company typically takes 60 to 90 days to get up and running, it is not a last-minute strategy where you can make a decision on December 31 and get a deduction for premiums paid. Typically, the steps to form a captive need to begin no later than October 15 for the company to be formed and licensed in time for premium payments to be made to it before year's end.
So...let's see: We've got Jay (who is not a tax attorney) planning for tax-deductible premiums late in the tax year on the front-end and tax-favored distributions on the tail end. Sounds kinda like a tax-motivated transaction to me--and one that he'd mercilessly criticize if advocated by another.  No? 

Indeed. And just to drive the point home that others can't be trusted with such matters, he tells us:
Caution that the tax treatment of insurance companies is very complicated, and captive insurance companies are particularly so. Along this line, one must especially beware of the risk spreading and risk shifting requirements discussed in Rev.Ruling 2005-40 and other IRS notices. To become an 831(b) company requires that an election be affirmatively made by the company, much like making an S-corporation election. No election; no 831(b) treatment.
And, just in case this "complexity" warning about other professionals and advisors was too subtle, Jay states his next warning a little more shamelessly:
A lot of insurance and tax planners have tried to move into selling 831(b) companies the last couple of years, by claiming experience in setting up and managing captives that they do not have. Some of these planners will take the fact that they have associated with an insurance manager who actually has, say, 10 years of experience and then claim to their clients that they themselves have 10 years of experience when they don't have any or little experience with captives. You may be one of their first cases, which is a dangerous thing. Between us, Chris and I have formed many dozens of captives over the last decade. The captive professionals we work with have formed many dozens more. Yet, it never ceases to amaze any of us that so many "bad" captives are being formed and badly run by others. Captives are a great tool when formed and managed correctly, but doing that is the catch.
Why is Jay always so concerned about the quality of work of other professionals? Does he really think that they are that...incompetent? Perhaps, but I doubt it. I've always considered such snarky remarks to be primarily a shameless and unprofessional marketing ploy. But...I'm now convinced there's more to it than that.

Truth be told, Jay's issue with other "promoters" isn't really that they don't know what they are doing, but rather that they may know exactly what they are doing and are just too forthright about it! As we shall see, in Jay's mind effective tax and asset protection planning put it bluntly...deceit. And not just any deceit, but specifically deceit about one's motivations in engaging in the transactions to begin with. Unlike Jay, other advisors (many of whom are in fact tax attorneys) can't necessarily be trusted to be as...well...discrete as Jay.

Perhaps my calling Jay deceitful seems too harsh at this point? Keep reading. It won't.

 The reader may also recall that Jay has been publicly critical of arrangements where the amount of captive insurance purchased by the operating entity is determined with consideration to any business factors other than the amount of insurance needed by the entity. Said another way, Jay has heaped scorn upon arrangements where the amount of insurance purchased was a function of some targeted premium amount rather than the premium being a function of some target insurance amount. He has stated that the former is evidence of a "sham" since, in such cases, the operating business's primary motivation wasn't obtaining insurance coverage but achieving some stated premium level to achieve a certain tax deduction or some other business objective. This argument is stupid in the extreme--after all, businesses don't have unlimited budgets and therefore often seek to obtain the best insurance coverages for a given, set premium, even in the third party insurance market. But that hasn't kept Jay from making the argument anyway.

So, once again, imagine my shock when I saw Jay explaining in this newsletter that using a captive to zero out profits is perfectly legitimate (at least the way he does it):
Another benefit of captive insurance is that the premium payments effectively deplete the assets of the business being underwritten. In other words, every dollar of premiums paid to the captive is a dollar that has been moved out of the business and thus away from creditors. A good captive arrangement can keep other businesses appearing as only a "break even" enterprise on paper, because the profits have been effectively shifted to the captive. Because the premium payments are "for value", it would be very difficult for a creditor to claim that such payments are fraudulent transfers.
Color me gobsmacked! Obviously, when a captive is used in this way, it's going to be the desired amount of the asset transfer (i.e., the premium payment) that determines the amount of insurance purchased from the captive and not vice versa, right? When mere mortals attempt to do things this way, Jay labels them "shysters" and "shills" and "promoters", but it's perfectly legitimate when someone with Jay' involved. Or, so he'd have one believe.

To conclude this part on captives, I've finally figured Jay out. It's not that he thinks every other professional is incompetent. It's not that he doesn't do the exact same things as those he criticizes (he clearly does!). It's that he thinks others are too transparent and open as to their intentions! In Jay's mind, good planning requires deceit! Or maybe he'd prefer to say...discretion. Either way, in his mind it requires a subtleness and a cynicalness that not every advisor and professional has, hence his criticism of them. In Jay's world, its okay to engage in tax planning with captives, just don't admit to it publicly! In fact, deny, deny, deny, and criticize everyone else. It's okay to do captives at year-end for tax reasons, just don't advertise it to the end-user consumer for heaven's sake! It's okay to base captive premiums on business objectives rather than insurance needs, just don't make it obvious! In fact, hide it! I mean, admitting the truth to a few non-specialist advisors in a newsletter or a presentation to the Association of Advanced Life Underwriters is one thing. After all, these people might send you referrals! But don't admit it to the rest of the world, for heaven's sake! And certainly don't produce and consumer-oriented marketing pieces that transparently discuss the truth of such things. How... indiscreet!

 Lest one think I'm being too harsh on Jay and I'm assuming too much, what if I were to tell you that Jay admits as much (and more) later in this very newsletter. You see, after talking about captives and some other things, Jay begins an analysis of some then-recent rulings regarding asset-protection planning. Asset protection planning, like the tax law, is one area where a client's motivation matters. Under the tax law it's okay to create a captive insurance company for non-tax business reasons, but if you're motivated too much by taxes you just might run afoul of the law and get in trouble with the IRS. Likewise, with asset protection planning, it's okay to transfer assets from one entity to another or one person for legitimate business or other reasons, but if you do so in order to avoid the claims of a creditor (such as by transferring assets to your spouse's name the day after you get sued), then you just might run afoul of the law again and get yourself in trouble. You see, in the tax world and the asset protection planning world, motivation matters.

 This puts attorneys who practice in these areas in a difficult position. Ethically and legally, attorneys cannot assist a client in perpetrating a fraud (e.g., they cannot assist their client in lying about or disguising their true motivations) upon a court or governmental authority (or most anyone else for that matter). Most lawyers have no problem staying within legal and ethical bounds in this regard, and a few will quietly step beyond them from time to time. But almost none openly advocate that the lawyer should help facilitate the scam.

So, imagine my dismay when I came across these comments starting on page 10 of the above-linked newsletter:
As this case shows, the very fact that the clients engaged in transfers to protect assets from unforeseen future creditors had the practical effect of a sworn confession that they had the intent to fraudulently transfer assets as to all creditors who came later. You cannot allow your clients to make this confession, which means that you cannot allow them to admit that they engaged in planning for the purpose of defeating ANY creditors of any kind. This has significant practice implications:

You should not have an engagement letter that says that a purpose for your planning is asset protection.

You should not give your clients a memorandum that discusses the asset protective effects of what they are about to do.

And you can't let your clients give affidavits or testify at depositions that the reason that they engaged in their planning was because of concerns of unknown future creditors. That doesn't work. If your clients so testify or the creditors gets possession of any documents that talks about asset protection, that will be evidence of actual intent to hinder, delay or defraud creditors under UFTA, even if the creditor who does appear later was totally unforeseen.
Even reading the above in the most favorable light, and making the best of assumptions about Jay's own motives (which is hard to do sometimes), it's difficult to escape the conclusion that what Jay is advocating here is nothing short of the lawyer becoming complicit in a fraud, and not just a fraud on the client's creditors but potentially upon future courts too. In fact, its future courts that seem to concern Jay most.

What could he be thinking? Jay, where are your ethics? Even absent them, where's that discretion that you're so famous for?

What else (but fraud) could Jay mean, after all, when he says "you cannot allow your clients to make this confession, which means that you cannot allow them to admit that they engaged in planning for the purpose of defeating ANY creditors of any kind." Could he make it any clearer that, in his mind, clients shouldn't admit that asset protection played ANY role in their planning? Even when it did? I don't think so.  He doesn't say that it shouldn't play a role, only that they shouldn't admit that it did.

So, how would Jay have us prevent clients from admitting the truth if, in fact, they desire some asset protection planning? Does he recommend that we lawyers refuse to accept a client who approaches us about such matters since the client revealed his true motives right up front? No. Does he suggest that we should not permit the client to testify or be interrogated at all (i.e., that he/she should plead the 5th)? No, and that's not even a likely possibility since most fraudulent conveyance cases are not criminal in nature anyway and don't involve the possibility of criminal charges. That being the case, the client will likely be compelled to testify. Does he suggest that we resign as counsel when clients raise such issues and concerns? No.

So...what are we to do? Do tell, dear Jay, how are we supposed to do proper planning for our clients while preventing them from admitting the truth of their (and our?) motivation to a future creditor or court? What's your solution?

 Well, your guidance on this really couldn't be any clearer: Help them lie, you say! In your world we attorneys should assist such clients by disguising the true nature of our engagement. We should even draft misleading engagement letters that don't mention asset protection planning at all. We should have only verbal discussions with our clients (e.g., you suggest that we give them no "memorandum") about "the asset protective aspects of what they are about to do".  Why?  So as to avoid creating any discoverable documents that would someday reveal the fraud. You go so far as to suggest that we should avoid the creation (or production?) of any documents whatsoever that even mention asset protection planning (which doesn't say much for your newsletter, but better to do as you say and not as you do, I suppose). If we do, then the client (and attorney?) can safely lie to the future creditor or court without fear of contradiction.

Do I have that about right, Jay?

Wow! I've heard you say lots of shameful, unethical, unprofessional and cynical things over the years, Jay, but these comments on asset protection planning in your own newsletter (which was meant for an audience of select professionals, I'm sure) really take the cake. And they give your prior comments and writings about captive insurance companies a whole new context.  I completely understand now why you so publicly criticize some of the very captive planning techniques that you "discretely" advocate and implement in private.

And now, so does everyone else.