More Jarrett Tax Issues

Good article on Obama pal Valerie Jarrett’s property tax shenanigans.  It’s heartening to see how Obama’s allies in his “tax the rich” jihad go to great lengths to avoid those same taxes for themselves.  It’s almost as if they do not really believe what they profess to believe.  Perish the thought.

It reminded me of Ms. Jarret’s Bermuda insurance company connection discussed in a previous post.  After mulling it over, one element that is hard to ignore is the cursory investigation by the news media of Ms. Jarrett’s disclosure.  After finding a couple of experts in the field who pronounce that there may be an innocent explanation for the transaction, ABC News pronounces itself satisfied and promptly moves along.  Sort of like it did with Mitt Romney’s Swiss bank account.

I’m inclined to agree that there is probably nothing nefarious going on, but the arrangement seems quite odd.

First, as to Jay Carney’s assertion that a letter of credit is a liability, and not an asset, umm, no.  A letter of credit is most assuredly an asset.  When an obligor has a long-running obligation, a creditor will often ask for security.  Occasionally it is funds held in escrow, sometimes a security interest in the obligor’s property.  The most desirable security for a creditor is a letter of credit (LOC), because it is easiest for the creditor to draw on.  If Ms. Jarrett defaults on her obligation, the creditor merely calls JP Morgan and asks for its money.   Once the LOC is drawn on it becomes a liability of Ms. Jarrett and not before.

Customarily a bank will not provide an LOC to an individual unless the individual has assets held by the bank that are pledged as security for the LOC and that the bank may exercise a right of set off against if it has to make a payment under the LOC.   In my experience an LOC is damned hard to get, even for businesses, and is very rarely given to individuals.  It is safe to say that a non-politically connected bank customer wanting an LOC without collateral posted with the bank would be politely informed that such arrangements are reserved for special clients of the bank.

The arrangement might be more questionable if it turned out that Ms. Jarrett had an insurance policy with the Bermuda insurer and the policy was pledged as security for the LOC.  This would be a variation of the transaction at issue (discussed in an earlier post below) in the German raids on the Credit Suisse clients.  Although details are sketchy in that case too, it seems to involve life insurance issued by the Bermuda companies.  Most likely the policies at issue there allow the policyholder to borrow against the cash surrender value of the policy, and also allows the policyholder to contribute “premiums” far in excess of what would be allowed in the U.S. or Germany.  In the U.S. contributing excessive premiums to a life insurance policy results in it being treated as a so-called “modified endowment contract” where a portion of the inside build up in surrender value is currently taxable to the policyholder.

Little information is available on Lansdown Insurance Company but what there is suggests that it is a “captive” insurance company.  This means that it does not do business with unrelated customers, but instead writes policies for other companies under common ownership.  For a variety of reasons it is also more likely to be a reinsurer or a property and casualty insurer.  If Lansdown is a captive the chance that is has issued a policy to Ms. Jarrett is slim to none, as doing so could subject it to U.S. tax and undermine the reason for setting up shop in Bermuda to begin with – low taxes!

What is peculiar is why JP Morgan would list an outside funding source for an LOC that has not been drawn upon, and is so small.  The LOC has a reported value of $100,000-250,000 — a rounding error of a rounding error for JP Morgan.  I can’t imagine what purpose is served by listing an offshore property and casualty captive insurance company as a potential funding source.

Probably benign, but definitely peculiar.

About Conrad

Conrad O'Connor is the nom de web of a tax lawyer working in Atlanta, Georgia.
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