The following is independent research done by the editor of this blog, with the help of some interviews, some internet searching, and some document sifting. It's quite possible that some of the information is inaccurate regarding tax laws. If you catch something here, please let me know and I'll correct the post.
TAX HAVENS AND CLAIRE MCCASKILL:
The Obama press conference on closing corporate loopholes for tax havens is threatening to ensnare Missouri's own Claire McCaskill, whose use of a reinsurance company headquarted in Bermuda has once again given rise to Missouri GOP charges that she's using the company as a way to avoid paying taxes. This was an issue brought up in a contentious Talent-McCaskill Debate in 2006, and it was never fully resolved.
The problem for Claire is her story has changed over the years. Her benefit is the issue is complex, and on one wants to take the time to research the matter. This gives her leeway to make new claims that are accepted without question. The crux of the matter is the Rural Reinsurance Company International, LTD, which in the filing for 2008 is listed as a company where up to $1,000,000 is invested by the McCaskill family. It's important to note that Senator McCaskill's husband owns a string of low-income apartments and nursing homes that provide a steady stream of income and excellent tax savings. It's one of those complicated rich people things, which there is nothing wrong with, but it's obscure enough that the average person can't understand, and can easily be convinced it's no big deal.
THE RURAL REINSURANCE COMPANY
The Rural Reinsurance Company International, LTD, is a company in Hamilton, Bermuda. It's a reinsurance company, which is to say that it's purpose is to insure insurance companies against losses from their primary holdings, allowing them to write more policies than they have capital in the bank.
Now, I wanted to understand more about the reinsurance industry, especially since RGA is a St Louis based reinsurance company, and I see their sign when I drive past it each day. It didn't make sense to me that a company in Chesterfield could sell reinsurance, but McCaskill had to put hers in Bermuda. I thought I'd ask around and see if I could find someone to explain reinsurance, tax laws, tax havens, and Bermuda to me, and measure that knowledge against what Senator McCaskill has told us. I did find someone who generously explained it to me and walked me through the complex maze of Bermuda and reinsurance.
At odds are several statements Claire McCaskill has made about her holdings in Bermuda.
1) In the debate with Jim Talent in 2006, McCaskill said "There is absolutely no tax sheltering that is occurring that is not part of a tax code that Senator Talent embraces.” (Kansas City Star, October 18, 2006). This is a pretty straightforward admission that tax sheltering is occurring.
2) In this KY3 video from this year, McCaskill says the reinsurance company is located in Bermuda because most reinsurance companies are located there in order to sell insurance to all 50 states on the secondary market. In that video, she also claims that her investments are not a tax shelter, and have never been a tax shelter. Now, that contradicts what she said in 2006, but this video is important, because it suggests a high degree of familiarity with how reinsurance works. It's not true that most reinsurance companies are in Bermuda, but there are quite a few, and some of the biggest incorporate there. I'll expain why later. It's not the reason McCaskill gives.
3) The company at question is the Rural Reinsurance Company International LTD. The name comes from McCaskill's 2008 financial disclosure, available here at Legistorm.com. Curious, I went back and looked at the 2007 disclosure, and saw something curious. In the 2007 filing, there is no Rural Reinsurance Company International. There is an entry for the Rural Housing Re-Insurance Co Of America, LTD. Now, I'm not a tax lawyer, but it does seem that the company is different. It now seems to brand itself as selling internationally, as oppposed to selling just in the US. It could be the same company, but official name changes and DBA's matter. The investment has also increased in value, moving from the $250-500k bracket to the $500K-$1,000,000 bracket. Dividend income remains the same $0-$201 a year (which sounds like a pretty poor investment if you're planning on living off those dividends). The lack of dividend income is a sure sign of tax advantages. Those files have a lot of dividends that pay $0-$201.
Here's where it gets tricky. Considering the difference in statements made by McCaskill, first that the company is a legal shelter, and then that it's a requirement to base the company offshore - could it be the company has shifted focus? Was it a tax shelter before, and now it isn't a tax shelter, but instead is used to sell internationally? Did the debate in 2006 spook her to have the company change its name and refocus earnings to nullify the issue for the future? That's a pretty wild guess, but unless we actually look at McCaskill's tax returns, we're left trying to parse her words or taking her contradictory statements at face value. The only plausible defense that she's telling the truth is to say the companies were two different companies, used for different reasons. Before we veer off into crazy land, the fact remains that we don't know much about these companies because Claire hasn't been asked specifics about why Bermuda from someone knowledgeable about the island.
BERMUDA:
So let's talk a little bit about Hamilton, Bermuda, and understand why someone would put a reinsurance company there, and then find out more about what tax advantages are available.
First, A company that incorporates in Bermuda doesn't have to pay corporate income taxes on money earned outside the US. A US firm can also borrow money from a Bermuda umbrella company, but the interest it pays, which is a tax writeoff, goes back to the parent. A search on the topic makes the claim that the IRS says that shareholders must pay taxes on any increase in the value of their shares (like the increase in the company from 2006-2008. But companies aren't required to share information with the US government unless they pay out money to shareholders. Thus the only way to determine what a Bermuda corporation is doing for someone is to look at their individual tax returns, documents McCaskill refuses to release. This would form the basis of Claire's claim that she is still subject to taxes, and thus it can't be a tax haven. This simply isn't true. If the Rural Reinsurance company is making money, McCaskill isn't seeing it in dividends, but she still has to self-report increases to the IRS. If the company is reinvesting money earned into selling more insurance, the value of the company increases but there may not be anything to report. If the company were here in the US, that value would be registed as corporate income and taxed. This is the reason why I don't hoard cash profit in my business, as I'll pay both for corporate profit, and individual income tax when I pull it out the next year. Bermuda-based companies don't have that problem.
The tax advantages for Bermuda are only the first part. She was accurate in saying that a lot of companies use Hamilton, a small city of less thatn 1000 people, but that's because some of the world's top lawyers and accountants live and work there. If you want to set up international holdings with great tax advantages, Hamilton, Bermuda is a great place to do so. All you need is an office, employees, and a purpose. The question of whether or not the Rural Reinsurance companies are in Hamilton for the talent is best solved by asking a simple question - does the company have a physical presence in Hamilton, or does it only exist on paper? If it's paper, it's a tax haven. Surely McCaskill can let us know the number of employees in Hamilton and the physical address? Perhaps she can share a story or two about high-level recruiting while scuba diving?
The third aspect of using Bermuda to house your reinsurance group is leverage. This is where the comment about needing to offshore your company to sell to all 50 states is relevant. You don't have to go to Bermuda to sell to all 50 states. The proof of that is in RGA, the St Louis based reinsurance giant which does just fine selling to all 50 states while based in Missouri. It's not a matter of can't sell reinsurance, it's a matter of ducking state laws to be able sell more insurance.
Companies set up reinsurance companies as a hedge against losses. They're the insurance version of credit default swaps, where companies find other companies to buy their risk. You pay a premium to investors who are responsible for your losses. Many companies don't like the idea of paying another company premiums, so they set up their own reinsurance company, and pay themselves a premium to manage risk across their subsidiaries. Unlike CDS's, reinsurance is subject to regulation. Individual states have specific cash reserves limits you're required to hold to sell insurance. Locating your company in Bermuda, you can exceed the insurance limits of your cash reserves because you're not bound by those state laws. So the decision to base your company in Bermuda instead of Missouri is a choice to route around individual state laws. Again, it's not that you can't sell to 50 states, it's that you can make more and sell more if you're not in those states. It's smart business that maximizes your investment, but it's an embarrassing admission for a politician to say their business is avoiding inconvenient tax laws, especially at a time when the gaming of regulations led to such massive financial losses in the equity markets.
CONCLUSION:
One thing is clear - the McCaskill fortune is a highly complex beast, where numerous properties generate small bits of income, capital gains advantages, and tax benefits that the ordinary taxpayer going through withholding never gets to see. Her disclosure shows that much. That's what happens when you can hire lots of lawyers and accountants to grow your holdings. In looking through McCaskill's disclosures, no one with an ounce of honesty will say that these are simple business investments taxed at some maximum rate. Affordable housing works for two reasons. First, the owner/developer is eligible for tax
credits if they agree to set aside the property for affordable housing for at least 30 years. Having large numbers of affordable housing units gives you tax breaks - lots of them. The investments are also sought after by other investors like pension funds, who prefer long-term investments in multi-family homes to guard against a downturn in equity markets. Selling reinsurance offshore can create an extra risk that circumvents state laws intended to prevent market losses by companies, and this is story line that McCaskill certainly isn't comfortable having someone follow in this financial climate. The point is the financial disclosure forms reveal a complicated tax and equity strategy designed to maximize income and minimize tax revenue. That's the underlying story, and pretending that somehow McCaskill's family isn't doing their best to avoid taxation is simply not credible. You can't build an almost $20 million fortune without using these strategies.
So what we have is a Democratic US Senator who is denying that her family's use of a Bermuda based company is for tax purposes because it's embarrassing to say such things when you're supposed to be a champion of the little people. Rather than simply admitting that her husband is using his money and connections to maximize his investments, like all rich people do, Senator McCaskill is trying to make us believe her husband is a poor businessman who doesn't understand how to take advantage of current tax laws. Claire has reversed her position from 2006, where she claimed her tax strategies were legal, and has now retreated to a position where she claims that her former statements, the evidence of her disclosure forms, and common sense are all misleading.
When will these politicians learn? It's not the crime, it's the cover-up. Having carefully managed her brand as one of fiscal stewardship Claire is now forced to say, Who are you gonna believe, me or your lying eyes?"
It's shameful, but it's what so many of our politicians are doing. They give us one set of rules, live by another, and lie when caught, counting on the press to buy whatever story they spin. Credit goes to Dave Cantanese for asking the question, but followup from an employed journalist would be a lot more effective.
A final note of warning. This is a long and complicated post, not easily understood or digested. I took the time to research and edit and re-edit this post because I want it to be as accurate as possible. The most likely response from McCaskill is to ignore it and hope no enterprising reporter pushes for more information. She will claim that she answered the question. She will say it's just more "gotcha." Liberal bloggers will chime in, look for a point here or there that is wrong and dismiss the entire story, or simply claim I lack the expertise to understand the matter. Don't let them hide. Our elected leaders play a lot of games. If just one person in each state went through these forms, we'd probably throw the whole lot of them out. And worse, the forms are inaccurate. They are rough estimates, not financial statements. Our Congress doesn't even have to show us what they make, while the rest of us get requests from state and city clerks to disclose the full amount of our revenues, our earnings, and our mortgages. It's time we shed light on the greed and hypocrisy of the Democratic majority. It starts with Senator McCaskill.
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