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Tax-Averse Firms Cross a State Line

California businesses are incorporating in Nevada, where there is no income tax. State officials call it fraud and vow a crackdown.

September 12, 2005|Evan Halper | Times Staff Writer

CARSON CITY, Nev. — Forget complicated wire transfers to the Cayman Islands or secret Swiss deposit boxes. Californians who want to hide their money from tax authorities are increasingly opting for a simpler alternative: socking it away just over the state line.

No need for savvy accountants or high-priced lawyers. Seminars, webcasts and radio advertisements bray that it's easy to slash a California tax bill -- or eliminate it altogether -- by creating a corporation in Nevada, where there is no income tax on businesses or individuals. Set one up online with a few keystrokes and a $395 credit card payment! For a little extra, a Nevada mailing address, telephone number and bank account can be added.

Promoters peddling the packages call it good tax planning. California officials call it something else: tax fraud. They say the cash-strapped state's coffers are being drained as even some of the smallest California businesses shift their profits into hastily created corporate shells in the Silver State.

"We want to catch this scam before it gets out of hand," said state Controller Steve Westly. "We think it will cost the state tens of millions of dollars if this continues."

After months of urging by tax preparers, the California Franchise Tax Board, of which Westly is chairman, has begun investigating reports that there has been a surge of interest from California in setting up shell companies registered in Nevada.

Establishing such companies requires only filing some simple paperwork with the Nevada secretary of state. California firms can then shift their income to the shell corporation, even though no business is transacted in Nevada and all operations and executives remain in California.

State officials say the law is clear: Money earned in California is taxable in California. Authorities are only a few weeks into their investigation but have already turned up enough activity for the tax board to launch a dozen audits.

State officials say many more may be on the way, as they scrutinize the returns of nearly 500 more California taxpayers who have formed Nevada corporations through a single business that advises clients on how to shelter income.

Officials would not name the business. But they said it is one of a number of companies pitching Nevada tax plans to Californians on AM radio, over the Internet and in newspaper ads. The tax board has so far uncovered about 270 individuals and companies promoting Nevada incorporation schemes they suspect are fraudulent.

Experts say California investigators will have a tough time stamping it all out. Nevada corporate secrecy laws can make it impossible to unearth how exactly money is being used once it is shifted there. Unlike most other states, Nevada doesn't work cooperatively with the IRS to root out tax cheats -- something the office of the Nevada secretary of state highlights in a pamphlet titled "Why Incorporate in Nevada?"

The pamphlet also says: "Stockholders, directors and officers need not live or hold meetings in Nevada, or even be U.S. citizens." And it touts "minimal reporting and disclosure requirements."

The incorporation schemes, meanwhile, may have received a boost from a recent U.S. Supreme Court decision that limits how far California tax agents can go in pursuing cases over the state line.

"If you are trying to track down a fraudster and the trail leads to Nevada, it is a dead-end," said Jack Blum, a Washington, D.C., attorney and tax-shelter expert who has assisted Congress in financial crime investigations. "The place has become famous internationally for enabling people who want to evade taxes or hide what they are doing. A lot of California people have figured this out.

"Everyone is trying to get a piece of this." Californians are supporting a cottage industry of incorporation agents in such places as Carson City, Las Vegas and Reno. A decade ago there were only a handful of businesses that specialized in setting up Nevada corporations. Now there are nearly 200. Californians own roughly 40% of the 71,000 Nevada corporations those companies helped form last year, according to the Nevada Resident Agent Assn., an umbrella group for incorporation businesses.

Nevada officials dispute that more than a handful of those companies are engaged in tax fraud. They say the days of people viewing Nevada as a haven for tax outlaws are over, and few taxpayers really believe that they can hide their profits in Nevada and not get caught.

Derek Rowley, the association president, points to numerous legitimate reasons Californians might incorporate in Nevada, such as laws many Californians believe offer more privacy protection for investors and shield business owners from being held personally liable in lawsuits against their company. California companies with a lot of business out of state also can save on taxes legally by operating under the banner of a Nevada corporation, he said.

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