QUESTION: I have a foreign grantor trust, but from what I have read I
have to file a FBAR report when I exceep $10,000 a year. Would the
same be true if I had a Panama Foundation? I was told that since I
wouldn't own it then I wouldn't have to list it, in fact I could make
the PF the beneficiary of my trust.

REPLY: For some reason that escapes me, there seems to be a huge
amount of mis-information about the U.S. tax treatment of U.S. persons
who are the founders and/or beneficiaries of a Panama Foundation.

As a reminder, the U.S. and the IRS do not have any jurisdiction over a
foreign foundation, trust or corporation -- BUT -- they do have legal
jurisdiction over the U.S. persons or entities that are the founders,
investors, grantors or beneficiaries of these foreign entities.

Without digressing into a long distertation about how the IRS and the
U.S. courts decide on the tax treatment of an entity or its
owners/beneficiaries, they will use the "duck theory". If it looks
like a duck, walks like a duck and quacks like a duck they will tax it
like a duck.

Based on this esoteric legal principle, they will treat a Panama or
other foreign foundation as a trust if it functions like a trust that
has a grantor and beneficiaries and a primary function of managing
investments. But if the foreign foundation is structured so that it
resembles a business corporation with shareholders, a board of
directors and transferability of ownership, they will treat it as a
corporation. And, in those few cases when a foreign foundation
resembles a charitable foundation, they will treat it as a foreign
charity.

Once they have decided how the foreign foundation should be treated
for U.S. tax purposes, they then impose various taxes and reporting
obligations on the shareholders (if it's treated as a corporation) or
the grantor (if it is treated as a trust.) A failure to comply with
their rules results in penalties and interest in the event of an audit
and a persistent failure could result in some time in their free hotel.

If the foreign foundation is treated like a trust, the U.S. grantor of
the trust will be required to file the FBAR (Foreign Bank Account
Report) report. If the foreign foundation is treated as a foreign
corporation, the U.S. officers and directors of the foreign
corporation (including certain owners) will be required to file the
FBAR report.

For those who disagree with the IRS on these matters, there are three
basic choices. (1) Dispute the issue in court if you can find a lawyer
willing to argue the matter for you. (2) Expatriate so that you are no
longer subject to the U.S. tax laws on future income. (3) Take your
chances on whether the IRS will find you. But with respect to that
last alternative, you might want to read my article on why secrecy
doesn't work anymore. (http://www.offshorepress.com/secrecy-myth.htm )

Vern Jacobs

P.S. The preceding explanation is not one that you will find in the
Internal Revene Code or the IRS Regulations and should therefore not
be construed to be an authoritative source of information.