EB-5 Investor Immigration Program Faces New Challenges from Kushner's Involvement

Andy J. Semotiuk writing for Forbes

Recent news reports indicate that companies owned by President Donald Trump’s son-in-law Jared Kushner are under investigation. The U.S. Securities and Exchange Commission is looking into their attempts to line up investor money from Chinese investors by presenting their New Jersey real estate projects as EB-5 visa investments. What is more, U.S. tax authorities have requested documents from lenders and investors in real estate projects managed by Jared Kushner’s family. Mr. Kushner has already been linked to Special Counsel Robert Mueller's investigation into Russian election meddling. In short, Kushner is increasingly under fire and appears to be the target of multiple investigations. Nowhere are these developments more troubling, however, than in the EB-5 investor immigration world.

Mr. Kushner's EB-5 related problems have brought unwanted infamy to an investor immigration program that has already had its share of problems. Earlier this year the Lucky Dragon Hotel project in Las Vegas involving Chinese EB5 investor immigrants closed down. It was reported that 60 investors stood to lose $ 500,000 each as well as legal fees they paid while not getting their green cards. For some time now Chinese investors have increasingly been losing interest in the program because of the more than 10 year wait times required, the uncertainty associated with its renewals, and new Chinese restrictions on the outflow of capital from the country.

In articles I previously wrote I looked at practical alternatives to the EB-5 program. In the first article I compared the EB-5 program to the E-2 work visa program, suggesting the E-2 visa is preferable. In that article I even suggested how a Chinese investor who normally could not qualify for an E-2 because China does not have an investment treaty with the USA, could qualify to obtain an E-2 visa by becoming a citizen of Grenada. In the second article, I suggested that for those Chinese investors who had an existing business in China, and investors in other countries who may not qualify under the E-2 visa, the EB-1C program is better.

Now consider the tax issues associated with the EB5 program. Gary Wolfe, a leading international tax attorney, summarized them nicely as follows:

The extent to which a new immigrant is exposed to U.S. taxation is:

1) Imposition of federal and state (e.g. CA) “blended income tax” rates up are to 55 percent.

2) For 2017, U.S. estate and gift taxes of 40 percent (after the personal exemption of $5.49 million or, the combined $10.9 million for a husband and wife plus gift exemptions of

$ 14,000 each for that year, thus totaling $11.26m for husband and wife.)

3) Risk of creditor attachments. Over one million lawsuits are filed yearly in California. Plaintiffs attorneys look for “deep pocket defendants” who hold assets titled in their individual names or closely held entities. Investors often fall into this category.

4) U.S. worldwide information reporting requirements for undisclosed foreign bank accounts. (FBAR filings/FinCen Form 114 for foreign bank accounts over $10 thousand. Failure to file is an annual 50 percent penalty. That can be up to 300 percent if non-tax compliant for 6 years. Willful FBAR failure to file violations can also result in a 10-year felony for each year FBAR is not filed.

5) Foreign Account Tax Compliance Act (FATCA) requires reporting by foreign banks on U.S. account holders (adopted March of 2010 and is effective for tax years thereafter). Form 8938 is a separate tax filing due (attached to Form 1040) for foreign financial assets over $50 thousand. Thus taxpayers with foreign bank accounts over $50 thousand have to file both the FBAR and the FATCA filing (Form 8938) or risk multiple civil and criminal tax penalties.

Consider these now new (2018 forward) tax pitfalls Wolfe has identified:

·         Elimination of multiple federal income tax deductions, such as: a) for alimony paid, and b) for payments in excess of $10 thousand annually for all state, and local income taxes paid, as well as for property and sales taxes paid and casualty losses for personal property (as for example in the wildfires that raged through California in 2017).

·         A one in three chance of an IRS tax audit if earnings and/or net worth exceed $10 million under the little disclosed IRS Tax Wealth Squad (formed in 2010) as a special  audit division of the IRS (which evaluates both income and net worth levels, triggered when a US taxpayer receives multiple K-1s from various investments.

To summarize, the EB-5 program has endured a lot of trouble in recent years. Apart from some losses by EB5 investors, Chinese long waiting times, uncertainty associated with the program's renewals and Chinese restrictions on the outflow of capital, two new challenges have entered the picture.

One is the problem created by Jared Kushner's use of the EB5 program to raise money in China for his New Jersey real estate projects. This has not helped strengthen the program's image nor boosted investor confidence in it, particularly because he is related to the President yet under investigation.

The other is the new tax realities facing EB5 permanent residents in America, particularly when viewed through President Trump's new tax act.

The point of this article is that by resorting to the E-2 visa, or even the L-1 inter-corporate transferee visa when the investor owns a company overseas, investors can avoid a lot of the problems outlined. As the Eb-5 program faces increasing scrutiny, these alternate investor programs appear to be better options for many investors.

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