|Not the same guy, but you get the picture|
It was initiated by a man who sat next to me on a cross-country airplane flight.
He was a normal-looking fellow traveling with a normal-looking colleague. They both were dismayed to learn that their firm's travel booker had got them window seats.
(Try flying in the middle seat, I could have said, but I prefer not to intrude on other people's conversations.)
After they sat down, the man next to me made a cellphone call while the last passengers straggled to their seats.
Here is the gist of his end of the conversation:
"We have a client who wants to put $4 million into a wholly owned company,
maybe a restaurant franchise, with no outstanding debt.
"Six months later, the client will receive $3.5 million back, and the whole
business will be over."
That's a weird proposition. Who would be willing to pay $500,000 to hide money for six months? Annualized, that's 25 percent, not counting the fee charged by the phone call guy to arrange the transaction.
I've been turning this over in my head for 10 days now, and I have come up with three scenarios, none of them admirable:
1)Tax fraud. If the "client" had sold a real estate investment property whose value had been depreciated to near zero, he would be liable for federal and state capital gains taxes, plus the ACA net investment gain tax on virtually all the proceeds, a cost of 30 percent ($1.2 million on $4 million) in some states, or possibly higher. Such taxes can be avoided with what is known as a "1031 exchange," essentially reinvesting sale proceeds in a similar property investment. The downside is that purchase and quick resale could trigger a tax audit. Perhaps the "client's" plan was to sell the exchange property back to the seller, quickly and at a loss, and to invent a ruse to justify the flip. A tax judge most likely would disallow the deductions if he or she learned that avoiding taxes had been the intent of the original $4 million purchase.
2) Divorce fraud. Perhaps the "client" is involved in a divorce and wants to hide assets from a soon-to-be former spouse. In a community property state, the couple would split the $4 million, 50-50, and the "client" would net only $2 million. If the client could invest the money in an instrument that his spouse and the spouse's lawyer could not discover, he would be left with $3.5 million, considerably more.
3) Money laundering. If the "client" obtained the $4 million illegally -- perhaps by selling street drugs for cash -- he would have a hard time depositing the money in a financial institution. Banks are required now to report large cash transactions to regulators. (In theory, he also would be required to report the income to the IRS and pay taxes on it. Hahahaha.) The "client" could launder the money through a cash business, maybe a restaurant, which could deposit the money as business proceeds, replacing other unreported income and harboring its own money from tax exposure. At the end of six months, the restaurant could buy back the "client's" equity at a loss. That repayment could be run through a regular financial institution without arousing regulatory attention.
Any of these ploys could work, I suppose, but I don't think a reputable advisor would involve himself any of them. Except for conducting sketchy-sounding business over the phone in a crowded airplane cabin, the man in the seat next to mine seemed perfectly normal.
I did not discuss this or any other matter with the man, but I did notice his stockings. Later I found similar pairs available online, in men's and women's versions, sold by a classy outfit called The Joy of Sox. Here is a picture.