Blackstone Valley Chiropractic Clinic: International Deferred Compensation

Following graduation from West Point with a degree in Basic Science and an emphasis in Anatomy and Physiology, Glenn E. Rachis entered the United States Army. There, he served as a Second Lieutenant line infantry officer and earned a Bronze Star. While active in Army service, he discovered his true calling and entered the New York Chiropractic Colleges Doctor of Chiropractic Program. Upon graduation, he joined the Army Medical Services Corps.

Eventually, Dr. Rachis was promoted to O-4 (Major) and served as Clinic Chief in Darmstadt, Germany until his retirement and honorable discharge from the service (at age 46). At retirement, Dr. Rachis was earning military compensation of $119,920. The breakdown of his final years pay from the Army can be found in Table 1 below.

Table 1:Dr. Rachis Final Army Payments

Monthly Base Pay	$6,252.30
Monthly BAQ (Basic Allowance for Quarters)	$1,131.60
Monthly BAS (Basic Allowance for Subsistence)	$192.74
Monthly Variable Special Pay for Medical Officers	$666.66
Monthly Board Certified Special Pay	$500.00
Total Monthly Pay	$8,743.30
Total Annual Pay		$104,919.60
Additional Annual Pay for Medical Officers		$15,000.00
Total 2000 (Annual) Military Pay		$119,919.60

After retiring from the Army, Dr. Rachis relocated to Worcester, Massachusetts where he purchased a 10 year-old personal injury practice in the Blackstone Valley area from a retiring chiropractor. The building exceeded 2,000 square feet, including reception, four exam/treat rooms, two diagnostic rooms, management office, massage room, radiology room, and dark room. The building was equipped with state of the art equipment.

Dr. Rachis was excited about opening his own practice and moving his family back to the US.

1. The practice was well-established in the community, with a very strong network of referring attorneys and other legal entities. The focus of the practice was personal injury (80 percent of total services). Well care, acute care, rehab, and expert witness testimony together comprised the remaining 20 percent of total services. The patient population was diverse and lived within a 10 mile radius. The sources of patients were as follows: 75 percent attorney referral, 15 percent direct mail, 6 percent employer referral, 4 percent patient referral. The practice accepted only cash and direct billing from attorneys.

For the initial year 2001, Dr. Rachis operated his practice as a sole proprietorship. Given that, he reported the income on his personal tax return (Schedule C, Form 1040). However, upon the advice of counsel, Dr. Rachis incorporated his practice under the name Glenn E. Rachis, DC, PC. The practice then operated as a C corporation and under the name Blackstone Valley Chiropractic Clinic.

During the first three years (2001-2003), the practice generated gross revenues of more than $700,000 per year and net income in excess of $600,000 per year. In 2003, the practice had more than 2,000 patient visits, including more than 600 new patients. Dr. Rachis take home pay before income taxes in 2003 was $480,620. Federal income taxes totaled $138,308.

THE CAPS PROGRAM

Due to the rapid and significant change in his personal income, Dr. Rachis became interested in succession planning, asset protection, and retirement funding. In early 2004, Dr. Rachis personal attorney (also a practicing CPA) shared with him a brochure (Appendix 1) he received from an entity by the name of Concept Asset Protection Systems (CAPS), LLC. The brochure described a two day seminar titled Asset Protection-Tax Deferral-Investment Strategies to be held in Las Vegas, NV in March 2004.

Following the recommendation of his personal attorney, Dr. Rachis traveled to Las Vegas, Nevada to attend the seminar. The seminar leaders introduction indicated that he had extensive experience in asset protection, estate and succession planning, and establishing income deferral programs and planning through tax treaties and appropriate domestic and international structures. The seminar leader also stated that he had represented numerous clients throughout the world and represented the U.S. in the China International Trade Talks. The advice that Dr.

Rachis received spanned several topics including the utilization of an international nonqualified deferred compensation plan. The seminar provided Dr. Rachis with a retirement plan analysis, complete with the backing of legal opinions supported by numerous cases and regulations (see Appendix 2 for seminar materials). After meeting with the seminar leader and prior to agreeing to adopt the CAPS program, Dr. Rachis sought the independent opinion of his attorney (also a CPA), who reviewed the legal opinions and seminar documents provided to Dr. Rachis.

Task #1

Dr. Rachis also sought an accounting firm to evaluate the plan. Martin Zingales is currently employed by a regional accounting firm. Not only does he have his CPA, but he is also a CFE. Ray Bertman, a partner in the firm, asks Martin to determine if using the CAPS program would cause Dr. Rachis, a potential client, to commit fraud or income tax evasion. Martin must prepare a research memo to address the items below using the tax rate schedule in Table 2.

1. Determine the potential tax savings had Rachis used the CAPS program in 2003 to defer

$400,000 of taxable income (leaving taxable income of $80,620 rather than $480,620).

2. Analyze the materials provided by Dr. Rachis (Appendix 1 and Appendix 2), and assess whether the proposed program is consistent with the objective of retirement planning. Specifically, using seminar materials as the facts, evaluate whether the proposed program is in compliance with U.S. tax law. If the plan is not in compliance, develop recommendations on how to change the plan so that it is compliant with the U.S. tax law.

Table 2: Schedule Y-1 Married Filing Jointly or Qualifying Widow(er)

If taxable income
Is over--	But not over--
$0	$16,700	10% of the amount over $0
$16,701	$67,900	$1,670.00 plus 15% of the amount over $16,700
$67,901	$137,050	$9,350.00 plus 25% of the amount over $67,900
$137,051	$208,850	$26,637.50 plus 28% of the amount over $137,050
$208,851	$372,950	$46,741.50 plus 33% of the amount over $208,850
$372,951	no limit	$100,894.50 plus 35% of the amount over $372,950