The Business of Guam - Handling Transactions and Litigation for Businesses and Individuals in Guam

The beginning of a new year always brings dramatic announcements from the U.S. Treasury Department (“IRS”) and year 2012 is no different. The most important news from the IRS for this new year is the emphasis that the IRS will continue to focus on the Offshore Voluntary Disclosure Program following the collection of more than $4.4 billion from 33,000 voluntary disclosures from the 2009 and 2011 Offshore Voluntary Disclosure Programs.

The IRS announced a third Offshore Voluntary Disclosure Program on January 9, 2012 to allow U.S. taxpayers, including green card holders (even if they do not live in the United States) who have undisclosed offshore financial accounts to bring their foreign income tax reporting and the reporting of offshore financial accounts on Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) into compliance. A person who holds a foreign account may have a reporting obligation on an FBAR even though the account produces no taxable income.

If you have or think you might have had an undisclosed foreign financial account reporting requirement (at any time during the past 8 years), you should contact a Calvo Fisher & Jacob LLP attorney immediately to set up a conference call or office visit to discuss your particular situation.

The IRS is going to be extremely aggressive in year 2012 in identifying taxpayers, including individuals and entities that are not in compliance with foreign reporting obligations, including not paying income taxes owned on foreign investments and not filing required FBARs. If you fail to timely file a required FBAR, with absence of reasonable cause, you will be subject to either willful or non-willful civil penalties, as well as the possibility of facing a criminal investigation and possible criminal prosecution.

In addition, a new U.S. law, effective December 19, 2011, known as the Foreign Account Tax Compliance Act (“FACTA”) requires U.S. taxpayers who have an interest in certain specified foreign assets (including any financial account maintained by a foreign financial institution and certain other foreign financial assets that are held in an account at a foreign financial institution, such as stock, securities, or other interests in a non-U.S. entity, with an aggregate value exceeding $50,000) to report those assets to the IRS annually. Reporting is to be done on IRS Form 8938, and it will be required beginning in year 2012 for the taxpayer’s 2011 tax return.

The federal government has recently stepped up efforts to crack down on Medicare fraud, particularly in such "fraud hot spots" as Miami, Los Angeles, Dallas, Houston, Detroit, Chicago, Brooklyn, Tampa and Baton Rouge. As reported by the Associated Press:

"Federal authorities [recently] charged more than 100 doctors, nurses and physical therapists in nine cities with Medicare fraud Thursday, part of a massive nationwide bust that snared more suspects than any other in history."

Although small in terms of absolute population figures, Guam is a significant consumer of Medicare funded medical care. As such, and given the aggressive enforcement posture espoused by Health and Human Services Secretary Kathleen Sebelius and Attorney General Eric Holder, it is perhaps just a matter of time before the federal government undertakes a similar investigation on our island.

On January 3, 2011, we reported about the negative impact of road construction on Guam businesses.  Now, In order to minimize the negative impact of road construction on residents and businesses, Sen. Vicente "Ben" Pangelinan has introduced Bill 36-31.  If passed, the bill would “empower and authorize the Guam Economic Development Authority (GEDA) to develop, implement, and administer the Government of Guam Mitigation Program for Business Interruption.”  This program would provide grants and loans to small and mid-size business owners who experience hardships and business interruption resulting from government-sanctioned projects or construction activity involving public infrastructure.   The bill is further meant to ensure the continued existence of these businesses.

To be eligible, program applicants must:

1.     Be a resident of Guam and a U.S. citizen or a permanent resident alien;

2.    Not have any outstanding taxes due to the Department of Revenue and Taxation and/or any outstanding debts at the Guam Memorial Hospital Authority which are not subject to an approved and current payment plan;

3.     Possess a valid Guam business license; and

4.     Be current with all reporting of taxes to the Department of Revenue and Taxation.

Eligible grantees and loan recipients will be able to use program funds to pay utility costs, commercial space rent, and/or salaries and benefits for their employees.

The Guam Business Corporation Act was enacted in early 2009 for the purposes of updating Guam's corporate laws, creating uniformity with corporate laws in other jurisdictions and modifying statutes to accomplish Guam’s objective of attracting off-island interest and investment. The Guam Limited Liability Company Act has also received legislative attention recently after remaining unrevised for nearly 15 years, demonstrating a further commitment to these purposes. 

This year, the Guam Legislature revisited and revised the Limited Liability Company Act, which had not been amended since its adoption in 1996. Consistent with its long-standing legislative purpose of making the entity choices more attractive to off-island investors that may be familiar with limited liability companies, the 30th Guam Legislature made two significant changes to the Guam Limited Liability Company Act.

First, single member limited liability companies are now permitted under Guam law, as they are in many jurisdictions, such as the neighboring Commonwealth of the Northern Mariana Islands. While two members were previously required the amended law allows one or more persons to form a limited liability company.

Second, like corporations, limited liability companies now enjoy perpetual existence. The Act previously restricted a limited liability company's duration to 30 years.

These amendments, while simple, will undoubtedly affect the considerations and options for local and off-island business owners and investors desiring to form a new entity under Guam law. In furtherance of the objective of attracting and facilitating investment into the island, perhaps the next amendment to the Limited Liability Company Act may be allowing formation of a “series limited liability company.” This entity has separate classes, each with distinct members and managers, separately owned assets, and the ability to incur obligations which are enforceable only against its respective assets. Such separation avoids the sometimes costly and burdensome practice of forming parent, subsidiary and affiliate companies. It remains to be seen whether Guam will join a handful of jurisdictions that currently allow such series limited liability companies, or wait until the structure is adopted as an amendment to the Uniform Limited Liability Company Act before modifying local law.

The Pacific Daily News reported in a recent article that the federal government intends to reclaim title ownership of the former Air Force Base Command in Marbo, which the federal government granted to Guam in 1992. According to the article, the deed which transferred the property to Guam in 1992 required that the property “be used to build a school that would help ease crowded conditions at Simon Sanchez High School.”

Nevertheless, and in spite of the passage of eighteen years, the government of Guam has yet to take any appreciable steps toward the construction of a new school on the Marbo property.

According to the U.S. Department of Education, the federal government decided to exercise its right to “revert title for the Marbo property back to the United States” because of “Guam’s ‘continued noncompliance with the terms of the deed’ under which the property was given to Guam,” i.e., the government of Guam’s failure to build a school on the Marbo property.

While the immediate loss here to Guam is obvious, some believe this event has much broader implications. In particular, some have expressed concerns that the federal government’s reclamation of Marbo may betray a broader strategy on the part of the federal government to search for, discover, and use similarly unfulfilled transfer conditions as the basis to assert reversionary rights to more property on Guam.

While possible, there are two principal reasons which militate against adopting this view. First, a quick perusal of the Marbo deed reveals certain material differences between it and the format used in most of the deeds used by federal government to transfer surplus land back to Guam in the 1990s and early 2000s. While these latter deeds contain restrictions on use, the Marbo deed contains much clearer reversionary language. Second, although it is cheaper in the short run to reacquire property through reversion than condemnation, the federal government likely recognizes that the political cost of such a strategy probably outweighs any pecuniary benefits that it may derive.

Nevertheless, there are perhaps hundreds of hectares of land on Guam whose present use profile stands in technical violation of an earlier deed from the federal government to Guam. Some of these properties were transferred under deeds which contained restrictions that explicitly, or implicitly, run with the land. And so, even if none these properties are under immediate threat of reclamation by the federal government, they nevertheless suffer a diminution in value and utility as a result of their clouded title.

Although the stated basis of many of these restrictions is to ensure that these properties are used to produce income for Guam, in the long view, these properties will provide the most benefit to Guam and its citizens once they are freed from these encumbrances and applied toward their most productive use as determined by the free market.