HP loses $190 million tax case against IRS
May 14 (Reuters) – Hewlett-Packard Co. on Monday lost a battle with the U.S. Internal Revenue Service for more than $190 million in tax refunds tied to a Dutch tax shelter designed by the derivatives arm of American International Group.
The ruling turns a spotlight on an aggressive tax-cutting strategy created last decade by AIG Financial Products and bankrolled by several European banks.
The strategy involved trading derivatives with the aim of generating capital losses and foreign tax credits for large corporations, like HP, which then used them to try to lower their U.S. tax bills.
Judge Joseph Goeke of United States Tax Court in Washington, D.C., ruled against HP, which had sued the IRS in 2009 seeking the refunds.
The strategy, broadly known as a foreign tax credit generator, involves complex investments by large U.S. companies in foreign entities, typically in low-tax jurisdictions. The companies claim on their U.S. tax returns offsetting, or tax-lowering, credits for payments they make or owe to foreign tax authorities on the investments.
The IRS contends that many foreign tax credit generators lack economic substance and are engineered to create artificial financial benefits that are not valid for IRS deductions. The IRS outlawed many foreign tax credit generators around 2007. An IRS spokewoman declined to comment on the HP ruling.
HP’S AIG STRATEGY USED ABN-AMRO
Fate of ex-UBS client cases uncertain, lawyers say
Tax lawyers are divided over the legal consequences of the bruising defeat in court of a billionaire former client of UBS AG who sued the Swiss bank for allegedly giving him incorrect tax advice.
On April 10, Judge Andrew Guilford of U.S. District Court in Santa Ana, Calif., dismissed a case brought by Igor Olenicoff, a Russia-born property developer. Olenicoff had accused the bank of improperly telling him he didn’t have to disclose certain Swiss-held assets on his U.S. tax returns.
In ruling for UBS, the judge said that because Olenicoff had been convicted in 2007 of tax evasion and of lying on his tax returns about having offshore accounts, he did not have a solid claim of fraud and breach of fiduciary duty against UBS. Judge Guilford wrote that because Olenicoff had admitted to tax evasion, he had placed “nearly every room of his legal house of cards into jeopardy.”
The judge wrote that UBS had run afoul of U.S. authorities over its offshore private bank, but added that “UBS’s admission of guilt does not give Olenicoff the right to sue UBS for fraudulent tax advice.”
In 2009, UBS averted indictment, admitted to criminal wrongdoing with tax-evasion services sold to 19,000 Americans through its private bank and signed a $780 million deferred-prosecution agreement with the U.S. Justice Department.
Barbara Kaplan, a tax lawyer at Greenberg Traurig in New York who represents clients of foreign banks, said that “the significance of the Olenicoff ruling is that a person is not going to be allowed to shift responsibility for his own acknowledged wrongdoing to another party, even if that party might be viewed in an unfavorable light.”
TAXPAYER RESPONSIBILITY
UBS fends off lawsuit of billionaire US tax evader
April 10 (Reuters) – A U.S. federal judge ruled on Tuesday in favor of Swiss bank UBS AG in a lawsuit brought by Igor Olenicoff, a billionaire former client who ran afoul of the tax-collecting Internal Revenue Service and tried to blame the bank.
Olenicoff sued UBS in 2008, accusing the bank of fraud, conspiracy and other charges in handling some $200 million he kept in offshore accounts and claiming that UBS had wrongfully advised him that he did not have to report them to the IRS.
Judge Andrew Guilford of the U.S. District Court in Santa Ana, California, issued a harshly worded ruling on Tuesday, about a month before the case was due to go to trial.
Olenicoff, a Russia-born American property developer, pleaded guilty to tax evasion in 2007 and to lying on his tax returns by failing to disclose the offshore accounts. He paid $52 million in back taxes. In March, Forbes estimated Olenicoff’s wealth at $2.6 billion.
The judge wrote that Olenicoff’s case was “built upon a simple premise: UBS gave Olenicoff bad tax advice, which Olenicoff believed.” But the judge said that having pleaded guilty to tax evasion, Olenicoff already had placed “nearly every room of his legal house of cards into jeopardy.”
Drawing on the maxim, “two wrongs do not make a right,” the judge said that “UBS’s admission of guilt does not give Olenicoff the right to sue UBS for fraudulent tax advice.”
Olenicoff’s civil case, asking up to $1.7 billion in damages, had sought in part to probe whether clients of Swiss banks could legally rely on their private bankers’ assertions that there was no need to disclose the accounts on their tax returns or sign required disclosures.
Odds favor IRS in Supreme Court tax cases: study
(Reuters) – The odds are stacked against corporations whose disputes with the tax-collecting Internal Revenue Service go all the way to the Supreme Court, a new study found.
Titled “Corporate Shams,” the study by two tax scholars at U.S. universities, found the government prevailed more than six times out of 10 in high court cases where it argued that corporations actively abused the tax code.
The 69-page study, parsing more than a century of public data, will be published in the New York University Law Review in December, a spokeswoman for the NYU law school said.
The government won 61 percent of the 137 cases heard by the Supreme Court from 1909 through 2011 that involved allegations by the federal government of abusive tax-motivated transactions by corporations, the study found.
The government fared even better in tax disputes with corporations in which the government alleges a misreading of the tax code rather than abuse, winning 68 percent of the time.
Authors Joshua Blank, faculty director of the graduate tax program at NYU law school, and Nancy Staudt, a tax scholar at the University of Southern California Gould School of Law, called their study the first to try to show the number of tax-abuse disputes the government has historically won at the Supreme Court, and why.
Lawsuits test UBS advice on offshore bank accounts
March 30 (Reuters) – The case of a wealthy U.S. businessman who pleaded guilty to evading taxes but then sued the Swiss bank where he hid his money is scheduled to go to trial on May 8, the first major test of civil legal challenges to Swiss banks that sold offshore private banking services to help Americans evade taxes.
The civil suit, filed against UBS AG in federal court in Santa Ana, California – and another filed against UBS in federal court in Chicago – will probe whether clients can legally rely on their private bankers’ assertions there is no need to disclose the accounts on their tax returns or sign required disclosures.
Tax lawyers describe the suits, emerging from a crackdown by federal authorities on Swiss banks, as the first of their kind in the United States to assert that Swiss bankers made improper assertions to their U.S. clients about the tax implications of their offshore accounts.
In the California case filed in 2008, Russia-born American billionaire Igor Olenicoff accuses UBS of fraud in handling some $200 million he kept in offshore accounts and wrongfully advising him he did not have to report them to the tax-collecting IRS. Olenicoff pleaded guilty to tax evasion in 2007 and to lying on his tax returns by failing to disclose his offshore accounts, and paid $52 million in back taxes. His suit seeks $500 million in damages.
The Chicago case, which seeks class-action status, was filed in June 2011 on behalf of former UBS clients Matthew Thomas of California and Himanshu Patel of Arizona. Thomas and Patel previously paid back taxes, interest and penalties to the IRS related to their Swiss accounts. They accuse UBS of fraud and breach of fiduciary duty for allegedly telling them that their accounts, opened when the two worked overseas during the last two decades, did not have to be disclosed to the IRS.
UBS argues in both cases that its clients have a duty to know what to declare on their U.S. tax returns. A UBS spokeswoman in New York, Karina Byrne, declined to comment specifically on the lawsuits, but said the bank “does not give any tax advice to our clients, and we encourage clients to seek third-party tax advice.”
U.S. INVESTIGATION UNDER WAY
Two Swiss financial advisers indicted in U.S.
(Reuters) – Posecutors in New York on Wednesday indicted two Swiss financial advisers, one a former private banker at financial giant UBS AG, on charges of conspiring to help wealthy Americans hide $267 million in secret bank accounts.
In separate indictments, one of them alleging that a child was used to carry cash to a client, charges were brought against Hans Thomann, 61, and Josef Beck, 46. Both live in Switzerland, but they worked separately from each other.
In the latest development in a U.S. crackdown on Swiss banking, the indictment said that Thomann was a client adviser at Swiss-based UBS from 1993 to around 2003, then later worked at a series of unnamed Swiss asset management firms.
He helped U.S. clients hide money at UBS and other Swiss banks, including Wegelin, a small Swiss bank that was indicted last month by the Justice Department for selling tax evasion services to American clients, the indictment said.
Thomann handled around 32 accounts holding $138 million for U.S. clients of UBS, and helped around 13 of them transfer their accounts to Wegelin and other Swiss banks when UBS came under pressure from U.S. authorities around 2008, it said.
Thomann also helped clients fleeing UBS transfer accounts to the Swiss branch of an unnamed Israeli bank, it said.
Romney’s 2010 IRS return flags complex tax strategies
Republican presidential candidate Mitt Romney’s release of his 2010 tax return offers a rare glimpse at two sophisticated tax transactions which the U.S. Internal Revenue Service requires that taxpayers disclose for investments driven by tax considerations.
Like thousands of other Americans’ returns, Romney’s included special attachments flagging “reportable transactions” to the IRS. Known as Form 8886s, the attachments showed that these foreign currency and contingent swap transactions were undertaken by one Bain Capital fund and three Goldman Sachs funds in which blind trusts for the assets of Romney and his wife Ann have invested several million dollars.
Under disclosure rules strengthened in 2002 to grapple with rising tax evasion by Americans, the IRS requires taxpayers to disclose transactions that it has banned or warned it may challenge as improper.
The IRS has historically had a tough time detecting tax shelters, both innocuous and questionable, buried in taxpayer returns.
While the disclosure rules sometimes help the agency spot abusive tax shelters, they also can cause taxpayers to flag transactions that might appear on the surface to be problematic, but in fact are not.
Romney’s disclosures come in a campaign environment dominated by talk about income inequality and tax loopholes. (Yesterday Romney put forward his ideas for fixing the tax code.)
While the disclosures may raise more questions than they answer, they highlight the sophisticated tax planning – in this case, by some of the funds Romney is invested in – available to wealthy investors.
Oldest Swiss private bank is newest U.S. target
GALLEN, Switzerland, Feb 16 (Reuters) – On the morning of Jan. 27, employees at the St. Gallen headquarters of Wegelin, Switzerland’s oldest private bank, were told to expect an important announcement from Konrad Hummler, Wegelin’s leading partner. Other Wegelin branches across Switzerland, also alerted, tuned in to the company-wide address system.
Speaking in Swiss-German, Hummler announced the bank had sold most of its assets to another Swiss bank. According to a person familiar with the matter, Hummler called it a last-ditch effort to preserve employees’ jobs amid withdrawals of assets by investors who were increasingly worried about a growing problem: a U.S. federal investigation into Wegelin’s sale of tax-evasion services to wealthy Americans. The dark-suited bankers and conservatively dressed office clerks, said the person, were in shock and tears.
The news for Wegelin, its headquarters nestled in the town of St. Gallen next to the Appenzell Alps near the German-Austrian borders, would only get worse. Six days later the U.S. Justice Department, acting on plans it had been making for weeks, indicted the 270-year-old bank on charges of enabling wealthy Americans to evade taxes on at least $1.2 billion from 2002 through last year. U.S. criminal laws apply to foreign banks that do business in the United States, even if the banks, like Wegelin, have no U.S. branches. The charges made Wegelin the first overseas bank in history to be indicted by U.S. authorities and marked a milestone in a burgeoning American crackdown on Swiss bank secrecy and efforts to force banks to turn over client names. The sale and the subsequent indictment effectively brought an end to the storied bank.
The Wegelin indictment also turned a spotlight on Hummler, an outspoken defender of the Alpine tradition of bank secrecy and an admirer of the Portuguese philosopher Fernando Pessoa’s concept of the banker as an anarchist. In an interview three years ago with Suddeutsche Zeitung, Germany’s largest newspaper, Hummler called the concept “a charming mind game.”
In a 2009 column in Neue Zurcher Zeitung, a Swiss newspaper on whose board Hummler sits, he wrote that he was “influenced by ’68″ – a reference to his time in Paris during the street riots of 1968 – and that he had “found a philosophical father” in Friedrich Hayek, the economist-philosopher who defended free markets and capitalism.
Last week, representatives of Wegelin failed to show up in a U.S. court in New York to respond to the indictment. The bank said in a statement and legal papers that it had not been served with a criminal summons – a legal paper that often follows an indictment. The court declared the bank a fugitive, raising questions over how a trial requiring the presence of Hummler and other Wegelin executives might take place. While Hummler was not named in the indictment against the bank, the document referred to unidentified Wegelin executives as “co-conspirators.”
After the hearing, Wegelin said in a statement that “the circumstances create a clear dilemma for Wegelin & Co: If it were to adhere to current U.S. legal practice aimed at Swiss banks, it would have to breach Swiss law.” Swiss law protects client confidentiality under a tradition dating to the Middle Ages; Switzerland does not consider tax evasion a crime for its own citizens and residents.
Detained Swiss banker’s fate up in the air
FORT LAUDERDALE, Florida (Reuters) – A Swiss private banker, held on a criminal complaint for 13 months without a formal indictment, was on Monday given 60 more days by a Florida court to go on trying to resolve the issue with U.S. authorities.
Christos Bagios, a Greek citizen and Swiss resident, was due
either to be indicted or have his case dismissed, but instead was granted the extension by Judge Lurana Snow in a federal courtroom in Ft. Lauderdale.
Bagios worked at Credit Suisse AG from early 2009 until this month, according to public securities records, and at UBS AG,, the Swiss bank giant, from 1993 to early 2009.
Under federal rules of criminal procedure, U.S. authorities have 30 days after bringing a criminal complaint to either indict a defendant or dismiss charges. An exception arises if, as in this case, the defendant waives his right to hearings that would result in an indictment or a dismissal.
Bagios has repeatedly, with the U.S. government’s blessing, waived that right, most recently on Monday.
“Absent extraordinary circumstances, judges are loath to allow waivers for extended periods of time,” said Robert Katzberg, a white-collar criminal defense lawyer in New York with clients of Swiss banks. “This is the longest waiver I have ever heard of, and by a lot.”
U.S. enlists 5 EU nations in offshore tax crackdown
(Reuters) – The U.S. Treasury Department on Wednesday enlisted five EU nations to help crack down on offshore tax evasion by Americans and ease the burdens the effort has imposed on many banks and financial institutions.
After complaints from the global financial industry about costs and legal issues, Treasury announced a new multilateral approach to implementing the Foreign Account Tax Compliance Act, or FATCA.
Enacted by the U.S. Congress in 2010, FATCA is intended to help the U.S. Internal Revenue Service gather information about Americans’ accounts with more than $50,000 in assets in foreign banks and other institutions.
Scheduled to take effect in 2013, the new law as drafted calls for banks and financial institutions worldwide to gather the information and directly disclose it to the United States’ Internal Revenue Service (IRS) tax collection agency.
Under Treasury’s proposed “new government-to-government framework for implementing FATCA,” the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.
Treasury said that once these five “FATCA partner” countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.
-
Follow Lynnley
