In a Dec. 16 letter obtained by Reuters, Bank Leumi
le-Israel BM urged U.S. clients to enter
the Internal Revenue Service’s voluntary disclosure program,
part of a wide-ranging U.S. crackdown on offshore tax dodging.

“As published in the media, U.S. authorities are conducting
investigations of foreign banks in connection with compliance
with U.S. tax laws,” the bank said in the letter.

The U.S. effort has been focused largely on banks in
Switzerland, but it has been known that banks in other
countries, including Israel, are under scrutiny.

Under the voluntary disclosure program, Americans can tell
the IRS about undisclosed income from offshore accounts, and in
return possibly get reduced fines and penalties. About 38,000
Americans have taken part in the program since 2009, bringing in
$5.5 billion in back taxes. The IRS has grown less lenient over
time.

The Leumi letter to clients said: “The bank supports you in
this step and will assist you in this process by gathering the
information and documents in the bank’s possession that are
required by the OVDP,” in reference to the offshore voluntary
disclosure program. The bank also gave a hot line for clients.

Asked about the letter, Lee Neumann, a Leumi spokesman in
Tel Aviv, said, “Like other banks in the world, we decided to
address our clients and advise them of the existence of the
IRS’s voluntary disclosure program. We also informed them that
in the event they choose to apply for this program, the bank
will provide them with any technical assistance that may be
required from the bank.” He declined to comment further.

An IRS spokesman declined to comment.

ISRAELI BANKS UNDER SCRUTINY

As previously reported by Reuters, Leumi and two other
Israeli banks, Bank Hapoalim and Mizrahi-Tefahot
, are under investigation by the U.S. Justice
Department in connection with offshore private banking services
that may have enabled wealthy Americans to evade taxes.

The broad probe comes as the United States moves closer to
fully implementing in 2014 the Foreign Account Tax Compliance
Act (FATCA), which requires foreign financial institutions to
help ensure that U.S. clients comply with U.S. tax laws.

Bryan Skarlatos, a New York tax lawyer with Leumi clients
who got the letter, said it “is the result of ratcheted up
pressure on Bank Leumi.” He said U.S. officials “are asking
clients questions about Leumi accounts: who the bankers were,
what they said, did they come to the U.S., whose idea was it.”

Faced with a federal deficit of roughly $1 trillion, the
U.S. government is searching for new revenues and coming down
hard on tax dodgers. Last July, the crackdown on offshore
account holders saw Credit Suisse AG get a target
letter saying it was a formal target of the U.S. probe.

Earlier this month, Switzerland’s oldest private bank,
Wegelin & Co., announced it would shut its doors after it
pleaded guilty to helping Americans evade taxes. In 2009, UBS AG
, Switzerland’s largest bank, agreed to pay $780
million to the U.S. government after admitting to similar
wrongdoing with its private bank. The bank provided more than
4,400 names of U.S. account holders to U.S. authorities.

Jeffrey Neiman, a criminal defense lawyer and former federal
prosecutor who was involved in the UBS case, said U.S. officials
are eager to expand their push beyond Switzerland, “and the
Israeli banks have whetted their appetite.”

‘CAUGHT IN CROSSFIRE’

Leumi told Reuters in September 2011 that its Swiss branch,
Bank Leumi Switzerland, was cooperating with the Justice
Department investigation “in accordance with Swiss law and under
legal advisement.”

Despite the scrutiny of Swiss banks, Leumi bought Banque
Safdie, a small Swiss private bank, in 2011.

Datan Dorot, a tax lawyer in Boca Raton, Florida, with
clients who are customers of Israeli banks, said Leumi had
frozen the accounts of some U.S. clients last year after they
did not provide the bank with documentation regarding their
compliance with U.S. tax laws, such as federal income tax
returns.

“These people aren’t tax-evading millionaires – they’re mom
and pops caught in the crossfire,” Dorot said.

Asher Rubenstein, a tax lawyer in New York with similar
clients, said that with FATCA looming, his clients “are getting
a lot of pressure from the banks to provide W-9s.” The IRS
forms, filled out by clients and given to banks, require banks
to withhold any tax the clients may owe the IRS.

FATCA requires foreign financial institutions to collect and
turn over data on U.S. clients with accounts of at least
$50,000, or to withhold portions of interest, dividend and
investment payments due clients and send the money to the IRS.

Last March, Leumi wrote to U.S. clients, citing FATCA and
requesting that they submit W-9 forms and sign declarations that
their accounts complied with U.S. tax laws, according to a copy
of the letter from the bank’s Haifa branch that was obtained by
Reuters. In signing the forms, the letter said, clients
“explicitly waive banking secrecy/consent to such disclosure.”

(Reuters) – A 79-year-old Florida woman pleaded guilty on Tuesday to criminal charges of tax evasion through accounts at Swiss bank UBS AG, one of the largest such prosecutions in years.

Mary Estelle Curran pleaded guilty in United States District Court in West Palm Beach, Florida, to two charges of filing false tax returns that failed to report her UBS accounts from 2001 to 2007, court papers show.

Curran’s UBS accounts used foundations in Liechtenstein and Panama, two tax havens, to conceal money, the Justice Department said in a statement. She faces six years in prison.

At their peak, in 2007, the accounts held more than $42 million, making the case among the largest of its kind.

More than four dozen American clients of Swiss and Swiss-style banks have been charged or indicted in recent years, part of a widening crackdown on offshore tax evasion by the U.S. Justice Department. Over the past four years, the crackdown has ensnared dozens of American clients of overseas banks as well as foreign bankers.

Curran’s accounts evaded U.S. taxes of $667,700, court papers show. Under onerous U.S. penalties for failing to report the accounts, Curran agreed to pay a civil penalty of more than $26.6 million, representing 50 percent of the high balance in the accounts. In addition, she owes back taxes of more than $667,700, plus penalties and interest, court papers show.

Curran inherited the accounts from her now-deceased husband of more than four decades, said her attorney, Nathan Hochman, a tax lawyer at Bingham McCutchen and former assistant attorney general for the Justice Department’s tax division in 2008.

In February 2009, Curran, attempted to enter a voluntary disclosure program with the Internal Revenue Service that would have allowed her to pay reduced fines and penalties. She was not accepted.

At the time, UBS, under criminal investigation for its work selling tax-evasion services to wealthy Americans, had disclosed Curran’s name to the American authorities, Hochman said in a telephone interview with Reuters. That month, UBS entered into a deferred prosecution agreement, agreed to pay a $780 million fine and later turned over more than 4,000 additional client names.

Taxpayers whose identities become known to the IRS before the clients come forward voluntarily are generally not eligible for the reduced fines and penalties.

“The Justice Department continues to pursue those who hide income and assets from the IRS through the use of nominee businesses and offshore bank accounts,” Assistant Attorney General Kathryn Keneally said in a statement.

“U.S. taxpayers who fail to come forward in the voluntary disclosure program risk prosecution and substantial fines, as this case demonstrates.”

Hochman said by telephone Curran “has taken full responsibility for her actions” and that her attempt to voluntarily disclose the inherited accounts, coupled with what he termed her lack of financial sophistication, should be factors in her sentencing.

“She didn’t use this money,” Hochman said. “She didn’t need it.”

(Editing by Christopher Wilson)

Tax lawyers and former prosecutors said on Friday the
closing of Wegelin & Co, Switzerland’s oldest private bank,
served as a stark warning for some Swiss banks under
investigation, especially smaller firms such as Wegelin.

Wegelin, founded in 1741, said on Thursday it would shut its
doors permanently after pleading guilty to an indictment
charging it with helping Americans dodge taxes through secret
accounts.

It was the first time the United States forced a foreign
bank to close because of its sale of tax-evasion services.

“The Justice Department wanted a scalp to send a message to
all the other banks, in particular the small cantonal and
private banks,” said Christopher Rizek, a tax lawyer at Caplin &
Drysdale in Washington, D.C., and a senior former Treasury
Department tax official.

Around a dozen banks are under criminal scrutiny by the
Justice Department, including Credit Suisse AG, which
disclosed last July it had received a target letter saying it
was under a grand jury investigation.

Zurich-based Julius Baer and some cantonal, or regional,
banks are also under scrutiny, U.S. sources familiar with the
probes previously told Reuters. So are UK-based HSBC Holdings
Plc and three Israeli banks, Hapoalim, Mizrahi-Tefahot
Bank Ltd and Bank Leumi, U.S. sources
briefed on the matter said previously. Those banks have not
commented on the inquiries.

The widening probe grew out of an investigation of Swiss
bank UBS AG, which in 2009 entered into a
deferred-prosecution agreement and paid a $780 million fine
after admitting to wrongdoing in selling tax-evasion services to
wealthy Americans.

Unlike UBS or Credit Suisse, both major global players
widely regarded as “too big to fail,” Wegelin and the cantonal
banks are smaller institutions unlikely to pose any systemic
risk to the global financial system if indicted or put out of
business.

As such, the old model in which UBS averted indictment and
survived does not appear to be a road map going forward for
smaller banks, tax lawyers said.

Jeffrey Neiman, a former federal prosecutor involved in
criminal proceedings against UBS, said that “the cantonal banks
that have similar exposure now have a blueprint to look at in
order to see how to resolve their liability.”

The prosecution and closing of Wegelin, however, did not
sacrifice a significant number of jobs. Although Wegelin had
about a dozen branches, all in Switzerland, at the time of its
indictment, it moved quickly to wind down its business, partly
through a sale of its non-U.S. assets to regional Swiss bank
Raiffeisen Gruppe.

In contrast, after Arthur Andersen was found guilty for its
role in the failed energy company Enron Corp, the accounting
firm went out of business in 2002. A 2005 Supreme Court ruling
later overturned the conviction, but it was too late to save the
firm.

Wegelin’s plea offers other hints of things to come. The
Swiss government has been at odds with the United States over
secrecy laws that govern bank client data and the plea leaves
open the question of how or whether the bank will disclose
client data in coming months. Going forward, the role of the
Swiss in resolving the logjam could be magnified.

Neiman said the plea, which ended the case against Wegelin,
but required it to preserve client data, suggested the U.S.
government had decided to take the issue of client data “head-on
with the Swiss government” and not with the Swiss banks.

“Clearly there is another process at work here and it’s one
in which there is now not going to be a compelled disclosure in
connection with a plea,” said Scott Michel, a tax lawyer at
Caplin & Drysdale in Washington, D.C. with many wealthy clients
of Swiss banks. A Justice Department spokesman did not return
calls requesting comment.

As part of its agreement, UBS was required to turn over some
4,450 client names, a long process that involved Swiss financial
and legal authorities and rattled sacred Swiss secrecy laws.
U.S. authorities have long maintained that client data is their
prime quarry.

But by leaving open the question of how or if Wegelin will
disclose client data, the Wegelin plea magnifies the new role
the Swiss government will likely have to play in resolving its
logjam with the United States over secrecy laws protecting bank
client data.

A Swiss government source declined to comment on
long-running talks between Switzerland and the Justice
Department and U.S. Internal Revenue Service regarding a
handover of American client names. The two sides are set to meet
“shortly,” the source said.

U.S. authorities already hold more weapons in their arsenal
following the 2009 agreement with UBS. Since then, tens of
thousands of Americans have come forward to the I.R.S. to
voluntarily disclose their hidden offshore accounts, providing a
road map to the inner workings of Swiss banks, and prosecutorial
leverage over them.

Last December, Switzerland agreed to comply with new U.S.
disclosure rules on offshore accounts controlled by Americans, a
new enforcement regime known as FATCA, or the Foreign Account
Tax Compliance Act.

“The Justice Department has a lot more leverage now than it
did with UBS,” said James Mastracchio, a tax controversy lawyer
at Baker Hostetler in Washington, D.C. Unlike UBS, whose case
dragged out over several years, Wegelin, indicted less than a
year ago, “had a very fast acceptance of responsibility.”

The plea, in U.S. District Court in Manhattan, marks the death knell for one of Switzerland’s most storied banks. It is also a potentially major turning point in the battle by U.S. authorities against Swiss bank secrecy.

The bank admitted to charges of conspiracy in helping Americans evade taxes on at least $1.2 billion for nearly a decade. Wegelin agreed to pay $57.8 million to the United States, including $20 million in restitution to the Internal Revenue Service.

Otto Bruderer, a managing partner at the bank, said in court that “Wegelin was aware that this conduct was wrong.”

Speaking in a thick Swiss-German accent, he said that “from about 2002 through about 2010, Wegelin agreed with certain U.S. taxpayers to evade the U.S. tax obligations of these U.S. taxpayer clients, who filed false tax returns with the IRS.”

When indicted last February, the first indictment of a foreign bank by U.S. authorities in recent history, Wegelin vowed to resist the charges. The bank, founded in 1741, was declared a fugitive from justice when its Swiss-based executives failed to appear in U.S. court.

The surprise plea effectively ends the U.S. case against Wegelin, one of the most aggressive bank crackdowns in U.S. history.

“Once the matter is finally concluded, Wegelin will cease to operate as a bank,” Wegelin said in a statement Thursday from its headquarters in the remote, small town of St. Gallen next to the Appenzell Alps near the German-Austrian border.

Wegelin, a partnership of Swiss private bankers, was already a shadow of its former self – it effectively broke itself up following the indictment last year by selling the non-U.S. portion of its business.

Dozens of Swiss bankers and their clients have been indicted in recent years, following a 2009 agreement by UBS AG, the largest Swiss bank, to enter into a deferred-prosecution agreement and pay a $780 million fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.

William Sharp, a tax lawyer in Tampa, Florida, with many American clients of Swiss banks, said Wegelin’s plea “should serve as a wake-up call” to the international banking community servicing U.S. clients to adopt measures to ensure compliance with U.S. law.

Sharp called Wegelin’s change of heart “shocking.”

Banks under criminal investigation by U.S. authorities in the wider probe include Credit Suisse, which disclosed last July it had received a target letter saying it was under a U.S. grand jury investigation.

Zurich-based Julius Baer and some cantonal, or regional, banks are also under scrutiny, sources familiar with the probes have previously told Reuters. So are UK-based HSBC Holdings and three Israeli banks, Hapoalim, Mizrahi-Tefahot Bank Ltd and Bank Leumi, sources have also said previously. Those banks have not commented on the inquiries.

In a statement after the plea, Assistant U.S. Attorney General Kathryn Keneally said it was a top priority of the Justice Department “to find those who continue to shirk their tax obligations,” as well as those who help them and profit from it.

“The best deal now for these folks is to come in and ‘get right’ with the IRS, before either the IRS or the Justice Department finds them,” she said.

As part of the plea, Wegelin agreed to pay the $20 million in restitution to the IRS as well a civil forfeiture of $15.8 million, the U.S. Justice Department said.

Wegelin also agreed to pay an additional $22.05 million fine, the Justice Department said. U.S. District Judge Jed Rakoff, who must approve the monetary penalties, set a hearing in the case for March 4 for sentencing.

Last year, the U.S. government separately seized more than $16 million of Wegelin funds held in a UBS AG account in Stamford, Connecticut, via a separate civil forfeiture complaint.

Because Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for U.S.-based clients.

(Reporting by Nate Raymond, Lynnley Browning and Martin De Sa’Pint; Editing by Martha Graybow, John Wallace and Steve Orlofsky)

The plea came at a hearing before Judge Jed Rakoff in U.S. district court in Manhattan. Wegelin was the first foreign bank to be indicted by U.S. authorities in recent history. The indictment, announced last February, shook the storied world of Swiss banking.

“Wegelin was aware that this conduct was wrong,” Otto Bruderer, a managing partner at Wegelin, said at the hearing.

Under a plea agreement, Wegelin agreed to pay $57.8 million, which includes of $20 million in restitution to the Internal Revenue Service and a civil forfeiture of $15.8 million, the U.S. Justice Department said.

It also agreed to a $22.05 million fine, the Justice Department said. Rakoff, who must approve the fine, said stipulated guidelines placed the fine at $14.7 million to $29.4 million. Sentencing was set for March 4.

Wegelin in a statement said it had set aside money to pay the fine, restitution and forfeiture.

“Once the matter is finally concluded, Wegelin will cease to operate as a bank,” Wegelin said.

The case has signaled a ramping up of pressure on nearly a dozen other Swiss and Swiss-style banks under criminal investigation by the Justice Department.

Last year, the U.S. government seized more than $16 million of Wegelin funds held in a UBS AG (UBSN.VX: Quote, Profile, Research) account in Stamford, Connecticut, via a separate civil forfeiture complaint.

Because Wegelin has no branches outside Switzerland, it used UBS for correspondent banking services, a standard industry practice, to handle money for U.S.-based clients.

Wegelin, founded in 1741, effectively broke itself up following the indictment by selling the non-U.S. portion of its business.

(Reporting by Nate Raymond, Lynnley Browning and Martin De Sa’Pinto; Editing by Martha Graybow, John Wallace and Steve Orlofsky)

The plea came at a hearing before Judge Jed Rakoff in U.S.
district court in Manhattan. Wegelin was the first foreign bank
to be indicted by U.S. authorities in recent history. The
indictment, announced last February, shook the storied world of
Swiss banking.

“Wegelin was aware that this conduct was wrong,” Otto
Bruderer, a managing partner at Wegelin, said at the hearing.

Under a plea agreement, Wegelin agreed to pay $57.8 million,
which includes of $20 million in restitution to the Internal
Revenue Service and a civil forfeiture of $15.8 million, the
U.S. Justice Department said.

It also agreed to a $22.05 million fine, the Justice
Department said. Rakoff, who must approve the fine, said
stipulated guidelines placed the fine at $14.7 million to $29.4
million. Sentencing was set for March 4.

Wegelin in a statement said it had set aside money to pay
the fine, restitution and forfeiture.

“Once the matter is finally concluded, Wegelin will cease to
operate as a bank,” Wegelin said.

The case has signaled a ramping up of pressure on nearly a
dozen other Swiss and Swiss-style banks under criminal
investigation by the Justice Department.

Last year, the U.S. government seized more than $16 million
of Wegelin funds held in a UBS AG account in Stamford,
Connecticut, via a separate civil forfeiture complaint.

Because Wegelin has no branches outside Switzerland, it used
UBS for correspondent banking services, a standard industry
practice, to handle money for U.S.-based clients.

Wegelin, founded in 1741, effectively broke itself up
following the indictment by selling the non-U.S. portion of its
business.

(Reuters) – Some 150 developing countries, led by China, have been the source of flows of tainted money totaling $5.9 trillion over 10 years through 2010, Global Financial Integrity, a research and advocacy group in Washington, D.C., said on Monday.

Flows of illicit money from tax evasion, crime and corruption in the developing world have roared back to pre-financial crisis levels, topping nearly $859 billion in 2010, near the all-time high of $871 billion in 2008, it said.

In 2009, following the global financial crisis, the figure dropped to $776 billion.

China tops the list of developing countries sending illicit money abroad, either to offshore havens or to financial institutions in developed countries, GFI said in a study.

GFI said the flows underscored a need for governments to increase exchanges of tax information; boost money laundering laws; reform laws allowing criminals to hide behind anonymous entities; and require corporations to disclose sales, profits and taxes paid in foreign countries.

In 2010, illicit money out of China totaled $420 billion, the report said, and exceeded $2.7 trillion for the decade ending in 2010 – nearly half that period’s total for all developing countries.

Malaysia came in second place, with more than $64 billion in illegal capital exported in 2010 and $285 billion for the decade.

Mexico ranked third for 2010, with over $51 billion in illicit flows, and close to 10 times that amount, or $476 billion, for the decade. Overall, Mexico ranked second over the decade in illegal outflows.

Tainted money flowing out of Iraq rose sharply in 2010, to just over $22 billion, from $18 billion in 2009, nearly $20 billion in 2008 and nearly $4 billion in 2007. GFI said it did not have reliable data for prior years.

Overall, the bulk, or nearly 61 percent, of illegal money flows over the decade came out of Asia, followed by just over 15 percent from the Western Hemisphere and just over 10 percent from the Middle East and North Africa.

But in recent years the highest growth in tainted flows has come from the Middle East and Africa.

Dev Kar, GFI’s lead economist and co-author of the report, said the 2010 figures likely underestimated actual totals for illicit flows, as they did not include cash-driven activities. Such activities, wrote Kar, formerly a senior economist at the International Monetary Fund, include smuggling, human trafficking and so-called trade mispricing for services.

(Reporting by Lynnley Browning; Editing by Howard Goller and Steve Orlofsky)

(Reuters) – Bain Capital has been leading private equity firms in using a controversial financing strategy to generate low-tax special dividends for itself and its investors for nearly the last decade.

A Reuters analysis shows Boston-based Bain had done more “dividend recapitalization” loans from 2003 through last June than TPG Capital LP TPG.UL, Blackstone Group LP (BX.N: Quote, Profile, Research, Stock Buzz) and other rival private equity firms.

Private equity firms, sometimes in consortiums with competitors, typically buy large stakes in established corporations with the goal of improving their performance and reselling them later at a profit.

Dividend recapitalization, which is legal, is a shortcut through this process. Instead of waiting to take profits when an acquisition is resold, the private equity firm arranges for the company to borrow money, either through a bank loan or a bond issue, often of speculative grade. The private equity firm then channels the proceeds to itself and its investors through a dividend.

Private equity firms also use this strategy to generate profits from companies they have already taken public, but which have not found a buyer or whose stock price is lagging.

Dividend recapitalization loans allow the private equity firm to extract some money from its investment while maintaining its control of it.

“It’s a way to put some cash in your pocket but still have control of a company when it is attractive to buyers at a later point,” said Joseph Doloboff, a partner with the law firm of Blank Rome who has been involved in some dividend deals, but none for Bain Capital.

ADDING TO COMPANY’S DEBT LOAD

Some have criticized the dividend recap strategy for saddling companies with debt and for the 15 percent U.S. tax treatment often applied to the payouts, which is far below the 35 percent top individual income tax rate.

“It seems like taxpayers are participants to the deals,” said Chuck Marr, director of federal tax policy at the left-leaning think tank Center on Budget and Policy Priorities.

If Congress does not intervene, the 15 percent tax treatment of qualified dividends will end in January. Anticipation of a possible increase in the dividend tax has boosted dividend recap activity.

Bank-loan financed dividend recaps paid out a record $34.1 billion to private equity firms in the first nine months of this year, well above $25.5 billion for all of 2011, according to financial data tracker S&P Capital IQ.

Over the nearly 10-year period analyzed by Reuters, Bain helped arrange, or was one of the firms involved in, at least 12 bank-loan financed payouts worth nearly $11.9 billion. The deals included such household names as Dunkin’ Brands Group Inc (DNKN.O: Quote, Profile, Research, Stock Buzz) and Domino’s Pizza Inc (DPZ.N: Quote, Profile, Research, Stock Buzz), according to Thomson Reuters LPC.

Reuters could not determine if or by how much Mitt Romney, the unsuccessful Republican presidential candidate who co-founded Bain Capital, benefited from the firm’s use of the dividend recapitalization strategy. Romney, who headed Bain Capital from 1984 to 1999, owns stakes in many of its funds.

A spokeswoman for Romney during the 2012 political campaign referred questions to Bain Capital spokeswoman Charlyn Lusk, who declined to comment for this story.

HOW RIVALS SCORED

Compared with Bain, other private equity firms were involved in fewer dividend recapitalization deals during the period Reuters analyzed.

Here are the number and total value of deals involving Bain and some of its rivals from 2003 through June 2012, according to LPC.

Private equity firm Number of deals involving firm Total value of deals Bain Capital 12 $11.89 billion TPG 6 $7.15 billion Blackstone 6 $4.56 billion Thomas H. Lee Partners 3 $3.82 billion Apollo Investment Corp (AINV.O: Quote, Profile, Research, Stock Buzz) 8 $3.76 billion KKR & Co LP (KKR.N: Quote, Profile, Research, Stock Buzz) 6 $3.33 billion

The LPC data excludes payouts financed by bonds instead of bank loans. While bond-financed payouts surged in 2010 and 2011, they have historically been about a third or less of total payout volume, according to S&P Capital IQ.

KKR, Apollo and TPG declined to comment; Blackstone and Thomas H. Lee did not respond to requests for comment.

Some dividend recap payouts are not considered qualified dividends but nontaxable returns of capital to investors. It is not known how many payouts by companies owned or controlled by Bain or other private equity firms have qualified for the zero-percent tax treatment.

(Editing by Kevin Drawbaugh, Howard Goller and Lisa Von Ahn)

The U.S. Ninth Circuit Court of Appeals earlier this month
dismissed the government’s claims against Kroger, the
Cincinnati-based company disclosed in a securities filing.

The dismissal by a three-judge panel came several weeks
following a government move to drop its claims, after pursuing
Kroger for nearly a decade, court papers showed.

An IRS spokesman declined to comment. A spokesman for Kroger
did not immediately return calls requesting comment.

The Justice Department’s tax division had appealed an IRS
loss last July of two Kroger-related cases in U.S. Tax Court
centered on the tax consequences of a transaction involving two
grocery chains later acquired by Kroger.

In a securities filing in August, Kroger said that losing
the cases would have required it to make an immediate cash
payment of up to $567 million to the IRS.

The dispute between Kroger and the IRS centered on a deal
involving two Kroger units: Ralphs Grocery Co. and Fred Meyer
Inc. Kroger acquired Fred Meyer, a competitor that owned Ralphs,
for $13 billion in 1999.

Prior to being bought by Kroger, Ralphs was owned by the
Federated Group of Stores. As part of a Chapter 11 bankruptcy
reorganization that involved other Federated units, Ralphs was
transferred in 1992 to a group of creditors. In that
transaction, the value of Ralphs for tax purposes rose.

Federated had large net losses at the time. As a result, the
transfer to creditors generated generous tax deductions, in the
form of depreciation, for Ralphs. But over the mid-1990s, the
IRS disagreed with the tax consequences of the transfer.

The agency said it was actually a tax-free reorganization
that did not allow Ralphs to take the depreciation deductions.

Kroger inherited the IRS dispute through the Fred Meyer
acquisition, said Roger Jones of McDermott Will & Emery, the law
firm that represented Kroger in the just-dismissed case. He
declined to speculate on why the government had dropped its
case, saying only that it “spent a long time pursuing it.”

Kroger challenged the IRS position in Tax Court in 2006. In
2011, the IRS lost the case and filed an appeal.

Those most vulnerable to long-term emotional fallout from the storm are people who lost loved ones or whose homes were destroyed. But the disruption to normal life could well affect millions of others, experts say.

From New York City to commuter towns to Atlantic Ocean seaside resorts, daily routines have been turned upside down by power outages, fuel shortages, blocked roads, closed schools and canceled trains and buses.

Thousands of people are scrambling to find housing, and children missed as much as a week of school. Homeowners are relying on candles, flashlights and canned food as temperatures dip to wintry levels.

Elderly people have been trapped in high-rise apartments with no lights or working elevators, and sick people living alone have been unable to refill prescriptions.

In Fairfield, Connecticut, a waitress at a downtown cafe brought her elderly mother to work. “She has nowhere to go and can’t function alone in the dark,” said the frazzled waitress.

Such challenges are “the grinding, daily wear and stress of a natural disaster,” said George Bonanno, a clinical psychology professor who specializes in post-traumatic stress disorder at Teachers College at Columbia University in New York.

Some people will develop anxiety, despair and relationship problems, he said, while others could over time see their immune systems compromised and get sick more easily.

Psychological research shows the leading impact of natural disasters is post-traumatic stress syndrome, characterized by nightmares, flashbacks or a sense of detachment, along with depression and other anxiety disorders.

Among those particularly at risk are people who feel they have little control over their lives or have a fatalistic world view, according to research.

“You definitely worry about folks getting depressed, hopeless, feeling they don’t have control,” said David Yusko, assistant clinical director at the Center for the Treatment and Study of Anxiety at the University of Pennsylvania.

Many people may experience sleep problems, panic attacks, rapid heartbeats and gastro-intestinal distress, he said.

That sense of control is key, said Scott Feldman, a social worker who recounted helping a young displaced mother on New York’s Staten Island, which was devastated by the storm.

The woman, with one baby 18 months old and a second just seven weeks old, called the delivery at a shelter of some special baby formula a miracle, he said.

Feldman reminded her that, rather than it being a miracle, she had advocated for her children, let neighbors know what she needed and was part of a community.

“It gave her more of a sense of control over her life, and that’s really important,” Feldman said.

(Editing by Ellen Wulfhorst and Todd Eastham)