Another UBS client has pled guilty to filing a false tax return, putting more pressure on the hold outs. The IRS's amnesty program ends in September and it looks like UBS is going to turn over a lot, if not all, of the information the IRS has summoned.
Why? Because there is now evidence that UBS committed fraud, not only in the U.S. but also in Switzerland. The latest plea agreement indicates that the defendant went to Switzerland having decided to "come clean" While there he consulted an attorney who told him not to worry about it, his name wouldn't be disclosed. After making this assurance, the defendant's Swiss attorney bribed a UBS official to keep the defendant's name off the list of UBS customer's already disclosed to the IRS. The defendant allegedly paid $40,000 to keep his name a secret.
This incident would seem to undercut UBS and Switzerland's argument that no Swiss laws have been broken and, therefore, UBS doesn't have to respond to the IRS's summons.
Friday, July 31, 2009
Tuesday, April 14, 2009
UBS Yacht Broker Client Pleads Guilty -
One of UBS's american clients, a Florida yacht broker, pleaded guilty to filing a false tax return today. According to government sources, the false tax return was filed on October 18, 2008, and failed to report his interest in a UBS account in Switzerland. He also failed to report the income he earned on his UBS bank accounts. The account was owned through a panamanian corporation.
That means it took the government less than six-months to investigate and prosecute the case -
It also appears that this case may be related to the criminal complaint filed a couple of weeks ago against the Florida accounant (see prior posts) many of whose clients were in the yacht brokerage business.
Wednesday, April 8, 2009
Federal Prosecution of UBS Client - Update
The Florida accountant who last week was charged with filing a false federal income tax return because he failed to disclosed his multimillion dollar account at UBS has been released from jail on a $12 million bond.
Tuesday, April 7, 2009
Innocent Spouse Reg. Invalidated
The Tax Court has invalidated Reg. §1.6015-5(b)(1), which imposed a two year period to apply for Code Sec. 6015(f) innocent spouse equitable relief following commencement of collection action (Lantz 132 TC No. 8).
Monday, April 6, 2009
Is UBS Deferred Prosecution Agreement Paying Off?
On April 2, the DOJ announced that they had charged a Boca Raton, Fla, accountant with filing a false income tax return because he failed to disclose his ownership of a foreign financial account at, you guessed it, UBS. Coincidentally, he also failed to report the income he earned on the account.
The accountant set up his account in Switzerland in the name of a nominee British Virgin Islands corporation. This appears to be the standard ploy UBS used to avoid having to disclose accounts owned by American citizens. UBS bankers, operating in the U.S. apparently told customers to set up entities in offshore jurisdictions and transfer the money to UBS from those offshore accounts. In this way UBS could claim not to know that the offshore accounts were really owned by U.S. citizens and could avoid disclosing the accounts to the IRS.
UBS has admitted that it conspired to defraud the U.S. and agreed to cooperate with the ongoing criminal investigation but to date has disclosed only a few of its U.S. customers who participated in the scheme. UBS also agreed to pay a $780 million fine.
It looks like the U.S. is really serious about cracking down on Americans who hide their money abroad.
The accountant set up his account in Switzerland in the name of a nominee British Virgin Islands corporation. This appears to be the standard ploy UBS used to avoid having to disclose accounts owned by American citizens. UBS bankers, operating in the U.S. apparently told customers to set up entities in offshore jurisdictions and transfer the money to UBS from those offshore accounts. In this way UBS could claim not to know that the offshore accounts were really owned by U.S. citizens and could avoid disclosing the accounts to the IRS.
UBS has admitted that it conspired to defraud the U.S. and agreed to cooperate with the ongoing criminal investigation but to date has disclosed only a few of its U.S. customers who participated in the scheme. UBS also agreed to pay a $780 million fine.
It looks like the U.S. is really serious about cracking down on Americans who hide their money abroad.
Tuesday, March 31, 2009
Related-Party 1031 Using QI KO'd
In only the second Tax Court decision to interpret the related party rules for like-kind exchanges using a qualified intermediary (QI), an exchange was deemed to have been structured to avoid the related party rules, and to have tax avoidance as one of its principal purposes (Ocmulgee Fileds v. Comm'r, 132 T.C. No. 6 (March 31, 2009)).
In Ocmulgee, a Georgia corporation owned several shopping centers and office buildings; it arranged to sell one low-basis appreciated shopping center to an unrelated party. The corporation intended to carry out the transaction as a like-kind exchange. It began hunting for sutiable replacement property, but was unable to locate an acceptable replacement other than a parcel (the "replacement property") which the corporation had previosuly sold to a related party (an LLC). The replacement property was part of three contiguous parcels; the corporation already owned the other two. Perhaps not coincidentally, the LLC had a relatively high basis in the replacement property.
To carry out the transaction, the corporation transferred the shopping center to a QI, which sold it, using the proceeds to purchase the replacement property from the LLC. The LLC reported the disposition of the replacement property as a sale, paying tax on the gain. The QI then transferred the replacement property to the corporation. Functionally this was no different from the related parties swapping properties, followed by the LLC immediately selling the property it received in the exchange. Had the transaction been structured without the use of a QI, it would have run afoul of Code Sec. 1031(f)(1).
Although this is not the first time a taxpayer has attempted to use a QI to in essence swap low basis property (“relinquished property”) for high basis property (“replacement property”) with a related party (see Teruya Brothers et. al. v. Comm’r, 124 TC 45 (2005)), what made this case interesting was that the taxpayer argued that there were important non-tax considerations for the exchange. This included the seemingly logical desire to reunite ownership of the replacement property with the two adjacent parcels the corporation already owned. Moreover, the corporation offered proof that an exchange with a related party didn't drive the transaction; the corporation intended to dispose of the shopping center and find suitable replacement property from an unrelated third party. It only entered into an exchange with the LLC when appropriate replacement property could not be located.
While the Tax Court questioned the factual and logical integrity of some of the corporation’s arguments, the following language from the decision confirms that even being able to prove an independent business motive is inadequate to circumvent Code Sec. 1031 (f)(2) and (4) when a principal purpose is tax avoidance:
“ [E]ven had petitioner shown a legitimate business purpose for the acquisition of the replacement property], that would not necessarily preclude a finding that either the deemed exchange of [the relinquished property] for the [replacement property] or [the related party’s] deemed sale of [the relinquished property] had as a principal purpose the avoidance of Federal income tax."
The language shows that the standard is “a” principal purpose, not “the” principal purpose. When a taxpayer has dual motives or objectives, any one of which is tax avoidance, the like-kind related party rules will be invoked, and use of a QI will not cure the problem.
As to the issue of intent at the time that an agreement is reached to dispose of the relinquished property, Ocmulgee provides a judicial explication of the analysis in Letter Ruling 9748006, issued in 1997. In the PLR the Service concluded that not having an intent to engage in a related-party exchange from the outset did not negate the transaction from being deemed to have tax avoidance as a principal purpose; the use of a QI in the PLR, as in Ocmulgee and Teruya, failed to save the day.
In Ocmulgee, a Georgia corporation owned several shopping centers and office buildings; it arranged to sell one low-basis appreciated shopping center to an unrelated party. The corporation intended to carry out the transaction as a like-kind exchange. It began hunting for sutiable replacement property, but was unable to locate an acceptable replacement other than a parcel (the "replacement property") which the corporation had previosuly sold to a related party (an LLC). The replacement property was part of three contiguous parcels; the corporation already owned the other two. Perhaps not coincidentally, the LLC had a relatively high basis in the replacement property.
To carry out the transaction, the corporation transferred the shopping center to a QI, which sold it, using the proceeds to purchase the replacement property from the LLC. The LLC reported the disposition of the replacement property as a sale, paying tax on the gain. The QI then transferred the replacement property to the corporation. Functionally this was no different from the related parties swapping properties, followed by the LLC immediately selling the property it received in the exchange. Had the transaction been structured without the use of a QI, it would have run afoul of Code Sec. 1031(f)(1).
Although this is not the first time a taxpayer has attempted to use a QI to in essence swap low basis property (“relinquished property”) for high basis property (“replacement property”) with a related party (see Teruya Brothers et. al. v. Comm’r, 124 TC 45 (2005)), what made this case interesting was that the taxpayer argued that there were important non-tax considerations for the exchange. This included the seemingly logical desire to reunite ownership of the replacement property with the two adjacent parcels the corporation already owned. Moreover, the corporation offered proof that an exchange with a related party didn't drive the transaction; the corporation intended to dispose of the shopping center and find suitable replacement property from an unrelated third party. It only entered into an exchange with the LLC when appropriate replacement property could not be located.
While the Tax Court questioned the factual and logical integrity of some of the corporation’s arguments, the following language from the decision confirms that even being able to prove an independent business motive is inadequate to circumvent Code Sec. 1031 (f)(2) and (4) when a principal purpose is tax avoidance:
“ [E]ven had petitioner shown a legitimate business purpose for the acquisition of the replacement property], that would not necessarily preclude a finding that either the deemed exchange of [the relinquished property] for the [replacement property] or [the related party’s] deemed sale of [the relinquished property] had as a principal purpose the avoidance of Federal income tax."
The language shows that the standard is “a” principal purpose, not “the” principal purpose. When a taxpayer has dual motives or objectives, any one of which is tax avoidance, the like-kind related party rules will be invoked, and use of a QI will not cure the problem.
As to the issue of intent at the time that an agreement is reached to dispose of the relinquished property, Ocmulgee provides a judicial explication of the analysis in Letter Ruling 9748006, issued in 1997. In the PLR the Service concluded that not having an intent to engage in a related-party exchange from the outset did not negate the transaction from being deemed to have tax avoidance as a principal purpose; the use of a QI in the PLR, as in Ocmulgee and Teruya, failed to save the day.
Thursday, March 26, 2009
Is the First Circuit Backing Off its Taxpayer-Friendly Stance
Workpapers Privileged Ren't They–
Back in January, the First Circuit Court of Appeals dealt the IRS a blow when it decided that Textron did not have to disclose documents it used to calculate its tax reserve. Now, the Appeals Court has agreed to rehear the issue.
The IRS had subpoenaed the documents because it discovered that Textron had participated in several Sale in/Lease out (SILO) transactions. The documents listed the various controversial positions that the company had taken on its tax returns and calculated the amount of additional tax that would result if the positions were disallowed after an audit and/or litigation. The documents also rated the different positions’ likelihood of success (that would tell a litigator which positions to give up on and which positions to hold on to when negotiating a settlement).
Despite establishing its case for enforcing the summonses, the IRS was denied access to the corporation's tax accrual work papers because they were protected by the work product privilege. The First Circuit concluded that documents prepared for alternative dispute resolution purposes (such as an audit or administrative appeal) could qualify for the work product privilege because they were prepared “because of litigation” and the company’s use of the documents for other purposes did not vitiate the privilege. However, since the company had shown the documents to its outside auditor, the case was remanded to see if the auditor’s work papers could be obtained and if those documents would disclose the company’s tax accrual positions.
The District Court had found that disclosing the documents to an outside auditor did not vitiate the privilege either, since it did not make their disclosure to the IRS more likely. However, some would argue that any disclosure would vitiate the privilege – More to come-
Back in January, the First Circuit Court of Appeals dealt the IRS a blow when it decided that Textron did not have to disclose documents it used to calculate its tax reserve. Now, the Appeals Court has agreed to rehear the issue.
The IRS had subpoenaed the documents because it discovered that Textron had participated in several Sale in/Lease out (SILO) transactions. The documents listed the various controversial positions that the company had taken on its tax returns and calculated the amount of additional tax that would result if the positions were disallowed after an audit and/or litigation. The documents also rated the different positions’ likelihood of success (that would tell a litigator which positions to give up on and which positions to hold on to when negotiating a settlement).
Despite establishing its case for enforcing the summonses, the IRS was denied access to the corporation's tax accrual work papers because they were protected by the work product privilege. The First Circuit concluded that documents prepared for alternative dispute resolution purposes (such as an audit or administrative appeal) could qualify for the work product privilege because they were prepared “because of litigation” and the company’s use of the documents for other purposes did not vitiate the privilege. However, since the company had shown the documents to its outside auditor, the case was remanded to see if the auditor’s work papers could be obtained and if those documents would disclose the company’s tax accrual positions.
The District Court had found that disclosing the documents to an outside auditor did not vitiate the privilege either, since it did not make their disclosure to the IRS more likely. However, some would argue that any disclosure would vitiate the privilege – More to come-
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