Three Swiss Bankers Charged for Conspiracy to Defraud the United States by Helping Americans Keep Secret Foreign Accounts

On January 3, 2012, a grand jury sitting in the Southern District of New York returned an indictment charging Michael Berlinka, Urs Frei, and Roger Keller with conspiracy to defraud the United States in violation of 18 U.S.C. section 371.  The indictment alleges that the three Defendants worked at a Swiss Bank that actively solicited American taxpayers who were fleeing UBS in the wake of the 2008 Department of Justice investigation and deferred prosecution agreement against UBS.

The indictment alleges that the Defendants sought to take advantage of the UBS investigation by offering to allow American taxpayers to open bank accounts that would not be disclosed to the IRS.  American taxpayers maintaining financial accounts abroad have an obligation under Title 31 of the United States Code to file Form TD90-22.1 (Report of Foreign Bank and Financial Accounts (“FBAR”)), available here, with the United States Treasury Department.  The willful failure to file an FBAR form is a felony.  The Defendants, according to the indictment, gave as part of their sales pitch to prospective clients assurances that the bank accounts would not be disclosed because the bank had a long tradition of bank secrecy and did not have offices outside of Switzerland.   The Defendants opened accounts at the bank in the name of sham corporations and foundations in jurisdictions that the IRS considers to be tax havens.

In order to ensure that the accounts would remain secret, account holders names were not used, statements  were not mailed to the United States, and emails were sent from personal accounts instead of business email accounts, all with the aim of reducing the risk of detection by U.S. law enforcement.  To that end, according to the indictment, the Defendants used a third-party website called “SwissPrivateBank.com” to solicit new business from American taxpayers.  The indictment goes on to detail, without naming, various individuals who had accounts opened by the Defendants with the aim of avoiding IRS detection and to avoid income tax obligations.     

A full copy of the indictment is available here. 

The attorneys at Fuerst Ittleman have experience with IRS and Department of Justice investigations of U.S. taxpayers who have unreported income and undeclared foreign bank accounts.  You can reach an attorney by emailing us at:  contact@fidjlaw.com, or by calling us at  305.350.5690.

U.S. Tax Court Rules Against Taxpayer Who Received Multiple Tax Opinions

In Gustashaw v. Comm’r, T.C. Memo 2011-195 (T.C. 2011), the Tax Court held that the taxpayers who conceded deficiencies in tax attributable to  participation in a Custom Adjustable Rate Debt Structure (CARDS) transaction are liable for accuracy-related penalties for gross valuation misstatements or, for 1 year, negligence, on account of resulting underpayments in tax.

The relevant facts are fairly straightforward. The Taxpayer exercised certain stock options, sold the stock and realized approximately $8M of income. The Taxpayers financial planner knew about the CARDS transaction, and the taxpayer consulted with a CPA  who promoted and arranged the CARDS transaction.  However, the taxpayers return preparer refused to prepare the income tax return without a tax opinion letter supporting the CARDS transaction and the related loss used to offset capital gains on the sale of the stock (the $8M gain).

The CPA provided a model tax opinion letter to the taxpayer from a major law firm.  The opinion letter  concluded that CARDS  transaction would more likely than not withstand an Internal Revenue Service examination and would protect the Taxpayer from substantial tax penalties if the transaction was ultimately disregarded for Federal tax purposes.  The Taxpayer subsequently received a formal tax opinion letter from the same major law firm, which arrived at the same "more likely than not" conclusions as the model tax opinion letter.

The Tax Court, in addressing the Taxpayers penalty defense based on reasonable cause, found that  “[the Taxpayers] reliance on  [the law firms] tax opinion letter was unreasonable because they should have known about the law firm’s inherent conflict of interest. [The CPA], the promoter of CARDS, both referred [the law firm] to [the Taxpayer] and supplied him with the law firm’s model tax opinion letter, which described a CARDS transaction that was not unique to [the Taxpayers] situation. [The Taxpayer] proffered no evidence that [the Taxpayer] had an engagement letter with [the law firm] spoke to any attorney at the law firm, or directly compensated [the law firm] for either tax opinion letter. On the facts presented, [the Taxpayer] could not have reasonably believed that [the law firm] was an independent adviser.”

A full copy of the opinion can be found here.

The teaching of Gustashaw is that a tax opinion must be tailored to the facts and circumstances of each taxpayer and “model” opinions can be problematic.  Likewise, penalty defenses based on tax opinions must be well developed and factually based in order to be successful in Tax Court litigation.

The attorneys at Fuerst Ittleman have experience in providing tax opinions and defending against penalties based on tax opinion reliance.  You can contact an attorney by emailing us at contact@fidjlaw.com.

U.S. Department of Justice indicts taxpayer for FBAR violation and tax evasion

On November 17, 2011, a grand jury in the Northern District of California returned an indictment against Ashvin Desai alleging violation of 26 U.S.C. sections 7201 (tax evasion) and 7206(2) (aiding in the preparation of a false tax return); 31 U.S.C. sections 5314 and 5322 (failure to file report of foreign bank and financial accounts). A copy of the indictment can be found here.

The indictment against Mr. Desai provides as follows:

“[The Defendant] who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his wife, which was filed with the Internal Revenue Service. In that false income tax return, it was stated that their joint taxable income for the calendar year 2008 was $69,917.84 and that the amount of tax due and owing thereon was $6,156.88. In fact, as DESAI then and there knew, their joint taxable income for the calendar year was in excess of the amount stated on the return, and, upon the additional taxable income an additional tax was due and owing to the United States of America, and he had an interest in, and signature or other authority over, bank accounts located in India during calendar year 2008.”

The significance of this criminal indictment is that the IRSs and the U.S. Department of Justices investigation of those holding unreported foreign bank accounts at HSBC have now started to produce tax evasion and FBAR failure to file cases against U.S. citizens who have attempted to use HSBC to avoid paying taxes to the U.S. government. This appears to be the first of many such cases as Title 31 violations are the criminal charge of the moment.

The attorneys at Fuerst Ittleman have experience defending against IRS investigations/audits and Department of Justice investigations and criminal prosecutions for those with unreported foreign bank accounts and unreported/under-reported income. You can reach an attorney by emailing us at: contact@fidjlaw.com.

Absolute Poker Co-Owner Pleads Guilty To Conspiracy To Violate UIGEA, Wire Fraud, And Mail Fraud In Connection With Internet Poker Site Operation

On December 20, 2011, Brent Beckley, co-owner of Absolute Poker, an internet poker website, pled guilty to conspiracy to violate the Unlawful Internet Gambling Enforcement Act (“UIGEA”), mail fraud, and wire fraud in connection to his operation of the internet poker website. In pleading guilty before Magistrate Judge Ronald Ellis of the United States District Court for the Southern District of New York, Beckley admitted his wrongdoing: “I knew that it was illegal to accept credit cards from players to gamble on the internet.”

While internet pay-for-play poker remains very popular, generating $5.1 billion in revenues last year alone, Beckley’s prosecution stems from a larger effort by Federal prosecutors to target internet gambling websites for violations of federal law. Although the law does not specifically address internet pay for play poker sites, UIGEA defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. However, since UIGEA’s passage, debate has raged over whether pay for play poker actually violates federal law with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

As we previously reported, on April 15, 2011, federal prosecutors indicted eleven people, including Mr. Beckley, in connection with their involvement in running internet poker websites PokerStars, Full Tilt Poker, and Absolute Poker. Prosecutors alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by using third party payment processors to make funds appear as payments for goods and services to non-existent online merchants and fake companies.

Beckley is scheduled to be sentenced on April 19, 2012 and is expected to receive between 12 and 18 months imprisonment as punishment. If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Third Circuit Vacates Sentence of John M. Crim in Commonwealth Trust Company Tax Shelter Criminal Tax Case

On December 12, 2011, the Third Circuit Court of Appeals entered an opinion and order in the consolidated case of United States of America, v. John M. Crim, et al.  case numbers 08-3028, 08-3931, 08-4077, and 08-4316.  The consolidated cases involved the appeals from the convictions obtained by the United States against  John M. Crim, John Brownlee, Constance Taylor, and Anthony Trimble.  John M. Crim was represented on appeal by Fuerst Ittlemans Senior Tax Associate Joseph A. DiRuzzo, III. Mr. Crim was not represented at trial by Mr. DiRuzzo.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTCs celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTCs advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crims case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuits Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fidjlaw.com.

8th Circuit rules in favor of the Government of the U.S. Virgin Islands in Coffey v. Commissioner

Today, the 8th Circuit Court of Appeals reversed and remanded, in a published and precedential opinion, a decision of the Tax Court in Coffey v. Commissioner, (8th Cir., case # 11-1362).  The 8th Circuit examined, similar to the Third Circuit in Appleton v. Commissioner, 430 Fed. Appx. 135 (3d Cir. 2011)(unpublished) (Appleton II), a decision of the Tax Court which incorporated by reference the holding and analysis of Appleton v. Commissioner, 135 T.C. 461 (2010) (Appleton I).

In Appleton I, the Tax Court held that the Government of the U.S. Virgin Islands lacked the ability to intervene under Rule 24 of the Federal Rules of Civil Procedure, made applicable to the Tax Court via Tax Court Rule 1.  The Government of the U.S. Virgin Islands sought to intervene either as of right (Rule 24(a)(2)) or permissively (Rule 24(b)(2)).  The Tax Court ruled in Appleton I that the Government of the U.S. Virgin Islands could not show that it had “neither demonstrated that its participation as a party is necessary to advocate for an unaddressed issue nor shown that its intervention will not delay resolution of this matter” and further stated that the participation of the Government of the U.S. Virgin Islands in the Tax Court litigation “could result in trial complications as well as delay the resolution of the issue in which movant asserts an interest.”

However, Judge Benton, in writing for the 8th Circuit, noted that neither of these concerns comported with the legal standard for Rule 24 intervention.  The 8th Circuit agreed with the 3rd Circuit that the appropriate standard is whether there is “undue delay” or “prejudice that adjudication of the original parties rights.”  Based on this erroneous view of the law, the Tax Court abused its discretion by denying the Government of the U.S. Virgin Islands intervention.

The ramifications of this ruling is that the pending cases before the 11th Circuit (Cooper v. Commissioner (11-10617); McGrogan v. Commissioner (11-10618); Huff v. Commissioner (11-10608)) and the 4th Circuit (McHenry v. Commissioner (11-1239)) are more likely to have an outcome in favor of the Government of the U.S. Virgin Islands.  The 4th Circuit has set oral argument in McHenry v. Commissioner for January 25, 2012, in Richmond, Virginia. Additionally, the outcomes in the pending motions to intervene in the Tax Court (Teffeau v. Commissioner (27904-10)) are more likely to be ruled in favor of the Government of the U.S. Virgin Islands.

A full copy of the 8th Circuits opinion can be found here.

The attorneys at Fuerst Ittleman have extensive experience litigating against the U.S. Government in tax cases in at both the trial and appellate court levels.  Likewise, Fuerst Ittlemans attorneys have extensive experience litigating USVI residency cases and cases against the USVI Government, and Joseph DiRuzzo of Fuerst Ittleman is licensed to practice in the USVI.  You can contact us by emailing us at contact@fidjlaw.com, or by calling us at 305.350.5690.

Two Attorneys Arrested and Charged with Structuring Transactions to Avoid Bank Secrecy Act Reporting Requirements

On November 4, 2011, two New Jersey attorneys, Goldie Sommer and Edward Engelhart, were charged with conspiring to violate and violating the Bank Secrecy Acts (“BSA”) by “structuring” attorney trust account deposits in order to evade BSA reporting requirements. A copy of the criminal complaint can be read here.

Generally speaking, the BSA, 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to 31 C.F.R. § 1010.313, “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

According to the complaint, between August 13, 2010 and September 22, 2010, Sommer and Engelhart structured a series of deposits into their attorney trust account totaling $118,000. The government alleged that most of these deposits included even dollar amounts each under $10,000 and occurred on the same day or within a short period of time. However, when taken in the aggregate, the deposits should each have exceeded the $10,000 threshold, thus requiring the filing of a report. Additionally, the government alleged that during the same period of time similarly structured deposits were placed into the personal accounts of Sommer, Engelhart and “other individuals associated with [them].” Checks were then drawn from the personal accounts and placed in the defendants trust account. In total, authorities allege that $354,000 was structured into the trust account.

The complaint further alleged that during a June 16, 2011 meeting with the IRS both Sommer and Engelhart admitted that they had agreed to structure the deposits into the trust account. Additionally, the complaint alleges that Sommer and Engelhart admitted to receiving the currency from a client of their firm for the purchase of real estate and “inferred that the client wished that the funds would be deposited into a bank without the filing of any forms with the [IRS].” If convicted of structuring, Sommer and Engelhart can face up to five years in prison, a $250,000 fine and forfeiture of the structured funds.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com

IRS’s Voluntary Classification Settlement Program Ignores the Penalty Free Relief Available to Employers under Section 530 of the Revenue Act of 1978

The (VCSP) provides employers partial relief from past federal employment tax obligations related to workers voluntarily reclassified from independent contractors to employees. In its announcement of the program, the IRS stated that the goal of the VCSP is to increase tax compliance and reduce the burden for employers. 

Notably, the burden that is imposed upon those employers participating in the VCSP is far more than what was required by Congress when it enacted Section 530 of the Revenue Act of 1978. 

Under the VCSP, in exchange for being alleviated from interest and penalties on the tax liability attributed to the misclassification, employers will pay a penalty equal to 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.  Although participating employers will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers, they will, however, be subject to a six-year statute of limitations for the first three years under the program instead of the three-year payroll tax statute of limitations.

In discussing the background of worker misclassification in its Announcement, the IRS extensively compared relief obtained under the VCSP to that obtained in the current Classification Settlement Program (CSP). As discussed by the IRS, the CSP allows employers and tax examiners to resolve worker classification issues in the administrative process; however, the VCSP allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through administrative correction procedures applicable to employment taxes.

Significantly, however, the VCSP Announcement as well as the VCSP Frequently Asked Questions fail to discuss an integral provision in the background of worker misclassification, Congresss safe harbor rule, section 530 of the Revenue Act of 1978, which entitles certain employers to reclassify workers as employees without being imposed a penalty. 

As discussed by Congress:

Section 530 of the Revenue Act of 1997 is a safe harbor for an employer who owes FICA and FUTA taxes resulting from the improper classification of employee as independent contractor. Thus, if a worker employee is misclassified as an independent contractor under the common-law analysis, the employer will nonetheless escape employment tax liability if the conditions of section 530 are met.   Section 530 shields a taxpayer who pays workers for services from employment tax liability if the employer has consistently treated the worker as “other-than-employees” unless the employer had no reasonable basis for doing so. Section 530 should be interpreted liberally in favor of the employer.

Present Law and Background Relating to Worker Classification for Federal Tax Purposes. Page 6. JCX-27-07.Joint Committee on Taxation. (May 7, 2007)

Section 530(a) provides in pertinent:

  1. In general.

    2. – If “

    • for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and
    • in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee,

    then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

  2. Statutory standards providing one method of satisfying the requirements of paragraph (1). For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following:
    • judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;
    • a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or
    •  long-standing recognized practice of a significant segment of the industry in which such individual was engaged.
  3. Consistency required in the case of prior tax treatment.- Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977 . . .  

    4. Similarly, in order to be eligible for the VCSP, employers must meet the following criteria:

    • Employer must have consistently treated the workers in the past as nonemployees;
    • Employer must have filed all required Forms 1099 for the workers for the previous three years; and
    • Employer must not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

By failing to address section 530 in its discussions of the VCSP, the IRS is guiding Taxpayers into a voluntary penalty regime they may otherwise not be subject to.  Because section 530 was never codified as part of the Internal Revenue Code, most Taxpayers are oblivious of its existence. The IRS is taking advantage of this unawareness by marketing the VCSP as if it is the Taxpayers most favorable outcome.  Notably, however, when given a choice under the two schemes, it is inconceivable why Taxpayers would choose to be penalized.   

Section 530 relief was recently discussed on November 17, 2011, during the American Bar Associations (ABA) 22nd Annual Philadelphia Tax Conference.  According to these discussions, which included Ligeia Donis, Assistant Branch Chief in the IRS Office of Chief Counsel, Tax Exempt and Government Entities and numerous tax practitioners, the benefit of VCSP over section 530 relief is the certainty it provides.  According to one practitioner, “although an employer may believe it has an ironclad case for section 530 relief, there is always the possibility the IRS will disagree.”  

Remarkably, this discussion of section 530 is contrary to Congresss Joint Committee on Taxation, which expressly stated that “section 530 should be liberally construed in favor of the Employer.”  Present Law and Background Relating to Worker Classification for Federal Tax Purposes. Page 6. JCX-27-07.Joint Committee on Taxation. (May 7, 2007).  Further, section 530(e)(4) expressly includes the Taxpayers liberal burden of proof when requesting section 530 relief:

(A) IN GENERAL

-If-

  1. A taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an employee for purposes of this section, and
  2. The taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or his delegate,

    then the burden of proof with respect to such treatment shall be on the Secretary.

Although the IRS has provided Taxpayers with vast information regarding the VCSP, and similar programs such as CSP, it is silent on the penalty-less framework of section 530.   Unaware of other alternatives, Taxpayers continue to apply to the VCSP and consequently, voluntarily agree to be penalized where it may not otherwise be necessary. 

If you have any questions regarding the Voluntary Classification Settlement Program, relief under section 530 of the Revenue Act of 1978, payroll taxes, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

© Copyright 2011, Fuerst Ittleman, P.L. All rights reserved.

Tax Court holds that use of foreign bank accounts provides basis for fraud exception to statute of limitations

In Browning v. Commr, T.C. Memo 2011-261, Judge Halpern in a 55 page opinion sustained most of the IRS assessments of additional tax, penalties and interest.

The facts are as follows:

In December 1995, Mr. Browning, the principal shareholder, president, and CEO of SBE, a Vermont-based manufacturing corporation, on the advice of its promoters and his own tax adviser, entered into an offshore employee leasing (OEL) arrangement whereby he agreed to lease his services to an Irish corporation that subleased his services to a U.S. employee leasing company that subleased his services back to SBE. During the audit years (1995-2000), in consideration of Mr. Brownings services, SBE paid the leasing company annual amounts equivalent to what SBE had paid Mr. Browning as wages in prior years. The leasing company paid a portion of those amounts to Mr. Browning, who reported those payments as wages. The leasing company remitted the balance after deducting certain amounts, including the payroll taxes owed with respect to its payments to Mr. Browning, to the Irish corporation for deposit in a deferred compensation or retirement account for Mr. Brownings benefit (the retirement account). The retirement account was opened in the name of a Bahamas subsidiary of the Irish corporation. Mr. Browning and his wife received and used, during 1998-2000, credit cards in the name of the Irish subsidiary. Money from Mr. Brownings retirement account funded the bank account used to pay the credit card charges, many of which Mr. Browning recognized were personal. During all of the audit years, Mr. Browning continued to represent himself to third parties as an employee and president of SBE, and he acted on behalf of SBE in the same manner as before adoption of the OEL arrangement. He also determined the amounts to be deposited in the retirement account and he effectively controlled the manner in which the assets in the account were invested. During 1998-2000, he exercised his unrestricted access to the funds in the account by means of the Bahamas bank credit cards.

Both the 3- and 6-year periods of limitations on assessment under I.R.C. sec. 6501(a) and (e) had expired before the IRS issued the notices of deficiency (the notices) to Mr. Browning. However, the IRS alleged that the notices were timely issued by reason of the application of I.R.C. sec. 6501(c), which permits assessment of tax at any time in the case of a false or fraudulent return. The IRS also alleged that, for all open audit years, Mr. Browning (1)underreported his income, (2) is liable for the I.R.C. sec. 6663 fraud penalty, and (3) alternatively, is liable for the I.R.C. sec. 6662 accuracy-related penalty.

The Tax Court held as follows:

1. For all audit years, Mr. Browning was in constructive receipt of (1) amounts equal to the excess of SBEs payments to the leasing company for his services on behalf of SBE over the sum of the amounts he reported as wages plus the employer portions of the Social Security and Medicare taxes that the leasing company paid with respect to those reported wages and (2) the capital gains and investment income generated by the assets in the retirement account.

2. Mr. Brownings 1998-2000 returns were fraudulent by reason of Mr. Brownings concealment of the Bahamas bank account and associated credit cards by means of which he had, and intended to exercise, his unrestricted access to the constructively received amounts described in holding 1.

3. Mr. Brownings 1995-97 returns were not fraudulent with the result that IRSs determinations and adjustments regarding those years are barred.

4. Mr. Browning is subject to the I.R.C. sec. 6663 fraud penalties for 1998-2000 with respect to all the constructively received amounts described in holding 1.

5. Finally, the I.R.C. sec. 6663 fraud penalties to Mr. Brownings total underpayments for 1998-2000, and the I.R.C. sec. 6662 accuracy-related penalties do not apply for those years.

The significance of this case is that for those taxpayers who may have used offshore (non-domestic) accounts, especially in tax haven jurisdictions (such as the Bahamas, the British Virgin Islands, the Cayman Islands, and Switzerland), the IRS may be able to avoid both the 3 year statute of limitations provision against assessment, and the extended 6 year statute of limitations provision against assessment for those that understated income by more than 25%, by asserting that the taxpayers use of the offshore bank accounts was fraudulent and, as a result, there is no statute of limitations provision protecting the taxpayers from additional tax, penalties, and interest.

The full opinion can be found here.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with the IRS for taxpayers with under-reported income and undeclared foreign bank accounts. The attorneys at Fuerst Ittleman likewise have experience litigating in both the U.S. Tax Court, the U.S. District Courts, and the U.S. Circuit Courts. You can contact an attorney by emailing us at: contact@fidjlaw.com

Congressmen Call For Investigation of Two U.S. Companies for Possible Syrian Sanctions Violations

On November 10, 2011 several U.S. Congressmen sent letters to the Departments of State and Commerce urging them to investigate two U.S. IT companies, NetApp, Inc. and Blue Coat Systems, Inc. (“Blue Coat”), for possible violations of U.S. trade sanctions against Syria. The alleged violations stem from the exporting or re-exporting of the companies technology for use in internet surveillance projects by the Syrian government.

Generally speaking, the sanctions program in place against Syria prohibits U.S. persons from engaging in transactions with the Government of Syria and separately prohibits the exportation, reexportation, sale, or supply, directly or indirectly, by a United States person, wherever located, of any services to Syria. More information regarding the sanctions against Syria can be found on the Office of Foreign Assets Controls (“OFAC”) website here.

According to a recent Bloomberg report, Area SpA, an Italian surveillance company, is working with the Syrian government to create an internet surveillance system designed to “intercept and catalog virtually every e-mail that flows through the country.” As part of this massive project, it is alleged that Area SpA is using NetApps hardware and software technology to create four petabytes of storage for archiving e-mails. (By comparison, a database with four petabytes of storage space can store more than 15 times the amount of data stored in the online archives of the Library of Congress.) Additionally, it is alleged that the Syrian government has been using Blue Coats technology to censor and filter website content within Syria.

NetApp and Blue Coat have come under criticism not only because their activities may violate the sanctions scheme in place against Syria, but also because of concerns that the purpose of the Syrian surveillance programs is to suppress activists and dissidents opposed to the totalitarian Assad regime. Since March of 2011, the Syrian government has engaged in a brutal crackdown of dissidents resulting in the deaths of more than 3,000 Syrian citizens.

Both companies have denied wrongdoing. NetApp has stated that it is not aware of any of its products being sold to Syria. However, a November 4, 2011 Bloomberg report reported that the NetApp structured its contract in a way to avoid direct dealing with Syria or Area SpA. According to the report, NetApps Italian subsidiary sold its products to a authorized vendor which then re-sold NetApps technology to Area SpA for use in the Syrian surveillance program. Blue Coat has also denied violating U.S. sanctions claiming its products were illegally transferred to the Syrian government. Blue Coat has launched an internal investigation to determine how its web filtering technology was transferred to Syria.

This situation provides an important reminder to businesses which engage in international trade. Because of the breadth and complexity of these regulatory schemes, although businesses may not directly engage in trade with Syria, they may still unknowingly violate OFAC sanctions because of the nature of their relationships with foreign businesses who do. Examples of this can be read in our previous reports here and here. If you have questions pertaining to the OFAC sanctions on trade with Syria, the BSA, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.