More on UBS: DOJ memo in favor of summons enforcement

The pending summons case in Southern District of Florida has taken another step forward this week.  The DOJ has asked for documents identifying the US taxpayers that have held "undeclared" accounts at UBS in Switzerland between 2002 and 2007--i.e., accounts over which U.S. taxpayers had authority and for whom UBS did not posses an appropriate FormW-9 and did not file accurate Forms 1099.   The government thinks there are 52,000 such accounts.  When Switzerland tentatively agreed to a new tax treaty that apparently calls for somewhat improved information exchange, some speculated that the Department of Justice might settle its summons case without pursuing the additional 52,000 account names.  That speculation has been proven wrong, since DOJ has now filed its memorandum in the case calling for enforcement.  Memorandum of Law in support of Petition to Enforce 'John Doe' Summons, DOJ, June 30, 2009 (on BNA--not yet available on Pacer).

The government presents as key facts that it is investigating non-complying US taxpayers, that UBS violated the law and helped US taxpayers evade their taxes (--i.e., committed and facilitated tax evasion, knowingly aiding US customers in structuring accounts to avoid disclosure and to evade US taxes, knowing done within the US and therefore knowingly having exposed UBS to US Jurisdiction, keeping hidden a profitable business with compensation practices that encouraged the brokers' illegal conduct in the US, and regular travel to and from the US to conduct business, using stealth), and that the US-Swiss tax treaty doesn't provide an avenue for the IRS to obtain the documents sought.

Tidbits of interesting facts here.

• in 2004, a training session for brokers admitted that the cross-border broker services could trigger long-arm jurisdiction rules.  As far back as 1999, UBS's private banking department in New York acknowledged the risk that UBS's unlicensed brokerage services to US customers was subject to US jurisdiction.
• 45-60 UBS brokers traveled 2-3 times a year to the US , for 1-3 weeks each trip, to meet with 3-5 clients daily, resulting in about 3800 client visits in 2004.  They used encrypted laptops to hide client information and claimed the US trips were pleasure and not business to fool US authorities.
• A form letter used with the US clients originally stated that "I would like to avoid disclosure of my identity to the US Internal Revenue Serivce under the new tax regulations" but was changed because clients thought it amounted to an admission of tax evasion.
• UBS referred clients to accommodating lawyers who would help them form offshore companies to avoid securities investment restrictions that UBS was supposed to enforce under the QI agreement.  UBS selected these companies after a competitive presentation "on the structures/vehicles that you recommend to U.S. and Canadian clients who do not appear to declare income/capital gains to their respective tax authorities."

The DOJ argues that the IRS has broad summons authority and has proven its prima facie case.  International comity favors enforcement, esepcially given the importance to the investigation of the documents, the degree of specificity, the origination of information, the lack of alternative means, and the extent to which noncompliance would undermine important US interests.  It claims that the comity arguments raised in favor of UBS lack merit--enforcement won't implicate decisions reflected in the tax treaty, US banking privacy interests don't weight against enforcement, and the "revenue rule"  (that one country will not collect taxes for another country) isn't at issue here and doesn't apply.  The treaty doesn't preempt the statutory authority, since Swiss bank secrecy law can't prevent the US from investigating US citizens whose violations of US law were aided by a Swiss bank doing business openly within the United States.  Nor does the Qualified Intermediary Agreement with UBS, which "UBS secretly and consistently violated with impunity".  Case law that supports enforcement is not distinguishable as UBS claims, and there is no good faith argument favoring UBS.

Here is an excerpt of the argument against UBS's claim that the treaty information exchange is the exclusive means by which the IRS may obtain information in UBS's records.

In essence, UBS argues that it may come into the United States, violate the laws of the United States with impunity for seven years, and help thousands of its U.S. customers violate the laws of the United States--evading hundreds of millions of dollars in U.S. income taxes in the process.  And as long as it maintains the records of its wrongdoing--and the identities of its lawbreaking U.S. customers--in Switzerland, UBS argues that the IRS is powerless to obtain those records.  This proposition not only defies the law, it defies logic and common sense as well.

As noted above, Congress gave the IRS very broad authority to obtain information through its summons power.  The treaty at issue here does not abrogate tht power, either explicitly or implicitly.  Accordingly, no court has ever ruled that the IRS may not use its summons power to obtain information that it might be able to request under this treaty, or any other similar tax treaty.  Nor should this Court.

...It is well settled that a treaty can only preempt inconsistent U.S. legislation if the treaty is clearly inconsistent with that legislation and, in entering the treaty, the United States clearly intended the treaty to preempt the legislation.

As for UBS's good faith argument, the DOJ memorandum makes short shrift of it. 

The notion that UBS has always acted in 'good faith' to comply with U.S. law--and to help its customers comply with their obligations under U.S. law--bears all the hallmarks of an eleventh-hour confession, made in the hopes the sinner will be absolved from the full consequences of his wrongdoing.

***

In the real world, good faith demands full, not partial, compliance with our obligations.  In the real world, compliance comes before one is caught.

The memo  lists the activities of the bank in illegally trolling for US clients and the fact that it did nothing to stop the practices until it had been contacted by the DOJ about the illegal business.

Comments

[Asher Rubinstein]

"The DOJ has asked for documents identifying the US taxpayers that have held "undeclared" accounts at UBS in Switzerland between 2002 and 2007--i.e., accounts over which U.S. taxpayers had authority and for whom UBS did not posses an appropriate FormW-9 and did not file accurate Forms 1099."

Are you sure that UBS would have had to issue 1099s to US clients? Would the 1099 requirement apply to a foreign account at a foreign bank?

UBS clearly has a tremendous mountain to overcome. It appears that both the law and equity may be against UBS here. My feeling is that UBS will be forced to settle, law and equity aside, because (a) it would risk losing its valuable banking license in the US, (b) it has too many assets within the US, subject to US jurisdiction and potential attachment, and (c) should a and b occur, the effects will be felt not just at UBS but throughout the entire Swiss economy.

[LindaMBeale]

I am of course reporting on the government's arguments in its memorandum asking for enforcement of the summons, and the government memorandum also argues that UBS breached its QI agreement.

UBS clearly had 1099 reporting and withholding responsibility under the QI agreement. The QI role permits banks to act as middlemen to ensure proper reporting and withholding on accounts they establish, so that other agents paying amounts to the QI bank need not have specific information on the holders of the accounts. These rules are very detailed in terms of their requirements. For more on the QI responsibilities, see this IRS link: http://www.irs.gov/businesses/international/article/0,,id=102314,00.html

[Laurent GUERBY]

(off-topic of this post)

The Tax Justice Network calls for people to join their expert team on transfer pricing:

http://taxjustice.blogspot.com/2009/06/tjns-new-transfer-pricing-project.html

Sorry if you already had the information, I noticed the Tax Justice Network is not on your blogroll.

[LindaMBeale]

Thanks, Laurent. I should have added a link earlier and will correct that now!

[lotro gold]

Thank you very much. I am wonderring if I can share your article in the bookmarks of society,Then more friends can talk about this problem.

[LindaMBeale]

Lotro--feel free to link to this, with an excerpt.