Zürcher Kantonalbank Agreed To Pay $98.5M For Aiding US Tax Avoidance

According to Law360, Swiss bank Zürcher Kantonalbank has agreed to pay $98.5 million after admitting to helping U.S. clients dodge taxes by letting them stash money in undeclared accounts that used code names and shell companies, Manhattan federal prosecutors announced on August 13, 2018.

ZKB will hand over the amount as part of a deferred prosecution agreement, which the bank reached after admitting to helping U.S. clients collectively avoid paying more than $39 million in U.S. taxes between 2002 and 2013, according to prosecutors. The bank would have been given more credit for cooperating with the government if it hadn’t dissuaded two indicted employees from reaching out to the U.S. Attorney’s Office, prosecutors said.

Those two bankers, Stephan Fellmann and Christof Reist, were originally indicted on felony charges and pled guilty to misdemeanor charges on August 13, 2018.

“The Substantial Financial Penalties Imposed on the Bank, and the Two Bankers’ Pleas, Should Make Clear That Helping US Taxpayers to Be Tax Evaders Will Not Be Tolerated,” Manhattan U.S. Attorney Geoffrey S. Berman said in a statement. 

If ZKB abides by the agreement, which includes a requirement to turn over information about the U.S. client accounts, the government said it will defer prosecution on the information for three years and then seek to dismiss the charges.

According to the prosecutors’ statement, ZKB helped U.S. clients dodge taxes by opening and maintaining undeclared accounts, including by allowing the clients to be identified by a code word instead of by name. The bank also allowed U.S. clients to maintain accounts held in the names of non-U.S. entities, some of which were sham structures existing solely to hide offshore assets, prosecutors said.

At ZKB’s “high-water mark” in 2008, the bank held approximately $794 million in assets relating to undeclared accounts held by U.S. clients, according to the statement.

ZKB’s external asset manager desk “treated UBS’ decision to stop accepting U.S. taxpayer-clients as a business opportunity, and actively sought to increase its U.S. taxpayer-client base,” according to the prosecutors’ statement.

In December 2012, three ZKB bankers: Fellmann, Reist and Otto Hüppi, were charged in a New York federal court with conspiracy to defraud the U.S. and the IRS for their role in ZKB’s conduct, according to prosecutors.

Fellmann, whose name is spelled “Fellman” in the case name and Reist are scheduled to be sentenced Nov. 30 and face up to one year in prison. Hüppi remains at large.

The case is USA v. Fellman et al., case number 1:12-cr-00962, in the U.S. District Court for the Southern District of New York.

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IRS Prop Regs on 20 % Deduction for Passthrough Businesses

The Internal Revenue Service issued proposed regulations on August 8, 2018 for a new provision allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income.

The new deduction, referred to as the Section 199A deduction or the deduction for qualified business income, was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains.


Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. Those limitations are fully described in the proposed regulations.

Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded.

In addition, Notice 2018-64, also issued on August 8, 2018, provides methods for calculating Form W-2 wages for purposes of the limitations on this deduction.

Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.

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IRS Win In Altera Cost-Sharing Row Withdrawn?

On July 24, 2018 we posted IRS Cost-Sharing Regulations Revived By Appeals Court where we discussed that the Ninth Circuit reversed a decision by the U.S. Tax Court that invalidated an Internal Revenue Service cost-sharing regulation in a dispute with an Intel Corp. subsidiary, saying the revenue agency did not exceed its authority in promulgating the rule.  In a 2-1 decision, the appeals court said the IRS is entitled to deference and was justified in issuing the rule under the Administrative Procedure Act, despite comments from the public that opposed the regulation.

The Tax Court had sided with Altera Corp., an Intel subsidiary, in the case in July 2015 after finding that the IRS had ignored significant evidence and public comments while issuing its rule requiring cost-sharing agreements between related parties to include the costs of stock-based compensation.

Now according to Law360 on August 7, 2018 the Ninth Circuit withdrew its July 24 decision against Intel Corp. subsidiary Altera, letting stand a U.S. Tax Court decision invalidating IRS regulations that require employee stock option expenses to be shared with foreign subsidiaries in cost-sharing arrangements.

The now-withdrawn Ninth Circuit opinion that went against Altera Corp., an Intel Corp. subsidiary, represented a rare win for the Internal Revenue Service in a transfer pricing case.

The ruling was also unusual in that one of the judges voting with the majority, Stephen Reinhardt, had died in March, months before the opinion was issued.

The now-withdrawn ruling said Judge Reinhardt had “fully participated” in the case and “formally concurred in the majority opinion” before his death.

The one-sentence order withdrawing the ruling stated that the majority and dissenting opinions “are hereby withdrawn to allow time for the reconstituted panel to confer on this appeal.”

The case is Altera Corp. and Subsidiaries v. Commissioner of Internal Revenue, case numbers 16-70496 and 16-70497, in the U.S. Court of Appeals for the Ninth Circuit.

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Court of Claims Rejects Colliot & Wadhan: Willful FBAR Penalty Not Limited to $100,000

On July 27, 2018 we posted 2nd Taxpayer Victory on a FBAR Penalty Case - FBAR Limited to $100M!  where we discussed US v. Dominique G. Colliot, case number 1:16-cv-01281, in the U.S. where a District Court for the Western District of Texas how that the maximum FBAR penalty was limited to $100,000 a year.

We also discussed that a second district court has determined that, despite a statutory change authorizing higher penalties, IRS couldn't impose penalties, for willfully failing to file a Report of Foreign Bank and Foreign Accounts (FBAR), in excess of the amounts provided in regs that were promulgated before the law change and that haven't been changed to reflect the increase in United States v. Wadhan, D. Colo. Dkt 17-CV-1287 Dkt Entry 5

Now on July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty. 

.
Congress’ Intent in Amending § 5321 The court stated that:

"In addition to the unambiguous language of the statute, Congress clearly stated its intent to raise
the maximum amount of FBAR penalties when it passed the AJCA in 2004. (emphasis added) ... “Congress believed that increasing the [previous law’s] penalty for willful non-compliance” would “improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005)."

The Reasoning in Colliot The court went on to state that:

"In Colliot, the district court held that Congress’ amendment to §5321 in the AJCA did not supersede the regulation promulgated under the statute before amendment. The district court reasoned: [The amendment] sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, §5321(a)(5) vests the Secretary of the Treasury with discretion to determine the
amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C). 2018 U.S. Dist. LEXIS 83159 at *5-6 (citations omitted).  

It is true that the statute vested the Treasury Secretary with discretion to determine a penalty’s amount. However, this statement mischaracterizes the language of § 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004. Crucially, the amended statute dictates that the usual maximum penalty “shall be increased” tothe greater of $100,000 or 50 percent of the account. § 5321(a)(5)(C)(i) (emphasis added). Congress used the imperative, “shall,” rather than the permissive, “may.”

Therefore, the amendment did not merely allow for a higher “ceiling” on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion. Rather, Congress raised the new ceiling" itself, and in so doing, removed the Treasury Secretary’s discretion to regulate any other maximum."

 
Finally, the court ruled that:

There is no question whether Congress can supersede regulations, only whether Congress did supersede the regulation in this instance... The regulation in question, 31 C.F.R. 1010.820, which guided enforcement of § 5321 before its 2004 amendment, sets the maximum penalty for a willful violation of § 5314 to $100,000.00. However, because § 5321(a)(5)(C)(i) mandates that the maximum penalty be set to the greater of $100,000.00 or 50 percent of the balance of the account, the
regulation is no longer consistent with the amended statute. Therefore, 31 C.F.R. 1010.820
is no longer valid.  
In conclusion, the court said that "although IRS believes that it is empowered by 31 U.S.C. 5321 to act, it is not. It is empowered by the Secretary who has discretion to determine what penalties are imposed. 1010.820 remains in effect until amended or repealed." 

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IRS & Treasury Issue Proposed Regulations Implementing IRC Section 965 Transition Tax

The Internal Revenue Service and the Department of the Treasury on August 1, 2018 issued proposed regulations on Section 965 of the Internal Revenue Code. The proposed regulations affect United States shareholders, as defined under section 951(b) of the Code, with direct or indirect ownership in certain specified foreign corporations, as defined under section 965(e) of the Code.

Section 965, enacted in December 2017, levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by United States shareholders by deeming those earnings to be repatriated. For domestic corporations, foreign earnings held in the form of cash and cash equivalents are generally intended to be taxed at a 15.5 percent rate for 2017 calendar years, and the remaining earnings are intended to be taxed at an 8 percent rate for 2017 calendar years.

The lower effective tax rates applicable to section 965 income inclusions are achieved by way of a participation deduction set out in section 965(c) of the Code.  A reduced foreign tax credit also applies with respect to the inclusion under section 965(g) of the Code.

Taxpayers may generally elect to pay the transition tax in installments over an eight-year period under section 965(h) of the Code. The proposed regulations contain detailed information on the calculation and reporting of a United States shareholder’s section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under section 965.

The proposed regulations are generally consistent with prior guidance and contain many technical details.
Key aspects include:

• Unfavorable rules that may inflate cash positions above actual cash and require double counting, including: (i) a hybrid approach for measuring the cash position of consolidated groups; and (ii) rules addressing groups with multiple year ends;
• Rules allowing certain intercompany receivables to be disregarded for purposes of determining cash positions (including certain cash pools run through third-party banks if treated as intercompany transactions under general tax principles);
• Treasury's decision not to expand the definition of "accounts payable" to include other short-term ordinary expenses;
• Foreign tax credits for both income and withholding taxes reduced in proportion to the reduced transition tax rate;
• Anti-avoidance rules disregarding: (i) certain transactions that change the amount of the income inclusion, cash position, or creditable foreign taxes (whether or not such change affects a taxpayer's total tax liability or is material in amount) that are undertaken on or after November 2, 2017 (in whole or in part) with a principal purpose of effecting such change (with materiality of the change relevant in determining whether there was a purpose); and (ii) certain accounting method changes and entity classification elections with similar effects (even if effective before November 2, 2017, and including changes from impermissible to permissible methods);
• Instructions for electing to pay the tax in installments and permitting an acquirer to assume a target's installment obligation;
• An election to transfer basis between foreign subsidiaries to better align with foreign subsidiary earnings to facilitate repatriation;
• Rules for reducing an inclusion by deficits from other foreign subsidiaries, including an unfavorable rule reducing deficits by the amount of certain previously taxed earnings;
• Clarification that individual owners of pass-through entities may elect to be subject to tax at corporate rates under section 962 if they are "U.S. shareholders" with respect to foreign corporations;
• Application of the normal FX rules only to certain distributions of subsidiary earnings; and
• Strict filing requirements without late filing relief available for many of the statements and elections.

Written or electronic comments and requests for a public hearing on this proposed regulation must be received within 60 days of publication in the Federal Register, which is forthcoming.

More information regarding the Tax Cuts and Jobs Act, as well as Section 965, can be found at the Tax Reform page.
  

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