The case of a wealthy U.S. businessman who pleaded guilty to evading taxes but then sued the Swiss bank where he hid his money is scheduled to go to trial on May 8, the first major test of civil legal challenges to Swiss banks that sold offshore private banking services to help Americans evade taxes.
The civil suit, filed against UBS AG in federal court in Santa Ana, California—and another filed against UBS in federal court in Chicago—will probe whether clients can legally rely on their private bankers' assertions there is no need to disclose the accounts on their tax returns or sign required disclosures.
Tax lawyers describe the suits, emerging from a crackdown by federal authorities on Swiss banks, as the first of their kind in the United States to assert that Swiss bankers made improper assertions to their U.S. clients about the tax implications of their offshore accounts.
In the California case filed in 2008, Russia-born American billionaire Igor Olenicoff accuses UBS of fraud in handling some $200 million he kept in offshore accounts and wrongfully advising him he did not have to report them to the tax-collecting IRS. Olenicoff pleaded guilty to tax evasion in 2007 and to lying on his tax returns by failing to disclose his offshore accounts, and paid $52 million in back taxes. His suit seeks $500 million in damages.
The Chicago case, which seeks class-action status, was filed in June 2011 on behalf of former UBS clients Matthew Thomas of California and Himanshu Patel of Arizona. Thomas and Patel previously paid back taxes, interest and penalties to the IRS related to their Swiss accounts. They accuse UBS of fraud and breach of fiduciary duty for allegedly telling them that their accounts, opened when the two worked overseas during the last two decades, did not have to be disclosed to the IRS.
UBS argues in both cases that its clients have a duty to know what to declare on their U.S. tax returns. A UBS spokeswoman in New York, Karina Byrne, declined to comment specifically on the lawsuits, but said the bank "does not give any tax advice to our clients, and we encourage clients to seek third-party tax advice."
U.S. Investigation Underway
The two cases are unfolding at a time when U.S. authorities are conducting a major investigation into the Swiss banking industry. The U.S. Justice Department has indicted one Swiss private bank, Wegelin, and charged scores of Swiss bankers and their American clients with tax evasion.
In 2009, UBS averted indictment and paid a $780 million fine to the U.S. Justice Department as part of a deferred-prosecution agreement in which it admitted to fraud and conspiracy in helping about 19,000 wealthy Americans hide up to $20 billion in secret bank accounts.
Olenicoff's name had been provided to the U.S. Justice Department earlier. The other two plaintiffs came forward to the IRS through voluntary disclosure programs, created in the wake of the UBS probe, which drew in 33,000 U.S. taxpayers with unreported accounts in Switzerland and elsewhere.
It is legal for U.S. residents to hold offshore bank accounts, but the IRS requires taxpayers to disclose the accounts on their tax returns as well as to sign special disclosures provided by the banks, known as W9 forms.
Under a U.S. Treasury program known as qualified intermediary, banks are required to collect the W9 forms and withhold taxes—typically 28 percent to 31 percent—on proceeds from U.S. securities held in client accounts and to send that money to the IRS.
If clients refuse to sign the disclosures, the banks must sell any U.S. securities held in the offshore accounts, a process that triggers a tax bill for the client and a requirement that the bank report the sale and the client's identity to the IRS.
UBS admitted as part of its agreement in 2009 that it did not collect or require clients to sign the forms, while concealing their identities from the IRS under Swiss bank secrecy laws. Olenicoff, a property developer whose wealth was estimated by Forbes in March 2012 at $2.6 billion, argues in part that UBS told him he did not have to sign the disclosures and that the investment accounts he was in complied with U.S. tax laws.
In March 2010, the judge in Olenicoff's case rejected UBS's motion to dismiss the case, noting that "while banks typically do not owe fiduciary duty to their depositors, there are some situations where a fiduciary duty is owed."
Thomas and Patel allege that UBS never told them they had to sign W9s and failed to withhold required taxes on U.S. securities in their accounts.
David Deary, a Dallas-based lawyer for Thomas and Patel, said the potential number of plaintiffs in his case, which would cover American customers of UBS from 2002-2008 who entered voluntary disclosure programs with the IRS, could reach 25,000.
"Our clients simply followed UBS's advice that they did not have to declare and pay taxes on the investment income," he said.
Some tax experts, including Jay Soled, an accounting professor specializing in tax at Rutgers University, say potential plaintiffs might not come forward for fear of airing dirty laundry about their own taxes.
The cases against UBS may differ in one key way from the fraud and breach of fiduciary duty claims filed in recent years against some accounting, auditing and law firms by wealthy Americans who had bought tax shelters. Plaintiffs in those civil cases, which resulted in hefty settlements, were bolstered by legal opinions from the law firms blessing their invalid shelters—something the UBS clients lack, tax lawyers said.
Larry Campagna, a tax lawyer at Chamberlain Hrdlicka in Houston, said most juries would be unsympathetic to a wealthy U.S. resident who relied on a foreign banker for tax advice.
But Jonathan Strouse, a tax lawyer at Holland & Knight in Chicago, said that even if Swiss bank clients had a duty to know they should have reported the secret accounts on their tax returns, they could still have "false representation" cases against banks which gave them improper information.
"A lot of the clients had huge tax bills, and they're going to be looking to get back anything they can from the banks," Strouse said.
(Reporting by Lynnley Browning in Fairfield, Conn. Editing by Amy Stevens, Howard Goller and Richard Chang)
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