Archive for September 11th, 2012

From Bloomberg:

Bradley Birkenfeld, the former UBS AG banker who told the Internal Revenue Service how the bank helped thousands of Americans evade taxes, secured an IRS award of $104 million, an amount his lawyers said may be the largest ever for an individual U.S. whistle-blower.

It was Berkenfeld who ultimately undid an elaborate UBS plan to come to the U.S. in search of wealthy Americans, manage their assets, and help them cheat the IRS:

Birkenfeld’s disclosures preceded UBS’s decision to pay $780 million to avoid prosecution, admit it fostered tax evasion from 2000 to 2007 and turn over data on 250 Swiss accounts. UBS later agreed to provide information on another 4,450 accounts. Since then, at least 33,000 Americans have voluntarily disclosed offshore accounts to the IRS, generating more than $5 billion.

The payout didn’t come without sacrifice, however, as Birkenfeld had previously plead guilty to conspiracy in 2008, a year after blowing the whistle on UBS, and was only recently released from rich-white-guy-prison. Of course, to put things in perspective, I would sign up for a few years in minimum security prison today if it even harbored the possibility of walking away with $100 mill.  Sailing…croquet tournaments….karaoke night hosted by Bernie Madoff; it’s not a bad way to kill a few years if the GDP of Costa Rica is waiting for you on the other end.

Dollar amounts aside, the newsworthy aspect of the story is that this is the first major award issued under the IRS whistle-blower law, and given the size of the payout, it’s sure to give other money-hungry traitors Good Samaritans all the motivation they need to come forward and sing like canaries about their employer’s shady tax undertakings.

“The IRS sent 104 million messages to whistle-blowers around the world — that there is now a safe and secure way to report tax fraud,” Birkenfeld’s attorney Stephen M. Kohn said today at a news conference in Washington.

This is indeed a positive step forward for the Service’s whistle-blower program, which has come under criticism in recent months for the length of time necessary to process claims and what has been perceived as unjust rejection of award claims. The program was created in 2006 to boost tax revenue by providing incentive to tipsters, but over the past five years, many of the 1,300 filed claims  — rumored to have alleged total tax underpayments of $2.6 billion —  have gone unaddressed.

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Piggybacking on previous decisions by the Fourth, Seventh and Eleventh Circuits and district courts in Maryland, Tennessee, California and Illinois, the Court of Appeals for the Federal Circuit recently held that an E&Y partner who sold a partnership interest in exchange for stock was taxed on the value of the stock in the year it was received, rather than when it was subsequently released from escrow.

In Hartman,  the taxpayer was a partner in Ernst & Young’s IT consulting business. The partners sold the business to Cap Gemini, a French corporation, in exchange for Cap Gemini stock, and signed an employment agreement to work for a new entity owned by Cap Gemini. Important details relative to the stock proceeds include:

  1. The stock was placed into an individual account in Hartman’s name at Merrill Lynch, effectively acting as an escrow.
  2. The stock could not be withdrawn from the Merrill account and sold by Hartman for four years and 300 days following closing. This was done to prevent all of the E&Y partners from selling the Cap Gemini stock at once and diluting its value.
  3. During the time the stock was restricted, Hartman had full dividend and voting rights.
  4. The restricted shares would be forfeited upon three conditions: If Hartman terminated his employment, violated his employment agreement, or was fired for cause.
  5. In the event Hartman was terminated for “poor performance”, he could forfeit 50% of the restricted shares, but could also receive all of the shares pending a review.

Hartman initially reported the value of the stock as having been constructively received in 2000, the year of the sale. After later discovering that some of his former E&Y partners had filed amended returns to remove the escrowed value from the 2000 return, however, Hartman followed suit.

The Claims Court initially found that Hartman had constructively received all of the shares of Cap Gemini common stock in 2000, and that he had properly reported the gain from the transaction on their income tax return for 2000 and thus was not entitled to a tax refund. For a discussion of the “constructive receipt” rules for cash basis taxpayers, see here.

The Federal Court of Appeals affirmed the Claims Court, reaching the same conclusion as all the other courts that have decided a “Cap Gemini” case: the stock was constructively received by the selling taxpayer — and thus included in taxable income —  during 2000. From the court:

…although the accredited consulting partners’ right to “sell, assign, transfer, pledge, grant any option with respect to or otherwise dispose of any interest” in the Cap Gemini common stock was restricted, the Cap Gemini shares here were set aside for each accredited consulting partner in a Merrill Lynch account in each partner’s name, and the partners were able to receive dividends from and vote the shares during the period of time in which the sale of the shares was restricted. The risk of a decline in the value of the shares and the benefits of any increase in the value of the shares accrued entirely to the accredited consulting partners. Under the agreement, the shares immediately vested in the partners to ensure that the shares would not be treated as deferred compensation for future services.

Furthermore, in distinguishing Hartman’s plight from a previous decision that favored the taxpayer, the court told the former E&Y partner to lay in the bed he’d made:

Unlike Patton, Mr. Hartman and the other accredited consulting partners agreed to condition receipt of their shares on satisfaction of their own contractual obligations under the Partner Agreement and their employment contracts with CGE&Y. Under such circumstances, Mr. Hartman cannot now be heard to complain that such restrictions undermine his constructive receipt of the shares. The Claims Court rightly found that “Mr. Hartman voluntarily agreed to accept his share of the transaction proceeds with these limitations.” The fact that Mr. Hartman voluntarily agreed to subject himself to the restrictions imposed by the Partner Agreement cannot defeat constructive receipt.

There are still other E&Y Cap Gemini cases in the pipeline, and something tells me these guys won’t rest until they’ve exhausted every opportunity to have anyone and everyone hear their side of things, including but not limited to Judge Judy, the court of public opinion, and the cast of the former NBC sitcom Night Court. But unless  Judge Harry T. Stone is feeling particularly generous, there’s no reason to believe any other partner will find a more attractive result.

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