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Now You See It--Now You Don't.

By John Dietz - Email Editor

Date : July 8, 2008

Dear Valued Reader,

Can you hide money?

The moral of the story is: all US Citizens are required to report all worldwide income, under all circumstances. If they do not, it is punishable by imprisonment, court costs and restitution to the IRS.

There is a lot of circumspect mystery surrounding this subject. When it comes to the IRS code, complication trumps reasoning and excuses don’t equate to acquittal. As we saw in the Wesley Snipes case, the standard excuses of the defense (such as I was misinformed and I blame it on bad advice from my accountant) do not work. The reality is that the omnipresent IRS, with their pervasive powers, will generally win the day.

Often times we do not get to see the outcome of our questions because the investigation is covert, however we as the audience may get to see the answers to the question, can you hide money from the IRS?

If this were a feature film, it is hard to say how it would play out, but the script is being written as we speak. For the first time, the Justice Department has served a so-called “John Doe” summons on a foreign bank to find out if any Americans are evading taxation. The summons would direct UBS AG to produce records identifying U.S. taxpayers who had accounts with the bank in Switzerland between 2002 and 2007, and who chose to have their accounts remain hidden from the IRS and for which UBS did not have a tax form known as a W-9.

You can make your own guess as to how this will turn out. Here is the question that you have to solve. Is UBS going to cooperate and turn over the US account holders to the IRS or appeal the decision in an effort to continue to conceal the account beneficiaries in the Swiss bank UBS? (There is a third option; see if you can guess it.)

CASE BACKGROUND - UBS Company Information from The New York Times

UBS AG is a global provider of financial services for wealthy clients. UBS's financial businesses are organized on a worldwide basis into three business groups and the corporate center. Global Wealth Management & Business Banking consists of three segments: Wealth Management International & Switzerland, Wealth Management US and Business Banking Switzerland. The Business Groups Investment Bank and Global Asset Management constitute one segment each. The Industrial Holdings segment holds all industrial operations controlled by the group.

The ENTRY journal creates our docket of record.

ENTRY 1 - John Doe Summons Issued by the United States Government - According to the IRS - A John Doe Summons is any summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified. A John Doe summons can only be served after approval by a Federal court. It begins with “In the matter of …..”

25.5.7.5.1  (09-01-2006)
Ascertainable Group or Class of Persons

1.The unidentified person, group or class of persons under investigation, and the activity or transaction under investigation must be described with particularity on the line of the summons that begins with “In the matter of." The phrase "group or class" refers to a group or class of persons who have engaged in specifically described transactions or activities that are common to all persons or entities in the group or class. Generally, the common activities or transactions of the group or class of persons will directly relate to compliance with the internal revenue laws.

ENTRY 2 - UBS AG in the USA and Switzerland are publically traded companies The AG in the company's name means Aktiengesellschaft, which is equivalent to a publically based shareholder corporation in the USA who uses INC.

ENTRY 3 - Jurisdictional Issue - UBS AG in the United States has no jurisdiction over the Zurich headquartered UBS in Switzerland (or so it would appear). Swiss banking laws and US banking laws differ greatly in terms of the laws and taxation and these laws vary depending on your citizenship. Remember that just as no jurisdiction in the world upholds US judgments and likewise no judge in the US has jurisdiction over any courts in Switzerland.

ENTRY 4 - Banker Pleads Guilty - In June 2008, Bradley Birkenfeld, a former UBS private banker, pleaded guilty to conspiracy and said the bank helped wealthy U.S. citizens conceal $20 billion in assets and evade income tax laws.

ENTRY 5 - New York Times – June 30, 2008 - In a court filing today, Internal Revenue Service agent Daniel Reeves said he interviewed Birkenfeld on Oct. 12, 2007, and that Birkenfeld said he was one of 40 to 50 UBS private bankers who made quarterly trips to the United States to manage customers.

Reeves said Birkenfeld told him that to avoid detection, the bankers were trained by UBS to lie on customs forms that they were visiting the US for personal reasons rather than for business. They traveled with encrypted laptop computers that contained client portfolios, Reeves said.

ENTRY 6 - UBS AG makes statement – July 1, 2008 - As of now, UBS AG Spokespersons claim that they will work with US and Swiss authorities to cooperate.

ENTRY 7 - Reuters – July 5, 2008 - ZURICH - Battered Swiss bank UBS said on Friday it should be saved from another hefty loss in the second quarter by a large tax credit, giving a much-needed though short-lived boost to its share price.

UBS Client Proclamation States - ``Under no circumstances will his/her identity be revealed,'' the letter stated. The bank's compliance with the agreement ``does not create the risk that his/her identity be shared with U.S. authorities.''

Legal Bogs and Related Articles Report - UBS AG has the right to an appeal. During the time of appeal, UBS AG would not have to produce any records indentifying US taxpayers. However, there may be some interference due to the Patriot Act I and II that may allow the US Government some liberties of injunction and invasion and let’s not forget the straw dogs, Enron and Bear Stearns. Might these straw companies and their accounting practices become the topic of scrutiny?

My take at this point is this:

These are the clues, but certainly not all the facts. Rather than stumble through this like Inspector Kluso, my supposition is, with Bear Sterns as a backdrop to the current banking landscape, and knowing UBS is tied to the subprime crisis, there will be a cooperative and collaborative effort from all involved.

One would think, given the economics of the times and having no stomach for another Enron at this juncture, that deals will be made. Our suggestion, as readers of this newsletter already know, is that privacy is great as long as at the end of the day, you report and pay your due taxes.

Until next time,
 
John

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