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A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com Volume 261—NO. 94 Thursday, may 16, 2019

Tax Litigation Issues Expert Analysis Closed for Business: Shutting Down The US as an Offshore Tax Haven

or more than a decade, the the Delaware Secretary of State Department of Justice and endorsed proposed legislation Internal Revenue Service By that would put the federal gov- Jeremy H. have devoted substantial Temkin ernment in charge of overseeing resources to eradicating corporate ownership, thereby theF use of offshore accounts to limiting the availability of shell evade U.S. tax obligations. This col- companies created under state umn has chronicled these efforts, serves as a reminder that offshore laws. Samuel Rubenfeld, Delaware which have included criminal pros- tax evasion is not a uniquely Ameri- ecutions and significant civil pen- can problem. A recent filing seeking “John Doe alties imposed on taxpayers who Financial Transparency summonses” based upon a treaty failed to avail themselves of one of In the United States request from Finland serves as a the IRS’s Offshore Voluntary Dis- reminder that offshore tax eva- closure Programs. But the United In 2018, the United States ranked sion is not a uniquely American States is not the only country whose second—behind only Switzerland problem. citizens use offshore vehicles to and one spot ahead of the Cayman cheat on their taxes, and while U.S. Islands—in the Tax Justice Net- Backs Overhaul of Shell-Company taxpayers think of Switzerland and work’s Financial Secrecy Index of Rules, Wall St. J. (June 25, 2018). Caribbean islands as tax havens, tax havens based on an assessment That legislation—which harkens many foreign nationals use U.S.- of the level of secrecy provided by back to Ralph Nader’s effort in the based vehicles to evade their own each country’s laws in light of the 1970s to form a Federal Charter- tax obligations. A recent filing seek- jurisdiction’s overall importance in ing Agency—has been proposed ing “John Doe summonses” based the global markets. on a number of occasions in the upon a treaty request from Finland One common means of avoid- past decade without ever mak- ing transparency in the United ing it out of committee. Samuel

Jeremy H. Temkin is a principal in Morvillo States is the Delaware LLC, Rubenfeld, U.S. Congress Tries, Abramowitz Grand Iason & Anello P.C. Devin Cain, which need not identify its own- Again, on Corporate Transpar- an associate at the firm, assisted in the preparation of this article. ers publicly. Last year, however, ency, Wall St. J. (June 28, 2017). Thursday, may 16, 2019

Whether Delaware’s support will customer was not complying with discernible patterns, leading the make a difference this time around his tax obligations. Congress codi- Finnish Tax Authority to conclude is yet to be seen, but as of this writ- fied Bisceglia’s holding at §7609(f) that they were likely being used ing, no such legislation is pending. of the Internal Revenue Code, which by Finnish taxpayers who had not Meanwhile, none of the various authorizes the IRS to issue so-called properly reported their income in amendments to Delaware’s General John Doe summonses where it can Finland. Thus, the application for Corporation Law that were passed show (1) that the summons relates the John Doe summonses was predi- last August required greater trans- to “a particular person or ascertain- cated on a request made under the parency by corporations. See Louis able group or class of persons,” (2) United States-Finland tax conven- G. Hering & Melissa A. DiVincenzo, that there is “a reasonable basis for tion seeking the identities of the Insight: 2018 Amendments to Dela- believing” that the person(s) may individuals who had acquired the ware’s General Corporation Law and have failed to comply with “any cards in question. Alternative Entity Statutes, Bureau internal revenue law,” and (3) that Potential Legal Obstacles of Nat’l Affairs (Aug. 10, 2018). By the information sought and the iden- To Tax Treaty Summonses contrast, following increased atten- tities of the person(s) are not readily tion to the possible use of U.S. real available from another source. While §7609(f) does not expressly estate (especially in New York On April 23, 2019, the IRS filed authorize the issuance of John Doe and Miami) to launder money, the a petition in the Western District summonses to aid foreign govern- Financial Crimes Enforcement Net- of North Carolina (United States v. ments, in its application the gov- work (FinCEN) recently expanded a John Does, Case No. 3:19-mc-00067) ernment asserted that Congress’s requirement that beneficial owners seeking leave to serve John Doe inclusion of the requirement that of shell companies buying residen- summonses on three banks. Like such summonses seek informa- tial real estate for cash be identi- summonses that the IRS obtained tion regarding persons who failed fied. FinCEN, Geographic Targeting in the early 2000s requiring Ameri- to comply with “any internal rev- Orders Involving Certain Real Estate can Express, MasterCard and Visa enue law” permits their use to assist Transactions (Nov. 15, 2018). to produce records of transactions other countries. Because the gov- using debit and credit cards issued ernment’s submission in John Does The John Doe Summons in tax havens, see Offshore Credit was made ex parte and granted in While legislative and regulatory Card Program (OCCP), the sum- a summary order with no opposi- fixes seek to increase transparency, monses presented to the court in tion briefing, this issue was not con- the IRS is using its investigative arse- North Carolina sought information tested, and there does not appear nal, including John Doe summonses, regarding cards issued by the three to be any case law addressing it. In to help other countries pursue tax banks in question. Unlike with the its application, however, the govern- evasion by their citizens. earlier summonses, however, the ment identified a series of John Doe In United States v. Bisceglia, 420 cards in question were not used summonses obtained on behalf of U.S. 141 (1975), the Supreme Court by U.S. taxpayers. Instead, the Norway in 2013 and another John authorized the IRS to issue a sum- cards had been used at ATMs or in Doe summons obtained on behalf mons on a bank where it had rea- other transactions in Finland over of the Netherlands in 2017. Each of son to believe an unidentified bank an extended period of time and in those prior matters involved similar Thursday, may 16, 2019 allegations that foreign individuals information on behalf of tax treaty possibility that a successful chal- were storing money in the United partners, the practice appears to lenge could be brought if the IRS States and using bank cards to make rest on solid legal ground. summons sought information to purchases abroad as a way to avoid This does not mean summonses which the foreign tax authority was foreign taxes. Unfortunately, the issued on behalf of foreign coun- not entitled to under its domestic only reported order to come out tries pursuant to treaty requests law. of the prior applications did not are immune from legal challenge. Conclusion address any legal obstacles to the In Mazurek v. United States, 271 F.3d summonses, and targets of John 226 (5th Cir. 2001), the IRS issued a After years of seeking other coun- Doe summonses have little ability summons seeking financial records tries’ aid in investigating offshore to challenge their issuance. See Jer- on behalf of the French Tax Author- tax evasion, the United States is emy H. Temkin, “Tax Enforcement, ity. Mazurek, the target of the French (slowly) moving towards requir- John Doe Summonses and Digital investigation, moved to quash the ing increased transparency as well. Currency,” New York Law Journal summons on the grounds that the While such legislation and regula- (Jan. 19, 2017). French proceedings were invalid tion may take time, the case law Moreover, Circuit Courts of appears to impose few limitations on Appeals have consistently con- After years of seeking other the IRS using its summons authority cluded that IRS summonses apply countries’ aid in investigating on behalf of foreign countries seek- equally to a foreign tax investiga- offshore tax evasion, the United ing evidence that their citizens are tion even where no U.S. audit exists. States is (slowly) moving towards using vehicles available in the Unit- In United States v. A.L. Burbank & requiring increased transparency ed States to conceal their income Co., 525 F.2d 9, 13-14 (1975), the as well. and assets. Given the widespread U.S. Court of Appeals for the Sec- concerns that the United States ond Circuit found that a narrower inasmuch as he was not a resident serves as a tax haven for citizens interpretation would frustrate the of France during the relevant peri- of other countries, the recent John purpose of the various tax conven- ods and thus the summons did not Doe summonses discussed in this tions to which the United States is serve a legitimate purpose. The U.S. article may be a sign that foreign party. Following Burbank, in Lidas Court of Appeals for the Fifth Circuit countries are becoming increasingly v. United States, 238 F.3d 1076, 1081 rejected that challenge because it aggressive in seeking the IRS’s assis- (2001), the Ninth Circuit observed improperly “focuse[d] on the legiti- tance in shutting down offshore tax that limiting the IRS summons pow- macy of the [French] investigation, evasion by their citizens and that er to domestic tax liabilities would not on the legitimacy of the IRS’s the IRS is committed to providing conflict with the fact that tax trea- compliance with the [French Tax that assistance. ties, upon ratification, become part Authority’s] request.” Id. at 231. of the law of the United States and To show that the IRS had no legiti- thereby impose obligations on the mate purpose, Mazurek would have IRS. Thus, even though courts have needed to show it was acting in bad

Reprinted with permission from the May 16, 2019 edition of the NEW YORK not specifically addressed the use faith in complying with the treaty LAW JOURNAL © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 of John Doe summonses to gather request. The court left open the or [email protected]. # 070-05-19-18