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Thursday, February 29, 2024
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9th Circuit Shoots Down Tax Shelter RICO Lawsuit

(CN) - A man who had to pay the Internal Revenue Service an $11 million penalty does not have valid racketeering claims against the German financial firm that provided him with an illegal tax shelter, the 9th Circuit ruled.

The San Francisco-based federal appeals panel found that Bayerische Hypo-Und Vereinsbank AG and its American subsidiaries under the HVB umbrella created illegal tax shelters that deprived the United States of tax revenue.

The firm's clients, who used the shelters to "generate the appearance of large capital losses for high net worth investors to reduce their tax income liability," were harmed by the fraud indirectly, which does not support a valid RICO claim, the ruling states.

To avoid paying federal income taxes, John Rezner participated in a Custom Adjustable Rate Debt Structure (CARDS) transaction through HVB in 2001.

The tax shelter involved multimillion-dollar loan transactions moving through various financial entities to give the appearance that clients, like Rezner, had recorded large capital losses.

Rezner paid more than $4 million in fees to HVB and other firms involved in the shelter.

When the IRS audited Rezner in 2005 and discovered that the $39.6 million loss he had claimed was phony, it ordered him to pay about $11 million in back taxes and interest.

HVB, meanwhile, admitted to participating in unlawful tax shelters meant to defraud the United States, and entered into a deferred prosecution agreement with the Manhattan U.S. Attorney's Office.

A year later, Rezner sued HVB in California district court, alleging violations of the federal Racketeer Influenced and Corrupt Organizations Act and other charges.

Rezner moved for summary judgment, arguing that HVB's admission that it had defrauded the United States had already affirmed his RICO claim.

HVB countered that Rezner had failed to satisfy RICO's proximate causation requirement because his own participation in tax shelter had caused his alleged injury.

The district court agreed with Rezner and granted summary judgment on his claims for violations of RICO and the Unfair Business Practices Act of California.

The federal appeals panel in San Francisco reversed, ruling that Rezner had failed to prove that HVB's admitted fraud had caused him harm.

"Here, the United States, not Rezner, was the immediate victim of HVB's fraud and better situated to sue HVB," Judge Arthur Alarcón wrote for the three-judge panel. "Therefore, we hold that Rezner cannot show proximate causation based on HVB's fraud against the United States and reverse the district's court grant of summary judgment on the RICO claim."

Without the proof of a RICO violation to support Rezner's state claim, the court vacated that judgment as well.

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