CHICAGO (CN) – A federal judge found it “inconceivable” that three holders of Swiss bank accounts unwittingly failed to pay U.S. taxes on their accounts because UBS schemed to avoid the IRS’s reporting requirements.
In 2001, the Internal Revenue Service (IRS) started the Qualified Intermediary (QI) Program, designed to “encourage foreign financial institutions to report and withhold tax on U.S. source income paid to foreign bank accounts,” according to the complaint. UBS, a Swiss bank, agreed to participate in the program, under which it agreed to file a Form 1099 for each U.S. account holder with the IRS each year.
However, in 2011, three owners of Swiss bank accounts – Matthew Thomas, Himanshu Patel, and Mathilde Guetta – sued UBS in the Northern District of Illinois, claiming that the bank “devised an intricate scheme… to unlawfully avoid the terms and reporting requirements of the QI Agreement.”
The plaintiffs said they were unaware they were required to report the income earned from their Swiss accounts until 2009, when the IRS announced the Offshore Voluntary Disclosure Program. All three elected to participate in the program and had to pay a penalty of 20 percent of the highest aggregate account balance between 2002 and 2008.
The complaint frequently quoted a 2008 indictment against UBS Chief Executive Officer Raoul Weil for UBS’s non-compliance with the QI Agreement and claimed that the Justice Department’s investigation showed that “UBS has admitted its participation in a fraudulent scheme to facilitate the evasion of U.S. taxes and the requirements of the QI Agreement.”
U.S. District Judge John Darrah disagreed with the plaintiffs’ reasoning, and dismissed their complaint without prejudice.
“Plaintiffs do not sufficiently allege that UBS had a duty to plaintiffs. The QI Agreement is between UBS and the IRS. Consequently, UBS’s obligations under the QI Agreement run to the IRS, not the plaintiffs. Therefore, plaintiffs’ allegation that UBS had a duty to plaintiffs is not plausible,” Darrah said.
Additionally, “with respect to causation, plaintiffs allege that ‘UBS’s failure to meet the applicable standard of care’ caused them to fail to ‘disclose their UBS Swiss Accounts on their U.S. tax returns.’ But plaintiffs fail to allege how UBS’s alleged negligence caused plaintiffs to fail to disclose their foreign accounts on their U.S. tax returns,” the judge continued.
In a long footnote, Darrah noted that Line 7a on Schedule B of IRS Form 1040 specifically asks taxpayers if they had funds in a foreign account during the tax year. “It can be inferred from the amended complaint that each of the plaintiffs falsely answered ‘No’ to Line 7a. This yes-or-no question on Schedule B renders plaintiffs’ negligence and fraud claims implausible… The simple yes-or-no question of Schedule B makes it inconceivable that plaintiffs could have misinterpreted this question, regardless of what UBS representatives told or failed to tell plaintiffs,” Darrah said in the footnote.