‘Tax Cheats’ Can’t Sue Swiss Banks Over Fines

CHICAGO (CN) - The 7th Circuit called it a "travesty" that a group of tax cheats even tried to get the Swiss banks that hid their money to cover penalties later assessed by the IRS.

In 2009, Switzerland's largest bank, UBS AG, paid a $780 million fine to the IRS after it admitted to helping tens of thousands of its clients evade U.S. income taxes.

Two years later, a group of U.S. citizens whose Swiss accounts had held between $500,000 and $2 million sued UBS.

The case went to the 7th Circuit after U.S. District Judge John Darrah dismissed it before contemplating class certification.

"This lawsuit, including the appeal, is a travesty," Judge Richard Posner wrote for a three-judge panel. "We are surprised that UBS hasn't asked for the imposition of sanctions on the plaintiffs and class counsel."

Participation in the IRS Offshore Voluntary Disclosure Program eventually required the accountholders to pay back taxes, interest and a 20 percent penalty.

Posner did not take kindly to their attempt to have UBS reimburse the penalties, plus the hundreds of millions of dollars in profits it earned as a result of the alleged fraud.

"The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS," the ruling states (parentheses in original).

The class claimed primarily that UBS was obligated to give them accurate tax advice and failed to do so. The complaint did not allege that UBS had given inaccurate advice, only that it had not advised them of their tax obligations.

But there is no common-law duty to prevent another person from violating the law, according to the ruling.

Plaintiffs "argue rather that the bank should have prevented them from violating the law," Posner wrote. "This is like suing one's parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties."

Though UBS was required to report tax information to the IRS about depositors who were U.S. taxpayers, its failure to do so does not allow the class to pursue claims against it because plaintiffs are not third-party beneficiaries of the agreement.

"It's unlikely that the IRS would want the tax cheats that the contract was intended to deter ... to shift the burden of the penalties that the IRS imposes on tax cheats to the foreign banks," Posner wrote. "True, that would increase the banks' incentives to comply with the contract. But offsetting this effect would be the reduction in the taxpayers' incentive to honor their tax obligations if they could shift the cost of cheating on their taxes to the foreign banks."

The bank also owed no fiduciary duty to its depositors, the court determined. To them, UBS is merely a creditor.

UBS "has no duty to treat [depositors] like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits," Posner wrote.

"The plaintiffs haven't gotten to first base in showing that UBS committed a tort against them," he added.

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