Sudden changes are seldom witnessed in the tax world. History teaches that for every brilliant tax reform proposal, there is a well-organized lobby seeking to preserve the status quo. Consider offshore tax evasion. For decades policymakers have decried the ability of Americans to illegally shelter assets offshore while failing to declare the related income on their tax returns. Yet the IRS often seems unable to do anything about this activity, and Congress has been perpetually unwilling to get serious on the issue.
As regular readers know, this publication has more than once likened tax havens to the proverbial whorehouse on the edge of town. Nobody wants to publicly defend their existence, yet they continue to be tolerated by the people who make the rules. The dirty little secret is that cross-border tax evasion has been a thriving business for generations. All that changed in 2009. Unless you've been living under a rock, you've noticed that the practice of tax law is significantly different today than it was just 12 months ago.
During 2009 it was revealed that respected foreign banks are all too eager to serve as conduits for tax evasion for nonresident clientele, and that they generally regard the know-your-customer rules as some kind of joke that can be safely ignored. It was further revealed that foreign banks view the IRS's qualified intermediary regime not as an enforcement tool, but as a convenient road map for perpetrating systematic abuse. Consider these snippets from a survey of Tax Notes headlines over the past year:
- In February, Swiss banking giant UBS AG — the world's largest manager of private wealth — entered into a deferred prosecution agreement with U.S. authorities in which it admitted helping American clients evade taxes. UBS paid a criminal fine of $780 million. In an apparent breach of centuries-old Swiss bank secrecy, UBS provided U.S. authorities with the names of 250 American account holders as part of the settlement. (Swiss bank regulators insist the UBS disclosure did not violate the country's bank secrecy rules because those accounts were initiated under false pretense and therefore weren't entitled to protection.)
- At a G-20 gathering in London, leaders such as French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown declared the era of cross-border tax evasion to be on its deathbed, a theme continued at the subsequent G-20 summit in Pittsburgh.
- Fueled by outrage over the UBS scandal, the OECD renewed its counter-tax-haven campaign issuing various blacklists and gray lists, resulting in the signing of dozens of new bilateral tax information exchange agreements.
- By summer UBS was in court again, facing a John Doe summons in which U.S. authorities sought the names of roughly 19,000 U.S. citizens with undisclosed Swiss bank accounts. The resulting diplomatic spat rose to the highest levels of government, requiring personal meetings between the U.S. secretary of state and the Swiss foreign minister.
- August delivered another apparent breach of Swiss bank secrecy. After an intense diplomatic dialogue, UBS conveyed information on about 4,450 U.S. account holders to the Swiss Federal Tax Administration. In September, Switzerland and the United States signed a protocol amending their tax treaty to facilitate the exchange of taxpayer information obtained from UBS.
- Following announcement of the Swiss-U.S. treaty protocol, other Swiss banks joined UBS in winding down their private banking operations in the United States.
- Prompted by the UBS scandal, the IRS expanded its voluntary disclosure program offering repentant taxpayers the opportunity to come clean in exchange for reduced penalties and no jail time. By the time the program ended in October, it had drawn in more than 14,700 participants.
- Numerous criminal prosecutions of Americans with undisclosed bank accounts are working their way through the courts. Several former UBS account holders have already been found guilty and sentenced to serve prison time.
- The movement spread globally, as tax administrators in other countries launched similar probes of offshore banks. As the year drew to a close, tens of thousands of tax dodgers across the world were sweating bullets about what to do with their offshore bank accounts and undisclosed income.
Pardon our French, but what the hell happened?
The short answer is that UBS was outed by an insider with firsthand knowledge of what goes on in the wealth protection units of the world's major banks. The UBS scandal, and its aftermath, is largely because of the efforts of one man: Bradley Birkenfeld.
Simply put, Birkenfeld must be considered among the biggest whistle-blowers of all time. He is the Benedict Arnold of the private banking industry and single-handedly made 2009 the year in which the world finally got serious about cracking down on tax evasion. His story is both personally compelling and significant in terms of the sudden changes it has brought to our tax system.
Although Birkenfeld is responsible for the snaring of countless tax cheats, he's no ordinary hero. His hands were hardly clean in the UBS affair. Like a Shakespearean protagonist, he seems as flawed as he is noble. What's undeniable, though, is that the consequences of his actions have affected millions of taxpayers, the global financial sector, and tax administrations around the world. For all of these reasons, Bradley Birkenfeld is Tax Notes' Person of the Year for 2009.
Path to Glory
Birkenfeld, 44, is the son of a Boston neurosurgeon. He and his brothers grew up as privileged "South Shore boys" regularly vacationing on Cape Cod. After first attending another college, he transferred to Norwich University, a private military college outside Montpelier, Vt., earning an economics degree in 1988. He landed a job at the asset management division of State Street Bank and Trust in Boston, where he worked for six years before leaving in 1994. Unemployed, he soon relocated to Vevey, Switzerland, where he enrolled in the newly established American Graduate School of Business. After graduation, he worked for Credit Suisse and Barclays Bank in Geneva. In 2001 he moved to UBS in Geneva, working as one of about 50 private bankers.
Birkenfeld's specialty at UBS was soliciting and catering to affluent U.S. clients. His job, in short, was to convince rich Americans to stash their personal fortunes with UBS in Switzerland, often routing funds through networks of correspondent accounts and shell companies in London, Liechtenstein, and Panama. He would later acknowledge that the sole purpose of the shell companies was to cloak the beneficial ownership interests of well-heeled U.S. investors.
Private banking was a lucrative business for Birkenfeld, who did rather well for himself. He owned several homes, including a house in Geneva's fashionable Cours de Rive and a ski chalet in Zermatt that overlooks the Matterhorn.
Bradley Birkenfeld (Charles Trainor Jr./Miami Herald/MCT)
We know now that these private bankers carried encrypted laptops and used codes to memorialize account activity. References to foods and colors were used as code for countries and currencies. Cash transfers were regularly disguised as bogus loan proceeds. Clients were advised to destroy their own records of offshore bank activity. Personal assets were converted into works of art or jewelry to be more easily moved from country to country without leaving a paper trail. Birkenfeld once famously smuggled a client's diamonds across international boundaries, concealed in tubes of toothpaste, so they could eventually land safely in an underground Swiss bank vault.
One of Birkenfeld's high-profile clients was Igor Olenicoff, the California real estate mogul once listed by Forbes magazine as one of the country's richest men. Olenicoff, a billionaire, was a model citizen in many respects with a long history of charitable giving to worthy causes. He also played in the offshore sector.
Olenicoff had used offshore accounts since the early 1980s and, by the time Birkenfeld moved to UBS, had amassed millions of dollars in the Bahamas with Barclays Bank. Birkenfeld spent years cultivating a relationship with Olenicoff, along the way enjoying cruises on his 147-foot yacht and flying on his private jet. Birkenfeld eventually convinced Olenicoff to abandon Barclays Bank for UBS and transfer most of his offshore wealth from the Bahamas to Geneva. Birkenfeld later estimated he helped Olenicoff shelter $200 million in Swiss bank accounts managed by UBS.
At the time, snatching Olenicoff's business away from Barclays must have seemed like a feather in Birkenfeld's cap. It would later prove to be his undoing. The IRS was already on to Olenicoff.
From Rich to Snitch
In October 2005 Birkenfeld resigned from UBS. The specific reasons for his departure remain private. On leaving UBS, he provided senior management with written complaints that documented the private banking group's illegal practices. A subsequent internal review by UBS in 2006, predictably, found no wrongdoing.
Frustrated by the results, Birkenfeld traveled to the United States in 2007 and voluntarily registered as an IRS whistle-blower with the intention of exposing UBS's complicity with illegal tax evaders. For over a year Birkenfeld provided a treasure trove of inside information to U.S. authorities. He held frequent meetings with officials from the IRS, the Justice Department, and the SEC. The information he provided was the foundation for the UBS debacle and everything that followed. Significantly, Birkenfeld did not obtain immunity from prosecution in exchange for his disclosures.
On numerous occasions the U.S. government has acknowledged Birkenfeld's role as the source who made the UBS probe possible. A DOJ court pleading described his assistance as "timely, significant, useful, truthful, complete, and reliable." Kevin Downing, the prosecutor in charge of the UBS case, said that "without Mr. Birkenfeld walking through the doors of the Justice Department in the summer of 2007, I doubt this massive fraud scheme would have been discovered by the United States government." In short, there would have been no UBS scandal without him.
One area that Birkenfeld was apparently less than candid about was his personal actions. Those actions caused federal prosecutors to seek a warrant for his arrest. In May 2008 Birkenfeld returned to the United States from Switzerland to attend his 25-year high school reunion. He was arrested on exiting the plane at Boston's Logan Airport. He pleaded guilty to a single count of conspiracy to commit tax fraud — the Olenicoff case — which carried a maximum sentence of 60 months in jail. At his sentencing hearing in August 2009, U.S. prosecutors sought a reduced term of 30 months. Federal Judge William J. Zloch was unimpressed and gave Birkenfeld 40 months.
As this edition of Tax Notes goes to press, Birkenfeld is free on a $2 million bond, secured by family members' homes. He is subject to a home detention curfew and wears an ankle bracelet allowing officials to monitor his daily movements. He has lived under these conditions for almost a year and a half — none of which counts against his jail sentence, scheduled to commence January 8. (For related coverage, see p. 58.)
Ironically, Birkenfeld's cohorts at UBS have fared much better. His former boss, Martin Leichti, UBS's head of private banking for the Western Hemisphere, was temporarily detained by U.S. officials in 2008. Leichti invoked his Fifth Amendment protection against self-incrimination at a Senate hearing and was later released back to Switzerland, where he remains a free man.
Olenicoff was eventually confronted by the IRS and pleaded guilty to filing a false tax return. He admitted to concealing investment income from offshore accounts in the Bahamas, Liechtenstein, Switzerland, and the United Kingdom, paying $52 million in back taxes, interest, and penalties. A federal judge sentenced him to two years' probation and 120 hours of local community service.
Olenicoff has filed a civil lawsuit seeking $500 million in reputational damages against UBS, Birkenfeld, and 35 codefendants from the private banking industry. He claims the Swiss bankers misled him about the nature of his domestic liabilities resulting from his offshore activity. UBS denies the charges and intends to aggressively defend the lawsuit.
Birkenfeld most recently made headlines for claiming a whistle-blower reward under section 7623(b) related to his UBS disclosures. Depending on whether he qualifies for the mandatory reward scheme, his claim could be enormous. By statute, the size of the reward ranges from 15 percent to 30 percent of the tax revenues collected from the whistle-blower's disclosures. When Birkenfeld leaves federal prison in 2013, he could be a billionaire — just like the clients he previously serviced.
2009 has been a year of more drama than any of us expected. Tax attorneys around the world have one man to thank for the fact that their phones were ringing off the hook with new clients seeking to exit the offshore sector. Birkenfeld may be going to prison in a few days, and he faces a half-billion-dollar lawsuit from his former prized client, but at least he can enjoy the comfort of knowing he is — without any doubt — Tax Notes' Person of the Year.
Other notable and talented figures in the tax world were considered for Person of the Year. Despite their many contributions (both positive and negative) to tax policy, legislation, practice, and academia, no one quite matched Birkenfeld's feat in 2009.
Douglas Shulman (Tax Analysts/Derek Squires)
If Birkenfeld gets credit for helping to bring the extent of offshore tax evasion to the attention of the DOJ and the IRS, IRS Commissioner Douglas Shulman should also receive kudos for leading the agency's charge to collect the billions in tax dollars from Americans who hid their income in undisclosed offshore accounts. That charge began early in 2009, when Shulman announced the IRS's intention to enforce the John Doe summons against UBS despite the settlement that the Swiss bank reached with the DOJ. That settlement was followed by the announcement of a new IRS initiative to significantly lower penalties on taxpayers who voluntarily disclosed their offshore accounts. Shulman gave several speeches on international tax compliance throughout the year that emphasized the seriousness of his agency's crackdown on offshore tax evasion.
The success of the IRS's efforts became evident in August, when the government announced that it had reached an agreement with the Swiss government and UBS to resolve the John Doe summons enforcement case, and in October, when the preliminary results of the voluntary disclosure initiative were first announced. The IRS announced that more than 14,700 individuals had participated in it. Shulman has vowed a "multiyear focus on international issues," indicating that 2009 could be only the beginning of the Service's efforts to combat offshore noncompliance.
As the public face of the IRS, Shulman is likely to continue making waves in 2010, focusing not only on the international side, but also on developing new domestic initiatives that could result in the regulation of return preparers or corporate boards of directors being tasked with more responsibilities related to tax compliance oversight.
Charles B. Rangel
Charlie Rangel (Tax Analysts/Derek Squires)
House Ways and Means Committee Chair Charles B. Rangel, D-N.Y., generated a considerable amount of tax news in 2009, much of it unwelcome to the chair and his party. In addition to being the primary force behind much of the tax legislation in the House, Rangel endured another year of controversy related to his personal tax compliance and even fought off calls for his resignation by Republicans, The New York Times, and The Washington Post.
Rangel was largely successful in pushing tax legislation through the House. Admittedly, that was accomplished at the expense of Ways and Means markup sessions (only three were held all year), but the House succeeded in passing a permanent extension of the 2009 rates for the estate tax and an "extenders" bill offset largely by changing the tax treatment of carried interests. Rangel was also instrumental in putting together the House version of healthcare reform, which relied largely on a 5.4 percent surtax on individuals with adjusted gross income of more than $500,000 ($1 million for joint filers) and a 2.5 percent excise tax on medical devices. Rangel also joined with Senate Finance Committee Chair Max Baucus, D-Mont., to introduce the Foreign Account Tax Compliance Act of 2009 (FATCA), which would enact anti-tax-haven measures estimated to raise $8.5 billion over 10 years.
Unfortunately for Rangel, 2009 is unlikely to be remembered as a year of triumph as new revelations about his tax compliance continued to cloud his accomplishments. Rangel's problems also stem from a series of ethics violations. He has come under scrutiny because he reversed an earlier position and blocked a Senate offset in 2007 dealing with corporate inversions. Rangel's reversal directly benefited an oil drilling company, Nabors Industries Inc., whose CEO contributed $1 million to a City College of New York academic center named for the lawmaker.
The Post and Times, along with other media outlets, called for Rangel to resign after it was revealed that he had amended his tax returns in August to reflect $500,000 in previously unreported assets and at least $38,000 in unreported income. Although a GOP-sponsored privileged resolution that would have forced Rangel to step down was defeated along party lines, the scandal is far from over. Democrats face the very real possibility that if Rangel is allowed to remain as chair of the Ways and Means Committee, their efforts to enact tax reform or deficit reduction measures will be compromised.
Michael Mundaca (Tax Analysts/Derek Squires)
The Obama administration has focused on international tax reform, laying out a series of proposals designed to discourage companies from relocating jobs offshore and calling for a partial repeal of the check-the-box regime. It should be no surprise then that the president tapped a man with considerable international experience to serve as the Treasury assistant secretary for tax policy.
Michael Mundaca served as Treasury's deputy assistant secretary for international tax affairs from July 2007 to August 17, 2009. Mundaca returned to Treasury in 2007 at the request of then-President George W. Bush's newly confirmed Treasury assistant secretary for tax policy, Eric Solomon, who served in the position from 2006 to 2009. From 1995 to 2002, Mundaca served as an attorney-adviser and later as an associate and then deputy international tax counsel. He also served as the senior adviser on electronic commerce for the department's Office of Tax Policy.
As acting assistant secretary for tax policy, Mundaca likely played a behind-the-scenes role in drafting Obama's controversial international tax proposals and in shaping administration policy toward legislative proposals such as the Stop Tax Haven Abuse Act and FATCA. That role is likely to become more prominent in the new year if (or when) Obama and Congress turn back to tax reform.
Alan D. Viard
Alan Viard (Tax Analysts/Derek Squires)
At the American Enterprise Institute (AEI), economist Alan D. Viard performs objective and solidly researched tax analysis. His views are harder to pigeonhole than those of other conservatives.
Viard was active and visible in Washington in 2009. He testified before the tax reform task force of the President's Economic Recovery Advisory Board and before the Senate Finance Committee on cap-and-trade legislation and on middle-class tax relief. He also edited for AEI Press a newly released compilation titled Tax Policy Lessons From the 1990s and began the On the Margin column in Tax Notes.
Viard's pro-business positions include advocacy of expanded use of net operating losses to stimulate the economy while also reducing the tax penalties on risky investments. On corporate tax, he favors broadening the base and lowering the rate. He has argued against the proposed surtax on millionaires that is the chief revenue raiser in the House-passed healthcare reform bill because, he says, it avoids hitting the broader population, where the real money is. Viard's overall prescriptions for tax reform reveal a broad-mindedness that draws on ideas from across the ideological spectrum. He favors a carbon tax over the cap-and-trade approach being considered by Congress. And he is open to some kind of consumption tax, having recently recommended one for cash-strapped California.
After becoming an assistant professor of economics at Ohio State University in 1990, Viard spent two years in Washington as an economist at the Joint Committee on Taxation. In 1998 he began work as a senior economist at the Federal Reserve Bank of Dallas. During the Dallas years, he also returned to Washington for stints as a senior economist for the president's Council of Economic Advisers and as a visiting scholar at the Treasury Department's Office of Tax Analysis. He joined AEI in 2006. He is a member of the board of directors of the National Tax Association.
Paul L. Caron
Anyone looking for a quick fix of the day's major tax headlines, highlights of recently released papers from heavy hitters in the tax law community, or news on other happenings in the academic world of tax law increasingly turned to Paul L. Caron's TaxProf Blog in 2009. The blog's "SiteMeter" shows that it has received over 8.5 million visitors since its inception in April 2004, and the blog had the fifth most visitors among the top 35 blogs edited by law professors with publicly available SiteMeters for the October 2008 to September 2009 period, according to an October 13 post. That was a 46.4 percent increase over the previous 12-month period. TaxProf Blog was named the best law professor blog by Dennis Kennedy in his sixth annual law-related blogging awards (the Blawggies).
It's easy to see why interest in Caron's blog has grown. Not only is TaxProf Blog a convenient clearinghouse for up-to-date tax information, but discussions on the blog have also helped steer the national debate on tax law. For example, few would have imagined that the accident that occurred on Washington's subway line in June had its roots in tax law. But Caron helped draw attention to the argument, first made by Sarah B. Lawsky of the George Washington University Law School, that the Washington Metropolitan Area Transit Authority's tax-advantaged sale-leaseback transactions prevented the agency from replacing older, unsafe cars. Not only did the major media outlets pick up on the story after it was featured on TaxProf Blog, but even members of Congress took notice.
Of course, Caron is not just known for his work on TaxProf Blog. He is also the associate dean of faculty and the Charles Hartstock Professor of Law at the University of Cincinnati College of Law. New editions of Caron's Tax Stories and Federal Wealth Transfer Taxation: Cases and Materials (which he coauthored with Paul R. McDaniel and James R. Repetti) were also published in 2009.
Charles P. Rettig
Charles Ritteg (Tax Analysts/Derek Squires)
Charles P. Rettig of the tax boutique firm Hochman, Salkin, Rettig, Toscher & Perez PC in Beverly Hills, Calif., is one of those tax attorneys with boundless energy, and it shows. Rettig serves on the IRS Advisory Council, chairs the American Bar Association Section of Taxation Civil and Criminal Tax Penalties Committee, and hosts the annual University of California Los Angeles Tax Controversy Institute. He is also a frequent speaker at tax conferences across the country and a sought-after press commentator.
In 2009 Rettig and his firm colleagues were front and center in the controversy over offshore accounts, acting as counsel to several individuals indicted by the government for having unreported Swiss bank accounts. Rettig and his firm also represented hundreds of taxpayers in the IRS offshore voluntary disclosure program. Because of his practice, Rettig was an influential voice in the offshore disclosure debate.
Ken Kuykendall (Tax Analysts/Derek Squires)
Ken Kuykendall, a partner at PricewaterhouseCoopers LLP in Chicago, serves as the accounting firm's U.S. international financial reporting standards tax leader, a role that calls for him to work with the IRS, Congress, and U.S. companies to provide education on the tax issues that could arise if U.S. regulators proceed with proposed rulemaking that would require U.S. companies to use IFRS.
In 2009 Kuykendall was a frequent participant at events hosted by the American Institute of Certified Public Accountants and the International Fiscal Association. He often spoke about the possible consequences for tax professionals as a result of a standard-by-standard change in accounting rules because of IFRS convergence. At an event in Washington, Kuykendall said that even if full-scale conversion to IFRS moves more slowly in the United States and the SEC waits to determine a date certain for adoption, the specter of the convergence project between U.S. and international standard setters will remain.
Whatever the outcome may be in terms of IFRS convergence, Kuykendall will be ready to educate others about changes in tax accounting policy.
Erika W. Nijenhuis
Erika W. Nijenhuis is the chair of the New York State Bar Association Tax Section and a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. Before becoming chair of the tax section, Nijenhuis served on its executive committee for more than 10 years. She is an expert in the taxation of financial products and transactions.
In 2009 Nijenhuis was involved in several high-profile matters involving the restructuring of the U.S. financial markets and significant financial institutions. She represented the Clearing Corporation in its establishment, with Intercontinental Exchange (ICE) and a consortium of derivatives dealers, of the first clearinghouse to clear credit default swaps, ICE Trust US. She also represented Dexia in the sale of its financial guarantee subsidiary, Financial Security Assurance, to Assured Guaranty and has been working on the restructuring of other financial guarantee insurers, including representing BSG Markets LLC and Deutsche Bank Securities as dealer managers in a $5 billion tender offer as part of the successful restructuring of Syncora Guarantee Inc.
Most recently, Nijenhuis represented Citigroup in the largest public equity offering in U.S. capital markets history, in which Citigroup repaid the U.S. government's $20 billion investment under the Troubled Asset Relief Program with the proceeds of a $17 billion common stock offering and a $3.5 billion offering of a novel equity unit transaction that received partial Tier 1 capital treatment. Nijenhuis also has been counsel to the Securities Industry Financial Markets Association and several major financial institutions in connection with tax issues related to the subprime meltdown and related credit crisis.
T. David Cowart
David Cowart (David Cowart)
T. David Cowart, a partner at Sonnenschein Nath & Rosenthal LLP, was highly visible during a difficult year for employee retirement and welfare plans. An expert in employee stock ownership plans, he was well-positioned to respond to IRS guidance in that area, and his actuarial acumen and knowledge of the intricacies of defined benefit plans allowed him to assist clients with the final regulations on funding standards that arrived in October, only weeks before key elections had to be made.
Cowart works out of Sonnenschein's Dallas office, and until March 2007 he directed the ERISA group of the former Jenkens & Gilchrist PC. He served as chair of the Committee on Employee Benefits for the ABA tax section from 1989 to 1999 and as chair of the ABA's Joint Committee on Employee Benefits from 1999 to 2000. He became a member of the American Law Institute in 2000, has been included in Best Lawyers in America since 2000, and along with his wife, Greta Cowart, a partner at Haynes and Boone LLP, was listed in 2009 among D magazine's best personal lawyers in Dallas in the ERISA category.
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