Bordering on Tax Evasion

Should corporations concern themselves with the fate of a few liquor smugglers? A recent Supreme Court decision could have consequences for businesses as well as bootleggers.

West and other experts stress that despite the Supreme Court decision, legitimate tax-planning efforts are endangered only by worst-case scenarios. But “although unlikely,” West contends, under the Pasquantino decision those scenarios “become possibilities.”

Thomas Carlucci, a partner in the San Francisco office of law firm Foley & Lardner, has a special warning for companies already under investigation by the Securities and Exchange Commission or the Department of Justice. If their financial conduct (or misconduct) has already attracted the attention of regulators, then their tax shelters and transfer-pricing procedures may invite extra scrutiny. “It’s not likely a wire-fraud charge would be the sole violation being investigated,” notes Carlucci, “but it introduces a new risk exposure.”

Philip Marcovici, an international tax partner in the Zurich office of law firm Baker & McKenzie, reckons that cross-border mergers and acquisitions may be another potential problem area. Marcovici, who advises high-wealth individuals, explains that outside the United States, many companies — public or private, large or small — are still controlled by families. U.S. corporations that acquire such businesses are usually required to buy out the target’s family-controlled interests, which can represent between 30 percent and 50 percent of total corporate ownership.

Thorny tax issues can arise when a family, as a condition of the deal, insists that the American acquirer transfer part of the buyout proceeds to a tax haven such as an offshore trust, for example. According to Marcovici, such tax sheltering is routine; it might be used to hoard wealth or even to mask income to protect the family from kidnap-and-ransom situations, he says.

The sheltering might be ignored by a country with a lenient tax code or lax law enforcement, but U.S. prosecutors — armed with the Pasquantino precedent — could charge the acquiring company and its tax managers with wire fraud if a U.S. phone system was used to arrange some part of the deal. The Supreme Court decision is unclear about whether wire-fraud indictments could extend to the company’s tax or banking advisors.

Quentin Riegal, vice president of litigation for the National Association of Manufacturers — which represents 14,000 industrial members, including 10,000 small and mid-sized companies — also worries that Pasquantino will make it more difficult for U.S. companies to compete in the global marketplace.

Riegal posits that if foreign courts follow the example set by the Supreme Court’s decision, they might begin to interpret U.S. tax law using their own countries’ standards. As a result, U.S. companies could be subject to criminal charges abroad, based on what courts there deemed to be tax evasion in the United States. “One man’s reasonable interpretation of tax law is another’s interpretation of fraud,” asserts Riegal.


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