The United States brings this action on state law fraudulent conveyance and unjust enrichment theories to recover over $190 million in unpaid tax, penalties and interest allegedly owed by Deutsche Bank A.G. and affiliates (collectively, "DB"). Broadly speaking, it claims that DB in 2000 conducted a series of transactions with the purpose and effect of leaving a special purpose vehicle owing tends of millions of dollars of federal taxes that it was unable to pay while DB profited as a result of the non-payment of the taxes. DB moves to dismiss the complaint on the theory that it is barred by the New York statute of limitations, fails to state a legally sufficient claim, and fails to allege fraud with the particularity required by Fed. R. Civ. P. 9(b). In the alternative, it seeks to limit the government's recovery.Just for background, this general introduction is reminiscent of the wave of Midco transactions that proliferated in the 1990s and early 2000s. In those transactions, one or more shareholders in a corporation having substantial built-in gain in assets would have shares that were worth only the value the corporate assets less all liabilities, including the tax on the expected tax on the built-in gain. Some buyer would buy the stock from the selling shareholders, paying them more than that value. The buyer could pay more because, supposedly, it had some way to eliminate or mitigate the gain, thus avoiding the corporate level tax. In effect, to the extent of the excess price paid the selling shareholders, the buyer and the selling shareholders would share the tax benefit of eliminating or mitigating the tax. The problem in the abusive transactions was that the elimination or mitigation of the tax did not work (often because the buyer sought to eliminate the gain with bullshit tax shelters or some other similar bullshit mechanism). The IRS and the citizens of the U.S. were left holding the bag with, so the schemers hoped and, in many cases, I am sure, prayed, nowhere to collect the tax. The Midco transactions were structured variously, often with an attempt to obscure the skulldugggery, but that was the essence.
Judge Kaplan makes short shrift of Deutsche Bank's attempt to avoid justice in this case. But, I would like in the balance of this blog entry to deal with the Midco-like quality of the transactions based on the allegations in the U.S. complaint, here, Here is the Introduction from the complaint.
1. In 2000, defendants Deutsche Bank, A.G. ("DB AG"), DB U.S. Financial Markets Holding Corp. ("DBUSH"), and Deutsche Bank Securities, Inc. ("DBST" and, collectively with DB AG and DBUSH, "Deutsche Bank" or the "Deutsche Bank defendants") implemented a plan to avoid payment of tens of millions of dollars of tax liabilities. As described in more detail below, Deutsche Bank participated in a series of transactions with the purpose and effect of leaving the United States Treasury with a huge, uncollectable tax bill. With the addition of statutory interest and penalties, that tax liability is today more than $190 million. This suit seeks to recover those funds.
2. The scheme was simple at its heart: Deutsche Bank had acquired a corporation that held stock with a very low cost-basis, such that the sale of this stock would trigger approximately $150 million in taxable gain. Deutsche Bank entered into an arrangement with a firm (collectively and with two related individuals and certain entities, the "Promoter," and each individually, a "Promoter") that created three shell corporations: defendants BMY Acquisition Corp. ("BMY Corp."), BMY Acquisition LLC ("BMY LLC"), and BMY Statutory Trust ("BMY Trust" and, collectively with BMY Corp. and BMY LLC, "BMY"). BMY was created to serve as an underfunded special purpose vehicle left holding the bag when the taxes came due. Through a series of pre-planned transactions, Deutsche Bank passed the appreciated stock from one Deutsche Bank entity through BMY to another Deutsche Bank entity in order to trigger the built-in tax liabilities while the stock was in BMY's hands. Through these transactions, Deutsche Bank attempted to make off with the stock with a stepped-up cost-basis, and BMY was left insolvent and unable to pay the resulting tens of millions of dollars in taxes.
3. To unravel this scheme and make the U.S. Treasury whole, the United States, first, seeks a judgment against BMY Corp. awarding the amount of BMY Corp.' s unpaid federal tax liability. Second, the United States brings actual and constructive fraudulent conveyance claims against the Deutsche Bank defendants, BMY, and First Union National Bank, as trustee of BMY Trust. The United States seeks a ruling with regard to these claims, pursuant to New York Debtor and Creditor Law ("NY DCL") sections 273, 274, 275, 276, 276-A, and 278, setting aside the conveyances of property (including funds) from BMY to the Deutsche Bank defendants to the extent necessary to satisfy BMY Corp. 's unpaid federal tax liability, allowing the satisfaction of BMY's debt from the transferred property or awarding the amount of taxes due, and awarding attorney's fees. Third, the United States brings a claim against the Deutsche Bank defendants for unjust enrichment.That is the gravamen of the complaint as alleged. The rest of the complaint has some significant details.
Here are some additional snippets which, because only snippets can address only some interesting facets rather than the big picture covered in the Introduction above (bold facing is supplied by JAT):
15. Here, Deutsche Bank, having acquired a company owning appreciated stock with a large built-in tax liabilities, attempted to evade that liability through a series of structured transactions. Deutsche Bank caused one entity, DBUSH, to sell its shares of the company holding highly appreciated stock to a special purpose vehicle (BMY) without funds to pay the taxes pursuant to an arrangement requiring BMY to sell the stock to a second Deutsche Bank entity (DBST, acting as agent for DB AG), in such a way as to cause BMY to become liable for tens of millions of dollars of tax that it could not afford to pay, and to allow Deutsche Bank to claim that it had acquired the stock with the new, higher basis.Note the use of the word "evade" which has meaning in the tax world. Evade is the same as tax evasion in Section 7201, although this is not a criminal case requiring proof beyond a reasonable doubt. (Probably it should have been.) But, later on the complaint uses the more benign "avoided."
16. These series of transactions, separately and collectively, amounted to fraudulent conveyances. Moreover, Deutsche Bank was unjustly enriched to the detriment of the United States as a result of these transactions.
17. In the fall of 1999, Deutsche Bank was looking to profit from deals in which it would deliberately incur income that it could shelter from taxation.
18. One vice president in Deutsche Bank's Structured Transactions Group found just such a deal for Deutsche Bank: Deutsche Bank would acquire a holding company that held appreciated stock and find a way to obtain the benefit of the stock without paying the large built-in tax. As this vice president explained in an email to the Tax Director for Deutsche Bank Americas, "[i]n accord with the broader income acceleration strategy that is underway, we have honed in [on] a particular personal holding company opportunity that will provide approximately $220 million in income (subject of course to market fluctuations)."
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25. The approximately $150 million purchase price paid by Deutsche Bank for the Charter stock was significantly greater than the economic value of the Charter stock if the built-in gain associated with the BMY shares owned by Charter are taken into account. Deutsche Bank was willing to have DBUSH pay significantly more than fair value for the Charter stock only because it knew that it would evade payment of the tax on this gain.The complaint then alleges facts indicating the Deustche Bank tried different gain eliminating strategies and then settled on the one actually employed.
29. This put Deutsche Bank in a difficult position. It had acquired Charter to gain access to the BMY shares, which had tens of millions of dollars of built-in tax liabilities. The market price of the stock-although fluctuating over time-was, as of March 2000, approximately $150 million, and the BMY shares had a basis of under one million dollars; accordingly, assuming the applicability of a 34.5% tax rate, the federal tax liability associated with the built-in gain of the BMY shares would have been greater than $51 million. But Deutsche Bank wanted to avoid paying these taxes, so it devised another scheme to evade doing so.
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31. Specifically, the plan was to restore the BMY shares to Charter; to transfer the Charter corporate stock from DBUSH to the shell companies (BMY) and -to cause the shell companies to incur the built-in tax liabilities and to transfer the BMY shares from BMY to DBSI, acting as agent for DB AG, with a stepped-up basis. The shell companies, set up specifically for this purpose and lacking assets sufficient to pay the tax liabilities, would default on those liabilities, leaving the United States unable to collect tens of millions of dollars in taxes. The benefit of not paying these taxes would substantially accrue to Deutsche Bank, including DBUSH, DBSI, and DB AG.
32. To effectuate this plan, Deutsche Bank worked with the Promoter, which, among other things, created the shell companies.
33. Solely for the purpose of these transactions, the Promoter created and controlled [Names of corporations], the shell companies that would be -- and were -- insolvent but liable for the tax liabilities as a result of various conveyances made pursuant to this scheme.
34. [The Deutsche Bank entities] knew (or should have known and were willfully blind to the fact) that the entire purpose of these transactions was to leave the tax liabilities with an entity other than Deutsche Bank in a manner that would hinder, delay and defraud the United States as a creditor of [the shell entity].Note the bold-face language that could easily be alleged as elements of the crimes of tax obstruction, § 7212(a), or the defraud / Klein conspiracy under 18 USC § 371.
Here are some of more details alleged:
55. BMY Trust substantially overpaid DBUSH for the Charter shares. At a minimum, the sales price did not account for the tax liabilities associated with the built-in gain on the BMY shares owned by Charter. The price only makes sense in connection with an intent not to pay the tax liabilities.
56. Moreover, the price paid by BMY Trust for the Charter shares may have been inflated by an additional amount as a result of other features of the overall set of transactions, including the encumbrance of the BMY shares by the BMY collar agreement and BMY option contract.
57. This transfer was conducted in bad faith and with the intent of hindering, delaying, and defrauding the United States as creditor of BMY.
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62. The sales price paid by DBSI to BMY did not reflect the built-in tax liabilities incurred by BMY, even though incurring this liability was part and parcel of the transaction. No reasonable party in BMY's position intending to pay this tax liabilities would have sold the BMY shares for the price that DBSI, as agent for DB AG, paid.
63. Moreover, the price paid by DBS! for the BMY shares additionally may not have been reasonably equivalent to the value of the BMY shares because of purchase-price reduction purportedly taken to account for the BMY collar agreement and BMY option contract and finance charges.
64. BMY and DBS!, acting as 'agent for DB AG, intended for BMY to incur the taxable gain on the BMY shares as a result of this sale. The entire series of transactions that took place in May 2000 were structured to cause this to occur, and the sale of BMY shares to DBSI would not have occurred absent BM Y's incurring of this taxable gain.
65. As intended by the parties to the transaction, BMY incurred substantial tax liabilities as a result of the built-in gain on the BMY shares due to the sale of the shares to OBST.
66. Deutsche Bank and BMY knew or should have known (and were willfully blind to the fact) that as a result of this transaction, BMY would not be able to pay the tax liabilities arising as a result of the sale of the BMY shares to DBS.
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5) Result of the Tax Scheme: BMY Is Left with Tax Bill It Cannot Pay While Deutsche Bank Benefits
70. As a result of this tax scheme, Deutsche Bank avoided paying tens of millions of dollars of taxes by being able to claim the stepped-up basis when it ultimately sold the BMY shares.
71. As specified below, BMY Corp. was left with a federal tax liability that, prior. to interest and penalties, amounted to $52,828,853.00.
72. After the repayment of the Rabobank loan, little or no money remained in BMY.
73. The BMY entities were left with no income or material assets other than the BMY shares, and thus were insolvent and unable to pay the federal tax liability incurred by BMY Corp. as a result of the transaction.Well, there is more, but readers can read the whole complaint.
Interestingly also is the presence of both Deutsche Bank and Rabobank, both of whom were foreign bank enablers in the bullshit Son-of-Boss cases proliferating among rich and sometimes famous taxpayers and prominent accounting and law firms. Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (Federal Tax Crimes Blog 11/22/10), here, and HVB Cops Plea in KPMG Tax Shelter Fraud (Tax Prof Blog 2/15/06), here. See also Dutch Bank Funded U.S. Tax Shelters: Rabobank Supplied Cash for Structures Under Investigation (WSJ 5/2/13), here. The key difference in this particular case is that Deutsche Bank was tax sheltering for its own benefit rather than enabling others.