Monday, December 11, 2017

Court Holds that Foreign Law Not Proved and Applies U.S. Law (12/11/17)

In Nineveh Investments Ltd. v. United States, 2017 U.S. Dist. LEXIS 199486 (E.D. Penn. 2017),  here, the Government assessed tax against one Gary Kaplan and then, in collection of the tax, levied on assets nominally owned by either Nineveh Investments, Ltd. ("Nineveh") or the Kaplan Family Trust ("KFT"); Nineveh brought a wrongful levy suit.  (Related Documents are (i) the docket entries as of today, here, the complaint, here, the answer, here, and the Government response on the motion, here.)  

The underlying liability for Gary Kaplan was litigated in Kaplan v. Commissioner, T.C. Memo. 2014-43, here, where the Court stated the issues and its bottom-line holding in the introduction:
 Petitioner did not file Federal income tax returns nor make any tax payments for 2004 and 2005, the years at issue. Pursuant to his authority under section 6020(b) , respondent prepared substitutes for returns for both years.
 In a notice of deficiency, respondent determined the following income tax deficiencies and additions to tax:

Sec. 6654
Additions to
Sec. 6651(a)(1)
Sec. 6651(a)(2)
 Petitioner resided in Missouri when he timely petitioned this Court. The issues before us are:
(1) whether for the years at issue petitioner is liable for self-employment tax on his income as a consultant for BetOnSports, PLC, and capital gains tax from the sale of shares of BetOnSports, PLC. We hold that he is; and
(2) whether for the years at issue petitioner is liable for additions to tax under section 6651(a)(1) for failure to file timely, under section 6651(a)(2) for failure to pay tax timely, and under section 6654 for failure to make estimated tax payments. We hold that he is.
The Nineveh Court states the facts succinctly, so I just offer them here:
This lawsuit arises out of tax levies by defendant United States on the claimed assets of terminated third-party defendant Gary Kaplan to satisfy Kaplan's outstanding tax obligations. Kaplan's tax obligations stem from the sale of his shares in BetOnSports, PLC, an overseas gambling operation, in public offerings in 2004 and 2005. Doc. No. 37 at 3. In anticipation of the public offerings, Kaplan settled two trusts based in the Isle of Jersey, to which he transferred his shares in BetOnSports. Doc. No. 38 at 2. During the public offerings, the trusts sold Kaplan's shares in BetOnSports for approximately $97 million, which Kaplan invested in bank accounts in Switzerland and the Isle of Jersey. Id. at 3. In 2010, Kaplan settled the Kaplan Family Trust ("KFT") under the laws of the Bahamas as a successor to the two trusts based in the Isle of Jersey. Doc. No. 37 at 4. Plaintiff Nineveh Investments Limited is a Bahamian corporation that serves "as the underlying company for KFT's financial assets." Id. In 2014, the United States Tax Court ruled that Kaplan earned taxable income from the 2004 and 2005 sales of his shares in BetOnSports. Doc. No. 38 at 3. Consequently, on February 24, 2016, the Internal Revenue Service ("IRS") placed levies on assets transferred by Kaplan to plaintiff. Doc. No. 37 at 4. 
On March 4, 2016, plaintiff Nineveh Investments Limited filed suit in this Court, alleging that the levied assets were not taxable property belonging to Mr. Kaplan, but only to plaintiff and KFT. The Complaint set forth a single count, for wrongful levy, and sought return of the levied assets, with interest and costs. Plaintiff also filed suit in the Bahamian Supreme Court, a trial-level tribunal, against Kaplan for determination of "the rights of the discretionary beneficiaries" of KFT. Doc. No. 37, exh. B ¶ 5. The United States was invited to "participate" in the Bahamian proceedings, but declined to do so. Doc. No. 37 at 3. On July 6, 2017, the Bahamian Supreme Court issued an Order ("July 6, 2017 Order"), ruling that the levied assets "do not form a part of the personal assets of Gary Kaplan." Doc. No. 37, exh. C. Plaintiff now asks this Court to adopt the July 6, 2017 Order.
Well, I am sure readers can see where this is going.

The Court first traversed the U.S. law on proving a foreign country's law as follows:
Plaintiff first asks this Court to adopt the July 6, 2017 Order under Federal Rule of Civil Procedure 44.1. Under Rule 44.1, "[a] party who intends to raise an issue about a foreign country's law must give notice by a pleading or other writing." Fed. R. Civ P. 44.1. The party raising an issue of foreign law must "carry both the burden of raising the issue that foreign law may apply in an action, and the burden of adequately proving foreign law to enable the court to apply it in a particular case." Bel-Ray Co. v. Chemrite Ltd., 181 F.3d 435, 440-41 (3d Cir. 1999). "Where parties fail to satisfy either burden the court will ordinarily apply the forum's law," regardless of the law dictated by the applicable choice of law rules. Id. "[I]n the absence of sufficient proof to establish with reasonable certainty the substance of the foreign principles of law, the modern view is that the law of the forum should be applied." Banco de Credito Indus., S.A. v. Tesoreria Gen. de la, 990 F.2d 827, 836 (5th Cir. 1993); accord Restatement (Second) of Conflicts of Laws § 136, cmt. h (1971). In the absence of sufficient proof, Rule 44.1 "provides courts with broad authority to conduct their own independent research to determine foreign law but imposes no duty upon them to do so." Bel-Ray Co., 181 F.3d at 440.
Nineveh's position was that Bahamian law controlled and the July 6, 2017 Order correctly interpreted and applied that law.  The Court held that the plaintiff had not met its burden to prove the law supposedly applied in the Order.
The Court agrees with the United States with respect to the application of foreign law. Rule 44.1 provides that "[i]n determining foreign law, the court may consider any relevant material or source, including testimony." Fed. R. Civ. P. 44.1. "Rule 44.1 was intended to provide a uniform and liberal federal procedure for determining foreign law." Ramirez v. Autobuses Blancos Flecha Roja, S.A. De C.V., 486 F.2d 493, 497 n.11 (5th Cir. 1973). The purpose of the Rule is to enable courts to determine the substance of foreign law and apply it as appropriate to the cases before them. Although Rule 44.1 allows this Court to consider the July 6, 2017 Order by the Bahamian Supreme Court, that Order provides no evidence of the substance of Bahamian law. It simply recites that court's findings without quoting or discussing the law it purports to apply. Plaintiff has provided no other evidence of the substance of Bahamian law and consequently has failed to carry its burden of adequately proving foreign law. 
Where the parties have failed to prove the substance of foreign law, under Third Circuit precedent, a district court applies the law of the forum. Ferrostaal, Inc. v. M/V Sea Phx., 447 F.3d 212, 218 (3d Cir. 2006) ("Ferrostaal had the burden of establishing Tunisian law and showing that it differs from United States law. It did not carry that burden. Under these circumstances, we assume that Tunisian law is the same as United States law." (internal citations omitted)); Bel-Ray Co., 181 F.3d at 440 ("Ordinarily, [application of foreign law] would require a conflict of laws analysis to determine which state had the weightier interest in having its law apply in resolving the relevant issue. Because of a failure of proof discussed below, however, we will apply the law of the forum."). Thus, this Court will apply Pennsylvania law in this case.
The Court also rejected comity, concluding:
The Court agrees with the United States with respect to the issue of comity. Critically, the United States was not subject to the jurisdiction of the Bahamian Supreme Court and was not a party to those proceedings. "It is axiomatic that the United States may not be sued without its consent and that the existence of consent is a prerequisite for jurisdiction." United States v. Mitchell, 463 U.S. 206, 212, 103 S. Ct. 2961, 77 L. Ed. 2d 580, (1983). That consent "cannot be extended beyond the plain language of the statute authorizing it." Price v. United States, 174 U.S. 373, 376, 19 S. Ct. 765, 43 L. Ed. 1011 (1899). 
The United States has not consented to be sued in foreign courts. See 28 USCS § 1346(e) (granting "[t]he district courts . . . original jurisdiction of any civil action against the United States" arising from the Internal Revenue Code); cf. Newman v. Soballe, 871 F.2d 969, 977 (11th Cir. 1989) ("Under the Gonzalez Act's scheme [indemnifying certain U.S. personnel], the United States is not subjected to the foreign court's jurisdiction and no foreign sovereignty may render a judgment against the United States."). 
Consequently, the Bahamian Supreme Court did not have jurisdiction over the United States, and the United States was not obligated to "participate" in those proceedings, as a party or otherwise. Adopting the July 6, 2017 Order would subject the United States to a proceeding to which it did not consent.
On other issues, the Court deferred:
The parties raise additional arguments including whether it is necessary to resort to state law to determine the scope of Kaplan's property rights in the levied assets; whether KFT was Kaplan's alter ego or "nominee"; whether KFT is, in fact, a revocable trust; and whether the United States may be bound by a "state trial court adjudication." Doc. No. 38 at 8-13; Doc. No. 40 at 5-10. The Court agrees with defendant that those issues are not ripe for decision, Doc. No. 43 at 5 n.1, and concludes that it is not necessary to reach them in deciding the present Motion.
JAT Comments:

1.  I noticed that the Government requests attorneys fees in its answer.  I have not researched what the basis for attorneys fees is.

2.  The facts indicate that Kaplan has taken some extreme actions first to initially avoid/evade assessment of the tax and then to avoid/evade payment of the tax.  I wonder if those actions, including the commencement of what is probably a sham or close to sham Bahamian legal action and even this wrongful levy suit in the name of nominees or alter egos might be considered affirmative acts that could support an evasion of assessment or evasion of payment charge.   Of course, the criminal statute of limitations may have run on some of the underlying conduct (although all of the time that Kaplan was outside the U.S. would suspend the statutes of limitations under § 6531.

3.  I don't know why Kaplan chose the name Nineveh for the corporation.  Nineveh is of course a name prominent in ancient history and the Hebrew Bible.  See Wikipedia entry on Nineveh, here.

4.  For those readers working in the offshore tax and FBAR area, think about Kaplan's other risks for penalties -- FBAR willful penalties, probably coming into the recent years because of nominee/alter ego/sham possibilities, and the other penalties related to transfers to foreign corporations and foreign trusts.  Of course, the statute of limitations might be closed on some, but for some of those there are suspensions of the statute until the taxpayer provides the relevant information to the IRS.

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