The First Department, disregarding the spirit of Chevron, dismisses a qui tam tax fraud case. Subsequent expert opinion shows the ruling cost New York State and New York City up to $75 million each.
The First Department, disregarding the spirit of Chevron, dismisses a qui tam tax fraud case. Subsequent expert opinion shows the ruling cost New York State and New York City up to $75 million each.
You can download the complete powerpoint presentation below (846 mb)):
Further, neither jurisdiction has any statute of limitation on these claims. Each has damages, taxes, interest and penalties, of approximately $25 million. However, neither jurisdiction has sought to pursue these claims. Even further, the Relator, with a 17 page supporting letter, documenting each email over 2 years, has alleged to the New York City Inspector General that the New York City Law Department, and unnamed members of the New York City Department of Finance, deliberately engage in a pretense of investigation All the of the above can be traced to the decision of the New York State First Department to follow the spirit of the Chevron Doctrine and defer to the expert testimony Relator anticipated he could produce in due course.
The Chevron doctrine is subject to challenge before SCOTUS. How much deference should courts pay to the expert opinion of agI (hereafter “Relator”) have an example of a case wherein the First Department Appellate Division of New York State faced complex allegation of tax fraud and, without permitting discovery and the introduction of expert testimony, dismissed the case. As explained in more detail below, this cost the State of New York potentially $75 million.1
In the early 2000s, through litigation, Relator discovered what Relator believe to be tax fraud inflicted on the US and New York City by several Wall Street Banks. The transactions at issue (the “PSINet Transactions” were private placements of securities in 1990 with 85% of the funds raised in the United States by US Banks (The “US Affiliates”) and 15% raised in the UK by the British counterparts of the US Banks (the “UK Affiliates”). The Relator based his claims on documents showing the “US Affiliates”, the investment banks of an internet start up the year prior (1998) , simply chose in one tax year to have the UK Affiliates be the “principals” in almost two billion in bond placements.
The Purchase Agreements for each of the two transactions (July and November) described the UK Affiliates as the “initial purchasers” of the securities at issue, with the US Affiliates as simply agents for the UK Affiliates
Even though 85% of the money was raised by the US Affiliates in the United States, the UK Affiliates on some (but not all) of the documents were the purported principals.
Further, in multiple documents (included the front and back of the two prospecti, the US Affiliates identified themselves as the principals.
The structure of the transactions, again, well documented, was simply that the US Affiliates, acting as de facto principals, raised 85% of the $1.6 billion in the US, and wired the funds from the New York City closing to the UK, where the UK Affiliates simply booked the fees at the UK’s then-lower corporate tax rate. Slides 121 to 169, and the accompanying video, of a Powerpoint presentation, on the case show this fraud in detail.
In 2005, Relator sought to report this to the IRS. At that time, the IRS had a terrible reputation for treating whistleblowers poorly. As can be seen in the following few paragraphs, it lived up to its reputation.
In March 2005, the IRS referred Relator to a Special Agent (the “SA”) in New York. The SA said he needed to confirm there was no previous audit taking place before he could meet with me. Two weeks later, the SA called to notify me there was no pre existing audit, and we arranged a meeting at the IRS’ offices off of Times Square. At the meeting, the SA and his colleagues asked some questions, but showed no deep interest in examining the case.
In April, 2005, I received a notice of rejection from the Ogden Utah IRS Office. In response, I made several phone calls seeking to find out what was the basis for the rejection. I ultimately reached a lawyer in the International Division of the IRS (IRS Attorney), who asked me to submit a memorandum explaining my allegations of fraud.
On reading this news, I called the IRS Attorney . However, he gave a vague response, indicating there was a recovery had taken place, but, due to a pre existing audit, I was not eligible for a reward.
In 2007, I made inquiry to the head of the newly created OOW. However, his June 2007 response made an oblique reference to a prior denial (of which I was not aware) and said that it had been “well-reasoned”. Based on a review of cases where the IRS has had no hesitation telling whistleblowers the IRS recovered nothing, Relator viewed the letter as an excuse to deny a reward because the Relator could not appeal the ruling.
In 2011, New York State passed tax amendments to its qui tam legislation that permitted private relators to bring actions on behalf of the State and its municipalities.
In 2012, the Relator filed such an action on behalf of New York State, alleging Wall Street defrauded it as a result of the PSINet transactions. The Relator was aware that tax whistleblowers had a history of poor treatment by the government. However, Relator though the claims were so compelling that the government and courts would assist. Further, I believed the documentation on file with the IRS relating to my interactions with the SA Agent and IRS Agent would demonstrate the IRS had In November 2012, I wrote a letter to the New York State Taxpayer Protection Bureau (TPB), setting how the US tax code made funds earned in the geographic United States taxable in the United States. However, the TPB did not think the case had merit. Further, it declined to interview either the OOW to determine if the IRS had effectuated a recovery, or the IRS Attorney, who would certainly provide expert opinion on the facts (Relator did not have subpoena authority for these efforts). Instead, the TPB declined to intervene on behalf of NYS, characterizing the case as a “fishing expedition”. The courts typically view such a declination as a “black mark” on a case, based on the assumption a thorough investigation was conducted.
The trial court’s dismissal, did not even address the merits of these allegations, focusing instead on statute of limitations. However, the appellate court, taking the fact finding and international tax law interpretation into its own hands at the motion to dismiss stage (and therefore before expert reports were due), ruled the tax fraud allegations were “pure speculation”.
In contrast to many other cases dismissing fraud as “speculation”, the appellate court did not set forth the allegations on which the Relator based of tax fraud, or explained why they were speculation.
Unfortunately for that ruling, in the months prior to the appellate court ruling, I had set forth the facts of the case in clear detail to a nationally known tax professor, whose written letter in response opined that the transactions in question were “structured to evade . . New York State taxes” and that the defendants should pay these taxes. Even further, the tax expert noted the importance of obtaining the results of the IRS inquiry as part of a complete investigation.
Experts with national reputations do not base their opinions on “speculation”; therefore, the evidence before the appellate court was not such. The damage caused by this ruling was not limited to the taxes owed to New York State.
In early 2016, the Relator noticed that New York City had a corporate franchise tax which applied to the transactions at issue. In March of 2016, the Relator filed a qui tam case on behalf of that entity, alleging tax fraud in the PSINet transactions.
The Relator’s Second Amended Complaint, included the above-described opinion of Professor Reuven Avi-Yonah and other experts. It included supporting appendices, Volumes One Two and Three.
One of the experts, Professor Richard Painter of the University of Minnesota, tweeted “[i]f the factual allegations in these pleadings are true, the banks inflicted a huge fraud on New York State and New York City. Someone should investigate this”.
The Defendants sought to dismiss the case on the grounds that the Relator’s case against the State meant that pressing the same claims against the City were barred by the doctrines of res judicata and collateral estoppel. Insert Motion to Dismiss.
In response, Relator filed an Opposition to Motion to Dismiss, with multiple expert opinions.
In January 2017, the City of New York accepted evaluation of the case per court order. In late July 2017, late January 2018 and late July 2018, the City Law Department filed “reports” to the court, to which Relator was not privy. However, the Law Department told Relator the reports simply stated the investigation was ongoing. During these two years, the Law Department never provided any documents or information relevant to the case to Relator.
The First Department affirmed the trial court’s dismissal of the second case, on the grounds of res judicata and collateral estoppel.
In the early 2000s, through litigation, Relator discovered what Relator believe to be tax fraud inflicted on the US and New York City by several Wall Street Banks. The transactions at issue (the “PSINet Transactions” were private placements of securities in 1990 with 85% of the funds raised in the United States by US Banks (The “US Affiliates”) and 15% raised in the UK by the British counterparts of the US Banks (the “UK Affiliates”)
The Relator based his claims on documents showing the “US Affiliates”, the investment banks of an internet start up the year prior (1998) , simply chose in one tax year to have the UK Affiliates be the “principals” in almost two billion in bond placements.
The Purchase Agreements for each of the two transactions (July and November) described the UK Affiliates as the “initial purchasers” of the securities at issue, with the US Affiliates as simply agents for the UK Affiliates
Even though 85% of the money was raised by the US Affiliates in the United States, the UK Affiliates on some (but not all) of the documents were the purported principals Further, in multiple documents (included the front and back of the two prospecti, the US Affiliates identified themselves as the principals.
The structure of the transactions, again, well documented, was simply that the US Affiliates, acting as de facto principals, raised 85% of the $1.6 billion in the US, and wired the funds from the New York City closing to the UK, where the UK Affiliates simply booked the fees at the UK’s then-lower corporate tax rate. Slides 121 to 169, and the accompanying video, of a
In 2005, Relator sought to report this to the IRS. At that time, the IRS had a terrible reputation for treating whistleblowers poorly. As can be seen in the following few paragraphs, it lived up to its reputation.
In March 2005, the IRS referred Relator to a Special Agent (the “SA”) in New York. The SA said he needed to confirm there was no previous audit taking place before he could meet with me. Two weeks later, the SA called to notify me there was no pre existing audit, and we arranged a meeting at the IRS’ offices off of Times Square. At the meeting, the SA and his colleagues asked some questions, but showed no deep interest in examining the case.
In April, 2005, I received a notice of rejection from the Ogden Utah IRS Office. In response, I made several phone calls seeking to find out what was the basis for the rejection. I ultimately reached a lawyer in the International Division of the IRS (IRS Attorney), who asked me to submit a memorandum explaining my allegations of fraud.
I heard nothing back, However, in 2006, Congress passed legislation creating the IRS office of Whistleblower (“OOW”). It gave IRS whistleblowers various protections, such as an appeal to the Tax Court on a reward denial. However, such protections applied only to information provided after the passage of the Act
On reading this news, I called the IRS Attorney . However, he gave a vague response, indicating there was a recovery had taken place, but, due to a pre existing audit, I was not eligible for a reward.
In 2007, I made inquiry to the head of the newly created OOW. However, his June 2007 response made an oblique reference to a prior denial (of which I was not aware) and said that it had been “well-reasoned”. Based on a review of cases where the IRS has had no hesitation telling whistleblowers the IRS recovered nothing, Relator viewed the letter as an excuse to deny a reward because the Relator could not appeal the ruling.
In 2007, I made inquiry to the head of the newly created OOW. However, his June 2007 response made an oblique reference to a prior denial (of which I was not aware) and said that it had been “well-reasoned”. Based on a review of cases where the IRS has had no hesitation telling whistleblowers the IRS recovered nothing, Relator viewed the letter as an excuse to deny a reward because the Relator could not appeal the ruling.
In 2011, New York State passed tax amendments to its qui tam legislation that permitted private relators to bring actions on behalf of the State and its municipalities.
In 2012, the Relator filed such an action on behalf of New York State, alleging Wall Street defrauded it as a result of the PSINet transactions. The Relator was aware that tax whistleblowers had a history of poor treatment by the government. However, Relator though the claims were so compelling that the government and courts would assist. Further, I believed the documentation on file with the IRS relating to my interactions with the SA Agent and IRS Agent would demonstrate the IRS had In November 2012, I wrote a letter to the New York State Taxpayer Protection Bureau (TPB), setting how the US tax code made funds earned in the geographic United States taxable in the United States. However, the TPB did not think the case had merit. Further, it declined to interview either the OOW to determine if the IRS had effectuated a recovery, or the IRS Attorney, who would certainly provide expert opinion on the facts (Relator did not have subpoena authority for these efforts).
Instead, the TPB declined to intervene on behalf of NYS, characterizing the case as a “fishing expedition”. The courts typically view such a declination as a “black mark” on a case, based on the assumption a thorough investigation was conducted.
The trial court’s dismissal, did not even address the merits of these allegations, focusing instead on statute of limitations. However, the appellate court, taking the fact finding and international tax law interpretation into its own hands at the motion to dismiss stage (and therefore before expert reports were due), ruled the tax fraud allegations were “pure speculation”.
In contrast to many other cases dismissing fraud as “speculation”, the appellate court did not set forth the allegations on which the Relator based of tax fraud, or explained why they were speculation.
Unfortunately for that ruling, in the months prior to the appellate court ruling, I had set forth the facts of the case in clear detail to a nationally known tax professor, whose written letter in response opined that the transactions in question were “structured to evade . . New York State taxes” and that the defendants should pay these taxes. Even further, the tax expert noted the importance of obtaining the results of the IRS inquiry as part of a complete investigation.
Experts with national reputations do not base their opinions on “speculation”; therefore, the evidence before the appellate court was not such.
The damage caused by this ruling was not limited to the taxes owed to New York State.
In early 2016, the Relator noticed that New York City had a corporate franchise tax which applied to the transactions at issue. In March of 2016, the Relator filed a qui tam case on behalf of that entity, alleging tax fraud in the PSINet transactions.
The Relator’s Second Amended Complaint, included the above-described opinion of Professor Reuven Avi-Yonah and other experts. It included supporting appendices, Volumes One Two and Three.
One of the experts, Professor Richard Painter of the University of Minnesota, tweeted “[i]f the factual allegations in these pleadings are true, the banks inflicted a huge fraud on New York State and New York City. Someone should investigate this”.
The Defendants sought to dismiss the case on the grounds that the Relator’s case against the State meant that pressing the same claims against the City were barred by the doctrines of res judicata and collateral estoppel. Insert Motion to Dismiss.
In response, Relator filed an Opposition to Motion to Dismiss, with multiple expert opinions.
In January 2017, the City of New York accepted evaluation of the case per court order. In late July 2017, late January 2018 and late July 2018, the City Law Department filed “reports” to the court, to which Relator was not privy. However, the Law Department told Relator the reports simply stated the investigation was ongoing. During these two years, the Law Department never provided any documents or information relevant to the case to Relator.
The First Department affirmed the trial court’s dismissal of the second case, on the grounds of res judicata and collateral estoppel.
On conclusion of the case, the Relator reviewed how the New York City Law Department spent two years (2017-2018), reporting to the court it was investigating the case, when the Law Department never produced any documents, interviewed any witnesses or reported to Relator any information he requested.
Specifically Relator saw no evidence the Law Department had reviewed the tax returns at issue to determine the amount of refunds available as damages. Further, the Law Department never interviewed plaintiff’s tax expert nor disclosed to Relator its “Tax Refund Policy”; or opened a major attachment to one of Relator’s emails, sent in July 2018, in response to the Law Department’s request for “additional evidence of fraud”.
In September 2019, the Court unsealed the Complaint. After that time, the Law Department ceased communications with Relator, even declining to confirm receipt of filings or consent to filing
In December 2020, the Relator found one of his emails to “Attorney X” of the Law Department returned undeliverable. On inquiry, Attorney X had left the Law Department without advising the Relator of this fact, or finding another attorney to communicate with Relator.
On the basis of these facts and a review of the emails between the Relator and the New York City Law Department, the Relator filed a complaint with a senior member of the New York City Law Department, alleging that the City, through its Law Department, had deliberately obstructed the case by spending two years falsely representing to the court that it was conducting an investigation. In fact, the emails indicate the Law Department was conducting no such review; instead it was trying to discourage Relator, and hoping he would drop the case.
After almost a year of silence, in January 2024, the Relator passed on the complaint to the New York City Inspector General. To date, Relator has received no response.
Even after the dismissal of the Relator’s claims, the State and City of New York still have claims for about $25 million each. They have declined to pursue them, likely because of the resulting embarrassment of having to admit their first assessment that the claims were “speculation” was completely undermined by unimpeachable expert opinion.
This is what happens when courts substitute their opinions for experts.
All of my claims are documented in a video I have prepared, cited later on in the post. My purpose in this presentation is to give a general introduction to a complex set of facts. The video shows the raw documents, which will provide a much deeper level of comprehension ↩︎