The US Court of Appeals for the Seventh Circuit has dismissed a class action suit filed by US taxpayers to seek damages from UBS AG (UBS) for penalties and other losses that they incurred for hiding their UBS accounts from the US Internal Revenue Service (IRS).
The case involved US taxpayers who held bank accounts in UBS and did not disclose the existence of the accounts, or the income earned in those accounts, on their US federal income tax returns. The US taxpayers also did not pay US federal income tax on the income. Pursuant to an IRS amnesty program, i.e. the "Offshore Voluntary Disclosure Program", which was adopted in the wake of the UBS tax-evasion scandal in 2008, the US taxpayers disclosed their accounts in UBS and paid the taxes on the income, together with interest on the taxes and a 20% penalty.
The US taxpayers filed a class-action lawsuit to recover from UBS the penalties, interest, and other related costs, plus the profits that they alleged UBS had made from the US taxpayers by inducing them to maintain their accounts with it.
The US taxpayers based their claims on various legal grounds, including a breach of contract, fraud, and a breach of fiduciary duty, unjust enrichment, negligence, and malpractice. The US taxpayers argued, inter alia, that:
- the UBS had a duty to prevent them from violating the law by informing them that they were required to pay taxes on the earnings in their accounts,
- the UBS coaxed them into continuing to invest with it by concealing its agreement with the IRS to report tax information about the US taxpayers to the IRS; and
- UBS touted the secrecy of the US taxpayers' accounts, which led the US taxpayers to infer that the bank would conceal their accounts from the IRS enabling them to avoid payment of tax on the earnings in their accounts.
The Court of Appeals stated that the US taxpayers are tax cheats and that it is very odd for tax cheats to seek to recover their interest and penalties from the source (i.e. UBS in this case) of the income concealed from the IRS.
The Court of Appeals further stated that there is in general no common law duty to prevent another person from violating the law. The Court of Appeals then likened this case to the Highwayman's Case (Everet v. Williams, Ex. 1725), in which a criminal sued his accomplice for an accounting of the illegal profits from their criminal activity, and the court, without adjudicating the case, had both parties hanged.
The Court of Appeals rejected all of the US taxpayers' claims and affirmed the district court's decision that dismissed the case.
The Court of Appeals noted that this lawsuit was a travesty and that it was surprising that UBS had not requested the imposition of sanctions on the US taxpayers and their class counsel.
United States - US Court of Appeals dismisses US clients' class action against UBS (13 Feb. 2013), News IBFD.
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