The admission by UBS that its employees concealed overseas accounts of U.S. taxpayers has already cost the Swiss bank $780 million in penalties.
Now some investors who owned those accounts are trying to make UBS liable for the tax penalties they had to pay on their undisclosed income, alleging that bank officials assured them the accounts were legal and not subject to U.S. taxes.
Among those suing are Riwall and Cristina Le Bars, a couple in their 60s who live in Aliquippa. They do not conform to common perceptions about the types of people who have Swiss bank accounts, according to one of the lawyers representing them.
"Everyone assumes that if you have a Swiss account or an offshore account, you're a multimillionaire. That's not true," says Alice Stewart, the University of Pittsburgh law professor who filed the Le Bars' lawsuit in federal court, Downtown, in April.
The Le Bars are seeking more than $750,000 in damages. The claim is based on the more than $275,000 penalty they paid to the IRS after they took advantage of an IRS offer for offshore investors to come clean, $200,000 in losses they incurred after UBS forced them to close their accounts, and a loan the couple took out on the advice of a UBS representative who they say told them adding the loan proceeds to their account would given them a better deal.
Here's how the lawsuit tells their story:
Mr. Le Bars, a mechanic, and his wife were living in Pennsylvania in 1992 when they opened an account at UBS with $9,000. They added to the account when Mr. Le Bars' father died in 2005. The following year, a UBS representative suggested that if they borrowed 300,000 Swiss francs -- worth about $310,000 at today's exchange rates -- they would "receive special investment treatments," according to the complaint.
So the couple took out the loan at 5 percent interest, putting their account balance over 1 million Swiss francs.
In 2009, after seeing news stories about the IRS offering to treat investors more leniently if they voluntarily disclosed their offshore holdings, the Le Bars took the agency up on its offer. They paid a penalty equal to 20 percent of the highest balance on their account between 2003 and 2008, which came to more than $275,000, according to the lawsuit.
To make matters worse, UBS told the couple in 2009 they would have to close their accounts and repay the loan. Liquidating their investments after financial markets had collapsed the previous fall resulted in $200,000 in losses.
At least two other lawsuits have been filed making similar claims.
One of them was submitted by California real estate developer Igor Olenicoff, who sued UBS in 2008. But Mr. Olenicoff's case was undercut by the fact that he pleaded guilty to failing to disclose his UBS offshore accounts on his tax returns.
In April, U.S. District Court Judge Andrew J. Guilford threw out the case, ruling that Mr. Olenicoff's admission "places nearly every room of his legal house of cards into jeopardy."
Investors seeking to make a class-action case against UBS filed a complaint in federal court in Chicago last year. California resident Matthew Thomas and Himanshu Patel of Arizona alleged the same things the Le Bars did: that UBS repeatedly assured them they did not have to pay taxes on the accounts; that it failed to deliver year-end documents investors in taxable accounts receive; and that it did not disclose that the Swiss bank signed an agreement with the U.S. government in 2001 agreeing to comply with tax-withholding obligations. Those obligations included requiring the bank's U.S. investors to complete IRS forms that would enable the agency to identify taxpayers who had offshore accounts.
U.S. District Court Judge John W. Darrah dismissed the complaint in June, ruling that UBS' former customers failed to plead their case well enough. One of their shortcomings was showing how the bank's negligence caused the investors not to disclose their foreign accounts on tax returns.
Investors are appealing his decision.
In its court filings, UBS pointed out that Schedule B of the Form 1040 income tax return requires taxpayers to disclose whether they have foreign accounts.
Joseph Nicola, a tax expert with Downtown accounting firm Sisterson & Co., said the question is supposed to remind investors that they may be liable for taxes on those accounts. But some taxpayers only report income documented on W-2s or other year-end statements like the ones that UBS investors said they never received, Mr. Nicola said.
The Le Bars lawsuit alleges that they were told that as long as their accounts held non-U.S. securities and were held by a foreign entity, they would not have to pay U.S. taxes.
"To the reasonable person, that sounds reasonable," Ms. Stewart said.
The outcome of the lawsuits will affect more than UBS and its former clients. The IRS and federal prosecutors have moved on to other Swiss banks and their clients.
Last week, an 83-year-old Massachusetts man who did not take advantage of the IRS' voluntary disclosure plan pleaded guilty to failing to disclose income from offshore accounts. The plea agreement requires him to pay more than $419,000 in back taxes and a $2.8 million penalty.bizopinion
Len Boselovic: email@example.com or 412-263-1941.