Case Studies

Epstein Becker Green Wins Dismissal of Lawsuit Seeking Millions in Reimbursement of IRS Penalties, Interest, and Investment Losses

On February 25, 2013, the Supreme Court of the State of New York, New York County, dismissed on summary judgment a complaint brought by an individual whose $35 million deduction for tax shelter losses was disallowed and who sought reimbursement of more than $5 million in Internal Revenue Service ("IRS") penalties, interest on unpaid income tax, and investment losses against an Epstein Becker Green client, a trust company. The plaintiff claimed that our client, among other things, committed a fraud, breached fiduciary duties, and negligently handled his accounts by participating in the tax shelter.

The plaintiff had founded a highly successful video game company and had income of $35 million in 2001 that he wanted to shelter from taxes. He engaged accountants and advisors, and a lawyer from a prominent law firm, who together devised a complex investment structure to create paper losses that involved, among other things, engaging a trust company (Epstein Becker Green's client) simply to administer a pooled investment trust and to handle related paperwork. The structure involved borrowing $35 million from a foreign bank. After the IRS determined the loan to be a sham and the investment losses artificial, it disallowed the loss deductions, and the plaintiff had to pay $13 million in back taxes, $2 million in interest, and $1.3 million in penalties. The lawyer was jailed for tax fraud and the foreign bank entered into a deferred prosecution agreement and paid fines. Having settled with the law firm and several other participants in the shelter, the plaintiff sued our client and the foreign bank that made the "sham" loans.

After extensive discovery of all the sponsors and participants in the tax shelter scheme, the court dismissed the complaint. It held that, because the plaintiff knew or should have known that the tax shelter was risky and because he was complicit in the scheme, he could not have reasonably relied on any alleged fraudulent statements by any of the defendants. Moreover, the proximate cause of the disallowance and the penalties was not the bank's or trust company's actions, but the plaintiff's own participation in a transaction of "doubtful illegality." Hence, all of the plaintiff's breach of contract and fiduciary duty theories were rejected. The court appropriately placed the loss on the plaintiff who stood to benefit from the shelter, and not on anyone else.

Epstein Becker Green attorneys Kenneth J. Kelly and Lori A. Jordan were on the litigation team in New York. Salt Aire Trading LLC v. Enterprise Bank and Trust Corp., S.Ct., N.Y. Co. Index No. 603798/07 (2/25/13).

Epstein Becker Green Helps Client Obtain Dismissal of Religious Discrimination Suit

Epstein Becker Green successfully represented one of its clients, a messenger service (“Defendant”), in an appeal of a trial court’s judgment that dismissed a lawsuit by a former employee (“Plaintiff”).

When the Plaintiff was hired by the Defendant as a bicycle messenger, he was given, in accordance with the Defendant’s dress code, a company uniform that included a messenger bag containing the Defendant’s logo. However, the Plaintiff decided to carry a personal bag with religious writing on the outside. The Defendant repeatedly informed the Plaintiff that he could not use his personal bag while working and had to carry the Defendant’s messenger bag instead. The Plaintiff continued to carry his personal bag while working, so the Defendant fired him for violating its dress code. The Plaintiff then filed suit against the Defendant, claiming that he was a victim of religious discrimination. After the New York Supreme Court, Bronx County, dismissed the Plaintiff’s lawsuit, he appealed.

On April 16, 2015, the New York Supreme Court, Appellate Division, First Department, affirmed the trial court’s decision to dismiss the suit. The Appellate Division pointed out that the Plaintiff never explained to the Defendant why he needed to carry his personal bag, despite the Defendant’s dress code. “Plaintiff's failure to inform defendant of his reason for carrying his personal bag is fatal to his claim,” stated the Appellate Division. Also, the Plaintiff’s religious discrimination claim failed because he could not prove that the Defendant’s policy of carrying only one messenger bag as part of a uniform applied solely to him, and not all employees. The Appellate Division added that the Defendant had “a legitimate, nonpretextual reason for discharging [P]laintiff from employment.”

Epstein Becker Green attorney Lori A. Medley represented the Defendant.