By Saabira Chaudhuri And Christopher M. Matthews
The Justice Department has sued Deutsche Bank AG over
allegations of tax fraud, saying the German lender owes taxes and
penalties amounting to more than $190 million over a transaction
that took place more than a decade ago.
The U.S. Attorney for the Southern District of New York, Preet
Bharara, in a civil suit filed Monday in Manhattan federal court
alleged that Deutsche Bank struck a deal to create shell companies
to help it avoid paying taxes. Deutsche Bank says it plans to
contest the allegations.
The taxes in question would have been triggered by selling
Bristol-Myers Squibb Co. stock that Deutsche Bank had received as
part of a 1999 acquisition.
In the spring of 2000, Deutsche Bank sold the company that held
the stock to the shell companies for a price that the Justice
Department says didn't represent its fair value given "the tens of
millions of dollars of tax liabilities on the built-in gains."
One of the shell companies bought the stock using a short-term
loan and then immediately sold it back to Deutsche Bank, Mr.
Bharara's office alleged. The sale triggered a tax liability for
the shell company, which after paying back the loan and other
expenses didn't have the money to pay the tax bill.
Deutsche Bank then sold the stock without paying the tax
liability, alleges the Justice Department.
The Justice Department's civil suit comes amid heightened
scrutiny over how banks and their clients handled U.S. tax bills.
Credit Suisse Group AG in May admitted it conspired to aid tax
evasion and agreed to pay $2.6 billion to settle a long-running
probe with the Justice Department. UBS AG agreed to pay $780
million as part of a deferred-prosecution agreement in 2009. As
part of that deal, UBS acknowledged aiding U.S. tax evasion but
didn't plead guilty.
Deutsche Bank has been dinged on taxes related to stock sales
before. In 2009, the bank paid $6 million as part of a previously
undisclosed settlement with the Internal Revenue Service over the
matter, according to a person familiar with that settlement. The
IRS investigated the matter between 2003 and 2009.
The bank has taken the position with prosecutors that the IRS
settlement should resolve the matter, according to people familiar
with the situation. But prosecutors disagree and believe the $6
million doesn't address the tax liabilities owed as a result of the
alleged shell-company scheme, the people said.
"Deutsche Bank tried to make its potential tax liabilities
disappear," Mr. Bharara said in a statement. "This was nothing more
than a shell game."
A spokeswoman for Deutsche Bank said: "We fully addressed the
government's concerns about this 14-year-old transaction in a 2009
agreement with the IRS."
"In connection with that agreement they abandoned their theory
that DB was liable for these taxes, and while it is not clear to us
why we are being pursued again for the same taxes, we plan to again
defend vigorously against these claims," she said.
According to the Justice Department, the lawsuit is aiming to
recover the unpaid taxes, along with penalties and interest.
In the fall of 1999, Deutsche Bank was looking to profit from
deals in which it would incur income that it could shelter from
taxation, prosecutors said in court documents. The bank ultimately
settled on the plan to use a shell company to shed the tax
liability, prosecutors said in the documents. Deutsche Bank should
have known the holding company would incur a tax liability it was
unable to pay, and if the bank was unaware of that, it was because
people in the bank "actively avoided such knowledge," the documents
said.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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