Are you fascinated with avoiding tax hikes in New York? Then consider the False Claims Act | Rivkin Radler LLP

According to Justice Learned Hand, “Everyone can manage their affairs so that their taxes are as low as possible; he is not obliged to choose the pattern that the treasury pays best; There isn't even a patriotic duty to raise taxes. "(FN: Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)) In other words, taxpayers have the right to pay only the tax amount due by law.

Even so, taxpayers have shown varying degrees of aversion to their tax obligations over the years – especially in high-tax countries like New York. Hopefully, those New York taxpayers willing to "roll the dice" are aware of the audit risk involved, but many of them may not be aware of the exposure to the New York False Claims Act.

Federal taxes rise …

Last week President Biden unveiled the first part of his two-part plan to rebuild America's infrastructure. (I) Under the President's proposed US employment plan, (ii) the federal government would spend nearly $ 2.3 trillion over an eight year period (iii) repairing the nation's infrastructure and accomplishing much more. (iv)

To fund this very ambitious and very expensive plan, the president also introduced the Made in America tax plan, which would raise the federal corporate tax rate from a flat rate of 21 percent to 28 percent. (V) The minimum tax on the non-refundable taxable foreign income of a domestic C company would be doubled from 10.5 percent to 21 percent. (vi) The taxable portion of this income would be increased by eliminating the 10 percent “net return on material income” and a 15 percent minimum tax rate is imposed on the income that “the largest” companies use to report their profits to investors. (vii)

According to the White House, the second part of the president's plan – the American family plan – will be introduced "in a few weeks". This plan is expected to be accompanied by its own companion tax plan, which is likely to suggest individual tax increases for ordinary income, long-term capital gain, qualified dividends, and possibly a reduction in the flat federal exemption and gift tax exemption amount (viii)

… And New York tax increases

In the spirit of what may be federal tax madness and the fact that it won't be outdone by any other tax jurisdiction, New York lawmakers slapped around $ 7 billion in new taxes for wealthy New Yorkers and corporations for the coming month Fiscal year before (ix)

How will wealthier New Yorkers respond to this tax hike?

Some will resign themselves to biting the proverbial bullet – the combined federal and New York tax hikes will hurt, (x) but these individuals are not yet ready to leave the state, let alone emigrate to a tax haven. (Xi)

Others will realize that while they cannot eliminate their federal taxes, they can lower their state and local taxes by leaving New York for warmer areas. (Xii)

Most will consult their tax advisor to formulate some sensible strategies for lowering their taxes or otherwise mitigating their economic effects.

Then there are those who detest tax increases and who use almost every method to avoid (xiii) getting paid.

Are you wondering if the people belonging to this last group of taxpayers sleep soundly at night? Many of them certainly do – their hubris is so great that they are almost blind to nature and the possible consequences of their actions. Then there are those who have implemented what they thought was the “perfect” tax avoidance system at the time, but who live in constant fear of an exam. (Xiv)

Increased enforcement …

This last group of taxpayers might be more of a concern these days. For example, the President's US employment plan calls for a "broader enforcement initiative" and aims to provide the IRS with the resources it needs to enforce tax laws.

Furthermore, unlike many other parts of the President's legislative agenda, there is bipartisan support for increased enforcement efforts.

But why should a New York taxpayer worry about federal enforcement activities when considering his state income tax liability?

Because federal tax adjustments may require government tax adjustments; If the taxpayer fails to report these adjustments to the state, the regular New York statute of limitations for assessing a tax deficiency (xv) will be suspended and New York may assess the resulting tax liability at any time. (xvi)

Additionally, New York has recently taken the initiative to scrutinize taxpayers' income tax returns on one level of content – interpret the Code when New York tax law is in line with this federal law – rather than waiting for the IRS to do so, and then, so to speak, ride on the coattails of the federal authority. (xvii)

But wait – there is more

"More?" You can ask. "Something worse than increased enforcement activity?" (Xviii)

You may recall that New York Attorney General James and New York City Corporation attorney Johnson announced earlier last month that they were recovering $ 105 million in taxes and damages from a hedge fund manager, Thomas Sandell who cheated on the state and the city for income reasons and wage taxes on deferred earnings. (xix)

The above amount was paid under a settlement agreement reached in February of this year. (Xx) Under the agreement, Sandell, who was resident in New York during the periods in question, attempted to avoid recognizing deferred administration and performance fees of approximately $ 450 million, thereby avoiding paying state and city taxes regardless that the fees were earned from investment management services provided in the city. (xxi)

Sandell was advised by certain tax experts that he could reduce or waive his New York tax liability by, among other things, removing his business and operations from New York.

In response to that advice, Sandell opened a three-person office in Florida (actually a shell with three back-office employees) that served as his main office. To strengthen that position, he took steps (often with the assistance of an accounting firm) to create the impression that he was no longer based in New York. For example, to hide his company's presence in New York, Sandell arranged for the rent and salary costs (for which the company remained responsible) to be directed through another facility he controlled. Sandell himself left New York to live in London.

When Sandell filed his personal and business tax returns for the state and city of New York for that year, he was not claiming any taxes owed, even though his business actually continued to operate in New York.

Almost immediately after filing the above tax returns, an immediate lawsuit (xxii) was filed against Sandell and its entities under the New York City False Claims Act (the “Act”). (Xxiii) This lawsuit is essentially a whistleblower lawsuit against a private party (the "Relator") who was not directly harmed by the defendant, bringing a lawsuit essentially on behalf of the government. (xxiv)

In Sandell's case, the reporter (Tooley, LLC (xxv)) alleged that Sandell “made, used or caused, or used or caused false statements that were material to (Sandell's) obligation to pay or transfer money (i.e. taxes). to the state and the city. "

The Attorney General opened an investigation into the allegations made in the rapporteur's complaint. The investigation found that Sandell provided the investment services that generated the deferred fees in question only in New York City, that its deferred fees were therefore taxable in New York State and the city, and that Sandell owed taxes in both jurisdictions.

The outcome of the attorney general's findings was the settlement agreement dated February 2021 and the payment dated March 2021.

The whistleblower

"You know how to whistle don't you Steve?

You just put your lips together and … blow. "(xxvi)

In its March 2, 2021 press release announcing the settlement with Sandell, the Attorney General's Office acknowledged the whistleblower – Relator Tooley LLC – "without whose information the misconduct may not have been detected" (xxvii) .

More important than the attorney general's "appreciation", however, was, at least from the relator's point of view, the 22 million US dollars that had to be paid to the relator under the law. As explained in the press release, "Whistleblowers are entitled to a percentage of the settlement proceeds in order to bring this misconduct to light."

According to the attorney general's whistleblower portal (xxviii), “(t) the New York attorney general welcomes and encourages whistleblowers, tips, and complaints. Whistleblowers are critical to the fulfillment of our mission – to protect the citizens of New York. "

The foregoing statements from the Attorney General's press release and his website serve two purposes. First, it is intended to provide individuals with information about the types of wrongdoing covered by the law – i. H. Potential whistleblowers – asked to come forward. and second, to deter potential wrongdoers from doing wrong by giving them a reason to doubt the loyalty or "discretion" of those with whom or with whom they are necessarily sharing or disclosing information about their activities.

The law (xxix)

The attorney general's testimony echoes the story of the 2010 (xxx) legislation that broadened the scope of the law to include taxes and expanded protection for whistleblowers. (Xxxi)


Under the law, anyone who "knowingly" (xxxii) makes false records or declares an obligation to pay or submit taxes (e.g., income taxes or withholding taxes) makes, uses or causes them to create or use) to the state (xxxiii) or whoever hides, or knowingly and "inappropriately" avoids or reduces their legal obligation (xxxiv) to pay or submit taxes to the state, is liable to the state for a civil penalty of at least 6,000 US dollars and no more than $ 12,000 (adjusted to match the civil penalty allowed under federal false claims law) plus an amount equal to three times any damage the state will suffer as a result of that person's actions. (Xxxv)

The foregoing rule applies to any claim, record, or return under tax law only if (i) the net income or sales of the person being sued is $ 1 million for a tax year in which the action is being brought or more Law (xxxvi) and (ii) the indemnity (ie, lack of tax) alleged in such action exceeds $ 350,000. (xxxvii)

Qui Tam

The law provides that anyone can bring an immediate civil lawsuit on behalf of the state for violating tax laws. (Xxxviii)

The state can choose to replace this measure or intervene and continue. The Attorney General is required to contact the Department of Taxes and Finance before engaging in any immediate lawsuit based on the filing of false claims, records or declarations under the Tax Act. If the state refuses to participate in such an action, the plaintiff must seek approval from the Attorney General before filing a motion to compel the Department of Taxes and Finance to disclose tax records. (Xxxix)


If the attorney general decides to convert the qui-tam civil lawsuit into an enforcement action, or if the attorney general decides to intervene in the qui-tam lawsuit, the person who initiated the qui-tam lawsuit may be eligible for 15 to 25 percent of the proceeds from the lawsuit or the settlement of the lawsuit. It is for the court to determine the percentage of the proceeds that a person filing an immediate lawsuit is entitled to by taking into account the extent to which the plaintiff has contributed significantly to the prosecution of the lawsuit. If the attorney general does not elect to intervene or commute the lawsuit and the lawsuit is successful, the person who initiated the Qui-Tam lawsuit that generates the proceeds may be entitled to 25 to 30 percent of the under the lawsuit will have proceeds or settlement of the lawsuit. (xl)

Forewarned is armed

The Sandell whistleblower case is the latest example of how New York's False Claims Act helped the state find tax evaders who might otherwise have got away. It is also the largest such case that a person is involved.

The Sandell case, however, is far from being an isolated matter. For example, in 2018 the attorney general announced a record $ 330 million settlement on a lawsuit against Sprint and some of its subsidiaries under the New York False Claims Act related to its failure to collect state and local sales taxes The investigation that led to the settlement began with a whistleblower lawsuit filed under the law. (xlii)

As we enter a phase of federal and New York tax hikes, there will be individuals and companies who tend to go beyond the proverbial framework. Given what is likely to be a more aggressive tax enforcement environment, and given the very real threat posed by the State False Claims Act, any tax-saving strategy that such a taxpayer is attempting to implement must be carefully documented if there is one should have a reasonable chance of standing up to scrutiny by the state or in a lawsuit brought by a less than civic person.

(i) Do you remember "Better to demolish?"

(ii) Did you notice the pattern here, by the way: the American Rescue Plan (the $ 1.9 trillion economic incentive bill that went into effect last month), the American Jobs Plan, the Made in America Tax Plan and the American Families Plan?

(iii) I think Mr Biden expects to be re-elected and retain control of both chambers of Congress. Cake in heaven? Maybe. After all, Republicans only need to win a Senate seat in 2022 to neutralize the vice president and break most of the laws that could be passed by the Democrats.

(iv) For example: repairing the country's highways and bridges, modernizing its ports, airports and transit systems, renewing the electricity network, providing high-speed broadband in all parts of the country, revitalizing production and securing the country's supply chains, investing in research and development , Building a network of small business incubators and investing in workforce development.

(v) Before the Tax Reduction and Employment Act 2017 ("TCJA"), federal corporate income tax was set on a graduated scale with a maximum rate of 35%.

(vi) The TCJA introduced a new class of income – Low Global Intangible Tax Income ("GILTI") – which must be included in the gross income of a US shareholder in a CFC (excluding Part F income) and which further Person deferring US overseas business income taxation has been undermined.

This provision requires the current inclusion of (i) their share of all income of a CFC that is not Part F of a CFC (with the exception of income effectively related to a U.S. trade or business and income received from the overseas Base excludes) corporate income due to the "high tax" exception), (ii) less an amount equal to the US shareholder's stake of 10% of the adjusted base of the CFC's tangible property used in his trade or business, and an Art in respect of which a depreciation allowance is generally permitted (the "material net income return"); The difference is the shareholder's GILTI.

In the case of an individual, the maximum federal tax rate for GILTI is currently 37%. This is the rate that applies, for example, to a US citizen who directly owns at least 10% of the shares in a CFC.

More forgiving rules apply to a US shareholder who is a C company. For tax years beginning after December 31, 2017 and before January 1, 2026 – yes, that's right, the plan merely accelerates a planned increase in the tax rate – a regular domestic C company will generally have a deduction from an amount granted from 50% of its GILTI; The federal corporate income tax rate for GILTI is therefore actually 10.5% (the lump sum of 21% multiplied by 50%).

(vii) Your "Book Income".

(viii) See IRC Sec. 1 (h): Long-term profits and qualified dividends are currently subject to federal income tax at a maximum of 20%.

Mr Biden has proposed increasing the federal maximum individual income tax rate on ordinary income from 37% to 39.6%.


(x) Especially if there is no individual deduction for SALT. It should be noted that last week several Democratic officials (including Long Island's Tom Suozzi) said they would not support tax hikes to fund the president's infrastructure plans unless the $ 10,000 cap on state and local tax deductions has been deleted from the EU code. Under current law, this upper limit will expire after 2025.

(xi) Although almost every tax haven in the Caribbean is tempting, the "exit tax" charged on the sale of assets of "covered expatriates" under IRC Sec. 877A will discourage many individuals from giving up their status as US persons.

For shits and giggles, check out the IRS's quarterly publication which lists the name of everyone who gave up their US citizenship in the previous quarter.

(xii) On one of his radio broadcasts, humorist and writer Garrison Keillor stated that migration from the northern to the southern parts of the country had increased the average IQ of both. Ha!

(xiii) "Avoidance" in itself is not a bad thing. Dodging is.

(xiv) Like the narrator in Poe's The Tell-Tale Heart, who, after murdering and dismembering his victim, hides the “body” under the floorboards of his room. It doesn't take long before he begins to "hear" what he thinks is the beating of the dead man's heart.

(xv) Usually three years after filing the tax return.

(xvi) N.Y. Tax Law Sec. 659 and Sec. 683.

If the taxpayer omits an amount of gross income in his tax return that exceeds 25% of the gross income shown in his tax return, the limitation period for determining the additional tax is six years.

There are other exceptions to the general three-year rule.

(xviii) This question reminds me of a story. Once, when I was in college in the early 80s, I took the Broadway local to the clothing district to drop off something with my father. He introduced me to his employer, who was kind enough to sit with me for a while and discuss my future. At one point he complained about his accountant. When I suggested that he find another accountant, he replied, "Louie, I wish I could, but this guy knows every skeleton in my closet."


(xx) It is interesting to note that Sandell did not admit or deny any wrongdoing in the settlement agreement. State of New York, ex rel. Tooley, LLC v Thomas Sandell, Sandell Asset Management Corporation, and SAMC Partners LP, Supreme Court, New York County, Index No. 101494/2018.

(xxi) The services in question were provided during the 10 year period ending in 2008. As a result of a change in federal law, the compensation earned for these services was not included in income until 2017. Sandell "reorganized" his business to be outside of New York in 2017, or so he thought.

(xxii) A brief description of the "Qui Tam" cases can generally be found at

(xxiii) State Finance Act, Art. 13, Sections 187-194.

(xxiv) In other words, the government becomes the real interested party.

(xxv) The owners were not disclosed in the settlement agreement.

(xxvi) Lauren Bacall to Humphrey Bogart in To Have and Have Not (which was very loosely based on Hemingway's novel of the same name). It was the debut for the 20-year-old from the Bronx.




(xxx) S7169B.;

(xxxi) Law Sec. 191. Any current or former employee, contractor, or representative of a private employer who is dismissed, demoted, suspended, threatened, harassed or otherwise discriminated in terms of employment or otherwise harmed or punished by an employer or a prospective employer due to Legitimate acts of the employee, contractor, agent or related person to promote a lawsuit under the law or any other effort to stop one or more violations of the law are entitled to all facilities necessary to make the employee, contractor or agent complete.

(xxxii) Means that a person: (i) actually knows the information; (ii) acts in deliberate ignorance of the truth or falseness of the information; or (iii) acts in reckless disregard for the truth or falseness of the information; proof of a specific fraudulent intent is not required; However, acts that are accidental or negligent are not covered. Act sec. 188.3.

(xxxiii) Or to a local government.

(xxxiv) Law Sec. 188.4.

(xxxv) Law Sec. 189.1 (g) and (h). Altitude damage.

(xxxvi) These thresholds should cover most businesses and high net worth individuals.

(xxxvii) Law Sec. 189.4.

(xxxviii) Law Sec. 190.2. However, if the allegations contained in the complaint only concern damage to a city with a population of one million or more (i.e., New York City), the attorney general may not replace or intervene in such action without the consent of the business adviser of such city.

(xxxix) If the state refuses to participate in the lawsuit, the Qui-Tam lawsuit may be carried out subject to judicial review, the law and regulations of civil practice and other applicable laws.

For the specificity of the pleadings and the burden of proof, see Law Sec. 192.

(xl) Law Sec. 190.6.


(xlii) The whistleblower received $ 62.7 million.