DEFENSES OF THE CORPORATE TAXPAYER ACCUSED IN CONNECTION WITH SENSITIVE FOREIGN PAYMENTS

• NCJ Number: 65924
• Journal: TAXES Volume: 55 Issue: 12 Dated: (DECEMBER 1977) Pages: 806-810
• Author(s): J RITHOLZ
• Date Published: 1977
• Length: 5 pages
• Corporate Author: Commerce Clearinghouse, Inc
• Publication Format: Article
• Language: English
• Country: United States of America

Annotation

THE STATUTES INVOKED IN AN INVESTIGATION OF ILLEGAL CORPORATE PAYMENTS TO FOREIGN OFFICIALS ARE DETAILED ALONG WITH APPROPRIATE DEFENSE STRATEGIES.

Abstract

A PAYMENT CAN BE DEFINED AS SENSITIVE IF PAID TO GOVERNMENTS, GOVERNMENT OFFICIALS, POLITICAL PARTIES, OR CUSTOMER-EMPLOYEES. SUCH PAYMENTS ARE USUALLY MADE THROUGH INTERMEDIARIES USING A BANK ACCOUNT THAT IS NOT REFLECTED IN A COMPANY'S BOOKS AND RECORDS. THE INITIAL BASIS FOR AN INVESTIGATION WILL BE THE EVASION STATUTE AND THE FALSE STATEMENT STATUTE. OTHER LAWS CITED IN SUCH CASES HAVE BEEN ENACTED TO INVESTIGATE AIDING AND ABETTING, MAIL FRAUD, CONSPIRACY, FALSE DECLARATIONS TO THE GOVERNMENT, AND REPORTING CURRENCY AND FOREIGN TRANSACTIONS. WHEN AN ATTACK AGAINST A CORPORATION IS BASED ON TAX STATUTES, THE KEY IS THE ALLEGATION OF NONDEDUCTIBILITY UNDER SECTION 162 OF THE INTERNAL REVENUE CODE AND THE PROOF OF SPECIFIC INTENT. ESTABLISHING THAT PAYMENTS WERE MADE TO A FOREIGN CONSULTANT FREQUENTLY CONSTITUTES AN EFFECTIVE DEFENSE SINCE LAWS FORBIDDING BRIBERY OF FOREIGN OFFICIALS ARE NOT APPLICABLE WHEN THE FOREIGN GOVERNMENT IS ACTING AS A BUSINESSMAN OR WHEN ITS LAWS DO NOT PROHIBIT SUCH PAYMENTS. PAYMENTS MADE TO A CUSTOMER'S EMPLOYEES TO ASSIST IN CIRCUMVENTING FOREIGN LAWS ARE OFTEN TREATED AS PART OF THE COST OF SALES. IN SUCH CASES, SECTION 162 CAN BE VIEWED AS INAPPLICABLE BECAUSE PAYMENTS WERE A SUBTRACTION IN DETERMINING GROSS INCOME. PAYMENTS MADE BY A FOREIGN SUBSIDIARY MAY BE IRRELEVANT TO A UNITED STATES TAX RETURN BECAUSE EARNINGS AND PROFITS ARE REDUCED. SENSITIVE PAYMENTS REDUCE EARNINGS AND PROFITS AND THEREFORE ARE NOT SUBJECT TO SECTION 162. THE PROVISIONS OF THE 1976 TAX REFORM ACT PROHIBITING THE SUBTRACTION OF PAYMENTS FROM EARNINGS, AND PROFITS OF A CONTROLLED FOREIGN CORPORATION INFERS THAT THIS PRACTICE HAD BEEN PERMITTED BY PRIOR LAW. THE INTERNAL REVENUE SERVICE SHOULD BE RESTRICTED TO ITS USUAL METHODS OF FINDING UNDEDUCTIBLE MATTERS WHEN INVESTIGATING PAYMENTS TO FOREIGN OFFICIALS. CASE LAW IS CITED, AND FOOTNOTES ARE PROVIDED. (MJM)