Mr. Aaron Cohen, a California resident, maintained two foreign bank accounts. The headquarters for both banks were in Tel Aviv, Israel. That part was fine. What was not fine, however, was Mr. Cohen’s failure to disclose the accounts with the Internal Revenue Service when they earned interest income.
One of Mr. Cohen’s undeclared accounts was located in the Cayman Islands. To preserve their secrecy from the U.S. government, the accounts were maintained under a name other than Mr. Cohen’s—a “nominee” account, as they are called. According to Black’s Law Dictionary, a nominee is one “who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.” See also U.S. v. Memmott (E.D. Cal., Aug. 21, 2013, CR-S-08-402 KJM), 2013 WL 4496615 (identifying the six required elements).
Mr. Cohen used a creative device that worked for him for several years. Shortly after the funds were transferred to the Cayman Islands, he used them as collateral for loans from another branch of the bank, located in Los Angeles. And he did not identify his ownership of the Cayman Islands accounts on any of the loan documents.
Effectively, Mr. Cohen was borrowing against his own money. From a tax perspective, though, he paid tax-deductible interest on the loans, and he was failing to report on his U.S. income tax return the interest income he earned on the assets in the Cayman Island accounts.
Mr. Cohen employed his strategy of borrowing against his own money starting in 2000, and repeated it in 2009. From 2006 through 2009, the DOJ reports that Cohen had approximately $238,000 of unreported interest income.
What did this earn Cohen? A guilty plea for concealing income and at least three other things: (1) potentially five years in prison, (2) a fine of $250,000 owed to the IRS, and (3) a civil penalty, in the amount of 50% of the highest balance of his undeclared foreign account, for failing to file his Report of Foreign Bank and Financial Reports or “FBAR.”
