Types Of SEC Cases:  Tax Reporting Violations

SEC Fines Shipping Conglomerate $5 Million For Tax Reporting Violations

The SEC charged a US shipping company and its CFO with tax reporting violations for failing to properly report approximately $512 million of tax liabilities.

Tax Reporting Violations Covered Up “Deemed Dividends”

In its Order imposing the sanctions, the SEC alleged that Overseas Shipholding Group, Inc. (“OSG” or “the Company”) and its CFO, Myles Itkin, committed tax reporting violations by failing to record material federal income tax liabilities on the Company’s financial statements from 2000 through early 2012.

tax reporting

The SEC Order

During this period, the Company’s credit agreements were jointly and severally guaranteed by Overseas International Group Inc. (“OIN”) and Overseas Bulk Ships (“OBS”), both of which were wholly owned subsidiaries of OSG.  According to the SEC, because both OIN and OBS were wholly owned subsidiaries of OSG, the amounts available and borrowed under the credit agreements should have been recorded as liabilities for tax reporting purposes.

Since the two subsidiaries were controlled foreign corporations, the tax liabilities should have been reported under Internal Revenue Code Section 956.  That Section states that if a controlled foreign corporation is the guarantor for debt of its U.S. parent company, the monies borrowed by the parent company, in this case OSG, are considered “deemed dividends” and thereby taxable to the parent (OSG).

The SEC alleged that, by failing to properly record the transactions, OSG understated its tax liabilities by approximately $512 million during the twelve-year period.  As a result, OSG’s total liabilities for the time period were understated by 17%.

Had the transactions been properly reported, OSG’s net loss during this timeframe would have increased 265%.

Deficient Internal Controls

According to the Order, OSG did not report the issue to its outside auditors or seek guidance on the impact of the credit agreements on its financial reporting requirements.  The Commission therefore determined that OSG had inadequate and deficient internal accounting and financial reporting controls.

Penalties For The Tax Reporting Violations

OSG and Itkin resolved the tax reporting and related charges by entering into a settlement with the SEC.  Among other things, the Order required OSG to pay a $5 million penalty.  Itkin agreed to pay a $75,000 penalty.

An SEC press release about the case quoted the Associate Director of the SEC’s Enforcement Division:

“Where public companies derive economic benefits from their offshore earnings, it is critical that those responsible for the company’s accounting and financial reporting understand the federal income tax consequences triggered from these benefits.”

reporting tax

The SEC’s press release

Whistleblowers Can Inform The SEC About Tax Reporting Violations

This case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program.

However, the SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case.  The SEC Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million.  The NoCA list does not disclose if a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.

Additional Information

For more information about tax reporting violations, click on the links below:

  • The SEC’s Order in SEC v. OSG.  (External link to the SEC’s website.)
  • The SEC’s Press Release about the case.  (External link to the SEC’s website.)