Fight to uncover ATO's role

DOCUMENTS filed in a US court indicate that Peter Lowy, the Los Angeles-based managing director of the Westfield Group and son of the tycoon Frank, may have already been issued with penalty notices by the US Internal Revenue Service as part of a long-running, cross-border investigation into the financial affairs of Lowy family members.

The court documents refer to "conclusions" reached by the IRS in relation to the Lowys' alleged links to a Liechtenstein entity known as the Luperla Foundation. The documents also refer, without elaboration, to penalty notices that have apparently been issued by the IRS.

Peter Lowy and his wife deny they were either beneficiaries of the Luperla Foundation or that they were customers of "any financial institution connected to that entity".

While it is not clear which "financial institution" they are referring to, it may be a reference to LGT Bank, the Liechtenstein bank which, according to documents purloined by a former employee, discreetly engineered international tax avoidance arrangements for wealthy clients.

If penalty notices have indeed been issued by the IRS to Peter Lowy, his wife, Janine, and Beverly Park Corporation - a property investment company they control - it is likely to mark the first stage of a long and possibly litigious battle ahead.

That is because Peter and Janine Lowy have already demonstrated they are prepared to fight. According to their court documents, they believe that despite interviews and further documentations provided to the IRS, the US tax office has misconceived their connection with the Luperla Foundation and misunderstood its activities.

In mid-2008, the powerful US Senate Permanent Subcommittee on Investigations relied on some of the LGT Bank documents as it accused the Lowys of hiding $US68 million of assets in a foreign trust beyond the reach of US tax authorities. The documents indicate Luperla was set up in May 1997 and one of the memos of 1998 indicates that the foundation was intended to hold $US100 million that would arise from a complex transaction.

The English language version of the LGT memo, relied on by the subcommittee, suggested the transaction was designed "with the goal of bringing shares listed in the stockmarket back into the family's possession, which was successfully completed".

The original German version of that same memo refers specifically to listed shares of the Westfield Group coming back into the possession of the Lowy family.

Peter and Janine Lowy launched legal action in the US District Court in California in February under an FOI challenge as part of their bid to obtain more information about the tax investigations being conducted into the Lowys on two continents.

They are seeking all records about the Lowys in the control of the IRS that relate to its dealings with the Australian Tax Office and the Tax Commissioner, the government or other Australian authorities, as well as communications between the IRS and a US Senate subcommittee that in mid-2008 accused the Lowy family of tax evasion. They also want the names of all third parties that have provided information to the tax authorities.

A letter sent by Mr and Mrs Lowy's Washington lawyers in October 2008, and which is included in the court file, notes the IRS first notified the couple on October 31, 2007, that their 2005 federal tax return had been selected for "examination".

But in notices on the court file that certify the appointment of certain lawyers to manage the Lowys' case on their behalf, there are references that suggest the US tax authorities are studying their tax returns from 1996-97 to 2007-08 and that the IRS may be considering levying penalties against the Lowys under section 6677 of the Internal Revenue Code.

This section relates to the failure to file information about foreign trusts. Penalties start at 35 per cent of the gross value of the sum transferred to the foreign trust. If this were applied to the estimated $US68 million of Luperla Foundation assets, the Lowys could face penalties of more than $US23 million.

While the California case represents a challenge under US freedom of information laws, it also represents the first time Peter Lowy has expressed public criticism about the conduct of the investigations.

Among other things, the Lowys believe the ATO may have given the US authorities "erroneous or incomplete information" which led the IRS to decide that the Lowys were engaged in tax evasion. They also say that the information apparently relied on by the IRS is "unverified, incomplete, unreliable and likely inauthentic [sic]".

"Starting in 2007 and into 2008, the IRS has misunderstood the association of the Australian relatives of Peter Lowy with, and activities of, the Luperla Foundation ..." the Lowys say, through their lawyers, in court documents.

"The IRS has wrongfully concluded that Peter and Janine Lowy were beneficiaries of that entity and/or customers of any financial institution connected to that entity."

Under the headline "IRS Obtains Information from Australian Government and Elsewhere to Support its Penalty Notices", the Lowys say they became aware, as a result of the IRS investigation, that the ATO had exchanged information with the US authorities.

In July 2008, when called before the Senate subcommittee, Peter Lowy opted to remain silent about allegations of tax evasion. As a US citizen, Mr Lowy was exercising his privilege under the constitution, but arguably there was little he could have said that day that might have appeased the politicians.

The Senate subcommittee members had just released a 115-page report detailing the financial transactions of wealthy US citizens who used the discreet services of the LGT Bank in the tax-haven Liechtenstein.

Seven pages of that report and dozens of pages of exhibits dealt directly with the Lowys and how LGT bankers a decade ago engineered arrangements ensuring the transfer of millions of dollars from the Lowys through a series of companies to the Luperla Foundation.

When the 2008 report was released, the patriarch, Frank Lowy, issued a statement saying all of the funds were "legally and properly held" and ultimately were "distributed for charitable purposes in Israel some years ago without claiming a tax deduction".