• Shipping Conglomerate OSG And Former CFO Agree To Settle SEC Claims Over Failure To Recognize Tax Liabilities
   

  01/30/2017
  On January 23, 2017, Overseas Shipholding Group, Inc. (“OSG”), an international shipping conglomerate, and its former chief financial officer Myles R. Itkin, reached an agreement with the United States Securities and Exchange Commission (“SEC”) that brought to a close an SEC investigation into OSG’s failure to record certain federal income tax liabilities of approximately $264 million that, when recognized in the second quarter of 2012, drove the company into bankruptcy.  In the Matter of Overseas Shipholding Group, Inc. and Myles Robert Itkin, Admin. Proc. No. 3-17807 (Jan. 23, 2017) (“Order”).  Without admitting or denying the allegations, OSG and Itkin each consented to the entry of an order instituting settled cease-and-desist proceedings, which found that both violated or caused the violation of the negligence-based antifraud provisions as well as reporting, books-and-records, and internal controls provisions of federal securities laws.  OSG agreed to pay a $5 million penalty, which is subject to bankruptcy court approval, and Itkin agreed to pay a $75,000 penalty.  
   
  The federal income tax liabilities that OSG failed to report arose from OSG credit agreements containing a provision making its controlled foreign subsidiary, Overseas International Group, Inc. (“OIN”), jointly and severally liable for OSG’s debt.  This provision in the credit agreements triggered current income tax liability under Section 956 of the Internal Revenue Service Code, which addresses investments in United States property by controlled foreign corporations.  Enacted in 1962, Section 956 is an anti-abuse provision that was initially designed to prevent U.S. companies from repatriating their foreign subsidiaries’ earnings through investments in U.S. property without having to pay the taxes that would otherwise apply if those earnings were distributed as dividends.  Under Section 956, when a foreign subsidiary guarantees the loan of its U.S. parent company, certain earnings and profits of the subsidiary are deemed to have been distributed to the U.S. parent, and the U.S. parent company is subject to U.S. federal income tax liability based on the amount of the deemed dividend. 
  
  Various credit agreements entered into by OSG from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary OIN and another subsidiary, Overseas Bulk Ships (“OBS”), “jointly and severally” liable for OSG’s debt.  According to the SEC’s order, OSG and Itkin were responsible for failing to recognize that the “jointly and severally” liable provision in the credit agreements represented a guarantee of OSG’s debt by a controlled foreign subsidiary, and therefore could result in tax liability under Section 956, and accordingly failed to pay hundreds of millions of owed taxes.  According to the SEC, starting in 2011, OSG and Itkin were presented with numerous indicators that the company was facing potential tax liability, including tax memos from outside counsel and communications with the banks during negotiations of the credit agreements in question, but did not take action for over a year.  However, OSG is on record as contending that any failures were due to faulty legal advice. 
  
  The OSG case has been widely followed in tax and legal circles, and on some level the SEC order is thus no surprise—it does not shed any particular new light on the circumstances that led to the OSG bankruptcy or OSG’s response.  However, given the amount of damage already recognized as a result of OSG’s failure to recognize the Section 956 issue in its credit agreements, some may question whether the subsequent SEC investigation and resulting SEC Order had any incremental deterrent or other effect worth pursuing.  
  Category: Regulatory Enforcement Matters
  

Links & Downloads

• In the Matter of Overseas Shipholding Group, Inc. and Myles Robert Itkin