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An Illinois court has unsealed another 23 lawsuits filed by a veteran whistleblower who is targeting dozens of foreign and domestic bespoke tailors for alleged tax frauds under the Illinois False Claims Act.
Cook County Circuit Court Jan. 25 removed seals on 23 FCA actions filed by Chicago attorney Stephen B. Diamond, the most prolific tax whistleblower in the country. The actions claim the custom tailors, located primarily in Hong Kong, failed to collect and remit sales and use taxes on transactions involving customers in Illinois. Diamond, known to some as the “king of qui tam,” has filed approximately 1,000 FCA actions in circuit court over the last 15 years.
The latest round of cases were originally filed late last year in secret, giving the Office of the Illinois Attorney General an opportunity to intervene. In each case, Diamond seeks to step into the shoes of Illinois to capture taxes, penalties and fees on behalf of the state. The state waived that right, permitting the court to unseal the actions and giving Diamond authority to litigate the tax disputes.
David S. Ruskin, a partner in the Chicago office of Horwood Marcus & Berk Chartered and counsel to several of the defendants, said the 23 suits are a continuation of the pattern of litigation launched by Diamond in May 2017, when an initial 34 FCA actions were filed against domestic custom tailors and tailors in Hong Kong and the United Kingdom. Diamond has said in court that he intends to file as many as 85 lawsuits against high-end custom tailors.
“These cases are more of the same,” Ruskin said. “It’s the cottage industry that Steve Diamond created for himself to put money in his pocket and it’s going to continue until there is legislation or the judiciary puts a stop to it.”
Kim & Burns LLP, counsel for Diamond, didn’t respond to requests from Bloomberg Tax for comment on the litigation.
All of the cases object to a custom tailoring business model in which foreign and out-of-state tailors convene trunk shows and fitting meetings with Illinois customers at hotels in the Chicago area. Customers can see samples, pick out fabrics, and be measured for custom-made suits, shirts, tuxedos, and overcoats. Tailors in Hong Kong and other out-of-state locations sew the garments and ship them directly to their Illinois customers.
Diamond contends the defendants create tax nexus with Illinois during these scheduled trunk shows and fitting sessions. In this context, Diamond asserts the tailors are obligated to collect and remit taxes to the state.
Ruskin, who represents 18 of the tailors and the Hong Kong Tailors Association, said none of the initial cases have been settled or dismissed. Ruskin said he had hoped for a broad settlement for at least some of the defendants, but Diamond, the attorney general and the Department of Revenue don’t appear interested.
Ruskin said some of the defendants, particularly the domestic tailors, will pursue settlement negotiations in the near term. He predicted the litigation would continue, however, for many of the foreign tailors who likely had no capacity or intent to violate Illinois’ tax code.
“How can a foreign company have the intent to defraud a state government where their understanding is they don’t have any obligation for not only state sales tax, but federal income tax typically,” he said.
Ruskin said Judge James E. Snyder held a Jan. 4 status hearing on the cases. Snyder agreed to temporarily stay discovery and ordered the various defendants to file responsive pleadings by Feb. 28. Snyder also scheduled a status hearing for March 22.
The lead case is Illinois ex rel. Stephen B. Diamond P.C. v. Raja Fashions Ltd. , Ill. Cir. Ct., No. 17 L 39, 1/4/18 .
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