FinCEN Issues Advisory To U.S. Financial Institutions Regarding Providing Financial Services to Foreign-Located MSBs

On February 15, 2012, the Financial Crimes Enforcement Network (“FinCEN”) issued an Advisory to U.S. financial institutions advising them of their obligations under the Bank Secrecy Act (“BSA”) when dealing with foreign-located money services businesses (“MSBs”). A copy of FinCENs advisory can be read here.

The advisory comes several months after FinCEN implemented new rules defining which businesses qualify as MSBs subject to the anti-money laundering regulations of the BSA. As we previously reported, on July 21, 2011, FinCEN published a final rule which amended the definition of “money services business” under 31 C.F.R. § 1010.100(ff) to clarify that it is the activities performed within the U.S. by a business which will cause it to be classified as a MSB regardless of the businesss physical location. The rule change arose out of the recognition that the Internet and other technological advances make it increasingly possible for businesses to offer MSB services in the U.S. from foreign locations.

The definition of MSB has been rephrased to state: “[a] person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States” as a currency dealer, currency exchanger, check casher, money transmitter, and/or a seller, issuer, and redeemer of travelers checks, money orders, or prepaid access cards. As a result of this change, foreign-located businesses engaging in MSB activities within the U.S. are subject to the rigorous requirements of the BSA, even if the foreign based MSB has no physical presence in the U.S. The final rule also required each foreign-located MSB to appoint a person residing in the U.S. as an agent for service of legal process.

In its Advisory, FinCEN advises U.S. financial institutions to reevaluate their own anti-money laundering (“AML”) programs if they provide financial services or engage in financial transactions with foreign-located MSBs. FinCEN further suggests that U.S. financial institutions look to its earlier guidances, such as FinCENs 2005 Intra-agency Interpretive Guidance on Providing Banking Services to MSBs Operating in the U.S. and FinCENs 2010 Advisory on Informal Value Transfer Systems, in order to ensure that the foreign-located businesses they are dealing with are not operating as unregistered or unlicensed MSBs. FinCEN also reminded financial institutions that provide services to foreign-based MSBs of their obligations to file Suspicious Activity Reports (“SARs”) should they become aware that their customers are operating as unregistered or unlicensed MSBs.

If you have questions pertaining to the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

Florida Department of Revenue Issues Tax Warrant to the “Florida Supreme Court”

On February 10, 2012, the Florida Department of Revenue Issued a Tax Warrant on the Florida Supreme Court at its 500 S. Duval St., Tallahassee addresses in the amount of $1,949.19.  However, while the warrant has raised speculation that it was issued to Florida Supreme Court itself, it was actually issued to the Florida Supreme Court Historical Society, Inc. a non-profit with the same address as the Florida Supreme Court. 

A copy of the tax warrant is available here.

Aside from its misleading draftsmanship, the significance of the tax warrant is that the Florida Department of Revenue continues to aggressively look to raise funds.  The attorneys at Fuerst Ittleman have extensive experience addressing State of Florida and other local tax issues in addition to federal tax issues.  You can contact an attorney by emailing us at  contact@fidjlaw.com.

FinCEN Final Rule Requires AML Programs and SAR Filing for Non-Bank Mortgage Lenders and Originators

On February 7, 2012, the Financial Crimes Enforcement Network (“FinCEN”) announced final rules requiring non-bank residential mortgage lenders and originators to establish anti-money laundering (“AML”) programs and comply with suspicious activity report (“SAR”) regulations. The final rule will be effective 60 days after its publication in the Federal Register. A copy of the final rule can be read here.

As we previously reported, prior to the finalization of this rule, the only mortgage originators that FinCEN regulations required to file SARs were banks and insured depository institutions. However, FinCEN mortgage fraud reports have shown that non-bank mortgage lenders and originators initiated many of the mortgages that were the subject of bank SAR filings. By extending AML and SAR requirements to non-bank mortgage lenders and originators, FinCEN hopes to mitigate and minimize the risks and vulnerabilities that have been exploited by criminals in the past including false statements, straw buyers, fraudulent flipping, and identity theft. As explained by FinCEN, “the new regulations likely will significantly increase the number of mortgage related SAR filings; give law enforcement and regulators more comprehensive data on specific crimes; and provide government and industry a more complete perspective on mortgage related crime trends nationwide.”

The new rules come as part of a broader effort by FinCEN and multiple federal agencies to combat mortgage fraud. Since 2009, the Financial Fraud Enforcement Task Force has coordinated multiple federal agencies, the Department of Justice and State and local law enforcement partners in collaborative efforts to prosecute mortgage fraud and financial crimes. On November 3, 2011, FinCEN announced a proposal to extend AML and SAR compliance requirements to Fannie Mae, Freddie Mac, and Federal Home Loan Banks. Most recently, in January 2012, the Department of Justice announced the creation of the joint DOJ and SEC Residential Mortgage-Backed Securities Working Group which will focus its efforts on prosecuting abuses in the residential-mortgage backed securities market.

The compliance date for the new rule is six months after its publication in the Federal Register. If you have questions pertaining to FinCEN regulations, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance, contact Fuerst Ittleman PL at contact@fidjlaw.com.

IRS Offers New Offshore Amnesty Program Amid Controversy

Since the 1970s the United States Congress and the Internal Revenue Service has been seeking ways to collect tax money which they are convinced is being hidden in offshore tax havens.  These early efforts resulted in the requirement for US taxpayers to file a report of Foreign Bank and Financial Accounts called the FBAR.  Additionally, a compliance regime was foisted on foreign financial institutions through the qualified intermediary regulations, which the IRS issued on its own authority – essentially foreign financial institutions agree to come under the IRS umbrella for purposes of US tax enforcement of foreign accounts.

This compliance process was not satisfactory to the Congress who felt there was some US$100 billion over a 10-year period lost in taxes.  The IRS upped the ante by utilising criminal indictments of foreign banks and foreign bankers.  The US government felt justified in proceeding with this direct attack rather than going through its cumbersome tax treaty procedures.  It is fair to say that these actions were viewed by the foreign financial institutions as highly divisive, creating tension and ill will between the United States and foreign financial and non-financial institutions.

Amid these efforts by the Congress, through the Internal Revenue Service, to bring virtually the entire financial world under the United States taxing authority, they also used a carrot approach whereby in 2009 and then again in 2011 the IRS offered the Offshore Voluntary Disclosure Program (OVDP).  This allowed US taxpayers to voluntarily disclose to the IRS that they hold offshore accounts that have not been reported and provided means to civilly settle the affair and avoid potential criminal charges that stick.

For 2009, 2010 and 2011, the IRS reports that they have collected US$4.4 billion and they have closed, as of now, 95 per cent of the cases from the 2009 program.  This encompasses some 33,000 voluntary disclosures as a result of this voluntary disclosure initiative.  On January 9, 2012, the IRS reopened the Offshore Voluntary Disclosure Program since the IRS is fervently looking for an easy way to deal with otherwise unreported offshore financial accounts.

Between the 2009 Offshore Voluntary Disclosure Program and 2011, Congress enacted the Foreign Account Compliance Tax Act (FACTA).  As reported by the Financial Times in 2010, “Tens of thousands of banks, fund managers, insurers and hedge funds face having to give the names of US clients with at least US$50,000 of assets to the Internal Revenue Service under the Foreign Account Tax Compliance Act, passed in March.”

In a New York Times story just three weeks ago, a former international tax policy advisor for the Treasury Department was quoted as saying: “The FACTA story is really kind of insane.”  Also the head of global tax compliance at Deloitte in New York is quoted as saying: “Theyre trying to force every financial institution in the world to sign onto this regime.”

A backlash has resulted in a growing number of foreign financial institutions and non-financial institutions refusing to have American customers and some are even reducing owning American securities.  As a consequence, the Internal Revenue Service has extended the deadlines for the registration of foreign financial and non-financial institutions with the Internal Revenue Service until June 30, 2013.  It has been reported that the IRS is struggling to provide detailed guidance by the end of 2012.

Ongoing Efforts

While the difficulties of the US in dealing with foreign financial and non-financial institutions because of FACTA remains, the IRS is proceeding with its already established procedures applicable to US taxpayers.  This includes the FBAR reporting requirement (involving Form TD 90-22.1), which is filed with the US Treasury.  Separately, there is now FACTA reporting requirements, involving a new Form 8938, which is the Statement of Specified Foreign Financial Assets.  This will be part of a taxpayers regular tax return filed with the IRS.  A significant amount of financial information must be reported whether or not there is taxable income.  These two separate reporting rules exist side by side.  The FACTA rules are tax rules.  The FBAR rules are Treasury Department, Bank Secrecy Act rules.

What is expected to be confusing is that there is a great deal of overlap between the two forms in reporting overlapping information.  Many of the definitions used in the forms are different for each form.  In this regard, if taxpayers are not using a foreign tax specialist previously, they will need to have one now.

Along with this new heightened and intrusive regime the IRS is stepping up the attention it gives to the tax returns of foreign corporations under Form 1120-F.  This follows the restructuring by the Internal Revenue Service of the Large and Midsize Business Division to what is known now as the LB&I.  As stated by IRS Commissioner Shulman: “The realigning organization will let us focus on high risk international compliance issues and handle these cases with greater consistency and efficiency as we continue to increase our work in this area.”  

This effort will directly impact foreign entities having any financial relationship with the United States, which may involve any form of income shifting and inbound financing by foreign entities.  Also being examined are foreign companies doing business in the United States through a branch or a subsidiary which has not been reporting as a business/permanent establishment situation.  

The IRS is also taking a more direct approach in dealing with taxpayers.  The new efforts are to execute a subpoena on the US taxpayers and require them to provide foreign account information.  Concomitant with that effort, the IRS, should it have the correct information, will proceed with a direct levy on an office or branch of a bank engaged in the banking business in the United States with which the taxpayers under the microscope has a foreign account.  Apparently, following the reasoning that since dollars are a fungible commodity, it follows that it would be impossible to distinguish a taxpayers dollars held in an account in a foreign institution when there are dollars being held in its related US sitused institution.  

IRS Taxpayer Advocate Enters the Fray

The Taxpayer Advocate Service (TAS) is an independent organisation within the IRS. It was enacted into law by Congress who understood that taxpayers may be having problems with the Internal Revenue Service system and needed a government funded organisation to advocate on their behalf.  The TAS not only handles individual problems and tries to resolve them within normal IRS channels but also deals with large scale or systemic problems that can affect a large number of taxpayers.

On January 6, 2012, the National Taxpayer Advocate, Nina Olson, invoked a rarely used administrative tool to try and force the IRS, and its LB&I and small business/self-employed divisions to change their audit procedures with regard to the offshore involuntary disclosure program.  In a very rare taxpayer advocate directive (TAD,) the NTA ordered disclosure and revocation of an IRS memo to its frontline examiners.  The point of controversy involved a published set of facts and questions by the IRS in its explanation of the Offshore Voluntary Disclosure Program.  The taxpayer advocate is authorised by Congress to issue TADs so that as a watchdog enforcing actions against the IRS the TADs would have some teeth.  The consequence is that Congress is trying to give the taxpayer advocate directive powers to force IRS compliance on issues that the advocate deems abusive or inequitable to taxpayers.  Presently, neither of the commissioners of LB&I or SB/SE have acquiesced to the taxpayer advocate directives.   The matter now is for Commissioner Shulman who will make the decision.  The report which can be found in 2012 TNT 4-1 is well worth reading.

Impact on Foreign Investment Funds

Many, if not most foreign investment managers and fund managers feel that they are not involved in selling reportable assets to Americans.  However, one of the little known provisions of the complex Internal Revenue Code relates to what is known as passive foreign investment companies (PFIC).  Essentially, the Internal Revenue Code says that if an American investor owns even one share of a foreign corporation or a deemed foreign corporation that is the fund investment entity, then the US shareholder is treated as owning a PFIC and must report that as part of his annual tax return.  

The Hiring Incentives to Restore Employment Act (HIRE) as passed in 2010 amended the Internal Revenue Code and added a new section dealing with information with respect to foreign financial assets.  Under Section 6038(D), any individual who during the taxable year held an interest in any specified foreign financial account, the taxpayer is required to attach to his or her income tax return for the taxable year certain required information.  This information is in respect to each foreign financial asset if the aggregate of all the individual specified assets exceed US$50,000.  To accompany this, the IRS has released Form 8938 dealing directly with the specified foreign assets and also Form 8621 dealing with PFICs or a qualified electing fund.  Needless to say, many professionals kindly refer to the Internal Revenue Codes foreign tax position as complex while others perhaps in humor or perhaps in seriousness refer to those same provisions as insane or bizarre.  Nonetheless, the reality is that US taxpayers who do have various forms of these specified foreign assets will be paying a great deal more in fees for the preparation of their annual tax return.

Impact on US Tax Compliant Ex-Pats

At the end of 2011, The Wall Street Journal had an article which observed that US persons that are considered ex-pats will soon discover that it is going to be hard to maintain foreign assets.  The impact of FACTA on foreign financial institutions is that they are required to collect a 30 per cent tax on any Ëœpass through transactions made with foreign institutions that are not in compliance with this new regime.  As a spokesman for Deloitte stated: “Its their responsibility to withhold that money and send it to the US.”  The article further states that, “in response, some foreign banks have said they will close all their American clients investment accounts rather than incur the expense of complying.  That move could prompt even fully tax compliant Americans who reside abroad to renounce their citizenship rather than face this prospect.”

The article does reveal one unquestionable fact about the US foreign tax administration.  That is, even without this extensive and complex burden on the IRS, Congress has continually and vastly underfunded the IRS.  For all the complexity of tax codes and requirements placed on the Internal Revenue Service, it doesnt have enough money, and no manpower.  Congress seems to be in the mood to continue to pile on duties on to the IRS, which make a difficult problem worse.  Nonetheless, the Internal Revenue Service will do its best to go forward and taxpayers are expected to comply.

Virtually all the developed countries of the world are in the position whereby budgeted national expenses far exceed their ability to collect tax revenues.  As a result, there are increased efforts aimed at enforcing tax compliance which the US and other governments claim will actually raise revenue to offset the growing amount of national debt.  

Practitioners throughout the world will need to prepare and understand exceedingly complex law.  Many foreign financial and non-financial institutions will soon have to make a decision in the relatively near future as to whether they will comply with the United States extending its authority over them or whether they will take some other actions.

US taxpayers, whether in the United States or living outside the United States, are expected to comply fully with the US tax law.  The IRS, by establishing a third voluntary disclosure program, is encouraging taxpayers to come forward and bring the assets held in foreign accounts back into compliance. In return, the taxpayer will be relieved of the potential for extraordinary civil penalties and the possibility of criminal prosecution as well.  

It is really unknown what the consequences will finally be as a result of the US Governments efforts to use extreme tax compliance methods for revenue enhancement as well as to deal with other egregious international crimes.  That will be an unfolding story which will likely dramatically impact the course of global financial relationships as well as the definition of what is a sovereign nation.

This article was originally published in the IFC Review February 2012 e-Journal.  For the original article and more information, visit www.ifcreview.com.

IRS’s Taxpayer Advocate Speaks Out Against the IRS

Last year the Internal Revenue Service (IRS) Taxpayer Advocate released Taxpayer Advocate Directive 2011-1 speaking out against the IRSs failure to implement Frequently Asked Question (FAQ) 35 of the 2009 Offshore Voluntary Disclosure Program (OVDP) to numerous taxpayers.

OVDP FAQ 35 provides that: 

[IRS] [v]oluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing.  These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer.  Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.

Under existing law, United States (US) persons are generally required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, (FBAR) disclosing their interest in foreign financial accounts and report income generated from these on their US income tax returns.  Notwithstanding the potential for criminal prosecution, the maximum civil penalty for willful FBAR violations can amount to the greater of $100,000.00 or 50 percent of the account balance for each violation for each year; the maximum civil penalty for non-willful violations amounts to $10,000.00 per violation and no penalty if the taxpayer qualifies under the reasonable cause exemption. 

Additionally, under “existing statutes,” various non-willful FBAR violations call for the implementation of reasonable cause, placing the burden of proving willfulness on the IRS.  Also, the IRSs application of existing statutes requires the imposition of lower penalty amounts for certain taxpayers with relatively low account balances under the IRSs “mitigation” guidelines.  Thus, under the rubric of OVDP FAQ 35, program participants with non-willful FBAR violations or relatively low account balances believed that they would not be required to pay a penalty greater than that that they would have been liable for under existing statutes.

On March 1, 2011, however, the IRS “clarified” FAQ 35 directing examiners to stop accepting less than the 20 percent offshore penalty under the program, regardless of whether a taxpayer would be liable for a lower penalty under existing statutes, except under narrow circumstances.  Even during those instances in which the IRS was applying existing law, it did not consider reasonable cause and assumed that a taxpayers failure to file an FBAR was subject to the maximum penalty for willful violations unless the taxpayer could prove that the violation was not willful. 

Following the IRSs clarification of FAQ 35, the Taxpayer Advocate highlighted various problems related to this change.  First, the Taxpayer Advocate stated that several of the 2009 OVDP participants entered into the program relying on its original terms and with the idea that they would be treated like similarly situated taxpayers.  Instead, the IRS applied the original FAQ 35 to those taxpayers whose applications were processed prior to March 1, 2011, while applying the clarified FAQ 35 to those taxpayers whose applications were processed after March 1st.  By doing so, and though no fault of the taxpayer, those cases that were processed before March 1, 2011, received a better deal than those processed thereafter. 

The Taxpayer Advocate then argued that a court may require the IRS to follow FAQ 35, if the Court determines that the taxpayer relied to his or her detriment on FAQ 35.  Particularly, the Taxpayer Advocate stated that the court may base its decision on the “Accardi” doctrine or similar legal theories based on the “duty of consistency” or “equality of treatment.”  Often, courts acknowledge that taxpayers generally may not rely on the Internal Revenue Manual (IRM) or similar types of guidance; however, when taxpayers have reasonably relied on IRS procedures, courts have required the IRS to follow its procedures in an effort to avoid inconsistent results.  Even though the Accardi doctrine is limited to situations in which taxpayers have detrimentally relied on the governments procedures, one may argue that several taxpayers relied to their detriment when seeking participation in the 2009 OVDP.

Next, the Taxpayer Advocate argued that the IRS did not publish its March 1, 2011, memo clarifying FAQ 35 as required by the Freedom of Information Act (FOIA).  Specifically, the Taxpayer Advocate states that an item that is not properly published and does not otherwise give “timely” notice to the taxpayer may not be “relied on, used, or cited” by the IRS against a taxpayer.  Thus, the IRSs March 1st memo may be invalid and the IRSs use and reliance on it may constitute a second FOIA violation.

Finally, the Taxpayer Advocated argued that the IRSs new FAQ 35 damages the IRSs credibility with practitioners and taxpayers alike thereby reducing voluntary compliance and participation in future initiatives. 

After the Taxpayer Advocates outcry against the new FAQ 35, there have been several communications between the IRS and the Taxpayer Advocate office in an effort to resolve their dispute.  The most recent communication required a response from the IRS on January 26, 2012; that has not yet been published.

Fuerst Ittleman will continue to monitor the exchange between the IRS and the office of the Taxpayer Advocate for more developments.  You may also monitor these exchanges here.  If you have any questions regarding the 2009 OVDP or offshore voluntary disclosure generally, please contact us at contact@fidjlaw.com.

©Copyright 2012 Fuerst Ittleman, PL. All rights reserved.

Bill Introduced In Florida House Of Representatives Is Designed to Combat MSB Facilitated Workers’ Compensation Fraud

On February 1, 2012, the Florida House of Representatives Insurance and Banking Subcommittee approved HB 1277 which is designed to combat MSB facilitated workers compensation fraud in Florida. Over the past year, MSB facilitated workers compensation fraud has been in the crosshairs of the Florida government.

As we previously reported, on August 2, 2011, the Financial Services Commission of the Florida Office of Financial Regulation (“OFR”) issued a report to Governor Rick Scott and his Cabinet regarding workers compensation fraud in the State of Florida. The cabinet report revealed that money services businesses have played an active, critical, and sometimes unknowing part in defrauding the workers compensation insurance market. A complete overview of the fraud scheme can be read here.

At the time of our prior report on this matter, Florida C.F.O. Jeff Atwater announced the creation of the “MSB Facilitated Workers Compensation Fraud Workgroup” to develop comprehensive reforms to combat the fraud scheme. The efforts of the Workgroup culminated with its report and recommendations which were presented to the Insurance and Banking Subcommittee on November 2, 2011. A summary of the Workgroups report and recommendations can be read in our previous report here.

Many of the Workgroups recommendations were adopted by the Subcommittee in drafting HB 1277. First, HB 1277 would allow the Office of Financial Regulation (“OFR”) to make unannounced visits to inspect MSBs. This change would eliminate the requirement under § 560.303, Fla. Stat. that state regulators give check cashers 15 days notice before conducting an examination of their records. The goal of this revision is to prevent those MSBs that are facilitating the fraud from hiding, destroying, or tampering with records and evidence prior to an OFR inspection.

Second, HB 1277 eliminates the requirement that new MSB licensees be inspected by OFR within six months of the issuance of its license. However, the bill still requires that all MSBs undergo an examination every five years. The hope is that by eliminating the mandatory six-month inspection, OFR can better allocate its resources to investigating suspected fraudulent and high risk MSBs first then moving on to investigate lower risk MSBs at a later time.

HB 1277 also adopted two other recommendations of the Workgroup requiring that check cashers deposit all checks into a single commercial bank account maintained at a federally insured financial institution, and eliminating the ability of companies to cash third-party checks in check cashing facilities. The Workgroup believes that these changes will enhance fraud detection because the Workgroup perceives banks to be in a stronger position to monitor and filter out unlawful transactions. The bill will now proceed to the House floor for reading and debate.

Fuerst Ittleman will continue to monitor the progress of HB 1277 with a keen eye as the passage of HB 1277 will result in changes to regulatory compliance for the Florida MSB industry. If you have questions pertaining to HB 1277, the Florida Office of Financial Regulation, anti-money laundering compliance, or how to ensure that your business maintains regulatory compliance at both the state and federal levels, please contact us at contact@fidjlaw.com.

U.S. Department of Justice Indicts Swiss Bank Weglin & Co. for Assisting in Tax Fraud

On February 2, 2012, the U.S. Department of Justice announced the indictment of Wegelin & Co., a Swiss private bank, for conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret accounts and the income these accounts generated from the Internal Revenue Service (IRS).  This is the first time an overseas bank has been charged by the United States for facilitating tax fraud by U.S. taxpayers.

The Justice Department press release  also notes that the U.S. Government seized more than $16 M from Wegelins U.S. correspondent bank accounts, pursuant to a civil forfeiture complaint.  The press release details the allegations in the criminal indictment, the thrust of which are succinctly summarized as follows:

In the wake of the IRS investigation of UBS, members of Wegelins senior management affirmatively decided to capture the illegal business that UBS exited.   To capitalize on the business opportunity this presented and to increase the assets under management, along with the fees earned from managing those assets, Berlinka, Frei, Keller and others, acting on behalf of Wegelin, told various U.S. taxpayer-clients that their undeclared accounts would not be disclosed to U.S. authorities because the bank had a long tradition of secrecy.   They also persuaded U.S. taxpayer-clients to transfer assets from UBS to Wegelin by emphasizing, among other things, that unlike UBS, Wegelin did not have offices outside of Switzerland and was therefore less vulnerable to U.S. law enforcement pressure.   Members of the Swiss banks senior management approved efforts to capture the clients who were leaving UBS and also participated in meetings with U.S. taxpayer-clients who were fleeing UBS.

However, the timing of indictment is conspicuous.  On January 30, 2012, eight Swiss banks (Credit Suisse, Julius Baer, and Basler Kantonalbank, among others) handed over to the United States government data on U.S. clients  suspected of evading U.S. income taxes.  This disclosure was made in order to avoid prosecution in the United States.  However, remarkably, the data was encrypted at the Swiss governments request, and Switzerland has indicated that it will not provide the encryption key to unlock the data  until the Swiss and the United States reach a broader agreement on exchange of information.

The clear implication of the Wegelin indictment is that the Department of Justice is making good on its threats of prosecution.  Indeed, in taking the unprecedented move to indict a foreign bank that has no branches to the United States, the Justice Department is sending a clear message to foreign banks, and U.S. taxpayers, that income tax evasion, and assisting those that evade income taxes, will not go unpunished.

The press release is available here.

The attorneys at Fuerst Ittleman have extensive experience dealing with IRS audits and Justice Department prosecutions.  You can reach an attorney by emailing us at contact@fidjlaw.com.

Tax Court of New Jersey rules that single employee telecommuting from New Jersey is sufficient contacts to permit New Jersey to tax out of state business

In Telebright Corp. v. Director, Division of Taxation, the State of New Jersey used a single employee’s act of telecommuting while in New Jersey as the jurisdictional basis to tax the income of a corporation that had no offices in the State of New Jersey. The employee received and completed her work assignments from her home in New Jersey using a company-provided computer. Based on these indirect contacts, the business was held to be "doing business" in New Jersey. Thus, the businesss income was subject to taxation in New Jersey under New Jersey law.

In its decision, the full text of which is available here, the Tax Court of New Jersey ruled that such taxation was consistent with both the Due Process Clause and Commerce Clause. The Court held that New Jerseys attempt to tax did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. The court also held that the employee’s presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey’s labor markets.

The significance of this decision is that when an employee is located outside of the jurisdiction where the business is incorporated and/or doing business, the foreign jurisdiction may have a claim to tax the business.  Consequently, businesses must be cognizant of the fact that they may have filing obligations and tax liabilities to jurisdictions that they had not previously considered.

The attorneys at Fuerst Ittleman have extensive experience advising clients to minimize or reduce the ability of state and local governments to tax businesses.  Additionally, the attorneys at Fuerst Ittleman have extensive experience litigating against the government when it assesses additional tax, penalties, and interest.  You can reach an attorney by emailing us at  contact@fidjlaw.com.

FDA Denies Citizen Petition Seeking Mandatory NDA Labeling for Prescription Drugs

On January 6, 2012, the U.S. Food and Drug Administration (“FDA”) denied a citizen petition (Docket No. FDA-2008-P-0291) requesting the FDA to require manufacturers and distributors of prescription drug products to include the new drug application (“NDA”) number on drug product labels.

PRN Publishing, a company that distributes a monthly newsletter for community pharmacists, filed this citizen petition in 2008 over concerns about pharmacists ability to determine the equivalency status of prescription drug products. (See the full text of PRNs citizen petition here.) When filling prescriptions, pharmacists often refer to the list of Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book, to determine the equivalence status of brand and generic drug products in the United States. Where substitution is not prohibited by a prescriber, pharmacists have a duty to dispense only those generic products which appear in the Orange Book and are rated “A.” The citizen petition argued that, due to frequent changes in drug manufacturers and distributors of particular drugs, pharmacists may have difficulty matching drug products on the shelves with the corresponding listing in the Orange Book. As a solution, PRN suggested that all prescription drug manufacturers and distributors should include a drug products NDA number on the label of each bottle. Thus, this system would allow pharmacists “to quickly and easily determine the equivalence status of any drug product by simply comparing the NDA number on the bottle to the NDA numbers listed in the Orange Book under the heading of the particular drug in question.”

Currently, 21 C.F.R. part 314 requires that all drug manufacturers obtain FDA approval of a drug application in order to market a new drug or generic drug. Manufacturers and distributors, however, are not required to place this approved application number on drug product labels. Section 10.30 of the Code of Federal Regulations provides citizens the opportunity to submit a petition to the FDA requesting the Agency to add, remove, or change its regulations. (See 21 C.F.R. § 10.30.) In its citizen petition, PRN suggested that the change to Agency requirements would benefit all stakeholders because it would 1) protect patients from inadvertent illegal substitution; 2) relieve pharmacists of the undue burden of having to research the provenance of each drug product before dispensing generics; and 3) guarantee drug makers that a companys NDA is “firmly attached to its product in whatever form it is distributed.”

Upon reviewing this citizen petition, the FDA did not find PRNs recommendation to be an effective means of communicating drug equivalence to pharmacists. (See the full text of FDA denial here.) In its denial, the FDA pointed out that authorized generic drugs share the same NDA numbers as the branded innovator product and would not be identified separately from the branded drug in the Orange Book. The FDA addressed this issue in the introductory section of the 28th edition of the Orange Book. There, the FDA specifically indicated that distributors and repackagers of products in the Orange book are not identified “because [they] are not required to notify FDA when they shift their sources of supply from one approved manufacturer to another.” Consequently, “it is not possible to maintain complete information linking product approval with the distributor or repackager handling the product.”

Further, the FDA asserts that PRNs recommendation may result in confusion because “[p]harmacists could be confused when they look up an NDA number in the Orange Book and find only a listing for the innovator product.” The FDA noted that the citizen petition lacked sufficient data or information to support the claims listed. After balancing PRNs claims against the Agencys statutory mandate, space limitations, alternatives, potential for confusion, and potential safety risk, the FDA concluded that it would not be necessary to amend the current drug labeling requirements at this time and denied PRNs citizen petition.

Fuerst Ittleman will continue to monitor the developments in the regulation of drug products. For more information, please contact us at contact@fidjlaw.com. 

FDA Fines American Red Cross for Blood Safety Violations

After conducting inspections of American Red Cross facilities between April 2010 and October 2010, the FDA found that 16 blood collection sites did not meet the FDAs standards for safety. These “significant violations” included inadequate managerial control, record-keeping and quality assurance. According to the FDA, however, the lapses did not lead to serious health consequences for blood recipients. The Red Cross has announced that it has taken corrective action to address the FDAs concerns. On January 18, 2012, the U.S. Food and Drug Administration (FDA) fined the American Red Cross $9.59 million for failing to comply with blood safety regulations.

The FDA, through the Center for Biologics Evaluation and Research (CBER) and Office of Regulatory Affairs (ORA), is responsible for the regulation of the collection of blood and blood components used for transfusion or for the manufacture of pharmaceuticals derived from blood and blood components.  Pursuant to Section 351 of the Public Health Service Act (“PHS Act”) and the Food, Drug, and Cosmetic Act (“FDCA”), the FDA oversees and enforces quality standards, conducts inspections of blood establishments, and monitors reports of errors, accidents and adverse clinical events.

The FDA inspects blood establishments to ensure that products are manufactured safely and in a way that protects the purity, potency and quality of the blood products. In addition, the FDA requires blood establishments to properly screen donors, maintain good manufacturing practices (cGMPs), maintain accurate records, investigate any breaches of establishment safeguards, and correct system deficiencies. Licensed blood facilities may engage in the sale, transport, and exchange of blood and blood products across state lines.

Failure to comport with the FDAs regulations may result in enforcement action in the form of a fine, as in the Red Crosss case, regulatory action letters, or revocation of establishment licensure.  In previous years, the FDA has entered into Consent Decrees with several blood bank establishments, such as the American Red Cross and the New York Blood Center, for violations of cGMPs and inadequate quality assurance programs. The FDA has also suspended the license of a blood center (Intermountain Health Care) due to numerous cGMP violations. Although the FDA has expressed its continued commitment to upholding high standards for blood collection and blood bank establishments, the onus of compliance with the FDAs regulations and the safety of the nations blood supply rest in the hands of the individual blood establishments.

Fuerst Ittleman will continue to monitor the FDAs regulation of biologics products and establishments. For more information, please contact us at contact@fidjlaw.com