Foreign Bank Account Report (“FBAR”) Extended Filing Date Announced for Signatory Authority Only Filers

The U.S. Department of the Treasury, Financial Crime Enforcement Network (James H. Freis, Jr., Director) announced via FinCEN Notice 2011-1, that individuals in the following categories now have until June 30, 2012 to file FBARs (for calendar year 2010 reporting obligations):

(1) An employee or officer of an entity under § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity, OR

(2) an employee or officer of a controlled person of an entity under § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.

A full copy of the notice is available here.

However, individuals and entities that do not fall within the exception must file the FBAR for calendar year 2010 by June 30, 2011. The form must be received by June 30th and a USPS postmark will not suffice.

The attorneys at Fuerst Ittleman, PL have extensive experience navigating the complex regulator and statutory provisions regarding the reporting of foreign bank accounts. You can contact an attorney by emailing us at: contact@fidjlaw.com

U.S District Court Judge Rebuffs IRS’ Attempt to Use “John Doe” Summons

In what many consider to be a surprise, United States District Judge Morrison C. England, Jr. denied the United States ex parte petition for leave to serve “John Doe” summons on Californias Board of Equalization.

Any person making “gifts” in excess of the annual exclusion amount must file an IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. 26 U.S.C. §§ 2503(b), 6019(a). Taxpayers have a lifetime credit against gift taxes, and Form 709 is used to track

the amount of credit both: 1) utilized by the taxpayer; and 2) remaining for future use. In addition, estate taxes may be due based on the value of an estate when transferred. The estate tax owed includes certain taxable gifts reported on Form 709 during the decedents lifetime.

The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.

The IRS attempted to obtain informal cooperation from the State of California, and then attempted to obtain permission to use a “John Doe” summons to formally obtain the requested information. The Court held that “because the United States has failed to show that the information sought cannot be obtained from another readily available source, the instant Petition is denied without prejudice.”

Interestingly, the Court noted that it may not have the power to issue a “John Doe” summons to a State. The Court outlined the following questions that would have to be answered before it would issue a “John Doe” summons to a State:

1) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f); 2) Whether a states sovereign immunity precludes

issuance of a John Doe Summons; 3) Whether, assuming a state is subject to the Courts power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and 4) Whether the United States should be required to

attempt to pursue any and all state court remedies prior to seeking relief in federal court.

A full copy of the opinion is available here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS, including but not limited to IRS summons enforcement. You can reach an attorney at Fuerst Ittleman by emailing us at: contact@fidjlaw.com

U.S. Tax Court Rules in Favor of Good Faith Taxpayers

On March 1, 2011, the Tax Court held that a husband and wife were not liable for accuracy-related penalties related to their 2005 income tax return where they acted in good faith and made reasonable efforts to accurately report their income. The entire Bengtson v. Commissioner opinion is available here.

The married taxpayers made an express agreement with the wifes sister to invest in the shares of two companies. In 1999, 2000, and 2001, the sister purchased stock through her brokerage account with funds provided by the taxpayers. The investments completely devalued when one companys shares were delisted in 2001 and the other company ceased operations in 2002. The taxpayers requested information about the stock from the wifes sister, who did not comply with their requests. The taxpayers thereafter claimed a long-term capital loss from the investment in each company on their 2005 tax return. The Internal Revenue Service subsequently denied the capital losses on the basis that the stocks became worthless prior to 2005. Further, the IRS asserted that there was insufficient evidence to prove that the taxpayers were even the actual stock owners, since the wifes sister never provided such information. The IRS then went on to correct the taxpayers characterization of income from the sale of options, which was reported as a capital gain but should have been reported as ordinary income.

Ultimately, the husband and wife conceded that the sale of options should have been reported as ordinary income and that their stock investments became worthless prior to 2005, but argued that the IRS penalties were inapplicable due to reasonable cause and good faith. Responding to the taxpayers defense, the Tax Court noted that the taxpayers read IRS publications, took reasonable measures to properly report the sale of options, and sought to obtain the necessary stock information from the wifes sister. The court held that the sisters lack of responsiveness was irrelevant to its decision that the taxpayers actions were sufficient to clear them of accuracy-related penalties.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS in both the Tax Court and District Courts. You can contact an attorney by emailing us at contact@fidjlaw.com

Improving the FDA Seafood Oversight Program

On April 14, 2011, the U.S. Government Accountability Office (GAO) reported that the U.S. Food and Drug Administrations (FDA) seafood oversight program, which ensures the safety of all imported seafood, is “limited” and needs improvement. In response to the GAO report, Congresswoman Rosa DeLauro (D-CT) announced her support for increased funding and better oversight for seafood to protect the public. DeLauro demanded that we “ensure that the FDA has the additional resources needed to be successful at their mission in ensuring the safety of these products and the protection of the American public.”

Currently, 80 percent of all seafood consumed in the U.S. is imported, and half of all imported seafood is farm-raised. However, due to the high rates of infection associated with raising fish in farms, farmers find it necessary to treat their fish with drugs, such as antibiotics and antifungal agents, which creates a potential risk of drug residue for consumers.

Concerned with the safety and increasing quantities of imported seafood, DeLauro emphasized that “only one in every ten imported fish, shellfish, shrimp, or other seafood is tested for drug residues when it enters our country.” The FDA tests for residue of 16 unapproved drugs, in comparison to the European Union (EU) which tests for residue of as many as 50 drugs. The GAO recommended that the FDA should study the feasibility of adopting other practices, such as developing a national residues monitoring plan to control the use of aquaculture drugs to ensure the safety of imported seafood.

The GAO also found that sampling of imported seafood was inadequate. The FDA collects approximately 0.1 percent of imports for sampling, a very limited number. The EU samples as much as 4 percent of seafood imports. The GAO proposed that the FDA develop a more comprehensive import sampling program effectively using its laboratory resources. Currently, the FDA only utilizes 7 of 13 available laboratories for seafood drug residue testing. Additionally, the GAO found that the FDA should take into account the imported seafood sampling programs of other entities and countries.

The GAO further discussed that FDA inspectors do not typically visit foreign aquaculture farms to evaluate drug use or the capabilities, competence, and quality control of laboratories that analyze the seafood. In China, the FDA has only inspected 1.5 percent of seafood processing facilities in the last 6 years. The GAO noted that the FDAs assessment is limited by the lack of procedures, criteria, and standards. In contrast, the EUs inspection includes a review of the government structure, food safety legislation, and the foreign countrys own inspection program. The GAO recommended developing a strategic approach with specific time frames to enhance the current inspection program.

Fuerst Ittleman will continue to monitor the FDA for implementation of changes to the seafood oversight program. For more information, contact us at contact@fidjlaw.com.

Recent DOJ Letters May Signal Increased Federal Efforts To Prosecute Medicinal Marijuana Under the CSA

Recent Department of Justice actions may signal an impending crackdown on the medical marijuana industry by federal authorities. The issue of medical marijuana is a textbook example of the interplay between State and Federal governments and highlights issues of federalism, preemption, and the Supremacy Clause of the U.S. Constitution.

Though 15 states currently allow for the use of medical marijuana, marijuana remains prohibited under federal law. Under federal law, marijuana is classified as a Schedule 1 drug under the CSA. Drugs classified as Schedule 1 have been found by Congress to: 1) have a high potential for abuse; 2) have no currently accepted medical use in treatment in the US; and 3) lack accepted safety for use under medical supervision. Additionally, no prescriptions may be written for CSA Schedule 1 drugs. Therefore, though it may be legal under state law to possess, cultivate, and/or distribute marijuana for medicinal purposes, such actions violate federal law.

The conflict between the rights of citizens under state medical marijuana laws and the federal CSA has played out in several landmark decisions in the U.S. Supreme Court over the past decade. In United States v. Oakland Cannabis Buyers Cooperative, 582 U.S. 483 (2001), the Court was faced with a battle between the rights of citizens under California law and the CSA. Under the California Compassionate Use Act, a patient or his primary caregiver could cultivate or possess marijuana on the advice of a physician. Oakland Cannabis Buyers Cooperative was organized to distribute marijuana to qualified patients for medical purposes. The United States sued to enjoin the Cooperative under the CSA arguing that the Cooperatives activities violated the CSAs prohibitions on distributing, manufacturing, and possessing with the intent to distribute or manufacture a controlled substance. In response, the Cooperative argued that a common law medical necessity defense should be written into the CSA and that because California law allowed for medicinal use, the medical necessity defense should apply.

In siding with the government, the Supreme Court held that there is no medical necessity exception to the CSAs prohibitions on manufacturing and distributing marijuana. The Court went on to explain that Congress made a value judgment in placing marijuana in Schedule 1 under the CSA. As such, because the CSA defines Schedule 1 drugs as having no currently accepted medical use, medical necessity could not be used to avoid prosecution.

In Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court directly addressed the issue of whether Congress, pursuant to its Commerce Clause authority, could regulate and prohibit the local cultivation of marijuana which complied with California state law. In Raich, the Respondents were California residents who qualified for medicinal marijuana under the states Compassionate Use Act. After federal agents seized and destroyed all six of Monsons cannabis plants, the respondents filed suit seeking injunctive and declaratory relief prohibiting the enforcement of the federal CSA to the extent it prevented them from possessing, obtaining, or manufacturing cannabis for their personal medical use. The respondents claimed that enforcing the CSA would violate the Commerce Clause and other constitutional provisions. In response, the government argued that the Commerce Clause permitted regulation of even entirely intrastate activities so long as those activities are part of an economic “class of activities” that have a substantial effect on interstate commerce.

In holding that the CSAs prohibition of locally grown and used marijuana was permissible, the Court found that Congress had a rational basis for concluding that local marijuana substantially affects interstate commerce. The Court found that Congress can regulate purely intrastate activity that is not itself “commercial,” i.e., not produced for sale, if it concludes that failure to regulate that class of activity would undercut the regulation of the interstate market in that commodity. The Court went on to find that due to the inability to distinguish or prevent locally cultivated marijuana from entering the interstate market, the failure to regulate it would undermine the purposes of the CSA as a whole.

Post-Raich, the position of the DOJ throughout the remainder of the Bush administration was that any use of medicinal marijuana, though legal under state law, could and would be prosecuted under the CSA. However, this position appeared to change under the Obama administration with the publication of the Ogden Memorandum in 2009. On October 19, 2009, the DOJ announced that, while it was committed to the enforcement of the CSA, it was also committed to efficient and rational use of its limited resources. Therefore, the DOJ advised that prosecutors “should not focus federal resources in [their] States on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” A copy of the Ogden Memorandum can be read here.

However, news organizations such as NPR have reported that over the course of the past several months, the U.S. Attorneys Office has issued letters to 8 of the 15 state governments which authorize the use of medicinal marijuana emphasizing DOJs commitment to enforcing the Controlled Substances Act (“CSA”) vigorously against individuals and organizations that participate in unlawful manufacturing and distribution activity involving marijuana under federal law, even if such activities are permitted under state law. A copy of NPRs report can be read here.

In the wake of these letters, DOJ spokespersons have emphasized that the Ogden Memorandum neither legalized marijuana possession nor provided a defense to prosecution under federal law and that distribution continues to be a federal offense. As a result, dispensaries, which are legal under some State medical marijuana laws, may face a renewed risk of prosecution.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with administrative law, regulatory compliance, and white collar criminal defense. You can reach an attorney by emailing us at contact@fidjlaw.com.

FDA and Medical Devices Subject of Congressional Hearing

The House Oversight & Government Reform Subcommittee on Health Care is scheduled to hold its “Pathways to FDA Medical Device Approval: Is there a Better Way?” hearing tomorrow, June 2, 2011. The panel is set to call FDAs Dr. Jeffrey Shuren, Director of Centers for Devices and Radiological Health; in order to “study the FDAs inconsistent application of reasonable standards for safety and effectiveness in approving medical devices, and the impact it has on American job creators.”

In addition to Shuren, the committee is set to call Congressman Erik Paulsen (R-Minn.), Jack Lasersohn of the venture capital firm The Vertical Group, Dr. David Gollaher of the California Healthcare Institute, and Dr. Rita Redberg, Director of Womens Cardiovascular Services in the Division of Cardiology at the University of California, San Francisco. Representative Paulsen is a supporter of the medical device industry and is currently pushing for legislation to “modernize” the FDA and block implementation of a $20 billion tax on medical devices. According to Paulsen, “[w]ere going to propose legislation that modernizes the FDA so that this industry remains strong. Companies dont mind if [FDA review] is rigorous. They want to make sure its relevant.”

Fuerst Ittleman recognizes the importance of a consistent pathway for FDA medical device clearance. We will monitor this and future hearings related to the FDA and changes to the medical device review process. For more information on FDAs regulatory oversight of medical devices, please contact us at contact@fidjlaw.com.

FDA Still Has Not Defined Gluten-Free After 3 Years

In January of 2007 the U.S. Food and Drug Administration (FDA) proposed a definition for the term “gluten-free,” and three years later there is still no regulation regarding the term. Regulations for gluten-free labeling would help those who suffer from celiac disease, a chronic inflammatory disorder of the small intestine which is triggered by certain proteins known as gluten. Approximately 1 percent of the population suffers from celiac disease. Glutens are naturally present in certain cereal grains and form when wheat flour is mixed with liquid and kneaded. Grains that contain gluten are wheat, rye, barley, cross-bred hybrids, and possibly oats.

Currently, a label with the term “gluten-free” must be truthful and not misleading; however, there is no set definition provided by the FDA. The FDA has proposed that a food which bears the label “gluten-free” must not have more than 20 parts per million or more of gluten, which is the amount that can be reliably detected. The use of the label would be voluntary, meaning foods that are naturally gluten-free, such as milk or water, would not have to bear the label. Foods that would be prohibited from bearing the label are those which include barely, common wheat, rye, spelt, kamut, triticale, farina, vital gluten, semolina, and malt vinegar. Other countries such as Canada, Brazil and the Codex Alimentarius Commission, an joint international FAO/WHO standards organization, have defined gluten-free as having no more than 20 parts per million of gluten present.

Recently, the owner of Great Specialty Products in North Carolina was sentenced to 11 years in prison after he was found guilty of purchasing regular bread and rolls and repackaging them as gluten-free. Dozens of people complained of illness after consuming the goods.

Hopefully, the FDA will not take as long to define the term “gluten-free” as it took the U.S. Department of Agriculture (USDA) did to define the term “organic.” CNN reported in 1997, seven years after the Organic Foods Production Act of 1990, that USDA officials had finally drafted a set definition for organic.

On May 4, 2011, activists seeking to pressure the FDA to define gluten-free brought a 13-foot-tall gluten-free cake to Capitol Hill. In the absence of a federal standard, it is buyer beware.

Fuerst Ittleman will continue to monitor the FDA for changes to gluten-free labeling requirements. For more information, contact us at contact@fidjlaw.com.

Proposed rulemaking by DEA will bring its regulations governing forfeitures in line with the Civil Asset Forfeiture Reform Act

The Drug Enforcement Administration (DEA) recently published a notice of proposed rulemaking regarding the consolidation of seizure and forfeiture regulations in the Department of Justice which will harmonize the regulations of the DEA, Bureau of Alcohol, Tobacco & Firearms (ATF) and Federal Bureau of Investigation (FBI) pertaining to the seizure and forfeiture of assets and bring those procedures for seizure and forfeiture under one regulation. That notice of proposed rulemaking can be found here. Generally, assets may be seized and forfeited to the government if they were used in violation of a law providing for forfeiture, are contraband, violate a regulatory statute, or are connected in some way to the laundering of monetary proceeds of a specified unlawful activity.

In 2000, Congress passed the Civil Asset Forfeiture Reform Act (CAFRA) which amended the forfeiture laws regarding seizures and forfeitures involving federal agencies, except for violations of the Customs laws, certain laws involving embargos, IRS laws or seizures for violations of the Food, Drug & Cosmetic Act. CAFRA was passed in response to stories of abuse regarding the seizures and forfeitures of assets without adequate due process protections for individuals who could not afford counsel or the bond often required to challenge government forfeitures.

For example, prior to CAFRA, there were no fixed time limits regarding when notice letters had to be sent by the agency informing an owner that his or her goods had been seized for forfeiture and no remedies to the owner for goods being held an inordinate amount of time. Likewise, there was no fixed deadline governing when a forfeiture proceeding had to be commenced after notice had been sent to the owner. Additionally, persons claiming seized goods had to post a bond, sometimes in the thousands of dollars, just for the right to contest the forfeiture. In cases where the owner of seized property could not afford a lawyer, he or she had to represent his or her self. In all cases, the agency only had to show probable cause that the goods were forfeitable, the owner had the burden of proof to show why the goods should not go to the agency. Innocence or lack of knowledge of a violation of the law was not necessarily a defense.

Now, under CAFRA, forfeiture notices must generally be sent within 60 days of seizure;, and if the notice is not sent the agency must return the property. If an owner files a claim for the property, a complaint for forfeiture in court must be filed within 90 days, the owner no longer needs to post a bond, and if the forfeiture is of a primary residence, and the owner does not have the funds for a lawyer, the court must appoint a lawyer. Furthermore, the government now has the burden to prove by the greater weight of the evidence that the goods are forfeitable under the law, and an owner now can assert innocence or lack of knowledge of the violation claimed by the agency as a defense to forfeiture, and an owner can obtain an attorneys fees award against the agency if he or she prevails in a forfeiture action in court.

The proposed rulemaking by the DEA seeks to harmonize its regulations with these CAFRA requirements and consolidate its rules and procedures with those of other Department of Justice agencies. These proposed, consolidated regulations will apply to all seizures and forfeitures commenced by any agency of the Department of Justice except those specifically excluded by CAFRA. The proposed regulations will make express in the rules of the Department of Justice the enhanced due process protections provided by CAFRA to owners and others with interests in property.

When faced with the deprivation of property by a federal agency, it is important to obtain counsel in order to ensure that the government complies with the enhanced due process protections of CAFRA. At Fuerst Ittleman, we will monitor the proposed rulemaking and will blog when the final rules are promulgated.

All Induced Pluripotent Stem Cells (iPSC) Are Not Created Equal

A recent study shows that the ability of nerve cells derived from human induced pluripotent stem cells (iPSCs) to function in the body may vary according to the method used to generate the iPSCs from adult stem cells. As we previously reported, iPSCs are adult stem cells that have been genetically reprogrammed to have the pluripotency character of embryonic stem cells. In the current study, a team based in the Republic of Korea and the United States has found that neurons and neural precursor cells (NPCs) demonstrated residual expression of exogenous reprogramming genes, early senescence, and apoptotic cell death when derived from virally reprogrammed iPSCs. However, NPCs and dopamine neurons were highly expandable and exhibited gene expression and other properties similar to those of the brains own dopamine neurons when derived from iPSCs generated using a protein reprogramming technique. These NPCs and dopamine neurons also restored motor deficits in rats with Parkinson disease.

According to the authors of the study, “[o]ur results suggest that protein-based reprogramming may be a viable approach for generating a patient-specific source of cells for treatment of [Parkinson disease] and other degenerative diseases.” We will continue to monitor the progress that scientists are making with induced pluripotent stem cells and other stem cells. For more information contact us at contact@fidjlaw.com

IRS’s Second Guidance on the Foreign Account Tax Compliance Act (FATCA) Leaves Many Questions Unanswered

As we previously discussed here, the Foreign Account Tax Compliance Act (FATCA) enacted in March 2010 imposes a 30 percent withholding tax on foreign banks who do not properly disclose accounts held by U.S. taxpayers. In its implementation of FATCA, the Internal Revenue Service (IRS) has issued two Notices providing guidance to those that are affected. As previously discussed in our blog, the IRS issued its first guidance regarding its implementation of FATCA in late 2010. In this original guidance, the IRS required foreign institutions to document every account regardless of whether it had documentation on file.
In response to numerous complaints to the first notice, the IRS provided additional guidance in Notice 2011-34 on April 8, 2011. According to this notice, financial institutions will have to review paper and electronic account files to identify U.S. accounts. Although this has reduced the requirements imposed by the first notice, it is still extremely burdensome.
According to Danielle Nishida, attorney advisor in the Office of Associate Chief Counsel, the IRS has narrowly tailored its guidance regarding the FATCA, hoping to provide more broad advice in the future. Notably, however, the IRS is looking to the community for comments in assessing the effect of FATCA on retirement plans, employee benefit plans, trusts, and numerous other areas. Ultimately, these comments will guide the IRS in its implementation of FATCA.
According to Nishida, the IRSs goal is to “get U.S. reporting” and “not to tax anyone besides U.S. taxpayers.” Notably, however, the foreign institutions involved are either subject to the task assigned to them by the IRS or pay a 30 percent withholding tax. While discussing the withholding tax, Michael Plowgian, attorney advisor in the Treasurys Office of Tax Policy, explained the 30 percent withholding tax “gives foreign financial institutions a way to incentivize recalcitrant account holds to provide information about their accounts” and “prevents a ring of Ëœblockers from forming around the United States to act on behalf of noncompliant entities.”
The IRS is also struggling with how to best address partnerships and other pass-through entities under the disclosure regime established by FATCA. During a forum sponsored by the D.C. Bar Taxation Sections Passthroughs and Real Estate Committee on May 25, 2011, Plowgian expressed that “because of the way partnerships are structured, these entities represent a significant challenge as the government works to implement the statute.”
According to Plowgian, the IRS is working to create exceptions for those entities that do not represent a risk of tax evasion. Specifically mentioned were pension and retirement plans and tax exempt charities. The Department of Treasury is also working to narrow the scope of entities subject to the FATCA by working on determining “when a foreign entity is primarily engaged in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such instruments,” which would put that institution within the requirements of the FATCA.
The two guidance documents issued by the IRS are clearly only a starting point in the implementation of FATCA. Before the provisions become effective in 2013, the IRS must undertake the responsibility of explaining the mechanics of FATCA to the endless list of potential taxpayers.
The attorneys at Fuerst Ittleman have extensive experience in the areas of tax law and tax law litigation and will continue to monitor the changes made or considered by the Internal Revenue Service. If you have any questions regarding the FATCA or any other Internal Revenue Code section, do not hesitate to contact us as contact@fidjlaw.com