4th Circuit Rules in Favor of Taxpayers in Son of Boss Case in Home Concrete v. United States

The Fourth Circuit, in an opinion available here, has added itself to the list of Federal circuits in conflict by ruling that a basis overstatement does not qualify as an omission to income under IRC section 6501 that would increase the normal three year limitation period to six. Section 6501 can be viewed in full here. As we previously blogged (in two separate posts here and here), the Seventh Circuit and the Fifth Circuit recently decided the same issue with opposite conclusions.

The Fourth Circuit Court of Appeals held that the statutory issue was resolved by the Supreme Courts decision in Colony, rejecting the argument recently accepted by the Seventh Circuit in Beard found here. The Fourth Circuit concluded that “we join the Ninth and Federal Circuits and conclude that Colony forecloses the argument that Home Concretes overstated basis in its reporting of the short sale proceeds resulted in an omission from its reported gross income.”

Second, the Court held that the outcome was not changed by new Treasury regulations, and in any event, no deference would be given to the Treasury regulations because the Supreme Court had already conclusively construed the term “omission from gross income” in Colony and therefore there was no longer any room for the agency to resolve an ambiguity by regulation.

Judge Wilkinson, on behalf of the Fourth Circuit, further discussed the limits of Chevron deference in the wake of the Supreme Court’s decision in Mayo Foundation case, available here. According to Judge Wilkinson, Mayo “makes perfect sense” in giving “agencies considerable discretion in their areas of expertise.” However he emphasized that “it remains the case that agencies are not a law unto themselves. No less than any other organ of government, they operate in a system in which the last words in law belong to Congress and the Supreme Court.”

The IRS’s attempt to reverse Colony via Treasury regulation “pass[es] the point where the beneficial application of agency expertise gives way to a lack of accountability and a risk of arbitrariness.” He summarizes that “Chevron, Brand X, and more recently, Mayo Foundation rightly leave agencies with a large and beneficial role, but they do not leave courts with no role where the very language of the law is palpably at stake.”

The significance for taxpayers is that depending on where the taxpayer lives at the time his Petition for Redetermination is filed with the U.S. Tax Court, or which U.S. District Court he/she files a lawsuit against the U.S. Government, will govern the outcome of the case. Accordingly, unless and until this issue is resolved by the United States Supreme Court, two taxpayers with identical facts may have two different outcome based merely upon where they reside.

Lawyers at Fuerst Ittleman PL are experienced in handling tax litigation against both the IRS and the U.S. Department of Justice.

House Ways And Means Committee Approves Repeal Of Expanded Form 1099 Provisions

The House Ways and Means Committee approved a bill that would repeal the expanded Form 1099 reporting requirements.

The House bill, called the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR 705), available here, would repeal both the expanded information reporting requirements that went into effect with the Patient Protection and Affordable Care Act (PL 111-148), available here.

The expanded the 1099 reporting requirements include all payments aggregating $600 or more in a calendar year to a single payee. The Small Business Jobs Act (PL 111-240), available here, requires individuals who receive rental income to issue Forms 1099 for payments of $600 or more, starting in 2011. HR 705 would repeal both of these recent changes. The increased need for revenue from the growing budget deficient has resulted in an increased budget for the IRS to step up compliance enforcement. The IRSs most recent budget included an additional $1 Billion for increase hiring of IRS auditors and employees.

The attorneys at Fuerst Ittleman are experienced in addressing federal, state, and local tax compliance issues. If you have questions regarding how these changes may affect you, contact Fuerst Ittleman at contact@fidjlaw.com.

E-Cigarette Distributor Sues to Stop FDA from Preventing the Importation of Electronic Cigarettes

In an ongoing saga of litigation between electronic cigarette (“E-Cigarette”) distributors and the FDA regarding the power of the FDA to regulate and prevent the importation of E-Cigarettes, another E-Cigarette distributor has thrown its hat into the ring. Last week, Totally Wicked “E.Liquid (“TWI”) filed suit in the United States District Court in Washington DC to prevent the FDA from regulating TWIs electronic cigarettes as a drug, medical device, or combination of the two and from barring their importation. A copy of that lawsuit can be seen here. TWI claims that their product is a tobacco product and should be regulated as such and not as a drug, medical device or combination thereof.

On December 7, 2010, in the case of NJOY v. FDA, the United States Court of Appeals for the D.C. Circuit affirmed a District Court decision in the e-cigarette industrys favor which enjoined the FDA from regulating e-cigarettes as drugs. That opinion can be seen here. However, it appears that the FDA is nevertheless continuing to regulate of E-Cigarettes despite the DC Circuits ruling, and has issued additional import alerts regarding E-Cigarettes. As such, TWI has now filed suit to protect its own interests and to have the D.C. Circuits opinion applied to its own products.

Fuerst Ittleman lawyers are experienced in bringing suit against regulatory agencies such as the FDA when they seek to regulate products outside their jurisdiction or in ways not in conformity with their own regulations.

New Bill Seeks to Limit the Way Manufacturers Handle Recalls

Last week, United States Senator Charles Schumer (D-NY) introduced a bill aimed at limiting the options that manufacturers may pursue in the event of a product recall.  Found here, the Consumer Recall Protection Act states that “. . . a person may not sell to a consumer any covered product that is subject to a recall.”  As written, the Act will apply to a variety of products, including food, drugs, cosmetics and devices, all covered by the Food, Drug, and Cosmetic Act (FD&C).  If enacted, the Consumer Recall Protection Act will prohibit manufacturers from selling recalled products to consumers until the defect prompting the recall is remedied. 

The Bill may have come as a response to the recent controversies raised by Johnson & Johnson’s “phantom recall” efforts.  As previously reported, the handling of several recalls by J&J has led to scrutiny of the current recall process by the FDA and Congress.  After years of concern regarding the company’s manufacturing and responsiveness to FDA warnings, the massive recall of Children’s Tylenol in 2010 led Congress to probe the effectiveness of the FDA’s regulation of drug manufacturing.  During a recent hearing before the House, the FDA expressed its concern regarding J+J and the company’s efforts to postpone recalling its products.  In what is known as a “phantom recall,” J+J hired contractors to go into stores and purchase its products rather than conducting a widespread and highly-public voluntary recall.   

In addition to combating the “phantom recall,” recent legislative efforts have focused on reforming the current voluntary recall process for drug products.  Because the current drug recall scheme is voluntary, the FDA is often able to prompt manufacturers into initiating recalls after alerting the public of the possible dangers associated with the products at issue.  While the recent Food Safety Modernization Act, discussed here, granted authority to the FDA to issue mandatory recalls in certain circumstances, the FDA does not currently have the power to initiate recalls of drugs.  However, the voluntary recall process for drug products may soon come to an end.  As recently reported, new legislation has been introduced in the House that focuses on reforming the FDA’s ability to oversee and enforce drug safety.  The bill, known as the Drug Safety Modernization Act, largely mirrors the recent food safety legislation and contains provisions giving the FDA mandatory recall authority over drug products.  

While it appears that Congress is scrambling to restore public confidence in the FDA’s ability to keep consumers safe, the potential effectiveness of the newly proposed Consumer Recall Protection Act is questionable.  Although the bill may largely be a response to J+J’s phantom recall efforts, the Act will only prevent companies from selling products to consumers once a recall has already been initiated.  Because the Act would only apply once a recall has been initiated, it would not have prevented the phantom recall situation that J+J engaged in.

Swiss Bankers Indicted in Virginia by Department of Justice Tax Division for aiding tax evasion

On February 23, 2011, a federal indictment was unsealed in the United States District Court for the Eastern District of Virginia alleging violations of 18 U.S.C. section 371, commonly referred to as a “Klein Conspiracy.” The Defendants are Marco Parenti Adami, Emanuel Agustoni, Michelle Bergantino, and Roger Schaerer.

The indictment alleges that an international Swiss bank (unnamed in the indictment) was one of the largest wealth mangers in the world and had branches in the U.S. and over $3 Billion in total assets in undeclared accounts. The indictment also alleges that two private Swiss banks and an Israeli bank participated in the conspiracy. All defendants, either residents or citizens of Switzerland, are alleged to have conspired with each other to defraud the United States for the purposes of impeding, impairing, obstructing, and defeating the lawful government functions of the IRS in the ascertainment, computation, assessment, and collection of revenue “ specifically U.S. income taxes.

The indictment goes on to allege that the conspiracy involved soliciting U.S. customers to open undeclared Swiss bank accounts through the use of nominee tax haven entities, and that as a result of the defendants actions, U.S. customers filed false and fraudulent income tax returns with the IRS and failed to file Form TD 90.22-1 (Foreign Bank Account Report). More specifically, the indictment alleges that the defendants discouraged their U.S. customers from disclosing their unreported foreign bank accounts to the IRS through the Voluntary Disclosure program and instead encouraged their U.S. customers to transfer their funds to other banks in Switzerland and Hong Kong.

The full indictment is available here.

It appears that in the wake of the UBS deferred prosecution and the indictment, trial and conviction of Maurico Cohen Assor and his son, the Department of Justice is stepping up and continuing enforcement of tax related crimes. The attorneys at Fuerst Ittleman have extensive experience in criminal and civil tax litigation and regularly represent those being investigated for criminal tax offenses.Swiss Bankers Indicted in Virginia by Department of Justice Tax Division for aiding tax evasion

FinCEN Issues Guidance To Financial Institutions On Ongoing Events In Libya

On February 16, 2011, the Financial Crimes Enforcement Network (FinCEN) issued a guidance advising reminding financial institutions as to their responsibilities regarding the political turmoil which was then ongoing in Egypt as the Mubarak government fell from power. (We reported on that guidance document here.) Today, as similar events unfold in Libya and as the Gaddafi government struggles to maintain power, FinCEN has issued another guidance document “to remind U.S. financial institutions of their requirement to apply enhanced scrutiny for private banking accounts held by or on behalf of senior foreign political figures and to monitor transactions that could potentially represent misappropriated or diverted state assets, proceeds of bribery or other illegal payments, or other public corruption proceeds.” (FinCENs February 25, 2011 Guidance Document may be read here). In other words, with the potential fall of the Gaddafi government, FinCEN has highlighted the risk that “Senior Foreign Political Figures” or “Politically Exposed Persons” in possession of funds misappropriated from the Libyan treasury may attempt to divert those funds in an effort to evade the jurisdiction of Libyan law enforcement.

Politically exposed persons (or “PEPs”) are generally known as persons who have been entrusted with a prominent public function, or individuals who are closely related to such a person. (United States law refers to PEPs as “Senior Foreign Political Figures.”) PEPs are viewed as money laundering risks due to the increased potential that they may be involved in bribery and corruption. Although it is not a violation of the law to provide banking or financial services for PEPs, financial institutions are generally advised to conduct enhanced due diligence on PEPs during the account opening process and enhanced monitoring of transactions once the account has been opened. As articulated by FinCEN in this announcement, “[i]n instances where senior foreign political figures maintain private banking accounts at a covered institution, those financial institutions are required to apply enhanced scrutiny of such accounts to detect and report transactions that may involve the proceeds of foreign corruption.”

Ocean Bank to Pay Fine for Bank Secrecy Act Violations

As a result of a two year investigation by the United States Department of Justice, Miami-based Ocean Bank is expected to agree to pay between $10 and $15 million in penalties and fines for violations of the Bank Secrecy Act (“BSA”). The violations stem from Ocean Banks BSA compliance weaknesses as evidenced by its failure to file suspicious activity reports and adequately monitor high-risk accounts.

The BSA requires U.S. financial institutions to assist U.S. government agencies in detecting and preventing money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, in daily aggregate amounts, and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. General information about the Bank Secrecy Act can be found on FinCENs website.

This is not the first time Ocean Bank has had anti-money laundering and Bank Secrecy Act compliance issues. In March 2007, Ocean Bank consented to the issuance of a Cease and Desist Order by the FDIC and the Florida Office of Financial Regulation. The 2007 Order required Ocean Bank to improve most aspects of its anti-money laundering compliance program including the monitoring of high-risk accounts and the reporting of suspicious activity. A copy of the March 2007 Cease and Desist Order can be read on FDICs website here.

In 2008, the FDIC issued a Modified Cease and Desist Order which ordered the bank to correct its violations of federal capital requirements and lending rules. The Modified Cease and Desist Order can be read here. Ocean Bank also currently faces a civil suit by a former employee who alleges that she was fired for reporting suspicious activity of customers. In November 2010, a Miami judged ruled that the former employee can discuss what the suspicious activity in question was in presenting her case but federal law prohibits the disclosure of whether she reported the suspicious activity to the U.S. Treasury Department.

If you have questions pertaining to the Bank Secrecy Act, FinCEN regulations, 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.

FDA to Unveil Rules for Reviewing Biosimilars “Very Soon”

The U.S. Food and Drug Administration (FDA) will announce new rules for reviewing the first copies of biologic drugs, also known as “biosimilars.” According to FDA Commissioner Margaret Hamburg, these new rules will be formally implemented in “the very near-term time frame.”

The health-care overhaul passed last year included a provision that authorized the FDA to develop a process for approving cheaper copies of compounds made from living cells. The FDA is currently evaluating different models for evaluating that the biosimilars work as well as the products they copy.

In the absence of final rules, generic companies have been filing the same biologics license applications (“BLAs”) used for brand-name drugs. The BLA process does not create savings for patients like the generic drug program for traditional medicines. According to the Congressional Budget Office, it is estimated that Americans would save $25 billion in a decade through rules allowing copies of biologic drugs.

Hamburg stated that the FDA plans to discuss with industry in the next couple of months how much it will charge to review applications for biosimilar products under the new rules. This is a step in the right direction for moving forward with rules for reviewing biosimilars. Fuerst Ittleman will monitor FDAs progress with developing final rules.

For more information on biosimilar products, please contact us at contact@fidjlaw.com.

Fifth Circuit Rules against the United States in basis overstatement case – causing further rift between the Circuits in Son of BOSS cases

On February 9, 2011, the Fifth Circuit Court of Appeals issued an opinion in a consolidated appeal in Daniel Burks, as Tax Matters Partner for Key Harbor Investment Partners v. United States. The full decision can be found here.

As in all of the recently discussed opinions, in Burks, again, the issue was whether the overstatement of basis was a reason for the IRS to use the substantial omission from gross income exception to the normal 3 year statute of limitation rule contained in IRC section 6501(a). Section 6501 can be view in full here.

However in ruling for the taxpayer, the Fifth Circuit concluded that an overstatement of basis is not an omission from gross income for purpose of the six year statute of limitations contained in IRC section 6501(e)(1)(A), and affirmed the Tax Court’s judgment in favor of the taxpayer and reversed the district court’s judgment in favor of the government. The 5th Circuit explained that an omission of an amount from the tax return or a misstatement of the nature of an item reported in a tax return that puts the government at a disadvantage in detecting the error in the taxpayers return that results in the six year statute of limitations contained in IRC section 6501(e)(1)(A). Because the nature of the item, in this case the basis of the partnership was included in the tax return, this gave the government with sufficient information to look into that specific item contained on the tax return. As long as there is not a fundamental change of nature of the item reported on the tax return, the disclosure of the item at issue on the tax return provides the government on notice of the item being reported and the three year normal limitations period under IRC section 6501(a) should apply.

The 5th Circuit’s decision is in direct conflict with an earlier ruling entered by the 7th Circuit, as we previously blogged here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice “ Tax Division regarding tax shelters and statute of limitations.

FinCEN Issues Guidance To Financial Institutions On Recent Events In Egypt

On February 16, 2011, the Financial Crimes Enforcement Network (FinCEN) issued a guidance document (available here) “to remind U.S. financial institutions of their requirement to apply enhanced scrutiny for private banking accounts held by or on behalf of senior foreign political figures and to monitor transactions that could potentially represent misappropriated or diverted state assets, proceeds of bribery or other illegal payments, or other public corruption proceeds.” In other words, with the departure of the Mubarak government from power and potentially into exile outside of Egypt, FinCEN has highlighted the risk that “Senior Foreign Political Figures” or “Politically Exposed Persons” in possession of funds misappropriated from the Egyptian treasury may attempt to divert those funds in an effort to evade the jurisdiction of Egyptian law enforcement.

Politically exposed persons (or “PEPs”) are generally known as persons who have been entrusted with a prominent public function, or individuals who are closely related to such a person. (United States law refers to PEPs as “Senior Foreign Political Figures.”) PEPs are viewed as money laundering risks due to the increased potential that they may be involved in bribery and corruption. Although it is not a violation of the law to provide banking or financial services for PEPs, financial institutions are generally advised to conduct enhanced due diligence on PEPs during the account opening process and enhanced monitoring of transactions once the account has been opened. As articulated by FinCEN in this announcement, “[i]n instances where senior foreign political figures maintain private banking accounts at a covered institution, those financial institutions are required to apply enhanced scrutiny of such accounts to detect and report transactions that may involve the proceeds of foreign corruption.”

Given the widespread allegations that the Mubarak government misappropriated billions of dollars during its thirty year term, “[f]inancial institutions should be aware of the possible impact that events in Egypt may have on patterns of financial activity when assessing risks related to particular customers and transactions.”