IRS Announces Second Special Offshore Voluntary Disclosure Initiative (OVDI)

On February 8, 2011, the IRS issued an announcement entitled: “Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 Deadline” via IR-2001-14, available here.

The decision to “open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.” United States persons (U.S. citizens and resident aliens, among others) have an obligation under the Bank Secrecy Act (BSA), codified in Title 31 of the United States Code to report to the U.S. Department of the Treasury their foreign bank and financial accounts. The official Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) is available here.

Of particular note is that the penalty framework is as follows:

  • 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period;
  • 12.5% penalty for offshore accounts with less than $75,000;
  • 5% for those that (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

The IRS also issued a series of frequently asked questions and answers (FAQs), available here.

However, what is significant in the IRS announcement is the absence of any mention of Passive Foreign Investment Company (PFIC) taxation. The PFIC taxation regime (what some would characterize as draconian in nature) is found in the Internal Revenue Code at sections 1291-1298, available here.

U.S. taxpayers are required to file Form 8621, available here.

The lack of disclosure by the IRS that IRS auditors may be seeking to impose taxation on the foreign bank account(s) pursuant to the PFIC regime may surprise those taxpayers that initial entered the first voluntary disclosure program, or that may be considering the second voluntary disclosure program. The result is that the income tax due, plus penalties and interest may be substantially higher than initially anticipated by the taxpayer (and in some instances by his/her taxation professional). A further discussion on PFIC taxation, and its inter-relation to the voluntary disclosure program will be a subject of a separate discussion.

The attorneys at Fuerst Ittleman, PL have extensive experience in voluntary disclosures, PFIC taxation, Controlled Foreign Corporation (CFC) taxation, and tax litigation.

Florida’s Fourth District Court of Appeal Expands Definition of “Salaries or Wages” to Include Commissions

On January 26, 2011, Floridas Fourth DCA entered its opinion in Baker v. Storfer, and ruled that the definition of “salary or wages” as used in Florida Statute section 77.035 includes “commissions.” The matter was a case of first impression in the State of Florida. A copy of the Courts decision may be read here.

Baker v. Storfer involved a lawsuit filed by a creditor against a debtor stemming from an unpaid personal judgment. When the creditor sought to collect the judgment by garnishing the debtors wages via a motion for a continuing writ of garnishment, the debtors employer objected and argued that the debtors wages were not “salary or wages” under section 77.035 and therefore not subject to garnishment. The trial court agreed with the debtors employer and ruled that the debtor did not have income that was subject to garnishment.

The Fourth DCA reversed the trial courts ruling by employing a “plain meaning” interpretation of the term “wages.” According to the Fourth DCA, relying on parallel decisions and the Blacks Law Dictionary, the term “wage” is very broad, and includes “”[p]ayment for labor or services, usu. based on time worked or quantity produced; specif., compensation of an employee based on time worked or output of production. Wages include every form of remuneration . . .including . . . commissions.”

Fuerst Ittlemans attorneys are experienced litigators and regularly represent clients in complex cases in State and Federal courts.

NOAA Seeks to Expand Aquaculture to Increase Consumption of Domestic Seafood

The National Oceanic and Atmospheric Administration (NOAA) recently released a draft policy document detailing its intentions to increase aquaculture domestically. The cultivation of sea-life in selected environments, a process known as aquaculture, is a priority for the NOAA because of the current disparity between domestic and overseas seafood production. According to the draft policy, “[a]pproximately 84 percent of the seafood consumed in the United States is imported, about half of which is sourced from aquaculture.” Further, while half of seafood consumed in the U.S. comes from aquaculture, only about 5 percent comes from domestic sources. While the NOAA is seeking to increase the growth of aquaculture domestically, these efforts are being touted as a means to reduce the trade deficit. With approximately $9 billion worth of seafood being imported into the United States each year, seafood is one of the largest contributors to the deficit.

For more information about the policies or regulations affecting trade, please contact us at contact@fidjlaw.com.

Medical Device Manufacturers Seek Quick Approval Overseas

Recently, medical device manufacturers have been shifting their operations overseas in an effort to speed up the approval process. More relaxed regulatory oversight abroad has led some of these companies to make the move to Europe, Asia, and Latin America. Rather than deal with the stringent approval process for medical devices in the United States, these companies are looking for a less costly and time consuming way to bring new products to market.

While the FDA is responsible for administering the regulatory scheme surrounding medical devices in the United States, critics argue that the Agency has gone too far by scrutinizing new products and creating a lengthy, complex process. Currently, the two main pathways for medical devices to enter the market are through premarket approval (PMA) and the 510(k) process. While the premarket approval process is a more complicated and time-consuming pathway, both require a device manufacturer to demonstrate that the product is safe and effective for its intended use. The advantage that device manufacturers may find abroad is a more relaxed approval process through which a demonstration of a devices safety alone may secure the approval necessary to bring a product to market. Unlike the regulatory requirements in the United States, showing that a device is effective for its intended use is often not required abroad.

However, this perceived advantage may be short-lived. The FDA has begun to review the current pathways for medical devices. As we previously reported, the FDA recently proposed several changes to the 510(k) process. These changes are primarily aimed as increasing the efficiency of the device approval process and reflect some recognition that reform is necessary to ensure that the United States remains at the forefront of medical device innovation. As we previously reported, the FDA has also proposed its Innovation Initiative, a plan targeted at streamlining the medical device approval process thereby reducing costs associated with research and development of new devices. While no official changes to either the PMA or 510(k) process have come into effect, the FDA expects to implement some of these measures later this year.

The FDAs review of medical devices through the 510(k) or PMA process is complex. Fuerst Ittleman has extensive experience successfully navigating medical devices through FDA review. For more information on FDAs review of medical devices, please contact us at contact@fidjlaw.com.

FDA Announces Availability of “Medical Device Innovation Initiative” Report for Public Comment

The U.S. Food and Drug Administrations (FDA) announced in the Federal Register on February 9, 2011 that its report entitled “Medical Device Innovation Initiative” is available for public comment. This report proposes potential actions to be taken by the FDAs Center for Devices and Radiological Health (CDRH) to facility the development, assessment, and regulator review of innovative medical devices.

On February 8, 2011, the FDA proposed its “Innovation Pathway,” which is a priority review program for “new, breakthrough medical devices.” The agency announced that the first submission to the program will be a “brain-controlled, upper-extremity prosthetic.” The FDA is seeking further public comment before the Pathway will be used more broadly.

CDRH announced 25 actions it will take this year to improve its 510(k) program, the FDAs premarket review process for certain medical devices. CDRH has expressed its desire to “increase its use of emerging science to foster innovation and improve the predictability, consistency, and transparency of its decision making.” Click here to read the FDAs “510K) and Science Report Recommendations: Summary and Overview of Comments and Next Steps.”

The report on medical device innovation outlines CDRH actions that may be put into place to accelerate the agencys evaluation of innovative devices. Some of these actions include:

  • Facilitate the development and regulatory evaluation of innovative medical devices;
  • Strengthen the U.S. research infrastructure and promote high-quality regulatory science; and
  • Prepare for and respond to transformative innovative technologies and scientific breakthroughs.

The Federal Register notice announcing the availability of the report for public comment acknowledges that the U.S is the global leader in innovative medical devices. The notice states that millions of Americans benefit from innovative medical devices that “reduce suffering, treat previously untreatable conditions, extend lives, and improve public health.” CDRH has stated that because of the need for these innovative devices, the office has committed itself to assuring that these new technologies and products are available on a timely basis while still retaining their safety and efficacy.

The FDA has been criticized by the medical device industry for its 510(k) process. The industry has been vocal in its views that the review process is much too slow and much too inconsistent. Click here to read an article in the New York Times on domestic medical device firms sending business overseas.

CDRH is seeking public comment on the report and the proposals outlined therein. The FDA will be holding a public meeting to garner stakeholder feedback at its White Oak, Maryland campus on March 15, 2011.

The FDA news release on its Innovation Initiative can be found here.

FDA Releases Criteria For Criminal Prosecution Under Park Doctrine

The FDA has released “criteria” it developed for consideration of which cases would be appropriate for misdemeanor criminal prosecution under the Park Doctrine, named after a Supreme Court case called United States v. Park, 421 U.S. 658 (1975).

Under the Park Doctrine, an executive may be criminally prosecuted for violations of the Food, Drug & Cosmetic Act, if he or she had, by reason of his or her position in the corporation, responsibility and authority either to prevent in the first instance, or to promptly correct the violation of the law. This is known as the “responsible corporate officer doctrine,” which does not require that the corporate officer be aware of wrongdoing within the company. Use of this doctrine is limited to misdemeanor offenses involving regulatory or public safety crimes that do not have an intent requirement.

The new criteria released by the FDA is not binding on the agency, and creates no rights or benefits on the behalf of a putative defendant who is potentially subject to Park responsible corporate officer liability. In addition to the individuals position in the company and whether he or she had the authority to prevent or correct the violation, the FDA will also consider, when determining whether to bring a Park Doctrine indictment:

  1. Whether the violation involves actual or potential harm to the public;
  2. Whether the violation is obvious;
  3. Whether the violation reflects a pattern of illegal behavior and/or failure to heed warnings;
  4. Whether the violation is widespread;
  5. Whether the violation is serious;
  6. The quality of the legal and factual support for the proposed prosecution; and
  7. Whether the proposed prosecution is a prudent use of agency resources.

The announcement regarding the new criteria may be found here.

The FDA has expressly stated that it will seek to increase the amount of Park Doctrine criminal prosecutions of corporate executives whose companies are involved in Food, Drug & Cosmetic Act violations. This increase in enforcement is part of the FDAs aggressive stance in a variety of investigations, one of which has recently resulted in the prosecution of a companys lawyer for obstruction of justice, as we previously blogged here. Compliance reviews, and if necessary, a strong defense team in the face of such potential jeopardy to ones liberty is advisable, necessary and prudent in todays regulatory environment. In addition, when facing a potential Park Doctrine prosecution, executives should consider obtaining separate counsel from their employers, free of any potential conflicts of interest with the company.

Fuerst Ittleman attorneys have represented clients in a variety of FDA-related criminal investigations and prosecutions. For more information, please contact us at contact@fidjlaw.com.

Swiss Government invokes Mutual Legal Assistance Treaty in fraud investigation of Miami businessman

Recently, the Swiss government, pursuant to a seldom used Mutual Legal Assistance Treaty, (“MLAT”) have requested that the United States Attorneys’ Office in Miami issue subpoenas in regard to a pending Swiss criminal investigation of a Miami businessman suspected of defrauding lenders in Switzerland of over $220 million. The Swiss government alleges that the Miami businessman and others created false financial statements showing that their company was in far better financial shape than was the reality. A U.S. federal judge last month entered an order empowering a federal prosecutor to issue subpoenas and utilize other entities within the federal government to assist with the Swiss investigation.

The U.S. is party to MLATs with a variety of nations for the purpose of promoting international cooperation in criminal investigations that cross international borders. These treaties streamline the process for investigators in one country to obtain orders for the production of relevant evidence in another country. MLATS have been used with great success in recent investigations originating in Brazil and Trinidad & Tobago, among other parties to such treaties.

Lawyers at Fuerst Ittleman are experienced in defending companies and individuals that are subject to criminal investigations involving MLATs and other international considerations. When one is served with subpoenas pursuant to an MLAT, it is imperative to obtain the advice of competent counsel to represent your interests.

Tax Court Holds for Taxpayers – Upholds Use of Limited Liability Company to Generate Tax Credits

On January 3, 2011, the Tax Court in Historic Boardwalk Hall, LLC, et al. v. Comm’r, 136 T.C. No. 1, disagreed with the IRS and held that

  1. The limited liability company (“LLC”) was not a sham and did not lack economic substance;
  2. One of the purported partners/members was in fact a partner/member of the limited liability company;
  3. One of the purported partners/members did effectuate a transfer of property for income tax purposes; and
  4. Internal Revenue Code section 6662 penalty was not applicable.

The IRS had attacked the limited liability company established to generate historic rehabilitation tax credits as a sham that lacked economic substance and asserted that the LLC was not to be respected for income tax purposes. The IRS asserted that the substance of the transaction was akin to the sale of rehabilitation credits.

The Tax Court in looking at tax credits noted that without certain tax credits a party would not be able to earn a sufficient net economic benefit on the transaction, and that the purpose of tax credit are directed at this problem. The significance of this decision is that tax credits can be a legitimate reason for entering into a transaction that would not have otherwise make economic sense. In other words, the economic substance doctrine includes looking at the entire transaction, including tax credits.

This decision bodes well for those individuals that participated in the U.S. Virgin Islands Economic Development Credit program and who are currently under audit or are in litigation with the IRS over the validity of those credits.

The attorneys at Fuerst Ittleman are experienced in litigating against the IRS regarding the U.S. Virgin Island Economic Development Credit, tax credits in general, partnerships, and economic substance. See other blogs from Fuerst Ittleman on the rapidly emerging law regarding the IRS growing use of economic substance rule.

Court Of Appeals Widens Circuit Divide on Basis Overstatement as to the Six Year Statute Of Limitations

On January 26, 2011, Judge Evans in writing for the 7th Circuit held that an overstatement of basis is an omission of income under Internal Revenue Code section 6501(e) thereby triggering a six year (as compared to three year) statute of limitations under section 6501(a). The trial court ? the U.S. Tax Court ? held that under U.S. Supreme Court precedent the overstatement of basis is not an omission of income for purposes of the extended statute of limitations.

The 7th Circuit distinguished the Supreme Court case of Colony, Inc. v. Comm’r, 357 U.S. 28 (1958) and noted that that Colony is factually distinguishable and did not control. The 7th Circuit pointed to changes in section 6501(e)(1)(A). In particular, the court noted the addition of two subsections (i) and (ii) that address the situation faced by the Supreme Court in Colony . Subsection (i) addresses when ?there is an omission of an actual receipt or accrual in a trade or business situation.? Subsection (ii) ?provides a safe harbor for improperly completed returns where the return on its face still provides a ?clue? to the omitted amount.?

The Court noted that some courts have found Colony not to apply to basis overstatements. See, e.g., Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968); Home Concrete & Supply, LLC v. United States, 599 F. Supp. 2d 678 (E.D. N.C. 2008), appeal docketed, No. 09-2353 (4th Cir. Dec. 9, 2009); Burks v. United States, 2009 WL 2600358 (N.D. Tex. June 13, 2008), appeal docketed, No. 09-11061 (5th Cir. Oct. 26, 2009); Brandon Ridge Partners v. United States, 100 A.F.T.R. 2d 2007-5347, 2007 WL 2209129 (M.D. Fla. Jul. 30, 2007).

While other courts have found Colony to apply. See, e.g., Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy Partners LP v. Commissioner of Internal Revenue, 568 F.3d 767 (9th Cir. 2009); Grapevine Imports, Ltd. v. United States, 77 Fed. Cl. 505 (2007), appeal docketed, No. 2008-5090 (Fed. Cir. June 27, 2008).

The full decision can be found here:

https://www.ca7.uscourts.gov/tmp/551FETWN.pdf

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, 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.

South Florida Residents Sentenced To 10 Years

On February 4, 2011, United States District Court Judge William J. Zloch sentenced Mauricio Cohen Assor, 77, and his son Leon Cohen-Levy, 46 each to 120 months, with additional orders of restitution in the amounts of $9.3M and $7..7M , respectively. Both men were convicted after a month long trial that took place in Ft. Lauderdale. Both men were accused of concealing assets from the U.S. Government and failing to report and pay income taxes on $49M to the IRS.

See the U.S. Dept. of Justice press release here

The Cohens used shell companies formed in countries that are often considered “tax havens” such as the British Virgin Islands, Panama, Switzerland, and Liechtenstein. United States persons are required under the Bank Secrecy Act to report their foreign bank accounts in which they have signatory authority and/or a financial interest in if the aggregate amount is greater than $10,000. The IRS has the authority to investigate violations of the Bank Secrecy Act and U.S. persons are required to file Form TDF 90-22.1 with the U.S. Treasury Department.

The Cohen prosecution was headed by an attorney from the Dept. of Justice, Tax Division and the U.S. Attorney’s Office for the Southern District of Florida. Of particular note is that the Southern District of Florida (which extends from Ft. Pierce to Key West and includes Miami, Palm Beach, and Ft. Lauderdale) has been particularly active in tax prosecutions. The significance for South Florida residents who have failed to properly report and disclose foreign bank accounts and who have failed to report all their income and pay the appropriate tax to the IRS is that their risk of investigation and prosecution is much greater than in other parts of the country.

The tax litigation and white collar defense lawyers at Fuerst Ittleman PL are experienced in handling all phases of criminal tax investigations and defend tax prosecutions.