Three Pharmaceutical Manufacturers Agree To Pay $421.2 Million In False Claims Act Settlement

On December 7, 2010, the United States Department of Justice announced that it had reached a $421.2 million settlement agreement with three pharmaceutical manufacturers for alleged violations of the False Claims Act. The violations stem from allegations that the drug manufacturers published false and inflated prices of numerous medicines to defraud Medicare and Medicaid. A copy of the Department of Justice press release can be read here.

Authorities allege that the manufacturers, Abbott Laboratories, Inc., Roxane Laboratories, Inc., and B. Braun Medical, Inc., falsely published inflated average wholesale prices of numerous pharmaceuticals in an effort to market, promote, and sell the drugs to existing and potential customers. According to the Department of Justice, the scheme involved an agreement between healthcare providers and the manufacturers to falsely adjust the “spread” on the price of pharmaceuticals in order to create larger profits for the healthcare providers. The “spread” is the difference between the inflated published price, which the government reimburses at, and the actual price paid by the healthcare provider for drugs. The larger the “spread” the more profit the healthcare provider makes in reimbursements from the federal government.

Authorities alleged that providers would purchase pharmaceuticals from the companies at prices lower than the reported average wholesale price. Medicare and Medicaid would then reimburse healthcare providers at those higher prices and the providers would pocket the difference. The scheme was designed to allow the healthcare providers to make more profits and for the drug manufacturers to retain the providers as customers for the future. As a result of the scheme, federal healthcare programs paid millions more too healthcare providers than they would have had the manufacturers been truthful.

Under the settlement agreements, though each company denied wrongdoing, Roxane will pay $280 million, Abbott will pay $126.5 million, and B. Braun Medical will pay $14.7 million in civil fines. The settlements resolve allegations brought by a whistleblower under the qui tam provisions of the False Claims Act.

The False Claims Act allows for private persons to file suits to provide the government information about wrongdoing. Under the statute, if it is established that a person has knowingly submitted or caused others to submit false or fraudulent claims to the United States, the government can recover treble damages and $5,500 to $11,000 for each violation of the statute. If the government is successful in resolving or litigating its claims, the whistle blower who initiated the action can receive a share of between 15 percent to 25 percent of the amount recovered. In this case, the False Claims Act suits were brought by Ven-A-Care, a Florida home infusion company. As a result of its whistle blowing efforts, Ven-A-Care will receive approximately $88.4 million.

If you have any questions regarding qui tam actions, or for information about Fuerst Ittlemans experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Treasury Department Moving Closer to Finalizing Rules on COD Income for Partnerships

On December 1, 2010, the Treasury Department announced its goal of finalizing regulations dealing with cancellation of debt income (“COD”) in partnerships contained in Section 108(e)(8) of the internal revenue code (“IRC”) this fiscal year. The regulations, when finalized, would extend most of the COD rules which now apply to corporations to partnerships.

In 2004, Section 108(e)(8) was amended to include discharges of partnership indebtedness occurring on or after October 22, 2004. Prior to the amendment, Section 108(e)(8) only applied to discharges of corporate indebtedness. Section 108(e)(8), as amended, provides that for purposes of determining income of a debtor from discharge of indebtedness (COD income), if a debtor corporation transfers stock or a debtor partnership transfers a capital or profits interest in such partnership to a creditor in satisfaction of its recourse or nonrecourse indebtedness, such corporation or partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock or interest. In the case of a partnership, any COD income recognized under section 108(e)(8) shall be included in the distributive shares of the partners in the partnership immediately before such discharge.

Though first proposed by the Department of the Treasury in 2008, partnership COD regulations have been difficult to finalize because several rules that affect corporate CODs do not have analogous counterparts in the partnership provisions. However, at least four IRC provisions affecting corporate COD do not have analogous provisions in partnership codes so simply applying the corporate COD rules to partnerships would be problematic.

The proposed regulations provide guidance regarding the determination of discharge of indebtedness income of a partnership that transfers a partnership interest to a creditor in satisfaction of the partnerships indebtedness (debt-for-equity exchange). The proposed regulations also provide that Section 721 applies to a contribution of a partnerships recourse or nonrecourse indebtedness by a creditor to the partnership in exchange for a capital or profits interest in the partnership.

Fuerst Ittleman anxiously awaits development of finalized regulations by the Department of the Treasury. Keep coming back to our Blog regularly for the latest information on the finalization of COD Income regulations for partnerships. If you have any questions regarding corporate or partnership taxation, please contact Fuerst Ittleman at contact@fidjlaw.com.

FDA Publishes Agenda for Upcoming Guidance Documents

The FDA has recently issued its annual guidance document agenda. The Annual Guidance Agenda details the topics that the Agency intends to focus on in the upcoming year. While the agenda includes a wide-range of topics, like “Use of Dietary Guidance Statements” and “Promotion of Prescription Drug Products Using Social Media Tools”, the Agency is not bound by this list of topics. The agenda does not constitute a comprehensive list of topics that the Agency intends to focus on in the near future, but it does give some indication of the FDAs plans for the coming year. As always, we will keep our eye on the FDA and update this blog as often as possible.

For more information on FDA guidance documents, please contact us at contact@fidjlaw.com.

McNeil Brings Failure-to-Warn Preemption Issue to Supreme Court

McNeil, the manufacturer of Tylenol Cold, has asked the U.S. Supreme Court to decide whether federal law, which imposes certain requirements for labeling on makers of over-the-counter (OTC) drugs, preempts state law thereby precluding product liability actions for failure-to-warn. The case originated in 1999, when sixteen year old Armando Valdes suffered a heat stroke during a roller hockey game after ingesting McNeils product, along with a caffeinated beverage, earlier that morning. Having suffered permanent disability in connection with this incident, the Valdes family brought suit against McNeil under a state law failure-to-warn theory.
The suit alleged that McNeil was negligent and/or strictly liable for failing to warn of the increased risks involved with taking the product when ingested with caffeinated drinks and coupled with strenuous physical activity. While the Miami-Dade County Circuit Court granted summary judgment in favor of McNeil, finding federal law impliedly preempted state law products liability actions in this context, the Third District Court of Appeal reversed this ruling. Found here, the Third District found that the Federal Food, Drug, and Cosmetic Act (the FDCA) neither expressly nor impliedly preempted state law and that the Supreme Courts recent decision in Wyeth v. Levine was controlling.

In Wyeth, the Court found that the FDCAs provisions for prescription drugs did not preempt state law failure-to-warn claims because Congress did not expressly preempt such claims in the revisions to the Act. The Supreme Court reasoned that because Congress expressly provided for such preemption in the case of medical devices, any failure to include the same for other types of products was not due to oversight. This is the reasoning that the Third District used in reaching its decision concerning preemption and OTC drugs.

In its recent petition for certiorari filed with the Supreme Court, the drug manufacturer argues that the Third District Court of Appeal erred in failing to consider that the product in Wyeth was a prescription drug. Rather, McNeil argues that Wyeth is distinguishable because McNeils product, Tylenol Cold, is an OTC drug and thus subject to different provisions under the FDCA. As McNeil argues, the granting of its petition would enable the Supreme Court “to resolve the overbroad and conflicting application of Wyeth” and decide whether Congress, by adopting less stringent processes for OTC drugs when compared to prescription drugs, intended to preempt state law failure-to-warn claims.

For more information on FDA regulation and labeling guidelines, please contact us at contact@fidjlaw.com.

IRS Issues PMTAs Regarding Financial Data Requests At CDP Conferences, Lien Discharge in Short Sale Situations

On November 30, 2010, the IRS posted to its website two program manager technical advice memorandums (“PMTA”) regarding CDP conferences and short sale situations. A PMTA is a document issued by the Office of Chief Counsel that contains authoritative legal opinions which is issued to IRS personnel to assist in the administration of certain tax programs. A complete list of all PMTAs issued by the IRS for 2010 can be found here.

In the Services PMTA regarding submission of financial information as a condition to granting face-to-face collection due process conferences, available here, the IRS addressed the issue of whether the Office of Appeals may require a taxpayer to submit financial information as a condition to granting a request for a face-to-face Collection Due Process (“CDP”) conference. The Office of Chief Counsel concluded that the submission of financial information may be required if the “sole purpose of the conference is to discuss a collection alternative, the evaluation of which requires financial information, unless Appeals determines that a face-to-face conference is necessary to explain the requirements for becoming eligible for a collection alternative.”

Though not required, the Office of Appeals will usually grant a taxpayers request for a face-to-face CDP conference if the taxpayer wishes to discuss relevant, non-frivolous issues relating to the unpaid tax or proposed collection action. Additionally, the Office of Appeals may condition a face-to-face CDP conference concerning a collection alternative on the taxpayer becoming eligible for that alternative. However, the IRS may not consider a collection alternative for which financial information is required, such as offers in compromise and partial payment installment agreements, unless the taxpayer has provided the information. As a result of this requirement, it becomes necessary in certain situations to require the submission of financial information prior to a face-to-face CDP conference.

This PMTA was posted on the TRS website the same day the U.S. Tax Court issued its ruling in Golditch v. Commissioner of Internal Revenue. In Golditch, the Tax Court held that while a pre-levy hearing is required under 26 U.S.C. § 6330(b)(1) it does not require that hearing to be face-to-face. Additionally, the Court went on to hold that though the petitioner raised relevant, non-frivolous issues by seeking to ensure that the IRS had met its procedural requirements, nothing in 26 U.S.C. § 6330(b)(1) required a face-to-face meeting merely to obtain this verification.

The Service also issued a PMTA addressing whether as a condition of discharge in a short sale situation the IRS may require that it be paid the sum that otherwise would be applied to junior real estate transfer taxes. The IRS concluded that “where short sale conditions apply, the value of the Services tax lien interest in the subject property is zero. Accordingly, the Service cannot require payment of the sum that otherwise would be applied to junior real estate transfer taxes as a condition of discharge.” A copy of the PMTA can be read in full here.

Generally, the IRS will issue a certificate of discharge where its lien has been satisfied or where the interest of the United States in the property to be discharged has no value. In non-short sale situations, where the lien claim of the bank is fully paid, and the federal tax lien attaches to the surplus proceeds, the IRSs lien must be satisfied before it can be discharged from the property.

However, such a situation does not apply in short sale situations. A short sale occurs when a lienholder agrees to accept less than the total amount owed as satisfaction for its lien claim. The Office of Chief Counsel found that when a senior lien holder uses part of the short sale proceeds to pay real estate transfer taxes it does not create an equity interest on behalf of the taxpayer that is subject to a tax lien; rather, the interest to the United States is valueless. Therefore, the IRS has no authority to require payment of the sum of money that would be applied to junior real estate transfer taxes as a condition to issuing a certificate of discharge.

If you have any questions regarding how these recently posted PMTAs will affect your business or any other tax provision, please contact Fuerst Ittleman at contact@fidjlaw.com.

FinCEN Proposes AML Plan for Non-Bank Mortgage Lenders and Originators

On December 6, 2010, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of the Treasury announced a proposed rule that would require non-bank residential mortgage lenders and originators to establish anti-money laundering (“AML”) programs and comply with suspicious activity report (“SAR”) regulations. The announcement comes as FinCEN leads an inter-agency effort, along with the Department of Justice and the Federal Trade Commission, targeting foreclosure rescue scams and loan modification fraud. A full copy of the proposed rule can be read here.

Currently, the only mortgage originators that FinCEN regulations require to file SARs are banks and insured depository institutions. The proposed rule would extend AML program and SAR reporting compliance requirements to those mortgage brokers and lenders not affiliated with banks that, under current law, have been able to avoid such requirements. FinCEN believes that the proposed AML and SAR requirements are consistent with these non-bank institutions due diligence and information collection processes to assess creditworthiness when lending. Additionally, FinCEN believes that the effectiveness of the proposed regulations will be enhanced by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”). The SAFE Act requires the development of a nationwide licensing system and registry for certain mortgage professionals including loan originators, processors, and underwriters.

Under the Bank Secrecy Act, FinCEN can issue regulations requiring financial institutions to keep records and file reports determined to have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. One of the key weapons in FinCENs arsenal for investigating and combating mortgage fraud is the SAR. FinCEN mortgage fraud reports have found that non-bank mortgage lenders and originators initiated many of the mortgages that were associated with SAR filing. FinCEN believes that the proposed AML and SAR requirements will help mitigate some of the activities, such as false statements, straw buyers, fraudulent flipping and identity theft, that criminals have exploited when committing mortgage fraud.

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.

Senate Rejects Amendments To Repeal 1099 Rules From Health Care Reform Bill

On November 29, 2010, the United States Senate rejected two proposals to repeal new 1099 filing requirements for small businesses that were passed as part of the Patient Protection and Affordable Care Act (“PPACA”). This little noticed provision of the PPACA could result in large paperwork and administrative burdens for small businesses. The full text of the PPACA is available at here.

While 1099 tax forms are traditionally associated with the reporting of taxable income for wages of independent contractors, 1099s are already used to report a wide variety of payments of taxable income other than wages such as interest income or dividends. However, the PPACA expands the use of 1099 forms to many more areas than they were typically used before. Starting in January 2012, all businesses will be required to file 1099-MISC tax forms identifying anyone to whom they pay $600 or more for goods or merchandise in a year. Additionally, the PPACA also requires businesses to send copies of the 1099 forms to their vendors, suppliers, and contractors.

The idea behind requiring such a reporting requirement is that businesses would be more likely to pay taxes on income if they knew that income was already being reported to the IRS by other business partners. The new filing requirement is expected to generate $17 billion in additional revenue over the next 10 years that will go to help fund the implementation of the new health care reform package.

Because of the strong opposition from the business community to the new filing requirements, several amendments were put forth on the Senate floor addressing the 1099 requirements. The first proposal, sponsored by Sen. Mike Johanns of Nebraska, called for a full repeal of the 1099 filing requirements in the PPACA. A second amendment, proposed by Florida Senator Bill Nelson, would have modified rather than repealed the provision. Under the Nelson proposal, the threshold for reporting would have been increased from $600 to $5,000 and any business that employed no more than 25 workers at any time during the taxable year would have been exempt from reporting. However, both the Johanns and Nelson amendments were defeated.

If you have any questions regarding the potential impact the PPACA and its 1099 filing requirement may have on your business or any other tax provision, please contact Fuerst Ittleman at contact@fidjlaw.com.

U.S. And Panama Sign Tax Information Exchange Agreement

On November 30, 2010, the United States Department of the Treasury announced that the U.S. and Panama have signed a new tax information exchange agreement (“TIEA”). A copy of the Department of the Treasurys press release can be read in full here.

Under the terms of the TIEA, both the United States and Panama will be able to gather information, including information related to bank accounts, from each other in both criminal and civil tax matters for tax years beginning on or after November 30, 2007. Federal taxes covered not only include income taxes, but also employment, gift, estate, and excise taxes. Additionally, while the information exchanged is to be used primarily for tax purposes, it may also be used for purposes allowed under the provisions of US-Panama Treaty on Mutual Legal Assistance in Criminal Matters provided that the country which is producing the documents gives written consent. The full text of the U.S.-Panama TIEA can be read here.

The U.S. – Panama TIEA comes at a time when countries around the world once thought of as tax havens are moving away from tight bank secrecy laws and into an era of openness and transparency. By using bi-lateral tax information exchange agreements, countries can ensure that taxpayers are left without a place to hide their assets and income. A complete list of tax information exchange agreements has been published by the Organization for Economic Cooperation and Development (“OECD”) and can be found here.

The OECD is one of the leading groups calling for more transparency in banking laws. With the backing of the G20, the OECD has taken steps to encourage tax information exchange agreements by proposing a model tax exchange agreement. The OECD also maintains its “blacklist” of uncooperative tax haven nations, its “grey list”, which names nations that have committed to OECD standards but have yet to fully implement the required changes, and its “white list” of countries that have substantially implemented the tax rules. As countries commit to transparency and enter into fully enforceable information exchange agreements, the OCED reclassifies nations.

Uruguay provides an example of what the OECD hopes to accomplish. In April of 2009, OECD placed Uruguay on its blacklist as a nation that had not committed to internationally agreed tax standards. However, due to the swift action of the government of Uruguay in entering into 12 tax information exchange agreements with nations around the world, Uruguay was re-classified as a gray list country. It is expected that when all 12 agreements are fully implemented Uruguay will be removed from the gray list and placed the white list of OECD nations.

If you have any questions regarding the potential impact the US-Panama TIEA may have on your business or any other tax provision, please contact Fuerst Ittleman at contact@fidjlaw.com.

Stakeholders Seek Additional Clarifications From IRS In Wake Of Its Initial Guidance On FATCA

As the Internal Revenue Service moves towards full implementation of the Foreign Account Tax Compliance Act (“FATCA”), businesses and financial institutions are seeking greater clarifications, and in some cases exemptions, from the laws broad new reporting and disclosure requirements. Numerous institutions from around the world have requested that the IRS scale back the impact of the new law. The requests come in response to the recent initial guidance published by the IRS in Notice 2010-60. A full copy of Notice 2010-60 can be read at: IRS releases initial guidance on FATCA.

The FATCA is a part of the larger arsenal of weapons the IRS is using to root out U.S. persons that are holding assets outside the U.S. and evading taxes. Generally the FATCA contains a broad set of tax penalty rules on foreign financial institutions that do not conduct due diligence on their account holders and disclose the identity of such persons to the IRS.

Beginning in 2013, “foreign financial institutions” (“FFI”), and “non-financial foreign entities”(“NFFE”) will be required to enter into agreements with the United States Department of the Treasury that will require them to report to the IRS information on U.S. accounts maintained by the FFI or face a 30% U.S. withholding tax on certain U.S. source income including interest and dividends, and gross proceeds from the disposition of any property of a type which produces interest or dividends from sources within the United States. The information required to be reported includes the name, address, and taxpayer identification number of each substantial U.S. owner of the account, and information as to the amount in the account even if such U.S. account holders only hold non-US assets within these accounts.

The potential impact of the FATCA and the regulations that will implement it will be widespread as a “business” for FATCA purposes is much broader than for general income tax purposes. In Notice 2010-60, the IRS announced that a wide variety of businesses will be considered FFIs for the purpose of the FATCA. This includes non-US entities that accept deposits in the ordinary course of business, such as savings banks and credit unions, non-US entities that hold financial assets for the account of others as a substantial portion of their business, such as broker-dealers and trust companies, entities acting as custodians of the assets of employee benefit plans, and entities that are primarily engaged in the business of investing or trading securities or commodities.

As a result of the breadth of the FATCA, numerous organizations are calling for further clarifications as to what an FFI is. Businesses from around the world are worried that without more detailed clarifications as to what an FFI is and bright-line safe harbors it may be impossible for a financial institution to comply. In response to IRS Notice 2010-60, financial institutions are calling for reforms that will allow an FFI to rely on a payees self-certification in making its determination whether to report information to the IRS and to allow for a one-year grace period for all reporting errors after the law takes effect. Additionally, several groups are asking that future rules provide for exemptions for those FFIs that pose a low risk of tax evasion.

If you have any questions regarding the potential impact the FATCA may have on your business or any other tax provision, please contact Fuerst Ittleman at contact@fidjlaw.com.

IRS Withdraws “John Doe” Summons Against UBS

On November 16, 2010, the Internal Revenue Service (“IRS”) and the government of Switzerland announced that the IRS has withdrawn its legal proceedings against Swiss bank UBS stemming from the banks role in assisting its U.S. clients to shield income from the IRS. Had the summons been fully enforced, it could have led to the revocation of UBSs operating license in the United States.

As we previously reported, the IRS originally filed its “John Doe” Summons, a summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified, against UBS in 2008. In 2008, the IRS increased its efforts in pursuing U.S. taxpayers who had avoided federal taxes by holding money in undeclared offshore accounts. An undeclared account is an account for which the IRS does not have a W-9 form from the account holder. At that time of the filing of the Summons, the IRS sought details from UBS on 52,000 undeclared accounts, held by U.S. taxpayers at UBS in Switzerland at any time between 2002 and 2007.

During its investigation, the IRS accused UBS of having helped thousands of Americans avoid paying taxes in the U.S. by setting up off shore accounts. The IRS further alleged that UBS helped American taxpayers hide approximately $20 billion. In February of 2009, UBS admitted wrongdoing and paid fines and penalties totaling $780 million. Additionally, in August of 2009, the U.S. and Switzerland entered into an agreement whereby UBS would provide account holder information for 4,450 accounts in exchange for the IRS withdrawing the Summons.

According to the terms of the August 2009 agreement, the Swiss Federal Tax Administration was required to review the 4,450 targeted accounts to see if they satisfied the requirements for disclosure. In order to satisfy the requirements for disclosure, the UBS clients suspected in engaging in tax fraud must have been either U.S. domiciled clients of UBS who directly held or beneficially owned undisclosed accounts in excess of 1 million Swiss Francs at any point between 2001 and 2008, or any U.S. person, regardless of domicile, who beneficially owned offshore company accounts established or maintained between 2001 and 2008. Of the 4,450 accounts reviewed approximately 4,000 met the criteria for disclosure. The complete US-Swiss Agreement can be read here.

While the IRS has withdrawn its Summons against UBS it has also announced that it will continue its efforts at focusing on foreign banks around the world that harbor and aid tax evaders. A full copy of the IRS press release can be read here.

If you are facing criminal tax prosecution or have questions about tax law provisions please contact our attorneys at contact@fidjlaw.com.