The United States Department of Commerce Bureau of Economic Analysis (BEA) is authorized to conduct benchmark surveys of U.S. direct investment abroad every five years pursuant to the International Investment and Trade in Services Survey Act (P.L. 94-472, 90 Stat. 2059, 22 U.S.C. 3101-3108, as amended –hereinafter “the Act”).  Compliance with the benchmark survey, Form BE-10, has always been mandatory pursuant to the Act, but until November of 2014, it was only required of U.S. persons who received notices from the BEA.  However, following public notice on November 20, 2014 provided via publication in the Federal Registrar of the Final Rule by the BEA, the 2014 survey is now mandatory for all U.S. persons who fall under the specific foreign interest ownership threshold, including any person resident in the United States or subject to the jurisdiction of the United States.  The purpose of the Act is to authorize the President “to collect information on international investment and United States foreign trade in services, whether directly or by affiliates, including related information necessary for assessing the impact of such investment and trade, to authorize the collection and use of information on direct investments owned or controlled directly or indirectly by foreign governments or persons, and to provide analyses of such information to the Congress, the executive agencies, and the general public” (22 U.S.C. 3101).  More specifically, the President is to utilize the data collected “to determine the magnitude and aggregate value of portfolio investment, form of investments, types of investors, nationality of investors and recorded residence of foreign private holders, diversification of holdings by economic sector, and holders of record” (22 U.S.C. 3101).

Background

Form BE-10 can be seen as the latest in a long line of requirements arising out of the federal government’s emphasis on gathering information about U.S. taxpayers’ offshore economic activities.  While many laws requiring U.S. persons to report offshore economic interests have been on the books for decades, the government’s enforcement of these laws, and its effort to add new and stricter requirements, has been much more pronounced since revelations in 2007 that Swiss banking giant UBS had for years affirmatively engaged in efforts to assist U.S. taxpayers in evading their tax obligations under the veil of Swiss bank secrecy laws.  As a result, UBS was fined $780 million and the names of hundreds of UBS depositors were provided to the government.  (See the Department of Justice announcement here).  Since that time, the IRS and the Department of Justice have been active in prosecuting U.S. taxpayers for failing to report income from, or just the existence of, offshore bank and financial accounts and have been pursuing the identity of undeclared U.S. depositors with accounts in Switzerland, Israel, the Caribbean, and elsewhere.  (See related FIDJ blog post here).

Largely in response to the UBS case, Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010.  While much of the focus regarding FATCA has been centered on its requirement that foreign financial institutions provide information regarding U.S. account holders to the U.S. government or face automatic 30 percent withholding on all U.S. source payments, FATCA also included new filing requirements for U.S. taxpayers holding assets abroad.  In conjunction, the U.S. ramped up its enforcement of preexisting reporting obligations, such as the Foreign Bank Account Report (FBAR) obligation, discussed below.  As it is imperative that all U.S. persons with foreign interests familiarize themselves with the varied forms, the following is a brief summary of the forms and their applicable penalties:

U.S. Department of Commerce

Form BE-10 – Benchmark Survey of U.S. Direct Investment Abroad

Form BE-10A

Form BE-10A is a report that must be submitted by U.S. Reporters with foreign affiliates.  This includes any U.S person or entity, including private funds, which directly or indirectly owned or controlled at least 10 percent of the voting stock of an incorporated foreign business enterprise, or an equivalent interest in an unincorporated foreign business enterprise or fund – at any time during the entity’s 2014 fiscal year.  Irrespective of any equity (financial) interest in the foreign business enterprise, U.S. private fund parents with at least 10 percent voting interest in a foreign business enterprise are required to report.  If the U.S. person is an incorporated business enterprise, the U.S. Reporter is considered the fully consolidated U.S. domestic enterprise excluding foreign branches and all other foreign affiliates.

Form BE-10B

Form BE-10B must be submitted by U.S. Reporters for each foreign affiliate that is a majority-owned foreign affiliate with total assets, sales, or net income were greater than $80 million (positive or negative) during the 2014 fiscal year.

Form BE-10C

Form BE-10C must be submitted by U.S. Reporters for foreign affiliates that were (i) majority-owned foreign affiliates for which total assets, sales, or net income was greater than $25 million (positive or negative), and none of these items was greater than $80 million (positive or negative) at any time during the 2014 fiscal year; (ii) minority-owned foreign affiliates for which total assets, sales, or net income was greater than $25 million at any time during the 2014 fiscal year; or (iii) foreign affiliates for which total assets, sales or operating revenue did not exceed $25 million (positive or negative) at any time during the 2014 fiscal year and that is a foreign affiliate parent of another foreign affiliate being filed on Form BE-10B or BE-10C.

Form BE-10D

Form BE-10D must be submitted by U.S. Reporters for each foreign affiliate for which assets, sales, and net income did not exceed $25 million (positive or negative) at any time during the 2014 fiscal year and the affiliate is not a foreign affiliate parent of another foreign affiliate being filed on Form BE-10B or BE-10C.

The deadline to file the BE-10 reports for U.S. Reporters with fewer than 50 reports was May 29, 2015 and the deadline for U.S. Reporters with more than 50 reports is June 30, 2015.  The deadline for first time filers, however, has been extended to June 30, 2015.  An extension may also be granted by the BEA for those who file a Request for Extension if the request is filed prior to the applicable reporting deadline.  Failure to file the BE-10 report shall subject the U.S. Reporter to a civil penalty of not less than $2,500, and not more than $25,000, and to injunctive relief commanding such person to comply, or both.  A willful failure to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both.  Similar fines and/or imprisonment may also be imposed on any convicted officer, director, employee, or agent of any corporation who knowingly participates in such violations (22 U.S.C. 3105), subject to inflationary adjustments.

Form BE-13 – Survey of New Foreign Direct Investment in the United States

On November 21, 2014, just one day following public notice of the new mandatory requirements for Form BE-10, the BEA announced on its website that the survey of new foreign direct investment (Form BE-13) was being reinstated and would also be required of all U.S. entities subject to the reporting requirements, regardless of whether they are contacted by the BEA or not.  The BEA announcement states that Form BE-13 “captures information about new investments made when a foreign investor establishes or acquires a U.S. business (either directly, or indirectly through a U.S. business it already owns) or expands an existing U.S. business.”

Form BE-13A

Form BE-13A must be submitted for a U.S. business enterprise when a foreign entity acquires a voting interest (directly, or indirectly through an existing U.S. affiliate) in that enterprise, segment, or operating unit and (i) the total cost of the acquisition is greater than $3 million, (ii) the U.S. business enterprise will operate as a separate legal entity, and (iii) by this acquisition, at least 10 percent of the voting interest in the acquired entity is now held (directly or indirectly) by the foreign entity.

Form BE-13B

Form BE-13B must be submitted for a U.S. business enterprise when a foreign entity, or an existing U.S. affiliate of a foreign entity, establishes a new legal entity in the United States and (i) the projected total cost to establish the new legal entity is greater than $3 million, and (ii) the foreign entity owns 10 percent or more of the new business enterprise’s voting interest (directly or indirectly).

Form BE-13C

Form BE-13C must be submitted for an existing U.S. affiliate of a foreign parent when it acquires a U.S. business enterprise or segment that it then merges into its operations and the total cost to acquire the business enterprise is greater than $3 million.

Form BE-13D

Form BE-13D must be submitted for an existing U.S. affiliate of a foreign parent when it expands its operations to include a new facility where business is conducted and the projected total cost of the expansion is greater than $3 million.

Form BE-13E

Form BE-13E must be submitted for a U.S. business enterprise that previously filed a Form BE-13B or BE-13D indicating that the established or expanded entity is still under construction.

Form BE-13 is due no later than 45 days after the reportable acquisition is completed, the new legal entity is established, or the expansion is commenced.  Failure to report may subject the U.S. Reporter to a civil penalty of not less than $2,500, and not more than $32,500, and to injunctive relief commanding such person to comply, or both.  Willful failures to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both.  Similar fines and/or imprisonment may also be imposed on any officer, director, employee, or agent of any corporation who knowingly participates in such violation, subject to inflationary adjustments.  Claims for Exemption from Form BE-13 may be filed for U.S. business enterprises that meet all of the requirements for filing Forms BE-13A, BE-13B, BE-13C, or BE-13D except the $3 million reporting threshold.

Form BE-12 – Benchmark Survey of Foreign Direct Investment In The United States

Form BE-12 is a benchmark survey of foreign direct investment in the U.S. conducted every five years in lieu of the Annual Survey, described below.  Form BE-12 applies to any U.S. entity in which foreign investors hold at least 10 percent of the voting interests at the end of the reporting calendar year where the entity’s total revenue, total assets, or net income exceeds $60 million.  A Claim for Not Filing may be filed for Form BE-12 if (i) a foreign person did not own 10 percent or more of the voting ownership (or the equivalent) in the U.S business enterprise, (ii) the U.S. business enterprise is fully consolidated or merged into another U.S. affiliate, or (iii) the U.S. business enterprise was liquidated or dissolved.  This survey was recently completed in 2012 and will not be issued again until 2017.

Form BE-12A

Form BE-12A must be submitted for a majority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $300 million (positive or negative).

Form BE-12B

Form BE-12B must be submitted for (i) a majority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative), but no one of these items was greater than $300 million (positive or negative), and (ii) a minority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).

Form BE-12C

Form BE-12C must be submitted for a U.S. affiliate for which no one of these items was greater than $60 million (positive or negative): total assets, sales or gross operating revenues, and net income.

Form BE-577 – Quarterly Survey of U.S. Direct Investment Abroad required only for those directly contacted by BEA.

Form BE-577 should be submitted for (i) each directly-owned foreign affiliate for which total assets; annual sales or gross operating revenues, excluding sales taxes; or annual net income after provision for foreign income taxes was greater than $60 million (positive or negative) at any time during the affiliate’s fiscal reporting year, and (ii) each indirectly-owned foreign affiliate that met the $60 million threshold and had an intercompany debt balance with the U.S. reporter that exceeded $1 million.  Entities not contacted by BEA have no reporting responsibilities.

Form BE-11 – Annual Survey of U.S. Direct Investment Abroad required only for those directly contacted by BEA.

Form BE-11A

Form BE-11A should be submitted for the fully consolidated U.S. domestic business enterprise of a U.S. reporter that has a reportable foreign affiliate.

Form BE-11B

Form BE-11B should be submitted for a majority-owned foreign affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).  If the majority-owned affiliate is a foreign affiliate parent of another foreign affiliate being filed on Form BE-11B or BE-11C, Form BE-11B must be filed for the foreign affiliate parent even if total assets, sales or gross operating revenues, or net income did not exceed $60 million (positive or negative).

Form BE-11C

Form BE-11C should be submitted for a minority-owned foreign affiliate with total assets, sales or gross operating revenues, or net income greater than $60 million (positive or negative).  If the minority-owned affiliate is a foreign affiliate parent of another foreign affiliate being filed on Form BE-11C, Form BE-11C must be filed for the foreign affiliate parent even if total assets, sales or gross operating revenues, or net income did not exceed $60 million (positive or negative).

Form BE-11D

Form BE-11D should be submitted for a foreign affiliate established or acquired during the fiscal year with total assets, sales or gross operating revenues, or net income greater than $25 million (positive or negative), but for which no one of these items was greater than $60 million (positive or negative) at the end of, or for, the affiliate’s fiscal year.

Form BE-605 – BEA’s Quarterly Survey of Foreign Direct Investment in the U.S. required only for those directly contacted by BEA.

Form BE-605 should be submitted for every U.S. affiliate for which total assets, annual sales, or gross operating revenues, OR annual net income (not just the foreign parent’s share) were greater than $60 million (positive or negative).  Reports are required even though the U.S. business enterprise may have been established, acquired, liquidated, sold, or inactivated during the reporting period.  Entities not contacted by BEA have no reporting responsibilities.

Form BE-15 – BEA’s Annual Survey of Foreign Direct Investment in the U.S. required only for those directly contacted by BEA.

Form BE-15A

Form BE-15A should be submitted for a majority-owned (exceed 50 percent) U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $300 million (positive or negative).

Form BE-15B

Form BE-15B should be submitted for 1) a majority-owned (at least 10 percent, but not more than 50 percent) U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $120 million (positive or negative), but no one

of these items was greater than $300 million (positive or negative) and, 2) a minority-owned U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $120 million (positive or negative).

Form BE-15C

Form BE-15C should be submitted for a U.S. affiliate with total assets, sales or gross operating revenues, or net income greater than $40 million (positive or negative), but none of these items was greater than $120 million (positive or negative).

Form BE-9 – Quarterly Survey of Foreign Airline Operators’ Revenues and Expenses in the United States required only for those directly contacted by BEA

Form BE-9 is mailed to about 50 persons each quarter.  This quarterly survey collects data from U.S. offices, agents, or other representatives of foreign airline operators that transport passengers or freight and express to or from the United States.  A report is required if the carrier’s total covered revenues or total covered expenses were $5 million or more in the previous year or are expected to be $5 million or more during the current year.

Form BE-29 – Annual Survey of Foreign Ocean Carriers’ Expenses in the United States required only for those directly contacted by BEA

Form BE-29 is mailed to about 85 persons each year.  This annual survey collects data from U.S. agents of foreign ocean carriers who must report all relevant transactions in port services provided by them or obtained by them for foreign carriers and on port services provided by third persons.  A report is required if the U.S. agent handled at least 40 port calls by foreign vessels and if total covered expenses were $250,000 or more in the reporting period.

Form BE-30 – Quarterly Survey of Ocean Freight Revenues and Foreign Expenses of United States Carriers required only for those directly contacted by BEA

Form BE-30 is mailed to about 25 persons each quarter.  The quarterly survey collects data from U.S. airline operators engaged in the international transportation of U.S. export freight and the transportation of freight and passengers between foreign points.  A report is required if the U.S. airline operator’s total covered revenues or total covered expenses were $500,000 or more in the previous year or are expected to be $500,000 or more in the current year.

BE-180 – Benchmark Survey of Financial Services Transactions between U.S. Financial Services Providers and Foreign Persons required only for those directly contacted by BEA

Form BE-180 was mailed to about 6,200 firms in 2009.  The benchmark survey covers financial services transactions (including, payments to, and receipts from) affiliated and unaffiliated foreign persons.  A report is required if in the fiscal year covered by the survey, the U.S. person transacted with a foreign person in any of the covered financial services.  The U.S person is required to provide detailed information by type of service and by country if the U.S person had more than $3 million of receipts or payments in all financial services combined.  If the U.S. person’s total transactions fell below the threshold, estimates of total receipts and total payments must be provided.  In addition, the U.S. person is asked, but not required, to provide an estimate of the total transactions for each type of financial service.

Form BE-185 – Quarterly Survey of Financial Services Transactions between U.S. Financial Services Providers and Foreign Persons required only for those directly contacted by BEA

Form BE-185 is mailed to about 675 firms each quarter.  This quarterly survey covers payments to, and receipts from, affiliated and unaffiliated foreign persons.  A report is required if a U.S. person had (i) receipts from affiliated and unaffiliated foreign persons for all financial services combined of more than $20 million in the previous fiscal year or expects to have receipts of more than $20 million in the current fiscal year or (ii) payments to affiliated and unaffiliated foreign persons for all financial services combined of more than $15 million in the previous fiscal year or expects to have payments of more than $15 million in the current fiscal year.

Form BE-140 – Benchmark Survey of Insurance Transactions by U.S. Insurance Companies With Foreign Persons required only for those directly contacted by BEA

Form BE-140 was mailed to about 1,100 firms in 2008.  This benchmark survey collects data from U.S. insurance companies that have engaged in insurance transactions with foreign persons during the reporting period.  A report is required if a U.S. insurance company had transactions in any of the covered items that were less than $2 million or were more than $2 million in the calendar year covered by the survey.

Form BE-45 – Quarterly Survey of Insurance Transactions by U.S. Insurance Companies with Foreign Persons required only for those directly contacted by BEA

Form BE-45 is mailed to about 550 firms each quarter.  This quarterly survey collects data from U.S. insurance companies that have engaged in insurance transactions with foreign persons during the reporting period.  A report is required if transactions in any of the covered items were less than $8 million or more than $8 million in the previous year or are expected to be in the current calendar year.

Form BE-120 – Benchmark Survey of Transactions in Selected Services and Intellectual Property with Foreign Persons required only for those directly contacted by BEA

Form BE-120 was mailed to about 14,500 persons in 2011.  This benchmark survey collects data from U.S. persons who had transactions (receipts and/or payments) with affiliated and unaffiliated foreign persons during the reporting period.  A report is required if the U.S. person transacted with a foreign person in any of the covered services during the fiscal year.  The U.S. person is required to provide detailed information by type of service and by country if the total transactions (affiliated and unaffiliated) in any of the categories exceeded $2 million for receipts or $1 million for payments.  If the U.S. person’s transactions fell below the threshold, estimates of total receipts and total payments must be provided.  In addition, the U.S. person is asked, but not required, to provide estimates of the total transactions for each type of service.

Form BE-125 – Quarterly Survey of Transactions in Selected Services and Intellectual Property with Foreign Persons required only for those directly contacted by BEA

Form BE-125 is mailed to about 2,000 persons each quarter.  This quarterly survey collects data from U.S. persons who had transactions (receipts and/or payments) with affiliated and unaffiliated foreign persons during the reporting period.  A report is required if a U.S. person had (i) receipts from affiliated and unaffiliated foreign persons in any of the covered categories of more than $6 million in the previous fiscal year or expects to have receipts of more than $6 million in the current fiscal year or (ii) payments to affiliated and unaffiliated foreign persons in any of the covered categories of more than $4 million in the previous fiscal year or expects to have payments of more than $4 million in the current fiscal year.

Form BE-150 – Quarterly Survey of Payment Card and Bank Card Transactions Related to International Travel

Form BE-150 is filed by all U.S. credit card companies and by debit networks that are based on personal identification numbers.  These companies are required to report (i) transactions between U.S. cardholders traveling abroad and foreign businesses and (ii) transactions between foreign cardholders traveling in the United States and U.S. businesses.

Internal Revenue Service

Form 926

Under Internal Revenue Code (IRC) §6038B, each United States person (generally defined for Form 926 and the other forms described herein as a citizen or resident of the United States, or a domestic entity (i.e. partnership, corporation, estate, or trust formed under the laws of the United States)) who transfers property to a foreign corporation in an exchange described in IRC §§332, 351, 354, 355, 356, or 361, or a corporation that makes a distribution described in IRC §336 (i.e. a liquidating distribution) to a non-U.S. person must report the transfer to the IRS on Form 926.  This provision is intended to provide the U.S. government with information regarding capitalization, liquidation, or reorganization of a foreign corporation in which a U.S. person holds an interest.

Any U.S. person who fails to provide notice of the transfers to foreign persons as described above may be liable for a penalty equal to 10 percent of the fair market value of the property transferred, valued at the time of the exchange.  The taxpayer may also be required to recognize gain on the transaction even if the transaction would have been a non-recognition event in the normal course.

Form 3520

U.S. persons must file Form 3520 to report certain transactions with foreign trusts, ownership of foreign grantor trusts, and receipt of certain large gifts or bequests from certain foreign persons.  A separate Form 3520 must be filed with respect to each foreign trust or gift.

Failure to file the form can lead to penalties equal to the greater of $10,000, 35% of the gross value of any property transferred to a foreign trust during the year, 35% of the gross value of the distributions received from a foreign trust during the year, or 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person in a foreign grantor trust.

Form 3520-A

Form 3520-A is the annual information return of a foreign trust (i.e. a trust formed under the laws of a foreign country, and subject to the courts of a different country) with at least one U.S. owner.  The form requires submission of information about the foreign trust, its U.S. beneficiaries, and any “U.S. person”who is treated as an owner of any portion of the foreign trust.  A foreign trust with a U.S. owner must file Form 3520-A in order to satisfy their annual information reporting requirements under IRC §6048(b).

A U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust does not timely file the form, or files an incomplete or incorrect form.

Form 5471

IRC §6046 requires each of the following to file Form 5471, setting forth certain information with respect to a foreign corporation:

• Each United States citizen or resident who becomes an officer or director of a foreign corporation if a United States person own 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or 10 percent or more the total value of the stock of the foreign corporation.
• Each United States person who acquires stock and, either when added to any stock owned on the date of such acquisition or without regard to stock owned on the date of such acquisition, owns 10 percent or more of the total combined voting power of all classes of stock of a foreign corporation entitled to vote, or 10 percent or more the total value of the stock of a foreign corporation.
• Each person who is treated as a United States shareholder under IRC §953(c).
• Each person who becomes a United States person while owning 10 percent or more of the total combined voting power of all classes of stock of a foreign corporation entitled to vote, or 10 percent or more the total value of the stock of a foreign corporation.

In determining ownership percentages, complex rules regarding attribution of ownership from family members or related entities apply, creating a trap for unwary taxpayers who look only to interests held in their name in determining their reporting obligations.  Form 5471 must be filed for each foreign corporation that gives rise to a reporting obligation.  Failure to file Form 5471 may lead to penalties of $10,000 for each failure.  Further, failure to file the form may compromise opportunities to take advantage of the foreign tax credit and may lead to criminal prosecution.

Form 8621

U.S. persons holding interests in passive foreign investment companies (PFICs) must report such interests, as well as any PFIC distributions, each year on Form 8621.  PFICs are foreign corporations whose assets are primarily devoted to the generation of passive income (interest, dividends, etc.).  A separate form must be filed for each PFIC in which the U.S. person has an interest.  Furthermore, PFIC distributions, i.e. dividends or dispositional gains, are taxed differently (and more punitively) than typical dividends or capital gains.

Form 8865

If a U.S. person holds an interest in a foreign partnership, there is good chance that person will have to file Form 8865.  The form is used to report the information required under IRC §6038 (reporting with respect to controlled foreign partnerships—where U.S. persons own more than 50 percent of the partnership), IRC §6038B (reporting of transfers to foreign partnerships), and IRC §6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests).  Form 8865 sets forth several categories of interest holders who must file the form and requires different schedules, statements, and information, depending on the category of filer.  As with the other forms discussed, failure to file a timely and accurate Form 8865 may lead to penalties of $10,000 for each failure and may lead to criminal prosecution.

Form 8938

Pursuant to IRC §6038D, any U.S. person who, during any taxable year, holds a specified interest in a specified foreign financial asset is required to attach to his individual income tax return (i.e. Form 1040), specific information regarding those assets on Form 8938.  While the filing thresholds for Form 8938 can be quite complex, generally U.S. persons living in the U.S. must file Form 8938 if their offshore financial assets (bank accounts, investment accounts, interests in foreign entities, and most other financial assets) exceeds $50,000 for a single tax return filer and $75,000 for joint tax return filers.  These thresholds rise when the U.S. taxpayer resides abroad.  Failure to file Form 8938 may lead to penalties of $10,000 per failure and criminal penalties.  Form 8938 in many circumstances is redundant with the FBAR filing obligation, but filing Form 8938 does not relieve the FBAR filing obligation, and vice versa.

FinCEN Form 114 (FBAR)

FBARs must be filed by any U.S. person that has signatory authority over, or a financial interest in, a foreign bank account(s) with a value exceeding $10,000 at any time during the preceding taxable year.  A financial interest means a person that is either the legal title holder of the account or someone who can (either independently or in conjunction with another) direct the disposition of the account assets.  The $10,000 threshold cannot be circumvented by keeping multiple accounts; all account values are aggregated.  While most of the forms discussed above are required to be filed with a taxpayer’s tax return (except for 3520 and 3520-A, which must be filed separately with the Ogden, Utah IRS service center), the FBAR must be filed online with the Bank Secrecy Act’s e-filing website, and is due by June 30 for the previous taxable year (i.e., FBARs for 2014 are due on June 30, 2015).

A $10,000 penalty is imposed for non-willful failures to file an FBAR.  For willful failures, the penalties can reach 50% of the maximum account value each year.  Strict application of this rule can lead to penalties far in excess of the account value.  Schedule B of Form 1040 requires taxpayers to affirmatively state whether they had a financial interest in, or signatory authority over, a foreign bank account during the previous year.  The presence of that question, no matter how it is answered, severely hurts any argument that a failure to file an FBAR was not willful.  (See related FIDJ FBAR blog posts here).

Other Penalties

In addition to giving rise to independent monetary penalties, failure to file Forms 5471, 3520, 3520-A, 926, 8938, or 8865 will extend the statute of limitations for making an assessment of tax with respect to the entire return, whether or not the assessed deficiency relates to the unfiled form.  IRC § 6501(d)(8).  Further, if there is a deficiency that arises out of income relating to an unfiled form, a penalty of 40% can be assessed in addition to the deficiency.  IRC § 6662(j).

Given the overlap of the various filing requirements, failing to abide by these filing requirements in just a single year can lead to huge penalties or worse.  For instance, if a taxpayer has a single offshore investment account with $400,000 in it, he will have to file an FBAR, a Form 8938, and, in some circumstances, a Form 8621 to report interests in PFICs.  Failure to do so in just a single year gives rise to almost automatic penalties of $20,000, plus additional penalties if there is any unreported income attributable to the account.  Further, the statute of limitations for the entire return will not begin to run until all forms are filed.

Years of abuse by U.S. taxpayers of foreign bank secrecy laws coupled with an increased desire to generate revenue has led to the situation we are in today.  If a U.S. person has economic interests abroad, almost invariably they have an obligation to report the interest, often on more than one form.  As shown by Form BE-10A, agencies beyond just the IRS or the Department of Treasury are beginning to impose reporting obligations with respect to foreign investment.  It is essential that taxpayers in that position seek experienced counsel to guide them through the various filing requirements.  The old adage “an ounce of prevention is worth a pound of cure” has never been more apt.

The attorneys at Fuerst Ittleman David & Joseph specialize in the complexities faced by U.S. taxpayers investing, operating business, or holding assets abroad, with a particular focus on the tax implications of those activities.  Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions regarding this article or any other issues on which we might provide legal assistance.

The Government must prove by a preponderance of the evidence that a defendant has waived his Sixth Amendment right to an impartial jury, which is a heavier burden than one might expect after the Second Circuit’s decision in United States v. Parse, available here. In Parse, after a juror revealed her hidden agenda, the District Court and the parties discovered multiple lies she concealed during voir dire and the trial. However, the District Court found that the criminal defendant’s (David Parse) attorneys knew, or should have known, about the lies based on previous research on the juror, and therefore concluded that Parse waived his right to an impartial jury. The District Court refused to grant his motion for a new trial despite granting it for his codefendants. The Second Circuit reversed and held that the District Court clearly erred when it refused to order a new trial after the juror’s strategic manipulation because such a refusal would seriously affect the “fairness, integrity, and public reputation of judicial proceedings” when there was no evidence proving the lawyers or Parse knew the juror was lying.

Background

Parse was a broker employed by an investment banking firm. He and others were indicted and charged with conspiracy to defraud the U.S. and to commit mail fraud, wire fraud, and tax evasion in violation of 18 U.S.C. § 371, among other tax-related offenses. He was tried along with his codefendants, and following the three-month trial the jury returned a split verdict for Parse. Parse was found guilty on substantive mail fraud and obstruction charges but not guilty on the four other counts against him.

Months after the verdict, all four codefendants moved under Federal Rule of Criminal Procedure 33for a new trial on the ground that Catherine M. Conrad, Juror No. 1, had lied and withheld information in voir dire and during the trial. These motions were sparked by a letter Conrad sent to the Government praising its work in the trial. She also told the Government that she had been holding out for days during deliberation trying to convince other jurors to convict Parse. After this letter, the subsequent motions, and an evidentiary hearing, the District Court released an opinion finding Conrad had “lied extensively during voir dire and concealed important information about her background.”

To begin, the only information Conrad revealed to the voir dire survey questions was that her father works as an immigration officer and that she was a plaintiff in a personal injury negligence case. She was silent as to questions about criminal history, relatives who are attorneys, and many other basic questions that would indicate bias. During individual questioning she also stated that she had lived at the same address her whole life and she was currently a stay-at-home wife with a college education. Among the lies the District Court discovered: Conrad’s occupation as a lawyer and subsequent suspension from the profession for professional misconduct, her multiple previous arrests for everything from shoplifting to DUI to aggravated harassment, her apartment located at a different address than she claimed, and her career criminal husband, who has been convicted of at least nine criminal offenses and incarcerated. During an evidentiary hearing Conrad also made multiple biased statements, such as “[Defendants are] fricken crooks and they should be in jail and you know that.” She also told the Court that she lied to make herself more “marketable” as a juror. The District Court found she was biased against the defendants and a pathological liar. The District Court then granted the codefendants’ motions for a new trial, but not Parse’s.

District Court’s Denial of a New Trial for Parse

In short, the District Court determined that Parse’s attorneys either knew, or should have known through due diligence, that Conrad was lying. Accordingly, the District Court ruled that Parse waived his constitutional right to an impartial jury. In support of its holding, the District Court cited several exchanges occurring before voir dire, during closing arguments, and after the verdict. First, it cited several email exchanges where Parse’s attorneys discussed Google searches that revealed information about a suspended lawyer who also went by the name Catherine M. Conrad. Parse’s attorneys felt it could not be the same person because it would have required blatant lying in voir dire, and therefore chose not to pursue it further. Next, the law firm disclosed further research conducted during closing arguments after Conrad had submitted a note to the Court. During that search, a paralegal discovered the Suspension Orders suspending Conrad from practicing law in New York in both 2007 and 2010. The paralegal also produced a Westlaw Report that contained information about Conrad’s previous address and her involvement in a civil lawsuit. Again, the team concluded it was “inconceivable” that Conrad lied during voir dire. Finally, after the post-verdict letter, another Google search matched Conrad’s telephone number to one associated with the suspended attorney, and that was the first time the attorneys said they really suspected it was the same person. A two-week investigation looking at property records, Conrad’s husband’s criminal records, and marriage records confirmed suspicions.

The District Court was displeased and asked the attorneys if the law firm would have ever disclosed their previous research and findings had the court/Government not inquired. The District Court based the attorneys’ supposed knowledge of Conrad’s lies on evidence such as an email exchange that occurred the same day jury deliberations began where a paralegal wrote, “Jesus, I do think that it’s her,” when discussing the connection between Conrad and the suspended attorney. The District Court said this showed the attorneys had actionable intelligence that she was an imposter. Therefore, Parse waived his rights through the actions (or failed actions) of his attorneys.

Second Circuit Reverses

The Second Circuit vehemently disagreed with the District Court’s holding, and instead held that Parse should have been granted a new trial on the ground that he was deprived of the right to a trial before an impartial jury. The Second Circuit conceded that had the defendant known prior to the end of the trial that a prospective juror had given false voir dire responses and did not reveal the disqualifying falsehoods to the court, “the interest of justice” would not require a new trial under Rule 33. However, the Court referenced a two-part test to help it decide whether the District Court should have granted a motion for a new trial based on juror nondisclosure or misstatements. Citing McDonough Pwr. Equip. v. Greenwood, 464 U.S. 548, 556 (1984), available here, the Court held the party must first show that “a juror failed to answer honestly a material question in voir dire,” and secondly, must show that “a correct response would have provided a valid basis for challenge.” Both prongs were easily met in this case.

The Second Circuit reviewed the District Court’s decision by an abuse of discretion standard, and here it determined the District Court erred as a matter of law by holding Parse waived his rights. The Court wrote that a waiver must be knowing, intelligent, and made with awareness of the likely consequences, which is not what occurred in Parse’s proceedings before the District Court. The Second Circuit also noted that the District Court had no evidence that Parse himself knew about Conrad’s misrepresentations, but regardless the Court believed the District Court erred in ruling that Parse’s attorneys had knowledge in the first place. The Second Circuit stated that not every failure to object or to advance a given argument constitutes a waiver, and especially because Conrad “presented herself as an entirely different person,” any finding that Parse’s attorneys knew prior to trial that she was the same as the suspended attorney was erroneous.

Overall, the Second Circuit acknowledged that Parse’s attorneys could have asked the court to pose additional questions to Conrad, but the Court held that their failure to do so or pursue additional information sufficient to reveal her misrepresentation did not provide an appropriate basis for the District Court’s finding that Parse’s lawyers knew the truth about Conrad and waived Parse’s right to an impartial jury.

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The takeaway from the Second Circuit’s decision is its emphasis on Parse’s constitutional right to an impartial jury trial, and how far the Court believes that right extends. Even though Parse’s attorneys were able to find some information on Conrad and could very well have further inquired as to the discrepancies, they did not, but that did not mean that Parse waived his Sixth Amendment rights. While the Court did not address specifically whether Parse could waive his rights through his attorneys even if he did not have any personal knowledge of Conrad’s lies, this case still implies a high standard for proving waiver. Holding the Government to a preponderance of the evidence standard for proving waiver better values defendants’ constitutional rights.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in the areas of complex civil and administrative litigation at both the state and federal levels, white collar criminal defense, as well as tax and tax litigation. Should you have any questions or need further assistance, please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690.

In its recently published “FDA and Marijuana: Questions and Answers,” the U.S. Food and Drug Administration (FDA) announced that products containing cannabidiol (CBD), a non-narcotic component of Cannabis sativa, cannot be marketed as dietary supplements because CBD is the subject of an FDA regulated clinical investigation. FDA’s conclusion could be problematic for the growing number of companies marketing and distributing cannabis-based products in states that have legalized marijuana. If these companies continue to market products containing CBD as dietary supplements, FDA could launch enforcement actions against them based upon the allegation that they are selling unapproved new drugs.

How is CBD regulated?

The entire Cannabis plant is listed as a Schedule 1 substance by the Drug Enforcement Administration’s Office of Diversion Control, making trade of any component of the plant illegal in nearly all circumstances under federal law. However, twenty-three states and the District of Columbia have passed laws allowing the use of medical marijuana within their borders. Additionally, voters in four states—Alaska, Colorado, Oregon, and Washington—and the District of Columbia have passed initiatives allowing recreational use of marijuana within their borders. These laws have created a market for an entirely new industry of products containing cannabis-derived substances including foods and dietary supplements. Although FDA has remained largely silent on how products containing cannabis-derived substances are regulated under federal law, it has recently published its policy that products containing CBD cannot be marketed as dietary supplements.

What is a dietary supplement?

Dietary supplements are defined and regulated pursuant to the federal Food, Drug, and Cosmetic Act (FDCA) (21 USC § 321(ff)) as a type of food product intended to supplement the diet that contains one or more dietary ingredients. Dietary ingredients include vitamins, minerals, herbs, botanicals, amino acids, concentrates, metabolites, constituents, and extracts.

To be lawfully marketed as a dietary supplement under the FDCA, a product must essentially meet four criteria: the product must (1) be intended to be ingested orally, (2) not be represented for use a conventional food or sole item of a meal or diet, (3) be labeled as a dietary supplement, and (4) contain one or more compliant dietary ingredients.

The FDCA, along with its related regulations, dictate what constitutes a compliant dietary ingredient that can lawfully be included in the formula of a dietary supplement. We will focus here on one such provision of the FDCA, 21 USC § 321(ff)(3)(B)(ii).

21 USC § 321(ff)(3)(B)(ii)

Many vitamins, minerals, herb, botanicals, and other similar articles are permissible dietary ingredients under the FDCA. However, the FDCA prohibits the use in dietary supplements of certain articles that are the subject of research for pharmaceutical uses. Specifically, the FDCA states that dietary supplements cannot contain:

an article authorized for investigation as a new drug, antibiotic, or biological for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, which was not before such approval, certification, licensing, or authorization marketed as a dietary supplement or as a food unless the Secretary, in the Secretary’s discretion, has issued a regulation, after notice and comment, finding that the article would be lawful under this chapter. (21 USC § 321(ff)(3)(B)(ii).)

This provision prohibits articles studied under an investigational new drug application (IND) from use in dietary supplements if those articles were not marketed as part of a dietary supplement or food prior to the start of the study or research. In order to bring a new pharmaceutical to market in the United States, the sponsor of the pharmaceutical product must go through FDA’s IND process. Once a sponsor’s IND is approved by FDA, the sponsor can begin clinical trials into the safety and efficacy of that drug product for human beings for a specific intended use. Most approved INDs are publically available on www.ClinicalTrials.gov.

The Pyridoxamine Example

Applying this FDCA prohibition, in 2009, FDA responded to a citizen petition filed on behalf of a pharmaceutical company studying the effects of pyridoxamine, a type of vitamin B6, for diabetic nephropathy. (Read FDA’s 2009 response here.) FDA determined that products containing pyridoxamine could not be dietary supplements lawfully marketed within the FDCA because pyridoxamine was authorized for investigation as a new drug pursuant to a publically announced clinical trial. The FDA concluded that no independent, verifiable evidence existed showing pyridoxamine had been marketed as a food or dietary supplement prior to implementation of the clinical investigation into the article. Consequently, companies marketing pyridoxamine supplements could no longer lawfully do so. These companies were forced to remove those products from the market or risk enforcement action by FDA.

In FDA’s response to the citizen petition, the agency further clarified the types of articles included under 21 USC § 321(ff)(3)(B)(ii). FDA determined that an “article authorized for investigation as a new drug” includes both the active ingredient, like pyridoxamine hydrocholoride, as well as the active moiety, like pyridoxamine. (See FDA’s definition of ‘active moiety’ here.) FDA used its conclusion in this pyridoxamine case as an example in its 2011 guidance document, “Draft Guidance for Industry: Dietary Supplements: New Dietary Ingredient Notifications and Related Issues,” which can be read in full by clicking here, stating:

[A]ssume that Substance A, which is a constituent of a plant and has never been marketed as an article of food or as a dietary supplement, is a botanical dietary ingredient under section 201(ff)(1)(C) of the FD&C Act. A drug company is studying a salt of Substance A, “Substance A hydrochloride,” as an investigational new drug under an IND. In this situation, the relevant article for purposes of whether Substance A can be used in a dietary supplement is not Substance A hydrochloride, but Substance A itself, because Substance A is the active moiety that is being studied for its possible therapeutic action. Any compound that delivers Substance A is excluded from being used in a dietary supplement.

FDA’s determination with regard to pyridoxamine expands the number and types of articles that cannot be included as compliant dietary ingredients in dietary supplement formulations.

Why did FDA conclude products containing CBD are not dietary supplements?

FDA’s recently released Q&A page states:

Based on available evidence, FDA has concluded that cannabidiol products are excluded from the dietary supplement definition under section 201(ff)(3)(B)(ii) of the FD&C Act. Under that provision, if a substance (such as cannabidiol) has been authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, then products containing that substance are outside the definition of a dietary supplement. There is an exception if the substance was “marketed as” a dietary supplement or as a conventional food before the new drug investigations were authorized; however, based on available evidence, FDA has concluded that this is not the case for cannabidiol.

It is likely that FDA reached this conclusion because GW Pharmaceuticals began a clinical trial in 2013 under an FDA-approved IND to study a pure, synthetic form of CBD for the treatment of childhood epilepsy. FDA has concluded that without evidence of prior marketing of CBD as part of a supplement or food product, GW Pharmaceuticals’ IND application prohibits any manufacturer from marketing a dietary supplement with CBD as an ingredient. However, FDA does indicate that it will consider any evidence submitted to demonstrate that prior to the IND filing, the ingredient was marketed as part of a supplement or food product. FDA’s recent announcement states “[i]nterested parties may present the agency with any evidence that they think has bearing on this issue.”

What does this mean for dietary supplements containing CBD?

Uncertainty surrounds the future of dietary supplements containing CBD. FDA’s current policy is clear in that products containing CBD cannot be marketed as dietary supplements. However, that policy could change should an entity or individual submit evidence to FDA that CBD has been marketed as part of a food or dietary supplement prior to the start of GW Pharmaceutical’s clinical trial in 2013.

Alternatively, if a dietary supplement manufacturer were to demonstrate that the CBD that is the subject of GW Pharmaceutical’s clinical trial is somehow different from the CBD that is utilized in the marketed supplements, the prohibition of 21 USC § 321(ff)(3)(B)(ii) may not apply. (Other new dietary ingredient regulations and policies would likely then apply but that will be the subject of a future post.) Given FDA’s determination in the pyridoxamine this case would be very difficult position to take as the agency’s current policy would exclude any compound that delivers CBD, including CBD and any derivatives of CBD.

Will FDA use the CBD determination as a basis for enforcement actions?

In the agency’s “FDA and Marijuana: Questions and Answers,” the following question and answer are offered:

13. Will FDA take enforcement action regarding cannabidiol products that are marketed as dietary supplements?

1. When a product is in violation of the FD&C Act, FDA considers many factors in deciding whether or not to initiate an enforcement action. Those factors include, among other things, agency resources and the threat to the public health. FDA also may consult with its federal and state partners in making decisions about whether to initiate a federal enforcement action.

Without providing a clear answer to the question, FDA has indicated that it is preserving its authority to take enforcement action against companies that market dietary supplements containing CBD.

In February of 2015, FDA issued warning letters to six companies marketing products claiming to contain CBD (interestingly, FDA notes that some of these were products were tested and shown to not actually contain CBD). However, the violations cited in these letters related primarily to the claims made about the products and the intended uses these companies ascribed to the various CBD products. These warning letters did not cite 21 USC § 321(ff)(3)(B)(ii) as a reason for issuance of the letters.

An FDA warning letter is “issued only for violations of regulatory significance,” which are “violations that may lead to enforcement action” if not corrected swiftly. (FDA Regulatory Procedures Manual 4-1.) Recipients of warning letters are typically granted 10-15 days to correct violations and respond to FDA. Failure to correct such violations or respond to the agency could result in more sever enforcement actions, like injunctions, seizures, and other penalties.

FDA has not yet utilized enforcement mechanisms applying this policy prohibiting CBD in dietary supplements based on 21 USC § 321(ff)(3)(B)(ii). Further, the agency has yet to determine if it will utilize enforcement mechanisms as the market for different products containing marijuana and marijuana derivatives continues to expand. If adverse events stemming from these types of products are reported directly to FDA or through state health agencies, FDA could take action against companies distributing and manufacturing these products. Likewise, if companies or institutions engaged in clinical investigations engage in market discipline, petitioning FDA to actively prohibit the use of CBD in supplements pursuant to  21 USC § 321(ff)(3)(B)(ii), the manufacture and distribution of these types of products will be negatively affected, like the case pyridoxamine in 2009.

Companies in the growing marijuana products industry will need to stay abreast of these federal regulatory issues and aware of possible enforcement actions to prepare for and, hopefully, avoid adverse consequences.  For more information regarding how the FDA regulates the use of CBD in dietary supplements and other products, please contact us at contact@fidjlaw.com.

On May 28, 2015, former Speaker of the United States House of Representatives Dennis Hastert was indicted and charged with one count of making false statements to a federal law enforcement officer in violation of 18 U.S.C. § 1001(a)(2), and one count of structuring to evade currency reporting requirements in violation of 31 U.S.C. § 5324. Both charges relate to a series of cash withdrawals Hastert made in order to complete a series of payments to on unidentified person who had accused Hastert of sexually assaulting him more than 30 years earlier. As explained by Jeffrey Toobin in his article for The New Yorker, the case against Hastert is a prime example of how conduct which itself may not be criminal in nature can become criminal through the failure to comply with the Bank Secrecy Act. A copy of the indictment can be read on the Chicago Tribune’s website here.

Generally speaking, the Bank Secrecy Act (“BSA”), 31 U.S.C. 5311-5330, and its implementing regulations, found at 31 C.F.R. Chapter X, require financial institutions to keep records of certain financial transactions and report these transactions to the federal government. The BSA was designed to prevent financial institutions from being used as part of illicit activity such as money laundering, drug trafficking, tax evasion, and terrorist financing.

In particular, 31 U.S.C. § 5313 (a) requires domestic financial institutions, including banks, which are involved in a transaction for the payment, receipt, or transfer of United States currency in an amount greater than $10,000.00, to file a currency transaction report (“CTR”) for each cash transaction with the IRS. Additionally, pursuant to31 C.F.R. § 1010.313(b) “multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”

Occasionally, depositors will “structure” their transactions so that multiple cash deposits are made each under $10,000, sometimes over the course of several days or at multiple braches of a bank, in an effort to avoid the reporting requirements of the BSA. Such activity is known as “structuring” and is prohibited by federal law. 31 U.S.C. § 5324 makes it a crime for an individual to: a) “cause or attempt to cause a domestic financial institution to fail to file a report under § 5313(a);” b) “cause or attempt to cause a domestic financial institution to file a report required under § 5313(a) that contains a material omission or misstatement of fact;” or c) “structure or assist in structuring, any transaction with one or more domestic financial institutions” for the purpose of evading the reporting requirements of § 5313(a). More information on the BSA can be found on FinCENs website.

In Hastert’s case, paying money to an alleged victim of previous conduct which is most likely non-prosecutable because of a running of the statute of limitations is not criminal in and of itself. As the Toobin article notes, had Hastert simply paid the alleged victim by check, no violation of law would have occurred. Here however, once Hastert made the decision to make cash payments, he was under an obligation to comply with the reporting requirements of the Bank Secrecy Act. As alleged in the indictment, once Hastert realized CTRs were required to be filed for his withdrawals over ten thousand dollars, Hastert proceeded to structure his withdrawals such that he would make several smaller transactions under the ten thousand dollar reporting requirement in an effort to avoid reporting. As a result, Hastert transformed legal conduct into illegal conduct and faces criminal prosecution.

The Hastert case is a prime example of how even perfectly legal financial transactions can lead to criminal liability when they are executed with the aim of evading or circumventing the BSA As another example, as we previously reported, despite the wishes of clients, attorneys are under an obligation to maintain their trust accounts in compliance with the BSA. Thus, attorneys cannot structure trust account deposits and withdrawals in an effort to shield client identity.

Another example may be found in the burgeoning marijuana industry. There, despite changing state legislation, the federal government still lists marijuana as a Schedule I controlled substance under the Controlled Substances Act (“CSA”) 21 U.S.C. § 801 et seq, and the possession, use, and distribution of marijuana remains criminal under federal law. With regards to banking for marijuana related businesses and the BSA, FinCEN has explained:

Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.

(emphasis added). See FinCEN, FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses, (February 14, 2014), available here. Thus, because the sale of marijuana remains prohibited under federal law, financial institutions are placed in a position where, if they agree to service marijuana dispensaries, they would be required to report any transaction regardless of State law. (More information on marijuana related BSA requirements can be found in our previous report here.).

As a result of these reporting requirements, many legal marijuana businesses have resorted to all cash operations. With the rigorous reporting requirements in place, dispensaries are looking for “creative” ways to engage in banking including: 1) establishing shell companies to disguise marijuana proceeds; 2) funneling marijuana derived profits into accounts of other legitimate businesses; and 3) placing marijuana derived profits into bank accounts of family members or personal accounts. However, generally speaking, the use of shell companies or other accounts to mask the profits derived from the sale of marijuana could subject the owner of a dispensary to a wide variety of federal criminal penalties, including bank fraud 18 U.S.C. § 1344, wire fraud 18 U.S.C. § 1343, and money laundering 18 U.S.C. § 1956. (More information on marijuana-related business banking difficulties can be read here.).

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, tax law and litigation, constitutional law, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690