U.S. Attorney Seeks $7 Million In Forfeiture Trial Of Privately Printed “Liberty Dollars”

On April 4th, federal prosecutors will resume the forfeiture trial of approximately $7 million in precious metals used to create “Liberty Dollar” coins, a privately minted and distributed currency which prosecutors believed was designed to compete with US currency in violation of federal law. The forfeiture trial comes after the March 18, 2011 conviction of the Liberty Dollars creator, Bernard von NotHaus, on multiple charges including making coins resembling US currency, issuing and passing Liberty Dollars coins intended for use as “current money,” and conspiracy. A copy of Federal Bureau of Investigations press release announcing the conviction can be read on their website here.

The authority of the federal government to regulate and coin money traces its roots directly to the U.S. Constitution. Article I, section8, clause 5 of the U.S. Constitution grants Congress the power to coin money. The power of Congress to regulate and coin money also necessarily includes the power to place restrictions on circulation of money printed by non-federal entities. However, no law currently exists that prevents a local community from printing and circulating it own currency.

Although locally printed and circulated alternative or “local currencies” do exist, they are subject to several federal laws. For example, 18 U.S.C. § 485 prohibits possession and sale of local currencies in “resemblance or similitude of any coin of a denomination higher than 5 cents.” This not only prevents local currencies from printing currency with the marks of U.S. minted coins and dollars, such as “In God We Trust,” but also prevents local currency minters from printing currency with marks which closely resemble those familiar U.S. marks, such as “Trust in God.” 18 U.S.C. § 485 protects against local money being printed and passed off as official legal tender of the U.S. Additionally, 18 U.S.C. § 486 prohibits individuals and organizations from creating “current money,” private coin and currency systems to compete with the official coinage and currency of the U.S. as the recognized legal tender.

In this case, prosecutors alleged that von NotHaus, and his organization National Organization for the Repeal of the Federal Reserve and Internal Revenue Code (NORFED), minted Liberty Dollar currency with features that resembled U.S. coin and currency. Additionally, prosecutors alleged that based upon the widespread sale of the Liberty Dollar through the U.S. and Puerto Rico, “NORFEDs purpose was to mix Liberty Dollars into the current money of the U.S.”

Von NotHaus, who remains free on bond, faces a sentence of up to 15 years imprisonment on count two of the indictment and a fine of not more than $250,000. Von NotHaus faces a prison sentence of five years and fines of $250,000 on both counts one and three. In addition, the United States is seeking the forfeiture of approximately 16,000 pounds of Liberty Dollar coins and precious metals, currently valued at nearly $7 million. For more information, please contact us at contact@fidjlaw.com.

Senate Passes the America Invents Act Promoting Taxpayer Rights at the Expense of Intellectual Property Rights

On March 8, 2011, the Senate passed the America Invents Act, which “most notably, includes a provision preventing patents on tax strategies, which will reduce the cost of compliance for taxpayers during tax season.” S. 23, America Invents Act of 2011. Senate Democratic Policy Committee Legislative Bulletin. (February 28, 2011).
The relevant provision states:

For purposes of evaluating an invention under section 102 or 103 of title 35, United States Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

America Invents Act of 2011, S. 23, 112th Cong. §14(a) (2011). In order to obtain a patent for an invention, an inventor must show that the invention is novel, non-obvious, and has a practical application. In 1998, the United States Court of Appeals for the Federal Circuit determined that business methods and methods of doing business may be patentable; State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). This led to a flood of business-related, including tax-related inventions. This provision now provides that tax strategy patents with claims for any strategy for reducing, avoiding, or deferring tax liability cannot be considered novel or non-obvious, and therefore are not patentable.

Senior committee member Chuck Grassley from Iowa discussed the balance between taxpayer rights and intellectual property rights:

Tax strategy patents are on the rise. More and more legal tax strategies are unavailable or more expensive for more and more taxpayers. Its important to protect intellectual property rights for true tax preparation and financial management software. At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. Thats necessary for fairness and tax compliance.

Notably, the America Invents Acts ban on tax strategy patents actually promotes taxpayer rights at the local, state, federal, and even international level. Among the Acts supporters is the American Institute of Certified Public Accountants (AICPA) which has expressed numerous concerns with the patentability of tax strategies in its letters to Congress. Specifically, AICPA argued that tax strategy patents limit the taxpayers ability to use tax law interpretations intended by Congress, deters compliance by taxpayers, and may deceive taxpayers into believing that a patented strategy is valid under the tax law.

AICPA President, Barry Melancon, commented on the passage of the legislation:

Tax strategy patents restrict taxpayers use of the tax laws as Congress intended and, in effect, create a monopoly on tax compliance for those holding the patents. The patent holders can effectively become gatekeepers for who can and cannot use certain parts of the Tax Code. The AICPA believes that no taxpayer should be sued or have to pay a royalty just for using the best legal means available to comply with the Federal Tax Code. Section 14 of S. 23 is a pro-taxpayer measure that finally would solve the tax strategy patent problem and give all taxpayers and their advisers equal access to the tax laws.

As we previously reported, the Internal Revenue Service (IRS) has sought to meet its goals of “a sound, fair and efficient tax administration” and “improved compliance” by shifting its focus from taxpayers to return preparers. Section 14 of the America Invents Act is expected to further these goals.

Senate Finance Committee Chairman Max Baucus from Montana discussed the positive effect of Section 14 on recent tax reform:

Taxes are a responsibility we share, and tax strategies should not be hijacked and monopolized for profit. Every American has the same right to work within the tax code, and no one should be able to claim a strategy as his own. Our efforts to improve the tax code dont stop here. We have already begun looking at reforming the tax code in a manner that will create jobs, draw investment into the U.S., simplify the system and increase fairness for all taxpayers.

If you have any questions regarding the America Invents Act or any other tax or intellectual property provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Tax Court’s Ruling in Canal Corp. v. Commissioner calls into question the ability to rely on formal tax opinions

In CANAL CORPORATION AND SUBSIDIARIES, FORMERLY CHESAPEAKE CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent, 135 T.C. 9 (2010), the Tax Court ruled against the taxpayer in a leverage partnership distribution. Judge Kroupa’s blistering decision railed against the taxpayer who, in part, relied on a tax opinion from a national accounting firm.

The Tax Court’s official holdings were as follows:

1. Held: Wholly owned subsidiary’s asset transfer to a newly formed LLC was a disguised sale under IRC sec. 707(a)(2)(B). Petitioner/taxpayer must include gain from the sale on its consolidated Federal income tax return for 1999.

2. Held, further, Petitioner/taxpayer is liable for an accuracy related penalty for a substantial understatement of income tax under IRC sec. 6662(a).

The facts of the case are somewhat complicated and involve the wholly owned subsidiary of the corporate parent transferring its assets and liabilities to an newly formed LLC. The newly formed LLC had two members – the wholly owned subsidiary and an unrelated third party. The corporate parent hired an investment bank and national accounting firm to structure the transaction. The national accounting firm also issued a “should” opinion that the transaction would be tax free as a contribution to a partnership and not a taxable sale.

Ultimately, the Tax Court held that it was a disguised sale and not a tax free contribution to a partnership. After determining that the transaction was a disguised sale the Court turned its attention to the taxpayer’s reliance on the “should” tax opinion.

First the Court noted that the accounting firm had a conflict in interest in structuring the transaction and then giving an opinion on the transaction. Second, the Court noted that the $800,000 price tag on the opinion amounted to, in essence, the taxpayer buying a “should” opinion in order to protect itself from penalties.

Specifically the Court stated:

Considering all the facts and circumstances, [the accounting firm’s] opinion looks more like a quid pro quo arrangement than a true tax advisory opinion. If we were to bless the closeness of the relationship, we would be providing carte blanche to promoters to provide a tax opinion as part and parcel of a promotion. Independence of advisers is sacrosanct to good faith reliance. We find that [the accounting firm] lacked the independence necessary for [the taxpayer] to establish good faith reliance.

The entire opinion can be found here.

The take-away from the opinion is that notwithstanding a “should” tax opinion from a competent tax advisor, the Court will look to the totality of the circumstances surrounding the delivery of the tax opinion to determine if the taxpayer reasonably relied on the opinion. In other words, an opinion is not per se penalty protection. Unfortunately, many taxpayers have relied on opinion(s) from tax advisors on transactions that are now under attack by the IRS. The attorneys at Fuerst Ittleman regularly assist taxpayers where advice from tax advisors is being questioned by the IRS. Please feel free to contact Fuerst Ittleman at contact@fidjlaw.com.

11th Circuit Affirms Conviction in Tax Fraud Case Under 18 U.S.C. section 286

On August 17, 2010, the 11th Circuit affirmed the conviction of the Defendant in the case of the United States of America v. Maritiza Valiente, docket # 09-14493.

The facts of the case were somewhat unique, and described by the Court as follows:

Valiente and her codefendants falsely claimed that certain individuals were entitled to income tax refunds based upon their employment at Valiente’s business in 1999. However, in reality, Valiente’s business never had any employees. Using falsified W-2 forms provided by Valientes company, one codefendant prepared and filed false IRS1040 Forms. During early 2000, the two other codefendants assisted in preparing and filing false 1040 Forms. All three codefendants then distributed the illegal proceeds of the federal income tax refunds.

This case is unusual in that the government charged the tax fraud under 18 U.S.C. section 286 (conspiracy to defraud the government in respect to claims); the entire section can be found here. Typically, the government charges individuals with tax evasion under 26 U.S.C. section 7201, found here, or as “Klein conspiracies” under 18 U.S.C. section 371, found here.

Ultimately, the Court found that there was sufficient evidence to support a conviction, and the judgment and sentence were both affirmed. The Eleventh Circuits entire opinion can be found here.

The attorneys at Fuerst Ittleman have extensive experience litigating tax and other white collar criminal matters at trial and the appellate levels. You can contact an attorney at Fuerst Ittleman by emailing contact@fidjlaw.com.

Andrew Ittleman of Fuerst Ittleman to Instruct at 2011 US Money Transmitter Seminar in Los Angeles

On April 14 and 15, 2011, Andrew Ittleman, Esq. CAMS of Fuerst Ittleman will participate as an instructor at the US Money Transmitter Seminar at the Hotel Intercontinental in Los Angeles, California. The Seminar, which will be held as part of the 2011 International Money Transmitter Conference (IMTC), will be the first of its kind in California and will feature intensive discussions on a variety of issues affecting the money transmitting industry. The Seminar is intended to give an in-depth overview of the most important US money transfer regulations as well as the interpretations and expectations of US authorities regarding such regulations. Using examples drawn from real life, participants will receive practical advice on how to implement proper actions to prevent costly mistakes and avoid litigation risks. Among other issues, the Seminar will address the following questions:

  • What is a money transmitting business? Are you sure you are one? Are you sure you are not?
  • If you have a bank account in a state in the US, is your business required to become licensed there?
  • If you have corporate headquarters in a state, is your business required to become licensed there?
  • If you have a license to transmit money in one state, what types of activities can you conduct in other states where you are not licensed?
  • Can a foreign money transmitting business maintain bank accounts in the United States if the business is unregistered or unlicensed in the United States? Does it have to register with FINCEN?
  • Why are criminal investigations and prosecutions uniquely devastating for money services businesses?

For more information about the conference, please visit IMTC’s website. Additionally, Fuerst Ittleman clients and colleagues are entitled to a $100 discount off the cost of registration. For more information, please see the following announcement from IMTCs Director, Mr. Hugo Cuevas-Mohr:

Hugo Cuevas Letter [PDF]

U.S. Department of Justice charges former UBS banker Christos Bagios with conspiracy to defraud the United States

The United States Attorney’s Office for the Southern District of Florida together with the Department of Justice – Tax Division, charged via information Christos Bagios, now a senior banker at Credit Suisse, of conspiring to defraud the United States of income taxes from U.S. citizens and residents pursuant to 18 U.S.C. section 371, commonly referred to as a Klein Conspiracy. Section 371 is available in full here.

According to the criminal complaint, Bagios, while he worked at UBS from 1999 through 2005, helped U.S. taxpayers hide assets from the U.S. government. U.S. taxpayers have an obligation under the Bank Secrecy Act to report foreign bank accounts to the U.S. Treasury. The Bank Secrecy Act is enforced by the Department of the Treasury – Financial Crimes Enforcement Network; see https://www.fincen.gov/statutes_regs/bsa/

According to the information, Bagios aided as many 150 U.S. clients in a bid to conceal between $400 million and $500 million from the Internal Revenue Service. The IRS has been delegated the authority to administer the Foreign Bank Account Report (“FBAR”) forms (Form TD 90.22-1) available here.

As we have previously blogged, four other Swiss bankers were charged last week with helping Americans evade U.S. taxes.

The full text of the criminal complaint can be found here

As we noted before, it appears that in the wake of the UBS deferred prosecution and the indictment, trial and conviction of Maurico Cohen Assor and his son, the Department of Justice is stepping up and continuing enforcement of tax related crimes. The attorneys at Fuerst Ittleman have extensive experience in criminal and civil tax litigation and regularly represent those being investigated for criminal tax offenses. If you have questions regarding income tax and reporting obligations, contact Fuerst Ittleman at contact@fidjlaw.com.

FinCEN Amends and Clarifies FBAR Responsibilities

On February 24, 2011, the Financial Crimes Enforcement Network (FinCEN) issued a final rule amending and clarifying the Bank Secrecy Act (BSA) implementing regulations regarding the Report of Foreign Bank and Financial Accounts (FBAR). FBARs, which have existed since 1972, are used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries if the aggregate value of the accounts exceeds $10,000. The complete final rule, which is available here, will become effective on March 28, 2011.

On February 26, 2010, FinCEN issued a Notice of Proposed Rulemaking (NPRM) addressing the FBAR rules. The final rule, which was issued following FinCENs receipt and review of 42 timely filed comment letters from the interested public, adopts the proposed rules proposed changes with slight modifications. Among the highlights of the final rule are the following critical points:

First, in the final rule, FinCEN clarified the issue of what constitutes a reportable account. According to FinCEN, “an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the United States.” FinCEN also addressed cases where a bank in the United States acts “as a global custodian” holding the persons assets outside the United States. As it relates to these accounts (commonly referred to as “omnibus accounts”), FinCEN clarified that so long as the US person cannot directly access their foreign holdings maintained at the foreign institution, the US customer maintains an account with a financial institution located in the United States and thus “the US customer would not have to file an FAR with respect to assets held in the omnibus account and maintained by the global custodian.”

FinCEN next addressed the troublesome and oftentimes confusing question of the type of “signature or other authority” that a person must have over a foreign financial account to trigger a FBAR filing requirement. In addressing issue, FinCEN first revised the definition of “signature or other authority” to provide as follows:

Signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.

According to FinCEN, the test for determining whether an individual has signature or other authority over an account (and thus a filing obligation) “is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account.” Thus, as explained in the final rule, the reporting obligation extends even “to employees with signature authority over but no financial interest in their employers foreign financial accounts.” According to FinCEN, it had contemplated creating an exemption for such employees, but consultations with law enforcement authorities revealed that law enforcement interests would be better served by requiring employees and employers to file FBARs, despite the duplicative filings that will undoubtedly result. However, as it relates to employees or officers who file solely due to their signature authority over foreign financial accounts, FinCEN will not “expect such officers or employees to personally maintain the records of the foreign financial accounts of their employers.”

The final rule also addresses a variety of case specific issues in response to comments submitted by the interested public. It is worth reading in its entirety, especially if you have concerns about a possible FBAR filing obligation of your own. If you have questions about whether this FinCEN final rule may impact you, contact us at contact@fidjlaw.com.

U.S. Supreme Court to Decide if Internal Revenue Code Section 7206 Offenses are a Basis for Deportation

In November of 2010, the taxpayer at issue in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) (available here), petitioned the Supreme Court for a Writ of Certiorari. The question presented to the Court in that petition was whether Code section 7206, available here, provides a basis for deportation. The Ninth Circuit has reached a different conclusion than the Third Circuit in Ki Se Lee v. Ashcroft, 368 F.3d 218, 224 (3d Cir. 2004) (available here) creating a split among the Circuits.

The law at issue, 8 U.S.C. §1101(a)(43)(M), available here, defines an aggravated felony as

(M) an offense that”

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.

The split between the Circuits is whether an IRC section 7206 violation can be an aggravated felony when IRC section 7201 is exclusively referenced as an aggravated felony within the criminal provisions contained in Title 26 (the Internal Revenue Code). The significance of this issue is that if the Ninth Circuit’s decision is adopted by the Supreme Court, any crime contained in the Internal Revenue Code could in theory be used as a basis for deportation. As a result, any criminal tax offense must be studied for both criminal and immigration consequences.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating criminal tax matters and have experience litigating ineffective assistance of counsel claims after a plea or conviction.

Tax Court Rules in Favor of Taxpayers in Foreign Tax Credit Cases

In PPL Corp. v. Commissioner, 135 T.C. No. 8 (Sept. 9, 2010), found here and Entergy v. Commissioner, T.C. Memo 2010-166 (Sept. 9, 2010), found here, the Tax Court addressed whether a Windfall Tax imposed by the U.K. government is a creditable income tax under the Internal Revenue Code. Under section 901 of the Code and related provisions, a U.S. taxpayer can elect to credit qualifying income taxes paid to a foreign country. Section 901 can be found here. Only income taxes are eligible for this credit, and the determination of whether a foreign tax is an income tax depends on whether it is the equivalent of an income tax as defined in the Internal Revenue Code.

The U.K. tax at issue is atypical because it was a one-time tax on formerly public utilities. The taxpayers argued that the creditability of the U.K. tax was the equivalent of an income tax imposed at a rate of roughly 50% on profits earned over a four-years, and as such, the taxpayers argued that the U.K. tax at issue was an income tax and subject to the foreign tax credit regime of the Internal Revenue Code.

Ultimately Judge Halpern ruled that “The United Kingdom windfall tax enacted on July 2, 1997, and imposed on certain British utilities is a creditable tax under sec. 901, I.R.C.”

The attorneys at Fuerst Ittleman, PL have extensive experience in international tax litigation including litigating foreign tax credits.

United States Tax Court Denied Motion to Interplead the Government of the Virgin Islands Regarding Tax Credits Under the Virgin Islands Economic Development Program

In a recent opinion, Judge Jacobs of the United States Tax Court refused to allow a taxpayer to interplead the Government of the Virgin Islands as a party to Tax Court litigation under U.S. Tax Court Rule 1(b), found here, and Federal Rule of Civil Procedure 22, found here. The case is captioned Huff v. Commissioner, 135 T.C. 30 (2010) and the text of the opinion can be found here.

The Huff case stems from the IRS audit of a taxpayer that took Virgin Islands Economic Development credits under Internal Revenue Code section 934, found here. The Virgin Islands Economic Development Program is administered by the Economic Development Commission (see, https://www.usvieda.org/) and is promoted by the United States Department of the Interior, see e.g. https://www.doi.gov/oia/press/2009/11192009.html.

Judge Jacobs ruled that because the Tax Court lacks jurisdiction to redetermine the taxpayer’s Virgin Islands tax liabilities, the taxpayer will not be permitted to interplead the Virgin Islands. The Court further held that 48 U.S.C. sec. 1612(a) explicitly provides that the District Court of the Virgin Islands is the sole court that may determine the correct amount of petitioners Virgin Islands tax liabilities for 2002, 2003, and 2004. The petitioner would consequently have to appear before that court to seek refunds from the Virgin Islands.

The result of the Tax Court’s decision is that there is now a distinct possibility that those taxpayers that were not bona fide Virgin Islands residents, or that did not have Virgin Islands sourced income or income effectively connected with at Virgin Islands trade or business will have to sue the Virgin Islands government in the District Court of the Virgin Islands to recoup taxes improperly paid to the Virgin Islands Bureau of Internal Revenue, found https://www.viirb.com/.

The attorneys at Fuerst Ittleman, PL have extensive experience handling tax litigation against the IRS, the United States government, and the Virgin Islands government.