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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The full indictment is available here.

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

FinCEN Issues Guidance To Financial Institutions On Ongoing Events In Libya

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

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

Ocean Bank to Pay Fine for Bank Secrecy Act Violations

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

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

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

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

If you have questions pertaining to the Bank Secrecy Act, FinCEN regulations, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

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

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

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

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

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

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

FinCEN Issues Guidance To Financial Institutions On Recent Events In Egypt

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

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

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

IRS Announces Second Special Offshore Voluntary Disclosure Initiative (OVDI)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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