United States v. Lang: Eleventh Circuit Clarifies How Structuring Violations Must be Pled in Federal Criminal Cases

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On October 3, 2013, the United States Court of Appeals for the Eleventh Circuit issued its decision in United States v. Lang clarifying how future indictments for structuring in violation of 31 U.S.C. § 5324(a)(3) must be pled. The decision is a game changer as it limits the ability of prosecutors to bring counts for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme. A copy of the decision can be read here.

Generally speaking, the Bank Secrecy Act (“BSA”), found at 31 U.S.C. § 5311 et seq., requires U.S. financial institutions to assist in the detection and prevention of money laundering. More specifically, the BSA requires that financial institutions file reports with the United States Department of the Treasury of all cash transactions which exceed a daily aggregated amount of $10,000. See 31 U.S.C. § 5313; 31 C.F.R. §§ 1010.311, 1010.313. In order to prevent circumvention of this reporting requirement, the BSA further prohibits attempts to “structure” transactions for the purpose of evading BSA currency reporting requirements. See 31 U.S.C. § 5324(a)(3); 31 C.F.R. § 1010.314.

The implementing regulations of the BSA define “structuring” as follows:

For purposes of § 1010.314, a person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the reporting requirements under §§ 1010.311, 1010.313, 1020.315, 1021.311 and 1021.313 of this chapter. “In any manner” includes, but is not limited to, the breaking down of a single sum of currency exceeding $10,000 into smaller sums, including sums at or below $10,000, or the conduct of a transaction, or series of currency transactions at or below $10,000. The transaction or transactions need not exceed the $10,000 reporting threshold at any single financial institution on any single day in order to constitute structuring within the meaning of this definition.

See 31 C.F.R. § 1010.100(xx).

However, when a transaction has been structured, a question arises as to how many structuring crimes have occurred. In other words, the issue in such situations is whether a person may be separately charged with violating 5324(a)(3) for the act of structuring itself and for each sub-threshold transaction made in furtherance of the crime. In Lang, the 11th Circuit answered this question with a resounding no.

In Lang, the defendant was indicted on 85 counts of violating § 5324(a)(3), and each count of the indictment charged as a separate structuring crime a currency transaction involving a single check in an amount less than $10,000. In finding that the indictment was insufficient and vacating the conviction, the 11th Circuit initially turned its focus to the phrase “for the purpose of evading” found within 31 C.F.R. § 1010.100(xx). As explained by the court, “[i]n order to be “for the purpose of evading” the reporting requirements, the structured transaction must involve an amount that is more than $10,000; otherwise, evasion would not be necessary or possible because there would be no reporting requirement anyway.” Building on this logic, the court held that “the proper unit of prosecution in structuring is the amount exceeding the reporting threshold that is structured into smaller amounts below that threshold, not each of the resulting sub-threshold transactions.”

In Lang”s case, the court found that the indictment was insufficient because of how the Government drafted each count. As explained by the court, “[i]nstead of a series of counts each alleging a payment or payments totaling more than $10,000 that were structured into checks of smaller amounts…the indictment consists of 85 counts each of which separately alleges that a single check in an amount less than $10,000 was structured. That is not possible.” Simply put, “[a]cash transaction involving a single check in an amount below the reporting threshold cannot in itself amount to structuring because the crime requires a purpose to evade the reporting requirements, and that requirement does not apply to a single cash transaction below the threshold.” As a result, the court vacated the judgment against Lang and remanded the case with directions that the indictment be dismissed.

The decision in Lang restricts the ability of prosecutors to charge defendants with separate counts of structuring for each sub-threshold transaction used to evade reporting requirements within the greater structuring scheme.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

IRS Requiring Taxpayers to File FBARs Electronically Raises Concerns About Delinquent Filing and Offshore Voluntary Disclosure Program

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In recent years, the United States government has intensified its efforts to collect taxes on income generated by offshore bank accounts and financial holdings.  A key tool in these enforcement efforts is a provision under the Bank Secrecy Act requiring United States persons (generally U.S. citizens, green card holders, or individuals spending a certain number of days in the United States within the last three years), or non-resident aliens located and doing business within the United States, to disclose annually to the Treasury Department a  financial interest in, or signature authority over, a foreign financial account (including bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts).  The method of reporting these accounts to the IRS is by filing a Report of Foreign Bank and Financial Accounts (FBAR).

Until recently, FBAR filings could be made electronically or on paper.  However, new rules effective July 1, 2013 require FBAR filings to be made electronically.  These rules have raised concerns that taxpayers filing delinquent FBARs will not be able to adequately explain the reason for the delinquent filing and thus become subject to penalties.

General Qualifications of and Exemptions to Mandated FBAR Reporting

Generally, United States persons (which includes business entities and trusts created or formed in or under the laws of the United States), and non-U.S. persons located in and doing business within the United States, must file an annual FBAR disclosing the existence of all foreign financial accounts in which they hold a financial interest, or on which they hold signatory authority, if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year.

Several exceptions apply to the FBAR filing requirement.  Generally, parties that hold signatory power but no financial interest in a foreign account, holders of interests in accounts owned by foreign governments, IRA owners and beneficiaries, United States persons included in a consolidated FBAR, participants in, and beneficiaries of, tax-qualified retirement plans (e.g. a qualifying defined benefit plan), and trust beneficiaries (so long as the trust itself files the necessary report), are all generally exempt from the FBAR filing requirement.

If a taxpayer does not fit into one of the exemption categories and he or she holds an interest in or signatory authority over a foreign financial account the taxpayer must file an FBAR.

Mechanics of FBAR Filing and a New Electronic Filing Requirement

Parties subject to the FBAR filing requirement must file their FBAR (via TD F 90-22.1) by June 30 of the year following the year subject to reporting (for example, FBARs for 2012 must have been filed by June 30, 2013).  It is important to note that the FBAR is filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS.

As of July 1, 2013, all FBARs must be filed electronically on the prescribed form (TD F 90-22.1) unless an exemption from electronic filing is requested and granted.  Amendments to previously filed FBARs must also be made electronically.  Previously, FBARs could be filed electronically or on paper, even after the FinCEN announced its E-File program in 2011.  Because FBARs for 2012 were required to be filed by June 30, 2013, the the new electronic filing requirement will primarily effect taxable year 2013 FBAR filers or delinquent 2012 filers.

FBAR Penalties and the Reasonable Cause Exception

The new electronic filing requirement has raised the concern among commentators that the required form in its current state does not contain a section to explain any delinquencies or past failures to file an FBAR.

An opportunity to explain past non-compliance with the FBAR requirements can be important for taxpayers seeking to avail themselves of the “reasonable cause” exception to the penalties imposed as a result of FBAR non-compliance.  Specifically, failure to timely file or properly complete an FBAR can give rise to civil penalties of up to $10,000 per violation.  Willful violations, for which there can be no reasonable cause exception, give rise to penalties up to the greater of $100,000 or half the balance of the subject account and may expose the violator to criminal liability.

Penalties for non-willful violations will not be imposed where the late filing or failure to file was the result of “reasonable cause,” and where all income from the subject account(s), and the account’s balance, were properly reported.  Reasonable cause in this context is determined by examination of all of the facts and circumstances applicable to each taxpayer.  IRS guidance indicates that factors that weigh in favor of a finding of reasonable cause include reliance on the advice of a professional tax advisor knowledgeable of all relevant facts, the fact that the subject account(s) were established for legitimate purposes, that no efforts were made to conceal income or assets, and there was no tax deficiency related to the unreported foreign account.  No single factor is determinative.

Because circumstances constituting “reasonable cause” are often detailed and varied, and the opportunity to fully explain the circumstances would clearly benefit a taxpayer in his or her efforts to avail himself of the reasonable cause exception.  However, until a new electronic form providing space to explain a delinquent filing becomes available at the end of September, FBAR filers appear to be without that opportunity.  IRS guidance indicates that before the new form allowing for electronic submission of reasonable cause explanations becomes available, FBAR filers should create a statement but retain it for use if the IRS subsequently requests it rather than submit it with their FBAR filing.

To access FinCEN’s electronic filing system, a party must first register in the Bank Secrecy Act filing system.  Third parties other than the subject taxpayer may complete the FBAR and its electronic filing and serve as the taxpayer’s liaison with the FinCEN provided that the third party representative registers with the Bank Secrecy Act filing system.  A new form (FinCEN 114(a)) is used to document a taxpayer’s authorization of a third party representative.

Relationship between FBARs and the Offshore Voluntary Disclosure Program

In January 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) to allow taxpayers with unresolved tax issues relating to assets held abroad to resolve those issues with reduced penalties by fully disclosing the existence of those assets to the IRS.  The IRS reopened the program in response to continued interest in the program following its implementations in 2009 and 2011.  Depending on a taxpayer’s circumstances, FBAR filing may also be part of a taxpayer’s OVDP reporting.

Taxpayers who failed to file FBARs in the past and failed to pay taxes on related income can take advantage of the OVDP by filing full and complete FBARs for the applicable years, paying any tax owed on the disclosed accounts, paying any applicable failure to pay penalties (IRC § 6651) or failure to file penalties (IRC § 6652), and paying a penalty equal to 27.5 % of the highest aggregate balance in the taxpayer’s foreign accounts over the period covered by the voluntary disclosure.

This flat penalty subsumes FBAR and other potentially applicable penalties (including willfulness penalties) and may therefore provide a significant reduction in overall tax liability, especially for those taxpayers with significant offshore holdings.  Whereas a finding of willfulness could lead to a penalty equal to 50 % of the offshore account’s balance, under the OVDP that penalty is cut almost in half.

Taxpayers who reported, and paid tax on, all their taxable income from whatever source, but failed to file FBARs, cannot take advantage of the OVPD program.  Instead they are required to file delinquent FBARs pursuant to the standard procedure (which now mandates electronic filing of FBARs, as described above).  According to IRS guidance, FBAR penalties will not be imposed for failure to file timely FBARs if there are no underreported tax liabilities and the taxpayer has not been contacted regarding an income tax examination or a request for delinquent returns.

For taxpayers who failed to file FBARs and failed to report and pay tax on related income, and who choose to participate in the OVPD program, FBARs must be filed as part of the voluntary disclosure.  Although there is no express requirement to file OVDP documents electronically, it appears that the electronic filing requirement applicable to FBARs extends to the OVDP context.  See Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers at No. 44, found here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax and banking regulation compliance.  They will continue to monitor any future changes relating to FBARs or the OVDP. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

Tax Practictioners Report Increase in Summons Issuance; IRS Issues New Guidance on Informal Document Requests

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Tax practitioners have reported an increase in the issuance of IRS summonses in recent months, despite statements from the IRS indicating that it prefers informal means of investigation. Because of the intrusive nature and wide-ranging scope of the IRS’s summons power, an increase in summons issuance could be a worrying sign for taxpayers.

IRS Summons Background

Summonses are issued pursuant to a broad grant of authority contained in Internal Revenue Code section 7602. Specifically, section 7602 permits the IRS, for the purpose of ascertaining the correctness of a return, determining liability, making a return where none has been filed, or collecting a liability, to summon

a person liable for the tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.

Clearly, the summons power is expansive in its scope and penetrating in its reach. It is one of the IRS’s most effective and powerful enforcement tools. The Supreme Court has set limits on the broad scope of § 7602. Specifically, to enforce a summons the summons recipient has failed to comply with, the IRS must establish that (1) the examination must be conducted for a limited purpose; (2) the information sought may be relevant to that purpose; (3) the IRS does not already possess the information sought; and (4) the IRS has followed all necessary administrative steps, particularly regarding notice and service of the summons. United States v. Powell, 379 U.S. 48 (1964).

Becoming involved in protracted litigation regarding summons enforcement can also be dangerous to the IRS because the issuance of a general summons does not toll the statute of limitations on the taxpayer’s liability, and the limitations period for assessment may expire while issues regarding summons enforcement are still being fought.

However, despite these protections, an IRS summons is still an extremely potent investigatory tool and the receipt of a summons places a taxpayer in a hazardous situation. Providing false information, destroying documents, or failing to respond properly to a summons can lead to criminal liability. Further, each record provided to the IRS pursuant to a summons can be used to build a case against the taxpayer.

Recent Increase in Summons Issuance and Developments in Other Areas of IRS Investigatory Techniques

For these reasons, an increase in summons issuance is an important development for tax practitioners and taxpayers. It has been reported that the IRS has shifted its policy in South Florida so as to get IRS counsel involved in the audit of taxpayers sooner than has previously been the case. This demonstrates a far more aggressive approach to the audit process and, some believe, has been behind the increase in summons issuance. The increase has been particularly noticeable in higher-dollar cases.

The IRS officials have indicated that the issuance of a summons is a last resort, and that it prefers more informal sources of information gathering, such as simply speaking to the taxpayer about the desired information. Taxpayers should be wary, however, and not be misled by the informal nature of a conversation with an IRS representative. False statements made in the course of the conversation, even though not under oath, can create felony criminal liability under 18 U.S.C. § 1001.

Another preferred investigatory technique that does not rise to the level of a summons is an Informal Document Request (IDR). IDRs are often used by the IRS to acquire information and documents without resorting to the more drastic step of issuing a summons. In an effort to increase IDR efficiency, the IRS’s Large Business & International Division (generally covering corporate and pass-through taxpayers with assets in excess of $10 million) has announced new compliance procedures for the issuance of IDRs by Revenue Agents within the division, effective June 30 of this year. An IRS memorandum announcing the new guidelines can be found here.

The newly adopted procedures require IDRs to identify and state the issue that led the examiner to issue the IDR. Further, the IRS’s memorandum regarding the new procedures makes clear that the examiner must discuss the IDR with the taxpayer prior to issuance, and the examiner and taxpayer must discuss a reasonable time frame for responding to the IDR. Implicit in the new procedures appears to be an effort to prevent IRS Revenue Agents from seeking information without having a prior basis to assert the relevancy of the requested information. Further, the procedure by which to respond to an IDR is also altered by the new guidelines. Under the new guidelines, disputes regarding the IDR must be resolved, at least in part, prior to the issuance of the IDR, rather than afterwards.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of IRS investigation and enforcement and civil and criminal tax litigation. They will continue to monitor the reported increase in IRS summons issuance. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

U.S. Department of Justice & Swiss Federal Department of Finance Enter into Historic Agreement Regarding Tax Evasion Investigations

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Continuing its mission to eradicate offshore tax evasion, on August 29, 2013, the United States Department of Justice Tax Division (the “DOJ”) and the Swiss Federal Department of Finance issued a Joint Statement regarding the establishment of the “Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks” (the “Program”).

As previously discussed in this blog’s coverage of the United States government’s protracted investigation into offshore tax evasion, the Department of Justice and Internal Revenue Service (“IRS”) have used a variety of tactics in their fight against illegal offshore activity. The Foreign Account Tax Compliance Act (“FATCA”), for example, requires foreign institutions to report information regarding its U.S. account holders to the IRS or pay a substantial (30%) withholding tax for all of its accounts held by U.S. persons. The IRS’s Offshore Voluntary Disclosure Program (“OVDP”) incentivizes U.S. taxpayers to report undisclosed foreign accounts and holdings to the IRS to eliminate substantial civil penalties and eliminate the risk of criminal prosecution.

The latest Program re-crafts the DOJ’s approach to investigating Swiss banks in a manner that closely resembles the IRS’s OVDP. Unlike the OVDP however, the Program offers amnesty to banks rather than individual accountholders. This agreement is the first program of this kind, and if successful, is likely to be the first of several future agreements between the DOJ and other countries’ finance departments.

The Program’s Framework

The Program’s structure is based on a four-tiered ranking system that categorizes each Swiss bank’s exposure to illegal activity.  Category 1 banks consist of the fifteen Swiss banks currently under criminal investigation. These institutions are excluded from the Program altogether along with insurance companies, asset managers and others such as fiduciaries, financial advisers, and lawyers (whether under investigation or not).

Category 2 banks consist of institutions which “have reason to believe” they may have committed tax-related offenses or monetary transaction offenses under U.S. law in connection with undeclared U.S. taxpayer accounts. Category 2 institutions are only allowed to request a Non-Prosecution Agreement, which if obtained would shield them from criminal charges.

The window for compliance with the Program is narrow. The DOJ must receive a letter of intent to enter into the Program no later than December 31, 2013. In addition to requesting the Non-Prosecution Agreement, Category 2 institutions seeking protection under this Agreement will have 120 days after submission to come into full compliance. Category 2 institutions must also name and identify an independent examiner to audit the respective bank’s cross-borders business for US accounts and present his or her findings regarding the bank’s structure, business operations, marketing, and management to the DOJ.

While the DOJ is willing to forego criminally prosecuting institutions, the potential penalties for Category 2 institutions are significant. Penalties are assessed based on the amount held in the account, with a respective 20% penalty being charged against amounts held on August 1, 2008; 30% penalties on the aggregate amount on accounts opened between this date and February 28, 2009; and 50% penalties of the aggregate amounts opened thereafter. The DOJ based this timeline for calculating penalties on the timing of the United Bank of Switzerland fallout in late 2008. The DOJ reasoned that once that occurred, Swiss banks were on notice that handling undeclared accounts for U.S. taxpayers was a violation of U.S. law.

Category 3 institutions are those which have not assisted U.S. taxpayers with undeclared accounts. Category 4 banks consist of institutions that are purely local in nature, do not have U.S. or other non-Swiss customers, and are otherwise “Compliant Financial Institution” under the definition promulgated under the Agreement between the U.S. and Switzerland for the Cooperation to Facilitate the Implementation of FATCA. Under the program, both Category 3 and 4 banks can request a Non-Target Letter by submitting a letter of intent to the DOJ between July 1, 2014 and October 31, 2014.

Along with these conditions, Category 2, 3, and 4 institutions must retain records for 10 years following the signing of a respective Non-Prosecution Agreement or Non-Target Letter. Participants in the program must also waive any statute of limitation defenses, with the DOJ retaining sole discretion to decline to enter into an Agreement with an institution for any reason.

The Program So Far & Identification of New Category 1 Banks

The DOJ estimates that the Program will be applicable to approximately 100 Category 2 Swiss banks, which will be forced to disclose information about previously undisclosed U.S. accounts and incur significant penalties. Credit Suisse, Julius Baer, and state-backed regional bank Zuercher Kantonalbank account for just a few of the banks that are already being investigated by the U.S. (see here).

Most recently, on September 10, 2013, Rahn & Bodmer Co., one of the oldest private banks in Zurich, announced that it too was among the group of Category 1 banks under investigation. Rahn & Bodmer Co. partner, Christian Rahn, expressed his belief that his bank would fall within Category 2 stating “the bank discontinued its dealing in untaxed funds in 2008, and has encouraged its American clients to cooperate with the DOJ through voluntary offshore-disclosure programs offered by U.S. authorities.” Rahn went on to state that he believed that “client use of those disclosure programs, which have drawn thousands of participants, likely caused his bank to come under investigation” (see here).

Ultimately, the DOJ expects the Program to unearth a significant amount of data, while affording institutions free of wrongdoing assurances that they can provide information to the DOJ without fear of being targets of criminal investigations. As this Program continues to develop, it will be interesting to see how effective it actually is.

The attorneys at Fuerst Ittleman David & Joseph will continue to follow the progress of multinational initiatives by the Department of Justice, Treasury, & Internal Revenue Service as they continue to fight illegal offshore tax avoidance. Our attorneys have extensive experience working with taxpayers with undisclosed foreign bank accounts and who have availed themselves of the different disclosure programs offered by the IRS and DOJ. You can reach an attorney by calling us at 305-350-5690 or emailing us at contact@fidjlaw.com

Las Vegas Sands Casino Money Laundering Settlement a Bellwether for Future Cases

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On August 27, the Justice Department announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. (“Sands”) and that the Sands had agreed to “return” $47,400,300 to the Government in order to avoid criminal prosecution. For more about the case, see here and here.

A brief history of the Sands’ recent legal troubles is in order. First, the Sands is a publicly traded company (“LVS”), and its Chairman and CEO is Sheldon Adelson, who made headlines throughout the 2012 presidential election process for his outspoken support of Mitt Romney and criticism of Barack Obama. (We have no idea whether Mr. Adelson himself has been a lightning rod drawing the ire of the Obama administration, and we will not speculate.) Second, the Justice Department’s money laundering investigation into the Sands is not its only investigation. As has been reported  here, here and here, the Sands has also been the subject of an investigation into alleged Foreign Corrupt Practices Act (FCPA) violations related to its development of properties in Macau and China. The Sands actually reported to the SEC that the violations actually occurred, and Mr. Adelson and other members of the Sands Board of Directors are now defendants in multiple shareholder derivative suits alleging that they failed to stop the violations from occurring and thereby breached the fiduciary duties they owed to the Sands; see here. (Generally, in order to assert a derivative claim, the derivative plaintiff must show “either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately resulted in the losses complained of…” e.g. Stone v. Ritter, 911 A.2d 362 (Del. 2006)). The resolution of this money laundering investigation does not appear to resolve the FCPA investigation, and may prove to be additional fodder for the derivative claims. Copies of the derivative suits are available here and here.

Like the FCPA investigation, the money laundering investigation has been in the headlines for quite some time. In January, the Wall Street Journal reported that the Sands was bolstering its anti-money laundering compliance program, and ceased “executing international money transfers for its high-rolling customers”¦” In June, the Journal reported that a grand jury had been empaneled in Los Angeles to investigate the money laundering investigations, and that the investigation was being led by the U.S. Attorney’s Office in Los Angeles. In July,  the Las Vegas Review-Journal reported that as part of its compliance program overhaul, the Sands had retained Jerry Markling to be the Venetian’s new Director of Investigations. As the Review-Journal explained, Mr. Markling was formerly the Gaming Control Board’s Chief of Enforcement, and was able to circumvent the State of Nevada’s one year “cooling off period” because he had held his position as Chief of Enforcement longer than the “cooling off period” had been in place.

As discussed by the Wall Street Journal, the money laundering investigation followed the Sands’ relationship with two high rollers. The first, Zhenli Ye Gon, was charged in Mexico for manufacturing ingredients used in the manufacturing of methamphetamines and wiring the proceeds of his sales to himself at Sands-operated casinos in Las Vegas. All told, Zhenli received well in excess of $100,000,000, and according to the Justice Department’s press release, the Sands did virtually nothing to identify the source of the funds. As discussed in the press release,

The money being paid the United States represents money sent to the Venetian casino by or on behalf of Zhenli Ye Gon, who at the end of 2006 or early 2007 was “the largest all-cash, up-front gambler the Venetian-Palazzo had ever had to that point,” according to the non-prosecution agreement. In March 2007, Ye Gon’s residence in Mexico City was searched by law enforcement authorities, who seized approximately $207 million in United States currency from the residence in what remains the largest-ever seizure of currency by law enforcement.

Ye Gon was indicted by federal officials in the District of Columbia on narcotics charges, but that case was dismissed in 2009. Ye Gon is currently pending extradition to Mexico, which has charged him with drug trafficking offenses.

According to the agreement, prosecutors believe that in October 2006, prior to Ye Gon being publicly linked to drug trafficking as a result of the search of his residence, officials at the Venetian-Palazzo, should have identified as “suspicious” Ye Gon’s financial transactions, which included the wire transfer of approximately $45 million and depositing of approximately $13 million in cashier’s checks between February 2005 and continuing through March 2007. Casino officials should have filed one or more SARCs against Ye Gon in addition to a SARC it filed in April 2007, prosecutors contend.

For its part, the Las Vegas Sands, while unaware of Ye Gon’s alleged criminal activities prior to March 2007, acknowledges that “in hindsight…the Venetian-Palazzo failed to fully appreciate the suspicious nature of the information or lack thereof pertaining to Ye Gon in the context of the Venetian’s evaluation of whether to file additional SARCs against him earlier and in retrospect should have filed SARCs earlier, and should have filed a more complete SARC when it did file one.”

During his patronage at the Venetian, Ye Gon wire transferred money to the Las Vegas Sands Corp. and subsidiary companies from two different banks and seven different Mexican money exchange houses known as casas de cambios. The wire transfer originators included several companies and individuals the Las Vegas Sands Corp. could not link to Ye Gon. Ye Gon also transferred some funds from Mexican casas de cambios to a Las Vegas Sands Corp. subsidiary in Hong Kong for transfer to Las Vegas. In many instances, Ye Gon’s wire transfers lacked sufficient information to identify him as the beneficiary. The Las Vegas Sands also allowed Ye Gon to transfer funds several times to an account that did not identify its association with the Venetian, specifically an aviation account used to pay pilots operating the company’s aircraft. During its investigation, the government developed evidence that “when casino personnel asked Ye Gon to wire the money in larger lump sums, as opposed to breaking it up incrementally, and use consistent listed beneficiaries, Ye Gon stated that he preferred to wire the money incrementally because he did not want the government to know about these transfers.”

Copies of the Zhenli Ye Gon Arrest and Extradition Complaints are available here and here.

Interestingly, the Journal also reported that the Sands’ relationship with Ausuf Umar Siddiqui was also being examined by the grand jury. Following a 2008 indictment filed in San Jose, Mr. Siddiqui was convicted of taking illegal kickbacks while working as a buyer for Fry’s and wiring the proceeds (which well exceeded $100,000,000) to himself at Sands-operated casinos in Las Vegas. A copy of the government’s complaint against Mr. Siddiqui is available here. The Justice Department’s press release makes no mention of Mr. Siddiqui, and likewise makes no mention of why the government walked away from that issue.

But the Sands case is noteworthy for much more than the underlying investigations and the Ye Gon and Siddiqui cases. We see it as a bellwether, or more specifically, a sign of things to come for casinos operating in the United States. As the Justice Department made clear in its press release,

“What happens in Vegas no longer stays in Vegas,” said United States Attorney André Birotte Jr. “For the first time, a casino has faced the very real possibility of a federal criminal case for failing to properly report suspicious funds received from a gambler. This is also the first time a casino has agreed to return those funds to the government. All companies, especially casinos, are now on notice that America’s anti-money laundering laws apply to all people and every corporation, even if that company risks losing its most profitable customer.“

In short, having already resolved huge money laundering cases with the likes of HSBC, Wachovia, Wells Fargo, Bank of America, JP Morgan Chase, Citibank, Bank of New York, Bank of Hong Kong, Western Union, Pay Pal, and a host of others, Justice may now be turning its focus to casinos, which it may very well perceive as low hanging fruit, flush with cash and easy-to-locate program violations.

Like banks, federal law defines casinos as financial institutions; 31 U.S.C. 5312(X). This includes “Indian gaming operation(s) conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming”¦” As financial institutions, casinos are required to maintain anti-money laundering compliance programs, which must include, at a minimum, the following critical elements:

(i) A system of internal controls to assure ongoing compliance;

(ii) Internal and/or external independent testing for compliance. The scope and frequency of the testing shall be commensurate with the money laundering and terrorist financing risks posed by the products and services provided by the casino;

(iii) Training of casino personnel, including training in the identification of unusual or suspicious transactions, to the extent that the reporting of such transactions is required by this part, by other applicable law or regulation, or by the casino’s own administrative and compliance policies;

(iv) An individual or individuals to assure day-to-day compliance;

(v) Procedures for using all available information to determine:

(A) When required by this part, the name, address, social security number, and other information, and verification of the same, of a person;

(B) The occurrence of any transactions or patterns of transactions required to be reported pursuant to § 103.21;

(C) Whether any record as described in subpart C of this part must be made and retained; and

(vi) For casinos that have automated data processing systems, the use of automated programs to aid in assuring compliance.

31 C.F.R. 103.64; see also 31 U.S.C. 5318(h).

However, it is not enough for the casino to simply have a compliance program. The program must be designed to protect against the unique money laundering and terrorist financing risks posed by the individual casino, and the program must be implemented. Additionally, to the extent that a casino employee (including dealers and cage personnel) will confront money laundering activities, they must be included as part of the program and given instructions regarding how to report suspicious activity. Finally, the program must be strong enough to withstand not only internal and external reviews, but the scrutiny of the IRS, which has been delegated the authority to audit casinos for compliance with the Bank Secrecy Act. Suffice it to say that the IRS has an extensive background auditing casinos for taxation purposes, and is well equipped to audit casinos for AML purposes too. The IRS is also perfectly willing to use information discovered during a compliance audit for tax purposes, and vice versa. So, again, a robust program, implementation, and the buy-in of all relevant casino employees are all critical, and the failure to have such a program can expose the casino and its directors to civil and criminal liability.

Today’s Wall Street Journal attributed the following quote to Bill Goss, senior director for anti-money laundering at IPSA International: The Sands investigation “will likely bring enhanced scrutiny upon the gaming industry for their anti-money laundering controls and procedures”¦Just one public and egregious incident of this type causes law enforcement and regulators to shine a very bright light on an entire industry group.” We agree. We see the Sands case as a sign of things to come for the casino industry, and a warning to casinos to have their compliance programs in working order as soon as possible.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the Department of Justice and the casino industry for the latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

House Bill Proposes Narrowing Scope Of Firpta; Eases Burdens On Reits

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A bill introduced late last month in the United States House of Representatives (H.R. 2870) by Congressmen Kevin Brady, a Republican from Texas, and Joseph Crowley, a Democrat from New York, sets forth several proposed amendments to the Foreign Investment in Real Property Act (FIRPTA), aimed at easing the burden on foreign investors in United States real property and spurring overseas investment in U.S. real estate. A companion measure (S. 1181) was introduced in the Senate in June. A copy of the House bill can be found here.

A Brief FIRPTA Background

FIRPTA was enacted in 1980 amid fear of increasing foreign control over U.S. real estate. Among its key provisions, FIRPTA requires non-U.S. residents to recognize U.S. source income on the gain realized from the disposition of “United States Real Property Interests” (USRPI), defined to include fee ownership, leaseholds, interests in natural resources, and other real property interests located within the United States or the U.S. Virgin Islands. Absent this provision, disposition by non-US residents of USRPI would be sourced as a capital gain to the taxpayer’s country of residence under I.R.C. §§ 871 and 882, thereby escaping U.S. taxation.

Entity Interests Can Constitute USRPI

Interests in entities that own U.S. real estate, such as partnerships, are also considered USRPI and thus sales of those interests give rise to U.S. source income to the non-U.S. resident seller. Similarly, sales by a foreign partnership of USRPI will be attributed directly to the entity owners, rather than the entity itself, and thus non-resident entity owners must realize U.S. source income upon entity-level disposition of USRPI.

Conversely, consistent with the Internal Revenue Code’s treatment of corporations as distinct entities, income from sales by a foreign corporation of USRPI will be attributed to the corporation itself instead of the shareholder. However, stock in a United States corporation deemed to be a United States Real Property Holding Corporation (USRPHC) is considered a USRPI and therefore sale of such stock by a non-U.S. resident will trigger U.S. source income like any other sale of U.S. real property. This rule prevents circumvention of FIRPTA’s requirements through the ownership of U.S. real property in a corporation. Without the rule, a foreign owner of stock of a foreign corporation that owned USRPI could cause the corporation to sell the USRPI and then extract the cash from the stock either through a distribution or sale of the stock. In the process, the shareholder would avoid any FIRPTA gain because all such gain would be foreign source capital gain recognized only by the corporation.

How Does a Corporation Become a USRPHC?

Whether a U.S. corporation constitutes a USRPHC is determined by comparing the value of the corporation’s USRPI with the value of its worldwide real estate holdings and business assets. If the ratio is 50 % or greater in favor of USRPI, then the corporation is a USRPHC and its stock is considered a USRPI.

An Exception to USRPHC Stock’s Status as USRPI

Generally, an exception to the USRPHC rules exempts from FIRPTA treatment sales of USRPHC stock traded on an established securities market. However, this exception currently does not apply to any shareholder that holds more than 5 % of the stock of the subject corporation. Thus, even if the stock is publicly traded on an established securities market, if the seller of the stock was a greater than 5 % holder prior to the sale, the sale will be treated as a sale of a USRPI.

How H.R. 2870 Proposes to Change FIRPTA

Under the proposed amendments to FIRPTA in H.R. 2870, the above-referenced 5 % threshold will be raised to 10 % in the case of shares held in a publicly traded Real Estate Investment Trust (REIT). The proposed change encourages additional investment of foreign capital in U.S. real estate by permitting an additional 5 % of ownership of a publicly traded REIT without incurring FIRPTA gain upon disposition of the stock. FIRPTA can also dissuade investment in U.S. real estate due to the fact that FIRPTA gain is U.S. source income requiring the recipient to file a U.S. tax return and bear the administrative burden associated with doing so. Under the proposed amendment, investors holding 10 % or less of the stock of a publicly traded REITs will not recognize U.S. source income and thus will avoid onerous U.S. filing requirements.

Another important change to FIRPTA proposed in H.R. 2870 concerns distributions made by REITs. Under current law, distributions made by U.S. REITs to non-resident individuals, foreign corporations, or other REITs are treated as gains on the sale or exchange of a USRPI (and thus subject to FIRPTA) to the extent the distribution is attributable to a gain by the distributing REIT on the sale or exchange of a USRPI. In essence, under FIRPTA, distributions to non-US recipients are “looked through” to the underlying source of the property constituting the distribution. If the distribution is attributable to gain on the sale of exchange of USRPI, it will be FIRPTA gain to the recipient.

An exception to this look through rule applies to any distribution made with respect to REIT stock traded on an established securities market within the United States, unless the recipient of the distribution owns more than 5 % of such stock. The proposed bill will raise that threshold from 5 % to 10 %. Further, H.R. 2870 removes from the scope of the look through rule REIT distributions that are treated as a sale of stock under §§ 301(c)(3), 302 (relating to redemptions of stock), and 331 (relating to distributions in complete liquidation of a corporation). This revision would override I.R.S. Notice 2007-55, which treated REIT redemptions and liquidating distributions as sales or exchanges of USRPI, thus giving rise to US source gain under FIRPTA.

Finally, H.R. 2870 clarifies the definition of a “domestically controlled REIT.” Classification of a REIT as domestically controlled is important because stock of a domestically controlled REIT is not considered USRPI and thus its disposition does not give rise to FIRPTA gain. A REIT is domestically controlled if less than 50 percent of its stock is held by non-U.S. persons. Under H.R. 2870, any shareholder owning less than 5 % of the REIT stock that is traded on an established U.S. securities market can be presumed to be a U.S. person unless the REIT has actual knowledge to the contrary. Conversely, any stock in the REIT held by another REIT is presumed to be held by a foreign person, unless the parent REIT is actually domestically controlled. Both of these proposed amendments provide a degree certainty for REIT administrators struggling to determine the identity and classification of their shareholders.

Overall, the proposed amendments to FIRPTA contained in H.R. 2870 would go a long way toward easing the burden on foreign investment in U.S. real estate by exempting dispositional and distribution income arising from REIT shares and by clarifying and providing certainty for those investors seeking to take advantage of the Code’s favorable treatment of domestically controlled REITs.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax planning and real estate investment. They will continue to monitor the progress of the legislation outlined above. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

FATCA Update: IRS Introduces FATCA Registration Portal While Foreign Financial Institutions and U.S. Expatriates Push Back

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On August 19, 2013 the Internal Revenue Service officially introduced its new registration portal (available here) to assist Foreign Financial Institutions (“FFI”) as they attempt to comply with the Foreign Account Tax Compliance Act (“FATCA”). As noted in our previous blog entry regarding FATCA compliance available here, there have been significant delays in the implementation of FATCA primarily due to stalled negotiations between the United States and foreign governments which have yet to enter into Intergovernmental Agreements (“IGA”) because they do not want to open up their books to the U.S. and do not expect reciprocity from the U.S. regarding disclosure of its own domestic account holders. The IRS has made a significant push to have FATCA implemented promptly, but opponents to its implementation have offered valid justifications as to why FATCA may be an unworkable and ineffective means of collecting additional unreported tax revenue from foreign accounts held by U.S. taxpayers.

The Goal of FATCA

Pursuant to FATCA, FFIs are required to provide information about their U.S. clients to the IRS, a violation of which results in exposure for non-compliant FFIs to a 30 percent withholding tax. In response to these disclosure requirements, the U.S. Treasury Department developed model IGAs (available here) to assist foreign countries in implementing FATCA.

FATCA is being implemented in three phase so as to achieve an orderly exchange of information regarding offshore financial activity. The first phase consists of the implementation of FATCA itself, with the collection of information regarding the financial assets of U.S. accountholders in FFIs. In the second phase, FATCA partner countries will enter into bilateral agreements with each other to exchange information. Phase three provides for the transfer of this information to a centralized automated system with FATCA databases functioning as the central repository for offshore account information for all countries that are members of the Organization for Economic Co-Operation and Development (“OECD”). FATCA proponents expect this to result in a simple, powerful and scalable system that will promote worldwide fiscal transparency and provide each country’s respective tax authorities significant data on their foreign and domestic accountholders.

In theory, this seems like an efficient means of combating illegal tax evasion while simplifying the work of tax authorities. In practice, however, the enormous complexity has resulted in two legislative delays of FATCA deadlines and significant resistance from FFIs and U.S. expatriates.

FATCA Backlash & Possible Economic Consequences

The ongoing delay in the implementation of FATCA is providing FFIs with extra time to organize FATCA compliance procedures, and may also be evidence of problems with the legislation itself. Evidence suggests that FFIs and their respective U.S. accountholders are resisting the IRS snooping into their financial affairs and are frustrated with the expensive and cumbersome reporting and compliance burdens associated with FATCA

FFIs facing these heavy compliance burdens and additional tax exposure are considering whether it may be more financially feasible to simply drop American clients and investments altogether. This puts expatriates and Americans that invest internationally in a very unfavorable position because they are finding that they have fewer banking and investment options; see here. FATCA makes it more difficult for Americans doing business internationally to obtain bank accounts, qualify for loans, receive insurance coverage, and participate in company-sponsored pension plans. As early as 2011, for example, European banks such as Deutsche Bank, Commerzbank, HSBC, ING Group, and Credit Suisse began terminating their American customers’ accounts. Spokesperson of the expatriate group American Citizens Abroad (ACA), Jackie Bugnion, stated that:

many [expats] are furious about what FATCA means to them, and some are scared they will fall foul of the new rules unintentionally”¦Banks don’t want American customers anymore because of the hassles with FATCA. Expats are having accounts closed, and while they may find a bank offering a current account, deposit accounts are almost impossible to locate. Some expats have [even] had their mortgages cancelled and many are refused loans.

These complications go beyond personal banking. FATCA also complicates foreign direct investment with United States entities and investors, since American ownership makes a business subject to FATCA reporting. Under FATCA, FFIs are required to report any private foreign corporation, business, or partnership in which a U.S. citizen is a ten percent or greater shareholder; see here.

At 39.1 percent and approximately 14 percent higher than the OECD weighted average, the United States currently has one of the highest corporate tax rates in the developed world; see here. The United States already subscribes to double taxation of both dividends and capital gains for corporations, which are set to increase this year; and further requires U.S. firms operating abroad to pay taxes on their foreign-sourced earnings. Uniquely, the United States is also the only developed country that taxes its citizens living abroad.

So, what are the implications for Americans who invest internationally? Arguably, their involvement in international business could expose sensitive account information of their prospective foreign business partners to U.S. inspection and taxation. Because of this, foreigners may be reluctant to do business with U.S. citizens who may subject them to significantly higher tax exposure, investigation, inspection, and business risk; thus putting U.S. investors at a competitive disadvantage in the international marketplace.

Over the next ten years, FATCA is projected to unearth $8.7 billion of the nearly $40 billion annual cost of international tax evasion; see here. However, whatever may be gained by FATCA could be well outweighed by way of lost prospective foreign direct investment and global business deals which would otherwise contribute to the U.S. GDP and provide additional taxable revenue streams. From a purely economic standpoint, these lost opportunities could very well negate a large portion of the less-than-$1 billion that FATCA is projected to unearth annually over the next ten years.

Because of these issues, U.S. expatriates and investors are expressing outrage with both FATCA and cumbersome U.S. tax policies by disassociating themselves with the U.S. altogether. Over the past year there has been a significant surge in the number of Americans renouncing their U.S. citizenship; one of the more notable being Eduardo Saverin, the Brazilian-born co-founder of Facebook, who renounced his U.S. citizenship last year right before the company’s highly anticipated initial public offering (IPO). Bloomberg has reported (see here) the renunciation of U.S. citizenship increased nearly six-fold in the second quarter of 2013 to 1,131 in comparison to 189 for the same period one year earlier. Reports also attribute this surge to the increase in capital gains and income tax rates in 2013, and the overall difficulty U.S. expatriates are having preparing burdensome and complicated tax returns.

So is FATCA the Solution?

Despite the outcry, in the long-term, if implemented according to plan, FATCA could successfully curb illegal offshore activity in OECD member countries. The question is at what cost? Many argue that FATCA will result in more harm than good to the U.S. in the international marketplace.

Arguably, increased enforcement efforts through proven whistle-blowing initiatives such as the Offshore Voluntary Disclosure Program (discussed here) and stiffer non-disclosure penalties offer a more effective alternative for curbing illegal tax evasion and promoting tax revenue collection in a way that is less burdensome on expatriates and U.S. global competition.

As previously discussed (see here), for FATCA to truly be effective, FFIs will have to buy into the idea of globally-centralized information sharing of tax information. Currently only ten of the thirty-four OECD countries have signed IGAs. Nevertheless, the OECD as a whole appears to be on board, as evidenced by the OECD’s automatic information exchange initiative which is seeking to revolutionize global tax transparency and accountability; see here. Most recently, the British territory of the Cayman Islands, considered the world’s sixth largest financial center and major haven for mutual funds and private equity, stated that it too had reached an agreement with the U.S. to provide information on accounts held by American citizens; see here. The Cayman Island Financial Services Minister, Wayne Panton, has expressed his intentions of making the text of this IGA public once an official signing ceremony is held, and further stated that this agreement illustrates the Cayman Islands’ “commitment to engage in globally accepted tax and transparency initiatives.”

Whether FATCA will fail or succeed is not yet known, and it will be imperative for Congress and Treasury to carefully monitor the development and implementation of FATCA as it begins its roll-out to ensure that the problems it was created to resolve are fixed and/or mitigated rather than worsened and further complicated.

Fuerst Ittleman David & Joseph will continue to monitor IRS’s implementation of FATCA. For more information, please feel free to contact us via email at contact@fidjlaw.com or by phone at (305) 350-5690.

Tax Litigation Update: Second Circuit Decision Limits Deductibility of Life Insurance Dividends

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A decision by the United StatesCourt of Appeals for the Second Circuit earlier this month strictly interpreted deductibility I.R.C. § 808(c) as it relates to the deductibility of policyholder dividends paid by life insurance companies. Generally,  I.R.C. § 808(c) permits life insurance companies to deduct amounts “paid or accrued during the taxable year.” In the case, New York Life Insurance Company of America v. United States, the Second Circuit denied New York Life’s attempt to deduct dividend payments in one year that, in the opinion of the Second Circuit, were not paid or accrued until the following year. A copy of the decision is available here.

Background

At issue in the case were two primary types of dividend payments. The first, referred to by the Second Circuit as “Annual Dividends on January Policies,” were paid to policyholders annually, in an amount equal to the policyholder’s proportionate interest in the company’s annual surplus. These dividends were payable on the anniversary date of the policyholder’s purchase of the policy, but only if the policyholder had paid the preceding 12 monthly premium payments and only if the policy was in force (i.e., the policyholder had not cashed out or surrendered the policy) prior to the anniversary date.

New York Life developed a practice whereby it would credit the policyholder with the annual dividend shortly before, but not exactly on, the date on which the payment was actually made. In most circumstances, both the credit date and the payment date were in the same year. For certain January policies, however, the credit date fell in year 1 while the payment date fell in year 2. In such circumstances, New York Life deducted the payment when the credit was made (year 1) rather than waiting to deduct the payment in the following year, when it was actually made. The Internal Revenue Service (IRS) asserted that these credited payments were not deductible until the year they were actually paid, and thus New York Life was taking advantage of the deduction a year earlier than permissible.

The second type of dividend at issue was referred to by the Court as a “Termination Dividend.” Termination Dividends were paid automatically upon termination of a given policy, for instance upon death of the policyholder, or maturation or surrender of the policy. Depending on the circumstances, a policyholder would either receive an annual dividend, a Termination Dividend, or both. In the event the termination event took place before the annual dividend was credited, the policyholder would only receive the termination dividend. If the termination event took place after the credit date, the policyholder received both. If no termination event took place, the policyholder received only the annual dividend. Deductions for Termination Dividends were taken based on New York Life’s projection, made each December, as to the amount of the Annual and Termination Dividends that would be paid on each policy, with the deduction taken for the lesser of the two. Like the “Annual Dividends for January Policies,” this practice resulted in deductions for Termination Dividends being taken in the year prior to actual payment.

Six taxable years (1990-1995) were at issue in the case. After examination, the IRS denied nearly 100 million dollars in deductions attributable to the dividend practices described above. New York Life paid the liability and sued for a refund. The U.S. District Court for the Southern District of New York dismissed New York Life’s complaint for failure to state a claim, holding that based on the facts set forth in New York’s Life complaint, New York Life was entitled to no relief. New York Life’s appeal of that order precipitated the Second Circuit’s opinion.

Second Circuit Opinion

The Second Circuit analyzed the deductibility of each dividend payment under the “All Events” test, codified at Treas. Reg. § 1.461-1(a)(2)(i). This test is used in determining the timing of deductions for accrual basis taxpayers and contains three elements:

  1. All the events have occurred that establish liability;
  2. The amount of the liability can be determined with reasonable accuracy; and
  3. Economic performance has occurred with respect to the liability.

All three elements must be met for a payment to become deductible by an accrual basis taxpayer. The Second Circuit held that both of the at-issue dividends failed the first element of the test and were thus not currently deductible.

Annual Dividends on January Policies

Regarding the “Annual Dividends on January Policies,” the Court held that at the time the payments were credited to the policyholders certain events still needed to occur before New York Life’s liability on the dividend became fixed and inescapable, not contingent upon some future event. Specifically, the Court held that even where the policyholder had fully paid the previous 12 months of premiums, it was still uncertain whether the policy would be in force on the payment date. Even if the possibility was slight, there still remained the chance that the policyholder would choose to cash in the policy prior to the dividend payment date, and thus the second requirement necessary for a policyholder to receive an annual dividend payment would not be met. Significantly, the Court held that even a “statistical certainty” that a policyholder would keep her policy in force as of the dividend payment date was insufficient to satisfy the first element of the All Events test.

New York Life had set forth two primary arguments in support of its deduction of the “Annual Dividend for January Policies.” First, it argued that an interpretation § 808(c) requiring a taxpayer to wait until the year of payment to deduct the dividend amount renders the “accrued” part of the phrase “paid or accrued” in § 808(c) superfluous. In rejecting this argument, the Court reasoned that, in the context of § 808(c), “accrued” refers to amounts which are guaranteed ahead of payment; they have not been paid yet but there was no way for the payor to escape the obligation to pay in the future. That certainty of obligation was not present with New York Life’s annual dividends and thus could not be said to have accrued.

Second, New York Life argued that a policyholder’s decision to keep or give up her policy was not an “event” for purposes of the All Events test, and thus that decision did not have to be made to satisfy the first element of the All Events test.

This argument was based on a prior Second Circuit decision that defined “event” under the All Events test as “something that marks a change in the status quo.” Burnham v. Comm’r, 878 F.2d 86 (2d. Cir. 1989). According to New York Life, the current status of existing policies (i.e. being in force) constituted the status quo and thus the policyholder’s decision to simply leave the policy alone and let it remain in force through the anniversary date was not an “event” for purposes of the test.

Somewhat unpersuasively, the Second Circuit distinguished the phrase “continuation of the status quo” as used in Burnham from its application to New York Life on the basis that, in Burnham, “the fact of the liability” was conclusively established, while New York Life’s liability was still predicated on the policy being in force on the anniversary date.

Further, the payment in Burnham was not predicated on any choice to be made by the payee, whereas New York Life’s liability depended on the policyholder’s choice to keep the policy in force or cash out. These distinctions were sufficient to distinguish the concept of “maintaining the status quo” as used in Burnham such that a decision by a New York Life policyholder to not surrender the policy, even if that decision was completely passive, was an event that would change the status quo of the relationship between New York Life and the policyholder.

Termination Dividends

The rationale behind denying the deductions taken for Termination Dividends was more straightforward. Essentially, the Court held that New York Life did not have an obligation to pay a dividend upon policy termination and therefore could not deduct the dividend amount until it was paid. The individual policies did not contain an obligation to pay a termination dividend (other than a “post-mortem dividend”), nor did applicable state law. Further, board resolutions made in November to pay the following year’s dividends, even irrevocable resolutions, were insufficient to create a contractual obligation to pay the dividends. The Court distinguished similar cases that held board resolutions were sufficient to create contractual liability on the basis that, in those cases, the payee was notified of the forthcoming payment thereby creating an implied contract between the corporation and the payee.

Disagreement With Federal Court of Claims

Although it attempted to distinguish the two cases, the Second Circuit’s decision appears to conflict with a recent decision of the Federal Court of Claims, Massachusetts Mutual Life Ins. Co. v. United States, 103 Fed. Cl. 111 (2012). In that case, the Court of Claims upheld a deduction taken by a life insurer on dividends paid to policyholders under circumstances extremely similar to those present in the New York Lifecase. Specifically, the insurer was permitted to deduct dividend payments prior to actual payment when the sole requirement for the policy to be considered “in force,” thus entitling its holder to a dividend, was for all premiums to have been paid through the policy anniversary date.

In a footnote, the Court attempted to distinguish its opinion from the Court of Claims’ opinion based on the fact that New York Life required, in addition to up to date premium payments, that the policyholder not surrender her policy prior to the anniversary date.

This attempt to distinguish the cases seems, at best, questionable. The policy in the Mass Mutual case could easily be read to imply a requirement that the policyholder not surrender its policy prior to the anniversary date. Otherwise, Mass Mutual would be obligated to pay dividends on policies that no longer existed. More realistically, the Second Circuit’s opinion should be read as being in conflict with the Court of Claims’ opinion, which could have several pertinent ramifications. Most importantly, similarly situated taxpayers, beyond those within the Second Circuit’s jurisdiction, will likely be more inclined to file refund complaints in the Court of Claims than in a Federal District Court within the Second Circuit.

More generally, if the Second Circuit’s strict interpretation of the Code’s timing provisions is found persuasive in other jurisdictions, accrual basis taxpayers, not just dividend-paying life insurers, may be forced to review and modify their current deduction practices.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in all aspects of tax litigation, and routinely litigate complex tax matters against the IRS and Department of Justice. We will continue to monitor developments in this and similar cases. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

Update: “Marijuana Businesses Access to Banking Act of 2013” proposed in Congress to ease burdens associated with providing banking services to marijuana-related businesses

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On July 10, 2013, U.S. Representatives Ed Perlmutter (D-Colorado) and Denny Heck (D-Washington) introduced the “Marijuana Businesses Access to Banking Act of 2013” (“Access to Banking Act”) in the United States House of Representatives. The bill is designed to update federal banking laws to create protections for depository institutions that provide financial services to marijuana-related businesses. A copy of Rep. Perlmutter’s press release can be read here.

As we have previously reported, despite the growing number of States that have sanctioned the use of marijuana in various forms, the federal government has continued its efforts to crack down on dispensaries. (Our recent articles discussing these efforts can be read here, here, here and here.). In addition to direct criminal prosecution for drug trafficking, dispensaries face additional legal barriers which make operation difficult. As we previously reported, one such practical legal barrier dispensaries face is finding banks, credit card companies, and payment processors to process the proceeds of marijuana sales. As we previously explained, because the sale of marijuana remains prohibited under federal law, banks are placed in a position where they would be required to report any banking transactions involving proceeds from marijuana dispensaries. Moreover, banks face the realistic possibility of criminal penalties for assisting in money laundering should they knowingly accept and process funds from dispensaries.  As a result of these risks and possible penalties, banks have simply refused to allow marijuana dispensaries to maintain accounts or conduct business.

However, the Access to Banking Act attempts to resolve this problem by allowing “depository institutions,” defined within the act as 1) a depository institution as defined in 12 U.S.C. § 1813(c); or 2) a federal credit union or state credit union as defined in  12 U.S.C. § 1752, legal authority to provide banking services to “marijuana-related legitimate businesses.” (“Marijuana-related legitimate business” is defined within the act as “a manufacturer, producer or any person that (A) participates in any business or organized activity that involves handling marijuana or marijuana products, including selling, transporting, displaying, dispensing, or distributing marijuana or marijuana products; and (B) engages in such activity pursuant to a law established by a State or a unit of local government.)

The Access to Banking Act would provide a “safe harbor” for depository institutions under which a federal banking regulator may not:

  1. terminate or limit a depository institution’s access to FDIC depository insurance for providing financial services to a marijuana-related legitimate business;
  2. prohibit, penalize, or discourage a depository institution from providing financial services to marijuana-related legitimate businesses;
  3. recommend, incentivize, or encourage a depository institution not to offer financial services to an individual solely because the individual is a manufacturer, producers or owner/operator of a marijuana-related legitimate business; and
  4. take any action against a loan to an owner/operator of a marijuana-related legitimate business.

The Access to Banking Act would also provide immunity from Federal criminal prosecution for depository institutions who provide such services.

In addition, the Access to Banking Act would amend 31 U.S.C. § 5318 of the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330, to exempt depository institutions from the requirement to file Suspicious Activity Reports (“SAR”) solely because a party to the transaction is a marijuana-related legitimate business. (12 C.F.R. § 21.11 requires national banks to file Suspicious Activity Reports (“SAR”) when the bank knows, suspects, or has reason to suspect that a transaction involves funds from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law.)

Although the bill has a long way to go before becoming law, the Access to Banking Act has the potential to be a game-changer for the State sanctioned legalized marijuana industry. Fuerst, Ittleman, David &Joseph, PL will continue to monitor the bill for its latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, constitutional law, regulatory compliance, white collar criminal defense and litigating against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Florida Corporate and Business Law Update: The Florida Revised Limited Liability Company Act, Chapter 605 of the Florida Statutes, Modernizing Florida’s Limited Liability Company Laws

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The State of Florida has taken an important step in modernizing its business climate by revamping its limited liability company (“LLC”) laws and thus keeping Florida competitive with other influential commercial jurisdictions in the U.S. Specifically, the Florida Legislature recently passed into law the Florida Revised Limited Liability Company Act (the “Revised LLC Act”), which is codified in the new Chapter 605 of the Florida Statutes. A “substitute” version of the Revised LLC Act is available here. The revisions impact not only existing businesses in Florida but also all third parties who transact business with LLCs in Florida.

Key Revisions

The Revised LLC Act is largely based on the 2011 version of the Revised Uniform Limited Liability Company Act (“RULLCA”), available here, but also retains certain provisions from the existing Florida LLC Act, which is codified in Chapter 608 of the Florida Statutes and is available here. The revised act also borrows from the American Bar Association’s Revised Prototype LLC Act, the Revised Model Business Corporation Act, Florida’s partnership acts, and the LLC statutes of Delaware and other leading commercial states.

Among its key revisions, the Revised LLC Act does the following:

  • Like its predecessor, the Revised LLC Act is a default statute, meaning that it sets forth certain provisions that cannot be waived and it also is used to fill in gaps when parties have failed to consider certain issues in their articles of incorporation and/or operating agreements. The revised act expands the list of non-waivable provisions and contains various gap-fillers, such as for fiduciary duties, special litigation committees, derivative actions, indemnification for wrongful or intentional misconduct, and an LLC’s capacity to sue and be sued. (However, because an LLC may override certain default gap-fillers by contract, the operating agreement continues to be a critical focal point for the rights and responsibilities by and between the LLC’s members and managers).
  • The Revised LLC Act modifies various provisions governing an LLC’s management structure, including, among other such modifications, by eliminating the concept of a “managing-member” and thus leaving LLCs to exist as either member-managed or manager-managed; and by altering certain voting rules for both members and managers, such as by requiring that a majority-in-interest of the members approve any action outside of the LLC’s ordinary course of business.
  • The Revised LLC Act recognizes the agency power of an LLC’s managers and members, giving both of them “apparent” authority to bind the LLC. In the absence of a contrary provision in the articles of incorporation or operating agreement, all Florida LLCs are now considered to be member-managed, and all members have authority to bind the LLC as agents of the LLC. Thus, because information regarding whether an LLC is member-managed or manager-managed may not be contained in public records, third parties under the revised act would be well-advised to ask for copies of an LLC’s operating agreement and/or written management designation to determine the authority of the LLC’s managers and members as agents of the LLC. Alternatively, the revised act now allows for the filing of a statement of authority, which, as with similar statements authorized under Florida’s partnership statutes, allows an LLC to designate any member(s), manager(s) or other person(s) who can bind the LLC. An LLC also can file a statement of denial to revoke (or deny) a prior grant of authority. The revised act further imposes additional reporting requirements regarding information that is submitted to the Department of Corporations.
  • The Revised LLC Act modifies the provisions regarding the winding up of an LLC’s affairs, dissociation of members, and dissolution of LLCs, including by introducing the concept of “wrongful dissociation,” and by giving an LLC the right to damages against a member who wrongfully dissociates from the LLC (and, for example, wrongfully competes against the LLC). Similarly, the revised act clarifies the grounds for judicial dissolution and the appointment of receivers and custodians, including a “deadlock sale” provision addressing deadlock between managers or members. The revised act also eliminates certain prior provisions (under the existing act) regarding the circumstances in which an LLC’s creditor can bring an action against the LLC for judicial dissolution.
  • The Revised LLC Act modifies the provisions regarding service of process on LLCs, and thus clarifies how to serve process on a Florida LLC and/or a foreign LLC that is authorized to transact business in this state.
  • The Revised LLC Act clarifies the provisions regarding appraisal rights and organic transactions, such as mergers, conflict-of-interest exchanges, conversions and domestications, including interest exchanges and in-bound domestications by non-U.S. entities. (The revised act does not currently adopt “Series LLCs,” although the issue continues to be considered and, if necessary, could be the subject of a future special task force.)

Conclusion

Once it is signed into law by the Governor, the Revised LLC Act will become effective on January 1, 2014, and will apply to all new limited liability companies (or LLCs) formed or registered to do business in the State of Florida on or after that date, or to all existing LLCs that registered prior to January 1, 2014 and elect to come under the revised act.

In addition, as of January 1, 2015, the revised act (in Chapter 605 of the Florida Statutes) will repeal the existing Florida LLC Act (in Chapter 608) for all LLCs formed or registered to do business in Florida prior to January 1, 2014, and thus will become the mandatory default statute for all LLCs (regardless of registration date) as of January 1, 2015. The one-year gap provides existing LLCs a limited window within which to assess their current governance procedures and corporate documentation before being subject to the new provisions of the Revised LLC Act.

Although the statutory revisions are designed to, and should, make Florida a more desirable location for business owners, the Revised LLC Act contains significant changes from the existing act and thus implicates many material issues for anyone who conducts business in this state and/or deals with Florida or foreign LLCs here, including lenders and other parties who contract with Florida LLCs.

The key revisions identified above provide a non-exhaustive glimpse into the subject changes. Florida business owners and third parties with commercial operations in this state should consult with a legal advisor to determine what changes, if any, are appropriate given the Florida Revised LLC Act and to avoid unintended consequences of transacting business in this state.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of commercial transactions, including incorporation, management, governance and compliance issues. Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.