Online Sales Taxes Emerging as New York Court of Appeals Shoots Down Overstock and Amazon’s Constitutional Objections

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Introduction:

In a March 28, 2013 decision, New York’s highest state court, the New York State Court of Appeals, held that New York’s “click-through” nexus statute, Tax Law § 1101 (b)(8)(vi), does not violate the United States Constitution under either the Commerce Clause or Due Process Clause. [A copy of the opinion can be found here.] This click-through nexus statute, typically referred to as the “Internet Tax”, extends state income taxability to internet retailers who employ website owners residing in New York to advertise for them. The growing popularity of click-through nexus liability and general e-commerce taxability nationwide has become problematic for major ecommerce sites such as Overstock and Amazon, and resulted in significant increases in tax exposure for internet retailers that utilize click-through advertising to increase traffic to their websites.

What is a “Click-Through” Nexus?

So what exactly is this “click-through” or “affiliate” Nexus? In 2008, New York was the first state to enact this form of legislation. The basic premise of this legislation is to update the way in which state governments assert sales and use tax guidelines to reflect advancements in modern technology. The New York legislature was able to accomplish this by amending the Tax Law. More specifically, the New York legislators amended the statutory definition of “vendor” under this law to include:

A person making sales of tangible personal property or services taxable under this article (“seller”) shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of his state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods.

(Tax Law § 1101 (b)(8)(vi)). This definition was further clarified by a memorandum issued by the New York Department of Taxation and Finance [a copy of the memorandum can be found here] which made it clear that the presumption of taxation is rebuttable if the web site owner did not engage in any solicitation in New York that would result in a finding of nexus under constitutional standards.

Amazon and Overstock’s Failed Attempt to Challenge Tax Law

The establishment of this “click-through” nexus was challenged by two of the biggest internet retailers, Amazon.com and Overstock.com two days after the statute was enacted in New York in 2008. Both retailers argued that although they ship items to buyers worldwide (including New York), neither has any employees who work or reside in New York and neither maintains offices or property in New York. On the other hand, both Amazon and Overstock maintain affiliate programs whereby associates can maintain links to the respective retailers home pages in turn for a commission based on sales.

Amazon challenged the Tax Law on the grounds that it was an unconstitutional violation of Commerce, Due Process, and Equal Protection clauses. Overstock filed a complaint raising the same issues. These challenges were dismissed in both instances at the trial level. On appeal, the New York Supreme Court affirmed portions of the dismissals, but reinstated the case to determine if the statute violated the Commerce or Due Process Clauses. Amazon and Overstock then appealed their facial constitutional challenges to New York’s highest court, the New York State Court of Appeals.

In deciding the case, the New York State Court of Appeals wrote that it was bound by the U.S. Supreme Court’s holding in Quill Corp. v. North Dakota 504 U.S. 298 (1992), which found that physical presence in the state itself did not need to be substantial in order to establish a nexus with that state. All that is required is more than a “slight presence.” In Quill, the Supreme Court found that a mail-order business that solicited business in a state absent any other physical presence was sufficient to satisfy the nexus requirement. Drawing parallels between Quill‘s mail-order business and the internet retailers’ in-state solicitations, the New York Court of Appeals found that the presence requirement was satisfied so long as economic activities were performed in the state by a seller’s employees or on its behalf. As such, no facial violation of the Commerce Clause occurred.

Similarly, the New York Court of Appeals found that there were no facial violations of Due Process under Quill. The Court of Appeals determined the Commerce and Due Process challenges to be “closely related” and noted that physical presence was not necessary to trigger the Due Process Clause. In support of this holding, the Court of Appeals noted that under Amazon and Overstock’s compensation schemes, New York website owners were paid directly for referrals that resulted in purchases. The Court of Appeals determined that this direct correlation between compensation and referrals illustrated that New York residents were encouraged to actively solicit customers in the state, thus subjecting them to state taxes.

Growing Popularity of Internet Taxation

New York is not the only state that is aggressively moving toward the expansion of click-through taxation. Since 2008, click-through nexus statutes have grown in popularity and spread to several other states. Many states have similarly revised their definitions of terms such as “vendor,” “maintaining a place of business,” and “doing business in” to include remote sellers into their definition of characters susceptible to that respective state’s nexus requirement. Currently, Arkansas, California, Colorado, Connecticut, Georgia, Illinois, New York, North Carolina, Rhode Island, and Vermont have similar click-through statutes. Additionally, Florida, Hawaii, Indiana, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, New Mexico, Pennsylvania and West Virginia have introduced nexus legislation that target remote sellers.

The complete erosion of internet tax exemptions seem to be imminent as states that are in desperate need of funds are looking for new ways to collect additional tax dollars. However, this trend is not just prevalent in state legislatures. In fact, there is currently an Internet Sales Tax law called the “Marketplace Fairness Act” advancing through the United States Congress that would effectively allow 45 states and the District of Columbia to demand that online retailers collecting more than $1million per year in sales collect sales tax on all purchases – irrespective of the internet retailer’s physical presence in a specific state.

This bill is expected to pass the Senate soon and has been projected to result in the collection of between $22 billion and $24 billion in additional tax revenue. The National Retail Federation and many brick-and-mortar retailers are supporting these initiatives due to the loss of traditional retail sales to the online marketplace. They also argue that uniform taxation across these different sales channels could help level the playing field between all retailers.

Small businesses and e-commerce sites, on the other hand, are not as thrilled. There are approximately 9,600 individual tax jurisdictions throughout the United States, all of which have unique tax laws and regulations. While there is significant infrastructure and software to help businesses keep track of the different applicable tax regulations, one can expect significant switching costs for implementation and training – costs that will likely hit small internet businesses and start-ups the hardest.

In support of small business e-commerce sites, EBay has most recently become a part of the efforts to fight these proposed taxing schemes. Recently, EBay CEO, John Donahoe, urged EBay’s merchants to write their respective congressmen and express their disagreement with the legislation. Donahoe has made the claim that the proposed tax legislation would be harmful to small businesses and suggested that the threshold for this tax be raised from the proposed $1 million per year in sales to $10 million per year in out-of-state sales and less than 50 employees. This proposal that could be considered reasonable when, as John Donahoe noted, Amazon makes more than $10 million of sales every 90 minutes.

Concluding Thoughts

As this issue progresses, it will be interesting to see how courts will reconcile internet tax legislation like the Marketplace Fairness Act with the “more than a slight” presence requirement outlined in the Quill holding. The expansion of internet taxation seems to be inevitable, and in the event that the Marketplace Fairness Act becomes law, there will be even less of a connection between the respective taxing jurisdictions and internet retailers. Consequently, we may see the Quill case interpretation broadened; further altering the historic interpretation of the Commerce Clause to keep pace with modern technology.

While consumers and small businesses will likely feel the effects of this proposed legislation the most, it is important to note that irrespective of internet retailers’ presence, the responsibility has been on consumers to report uncollected taxes on internet purchases from day one – a responsibility that has for the most part been ignored. In the states’ defense, they are not creating any new responsibility to pay taxes or arbitrarily taxing retailers, but rather attempting to reconfigure legislation so as to ensure that these sales taxes are actually being collected. From an economic standpoint, this should not be very shocking. About $20 billion in uncollected tax funds are being left on the table, an amount that is too large for states desperately seeking additional revenue to overlook any longer. Long story short, it looks like the free ride may be over for savvy shoppers and the internet retailers who have shifted tax savings to their customers.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the IRS and the U.S. Department of Justice and have appeared before the U.S. Tax Court, the various U.S. District Courts, the U.S. Court of Federal Claims, and the various U.S. Courts of Appeal. You can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Third Circuit Court of Appeals Issues Landmark Decision in Virgin Islands Economic Development Program Case

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Disclosure: Joseph A. DiRuzzo, III of Fuerst Ittleman David & Joseph was part of the trial team that representedthe taxpayers in the June 2010 bench trial in the District Court of the Virgin Islands.

On April 17, 2013, the United States Court of Appeals for the Third Circuit overturned, in part, the ruling of the District Court of the Virgin Islands that the taxpayers were not bona fide U.S. Virgin Islands residents under I.R.C. section 932. The case is V.I. Derviates ex. rel. Vento v. Director of Virgin Islands Bureau of Internal Revenue, et al., case nos. 11-2318, 11-2319, 11-2320, 11-2321, 11-2322,11-2603, 11-2618, 11-2619, 11-2620, 11-2621, 11-2622, 11-2623,11-2624, 11-2625, 12-1416 and 12-1417. The Third Circuit’s precedential decision is available here.

The Vento case is a major win for taxpayers fighting the IRS over Virgin Islands residency and has major implications for those taxpayers who took tax credits for participating in the Virgin Islands Economic Development Program (EDP).

The facts of the case are as follows:

Richard and Lana Vento are married and filed a joint 2001 tax return with the VIBIR. In May 2001, the Ventos (through a limited liability company they controlled) contracted to buy Estate Frydendahl, a residential property on St. Thomas, for $7.2 million. Estate Frydendahl””which included a five-bedroom main house and several outlying buildings, including three two-bedroom cottages with kitchens””was sold furnished, and the transaction closed on August 1, 2001. At the time of purchase, the sellers were living in some of the outlying buildings, but the main house was vacant.

The Ventos hoped that renovations to Estate Frydendahl could be completed in time for them to move in by Christmas 2001. Progress was slow, however, and the Ventos grew frustrated. Consequently, in the late fall of 2001, Lana Vento brought in Dave Thomas, a construction manager whom she had previously hired to work in Hawaii, to supervise the project. In December 2001, Thomas travelled to the Virgin Islands and concluded that the main house at Estate Frydendahl was 50 percent livable, but the normal amenities, including water and electricity, did not work properly or consistently.

The Vento family (including Richard and Lana, as well as their daughters Nicole Mollison, Gail Vento, and Renee Vento) was on St. Thomas for the holiday season in December 2001. Nicole Mollison returned to Nevada with her husband and children on December 26, 2001, while the other Vento family members and guests stayed on St. Thomas through New Year’s Eve. Afterwards, the Ventos began to split their time between the Virgin Islands and the mainland. Lana visited the Virgin Islands most frequently because she was overseeing the construction efforts at Estate Frydendahl. She would spend between one and six weeks at a time there, then leave for another six weeks. During the first five months of 2002, Richard spent 35 days in St. Thomas, 23 days in San Francisco, and 41 days in Nevada. Richard also spent considerable time in Hawaii in 2002.

In addition to purchasing Estate Frydendahl, Richard became interested in participating in the Virgin Islands’ Economic Development Program (EDP), which offers very favorable tax treatment to certain approved Virgin Islands companies. Based on legal advice Richard received regarding the EDP between May 2001 and August 2001, he founded three companies in the Virgin Islands: (1) Virgin Islands Microsystems, which was to perform nanotechnology research; (2) Edge Access, which was to build internet access devices; and (3) VI Derivatives, LLC, which the VIBIR and IRS later deemed a sham partnership. Ultimately, only Virgin Islands Microsystems was approved to receive EDP benefits, and that approval did not occur until 2002.

In 2005, the Virgin Islands Bureau of Internal Revenue (VIBIR) issued Notices of Deficiency and Final Partnership Administrative Adjustments (FPAAs) to Richard Vento, Lana Vento, Nicole Mollison, Gail Vento, and Renee Vento and partnerships they controlled, assessing a deficiency and penalties of over $31 million against the Ventos and approximately $6.3 million against each of their three daughters (Nicole, Gail, and Renee). The VIBIR also concluded that two Vento-owned partnerships, VI Derivatives, LLC and VIFX, LLC were shams and disregarded them for tax purposes.

That same year, the IRS issued FPAAs that were nearly identical to those issued by the VIBIR. Significantly, however, the IRS also issued FPAAs to two other Vento-controlled partnerships. The Taxpayers challenged the VIBIR’s and IRS’s Notices of Deficiency and FPAAs in several separate proceedings in the District Court of the Virgin Islands.

The United States, on behalf of the IRS, intervened in the cases between the Taxpayers and the VIBIR, arguing that the Taxpayers should have filed and paid their 2001 taxes to the IRS instead of the VIBIR because they were not bona fide residents of the Virgin Islands.

In June 2010, the District Court in the Virgin Islands conducted a bench trial. The sole issue at trial was whether the Taxpayers were bona fide residents of the Virgin Islands as of December 31, 2001. The District Court held that they were not, and the Taxpayers, joined by the VIBIR, appealed.

The Virgin Islands taxation statutory scheme is known as the “Mirror Code,” under which the Internal Revenue Code is applied to the Virgin Islands merely by substituting “Virgin Islands” for “United Sates” throughout the Internal Revenue Code. However, Virgin Islands residents are subject to different tax filing requirements than other United States citizens. Under the version of 26 U.S.C. § 932(c) applicable in these appeals, taxpayers who are “bona fide resident[s] of the Virgin Islands at the close of the taxable year are required to” file an income tax return for the taxable year with the Virgin Islands. 26 U.S.C. § 932(c) (1986).

Thus, bona fide Virgin Islands residents who fully report their income and satisfy their obligations to the VIBIR do not pay taxes to the IRS. See Abramson Enters., Inc. v. Gov’t of Virgin Islands, 994 F.2d 140, 144 (3d Cir. 1993), available here. This is true even if the bona fide Virgin Islands resident is also a resident of the mainland United States. Slip op. at 19 (emphasis added).

As outlined by the Third Circuit, the meaning of “residency” may vary according to context. Martinez v. Bynum, 461 U.S. 321, 330 (1983). In the tax context, residency requires far less than domicile. Sochurek v. Comm’r, 300 F.2d 34, 38 (7th Cir. 1962); see also Croyle v. Comm’r, 41 T.C.M. (CCH) 339 (1980) (“[T]he citizen need not be domiciled in a foreign country”¦in order to be classed as a resident for Federal income tax purposes.”) Furthermore, while a person can have only one domicile, he can be a resident of multiple places at the same time.

As the Third Circuit explained, the intent to become a resident is not necessarily the intent to make a fixed and permanent home. Rather, it is the intent to remain indefinitely or at least for a substantial period in the new location. According to the Third Circuit, both Richard and Lana Vento intended to become Virgin Islands residents as of December 31, 2001. That intent was evidenced by their purchase of Estate Frydendahl and their ongoing business interests in the Virgin Islands. “And while the Ventos undoubtedly were motivated to live in the Virgin Islands because of its relatively favorable tax system, there is nothing unlawful or deceitful about choosing to reside in a state or territory because of its low taxes. Therefore, the District Court erred when it held that those motivations counseled against the Ventos‘ bona fide residency claims.” Slip op. at 31-32 (emphasis added).

The Ventos’ purchase and renovation of Estate Frydendahl showed that, by the end of 2001, they planned to remain in St. Thomas at least for a substantial period. Months before the end of 2001, the Ventos purchased Estate Frydendahl for $6.75 million, and began a renovation process that would eventually cost them another $20 million. This substantial outlay, approximately three times the size of the tax controversy in this case, was deemed by the Third Circuit to be strong evidence that the Ventos were not purchasing a sham property to avoid paying taxes, but rather that they had a bona fide intent to remain indefinitely or at least for a substantial period in the Virgin Islands. Richard Vento’s establishment of business interests in the Virgin Islands further supported his claim of bona fide residency.

Under Sochurek, a taxpayer’s unlawful tax evasion motives can clearly be considered evidence against bona fide residency. However, in this case, the Third Circuit held that the Ventos’ desire to take lawful advantage of more favorable tax treatment in the Virgin Islands did not undermine their claim of bona fide residency. Significantly for all pending Virgin Islands tax cases, the Third Circuit held as follows:

[A] taxpayer’s sincere desire to change his residency in order to take advantage of lawful tax incentives does not undermine his claim of bona fide residency. If anything, such a motivation would support the taxpayer’s intent to establish bona fide residency, which is a prerequisite for taking advantage of the lawful tax incentives.

Slip op. at 33-34; (emphasis added).

In refuting the IRS’ claim of improper motive in establishing a residency in the Virgin Islands, the Court acknowledged the well-settled proposition that “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” citing Gregory v. Helvering, 293 U.S. 465, 469 (1935). Furthermore, the Court reiterated that “a taxpayer’s legitimate tax avoidance motives should not be held against him.” Slip op. at 37 citing Lerman v. Comm’r, 939 F.2d 44, 45 (3d Cir. 1991).

The Third Circuit faulted the District Court’s decision that the Ventos only moved to the Virgin Islands so they would be able to file tax returns with the VIBIR and not the IRS. The District Court’s decision was erroneous because that is precisely what Congress intended. The purpose of 26 U.S.C. § 932(c) is to “assist the [Virgin] Islands in becoming self-supporting” by “providing for local imposition upon the inhabitants of the Virgin Islands of a territorial income tax, payable directly into the Virgin Islands treasury. If a taxpayer decides to move to the Virgin Islands because he would prefer to file his taxes with the VIBIR rather than the IRS, that taxpayer is helping the Virgin Islands become self-supporting, so his move does not upon its face lie[] outside the plain intent of [§ 932(c)].”  Slip op. at 37. The Third Circuit concluded: “Using [the Ventos] desire to subject themselves to the mirror code as evidence that they did not intend to comply with it would be both incongruous and contrary to the Congressional scheme.”  Slip op. at 38.

Turning to physical presence, the Court viewed IRC § 932 as merely requiring that a taxpayer be a bona fide resident of the Virgin Islands at the close of the taxable year. Id. § 932(c)(1)(A) (1986). As stated by the Court:

Under the terms of § 932, a taxpayer can take advantage of its provisions even if he became a bona fide resident of the Virgin Islands only on the last day of the taxable year.

Slip op. at 40. Therefore, the Ventos’ presence or lack thereof in the Virgin Islands in the first part of 2001 sheds little light on their eligibility for § 932(c), which requires only that they be bona fide residents of the Virgin Islands at the end of 2001. Slip op. at 40.

In addition to being a huge win for the taxpayer and a huge loss for the IRS, this case is nothing short of a landmark in the longstanding dispute between the IRS and numerous individuals and entities which have attempted to participate in the Virgin Islands Economic Development Program. The IRS intervened in the District Court and essentially fought against the taxpayers and the Virgin Islands. The Third Circuit rebuffed the IRS and in doing so provided clear guidance regarding how participants in the Virgin Islands Economic Development Program are to be treated when faced with the claims of the IRS that they were not bona fide Virgin Islands residents and/or did not properly claim an EDP tax credit. Further, the fact that the taxpayers have multiple residences and moved to the Virgin Islands to participate in the Virgin Islands EDP will not be viewed against them, all of which strongly contradicts the IRS’s position that if a taxpayer has a residence in the 50 States he cannot be a bona fide Virgin Islands resident.

The attorneys at Fuerst Ittleman David & Joseph are actively litigating against the IRS, the United States, and the Virgin Islands Bureau of Internal Revenue in Virgin Islands residency cases in the District Court of the Virgin Islands, the U.S. Tax Court, the Third Circuit Court of Appeals, and the U.S. Court of Federal Claims. Additionally, Joseph A. DiRuzzo, III, is licensed to practice in the Virgin Islands and actually lived on St. Thomas for years before relocating to South Florida. Joseph A. DiRuzzo, III, is actively litigating federal tax cases (both civil and criminal) on St. Thomas and St. Croix.

You can contact us via email at: contact@fidjlaw.com, or by telephone at 305.350.5690.

Business Litigation Update: Suddenly, Contracting Parties Face Tort Risks in Florida

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A recent Florida Supreme Court ruling could open the door to unforeseen liabilities for individuals and companies entering into contracts governed by Florida law.

On March 7, 2013, in Tierra Condominium Ass’n vs. Marsh & McLennan Cos., SC10-1022, 38 Fla. L. Weekly S151a (March 7, 2013), the Court limited the application of the “economic loss doctrine” (or, the “Rule”) to product liability cases. This ruling went largely unreported – except for our blog entry that you can read here – and was probably ignored by anyone who wasn’t a builder or a lawyer. Yet this ruling actually has a profound impact on anybody who has entered into a contract in which Florida law applies.

In usual circumstances when a party is the victim of a contract breach, the offended party sues under the contract seeking damages. Now enter the economic loss doctrine. Generally speaking, the Rule provides that someone suffering only economic damages in the breach of a contract may recover for those damages based only upon the provisions of the contract, such as warranties. Other “tort theories,” such as negligence or strict liability that seek to circumvent mundane and defined contractual remedies, were not. This was to prevent – as the U.S. Supreme Court said in one seminal case – “contract law . . . drown[ing] in a sea of tort.” East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 873 (1986). Therefore, as a result of the economic loss doctrine, an aggrieved contract party cannot recover for things like personal injury or property damage.

Not so fast, says the Florida Supreme Court. In its March 7, 2013 ruling, the court held, “[T]he application of the economic loss rule is limited to products liability cases. Therefore, we recede from prior case law to the extent that it is inconsistent with this holding.” What the Florida court was “reced[ing] from” was 25 years of jurisprudence in which the court expanded the application of the Rule well beyond its humble beginnings in product liability law. With the ruling in Tierra, however, the court has gone back to the roots of the Rule. The Tierra decision can be read in full here.

Implication for Florida Contracts

So let’s say that you have a supply/distribution contract governed under Florida law, and that contract provides that a party cannot seek damages for the supplier failing to deliver a product in a timely fashion. When the merchandise shows up late at the distributor’s warehouse, the Miami court house doors are opened. Before Tierra, the court would have said that the distributor cannot sue under the contract for damages because of the applicable provision. Now, with the Tierra ruling, the distributor may be able seek damages from the supplier alleging that the supplier was negligent in not properly delivering the merchandise. While it is unclear whether other long standing doctrines from which the economic loss rule expanded will continue to bar such remedies, a wave of new litigation is fully expected to test Tierra ramifications.

It is precisely because of this “wave of uncertainty” businesses should consult with their counsel to revisit existing contractual language. From a drafting standpoint, business lawyers for years have worked clauses into contracts to limit their clients’ liability. Accommodating the ruling in Tierra is no exception. Now, in addition to specifically disclaiming certain warranties and waiving liability for indirect, consequential, incidental and special damages, the contract will have to contain waivers for damages under tort theories as well. The inclusion of certain provisions should be able to provide an effective breakwater against the sea of tort litigation that is expected after Tierra.

This ruling has other implications of which companies should be aware. For example, it is sound business practice that when risks cannot be managed through contracts, private insurance is employed to mitigate the exposure. The question now arises whether a company’s commercial general liability (“CGL”) policy covers these new tort liabilities. The commonly used Insurance Services Office’s CGL policy (2007 form) lists 16 specific exclusions from coverage, including a “Contractual Liability” exclusion, which excludes coverage for a contractual breach. So even though a CGL policy typically covers tort claims such as personal injury and property damage claims directly against the insured, such a policy may not cover these claims when they arise out of a contract. It is incumbent upon businesses to review their respective policies to discern whether the policies exclude tort claims arising from contractual duties. And if that is the case for the insurance in your business, you may want to see if you can obtain specific “Contractual Liability Insurance.”

It is certain that the ripple effects of the Florida Supreme Court’s ruling in Tierra will be felt in the business and legal communities for years to come. The important message here is to be prepared. Whether seeking to mitigate your risks of tort damages through effective contractual drafting, or through insurance, or a combination thereof, effective legal guidance on this critical issue is essential.

Even an older, executed contract can be amended to accommodate the changes brought about by the Florida Supreme Court’s ruling. To perform a check–up, contact one our experienced business attorneys today.

Queen Shoals Ponzi Scheme Defendant Pleads Guilty

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A United States District Court Judge for the Western District of North Carolina sentenced Gary D. Martin, of St. Augustine, Florida, to a 10-year prison sentence for his participation in a 30 million dollar commodities and foreign exchange Ponzi scheme. As reported, Martin pled guilty in February 2012 to one count of money laundering conspiracy, and was sentenced this week to the statutory maximum 10-year prison term. Along with his prison sentence, he was also ordered to pay $28.5 million in restitution to scheme victims.

According to court documents, Martin, through Queen Shoals Consultants, LLC and the Queen Shoals web site and other means, also made false claims about Queen Shoal’s financial expertise in “Self-Directed IRA Strategies and Fixed Rate Accounts.” Martin held Queen Shoals out as “leaders in Professional Private Placement Retirement Planning” and falsely claimed that Queen Shoals had a “proven method of diversification [that] spreads the risk nicely for a balanced portfolio,” when, in fact, Queen Shoals offered no such diversification and funneled victim funds solely into the scheme.

Martin and his wife, Brenda, acted as so-called “consultants” who, after forming Queen Shoals Consultants, LLC solicited potential investors by telling them that Queen Shoals Consultants had over 20 years of experience in financial services, and that Martin had vast experience dealing with commodities and foreign currencies. Investors were promised annual returns ranging from eight to twenty-four percent, along with an additional 1% to investors who rolled over their IRA balances.

Through Queen Shoals Consultants, the Martins raised over $20 million from investors through in-person solicitations, written materials, and a website. All funds raised by the Martins were then turned over to Sidney Hanson (the operator of the Ponzi scheme), who paid the Martins at least $1.44 million in undisclosed referral fees.

However, Queen Shoals was far from a legitimate operation. Instead, Hanson masterminded an elaborate Ponzi scheme that incurred massive losses in the minimal forex trading that actually did occur. The remainder of the funds taken in from investors were used to pay quarterly interest payments to existing investors, referral fees to so-called “consultants”, and to sustain Hanson’s lavish lifestyle.

Martin and his wife previously agreed to settle (see here and here) an action brought by the U.S. Commodity Futures Trading Commission by agreeing to permanent bans from the commodities trading industry, as well as agreeing to make full restitution to defrauded investors. Completing the pile-on, the SEC also brought an action, see here.

Between Hanson and the Martins, over $9 million has been paid into the Court registry for eventual distribution to victims.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the federal government in both civil and criminal matters involving highly regulated industries. You can reach at attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

US Court Orders Wegelin to Pay a Total Penalty of $74 Million

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As has been widely reported, the United States District Court for the Southern District of New York sentenced Wegelin & Co, the oldest Swiss private bank, to pay an additional $58 million after it admitted to helping wealthy Americans evade taxes. The press release issued by the U.S. Attorney’s Office for the Southern District of New York is available here. Our prior report on the Wegelin indictment is available here and our prior report on the Wegelin guilty plea is available here.

As noted in the press release

Together with the April 2012 forfeiture of more than $16.2 million from WEGELIN’s U.S. correspondent bank account, this amounts to a total recovery to the United States of approximately $74 million. WEGELIN pled guilty in January 2013 to one count of conspiracy to defraud the IRS, file false federal income tax returns, and evade federal income taxes before U.S. District Judge Jed S. Rakoff, who also imposed today’s sentence. This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea and sentencing of such a bank.

Manhattan U.S. Attorney Preet Bharara said: “Wegelin has now paid a steep price for aiding and abetting tax fraud that should be heeded by other banks, bankers, and advisers who engage in the same conduct. U.S. taxpayers with undeclared accounts – wherever those accounts may be – should know that their bank may be next, and they should pay what they owe the IRS before we come find them.”

Wegelin, which had $25 billion in assets at the end of 2010, said at the time of its guilty plea in January said it would close.

Reuters described the March 4 hearing as follows:

During Monday’s hearing, [District Court Judge] Rakoff followed prosecutors’ recommendations and imposed a $22.05 million fine and ordered $20 million in restitution. He also entered an order finalizing $15.82 million in forfeitures, which he preliminarily approved at the time of the guilty plea.

But while Rakoff approved the plea deal, he said there was a “funny tension” between the U.S. Justice Department’s decision not to seek the maximum $40 million fine and its assertion Wegelin acted with “extreme willfulness.”

Rakoff said even including the $16.3 million the government recovered in April 2012 by seizing money in Wegelin’s U.S. correspondent account, the bank will be giving up just 12 percent of the 560 million Swiss francs ($613 million) it earned after it sold most of its assets to regional Swiss bank Raiffeisen last year.

“Not much pain there, is there?” Rakoff said.

Rakoff, who has previously rejected U.S. Securities and Exchange Commission settlements with Citigroup Inc and Bank of America Corp, ultimately accepted the proposal, which prosecutor Daniel Levy called “very substantial.”

What does the prosecution mean for U.S. taxpayers? While it remains to be seen, it appears that the U.S. Government’s attempt to increase the pressure on U.S. taxpayers and foreign banks that have assisted U.S. taxpayers with skirting their reporting obligations has not slowed at all. In fact, it appears to be increasing. The result is that U.S. taxpayers who still are attempting to hide their assets out of the country to avoid U.S. taxation may be losing their window of opportunity to make amends and pay civil penalties and avoid criminal prosecutions.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in navigating the world of offshore bank accounts and the reporting requirements of U.S. taxpayers with the IRS. One can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Senate Committee on Banking Holds Hearing on Lax Enforcement of the Bank Secrecy Act

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As recently reported, the Senate Committee on Banking, Housing and Urban Affairs (information here), on March 7, 2013, held a hearing on “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement”, see here. The committee, led by Senator Tim Johnson of South Dakota, and Ranking Member Mike Crapo of Idaho, directedquestions to David S. Cohen, the U.S. Treasury Department’s Undersecretary for Terrorism and Financial Intelligence, Thomas J. Curry, Comptroller of the Comptroller of the Currency, and Jerome H. Powell, a Federal Reserve governor. Mr. Cohen’s testimony is available here, Mr. Curry’s testimony is available here, and Mr. Powell’s testimony is available here.

The Senators asked numerous questions regarding why international banks appear to be too large to prosecute and why no individuals at the large international banks have been prosecuted. Senator Mark Warner

of Virginia commented, “I do not… believe that it can be the position of the United States government that any institution should be too large to prosecute.”

With respect to HSBC, Senator Elizabeth Warren noted that “HSBC paid a fine, but no individual went to trial, no individual was banned from banking, and there was no hearing to consider shutting down HSBC’s activities here in the United States.”  HSBC avoided criminal prosecution in its deferred prosecution agreement with the Justice Department and paid a penalty of $1.92 billion.  Warren went on to state: “But evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night,” she added. “I think that’s fundamentally wrong.” (Rolling Stone’s rhetorical coverage of the HSBC case, which is representative of the coverage this story has received since being made public, is available here.)

Recently, Attorney General Eric Holder testified that some large banks are too large to prosecute, see here and here. In December, Senator Jeff Merkley was one of three Senators who wrote to Attorney General Eric Holder asking about the lax enforcement of financial institutions, specifically HSBC, and the widespread use of deferred prosecution agreements with them.  The recent activity on Capitol Hill suggests that after years of lax enforcement of international banks the U.S. Department of Justice, with overwhelming pressure from Congress, may be forced to increase scrutiny, which may result in criminal prosecutions for institutional and/or individual violations of the Bank Secrecy Act.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive civil and criminal experience litigating against the U.S. Government and defending targets of both civil and criminal investigations by the U.S. Department of Justice, the various Agencies of the U.S. Government, and the State of Florida.  You can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Third Circuit Court of Appeals Affirms Tax Court Decision on CARDS Tax Shelter

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On February 25, 2013, the United States Court of Appeals for the Third Circuit in the case of Crispin v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), available here, affirmed the decision of the Tax Court (Crispin v. Comm’r, T.C. Memo 2012-70, available here) which held, among other things, that the CARDS tax shelter did not result in an ordinary loss deduction for the taxpayer. The Third Circuit described the CARDS transaction as follows:

A CARDS transaction is a tax-avoidance scheme that was widely marketed to wealthy individuals during the 1990’s and early 2000’s. It purports to generate, through a series of pre-arranged steps, large “paper” losses deductible from ordinary income. First, a tax-indifferent party, such as a foreign entity not subject to United States taxation, borrows foreign currency from a foreign bank (a “CARDS Loan”). Then, a United States taxpayer purchases a small amount, such as 15 percent, of the borrowed foreign currency by assuming liability for a an equal amount of the CARDS Loan. The taxpayer also agrees to be jointly liable with the foreign borrower for the remainder of the CARDS Loan and so the taxpayer purports to establish a basis equal to the entire borrowed amount.

The Commissioner contends that that step in the CARDS transaction “is predicated on an invalid application of the … basis provisions of the Internal Revenue Code.” (Appellee’s Br. at 4.) Specifically, I.R.C. § 1012 (available here) provides that a taxpayer’s basis in property is generally equal to the purchase price paid by the taxpayer. That purchase price includes the amount of the seller’s liabilities assumed by the taxpayer as part of the purchase, on the assumption that the taxpayer will eventually repay those liabilities. See Comm’r v. Tufts, 461 U.S. 300, 308-09 (1983) (available here) (noting that a loan must be recourse to the taxpayer to be included in basis). But in a CARDS transaction, the Commissioner argues, the taxpayer and the foreign borrower agree that the taxpayer will repay only the portion of the loan equal to the amount of currency the taxpayer actually purchases.

Finally, the taxpayer exchanges the foreign currency he purchased for United States dollars. That exchange is a taxable event, and the taxpayer claims a loss equal to the full amount of his supposed basis in the CARDS Loan, less the proceeds of the relatively small amount of currency actually exchanged. The taxpayer uses that loss to shelter unrelated income. The general structure of a CARDS transaction is well and thoroughly set forth in Gustashaw v. Commissioner, 696 F.3d 1124, 1127-28, 1130-31 (11th Cir. 2012), (available here)

We have previously blogged about the Gustashaw case, available here. Ultimately, the Third Circuit held in that case as follows: “In this case, there was ample documentary and testimonial evidence that contradicted Crispin’s account of the business purpose of his CARDS transaction, and the Tax Court did not abuse its discretion in deciding  not to credit Crispin’s evidence”¦” Consequently, the taxpayer was not entitled to the ordinary loss deduction.

Interestingly, the Third Circuit noted a circuit split regarding the imposition of the gross valuation misstatement penalty in § 6662(h), available here. A the Third Circuit described:

Our sister circuits are divided as to whether the valuation misstatement penalty applies to tax deductions that have been totally disallowed under the economic substance doctrine. Compare Fidelity Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667, 671-75 (1st Cir. 2011) (holding that the penalty is applicable), Zfass v. Comm’r, 118 F.3d 184, 190 (4th Cir. 1997) (same), Gilman v. Comm’r, 933 F.2d 143, 151 (2d Cir. 1991) (same), and Massengill v. Comm’r, 876 F.2d 616, 619-20 (8th Cir. 1989) (same), with Heasley v. Comm’r, 902 F.2d 380, 383 (5th Cir. 1990) (holding that when the IRS totally disallows a deduction, the underpayment is “not attributable to a valuation overstatement” but rather to claiming an improper deduction), Gainer v. Comm’r, 893 F.2d 225, 228 (9th Cir. 1990) (same), and Todd v. Comm’r, 862 F.2d 540, 543 (5th Cir. 1988) (holding that the penalty was inapplicable when the deficiency was not due to overstated basis but to a failure to place property into service). However, Crispin’s reliance on Todd and Gainer is misplaced because they do not state the law of this Circuit. See Merino v. Comm’r, 196 F.3d 147, 157-159 (3d Cir. 1999) (holding that the valuation misstatement penalty applies to property acquired in a transaction found to lack economic substance and expressly declining to follow Todd and Heasley).

Our reasoning as to the applicability of the valuation misstatement penalty finds support in the recent decision of the United States Court of Appeals for the Eleventh Circuit in Gustashaw, supra. In that case, the taxpayer conceded the tax deficiency that the Commissioner had assessed as a result of the disallowance of a CARDS Loan loss, so the economic substance issue was not before the Court, but the taxpayer contested the penalties. Applying the “majority rule,” the Eleventh Circuit held that the 40 percent penalty applies “even if the deduction is totally disallowed because the underlying transaction, which is intertwined with the overvaluation misstatement, lacked economic substance.” 696 F.3d at 1136. Also, the Fifth and Ninth Circuits “have questioned the wisdom of their positions” in Todd, Heasley, and Gainer because those positions create the “anomalous result” of relieving a taxpayer of the penalty when a deduction is disallowed because it is so egregious that it is improper for a reason other than valuation, such as a lack of economic substance, See Bemont Investments, L.L.C. ex rel. Tax Matters Partner v. United States, 679 F.3d 339, 355 (5th Cir. 2012) (Prado, J., concurring) (noting that the “Todd/Heasley rule,” by “[a]mplifying the egregiousness of the scheme ”” to the point where the transaction is an utter sham ”” could … , perversely, shield the taxpayer from liability for overvaluation”); Keller v. Comm’r., 556 F.3d 1056, 1061 (9th Cir. 2009) (recognizing that the rule as expressed in most Circuits, including Merino, is a “sensible method of resolving overvaluation cases” because it “cuts off at the pass what might seem to be an anomalous result ”” allowing a party to avoid tax penalties by engaging in behavior one might suppose would implicate more tax penalties, not fewer[,]” but acknowledging that, “[n]onetheless, in this circuit we are constrained by Gainer“).

The Crispin case, on its face, looks like a total loss for the taxpayer. However, given that in the Fifth and Ninth Circuits taxpayers can successfully attack the valuation misstatement penalty when the underlying deduction has been totally disallowed by the IRS, the Circuit divide on this issue could provide fertile ground to push back on the IRS in tax shelter litigation. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the IRS and the U.S. Department of Justice in the U.S. Tax Court, the U.S. Court of Federal Claims, the various U.S. District Courts and Courts of Appeals in both civil and criminal tax cases. You can contact us by emailing us at: contact@fidjlaw.com or by telephone at 305.350.5690.

Update: IRS Continues To Use Anti-Drug Trafficking Tax Code Provision To Limit The Ability Of Marijuana Dispensaries to Deduct Business Expenses

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As we have previously reported, despite the growing number of States (18 in total) 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, and here.). In addition to prosecutions for violating federal law, federal authorities have used various other techniques in an effort to quash the burgeoning marijuana industry. One such technique disallows marijuana dispensaries from taking business deductions on their federal income taxes pursuant to 26 I.R.C. § 280E.

26 I.R.C. § 280E states:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Pursuant to this statute, federal income tax deductions for business expenses commonly used by small businesses (such as deductions for office rent or mortgage payments, electricity, phone and internet services) are not available to state sanctioned marijuana dispensaries because they are still deemed by federal authorities to violate the Controlled Substances Act.

In response, the IRS issued a series of letters to the Congressmen strongly refuting their position:

Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term “controlled substances” has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act. See Californians Helping to Alleviate Medical Problems, Inc. v. C.I.R., 128 T.C. No. 14 (2007). The United States Supreme Court has concluded that no exception in the Controlled Substances Act exists for marijuana that is medically necessary. U.S. v. Oakland Cannabis Buyers Co-op., 532 U.S. 483 (2001).

The effect of 280E can be drastic on dispensaries. According to a recent CNNMoney report, the inability of dispensaries to take business deductions has resulted in dispensaries paying an effective tax rate as high as seventy-five percent (75%). The practical effect of this massive tax burden makes business operations difficult, if not impossible.

However, beginning in 2010, IRS’s use of Section 280E to deny marijuana dispensaries the ability to deduct business expenses has come under increased scrutiny. In November of 2010, a group of U.S. Congressmen led by Rep. Pete Stark of California sent a letter to the IRS explaining that “the legislative intent, in drafting [280E], was to deny the benefit of tax deductions and credits to those who violate our laws against trafficking in illegal drugs,” not to prohibit businesses which are compliant with state or local laws from deducting business expenses. The Congressmen requested that the IRS issue a revenue ruling holding that “deductions or credits shall be allowed for amounts paid or incurred during the taxable year in the carrying on of a trade or business if the activities which comprise the trade or business are conducted in compliance with state or local law.” A copy of the letter can be read here.

The IRS’s letter concluded that “because neither section 280E nor the Controlled Substances Act makes exception for medically necessary marijuana, we lack the authority to publish the guidance that you request. The result you seek would require the Congress to amend either the Internal Revenue Code or the Controlled Substances Act.” A copy of the IRS’s letter can be read here.

In response to this letter, on May 25, 2011, Rep. Stark introduced H.R. 1985, the Small Business Tax Equity Act of 2011, which would have amended the Internal Revenue Code to allow for a deduction for expenses in connection with the trade or business of selling marijuana intended for patients for medical purposes pursuant to State law. However, the bill died in the House Ways and Means Committee and did not make it to the floor for a vote.

Thus, as it now stands, while the threats of criminal prosecution and asset seizure for marijuana distribution are undoubtedly severe, the IRS’s current interpretation of 280E could have an equally devastating impact on the industry.

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 IRS and 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 Issues Guidance for Native Americans Regarding Tribal Trust Settlements

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The IRS recently issued guidance in the form of Notice 2013-1, available here, that provides guidance on federal tax treatment of certain per capita payments made to members of Indian tribes. The background for the Notice is as follows:

The United States has entered into agreements with federally recognized Indian tribes, settling litigation in which the tribes alleged that the Department of the Interior and the Department of the Treasury mismanaged monetary assets and natural resources the United States holds in trust for the benefit of the tribes (“Tribal Trust cases”). Upon receiving the settlement proceeds, the tribes will dismiss their claims with prejudice. See Press Release, U.S. Department of Justice, Attorney General Holder and Secretary Salazar Announce $1 Billion Settlement of Tribal Trust Accounting and Management Lawsuits Filed by More Than 40 Tribes (April 11, 2012), available here.

Although agreeing to settlements, the United States has admitted no liability and has no fiduciary responsibilities over the Tribal Trust case settlement proceeds that the tribes receive and that are deposited into accounts at private banks or other third-party institutions.

The applicable law is as follows.

Section 61(a) of the Internal Revenue Code, available here, provides that, except as otherwise provided by law, gross income means all income from whatever source derived. Native Americans are citizens subject to the payment of income taxes; see Squire v. Capoeman, 351 U.S. 1, 6 (1956), available here. The Per Capita Act, Pub. L. No. 98-64, 97 Stat. 365, available here, and 25 U.S.C. §§ 117a through 117c, available here

provide authority to Indian tribes to make per capita payments to Indians out of tribal trust revenue. The Indian Tribal Judgment Funds Use or Distribution Act, 25 U.S.C. §§ 1401 through 1408, available here, concerns the distribution of certain judgment funds to Indian tribes. Under 25 U.S.C. § 117b(a), available here, funds distributed under 25 U.S.C. § 117a are subject to the provisions of 25 U.S.C. § 1407. Under 25 U.S.C. § 1407, the funds described in that section, and all interest and investment income accrued on the funds while held in trust, are not subject to federal income taxes. For federal income tax purposes, per capita payments that an Indian tribe makes from the tribe’s Tribal Trust case settlement proceeds are treated the same as per capita payments from funds held in trust by the Secretary of the Interior under 25 U.S.C. § 117a

The IRS announced that under 25 U.S.C. § 117b(a), per capita payments made from the proceeds of an agreement between the United States and an Indian tribe settling the tribe’s claims that the United States mismanaged monetary assets and natural resources held in trust for the benefit of the tribe by the Secretary of the Interior are excluded from the gross income of the members of the tribe receiving the per capita payments. But per capita payments that exceed the amount of the Tribal Trust case settlement proceeds and that are made from an Indian tribe’s private bank account in which the tribe has deposited the settlement proceeds are included in the gross income of the members of the tribe receiving the per capita payments under § 61.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the IRS and the U.S. Department of Justice and have appeared before the U.S. Tax Court, the various U.S. District Courts, the U.S. Court of Federal Claims, and the various U.S. Courts of Appeal. You can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.

Eleventh Circuit Court of Appeals Sustains Required Records Exception to the Fifth Amendment

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On February 7, 2013, the U.S. Court of Appeals for the Eleventh Circuit affirmed the decision of the U.S. District Court for the Northern District of Georgia holding that the Required Records Exception overrides a taxpayer/criminal defendant’s Fifth Amendment assertion against incrimination when in respect to foreign bank account records.  A copy of the Eleventh Circuits decision is available here.

The Eleventh Circuit joined with the Seventh Circuit in In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903, 90509 (7th Cir. 2012), available
here, the 9th Circuit in In re Grand Jury Investigation M.H., 648 F.3d 1067, 107179 (9th Cir. 2011), cert. denied, 133 S. Ct. 26 (2012), available here, and the 5th Circuit in In re Grand Jury Subpoena, 696 F.3d 428, 43236 (5th Cir. 2012). Our prior blog entry regarding the Seventh Circuits position on this issue is available here.

The facts of the case are as follows:

A grand jury investigation occurred in the Northern District of Georgia by the IRS and the U.S. Dept. of Justice. The government suspected that the Target, along with his wife, maintained foreign bank accounts both together and individually. For the years under investigation, the Target and his wife filed joint tax returns. Among other things, the governments investigation focused on the Target and his wifes failures to: (1) disclose on their tax returns their ownership of or income derived from their foreign accounts; and (2) file, with the U.S. Department of the Treasury, Forms TD F 90-22.1, Reports of Foreign Bank and Financial Accounts (FBAR) for these alleged accounts.

On June 29, 2011, the grand jury issued subpoenas duces tecum to both the Target and his wife. The subpoenas required the Target and his wife to produce any foreign financial account records that they were required to keep pursuant to the federal regulations governing offshore banking.

The Target and his wife informed the government that they would not produce the subpoenaed records. The government filed a motion seeking to compel their compliance with the subpoenas. In its motion, filed in the district court, the government argued that the Bank Secrecy Act (BSA) and its implementing regulations required the Target and his wife to keep the foreign financial account records sought by the subpoenas.

The Target and his wife filed a response to the governments motion to compel, arguing that the Required Records Exception did not apply to them based on the particular facts and circumstances of their case.  On November 7, 2011, the district court granted the governments motion to compel.  The Target and his wife did not comply with the district courts order. On March 5, 2012, the government moved the district court to hold the Target and his wife in contempt pursuant to 28 U.S.C. § 1826. The district court issued an order holding the Target and his wife in contempt for their failure to comply with the district courts earlier November 7 order.

On appeal, the Eleventh Circuit dispensed with the taxpayer/Target’s argument holding, among other things, that the Fifth Amendment did not apply.  The Eleventh Circuit reasoned that the Supreme Court has made clear that when the government is authorized to regulate an activity, an individuals Fifth Amendment privilege does not prevent the government from imposing recordkeeping, inspection, and reporting requirements as part of a valid regulatory scheme; citing Shapiro v. United States, 335 U.S. 1, 3233 (1948), available here. Interestingly, the 11th Circuit’s opinion fails to mention United States v. Hubbell, 530 U.S. 27 (2000), which held that although there is no Fifth Amendment privilege for the contents of documents, compulsory process may implicate the Fifth Amendment where the witness’s act of producing is inherently testimonial.

The takeaway from this case is that the IRS and the Department of Justice will continue to assert that there are no viable Fifth Amendment protection for taxpayers who have been compelled to produce evidence of their foreign bank accounts. As the Ninth, Seventh, Fifth, and Eleventh Circuits have ruled on this issue, it remains to be seen whether the other Circuits will follow, or whether the Supreme Court will agree to hear a case on this issue.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in both civil and the criminal tax litigation before the U.S. District Courts and the U.S. Circuit Courts of Appeal. You may contact us by calling 305.3560.5690 or by emailing us at contact@fidjlaw.com