BigLaw Stands To Gain From New US Policy In Cuba

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360

By Carolina Bolado
December 18, 2014    

President Barack Obama’s announcement Wednesday that the U.S. would ease travel and trade restrictions with Cuba for the first time since 1961 positions Miami as a departure point for future investments and means major opportunities for lawyers in the hospitality, travel, telecommunications and construction sectors, experts say.

After 18 months of secret talks with Cuban President Raul Castro, Obama announced that the U.S. would begin normalizing diplomatic relations with Cuba and will lift restrictions on interstate money exchange, travel, trade, telecommunications and third-country financial transactions. While the announcement was met with mixed reactions in the political sphere, the legal and business communities looked to the opportunities that may open up with greater interaction with the island nation 90 miles away.

The easing of regulations and restoration of diplomatic relations is a “watershed moment,” according to Pedro Freyre, chairman of Akerman LLP’s international practice, who said he almost fell out of his chair when he heard the announcement.

“It’s not hyperbole to say that this is historic,” Freyre said. “The U.S. and Cuba have not had diplomatic relations since 1961.”

The hospitality and travel business will likely be immediately impacted thanks to loosened restrictions on travel to Cuba, according to Francis Rodriguez, a partner at Shutts & Bowen LLP in Miami. In addition to easing regulations on who can visit Cuba, the announcement that the U.S. would allow Americans to use credit and debit cards on the island will make travel in Cuba easier.

“In the immediate future, we see the primary opportunities for business interests and our clients in the tourist industry, including travel and hospitality,” Rodriguez said. “There has already been a lot of interest in Cuba in those sectors and we expect the president’s comments to increase those interests.”

He expects new opportunities for joint venture agreements with existing travel and hospitality operators to expand facilities and to market Cuba more broadly to the American public.

“Given the reality of the political situation in Cuba, our clients have been measured in their approach to investment in Cuba,” Rodriguez said. “However, the president’s comments may help facilitate Miami as a potential departure point for the investments which our clients wish to cautiously investigate and pursue.”

In many ways, South Florida, the hub of all things Cuban outside of Cuba, could be the epicenter of mid- to small-sized businesses that might want to participate in new opportunities opened up by the easing of regulations, according to Holland & Knight LLP partner Jose Sirven.

Sirven said that in addition to the travel sector, financial institutions, which previously were not permitted to have correspondent accounts with Cuban banks, will feel the immediate effect of the changes and that he expects his financial institution clients to call for advice on how these changes might affect them.

“It’s an immediate change that they need to figure out how to handle,” Sirven said. “They can’t currently have Cuban accounts, but that’s a particular change that the president has requested. It sounds like financial institutions will now be permitted to deal with Cuban banks.”

This will allow for more large-scale commerce to occur between the U.S. and Cuba, as opposed to just the family remittances that are regularly sent back to the island, according to Andrew Ittleman of Fuerst Ittleman David & Joseph PL. His partner at the firm, Mitchell Fuerst, added that he expects change to come quickly after the president’s announcement.

“There is a huge amount of business between the U.S. and Cuba, and it pings off of Colombia, Venezuela, Belize and Guatemala,” Fuerst said. “What you’re going to see is business instead of being directed in some ignoble way is going to go directly from the U.S. The embargo is not down, but I don’t believe that will influence people’s behavior. We’ve seen it already in remittances. With money transfers from the U.S. to Cuba, there is no barrier.”

Other attorneys think the increase in trade and business will be more incremental. Freyre at Akerman does not expect the trade floodgates to open immediately, but he said Obama’s move should facilitate trade in certain areas, beginning with foodstuffs, which are already allowed under the embargo and which U.S. companies have sold to the Cuban government for years. From there, trade could expand in telecommunications, which Obama specifically mentioned in his announcement Wednesday, and possibly construction materials, which are sorely needed on the island, where buildings are crumbling from decades of neglect.

“Step No. 1 is more trade, and that builds confidence and relationships,” Freyre said. “If things go well and there’s a lowering of tensions, you’ll see greater financial compacts and greater flow of goods. If that goes well and Cuba modernizes its corporate law, trade law and judiciary, investors will begin to feel confident that it’s a safe place to invest. It will not happen overnight.”

Among the many announcements made by the president Wednesday, one that exporters to Cuba were relieved to hear is that they will no longer have to wait for payment from Cuba before shipping their products. Cuba will still have to pay in cash for its purchases, but the payment can now be made just before handing over the goods at the port of entry, according to Freyre, who said the small tweak should make trade between the two countries run more smoothly.

 

But many of the impediments to increased trade come not from the U.S., but from Cuba, where the average citizen makes very little money. Trade is done with the government, which is cash-strapped, has no credit and whose economy is in shambles. The country is particularly suffering now that oil prices have plummeted, as it has in years past sold heavily subsidized Venezuelan oil on the open market to generate cash.

“They can’t rely on Venezuela anymore, which has its own problems,” Doug Jacobson of Jacobson Burton PLLC said. “They have to now fend for themselves, and that’s not easy to do in a truly state-run economy. The economy there is still very much a work in progress.”

Trade in agricultural products will likely increase incrementally, according to Jacobson, who added that suppliers of telecommunications products could also find buyers in not just the Cuban government but also with telecom companies from other countries that operate on the island.

Jacobson, who has worked on Cuba licensing issues for more than two decades, added that though the president’s goal of getting more Cubans connected with smartphones and computers is a good one, the Cuban government’s agenda is a different one.

“Average Cubans have very little access to the Internet, and infrastructure in Cuba is still very very poor,” Jacobson said. “In terms of what we want to accomplish, it sounds great, but if the Cuban government doesn’t want that, it won’t happen.”

Even if the embargo were lifted completely, large-scale changes will need to be made on the island before investors are willing to dip their toes in the market. But re-establishing diplomatic relations is an important first step, according to Freyre.

“We are now taking steps on our side to make things easier,” Freyre said. “We’re opening our valve a little bit. Cuba needs to do the same.”

Tax Litigation Update: Ninth Circuit Decision Provides Significant Support for Taxpayers Seeking to Discharge Tax Debt in Bankruptcy

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October 20th, 2014

On September 15, 2014, the United States Court of Appeals for the Ninth Circuit issued a landmark decision strongly favoring debtors seeking to discharge tax debt in bankruptcy.

The case, Hawkins v. Franchise Tax Board (In Re Hawkins), involved a taxpayer, Trip Hawkins, seeking to discharge roughly 19 million dollars in a Chapter 11 bankruptcy.  The Government objected to the discharge under 11 U.S.C. § 523(a)(1)(C), which precludes the discharge of a tax debt “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.”  The Government, which prevailed at the bankruptcy court and district court levels, argued that Hawkins’ level of spending while his tax debt remained outstanding constituted a willful attempt to evade or defeat his tax liability.

Overruling the bankruptcy court and district court decisions below, the Ninth Circuit held that in order for a tax debt to be precluded from discharge due to a willful attempt to evade or defeat the tax, the Government must establish that the debtor had the specific intent to evade payment of tax; mere overspending on other items while the tax debt remained outstanding, if the overspending did not occur with the specific intent of avoiding payment of tax, is insufficient to rise to requisite level of willfulness.

Background

Hawkins’ background created a less than sympathetic picture, which may have had some effect on the lower courts’ decisions to bar discharge.  Hawkins was a graduate of Harvard and Stanford who had been among the first employees of Apple Computers and later served as CEO (and significant stockholder) of Electronic Arts (EA), the noted video game manufacturer.  Hawkins’ wealth grew to about $100 million.  In 1990, EA created a wholly owned subsidiary called 3DO for the purpose of developing and marketing video games and game consoles, and Hawkins was put in charge of 3DO.  Thereafter, Hawkins sold a large amount of his EA stock and used the proceeds to invest in 3DO.  By selling his EA stock, Hawkins generated significant capital gains.  In order to offset his capital gains liability, Hawkins invested in several tax shelters offered by KPMG.  The IRS challenged the tax shelters in 2001 and disallowed the losses Hawkins had taken to offset his capital gains, resulting in millions of dollars of liability for Hawkins.  At the same time, 3DO’s business was stuttering, further compounding Hawkins’ financial situation.  In a 2003 state court filing seeking to reduce his child support obligations, Hawkins acknowledged that he owed $25 million to the United States in back federal income taxes.  All the while, even after recognizing the severity of his tax debt, Hawkins had enjoyed an expensive lifestyle, spending somewhere between $500,000 and $2.5 million more than what he earned on personal expenses in the 33 months between January 2004 and September 2006 when the bankruptcy petition was filed.

Hawkins did make some efforts to reduce his tax liability; he sold his house in July 2006 and paid all of the net proceeds, $6.5 million, toward his tax debt.  Hawkins also proposed an Offer in Compromise of $8 million in an effort settle the liability, but the IRS rejected the offer.  In September 2006, Hawkins filed for Chapter 11 protection, primarily in an attempt to rid himself of his tax debt.  Shortly after filing, Hawkins sold a vacation house for $3.5 million and paid the proceeds to the IRS.  The IRS also received a distribution of $3.4 million in Hawkins’ Chapter 11 plan.  Nevertheless, millions of dollars of tax debt remained outstanding and the United States objected to the discharge of the tax debt on the basis that Hawkins willfully attempted to evade or defeat his tax liability, again arguing that Hawkins’ extravagant spending evidenced his willfulness.

The United States prevailed on this argument at both the Bankruptcy Court and District Court levels, and Hawkins appealed to the Ninth Circuit.

Governing Law

The Bankruptcy Code generally permits a discharge of all pre-petition liabilities of a debtor, unless discharge is specifically precluded by the Bankruptcy Code.  Discharging income tax debt is possible, but doing so requires the debtor to overcome several hurdles.  In addition to meeting several timing requirements contained in § 523(a)(1)(A)-(B) (for instance, the tax at issue must have been based on a return due at least three years before the petition date and the return must have been timely filed and filed more than two years prior to the petition date), the debtor’s return must not be fraudulent and the debtor must not have willfully attempted to evade or defeat the tax at issue.

In many cases, the timing and non-fraudulent return requirements are clearly satisfied, and the outcome of the dischargeability determination hinges solely on whether the debtor willfully attempted to evade or defeat the tax at issue.  Courts are in near universal agreement that the phrase “willfully attempted in any manner to evade or defeat such tax” contains two elements the Government must prove: a conduct requirement and a mental state requirement.  The conduct requirement means that the Government must prove that the debtor engaged in some act or omission in an attempt to evade or defeat the tax.  The Government must also prove that the debtor committed the act or omission willfully.

The Hawkins case dealt solely with the mental state requirement, more specifically the mental state required by the statute’s use of the word “willfull” in order to preclude discharge.  A majority of Courts, including the Eleventh Circuit, have adopted a test which requires the Government to show that the debtor (1) had a duty to pay taxes under the law; (2) knew that he had such a duty; and (3) voluntarily and intentionally violated that duty.  These courts have not expressly required the Government to establish that a debtor had a specific, fraudulent intent to evade or defeat the tax.

In reversing the bankruptcy court and district court in Hawkins, the Ninth Circuit set forth a more restrictive, debtor-friendly interpretation of willfulness.  Specifically, the Court held that “we conclude that declaring a tax debt dischargeable under 11 U.S.C. § 523(a)(1)(C) on the basis that the debtor ‘willfully attempted in any manner to evade or defeat such tax’ requires showing of a specific intent to evade the tax.  Therefore, a mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax; the government must establish that the debtor took action the actions with the specific intent of evading taxes.”  In other words, to the Ninth Circuit, overspending alone will not rise to willfulness unless the debtor overspent with the specific intent of avoiding payment of his tax liability.

In reaching this conclusion, the Ninth Circuit focused on purpose of the Bankruptcy Code and the textual structure of § 523(a)(1)(C).  First, the Ninth Circuit emphasized the fact that federal bankruptcy law was designed to provide debtors with a fresh start, which in turn compels a strict, rather than expansive, interpretation of “willfulness.”  For support, the Ninth Circuit cited Kawaauhau v. Geiger, 523 U.S. 57 (1998), in which the Supreme Court held that, under § 523(a)(6) of the Bankruptcy Code, which precludes discharge of debts arising out of a willful and malicious injury, the party seeking to preclude discharge must establish an intent to injure, not just an intentional act that leads to injury.

The Ninth Circuit also relied on the text of § 523(a)(1)(C) in requiring a higher standard of willfulness.  The Ninth Circuit held that by grouping willfulness with the filing of a fraudulent return in a separate subsection, rather than the more banal timing requirements of § 523(a)(1)(A)-(B), Congress had evidenced its intent to require a showing of bad purpose on the part of the debtor for the Government to establish willfulness.

The Court also found support for its ruling in the Internal Revenue Code.  Specifically, the Court highlighted the fact that the language of § 523(a)(1)(C) is nearly identical to that found in IRC § 7201, which makes it a felony to “willfully attempt in any manner to evade or defeat any tax.”  Courts interpreting § 7201 have required the Government to prove that the taxpayer voluntarily and intentionally violated a known legal duty.  See Cheek v. United States, 498 U.S. 201 (1992).  This, “almost invariably,” will “involve deceit or fraud upon the Government, achieved by concealing tax liability or misleading the Government as to the extent of the liability.”  Kawashima v. Holder, 132 S. Ct. 1166, 1175, 1177 (2012).  In following this rationale, the Ninth Circuit rejected reasoning of other Circuit Courts facing this question which have relied upon portions of the Internal Revenue Code dealing with civil willfulness (such as IRC § 6672).  Generally speaking, civil willfulness requires the Government to establish intentional conduct, but not a bad faith purpose, while criminal willfulness requires a bad faith purpose.

The Ninth Circuit also focused on the consequences of imposing a rule providing that living beyond one’s means would lead to the preclusion of tax debt dischargeability.  “Indeed, if simply living beyond one’s means, or paying bills to other creditors prior to bankruptcy, were sufficient to establish a willful attempt to evade taxes, there would be few personal bankruptcies in which taxes would be dischargeable.  Such a rule could create a large ripple effect throughout the bankruptcy system.”

In sum, the Ninth Circuit held that acts that detract from a debtor’s ability to pay the outstanding tax debt will not preclude discharge unless those acts are made with the specific intent of evading tax.  Intending to commit the act (or omission) that detracts from payment of the outstanding tax is not by itself sufficient.

Conflict with Other Circuits?

As stated above, several Circuit Courts of Appeal have read § 523(a)(1)(C) to require the Government to prove that the debtor (1) had a duty to pay taxes under the law; (2) knew he had that duty; and (3) voluntarily and intentionally violated that duty.  Under a broad interpretation, those elements are arguably satisfied if the act of overspending was committed intentionally, but without the specific purpose of avoiding taxation.

From a surface level it appears that the Ninth Circuit’s Hawkins decision creates a Circuit split, because the Ninth Circuit now requires the Government to prove specific intent to establish willfulness while a number of other Circuits have not expressly made that a requirement.  However, as the Court points out in Hawkins, in those other Circuits, living a lifestyle beyond one’s means has always been coupled with some other act or omission designed to evade taxes, such concealing assets, a failure to file returns and pay taxes, and structuring financial transactions to avoid currency reporting requirements.  Prior to Hawkins, no Circuit Court had directly answered the question of whether a taxpayer that files timely, accurate returns and does not engage in acts of deceit but spends beyond his means is willful under § 523(a)(1).  In that regard,Hawkins can be seen as a case of first impression and its reasoning is applicable across the country.

Moreover, it can be argued that the Ninth Circuit’s Hawkins decision expressly said what other Courts have said implicitly, or at least in a less forthright manner: where a bankruptcy debtor has lived beyond his means in the face of an existing tax debt, in order for discharge of the tax debt to be precluded, the Government cannot rely on overspending itself and must establish by a preponderance of the evidence some other act designed to evade taxes.

Effect on Eleventh Circuit Cases

The Eleventh Circuit is among the Circuit Courts that applies the three part test set forth above (the debtor had a legal duty to pay tax, knew of the legal duty, and voluntarily and intentionally violated that duty) in determining whether the mental state requirement of § 523(a)(1) has been satisfied.  Put more succinctly, “a debtor’s tax debts are non-dischargeable if the debtor acted knowingly and deliberately in his efforts to evade his tax liabilities.”  In Re Mitchell, 633 F.3d 1319 (11th Cir. 2011).  Additionally, the Court has stated that “fraudulent intent is not required” in determining willfulness.  In Re Fretz, 244 F.3d 1323 (11th Cir. 2001).

However, the Eleventh Circuit has never held that mere lavish spending in the face of a tax debt is sufficient to bar discharge.  Some evidence of a debtor’s deceit has always been present.  In both Mitchell (failure to file, titling assets in nominee names, reincorporating to avoid garnishment) and Fretz (failure to file), other factors contributed to the determination that the debtor satisfied the willfulness requirement.  Overspending alone was not determinative.  Therefore, Hawkins does not serve as directly contrary authority to the Eleventh Circuit’s approach to determining willfulness, but it does lend significant support to combat any argument the Government may raise in an attempt to establish willfulness based solely on overspending.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax and tax litigation in the Tax Court, the Federal District Courts, and Bankruptcy Courts.  They will continue to monitor developments in the Hawkins case and this area of the law generally. If you have any questions, an attorney can be reached by emailing us at contact@fidjlaw.com or by calling 305.350.5690.

11th Circuit Case Signals Split on Law vs. Regulation vs. … Contract?

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Decision holds interesting repercussions for trade violations and penalty amounts

On February 22, 2013, the U.S. Court of Appeals for the Eleventh Circuit vacated the smuggling and conspiracy convictions of two importers of allegedly tainted cheese products in the case of United States of America v. Yuri Izurieta and Anneri Izurieta (Case No. 11-13585). The decision created a circuit split over the scope of U.S. Customs and Border Protection (CBP) import bond regulations, yet also raised the possibility of a new line of attacks against CBP import penalties and liquidated damages.

With the highly respected U.S. Court of International Trade Judge Jane A. Restrani sitting with the 11th Circuit by special designation, a three-member panel found that a certain class of U.S. import regulations are civil rather than criminal in nature. Therefore, the criminal convictions of the husband and wife failed for lack of subject matter jurisdiction.

The case focused on the actions of the Izurietas and their Miami-based company, Naver Trading, Corp. Over several years, the company imported several large shipments of cheese and other dairy products into the United States. The shipments were “conditionally released” upon importation, that is, CBP and the U.S. Food and Drug Administration (FDA) allowed the shipments to move to Naver’s warehouse, but ordered the merchandise to be held at the warehouse pending further review and testing by the FDA. When the FDA tests came back indicating that the products were contaminated with Salmonella, E. coli and Staphylococcus aureus, the FDA ordered the products to be either destroyed or re-exported under the supervision of CBP.  The Izurietas failed to do so, however, and admitted that almost 5,000 kilograms of imported cheese that contained both E. coli and Staphylococcus aureus had been sold into the United States.

The FDA Office of Criminal Investigation, aided by special agents from U.S. Immigration and Customs Enforcement (ICE) investigated and referred the case for criminal prosecution to the U.S. Department of Justice. The Izurietas were tried, convicted, and sentenced in June 2011.

The defendants appealed to the 11th Circuit arguing violations of their Sixth Amendment rights to confront witnesses, improper statements made by the prosecutor over the course of trial, and faulty calculations underlying their sentences. The Appeals Court, however, saw a different issue in the case, which it raised sua sponte.

Six of the seven counts in the original indictment against the Izurietas alleged violation of 18 U.S.C. § 545, which is the statute barring smuggling into the United States. The operative language of the statute reads:

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law. . .
Shall be fined under this title or imprisoned not more than 20 years, or both. (18 U.S.C. § 545 (emphasis added).)

In this case, the “law” alleged to have been violated was a CBP regulation governing the conditional release of food, drug, device, cosmetic and tobacco products. Section 141.113 of Title 19, Code of Federal Regulations, allows for the conditional release of such products; however, subsection (c)(3) requires:

If FDA refuses admission of a food, drug, device, cosmetic, or tobacco product into the United States, or if any notice of sampling or other request is not complied with, FDA will communicate that fact to the CBP port director who will demand the redelivery of the product to CBP custody. … [A] failure to comply with a demand for redelivery made under this paragraph (c) will result in the assessment of liquidated damages equal to three times the value of the merchandise involved[.] (19 C.F.R. § 141.113 (c)(3).)

The court held that the regulation at issue “sets forth the terms of the contract between the importer and Customs by delineating the obligations of the importer upon conditional release and the damages for a breach of those contractual obligations.” When the Izurietas breached their contract with the Customs, the court held that criminal charges could not arise because “that law is civil only, and in particular reflects contractual requirements.” The court went on to state, “While some regulations may fall under the criminal prohibitions of 18 U.S.C. § 545, the text of 19 C.F.R. § 141.113(c) along with the comments issued during its promulgation certainly indicate to the average person that liability is strictly civil and monetary, capped at most at three times the value of the merchandise secured by bond, and is not aimed at punishment.”

Having found that only civil, contractual violations occurred, the 11th Circuit vacated the criminal convictions of the Izurietas under the smuggling charges, and vacated the accompanying conspiracy charge noting, “The indictment was sufficiently unclear as to whether any crime was charged such that the average person could easily read [the conspiracy count] as actually charging only a conspiracy to commit non-criminal acts.”

“We disagree with the conclusion of our sister circuit …”

The Izurieta case is noteworthy in many respects, not least of which is that the court’s opinion sets up a split among the Circuits regarding the interpretation of the “contrary to law” provision of 18 U.S.C. § 545.

The 11th Circuit panel referred to a Ninth Circuit case in which that court adopted a relatively narrow interpretation of the smuggling statute. The court in United States v. Alghazouli, 517 F.3d 1179 (9th Cir. 2008), decided that regulations are included within the definition of a “law” for purposes of 18 U.S.C. § 545 only if there is a statute (a “law”) that specifies that violation of that regulation is a crime. Alghazouli, 517 F.3d at 1187.

The court in Izurieta also took notice of a Fourth Circuit case, United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994). In Mitchell, the court adopted a more expansive reading of 18 U.S.C. § 545, stating, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency  regulations have the ‘force and effect of law.'” Mitchell, 39 F.3d at 468 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 295-96 (1979)).  The 4th Circuit then went on to apply a three-prong test (under Chrysler) to determine whether the regulation at issue in Mitchell had the “the force and effect of law.”

Finally, the Eleventh Circuit gave a nod to the First Circuit, which addressed this issue in United States v. Place, 693 F.3d 219 (1st Cir. 2012). The Izurieta court noted, however, “Because the appellant in [Place] made only an “all-or- nothing” argument that no regulations could be included within the scope of  “law” under 18 U.S.C. § 545, the First Circuit decided not to address ‘this delicate point.'” Place, 693 F.3d at 228 n. 12.

Examining the sum of these precedents and calling to mind the deliberations of Goldilocks in the three bears’ house that day, the 11th Circuit decided in Izurieta to reject both the narrow reading of the 9th Circuit and the “sweeping result” which would occur from the “breadth of the Fourth Circuit’s three-prong approach, derived from a non-criminal context.” Instead the court decided – correctly, in our opinion – to examine the true nature of the regulation and opt for lenity, or kindness, “especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.”

Important Ramifications for International Trade Enforcement Measures

In addition to the circuit split, the Izurieta case potentially opens the door for a new line of attacks on Customs’ and other regulatory agencies’ fines, penalties, and liquidated damages. In calling the CBP regulation “civil only” and contractual in nature, the question arises as to the applicability of the tenets of contract law to such governmental regulations.

The CBP regulation at issue in this case (19 C.F.R. § 141.113) is similar in language and intent to many other CBP and other government agency regulations. CBP regulations for import bonds under 19 C.F.R. § 113.62, et seq., has provisions such as “(a) Agreement to Pay Duties, Taxes, and Charges,” (f) Agreement for Examination of Merchandise,” and “(m) Consequence of default.” All of these provisions are very civil and very contractual in nature. In fact, most of the regulatory provisions for which CBP assesses “liquidated damages” – for violations of bond provisions, failure to files timely export information (15 C.F.R. § 30.24), violation of airport security regulations (19 C.F.R. § 122.181, et seq.) and violation of CBP-bonded warehouse and other customs-bonded facilities (Treasury Decision 99-29 and multiple regulations) – are decidedly civil and contractual in nature.

Thanks to Izurieta, it can now be argued by importers and others in the trade community in the Eleventh Circuit that violation of any of these types of civil, contractual regulations cannot result in criminal prosecution. Yet more interestingly, if these regulations are civil and contractual in nature would contract law provisions apply to the liquidated damages, fines and penalties that result from these provisions?

For example, if an importer enters incoming merchandise by filing entry documents with CBP, but is late in paying the duties that are due on that merchandise, the importer can be cited with a violation of the import bond provision (19 C.F.R. §§ 113.62(l)(4), and 113.62(a)(1)) and can be assessed liquidated damages in an amount of double the unpaid duties. In light of Izurieta, we would have to now ask, are these civil damages reasonable?

In a 2009 decision in the case of Country Inns & Suites By Carlson, Inc. v. Interstate Properties, LLC, 329 Fed. Appx. 220, No. 08-16850 (11th Cir., May 12, 2009), the Eleventh Circuit examined the validity of liquidated damages in a contract dispute arising under Florida law. The court held that the test under Florida law as to when a liquidated damages provision will be upheld should be applied to the case. Under Florida law, liquidated damages are enforceable when:

First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. (Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991).

In our hypothetical case of the late-paying importer above, CBP may assess liquidated damages of double the unpaid duties even if the duty payment is only one day late. Looking at the second prong of the test from Lefemine, the actual damages to CBP of a late duty payment are, at best, the opportunity costs of that late payment. In most contractual settings, such late payment fees are a small percentage (1% or 1½% per month) of the unpaid amount. In a duty bill of $100,000, however, the liquidated damages could equal to $200,000. Such CBP-levied damages clearly violate the Lefemine test and would be thrown out in a Florida court, and now apparently, in the 11th Circuit as well.

The implications for the potential application of Izurieta are enormous. The Eleventh Circuit includes the major international ports of Miami, Fort Lauderdale, Tampa, Jacksonville, Atlanta, and Savannah to name a few. The ports of the 11th Circuit saw over $150 Billion in imports during 2011, almost 10% of the total in the United States. The liquidated damages, fines and penalties to CBP arising from these ports are similarly great. The question after the holding in United States of America v. Yuri Izurieta and Anneri Izurieta is now whether these monetary damages can now be sustained.

Joseph A. DiRuzzo, III OF Fuerst Ittleman convinces Third Circuit to reverse District Court regarding ineffective assistance of counsel allegations

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On May 2, 2012, Circuit Judge Aldisert, in writing for a panel of the U.S. Court of Appeals for the Third Circuit in the case of United States v. James Russell, reversed the decision of the U.S. District Court for the Eastern District of Pennsylvania, and remanded the case for the District Court to hold an evidentiary hearing on the Appellants ineffective assistance of counsel claim. A full copy of the opinion is available here.

The facts are as follows:  James Russell appealed the judgment of the United States District Court for the Eastern District of Pennsylvania, entered on November 17, 2010, denying Russells motion to vacate, set aside or correct his sentence pursuant to 28 U.S.C. § 2255.  At the April 19, 2007 sentencing hearing, the District Court imposed a term of 41 months imprisonment, but did not specify whether the term was to run concurrently or consecutively. Russell timely appealed his sentence to the Third Circuit. The government agreed that the case should be remanded, and, based upon the agreement of the parties, the Third Circuit dismissed Russells appeal on December 20, 2007.

Russell was subsequently resentenced. At that time, Russells newly appointed attorney, Joseph Mitchell III, urged the District Court to impose a concurrent sentence and to show leniency. Mitchell also urged the District Court to grant the renewed motion for a downward departure. The District Court denied the motion and imposed a sentence of 33 months, to run consecutively to Russells other federal sentence.  At the conclusion of the hearing, Russell informed the Court: “And for the record, Im satisfied with the sentence. Thank you. And I would not be filing an appeal on that. Thank you very much.” Russell soon realized, however, that he was not, in fact, satisfied with his sentence. Russell asserts that two days after the sentencing hearing, on April 9, 2009, he notified Mitchell that he had changed his mind and directed him to file an appeal on his behalf.  Mitchell did not file an appeal.

On October 13, 2009, Russell filed a pro se § 2255 motion presenting six arguments: (1) that the District Court failed to properly apply the Sentencing Guidelines; (2) that Mitchell was ineffective for failing to argue that the Guidelines required a concurrent sentence; (3) that the prosecution misled the District Court regarding its authority to impose a concurrent sentence; (4) that Mitchell was ineffective for failing to counter the governments argument; (5) that the District Court erred in failing to credit his time already spent in federal custody toward his sentence; and (6) that Mitchell was ineffective for failing to seek an award of such credit. Russell wrote on the form motion that none of the grounds were presented previously because his “counsel Ëœrefused to raise them.”

In its November 15, 2010 opinion and order, the District Court denied Russells motion. In relevant part, the Court explained the effect of Russells counsels failure to file an appeal as follows: 

Russell alleges that his failure to directly appeal is the fault of his counsel, who refused to raise the issues on appeal. “A successful claim of ineffective assistance of counsel . . . satisfies the Ëœcause prong of a procedural default inquiry.” United States v. Garth, 188 F.3d 99, 107 (3d Cir. 1999) (citation omitted). Because the Court finds that Russell cannot satisfy the “prejudice” prong of the default inquiry, it will not consider whether Russell has demonstrated requisite cause.

On May 19, 2011, the Third Circuit granted Russells application for a certificate of appealability, limited to the following issue: “whether the counsel was ineffective for failing to file a direct appeal.”

The Third Circuit, in response to the governments contention that the certificate of appealability was improvidently granted, stated:  We decline the governments invitation to review our grant of the certificate of appealability. See Gatlin v. Madding, 189 F.3d 882, 887 (9th Cir. 1999), available here. (“[O]nce a [certificate of appealability] has been issued without objection by this court, the procedural threshold for appellate jurisdiction has been passed and we need not revisit the validity of the certificate in order to reach the merits.”)

Addressing the merits of Russells claim of ineffective assistance of counsel, the Third Circuit stated:  “[W]hen counsels constitutionally deficient performance deprives a defendant of an appeal that he otherwise would have taken, the defendant has made out a successful ineffective assistance of counsel claim entitling him to an appeal.” Roe v. Flores-Ortega, 528 U.S. 470, 484 (2000), available here.

A case in which a lawyer fails to file a direct appeal, contrary to the clients instructions, “is quite different from a case in which it is claimed that counsels performance was ineffective. As [the Supreme Court] stated in Strickland, the Ëœ[a]ctual or constructive denial of the assistance of counsel altogether is legally presumed to result in prejudice.” Penson v. Ohio, 488 U.S. 75, 88 (1988), available here; citing Strickland v. Washington, 466 U.S. 668, 692 (1984)), available here.

The Third Circuit concluded that:  “On the record before us, however, we are unable to adjudicate the merits of this claim.” As a result, “Inasmuch as these questions can be decided only after an evidentiary hearing, however, and because the district court did not hold such a hearing, we shall remand the case for this purpose.” United States v. Ackerman, 619 F.2d 285, 288 (3d Cir. 1980), available here.

The attorneys at Fuerst Ittleman have extensive experience litigating both civil and criminal appeals before the United States Circuit Courts of Appeals.  You can contact us at 305.350.5690 or by email at contact@fidjlaw.com.

IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

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IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

On December 15, 2010, the Internal Revenue Service (IRS) issued final regulations requiring certain corporations with both uncertain tax positions and assets equal to or exceeding $10 million to fill out a Schedule Uncertain Tax Position (UTP).  Requirement of a Statement Disclosing Uncertain Tax Positions, 75 Fed. Reg. 240, 78,160 (December 15, 2010) (to be codified at Treas. Reg. §1.6012-2).  The schedule UTP is currently available on the IRS’s website.

These uncertain tax positions are identified by corporations during the process of preparing financial statements under applicable accounting standards. Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010).  Consequently, this regulation only affects taxpayers that are required to issue audited financial statements and does not affect smaller entities that rarely prepare audited financial statements. 75 Fed. Reg. 240 at 78,160.

For the 2010 tax year, this requirement is only applicable to those corporations meeting the above mentioned requirements that will be filling out one of the following tax returns:

– Form 1120, U.S. Corporation Income Tax Return;
– Form 1120L, U.S. Life Insurance Company Income Tax Return;
– Form 1120PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
– Form 1120F, U.S. Income Tax Return of a Foreign Corporation.

An issue raised by one commentator during the comment period was whether Schedule UTP required the disclosure of privileged information.  The IRS addressed this comment by stating:  

Provisions relating to the assertion of privilege are not included in this regulation, since it does not affect the existence of any applicable privileges taxpayers may have concerning information requested by a return or how they may assert those privileges.  

Id.

In this reply, the IRS seems to imply that the information required on Schedule UTP is not information protected by any privileges. 

Note, however, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS indicated that it would “forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

These “particular documents” likely include those at issue in U.S. v. Deloitte, 610 F.3d 129 (D.C. Cir. 2010) and Textron v. U.S., 577 F.3d 21 (1st Cir. 2009).  Both cases dealt with documents prepared by taxpayer corporations as part of an audit process which the taxpayer corporations argued were protected as work product. We previously discussed these cases at length here.

In both cases, in addition to arguing that the documents at issue were not prepared “in anticipation of litigation,” the IRS also argued that when the taxpayer corporations showed the documents to the independent auditors that were reviewing their financial statements, the taxpayer corporation had waived the protection of these documents as work product. 

Significantly, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS agreed “not to assert that privilege has been waived by such disclosure” but listed numerous exceptions to their “policy of restraint.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

The IRS has provided itself with a means to obtain additional information with the regulations requiring the Schedule UTP.  The IRS has not, however, provided an answer to the question regarding the impact of these regulations on protections, such as privileges and work product, which are afforded to parties in litigation to ensure maintenance of an adversary system.  We previously reported IRS Chief Counsel William Wilkins’s reassurances regarding the IRS’s intention to comply with the attorney client privilege.  Notably, however, the IRS does not seem to express the same intention in the published final regulation.  The IRS avoided the question of “privilege” when it published its final rule with the blanket assertion that the information disclosed on the Schedule UTP will not consist of privileged information. The IRS provides no means by which taxpayers subject to the Schedule UTP can assert applicable privileges. 

Additionally, the UTP itself is likely a “required disclosure” under the Financial Accounting Standards Board’s (FASB) proposed standards on loss contingency disclosures.  Previously in our blog, Mitchell Fuerst commented on the proposed FASB standards, which standing alone are likely to result in a violation of the attorney client privilege.  The disclosure requirements imposed by the Schedule UTP reflect an additional attempt by a government agency to violate the traditional rules of litigation. 

If you have any questions regarding Schedule UTP or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

FDA Clearance of New Embryonic Stem Cell Clinical Trials and Upcoming Arguments in Federal Court of Appeals

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Earlier this week, the U.S. Food and Drug Administration (FDA) cleared a human clinical trial using embryonic stem cells. This clinical trial will examine the effects of the stem cells on a rare disease causing serious vision loss, Stargardts Macular Dystrophy. The approval of the trial marked only the second time human trials involving embryonic stem cells have been cleared by the U.S. government.

The California biotech company, Advanced Cell Technology (ACT), expects to begin the research in early 2011. The ACT announcement follows just months after the approval by the FDA of Geron Corp.s clinical trials of a treatment for spinal cord injuries through the injection of cells derived from embryonic stem cells. Our original report on the August approval of the Geron Corp. trials can be found here.

The timing of the FDA clearance of these clinical trials coincides with the ongoing law suit in the U.S. Court of Appeals for the D.C. Circuit regarding federal funding of human embryonic stem cell research. In that case, Sherley v. Sebelius, former MIT professor James L. Sherley is suing the National Institutes of Health alleging that embryonic stem cell research violates federal law. The federal district court had issued a preliminary injunction in the case blocking federally-funded human embryonic stem cell research, but the appeals court temporarily blocked that injunction pending the outcome in the case. Oral arguments are to take place in that case next month.

With the FDA clearance of these embryonic stem cell trials, the Department of Justices fight against government funding of human embryonic stem cell research, and the on-going controversy surrounding stem cell research and lack of clear government regulation or policy on the industry, it seems like the embryonic stem cell debate could be reaching a boiling point.

This week, John Gearhart, head of the University of Pennsylvania’s Institute for Regenerative Medicine and one of the first two scientists to isolate human embryonic stem cells, told the Philadelphia Inquirer that a clear policy on the subject is required. “We need a comprehensive national policy on all human embryo research with appropriate, unequivocal laws,” he said last week. “Congress has no stomach to take this up.” Click here to read the Philadelphia Inquirer article.

Fuerst Ittleman is watching these developments with a keen eye. As a firm with a practice area dedicated to the legal issues surrounding human cellular tissue-based products (HCT/Ps), and as frequent contributors to the debate on the use of adult stem cells, we are anxious to see how the legal issues surrounding the use of embryonic stem cells play out.

For more information on Fuerst Ittlemans experience handling the FDA regulatory framework regarding stem cells, drugs, and biologics, please contact us at contact@fidjlaw.com.

Mitchell Fuerst Presents Webinar on Year-End Tax Planning for CFOs

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On November 23rd, Mitchell Fuerst, Managing Partner of Fuerst Ittleman, PL, presented a webinar on “CFO Best Practices for Tax Breaks & Strategies to Capitalize on Before Year-End 2010.” Offered by ExecSense, the worlds largest library of webinars for executives and legal professionals, the seminar focused on the steps that companies and their CFOs can implement before the end of the calendar year to maximize their tax advantages; i.e., to anticipate those tax increases that will be coming in 2011 and to make use of tax breaks that must occur before January 1st.

The list of topics addressed in the webinar included:

¢ accelerating income and postponing deductions
¢ taxable compensation and ordinary dividends to shareholders
¢ distributions of real estate
¢ dividends in lieu of salary
¢ accelerating capital gains
¢ electing out of installment treatment

The webinar detailed the key provisions of the tax code that will be expiring at the end of 2010 and those which will be carrying over into 2011. Mr. Fuerst also focused listeners attention to new reports that will be due to the Internal Revenue Service with a companys 2010 tax filing.

The complete webinar can be accessed for your computer, iPhone, Blackberry, iPod, Kindle or iPad through ExecSense by clicking here.

For a private consultation regarding you companys tax planning or tax issues, contact Mitchell Fuerst, Esq., and the Tax Planning practice of Fuerst Ittleman.

Mitchell Fuerst Featured Speaker at Upcoming Stem Cell and Age Management Medicine Conference and Meeting

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Fuerst Ittlemans Managing Partner, Mitchell S. Fuerst, Esq., is a featured speaker and participant at a series of upcoming meetings and conferences focused on stem cell medicine and age management medicine.

Fuerst will be speaking on the "Practice of Medicine “ Physicians, Stem Cells and the Current Regulatory Environment" at the annual conference of the Age Management Medicine Group (AMMG) in Las Vegas, NV, on November 11, 2010.  The conference, entitled "Clinical Applications for Age Management Medicine," brings together leading healthcare professionals, physicians, researchers and others to provide education and information on the preservation of optimum human function and quality of life making every effort to modulate the process of aging prior to the onset of degenerative aging.

In addition to traditional medicine, alternative medicine therapies, and general health and nutritional régimes, age management medicine focuses on regenerative and stem cell therapies.  The leading professional, non-profit organization devoted to researching, promoting and safeguarding stem cell therapies and its related research, the International Cellular Medicine Society (ICMS), will be holding its annual membership meeting and congress concurrent with the AMMG conference.

The 2nd Annual International Congress on Regenerative and Cell Based Medicine, sponsored by ICMS and Fuerst Ittleman, will bring together medical practitioners from dozens of countries to discuss the latest developments in cell-based medical therapies and will feature presentations on the therapeutic use of platelet rich plasma, adipose tissue, bone marrow, and peripheral blood.  As one of the foremost authorities on the governmental regulation of stem cell therapies and medical professionals who practice in the field, Mitchell Fuerst is featured at the Congress as a faculty member.

In addition to its Congress, ICMS will also be conducting its annual general membership meeting, at which Mr. Fuerst will serve as a panel member discussing "Severe Adverse Events and Cell Based Medicine."  The panel is expected to discuss FDA regulation over stem cell therapies and the various ways in which the FDA could attempt investigation and enforcement actions regarding the practice of that particular form of medicine.

For more information on Fuerst Ittlemans experience in the legal aspects of stem cell therapies, age management medicine, food and drug law in general, and FDA regulatory and enforcement actions, please visit our Food, Drug and Cosmetic Law practice page.

Tea Party May Throw Kink Into GOP Trade Policies

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By Ryan Davis

Law360, New York (November 03, 2010) — In the past, a sweeping election win for Republicans reliably translated into wide support for free trade measures. That may not be the case after Tuesday’s election results, lawyers say, because the Tea Party movement that powered the GOP to victory is largely an unknown commodity when it comes to trade and may be hostile to the traditional GOP agenda on the issue.

Congress has gotten relatively little done on the international trade front since President Barack Obama took office, but the Republican gains and divided legislature brought about by the election will likely push trade even further down on the congressional agenda, attorneys say.

While the new leaders in the House, including presumptive House Speaker John Boehner, R-Ohio, and Majority Leader Eric Cantor, R-Va., have a track record of supporting free trade policies, the freshman class of Tea Party-backed Republican representatives could be far less supportive, though their positions on trade are still largely unknown, lawyers say.

The conservative rhetoric in this year’s election was fueled by populist anger about the economy and fear about the threat open trade policies pose to American jobs, lawyers say.

“It’s interesting, you would expect a high number of additional Republicans would translate into additional support for free trade,” said Behnam Dayanim, a partner at Axinn Veltrop & Harkrider LLP. “But we’re not in normal times.”

Nevertheless, few of the newly elected Republican representatives have extensive background in trade or ran on an explicitly trade-based platform, so it is difficult to guess how they will vote, said Russell L. Smith, special counsel at Willkie Farr & Gallagher LLP.

Given the economic climate and the circumstances of the election, Smith said it’s possible the freshman GOP lawmakers will be inclined to support protectionist trade policies to curry favor with constituents.

That could create tension with House leaders who are more supportive of free trade and lead to a “battle for the soul of the Republican Party,” Smith said. Whether the leadership will be able to wrangle the votes to pass legislation in support of free trade “is a big unknown,” he added.

Dayanim said he could envision a scenario in which Tea Party Republicans and liberal members of Congress who support more protectionist policies form an unusual coalition to oppose some pieces of free trade legislation.

Republicans who are skeptical of free trade “will have to do a delicate straddle on this issue because their corporate supporters like those policies just fine,” said Stanley J. Marcuss, a partner with Bryan Cave LLP.

“It’s a peculiar time,” said Mitchell S. Fuerst, managing partner at Fuerst Ittleman PL. “There are rules we thought we knew about Democrats and Republicans, but new rules are getting written.”

Any ideological schism between Republicans of different stripes will only become visible when trade legislation comes up for a vote, but many lawyers say they don’t expect trade to be a significant part of the agenda in the new Congress.

“Unfortunately, I don’t think trade will be a priority issue,” said Ashley W. Craig, a partner at Venable LLP. “The Republicans in the House have said they will focus on financial issues and repealing health care reform, so trade may get caught in the crossfire and fall victim to a further lack of consideration.”

Thompson Hine LLP partner David Christy said he doesn’t see any way for the newly elected Congress to score political points by pushing potentially unpopular free trade measures that may just get vetoed by the president anyway.

“Given the state of the economy, it won’t be a golden age for free trade,” he said.

One litmus test for how the new Congress will handle trade issues will be how it addresses the three pending free trade agreements with South Korea, Colombia and Panama. The U.S. signed the deals years ago, but they still require approval by both houses of Congress.

There has been little action so far during the Obama administration about getting the agreements approved by Congress, although the U.S. and Korea are seeking to finalize details of the plan in advance of next week’s G20 meeting in Seoul.

Jennifer Choe Groves, a partner at Hughes Hubbard & Reed LLP, said the free trade agreements “might provide an opportunity for cooperation between the White House and Congress.”

She said that even with the unknown quantity of the Tea Party’s stance on trade and the fact that Obama has voiced support for getting the deals approved, she’s optimistic the House, if not the Senate, could vote to implement the trade deals.

“Passage of the free trade agreements would be good for the country,” she said. “I don’t think the Republicans would vote against them just to spite Obama.”

Craig was less certain that the House GOP leaders would have the appetite for a vote on trade deals that conservative new members could portray as aiding foreign countries at the expense of American jobs.

“The big question is whether they want to tackle something that could blow up in their face,” he said.

Still, Craig said, Republican leaders inclined to seek a less risky approach to supporting free trade and set themselves apart on trade issues could issue statements putting pressure on the administration to begin negotiating new free trade agreements with other trading partners.

As it has for the past several years, China will be the focus of most trade-related policy and discussion, and legislators on both sides of the aisle could ramp up anti-China rhetoric, Dayanim said, and even seek to strip away some favorable trade provisions the country now enjoys.

“I suspect China is going to be an even bigger bogeyman for many members of Congress than it has been in the past,” he said.

Smith said that although the new Republican leaders have pledged to tackle the very difficult task of fixing the economy first, if they become frustrated in that effort, they may find it politically expedient to capitalize on public suspicion of China and by imposing punitive trade measures.

Mario Mancuso, a partner at Fried Frank Harris Shriver & Jacobson LLP, said that ultimately U.S. policy toward China may not change much under the new Congress, but in terms of public comments about Chinese policies, “there will be more fireworks.”

While Democrats retained control of the Senate, they now have a slimmer margin that could open the door for passage of free trade measures, lawyers say. Free trade proponents are also encouraged by the election of Republican Rob Portman, a former U.S. trade representative in the George W. Bush administration, to a Senate seat in Ohio.

Some parts of Obama’s trade agenda could be significantly hampered by the Republican victory, Mancuso said.

For one, the administration has placed a high priority on reform of the country’s Cold War-era export control system, a plan that requires congressional approval for some measures, but not others.

While export control reform is not typically viewed as a partisan issue, the aspects that need a vote by the legislative branch may run up against the same skepticism about free trade that could hinder other policies, he said.

Members of Congress who oppose the plan could also slow down parts of the process that don’t need a vote by requiring members of the administration to testify more frequently and answer more questions about the project, he said.

The election may also have brought the Obama administration’s efforts to open trade with Cuba, such as relaxing regulations on family travel and some exports, to a screeching halt, Mancuso said.

That’s because Ileana Ros-Lehtinen, a Cuban-American Florida Republican who strongly supports the embargo, is expected to become new chairwoman of the House Foreign Affairs Committee, which handles most Cuba-related legislation.

“To the extent that there was a mini-trend toward easing up on the embargo, that mini-trend stopped last night,” Mancuso said.

Mitchell Fuerst Comments on Proposed FASB Standards

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On September 14, 2010, Mitchell Fuerst of Fuerst Ittleman was interviewed by webcpa.com on the issue of why the Financial Accounting Standards Board’s (FASB) proposed standards on loss contingency disclosures could violate attorney-client privilege and be subject to legal and congressional challenges. The podcast from Mr. Fuerst’s interview is available for download here.

If you have questions regarding how these proposed FASB standards could affect you or your business, contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.