Archive for June, 2011

Federal Judge Permanently Enjoins HedgeLender From Promoting Its Stock-Loan Arrangement Which Allegedly Assisted Customers Evade Nearly 30 Million in Income Taxes

Thursday, June 23rd, 2011

On June 14, 2011, a Virginia federal judge granted a permanent injunction barring HedgeLender, LLC (“HedgeLender”) from promoting a stock-loan tax scheme that allowed owners of appreciated stock to obtain cash without paying capital gains tax through the use of purported income.

In 1999, Daniel Stafford started an unincorporated entity named the “SAS” group in Reston, Virginia. He incorporated the entity in 2001 in Delaware as HedgeLender Corporation and maintained its principal place of business in Reston, VA. In August 2001, HedgeLender entered into a joint venture agreement to design, produce, sell, and deliver no-margin call, no-contingent-liability stock loan products. HedgeLender coordinated all marketing efforts and advertised the transactions to customers outside the insurance industry.

Specifically, HedgeLender advertised HedgeLoans as a means for consumers to transfer their securities to certain lenders as collateral for a loan against the value of those securities. Specifically, they advertised the loans as “non-recourse, non-callable loans for up to 90% of the value of a customer’s securities.” The customers then transferred the securities to a specific as collateral for the loan. HedgeLender promotions also stated that capital gains from the HedgeLoans were not income, but tax free loan proceeds. Other marketing tactics included:

  • A term of two to seven years;
  • An above-market interest rate;
  • Any dividends issued on the securities during the loan were credited against the accrued interest;
  • Prepayment of the principal and interest was prohibited during the term of the loan; and
  • The customer can receive the full value of his securities at maturity if he repaid the balance of the loan, regardless of how much the securities had appreciated.

Once a customer entered into a HedgeLoan transaction, HedgeLender gave the customer a Master Loan Agreement (“MLA”). The customer would then be told to transfer his securities to a lender, which essentially also transferred the securities legal title. HedgeLender, however, told customers that they still had “beneficial ownership” of the securities for the term of the transaction. HedgeLender also told customers that once the securities were transferred, the lender would enter into “hedges” with the customers’ securities. According to the MLA, the lender had no responsibility to transfer the loan proceeds to a customer until it hedged the securities.

As discussed by the Court,

The defendant [was] aware that the “hedge” [was] actually a sale of the customers’ securities in the open market. Because the lender [sold] the securities, they are not collateral for a loan. Regardless, the lender in the joint venture with the defendant sends statements to the customers that describe the value of the customer’s collateral securities, the amount of accrued, and any dividends received on the securities. But, because the securities are sold, no dividends are issued on them and no interest is accrued. The lender also does not issue IRS form 1099 to customers or to the IRS when it sells the securities.

United States v. HedgeLender LLC, No. 10-cv-01054-TSE-IDD, (E. Dist. Va. 2011).

In 2007, several customers whose loans matured chose to repay the loans; the lender, however, did not have enough funds to buy back the securities or return the cash equivalent to the customers. The lender, thus, defaulted on its obligations under the MLA. Consequently by 2008, more than $268 million in securities and more than 350 customers had transacted in the scheme.

After conducting audits of some HedgeLoans customers, the IRS has determined that the HedgeLoan schemes have helped customers to evade taxes and hindered the Agency’s efforts to administer federal tax laws. Furthermore, between 2001 and 2008, Defendant’s promotion of HedgeLoans caused more than $268 million in taxable sales of securities for more than 350 customers. The IRS has determined that the average amount of under-reported income for HedgeLender customers has resulted in an average deficiency of $85,641 in income tax owed per customer. As a result, the Agency estimates a total loss in income tax in the amount of as much as $30 million.

Id. As discussed above, the Court deemed HedgeLoans a tax shelter within the meaning of IRC §6700. As further discussed by the Court:

Since the Defendant promoted the HedgeLoans transactions as “loans,” which has tax implications for customers, then the transactions have some connection to taxes and are a “plan or arrangement” within the meaning of IRC §6700.

When considering whether injunctive relief was appropriate under IRC §§7402(a) and 7408, the Court considered the following:

  1. The gravity of harm caused by the offense;
  2. The extend of the defendants participation and his degree of scientor;
  3. The isolated or recurrent nature of the infraction and the likelihood that the defendants customary business activities might again involve him in such transactions;
  4. The defendants recognition of his own culpability; and
  5. The sincerity of his assurances against future violations.

With regard to HedgeLender, the Court found that permanent injunctive relief was appropriate after weighing the above factors.

Specifically, Defendant has promoted and marketed HedgeLoans, and as a result, hundreds of customers have engaged in transactions. Through audits of some HedgeLoans customers, the IRS has determined that these customers have failed to report income, which on average, results in $85,641 in income tax deficiency per customer. In total, the IRS estimates that it has lost income in the approximate amount of $30 million in unpaid taxes involving all HedgeLoans customers. In addition, the Agency will have to utilize significant resources to continue audits of HedgeLoans customers. This is a significant harm to society because it promotes noncompliance with federal tax laws and is a great cost to the public.

Id. (emphasis added).

The attorneys at Fuerst Ittleman, PL have extensive experience with the complex regulatory provisions governing the reporting of transactions including the tax treatment of loans as well as the sale of securities. You can contact an attorney by emailing us at

FDA’s New “Pathway” to Improved Monitoring of Food and Drug Imports

Thursday, June 23rd, 2011

Amid growing concerns over the safety of food and drug imports into the country, the U.S. Food and Drug Administration (FDA) recently released a plan to improve oversight and regulation of imported goods. The “Pathway to Global Product Safety and Quality” is part of the FDAs “new global strategy” under the Food Safety Modernization Act (FSMA) to monitor and inspect an increasing number of imports that cross into U.S. borders.

The FDA is responsible for overseeing the food, pharmaceutical and medical device products that enter into U.S. territory, as well as regulating the manufacturers and importers who produce these goods. The movement towards globalization and increased flow of capital, information, and goods across borders have put a strain on both the FDAs resources and ability to efficiently and effectively regulate the importation of goods. Over the next year alone, the FDA projects the number of shipments of FDA-regulated goods that will pass through the nations 300 ports of entry is expected to quadruple from 6 million to 24 million shipments.

This heavy influx of imported, globally-sourced goods has effectively created a regulatory nightmare for the FDA. In todays market, a product may move through different manufacturers or suppliers in multiple countries before reaching its final product stage or destination. Because goods are now entering the U.S. from new and different markets, the FDA is faced with the challenge to ensure that all entities in that multi-step chain comport with FDA regulations. The FDAs ability to sustain adequate regulatory functions has been impaired by these challenges.

In recent years, evidence of the FDAs struggle to keep up with the monitoring and regulation of imports has reached the publics eye. The New York Times published an article highlighting the FDAs failure to remove dangerous imported foods from the market. The article explained how the FDA failed to execute required audits or follow-up with companies about known contaminated food imports. Other events, such as heparin poisoning by a manufacturer, milk contamination, and counterfeit glucose monitoring strips, have put a spotlight on how the FDA has fallen short of its regulatory goals. As we blogged here earlier this year, the President even warned the FDA that it would likely be the target of a major overhaul due to its outdated processes and failure to keep up with advances in the rapidly changing market.

The new “Pathway to Global Product Safety and Quality” is the FDAs response to these mounting problems related to the importation of food and medical products. Under the FSMA, the FDA has a new mandate to require comprehensive, prevention-based controls. In addition, the FDA can now hold importers responsible for making sure that their foreign suppliers have adequate preventive controls to ensure the safety of foods shipped to the U.S. The FSMA also directs the FDA to inspect at least 600 foreign food facilities within the next year and to double the number of inspections every year for the next five years.

To help with the regulation of the medical device industry, the FDA has opened additional offices in key international locations and increased its number of foreign inspections. The FDA has also engaged in harmonization of drug regulation through the International Conference on Harmonization. In addition to working with Australia to create the Global Harmonization Task Force to expand the global regulation forum, the FDA also joined the Pharmaceutical Inspection Cooperation/Scheme (PIC/S), which is an informal organization of drug manufacturing inspectorates from 39 countries.

As part of its transformation “from a domestic agency operating in a globalized world to a truly global agency fully prepared for a regulatory environment in which product safety and quality know no borders,” the FDA is in the process of developing an international operating model as part of the new “Pathway to Global Product Safety and Quality” plan. The four tenets of this approach are:

  1. The FDA, in close partnership with its foreign counterparts, will assemble global coalitions of regulators dedicated to building and strengthening the product safety net around the world.
  2. With these coalitions, the FDA intends to develop a global data information system and network in which regulators worldwide can regularly and proactively share real-time information and resources across markets.
  3. The FDA will continue to expand its capabilities in intelligence gathering and use, with an increased focus on risk analytics and thoroughly modernized IT capabilities.
  4. The FDA will effectively allocate agency resources based on risk, leveraging the combined efforts of government, industry, and public- and private-sector third parties.

This operating model aims to provide the FDA with the information sharing and technological tools necessary to regulate a global market and to ensure the safety of Americans.

The FDAs new, extensive global plans raise serious questions about implementation. Even though these plans demonstrate that the FDA recognizes the deficiencies in its current scheme and understands what needs to be done to improve the regulation of imported goods into the U.S., these plans hardly seem feasible. For example, under the current model, the FDA has had difficulties inspecting a few hundred facilities annually, yet the Agency is expected to execute 19,200 food facility inspections in the plans sixth year. Without significant increases to agency personnel or third-party contractors and the threat of a smaller budget this fiscal year, the FDA seems to lack the manpower and resources to accomplish the goals set forth by the FSMA and in the new “Pathway to Global Product Safety and Quality” plan. The FDA does acknowledge in its new plan that it “does not”nor will it”have the resources to adequately keep pace with the pressures of globalization” and that constrained federal resources will prove challenging to the fulfillment of its goals. Even if the new global initiatives are successful in alleviating some of the FDAs current problems, it is still unclear as to whether the FDA will be able to implement any changes that produce discernible results or increased protection of the publics safety.

Fuerst Ittleman will continue to monitor the FDAs progress regulating the importation of foods and devices. For more information, please contact us at

Notice 2011-55: IRS Partially Suspends FATCA Information Reporting Requirements

Tuesday, June 21st, 2011

The IRS announced today that information reporting requirements under new Code Sections 6038D and 1298(f) are suspended until the release of new Form 8938 and revised Form 8621. Notice 2011-55, which comes only one day after the IRS released its draft Form 8938, provides a short respite for U.S. taxpayers subject to the barrage of foreign asset reporting requirements.

FATCA Reporting Requirements

The suspended requirements were initially enacted in 2010 with the Foreign Account Tax Compliance Act (“FATCA”), which plays a revenue support role in the larger Hiring Incentives to Restore Employment Act (“HIRE”). Code Section 6038D mandates U.S. taxpayers with foreign financial assets valued over $50,000 to file new informational Form 8938 with their annual return. Code Section 1298(f) requires shareholders of a passive foreign investment company (“PFIC”) to file an annual information report, later deemed to be a revised Form 8621. Both requirements are effective for tax years beginning on or after March 18, 2010; the Treasury intends to release regulations clarifying each provision.

Interim Guidance: Notice 2011-55

Because individuals may be subject to reporting requirements under 6038D and 1298(f) before the appropriate forms are released, the IRS issued interim guidance in Notice 2011-55. Scheduled to be published on July 18 with Internal Revenue Bulletin 2011-29, Notice 2011-55 provides the following:

  • Form 8938 reporting requirements under 6038D are suspended before the IRS releases Form 8938;
  • Pending the release of revised Form 8621, Section 1298(f) reporting requirements are suspended for PFIC shareholders who are not otherwise required to file Form 8621 under the forms current instructions. PFIC shareholders with Form 8621 obligations per the forms current instructions must continue to file the form with an income tax or information return filed before the IRS releases revised Form 8621.
  • Following the release of each form, individuals subject to the respective reporting requirements will attach the appropriate form(s) to their next income tax or information return to be filed with the IRS. Notice 2011-55 states,
  • A Form 8938 or 8621 filed for a suspended taxable year with a timely filed income tax or information return as required by this notice will be treated as having been filed on the date that [the return] for the suspended year was filed. Failure to file as required by the notice may result in the extension of the period of limitation for the suspended taxable year under section 6501(c)(8), and penalties may apply.

  • No FBAR Relief

    Compliance with Code Sections 6038D and 1298(f) does not relieve a taxpayer of the obligation to file a Report of Foreign Bank and Financial Accounts (“FBAR”).

    The attorneys at Fuerst Ittleman, PL have extensive experience with the complex regulatory provisions governing foreign asset reporting and PFICs. Contact an attorney by emailing us at

    U.S. Cracks Down on UBS Clients in California

    Tuesday, June 21st, 2011

    Our continuing coverage of the U.S. governments attack on hidden offshore assets brings us the two latest cases against UBS clients, both surfacing in California district courts. Robert Greeley of San Francisco and Sean and Nadia Roberts of Tehachapi were charged with filing false 2008 income tax returns that failed to disclose their foreign accounts. Since 2007, the government has accused more than two dozen former UBS clients of tax crimes.

    On June 14, Greeley was charged with filing a 2008 tax return that failed to report two UBS accounts and the interest income earned on the accounts. Greeley allegedly held both accounts in the name of Cayman Islands entities that he controlled”one from 2002 through at least 2008, and the other from 2004 through at least 2008.

    On June 20, the Justice Department announced that Sean and Nadia Roberts pleaded guilty to filing a false tax return that failed to disclose, among other foreign accounts, a secret UBS bank account. The charges culminate a string of transactions by the Robertses which effected a sham aircraft loan and filtered cash from their domestic business through various foreign accounts and entities. The Robertses admitted to the following:

  • Filing returns for tax years 2004 through 2008 that concealed their interest in the foreign accounts
  • Failing to report income on the accounts,
  • Falsely deducting transfers from their business to the accounts, and
  • Failing to file Reports of Foreign Bank and Financial Accounts (“FBARs”) disclosing their interests in same.
  • The couple agreed to pay $709,675 of restitution to the IRS, and a 50 percent penalty for the one year with the highest offshore balance to resolve their failure to file FBARs.

    The IRS implemented an Offshore Voluntary Disclosure Initiative in 2009”and again this year”whereby taxpayers avoid prosecution by disclosing their offshore accounts. Read our coverage of the Second Offshore Voluntary Disclosure Initiative here.

    The attorneys at Fuerst Ittleman, PL are adept in the complex regulatory requirements of the Bank Secrecy Act, foreign bank accounts, and the Internal Revenue Code. You can contact an attorney by emailing us at

    FDA Issues Final Rule On Cigarette Warnings And Unveils Nine New Graphic Warning Labels

    Tuesday, June 21st, 2011

    On June 21, 2011, the FDA released nine new graphic warning labels that will be required to appear on every pack of cigarettes sold in the US and in every cigarette advertisement starting no later than September 2012. A copy of the Department of Health and Human Services press release can be read here.

    As we previously reported, with the passage of the Family Smoking Prevention and Tobacco Control Act, (“Tobacco Act”) Congress granted the FDA the authority to regulate all tobacco products marketed within the United States. As part of this expansion of FDA jurisdiction, Congress required the FDA to establish nine new larger and more noticeable textual warning statements to appear on all cigarette packaging and in all advertisements. The act also required the FDA to develop and implement regulations requiring that graphic color images depicting the negative health consequences of smoking go together with each new warning statement.

    The new regulations require that by September 2012, the new cigarette warning labels and incorporated graphic images must appear on the top half of both the front and rear panels of each cigarette package to replace the current warnings which appear on cigarette packaging. Additionally, the regulations require that these warnings and images appear in the upper portion of each cigarette advertisement and occupy at least 20 percent of the total area of the advertisement. A copy of the final rules regarding cigarette warning labels can be read here.

    Since its passage, the Tobacco Act has been the subject of numerous lawsuits by tobacco manufacturers challenging several of its key provisions. As we previously reported, in February of 2011, two menthol cigarette manufacturers, Lorillard and R.J. Reynolds filed suit to block the FDA from implementing the recommendations of the Tobacco Products Scientific Advisory Committee regarding the prohibition of sale of menthol cigarettes. The suit alleges that the committee cannot provide fair advice because three of its members have conflicts of interests, which are expressly prohibited under the Tobacco Act.

    Additionally, prior to the adoption of final rules regarding new warnings labels, tobacco manufacturers filed suit alleging that the requirement of new warning labels, as well as the ban on color and graphics on future packaging and advertisements, violated the manufacturers right to free speech under the First Amendment. The United States District Court for the Western District of Kentucky found that the Tobacco Acts “blanket ban” on all uses of color and images in tobacco labels and advertisements was not sufficiently narrowly tailored to survive and therefore violated the First Amendment. However, the Court went on to find that the warning labels requirement is “sufficiently tailored to advance the governments substantial interest” in protecting public health and thus does not violate the First Amendment.

    It is important to note that tobacco product regulation in the United States also involves the U.S. Customs and Border Protection (CBP) and the U.S. Department of the Treasury, Alcohol, Tobacco, Tax and Trade Bureau (TTB). Additionally, the Department of Justice, Office of Consumer Protection Litigation (OCPL) regulates Cigarette labeling and advertising, and the Bureau of Alcohol, Tobacco, and Firearms (ATF) investigates and enforces interstate trafficking of contraband cigarettes. State laws may also be implicated.

    Experienced attorneys at FI can help establish calculation of duty including excise taxes and user fees, ensure compliance with invoice, permit, and recordkeeping requirements, ensure legal labeling and product packaging and defend against administrative actions and litigation. If you have questions pertaining to the FDCA or the Tobacco Act or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at

    FDA Announces Labeling Changes and Effectiveness Testing for OTC Sunscreen Products

    Tuesday, June 21st, 2011

    After decades of deliberation, the U.S. Food and Drug Administration (FDA) announced changes to the requirements for over-the-counter (OTC) sunscreen products. In 1978, the FDA began developing new rules for the regulation of sunscreen products. Now, over thirty years later, the FDA issued a Final Rule as part of its “ongoing efforts to ensure that sunscreens meet modern-day standards for safety and effectiveness” for sunscreens sold without a prescription. The FDA issued four regulatory documents: a Final Rule, a Proposed Rule, an Advance Notice of Proposed Rulemaking, and a Notice of Availability of Guidance Document for Industry (ANPR). The new requirements under the Final Rule will take effect by the summer of 2012.

    After reviewing current scientific data, the FDA established a standard broad spectrum test procedure for OTC sunscreens and developed new labeling requirements for marketing sunscreen products. While the current rule focuses almost exclusively on protection against only ultraviolet B (UVB) radiation from the sun, the new Final Rule addresses protection against UVB rays and early skin aging and skin cancer caused by exposure to ultraviolet A (UVA) rays. This new standard broad spectrum test essentially measures the level of UVA radiation protection in relation to the amount of UVB radiation protection. Products are required to pass this broad spectrum test in order to be labeled as “Broad Spectrum” sunscreens. This new designation is intended to help consumers make more informed decisions when selecting sunscreens.

    The new rule will also affect the labeling of “Sun Protection Factor” (SPF), the value that indicates the overall amount of protection provided by sunscreen, and claims for use. When used as directed, “Broad Spectrum” sunscreens with SPF values above 15 can help to protect against sunburn, skin cancer, and early skin aging. Under the FDAs new Rule, only these products may claim to reduce the risk of skin cancer and early skin aging if used as directed with other sun protection measures. Products with SPF values below 15, however, are prohibited from using “Broad Spectrum” on their labels and can only claim to help prevent sunburn.

    In addition to “Broad Spectrum,” SPF, and use claims labeling, the Final Rule also outlines requirements for water resistance claims and “waterproof,” “sweatproof,” or “sunblock” claims. The new labeling rules will require manufacturers to indicate on the front label whether the sunscreen product is effective for 40 minutes or 80 minutes while swimming or sweating, or if the product is not water resistant, to direct consumers to use a water resistant sunscreen if swimming or sweating. The Rule provides that sunscreen manufacturers cannot label products as “waterproof,” “sweatproof,” or identified as a “sunblock” because these claims “overstate their effectiveness.” As part of the new labeling requirements, manufacturers will also be required to include drug facts on their labels, which will provide consumers with easy access to the products active and inactive ingredients and detailed directions on proper usage.

    The FDA is also interested in obtaining additional information and data about sunscreen in other dosage forms, such as sprays, lotions, oils, sticks, gels, butters, ointments, creams, and pastes. The FDA seeks information about the safety and effectiveness of these alternative dosage forms of sunscreen because “the record (data and information) about sunscreens in spray dosage forms is not comparable to that for sunscreens in other dosage forms.” The ANPR serves as an invitation to the public to comment on regulations the FDA may pursue in its future rulemaking.

    By creating regulations that require testing and limit misleading claims, the FDA has demonstrated its increased effort to strengthen labeling regulation of sunscreen products. Despite these improvements, some continue to question whether the FDA could have done more. Advocacy groups, like Environmental Working Group (EWG), continue to pressure the FDA to further tighten safety standards for sunscreen products sold in the United States. “The Agencys weak standard for UVA protection will not allow consumers to differentiate between superior and mediocre products,” a representative of EWG said. EWG claims that the FDAs rule is not stringent enough and that “about 20 percent of products that meet the new FDA standards could not be sold in Europe, where UVA standards are strict.” According to the FDA, however, “the ingredients in sunscreens marketed today have been used for many years and the FDA does not have any reason to believe these products are not safe for consumer use.” The FDA is currently reexamining the safety information available for active ingredients included in sunscreens marketed today.

    The FDAs decision to make changes to the labeling and testing of sunscreen products comes less than one year after it released a Consumer Health Information publication warning about the dangers of exposure to devices such as sunlamps and tanning beds. As we reported here, the FDA announced its concern about the use of both UVA and UVB radiation in tanning salons because of the known risks associated with exposure, such as skin damage, early skin aging, and skin cancer. These concerns are the very same ones that prompted the FDA to make labeling changes to sunscreen products this year. While the FDA has yet to release new regulations governing sunlamps and tanning beds, the new changes to sunscreen product labeling may serve as an indication of the FDAs shift towards stricter oversight and regulation of products and devices associated with UVA and UVB exposure.

    Fuerst Ittleman will continue to monitor the FDAs rules for labeling and effectiveness testing of sunscreen products and other products or devices related to UVA or UVB exposure. For more information, please contact us at

    Researchers Continue to Look to Stem Cells for Clues for Effective Treatments of Orthopedic Trauma and Blood-Related Disorders

    Monday, June 20th, 2011

    This week, the scientific community announced two projects that may have important implications on the future of stem cell research and the development of effective treatments for orthopedic trauma and blood-related disorders. These projects signal a continued effort by researchers to improve our understanding of the bodys basic mechanisms for producing hematopoietic stem cells (HSCs), which are multipotent cells that have the ability to replenish all blood cell types. The U.S. Food and Drug Administration (FDA) regulates human cells or tissues intended for implantation, transplantation, infusion, or transfer into a human recipient, as well as the devices that process human cells and tissue. While the FDA has jurisdiction over these stem cells and has provided some guidance for related medical devices, its ability to regulate the industry is seemingly unmatched by the speed of scientific discovery and development. The continued research on stem cells and their potential therapeutic impact on patient care has pushed the boundaries of FDA regulation and has raised questions about the FDAs ability to keep up with science.

    Arteriocyte, a clinical stage biotechnology company that develops novel stem cell products and medical devices, recently announced that it signed a Cooperative Research and Development Agreement (CRADA) with the United States Army Institute of Surgical Research (USAISR). The three-year CRADA, entitled “The Use of Concentrated Bone Marrow Aspirate from a Point-of-Care Device in Orthopaedic Trauma,” aims to investigate new stem cell-based therapies for orthopedic and battlefield-related injuries. Together, Arteriocyte and the USAISR will explore stem cell-based therapies for amputation prevention, burn debridement and post-surgical wound infection prevention.

    The CRADA is designed to use Arteriocytes Magellan MAR01 system and NANEX technology. The FDA issued 510(k) clearance for Magellan, a bed-side medical device intended to rapidly produce platelet rich plasma from blood and bone marrow. The resulting tissue is rich in platelets and hematopoietic stem cells (HSCs), and can be applied to surgical cites to aid with tissue repair. The FDA has also approved the Magellan for a Phase I clinical trial of peripheral vascular disease, the obstruction of major arteries than can lead to ischemia of the limbs. NANEX technology is a biofunctional nanofiber-based 3-D scaffold that is designed to mimic the bone marrow environment. This technology is intended to rapidly produce HSCs. Arteriocyte is in the process of actively developing the NANEX technology for use in treatment of ischemic disease, identification and treatment of cancers of the blood system and rapid, high volume production of “universal-donor” red blood cells.

    Researchers at the University of California, San Diego (UCSD) and the University of Massachusetts recently announced that they may have discovered the genetic mechanism and signaling pathway that controls the production of hematopoietic stem cells (HSCs). The research team believes finding the mechanism involved in creating cells during embryonic development is the next step toward creating blood stem cells for patient treatment.

    The research study, which was published in Nature International Weekly Journal of Science, focused on a family of genes called Wnts, which have been identified as important to the process of embryogenesis. Researchers specifically isolated the Wnt16 gene and concentrated on examining its effect on production of HSCs. When researchers “turned on” Wnt16 in a population of zebrafish, whose blood is extremely similar to that of mammals, the expression of two types of ligands were triggered. Ten hours after fertilization, HSC production appeared in the zebrafish embryos. When Wnt16 was “turned off,” HSC production in the zebrafish was nonexistent. As a result, researchers believe Wnt16 is responsible for controlling a novel regulatory network for HSC production.

    Researchers at UCSD and the University of Massachusetts are optimistic that continued research in the area of HSC production can have important implications for the development of blood stem cells and, eventually, stem cell-based therapies for blood disorders. This discovery adds to existing knowledge about HSC formation and the ways in which these types of cells communicate throughout the formative stages of blood cell production. “Were on the cusp of understanding something that people have been wondering about for decades,” said Wilson K. Clements, first author of the study and a postdoctoral fellow in UCSDs lab.

    In spite of these new developments in the area of stem cell research and the scientific communitys prognostications about the therapeutic or curative potential of these stem cells, the FDA has only approved a few stem cell-based treatments, as we previously reported here and here. Even though the FDA has been cautious in outlining specific regulations for this burgeoning area of science, the continued research efforts to explore the mechanisms and value of stem cells may push the FDA to make difficult and more responsive decisions about its role in regulating this industry. Fuerst Ittleman will continue to monitor the progress and development of the FDAs regulation of HSC research and other stem cell-related devices and technologies. For more information, contact us at

    Foreign Asset Reporting Update: IRS Releases Form 8938, FinCEN Grants FBAR Extension for Some Investment Advisors

    Monday, June 20th, 2011

    In its crusade to rein in foreign asset reporting, the IRS moved closer to implementing a new reporting measure called for by the Foreign Account Tax Compliance Act of 2010. Meanwhile, FinCEN granted an FBAR reporting extension to certain employees of investment advisors.

    Draft Form 8938 Released: Statement of Specified Foreign Financial Assets

    On May 27, 2011, the IRS released a draft version of the Form 8938, Statement of Specified Foreign Financial Assets. The new form is the progeny of the Foreign Account Tax Compliance Act (“FATCA”), passed by Congress in 2010 to prevent foreign income tax evasion by U.S. taxpayers.

    A copy the draft version of Form 8938 is available here.

    Effective for tax year 2011 reporting, taxpayers with foreign financial assets valued over $50,000 will be required to file Form 8938 annually. To comply, taxpayers will trace foreign asset income, deductions, and credits from the Form 8938 to where the same are reported on the return. While many individuals will file both FBAR and the Form 8938, some may only need to file one or the other. The IRS has not yet released instructions for Form 8938.

    FinCEN Grants FBAR Extension for Employees of Investment Advisors

    Shortly after FinCEN Notice 2011-1 extended the FBAR filing deadline for certain signatories, the Treasury Department announced an extension for another subset of signatory filers. FinCEN Notice 2011-2 extends the FBAR filing deadline to June 30, 2012 for the following individuals:

  • Officers and employees of investment advisors registered with the Securities and Exchange Commission with signature or other authority over (but no financial interest in) the foreign financial accounts of persons that are not registered investment companies.
  • A full copy of Notice 2011-2 is available here.

    Individuals and entities that do not fall within the exceptions must file the FBAR for calendar year 2010 by June 30, 2011. The form must be received by June 30th and a USPS postmark will not suffice.

    The attorneys at Fuerst Ittleman, PL have extensive experience with the complex regulatory provisions governing the reporting of foreign assets and bank accounts. You can contact an attorney by emailing us at

    IRS Releases Final Circular 230 Revisions Regulating Registered Tax Return Preparers

    Monday, June 20th, 2011

    After considering more than 50 written comments on the proposed Circular 230 revisions, the Treasury and the IRS released final regulations on May 31, 2011. Notably, the regulations establish a new “registered tax return preparer” designation. Sections 10.3-10.6 of Circular 230 describe the process for becoming a registered tax return preparer (“Registered Preparer”) and the limited practice rights associated with the designation.

    Application Process

    Generally, the process to become a Registered Preparer requires an applicant to: (1) be at least 18 years of age, (2) pass a one-time competency exam, (3) pass a suitability check, and (4) obtain a Preparer Tax Identification Number (“PTIN”). The competency exam will be administered under IRS oversight and will be similar to the special enrollment examination for enrolled agents. The suitability check, also conducted by the IRS, inquires whether the applicant has engaged in any conduct that would justify suspension or disbarment.

    During the transitional period, an individual who obtains a provisional PTIN before the competency examination is offered may prepare any tax return or claim for refund until December 31, 2013, as long as the individual complies with all other requirements. After the examination is offered, only attorneys, CPAs, enrolled agents, and registered tax return preparers, or individuals defined in section 1.02(a) or (b) of Notice 2011-6 may obtain a PTIN.

    Scope of Registered Preparer Designation

    A Registered Preparer can represent taxpayers before revenue agents, customer service representatives, and other employees during an examination if the preparer signed the tax return for the period under investigation. Under no circumstances does the representation extend to proceedings before appeals officers, revenue officers, IRS counsel, or similar agents of the IRS or the Treasury. Moreover, a Registered Preparers practice dos not include the authority to advise clients beyond what is necessary to prepare a tax return, claim for refund, or other document intended to be submitted to the IRS. Thus, communications between a Registered Preparer and taxpayer are not privileged under IRC § 7525 because the advice is intended to be reflected on a tax return, not privileged or confidential.

    Tax Return Preparation Standards

    The revised Circular 230 Section 10.34 also provides the broad tax return preparation standards applicable to all practitioners, including CPAs and enrolled agents. According to the regulations,

    A practitioner may not willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that: (A) lacks a reasonable basis; (B) is an unreasonable position as described in section 6694(a)(2); or (C) is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2).

    The revised Circular 230 final regulations are posted by the Office of the Federal Register here.

    The attorneys at Fuerst Ittleman have extensive experience in tax refund claims and all forms of tax controversy. Contact an attorney by emailing us at

    Panelists Address New Approaches to Increasing Efficiency of U.S. APAs

    Friday, June 17th, 2011

    At the first annual Transfer Pricing Conference in Washington on June 8, current and former IRS officials explained recent initiatives in the Advance Pricing Agreement Program (APA). The panelists concluded that despite significant processing delays, obtaining an APA can prevent future complications with double taxation, tax evasion, and uncertainty over transfer pricing methods. Practitioners questioned whether the program can remain effective when limited resources and increased applications have lengthened the processing time.

    Advance Pricing Agreement Program

    The Advance Pricing Agreement Program, implemented in 1991, is designed to resolve actual or potential transfer pricing disputes under IRC § 482 in a cooperative manner. An APA is a binding contract between the IRS and a taxpayer whereby the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its tax return for a covered year consistent with the agreed transfer pricing method.

    From 2000-2007, the APA Program averaged 91 applications per year. Applications sharply increased in 2008 and maintained momentum through 2010 with 144 applications, representing a new one-year high for the Program. The APA Program expects APA applications to continue in 2011.

    Processing Delays

    The APA process is a lengthy one. The process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and agreement; and (5)

    drafting, review, and execution. Determinations are made on a case-by-case basis rather than by category. The APA team must satisfy itself of highly complex factual issues before reaching an advance agreement with a taxpayer; as a result, the due diligence and analysis stages can span a staggering number of months.

    The average time to complete a new APA for a small business is 40.7 months, 33.1 months for a renewal. Although the IRS expedites APA processing for small businesses, these cases require nearly the same amount of time and resources to analyze the highly factual, novel transfer pricing issues. Consequently, many taxpayers are opting to forgo the process.

    Recent Initiatives

    At the June 8 conference, former APA director John Hinding discussed IRS initiatives to reduce processing times amid restricted resources. Some of these initiatives include pooling resources with other competent authority and reducing the number of participants required at meetings.

    In 2005, the IRS Chief Counsel increased specialization within the office by creating five teams of select individuals to handle all cases of a particular type. The purpose was to increase efficiency, quality, and consistency. At the end of 2010, cases within these five categories accounted for 86 of the 243 cases pending in the office.

    Read more about the APA Program and its initiatives here.

    The attorneys at Fuerst Ittleman have extensive experience in transfer pricing and litigating foreign and domestic tax controversy. If you have a troublesome tax matter on your hands, email us at