In Browning v. Comm’r, T.C. Memo 2011-261, Judge Halpern in a 55 page opinion sustained most of the IRS assessments of additional tax, penalties and interest.

The facts are as follows:

In December 1995, Mr. Browning, the principal shareholder, president, and CEO of SBE, a Vermont-based manufacturing corporation, on the advice of its promoters and his own tax adviser, entered into an offshore employee leasing (OEL) arrangement whereby he agreed to lease his services to an Irish corporation that subleased his services to a U.S. employee leasing company that subleased his services back to SBE. During the audit years (1995-2000), in consideration of Mr. Browning’s services, SBE paid the leasing company annual amounts equivalent to what SBE had paid Mr. Browning as wages in prior years. The leasing company paid a portion of those amounts to Mr. Browning, who reported those payments as wages. The leasing company remitted the balance after deducting certain amounts, including the payroll taxes owed with respect to its payments to Mr. Browning, to the Irish corporation for deposit in a deferred compensation or retirement account for Mr. Browning’s benefit (the retirement account). The retirement account was opened in the name of a Bahamas subsidiary of the Irish corporation. Mr. Browning and his wife received and used, during 1998-2000, credit cards in the name of the Irish subsidiary. Money from Mr. Browning’s retirement account funded the bank account used to pay the credit card charges, many of which Mr. Browning recognized were personal. During all of the audit years, Mr. Browning continued to represent himself to third parties as an employee and president of SBE, and he acted on behalf of SBE in the same manner as before adoption of the OEL arrangement. He also determined the amounts to be deposited in the retirement account and he effectively controlled the manner in which the assets in the account were invested. During 1998-2000, he exercised his unrestricted access to the funds in the account by means of the Bahamas bank credit cards.

Both the 3- and 6-year periods of limitations on assessment under I.R.C. sec. 6501(a) and (e) had expired before the IRS issued the notices of deficiency (the notices) to Mr. Browning. However, the IRS alleged that the notices were timely issued by reason of the application of I.R.C. sec. 6501(c), which permits assessment of tax at any time in the case of a false or fraudulent return. The IRS also alleged that, for all open audit years, Mr. Browning (1)underreported his income, (2) is liable for the I.R.C. sec. 6663 fraud penalty, and (3) alternatively, is liable for the I.R.C. sec. 6662 accuracy-related penalty.

The Tax Court held as follows:

1. For all audit years, Mr. Browning was in constructive receipt of (1) amounts equal to the excess of SBE’s payments to the leasing company for his services on behalf of SBE over the sum of the amounts he reported as wages plus the employer portions of the Social Security and Medicare taxes that the leasing company paid with respect to those reported wages and (2) the capital gains and investment income generated by the assets in the retirement account.

2. Mr. Browning’s 1998-2000 returns were fraudulent by reason of Mr. Browning’s concealment of the Bahamas bank account and associated credit cards by means of which he had, and intended to exercise, his unrestricted access to the constructively received amounts described in holding 1.

3. Mr. Browning’s 1995-97 returns were not fraudulent with the result that IRS’s determinations and adjustments regarding those years are barred.

4. Mr. Browning is subject to the I.R.C. sec. 6663 fraud penalties for 1998-2000 with respect to all the constructively received amounts described in holding 1.

5. Finally, the I.R.C. sec. 6663 fraud penalties to Mr. Browning’s total underpayments for 1998-2000, and the I.R.C. sec. 6662 accuracy-related penalties do not apply for those years.

The significance of this case is that for those taxpayers who may have used offshore (non-domestic) accounts, especially in tax haven jurisdictions (such as the Bahamas, the British Virgin Islands, the Cayman Islands, and Switzerland), the IRS may be able to avoid both the 3 year statute of limitations provision against assessment, and the extended 6 year statute of limitations provision against assessment for those that understated income by more than 25%, by asserting that the taxpayer’s use of the offshore bank accounts was fraudulent and, as a result, there is no statute of limitations provision protecting the taxpayers from additional tax, penalties, and interest.

The full opinion can be found here.

The attorneys at Fuerst Ittleman, PL have extensive experience dealing with the IRS for taxpayers with under-reported income and undeclared foreign bank accounts. The attorneys at Fuerst Ittleman likewise have experience litigating in both the U.S. Tax Court, the U.S. District Courts, and the U.S. Circuit Courts. You can contact an attorney by emailing us at: contact@fuerstlaw.com

Last month, the Third Circuit reversed the judgment of the Tax Court which held that the Tax Court had jurisdiction over Sunoco’s claim that it was entitled to interest on tax overpayments. In reversing the decision of the Tax Court, the Third Circuit held that either the U.S. District Courts or the Court of Federal Claims have jurisdiction over claims that the United States owes interest on overpayments.

The relevant facts are as follows:  On July 1, 1997, the IRS issued a notice of deficiency to Sunoco for the tax years 1979, 1981, and 1983. The IRS claimed deficiencies of income tax in the amounts of $10,563,157.00, $5,163,449.00, and $35,916,359.00 respectively, for a total amount of $51,642.965.00. Sunoco responded to the notice of deficiency by filing a timely petition in the Tax Court in which it contested the IRS determination of deficiencies for 1979, 1981, and 1983. It also asserted that it had made income tax overpayments for those years totaling $46,100,857.00. Sunoco sought a refund of the overpayment together with interest.

Thereafter, in November of 1997, Sunoco amended its petition to add, inter alia, allegations relating to certain errors that Sunoco claimed the IRS had made in computing underpayment and overpayment interest. Sunoco alleged that for each of the disputed years, the interest the IRS had charged on underpayments pursuant to I.R.C. § 6601 was too high, and the interest the IRS had paid to Sunoco on overpayments pursuant to I.R.C. § 6611 was too low.

In March of 2000, the IRS moved to dismiss Sunoco’s amended petition to the extent that it asked the Tax Court to order the IRS to pay additional overpayment interest under I.R.C. § 6611. The IRS contended that Sunoco’s claims for overpayment interest for the taxable years 1979, 1981, and 1983 must be dismissed for lack of jurisdiction [because] the Tax Court does not have jurisdiction to determine the amount of interest due on overpayments allowed prior to the commencement of the case.

In an opinion dated February 4, 2004, the Tax Court denied the IRS motion to dismiss, holding that it had jurisdiction to determine interest with respect to overpayments where the overpayments and interest on overpayments had been refunded to the taxpayer or otherwise credited to the taxpayer’s account before the case arrived in the Tax Court. Sunoco, Inc. and Subsidiaries v. Commr of the IRS, 122 T.C. 88 (2004). A full copy of the Tax Court decision can be found here.

In overturning the decision of the Tax Court, the Third Circuit discussed the two types of interest, interest on tax underpayment and interest on overpayments.  Interest on tax underpayments is known as deficiency interest.  See I.R.C. section 6601.  Interest on overpayments is known as overpayment interest.  See I.R.C. section 6611.  The Tax Court has jurisdiction to determine interest on underpayments (deficiency interest).  See I.R.C. section 6512(b).  However, a claim for overpayment interest is a general monetary claim against the United States, which (like all such claims) must be brought in the federal district courts or the Court of Federal Claims within the six-year limitations period set forth in 28 U.S.C. §§ 2401 (district court) and 2501 (Court of Federal Claims). Consequently, the Third Circuit reversed the Tax Court’s decision that it had the requisite decision to hear Sunoco’s claim that it was entitled to interest on tax overpayments.

The significance of this decision is that a taxpayer must properly ascertain what time of interest deficiency vs. overpayment is involved in a particular dispute.  Failure to properly bring an action in the appropriate court could lead to a case being dismissed for lack of jurisdiction.  Moreover, if a case is brought in the wrong court, by the time a decision is rendered it may be too late to refile with the appropriate court.

A full copy of the Third Circuit’s decision can be found here

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the government in the Tax Court, the District Courts, the Court of Claims, and the Circuit Courts.  You can contact at contact@fuerstlaw.com.

On June 7, 2011, Judge Foley in writing for the Tax Court held that corporate taxpayers cannot rely on the advice of a tax professional as a reasonable cause defense to penalties when the tax professional is an employee of the taxpayer.  The case was decided on a consolidated basis with the cases captions of Seven W. Enterprises, Inc. & Subsidiaries, v. Commissioner, and Highland Supply Corp. & Subsidiaries, v. Commissioner.

The facts are relatively straight-forward.  From February 2001 until March 2002, the tax professional worked as an outside consultant for the taxpayers.  During this period, the tax professional prepared Seven’s 2000 tax return and Highland’s 2001 tax return. In March 2002, both taxpayers hired the tax professional as their vice president of taxes. As  the taxpayers’ vice president of taxes, the tax professional prepared and signed, on behalf of the taxpayers, Seven’s 2001, 2002, and 2003 tax returns and Highland’s 2002, 2003, and 2004 tax returns. In 2000 through 2004, the taxpayers incorrectly concluded that they were not liable for personal holding company taxes and, as a result, understated their tax liabilities relating to those years.  The IRS  issued Seven a notice of deficiency relating to 2000 through 2003 and Highland a notice of deficiency relating to 2003 and 2004. In the notices, the IRS determined that the taxpayers were liable for accuracy-related penalties.

The taxpayers contend that they had reasonable cause for their underpayments and acted in good faith. Alternatively, the taxpayers contend that they reasonably relied on the advice of the tax professional in 2000 when the tax professional served as an outside consultant and in 2001 through 2004 when he served as vice president of taxes.

The Tax Court explicitly held that pursuant to sec. 1.6664-4(b)(1) and (c)(1), Income Tax Regs., Seven is not liable for an accuracy-related penalty relating to 2000 because it reasonably relied on the then outside consultant/tax professional to prepare its tax return.  The Tax Court further held that the then in-house tax professional does not qualify as “a person, other than the taxpayer”, pursuant to sec. 1.6664-4(c)(2), Income Tax Regs., with respect to the returns which he signed on behalf of taxpayers, and therefore the aforementioned regulation is not applicable to the taxpayers’ underpayments of taxes relating to 2001 through 2004.  The Tax Court finally held that the taxpayers were liable for accuracy related penalties relating to 2001 through 2004.

Treas. Reg. 1.6664-4 provides that:  (a) In general. No penalty may be imposed under section 6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to, such portion.  The full text of the regulation can be found here.

In general, a penalty defense is a factually intensive analysis and will be unique to each individual taxpayer.  However, the over-riding principle is the extent that a taxpayer attempted to properly report and calculate the taxes due for each taxable year will determine if penalty relief is applicable. 

The full decision can be found here.

The implication of this decision is that reliance on in-house professionals is not a defense to penalties, and as a result, taxpayers need to consult with outside professionals on tax treatment as reflected on their income tax returns.  The attorneys at Fuerst Ittleman have extensive experience advising individuals, partnerships, and corporations on all aspects of the Internal Revenue Code and have extensive experience litigating against the IRS.  You can reach an attorney by emailing us at:  contact@fuerstlaw.com.

In Woodsum v. Commission, 136 T.C. No. 129 (June 13, 2011), Judge Gustafson addressed the taxpayers’ petition for redetermination of accuracy-related penalty of $104,295 that the Internal Revenue Service (IRS) determined against the taxpayers for tax year 2006, pursuant to section 6662(a). The issue for decision was whether the petitioners had “reasonable cause” under section 6664(c)(1) for omitting $3.4 million of income from their joint 2006 Federal income tax return.

In 1998 the taxpayers participated in a financial transaction described as a “ten year total return limited partnership linked swap.” In entering into this transaction, the taxpayers were advised by an attorney who supervised the preparation of the tax return for the year at issue. The taxpayers provided to their tax return preparer 160-plus information returns, including the Form 1099-MISC reporting $3.4 million from the termination of the swap and Form 1099-INT reporting $60,291.69 of interest income from the swap.  The Form 1040 prepared for the taxpayers was 115 pages long. The return did report the $60,291.69 of interest income that the taxpayers received from the swap. Likewise, the return did not include the $3.4 million from the swap.

The IRS received a Form 1099-MISC reporting the $3.4 million for the swap, compared with taxpayers’ return, and determined a deficiency in tax of $521,473 and an accuracy related penalty under section 6662(a) of $104,295.  The taxpayers agreed to the assessment of tax in the amount determined by the IRS. As a result, their tax due, which they reported as $3,719,454, was actually $4,240,927.  The taxpayers paid the tax deficiency plus interest. However, the taxpayers petitioned the Tax Court disputing the accuracy-related penalty.

The Tax Court held that the taxpayers did not receive advice from tax professionals that would justify the omission of income.  In so holding, the Court held that because the taxpayers knew that their Form 1099 should have been included, they lacked reasonable cause for their return preparer’s failure to include the income.  The Court also held that the taxpayers failed to show that they were entitled to the “computational or transcription error” exception.  The Tax Court’s decision requires taxpayers to perform more than a cursory review of the return to ensure of its accuracy. 

The full decision can be found here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating tax issues against the U.S. Government.  You can reach an attorney by emailing us at:  contact@fuerstlaw.com.

On October 6, 2011, the Internal Revenue Service (IRS) announced that its July 15, 2011 field directive (the “directive”) pertaining to the codified economic substance doctrine (the “doctrine”) should not be viewed as legal precedent because the IRS reserves the ability to modify the directive at any time.

According to Mark Periwen, special counsel to the Associate Chief Counsel, the directive is “just that,” and therefore does not have the force of law.  Notably, the function of field directives issued to employees of the IRS is similar to the function of the Internal Revenue Manual (IRM), which directs IRS personnel in their day-to-day activities. Smith v. U.S., 478 F.2d 398 (5th Cir. 1973).  This does not follow, however, that field directives and the IRM will not be taken into consideration by reviewing courts.

Instead, as discussed in Griswold v. United States, 59 F.3d 1571, 1575 n. 8 (11th Cir. 1995), "[w]hile the IRS Manual does not have the force of law, the manual provisions do constitute persuasive authority as to the IRS’s interpretation of the statute and the regulations." (emphasis added).  Similarly, each field directive provides insight as to the IRS’s interpretation of the laws it is entrusted to enforce.

As we previously reported here, transactions shall be treated as having economic substance only if the transaction changes the taxpayer’s economic position in a meaningful way and the taxpayer has a substantial purpose for entering into the transaction. The doctrine only applies to a transaction entered into in connection with a trade or business or activity engaged in for income.

Taxpayers are concerned how the IRS will apply the doctrine due to the no-fault penalty of up to 40 percent. Tax practitioners speculate the issuance of the directive suggests the IRS wants to ensure that the doctrine is appropriately applied.  In fact, the directive specifically provides that agents should limit the assertion of penalties to transactions that implicate the doctrine and not a “similar rule of law” as provided in the statute.

The IRS’s original field directive regarding the application of IRC §7701(o) was issued on September 14, 2011 with the objective “to ensure consistent administration of the strict liability penalty related to the application of the doctrine.”  The July 15, 2011 field directive was issued to “instruct examiners and their managers how to determine when it is appropriate to seek the approval of the Director of Field Operations in order to raise the economic substance doctrine.”

As further elaborated in the directive:

Once an examiner determines that raising the doctrine may be appropriate, this directive sets forth a series of inquiries the examiner must develop and analyze in order to seek approval for the ultimate application of the doctrine in the examination.

The directive, which is publicly available to all Taxpayers, clearly provides the IRS’s interpretation of IRC §7701(o).  Although it may not be binding as legal precedent, it is nonetheless highly persuasive and will not be ignored by courts that are deciding issues pertaining to the application of the doctrine.

Fuerst Ittleman will continue to monitor the progress of cases where the doctrine may be an issue. Our professionals at are knowledgeable in the newly codified economic substance doctrine. If you believe you have been affected by the new law, please contact our professionals at contact@fuerstlaw.com.

In Healthpoint Ltd. v. Comr., T.C. Memo 2011-241 (10/3/11), available here, the Tax Court held that a company could not rely on a settlement agreement to recast a jury award and settlement to avoid paying taxes at ordinary income rates.

The taxpayer filed suit against a rival company and received a jury verdict of $16.47 million, awarding actual damages ($5 million), punitive damages ($3,174,515), disgorgement of profit ($1,640,000), and Lanham Act enhanced damages ($6,349,030). While litigation was pending, the taxpayer filed suit against the same company on different grounds, however, both parties agreed to settle both law suits for $12 million and $4.5 million, respectively.

The parties allocated damages in the settlement agreement differently than the jury’s allocation.  In particular, the settlement agreement provided for no punitive damages, even though the jury had awarded punitive damages in the first suit.  As a result, the taxpayer reported $14.5 million in long-term capital gain and $1.8 million in ordinary income. The IRS conceded that the Lanham Act enhanced damages, which totaled $6,349,030 for loss of goodwill, are taxable as long-term capital gain. However, the IRS challenged the remaining allocations in the settlement agreement.

The Tax Court held that damages were not to be allocated in accordance with the parties settlement agreement but, rather, in accordance with the jury verdict in the first law suit.  The Tax Court determined that proceeds of a settlement agreement attributable to goodwill or damage to reputation are taxable as capital gains, but those determined to be lost or disgorged profits and/or punitive damages are taxable as ordinary income.   The court stated that normally express allocations in settlement agreements will be followed in determining tax consequences.  However, there is an exception if the settlement agreement is not entered into in an adversarial context, at arm’s length, or not in good faith.

The Tax Court ultimately held that damages should be allocated in accordance with the jury verdict because the verdict accurately reflected the economic realities versus the settlement agreement.

The attorneys at Fuerst Ittleman, PL have extensive experience structuring settlement agreements and litigating against the IRS in the event that a settlement agreement is not respected.  If you can contact an attorney by emailing us at: contact@fuerstlaw.com.

In WFC Holdings Corp. v. U.S., No. 0:07-cv-03320 (D. Minn. 9/30/11) a refund claim based on capital loss deduction was disallowed because the underlying transaction was a tax shelter with no business purpose other than tax avoidance.

In the matter before the District Court, the taxpayer was the parent corporation of an affiliated group of corporations.   After a series of acquisitions, the taxpayer was left with a large quantity of excess leased space that it no longer needed, but which it was liable for (“underwater”).

KPMG marketed a tax product to clients called an “economic liability transaction.” The “economic liability transaction” involved a transfer of the “underwater” leases and a related stock sale to an investment bank. The taxpayer agreed to pay for KPMG’s work on the “economic liability transaction.”  KPMG’s employees developed the “economic liability transaction” with the understanding that a taxpayer needs a non-tax business purpose to justify the transaction.

The district court held that the transfer of “underwater” leases to a subsidiary and a related sale of stock was a sham tax shelter that the taxpayer had purchased from KPMG.  The court considered the lease restructuring transaction and, viewing the transaction as a whole, determined that the taxpayer had failed to establish a legitimate business purpose for the transaction other than tax benefits. The court concluded that the stock sale lacked economic substance and, moreover, did not accomplish the stated goal. The court stated that the lease restructuring transaction was designed, marketed, and implemented as a tax shelter, and the taxpayer’s actions indicated an absence of any real potential.

A full version of the opinion is available here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the Department of Justice – Tax Division regarding tax shelters and transactions the IRS considers to lack business purpose. You can contact an attorney by emailing us at: contact@fuerstlaw.com.

Fifth Circuit Court of Appeals affirms District Court’s determination that Partnership Was a Sham

In Southgate Master Fund LLC v. U.S., No. 09-11166 (5th Cir. 9/30/11), the Court held that the loss claimed by the deducting partner was properly disallowed because the partnership was a sham.

The facts of the case are complex.  A Chinese-government-owned financial institution formed a single-member limited liability company (SMLLC).   As a wholly owned subsidiary, the SMLLC was created for the purpose of acting as its parent’s U.S. investment vehicle for nonperforming loans (NPLs) transactions. The parent company contributed to the SMLLC  a portfolio of NPLs.  The parent company contributed the NPLs to the SMLLC pursuant to a contribution which contained a series of warranties and representations stating that the parent company had not written off, compromised, or made a determination of worthlessness as to any of the NPLs.

The SMLLC and a related party formed and organized an S-corp.  Upon formation, the SMLLC contributed the NPLs to the S-corp. pursuant to a virtually identical contribution agreement. In exchange, the SMLLC received a 99% ownership interest in the S-corp.  The related party contributed cash and a promissory note in exchange for a 1% ownership interest in the S-corp. The related party was appointed as the S-corp.’s sole manager.

After receiving due diligence reports that the loans were valid and worth between $44.67 million (3.9% of face value) and $111.8 million (9.76% of face value), the taxpayer agreed to purchase a portion of the Chinese parent company and the SMLLC’s interest in the S-corp.

The taxpayer formed its own single-member LLC, (TSMLLC), through which he would invest in the S-corp. The taxpayer executed a series of transactions which resulted in the taxpayer becoming a direct 89.1% owner of the S-corp. The taxpayer then took the position that the series of transactions had increased his outside basis in the S-corp. by $180.6 million. The taxpayer ultimately took a $210.5 million deduction on his tax return because of losses from the NPLs.

The IRS issued a final partnership administrative adjustment (FPAA) pertaining to its partnership return. The partnership filed a petition for review in federal district court. The district court upheld the FPAA’s disallowance of the claimed losses on the ground that the partnership was a sham for tax purposes. However, the district court disallowed the imposition of penalties on the ground that the partnership had established reasonable cause and good faith and thus had a complete defense to any accuracy-related penalties. Both parties appealed the adverse determinations.

The Fifth Circuit held that the partnership was a sham, the deduction should be disallowed, and disallowed the accuracy-related penalties.  The Fifth Circuit applied a totality-of-the-facts-and-circumstances test to determine whether the partnership was a sham. Ultimately the Court determined that the partnership was “a meaningless and unnecessary incident” inserted into the chain of entities, transactions, and agreements through which the NPL acquisition took place. The partnership served no legitimate purpose whose accomplishment was not already assured by other means or could not have been equally well assured by alternative, less tax-beneficial means.  The full text of the opinion can be found here.

On September 28, 2011, Florida’s Second District Court of Appeal (“2nd DCA”) asked the Florida Supreme Court to rule on the constitutionality of Florida’s Drug Abuse Prevention and Control law, § 893.13 Fla. Stat. in the case of State v. Adkins. A copy of the 2nd DCA’s opinion can be read here. As we previously reported, on July 27, 2011, Judge Mary Scriven of the United States District Court for the Middle District of Florida declared the law unconstitutional under the United States Constitution as a violation of due process because it eliminated mens rea as an element of felony delivery of a controlled substance thus making the law a strict liability offense.

The federal court’s decision has opened the floodgates to litigation in pending drug cases in Florida and has led to uncertainty for criminal defendants for two main reasons. First, because the United States and Florida are separate sovereigns, the rulings of federal courts other than the U.S. Supreme Court are generally not binding on state courts. Second, because neither the Florida Supreme Court nor any District Court of Appeal has ruled on the constitutionality of § 893.13, the Circuit Courts of Florida (the tribunals responsible for adjudicating felony criminal cases) have no binding precedent to rely upon in determining whether § 893.13 is constitutional.

As a result, the Circuit Courts have split on the issue as to whether § 893.13 violates the 14th Amendment. In fact, as noted in the 2nd DCA’s Certification Order, in certain circuits, such as the Eleventh Judicial Circuit in Miami-Dade County, conflict exists within the different felony divisions with some judges adopting Judge Scriven’s opinion and declaring the statute unconstitutional while others finding the Middle District of Florida’s rationale unpersuasive because the precedent relied upon by that court was distinguishable.

In certifying the question of whether § 893.13 is constitutional, the 2nd DCA stated that because it would be the only district court of appeals to have ruled on the constitutionality of the drug law, its “decision would be binding statewide and could affect literally thousands of past and present prosecutions throughout the state.” The 2nd DCA noted that while the Florida Supreme Court prefers to resolve cases after multiple district courts have issued opinions, given the volume of the cases involved and the fact that the issue has been “fully briefed and thoroughly discussed” in trial court proceedings, it would be appropriate for the Supreme Court to decide this issue.

Although the 2nd DCA certified the question to the Supreme Court as one of ”great public importance” pursuant to Fla. R. App. P. 9.125, it should be noted that because the Florida Supreme Court is a court of limited jurisdiction, the Court can choose not to decide the issue under  Article V § 3 of the Florida Constitution as jurisdiction over such certified questions is not mandatory.

Fuerst Ittleman will continue to track the progress of this matter with a keen eye as its final resolution could affect all strict liability offenses. The white collar criminal defense lawyers at Fuerst Ittleman are experienced in handling even the most complex cases where clients are facing allegations of criminal actions. The attorneys of Fuerst Ittleman have defended clients in cases involving numerous general intent and strict liability offenses including money laundering violations found at 18 U.S.C. § 1957, the operation of unlicensed money transmitting businesses found at 18 U.S.C. § 1960, and violations of the FDCA under 21 U.S.C. §§ 331 and 333 as well as prosecutions of corporate officials for FDCA violations under the Park Doctrine. For more information regarding Fuerst Ittleman’s white collar criminal defense practice, contact an attorney today at contact@fuerstlaw.com.

On September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act (the “Act”) (H.R. 1249) which drastically reforms the U.S. patent system. Among other effects that the Act will have on the patent system, the Act prevents the granting of “tax strategy” patents. Since 1998, the U.S. Patent and Trademark Office (USPTO) has granted more than 160 tax strategy patents in the areas of real estate, charitable giving, retirement planning, and stock options.

Pursuant to the Act, “strateg[ies] for reducing, avoiding, or deferring tax liability” are considered to be a “prior art” and are thus not patentable. Applicants can no longer rely on the novelty or non-obviousness of a tax strategy to distinguish their claims over prior art pursuant to 35 U.S.C. § 101. The Act defines “tax liability” as any liability for a tax under any Federal, State, or local law imposed by statute, rule, regulation, or ordinance. However, the Act excludes methods, apparatus, technology, and computer programs that are used solely for tax preparation. The Act further states that existing tax strategy patents will not be affected yet, pending applications will be deemed prior art.

Proponents of the Act claim that it will bring fairness to the patent system and deter the use of tax shelters. Opponents, however, state that the ability to patent tax strategies creates an incentive to interpret existing tax law and disseminate it among the government and taxpayers as public knowledge. Opponents further say that the Act will force developers to keep new tax strategies as trade secrets.

If you have any questions or concerns related to this or any other tax issue, feel free to email an attorney at Fuerst Ittleman at contact@fuerstlaw.com.