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.

On September 27, 2011, the U.S. Supreme Court granted certiorari to determine whether an understatement of gross income attributable to an overstatement of basis in property is an "omi[ssion] from gross income" that can trigger the Internal Revenue Service’s (IRS) six-year statute of limitations.

Generally, the IRS has three years to assess additional tax if the Agency believes that the taxpayer’s return has understated the amount of tax owed. I.R.C. § 6501(a). However, the assessment period is extended to six years if the taxpayer "omits from gross income an amount properly includible therein . . . in excess of 25 percent of the amount of gross income stated in the [taxpayer's] return." I.R.C. § 6501(e)(1)(A).

The case currently before the Supreme Court, U.S. v. Home Concrete & Supply, LLC, will hopefully clear up inconsistent lower court rulings regarding the amount of time the IRS has to challenge a tax shelter technique known as “Son-of-BOSS” (Bonds and Options Sales Strategy). The IRS argues that it should have six years to challenge Son-of-BOSS shelters. The Seventh, Federal, Tenth, and D.C. Circuits held that the six year statute of limitation applies, while the Fourth, Fifth, and Ninth Circuits have held that the three year statute of limitations applies.

The disputed Son-of-BOSS shelter was designed to artificially inflate the cost basis of an asset when sold, often through partnerships, allowing taxpayers to claim little to no capital gains. According to IRS estimates, this technique was used by more than 1,900 taxpayers leading to more than $6 billion in unpaid taxes.

In U.S. v. Home Concrete & Supply, LLC, a group of North Carolina taxpayers entered into a short sale of U.S. Treasury bonds and moved the transaction into a partnership which they subsequently sold.  In 2006, the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) concluding that the taxpayers had improperly used a pass-through company to increase their cost basis, leaving them with a $69,000 gain on a sale of more than $10 million and requiring the taxpayers to pay $1.4 million. The taxpayers brought suit alleging the FPAA was barred by the general three-year limitations period in I.R.C. § 6501(a) and are seeking a refund.

Fuerst Ittleman will continue to monitor the progress of the abovementioned case along with new developments in tax law.  See our previous blogs on Son-of-BOSS tax shelters posted on February 21, 2011 and February 28, 2011. For more information, please contact us at contact@fuerstlaw.com.

On September 21, 2011, the Internal Revenue Service (IRS) announced that starting 2012, it will require certain tax preparers to undergo fingerprinting as part of the Return Preparer Initiative.  For more information regarding the Return Preparer Initiative please see our previous posting here. 

Pursuant to Notice 2011-08, registered tax return preparers will be required submit their fingerprints when renewing their Preparer Tax Identification Numbers (PTIN) annually as part of a suitability check.  The IRS also published proposed regulations (REG-116284-11) pertinent to fingerprinting user fees.

Additionally, prior to issuing PTINs to new applicants, the IRS intends to conduct suitability checks requiring applicants to submit fingerprints to the Federal Bureau of Investigation (FBI).  With these fingerprints, the FBI will conduct a database search as part of the applicants suitability review.

At this time, the IRS does not require attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents, and enrolled actuaries to be fingerprinted.  These individuals, however, must meet all other suitability requirements set forth by the IRS. Additional requirements for those who are currently exempt will be set forth in future guidance. 

If you have any questions regarding the Return Preparer Initiative or any other tax provision, please contact Fuerst Ittleman, PL at contact@fuerstlaw.com.

In January 2011, President Obama issued Executive Order 13563, Improving Regulation and Regulatory Review, requiring agencies to review current regulations and determine if they are necessary and effective. On August 22, 2011, the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) released their final plans for regulatory review. The IRS and DOL final plans for regulatory review aim to assist distressed sponsors and help retirement plans.

According to a White House fact sheet, the IRS is in the process of reviewing regulations pertaining to retirement plans to determine whether “any modifications could better achieve the objective of promoting retirement security by facilitating the offering of benefit distribution options in the form of retirement income.” This initiative plans to reduce administrative burdens for retirement plan sponsors looking to expand employees’ retirement income options.

Additionally, the IRS is considering providing relief to employers facing financial difficulty from requirements under the existing regulations pertaining to safe harbor contributions to 401(k) plans. The IRS proposal would provide flexibility to plan sponsors by allowing them to suspend required contributions based on financial health. According to the White House, the proposed regulations are in response to concerns raised by employers experiencing economic hardship and incapable of meeting certain safe harbor contributions under their plans.

The DOL Employee Benefits Security Administration (EBSA) will propose revisions to 401(k) plans that have been abandoned by their sponsors to reflect changes in the U.S. Bankruptcy Code. The proposed regulation would provide a streamlined program to terminate plans, including those for businesses involved in bankruptcy liquidations, with little EBSA involvement. Expanding the program to cover plans in liquidation would allow bankruptcy trustees to use the streamlined termination process to better discharge its obligations. The proposal is expected to be published in December 2011.

The attorneys at Fuerst Ittleman are current and knowledgeable on today’s pressing tax issues. If you have any tax concerns, email an attorney at contact@fuerstlaw.com.

The Internal Revenue Service has announced that it has eliminated the two-year limit for filing innocent spouse claims under IRC §6015(f), giving spouses of those accused of tax evasion more time to file their claims. 

The innocent spouse rule allows spouses who signed joint returns with their partners to avoid sharing the responsibility of paying taxes and penalties as a result of their partner’s wrongful actions.  Under Treas. Reg. §1.6015-5(b)(1), the IRS required innocent spouse claims to be filed within two years after the first attempt to collect.  About 50,000 innocent spouse requests are filed per year and about 2,000 are automatically rejected by the IRS because of the two-year rule.  Nina Olson, an Ombudsman at the IRS, said that the two-year rule did not work because, in many cases, taxpayers were unaware that the collection process had started.  Also, many taxpayers may have had legitimate reasons for missing the two-year deadline – including domestic abuse, divorce, fraud, and death.  (See blog entry Relaxed Restrictions for Tough “Innocent Spouse Relief” Rules, July 1, 2011).  However, despite legitimate reasons for taxpayers missing the deadline, the IRS has been unyielding in a number of especially sensitive situations.  Commissioner Douglas Shulman stated that the rule was too restrictive and not “flexible and compassionate” in its treatment of innocent spouses. 

The strictly-enforced deadline triggered an outcry of criticism from lawmakers and legal aid attorneys.  Whether Treas. Reg. §1.6015-5(b)(1) was a valid exercise of the IRS’s rulemaking authority has been challenged and several courts of appeal have upheld the validity of the two-year deadline (see, e.g., Lantz v. Commr., 607 F.3d 479 (7th Cir. 2010); Mannella v. Commr., 631 F.3d 115 (3d Cir. 2011); Jones v. Commr., 642 F.3d 459 (4th Cir. 2011)).  While the IRS has been defending the validity of the two-year rule in court, members of Congress have been urging the IRS to reconsider it.  Representatives Jim McDermott and Pete Stark, senior members of the House Ways and Means Committee, wrote a letter to Commissioner Shulman stating that Congress had not specifically included a statute of limitations for filing innocent spouse claims under IRC § 6015.  Regarding the new rule, McDermott says that the new rule makes the IRS rules consistent with congressional intent.  Representative Michele Bachman, a former IRS attorney, introduced a bill in April preventing the IRS from imposing a time limit on filing innocent spouse claims.

The new rule is effective immediately and will apply to certain cases pending before the IRS or in Tax Court.  Notice 2011-70 provides guidance regarding the new rule and several transitional rules pending formal modification of the regulations removing the two-year time limit. 

Future Requests.  Individuals may request equitable relief under IRC §6015(f) without regard to when the first collection activity occurred. The request must be filed within 10 years of the IRS’s assessment under IRC §6502.

Requests Pending with the IRS.  Innocent spouse requests that have already been submitted under IRC §6015(f) and are currently under consideration by the IRS will be honored, even if they were submitted more than two years after the first collection activity occurred.  They will be honored as long as the applicable period of limitation under IRC §6502 or IRC §6511 was open when the request was filed.

Requests that were Denied Solely for Untimeliness and not Ligitated.  Individuals whose IRC §6015(f) requests were denied solely because they were untimely and were not litigated may reapply for IRC §6015(f) relief by filing a new Form 8857, Request for Innocent Spouse Relief. 

Requests in Litigation.  For cases currently in litigation, the IRS will take appropriate action with regard to the timeliness issue and no reapplication for relief is required.

Requests that were in Litigation and the Case is now Final.  The IRS will take no further collection activity with respect to an individual who sought equitable relief under IRC §6015(f) in a judicial proceeding in which the validity of the two-year deadline was at issue and the decision in the case is final.  The collection relief provided under Notice 2011-70 applies only to those liabilities for which equitable relief would have been granted under IRC §6015(f).

Notice 2011-70 may be relied upon until final regulations modifying the two-year rule are published in the Federal Register or other published guidance is issued.  

The attorneys at Fuerst Ittleman are experienced in making and defending innocent spouse claims.  If you have any questions regarding the innocent spouse rule or any other provision of the Internal Revenue Code, please contact us at contact@fuerstlaw.com.

On August 15, 2011, the U.S. Department of Treasury and Internal Revenue Service (IRS) issued temporary regulations (T.D. 9544) and proposed regulations (REG-112805-10) regarding the annual fee imposed on certain branded prescription drugs. The prescription drug fee was enacted by section 9008(a) of Patient Protection and Affordable Care Act (PPACA). The $2.5 billion excise tax is an aggregate annual fee imposed on branded prescription drug manufacturers and importers with gross receipts over $5 million from sales to specified government programs. Please see our previous report here for more information regarding the prescription drug fee and the PPACA.

The temporary and proposed regulations describe the rules and actions of the prescription drug fee to be taken before the annual September 30th due date. The regulations are generally consistent with previous IRS guidance documents regarding the prescription drug fee. The regulations provide guidance regarding:

• A general overview of the fee rules
• An explanation of terms used in implementing the fee
• A description of the information requested from covered entities and provided by specified government programs
• A description of how the fee and subsequent adjustments are calculated
• Rules relating to the notice of preliminary fee calculation, dispute resolution process, and notification of final fee calculation
• An explanation of how to pay the fee, how the fee is treated for tax purposes, and how to make refund claims

See the official release of the documents in the August 18th Federal Register here and here. The Department of Treasury and the IRS are seeking public comment until November 16, 2011. The attorneys at Fuerst Ittleman, PL are knowledgeable in both tax and food and drug law. If you have questions regarding the prescription drug excise tax, please contact us at contact@fuerstlaw.com.

The IRS has updated its Business Consultant Audit Techniques Guide (“ATG”) to include an income section addressing issues that may arise during examinations. The new section discusses Income Assignment and Substance Over Form issues as well as related audit techniques.

Income Assignment

Income assignment involves the shifting or assigning of income earned by one entity to another entity to reduce the earning entity’s income and taxes. Income assignment can be addressed under IRC § 61 or IRC § 482, but courts have ruled that IRC § 482 more readily applies than IRC § 61. The question to be raised under IRC § 482 is whether parties would have entered into their financial relationships had they been unrelated parties dealing at arms-length. See, e.g., Keller v. Commissioner, 77 T.C. 1014 (1981).

According to the ATG, closely held or one-man personal services corporations, including business consultants, have assigned income to another entity in order to reduce their income and evade self-employment taxes. After this illegal shifting, the taxpayer may take a small salary from the assignee entity in proportion to the amount of income shifted. The IRS emphasizes that particular scrutiny is necessary when an individual incorporates an existing service profession and the corporation’s only business activity is effected solely through the individual as an employee of the corporation.

Substance over Form

The ATG income section also discusses the doctrine of “Substance Over Form,” which states that a transaction’s substance dictates how the transaction is taxed. This rule follows the notion that “taxation is concerned with actual command over the property taxed and the actual benefit for which the tax is paid.” Gregory v. Helvering, 293 U.S. 465 (1935). A transaction is viewed as a whole from the beginning of negotiations to completion. The true nature of a transaction cannot be hidden by an outward appearance that exists to alter tax liabilities.Comm’r v. Court Holding Co., 324 U.S. 331 (1945).

In applying the doctrine of Substance Over Form, courts look to the objective economic realities of a transaction rather than to the particular form the parties used. Gregory v. Helvering, 293 U.S. 465 (1935). When a step in a transaction is a mere “ritualistic incantation” in order to meet the words of the statute, that step will be ignored and the final result achieved will govern the tax consequences. Ericsson Screw Machine Products Co., 14 T.C. 757 (1950). The effect is to tax true taxable income regardless of how a taxpayer disguises it.

Audit Techniques

Pre-Audit

During the pre-audit phase of an examination, examiners determine whether the taxpayer reported all of the income required to be reported and that the income was reported in the proper period by the proper entity. The examiner looks for the following:

• A lack of internal controls;
• The types of books and records the taxpayer maintains;
• The taxpayer’s use of bartering;
• The shifting or assignment of income by a taxpayer to a related entity;
• The taxpayer’s use of the Internet;
• The taxpayer’s use of a fiscal year end in order to defer income.

Audit

During an audit, an examiner reviews the taxpayer’s consulting agreements or contracts for the following to determine whether income was assigned:

• To whom the client/customer is contracting the services;
• Whether the consulting fees per the contract are traceable to the Taxpayer’s books and records;
• For significant shareholders or partners (greater than 20% direct or indirect ownership), an examiner evaluates tax returns for:
• Examination potential;
• Proper treatment of related transactions with the corporation or partnership; and
• The likelihood of diverted funds.

The ATG stresses that a careful examination of the financial arrangements entered into will be required in order to ascertain whether an adjustment is necessary, either to reflect actual income or to prevent tax avoidance.

Read the full Business Consultant Audit Techniques Guide here.

The attorneys at Fuerst Ittleman have the knowledge and experience to guide you safely through any IRS encounter. You can reach an attorney at contact@fuerstlaw.com.

Senate Majority Whip Richard Durbin (D-Ill.) introduced legislation on July 29 that would require online retailers to collect the same sales tax as local stores, prompting deeply polarized reactions to the bill.  The Main Street Fairness Act, dubbed the “Amazon law” by critics, is welcomed by big box and bricks-and-mortar operations, but fervently opposed by tech groups and small online retailers.

The bill would certify the Streamlined Sales and Use Tax Agreement across the country, although 24 states have already written the agreement into law.  States that choose to use it would have clear authority to require retailers to collect the sales taxes they are already owed.  It would also require the Streamlined Sales and Use Tax Agreement to meet a lengthy list of simplification requirements to ease administrative burdens for sellers.  Additionally, the bill would compensate retailers for the startup administrative costs associated with collecting sales taxes.  Most notably, the bill exempts small businesses, as defined by the governing board of the agreement, from the duty to collect sales taxes.

Currently, only retailers which have a physical presence in a state are required to collect sales tax for that state.  Otherwise, consumers are responsible for keeping track of their online purchases and paying tax directly to the state, although few actually do.  Rep. Peter Welch (D-Vt.), who co-sponsored the bill in the House, noted that bricks-and-mortar shops are being used as display cases for products later bought online.  He explained, “When a consumer can walk into a store, try out a product and then go home and buy it online without paying sales tax, Main Street businesses and downtowns lose.”  Consequently, in 2012, states are expected to lose $24 billion in uncollected tax revenue from online and catalogue purchases.  If the bill passes, the recaptured revenue would provide a desperately needed boost for states struggling with budget problems and layoffs.

The Main Street Fairness Act received ardent support from the Retail Industry Leaders Association, whose members are primarily big box retailers like Best Buy, Apple, and Old Navy that maintain a physical and online presence throughout the states. According to Senator Durbin, the bill is also supported by the National Retail Federation, International Council of Shopping Centers, National Association of Real Estate Investment Trusts, and National Association of College Stores, and the Governing Board of the Streamlined Sales and Use Tax Agreement, among others.  Also, despite online mammoth Amazon’s recent battles over state tax policies, the company maintains that it fully supports this simplified federal approach.

eBay leads the opposition against the Main Street Fairness Act, joined by the Electronic Retailing Association, Computer and Communications Industry Association, National Taxpayers Union, other tech trade groups and countless small businesses.  Calling the bill a “job killer,” one executive of e-commerce group NetChoice argues that “small businesses would be subject to costly collection obligations … includ[ing] staff training, dealing with returns and exchanges, and dealing with sales tax audits.”  However, Sen. Durbin contends that small businesses would be exempt from the collection obligation, subject to the Governing Board of the Agreement.

Critics also argue that citizens will feel that their out-of-pocket expenses are higher.  The end result, according to some, will be that taxpayers will blame Congress for a perceived tax increase, and businesses will blame Congress for their complicated collection burden.  Proponents counter these statements by pointing out that consumers are well-acquainted with their duty to pay sales tax; further, the Main Street Fairness Act doesn’t raise taxes by a single penny.  Moreover, Sen. Durbin answers, “Main Street retailers collect sales taxes on behalf of consumers, why shouldn’t online retailers?”

At Fuerst Ittleman, we stay current on pressing legal and administrative issues to offer you the most comprehensive business representation available.  For more information, contact an attorney at contact@fuerstlaw.com.

On July 27, IRS officials announced restructuring changes aimed at improving its international operations.  First, the Advance Pricing Agreement (“APA”) Program and Mutual Agreement Program (“MAP”), will consolidate under a single executive in the Large Business and International Division.  Second, the IRS is creating a new position, the Assistant Deputy Commissioner (International), to facilitate agency coordination with treaty partners amid an increasingly global environment.

The New “Advance Pricing and Mutual Agreement Program”

The APA Program is concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing.  However, the lengthy APA process can exceed 40 months for a small business, which deters many candidates from using the service.  Until now, the MAP was separately concerned with the bilateral resolution of transfer pricing disputes with U.S. treaty partners.  Now, the APA Program will shift from the Office of Chief Counsel to consolidate with the MAP in the Large Business and International Division’s international operation.  The combination, which aims to reduce processing times, was recently announced at a transfer pricing conference where practitioners and IRS officials discussed solutions to the problematic APA delays.  Read our coverage of APAs and the transfer pricing conference here. 

The new “Advance Pricing and Mutual Agreement Program” will have increased staffing available and should allow the IRS to more efficiently handle APA agreements and transfer pricing disputes with treaty partners.  Although the combined program will be headed by a single executive, the Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues.

Assistant Deputy Commissioner for International Coordination

Next, the IRS plans to adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International).  The new commissioner will be responsible for coordinating international activities, exchanges of information, and participation in the Joint International Tax Shelter Information Center (JITSIC). The Assistant Deputy Commissioner (International) will also pursue competent authority agreements with treaty partners on issues other than transfer pricing and support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements.  With respect to non-governmental organizations, the commissioner will coordinate participation at the Organisation for Economic Cooperation and Development (OECD) and other programs.

Ideally, these two organizational changes will effect more cohesive transfer pricing operations and successful coordination with treaty partners.  IRS Commissioner Don Shulman announced, “These latest changes move forward to fulfilling one of my top priorities—meeting the challenge of tax administration in a global economy.”

At Fuerst Ittleman, we stay current on pressing legal and administrative issues to ensure your peace of mind.  For more information, email an attorney at contact@fuerstlaw.com.