On December 2, 2011, the IRS issued Notice CC-2012-002, available here, setting forth the IRS’s position “that a federal common law analysis to prove alter ego status is legally correct and consistent with the important principle of uniformity of federal tax enforcement.”  The Notice is in response to recent U.S. Circuit Court of Appeals cases, Old West Annuity and Life Insurance Co. v. Apollo Group, 605 F.3d 856 (11th Cir. 2010), United States v. Scherping, 187 F.3d 796 (8th Cir. 1999) and Floyd v. IRS, 151 F.3d 1295 (10th Cir. 1998) holding that federal courts must look to state property law before determining if a federal tax lien attaches to the property or rights to the property. 

The IRS takes this new position based on a strained reading of the U.S. Supreme Court’s holding in G.M. Leasing Corp. v. United States, 429 U.S. 338, 351 (1977), to conclude that “if an entity is a taxpayer’s alter ego, then it is appropriate to ‘regard’ all of the entity’s assets as the taxpayer’s property for federal collection purposes.”

The significance of the Notice is that taxpayers now must be ready to counter IRS efforts to apply “federal common law” instead of more favorable state law.  The result will be, at least in the short term, that the IRS will seek to challenge state law and will seek to aggressively enforce tax liens against taxpayers who own business entities.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice in tax lien and collection matters.  You can reach an attorney by emailing us at  contact@fuerstlaw.com.

On January 3, 2012, a grand jury sitting in the Southern District of New York returned an indictment charging Michael Berlinka, Urs Frei, and Roger Keller with conspiracy to defraud the United States in violation of 18 U.S.C. section 371.  The indictment alleges that the three Defendants worked at a Swiss Bank that actively solicited American taxpayers who were fleeing UBS in the wake of the 2008 Department of Justice investigation and deferred prosecution agreement against UBS.

The indictment alleges that the Defendants sought to take advantage of the UBS investigation by offering to allow American taxpayers to open bank accounts that would not be disclosed to the IRS.  American taxpayers maintaining financial accounts abroad have an obligation under Title 31 of the United States Code to file Form TD90-22.1 (Report of Foreign Bank and Financial Accounts (“FBAR”)), available here, with the United States Treasury Department.  The willful failure to file an FBAR form is a felony.  The Defendants, according to the indictment, gave as part of their sales pitch to prospective clients assurances that the bank accounts would not be disclosed because the bank had a long tradition of bank secrecy and did not have offices outside of Switzerland.   The Defendants opened accounts at the bank in the name of sham corporations and foundations in jurisdictions that the IRS considers to be tax havens.

In order to ensure that the accounts would remain secret, account holders names were not used, statements  were not mailed to the United States, and emails were sent from personal accounts instead of business email accounts, all with the aim of reducing the risk of detection by U.S. law enforcement.  To that end, according to the indictment, the Defendants used a third-party website called “SwissPrivateBank.com” to solicit new business from American taxpayers.  The indictment goes on to detail, without naming, various individuals who had accounts opened by the Defendants with the aim of avoiding IRS detection and to avoid income tax obligations.     

A full copy of the indictment is available here. 

The attorneys at Fuerst Ittleman have experience with IRS and Department of Justice investigations of U.S. taxpayers who have unreported income and undeclared foreign bank accounts.  You can reach an attorney by emailing us at:  contact@fuerstlaw.com, or by calling us at  305.350.5690.

On November 8, 2011, a grand jury sitting in the U.S. Virgin Islands returned a second superseding indictment in the case of United States of America and People of the Virgin Islands, v. Joseph Edge and Laura Edge, case # 3:10-cr-44. The indictment charged that the defendants had conspired to structure financial transactions and had violated and 33 V.I.C. section 1521, the Virgin Islands tax evasion statute.

A copy of the indictment can be found here

The Bank Secrecy Act (BSA) is codified at Title 31 of the United States Code and prohibits, among other things, the structuring of transactions with financial institutions in order to avoid the $10,000 reporting requirement for cash transactions. The indictment alleged that the Defendants used various business entities to attempt to conceal earned income by causing personal debts to be paid through the business entities.

The significance of the indictment is that the U.S. Department of Justice has now turned its eye on those U.S. citizens residing in the U.S. Virgin Islands who are in violation of the BSA and for related tax crimes.

The attorneys at Fuerst Ittleman have extensive experience defending against criminal violations of the BSA and the Internal Revenue Code throughout the country and in the U.S. Virgin Islands. Additionally, Joseph A. DiRuzzo is licensed to practice in the U.S. Virgin Islands and has litigated dozens of criminal cases there. You can reach an attorney by emailing us at: contact@fuerstlaw.com.

On December 13, 2011, the U.S. Department of Justice ("DOJ") announced that it formally brought charges against eight former executives and agents of Siemens AG. The indictment, found here, charges the defendants with violating various federal laws, including conspiracy to violate the Foreign Corrupt Practices Act ("FCPA").

According to the DOJ, the defendants sent bribes to officials in the Argentine government in order to secure a coveted contract for the Documento Nacional de Identidad ("DNI Project"), a project to replace the country’s national identity booklets with national identity cards. In addition to the alleged bribes to secure the contract, Siemens AG executives allegedly made further corrupt payments when the DNI Project was suspended and later pursued fraudulent arbitration in Washington D.C. against the Argentine government in an effort to recover profits that the company would have received had the Project not ultimately been terminated. In sum, the DOJ alleges that the conspiracy spanned almost two decades, from 1996 to 2009, and involved the commitment of over $100 million in bribes.

The FCPA makes it a crime for U.S. persons or companies, along with their subsidiaries and agents, to bribe officials of foreign countries in return for some business advantage. As we previously reported, the U.S. government has made it a priority to prosecute individuals and companies for violations of the FCPA, having secured lengthy prison sentences as well as hefty fines for offenders in 2011 alone. The DOJ has emphasized that heightened enforcement efforts aimed at thwarting corrupt payments to foreign officials will continue. This indictment against senior executives of a huge multi-national corporation with worldwide operations showcases the high profile of FCPA enforcement and prosecutions within the DOJ.

For more information about the FCPA or Fuerst Ittleman’s experience in defending against criminal investigations and prosecutions for white collar offenses, please contact us at contact@fuerstlaw.com.

In Gustashaw v. Comm’r, T.C. Memo 2011-195 (T.C. 2011), the Tax Court held that the taxpayers who conceded deficiencies in tax attributable to  participation in a Custom Adjustable Rate Debt Structure (CARDS) transaction are liable for accuracy-related penalties for gross valuation misstatements or, for 1 year, negligence, on account of resulting underpayments in tax.

The relevant facts are fairly straightforward. The Taxpayer exercised certain stock options, sold the stock and realized approximately $8M of income. The Taxpayer’s financial planner knew about the CARDS transaction, and the taxpayer consulted with a CPA  who promoted and arranged the CARDS transaction.  However, the taxpayer’s return preparer refused to prepare the income tax return without a tax opinion letter supporting the CARDS transaction and the related loss used to offset capital gains on the sale of the stock (the $8M gain).

The CPA provided a model tax opinion letter to the taxpayer from a major law firm.  The opinion letter  concluded that CARDS  transaction would more likely than not withstand an Internal Revenue Service examination and would protect the Taxpayer from substantial tax penalties if the transaction was ultimately disregarded for Federal tax purposes.  The Taxpayer subsequently received a formal tax opinion letter from the same major law firm, which arrived at the same "more likely than not" conclusions as the model tax opinion letter.

The Tax Court, in addressing the Taxpayer’s penalty defense based on reasonable cause, found that  “[the Taxpayer’s] reliance on  [the law firm’s] tax opinion letter was unreasonable because they should have known about the law firm’s inherent conflict of interest. [The CPA], the promoter of CARDS, both referred [the law firm] to [the Taxpayer] and supplied him with the law firm’s model tax opinion letter, which described a CARDS transaction that was not unique to [the Taxpayer’s] situation. [The Taxpayer] proffered no evidence that [the Taxpayer] had an engagement letter with [the law firm] spoke to any attorney at the law firm, or directly compensated [the law firm] for either tax opinion letter. On the facts presented, [the Taxpayer] could not have reasonably believed that [the law firm] was an independent adviser.”

A full copy of the opinion can be found here.

The teaching of Gustashaw is that a tax opinion must be tailored to the facts and circumstances of each taxpayer and “model” opinions can be problematic.  Likewise, penalty defenses based on tax opinions must be well developed and factually based in order to be successful in Tax Court litigation.

The attorneys at Fuerst Ittleman have experience in providing tax opinions and defending against penalties based on tax opinion reliance.  You can contact an attorney by emailing us at contact@fuerstlaw.com.

On November 17, 2011, a grand jury in the Northern District of California returned an indictment against Ashvin Desai alleging violation of 26 U.S.C. sections 7201 (tax evasion) and 7206(2) (aiding in the preparation of a false tax return); 31 U.S.C. sections 5314 and 5322 (failure to file report of foreign bank and financial accounts). A copy of the indictment can be found here.

The indictment against Mr. Desai provides as follows:

“[The Defendant] who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared, and by signing and causing to be signed, a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his wife, which was filed with the Internal Revenue Service. In that false income tax return, it was stated that their joint taxable income for the calendar year 2008 was $69,917.84 and that the amount of tax due and owing thereon was $6,156.88. In fact, as DESAI then and there knew, their joint taxable income for the calendar year was in excess of the amount stated on the return, and, upon the additional taxable income an additional tax was due and owing to the United States of America, and he had an interest in, and signature or other authority over, bank accounts located in India during calendar year 2008.”

The significance of this criminal indictment is that the IRS’s and the U.S. Department of Justice’s investigation of those holding unreported foreign bank accounts at HSBC have now started to produce tax evasion and FBAR failure to file cases against U.S. citizens who have attempted to use HSBC to avoid paying taxes to the U.S. government. This appears to be the first of many such cases as Title 31 violations are the criminal charge of the moment.

The attorneys at Fuerst Ittleman have experience defending against IRS investigations/audits and Department of Justice investigations and criminal prosecutions for those with unreported foreign bank accounts and unreported/under-reported income. You can reach an attorney by emailing us at: contact@fuerstlaw.com.

On December 20, 2011, Brent Beckley, co-owner of Absolute Poker, an internet poker website, pled guilty to conspiracy to violate the Unlawful Internet Gambling Enforcement Act (“UIGEA”), mail fraud, and wire fraud in connection to his operation of the internet poker website. In pleading guilty before Magistrate Judge Ronald Ellis of the United States District Court for the Southern District of New York, Beckley admitted his wrongdoing: “I knew that it was illegal to accept credit cards from players to gamble on the internet.”

While internet pay-for-play poker remains very popular, generating $5.1 billion in revenues last year alone, Beckley’s prosecution stems from a larger effort by Federal prosecutors to target internet gambling websites for violations of federal law. Although the law does not specifically address internet pay for play poker sites, UIGEA defines “unlawful internet gambling” as: 1) placing, receiving or transmitting a bet, 2) by means of the Internet, even in part, 3) but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made. However, since UIGEA’s passage, debate has raged over whether pay for play poker actually violates federal law with poker sites and federal prosecutors reaching opposite conclusions. Internet poker site operators have argued that UIGEA does not apply because poker should be classified as a game of skill, not a game of chance, and thus beyond the reach of UIGEA.

As we previously reported, on April 15, 2011, federal prosecutors indicted eleven people, including Mr. Beckley, in connection with their involvement in running internet poker websites PokerStars, Full Tilt Poker, and Absolute Poker. Prosecutors alleged that after the passage of a 2006 law which prohibited banks from processing payments to offshore gambling websites, the defendants engaged in a fraudulent scheme to deceive US banks and financial institutions as to the true identity of the funds being transferred by using third party payment processors to make funds appear as payments for goods and services to non-existent online merchants and fake companies.

Beckley is scheduled to be sentenced on April 19, 2012 and is expected to receive between 12 and 18 months imprisonment as punishment. If you have questions pertaining to UIGEA, the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittleman’s experience litigating white collar criminal cases, please contact us at contact@fuerstlaw.com.

On December 6, 2011, the U.S. Food and Drug Administration (FDA) announced the issuance of seven Warning Letters to companies marketing human chorionic gonadotropin (HCG) products for weight loss. Found here, the announcement highlights the various ways in which current marketing of these products is not compliant with federal law.

First, because these products are intended for use in the diagnosis, cure, mitigation or treatment of disease, they are considered drugs by the FDA. Noting that HCG is a FDA-approved prescription drug, FDA has found that these products are “new drugs” within the meaning of the Federal Food, Drug & Cosmetic Act (FDCA). Under the FDCA, a “new drug” is defined as:

[a]ny drug . . . the composition of which is such that such drug is not generally recognized, among experts qualified by scientific training and experience to evaluate the safety and effectiveness of drugs, as safe and effective for use under the condition prescribed, recommended, or suggested in the labeling thereof.

21 U.S.C. § 321(p).

In targeting these HCG diet products, the FDA has determined that they constitute “new drugs” under the FDCA because companies marketing the products do not possess any evidence showing that the drugs are recognized as safe for their intended uses.

Further, with cooperation from the Federal Trade Commission (FTC), the agencies have targeted these companies for making unsubstantiated claims regarding the effectiveness of HCG products. While both agencies require that promotional statements be truthful and non-misleading, the recent Warning Letters allege that these companies do not possess the necessary scientific evidence to support their weight loss claims.

Under the FTC Act, the FTC has shared jurisdiction with the FDA over claims made in the marketing of FDA-regulated products. Thus, when FDA-regulated products, like the HCG diet products in the present circumstances are at issue, the agencies often work together to target non-compliant parties, with both being able to require companies to take corrective action. For more information about FDA and FTC cooperative efforts, see our previous report here.

For more information regarding FDA and FTC enforcement measures or compliance, please contact us at contact@fuerstlaw.com

On December 12, 2011, the Third Circuit Court of Appeals entered an opinion and order in the consolidated case of United States of America, v. John M. Crim, et al.  case numbers 08-3028, 08-3931, 08-4077, and 08-4316.  The consolidated cases involved the appeals from the convictions obtained by the United States against  John M. Crim, John Brownlee, Constance Taylor, and Anthony Trimble.  John M. Crim was represented on appeal by Fuerst Ittleman’s Senior Tax Associate Joseph A. DiRuzzo, III. Mr. Crim was not represented at trial by Mr. DiRuzzo.

The facts of the case are somewhat complex, and are, in relevant part, as follows:  Mr. Crim founded the Commonwealth Trust Company (“CTC”), and according to the Government used CTC to assist taxpayers in evading their federal income tax obligations.  CTC allegedly marketed both domestic and offshore trusts to be used to siphon off income and profits from domestic taxpayers and advised taxpayers not to file federal income tax returns.  CTC also allegedly advocated the use of liens to avoid IRS seizures and tax liens.

The Government indicted Crim, Brownlee, Taylor, and Trimble and charged violations of 18 USC section 371 (conspiracy to defraud the United States), commonly referred to as a Klien conspiracy and 26 USC section 7212 (the “omnibus clause” prohibiting the administration of the Internal Revenue Code) in the Eastern District of Pennsylvania.  Crim, Brownlee, Taylor, and Trimble were convicted at trial of all counts.  

On appeal, Mr. Crim raised various issues, such as the improper admission at trial of evidence concerning CTC’s celebrity client Wesley Snipes (who was convicted of failing to file income tax returns as a result of heading CTC’s advice); that the restitution order was improperly entered; and that the 96 month sentence on both counts was procedurally improper.

The Third Circuit ultimately held that the sentence imposed against Mr. Crim was improper and vacated his sentence and remanded to the District Court for resentencing.  The Third Circuit also remanded Mr. Crim’s case for clarification of the restitution order. A full copy of the opinion can be found here.

A petition for rehearing en banc was filed and was denied on December 12, 2011.  Joseph A. DiRuzzo, III will be filing a petition on behalf of Mr. Crim before the U.S. Supreme Court early next year.

Among other things, what the Third Circuit’s Decision in the Crim teaches is that having an attorney who is well versed in substantive tax and substantive criminal law is an absolute necessity in a criminal tax case.  Having an attorney who is versed in one area of the law but not the other may result in opportunities being lost for a criminal defendant.  The attorneys at Fuerst Ittleman have proficiency in substantive tax law and criminal law and have experience litigating civil tax cases, criminal cases, and criminal tax cases.  You can contact an attorney by emailing us at contact@fuerstlaw.com.

On November 10, 2011, the U.S. Food and Drug Administration (FDA) issued two new draft guidance documents regarding Investigational Device Exemptions (IDE) applications for early feasibility studies and clinical investigations. The Agency seeks to foster early-stage development of medical devices in the United States, contribute to medical research, and address important clinical needs to improve patient care.

An IDE allows investigational devices to be used in feasibility or clinical studies in order to collect safety and effectiveness data required to support a Premarket Approval (PMA) application or a Premarket Notification [510(k)] submission to the FDA. All clinical evaluations of investigational devices, unless exempt, must have an approved IDE
before the study is initiated. 21 CFR 812. Please see our previous report for more information concerning PMA and 510(k) submissions for medical devices.

Draft Guidance for Investigational Device Exemptions (IDE) for Early Feasibility Medical Device Clinical Studies, Including Certain First in Human (FIH) Studies

The draft guidance regarding IDE applications for early feasibility studies applies to medical devices of significant risk in the early stages of development. Early feasibility studies allow for early clinical evaluation of devices to provide proof of principle and initial clinical safety data to better inform the final design of the device. The guidance permits studies to start earlier in the device development process than previously allowed. However, initiation of early feasibility studies must be justified by a risk-benefit analysis and adequate human subject protection measures. The new draft guidance also permits select device modifications to be made without FDA approval.

FDA Decisions for Investigational Device Exemption (IDE) Clinical Investigations

The draft guidance regarding IDE applications for clinical investigations clarifies the FDA’s process for approving clinical trials of medical devices. The draft guidance describes the Agency’s methods which allow clinical investigations of devices to begin under certain circumstances even when there are outstanding issues regarding the IDE application. Those methods include: approval with conditions, staged approval, and communication of outstanding issues related to the IDE through future considerations.

The FDA permits an IDE application that receives an approval with conditions to enroll patients in studies while certain issues are being resolved. Those issues may include: data analysis methods that can be resolved prior to gathering the data, minor divergences from study endpoints, or study design assumptions. A staged approval allows studies to begin with a smaller group of subjects while applicants gather additional data, prior to beginning larger general enrollment.

Fuerst Ittleman is well-equipped to assist members of FDA-regulated industry navigate the laws and regulations applicable to medical devices. For more information about the current regulatory framework surrounding medical devices, please contact us at contact@fuerstlaw.com.