The saga surrounding BPA continues. After much ado, the U.S. Food and Drug Administration (FDA) has announced that it will not ban bisphenol A (BPA). Today the FDA denied in its entirety a citizen petition requesting that the FDA prohibit BPA has a substance for use in human food.

What is BPA?

BPA is a controversial chemical used in production of polycarbonate polymers and epoxy-based enamels and coatings. It is “an industrial chemical that has been present in many hard plastic bottles and metal based food and beverage cans since the 1960s.” An overview on BPA provided by the FDA can be found here. While past research on BPA indicated that the chemical is safe, more recent research has raised concerns relating to potential effect of BPA on the endocrine system. For instance, the “Chapel Hill” report indicated that there could be some safety concerns related to use of BPA.

The uses of BPA as a food contact chemical were approved through food additive policies prior to the enactment of FDA’s food additive regulations and notification processes for food contact substances in place today. As an approved food additive, BPA can be used by any food manufacturer without prior notification to the FDA. 

Background: NRDC’S BPA Battle

In August of 2008, the FDA released a draft safety assessment stating that “an adequate margin of safety exists for BPA at current levels of exposure from food contact uses.” Disagreeing with the FDA, the Natural Resources Defense Council (NRDC) filed a citizen petition in October of 2008 requesting that the FDA take action and banning BPA as a food additive. In January 2010, the FDA seemed to change its course when it issued its “Update on Bisphenol A for Use in Food Contact Applications,” stating that it has “some concern about the potential effects of BPA on the brain, behavior, and prostate gland in fetuses, infants, and young children.”

Eventually, the FDA responded to NRDC with a form letter, stating that it lacked the resources to make a decision on the citizen petition. NRDC then petitioned the Court of Appeals for the District of Columbia Circuit to direct the FDA to render a decision. In June of 2011, the D.C. Circuit issued a ruling that it lacked exclusive jurisdiction and that the claim should be raised in district court. Persistently, NRDC filed a complaint in district court asking that the FDA be compelled to substantively respond to NRDC’s petition by a specified date. Finally, in December of 2011, the FDA came to an agreement with NRDC and committed to issuing a decision on the NRDC petition by March 31, 2012.

Today’s Decision

In rejecting NRDC’s citizen petition in its entirety, the FDA stated that it “takes this concern seriously” but that NRDC’s petition “was not sufficient to persuade FDA, at this time, to initiate rulemaking to prohibit the use of BPA in human food and food packaging.” The FDA indicated that scientific studies done on the effects of BPA in small animals cannot be applied to humans. The FDA also indicated that the sample sizes for the studies used in support of the petition may not be large enough to draw conclusive results. However, FDA has emphasized that it will continue to examine the safety of BPA and expects to issue a new update on the safety issues surrounding BPA within the next year. According to FDA’s denial, the agency “is performing, monitoring, and reviewing new studies and data as they become available.”

NRDC has not announced whether or not it will take further action. Fuerst Ittleman will continue to monitor this matter and further agency announcements related to the status of BPA. For more information about the regulation of food additives and food contact substances, please contact us at contact@fuerstlaw.com or (305) 350-5690.

On March 27, 2012, the U.S. Food and Drug Administration (“FDA”) published a “first-of-a-kind” guidance document for industry and FDA staff entitled, “Guidance for Industry and Food and Drug Administration Staff:  Factors to Consider When Making Benefit-Risk Determinations in Medical Device Premarket Approval and De Novo Determinations” (the “Guidance”). The Guidance is meant “to provide greater clarity for FDA reviewers and industry regarding the primary factors the FDA considers when making benefit-risk determinations during the premarket review process for certain medical devices.” According to Jeffrey Shuren, M.D., director of FDA’s Center for Devices and Radiological Health (“CDRH”), “[t]his guidance clarifies this process for industry, which will provide manufacturers with greater predictability, consistency and transparency in FDA decision-making while allowing manufacturers and the FDA to use a common framework for benefit-risk determinations.”

The factors explained in the Guidance are applicable to devices subject to premarket approval (“PMA”) applications or de novo classification petitions. Under section 513(a) of the Food, Drug, and Cosmetic Act (“FDCA”), a PMA is the FDA process of scientific and regulatory review to evaluate the safety and efficacy of Class III medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential unreasonable risk of illness or injury. The FDCA requires that FDA determine whether a PMA application provides a “reasonable assurance of safety and effectiveness” by “weighing any probably benefit to health from the use of the device against any probable risk of injury or illness from such use,” among several other factors. Pursuant to section 513(f)(2) of the FDCA, a de novo petition is available to sponsors of low to moderate risk medical devices that have been determined to be not substantially equivalent (“NSE”) through the 510(k) program.

According to the FDA, the Guidance:

• Outlines the systemic approach FDA device reviewers take when making benefit-risk determinations during the premarket review process;
• Provides manufacturers a helpful tool that explains the various principal factors considered by the agency during the review of PMA applications, the regulatory pathway for high-risk medical devices, and de novo petitions, a regulatory pathway available for novel, low- to moderate-risk devices; and
• Describes an approach that takes into account patients’ tolerance for risks and perspectives on benefits, as well as the novelty of the device.

In an effort to bring much needed clarity and consistency to the review and decision-making processes for PMA and de novo submissions, the Guidance provides worksheets that the FDA’s reviewers will use in making the benefit-risk. Additionally, the worksheet analysis will be described in the Summary of Safety and Effectiveness Data for PMAs and in the decision summary review memos for de novo decisions. The FDA’s press release for the Guidance states, “CDRH will train medical officers, review staff managers and device reviewers on the guidance to assure the guidance is applied consistently to submissions and petitions.” The factors outlined in this Guidance will be applied to incoming PMA and de novo submissions and to submissions already under review with decisions beginning on May 1, 2012.

This Guidance only applies to PMA and de novo submissions but does not address any benefit-risk determination in the 510(k) decisions. We will continue to monitor the FDA to determine if it will be apply a different or the same standards in 510(k) decisions. For more information about the regulation of medical devices, including the submission of a 510(k), PMA, or de novo petition, please contact us at contact@fuerstlaw.com or (305) 350-5690.

The IRS has recently gone on a hiring spree, bringing on board personnel with expertise in law, accounting, and economics, needed to identify, audit, and litigate “transfer pricing” cases. 

Transfer pricing, in short, allows taxpayers with international operation to allocate deductions to high tax jurisdictions, and allocate income to low tax jurisdiction, thereby increasing the value of the deduction and parking profits in low tax jurisdictions.  (Transfer pricing is governed by section 482 of the Internal Revenue Code, available here, which addresses the “allocation of income and deduction among taxpayers.”  Although Section 482 is fairly short, the Treasury Regulations under section 482, available here, are long and exceedingly complex.) The overall effect of transfer pricing is to decrease the amount of worldwide tax paid by the global company. The drug manufacturing and high-tech sectors extensively use transfer pricing to creatively minimize world-wide tax and reduce the amount of tax owed to the IRS, and over time, the practice of transfer pricing has come under increased scrutiny by the United States government.

In response to the increased profile that the issue has received, there has been a realignment within the IRS. The Advance Pricing Agreement (APA) program has shifted from IRS’s Office of Chief Counsel to the new Transfer Pricing Operations.  (The IRS’s press release on the realignment is available here.) The IRS recently hired Samuel Maruca to be the new director of its Transfer Pricing Operations unit.  Mr. Maruca, an attorney, has hired personnel from the Big 4 accounting firms, as well as law firms.  He has already hired 40 people and is looking to fill another 60 positions. As a result of the realignment, companies should expect that their transfer pricing agreements will come under scrutiny by the IRS. Likewise, increased audits and litigation regarding transfer pricing appear to be certain. 

The attorneys at Fuerst Ittleman frequently handle highly complex matters against the IRS, and are well versed on the laws governing transfer pricing.  You can contact us by phone at 305.350.5690 or by email at contact@fuerstlaw.com.

On March 21, 2012, the Supreme Court of the United States issued its opinion in the case of Sackett v. Environmental Protection Agency. In a unanimous decision, the Court held that compliance orders issued by the Environmental Protection Agency (“EPA”) constitute final agency action subject to review in federal court pursuant to the Administrative Procedure Act (“APA”). A copy of the Court’s opinion can be read here.

As we previously reported, the Sacketts’ fight with the EPA centers on a small 0.63 acre property located near Priest Lake, Idaho and an EPA compliance order prohibiting its development. In May of 2007, the Sacketts began to fill in the property with dirt and rocks in preparation for construction of a three-bedroom home. However, in November of that year, the EPA issued a Compliance Order that ordered construction to be halted claiming that the Sacketts’ land was a wetland, was subject to EPA jurisdiction under the Clean Water Act (“CWA”), and that the construction could not continue without first obtaining a permit from the Army Corp of Engineers. The Compliance Order also required the Sacketts to remove all fill material, restore the property to its original condition, and replant the property with wetland vegetation no later than April 30, 2008. Additionally, the Compliance Order threatened civil penalties as high a $32,500 per day for each day the Sacketts did not comply with the Order. A copy of the EPA’s news release announcing the issuance of the Compliance Order can be read here.

In its opinion, the Court focused on three issues in determining whether EPA compliance orders are final agency action subject to review under the APA: 1) whether a compliance order constituted “final agency action” under the APA; 2) whether “no other adequate remedy in a court” exists for challenging the compliance order, see generally 5 U.S.C. § 704; and 3) whether the judicial review of compliance orders pursuant to the APA is precluded by the CWA.

In holding that compliance orders were “final agency action,” the Court relied on three factors. First, the Court found that through the issuance of the compliance order, the agency “determined rights or obligations” of the Sacketts. The Court found that in order for the Sacketts to be in compliance with the compliance order, the Sacketts were legally obligated to, among other things, restore their property according to an EPA approved restoration plan and grant the EPA access to the property and records related to the conditions of the site.

Second, the Court found that because the failure to comply with a compliance order exposes a party to additional penalties above and beyond those for violating the CWA, “legal consequences … flow” from the EPA’s issuance of the order. Third, the Court noted that the “order also mark[ed] the consummation of the agency’s decisionmaking process” because the findings and conclusions contained within it were not subject to further agency review. The Court rejected the Government’s argument that the compliance order did not mark such a consummation because the order invited the Sacketts to engage in informal discussions regarding the terms stating that such an invitation “confers no entitlement to further agency review” and “the mere possibility that an agency might reconsider in light of ‘informal discussions’. . . does not suffice to make an otherwise final agency action informal. Thus, the Court found that the compliance order “has all of the hallmarks of APA finality that our opinions establish.”

The Court also held that “no other adequate remedy in a court” existed to challenge validity of a compliance order in court other than through a challenge pursuant to the APA. Outside of a direct challenge under the APA, the Court found that only two other possible paths to judicial review existed, neither of which was adequate: 1) a civil enforcement action brought by the EPA for failure to comply with an order issued; or 2) apply to the Army Corp of Engineers for a permit to fill a wetland, and if rejected seek judicial review of that decision pursuant to the APA. However, the Court found that because the Sacketts could not initiate the civil enforcement action and were subject to additional penalties for each day of noncompliance with the order, this was not an adequate remedy for challenging the order’s validity. With regard to judicial review of a permit denial by the Army Corps of Engineers, the Court stated “the remedy for denial of action that might be sought from one agency does not ordinarily provide an ‘adequate remedy’ for action already taken by another agency.” Thus, no other adequate remedy existed.

Additionally, the Court held that the CWA does not preclude judicial review of compliance orders pursuant the APA. Judicial review of final agency action is precluded under the APA “to the extent that [other] statutes preclude judicial review.” See 5 U.S.C. § 701(a)(1). However, the Court has long recognized that the APA creates a “presumption favoring judicial review of administrative actions.” Block v. Community Nutrition Institute, 467 U.S. 340, 345 (1984).Here, the Court found that nothing in the statutory scheme of the CWA precludes judicial review of compliance orders pursuant the APA. Therefore, the Court found that compliance orders are subject to review.

The Court also directly addressed the Government’s argument that the agency would be less likely to use compliance orders in the future and voluntary compliance could suffer. Writing for the Court, Justice Scalia noted:

The Government warns that the EPA is less likely to use the orders if they are subject to judicial review. That may be true – but it will be true for all agency actions subjected to judicial review. The APA’s presumption of judicial review is a repudiation of the principle that efficiency of regulation conquers all. And there is no reason to think that the [CWA] was uniquely designed to enable the strong-arming of regulated parties into ‘voluntary compliance’ without the opportunity for judicial review – even judicial review of the question of whether the regulated party is within the EPA’s jurisdiction. Compliance orders will remain an effective means of securing prompt voluntary compliance in those many cases where there is no substantial basis to question their validity.”

Ultimately, rather than focusing on the merits of the dispute between the Sacketts and the EPA, the Court focused on whether a party to a final agency action may seek judicial review of the jurisdiction and authority of the agency to act when review of such action has not otherwise been precluded. While the Court’s holding may not have revolutionized private parties’ ability to sue the federal government, the case will undoubtedly lead to further disputes between federal agencies and private parties regarding its true significance. These disputes, we suspect, will help to develop the jurisprudence of the lower courts regarding when, and under what circumstances, a private entity may sue the federal government.

Fuerst Ittleman will continue to monitor the impact the Court’s decision on administrative law jurisprudence. For more information on how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fuerstlaw.com.

As we previously reported, the Food and Drug Administration (“FDA”) released a Draft Guidance for Industry entitled, “Dietary Supplements: New Dietary Ingredient Notifications and Related Issues” (“the NDI Draft Guidance”), on July 5, 2011. The NDI Draft Guidance is highly controversial and, as we previously reported, many industry associations have been petitioning Congress to take action. In response, on February 29, 2012, 17 members of Congress sent a letter to Dr. Margaret Hamburg, Commissioner of the FDA, “strongly urging FDA to withdraw this guidance and begin work on a new draft that does not undermine the balance Congress struck in [the Dietary Supplement Health and Education Act of 1994 (DSHEA)] to provide consumers with access to safe, affordable dietary supplement products.”

According to the letter, the NDI Draft Guidance “seems to run counter to the will of Congress by: erecting new extra-legal barriers to market entry of dietary supplements; imposing food additive type evaluative criteria; requiring multiple New Dietary Ingredient (NDI) notifications for dietary supplements beyond those required by law; and transforming the legal requirements for marketing of dietary supplements that contain NDIs from the notification process described under law to an FDA approval process.” FDA has no statutory basis for these requirements.

As two examples of how FDA has overreached, the signatories of the letter point to FDA’s rejection of the industry association’s prepared lists of  “grandfathered” ingredients and FDA’s view that each manufacturer of a finished dietary supplement must provide a separate NDI notification. The Congressmen stated, ‘[i]f implemented as written, we believe that the draft guidance would overturn the rules that have been in place for the last 17 years and significantly increase the burden on the supplement industry far beyond the intent of Congress with no apparent benefit for consumers.”

This letter comes on the heels of FDA’s dismissal of Senator Hatch’s and Senator Harkin’s December 22, 2011 request that FDA withdraw the NDI Draft Guidance. In their letter, Senators Harkin and Hatch, the principle authors of the DSHEA, “urge[d] FDA to withdraw this guidance and begin work on a new draft that will provide needed clarification on what constitutes a New Dietary Ingredient (NDI), but does not undermine the balance Congress struck in DSHEA to provide consumers with access to safe, affordable dietary supplement products.”

Fuerst Ittleman will continue to monitor the status of the NDI Draft Guidance. For more information on how the NDI Draft Guidance may affect your company, please contact us at (305) 350-5690 or contact@fuerstlaw.com.

After nine years of ongoing litigation, on February 23, 2012, the U.S. District Court for the Northern District of Connecticut struck down the U.S. Food and Drug Administration’s (“FDA” or the “Agency”) proposed qualified health claim (“QHC”) regarding the relationship between green tea and the risk of breast and prostate cancer. The FDA generally requires the use of qualified health claims on a food or dietary supplement product labeling when a claim characterizes a relationship between a substance in the food or dietary supplement and a disease or health-related condition that does not meet the Agency’s significant scientific agreement standard. If a manufacturer chooses to make such a claim, the manufacturer must use a disclaimer that limits or “qualifies” the statement in such a way that does not mislead consumers about the nature of the product’s underlying scientific support. (See the FDA’s position on qualified health claims here.)

Fleminger, Inc., a manufacturer of green tea products, proposed a QHC to the FDA, which read: “Green tea may reduce the risk of breast and prostate cancers. The FDA has concluded that there is credible evidence supporting this claim although the evidence is limited.” The FDA, however, modified the proposed claim to state: “Green tea may reduce the risk of breast or prostate cancer. FDA does not agree that green tea may reduce the risk because there is very little scientific evidence for this claim.” In its decision, the court ruled that the FDA’s proposed disclaimer effectively negated Fleminger’s claim, and constituted an impermissible restriction on commercial speech in violation of the First Amendment. In applying the Central Hudson test, this court held that “there are less burdensome ways in which the FDA could indicate in a short, succinct and accurate disclaimer that it has not approved the claim without nullifying the claim altogether.” Furthermore, the court held that in order for the FDA’s disclaimer to be constitutional, it must “strike a reasonable fit between the government’s ends and the means chosen to accomplish those ends.”

As a result, the FDA must now either start anew and develop a QHC that is consistent with the court’s findings or take an appeal. Although the court ultimately decided that the FDA overstepped its constitutional limitations by requiring Fleminger to use an overly restrictive qualified claim, the court’s decision does not entirely disfavor the FDA. The court’s decision emphasized the FDA’s authority to impose appropriate disclaimers for QHCs due to the Agency’s substantial interest in preventing consumer confusion and protecting the public health. In addition, the FDA is not required to permit the use of a proposed disclaimer that is inaccurate or misleading to consumers. Rather, the FDA, through its expert analysis and judgment, may use its statutory and regulatory authority to determine the appropriate level of scientific evidence required to maintain and uphold its protective goals. This case highlights the caution with which the FDA must approach its future development of QHCs. Now, courts will likely closely scrutinize the phrasing of the FDA’s proposed QHCs to ensure that the Agency does not infringe on a manufacturer’s constitutionally protected commercial speech.

For more information on qualified health claims for food and dietary supplement products, please contact us at (305) 350-5690 or contact@fuerstlaw.com.  

The FDA has made clear that prosecuting individuals for strict liability misdemeanors under the Park Doctrine, also known as the “Responsible Corporate Officer Doctrine” (“RCO”), is a priority amid the clamor for the FDA to get “tough” on persons and companies in regulated industries, such as food and drug. The Park Doctrine allows a corporate official to be convicted of a misdemeanor based entirely on his or her position and responsibility in a corporation. There is no requirement that a person had any criminal intent or acted personally in any wrongdoing, or for that matter, was even aware of a violation. We have previously blogged about the re-discovery of the Park Doctrine by the FDA, here and here.

Now, given the heightened risk of Park Doctrine prosecutions by the government, Allied Insurance Company commenced issuing its “RCO Policy,” designed to provide coverage for control group executives for defense costs during an investigation or misdemeanor criminal proceeding, including potential losses resulting from debarment or exclusion from contracting with federal programs as a result of a misdemeanor conviction. Debarments or exclusions would result in substantial loss of income and livelihood for an RCO executive convicted of a misdemeanor under the Park Doctrine. However, the policies do not provide coverage for offenses for which the executive exhibited criminal intent, such as intent to defraud.

Under most current Directors & Officers (D&O) indemnity policies, coverage is provided for defense costs until there is a finding of criminal liability against the insured.  Under the Park Doctrine, such criminal liability can occur without the insured being shown to have intended or even been aware of the existence of the criminal violation. Under such a scenario, the insurer can deny coverage for the executive at the most critical stages of a criminal investigation, thereby leaving the executive to fend for him or herself in funding a defense, to his or her financial ruin.  This is tantamount to having no D&O coverage at all. It is often at the investigation stage where an adequately funded defense is most critical in order to stave off indictment.  Preventing indictment in the first place is paramount since post-indictment approximately 95 % of federal criminal cases result in a criminal conviction, either by plea or verdict.  It appears that this new RCO Policy could go a long way toward ensuring an adequately funded defense and avoiding the worst case scenario for executives.

The recent emphasis on Park Doctrine prosecutions by the Department of Justice and FDA, with the idea of increasing the deterrent effect of criminal prosecutions for violation of our nation’s food and drug laws, has elevated the potential liability of executives in regulated industries. The market is responding to these liability concerns by offering products insuring against these risks, although it remains to be seen whether the necessary premiums for such coverage will be acceptable to insurance customers.  Perhaps the best medicine is prevention—heightened recurrent training, invigorated compliance programs and revised policies and procedures to prevent violations in the first place.

Fuerst Ittleman PL is experienced in providing legal services to FDA regulated entities to address the prevention of violations and mitigation of potential Park Doctrine liability.  In this heightened enforcement environment, an ounce of prevention is worth more than a pound of cure.

On March 19, 2012, a panel of the U.S. Court of Appeals for the Third Circuit reversed the Tax Court which had held that Internal Revenue Code section 103 did not exempt from federal taxation the interest payments the Commonwealth of Pennsylvania had made to the taxpayers at issue in the case.  Judge Fuentes authored the opinion on behalf of the Third Circuit.

The facts are as follows:

The taxpayers were equal partners in various entities.  These entities owned an interest in several parcels of real property in Pennsylvania. The Commonwealth of Pennsylvania, through the Pennsylvania Department of Transportation, sought to acquire the property to build the Lackawanna Valley Industrial Highway. In 1993 and 1994, to allow construction to go forward, the Commonwealth and the taxpayers entered into two Rights of Entry, which permitted the Commonwealth to enter onto the land but did not alter the taxpayers  entitlement to just compensation.

In 1998, the State initiated condemnation proceedings against the properties in the Pennsylvania Court of Common Pleas by filing a Declaration of Taking pursuant to former 26 Pa. Stat. § 1-402(a). The taxpayers objected, contending that the declaration did not adequately describe the property. The court agreed and dismissed some of the suits. On the remaining suits, a jury trial was commenced but then stayed when the parties indicated that they had settled.

On November 7, 2001, the parties signed a memorandum of intent to settle. The taxpayers agreed that, in exchange for all their ownership interest in all the parcels of land, they would receive compensation of approximately $40.9 million, of which $24.6 million would be allocated to principal, and $16.3 million would be allocated to interest (“settlement interest”).

Because the Commonwealth lacked sufficient funds available to pay the settlement in full, the taxpayers agreed to accept the settlement money in five installment payments. By their agreement, each installment payment would be subject to the interest rate set forth in Rule 238(a)(3) of the Pennsylvania Rules of Civil Procedure, which governs the interest rate for tort suits (“installment interest”).

The Commonwealth made timely and complete payments under the agreement and, in fact, paid the remainder of the amount due in 2005, a full year early. The taxpayers filed income tax returns for tax years 2003 through 2005, and excluded from their gross income a portion of the settlement interest income and all of the installment interest income they had received.

The taxpayers excluded from their federal gross income any interest received above 6%, contending that anything above this rate was exempt as an obligation of the Commonwealth under Section 103. The taxpayers excluded all the installment interest income from their gross income calculations as exempt under Section 103. In 2008, the IRS issued deficiency notices to the taxpayers.

The Tax Court, in a written opinion, available here, held that no part of the settlement interest is excludable from the taxpayer’s gross income under Section 103. 

Section 103(a) simply states that:  Except as provided in subsection (b), gross income does not include interest on any State or local bond. A Section 103 is available in full here.

On appeal, the Third Circuit held that because the taxpayers agreed to a lower, variable interest rate for the purpose of extending credit to Pennsylvania, the Commonwealth’s obligation arose by voluntary bargaining, not by operation of law.  As a result, because the Commonwealth’s interest obligation was a voluntary one which allowed it to borrow money from the taxpayers, the Section 103 exclusion was appropriate. 

A full copy of the Third Circuit’s decision is available here.

The takeaway from this case is that good appellate advocacy in taxation appeals can, and has, resulted in the Tax Court being reversed.  The attorneys at Fuerst Ittleman have extensive experience litigating before the U.S. Courts of Appeals, and the firm is currently litigating tax cases before the Third, Fourth, and Eleventh Circuit Courts, in addition to the U.S. Supreme Court.  You can contact an attorney by emailing us at: contact@fuerstlaw.com or by calling us at: 305.350.5690.

On March 19, 2012, Judge Jacobs in speaking for the Unitd States Tax Court ruled that a United States Virgin Islands (USVI) limited liability company (LLC) is treated under the “check the box” regulations as a foreign corporation and that the unified audit provisions of the Internal Revenue Code, commonly referred to as the TEFRA provisions, do not apply.  As a result, the Tax Court did have jurisdiction over the notice of deficiency that the IRS issued, and the taxpayer’s motion to dismiss was denied.

The facts of the case summarized as follows:

The taxpayer filed income tax returns with the USVI Bureau of Internal Revenue (BIR) for 2002, 2003, and 2004. During those years the taxpayer was a member of NASCO, LLC a USVI Economic Development Commission (EDC) approved beneficiary.  The IRS claimed that the taxpayer’s was only involved with NASCO as a tax avoidance scheme in order to claim a tax credit under Internal Revenue Code (IRC) section 932.

Joseph A. DiRuzzo, III, a senior tax associate at Fuerst Ittleman, moved to dismiss the case on the grounds that the Tax Court lacked the jurisdiction necessary to adjudicate a notice of deficiency issued to an individual taxpayer that attempted to adjust partnership items.  The taxpayer argued that (1) NASCO was a valid LLC organized under the laws of the Virgin Islands, was recognized as such by the BIR, and should be respected for Federal tax purposes, and (2) this case involves a partnership item and hence the IRS should have issued an Final Partnership Administrative Adjustment (FPAA) to the Tax Matters Partner (TMP) of NASCO pursuant to the procedural rules of TEFRA, as opposed to a notice of deficiency.   

The Tax Court held as follows:

Business entities are generally classified for Federal tax purposes by section 7701 and the “check-the-box” regulations of sections 301.7701-1 through 301.7701-5, Proced. & Admin. Regs.8 The Virgin Islands, and the businesses established therein, are generally considered foreign for purposes of the Code because the Virgin Islands is not one of the 50 States or the District of Columbia. See sec. 7701(a)(4), (5), (9).

***

To conclude, because NASCO did not file a Federal partnership return and because NASCO is classified as a foreign corporation for Federal tax purposes, the TEFRA procedural rules do not apply. Consequently, we hold that (1) respondent was not required to issue an FPAA, and (2) respondent issued a valid notice of deficiency.

A full copy of the opinion can be found here. 

The opinion presents some interesting opportunities for taxpayers litigating against the IRS.  Because a USVI partnership is treated as a corporation (absent an affirmative election under the check the box regulations), and assuming that the USVI partnership is not a controlled foreign corporation (CFC) with Subpart F income, if the USVI partnership is found to be a valid business entity, any tax liability will be the liability of the USVI partnership and not of its members.  It is thus critical that the issue as to the validity of the USVI entity be properly litigated and tried.

The attorneys at Fuerst Ittleman have extensive experience litigating against the IRS before the Tax Court, the District Courts, the Court of Federal Claims, and the U.S. Circuit Courts.  Joseph A. DiRuzzo, III, is licensed to practice in a host of jurisdictions including the USVI and actively litigates and tries a wide variety of cases there.  You can contact an attorney by calling us at 305.350.5690 or by emailing us at contact@fuerstlaw.com.

On March 16, 2012, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of the Treasury issued a Guidance regarding when financial institutions should aggregate multiple transactions conducted by businesses with common ownership for currency transaction reporting purposes. A copy of FinCEN’s Guidance can be read here.

Pursuant to the Bank Secrecy Act (“BSA”), codified partially at 31 U.S.C. §§ 5311-5332, the Secretary of the Treasury is authorized to require financial institutions to keep records and file reports that the Secretary determines to have a high degree of usefulness in criminal and tax matters as well as counter-terrorism and anti-money laundering compliance. One such report is the currency transaction report (“CTR”). See 31 U.S.C. § 5313. Generally speaking, U.S. financial institutions are required to file a CTR with FinCEN for each “deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000.” See 31 C.F.R. § 1010.311.

Additionally, FinCEN regulations provide that in certain cases multiple currency transactions by the same person must be aggregated together to reach the $10,000 threshold. These regulations provide that multiple currency transactions will be treated as a single transaction, triggering the filing of a CTR, “if the financial institution has knowledge that [the multiple transactions] are by or on behalf of any person and result in either case in or cash out totaling more than $10,000 during any one business day.” See 31 C.F.R. § 1010.313.

However, a question arises regarding whether a financial institution is required to aggregate multiple transactions when the multiple transactions are conducted by businesses with common ownership. FinCEN previously addressed this issue in FinCEN Ruling 2001-2, however, that ruling was specific to the case of an individual who owned three separately incorporated businesses, each with its own tax identification number and bank account, but who made it a practice of using funds from one business account to pay expenses associated with the other businesses. Thus, in an effort to further clarify when aggregation should occur beyond the limited circumstances of Ruling 2001-2, FinCEN issued the March 16 Guidance.

In its guidance, FinCEN states that financial institutions should not automatically aggregate the currency transactions of separately incorporated businesses with common ownership because a rebuttable presumption exists that each incorporated entity is an independent person for reporting purposes. However, the Guidance goes on to state that each financial institution is ultimately responsible for determining whether businesses with common ownership are, in fact, operating as separate, independent entities. Additionally, not only must each commonly owned business be independent of one another to avoid aggregation, but each account of each commonly owned business must be separate and independent from the private accounts of the common owner.

FinCEN’s Guidance makes clear that there are no universal rules applicable to any situation. However, a financial institution should base its determination of whether businesses with common ownership are separate, independent entities, and thus not subject to aggregation for CTR purpose, on all the relevant facts and circumstances known from information obtained through the ordinary course of business. FinCEN advises that financial institutions take the following factors into consideration when determining whether commonly owned businesses are operating separately: 1)are the businesses staffed by the same employees; 2) are the businesses located at the same address; 3) is the bank account of one business repeatedly used to pay expenses of another business; and 4) are the business bank accounts repeatedly used to pay personal expenses of the common owner. If a financial institution determines that the businesses are not independent of each other or their common owner, then the financial institution should aggregate multiple currency transactions of these entities going forward.

If you have questions pertaining to CTR filing requirements, the BSA, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fuerstlaw.com.