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House Ways and Means Wants Probable Cause Before Seizure

The Internal Revenue Service (IRS) has come under scrutiny recently for seizing assets that the IRS claims were the subject of structuring violations. Structuring is the practice of consistently making cash deposits and/or withdrawals of less than $10,000 to avoid mandatory reporting requirements (filing a form 8300), a large part of which were put in place to prevent money laundering and tax evasion. Prior to a policy change in 2014, the IRS was seizing funds that they believed were the subject of structuring violations whether or not the IRS knew that the funds were coming from a legal or an illegal source.

Recent hearings conducted by the House Ways and Means Committee have shown that there are more than 600 cases of the government seizing legally sourced funds prior to the 2014 policy shift and frozen assets involved in these 600 cases yet to be returned to the taxpayers.

As a result of the Committee hearings, legislation has been introduced that would require the IRS to establish probable cause to show that the source of funds involved in a structuring scheme originated from an illegal source before the funds could be seized.   Under the proposed legislation, the IRS would be required, in most cases, to give 30 days of pre-seizure notice and hold a post-seizure hearing within 30 days of the notice.   Additionally, as a bonus, any interest that accrues on the wrongly seized funds will be exempt from income tax. The proposed legislation was scheduled for a mark up by the House Ways and Means Committee on July 7, 2016.

First Shoe Drops for Corporate Inversions

Notice 2014-52, released by the US Treasury Department on September 22, 2014, is intended to disrupt, and in some cases prevent, so-called corporate inversion transactions that have not been completed prior to the notice’s release.

Although the notice includes very detailed rules, it very generally takes a two-pronged approach to discourage inversions after September 21, 2014.

Dentons’ Tax team explores the implications of Notice 2014-52 on cross-border acquisitions or mergers.

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IRS Issues PFIC Regulations: A New Start to an Old Beginning

On December 30, 2013, the US Treasury Department (the “IRS”) published a package of proposed, temporary, and final regulations relating to Passive Foreign Investment Companies (“PFICs”) and their shareholders. The most significant component of the package is its guidance on the new annual filing requirements for PFIC shareholders, but the package also includes other, generally minor, changes to existing rules governing PFICs and their shareholders.

The IRS issued the regulations just in time to meet a self-imposed year-end deadline: the IRS wanted the new reporting rules to become effective before 2013 ended so that the new reporting rules would apply during the next filing season. Still, the package includes good news for some PFIC shareholders since the new regulations eliminate a retroactive filing requirement for 2011 and 2012 taxable years that had been threatened in a 2011 IRS notice.

The new regulations address in a limited way a package of technical PFIC regulations originally proposed by the IRS in 1992. Because the new package includes, in a modified form, a small portion of the 1992 proposed regulations, the new package withdraws that portion of the 1992 proposed regulations. The remaining (and outstanding) portion of the 1992 proposed regulations includes provisions that have been severely criticized. So, US investors and tax practitioners must await further IRS action to clarify the status of those proposed provisions and the interpretation of the applicable statutory rules.

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Companies May be Able to Deduct Settlement Payments Made to Resolve Potential Health Care Fraud Liability

Is there any silver lining when your company settles a False Claims Act suit with the government?  Possibly, in the form of a tax deduction.  In general, a taxpayer may deduct their ordinary and necessary business expenses.  A taxpayer may also deduct, as an ordinary and necessary business expense, a payment made in settlement of a claim.  A taxpayer may not, however, deduct any fine or penalty paid for a violation of the law.  Treasury Regulations provide that compensatory damages paid to the government do not constitute a fine or penalty.

The False Claims Act currently provides for a civil penalty of between $5,000 and $10,000 plus triple the amount of damages which the Government sustains because of the person’s actions.  In general, the damages (i.e., the losses sustained by the government) are considered compensatory, and the $5,000 to $10,000 penalty plus the triple damages (excluding the actual damages) are considered punitive.  For example, let’s say the government suffered a $100,000 loss due to healthcare fraud and imposed a $5,000 penalty plus $300,000 multiplied damages.  Under the general rule, one may think that $100,000 should be considered compensatory, whereas $205,000 would be considered punitive.  The current state of the law, however, is much more nuanced.

In 1976, when a prior version of the False Claims Act which authorized only double damages was in effect, the Supreme Court characterized the damages provision as “necessary to compensate the government completely for the costs, delays, and inconveniences occasioned by fraudulent claims.”   Sixteen years later, with the current triple damages provision in effect, the Supreme Court stated that the “damages multiplier has compensatory traits along with the punitive.”  A case-by-case determination is necessary to determine the portion of punitive and compensatory damages.

In Fresenius Medical Care Holdings, Inc. v. United States, 111 A.F.T.R. 2d 2013-1938 (D. Mass. 2013), the U.S. District Court for the District of Massachusetts (“District Court”), analyzed the deductibility of settlement payments made to the government to resolve a dialysis company’s potential liability under the False Claims Act (i.e., relating to allegations of Medicare and Medicaid fraud) and other causes of action.

During the 1990s, whistleblowers brought qui tam civil actions against an entity that later became a subsidiary of the dialysis company.  The dialysis company, to resolve its potential criminal liability, agreed to pay a substantial penalty.  To resolve its potential civil liability, the dialysis company agreed to pay the government approximately $385 million –of which approximately $66 million was to be paid to the whistleblowers.  The settlement agreement provided that the dialysis company agreed that nothing in the agreement was “punitive in purpose or effect.”  After paying the agreed-upon settlement, the company deducted the entire civil settlement payments as ordinary and necessary business expenses.  The IRS, after an audit, determined that only $193 million (i.e., approximately half) of the settlement payments were compensatory and thus properly deductible.  The dialysis company disagreed with the IRS’s determination that only half of the settlement was compensatory and filed an administrative appeal.  On appeal, the IRS agreed that the approximately $66 million paid to the whistleblowers was deductible, but maintained that approximately $127 million was not deductible.  The dialysis company paid all tax that the IRS said was due, and filed suit to recover the disallowed portion.  After a trial, a jury concluded that an additional $95 million was deductible (i.e., $353 million of the $385 million settlement was deductible).  The dialysis company moved for entry of final judgment.

Stating that “a factfinder must determine to what extent ‘multiple’ damages are, in fact, compensatory”, the District Court made clear that the IRS or taxpayers cannot unilaterally characterize payments.  The District Court found it reasonable for the jury to conclude that pre-judgment interest, which was not included in the settlement agreements, was necessary to make the government whole.  In addition, the District Court found it reasonable for the jury to conclude that the criminal settlement payment was intended to cover the bulk of punitive damages.  The District Court granted the dialysis company’s motion.

Key Takeaway: If you are negotiating with the government to negotiate a False Claim Act settlement you should consider the tax effects.  You may be entitled to a substantial tax benefit.

US Senate Passes Marketplace Fairness Act

On May 6, 2013, as anticipated when the Senate recessed last week, the US Senate passed the Marketplace Fairness Act of 2013 (S. 743). The bill’s passage was the culmination of a flurry of action by the Senate in recent weeks, including an April 25th procedural vote that ended debate on the bill and sent the bill to the floor of the Senate which passed the bill by an overwhelming majority.

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Sander Lurie and John R. Russell IV, members of Dentons’ Public Policy and Regulation practice, co-authored this article.

Changes Proposed to US Tax Reporting Rules for “Outbound” Transfers

On January 30, 2013, the US Treasury Department (IRS) proposed amendments to existing gain recognition agreement (“GRA”) regulations that apply to US persons who transfer stock of a US corporation or a foreign corporation to a foreign corporation. The proposed changes to the GRA regulations address the consequences to US persons for failing to file GRAs and related documents (failure to file), to comply in any material respect with the terms of, or rules governing, GRAs (failure to comply), or to satisfy other reporting obligations. The proposed changes would affect not only future reorganizations and contributions of stock to foreign corporations, but also prior transfers that continue to be subject to GRA reporting. The proposed changes also provide similar failure to comply rules with respect to liquidating distributions to foreign corporations and certain other document filing requirements arising with a US person’s transfer of stock or assets to certain foreign corporations.

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IRS Clarifies and Tightens New “Anti‑Inversion” Regulations

On June 7, 2012, the US Treasury Department (the “IRS”) issued new regulations interpreting the US tax rules that apply to “expatriated entities.” An expatriated entity, sometimes referred to as an “inverted company,” is a US company (usually the parent company of a group of US and foreign affiliates) that seeks to become a lower-taxed foreign company rather than a higher-taxed US company. In 2009, the IRS issued temporary regulations that were scheduled to expire on June 8, 2012 (the “2009 temporary regulations”), and the regulations released on June 7 were issued shortly before the 2009 temporary regulations lapsed.

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