Last month we wrote about the Justice Department’s new corporate resolution policy, which is intended to curb the practice of multiple government authorities imposing separate punishments on a corporate defendant for the same underlying conduct. Employing a football metaphor, Deputy Attorney General Rod Rosenstein explained that the intent of the new policy was to prevent “piling on,” which he described as “a player jumping on a pile of other players after the opponent is already tackled.” In the wake of this policy change, we have been carefully following Justice Department announcements of corporate investigations to see how this policy will work in practice.

The Justice Department recently announced resolution of a Foreign Corrupt Practices Act investigation involving a Hong Kong subsidiary of Swiss bank Credit Suisse. The allegations involved the awarding of employment to friends and family of Chinese officials in exchange for banking business. As part of the resolution, the Credit Suisse subsidiary entered into a non-prosecution agreement and agreed to pay a criminal penalty of $47 million. The SEC simultaneously announced that Credit Suisse entered into a settlement agreement covering the same underlying conduct and agreed to pay disgorgement of nearly $25 million with nearly $5 million of prejudgment interest. In an apparent nod to the anti-“piling on” policy, the SEC agreed to refrain from imposing any civil penalty. In fact, the SEC administrative order expressly provides that “[Credit Suisse] acknowledges that the Commission is not imposing a civil penalty based upon the imposition of a $47 million criminal fine as part of Credit Suisse’s settlement with the United States Department of Justice.”

When Rosenstein unveiled this new policy last month, he cited two examples of recent corporate resolutions that he said were consistent with the new anti-“piling on” approach. One of those resolutions, announced in April 2018, is very similar to the Credit Suisse resolution announced last week. In that case, the Justice Department entered into a deferred prosecution agreement in an FCPA investigation of the subsidiary of a global electronics company. The company paid a criminal penalty of $137 million. In a related proceeding, the SEC filed a cease-and-desist order against the company, which required the payment of $143 million in disgorgement for the same conduct. Rosenstein noted that the SEC agreed to forgo the imposition of penalties given the company’s agreement to pay a criminal penalty to the Justice Department.

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I have recently penned a Law360 article discussing lessons learned from recent tax decisions impacting cannabis businesses.  We will continue to cover this topic on this blog.

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BitcoinEarlier this week the Internal Revenue Service announced creation of a virtual currency compliance initiative that will focus on tax compliance by taxpayers engaging in virtual currency transactions. The IRS intends to address non-compliance in this area by conducting audits and engaging in taxpayer outreach, and by issuing future guidance. As part of this announcement, the IRS urged taxpayers with unreported virtual currency transactions to correct their tax returns, but also cautioned that it has no plans to offer a voluntary disclosure program in this area.

As we have previously reported, the IRS is focusing significant attention on tax compliance with respect to cryptocurrency transactions. Last year, the IRS prevailed in its long-running litigation with Coinbase seeking the names of clients who engaged in cryptocurrency transactions during 2013-2015, and Coinbase announced that it was disclosing transaction data to the IRS for 13,000 of its customers. In addition, the IRS-Criminal Investigation Division is ramping up its scrutiny of cryptocurrency transactions by assembling a team of specialized investigators in this area. And earlier this year, the IRS issued a very public “reminder” to taxpayers about reporting cryptocurrency transactions and threating audits, penalties, and even criminal prosecution for non-compliance.

The virtual currency announcement by the IRS Large Business and International Division (LB&I) was part of its roll-out of five additional “compliance campaigns” which are targeted at specific issues presenting risks of non-compliance. In early 2017, LB&I announced that it would be moving toward a risk-based approach to taxpayer examinations, and to date has identified 35 compliance issues that will guide its examination strategy moving forward.

The IRS described its newly-announced virtual currency campaign as follows:

U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.

The four other new compliance campaigns unveiled by LB&I this week include (1) restoration of sequestered AMT credit carryforward; (2) S corporation distributions; (3) repatriation via foreign triangular reorganizations; and (4) Section 965 transition tax. These campaigns are decribed in more detail as follows:

  • Restoration of Sequestered AMT Credit Carryforward

LB&I is initiating a campaign for taxpayers improperly restoring the sequestered Alternative Minimum Tax (AMT) credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. Taxpayers will be monitored for subsequent compliance. The goal of this campaign is to educate taxpayers on the proper treatment of sequestered AMT credits and request that taxpayers self-correct.

  • S Corporation Distributions

S Corporations and their shareholders are required to properly report the tax consequences of distributions. We have identified three issues that are part of this campaign. The first issue occurs when an S Corporation fails to report gain upon the distribution of appreciated property to a shareholder. The second issue occurs when an S Corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend. The third issue occurs when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.

  • Repatriation via Foreign Triangular Reorganizations

In December 2016, the IRS issued Notice 2016-73 (“the Notice”), which curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

  • Section 965 Transition Tax

Section 965 requires United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions).

Earlier this year, LB&I engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations under this provision. The external communication was circulated through stakeholder channels in April 2018.

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The Senate Finance Committee has scheduled a hearing for Thursday, June 22, 2018, to consider the nomination of Charles P. Rettig to be Commissioner of Internal Revenue.  The President nominated Rettig more than four months ago to succeed John Koskinen, whose term as Commissioner ended in November 2017. Since Koskinen’s departure, David J. Kautter has served as Acting Commissioner of Internal Revenue, and he also serves as Assistant Secretary of the Treasury for Tax Policy. We profiled Rettig in a prior post which you can read here.

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There is not too much to say about the Tax Court’s latest decision involving a marijuana company.  In Loughman v. Commissioner, T.C. Memo 2018-85, the operators of a Colorado marijuana dispensary argued that for a marijuana dispensary operating as an S corporation, Section 280E discriminates against S corporation shareholders by double taxing income when shareholder salary is disallowed pursuant to Section 280E as a deduction from flow-through S corporation income and also included on the shareholder’s individual tax return as W-2 wages.  The Tax Court noted that the regime was not discriminatory, but rather applied equally, because Section 280E disallows salaries not attributable to cost of goods sold whether or not the salaries are paid to the shareholder.

One of the harsh realities of operating a marijuana business is that Section 280E creates double taxation for owners who receive payments for services from marijuana companies.  It would seem the only way to avoid this is if the owner’s sole responsibility is activities related to the production of inventory. However, any officer/owner’s responsibilities are bound to include some sort of management and oversight.  While making an election to be taxed as a C corporation can minimize the cost of double taxation in this situation, it won’t eliminate it.

The Tax Court has shown little sympathy for marijuana companies when it comes to the harsh realities of Section 280E.  The court notes that the taxpayers can elect to be taxed as any type of entity and also elect to operate in any line of business.   Simply, in order to avoid double taxation caused by Section 280E, you are advised to operate a business not subject to Section 280E.

BitcoinOur colleague Kristen Howell has published an alert reporting on an important development in the cryptocurrency industry. The U.S. Securities and Exchange Commission has declared that Bitcoin, Etherium and other coins operating on truly decentralized platforms are not securities. The agency’s reasoning was revealed in remarks by William Hinman, Director of the SEC’s Division of Corporate Finance, at the Yahoo Finance “All Markets Summit: Crypto” on June 14. Hinman explained that since the value of cryptocurrency is not based on the expectation of profits resulting from the success or failure of the issuer, it does not compare to a typical security. You can read Kristen’s alert here.

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Yesterday, the Tax Court issued its opinion in Alterman v. Commissioner, T.C. Memo 2018-83.  This case involved the operation of a medical marijuana dispensary which was reported on Schedule C.  The opinion includes a long recitation of intricate accounting details that I will address on a summary basis so as to not lose readers other than accountants.  Readers interested in the details should read the opinion linked above.

The important facts are as follows:

  • The taxpayer sold marijuana and non-marijuana products.  The sales of non-marijuana products were 1.4% of gross receipts in 2010 and 3.5% of gross receipts in 2011.
  • On the tax returns, the taxpayer reduced gross receipts by cost of goods sold.  The taxpayer also deducted business expenses.  It does not appear based on the findings of fact that on the original return the taxpayer disallowed any expenses pursuant to Section 280E.
  • It appears the amount of cost of goods sold claimed on the return was, for the most part, amounts paid for purchases of inventory and did not include production costs.  At trial, the taxpayer asserted that it incurred over $100,000 of production costs each year in addition to the amounts paid for purchases of inventory.

The court found:

  • The sales of non-marijuana products were complimentary to the sales of marijuana products and therefore, were not a separate trade or business.  Even if the non-marijuana product sales were a separate trade or business, the record did not give the court any basis for determining the expenses attributable to the secondary business of sales of non-marijuana products.
  • The court applied Section 471 to determine cost of goods sold.  Section 471 allows taxpayers to include direct and indirect production costs in cost of goods sold.
  • The amount of cost of goods sold conceded by the IRS, which does not appear to include production costs, was the allowable amount of cost of goods sold because the taxpayers failed to properly account for beginning and ending inventories.
  • The taxpayer was negligent and subject to the negligence penalty because they did not keep adequate records to compute beginning and ending inventories or adequate books and records.  Further, there was no reasonable cause because the taxpayers did not seek advice regarding inventory accounting or the application of Section 280E.

Lessons and observations:

  • It is important that taxpayers subject to Section 280E use their best efforts to apply Section 280E when filing returns.
  • It is important that taxpayers subject to Section 280E properly classify costs as inventory costs when filing returns and maintain beginning and ending inventories with integrity.
  • It is important that taxpayers retain records needed to substantiate all accounting entries.
  • The substantiation issues are not unique to the marijuana industry.  However, due to high audit rates and the impact of Section 280E, the cost of the failure to substantiate is uniquely burdensome.  That being said, here, it is unclear how the failure to substantiate beginning and ending inventory also creates a restriction on the production costs that should be allowed.  Careful documentation and preparation of returns should overcome some of these burdens.

By Charles A. De Monaco, Matthew D. Lee and Jana Volante Walshak

Deputy Attorney General Rod Rosenstein unveiled a new Justice Department policy for resolving major corporate investigations last month at a speech to the New York City Bar White Collar Crime Institute.

The new policy encourages coordination among Justice Department components and other enforcement agencies in order to curb the practice of multiple government authorities imposing separate punishments on a corporate defendant for the same underlying conduct. Employing a football metaphor, Rosenstein said this new policy is meant to prevent “piling on,” which he described as “a player jumping on a pile of other players after the opponent is already tackled.”[1]

The goal of the policy is to enhance relationships with the Justice Department’s law enforcement partners in the United States and abroad, while avoiding what Rosenstein termed “unfair duplicative penalties.” And the Justice Department appears to have wasted little time in putting this policy into action, with the first such corporation resolutions of the new anti-“piling on” era announced this week, involving charges of foreign bribery and manipulation of the LIBOR interest rate.

Prior Instances of ‘Piling On’

Several corporate resolutions announced by the Justice Department over the last several years involved multiple penalties for the same underlying conduct which could be characterized as “piling on.” In 2012, international bank HSBC agreed to forfeit over $1.2 billion and enter into a deferred prosecution agreement with the Justice Department for violations of the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act.[2] In addition to the $1.2 billion forfeiture, HSBC agreed to pay $665 million in civil penalties for the same conduct to be apportioned among numerous other government agencies, including the Comptroller of the Currency, the Federal Reserve and the Treasury Department’s Financial Crimes Enforcement Network and Office of Foreign Assets Control.

In 2015, five global financial institutions pled guilty to charges that they conspired to manipulate currency prices in the foreign exchange market.[3] These banks paid a total of nearly $9 billion in fines to a long list of U.S. and foreign government agencies, including the Justice Department; the Federal Reserve; the Comptroller of the Currency; the New York State Department of Financial Services; the Commodity Futures Trading Commission; the United Kingdom’s Financial Conduct Authority; and the Swiss Financial Market Supervisory Authority.

The Justice Department’s New Corporate Resolution Policy

The Justice Department’s new anti-“piling on” policy has four key features. First, it reaffirms that the federal government’s criminal enforcement authority should not be used against a company for purposes unrelated to the investigation and prosecution of a possible crime. In particular, the Justice Department may not employ the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case.

Second, the policy addresses situations in which Justice Department attorneys in different components and offices may be seeking to resolve a corporate investigation based on the same misconduct. The new policy directs Department of Justice components to coordinate with one another, in order to achieve an overall equitable result. The coordination may include crediting and apportionment of financial penalties, fines and forfeitures, as well as other means of avoiding disproportionate punishment.

Third, the policy encourages Justice Department attorneys, when possible, to coordinate with other federal, state, local and foreign enforcement authorities seeking to resolve a case with a company for the same misconduct.

Finally, the new policy sets forth some factors that Department attorneys may evaluate in determining whether multiple penalties serve the interests of justice in a particular case. Factors identified in the policy that may guide this determination include the egregiousness of the wrongdoing; statutory mandates regarding penalties; the risk of delay in finalizing a resolution; and the adequacy and timeliness of a company’s disclosures and cooperation with the Justice Department. Rosenstein cautioned that under the new policy, the Justice Department may still seek penalties that may appear to be duplicative but are “essential to achieve justice and protect the public.” He also warned that a company’s cooperation with a different government agency or a foreign government is no substitute for cooperating with the Justice Department, and that his agency “will not look kindly on companies that come to the Department of Justice only after making inadequate disclosures to secure lenient penalties with other agencies or foreign governments.”

Rosenstein acknowledged that the new policy’s directive of cooperation is not a new idea. Certain Justice Department components and many U.S. Attorney’s Offices already coordinate with other federal agencies, including the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Reserve as well as authorities in other countries. For example, just a few months ago, the Justice Department’s Foreign Corrupt Practices Act unit announced a coordinated resolution with Brazil and Singapore.[4] The Justice Department’s Antitrust Division routinely cooperates with numerous foreign agencies in merger investigations, and its National Security Division works with the Treasury Department’s Office of Foreign Assets Control in investigations of sanctions and export control violations.

Rosenstein also reiterated that the Justice Department will continue to seek to identify and hold accountable culpable individuals in corporate investigations, a policy memorialized several years ago in the so-called “Yates Memorandum.” That policy document proclaimed that “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Rosenstein explained that in corporate investigations, the primary question remains: “Who made the decision to set the company on a course of criminal conduct?”

Rosenstein also announced the creation of a “Working Group on Corporate Enforcement and Accountability” within the Justice Department. Designed to promote consistency in the Department’s white collar efforts, the Working Group includes Justice Department leadership and senior officials from the Federal Bureau of Investigation, the Criminal Division, the Civil Division, other litigating divisions involved in significant corporate investigations and the U.S. Attorney’s Offices. The Working Group will make internal recommendations about white collar crime, corporate compliance, and related issues.

Recent Examples

In a more recent speech, Rosenstein cited two recent examples of corporate resolutions that are consistent with the Justice Department’s new anti-“piling on” directive.[5]

First, in February 2018, the Justice Department announced that a U.S. subsidiary of an international bank pled guilty to obstructing its primary federal regulator by concealing deficiencies in its anti-money laundering program.[6] There, the bank agreed to forfeit nearly $370 million, and the Justice Department agreed that $50 million of that obligation was satisfied by the payment of civil penalties to the Office of the Comptroller of the Currency in a separate administrative action.

Next, in April 2018, the Justice Department and FBI announced a deferred prosecution agreement in an FCPA investigation of the subsidiary of a global electronics company.[7] In that case, the company paid a criminal penalty of $137 million. In a related proceeding, the SEC filed a cease-and-desist order against the company, which required the payment of $143 million in disgorgement for the same conduct. Rosenstein noted that the SEC agreed to forgo the imposition of penalties given the company’s agreement to pay a criminal penalty to the Justice Department.

And in early June, the Justice Department announced the first corporate resolutions since issuance of its new corporate resolution policy. First, a global bank headquartered in Paris and a wholly owned subsidiary agreed to pay more than $860 million to resolve charges in the United States and France involving bribery in Libya and manipulation of the LIBOR interest rate.[8] The financial institution also agreed to pay $475 million in regulatory penalties and disgorgement to the Commodity Futures Trading Commission in connection with the LIBOR scheme, and $293 million to French authorities in connection with the Libyan bribery scheme. In an apparent nod to the new policy discouraging “piling on,” the United States agreed to credit the $293 million French payment against the total U.S. criminal penalty for the bribery charges.

In a related case announced the same day, a U.S. investment management firm entered into a non-prosecution agreement and agreed to pay $64 million in criminal penalties and disgorgement to settle FCPA charges relating to bribery in Libya.[9] The $64 million payment includes approximately $33 million to be paid to the United States Treasury and disgorgement of approximately $32 million, which will be credited against disgorgement paid to other law enforcement agencies within the first year of the agreement.

Conclusion

While the Justice Department’s new corporate resolution policy appears to be a step in the right direction, it remains to be seen how well the Department will be able to coordinate resolutions with other enforcement agencies, particularly those at the state level as well as foreign counterparts. For example, there may well be instances in which other interested law enforcement agencies – such as state attorneys general – may be unwilling to accept a reduced, or coordinated, punishment from a corporate wrongdoer. Without written policies to prevent “piling on” by coordinate law enforcement agencies, the Justice Department may be unable to prevent imposition of “unfair duplicative penalties.”


[1] U.S. Department of Justice Press Release, “Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute” (May 9, 2018).

[2] U.S. Department of Justice Press Release, “HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement” (Dec. 11, 2012).

[3] U.S. Department of Justice Press Release, “Five Major Banks Agree to Parent-Level Guilty Pleas” (May 20, 2015).

[4] U.S. Department of Justice Press Release, “Keppel Offshore & Marine Ltd. and U.S. Based Subsidiary Agree to Pay $422 Million in Global Penalties to Resolve Foreign Bribery Case” (Dec. 22, 2017).

[5] U.S. Department of Justice Press Release, “Deputy Attorney General Rod Rosenstein Delivers Remarks at the Bloomberg Law Leadership Forum” (May 23, 2018).

[6] U.S. Department of Justice Press Release, “Rabobank NA Pleads Guilty, Agrees to Pay Over $360 Million” (Feb. 7, 2018).

[7] U.S. Department of Justice Press Release, “Panasonic Avionics Corporation Agrees to Pay $137 Million to Resolve Foreign Corrupt Practices Act Charges” (Apr. 30, 2018).

[8] U.S. Department of Justice Press Release, “Société Générale S.A. Agrees to Pay $860 Million in Criminal Penalties for Bribing Gaddafi-Era Libyan Officials and Manipulating LIBOR Rate” (June 4, 2018).

[9] U.S. Department of Justice Press Release, “Legg Mason Inc. Agrees to Pay $64 Million in Criminal Penalties and Disgorgement to Resolve FCPA Charges Related to Bribery of Gaddafi-Era Libyan Officials” (June 4, 2018).

We previously reported that the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) had quietly extended its Geographic Targeting Orders directed at the luxury residential real estate market for another six months. In a break from its recent practice of making public announcements about GTOs, FinCEN evidently opted not to publicize this latest extension. A Miami Herald article reported that a FinCEN spokesperson stated only that “GTOs are a valuable tool and FinCEN is extending the current GTOs to continue studying this vulnerability.”

In order to seek to obtain additional information regarding the latest round of GTOs, we submitted a Freedom of Information Act request to FinCEN seeking copies of the GTOs that were set to take effect on March 21, 2018. In response, FinCEN refused to provide copies of the GTOs or any information regarding their scope. FinCEN relied upon the FOIA exemption for “records compiled for law enforcement purposes,” which allows a federal agency to withhold records if their release “would disclose techniques and/or procedures for law enforcement investigations or prosecutions, or would disclose guidelines for law enforcement investigations or prosecutions if such disclosure could reasonably be expected to risk circumvention of the law.”

We continue to monitor developments in this area and will provide updates as they become available.

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BitcoinThe American Institute of Certified Public Accountants – the world’s largest association of accounting professionals – yesterday asked the Internal Revenue Service to issue immediate, updated guidance regarding the tax treatment of cryptocurrency transactions. The AICPA call for tax guidance was prompted by “the rapid emergence of virtual currency [which] has generated several new questions on how the tax rules apply to various transactions involving virtual currency and activities and assets related to it.” The AICPA further noted that “the development in the number of types of virtual currencies and the value of these currencies make these questions both timely and relevant to a growing number of taxpayers and tax practitioners.”

Fours years ago, the IRS issued Notice 2014-21, its first and only guidance regarding the tax treatment of cryptocurrency transactions. The AICPA requests that the IRS issue immediate guidance to address issues from the original notice as well as new developments, such as chain splits, that have arisen since Notice 2014-21 was published.

The AICPA’s submission to the IRS includes suggested Frequently Asked Questions (FAQs) that address the following areas:

  • Expenses of obtaining virtual currency;
  • Acceptable valuation and documentation;
  • Computation of gains and losses;
  • Need for a de minimis election;
  • Valuation for charitable contribution purposes;
  • Virtual currency events;
  • Virtual currency held and used by a dealer;
  • Traders and dealers of virtual currency;
  • Treatment under Sec. 1031;
  • Treatment under Sec. 453;
  • Holding virtual currency in a retirement account; and
  • Foreign reporting requirements for virtual currency.

The AICPA notes that “[v]irtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client’s reporting requirements” and that “[t]he issuance of clear guidance in this area will provide confidence and clarity to preparers and taxpayers on application of the tax law to virtual currency transactions.”

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