In brief

On 21 January 2021, the Tax Court decided Adams Challenge (UK) Ltd. v. Commissioner, 156 T.C. No. 2, 2021 BL 19487 (2021), denying deductions to a foreign corporation because it filed its returns after the IRS had prepared returns on its behalf. Adams Challenge disputed Treas. Reg. § 1.882-4(a)(3)(i), requiring “timely” returns (defined as a period of 18 months after a due date) for a foreign corporate taxpayer to claim deductions and credits. It addressed a similar legal issue as Swallows Holding, Ltd. v. Commissioner, 126 T.C. 96 (2006), vacated and remanded, 515 F.3d 162 (3d Cir. 2008), a case whose taxpayer-friendly Tax Court decision was overturned by the Court of Appeals for the Third Circuit. While the Tax Court in Adams Challenge ultimately denied deductions to the taxpayer, it declined to overrule or otherwise reconsider its prior holding in Swallows Holding.


Background on Swallows Holding

The taxpayer in Swallows Holding was a foreign-owned Barbados corporation owning a parcel of real property in California from which it derived rental and option income. The taxpayer had not filed US federal income tax returns for taxable years 1993 through 1996, even though it generated income. In 1999, the taxpayer filed returns for the 1993 to 1996 years, claiming loss deductions while also reporting no trade or business in the United States.

The Internal Revenue Service (IRS) disallowed the loss deduction on the basis that the taxpayer had not complied with the prerequisites of Code Section 882(c)(2). Section 882(c)(2) provides that a foreign corporation may “receive the benefit of the deductions and credits allowed to it … only by filing … a true and accurate return, in the manner prescribed….” Treas. Reg. § 1.882-4(a)(3)(i) elaborates on the “manner” in which the return must be filed, such as the place of filing and consistency with subtitle F (Procedure and Administration). In addition to detailing the “manner” of filing the returns, the section 882 regulations also prescribe filing deadlines for such returns, whereby deductions will be disallowed unless a return is filed “timely,” defined as within an 18-month window.

The taxpayer plainly had filed outside the period specified in the section 882 regulations. The Tax Court nevertheless granted the taxpayer the claimed deductions because the court concluded that the adoption of the “timely” requirement in the regulations was contrary to the plain language of the statute, which only granted authority to prescribe the “manner” of filing US federal income tax returns. A majority of 12 Tax Court judges agreed with this opinion, with two other judges in concurrence in result and three in dissent.

On appeal, however, the Third Circuit reversed the Tax Court’s decision and denied the taxpayer the deduction. It held the disputed regulation to the higher Chevron standard of deference and thus concluded that the 18-month filing window created by Treas. Reg. § 1.882-4(a)(3)(i) was a “reasonable exercise of the Secretary’s authority.” This reversal by the Third Circuit does not overrule the Tax Court’s opinion provided that the taxpayer does not have a right of appeal to the Third Circuit, as provided for by Treas. Reg. § 1.6662-4(d)(3)(iii).

Since the decision in Swallows Holding, there have been several changes in the law worth noting. Under Treas. Reg. § 1.882-4(a)(3)(ii), the filing deadline of 18 months after a due date can be waived if a taxpayer “acted reasonably and in good faith in failing to file a US income tax return.” This is an adjustment from the previous “rare and unusual circumstances” standard in place before the 2003 regulation revisions, and which applied to the taxpayer in Swallows Holding.

Thus, the regulations are now more favorable to the taxpayer and presumably have reduced the number of cases where taxpayers are barred from claiming deductions and credits due to untimely returns (e.g., where the taxpayer can indicate reasonable reliance on an advisor, etc.).

Additionally, the Third Circuit took jurisdiction of the appeal of Swallows Holding because Form 1120-F returns were filed with the Internal Revenue Service Center in Philadelphia, Pennsylvania before 2006. Because Form 1120-F returns are now filed with the Internal Revenue Service Center in Ogden, Utah, any future decisions on this issue will be handled by the Tenth Circuit.

The Adams Challenge Decision

The Swallows Holding issue laid dormant and was largely forgotten by the tax community until the recent Adams Challenge decision. In Adams Challenge, the taxpayer was a UK company, whose only income-producing asset in the United States from 2009 to 2011 was a ship, the M.V. Adams Challenge. The taxpayer did not report the relevant income to the IRS, which issued a Notice of Jeopardy Assessment and Right of Appeal to the taxpayer in October 2013. In response, the taxpayer filed a Form 1120-F on December 2013 for 2011.  In April 2014, the IRS prepared returns for the taxpayer for the years 2009 and 2010. Later, in November 2014, the IRS issued a notice of deficiency to the taxpayer and denied taxpayer deductions and credits for 2009 and 2010 due to failure to file returns. As a result, the taxpayer petitioned the court in February 2015 and filed protective returns for the 2009 and 2010 years two years later in February 2017.

The taxpayer did not argue that it was entitled to deductions under the regulations. Instead, it argued that it was entitled to deductions because Treas. Reg. § 1.882-4(a)(3)(i) and the filing deadline set by it were invalid, citing the analysis in the Tax Court’s holding in Swallows Holding. The taxpayer ignored the Third Circuit’s holding in Swallows Holding on jurisdictional grounds, because appeal of the case did not lie in the Third Circuit. The IRS on the other hand requested that the Tax Court overrule its prior opinion in Swallows Holding and deny the taxpayer deductions.

The Tax Court declined to allow the taxpayer deductions or credits for the 2009 and 2010 years but also denied the IRS’ request to overrule its prior opinion. It found that the taxpayer had failed to file its 2009 and 2010 returns by the “terminal date established by section 882(c)(2), namely, the date on which the Commissioner exercised his authority … to prepare returns for it.”

The term “terminal date” is not found anywhere in the statute. It is instead a term coined by the Tax Court (previously known as the US Board of Tax Appeals) in Taylor Securities v. Commissioner, 40 B.T.A. 696 (1939). The “terminal date” is “the date on which the Commissioner exercises his authority to prepare and subscribe a return for the taxpayer under section 6020(b).” As such, the “terminal date” is “not fixed but variable,” and its only definition as adopted by the Tax Court remains the date on which the Commissioner files returns on behalf of a taxpayer.

The Tax Court did not reach the regulatory validity question because, even if the timeliness requirement of the regulations was ruled invalid, it would not allow the taxpayer to claim deductions or credits due to its failure to file returns before the “terminal date,” or the date on which the IRS filed returns for it.

Implications

The Tax Court’s refusal to grant the IRS’ request for the Tax Court to overturn its prior opinion in Swallows Holding suggests that the Tax Court holding in Swallows Holding is still good law and could be relied upon by a taxpayer that files returns past the 18-month window but before the “terminal date.”

Foreign taxpayers should still file protective returns, however. If the IRS files a return first, the foreign taxpayer may lose all deductions and credits for a given taxable year. Although the validity of the regulation mandating an 18-month filing deadline is not yet a settled question, the Tax Court-defined “terminal date” has long-standing precedent, and acts as a clear line in the sand that cannot be crossed. In other words, the period of limitations for foreign entities failing to file returns never runs.

Foreign taxpayers should identify income potentially subject to tax in the United States. This may be of special pertinence for tax year 2020 and 2021 because the pandemic has prevented some officers or employees of foreign companies or subsidiaries from leaving the United States, leading to temporary relief measures and unique tax questions. Failing to prepare a protective filing before the IRS files a return on behalf of a foreign company or subsidiary could result in the forfeiting of all deductions and credits for the taxable year, as Adams Challenge demonstrates.

The post United States: Adams challenge – A ‘challenge’ for taxpayers, or an opportunity? appeared first on Global Compliance News.

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In brief

In Mendu v. United States, the Court of Federal Claims held that penalties for failure to timely file a Report of Foreign Bank and Financial Accounts (FBAR), commonly known as “FBAR penalties,” were not subject to the Flora full payment rule, which requires a plaintiff to make payment of the full tax amount before they bring suit in the Court of Federal Claims or any US district court for the refund of any “internal-revenue tax.”


The plaintiff, Mendu, filed an action in the Court of Federal Claims challenging the assessment of a USD 752,920 FBAR penalty under 31 U.S.C. § 5321(a)(5) (willful FBAR penalty) after having made only a partial payment of USD 1,000 against the FBAR penalty, seeking to recover the USD 1,000 payment. The government filed a counter claim for the rest of the asserted FBAR penalty. Mendu then moved to dismiss the suit for lack of jurisdiction.

At issue was whether a FBAR penalty was an “internal-revenue tax” within the meaning of 28 U.S.C. § 1346(a). Section 1346(a)(1) grants district courts jurisdiction, concurrent with the Court of Federal Claims, of refund suits for any “internal-revenue tax.” The Supreme Court, in Flora v. United States, 357 U.S. 63 (1958) (“Flora I”) and, on rehearing, Flora v. United States, 362 U.S. 142 (1960) (Flora II, together with Flora I, “Flora”), interpreted section 1346(a) to require full payment of the challenged tax before jurisdiction is found—the so-called Flora full payment rule. Although 28 U.S.C. § 1491(a)(1) rather than section 1346(a)(1) typically provides the Court of Federal Claims with jurisdiction over refund suits, the Flora full payment rule also applies to refund suits before the Court of Federal Claims. Thus, in Mendu, if FBAR penalties were internal- revenue taxes within the meaning of section 1346(a), then the Flora full payment rule applied, and the court lacked jurisdiction, because the plaintiff had not paid the full FBAR penalty assessed against him. Conversely, if FBAR penalties were not internal-revenue taxes, then the Flora full payment rule did not apply, and the court had jurisdiction over the plaintiff’s claim.

Under the Bank Secrecy Act (BSA), US persons must annually report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. To properly disclose, US persons whose foreign financial accounts exceed USD 10,000 in aggregate value at any time during the calendar year must file a FBAR with the IRS on or before 30 June of the year following the calendar year for which the financial account is maintained. The accounts are reported by filing FBAR on FinCEN Form 114. The Secretary of the Treasury may impose civil money penalties on any person who fails to file a required FBAR. The civil penalties for failure to file are graduated according to the gravity of the offense, which may be either willful or non-willful.  A failure to file is willful if the taxpayer was aware of the filing requirement but intentionally did not comply. Treasury may assess FBAR penalties any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed. After timely assessment, Treasury may sue for collection, provided it does so within two years of either the date of assessment or the date on which the person was convicted of a criminal FBAR violation, whichever is later.

The court concluded that the structure of the BSA indicated that the FBAR penalty is not an “internal-revenue tax.” The court explained that, while section 1346(a) does not explicitly limit internal-revenue taxes to Title 26 taxes, Congress’s placement of FBAR penalties outside Title 26 distinguished FBAR penalties from internal-revenue taxes. Moreover, the court noted, because the FBAR penalties are not located within Title 26, the FBAR penalties are not subject to the various statutory cross-references in Title 26 that equate “penalties” with “taxes.” Both parties acknowledged that they were unable to find any example of a penalty outside Title 26 that is subject to the Flora full payment rule.

In Flora, the IRS had sent the taxpayer a notice of deficiency for income tax. Instead of filing a petition in Tax Court, the taxpayer paid part of the deficiency, filed a refund claim, and brought suit for a tax refund in district court. After recounting the history of section 1346(a)(1), the Supreme Court concluded that the statute was not intended to alter the historical practice that a taxpayer must “pay first and litigate later.” Generally, a taxpayer may appeal a deficiency in Tax Court without paying any portion of the deficiency, but once the time for filing the appeal expires, they must first pay the tax before filing any refund claim in a US district court or the Court of Federal Claims. Flora II reiterated the holding in Flora I that a claimant must pay the full tax amount prior to filing a tax refund. The Court looked to the nature of “internal-revenue tax” and the refund scheme Congress had devised and noted that the full payment rule was established because permitting partial payment in tax refund suits could seriously impair the government’s ability to collect taxes. In addition, such a suit would effectively be a suit for a declaratory judgment and would therefore contravene Congress’s prohibition of declaratory judgments over disputes with respect to Federal taxes.

The Mendu court distinguished Flora from the situation at hand and reasoned that Flora’s concerns with permitting tax refund suits prior to full payment of the disputed tax were not present in illegal exaction suits involving FBAR penalties. In particular, there was no concern that the collection of FBAR penalties would be seriously impaired without the application of a full payment rule. The court observed that, unlike the internal-revenue laws included in section 1346(a)(1), FBAR penalties are enforced mainly through a civil action to recover a civil penalty, and there were no administrative collection procedures for FBAR penalties with which a partial payment illegal exaction claim would interfere.

The plaintiff had relied heavily on Bedrosian v. United States, 912 F.3d 144 (3rd Cir. 2018) to support his assertion that the court did not have jurisdiction over the plaintiff’s claims (after a change of heart after the Court of Federal Claims rendered an opinion in a different FBAR case that was unfavorable to the plaintiff), but the court held that Bedrosian was not persuasive. In Bedrosian, the Third Circuit noted in dicta that it was “inclined to believe” that the district court did not have jurisdiction to hear Bedrosian’s refund claim because Bedrosian had brought suit after having paid only one percent of the total assessed FBAR penalty, contrary to what the court expected the Flora full payment rule required. This did not determine the jurisdictional issue, however, because the Third Circuit found that the government’s counterclaim for the full penalty amount supplied the necessary jurisdiction. Given the procedural posture, the Third Circuit left “a definitive holding on this issue for another day.”

The Third Circuit did not provide grounds for its belief that the Flora full payment rule applied, only pointing to several authorities that countered the parties’ contention that the “internal-revenue laws” under section 1346(a) referred only to laws codified in Title 26 of the US Code. While the authorities noted that “internal-revenue laws” are not limited to Title 26, the Mendu court concluded that none supported the conclusion that FBAR penalties were subject to the Flora full payment rule. In Wyodak Res. Dev. Corp. v. United States, 637 F.3d 1127 (10th Cir. 2011), for example, then Judge Gorsuch explained in concurrence that “internal-revenue laws” are defined by their function and not their placement in the US Code. The concurrence looked to the meaning of the term “internal- revenue laws” when Congress wrote it into the predecessor of section 1346(a)(1) under the Revenue Act of 1921, and argued that a law was an internal-revenue law if it was enacted pursuant to Congress’s power to tax, for the purpose of raising revenue. In contrast, a law enacted pursuant to Congress’s power to regulate private behavior was not a revenue law. The coal reclamation fees under the Surface Mining Control and Reclamation Act of 1977 (SMCRA) at issue in Wyodak was not an internal-revenue law, the concurrence argued, because its purpose was to protect the environment, in particular, by imposing a fee on coal mining and commanding that the resulting funds be used to reduce and repair the damage caused by mining activities. The concurrence also noted the SMCRA’s references to Congress’s authority to regulate interstate commerce and the statute’s consistent use of the term “fee” as opposed to “tax.” Applying this functional approach, the Mendu court held that the BSA’s stated purpose “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities” clearly extended beyond revenue raising and was regulatory in nature. The Mendu court also noted the BSA’s use of the term “civil money penalty” as opposed to “tax penalty.”

In short, under Mendu, taxpayers are permitted to bring illegal exaction suits for FBAR penalties in the Court of Federal Claims without first having paid the penalties.

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In brief

Tax equity financing transactions have become an increasingly popular way to provide a higher rate of return for outside investors and to help developers monetize an otherwise cost prohibitive project. In a recent Tax Court decision, Olsen v. Commissioner, T.C. Memo. 2021-41 (6 April 2021), the taxpayers invested in such a venture, but the result was a complete disallowance of all tax benefits because the investment was simply too good to be true and (according to the Department of Justice) a tax shelter. For individual taxpayers in particular, this case is an effective lesson on how not to structure investments in energy equipment transactions.


Background

The petitioners in Olsen were part of a group of more than 200 participants in a solar power investment plan, which a US district court held was a tax shelter and against which the court issued a permanent injunction to prevent future marketing of such transactions. See United States v. RaPower-3, LLC, 343 F. Supp. 3d 1115 (D. Utah 2018), aff’d. 960 F.3d 1240 (10th Cir. 2020). But it was the Tax Court that ultimately determined the tax consequences of the transactions. On 6 April 2021, the Tax Court ruled that the petitioners in Olsen were not entitled to any deductions and tax credits claimed as part of the solar energy transactions. The crux of the Tax Court’s holding was the fact that the solar power project never got beyond the research and development stage.

The facts in Olsen are relatively straightforward. Mr. Johnson formed International Automated Systems, Inc. (IAS), which constructed 19 towers at a testing site in Utah. IAS represented to investors that they could purchase triangular-shaped Fresnel solar lenses, which IAS would install into arrays on the towers to concentrate sunlight and convert the stored energy into electricity. Only one tower, however, was ever fully equipped with lenses. Even that tower produced only small amounts of electricity during testing and commercial production never materialized.

Having failed on its own, IAS marketed to investors, a lucrative opportunity to obtain tax benefits from energy credits and depreciation deductions. The purpose of the investment would be to “zero out” the investors’ tax liability. Enter Mr. and Mrs. Olsen. The Olsens purchased their first solar lenses in 2009. On the advice of counsel, they formed PFO Solar, LLC (“See United States v. RaPower-3, LLC,”), of which Mr. Olsen was the sole member, to be the nominal holder of the lenses. The Olsens then signed an “Equipment Purchase Agreement” with IAS, by which they agreed to purchase USD 60,000 worth of lenses: the payment was structured with USD 18,000 as a down-payment and the remaining balance was due only if the project produced electricity. The Agreement designated LTB, an LLC formed by Mr. Johnson, as responsible for ensuring installation of the lenses, though LTB itself was not a party to the agreement.

The Olsens claimed some tax credits on their 2009 tax return and carried forward the unused balance to 2010. In 2011, they purchased more lenses, this time with LTB acting as a purported “lessee” and with a slightly altered payment structure. Petitioners repeated this process in 2012, 2013, and 2014, purchasing USD 242,000 of lenses in those years. During 2009-2014, Mr. Olsen’s day job was as a law firm associate. At trial, Mr. Olsen admitted that he “occasionally read email updates” on the project, “did not [do] much” with his holding entity PFO Solar, and never actually saw a lens in operation producing electricity. Nevertheless, petitioners claimed depreciation deductions for PFO Solar on Schedule C and investment tax credits under section 48. Petitioners carried forward their claimed tax benefits to succeeding tax years, to the extent allowable depreciation deductions and credits exceeded their taxable income. The IRS disallowed all of these deductions and credits on the basis that the lenses were not used in a trade or business, held for the production of income, or placed in service during the relevant tax year.

The Tax Court sustained the IRS’s disallowance in full based on four considerations: (1) the Olsens were not engaged in a “trade or business”; (2) the Olsens did not hold the property for the “production of income”; (3) the solar lenses were never “placed in service”; and (4) the Olsens’ invest ment was a passive activity.

Trade or Business

Taxpayers typically must be engaged in a trade or business to claim most business expense deductions. In the energy credit space, section 48 investment tax credits are available only for depreciable property. Property is depreciable under section 167 if it satisfies the “trade or business” requirement. A taxpayer engages in a “trade or business” if the taxpayer is involved in the activity “with continuity and regularity” and the “primary purpose” for the activity is to earn profit or income. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). The frequency of activities is key, and sporadic activities do not rise to the level of a “trade or business.” See id. at 35. Moreover, managing one’s own investments does not constitute a “trade or business.” See Higgins v. Commissioner, 312 U.S. 212, 216 (1941).

In Olsen, the sum of the petitioners’ activities consisted of: (1) signing documents purporting to lease solar lenses to one of Mr. Johnson’s LLCs; (2) writing checks to IAS and the LLC; and (3) emailing the promoters of the investment transaction. Petitioners formed PFO Solar to “create the appearance of a trade or business,” but did not provide evidence that PFO Solar performed any business activities or had business records, employees, or a bank account. Further, the Tax Court determined that petitioners did not utilize or possess any of the lenses they purchased from IAS and the LLC and could not establish that they engaged in a sale-leaseback transaction that gave rise to a rental trade or business.

Production of Income

Second, tax planners should consider whether the taxpayer will hold the property for the production of income. Under section 167, depreciation deductions are allowed if the taxpayer is either engaged in a trade or business or holds property for the production of income. Section 212 provides taxpayers a deduction for ordinary and necessary expenses incurred “for the production or collection of income.” To meet the “production of income” requirement, the taxpayer must have engaged in activities “with a profit-seeking motive, independent of tax savings.” Collins v. Commissioner, T.C. Memo. 2011-37. To determine whether taxpayers have a profit motive, courts consider: the time and effort the taxpayer devotes to the activity; the manner in which the taxpayer carries it on; the expertise of the taxpayer and his advisors; the taxpayer’s history of income and losses from the activity; any expectation that property used in the activity will appreciate in value; and the financial status of the taxpayer. See Treas. Reg. § 1.183-2(b). If a taxpayer is not engaged in an activity for profit, then deductions are allowed only if they would be allowed regardless of whether the activity was engaged in for profit or if the deductions do not exceed the taxpayer’s gross income from the activity. See section 183.

In Olsen, the Tax Court held that petitioners also failed the “production of income” requirement. The Court noted that the solar lenses generated no income and would generate no future income unless they produced electricity, which was highly unlikely because the project had not progressed past the research and development stage. Further, the Tax Court held that petitioners “had no expectation that the lenses would appreciate in value,” did not request a refund or attempt to “cut [their] losses” when it became clear the lenses would never be profitable, and had substantial income from other sources that would otherwise be zeroed out with the tax benefits from the transaction. Based on these facts, the court found that petitioners purchased the solar lenses primarily to secure tax benefits, not to earn a profit. Because petitioners were not engaged in a trade or business and did not hold the solar lenses for the production of income, they were not entitled to the section 48 investment tax credit.

Placed into Service

The third time was not the charm for petitioners, as they also failed to show the solar lenses were “placed into service.” Property used in a trade or business must be “placed into service” during the year to claim deductions and credits with respect to that the property. See Treas. Reg. § 1.167(a)-10(b); Treas. Reg. § 1.46-3(d)(1)(ii). An asset is “placed in service” when it is “placed in a condition or state of readiness and availability for a specifically assigned function.” Treas. Reg. § 1.167(a)-11(e)(1)(i). If the asset is “an individual component that is designed to operate as a part of a larger system [but] is incapable of contributing to the system in isolation,” the asset “is not regarded as placed in service until the entire system reaches a condition of readiness and availability for its specifically assigned function.” Green Gas Del. Statutory Tr. v. Commissioner, 147 T.C. 1, 52 (2016), aff’d, 903 F.3d 138 (D.C. Cir. 2018).

Applying a five-factor test, the Tax Court rejected petitioners’ argument that the solar lenses were placed into service because they were held out for lease. The court distinguished the lenses from solar hot water heaters that were held to be in a ready condition because lenses are “mere components of a system” (i.e., they can’t operate independently). The court noted that there was no evidence that petitioners’ lenses were ever installed. And even if the lenses had been installed, there was no evidence that they were capable of producing electricity.

Passive Activity

Finally, petitioners forgot a basic rule of tax planning for individuals – passive activity losses and tax credits generally cannot reduce income from “active” activities (e.g., employment income). A “passive activity” includes any activity “in which the taxpayer does not materially participate” and generally includes “any rental activity.” Section 469(c)(1)-(2). A taxpayer is treated as “materially participating” in an activity only if he is involved in its operations on a basis that is “regular,” “continuous,” and “substantial.” Section 469(h)(1).

Petitioners had no passive income during 2010-2014 and thus, even if depreciation deductions were allowed, the losses generated by the deductions would be nondeductible passive losses. See section 469(d)(1). Similarly, because the taxpayer had no regular tax liability allocable to passive activities, any allowable energy credits would be passive activity credits that could not be claimed currently. See section 469(d)(2).

Lessons Learned

The silver lining in Olsen was that because the IRS failed to get written penalty approval the petitioners did not have to pay penalties and interest, which likely would have been substantial because the initial tax benefits were claimed in 2010. As tax equity financing structures become increasingly popular with individual taxpayers, projects such as solar panels or lenses may become common ways to obtain quick tax savings. But before pulling the trigger, taxpayers would be wise to seek counsel to make sure they can jump through the multiple hoops in the Internal Revenue Code before claiming beneficial depreciation deductions and tax credits. Otherwise, taxpayers may find their sought after tax benefits to be like the electricity in Olsen – all theory and no spark.

The post United States: Want to claim solar energy tax credits? Lessons on how to avoid common foot-faults in structuring transactions appeared first on Global Compliance News.

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On May 18, 2021, the Office of the United States Trade Representative (USTR) published in the Federal Register a notice that the Parties to the United States-Mexico-Canada Agreement (USMCA) intend to hold the first meeting of the Environment Committee (Committee) virtually, on June 17, 2021. Following the government-to-government meeting, the Committee will hold a virtual public session. The Office of the USTR will accept comments on suggestions for topics to be discussed during the Committee meeting, and questions for the public session. On The Parties’ will host a virtual public session of the Committee June 17, 2021, from 3:00 p.m. to 5:00 p.m. EST*. The deadline for submission of written comments on suggestions for meeting topics and questions for the public session is June 4, 2021, at 11:59 p.m. EST*. [*Should be EDT.]

The post United States: First United States-Mexico-Canada Agreement Environment Committee meeting appeared first on Global Compliance News.

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In brief

Please join us for a new weekly video series, hosted by Baker McKenzie’s North America Government Enforcement partners Tom Firestone and Jerome Tomas.

This weekly briefing is available on demand and will cover hot topics and current enforcement actions related to white collar crime and criminal investigations in the US and abroad to arm you with the information you need to start your business week.

As one of the largest global law firms, we will call upon our exceptionally deep and broad bench of white collar experts throughout the world and particularly in the commercial hubs of Europe, Asia, Africa and Latin America to join our weekly discussion series.

These briefings will cover:

  • High-profile DOJ case updates and implications
  • SEC enforcement developments 
  • CFTC enforcement developments
  • Other white collar defense industry developments 

9 June 2021

This week’s discussion will cover the following: 

  • Potential SEC ESG Disclosure Rulemaking and Materiality:  Commissioners Allison Herren Lee and Elad Roisman Continue to Volley
  • White House strategy statement on corruption and national security
  • Belarus sanctions
  • Bulgaria sanctions
  • Executive Order on Western Balkans

Video Link 

Podcast Link

25 May 2021

This week’s discussion will cover the following: 

  • Insight on Gary Gensler’s SEC Enforcement Agenda: SEC Chair’s Remarks at 2021 FINRA Annual Conference
  • Discussion of Treasury’s Plan to Increase IRS Enforcement and Narrow the Tax Gap
  • Update on Nord Stream 2 Sanctions 

Video link 

18 May 2021

This week’s discussion will cover the following:

  • Russian Response to US Sanctions and Designation of US as an “Unfriendly” Country  
  • Trial of Mayor of Fall River, Massachusetts for Extorting Marijuana Businesses  
  • The Challenges of Fitting Modern Practices into Old Laws: SEC Commissioner Hester Peirce’s Statement Regarding an Index Fund SEC Settlement  
  • SEC’s Continued Slow Embrace of Crypto Assets: Division of Investment Management’s Statement on ETF Holdings of Crypto Assets and Potential Enforcement Implications  to Assets and Potential Enforcement Implications  

Video Link

10 May 2021

This week’s discussion will cover the following:

  • Crypto developments:  SEC Chair Gensler’s Testimony, Dogecoin and Saturday Night Live
  • The “Swiss George Floyd Case”  (for more information about this case, please see this documentary featuring Simon Ntah here

Video Link

3 May 2021

This week’s discussion will cover the following:

  • First Voluntary Self-Disclosure of Sanctions and Export Violations Leads to Settlement between Software Company and DOJ
  • The Sudden Resignation of SEC Enforcement Director Alex Oh:  What is Next For SEC Enforcement?

Video Link

26 April 2021

This week’s discussion will cover the following:

  • New SEC Enforcement Director Alex Oh: What It May Mean For SEC Enforcement
  • DOJ Pattern and Practice Investigation of Minneapolis Police Department

Video Link

19 April 2021

This week’s discussion will cover the following:

  • First guilty plea in Capitol attack cases: What it means for future prosecutions
  • New Russia sanctions: What they do and don’t do, and what could be next
  • Comments by Acting Director of the SEC’s Division of Corporation Finance, “SPACs, IPOs and Liability Risk under the Securities Laws”: What it means for SEC enforcement

Video Link

12 April 2021

This week’s discussion will cover the following:

  • Criminal Antitrust Prosecutions of No Poaching and Wage Fixing Agreements: Perspective of a Leading Antitrust Lawyer.
  • Enforcement perspectives arising out of the SEC’s April 9, 2021 “Risk Alert” relating to ESG products and services offered by investment advisers, registered investment companies and private funds.
  • DOJ Priorities under the Biden Administration: What the Budget Tells Us.

Video Link

30 March 2021

This week’s discussion will cover the following:

  • SEC Enforcement Sweep Looks Into SPAC IPOs
  • New Legal Issues in the Capitol Riot Cases

Video Link

15 March 2021

This week’s discussion will cover the following:

  • DOJ/SEC FCPA priorities
  • Oath Keepers conspiracy case
  • New Russian law to protect officials against corruption charges
  • Does SEC Commissioner Crenshaw’s speech about increased corporate penalties foreshadow a possible retraction of the SEC’s 2006 Statement Concerning Financial Penalties and what we can expect from corporate securities enforcement over the next 4 years?

Video Link

8 March 2021

This week’s discussion will cover the following:

  • This week, Jerome is joined by his partners Amy Greer and Jen Klass and they will dig deep into the enforcement issues presented by the SEC’s “Enforcement Task Force Focused on Climate and ESG Issues” 

Video Link

1 March 2021

This week’s discussion will cover the following:

  • The SEC’s Plan to Dig Into Public Company Climate Change Disclosures: A White Collar Enforcement Perspective
  • Key Takeaways from Merrick Garland Confirmation Hearing
  • Update on Capitol Riot Cases
  • Secretary Blinken Statement on Anticorruption Champions 

Video Link

22 February 2021

This week’s discussion will cover the following:

  • Potential prosecution of former President Trump for incitement of the Capitol attack
  • The SEC’s latest message following the “The Market Events”: trading suspension in In the Matter of SpectraScience, Inc. 
  • New Transparency International Corruption Report
  • The SEC’s ICO enforcement initiative lives on: SEC v. Coinseed, Inc., et al. (S.D.N.Y. 17 February 2021)

Video Link

15 February 2021

This week’s discussion will cover the following:

  • Update on Capitol riot cases
  • The legal definition  of “incitement of insurrection” 
  • Discussion of the reported DOJ and SEC investigations into the retail traders in last month’s market events
  • A reminder on the scope of the US insider trading laws, courtesy of SEC v. Mark Ahn (D. Mass) (also a parallel criminal case was filed)

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8 February 2021

This week’s discussion will cover the following:

  • An update on the Capitol Riots
  • Consideration of new sanctions on Russia
  • An update on stock market events, including the FINRA notice on broker-dealer “game-style” trading apps 

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1 February 2021

This week’s discussion will cover the following:

  • Analysis of the Reddit/WallStreetBets-driven stock surges, with a special appearance by Jerome’s 15 year old son, Sam, who has been following the events on Reddit and Discord  
  • Discussion of the Hoskins appeal and the future of the FCPA’s “Agency” theory
  • Update on the Capitol raid prosecutions

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18 January 2021

This week’s discussion will cover the following:

  • New SEC Enforcement Statute of Limitations and Disgorgement Provisions Contained in the NDAA
  • New AML Whistleblower Bounty Provision in the NDAA
  • Criminal charges against Capitol rioters
  • Julian Assange extradition case

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4 January 2021

This week’s discussion will cover the following:

  • What criminal statutes might apply to the attack on the Capitol?
    • 18 USC 2383 – Rebellion or Insurrection
    • 18 USC 2384 – Seditious Conspiracy
    • 18 USC 1752 – Restricted Building or Grounds
  • What, if any, criminal statutes might apply to President Trump’s call last week with Georgia Secretary of State?
  • The 25th Amendment — A brief history of the amendment, what the amendment provides for and how it might apply in light of these events.

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14 December 2020

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07 December 2020

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23 November 2020

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16 November 2020

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9 November 2020

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26 October 2020

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19 October 2020

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5 October 2020

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29 September 2020

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8 September 2020

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24 August 2020

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17 August 2020

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10 August 2020

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3 August 2020

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27 July 2020

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20 July 2020

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13 July 2020

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6 July 2020

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29 June 2020

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22 June 2020

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17 June 2020

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9 June 2020

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26 May 2020 

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On April 28, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued a final rule amending and reissuing the Somalia Sanctions Regulations, 31 C.F.R. Part 551 (“Regulations”) to further implement two existing Executive Orders, Executive Order 13536 of April 2010 and Executive Order 13620 of July 2012, and to replace the prior Somalia Sanctions Regulations that were published in May 2010 in abbreviated form.  The Regulations also add a number of definitions and provisions to bring the Regulations in line with other more recent OFAC sanctions regimes, and add several new general licenses.   

Executive Order 13536 (as amended by Executive Order 13620) was issued to block property of those who threatened the peace, security, or stability of Somalia, after the US government found increased acts of violence in the country, piracy off the Somali coast, and violations of a United Nations arms embargo.  Executive Order 13536 covers, among others, entities and individuals who threatened peacekeeping operations, obstructed the delivery of humanitarian assistance, or directly or indirectly supplied or received arms or assistance related to military activities in Somalia.  The names of individuals and entities designated pursuant to Executive Order 13536, as amended, whose property and interests in property are therefore blocked, are included in OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”) with the identifier “[SOMALIA].” 

Executive Order 13620 added a prohibition on the importation into the United States of charcoal from Somalia after Somalia’s charcoal exports had been found to generate revenue for the militant group Harakat al-Shabaab al-Mujahideen.  As part of the implementation of Executive Order 13620, the Regulations now prohibit the importation, directly or indirectly, of charcoal from Somalia.  

Further, the Regulations add provisions and definitions similar to other, more recently issued OFAC sanctions regimes, such as the requirement to hold blocked funds in an interest-bearing blocked account, the prohibition on evading or causing a violation of the relevant restrictions, and the application of the “50% rule” under which an entity owned 50% or more by one or more blocked persons is also blocked, even if not identified on the SDN List.  OFAC also added a few new definitions, including “charcoal,” which for purposes of the sanctions regulations means “any product classifiable in heading 3802 or 4402 of the Harmonized Tariff Schedule of the United States.” Lastly, the Regulations include new general licenses authorizing US financial institutions to invest and reinvest blocked assets credited to a blocked account, payments for certain legal services from funds originating outside the United States, and official activities of the United States Government and United Nations agencies and organizations. OFAC also removed the requirement that payment for emergency medical services be specifically licensed, which had previously been a condition of the general license authorizing provision and receipt of nonscheduled emergency medical services.

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In brief

Shelter-in-place or stay-at-home orders have been prevalent throughout the United States since March 2020 as state and local governments have sought to protect their citizens from the spread of the COVID-19 virus while at the same time reopen their economies in accordance with phased reopening plans. Keeping abreast of the evolving nature of these orders and plans as the spread of the virus continues to evolve is critical to the functioning of all businesses throughout the country.


Baker McKenzie has a team in place that has been advising clients real-time on these most critical issues since the first orders were enacted. We are pleased to provide this Tracker, which identifies the relevant state-wide shelter-in-place orders and their related expiration dates, as well as the applicable state-wide reopening plans, in each of the 50 United States plus Washington, D.C. The “What’s Open” table on each page highlights the reopening status of four major sectors (office, manufacturing, retail and bars/restaurants).

In addition, the Tracker includes links to the relevant quarantine requirements or recommendations for incoming travelers in each state plus Washington, D.C.

Key developments reflected in this week’s update to the Tracker include the following:

  • The following jurisdictions extended their state-wide orders and/or the duration of the current phase of their reopening plans: Indiana, New Hampshire and New York.
  • The following jurisdictions eased restrictions, mask requirements and/or advanced to the next phase of their reopening plan: Colorado, New Mexico, Ohio, Rhode Island, Washington and Wyoming.

You can also view our brochure which highlights key areas of expertise where we can support your business’s tracking and reopening plans. Please call or email your regular Baker McKenzie contact if you require additional analysis regarding these matters.

Last updated 4 June 2021

Download US Shelter-In-Place / Reopening Tracker

The post United States: US State Shelter-In-Place/Reopening Tracker appeared first on Global Compliance News.

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On April 20, 2021, the Biden Administration took steps to address cybersecurity risks in the US energy sector industrial base by announcing a 100-day cybersecurity initiative for electricity subsector industrial control systems (“100-Day Plan”) and by issuing, on April 22, 2021, a Request for Information to inform future recommendations for US energy systems’ supply chain security (“RFI”).  Public comments in response to the RFI are due by June 7, 2021. 

These actions support the Biden Administration’s February 24, 2021 Executive Order on “America’s Supply Chains” (“Executive Order 14017” or “Supply Chain EO”), which, among other things, directed the heads of appropriate federal agencies, to, (i) within 100 days, identify and make recommendations to address risks in the supply chain for certain technologies and critical goods, and, (ii) within one year, review and make recommendations to improve supply chains for a wide range of industrial sectors.  These actions also mark the Biden Administration’s first efforts to formulate a new approach to specifically address the US energy sector’s supply chain security following President Biden’s suspension of Executive Order 13920 (“Bulk-Power System EO” or “BPS EO”). 

To see details on the 100-Day Plan and the RFI, please read the rest of this article by Alex LamyRyan Michael Poitras and Michael A. Stoker on our Global Supply Chain Compliance Blog here.

The post US – Biden Administration takes steps to address cybersecurity risks to the energy sector supply chain appeared first on Global Compliance News.

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In brief

The City of Chicago recently issued nexus guidance and a limited safe harbor for City tax purposes in light of the US Supreme Court’s pivotal South Dakota v. Wayfair ruling and the State of Illinois’ statutory economic nexus standards. True to form, the City implemented its new nexus standards by executive action via publication of a “nexus and safe harbor” “information bulletin” on its website (available on the City’s website, here), as opposed to the Chicago City Council more formally (and more appropriately) adopting a new ordinance.


The City’s Information Bulletin provides that as a home rule municipality, the state statutory economic nexus thresholds applicable for Illinois sales/use tax nexus do not directly apply for City tax purposes. Thus, while the City will consider whether a business has exceeded the Illinois economic nexus thresholds, which generally consist of USD 100,000 or more in sales or 200 or more transactions during the immediately preceding 12-month period, the City’s inquiry will not end there. Whether the City has the authority to require a given business to collect its taxes is a combined question of law and fact that must be analyzed on a case-by-case basis. Other factors the City may consider broadly include: “agreements that the entity has with other businesses in Chicago; activities that the entity’s employees or other agents perform on the entity’s behalf in Chicago; any physical presence that the entity has in Chicago; advertising directed at Chicago customers; and any other facts that support or oppose the conclusion that the entity has purposefully availed itself of the privilege of carrying on business in Chicago.”

In sum, the City has declared the State’s economic nexus thresholds to be inapplicable for the myriad of local taxes administered by the City (e.g., amusement tax, cigarette tax, hotel accommodations tax, lease transaction tax, liquor tax, restaurant tax, use tax, etc.).

Notwithstanding the broad and somewhat ambiguous economic nexus standard outlined above, the Information Bulletin does attempt to provide some certainty but only in limited circumstances. More specifically, beginning 1 July 2021, the City will offer a safe harbor for “an out-of-state entity that received under USD 100,000 in revenue from Chicago customers during the most recent four calendar quarters ….” However, this safe harbor is narrowly limited to “(i) Chicago’s amusement tax … as applied to amusements that are delivered electronically ; and (ii) Chicago’s personal property lease transaction tax … as applied to nonpossessory computer leases.”

Key takeaways

Under the auspices of executive action (i.e., an informal information bulletin), the City has finally addressed application of “economic nexus” to the numerous local taxes it administers. Unfortunately, other than the narrow circumstances outlined above, the nexus standard set by the City fails to provide the certainty and clarity multistate taxpayers deserve when attempting to effectively determine their state and local filing obligations. The lack of a clear economic nexus or safe harbor threshold — applicable to all of its taxes — is questionable, at best, and arguably is in conflict with the US Constitution’s Commerce Clause requirement for substantial nexus, as set forth by the US Supreme Court in Wayfair. Going forward, multistate taxpayers with operations or customers located in the City will need to closely examine their business activities in order to determine whether nexus exists and consider requesting a private letter ruling.

Baker McKenzie will continue to monitor developments regarding City of Chicago taxes.

The post United States: The City of Chicago issues nexus guidance and safe harbor in light of Wayfair and Illinois State level “economic nexus” standards appeared first on Global Compliance News.

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On May 12, 2021, the US International Trade Commission (USITC) announced that it had issued a report recommending that the President make certain modifications to the Harmonized Tariff Schedule of the United States (HTS) to conform it with World Customs Organization (WCO) amendments to the global Harmonized System. The USITC’s report, Recommended Modifications in the Harmonized Tariff Schedule, 2021, Inv. No. 1205-13, USITC Publication 5171, March 2021, is available on the USITC web site. The announcement said:

The recommended HTS amendments relate to a wide range of products and product groups, including, for example: flat panel display modules; 3D printers; unmanned aerial vehicles (i.e., drones); electric vehicles; tobacco products intended for inhalation without combustion; edible insect products; virgin and extra virgin olive oil; cell therapy products; rapid diagnostic test kits for detecting the Zika virus and other mosquito-borne diseases; placebos and double-blinded clinical trial kits; electronic waste (e-waste) and other hazardous waste; amusement park equipment; and cultural articles (i.e., antiquities).

The USITC’s actions are the latest step in a process that began when WCO officials approved changes to the Harmonized System nomenclature in June 2019.  Countries around the world must incorporate the changes into their national nomenclature systems.  The USITC maintains and updates the HTS, which is the United States’ product category system.   

Following expiration of a 60-day layover period before the Congress, the President is authorized to proclaim the modifications to the HTS.  The amendments enter into force on January 1, 2022.

The post United States: USITC recommends that the President make certain modifications to the US Harmonized Tariff Schedule Nomenclature appeared first on Global Compliance News.

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