UPDATE CARR, MORRIS & GRAEFF, P.C. 1120 G STREET, N.W., SUITE 930 • WASHINGTON, D.C. 20005-3801 • (202) 789-1000 OCTOBER - NOVEMBER 2008 CMG WELCOMES THOMAS BERGER TAX LOSS HARVESTING AND
We are proud to announce that Thomas K. Berger has become “Of Counsel” to Carr,
THE WASH-SALE RULE
Morris & Graeff. Tom’s practice concentrates predominantly on criminal and civil litiga-
tion. He has had considerable experience in handling cases before federal and state courts
decidedly in one direction; October was the
and administrative agencies, including the defense of individuals and companies accused of
worst month for the Standard & Poor’s index
federal and state criminal conduct, the representation of pilots before the Federal Aviation
of 500 stocks in 21 years — since the 1987
Administration and the representation of trucking companies in their regulatory compliance.
stock market crash. For those who hold their
He has been awarded an A-V rating by Martindale-Hubbell, the highest rating awarded by
investment portfolio at least partly in taxable
that organization for competence and integrity.
accounts, the recent downturn presents oppor-
Tom is admitted to the bars of Virginia, the District of Columbia and Mississippi. He has
tunities for year-end tax savings. (For those
practiced law since 1974. From 1974-1986 he was an Assistant United States Attorney for the
whose investment portfolio is comprised en-
Eastern District of Virginia and was the First Assistant U.S. Attorney for the Eastern District
tirely of tax-deferred retirement accounts, the
of Virginia from 1981-1986. He has been in private practice in Northern Virginia since 1986
following will not apply.) I suspect that each
and brings both talent and depth to the firm’s criminal, civil and regulatory capabilities.
of us holds a few losers in our stock portfolios
Tom is a FAA-licensed pilot, and holds single-engine land, single-engine sea, multi-en-
– now may be the time to turn that paper loss
gine land, and instrument ratings. He also holds a 50-ton U.S. Merchant Marine Master’s
into an actual loss and reap the tax savings.
$3,000 tax deduction for capital losses which can be carried over to subsequent tax years. Nevertheless, let’s review some of the “netting”
ally as nonresident aliens, are subject only to
provisions applicable between short-term and
ESTATE TAXATION OF
estate tax on their U.S.-situs assets, but are
long-term capital gains and capital losses. Your
PUERTO RICO RESIDENTS
accorded only a $60,000 exemption. United
fist step is to add together all your gains and
States realty, and the stocks and bonds of
losses. First, you net your short-term gains and
we have discussed U.S. income taxation of
U.S. companies, are typical U.S.-situs assets.
losses — that is, you calculate each individual
Puerto Rico residents. In this issue we tackle
Life insurance is not, nor are deposits in U.S.
gain or loss by subtracting the purchase price
estate taxation of such residents. The island
of the securities (including commissions)
of Puerto Rico was acquired by the U.S. from
from sales proceeds net of commission. Then
Spain under the Treaty of Paris of 1898. Puerto
considered a nonresident alien with respect
just sum everything up. You’ll come up with
Ricans have been U.S. citizens since 1917, but
to the U.S. if, at the time of death, decedent
an overall net short-term gain or loss figure.
Puerto Rico is not a state. It is organized as a
was domiciled in Puerto Rico and was a U.S.
Next, you net your long-term gains and losses
Commonwealth of the United States. As such
citizen who acquired his U.S. citizenship solely
in the same fashion. You’ll end up with either
it has no votes in the Electoral College and no
by reason of being a citizen of Puerto Rico or
a net long-term loss or a net long-term gain.
representation in Congress. Puerto Ricans,
by reason of birth or residence within Puerto
Combining your net long-term and short-term
though, are subject to conscription in the U.S.
Rico. These somewhat cryptic definitions have
armed forces and travel as U.S. citizens with
been elucidated by Treasury regulations. The
U.S. passports under the protection of the U.S.
government. Puerto Rico’s Commonwealth
• A, who acquired her U.S. citizenship un-
IN THIS ISSUE
status has given rise to a complicated estate
der Section 5 of the Act of March 2, 1917,
tax situation revolving mostly around the issue
by reason of being a citizen of Puerto Rico,
TAX: Tax Loss Harvesting and
of domiciliary status in Puerto Rico.
died there while domiciled there also. A
the Wash-Sale Rule. 1
U.S. citizens, resident aliens and domicili-
TAX: Estate Tax of Puerto
aries are subject to estate tax on their world-
• B, whose parents were U.S. citizens by vir-
Rico Residents. 1
wide estates with an exemption equal to the
tue of their birth in Philadelphia, was born
PRODUCTS LIABILITY:
applicable exclusion amount for the year in
Supreme Court Reviews Preemption. 2
question. Persons who are not U.S. citizens,
ciliary of the island. B was a nonresident
resident aliens, or domiciliaries, known gener-
alien since he acquired his U.S. citizenship
STAFF NOTES. 4 The articles in this publication are designed to give general information on the matters covered. Space limitations prevent exhaustive treatment or analysis of any topic. The articles are not intended to substitute for advice on specific legal problems.LEGAL UPDATE CARR, MORRIS & GRAEFF, P.C. PRODUCTS LIABILITY
regulators oppose the doctrine as impeding the
SUPREME COURT REVIEWS
central contention for asking the Supreme
PREEMPTION DOCTRINE
Wyeth argued that the trial court was wrong
Court to hear the case was that “Granting this
in allowing the jury to consider Ms. Levine’s
Petition would enable the Court to resolve the
claims because those claims conflicted with
pervasive and recurring conflict between state
case, Wyeth v. Levine, No. 06-1249 that is
Wyeth’s obligations under federal law regulat-
claims of power to regulate prescription drug
being closely watched by all within the busi-
ing prescription drug labels. Having satisfied
labeling and the integrity of the congressionally
ness community. Briefly, the case involves
FDA labeling regulations, Wyeth argued, it
mandated federal prescription drug labeling
is immune from state law claims of this sort.
regime that lies at the heart of the Food and
ment of approximately $6.8 million after
The Vermont appellate court rejected Wyeth’s
Drug Administration’s regulatory authority.”
suffering a severe adverse reaction to the drug
argument, holding that there was no conflict
The Petition goes on to state, “This conflict is
between state and federal law that required
currently at issue in tens of thousands of cases
Levine received Phenergan by “IV-push” to
preemption of plaintiff’s claim. The Vermont
in our nation’s courts, in which Plaintiffs claim
treat migraine headaches; her adverse reaction
appellate court noted that the trial court did
that manufacturers should have modified FDA-
resulted in the development of gangrene and
instruct jurors that they could consider the
approved prescription drug labeling,” and that,
ultimately led to amputation of her right arm
FDA’s approval of the label in use at the time
“A ruling by this Court on the preemption
below the elbow. In essence, the trial jury had
of plaintiff’s injury but that the label’s FDA
issues presented would provide invaluable
found that the drug’s label should have more
compliance did not establish the adequacy of
guidance to the hundreds of federal and state
specifically warned of the known dangers of
the warning or prevent Wyeth from strength-
judges now grappling with these claims.”
injecting Phenergan directly into a patient’s
In recent years the Bush administration,
vein. Wyeth contended that it was immune
Court stated, “We hold that the jury’s verdict
business groups and lobbying firms for busi-
from a state negligence lawsuit because the
against Defendant did not conflict with the
nesses have advocated lawsuit limitation cit-
Food and Drug Administration (“FDA”) had
FDA’s labeling requirements for Phenergan
ing the doctrine of preemption, arguing that
approved Phenergan’s labeling and, as such, the
federal regulation be afforded primacy over
state court action had been preempted by that
against IV-push administration without prior
contrary laws that may differ on a state-to-
FDA approval. The plaintiff, Diana Levine,
FDA approval and because federal labeling
state basis. Based on questioning during the
age 63, is a professional musician who is now
requirements create a floor, not a ceiling, for
November 3, 2008 oral argument, it is unclear
required to use a prosthetic limb while playing
how the court will rule concerning preemption.
The United States Supreme Court’s deci-
Justice Scalia seemed most opposed to the deci-
sion to hear Wyeth’s appeal of the Vermont
sion of the Vermont Supreme Court, stating
stemmed from a 2006 decision rendered by
Supreme Court’s affirmation of the jury award
that, “Excuse me, the risks were set forth on
the Supreme Court of Vermont in Levine vs.
is significant in that it may shed light on the
the labeling.” Continuing, he stated, “If you
Wyeth, reviewing the trial court’s judgment
preemption doctrine, which could either foster
are telling me the FDA has acted irresponsi-
against Wyeth. The fundamental ruling at is-
or impede the filing of similar cases throughout
bly, then sue the FDA. …” Justice Souter
sue was that injection of Wyeth’s drug caused
the pharmaceutical and business community
seemed more sympathetic to the reasoning of
Levine’s horrific injuries and that Wyeth was
and could involve literally billions of dollars
the Vermont Supreme Court when he stated,
liable for its failure to adequately warn users
in potential awards. The specific question
“Wyeth could have gone back to the FDA at
of possible adverse effects. On appeal of the
presented to the Supreme Court in Wyeth v.
any time and said, either based on experience
Levine is as follows: “Whether the prescription
or just rethinking of the data that we have, we
held that the plaintiff’s state law claim for
drug labeling judgments imposed on manufac-
think the label ought to be changed to say,
failure to warn was notpreempted by FDA
turers by the Food and Drug Administration
‘Don’t use IV push’.” Justice Kennedy, often
regulations. Loosely defined, “preemption”
(“FDA”) pursuant to FDA’s comprehensive
a swing vote, also seemed troubled by Wyeth’s
is a doctrine that shields a manufacturer from
safety and efficacy authority under the Federal
argument. Regardless of the outcome, the
state/common law tort claims if it can show
Food, Drug and Cosmetic Act, 21 U.S.C. §
Supreme Court’s decision in Wyeth v. Levine
its conduct satisfied applicable federal laws
301 et seq., preempt state law product liability
will certainly be a turning point in the national
and regulations. For the most part business
claims premised on the theory that differing
debate over the preemption doctrine.
advocates and business groups strongly favor
labeling judgments were necessary to make
STEPHEN GRAEFF
preemption, while consumer groups and state
1120 G STREET, N.W., SUITE 930 • WASHINGTON, D.C. 20005-3801 • (202) 789-1000 OCTOBER - NOVEMBER 2008
One final tax policy note. Presently, the U.S.
ceeds ($2,000) in another security – however,
has zero household saving. We rely largely on
beware of the Wash-Sale Rule.
nonresident aliens to provide capital for our
economic growth. Congress, as a matter of
$2,000 proceeds from the sale back into XYZ
• C, a former French citizen, acquired citi-
national security, should not put unneces-
Corporation – this is a violation of the Wash-
zenship in the U.S. through naturalization
sary tax obstacles in the way of badly needed
Sale Rule and you will lose the tax benefit of
proceedings in a court located in Puerto
foreign investment, whether from Puerto Rico
the short-term capital loss. The Wash-Sale
Rico after having qualified for citizenship
domiciliaries or other nonresident aliens. The
rule stipulates that a security is disallowed for
by residing in Puerto Rico for five years.
estate and income tax rules applicable to
a loss deduction if a substantially identical
nonresident aliens are of such mind-numbing
security is purchased within 30 days before or
complexity they only serve to discourage for-
after the sale of the security used for the loss
eign investment, while raising no more revenue
deduction. This rule was introduced to prevent
that a simpler scheme would. In any case, the
the sale of securities just for avoiding taxes.
• Finally, D, a citizen of the United States by
rules should be designed to attract maximum
The IRS does not have a clear definition of
reason of his birth in Chicago, established
investment regardless of their revenue-raising
“substantially identical”; it is determined by
residence in Puerto Rico, acquired Puerto
all the facts and circumstances in a particular
Rican citizenship, and died while a citizen
NÉSTOR CRUZ
case. Two share classes of the same fund, such
and domiciliary of Puerto Rico. D is not a
as a mutual fund and a corresponding ETF,
nonresident alien but rather is subject to
are probably substantially identical. There is
no ruling on whether two funds operated by
Since those persons who fall under the afore-
different companies tracking the same index
mentioned definition of Puerto Rico domicili-
are substantially identical; tax experts have
ary are nonresident aliens, they must take the
gains/losses can lead to any of several possible
differing opinions. Two funds tracking differ-
same precautions in investing in U.S. assets as
outcomes which you will want to review with
ent indexes, or an index fund and an actively
other nonresident aliens, especially because the
your accountant or other tax professional.
managed fund in the same asset class, should
exemption is a low $60,000. This means, when
Given the recent market climate, though, it is
not be substantially identical; again, there is
investing in U.S. realty or U.S. stock, they
likely that you will have both short-term losses
must do so through a foreign corporation. To
and net long-term gains. Net long-term gains
Therefore, when tax loss harvesting, if you
make life easier for foreign investors Treasury
can be offset by short-term losses. If short-term
do not hold proceeds of your sale for the 30-day
regulations list the foreign entities considered
loss exceeds long-term gain, the overall loss is
waiting period, you will need to find another
per se foreign corporations. The Puerto Rico
considered short-term, which means you can
security which is not substantially identical
“Corporación” is among them. Because bona
deduct up to $3,000 against other income,
(shares of one corporation cannot be substan-
fide residents of Puerto Rico are taxed by the
and then carry over any excess to next year. If
tially identical to those of another corporation;
U.S. on their world-wide income (except for
short term losses do not exceed net long-term
e.g., Ford and GM, Coke and Pepsi).
income from sources in Puerto Rico), Puerto
gains, the difference is taxed at the preferential
While never enviable, if you are sitting on
Rico domiciliaries cannot avail themselves of
a large paper loss, look at the silver lining and
the portfolio interest exemption, and thus the
Tax loss harvesting is the art of using capital
consider recognizing the loss for tax purposes.
debt itself is U.S.-situs. For nonresident aliens
losses to offset capital gains for tax purposes.
Remember, your loss will be disallowed as a
not from Puerto Rico, the debt itself would
The idea is simple – to capitalize on your cur-
deduction, or an offset of other gains, if you
not be U.S.-situs since its income would be
rent paper losses by recognizing the loss now,
invest the proceeds in a substantially identi-
and then, with the proceeds from the tax loss,
cal security within 30 days before or after the
In sum Puerto Rico domiciliaries need to
buying other securities in this depressed mar-
sale. When discussing this tax loss harvesting
be very careful when investing in U.S. assets.
ket. A clear example: you bought 50 shares
strategy with your tax professional as part of
They must first ascertain whether they would
of XYZ Corporation in January at $100 per
year-end planning, also consider maximizing
be considered nonresident aliens under the
share (total investment of $5,000), you sell the
your tax-advantaged retirement accounts,
rather complicated rules explained previously.
50 shares of XYZ Corporation in November
performing Roth IRA conversions, 529 plan
Then they must examine each asset to deter-
at $40 per share (result is a short term loss
contributions for your children or grandchil-
mine situs, bearing in mind the rules for some
of $3,000). You can claim a tax deduction of
dren, estate planning and depleting your “use
assets will differ from the regular rules. A good
$3,000 on your taxable income for the year, or
it or lose it” flexible spending accounts.
rule of thumb in order to totally avoid U.S.
use it to offset a gain you have elsewhere in your
JUSTIN BANFORD
estate taxation is to simply invest in the U.S.
portfolio by $3,000. After taking advantage of
only through a Puerto Rico “Corporación.”
the tax savings, you can now invest the pro-
LEGAL UPDATE CARR, MORRIS & GRAEFF, P.C. CARR, MORRIS STAFF NOTES & GRAEFF, P.C. Violating Rule #1. Due to a modest motorcycle mishap, Roy Morris is now sporting
some hardware holding his collarbone together. Recovery and rehab are going smoothly, but
Stephen Graeff. It is a diversified firm
Margarita and Néstor Cruz spent Thanksgiving break in Italy. While in Florence they
attended a performance of Siegried at the Teatro Comunale on the 400th anniversary of the
needs of businesses and their principals.
The firm strives to provide full service
representation to its corporate and indi-
When you’re hot. Phil Schwartz and his playing partner, Dana Eddy, rode a remarkable
vidual clients. It is designed to provide
streak of good luck, coupled with sickskills, to tie for Low Net at the Virginia State Golf
such service by organization and presenta-
Association 4-Ball Championship. Contested at Independence Golf Club in Midlothian,
tion of an array of attorneys with diverse
Phil and Dana carried the Springfield Golf and Country Club banner proudly. In order to maintain his amateur status, Phil declined to wear a CMG logo.Holiday needs. Drunken holiday office parties are so very 1960’s. As you develop your
more dignified and sedate holiday event, imagine the fun of sponsoring a group blood
cultural backgrounds of the attorneys of
donation! The American Red Cross can help: 1-800-GIVE-LIFE.
the firm are as diverse as their experience
SPECIAL WARNING, SECOND ANNOUNCEMENT: AT THE END OF OUR
Carr, Morris & Graeff, P.C., special-
CURRENT LEASE—THAT IS, FEBRUARY 28, 2009—CMG WILL BE RELOCATING TO TYSONS CORNER—THE BUSINESS HUB OF NORTHERN VIRGINIA. OUR NEW ADDRESS WILL BE: CARR, MORRIS & GRAEFF, P.C. 8300 BOONE BLVD., SUITE 250 VIENNA, VIRGINIA 22182 WE TRUST THAT OUR NEW LOCATION WILL PROVIDE EASE OF ACCESS TO ALL OF OUR CLIENTS IN THE GREATER METROPOLITAN AREA. CARR, MORRIS & GRAEFF, P.C. RETURN SERVICE REQUESTED
QUICK REFERENCE TO PSYCHOTROPIC MEDICATION® DEVELOPED BY JOHN PRESTON, PSY.D., ABPP To the best of our knowledge recommended doses and side effects listed below are accurate. However, this is meant as a general reference only, and should not serve as a guideline for prescribingof medications. Please check the manufacturer’s product information sheet or the P.D.R. for any changes in dosage sc