Oct nov 08_news

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 not preempted 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 sick skills, 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.
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Source: http://www.cmgpc.com/OctNov08.pdf