Intellectual Property Law

In July 2007, the US Senate Judiciary Committee adjusted the terms of the Patent Reform Act of 2007, limiting infringement damages, and seeking to put an end to 'forum shopping' for patent disputes.

The legislation, introduced earlier in the year, updates current patent laws to provide reforms for patent seekers and patent holders alike.

Among many important reforms, the bipartisan, bicameral bill would create a pure "first-to-file" system to bring clarity and certainty to the US patent system. The bill also attempts to create a more "streamlined and effective" way of challenging the validity and enforceability of patents, by allowing reviews to be undertaken of patents after they have been granted.

An amendment put forward by the Chairman of the Senate Judiciary Committee, Patrick Leahy (D-Vt) would limit the amount of infringement damages that could be claimed "unless the claimant shows that the patent's specific contribution over the prior art is the predominant basis for market demand for an infringing product or process".

Meanwhile, ranking Committee member, Arlen Specter (R-Penn) proposed linking the forum in which a patent dispute can be heard to the plaintiff's place of residence or business, or the area in which the infringement is alleged to have primarily taken place.

The bill is co-sponsored by Senator Leahy and Senator Orrin Hatch (R-Utah), with the lower House companion bill sponsored by Rep. Howard Berman (D-Cal).

Although Senator Leahy was keen to get the bill approved and onto the Senate floor as soon as possible, several of the panel members called for more time to discuss the proposed changes to the legislation.

The bills were subsequently approved by both the Senate and House Judiciary Committees.

While the legislation has the strong support of the technology sector (which sees itself as more vulnerable to patent infringement actions as a result of the amount of patented technology contained in hi-tech products), pharmaceutical and biotechnology firms are less supportive, arguing that the labour and cash-intensive process of developing a new drug requires cast-iron patent protection, over as long a period as possible.

In May 2007, US Attorney General Alberto R. Gonzales highlighted the Justice Department’s ongoing efforts to protect intellectual property rights, and unveiled a comprehensive legislative proposal, entitled the “Intellectual Property Protection Act of 2007”, to members of the US Chamber of Commerce Coalition Against Counterfeiting and Piracy.

In addition to the proposed legislation, the Department’s ongoing commitment to combating intellectual property includes measures for implementing valuable resources, and aggressively prosecuting counterfeiters, both elements of the government-wide Strategy Targeting Organized Piracy (STOP) Initiative.

The Intellectual Property Protection Act of 2007 submitted to Congress by AG Gonzales aims to enhance the Justice Department's ability to prosecute crimes and protect the intellectual property rights of citizens and industries.

Among its many provisions, the Act includes measures that would:

• Increase the maximum penalty for counterfeiting offenses from 10 years to 20 years imprisonment where the defendant knowingly or recklessly causes or attempts to cause serious bodily injury, and increase the maximum penalty to life imprisonment where the defendant knowingly or recklessly causes or attempts to cause death;
• Provide stronger penalties for repeat-offenders of the copyright laws;
• Implement broad forfeiture reforms to ensure the ability to forfeit property derived from or used in the commission of criminal intellectual property offenses;
• Strengthen restitution provisions for certain intellectual property crimes (e.g., criminal copyright and DMCA offenses); and
• Ensure that the exportation and transhipment of copyright-infringing goods is a crime, just as the exportation of counterfeit goods is now criminal.

Introducing the proposed legislation, Gonzales observed that:

"IP theft is not a technicality, and its victims are not just faceless corporations — it is stealing, and it affects us all. Those who seek to undermine this cornerstone of US economic competitiveness believe that they are making easy money; that they are beyond the law. It is our responsibility and commitment to show them that they are wrong."

Also in May 2007, the US Supreme Court delivered a key decision on the role that the 'obviousness' of an invention which contains pre-existing technologies should have in the granting, or otherwise, of a patent.

The case of KSR International Co. v. Teleflex Inc centred on gas pedals manufactured and supplied by KSR to General Motors, which contain technology allowing them to be adjusted according to the height of the driver, in addition to containing an electronic engine control system.

Teleflex took infringement action against KSR in 2002, arguing that it owned the patent for such a combination of technologies. KSR countered that the obviousness of the combination should invalidate Teleflex's patent.

KSR won its case in Federal District Court in Detroit, but that decision was rejected by the United States Court of Appeals for the Federal Circuit in 2005.

The Supreme Court's verdict reversed the appeals court decision and the case was sent back to the Detroit District Court, in a move which could have far-reaching implications for the granting of patents in the United States.

Writing on behalf of his peers, Justice Anthony Kennedy reportedly observed that:

"Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may ... deprive prior inventions of their value."

Earlier that month, The Office of the United States Trade Representative on Monday published that year's edition of the Special 301 report on the perceived adequacy and effectiveness of intellectual property rights (IPR) protection by US trading partners.

“Innovation is the lifeblood of a dynamic economy here in the United States, and around the world. We must defend ideas, inventions and creativity from rip off artists and thieves,” explained US Trade Representative Susan C. Schwab, adding:

“This report underscores the Administration’s scrutiny in pinpointing challenges in protecting IPR and signals to our trading partners that effective IPR protection will remain a critical focus in US policy.”

As in previous years, the USTR’s Special 301 report highlighted the prominence of concerns with respect to China and Russia, in spite of some evidence of improvement.

The USTR explained that:

"Russia remains a focus of US trade policy in the area of intellectual property. Large-scale production and distribution of IP-infringing optical media and minimally-restrained Internet piracy are among the major problems that require more enforcement action."

"The coming months will be a critical period, as Russia moves to implement a variety of legal and law enforcement improvements to which it committed as part of a bilateral agreement with the United States on Russia’s eventual accession to the World Trade Organization (WTO). Implementation of these commitments will be essential to completing the final multilateral negotiations on the overall accession package."

However, the department added that:

"Russia made ambitious commitments to improve its IPR protection and enforcement. As part of the Special 301 report, USTR is also announcing an out-of-cycle review to evaluate Russia’s progress."

Similar out-of-cycle reviews will be carried out with respect to Brazil, the Czech Republic and Pakistan.

The Special 301 report also provided an opportunity for the US to recognize progress. Brazil is being moved to the Watch List (from Priority Watch List), reflecting significant improvements in copyright enforcement, and five other trading partners – Bahamas, Bulgaria, Croatia, the EU, and Latvia – are being removed from the Special 301 listing altogether.

This year’s Special 301 report places 43 countries on the Priority Watch List (PWL), Watch List (WL) or the Section 306 monitoring list.

Countries on the Priority Watch List are not deemed to provide an adequate level of IPR protection or enforcement, or market access for persons relying on intellectual property protection. In addition to China and Russia, 10 countries are on the PWL in this year’s report: Argentina, Chile, Egypt, India, Israel, Lebanon, Thailand, Turkey, Ukraine, and Venezuela.

Thirty trading partners are on the lower level Watch List, meriting bilateral attention to address the underlying IPR problems. The Watch List countries are: Belarus, Belize, Bolivia, Brazil, Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Hungary, Indonesia, Italy, Jamaica, Korea, Kuwait, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Saudi Arabia, Taiwan, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam.

Paraguay will continue to be subject to Section 306 monitoring under a bilateral Memorandum of Understanding that establishes objectives and actions for addressing IPR concerns in that country.

In April 2007, the US Trade Representative announced that the United States would be making two requests for World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China: one over deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products, and the other over China’s barriers to trade in books, music, videos and movies.

"Piracy and counterfeiting levels in China remain unacceptably high,” Ambassador Schwab explained, continuing:

“Inadequate protection of intellectual property rights in China costs US firms and workers billions of dollars each year, and in the case of many products, it also poses a serious risk of harm to consumers in China, the United States and around the world. We acknowledge that China’s leadership has made the protection of intellectual property rights a priority and has taken active steps to improve IPR protection and enforcement."

"However, while the United States and China have been able to work cooperatively and pragmatically on a range of IPR issues, and China has taken numerous steps to improve its protection and enforcement of intellectual property rights, we have not been able to agree on several important changes to China’s legal regime that we believe are required by China’s WTO commitments."

"Because bilateral dialogue has not resolved our concerns, we are taking the next step by requesting WTO consultations. We will continue to welcome dialogue with China in an effort to resolve these issues. We also look forward to continuing fruitful bilateral discussions with China on other important IPR matters we have been working on together, since achieving comprehensive IPR protection requires concerted efforts on many fronts. Ultimately, it is in the best interest of all nations, including China, to protect intellectual property rights.”

The US Trade Representative added:

“In the same vein, we have discussed with China in detail the harm to US industries, authors and artists who produce books, journals, movies, videos, and music caused by limiting the importation of these products to Chinese state-owned entities, and the problems caused by Chinese laws that hobble the distribution of foreign home entertainment products and publications within China. These products are favorite targets for IPR pirates, and the legal obstacles standing between these legitimate products and the consumers in China give IPR pirates the upper hand in the Chinese market.”

“As we continue to have an open dialogue with China in an effort to resolve these particular issues with the help of the WTO dispute resolution mechanisms, we will of course also continue to put serious efforts into our joint work with China on innovation policy, intellectual property protection strategies, and the range of other important matters in our bilateral economic relationship through the U.S. – China Strategic Economic Dialogue and the Joint Commission on Commerce and Trade.”

The USTR announcement came despite the decision that week by the Chinese Supreme People's Court to reduce the threshhold levels for music and movie piracy, effective immediately.

Following the decision, anyone possessing more than 500 pirated DVDs or CDs (down from 1,000) will face criminal prosecution with gaol terms of up to three years, instead of fines, while possession of more than 2,500 pirated items (down from 5,000) will triggers more severe penalties of up to seven years in prison.

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Media Law

In July 2007, John Lefebvre, the founder and former president of payment services company Neteller, pleaded guilty to charges that he conspired with others to promote illegal gambling by providing payment services in the United States to offshore internet gambling businesses.

According to Michael J. Garcia, the United States Attorney for the Southern District of New York, the Neteller Group provided payment services to internet gambling businesses located outside the United States, so those businesses could take bets from gamblers in the United States, where such betting is now illegal.

Lefebvre and fellow co-founder Stephen Lawrence, both Canadian citizens, were arrested in connection with the charges in January.

Neteller PLC, formerly known as Neteller, Inc., is an internet payment services company that was founded by Lawrence and Lefebvre in 1999. Neteller is based in the Isle of Man and its shares are listed on the London Stock Exchange, although trading in the company's stock has been suspended.

Neteller began processing internet gambling transactions in approximately July 2000. Internet payment services companies like Neteller allow gambling companies to transfer money collected from United States customers to bank accounts outside the United States. According to Neteller’s 2005 annual report, Lawrence and Lefebvre, through Neteller, provided payment services to more than 80% of worldwide gaming merchants.

Both defendants held senior positions within Neteller; Lawrence served as the company's chief executive officer until December 2002, its executive director from 2001 until mid-2003 and as chairman until May 2006. Lefebvre was president of the company from 2000 until 2002 and a board member until approximately December 2005.

Neteller has revealed that as of 18 January 2007, US customers were no longer able to transfer funds using its services to or from any online gambling site. The company's board made the decision in the light of the passing of the Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA) by Congress last year, and the attendant.

In 2005, it is said that Neteller processed over $7.3 billion in financial transactions, and prosecutors alleged that 95% of the firm's revenue was derived from money transfers involving internet gambling companies.

Lefebvre pleaded guilty to a number of charges, including: one count of conspiracy to use the wires to transmit in interstate and foreign commerce bets; conducting illegal gambling businesses; engaging in international financial transactions for the purpose of promoting illegal gambling; and operating an unlicensed money transmitting business.

Lefebvre, 55, faces a maximum sentence of 5 years’ imprisonment and a fine of $250,000, or twice the gross gain or loss from the offense, when he is sentenced before United States District Judge P. Kevin Castel on October 29, 2007. Lawrence also admitted to forfeiture allegations, requiring him to forfeit $100 million.

In a related case, Lawrence pleaded guilty on June 29, 2007 to participating in the same conspiracy and also admitted to a forfeiture allegation of $100 million, for which he is jointly responsible with Lefebvre.

In June 2007, the government of Antigua and Barbuda argued that it is entitled to compensation of US$3.4 billion from the United States to rectify the damage to its economy caused by the long-running e-gaming dispute between the two countries.

If given the go-ahead by the World Trade Organisation, Antiguan finance minister Errol Cort said in a statement that the compensation would take the form of withdrawing intellectual property protection for US trademarks, patents and industrial designs.

"We feel we have no other choice in the matter, we have fought long and hard for fair access to the US market and have won at every stage of the WTO process," said Cort. "Until such time as the United States is willing to work with us on achieving a reasonable solution to this trade dispute, we will continue to use every legitimate remedy available to protect the interests of our citizens."

The WTO’s Dispute Settlement Body was set to review Antigua & Barbuda's request at its end of July sitting and decide whether such sanctions are reasonable. If approved, the sanctions could be put into place immediately thereafter. However the US also has the right to refer the issue to further arbitration and was expected to exercise this option, thus stringing out the protracted dispute for at least another three to four months, with the dispute panel's decision not expected to come until the end of the year.

The dispute between the two countries began when the US decided to block banks and credit card companies from processing payments made by US residents to online gaming companies based offshore, citing both moral and security justifications. A huge proportion of the global e-gaming market was thus wiped out at a stroke for the 32-registered online casinos in Antigua & Barbuda, a move which also threatens the jurisdiction's attempts to diversify its economy. According to the Antiguan government, income has fallen to $130 million a year from $1 billion among the jurisdiction's online casinos in 2000, when earlier US restrictions on online gaming were imposed.

The United States decision to withdraw from one of its WTO commitments after it finally lost its battle with Antigua and Barbuda provoked a storm of outrage and concern. The previous month, it emerged that the United States had decided to sidestep the ruling by the WTO dispute resolution panel in favour of Antigua by simply rescinding one of its services agreements. "We did not intend and do not intend to have gambling as part of our services agreement," stated Deputy US Trade Representative John K. Veroneau, in an announcement that shocked many observers. "What we are doing is just clarifying our commitments."

The WTO treaty allows a country to withdraw commitments to open its services market to foreign investors. However, the US could potentially have to renegotiate with any of the other 149 member countries if they raise objections to its decision. Member countries affected by the US ban on offshore online gaming firms may also have a case to claim compensation from the US government.

In April 2007, Rep. Barney Frank (D-MA) has introduced legislation into the House of Representatives that would create an exemption to the ban on online gambling for properly licensed operators, allowing Americans to lawfully bet online.

The Internet Gambling Regulation and Enforcement Act of 2007 establishes a federal regulatory and enforcement framework to license companies to accept bets and wagers online from individuals in the US, to the extent permitted by individual states, Indian tribes and sport leagues. All such licenses would include protections against underage gambling, compulsive gambling, money laundering and fraud.

“The existing legislation is an inappropriate interference on the personal freedom of Americans and this interference should be undone,” said. Rep. Frank, who is Chairman of the House Financial Services Committee.

In 2006, the House passed the Unlawful Internet Gambling Enforcement Act, restricting the handling of payments by US financial institutions for unlawful forms of internet gambling. That law prohibits the use of payment instruments by such institutions to handle the processing of any form of internet gambling that is illegal under US federal or state law.

Frank argued that traditional forms of legalized gambling already exist in nearly every state and by continuing to prohibit internet gambling in the US, Americans who choose to gamble online are without meaningful consumer protections. He said that the proposed legislation would institute practical and enforceable standards to bring transparency to internet gambling and provide consumers the protections they expect and deserve.

In March 2007, the Recording Industry Association of America launched a new and strengthened campus anti-piracy initiative that significantly expands the scope and volume of its deterrent efforts, while offering a new process that gives students the opportunity to avoid a formal lawsuit by settling prior to a litigation being filed.

The RIAA, on behalf of the major record companies, sent 400 pre-litigation settlement letters to 13 different universities. Each letter informed the school of a forthcoming copyright infringement lawsuit against one of its students or personnel.

The RIAA requested that universities forward those letters to the appropriate network user. Under this new approach, a student (or other network user) can settle the record company claims against him or her at a discounted rate before a lawsuit is ever filed.

The initial wave of the new initiative included letters in the following quantities sent to: Arizona State University (23 pre-settlement litigation letters), Marshall University (20), North Carolina State University (37), North Dakota State University (20), Northern Illinois University (28), Ohio University (50), Syracuse University (37), University of Massachusetts – Amherst (37), University of Nebraska – Lincoln (36), University of South Florida (31), University of Southern California (20), University of Tennessee – Knoxville (28), and University of Texas – Austin (33).

The RIAA, on behalf of the major record companies, will pursue hundreds of similar enforcement actions against university network users each month.

“We have transformed how we do business, and online music has experienced a sea change compared to three years ago,” observed Mitch Bainwol, Chairman and CEO of the RIAA.

He continued:

“A legal marketplace that barely existed in 2003 is now a billion dollar business showing real promise. Many rogue sites have gone under and fans have a far better understanding of the right and wrong ways to enjoy music. No matter how much we adapt, though, any new business model must always necessarily rely upon a respect for property rights. That’s why we must continue to enforce our rights.”

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Financial Law

In July 2007, the US Securities and Exchange Commission voted unanimously to adopt a new antifraud rule under the Investment Advisers Act that will clarify the Commission's ability to bring enforcement actions under the Advisers Act.

"This rule applies to investment advisers not only of hedge funds, but also of private equity funds, venture capital funds, and mutual funds. Collectively, these funds hold trillions of dollars of investors' assets and play an important and growing role in our capital markets," explained SEC Chairman Christopher Cox.

"The rule will give the Commission an important tool to help us police this market — to deter misconduct and to call to task those who breach their obligations to investors."

The new rule will make it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool.

The rule will apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act.

Under the new rule, a pooled investment vehicle will include any investment company and any company that would be an investment company but for the exclusions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act.

Also in July 2007, it emerged that the United States Supreme Court had agreed to hear a case involving the deductibility of fees incurred by trust managers, with the verdict promising to have widespread ramifications for the US trust industry.

The case of Knight v. Commissioner of Internal Revenue, comes to the Supreme Court on appeal from the Second Circuit US Court of Appeals in New York. The outcome of the case rests on whether the court decides that trustees may deduct fees paid to outside advisors in the course of managing assets in the trust, and if so, how much.

Trustees may deduct fees, known as trustees' commissions, for managing trusts, but the lower courts have been unable to agree whether fees paid to investment advisors such as banks are deductible. The issue is complicated by the fact that the law seems to be being applied differently across the states, with some allowing the trustee to fully deduct the outside advisory fee, and others arguing that the expenses don't qualify as above-the-line deductions, and are subject to the standard 2% miscellaneous deductions limitation, as stipulated in the Internal Revenue Code.

The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust's investment management fees based on an earlier decision by the Sixth Circuit Court of Appeals. However, he subsequently lost the case in the US Tax Court, and an appeal to the Second Circuit was dismissed.

While the case was not anticipated to have a great effect on the US trust industry in terms of lost business, the verdict is expected to reach far and wide in terms of how trustees and their accountants approach the issue of tax.

In June 2007, it emerged that new legislative proposals that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services would leave the majority of US venture capital firms unaffected.

Responding to the introduction of a bill that aimed to tax such funds at 35% instead of 15%, Mark Heesen, president of the National Venture Capital Association (NVCA), said in a statement that "almost no" venture capital firms would be affected by the proposals since they are aimed at funds which are publicly traded.

"The Bill proposed by Senators Baucus (D-MT) and Grassley (R-IA) is directed at publicly-traded partnerships," Heesen stated. "As almost no venture capital firms are publicly held, this proposed legislation does not impact our business."

Heesen added that the NVCA has met with staff members of the Senate Finance Committee, Joint Tax, and the House of Representatives Ways and Means Committee over previous months to explain how the venture capital model is "taxed correctly".

"We remain hopeful that lawmakers will continue to demonstrate an understanding that the existing venture capital tax structure is appropriate and critical to economic growth in the US," Heesen stated.

The National Venture Capital Association (NVCA) represents approximately 480 venture capital and private equity firms. According to a 2006 Global Insight study, venture-backed companies accounted for 10.4 million jobs and $2.3 trillion in revenue in the United States in 2006.

Senate Finance Committee Chairman Baucus and ranking committee Republican Chuck Grassley introduced the bill because, in the words of Grassley, some firms are "pretending to be something they’re not to avoid most, if not all, corporate taxes".

"It’s unfair to allow a publicly traded company to act like a corporation but not pay corporate tax, contrary to the intent of the tax code," he said upon the bill's introduction, adding: "If left unaddressed, the tax concerns presented by the public offerings of investment managers, like private equity and hedge fund management firms, could fundamentally erode the corporate tax base."

Earlier in June 2007, a former United States Treasury Secretary suggested that fund managers receiving pay through performance fees were not paying their fair share of tax, adding fuel to the debate as to whether curbs should be placed the escalating sums earned by the top fund managers.

Sitting as a panelist at a tax reform conference organised by the Hamilton Project, part of the Brookings Institution, Robert E. Rubin, a Treasury Secretary during the Clinton administration, was asked whether it would be more appropriate for fund managers earning profits from managing others' money, known as carried interest, to pay income tax at rates of up to 35%, instead of capital gains tax, which can be taxed at 15%.

“It seems to me what is happening is people are performing a service, managing peoples’ money in a private equity form, and fees for that service would ordinarily be thought of as ordinary income,” Rubin said. He went on to state that the issue should be examined “with great seriousness” by the Congressional tax committees.

Currently, the standard basic fee structure for managers of hedge and private equity funds is 20% of gains made by the fund, plus a 2% management fee. This has helped to fuel some massive pay increases for the heads of the most successful funds. According to Alpha magazine, the average pay of the 25 top performing fund managers was $570 million last year. The highest paid of these fund managers was James Simons, chairman of Renaissance Technologies, who earned $1.7 billion.

In May 2007, the US Departments of Treasury, Justice, and Homeland Security joined together in issuing the 2007 National Money Laundering Strategy, a report detailing continued efforts to dismantle money laundering and terrorist financing networks.

"The 2007 National Money Laundering Strategy is a direct result of close cooperation by the Departments of Justice, Treasury and Homeland Security, along with our foreign counterparts, and signifies our collective commitment to fight money laundering," announced Assistant Attorney General Alice S. Fisher, of the Justice Department's Criminal Division.

She continued:

"Implementation of this strategy will greatly assist in efforts to seize and forfeit millions in illegal proceeds that flow through the international financial system."

The 2007 Strategy addresses the priority threats and vulnerabilities identified by the Money Laundering Threat Assessment released in 2006.

The Assessment – the first government-wide analysis of its kind – brought together the expertise of regulatory, law enforcement, and investigative officials from across the government, culminating in a comprehensive analysis of specific money laundering methods, patterns of abuse, geographical concentrations, and the associated legal and regulatory regimes.

The 2007 Strategy builds on initiatives and programs pioneered in preceding National Money Laundering Strategies, and places an emphasis on bolstering the efficiency of the anti-money laundering processes currently in place.

"In every type of case, from human smuggling and drug trafficking to intellectual property rights violations and illegal alien employment schemes, the need to hide and move ill-gotten gains is a constant. ICE's anti-money laundering initiatives are at the forefront of attacking existing and emerging money laundering threats" observed Julie L. Myers, Assistant Secretary for Immigration and Customs Enforcement at the Department of Homeland Security.

She added: "ICE's trade transparency unit, bulk cash smuggling initiative and programs targeting illegal money service businesses and stored value card schemes are making it less profitable to commit these crimes."

Additionally, the 2007 Strategy focuses on "leveling the playing field internationally", according to the US Treasury, by "helping to ensure U.S. financial institutions are not disadvantaged through the implementation of controls and standards to combat money laundering and terrorist financing".

The Department concluded:

"Indeed, money laundering is a global threat the United States is working to address through international bodies, including the Financial Action Task Force (FATF), and through direct private sector outreach in regions around the world."

In February 2007, bipartisan legislation was reintroduced into Congress that aimed to close the supposed $17 billion capital gains tax gap by making the tax code fairer and simpler for taxpayers, but placing more reporting requirements on brokers and mutual funds.

The Simplification Through Additional Reporting Tax (START) Act, first introduced in March 2006 was sponsored by Senators Evan Bayh (D-IN) and Tom Coburn (R-OK) and Congressmen Rahm Emanuel (D-IL) and Walter Jones (R-NC).

The legislation will require brokerage houses and mutual fund companies to track and report to taxpayers and the Internal Revenue Service investment information related to capital gains taxes. The lawmakers say that this will make it easier for taxpayers to file their tax returns and help the IRS tackle would-be cheaters who intentionally under-report capital gains, as well as taxpayers who make innocent mistakes on their tax returns.

The most common error, deliberate or otherwise, made by taxpayers when calculating gains from the sale of securities is mis-stating the original purchase price. The new legislation, which is supported by President Bush, would take the reporting out of the taxpayers' hands and require brokers to track the purchase price and report the adjusted-cost basis to the IRS.

In 2005, 32 million taxpayers reported a capital gain or loss.

The lawmakers are forecasting that the legislation would bring in $7 billion in tax revenues over ten years.

"No business would succeed if it failed to collect $17 billion in sales every year, and the United States government can't afford to operate that way either," Bayh observed.

Bayh has said that the START Act makes the tax code fairer by ensuring that the IRS receives an independent verification of individuals' investment value, as currently occurs with wages. Americans cannot underpay their taxes related to wages because their employers submit wage information reports, W-2 forms, to the IRS. No comparable reporting occurs with stocks and capital gains income.

"Reducing the deficit and simplifying the tax code is a win-win for the 130 million taxpayers who are confused by a tax code that becomes more complex and burdensome every year," Bayh concluded.

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Law For Lawyers

In July 2007, US District Judge Lewis Kaplan dismissed charges against more than a dozen former executives of accounting firm KPMG, in a legal ruling that dealt a blow to the US government's crackdown against illegal tax shelters.

In a 64-page opinion, Judge Kaplan ruled that he had little choice but to dismiss the charges against 13 former senior KPMG officials because the government had denied them their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.

While Judge Kaplan stated that his ruling had been made "with the greatest reluctance", he decided that the Justice Department had "foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice".

"This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote.

The case will proceed against against three other former KPMG staff who weren't entitled to have their legal fees covered by the firm, and also against two lawyers who did not work for KPMG.

In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in tax shelters known as Blips, Flip, Opis and Short Option Strategy. Under the agreement, prosecution was deferred, with the government agreeing to drop charges after 31st December 2006 if KPMG submitted to outside monitoring and discontinued some types of tax-related activity. The withholding of legal fees to the defendants was a condition of this settlement.

The former KPMG employees and two others were accused of helping to structure and sell the tax shelters, which were deemed abusive by the Internal Revenue Service. The agency has estimated that the tax shelters helped investors avoid some $2.5 billion in taxes.

The government has said that the case is the largest criminal trial in US history, and the ruling will be seen as a setback in its fight to stamp out abusive tax sheltering. Prosecutors have admitted that Judge Kaplan had little choice but to throw out the charges, but this could clear the way for the government to reinstate the charges on appeal.

In a statement, Michael J. Garcia, the United States Attorney for the Southern District of New York, revealed that he "respectfully disagrees" with Judge Kaplan as to whether there was any constitutional violation in this case. "We will continue to pursue appellate review," Garcia concluded.

In April 2007, a Senate Finance Committee hearing on the prevalence of tax fraud and identity theft highlighted the need for tighter control of the loosely-regulated US tax preparation industry, according to Chuck Grassley, Committee ranking member.

“Taxpayers, beware,” Grassley said. “Sharks are in the water. The predators feed on the hope of making easy money. The ease of stealing identities and the lack of federal oversight of paid tax preparers are just chum for tax cheats. Be very careful with your personal financial information. If you use a paid preparer, choose someone you really trust.”

Grassley argued that the IRS needs to pay aggressive attention to the filing of false tax returns using stolen identities. “Identity theft is one of the fastest-growing crimes in the United States, and it is increasingly being used in the filing of false returns. Yet the IRS has no systematic way of identifying cases involving claims of identity theft or the impact of these cases in terms of the dollar value of refunds issued."

He added: "Resolution of cases involving identity theft can be time consuming, frustrating and difficult for the victims. But instead of reaching out to help the taxpayers who fall victim, sometimes the IRS interrogates them as though they were the crooks.”

Grassley said in 2006, more than 62% of all individual taxpayers used a paid preparer to complete their tax return. As a result, these preparers have a direct, substantial impact on tax compliance.

“Most tax return preparers are honest, knowledgeable individuals who serve the community well in providing sound financial advice, but there are clearly some sharks in the water,” Grassley stated. “These sharks are preying on innocent taxpayers, either through bad advice, incompetence, or downright fraud.”

The Senate Finance Committee ranking member went on to add that the IRS and the Department of Justice need to pick up the pace on preparer cases. He also said Congress needs to take action to ensure that paid preparers are competent and ethical enough to maintain the integrity of the tax system. Last year, the committee passed a bill that would regulate paid preparers and provide better taxpayer protection and assistance, but it did not come before the full Senate for a vote.

“We need to look at getting a similar bill passed this year,” Grassley argued. “I understand that no amount of regulation is going to prevent outright fraud, but Congress and the IRS can do much more to protect taxpayers. Anyone can hang a shingle and call himself a tax preparer. Taxpayers are paying for professional service, and they should get it.”

Grassley urged the IRS to impose stringent oversight of the paid tax preparation community, and where applicable, impose penalties and prevent the practitioner from preparing returns and representing taxpayers before the IRS. He also said that the agency should consider whether current law provides adequate protection to prevent identity theft used in the filing of false tax returns, and what can be done to better assist identity theft victims in resolving their cases with the IRS.

In addition, Grassley suggested that the IRS should consider whether it is fulfilling its obligation to help taxpayers understand and comply with their tax obligations. This includes determining whether free electronic filing methods are effective in assisting taxpayers to determine their correct tax liability, and if not, determining the IRS’ proper role in ensuring that such a method exists.

In January 2007, the Dubai International Financial Centre (DIFC) announced the issuance of the first license to a US law firm, Akin Gump Strauss Hauer & Feld LLP, to open an office at the DIFC.

Operating from the DIFC, Akin Gump will have access to a broad range of emerging markets stretching across Africa, the Middle East and South Asia.

Akin Gump, a firm with 15 offices around the world and a well-established Middle East presence, is now registered by the Dubai Financial Services Authority and authorised to provide legal services to financial institutions operating in the DIFC.

Akin Gump’s Chairman, R. Bruce McLean, commented: “We entered the Dubai market to advise our clients on increasing investment to and from the Middle East. The area’s dramatic growth and continued development has further solidified our commitment to the region. We are very pleased to be the first US law firm to be licensed in the DIFC, and we hope that others will follow our lead.”

Nasser Alshaali, Chief Executive Officer of the DIFC Authority, stated that: “The ability to provide specialist legal advice is an important part of the infrastructure we are creating within the DIFC. As we continue to grow both horizontally and vertically, the DIFC is strengthening its many core competencies, including legal advice. The continued rapid growth of the DIFC proves that this centre has become a truly international gateway for capital, which benefits Dubai, the UAE and the wider Middle East. In this regard, we are especially pleased to welcome Akin Gump.”

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Company Law

In June 2007, a Senate subcommittee hearing on the vexed issue of executive stock options has concluded that new tax and accounting rules are needed to bring more transparency for investors regarding CEO pay, and to rein in huge and undeserved salaries enjoyed by some bosses at non-performing companies.

The hearing, held by the Senate’s Permanent Subcommittee on Investigations examined corporate accounting and tax rules that require corporations to report one set of stock option compensation figures to investors on their financial statements and completely different figures to the Internal Revenue Service on their tax returns.

Three Fortune 500 companies that were among the nine who helped the Subcommittee with its calculations contributed to the hearing, along with the Acting Commissioner of the IRS Kevin Brown, the SEC Director of Corporation Finance, and three stock option experts.

“Stock options are a major factor in the growing gap – now chasm – between executive pay and average worker pay,” said Sen. Carl Levin (D - Mich), subcommittee chairman. “Companies pay their executives with stock options in part because, right now, those stock options often generate huge tax deductions that are 2, 3, even 10 times larger than the stock option expense shown on the company books."

Levin said that nine companies examined by the subcommittee claimed stock option tax deductions over five years that exceeded their stock option expenses by more than $1 billion, or 575%, even after using tougher new accounting rules to calculate the book expense.

New IRS data, examining tax returns for periods ending between December 2004 to June 2005, shows a stock option book-tax gap of $43 billion, "which means US companies legally reduced their taxes by billions of dollars for that period by claiming $43 billion more in stock option tax deductions than the stock option compensation amount shown on their books," Levin stated.