Tuesday, January 24, 2012

Government Appeal of Williams FBAR Case (1/24/12)

Readers will recall that I have posted several blogs on the Williams case where the trial judge refused to find willfulness for purposes of the onerous FBAR penalty.   I post the prior blogs at the end of this blog.  The Government appealed the case.  I now provide links to the Government's briefs.  (Note that these links are to pdf copies that I OCR'd within the pdf file and I provide certain highlights related to the points I discuss in this blog.)

The key points I note are as follows:

1. A lot of the fight is about whether Williams should be bound by -- hanged by, perhaps -- statements he made during a plea allocution in the earlier criminal case.  I am not going to comment on that.

2. A key argument the Government makes if it cannot hang Williams on those statements is that willfulness for purposes of the FBAR penalty is perhaps not the same as Cheek willfulness or even Ratzlaf willfulness (Ratzlaf v. United States, 510 U.S. 135 (1994), the statutory amendment for Ratzlaf did not amend the willfulness civil penalty in question here).  Willfulness is not a term with a single meaning, but certainly in the tax law it has a specific meaning -- intentional violation of a known legal duty.  And, Ratzlaf said it had that meaning the Treasury reporting requirements.  So a good argument, I  think, can be made that the standard is the same as the Cheek standard, but the Government argues otherwise.  Indeed, the Government claims that recklessness will  suffice -- in effect, the Government imports something like a conscious avoidance (aka willful blindness and other terms) into the concept.  I suppose that, if willful should be interpreted by analogy to the criminal provisions requiring willfulness, then perhaps the conscious avoidance concept, if valid for criminal purposes for the high willfulness standard, should also apply for civil FBAR willfulness.  (See my prior blogs on conscious avoidance by clicking the conscious avoidance link below.)  In any event, it seems to me that the standard should not be different, only a less strict standard of proof applies in a civil case.

3. There is no discussion in the briefs about the burden of proof the Government is required to meet.  I have discussed this issue before (see blog cited below), and believe that the burden is clear and convincing.  The trial judge in Williams applied a preponderance standard, and held that the Government even failed to meet that burden.  If the judge was right as to the quality of the Government's evidence, then necessarily the Government failed to meet the clear and convincing standard.  Nevertheless, since a key part of the Government's argument is that, on the record, the trial judge erred in making the finding that the Government had not proved willfulness, it is surprising that Williams did not try to engage this issue so as to require that the Government clear a greater hurdle for this argument to gain traction.  Indeed, since nothing is really engaged on this issue, I am concerned that the Court of Appeals would be lulled into the repeating the preponderance error (if indeed it is error).

The case is tentatively calendared for during the 3/20/12 - 3/23/12 argument session.

Added 4/10/12:  The case was argued on 3/21/12.  Judges Motz, Shedd and Agee were on the panel.  The Wikipedia entries for the panel judges are:  Motz (here), Shedd (here) and Agee (here).  The case was argued by Robert William Metzler for the U.S. and David Harold Dickieson for Williams.

United States Opening Brief in Williams Case, here.

Williams Answering Brief in Williams Case, here.

United States Reply Brief in Williams Case, here.

Prior Blogs:

NTA Discussion of the Williams Case (1/12/12), here.

Burden of Proof for Willfulness in FBAR Violations (9/6/11), here.

The Williams Offshore Account Saga Continues - You Win Some, You Lose Some (4/28/11), here.

Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10), here.

See also these blogs for related content:

Practitioner Experience with No Answers to the FBAR Question on Form 1040 (10/5/10), here.

Government Pursues FBAR Penalty in Civil Case (10/31/10), here.

27 comments:

  1. Jack

    I am not a lawyer, but I was wondering about one thing. Even if the government prevails in this case, the question is whether the taxpayer in an FBAR willfulness case needs to have either pled (Williams) or been successfully charged with civil fraud for the government to sustain an FBAR willfulness penalty based almost entirely on ticking No or not ticking the Schedule B question about foreign accounts.

    The Williams case implies that at the trial level, even that may not be sufficient to establish FBAR willfulness. I know these are technically different statutes, but it seems to me the government would have a hard time establishing FBAR willfulness unless they also had a case (or a plea) establishing civil fraud or the like on the tax return.

    I'm not sure I've put my point well, but I was trying to advance a reason why in this case the government's burden of proof might be lower (because Williams had pled to tax crimes already).

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  2. Jack

    This case has likely been argued by now. Any idea when the Appeals court may issue a ruling? Given that large sums might be involved here for some people under FBAR audit (either on opt out or under normal audit), I am surprised that no lawyer or group of lawyers submitted an Amicus Curae brief arguing for the higher standard of evidence for civil FBAR violations.

    If the Appeals Court's decision seems to (as you say) suggest that simply answering the foreign account question incorrectly on Schedule B is sufficient o establish willfulness, do you think it would embolden the Government to apply (or at least wield) the civil FBAR willfulness penalty) more liberally even in the case of taxpayers whose cases are more nuanced than Williams (who is probably the poster child for whom FBAR penalties were made).

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    1. The blog entry indicates that the case was calendared for oral argument in March. Times vary for decision after oral argument, but my guess (really just speculation) that the decision will come no earlier than June.

      Best,

      Jack Townsend

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    2. The oral argument was on 3/21/12. I have added to the blog entry the names of the judges on the panel at oral argument and the counsel arguing the case.

      Jack Townsend

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  3. Its interesting to compare this case with United States vs. Sturman (virtually the only appeals case other than Williams that deals with filing FBARs), the appeals court said


    The evidence in this case establishes that Reuben Sturman did take actions to conceal his assets from the federal government. He concealed his signature authority, his interests in various transactions, and his interest in corporations transferring cash to foreign banks. This conduct could be adequate for the jury to infer willfulness on the part of the defendant. In addition, the defendant did admit knowledge of and failure to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to a booklet that further outlines their responsibilities for reporting foreign bank transactions. This booklet discusses the duty to file Form 90-22.1. These resources indicate that the defendant could have learned of the additional requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant's failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.


    These are obviously different cases, decades apart, and Sturman was held to a higher standard of proof (criminal violation). Of course, Williams' actions do not seem as egregious and did not involve money skimmed from US businesses. Also, he did not 'admit knowledge of and fail to answer' the foreign account question, whereas there was apparently evidence that Sturman did.

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    1. Excellent comments! Thanks,

      Jack Townsend

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  4. Jack

    Do you know if there are cases where the government has seriously tried (i.e. not just as a ploy to get a settlement/plea) to take over 50% of the total offshore balance by using multi-year violations ? In the criminal cases, 50% seems to be the highest amount, but in that case, the other party also has to plead guilty.

    But in pure civil cases (say, against some of the UBS customers who did not do a VD), or against people discovered on routine audit, have you heard from other practitioners of clients being asked to settle for a multi-year FBAR violation ? There are constitutional concerns (although each year is technically a separate incident), and the government would have to prove a willful violation for each year, so their task would become even harder, and that could serve as a restraint.

    In the case of the Wisconsin surgeon, Dr. Ahuja. the last indictment charged 4 or so years of FBAR violation, but I'm not sure if that was just to get him to plea to a single year. The case doesn't seem to have gone to trial yet.

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    1. I am not aware of the Government trying to take more than 50%. I doubt that in the prototypical case, the Government would do so. By prototypical I would mean basically the same funds in the account from year to year. I think it might be different, for example, if $1,000,000 of income came in and was taken out each year, so that the account balance never exceeded $1,000,000 but really, over a six year period, $6,000,000 in funds were involved. Then, I could see the Government requiring 50% but including more years.

      As to Dr. Ahuja, it is usual if a plea deal cannot be reached in advance of indictment for the indictment to include multiple counts of the crimes in the scope of investigation. Then, if a plea deal can be reached after indictment, the plea will involve one or two felony counts, with the others being dismissed.

      If the case goes to trial and conviction is obtained on multiple felony counts, it is often the case that, except for the acceptance of responsibility favorable downward adjustment, the sentencing calculations will be basically the same under the Sentencing Guidelines whether one or two counts are involved or many more. One caveat to that is that, should the defendant take the stand and commit perjury, the court might impose an upward adjustment for obstruction.

      Jack Townsend

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  5. Jack

    The judge in the Williams trial had the following to say on the burden of proof issue:


    The Court agrees that a de novo standard is appropriate here. Though Eren is not wholly on point, the Court looks to the rationale in providing de novo review in a trial before the tax court as instructive in this case. Further, in enforcement actions brought by the Government in other contexts, e.g., U.S. S.E.C. v. Pirate Investor LLC,580 F.3d 233, 239 (4th Cir. 2009) (§ 10(b) enforcement action under the Securities Exchange Act of 1934); Hi-Tech Pharm., Inc. v. Crawford,544 F.3d 1187, 1191 (11th Cir. 2008) (enforcement actions brought under the Federal Food, Drug, and Cosmetic Act); Reich v. Local 89,36 F.3d 1470, 1474 (9th Cir. 1994) (Labor-Management Reporting and Disclosure Act of 1959), the Government is required to prove its case by a preponderance of the evidence on the record established at trial. The Court is also persuaded that a de novo standard is appropriate given that 31 U.S.C. § 5321 provides for no adjudicatory hearing before an FBAR penalty is assessed. See United States v. Healy Tibbitts Const. Co.,713 F.2d 1469, 1475 (9th Cir. 1983) ("where, as here, the statute contemplates a full adjudicatory hearing before the agency, a court trial de novo is inappropriate" (emphasis added));


    I'm not a lawyer, but it seems like the judge was more concerned about the issue of whether a 'de novo' trial was appropriate at all, rather than the standard of evidence. You have commented earlier (even including an IRS memo) that the analogy seems to be with tax fraud rather than other government actions to collect penalties, so the higher standard of proof should apply. Could the argument be made in a court (even though it apparently wasn't made or necessary in this case) that the analogy is not with other administrative penalties, but the civil fraud penalty, and hence the higher standard should apply ?

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    1. Yes. That is exactly the point.

      Thanks,

      Jack

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    2. Jack, thanks. So would it also follow that if there was no established of tax fraud (civil or criminal), there would be an even stronger argument for the 'clear and convincing evidence' standard for FBAR willful penalties ?

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    3. I am not sure I follow your reasoning.

      I think the clear and convincing evidence standard should arise from the willfulness interpretation under Ratzlaf (essentially a criminal-type standard in the original BSA and in the tax code). In a criminal context, willfulness must be proved beyond a reasonable doubt. In the civil tax context, the willfulness counterpart (fraud or evasion) requires clear and convincing proof.

      The civil tax requirement for clear and convincing evidence when the IRS asserts fraud has some background. It is common in pleadings and in proof that the assertion of fraud requires special burdens by the party who asserts it. The proffering party must plead with particularity and must prove by clear and convincing evidence.

      I see no policy reason that the burdens should be any lighter in the FBAR civil penalty context. Willfulness for the FBAR civil penalty is essentially the same as civil taqx fraud -- requiring proof of intentional violation of a known legal duty (the same standard for tax crimes). The policy rationale for clear and convincing for fraud in the civil tax context is equally applicable to the willfulness for civil FBAR penalties. IF that is the case, then it would follow that the clear and convincing standard of proof is required for willfulness for the FBAR civil penalty.

      Jack Townsend

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    4. Jack

      Sorry, I didn't phrase myself well. What I meant to convey was that a lawyer defending a taxpayer in an FBAR civil penalty case against whom the government did not have an established case of civil and/or criminal tax fraud (i.e. a less culpable defendant than Mr. Williams) may find it easier to argue that the FBAR civil penalty application should be held to a higher standard of evidence.

      Your argument, as I understand it, is that the analogy with civil tax fraud means that the standard of evidence should be 'clear and convincing evidence' in any case, irrespective of the defendant's tax situation.

      I did read the Ratzlaf opinion, and I understand the underlying criminal statute has been changed (but not the civil statute), but is the relevance to the FBAR filing issue restricted to the evidence standard, or does it also have some implication for some of the complicated reasoning when attempting to classify conscious avoidance as willful ? [ I'm afraid I didn't phrase that as well as I hoped]

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    5. To Rsearcher,

      Thanks for your interest in the blog and your obvious willingness to chase down your issues yourself.

      I think the evidence standard is a discrete issue from the conscious avoidance that courts use to as a proxy for willfulness. I think conscious avoidance as a substitute for willfulness -- willfulness is what Congress enacted -- is flawed. Willfulness as defined is the intentional violation of a known legal duty. Conscious avoidance is, after all, avoidance or ignorance as it is sometimes called. The knowledge to form the required intent is simply absent, otherwise the conscious avoidance concept would be irrelevant. However, the Supreme Court spoke on that issue in an unrelated civil context recently and embraced the conscious avoidance notion. So, I am in the minority on that but I don't think we have seen the last word on the issue.

      Jack Townsend

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    6. Jack

      Returning to the level of evidence required, it seems the crux of the matter is whether FBAR civil penalty standards should be similar to those of civil tax fraud, OR similar to those of other governmental penalties such as SEC insider trading penalties (which use the lower standard). Its possible the legislative history of the act may clarify what Congress intended (then again, maybe Congress leaves such matters for the courts). Irrespective of the resolution of this case, I think we may see further clarification of this matter in the courts.

      Continuing the SEC penalty analogy a little, I read the justification for the lower standard of evidence in insider trading cases was the competing interests of both parties -- the interest of the government in maintaining fair capital markets justified the lower evidentiary standard for insider trading penalties. By contrast, when it comes to FBAR penalties, the government has alternate tools in its arsenal (tax penalties, the non-willful penalty), so it could be argued that the government's interest is less compelling in this case, and the higher evidence standard should apply. [ I don't know if I'm splitting legal hairs here ]

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    7. Good analysis.

      Thanks,

      Jack Townsend

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  6. Jack

    has this case been decided yet ?  And while that may be tea leaf reading, is the fact that the case was actually argued orally an indication that the verdict may be reversed (at least in part) ?

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  7. I don't believe the case has been decided yet. It should be decided soon, though.

    Having oral argument does not indicate that the district court's judgment will be reversed, in whole or in part. The Court can and does dispense with oral argument where the law as presented in the briefs is relatively settled and little benefit would be achieved by oral argument.

    One factor, probably unquantifiable in terms of predicting the result, is that the Government is selective in talking appeals from adverse district court decisions. The approval of the Solicitor General of the United States is required, and recommendations have to be made by several levels in the Tax Division. Hence, the Government does not appeal trial court Government losses with the same frequency that taxpayers appeal trial court losses. Whether the Fourth Circuit took that into consideration or not is not known.

    Also, both parties have to state whether, in their view, oral arguments would be helpful. I would suspect that both parties stated in their briefs that oral argument would be helpful. That is not binding on the Court of Appeals, but it is taken into account.

    Finally, given the dearth of cases involving the FBAR penalty, I suspect that the Court of Appeals would be reluctant to treat Williams as a routine case. Important, at least interim, law will be made in Williams, regardless of who wins.

    Jack Townsend

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  8.  Jack

    Do you think the main reason for the government's interest (other than the obvious fact that they think Williams makes  a good poster boy for the FBAR penalty) is that they want to strengthen their position that someone who has pled to/been charged successfully with criminal (or even civil) tax fraud would be barred from contesting the FBAR penalty ?

    I saw your recent blog entry on the Pfleuger case, and he pled to criminal tax charges, but no FBAR criminal charges. The plea agreement (which you posted) says that it doesn't stop the IRS from assessing "taxes, penalties and interest". The penalty type is not defined, but presumably the IRS/DoJ might try and assess and collect a civil FBAR penalty against Mr. Pfleuger. The government's argument would be strengthened if they could establish the position I mention above, even in a different circuit.

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  9. The reason the Government appealed Williams is that, on the facts, Williams is a good case for the application of the FBAR willfulness penalty. In addition, there is sparse appellate authority on the interpretation and application of the FBAR penalty, so I think the Government probably wants that type of guidance for future cases, particularly if the Government wins (as it imagines it can and will).

    Also, I am not sure that conviction of civil tax fraud (I presume, evasion, under 7201) would bar contesting the FBAR penalty. In fact, I don't think that the elements of collateral estoppel are present. But, I do think that, by proving up the facts underlying the tax fraud plea, the Government would go a long way in proving the FBAR case. In this regard, a savvy prosecutor drafting the plea agreement factual statement could probably lock the defendant in on this. Indeed in the plea agreements under the initiative, the FBAR penalty is agreed upon.

    As to Pfuueger, it appears from everything I know about that case, that the case did not arise from the offshore account initiative but rather from other investigations and that the non-FBAR considerations really shaped the case. In this sense it is an outlier.

    However, in the offshore initiative criminal cases, the Government did usually offer the defendant taxpayer a choice of plea to tax perjury (7206(1)) or FBAR violation. All other things being equal, most taxpayers, particularly with large amounts involved, would take the tax perjury plea because it is a 3-year maximum sentence rather than 5-years for the FBAR violation.

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  10. Jack

    This case does not seem to have been resolved yet. Is it correct to say that the Appellate Court would have to review whether Williams violated the statute willfully as a matter of fact (and so it would have to find plain error to overrule) ? Or would it be a matter of law, which the appeals court reviews de novo ?  I would assume that if the court were evaluating only for plain error, they would have ruled by now ...

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  11. I think the way the judge decided the case, the review would be of a fact finding unless the court of appeals thinks that the trial judge articulated the wrong legal standard. I don't think the trial judge applied the wrong legal standard,, so I think it will be reviewed as a fact finding subject to the "clearly erroneous" standard of review.

    A classic statement of the "clearly erroneous" standard is (John B. Magree and Gerald Goldman, Uncut Gems: Judicial Review in Economic Substance Appeals, 2007 TNT 152-36 (2007)):

    "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948) (review of Sherman Act determination). Under that test, the fact-finder's choice between "two permissible views of the evidence . . . cannot be clearly erroneous." Anderson v. City of Bessemer, 470 U.S. 564, 574 (1985) (review of determination under Title VII of the Civil Rights Act of 1964). Even if a different ruling might be correct, the appellate court "may not reverse" as long as the trial court's "account of the evidence is plausible in light of the record viewed in its entirety." Id.

    Jack Townsend

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  12.  I remember listening to a transcript of the oral argument from the 4th circuit's web site. The government lawyer claimed that the judge committed an error of law by stating that there was no motive for Williams to conceal his account -- I think the reasoning the DoJ lawyer used was that a improper motivation is not needed for willfulness and hence alluding to motivation was an error of law. However, given that state of mind is important to prove willfulness, it seems to me that a judge should definitely take motivation into account when deciding whether a violation is willful. And so its a  matter of fact, not a matter of law.

    As I recollect, the DoJ lawer was also asked flat out whether checking the Schedule B box No was sufficient to show reckless disregard, willful blindness etc. The DoJ lawyer hemmed and hawed, but finally said that he thought it could be enough, but there was much more in the case.

    Side Comment: My recollection is that both lawyers (but particularly the government lawyer) seemed  unprepared and stumbling at times. It must be nerve wracking to be faced with a barrage of questions from 3 appellate judges, but I would assume that arguing in appellate court is a high point for any lawyer, and that a lawyer facing such a panel should prepare better.

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  13. The oral argument is here:

    http://coop.ca4.uscourts.gov/OAarchive/mp3/10-2230-20120321.mp3

    Jack Townsend

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  14. I should also note that both counsel should be experienced in appellate advocacy. The DOJ Tax lawyer is with the Appellate Section which exclusively handles cases in the court of appeals. (I used to work in that section.) Given that this was a government appeal in a very important case, it is likely that he had at least 2 years experience, so he should not be a novice. Still, I was surprised that he was unable to give more direct answers to the judge's questions.

    Mr. Williams' attorney is also experienced. I don't know his appellate experience, but he is an experienced lawyer with a good reputation in tax controversy matters.

    I guess what surprised me most was the misfocused questions of the judges. Of course, they are generalist judges who would probably know little more than they read in the briefs, and I have not gone back to the briefs to see whether they addressed some of the notions the judge's inquired about. Nevertheless, it did seem to me that the judges moved rather quickly to a wrong proposition of law -- that merely checking the Schedule B question no would, per se and as a matter of law, render the tax return signer as at least sufficiently reckless to be willful and draw the FBAR penalty. I am not sure that the judge asking that question was satisfied with Williams' lawyer's answer on that. That is troubling.

    Jack Townsend

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  15. Jack

    I thought Williams' lawyer did reasonably well on the oral  argument, but did make one potentially important mistake. He was asked about the Sturman case (you've blogged about that before), and admitted he was not familiar with the case ( I assume it was mentioned in the Government's briefs).  That case is distinguishable, since Sturman admitted he knew about and failed to answer the the Schedule B question.

    [I suppose Williams lawyer could also have included in his briefs 2 of the points you mention above: 1) That if anything, the judge should have used a higher standard of proof 2) That the 'reckless disregard' standard may not be appropriate for Title 31 civil willfulness]

    As the recent Supreme Court decision on health care reform shows, it may be hard to predict a decision based on oral argument. Nonetheless, my impression is that the judges seemed skeptical of the argument that merely ticking the Schedule B question was sufficient to demonstrate willfulness, and indeed I recollect that even the government lawyer seemed to partially concede that when asked whether it mattered that Williams was a sophisticated international lawyer (I think the answer was that it did matter, but that means conceding one needs to go beyond that one Schedule B matter to look at all the facts of the case).

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