Thursday, September 21, 2017

Big Win for Taxpayer/Filer in FBAR Willful Penalty Case (9/21/17; 9/23/17)

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 154625 (E.D. Pa. 2017) (E.D. Penn. 2017), here, the District Court held that the Government had not established willfulness for the FBAR penalty and ordered refund / return of the illegal exaction the Government had collected.  I have previously written on some of the pre-trial developments in the case and provide links to those blog entries at the end of this blog.  So, I will just focus on this latest decision on the merits.  I will be rather brief since I am posting this from Dublin while on vacation (which also explains why I have been relatively silent on the blog recently).

The key points are:

1.  The trial was a one-day trial as indicated in my most recent blog (linked below).

2.  The Court found Bedrosian, presumably the principal witness for himself, credible, thus accepting some key claims he made as to his now deceased accountant's knowledge of and advice regarding the omitted foreign account. The accountant was named Handleman.  From the opinion:
Bedrosian did not tell Handelman about his Swiss account until some point in the mid-1990s, at which time Handelman advised him that he had been breaking the law every year that he did not report the account on his tax return. (Id. at 49-50.) Bedrosian asked Handleman what he recommended doing about it, and Handelman stated that he could not “unbreak the law,” and should therefore take no action. (Id. at 50-51.) Handelman assured Bedrosian that his estate could deal with it upon his death, when his money was repatriated. Heeding Handleman’s advice, Bedrosian continued to not report either Swiss account on his tax returns.
So, this is a variation of the reliance on tax professional defense to a crime or civil penalty requiring willfulness.  But, the reliance is inherently inconsistent with the ultimate holding.  Handleman, by Bedrosian's admission, told Bedrosian that he was violating the law by not reporting the account.  Hence, by his own admission, he thus knew the law and must have intended to violate it, albeit with the goal of leaving it to his estate to work out the solution.

3. Of course, Bedrosian's defense is more subtle. Bedrosian must have told his new accountant, Bransky, who started in 2007 because that accountant did check the Box yes on the Schedule B foreign account question.  The resulting FBAR, though, only included one of Bedrosian's accounts, omitting the much larger one.

4.  Then in 2008, Bedrosian began discussing this matter with his attorney.  It is not stated precisely why he began that discussion, but UBS -- the bank involved -- was then feeling the heat from the Government.  (All that is history which, although not recounted in the opinion, was very much known to the practitioner community and a number of more sophisticated lay people with an interest in knowing.)  The opinion says:  "Notably, at the time Bedrosian took these steps to rectify the issue, the government had not begun its investigation of him and he did not know that UBS had turned his information over to the IRS."  The timing here is not as detailed as I would have liked to have seen it, but it suggests that UBS had turned over information in 2008.  I thought that did not occur until 2009.  (And, my prior blog indicated that his seeking legal advice occurred in 2009.)

5.  On advice of the attorneys then consulted and without knowledge of an IRS investigation, Bedrosian amended his returns for 2004 forward and paid the resulting taxes.  As written, that appears to have been a quiet voluntary disclosure rather than OVDP.  That probably was a dicey move at the time because, on his fact pattern, I suspect that most attorneys would likely have advised the then iteration of OVDP rather than quiet disclosure.  (Remember that, at that time, the Government was asserting its right and willingness to assert multiple year FBAR willful penalties.)

6.  The Court held that the standard of review of de novo.  (Consistent with prior holding discussed in the most recent blog on the case.)

7. The Court held that the Government must prove willfulness by a preponderance of the evidence, thus falling in line with the critical mass of cases deciding that issue (either as a direct holding or as dicta).  (I have said much on that issue in prior blog entries, so won't dig into it here.)
8.  The Court held that willfulness required either knowing or reckless violation of the law.  This is the key excerpt:
But, we [in the prior memorandum order] also noted that every federal court to have considered the issue has found the correct standard to be the one used in other civil contexts—that is, a defendant has willfully violated Section 5314 when he either knowingly or recklessly fails to file an FBAR. See, e.g., Williams, 489 F. App’x at 658; Bohanec, 2016 WL 7167860, at *5; McBride, 908 F. Supp. 2d at 1204. That definition contrasts with the one proposed by Bedrosian, which is that in order for the government to sustain a willful FBAR penalty, it must meet the standard used in the criminal context and show that his actions amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991). Although on summary judgment we declined to hold what the appropriate standard of willfulness was, we indicated that the civil standard stood on far stronger precedential footing. Consistent with those dicta, we now hold that Section 5321’s requisite willful intent is satisfied by a finding that the defendant knowingly or recklessly violated the statute. The government need not prove improper motive or bad purpose.
This is a bit muddled in my mind -- although I confess some muddlement in my mind because I write this while drinking a Guinness.  I think the court may mean (although not expressly articulating it) that the intent to violate a known legal duty is the standard but that reckless conduct can satisfy that standard.  I think that is oxymoronic and probably will write on it later.

9.  The Court then further muddles (in my mid) the willful blindness concept.  Willful blindness is, I think, mainstream thinking even in a criminal case where the statute requires willfulness (e.g., tax crimes a la Cheek).  But, it still boggles my mind how something that is not intent to violate a known legal duty can rise to that intent because it is reckless.  Oh well, I have said too much in prior blog entries on this issue.  But using that relaxation of the willful specific intent standard, the Government would have a much better case.

10.  The Court then moves to the heart of the case:
At trial and in his trial brief Bedrosian acknowledged that we were likely to conclude that the civil standard of willfulness applied, and he focused his advocacy on the argument that his actions were far less egregious than those of defendants found liable in other cases for willfully violating the FBAR requirement. He summarized the facts of three cases in which the willful penalty was imposed and compared them to his own conduct, contending that the record did not support a finding that he had acted with the requisite intent. The government countered with evidence intended to show that Bedrosian was well aware that his 2007 FBAR was inadequate, such as his business acumen, the fact that Handelman had told him in the mid-1990s that his failure to report his Swiss accounts was illegal, and various indicia that he knew that he had two accounts at UBS rather than just the one that he reported. The government additionally argued that even if it was true that Bedrosian did not know he had two accounts at the time he filed his 2007 FBAR, he easily could have gotten that information by reaching out to UBS.
11.  Protecting its holding on appeal, the Court cleverly and rightly posits the issue as a factual issue -- did he have the required intent or recklessness or not?  So here is the finding on that point:
After a careful review of the record, the trial transcript, and the parties’ post-trial briefing, we cannot conclude, based on a comparison of the facts of this case compared with those of cases in which a willful FBAR penalty was imposed, that the government has proved, by a preponderance of the evidence, that Bedrosian’s violation of Section 5314 was willful.
In other words, a failure of proof.  Technically, from a trial lawyer's perspective, the Court appears not to have had evidence sufficient to find either the presence or absence of willfulness.  Rather, on the record presented, the court was in equipoise and thus held against the Government because it had failed to meet its burden of persuasion (proof) to show that Bedrosian's failure to report the large account on the FBAR was willful.

12.  The district court did find Bedrosian credible but he did not state that he was credible enough to establish nonwillfulness -- just credible enough to show that the Government's "proof" was not persuasive by a preponderance of the evidence.

13.  The Court then distinguished the cases the Government had won.

That's all for now.

Addendum 9/23/17 4:45pm.

I just want to discuss the comment in paragraph 11 and perhaps 12 relating to proof issues.  The Court's holding was that the Government had not met its burden to proof it more likely than not (preponderance of the evidence) that Bedrosian's omission of the large account from the FBAR he timely filed was willful.  That is consistent with both (i) the trier (District Court) being in equipoise and (ii) the trier affirmatively finding that Bedrosian's omission was not willful.  However, I would think that, if the Court were in a position to make the finding that Bedrosian's omission was not willful, it could have just said so and the burden of proof would be irrelevant.  So, that is why I infer that this is one of those rare cases where the trier was in equipoise.   I offer the following from my Federal Tax Procedure book (some footnotes omitted and included footnotes renumbered:
f. The Limits of Burden of Proof. 
Cases are replete with burden of persuasion verbiage – usually referred to as burden of proof – as if burden of persuasion played a role in case outcomes.  Of course, in criminal cases, burden of persuasion beyond a reasonable doubt is critical and a constitutional requirement.  But in most civil cases the assignment of the ultimate burden of persuasion only determines who wins and who loses if the trier of fact is in equipoise -- i.e., is unable to find that the fact more likely than not existed or didn’t exist.  If the trier believes that the evidence establishes that the fact more likely than not existed or did not exist, then it doesn't matter which of the parties had the burden of persuasion.  It is only where the trier is unable to make the affirmative finding that the case is affected by which party bore the burden of persuasion.  Most trial observers feel that it is rare that a trier–whether judge or jury–is in this state of equipoise so that the assignment of the burden of persuasion may not ultimately be that important an issue, but it is important in framing and trying a case, of course.  n2359 In fact, in judge tried cases, it is common for the trial judge to discuss in the opinion the burden of persuasion to a greater or lesser extent, but then to say that, after all, the discussion is irrelevant because the judge is not in a state of equipoise as to any issue. n2369
  n2350  Schaffer v. Weast, 546 U.S. 49 (2009) (“In truth, however, very few cases will be in evidentiary equipoise.”); see also Justice Ginsburg’s dissent in Schaffer, p. 68 (“And judges rarely hesitate to weigh evidence, even highly technical evidence, and to decide a matter on the merits, even when the case is a close one. Thus, cases in which an administrative law judge (ALJ) finds the evidence in precise equipoise should be few and far between.”); Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (“The shifting of an evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie . . . .”); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing the Cigaran case);  Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004); and Knudsen v. Commissioner, 131 T.C. 185, 188 (2008); Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005) (declining to decide who has the burden of proof (persuasion) because the Tax Court decides the case on the preponderance of the evidence).  See also Neil Buchanan, The Burden of Proof and Tax Law: Deja Vu Silliness (Dorf on Law Blog 6/14/13), where Professor Buchanan notes that, although it is conceptually conceivable that there might be a 50-50 case where outcome is determined by the assignment of the burden of persuasion:
In the real world, however, it is never that close (in tax cases, or in any other civil case, as my CivPro-teaching colleagues can attest).  In fact, a study in 2008 (ten years after RRA98) showed that shifting the burden of proof under the 50%-plus-a-tiny-amount standard simply makes no difference in tax cases.  The outcome is the same, no matter who formally bears the burden of proof.
   n2360 In doing so, the judges often cite the cases cited in the preceding footnote to this text or cases with the applicable circuit’s variation of this theme.  Estate of Jorgensen v. Commissioner, 2011 U.S. App. LEXIS 9203 (9th Cir. 2011) (“When, as here, the tax court decides the case based on the preponderance of the evidence and without regard to presumptions of correctness, § 7491's burden-shifting is simply not relevant”); see also Scheidelman v. Commissioner, 755 F.3d 148 (2d Cir. 2014) (burden of proof shift under § 7491 is immaterial because the position sustained is “more persuasive, regardless of the burden of proof”) .   Moreover, if a trial judge does not expressly say that he is not in equipoise, a court of appeals may effectively so determine by saying that the allocation of the burden of persuasion did not affect the decision.  See e.g., Whitehouse Hotel Ltd. Partnership v. Commissioner, 615 F.3d 321, 332-333 (5th Cir. 2010) (“there is no indication that the tax court's decision turned on the allocation of the burden”).
I note again how clever the court was in making the conclusion bullet proof on appeal.  The Court accepted the Government's key legal arguments about de novo proceeding and the preponderance of the evidence burden of persuasion and then made the key factual findings, mostly based on credibility determinations, which, on appeal can be reversed only if clearly erroneous.

Finally, I throw out some thoughts that come to mind.  In the civil tax arena where penalties are involved, there are essentially two burdens of persuasion -- the preponderance of the evidence standard for the accuracy related penalty and the clear and convincing standard for the civil fraud penalty.  For the civil fraud penalty, the Government must first prove by clear and convincing evidence that some portion of the understatement is attributable to fraud, whereupon all of the understatement as to which the IRS has asserted the civil fraud penalty will apply unless the taxpayer establishes by a preponderance of the evidence that some portion is not attributable to fraud.  § 6663(b).  In contrast, for the accuracy related penalties in § 6662, the taxpayer has the burden of persuading the trier that the penalty does not apply so long as the Government has met a burden of production as to the application of the penalty.  Conceptually, evidence required to meet a burden of production is much lower than evidence required to meet a persuasion burden by a preponderance of the evidence.  So, the Court seemed to be persuaded that the willfulness standard for the FBAR penalty was more akin to penalties that do not require the clear and convincing burden of persuasion (such as the civil fraud tax penalty) but more like an ordinary civil penalty.  But, if the court had assigned the burden of persuasion in the manner that the civil tax penalty is assigned, Bedrosian would have lost because the evidence introduced by the Government certainly would have met a production burden.  In  that case, if the court were in equipoise and, as in civil tax cases, the party bearing the burden loses, Bedrosian would have lost.

I guess what I am saying is that there is a differentiation in the assignment of the burden of persuasion for civil penalty purposes between tax and other penalties.



Prior blogs on the Bedrosian pre-trial developments
  • Order on Motion In Limine and Trial Briefs in Case Involving FBAR Willful Penalty (Federal Tax Crimes Blog 9/11/17), here.
  • Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (Federal Tax Crimes Blog 4/13/17), here.

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