Sunday, June 3, 2018

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:
According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 
• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 
More specifically, Mr. Epstein's proposed testimony includes opinions on: 
• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 
Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)
The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:
Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).
2.  On the issue the jury will resolve, the expert's report:
does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 
What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.
JAT Comments:

1.  It seems to me the guts of the holding is the second stated basis -- the testimony is irrelevant in the court's mind.  The other two bases for the holding -- not helpful to the jury on facts it must decide and risk of confusion and invasion of jury province-- are really based on the court's belief in the irrelevancy of the proferred expert testimony. If the court had affirmatively found that the testimony was relevant, I am  not sure it could have or would have made the other two holdings.

2.  I am not sure the Court got it right on the relevancy issue.  What the taxpayer should have known is not relevant when the only issue is what he actually knew, the normal standard for willfulness.  The Government seeks to make its case on a key factor -- willful blindness -- which is not a showing that the taxpayer actually knew.  The proffered expert testimony is relevant when the Government throws in willful blindness as a substitute for what the taxpayer actually knew.  In the willful blindness environment, the state of the public knowledge about the the legal duty to file the FBAR should be relevant.  It is the law the the public reasonably could have known at the time  of his alleged acts of willful blindness that permits those acts to be properly tested as to the willfulness of the blindness.

3.  Beyond whether the jury is entitled to hear this evidence as bearing on willfulness, it seems to me that that this may be like the James line of reasoning.  James v. United States, 366 U.S. 213 (1961). If given the law at the time, the duty was objectively uncertain, the charge should be dismissed even if a legally knowledgeable person might have been able to speculate what the law would ultimately be determined to be.  In other words, a person even with specific intent to violate what he thought was the law cannot be charged if the law was objectively unreasonable on the state of the law at the time.  For willfulness -- knowing the legal duty and intending to violate the duty -- the law must first be objectively reasonable and then the defendant must have subjectively have intended to violate the law.  The James issue is for the court to determine.  If indeed the duty were not objectively clear, then it seems to me that no criminal charges could stand and, by extension, no civil penalties using the same willfulness standard can stand.  (In this regard, the defendants response memo seems to harp on the uncertainty of the law as to report "stiftungs.")

4.  I offer the following documents from pacer:
  • Government's motion in limine, here
  • The Defendants' response to the motion, here.  
  • The docket entries as of today, here.
5.  The prior postings on the Garrity casee:
  • District Court Holds Government FBAR Willful Penalty Burden of Proof is Preponderance and Recklessness is Willfulness for FBAR Willful Penalty (4/5/18), here.
  • Wrongful Disclosure Counterclaim in FBAR Willful Penalty Suit Dismissed Because Decedent Taxpayer Did Not Assert the Wrongful Disclosure (5/30/16), here.
 Added 6/3/18 6:49pm:  

6.  On the subject of willfulness, this article caught my eye after posting this blog entry. Ali Watkins, When Guns Are Sold Illegally, A.T.F. Is Lenient on Punishment (NYT 6/3/18), here.  Here are the money quotes:
Lawmakers set a stringent requirement decades ago for gun inspectors: They must prove that store owners not only violated the law but intended to do so. 
* * * * 
For gun dealers to lose their licenses, the A.T.F. must prove they “willfully” violated the Gun Control Act. Violating the law is not enough to justify the loss of a license; inspectors must prove that store owners knew they were acting illegally. 
“Other regulatory statutes don’t have that,” said Adam Winkler, an expert on constitutional law and gun policy. “This is part of a larger pattern in the federal gun laws that make it hard for A.T.F. to enforce.” 
In the bureau, one former A.T.F. inspector said, that standard was seen as difficult to uphold in court, where dealers would almost certainly appeal the A.T.F.’s decision. That prompted supervisors to overrule inspectors’ recommendations to revoke licenses, said the former inspector, who requested anonymity because he continues to work with the gun industry. 
To prove violations were willful, the A.T.F. seeks to establish a record of warnings. In warning letters, senior A.T.F. officials told dealers that violating the Gun Control Act again could jeopardize their license. But a review of A.T.F. records showed that even when stores had received such warnings and continued to violate the law, supervisors let them keep operating. 
“We operated in the idea that we’re not in the business of putting people out of business,” said Earl Kleckley, a former director of industry operations in the A.T.F.’s Los Angeles field office. “We have put people out of business, but that was a situation where these business entities had more than one bite of the apple and continued to operate in a violative fashion.” 
Added Mr. Wolfe: “We used to kind of bend over backwards.” 
One A.T.F. official cited the political environment when asked why the bureau overrules inspectors’ delicensing recommendations. The official cited the 2007 nomination of Michael Sullivan, then the acting director, to be permanent head of the A.T.F. Republican senators held up the nomination over allegations from constituents, including Red’s Trading Post, that the A.T.F. was too aggressive in its oversight.
JAT Comment:  The standard is the classic Cheek willfulness.  Sounds like they won't even pursue actual intent cases that they can prove.  There is no indication of the role, if any, of willful blindness.  Certainly, if it has a role

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