Court Denies Motion for Partial Summary Judgment on FBAR Willful Penalties (8/16/19)

A colleague alerted me to a Tax Notes article, titled Practitioners Balk at Potential DOJ Willful FBAR Argument (Tax Notes 8/16/19).  The Tax Notes link is here, but requires a subscription.  Here is the opening from the article:

Practitioners are disturbed by a possible legal stance of the Justice Department in the latest dust-up over foreign bank account reporting, which would negate reliance on a professional as a defense to willful penalties. 

Tax Notes talked with two practitioners following filings of a joint pretrial statement and proposed jury instructions in Dadurian that seemingly advanced that stance on the part of  the government. Later filings on August 15 that came in after those conversations  appear to be taking a slightly softer stance. How exactly the case will be argued at trial remains to be seen, however.  

“The government is pushing the envelope,” Steven Toscher of Hochman Salkin Toscher Perez PC said. “While most of the courts have untethered willfulness in FBAR cases from its traditional meaning, a taxpayer’s good faith — including reliance on a professional — has always been considered a defense to willful penalties.” 

In June the U.S. District Court for the Southern District of Florida denied summary judgment for Daniela Dadurian, who is facing a $2.7 million liability for failing to file FBARs for accounts owned by herself, her mother, and several foreign entities after she failed to convince the court that there’s no evidence of willfulness regarding five of the accounts at issue.  

The Justice Department has alleged that Dadurian had financial interest in or signatory authority over several foreign accounts — some with maximum balances of over $2 million in some years — but indicated on her 2007 to 2010 tax returns that she did not have such interest or authority. According to the complaint, while Dadurian had filed FBARs for Swiss and German accounts before 2007, she failed to tell Anthony Caruso, her tax return preparer for the years at issue, about her foreign assets. 

The defense, however, asserts that she did not willfully fail to report her accounts because she relied on her tax attorneys’ advice that she did not need to disclose them.  

As explained by the district court in its summary judgement order, under 31 U.S.C. section 5321(a)(5), reasonable cause is not a defense to willful FBAR violations. The court further noted that reliance on a professional may constitute reasonable cause for underpayments of tax.

Those interested and with access to Tax Notes should track down the full article with more detail.

I pulled up some documents from the case from the pacer.gov web site docket entries.  The case is United States v. Dadurian (S.D. Fla. 9:18-cv-81276).  The documents are:

• Docket Entries as of 8/16/19, here.
• Complaint, here.
• Defendant's Motion for Partial Summary Judgment, here.
• U.S. Response to Motion for Partial Summary Judgment, here.
• Defendant's Reply on Motion for Partial Summary Judgment, here.
• Court's Opinion Denying Motion for Partial Summary Judgment, here.

According to the docket entries (Dkt # 73), the parties are required to re-file proposed jury instructions and a proposed verdict form by 8/18/19 at 7pm.  I may check the new jury instruction request next week to see if they offer anything worth commenting on.

I am not sure what all the commotion reported in the article is about.  I do offer the following comments.

1.  Reasonable cause is a statutory defense from the non-willful penalty.  31 U.S.C. § 5321(a)(5)(B)(ii).  The failure of the statute to allow the defense for the willful penalty is consistent with the longstanding notion that willfulness negates reasonable cause, so that, if willfulness is present, reasonable cause as a defense is an oxymoron.

2.  Perhaps the more important question is whether reliance on a professional can negate willfulness.  Reliance on a professional is a defense to willfulness in tax crimes and the civil fraud penalty and, by projection, in FBAR willful penalty cases.  Of course, the person subject to the penalty must have given all the relevant facts to the professional, then must actually rely upon the advice of a professional, and the reliance must be reasonable under the circumstances.  In the Motion for Summary Judgment (p. 6), the defendant asserts facts relevant to this defense only for 2010.  And even there are sparse.  (I doubt that, under the facts of this case, this issue was susceptible for summary judgment, which is what the court essentially held by denying the motion.)

3.  The penalties at issue in the case are multiple year FBAR willful penalties.  The IRS has a policy for the willful penalty as follows (IRM 4.26.16.6.5.3 (11-06-2015), Penalty for Willful FBAR Violations - Calculation), here:

2. After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year. 

Note:
Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate 

3. Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval. 

4. If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner’s percentage of ownership, the highest balance will be divided equally among each of the co-owners.

4. Here are the penalties the Complaint alleges in the case.

Year		High Balance	Penalty	Percentage
2007	VP Bank (BVI)	2,514,558.45	676,344.00	26.90%
2007	VP Bank (BVI)	2,096,518.63	100,000.00	4.77%
2007	Frankfurter Bank	356,875.60	35,682.00	10.00%
2007	VP Bank	294,616.13	29,462.00	10.00%
2007	Sparkasse Bodensee	31,957.35	5,000.00	15.65%
	Totals for 2007	5,294,526.16	846,488.00	15.99%
2008	VP Bank (BVI)	1,388,118.86	100,000.00	7.20%
2008	VP Bank	366,400.73	36,640.00	10.00%
2008	Sparkasse Bodensee	20,333.34	5,000.00	24.59%
	Totals for 2008	1,774,852.93	141,640.00	7.98%
2009	Rahn & Bodmer	1,317,936.00	637,062.00	48.34%
2009	VP Bank (BVI)	1,213,990.90	100,000.00	8.24%
2009	Sparkasse Bodensee	18,000.00	5,000.00	27.78%
2009	Totals for 2009	2,549,926.90	742,062.00	29.10%
2010	Rahn & Bodmer	1,384,186.00	656,682.00	47.44%
2010	Sparkasse Bodensee	13,029.12	5,000.00	38.38%
	Totals for 2010	1,397,215.12	661,682.00	47.36%
	Penalty for All Years		2,391,872.00

[Note I spotted two number errors.  One was only a six cents difference for VPI Bank (BWI) for 2009; the other was more significant in that the 2009 Total Penalties as I calculated from the table was $5,000 less than the total presented in the table in the Complaint; I present the Total as I calculated it from the individual components; I don't know which is right; but I flag that calculation in red above]

The percentage calculation the right column is my own calculation.  The percentage of the penalties to the high balances in the account are less than 50%, sometimes significantly less than 50%.  I have not worked through the mitigation rules to determine whether they were used.