Monday, May 18, 2020

Court Re-Calculates Willful Penalties Found to Be Arbitrary (5/18/20; 8/28/20)

In United States v. Schwarzbaum (S.D. Fla. Dkt 18-cv-81147 Order Dtd 5/18/20), here, following through on its earlier opinion holding the calculation of willful FBAR penalties to be arbitrary and capricious, the Court recalculated the willful FBAR penalties.  The recalculation resulted in a reduction of the willful penalty for 2007-2009 from $13,729,591.00 to $12,907,952.00, resulting in a $891,639 reduction in FBAR and, presumably, commensurately reduced penalties and interest.  I previously wrote on the earlier opinion.  District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/21/20; 3/24/20), here.  I also wrote on a later case that relied on that earlier opinion in Schwarzbaum.  District Court Denies Summary Judgment on Willfulness But Finds Penalty Allocation Arbitrary and Capricious (Federal Tax Crimes Blog 5/15/20), here.

For the current order I make the following comments:

1.  According to the opinion (Slip Op. 6), the Government’s original “mitigated willful FBAR” penalty calculation amount was $35,729,591.  For that proposition, the Court cites its earlier order which offers no explanation.  Perhaps there is an explanation in the documents the Court earlier relied upon, but I have not traced that down because it is not necessary for analysis here.  I do note that, however, that extraploating from the numbers stated in the opinion, it is not at all clear to me how that original number of $35,729,591 could be reached.  The IRM process is to take 50% of the aggregate high amount for the highest year (which I presume eliminated duplications in the year for intra account transfers) which would mean that the aggregate high amount for highest year (which then included 2006-2009) would have been $74,479,182.  From the June 30 numbers offered in the opinion, it is hard to extrapolate that high a number during the respective years.  (Note that my presumption might not be correct that duplications were eliminated and that could explain why the IRS realized that the indicated high values produced an inappropriate FBAR amount; in addition, to the extent that the indicated amounts allocated to the years produced an amount in any given year in excess of the capped penalty of 50% of the amounts on the respective June 30, there would have to be an adjustment as well.)

2.  As I noted in the second blog entry above, if the calculation had been pursuant to the IRM, the IRS’s calculation should have produced an FBAR penalty in each year that was not in excess of the maximum 50% of account values on the respective June 30 reporting date.  So, it is not clear to me on the face of the opinion exactly what the differences between the Court’s calculations and the IRS’s mitigated calculations.  Perhaps it could be because the Court refused to base its calculations on estimated June 30 amounts for some accounts which the Government asked it to do.  Perhaps if those estimated accounts were used, the formula could have produced the $13,729,591.00.  But, by declining to use estimated values, thus limiting the penalty to $100,000 for accounts with higher estimates, the difference may be explained.  Perhaps someone who digs into the details of the case could offer an explanation that I could post here.

3.  The Court's refusal to permit the estimated June 30 balances for some accounts means that it is in the interest of a person otherwise subject (or potentially subject) to the FBAR willful penalty to obfuscate and stymy, by failing to cooperate in obtaining or helping the IRS obtain the key June 30 documents, in which case the penalty for a court demanding exact numbers will be $100,000 per account even if it is clear from other information that the account likely had millions of dollars and thus, with the correct information, the penalty would be much higher.

4.  I am still not certain that the Court's arbitrary and capricious holding is correct, at least if the IRS's penalty calculations followed the IRM procedure to cap the penalty for each year at the maximum allowed by the balances on the respective June 30 date.  The willful penalty is up to $100,000 or 50% of the amount on June 30.  The penalty can be less, and the IRM provides for mitigated penalties in some cases.  Congress clearly gave the agency (here, by delegation, the IRS) the authority to impose a lesser penalty, and that is a discretion permitted to the agency, not to the courts.  If the IRS has some logical method to determine penalties in lesser amounts than the maximum authorized by law that is not totally arbitrary, I think it should stand.  Here, that is all the IRM allocation method does -- permit an allocation that will be, in most cases, lesser than the maximum penalty allowed by law.  That allocation is based on the high aggregated balances in the high year.  If the IRS had allocated according to the June 30 balances, certainly that method would have withstood scrutiny.

5.  I mentioned above eliminating duplicate amounts.  Example, T has bank account at FBank 1 with high amount in year of $1,000,000 and FBank 2 with high amount of $1,000,000.   If that were the year used (the high year), the indicated FBAR max penalty under the IRM method would be $1,000,000.  But, if the amount is a duplication (e.g., the $1,000,000 were transferred from FBank 1 to FBank 2 on 9/1 of that year, then it should be eliminated in determining the maximum penalty, so that, if that year were the high year, the penalty base would be $1,000,000 and the penalty $500,000.  Of course, if as the statute requires the penalty is based on the June 30 value, eliminations will not be needed.

6.  The Court appeared irked that Schwarzbaum attempted to raise new arguments not within the scope of what the Court requested in the earlier opinion.  (Slip Op. 2-6.)  The Court said “those arguments are being raised for the first time in this case and, in any event, lack merit.”  I won’t dig into those arguments here.

7.  Added 5/19/20 at 3:00pm: For those who were paying attention to the very early parries in the IRS and DOJ initiatives against foreign banks, the first prominent Swiss bank to surface as a target was UBS in mid-2008. (Even before that, though, just for historical context, UBS and other prominent foreign banks commonly played roles in the rounds of bullshit tax shelters by making fake loans or offering tax indifferent parties, to permit U.S. taxpayers to raid the fisc for which they earned outsized fees.)  The 2008 initiatives included a John Doe Summons for records to help identify U.S. taxpayers with undeclared deposits in UBS.  By early 2009, UBS had settled with DOJ, requiring that it disclose U.S. taxpayer accounts.  And guilty pleas for UBS clients began to appear.  So with that bare outline of a trajectory, notice the Schwarzbaum pattern of bank accounts on the key FBAR reporting dates (June 30 following each reporting year) (see Slip Op. 9-10):
  • For the Swiss Banks on the 2007 reporting date on 6/30/08, UBS was the bank with by far the outsize deposits on 6/30/08 ($4,307,801 for one account and only an estimated balance for the other, which I infer from the amounts for 2008 (next bullet point) had a significant amount on 6/30/08).
  • For the Swiss Banks on the 2008 reporting date on 6/30/09, UBS is still there, but in much smaller amounts with new Swiss banks (e.g., Clariden Leu and Raiffeisen in particular) showing large amounts.  The inference is that the Schwarzbaums moved the money from UBS in order to avoid detection (a futile prospect, but they did not know that then).  In my practice and other opportunities to watch what was going on, I observed this pattern of moving deposits from UBS to other "friendly" Swiss banks as the Government bore down on UBS starting in 2008, but accelerating in 2009.
  • For the Swiss Banks on the 2009 reporting date of 6/30/10, UBS is gone altogether (from which I infer that the UBS accounts closed out in 2008), Clariden Leu is still there with an amount in the same ball park, Raiffeisen shows a $0 amount, but a new bank, Banca Amer, shows $3,078,492 (from which I infer that the amount in the Raiffesen account had been moved to Banca Arner).
The point of this is that that pattern clearly permits a reasonable inference supporting a finding of willfulness by moving the accounts.  This is, of course, why DOJ and the IRS were particularly interested in obtaining leaver lists from offending banks such as UBS over which they obtained some power, because the leaver lists would show where the deposits went as the U.S. taxpayers tried to hide the ball.

8.  It is still possible that there could be a statute of limitations issue if the Court's calculations were to produce a higher indicated penalty than the IRS had assessed for any given year.

9.  Added 5/26/20 10:00am:  I omitted mention of the Court's holding (Slip Op. 10-16) that the FBAR penalties "are not subject to the Eighth Amendment," which meant that it was not required to "evaluate whether the penalties are excessive."  The reasoning was that the penalties are remedial rather than punitive, thus avoiding the Eighth Amendment altogether.

10.  Added 5/19/20 10:30 am:  The Court entered judgment, here, on 5/19/20 (judgment signed on 5/18/20).  The judgment is short as they often are, ordering that (1) Schwarzbaum pay $12,907,952.00, in addition to late payment penalties and interest, for willful violations of the FBAR reporting requirements for tax years 2007, 2008, and 2009;" (2) the Court reserved jurisdiction to award attorneys fees and costs; (3) the Court ordered accrual of interest on the judgment under 28 U.S.C. § 1961; and (4) the Court directed the clerk to mark the case closed.  I will not veer off into a discussion of the judgment except to raise (but not answer) some questions I have.  Those questions are:  (1) is this a final appealable judgment where, despite the order to close the case, the Judge reserved an issue (attorneys fees and costs)?; (2) shouldn't the judgment have quantified the late payment penalties and interest that had accrued up to or reasonably close to the date of judgment?; and (3) was it necessary for the Court to order interest that accrues in the future under the statute (i.e., what does the order do that the statute does not do)?

11.  The CourtListener docket entries for Shwarzbaum are here.

12. Added 8/28/20 10:00 am:  On 8/27/20, the Court entered an order, here, altering or amending the judgment to correct an error in its calculations.  The Government's Opposed Motion to Alter or Amend is here.  Basically, the Court's calculations and resulting judgment was for amounts in excess of the amounts the Government had assessed for those years.  I have not gone back to figure out precisely what happened in the Court's calculations (I do discuss some of that above), but I think the Court attempted calculations in each year for the maximum permissible FBAR penalties for each year.  But, under the methodology the IRS uses to impose an aggregate FBAR penalty of 50% of the high amount in the high year and spread the result over the years for which an FBAR penalty is imposed, the actual FBAR penalty in each year should, mathematically, be less than the maximum for each year.  In the Motion to Alter or Amend, the Government makes precisely that point.  The amounts actually assessed were less than the amounts determined by the Court.  Actually, it is more nuanced than that -- the Court appears in its calculations to have included the FBAR penalty for the year that it determined the taxpayer was not willful and thus not subject to the FBAR penalty.   I am not sure whether the Court's action in effect countered its holding that the willful penalties were arbitrary; I suppose the Court could be saying that, though arbitrary (in the taxpayer's favor) since less than the amounts that could have been assessed, the erroneous calculation is harmless error (for the Court does make the harmless error finding (Slip Op. p. 4)).  In any event, it appears that, for each year, the amount the IRS actually assessed was in fact less than the maximum that could have been assessed.  In the order, the Court also calculates and imposes late-payment penalties and interest to the date of judgment.

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