Tax Court Finds Offshore Account Owner Not Credible; Determines Income Tax Deficiency and Civil Fraud Penalty (8/1/21)

In Harrington v. Commissioner, T.C. Memo. 2021-95, GS here, the Court (Judge Lauber) determined deficiencies and the civil fraud penalty for a taxpayer who played the offshore account game (a pernicious variation of the audit lottery) and lost.  The taxpayer was a UBS depositor; UBS disclosed the taxpayer’s information and documents.  And the rest was, in a sense, inevitable. I won’t detail the particular facts of the taxpayer's audit lottery gaming, but will discuss the role of credibility.

I offer a series of excerpts directly or indirectly addressing the Court’s credibility assessments which did not go well for the taxpayer (boldface supplied by JAT except for title headings).

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Petitioner testified that he lent this $350,000 to EWH as part of his effort to stabilize the company, by showing “potential creditors that * * * [EWH] had money in the bank.” There is no evidence that petitioner executed a loan agreement with Mr. Glube [Canadian lawyer] or EWH, and we did not find petitioner’s testimony credible.  We find that petitioner was impressed with Mr. Glube’s proficiency at secreting assets in the Cayman Islands and wished to secure the same treatment for his $350,000 nest egg.

A UBS document dated May 2002 identified petitioner and his wife as the “beneficial owners” of the Reed Account. In 2003 he traveled from New Zealand to the Cayman Islands and signed a variety of documents, one of which gave him a “power of attorney for the management of [Reed International’s] assets.” Despite being a beneficial owner of the Reed Account and having a power of attorney to manage the company’s assets, petitioner testified that he did not have “any access or control * * * to get the money back.” We did not find that testimony credible.

On the badges of fraud considered in imposing the civil fraud penalty: 

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f. Lack of Credibility of Taxpayer’s Testimony

We did not find petitioner to be a credible witness. He was often evasive or dismissive of questions that respondent’s counsel and the Court asked of him. We have noted above numerous points on which we found his testimony to lack credibility. Petitioner acknowledges inconsistencies in his testimony. But he urges that these lapses were attributable to the fact that he “was 88 years old at the time of trial” and that “many of the events at issue occurred 10 to 35 years before the trial began.” We are not persuaded.

Petitioner testified intelligently at trial; he did not simply misremember a few trivial facts, but mischaracterized facts and events of critical importance. He may have conceivably forgotten that he signed a particular document in 2003, but he cannot have “forgotten” that he had control over offshore investments worth $3 million.

g. Filing False Documents

Petitioner has admitted that the returns he originally filed for 2005-2009 omitted almost $800,000 of income. These omissions were large, both in absolute terms and relative to the income he did report (roughly $170,000 in the aggregate).  

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The FBARs he originally filed for each year were incomplete (and thus substantially false), reporting trivial assets in New Zealand and omitting massive assets in the Cayman Islands, Switzerland, and Liechtenstein. The false documents supply further evidence of fraudulent intent.

 JAT Comments:

1.  A lawyer who represents clients in this type of litigation must / should have made credibility assessments and advised the client that his credibility may and likely will be a problem for him.  Perhaps had the taxpayer here testified credibly, he would have lost the case anyway.  

2.  The finding of civil fraud for the civil fraud penalty in § 6663 required clear and convincing proof essentially of intent to violate a known legal duty.  That finding does not bode well with respect to the FBAR willful civil penalty which has a more expansive definition of willfulness (including not just intent to violate a known legal duty but recklessness and willful blindness as well).  One question I have not focused on is whether a finding of civil fraud for tax evasion related to the income from the offshore accounts might in some way be precluded by issue preclusion. The two liability standards appear substantially equivalent, except that the FBAR standard is broader (recklessness and willful blindness) and the burden of proof is preponderance).  So, having proved in effect intentional violation of a known legal duty by clear and convincing evidence in the related income tax case, should that be preclusive in the FBAR case where intentional violation of a known liability is clearly penalized?  I don't know but will think about it some more.  If anyone has gone down that trail / rabbit trail, please post a comment or email me.

3.  Even without issue preclusion, it appears that the Government will be able to prove civil willfulness for the FBAR civil willful penalty.