District Court Rejects Summary Judgment for FBAR Civil Willful Penalty (3/12/22; 3/13/22)

In United States v. Schik, 2022 U.S. Dist. LEXIS 41025 (SD NY 3/8/22), CL here, the Court denied the Government’s Motion for Summary Judgment for the FBAR willful penalty. In other cases with more or less similar facts (although Schik has some unusual facts, as I note below), the Government has been able to convince courts that objectively proved facts on the Motion for Summary Judgment (particularly answering “No” to the Schedule B question about foreign accounts) met the expansive civil definition of willfulness for FBAR purposes. But, probably because of the unique facts, the Court rejected the notion that a “No” answer suffices for willfulness on summary judgment. A key excerpt: 

            When Congress included penalties for “willful violations” of Section 5321(a)(5), it explicitly delineated between failures to report that are and are not willful. Willfulness, therefore, must mean something more than mere negligence. The Government’s suggested reading of the word—that willfulness should be found categorically even when an unsophisticated taxpayer did not know of an obligation to report and relied on a tax preparer— would abrogate that distinction. See Lowe v. SEC, 472 U.S. 181, 208 n.53 (1985) (a court “must give effect to every word that Congress used in the statute”); see also United States v. Schwarzbaum, 2020 WL 1316232, at *8 (S.D. Fl. Mar. 20, 2020) (“Imputing constructive knowledge of filing requirements to a taxpayer simply by virtue of having signed a tax return would render the distinction between a non-willful and willful violation in the FBAR context meaningless.”); Jones v. United States, 2020 WL 4390390, at *9 (C.D. Cal. May 11, 2020) (in the FBAR context, “signing a tax return on its own cannot automatically make the taxpayer’s violation ‘willful’ as that would collapse the willfulness standard to strict liability.”).

So, what were the unique facts? The Court has a good discussion in the case (pp. 2-5), but the Introduction to Schik’s opposition to the Motion offers a concise summary (See Dkt entry 38 here):

INTRODUCTION

            Defendant Walter Schik (“Mr. Schik” or the “Defendant”) hereby opposes the Motion for Summary Judgment filed by the government because there are numerous disputed issues of material fact in this case. The origination of Mr. Schik’s foreign bank accounts was not the nefarious scheme portrayed in the government’s brief, and the facts and circumstances present in Mr. Schik’s case are readily distinguishable from the cases cited by the government. Mr. Schik was born and grew up in eastern Europe before immigrating to the U.S. after experiencing the horrors of the Holocaust. This deeply traumatic experience has affected Mr. Schik’s entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II, so that they could be accessed in the event of further religious persecution or some other catastrophe. This was Mr. Schik’s sole intent when he established the foreign accounts at issue; there was no intent to evade U.S. tax or reporting obligations. After the accounts were opened, Mr. Schik relinquished almost all control over the accounts to a local asset manager, David Beck, and he did not participate in investment decisions and did not have any understanding about how Mr. Beck structured the accounts. Mr. Schik, who lacks almost any formal education, had no knowledge concerning the offshore asset reporting requirements of U.S. taxpayers; his accountant during the relevant time period did not advise him concerning foreign accounts; and Mr. Schik did not believe that it was necessary to discuss non-U.S.-based accounts with his accountant. As soon as Mr. Schik became aware of his reporting obligations, he applied to the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and, even after he was inexplicably rejected from the OVDP, he nevertheless proceeded to file amended tax returns (and thereby incriminated himself and exposed himself to criminal prosecution) and pay back tax and interest on the income from his foreign accounts. These  [*2] factors raise numerous questions of fact with regard to Mr. Schik’s knowledge and intent. Therefore, summary judgment should be denied.

For future reference, the CourtListener docket entries are here.

JAT Comments:

1.  The Court ordered mediation. (P. 15):

            The Court believes that the Parties in this case would benefit from mediation. By separate order the Court will refer the Parties to the Southern District of New York’s Mediation Program. See Local Civil Rule 83.9(e)(3) (the “assigned District Judge . . . may determine that a case is appropriate for mediation and may order that case to mediation, with or without the consent of the parties.”).

 Perhaps the Court is putting pressure on the Government to seek less than the whole loaf.

 2.  An interesting fact is the following from the Court opinion (p. 4, emphasis supplied by JAT):

            A few years later, Josef Beck [after signing a key tax return with a “No” answer to the foreign account question], the manager of Mr. Schik’s Swiss accounts, was indicted in this Court on charges of “conspiring with U.S. taxpayers and foreign financial institutions, including UBS, to enable Beck’s U.S. taxpayer clients to hide Swiss bank accounts and income generated in those accounts from the IRS.” 56.1 ¶ 31. For its part, UBS agreed to provide the Government the identities of certain United States customers pursuant to a deferred prosecution agreement. 56.1 ¶ 47. In 2010, after Mr. Schik read about the deferred prosecution agreement, he submitted a “voluntary disclosure to the IRS regarding his foreign accounts.” 56.1 ¶ 51. That disclosure was rejected by the IRS “due to timeliness and/or completeness.” 56.1 ¶ 52. Mr. Schik then “belatedly filed an FBAR for 2007, reporting [the] holdings in” the Accounts. 56.1 ¶ 54.

Focus particularly on the last sentence. The event is fleshed out a bit in Schik’s Introduction to his opposition to summary judgment as follows (pertinent portion repeated, with bold-face supplied by JAT):

As soon as Mr. Schik became aware of his reporting obligations, he applied to the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and, even after he was inexplicably rejected from the OVDP, he nevertheless proceeded to file amended tax returns (and thereby incriminated himself and exposed himself to criminal prosecution) and pay back tax and interest on the income from his foreign accounts.

 Later in the opposition, the following statement is made (p. 15):

In fact, the amended tax returns for the period 2003 through 2008 – which Mr. Schik voluntarily filed after he was denied participation in the OVDP – reflected no additional federal tax due as a result of his interest in the Swiss account. Yet, somehow, the government has deemed it appropriate to impose a penalty of nearly $9 million dollars to punish Mr. Schik for not reporting his Swiss accounts.

There is no indication as to defense strategy in filing amended income tax returns and delinquent FBARs.  Defense counsel will know that the decision when to correct noncompliance that may involve criminal exposure, not mitigated by voluntary disclosure, is a difficult call.  I bold-face language in the Opposition that said that, by correcting the noncompliance, Schik incriminated himself.  There is no disclosure of the crime(s) to which the claim of incrimination applies, but presumably it was either or both income tax crimes or FBAR crimes (although with no taxes due (as claimed)), a tax crime charge could be made for the "No" answer alone but that would be a tough charge to make).  (The Government argued in its reply that Shick had not proved the claim of no tax due.  See Reply, here, pp. 7-8.)  By the time the Opposition was filed, Schik was no longer at risk of criminal prosecution, but I was surprised that language used might indicate that Schik was guilty of the crimes for which he was at risk -- failure to file FBARs and false income tax returns.  If the amended returns and delinquent FBARs were really admissions of crimes, then presumably they would be admission of liability for the FBAR civil willful penalty as well, because criminal liability for FBAR crimes has to be willful for the FBAR civil willful penalty.  I am certain counsel did not intend that, and apparently neither the Government nor the Court read it that way.

Added 3/13/22 8:00am:

3.  The Court concluded by noting (pp. 14-15) the need to remand to the IRS for recalculation of the penalty if Schik were found to be willful after trial.  The Court would do that under the "arbitrary and capricious" standard because "the Government “has been unable to identify the records supporting the revenue agent’s conclusion as to the . . . balance [in the accounts needed for penalty calculation] as of December 31, 2007.”  It is not clear why the 12/31/07 records are relevant.  Statutorily, the FBAR penalty is based on the reporting date balances.  The reporting date was 6/30/08 for the 2007 year.  The the IRS could have used the 12/31/07 balance (in whole or part) if it were equal to or less than the 7/30/08 balance(s), but even then would be arbitrary and capricious based on authorities such as Schwarzbaum.  It is not clear what the basis for the penalty assessment was.  So, the Government requested the remand.

Schik argued that remand would not be appropriate because making a new assessment would be outside  the statute of limitation.  The Court said (pp. 14-15):

Mr. Schik agrees that the calculation was arbitrary and capricious, Opp. at 14, but argues that remand for recalculation would mean the penalty would “violate the statute of limitations” and the assessment would “be time-barred,” Opp. at 14-15. n3  Remand for recalculation of the penalty amount, however, would not be a new assessment of a penalty outside any statute of limitations. It would instead be a recalculation of the initial penalty based upon a finding of willfulness. See United States v. Schwarzbaum, __ F.4th __, 2022 U.S. App. LEXIS 2379, at *22-23 (11th Cir. Jan. 25, 2022) (no authority stands “for the proposition that, on remand from [*15] judicial review under the APA, an agency could be time-barred from re-evaluating its original actions.”).
   n3 Mr. Schik does not argue that the penalty as initially assessed was outside the statute of limitations. See Opp. at 14-15.

 I don't think we've heard the last of this issue.