District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)

 In United States v. Kerr (D. AZ Dkt O. 2:19-CV-05432 Order dtd 2/23/24), TN here and CL here, the district court ruled indicatively clarifying the intended effect of the district court termination of the case after remand to the IRS of willful FBAR penalties for certain years. The intended effect was not to vacate those penalties but to provide a procedure to reconsider and modify the amount of the penalties for future district court judgment. In other words, the remand did not require a new assessment of FBAR willful penalties (for which the assessment statute of limitations had run). Rather, any IRS action would adjust the previously timely assessed FBAR penalties. After this indicative ruling, the appeal of the case can proceed in the Ninth Circuit.

Links to items related to this blog are:

• FRCP 62,1, titled Indicative Ruling on a Motion for Relief That is Barred by a Pending Appeal, here,
• FRAP 12.1, Remand After an Indicative Ruling by the District Court on a Motion for Relief That Is Barred by a Pending Appeal, here,
• Kerr docket entries for this civil case (FBAR penalty enforcement case): CL, here.
• Ninth Circuit Order staying Ninth Circuit proceedings pending the district court’s indicative ruling, here.

Prior blogs involving Mr. Kerr are (reverse chronological order):

Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Sixth Circuit Affirms Summary Judgment on FBAR Willful Penalty on Conduct Objectively Reckless (2/14/24)

I report this morning on United States v. Kelly, ___ F.4th ___ (6th Cir. 8/8/24), CA6 here and GS here. Kelly affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.

I first offer the MS CoPilot (MS’s version of AI) explanation of the case:

Case Title: United States v. James J. Kelly, Jr.

Background:

• James J. Kelly, Jr., a U.S. citizen, opened an interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.

• He designated the account as “numbered” to keep his name off the statements and requested that Finter retain account-related correspondence instead of mailing it to him.

Legal Context:

• Under the Bank Secrecy Act, individuals with foreign bank accounts containing $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of the Treasury.

• Failure to file an FBAR by the deadline can result in civil penalties. The penalty amount depends on whether the failure was accidental or willful.

Case Details:

• The government sued James Kelly, alleging that he willfully failed to timely file FBARs for the years 2013, 2014, and 2015.

• The district court granted summary judgment in favor of the government.

• Kelly’s failure to file was deemed a willful violation of the Bank Secrecy Act.

Outcome:

• The court affirmed the judgment, emphasizing that Kelly’s actions constituted a willful violation of the law.

• In summary, James Kelly’s failure to file FBARs for his foreign bank account led to civil penalties due to willful non-compliance with the Bank Secrecy Act.

Law Firm Tax Partner Sentenced in Germany to 3 1/2 Years for Fraudulent Tax Shelters (2/7/24)

An earlier news item finally reached my consciousness this morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, Former Freshfields partner sentenced to jail for German tax fraud (Reuters 1/30/24), here; and Olaf Storbeck, Freshfields’ former tax partner sentenced to 3½ years in jail (Financial Times 1/30/24), here.

I don’t know exactly how the scheme worked but the generic description is summarily described in the Reuters article:

Using such dividend stripping schemes, banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.

The following is from the Financial Times article:

The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.

Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel [the judge' said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.

The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.

“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.

* * * *

During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.

In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.

The latter on fees caught my eye. My experience from the abusive tax shelter era was that the fees were very large compared to the hours expended delivering the opinions when they were "cookie-cutter" opinions marketed to many taxpayers. The excess fees were a form of “get out of jail free’ insurance premium to the taxpayers paying the fees. Viewed alone from a single transaction, the excess fee would be ridiculously low, but when marketed widely among wealthy and high-income earners, the fees really could add up to ridiculous amounts. See e.g., More on the Daugerdas Case - The Role of Nonpromoter Enablers (Federal Tax Crimes Blog 6/5/11), here.

Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)

 I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (Federal Tax Procedure Blog 12/24/25), here. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.

I have two developments to report:

1. Newsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), here.  I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:

           The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."

           Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.

          "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"

          Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.

          "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.

          Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."

          "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.

          "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."

          Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.

          "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." 

Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.