First Circuit Sustains Willful Penalty Where Willfulness Found as Discovery Sanction (5/2/22)

In United States v. Toth, 33 F.4th 1 (1st Cir. 4/29./22), CA1 here and GS here, the Court affirmed the district court’s grant of summary judgment which had imposed a willful determination as a discovery sanction.   See In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here; and District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20), here.  The opinion, written by Judge Barron (Wikipedia here) is a bit of a slog (42 pages in pdf of Slip Op.), so I just focus on the parts of the opinion that I found interesting.

1. The opinion says (Slip Op. 3) that Toth had filed her first FBAR in 2010.  I infer that the Court means 2010 FBAR which would have been filed in 2011.  The Court then says (Slip Op. 3) “the IRS filed the delinquent FBAR forms on her behalf for the relevant period (2005-2009).”  I may have missed something over the years, but I don’t recall hearing that the IRS files delinquent FBARs for taxpayers.  (Compare by analogy, substitutes for returns filed under § 6020.)   I  am aware of no such authority for the IRS or FinCEN to file substitutes for FBARs. (But then I am often unaware.)

2. The Court has considerable discussion (Slip Op. 21-31) of the issue of whether the FBAR penalty was limited under the regulation originally promulgated in1987 under the statute then capping the FBAR penalty at $100,000 which was not changed after the 2004 amendment increasing the willful penalty to the greater $100,000 or 50% of the unreported accounts precluded.  The consensus in the Courts of Appeals is that the old regulation (now updated effective 12/23/21) did not apply to limit the maximum penalty under the 2004 revision.

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.

Fourth Circuit Affirms District Court Decision in Tax Crimes Case to Limit Taxpayer's Reading Excerpts From Book on Cheek Willfulness Issue (10/24/20)

In United States v. Gerard, 2020 U.S. App. LEXIS 33341 (4th Circuit 10/22/20), here and govinfo here, the Court affirmed the taxpayer’s conviction for “for conspiracy to commit tax fraud” but remanded for the district court to address the elements of the obstruction of justice enhancement for sentencing purposes.  Although the opinion is an unpublished opinion, I thought the following from the opinion might be interesting to readers:

We further conclude that the district court did not err in barring Gerard from reading three books to the jury in support of his defense that he had a good faith belief that his tax minimization plan was lawful. We review a district court's evidentiary rulings for abuse of discretion, and will only overturn a ruling that is arbitrary and irrational. United States v. Farrell, 921 F.3d 116, 143 (4th Cir.), cert. denied, 140 S. Ct. 269 (2019). Rule 403 of the Federal Rules of Evidence states that "[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." We agree with the district court that Gerard's request to read all three books would amount to something similar to the presentation of expert testimony, but without the opportunity for the Government to cross-examine the expert. Furthermore, as the district court observed, Gerard did not have to prove that his tax minimization system was lawful, only that his good faith belief in the lawfulness of his system was credible. See Cheek v. United States, 498 U.S. 192, 201-02 (1991) (holding that a defendant in a criminal tax case can assert a defense of ignorance or misunderstanding of the tax law, leading to "a good-faith belief that he was not violating any of the provisions of the tax laws"). Moreover, as the court observed, Gerard's proposal to read all three books would confuse the jury. We note that, even though the court permitted Gerard to read excerpts from the books, Gerard chose to read excerpts from just one of the three books, suggesting that it was not so imperative that he read each book to the jury.

District Court Holds Government FBAR Willful Penalty Burden of Proof is Preponderance and Recklessness is Willfulness for FBAR Willful Penalty (4/5/18)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018), here, a Government suit to reduce the willful FBAR penalty to judgment, the Court held:

1.  The Government's burden of proof on the willful penalty is preponderance of the evidence.

2.  "T]he Government may prove the element of willfulness in this case with evidence that Mr. Garrity, Sr. acted recklessly."

The opinion is relatively short and straight-forward, so I refer readers to the opinion.

This case has a lot of commotion in it, so readers with particular interest might want to review the docket entries which as of today are here.  I make some comments about it below.

JAT Comments:

1.  As I have often noted, I do not believe that the preponderance of the evidence standard should apply because I think the case is sufficiently like the civil fraud penalty that the same burden should apply.  The court dismisses the civil fraud penalty analog in footnote 3 as follows:

   n3 In light of the presumption in favor of applying the preponderance standard in all civil actions, the few structural similarities that Defendants point out between the civil FBAR statute and the civil tax fraud statute are not sufficient to warrant applying a higher standard of proof. (See ECF No. 106 at 2-3.) It is also worth noting that the Second and Eighth Circuits have applied the preponderance of the evidence standard to the tax statute imposing civil penalties for aiding and abetting tax underpayments, i.e., 26 U.S.C. § 6701. See Barr v. United States, 67 F.3d 469 (2d Cir. 1995); Mattingly v. United States, 924 F.2d 785 (8th Cir. 1991). In doing so, the Mattingly decision, on which the Barr decision relied, suggested that the clear and convincing evidence standard is limited to civil tax fraud cases brought under 26 U.S.C. § 7454(a), which requires proof of "fraud with intent to evade tax." 26 U.S.C § 7454(a); Mattingly, 924 F.2d at 787 ("[A]bsent fraud with the intent to evade tax pursuant to § 7454(a), a preponderance standard is applicable in civil tax cases.").

I should note that the reliance on § 7454(a) is misplaced.  Section 7454 relates to Tax Court proceedings - i.e., it is under subchapter C titled "Tax Court."  That statute does not govern income tax proceedings in other courts where the Government must prove fraud by clear and convincing evidence.  Moreover, the Court's curt analysis does not address the issue that the the civil fraud penalty, like the FBAR civil willful penalty, bears the same structural relationship to the criminal fraud penalty, which is like the FBAR criminal penalty.  Both are civil counterparts to criminal fraud penalties.  To simply say that they are different penalties does not really address the issue.  Still, there is a lot of contrary authority at this stage so getting courts to hold otherwise may be almost impossible.

Big Win for Taxpayer/Filer in FBAR Willful Penalty Case (9/21/17; 9/23/17)

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 154625 (E.D. Pa. 2017) (E.D. Penn. 2017), here, the District Court held that the Government had not established willfulness for the FBAR penalty and ordered refund / return of the illegal exaction the Government had collected.  I have previously written on some of the pre-trial developments in the case and provide links to those blog entries at the end of this blog.  So, I will just focus on this latest decision on the merits.  I will be rather brief since I am posting this from Dublin while on vacation (which also explains why I have been relatively silent on the blog recently).

The key points are:

1.  The trial was a one-day trial as indicated in my most recent blog (linked below).

2.  The Court found Bedrosian, presumably the principal witness for himself, credible, thus accepting some key claims he made as to his now deceased accountant's knowledge of and advice regarding the omitted foreign account. The accountant was named Handleman.  From the opinion:

Bedrosian did not tell Handelman about his Swiss account until some point in the mid-1990s, at which time Handelman advised him that he had been breaking the law every year that he did not report the account on his tax return. (Id. at 49-50.) Bedrosian asked Handleman what he recommended doing about it, and Handelman stated that he could not “unbreak the law,” and should therefore take no action. (Id. at 50-51.) Handelman assured Bedrosian that his estate could deal with it upon his death, when his money was repatriated. Heeding Handleman’s advice, Bedrosian continued to not report either Swiss account on his tax returns.

So, this is a variation of the reliance on tax professional defense to a crime or civil penalty requiring willfulness.  But, the reliance is inherently inconsistent with the ultimate holding.  Handleman, by Bedrosian's admission, told Bedrosian that he was violating the law by not reporting the account.  Hence, by his own admission, he thus knew the law and must have intended to violate it, albeit with the goal of leaving it to his estate to work out the solution.

3. Of course, Bedrosian's defense is more subtle. Bedrosian must have told his new accountant, Bransky, who started in 2007 because that accountant did check the Box yes on the Schedule B foreign account question.  The resulting FBAR, though, only included one of Bedrosian's accounts, omitting the much larger one.

4.  Then in 2008, Bedrosian began discussing this matter with his attorney.  It is not stated precisely why he began that discussion, but UBS -- the bank involved -- was then feeling the heat from the Government.  (All that is history which, although not recounted in the opinion, was very much known to the practitioner community and a number of more sophisticated lay people with an interest in knowing.)  The opinion says:  "Notably, at the time Bedrosian took these steps to rectify the issue, the government had not begun its investigation of him and he did not know that UBS had turned his information over to the IRS."  The timing here is not as detailed as I would have liked to have seen it, but it suggests that UBS had turned over information in 2008.  I thought that did not occur until 2009.  (And, my prior blog indicated that his seeking legal advice occurred in 2009.)

5.  On advice of the attorneys then consulted and without knowledge of an IRS investigation, Bedrosian amended his returns for 2004 forward and paid the resulting taxes.  As written, that appears to have been a quiet voluntary disclosure rather than OVDP.  That probably was a dicey move at the time because, on his fact pattern, I suspect that most attorneys would likely have advised the then iteration of OVDP rather than quiet disclosure.  (Remember that, at that time, the Government was asserting its right and willingness to assert multiple year FBAR willful penalties.)

6.  The Court held that the standard of review of de novo.  (Consistent with prior holding discussed in the most recent blog on the case.)

7. The Court held that the Government must prove willfulness by a preponderance of the evidence, thus falling in line with the critical mass of cases deciding that issue (either as a direct holding or as dicta).  (I have said much on that issue in prior blog entries, so won't dig into it here.)

Fifth Circuit Rejcts Nontraditional Contest of FBAR Willful Burden of Proof Contest (3/22/17)

I previously had several blogs on the attempt by Bernhard Gubser to contest the burden of proof issue for the FBAR willful penalty through nontraditional means.  The most recent is this:  Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (Federal Tax Crimes Blog 11/16/16), here.  Mr. Gubser complained that the Government's burden of persuasion on the FBAR willful penalty should be clear and convincing rather than preponderance.  He alleged that the Appeals Officer had represented that he would win if the burden of persuasion were clear and convincing rather than preponderance.

It appears that Mr. Gubser failed to persuade the Fifth Circuit of the merits of his argument -- at least on whether he made the argument via the right process.  On March 22, 2017, in a short per curiam nonprecedential opinion, the Fifth Circuit rejected Mr. Gubser's bid.  Gubser v. United States, 119 AFTR 2d ¶ 2017-532 (5th Cir. 2017), here.

Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (11/16/16)

I have written before about the burden of proof the Government must meet in order to sustain an FBAR willful penalty.  I offer at the end of this blog some of the key blog entries on that issue.  Briefly, the issue is whether the Government must prove willfulness by a preponderance of the evidence or by clear and convincing evidence.  Although there is no universally agreed definition of either standard, many conceptualize the standards as follows:  (i) preponderance of the evidence on a fact issue is the evidence which, in the trier of fact's mind, indicates that the fact issue is more likely than not, sometimes stated as 50+% likely; and (ii) clear and convincing is higher than more preponderance but less than the reasonable doubt standard applicable in criminal cases.  Now, readers will note that I did not put a percentage construct on the clear and convincing standard because that certainly is not agreed upon, so perhaps the best statement is that clear and convincing is higher than preponderance and lower than reasonable doubt.  Of course, we don't know what percentage to assign to reasonable doubt, so that won't help up figure out a percentage for clear and convincing.  I include at the end of this blog some materials on this issue as presented in my Federal Tax Procedure book on the civil fraud penalty.  Suffice it to say now that there are cases in which the Government, bearing the civil burden of proof, might be able to prove a fact by a preponderance of the evidence, but could not prove the fact by clear and convincing evidence.  Those who have tried cases involving the civil fraud penalty, where the Government must prove fraud by clear and convincing evidence, know that the clear and convincing burden is substantial indeed, compared to the preponderance standard.

In a case now pending before the Court of Appeals for the Fifth Circuit, Guber v. IRS (No. 16-40948), the plaintiff-appellant, Gubser, had filed a complaint in district court asking for a declaratory judgment that the proper standard was the clear and convincing standard.  The FBAR penalty is not a tax penalty and thus not subject to the prohibitions on injunctions and declaratory judgments for tax matters.  But declaratory judgments do have some minimum justificability requirements in order to invoke the jurisdiction and action of the federal courts.  Therein lay the problem.

Gubser had not yet suffered the practical injury that might come from the imposition of the lower preponderance of the evidence standard because the FBAR penalty had not been assessed against.  All Gubser apparently had was some indication from the Appeals Officer that, if the standard were preponderance, the Appeals Officer would sustain the examining officer's assertion of the FBAR willful penalty, but that if the standard were clear and convincing the Appeals Officer would not sustain the penalty.  Gubser was claiming that the mere uncertainty as to the proper standard impacted his rights to fair processing of the Appeals hearing.

I offer here the brief in the Fifth Circuit by Gubser, by the Government and by Amicus representing other persons potentially impacted.  After offering links to those documents, I offer the summary of the argument in the Gubser's opening brief, in the Government's opening brief and in the Amicus brief.

• Gubser's Opening Brief, here.
• Government Answering Brief, here.
• Gubser's Reply Brief, here.
• Amicus Brief (supporting Gubser's position), here.

Summary of the Arguments:

Gubser's Opening Brief

Bernhard Gubser has established standing to sue for a declaration of the proper standard of proving a willful FBAR penalty. He pleaded sufficient facts to show (1) imminent harm (2) caused by the FBAR penalty proposed by the IRS (3) that the district court can redress with a declaratory judgment. Before filing suit, Gubser tried to settle the controversy with an IRS Appeals officer. ROA.17, 152-53, 156-57. The Appeals officer identified the standard of proof as dispositive and asked Gubser to seek guidance on this uncertain area. ROA.17, 109, 114-115. So Gubser sued for a declaration that the IRS must prove that he willfully violated the FBAR filing requirement by clear-and-convincing evidence (and not merely by a preponderance of the evidence).
The district court erroneously dismissed his suit for lack of standing, solely emphasizing the failure to establish redressability. ROA.85-86. The district court committed legal error when it mistakenly determined that declaratory judgment would be proper only if its order would legally bind the Appeals officer or would prevent the IRS from assessing the penalty. ROA.85-86. This Court reviews that legal error de novo. Time Warner Cable, Inc. v. Hudson, 667 F.3d 630, 635 (5th Cir. 2012) (“We review questions of standing de novo.”). 

U.S. Taxpayer Seeks Declaratory Judgment that Government Must Prove Willfulness for the FBAR Willful Penalty by Clear and Convincing Evidence (12/22/15)

Former Swiss account holders who joined the OVDP program and, upon opt out, are potentially subject to the willful penalty have filed a complaint, Gubser v. IRS (SD TX No. 15-00298), here, seeking a declaratory judgment as follows (from the complaint prayer for relief, p. 13 of the Complaint):

A judgment under 28 U.S.C. § 2201 declaring that the Defendants must establish willful violations of the FBAR filing requirement of 31 U.S.C. § 5314 by clear and convincing evidence when seeking to impose civil penalties under 31 U.S.C. § 5321(a)(5)(C)-(D).

The gravamen of the legal claim as to the proper evidentiary standard is in the following paragraph:

21. Congress’ use of the term “willful” with respect to the civil FBAR penalty reflects a level of wrongdoing commensurate with civil fraud [which is subject to the clear and convincing standard].

Most of the rest of the complaint seems to go far beyond the requirements of "notice" pleadings required by FRCP Rule 8(a), here, and seems more directed to an audience other than the judge and the opposing party.

Readers will recall that I have visited the issue of the proper burden of proof frequently and believe that the correct standard should be clear and convincing.  I link to some of those blog entries at the end of today's blog.  That is the same issue presented in this declaratory judgement format.  Normally, this issue would be presented after the FBAR is assessed, some of it paid, and suit to recover the payment as illegal.  (Note that this is not a tax refund suit subject to Flora's full payment requirement.)

As to the ripeness of the case in terms of the fundamental requirement of case or controversy, the key part of the complaint's introduction is as follows (emphasis supplied by JAT):

4. An actual controversy exists between Gubser and Defendants because: (i) the IRS has notified Gubser of a proposed civil FBAR penalty for a willful violation; (ii) an IRS Appeals Officer has indicated that, were the clear and convincing evidence standard applied, the IRS could not establish a willful violation by Gubser; (iii) the civil FBAR penalty for a non-willful violation is $10,000; and, thus, (iv) this Court’s declaration that the clear and convincing standard applies will prevent government confiscation of one-half of Gubser’s retirement savings, or approximately $1.35 million, as well as the opprobrium and other negative consequences of a finding that Gubser willfully violated U.S. law.

The current posture is that the IRS has made a proposed decision now being reviewed by Appeals, but that is just a proposed decision.  Even if the Appeals Officer has stated an inclination to apply the preponderance of the evidence standard in assessing the hazards of litigation (see par. 36, p. 12), that seems to just be stating at most a preliminary inclination rather than a decision on behalf of the IRS.  Moreover, I am not sure how much independent authority the Appeals Officer exercises for the FBAR willful penalty; when I handled an appeal on a proposed willful penalty, the Appeals Officer clearly signaled that the ultimate authority was not his.  So, I would expect that a significant "defense" to the case will be that the case is not yet ripe.  And, when it does become ripe -- by assessment -- Gubser will have an adequate remedy once the decision is made and an assessment pursuant to the decision is made.

I do not know that I can add anything that I have not said before.  I think the ultimate legal position is the correct one.  And I think the issue is an important one.  That is why proper presentation and ultimate resolution of the issue is so important.  As I have argued before, the two cases to date are of limited authority, if any, so the issue should still reasonably be in play when presented and properly litigated in a proper venue.  I am just not sure that the current action presents a proper venue for litigating the issue.

Here are some but not all of my previous blogs (presented in reverse chronological order):

• ABA Tax Lawyer Publication Comment on FBAR Willful Penalty (Federal Tax Crimes Blog 2/16/15), here.
• More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (Federal Tax Crimes Blog 7/22/14), here.
• Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
• 11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (Federal Tax Crimes Blog 6/14/14), here.
• McBride #2 - Proof of Willfulness (Federal Tax Crimes Blog 11/13/12), here.
• McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (Federal Tax Crimes Blog 11/11/12), here.
• Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.
• Burden of Proof for Willfulness in FBAR Violations (Federal Tax Crimes Blog 9/6/11), here.

11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (6/14/14)

In United States v. Carlson, ___ F.3d  ___, 2014 U.S. App. LEXIS 11001 (11th Cir. 6/13/14), here, the issue was the plaintiff's liability for " aiding and abetting understatement of tax liability in violation of I.R.C. § 6701."  Section 6701 is here.  In relevant part, Section 6701 imposes the penalty upon a person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.

Section 6701 may be viewed as the civil penalty analog to the tax crime of aiding and assisting, Section 7206(2), here.

One issue on the appeal was the appropriate burden of  proof the Government must bear.  Carlson argued that it was by clear and convincing evidence; the Government argued that it was by a preponderance.  The Court held that the standard of proof is by clear and  convincing evidence.  Here is the Court's discussion:

I. The Government must prove violations of I.R.C. § 6701 by clear and convincing evidence. 

At trial, the parties disputed the correct standard of proof. Carlson contends the correct standard should be clear and convincing evidence while the Government contends the correct standard is a preponderance of the evidence. The district court agreed with the Government and instructed the jury that the Government must prove its case by a preponderance of the evidence. We conclude that this instruction misstated the law. 

Under the Eleventh Circuit's longstanding precedent, the Government must prove fraud in civil tax cases by clear and convincing evidence. See, e.g., Ballard v. Comm'r of Internal Revenue, 522 F.3d 1229, 1234 (11th Cir. 2008) ("The Commissioner has the burden of proving allegations of fraud by clear and convincing evidence."); Korecky v. Comm'r of Internal Revenue, 781 F.3d 1566, 1568 (11th Cir. 1986) ("The IRS bears the burden of proving fraud, which must be established by clear and convincing evidence."); Marsellus v. Comm'r of Internal Revenue, 544 F.2d 883, 885 (5th Cir. 1977) (holding fraud must be proved by clear and convincing evidence); Webb v. Comm'r of Internal Revenue, 394 F.2d 366, 378 (5th Cir. 1968) (same); Goldberg v. Comm'r of Internal Revenue, 239 F.3d 316, 320 (5th Cir. 1956) ("The Commissioner has the burden of proving fraud by clear and convincing evidence."); Jemison v. Comm'r of Internal Revenue, 45 F.2d 4, 5-6 (5th Cir. 1930) ("Fraud is not to be presumed, but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case."). Our sister courts of appeals follow the same rule. See, e.g., Grossman v. Comm'r of Internal Revenue, 182 F.3d 275, 277 (4th Cir. 1999) (holding that a finding of fraud must be supported by clear and convincing evidence); Lessmann v. Comm'r of Internal Revenue, 327 F.2d 990, 993 (8th Cir. 1964) (same); Davis v. Comm'r of Internal Revenue, 184 F.2d 86, 86 (10th Cir. 1950) (same);Rogers v. Comm'r of Internal Revenue, 111 F.2d 987, 989 (6th Cir. 1940) ("Fraud cannot be lightly inferred, but must be established by clear and convincing proof."); Duffin v. Lucas, 55 F.2d 786, 798 (6th Cir. 1932) (same); Griffiths v. Comm'r of Internal Revenue, 50 F.2d 782, 786 (7th Cir. 1931) ("Fraud is never presumed but must be determined from clear and convincing evidence, considering all the facts and circumstances of the case.").

Zwerner Case Settles Without Decision on Excessive Fines Issue (6/6/14; Updated 6/12/14)

The Zwerner case has settled.  See the case closing document here.  I add the public settlement terms below.  The court's case closing says:  "the parties advised that they have amicably settled this matter."  (Emphasis supplied.)  I assume that the word amicably is a euphemism for the real world where the settlement is equally -- more or less -- painful to both sides, in order to strike a settlement balance.

Most immediately, it leaves several issues unresolved.

1.  The Excessive Fines / Eighth Amendment issue.

2.  The burden of proof issue -- preponderance or clear and convincing.  The judge instructed the jury to apply the preponderance standard.  Critical mass seems to be forming for preponderance, but I assume that was an issue Zwerner was prepared to assert on appeal.  I continue to think it should be clear and convincing, as the IRS itself once had.

3.  The issue of whether the trier of fact can assess the reasonableness of the IRS's exercise of discretion as to where between 0 and 50% the IRS should apply the willful penalty.  I don't think this was presented as an issue in the pretrial skirmishing and trial, but think that it should be an issue.  If the jury had been asked the further question of whether the IRS abused its discretion to assert in the aggregate an amount exceeding the account value, perhaps the jury would have given some relief.  This is not exactly the Excessive Fines issue, but has certain resonances with it.  Of course, this issue -- if it is even a proper issue -- would be one that would be decided by the jury.  The Excessive Fines issue would be decided by a judge.

Addendum 6/12/14:

The Notice of the Settlement is here.  The description of the settlement is short, so I cut and paste them:

Under the terms of the settlement, by September 2, 2014, Zwerner is to fully pay the United States the 50% FBAR penalties assessed against him for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively.

Analytically, this is a substantial concession by the Government.  It is two years of penalties where the jury awarded 3 years (in effect awarded because it found 3 years of willful failures).  Since the jury verdict was not likely to be overturned, one might infer that the substantial concession by the Government recognizes some risk with respect to the Excessive Fines issue.  That is an inference, however, and there may be other factors that caused the Government to reach this settlement.

Zwerner Rises to Defense Against Multiple FBAR Penalties (9/28/13)

Readers will recall that, in an unexpected development, Treasury assessed and DOJ Tax sued to collect the 50% FBAR penalty against Carl Zwerner for four years.  Up to that point, based on the information publicly available (principally from offshore account plea convictions), Treasury had only assessed a single FBAR of 50% for the highest year.  Thus, it was of considerable interest -- and angst -- to taxpayers and practitioners that Treasury would assert 4 years of FBAR penalties.  I discuss this in my prior blog on the filing of the case.  U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (Federal Tax Crimes Blog 6/14/13), here.

Zwerner has filed his answer, here, which states his side of the story, albeit in summary fashion.

Some key points from the answer:

1.  At the key time  of his reputed voluntary disclosure in 2008, Zwerner was represented by "a tax attorney, Dennis Kleinfeld, of the then reputable law firm Rothstein Rosenfeldt & Adler, P.A. (“RRA”)."  Notice the words "then reputable."  See Wikipedia entry on Scott W. Rothstein here, and paragraph 5 of the compliant quoted below.  Mr. Kleinfield's current law firm bio is here.  I understand that Mr. Kleinfeld referred Zwerner to Mark Nurik who represented Zwerner before the IRS.

2.  Here is a key allegation in the answer (pp. 3 and 4):

4. On February 10, 2009, the RRA lawyers met with IRS Criminal Investigation Division (“CID”) to go over the voluntary disclosure. On February 17, 2009, IRS CID issued a letter stating that no criminal action would take place, but the identity of the client had not been disclosed at the February 10, 2009 meeting. Nurik then advised Zwerner that his voluntary disclosure had occurred and he should file the amended returns for tax years 2004 – 2006. As instructed by his lawyers in March 2009, Zwerner immediately filed the amended tax returns and the FBARs for 2004, 2005, and 2006, and paid the tax and interest owing. 

As narrated, Zwerner's prior tax counsel did not complete the voluntary disclosure by identifying Zwerner to CI and making a full disclousure.  Instead, he told Zwerner to do a quiet disclosure by filing amended returns.  The implication and allegation is that Zwerner had no reason to question whether his tax counsel was giving good advice and that Zwerner reasonably believed and took affirmative objective steps to implement a voluntary disclosure.

Hale Sheppard Article on Willful FBAR Penalty Cases (4/26/13)

Hale Sheppard, here, a player in the offshore account area, has published a new article, titled Government Wins Second Willful FBAR Penalty Case: What McBride Really Means for Taxpayers, J. Taxation (Spring 2013).  The article can be view, by link, on his Firm's Tax Blawg, here.  Here is a short summary of the scope of the article:

Taxpayers with undisclosed foreign accounts wish it were not true, but the reality is that the U.S. government, after a long period of inactivity and ineffectiveness, has taken significant steps over the past few years to identify and punish failures to file Forms TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), or foreign bank account reports (“FBARs”) as they are commonly known.  These steps include enacting legislation obligating foreign institutions to automatically provide the IRS with information about U.S. accountholders, paying handsome rewards to whistleblowers, introducing a new information return forcing taxpayers to report their foreign financial assets (including foreign accounts) to the IRS each year, imposing multi-million dollar fines and disclosure duties on foreign banks that collaborate with taxpayers to evade U.S. taxes, extracting valuable data about international tax transgressions from taxpayers participating in the Offshore Voluntary Disclosure Program (“OVDP”), and criminally prosecuting FBAR offenders.  Another step has become apparent in the past few months; that is, litigation to collect civil penalties for “willful” FBAR violations.  To date, two cases have been decided, both in favor of the U.S. government.  The attached article, “Government Wins Second Willful FBAR Penalty Case:  Analyzing What McBride Really Means to Taxpayers,” examines the most recent case.  The article was published in the Journal of Taxation (April 2013).

The article has detailed discussions of the two decided willful FBAR penalty cases (Williams and McBride), both finally won by the Government.  As I have noted  before, both cases have bad -- indeed egregious -- facts for the taxpayer, so I am not sure how to extrapolate any real world conclusions for U.S. taxpayers with better facts.

I recommend that readers having an interest in or concern about the willful FBAR penalty read the article in its entirety because it covers a lot of ground.  Here are some excerpts that I thought might be particularly helpful to readers:

Report on Webinar on Opting Out and Litigating FBAR Penalties (1/17/13; with Caveat Update on 2/1/13)

Yesterday, I attended via computer the ABA Webinar titled Through the Looking Glass (Parts 1 and II) Opting Out of the OVDI Penalty Structure and Litigating FBAR Penalties (1/16/13).  The information about the meeting and  the participants is here.  The participants were:

Megan L. Brackney, Kostelanetz & Fink LLP, New York, NY
David A. Breen, Senior Counsel, Office of Chief Counsel, SB/SE, IRS, Philadelphia, PA
Caroline D. Ciraolo, Rosenberg Martin Greenberg LLP, Baltimore, MD
David H. Dickieson, Schertler & Onorato LLP, Washington, DC
Mark E. Matthews, Caplin & Drysdale Chartered, Washington, DC
John C. McDougal, Special Trial Attorney, Small Business/Self-Employed Division, Office of Chief Counsel, IRS, Washington, DC
Richard J. Sapinski, Sills Cummis & Gross PC, Newark, NJ
Thomas J. Sawyer, Senior Litigation Counsel, Counsel for International Tax Matters, Tax Division, Department of Justice, Washington, DC
Zhanna A. Ziering, Caplin & Drysdale Chartered, New York, NY

For those having access to TNT, a good summary is Jeremiah Coder, Taxpayers Face Hurdles and Risks When Opting Out of OVDP, 2013 TNT 12-4 (1/17/13).

The following is my summary (parallel to in many respects but not the same as Mr. Coder's):

1. Megan Brackney, a practitioner, opened with a summary of the Taxpayer Advocates recent report. I have previously reported on the report in a blog entitled TA Report Identifies IRS' OVDP / OVDI As Problem (1/9/13), here.   She presented the chart in the Report regarding processing times, opt  outs, etc.  She said that the low number of OVDI 2011 opt outs probably reflects the slow processing time to the point of opt out, with most cases not at that point yet.  She noted that the average FBAR penalty on opt out, about $15,000, was encouraging that the IRS was not being punitive on opt outs.

2. Mark Matthews, a practitioner, suggested that, for the more benign players (referred to on this blog as minnows), the threshold decision of whether to even join OVDI (currently 2012 OVDP) is important.  Certainly, for those joining with the expectation of opting out may have good alternatives to joining.  I think his comments were consistent with the point I have made several times -- that the profile of someone who would opt out (i.e., no risk of willfulness (or its income tax counterpart, civil fraud)) does not obtain the principal benefit of the program in the first place -- eliminating the criminal exposure -- and thus have only an audit risk if they don't join which is the risk -- indeed the certainty -- they have if they do join.

3. One of the alternatives to joining the program he discussed was filing perhaps 3 years of amended returns and some number of years of delinquent FBARs (I presume perhaps 4-6 years).  Mr. McDougal, an IRS lawyer heavily involved in the program and penalty assertion, countered with the oft-repeated claim that the IRS is screening amended returns reporting offshore account income (and presumably screening delinquent FBARs as well), but did acknowledge that it was a screening process and there is not 100% audit coverage.

4. Of course, historically, for taxpayers with criminal exposure, quiet disclosures by filing amended returns, was a practically effective -- if not guaranteed -- way to eliminate or mitigate the criminal exposure, but at the risk (but not often the actuality) of full bore civil fraud penalty exposure.

McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12)

Another court has applied a preponderance of the evidence burden in holding that the Government had established the taxpayer's willfulness for asserting the willful FBAR penalty.  McBride v. United States, 908 F. Supp. 2d 1186 (D. UT 2012), here

Here are the documents, including the Court's Findings of Fact and Conclusions of Law and the related Documents:

1. 20120514McBride-P'sTrialBrief.pdf, here.
2. 20120514McBride-D's Trial Brief.pdf, here.
3. 20120521McBride-Transcript.pdf, here.
4. 20120522McBride-Transcript.pdf, here.
5. 20120724McBride-USPropFoF&Conclusions.pdf, here.
6. 20120822McBride-D Obj re Govt Prop FoF.pdf, here.
7. 20120822McBride-DPropFoF&Conclusions.pdf, here.
8. 20121108McBride-Opinion.pdf, here.

Brief Summary of the Case

Readers will recall that the willful FBAR penalty is the greater of $100,000 or 50% of the amount in the account.  31 USC 5321(a)(5), here.  The penalty in question was the pre-10/23/04 version which provided for the same willful conduct a penalty of $25,000 or the value of the unreported account, not to exceed $100,000.

The McBride facts as found by the Court are ugly for McBride.  I won't recount them in detail, but suffice it to say they involved (i) clear intent to underreport significant amounts of income tax by diverting U.S. income to the offshore accounts, (ii) clear intent to establish the accounts out of the expected line of sight of the IRS with the purpose of furthering the evasion, (iii) information provided to him some of which he read that advised that there were reporting obligations, (iv) answers to the 1040 Schedule B questions of no when the defendant certainly knew he had interests in foreign accounts, (v) lying to the IRS about the offshore actyivity, and (vi) other really bad facts.

Burden on Government to Prove Willfulness in FBAR Matters (6/8/12)

Steven Toscher, bio here, a well-known player in the field, and his associate, Lacey Strachan, bio here, have published an excellent article on the requirement that the Government prove willfulness in criminal and civil FBAR penalty cases.  Steve Toscher and Lacey Strachan, Proving Willfulness in an FBAR Case, Journal of Tax Practice and Procedure (April - May 2012), here.

The article is excellent.

Addendum on 6/8/12 at 6:07 pm:

Here are my quick comments on the article:

1.  The authors note that, in all cases, the Government must prove willfulness which is the voluntary intentional violation of a known legal duty.  This is the same standard in a criminal context for the traditional federal tax crimes and for proving fraud in a civil income tax context.  There are some who think there might be a relaxed definition of willfulness in a civil case, but I think it is basically the same definition except that the burden of proof is more stringent in a criminal case.

2.  In the criminal cases, that proof of willfulness must be beyond a reasonable doubt.  The law is not certain as to the level of proof in a civil case.  The issue is whether the Government must prove willfulness by a preponderance of the evidence (i.e., just more likely than not, say 51%) or by clear and convincing evidence (say 65-80%).  I have discussed this issue in prior blogs, the most pertinent of which is Burden of Proof for Willfulness in FBAR Violations (9/6/11), here.  The authors correctly note that the only case directly addressing the issue, a trial level opinion in Williams (currently on Government appeal to the Fourth Circuit), the district court said it was applying the preponderance of the evidence standard, but it held against the Government so the standard of proof was not critical to its holding (i.e., the Government would lose whichever standard it applied).  I personally think that dictum holding  is wrong on that issue, but that is just my opinion. See my blog discussion.

Government Appeal of Williams FBAR Case (1/24/12)

Readers will recall that I have posted several blogs on the Williams case where the trial judge refused to find willfulness for purposes of the onerous FBAR penalty.   I post the prior blogs at the end of this blog.  The Government appealed the case.  I now provide links to the Government's briefs.  (Note that these links are to pdf copies that I OCR'd within the pdf file and I provide certain highlights related to the points I discuss in this blog.)

The key points I note are as follows:

1. A lot of the fight is about whether Williams should be bound by -- hanged by, perhaps -- statements he made during a plea allocution in the earlier criminal case.  I am not going to comment on that.

2. A key argument the Government makes if it cannot hang Williams on those statements is that willfulness for purposes of the FBAR penalty is perhaps not the same as Cheek willfulness or even Ratzlaf willfulness (Ratzlaf v. United States, 510 U.S. 135 (1994), the statutory amendment for Ratzlaf did not amend the willfulness civil penalty in question here).  Willfulness is not a term with a single meaning, but certainly in the tax law it has a specific meaning -- intentional violation of a known legal duty.  And, Ratzlaf said it had that meaning the Treasury reporting requirements.  So a good argument, I  think, can be made that the standard is the same as the Cheek standard, but the Government argues otherwise.  Indeed, the Government claims that recklessness will  suffice -- in effect, the Government imports something like a conscious avoidance (aka willful blindness and other terms) into the concept.  I suppose that, if willful should be interpreted by analogy to the criminal provisions requiring willfulness, then perhaps the conscious avoidance concept, if valid for criminal purposes for the high willfulness standard, should also apply for civil FBAR willfulness.  (See my prior blogs on conscious avoidance by clicking the conscious avoidance link below.)  In any event, it seems to me that the standard should not be different, only a less strict standard of proof applies in a civil case.

Burden of Proof for Willfulness in FBAR Violations (9/6/11)

A key issue in considering the FBAR willfulness penalty is the standard standard of proof if the Government pursues the FBAR penalty. The Government is required to pursue the FBAR penalty by filing a suit and, if successful, obtaining judgment, rather than through the panoply of collection devices for tax assessments.

In United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), previously discussed here, the court said that it was applying a preponderance of the evidence standard but it is clear that it held the Government to a fairly strict standard of proof. For burden of proof afficionados, I should state that historically in Anglo-American jurisprudence, a party alleging fraud must prove the fraud at a higher level than preponderance of the evidence. See generally Grogan v. Garner, 498 U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy discharge because of the nature and context of that exception). For example, if the IRS asserts the civil fraud penalty under § 6663, the Code only says that the burden of proof is on the IRS (§ 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or clear and convincing. But the law is clear that the IRS must prove fraud by clear and convincing evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (“Tax Court Rule 142(b) echoes the statutory language but specifies the clear and convincing standard by which the government must carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of the broadly prevailing rule.”). The clear and convincing burden is conceptualized as heavier than preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal burden).