Schwarzbaum Redux – 11th Circuit Issues New Opinion to Correct Statement of FBAR Willfulness Civil Penalty Standard (1/23/25)

In United States v. Schwarzbaum, ___ F.4th ___ (11th Cir. 1/23/25), CA11 here and GS here [to come], the 11^th Circuit revisited the long-running Schwarzbaum FBAR civil penalty litigation. I discussed the immediately preceding visitation/opinion in 11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (Federal Tax Crimes Blog 9/4/24) here. In this new opinion, issued yesterday, the Court starts:

Appellee’s [United States’] petition for panel rehearing is GRANTED. We VACATE our prior opinion in this case and substitute the following in its place:

The Slip Opinion for the prior opinion was 53 pages; the Slip Opinion for this new opinion is 55 pages. For purposes of Federal Tax Crimes and Federal Tax Procedure Blogs, the material changes * only correct misstatements in the original opinion that the FBAR willfulness civil penalty standard is the same as the FBAR willfulness criminal penalty standard (the Cheek/Ratzlaf standard). (See new footnotes on p. 40 n. 7 and p. 46 n. 10.) As all readers of this blog surely know, the civil penalty standard includes recklessness but the criminal penalty standard requires the stricter specific intent requirement in Cheek and Ratzlaf. I don’t think that those corrections affect the bottom-line holdings, so I just copy and paste the succinct summary I provided in the original blog entry.

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (9/4/24)

The opinion discussed in this blog was vacated by United States v. Schwarzbaum, ___ F.4th ___ (11th Cir.1/23/25), CA11 here and GS here [to come], with a new opinion substituted. I discuss the new opinion in the following blog: [to come]

In United States v. Schwarzbaum, 114 F.4th 1319 (11th Cir. 2024), 11Cir here and GS here, the Court:

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

The unanimous opinion is quite long (53 pages) and offers a lot of interesting discussion of the history of the FBAR penalties. Those relatively new to the subject, can learn from reading the opinion closely. Those who are veterans to the subject can probably skim through the opinion and understand the holdings.

JAT Comments:

Taxpayer Liable for Willful FBAR Penalties Despite Alleged ADHD, Stress, Depression, and Stage 3 Prostrate Cancer (8/10/24)

In United States v. Rund (E.D. Va. No. 1:23-cv-00549 Memo Opinion & Order 8/6/24), CL here and GS here, the Court granted the Government summary judgment on Rund’s liability for FBAR willful penalties and ordered judgment for “$2,915,663 as of April 30, 2021, consisting of an assessment against him under 31 U.S.C. § 5321(a)(5), plus pre- and post-judgment interest and penalties accruing on that assessment in accordance with 31 U.S.C. § 3717.”

Significant features of the opinion:

1. Rund “participated in OVDP from 2010 through 2016” and apparently either withdrew or was terminated. (Slip Op. 6.) While in OVDP he apparently did not fully disclose offshore accounts and even failed to file FBARs as due. (Id.) He alleged as a defense “improper termination and/or denial of entry from the OVDP program.” (Slip Op. 7 n6.) There is no further discussion of that adventure, and  Rund apparently failed to address the defense in his motion for summary judgment. (Id.)

2. More significantly, Rund claimed certain personal characteristics that he felt negated willfulness. The Court addressed that claim as follows (Slip Op. 13-14):

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):

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.

Paul Manafort "Settles" His FBAR Civil Willful Penalty Case in Full (3/6/23)

I report today on Paul Manafort’s “settlement” of his FBAR civil willful liability. I had earlier decided not to report on the “settlement” because the only noteworthiness was that the penalty was imposed on Paul Manafort, a person of some public notoriety resulting in the FBAR “settlement” achieving some public press. E.g., Azi Paybarah and  Devlin Barrett , Paul Manafort agrees to pay $3.15 million to settle with Justice Dept. (WAPO 3/5/23), here.

 The number is large, but there have been large FBAR civil willful penalties that were more or less routine, which I have not deemed worthy of posting to the blog. Why do I post now?

I do so because of the press about the "settlement." As I read the motion to enter this “settlement,” it was not a settlement in the way I think of settlements with mutual concessions. The Joint Motion for Entry of Consent Judgment and Notice of Settlement, here, says “As part of the settlement, Mr. Manafort has consented to an entry of judgment in full in this case, with interest accruing.”

Note, for some reason, the link to the Joint Motion seemed to be spotty in working. Readers can retrieve the document from Court Listener service for the docket entries at docket number 29 here,

I suppose that there may have been some costs that the Government gave up. And, I suppose, that it Manafort committed misconduct to hide assets or some other form of obstruction, the “settlement” might include the Government foregoing any further investigation or prosecution of that.  

JAT Comments:

Supreme Court Denies Cert in FBAR Willful Penalty Case With Justice Gorsuch Dissenting on Excessive Fines Issue (1/23/23)

I previously blogged about 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 First Circuit Sustains Willful Penalty Where Willfulness Found as Discovery Sanction (Federal Tax Crimes Blog 5/2/22), here. Toth petitioned for writ of certiorari. Toth v. United States (Dkt No. 22-177), docket entries here.

The question presented in the petition was:

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D)—penalties that are avowedly deterrent and noncompensatory—are subject to the Eighth Amendment’s Excessive Fines Clause.

Today, the Supreme Court denied a petition for writ of certiorari, with Justice Gorsuch issuing a three-page dissenting opinion, here. Justice Gorsuch sets up his argument with the 1^st Circuit’s holding:

It [the 1^st Circuit] held that the Constitution’s protection against excessive fines did not apply to Ms. Toth’s case because the IRS’s assessment against her was “not tied to any criminal sanction” and served a “remedial” purpose. 33 F. 4th 1, 16, 17–19 (2022).

Justice Gorsuch then states his case in three paragraphs spanning two pages. It is short, so I recommend readers read his version rather than an inadequate summary I might make.

JAT Comments:

Supreme Court Oral Argument in Bittner Re FBAR NonWillful Penalty Per Account or Per Form (11/3/22)

Yesterday, the Supreme Court held oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.)  The link for the typed transcript is here; the link for the audio is here. 

I listened to the audio and thumbed through the transcript.  The oral arguments were outstanding.  The advocates were

Daniel L. Geyser, for Bittner, here.
Matthew Gaurnieri, Assistant to the Solicitor General, DOJ, for the United States

I have posted earlier on the trajectory of Bittner, but the two postings most relevant to the Supreme Court consideration are:

• Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here.
• Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (Federal Tax Crimes Blog 10/12/22), here.

I offer some snippets (copy and paste) of portions of the transcript related to criminal conduct I found interesting]

[*20]

MR. GEYSER: Yes, Your Honor, it's -it's the same definition of violation, I think, carries throughout the statute, both in 5321 and in 5322, by the way, which is why, in our case, had Petitioner acted willfully in a criminal sense, under the government's reading, he would be exposed to a prison sentence of 1300 years in jail, which seems pretty egregious for what is really a prophylactic paperwork error.

   * * * *

Government Files FBAR Collection Suit for FBAR Willful Penalties Aggregating $23,102,381 (Plus Interest and Costs) (8/17/22; 8/18/22)

In United States v. Nadji (D. Colo. Case No. 1:22-cv-02070), CL dkt entries here, the Government filed an FBAR collection complaint on 8/15/22. The complaint is here. The complaint requests (¶ 55, p. 8) judgment

for $23,102,381 in willful FBAR penalties, $2,631,772.60 in accrued and assessed late payment penalties, and $877,257.53 of interest, plus costs of collection, pursuant to 31 U.S.C. § 3717, as  of  August 11, 2022. The United States is entitled to recover $26,611,411.13, plus interest, penalties, and costs accruing from August 11, 2022.

According to the complaint:

1. The amounts are significant.

2. Nadji was born in Iran in 1944. While educated in part in the U.S., he “moved back to the United States and became a naturalized U.S. citizen in 1992.”

3. Nadji was wealthy, deriving his wealth from an Iranian engineering company he owned 100%. Nadji paid no tax on income from the company, either in the U.S. or Iran.

4. He had interests in four foreign bank accounts from 2009 to 2012.  

5. During those years, his U.S. returns were prepared by a tax preparer in Colorado. However, he did not disclose his foreign accounts to the tax preparer.

6. In 2014, he entered the 2014 OVDI, disclosing the four accounts and filing delinquent FBARS for 2008-2012. The complaint has a table listing the amounts Nadji reported on the FBARS for the high balances in each account for the years and aggregating the high balances for each year. 

7. The IRS removed Nadji from OVDI because he disagreed with the final closing package. I infer that his disagreement was, at least in part, with the OVDI penalty amount (which I think was 27.5% for the high year in the covered period). I presume further that he filed delinquent income tax returns and paid the resulting taxes, penalties and interest.

3rd Circuit Affirms Bedrosian FBAR Will Penalty Liability Based on His Counsel's Judicial Admissions as to Amount (7/23/22)

In Bedrosian v. United States, 42 F.4th 174 (3rd Cir. 7/22/22), CA3 here, and GS here, the Court sustained the district court’s application of the FBAR willful penalty. Given the history which I cover in earlier blogs, the holding on the issue of Bedrosian’s willfulness is not surprising. See Bedrosian on Remand -- Held Bedrosian Acted Recklessly and thus Subject to FBAR Civil Willful Penalty (Federal Tax Crimes Blog 12/6/20), here; and Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 1/10/19), here. The earlier Third Circuit opinion is Bedrosian v. United States, Dep't of Treasury, IRS, 912 F.3d 144 (3d Cir. 2018), 3^rd Cir. here and GS here.

The one interesting aspect of the appeal is that the Court, although finding the Government’s proof was deficient as to the amount in the accounts subject to the penalty (thus precluding calculation of the penalty), Bedrosian through counsel made “judicial admissions” as to the amount that the Court of Appeals could invoke to supply the missing proof. The Court said (Slip Op. pp. 18-19, cleaned up): 

Still, even though the District Court did not address this argument, we may affirm on any basis supported by the record, even if it departs from the District Court’s rationale. And while arguably some of the statements Bedrosian made in the District Court proceedings are not judicial admissions, the statement made in opening argument acknowledged the true state of the facts. The concession that “there was about 2 million U.S. dollars” in the undisclosed account makes the IRS’s $975,789.17 penalty below the statutory maximum (50% of the account balance). We therefore affirm the District Court’s judgment on this alternative ground.

 JAT Comments:

Third Circuit Sustains FBAR Willful Penalty (6/7/22)

In Collins v. United States, 36 F.4th 487, (3rd Cir. 6/6/22), CA3 here and GS here, the Court affirmed the district court’s holding that Collins was liable for the willful FBAR penalty.  See United States v. Collins, 2021 U.S. Dist. LEXIS 23260, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), GS here.

The steps in the Court of Appeals reasoning were:

1. Collins had unreported foreign accounts.

2. Collins joined OVDP, apparently in 2010.  After filing his “amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002,” Collins opted out of OVDP, presumably hoping to pay less on opt-out.  The IRS audited and found that the amended returns failed to report PFIC income, which generated additional tax of “$71,324 for 2005, 2006, and 2007, plus penalties.”  Further, by opting out, Collins subjected himself to potential willful FBAR penalties rather than the mitigated miscellaneous penalty in OVDP.  The IRS proceeded to asset the FBAR penalty, although the IRS mitigated the penalty substantially under the IRM mitigation rules and agent discretion.

3. The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”

4. On the willful determination, The Court of Appeals articulated and applied the “civil standard of willfulness, which encompasses recklessness * * * * The dispositive question here is whether “Collins knew or (1) clearly ought to have known that (2) there was a grave risk that he was not complying with the reporting requirement, and if (3) he was in a position to find out for certain very easily.”  (Cleaned up.)

5. The Court of Appeals handily affirmed the district court’s holding that “Collins’s failure to disclose his foreign accounts was willful—not just reckless, but with ‘an actual intent to deceive.’”

District Court Retains Jurisdiction While Arbitrary and Capricious FBAR Willful Penalty Amount is Remanded to IRS for Recalculation (5/18/22)

In United States v. Schwarzbaum (S.D. Fla. Case # 18-cv-81147-BLOOM/Reinhart Dkt #146 5/16/22), CL here, the Court granted the Government's motion to retain jurisdiction while the FBAR penalty is remanded to the IRS for recalculation. The pleadings on the motion and much other commotion at the district court level can be reviewed on the CourtListener docket entries site for the case here. I have previously covered the issues on retention of jurisdiction:  More Thrashing in Schwarzbaum on Effect of Eleventh Circuit's Remand to Remand to IRS on Statute of Limitations (4/1/22; 4/7/22), here; see also 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (1/26/22), here.

The net effect of retaining jurisdiction is that the fight over the statute of limitations with respect to the recalculated FBAR penalty will be thrashed out later, probably on appeal after the district court enters judgment on the recalculated penalty amount. I am not an administrative law or Administrative Procedure Act (APA) expert, so I don't know and cannot credibly predict what the ultimate resolution of the issue will be. Can the IRS correct an "arbitrary and capricious" assessment outside the six-year limitations period? My best guess is that the law is not clear on the issue. I can say that correcting the assessment amount with the old timely assessment remaining in effect seems like the "right" answer. I just cannot speculate credibly on whether the law permits that right answer.

More District Court Thrashing Around on Arbitrary and Capricious Calculation of Willful FBAR Penalties (3/30/21)

I have written before on the saga of Timberly Hughes.  Court Sustains Willful FBAR Penalty for Two of Four Years (Federal Tax Crimes Blog 10/15/21), here.  Hughes is back in the news, so to speak.  In United States v. Hughes (N.D. Cal 18-cv-05931-JCS 3/29/22), here, Magistrate Judge Spero is trying to wrap up the case so that it goes to the District Judge and then, apparently, to the Ninth Circuit.  (The docket entries in CourtListener are here.)

 In high level summary:

1. The court confirms that for the two years it previously found nonwillful, that while losing on the willful penalty for the 2 years, there would be no nonwillful penalty for those years.  The court says (p. 3, n 4):

   n4 “The United States does not seek nonwillful penalties against Ms. Hughes for 2010 and 2011, though the United States reserves its right to appeal the Court’s  willfulness determination as to 2010 and 2011.” Pl.’s Reply (dkt. 168) at 2

I have never thought about whether nonwillful and willful penalties can be assessed and litigated in the alternative (something like a lesser included offense concept).  Since the IRS never assessed the nonwillful penalty, I suppose it is out of time to assert assess.  I don't know whether such alternative assessments and/or litigation could be made under the statutes or procedures.  For example, in the Hughes case, applying the nonwillful penalty to the years the court found were not willful.

2. The Court found that there were errors in the calculations and methodology in several respects and remanded to the IRS to reconsider the penalties.  There is no discussion of potential statute of limitations issues from a recalculation and reassessment.  The issue is whether a new assessment would be permitted or only an adjustment downward to the prior assessment.  I am not sure whether the normal APA remand to the agency holds or forces open the statute of limitations (sort of the way a petition to the Tax Court in a deficiency cases suspends the statute of limitations so that the correct number after litigation gets assessed).

3.  In paragraph 2 my prior blog here, I discussed a potential glitch where the IRS uses its methodology to quantify the willful penalty by spreading the amount quantified at 50% of the single high amount over the willful years.  The example I gave was a high amount of $2 million over four willful years and for simplicity assumed that high amount was static at all times during the year.  The maximum penalty authorized by the statute would be 50% per year, for an aggregate of $4 million.  Under the IRS policy to apply only a 50% to the high amount for all willful years (that's not each year), the willful penalty would be the same $1,000,000, but applied to each of the four years.  Now, with two years dropping out, does $500,000 allocated to the now nonwillful years drop off or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained.  I don’t know.  And, if you vary the amounts so that only in one year the high amount was $2 million, you can get weird results to this type of issue.  And what if in that varying scenario, the high amount were in a year judicially determined to be nonwillful?

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.

11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (1/26/22)

In United States v. Schwarzbaum, 24 F. 4th 1355 (11th Cir. 1/25/22), CA11 here and GS here, the Court affirmed the district court’s holdings that (i) Schwarzbaum was liable for the FBAR civil willful penalty and (ii) that the IRS calculation of the willful penalty was arbitrary and capricious. Based on the latter holding, the Court remanded for the IRS to recalculate the penalty.

The first holding—liability for the willful penalty—is consistent with the consensus holdings expanding the element of willfulness for the civil penalty beyond the strict meaning it has for the criminal penalty. Specifically, the willful penalty can apply to reckless conduct. However, in making that holding, the Court footnoted some of its reasons for the reckless conclusion (Slip Op. 13 n8):

   n8 Schwarzbaum argues that the district court’s finding that he recklessly violated the FBAR reporting requirements, even though his CPAs had advised him in previous years that he need not report accounts lacking a U.S. connection, conflicts with United States v. Boyle, 469 U.S. 241 (1985), in which the Supreme Court said: “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” Id. at 251 (emphasis omitted).
       Boyle concerned a different tax statute and did not provide the legal standard for willfulness in the FBAR context. Moreover, the Supreme Court’s statement in Boyle is readily distinguishable. While it may be generally reasonable for a taxpayer to rely on professional advice, it is no longer reasonable once the taxpayer has realized—as Schwarzbaum should have, once he read the FBAR instructions—that he has been receiving bad advice.

The second holding—arbitrary and capricious calculation with its consequence of remand to the IRS for recalculation—is, for me, the troublesome part of the opinion. The district court and the Court of Appeals applied the APA arbitrary and capricious test for review of agency actions. 5 U.S.C. § 706(2)(A). The statute states that the willful penalty per unreported account “shall not exceed” the greater of $100,000 or 50% of the amount in the account in the unreported account on the reporting date (June 30 for the years involved). The IRM has a formula that determines the maximum willful penalty that it will assess at 50% of the highest amount in the accounts in all willful years. The IRM then allocates that penalty in equal portions over the willful years. For example, assume that the person had $900,000 static amount in an account over 3 years and their respective reporting dates that was willfully not reported on timely FBARs. The IRS could theoretically assess $450,000 per year for an aggregate of $1,350,000. The IRM nevertheless provides a formula for a lesser penalty of 50% of the highest amount in all willful years ($450,000) and applying that amount over all three years in proportion to the high amounts in the accounts for each year provided that the amount allocated for each year cannot exceed the maximum the statute allows (50% of the amount on the reporting date for the year). This formula will always result in the penalty for a year never exceeding the amount the statute permits the IRS to assess. Indeed, the example illustrates this perfectly because the IRS could have assessed $1,350,000, but under the formula, the penalty is substantially less, $450,000. In effect, the IRS has (in mind) exercised its discretionary authority to impose a lesser penalty than it could have. I discuss this aspect in District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/22/20; 3/24/20), here; see par. 4 of that blog. (I should note that, depending upon the numbers assumed in the account for high amounts and reporting date amounts, the IRM formula could be affected, but the formula would always limit the amount that could be assessed for each year to 50% of the unreported account amount(s) on the reporting date.)

Court Enters Stipulated Order to Prevent Alienation of Swiss Account Holdings (12/27/21; 12/30/21)

I recently blogged on an order in United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart) to repatriate Swiss account funds based on the district court’s holding that a U.S. person was subject to the willful penalty. District Court Upholds Repatriation Order for FBAR Willful Penalty While Liability on Appeal (11/4/21; 11/5/21)), here.  The parties continue to fight about whether the repatriation order should be stayed pending the outcome of the appeal. The pleadings on that commotion may be viewed on CourtListener, here, but Schwarzbaum summarizes his position in the Motion to Stay

If, on the other hand, the Court refuses to stay its Order and Mr. Schwarzbaum is forced to liquidate his foreign investment accounts before the appeal is  concluded, he faces the threat of significant and irreparable harm. Mr. Schwarzbaum would be required to pay the transaction costs [*2] and income taxes associated with the liquidation and transfer of his assets into the United States. If this Court's decision is subsequently overturned, Mr. Schwarzbaum would not be able to secure a refund of those taxes, nor could he force the United States to make him whole for the costs and taxes he never should have been required to pay. To avoid this untenable result, the Court should stay its Repatriation Order pending conclusion of the appeal.

Update on 12/30/21 1:30pm:  On 12/20/21, the Court granted Schwarzbaum's Motion to Stay Pending Appeal.  See CL here.

 In United States v. Monica Harrington (D. Colo. 1:21-cv-02601-RBJz), CL Docket Entries here,  the Government sought a preliminary injunction against Monica Harrington to require her to repatriate funds in a Swiss account.  See Docket entry # 1, here.  This request relates to an FBAR collection action against Monica Harrington’s husband, George Harrington, who allegedly transferred ownership of the account to his wife to avoid the U.S. collecting in the event the U.S. prevails in the FBAR collection suit.  The FBAR collection case against the husband is still pending.  United States v. George Harrington (D. Colo 1:19-cv-02965), CL Docket Entries here.

FinCEN Adopts Immediately Effective Final Rule Omitting the Regulations Statement of the 2004 Willful Penalty Prior to the 2004 Statutory Amendment (12/26/21)

Readers may recall that the FBAR willful penalty, as amended in 2004, provides a maximum penalty of the greater of $100,000 or 50% of the amount in the account on the reporting date.  31 U.S.C. §5321(a)(5)(C).  Prior to 2004, the maximum willful penalty was $100,000.  After the 2004 amendment, FinCEN did not amend the regulation, 31 CFR § 1010.820(g), to reflect the change in the statute.  After the amendment, creative lawyers pursued the argument that, by leaving the regulation in tact, FinCEN exercised its discretion under the amended statute to maximize the FBAR willful penalty at $100,000 and thus could not assert a higher penalty under the amended statute.  That argument finally failed.  E.g., Norman v. United States, 942 F.3d 1111, 1117-1118 (Fed. Cir. 2019).

FinCEN has deleted subsection (g), thus eliminating any confusion (real or feigned) about the effect of the statutory amendment.  The Final Rule states that it is immediately effective on the date issued (12/23/21).  See 86 FR 72844, 72844-72845, here.

I have no idea why FinCEN took so long to make that deletion.

JAT Notes:

What is the effect of stating an effective date of 12/23/21?  Why didn’t FinCEN just state that the effective date was the 2004 amendment effective date?  Certainly, the deleted subsection (g) had been effectively deleted by 2004 amendment, as recognized by the court opinions prior to 12/23/21.

While I can't provide a definitive answer as to FinCEN's reasoning, I will step through my analysis.:

District Court Upholds Repatriation Order for FBAR Willful Penalty While Liability on Appeal (11/4/21; 11/5/21))

I have written before several posts on the trial level saga at the trial level in United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart) an FBAR collection suit.  See particularly District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/21/20; 3/24/20), here.  Basically, after trial, the district court entered an FBAR willful penalty judgment of $12,555,813.  That judgment is now on appeal to the Eleventh Circuit and was recently argued.  11th Circ. Mulls If IRS Should Revisit $12.5M FBAR Penalty, 2020 (Law360 315-118) (no link, subscription required); the oral argument on 10/5/21 is on the Court’s web page here.

In United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart 10/26/21), GS here and Cl here, the district court, sustaining the Magistrate Judge’s Report and Recommendation, held that the Government was entitled to an order granting repatriation of funds in offshore accounts in support of collection of the judgment.  The Court supported the repatriation on the basis of the the Federal Debt Collection Procedures Act of 1990, 28 U.S.C. §§ 3001, et seq. (“FDCPA”) and the incorporation of the All Writs Act, 28 U.S.C. § 1651.

The reason the Government wanted an order of repatriation is that, according to the Government, Schwarzaum was placing or had placed assets outside the collection power of the U.S., so that repatriation was necessary to collect the judgment.  Some interesting parts of the opinion are:

Court Sustains Willful FBAR Penalty for Two of Four Years (10/15/21)

In United States v. Hughes, (N.D. Cal. 3:18-cv-05931-JCS Entry 162 10/13/21), CL here and TN here, the Court (Magistrate Judge by consent) held in Findings of Fact and Conclusions of Law Regarding Willfulness (“FF&CL”) in an FBAR collection suit that the defendant, Timberly E. Hughes, was liable for the FBAR willful penalty for 2 of the 4 years for which the Government sought judgment.  For the two years that the Court did not sustain the willful FBAR penalty, the Court did not find Hughes nonwillful but held that the Government had not met its burden of proof.  (As the Court worded it, if the Court could have found her nonwillful, it would have done so, but instead found that the Government had not met its burden of proof, which  I infer means that the Court was in equipoise, the only circumstances that permits burden of proof to control the result.)

I am not sure that the conclusion that the Government had not met its burden of proof is supported by the Court’s findings.  I think that the inferences the Court drew on the objective findings are suspect.  The Court does state that it applied the reckless standard for the finding of willfulness.  But I am surprised that, on the objective facts recounted, the Court found the Government failed to meet burden of proof (preponderance).

There is a lot that could be discussed about the FF&CL  I offer below just some points that I focused on and think worth mentioning, but there are surely more interesting points.  Those wishing to go further will find a lot of the documents in the case available free at CourtListener docket entries here.

1. One factor that I think the Court gave short shrift to was Hughes’ income tax issues for those years.  The Government’s Post Trial Brief, Dkt. 158, here, at pp. 3-6, states the following under captions of “Income Shifting” and “False Business Addresses”):  Hughes had a bookkeeping service business, a Schedule C business, generating substantial U.S. source service income.  Hughes owned two foreign corporations which she improperly reported as Schedule C U.S/ operations.  One of those businesses generated major net losses (raising the hobby loss issue permitting deductions only against income which was minimal).  Hughes reported her bookkeeping service income as income of the businesses which she improperly reported on Schedule C, thus claiming deductions to which she was not entitled.  The erroneous deductions were from $331,145 to $1,306,505 for the years.  Apparently, she also gave a false U.S.  business address for the foreign entity, the inference being that she was trying to hide the foreign nature of the entity.  As a result of this reporting, Hughes underreported her income tax liability by over $600,000 in the years involved.  In  dismissing this as a relevant factor, the Court said (p. 22):

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).

[*5] 

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: