Article on Risks of Certifying NonWillfulness (7/26/14)

Tax Notes Today has the following article:  Andrew Velarde, Streamlined Program Non-Willful Certification Can Be Hazardous, 2014 TNT 143-4 (7/25/14) (no link available).  The article reports of several prominent practitioners on a Bloomberg sponsored webcast:  Robert F. Katzberg, of Kaplan & Katzberg, Alan Granwell of Sharp Partners, and Bill Sharp of Sharp Partners.

The thrust of the article is the certification of non-willfulness is risky and not for the poorly counseled, particularly because false certifications can lead to higher penalties (even than offered by OVDP) or even criminal prosecution.

I do agree with the thrust of the article.  I will quibble with part of one of the paragraph of the article.

Citing Cheek v. United States, 498 U.S. 192 (1991), Alan W. Granwell of Sharp Partners PA said that willfulness requires awareness of a legal duty, but it does not go so far as to require the taxpayer to be aware of the specific statutory provision for a tax violation. Speaking on willfulness under foreign bank account reporting requirements, which are under Title 31, William M. Sharp, also of Sharp Partners, said that it could be more difficult to show an intentional disregard of a known legal duty under Title 26 than under Title 31. In United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) 2012 TNT 219-21: Court Opinions, the court determined that the taxpayer's signature on the return constituted knowledge of a duty to comply with FBAR requirements. 

I focus on the second two sentences of this paragraph.

1.  The standard for both Title 26 criminal violations with a willful element is intentional violation of a known legal duty.  The sentence in the paragraph above uses "disregard" rather than "violation," but I think the word disregard weakens the requirement and prefer the standard formulation of intentional violation of a known legal duty.  That is perhaps a quibble.  But, focusing on whether there would be a difference in the Government's difficulty of proof between Title 26 and Title 31's FBAR requirements, the standard is exactly the same.  The only difference is proof levels.  In both Title 26 and Title 31's FBAR criminal prosecutions, the standard is the same and the proof level -- beyond a reasonable doubt -- is the exactly same.  No difference.  Now when we turn to the civil FBAR penalty and compare to the Title 26 and Title 31 criminal penalties, the proof level is different.  Criminal requires beyond a reasonable doubt.  Civil requires preponderance or, I argue, clear and convincing.  But the standard -- intentional violation of a known legal duty is the same.

ABA Tax Lawyer Publication Comment on FBAR Willful Penalty (2/16/15)

I refer readers to a very good Comment in the most recent ABA Section of Taxation Tax Lawyer publication on the FBAR willfulness penalty.  Kyle Niewoehner, Feigning Willfulness: How Williams and McBride Extend the Foreign Bank Accounts Disclosure Willfulness Requirement and Why They Should Not Be Followed, 68 Tax Lawyer 251 (2014), here.  The author is a J.D. Candidate in 2015 from Georgetown University Law Center.  The author acknowledges assistance from Jody Brewster, a Partner at Skadden, Arps, Slate, Meagher & Flom and Raven Keith, Georgetown University Law Center, J.D. Candidate 2015.  Here are some excerpts (footnotes omitted):

Since being handed enforcement authority from the Financial Crimes Enforcement Network in 2003, the Service has begun a campaign to provide stricter enforcement of the long-neglected Report of Foreign Bank and Financial Accounts (FBAR), which requires disclosure of foreign financial assets through Form TD F 90-22.1. Willful violations were required for any penalty under the pre-2004 law and carry heavy penalties under existing law, so these enforcement efforts rely to a great extent on the interpretation of the willfulness provision. 

Williams and McBride were the first two cases to address the willfulness requirement for an FBAR civil penalty. In Williams, the court held that failing to file an FBAR after signing a tax return constitutes “a conscious effort to avoid learning” about the FBAR requirement, which satisfies the willfulness requirement. In McBride, the court held that signing a tax return constitutes knowledge of the duty to comply with FBAR, which satisfies the willfulness requirement. By holding that taxpayers willfully violate the FBAR statute simply by signing a tax return and then failing to file, both Williams and McBride construe the willfulness requirement more broadly than applicable precedent would have dictated.

This Comment argues that the current text of the statute and precedent require a more narrow reading of the FBAR willfulness requirement. It argues that taxpayers should not be charged with constructive knowledge after signing a tax return. Instead, a court should have to find that the taxpayer is aware of the existence of the FBAR requirement in order to find a willful violation. In addition to being consistent with the text of the statute and precedent, this approach would avoid the liability nightmare created by a combination of the Williams–McBride strict liability standard and the ill-defined “other financial  account” language in the law. 

* * * * 

The Williams–McBride interpretation of the willfulness requirement in 31 U.S.C. § 5321(a)(5) is flawed because it imposes a strict liability standard where both the statute and the case law indicate otherwise. 

* * * * 

Before addressing the ways this standard misapprehends precedent, it must be noted that this standard cannot possibly be applied to the current version of section 5321(a)(5). Under the pre-2004 version applicable in Williams and McBride, the civil penalty in section 5321(a)(5) could be assessed only for willful violations. But under the current version of section 5321(a)(5), there are separate penalties for non-willful violations. Using the Williams–McBride standard of willfulness, it is difficult to conceive of how a violation could be nonwillful. 

* * * * 

IV. Conclusion: Future Courts Should Look to Sturman 

The solution for future courts is to look past the flawed Williams–McBride reasoning and adhere to the Sturman standard, which looked for an actual intent to violate the FBAR requirement or a course of conduct that would allow a court to infer willfulness. This would clearly avoid the liability problems created by the strict liability of Williams–McBride while upholding the relevant Supreme Court precedent and the current version of the statute.

More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (7/22/14)

Yesterday, I wrote a blog titled Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.  In that blog, I concluded that willful blindness for purposes of the income tax and the FATCA willful penalty did not include gross negligence or its parallel recklessness.  A reader pointed out that the Fourth Circuit had concluded that recklessness could meet the definition of willfulness.  United States v. Williams, 489 Fed. Appx. 655; 2012 U.S. App. LEXIS 15017 (4th Cir. 2012).  (For my prior blog on the Williams case, see Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.)  Today's blog addresses this aspect of the Williams holding.

I will focus on the FBAR side of the issue here.  The FBAR willfulness civil penalty is as follows (Section 5321(a)(5)(C), here:

(C) Willful violations.— In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
    (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
        (I) $100,000, or
        (II) 50 percent of the amount determined under subparagraph (D), 

So, the key statutory term is willfully.  As the Courts have noted on many occasions, when Congress uses the term willfully in statutory schemes, it may mean different things.  See Bryan v. United States, 524 U.S. 184, ___ (1998), here; see also former Justice Souter's opinion in  Justice Souter’s opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir.  2014), here (“willful” is a “chameleon” which changes in tone and color according to the Code section involved and the circumstances).  However, as Cheek noted, in the federal tax criminal provisions, it means intent to violate a known legal duty, the strictest formulation of scienter for the word willfully.  Cheek v. United States, 498 U.S. 192 (1991), here.  In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court held that willfully as used in Section 5322(a), here, the criminal provision for willfully violating the antistructuring provisions, should be interpreted the same as in Cheek -- intent to violate a known legal duty.  Ratzlaf had to know that structuring was illegal and intend to violate the law in order to be prosecuted.  In the course of so holding, the Court said:

A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] -- reading the word differently for each code section to which it applies -- would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").

The FBAR criminal penalty is in Section 5322(a) also. The FBAR civil willfullness penalty is part of the same regulatory scheme, incorporated in the immediately  preceding Code section, Section 5321.  Significantly, Section 5321(d) says that the civil penalty can apply "notwithstanding the fact that a criminal penalty is imposed with respect to the same violation."  So, referring to the above quote from Ratzlaf, willfulness for purposes of the civil penalty would have the same interpretation of willfully -- intent to violate a known legal duty.  Hence, the IRM  says that, for purposes of the FBAR civil penalty, "The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.  4.26.16.4.5.3  (07-01-2008) FBAR Willfulness Penalty - Willfulness, here.  We thus do not have to pick among possible meanings of willfully, we know the meaning of willfully.

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.

McBride #3 - Summary Analysis

I want to summarize my thoughts about the meaning, if any, of the McBride case beyond reconciling the dispute between the Government and McBride.  What does it tell taxpayers and the tax community?  I think that there has been some hyperbole about the case that will not bear close analysis.

In presenting my analysis, I will assume the reader's familiarity with the two prior blog discussions of the case.  Those are:

1. McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12), here.
2. McBride #2 - Proof of Willfulness (11/13/12), here.

First, as I previously noted, the facts were particularly damning against McBride on many fronts.  So, I am not sure that particular statements should be taken from the case and assume that they are controlling in less-damning fact patterns.  I have addressed a similar concern with respect to the Fourth Circuit's nonprecedential, unpublished opinion in United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012), here.  See Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here; see also, however, my blog on nonprecedential opinions, Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent? (Federal Tax Crimes Blog 8/29/12), here.  Williams also presented an egregiously bad fact pattern, so as I note in the blog for that reason and for the reason that the Fourth Circuit itself said that the opinion was nonprecedential, I am not sure how much enlightenment the Williams opinion offers in less egregious fact patterns.  The McBride opinion relies significantly upon the Williams opinion and thus incorporates by reference the weakness of the Williams opinion as guidance in other cases with less egregious facts.

Government Pursues FBAR Penalty in Civil Case (10/31/10)

In United States v. McBride (D. Utah No. 2:09-cv-378-DB-BCW), the Government seeks to enforce civil penalty for failure to file FBARs for 2000 and 2001. The amount sought is the maximum under prior law ($100,000 per year). The defendant participated in an offshore scam orchestrated by Merrill Scott and Associates ("Merrill Scott"). (For more on Merrill Scott, see here and here. Suffice it to say for present purposes that it involved offshore entities and offshore banks.

The Government has filed motion for summary judgment. The memorandum in support of the motion is here, the complaint is here and Dennis Brager's discussion of the case is here. The Government's motion appears strong (at least if it is a fair statement of both the summary judgment evidence and the case itself); the defendant appears destined to lose even if he survives a motion for summary judgment. (Cf the Williams case discussed here.)  I thought readers of this blog might be most interested in the Government's statement of the willfully standard for the maximum FBAR penalty which is now up to 50% of the highest amount in the account for each year. The Government argues that the willfully standard in the FBAR civil penalty is not the same as willfully standard in the criminal tax statutes (interpreted in Cheek to require the intentional violation of a known legal duty). Rather, the Government argues that a lesser standard applies in civil cases and argues, protectively, that even were the Cheek standard to apply, it is met here for purposes of summary judgment. Here is the Government's discussion (pp. 18-20 of the Memorandum).

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:

Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (4/13/17)

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017), here, the Court denied the parties' cross-motions for summary judgment with regard to an FBAR willful penalty assessed against Bedrosian.  The order is relatively short -- 9 pages.  I will just provide (i) the key documents; (ii) a timeline mostly from the Court's Memo (referred to as Court Memo) but with some from the parties' submissions; (iii) a discussion of the issues discussed and decided in the Court Memo; and (iv) some miscellaneous comments at the end.

KEY DOCUMENTS

• Bedrosian Complaint (Dkt 01), here.
• US Answer (Dkt 05), here.
• Bedrosian Reply (Dkt 07), here.
• US Motion for Summary Judgment - Memo (Dkt 22), here.
• US Motion for Summary Judgment - Statement of Facts (Dkt 22-3), here.
• Bedrosian Motion for Summary Judgment - Memo (Dkt 25), here
• Bedrosian Motion for Summary Judgment - Statement of Facts (Dkt 25-1), here.
• Bedrosian Response to US Motion (Dkt 26), here.
• Bedrosian Response to US Motion - Statement of Facts (Dkt 26-1), here.
• US Response to Bedrosian Motion (Dkt 27), here.
• US Reply to Bedrosian Answer to US Motion (Dkt 028), here.
• Court Memo Denying Cross-Motions for Summary Judgment, here.
• Bedrosian Docket Entries (as of 4/14/17), here.

TIMELINE

1.  Bedrosian is sophisticated and successful corporate executive (CEO of generic medication manufacturer).  "In this role, Bedrosian supervises approximately 100 employees, signs contracts and financial statements on behalf of Lannett, researches FDA regulations, and decides company policy with respect to FDA filings."  (Court Memo p. 1.)

2.  Bedrosian has had at least one Swiss account -- with UBS (actually a predecessor that transitioned into UBS before the year at issue) -- since the 1970s.  At the time here relevant (as of 2005 and after), he had two UBS accounts.  "Bedrosian avers that he always considered them one account." (Court Memo p. 2.)  The description in the Government's statement of facts is as follows:  "Each account had subaccounts and contained different assets, but the client numbers for each main account ended in 6167 and 5316."  (US Stmt of Facts par. 15, p. 3.)

3.  "Bedrosian would meet with his UBS banker annually to review his accounts and how well the accounts had performed over the year."  (US Stmt of Facts par. 18, p. 3.)

4.  Bedrosian was advised by a prior accountant some years prior to 2007 that he should be reporting his income from the account(s) but, so Bedrosian alleges, that accountant advised him not to correct and the matter would be worked out upon his death when the "the assets in the Swiss accounts would be repatriated as part of Bedrosian's estate and taxes would be paid on them then."  (Court Memo 2-3.)  That accountant died sometime before Bedrosian assigned the tax return work to a new preparer for the 2007 year.

District Court Imposes FBAR Willful Penalty, Holding Reckless Conduct is Willful and Applying Preponderance Standard (12/10/16)

In United States v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (CD CA 2016), here, the Government sued the Bohanecs for judgment for for a single year FBAR penalty.  The Court's Findings of Fact and Conclusions of Law sustain the Government's position.  I include at the bottom of this entry links to other key documents that I downloaded from Pacer.

The facts may be highly summarized as follows:

The Bohanecs were camera dealers in California for many years.  Their camera shop had an exclusive Leica dealership.  Through a relationship with the president of a Leica subsidiary in Canada, Kluck, the Bohanecs earned commissions on sales that were deposited into a UBS account established for them by Kluck.  They amassed substantial amounts in the UBS account.  In 1997, the account had $1,049,900 and, by 12/31/07, the account had $687,600.  The amount in the account on 6/30/08, the filing date for the 2007 FBAR was $643,662.

In addition to the UBS account, the husband had an Austrian account established before he immigrated to the U.S., into which certain deposits were made.  And, they also had an account in Mexico which received transfers from the UBS account to build and maintain a house in Mexico.

After 1998, the Bohanecs stopped filing U.S. income tax returns and did not file until they attempted to join OVDP ini 2010.  The Bohanecs never filed FBARs until they attempted to join OVDP in 2010.

In 2010, the Bohanecs submitted an application to participate in the OVDP.  In the submissions, the Bohanecs only disclosed the UBS account and, further, represented that "original balance and all funds deposited into the [Swiss UBS] account were after-tax earnings from our used camera business."

After preliminary acceptance (acceptance implying that they were not part of UBS's initial disclosures), the Bohanecs submitted six years of delinquent FBARs and delinquent income tax returns (six years were 2003-2008).  The FBARs omitted the Austrian and Mexican accounts.  The delinquent income tax returns omitted income earned by the Bohanecs from camera sale activity on EBay.

The Bohanecs were rejected from OVDP.  The opinion does not state why they were rejected.  Perhaps they were rejected because the IRS became aware of the omissions from the FBAR and the amended income tax returns.  Perhaps by then the IRS had obtained the UBS account documents (either submitted by the Bohanecs or obtained from UBS), showing transfers to the Austrian and/or Mexican accounts.  (If those UBS account documents were submitted by the Bohanecs in the OVDP process, the omission of the other accounts from the FBARs filed in the OVDP process is surprising.)

In 2013, the IRS asserted by notice of deficiency additional tax, failure to file penalties (the regular FTF of 25 percent), and the civil fraud penalty under § 6663.  (It is not clear why the IRS did not assert the fraudulent failure to file penalty in § 6651(f).)  The Bohanecs did not contest the notice and the deficiencies were duly assessed with interest.  Most of the amounts assessed were still outstanding in September 2016 (aggregating $492,163.61).

In this suit, the Government asserts the 50 percent FBAR willful penalty (50 percent of the account balances for reportable accounts on 6/30/08).  The Court in its conclusion states only that the FBAR willful penalty is "the greater of $100,000 or fifty percent of the balance in the foreign accounts on June 30, 2008."  It does not state the amount to which the fifty percent penalty applies.  That may be in the stipulations, though.  The amount of the penalty is not particularly important for present purposes.

The key conclusions for present purposes are relatively short, so I include them all:

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.

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:

According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 

• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 

More specifically, Mr. Epstein's proposed testimony includes opinions on: 

• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 

Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)

The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:

Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).

2.  On the issue the jury will resolve, the expert's report:

does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 

What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.

JAT Comments:

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.)

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.").