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).

6. McBride’s failure to disclose the Accounts was willful


As it existed prior to an amendment that took effect in 2004, Section 5321(a)(5) authorized penalties against taxpayers who “willfully” violated Section 5314. “’[W]illfully’ is a ‘word of many meanings whose construction is often dependent on the context in which it appears.’” Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2004) (quoting Bryan v. United States, 524 U.S. 184, 191 (1998)). In Ratzlaf v. United States, 510 U.S. 135 (1994), while interpreting the intent required for a criminal conviction under 31 U.S.C. § 5324, the United States Supreme Court noted that the test for “willfulness” in the context of criminal violations of Section 5314 is a “’“voluntary, intentional violation of a known legal duty.”’” Ratzlaf, 510 U.S. at 142 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (quoting Cheek v. United States, 498 U.S. 192, 201 (1991))). However, the test for “willfulness” set forth in Cheek is explicitly tied to the imposition of criminal, rather than civil, penalties. See Cheek, 498 U.S. at 199-2001. Accordingly, the the test for “willfulness” set forth in Cheek, and discussed in Ratzlaf, is inapplicable to civil cases.

When the term “willful” or “willfully” has been used in a criminal statute, we have regularly read the modifier as limiting liability to knowing violations. This reading of the term, however, is tailored to the criminal law, where it is characteristically used to require a criminal intent beyond the purpose otherwise required for guilt or an additional “bad purpose,” or specific intent to violate a known legal duty created by highly technical statutes. Thus we have consistently held that a defendant cannot harbor such criminal intent unless he “acted with knowledge that his conduct was unlawful.” Civil use of the term, however, typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.

Safeco, 551 U.S. at 57, n.9 (citations and quotations omitted); see also Denbo v. United States, 988 F.2d 1029, 1034-35 (10th Cir. 1993). The civil standard for willfulness is satisfied where the individual at issue acts “voluntarily in withholding requested information, rather than accidentally or unconsciously,” Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997), or in reckless disregard of statutory duty. Safeco, 551 U.S. at 57. Here, it is beyond dispute that McBride was aware of the FBAR reporting requirement, see SOF ¶¶ 6, 24, 25, 32, and that he nevertheless affirmatively denied having an interest in any reportable foreign account in his Individual Income Tax Returns for 2000 and 2001. See SOF ¶ 26. These facts are sufficient to satisfy the civil standard for willfulness.

Even if it is assumed for the sake of argument that the criminal standard for willfulness applies, that standard is satisfied here. The criminal standard for willfulness is satisfied where the individual at issue is aware of the reporting requirement, but, for any reason, deliberately evades it. See United States v. Tatoyan, 474 F.3d 1174, 1179 (9th Cir. 2007) (evidence at trial was sufficient to support conviction for willful violation of the currency reporting requirement where defendants “knew they were required to file a report and that, for whatever reason, they deliberately evaded this requirement.”); see also Ratzlaf, 510 U.S. at 154 n.5 (Blackmun, J., dissenting) (under, inter alia, Section 5314, knowledge of the reporting requirement necessarily entails knowledge that the failure to report is illegal). Criminal willfulness may also “be proven through inference from conduct meant to conceal or mislead sources of income or other financial information.” Sturman, 951 F.2d at 1476-77; see also United States v. Dashney, 117 F.3d 1197, 1203 (10th Cir. 1997) (“[I]n the structuring context, ‘proof of concealment tends to prove knowledge of illegality.’”) (quoting United States v. Marder, 48 F.3d 564, 574 (1st Cir. 1995)). This standard is satisfied here as a matter of law. It is beyond dispute that in 2000 and 2001 McBride was aware of the FBAR reporting requirement, see SOF ¶¶ 6, 24, 25, 32, and that he nevertheless affirmatively denied having an interest in any reportable foreign account in his Individual Income Tax Returns for 2000 and 2001. See SOF ¶ 26. Moreover, McBride concealed his involvement in offshore activities from the individuals who prepared his Individual Income Tax Returns for 2000 and 2001. See SOF ¶¶ 27, 28. And when McBride was approached by the Internal Revenue Service and questioned regarding his offshore activities, he was not truthful. See SOF ¶¶ 29, 30, 31, 33. Finally, and perhaps most importantly, the entire Merrill Scott program which McBride purchased for $75,000 was primarily designed to help McBride avoid income tax by concealing the Clip Company’s true revenues in offshore shell-companies funded through kickbacks paid by the Clip Company’s manufacturer in Taiwan, while making those revenues available to McBride through, inter alia, phony loans. See SOF ¶¶ 5, 7, 9, 11, 13, 14. These undisputed facts are sufficient to demonstrate willfulness under either the civil or criminal standard.