FBAR Part II and III Reporting for Title Owners who Are Not Beneficial Owners (6/18/11)

I have recently encountered an issue as to how the FBAR is to be completed in the following circumstance:

W reside in Europe. H is not a U.S. Citizen; W is a U.S. citizen. H has accounts in which he has all beneficial interest under the local law of the country in which they reside. W is listed as an account owner on his accounts, but in fact that is just to give her access to the funds if something happens to H. It is designed to serve as a testamentary disposition to W in the event of H's death; it could also serve as a way for W to access the funds for H's benefit in the event of H's becoming incapacitated. W made no deposits into the accounts, made no withdrawals, and has done nothing with the accounts and is not expected or authorized, as between W and H, to do so until those events. Bottom line, the mechanism of naming W as an account owner at the bank does not give W any ownership interest in the account. It does permit the bank to take instructions from W (including withdrawals).

The question is how W must make an FBAR report? I think all of us recognize instinctively that the FBAR requirement was designed to flush out a report from W, because W certainly has signature authority over the account. I address here how W reports on the form because there has been some confusion about that. For those not interested in the details, here is the bottom line. W should report on Part III in this instance and, if W were the sole title owner (but not beneficial owner), W should report on Part II. There is some nuance behind this bottom-line, so the following discussion may be important to some.

Let's start with the statute, 31 USC § 5314(a), which grants broad authority to Treasury to require a U.S. resident or citizen to keep records and file reports when that persons "makes a transaction or maintains a relation for any person with a foreign financial agency." Section 5314(b) gives Treasury broad authority to prescribe the rules. These rules are adopted in regulations that, unless unreasonable, have controlling authority under the Chevron regime.

The regulations have the following key definitions in relevant part (these are not quotes except where quotation marks are used):

"Financial interest" is defined to include an interest in a foreign financial account for which the person "is the owner of record or has legal title whether the account is maintained for his own benefit or for the benefit of others." 31 CFR 1010.350(e). There are more complexities there dealing with beneficial owners of the account who may not be owners of record or legal title holders (such beneficial owners obviously have a financial interest in the account), but the quoted provision is the one pertinent to the discussion in this blog entry. So, let's parse the words, although this is evident on the face of the words. Under traditional Anglo-American jurisprudence, there can be a title holder and a beneficial owner and the two are not the same; they may be but they need not be. There is no question that the quoted portion of the regulations intends to treat the title holder as having a "financial interest" in the foreign account but that does not make the person an owner of the foreign account, at least in the traditional sense of the word owner which normally connotes beneficial ownership. For example, if I had title to property subject to a trust for the benefit of others, I am not the owner of the property (for example, I would not list the property on my assets on any financial statement (including a bank financial statement or IRS Form 433B); I may have to explain why I am only title holder and not beneficial owner. So to make a fine point, with respect to an asset (whether financial account or otherwise and whether foreign or otherwise), the U.S. person is who serves as title holder but is not the beneficial owner of the account, that person is not the owner even though, as defined by the regulation, that person does have a financial interest in the account. So, in our example, W has a financial interest as a joint account title holder even though W is not the owner of the account.

"Signature or other authority" means, not surprisingly, any authority, acting alone or with other, "to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained." 31 CFR 1010.350(f). W in our example certainly has this authority.

Now, let's turn to the FBAR Form. So, let's start with the Form, TD F 90-22.1. As readers know, the form comes in 5 Parts. The first, Part I, is the identification information for the filer. The next 3 Parts -- Parts II, III and IV -- ask for the account information based upon the role that the filer serves with respect to the account. Parts II and III and require information for "Financial Account(s) Owned Separately" and "Financial Account(s) Owned Jointly", Respectively. Part IV requires information "Financial Account(s) Where Filer has Signature Authority but No Financial Interest in the Account(s)."  (Part V is irrelevant for present purposes.) 

Now there is something very curious here just on the face of the Form itself (setting aside the Form instructions). Focus on the example I started with. W certainly has signature authority by virtue of being one of the title owners of the account but Form Part IV excludes persons with signature authority who have a financial interest which, as just noted, includes title owners. This is curious to me because such persons serve functionally only in the role of signatory power serving the beneficial owner(s) of the account. OK, you say, well perhaps the Form requires the financial account information of title owners without beneficial ownership somewhere else on the Form. The only other place it can do that is in Parts II and III but something strange happens there (at least in terms of the situation we are dealing with). As noted, the Form asks about "Owned" financial accounts. If the drafters of the form intended to include in Parts II and III titled (but not beneficially owned) account information as well as beneficially owned account information, they could have easily done that under the definition of financial interest. They could have simply titled Parts II and III, respectively, to require information about "Financial Account(s) Where Filer has Financial Interest Owned or Titled Separately" and "Financial Account(s) Where Filer has Financial Interest Owned or Titled Jointly." Then it would be absolutely clear that W in the example must report in Part II (or as to someone who is the sole title owner, Part I).

Well, you say, do the instructions clear this up? Perhaps, but not as clearly as they should (at least in my mind).

The instructions start with the following: "Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the “FBAR”), is used to report a financial interest in or signature authority over a foreign financial account." Ok, that opening salvo sounds like the Form requires information about W, because as title owner but not beneficial owner because W has a financial interest as defined in the Regulations (and also as defined in the instructions). Similarly, just a couple of lines later in the opening instructions describing who must file, the U.S. person must file if he or she "has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year." That seems to indicate that W must file the form.

The instructions define financial interest and signature or other authority, in material part, just as the Regulations do. OK, looks like (as we already concluded), W has a financial interest in the account and must file the FBAR and W has signature authority over the account.

The instructions for Parts II and III start with merely repeating the Form titles: "Part II — Information on Financial Account(s) Owned Separately;" and "Part III — Information on Financial Account(s) Owned Jointly." For the reasons noted above, just focusing on the title the drafts used for Parts II and III, one might conclude that that does not include W because W does not own the account. And then, moving to Part IV, one might conclude that W does not report there either because it excludes persons with signature authority who have a financial interest. 

Now, the drill down. In the line item instructions there is the following which infers that the drafters of the form were, shall I say, fishing for information as to accounts in which the filer has a financial interest rather than just an ownership interest as the title for the Part might suggest: "For Item 15 [Maximum Value for Accounts Reported on Part II], if the filer had a financial interest in more than one account, each account must be valued separately." Then, again by inference rather than direct statement, the instructions prescribe that the filer with "a financial interest in or signatory authority over" who is unable to determine the maximum value, can report for "value unknown" on Parts II - V, as appropriate. (Emphases are supplied by me in both cases.)

I am told that those who have inquired about this situation with the IRS have been told that, under these circumstances, they intend that someone like W serving solely as title holder should report on Parts II or III, as appropriate. So, I think the better part of wisdom at this stage is to report on Parts II or III, as appropriate.  (Although I have to say that I doubt that the Government would footfault the person who reported on Part IV because (i) the person is not an owner of the account and thus might think that Parts II and III do not apply and (i) the person clearly does have signature authority and thinks in any meaningful sense that he or she does not have a financial interest in the account (so as to the exclude by the Part IV title); only the ounterintuitive special definition of financial interest contained in the Regs and the form would treat the person as having a financial interest.)

JAT Comments: An affliction lawyers suffer is that they always think they could do things better than the other guy.  So, here is my shot influenced by that malady (which often is influenced by lack of perspective).  I think reporting this type of title ownership and not beneficial ownership on Parts II and III is weird. The key information could be captured by Part IV if Part IV did not exclude financial interests. And, in terms of relevant information for enforcement priorities (tax and otherwise), when a title holder is serving as nothing more than a signatory on the account, Part IV reporting would give the Government all the information it really needs (perhaps some of the questions could be sharpened).  Perhaps Part IV could ask about beneficial ownership (it already asks about title ownership).  I grant that the Government needs to know the title holder in order to be able to or to expedite obtaining account information under a treaty or some other type request. But, the current scheme requiring reporting on Part II for the sole title owner provides the Government less information than it really needs. Say that, in the example, H were a U.S. person who set up the account in W's name as title owner only, with W acting solely as H's agent (although the bank records do not reflect that). Why would the Government not be interested in knowing who W is acting for? That H has to file a report using Part II is not relevant for the provisions are designed to capture redundant reporting.  But I think that the Government has a keen interest in knowing up front that the title owner (whether separate or joint) is not the beneficial owner.

Addedum on 6/20/11:  I think it is implicit in the above, but if one were only guided by the questions asked on the form, one would think that Parts I and II do not apply because, in the example, W does not own the account and would think that Part IV does apply because she defnitely has signatory authority but no financial interest which most people would equate with ownership interest.  (I act as trustee and title owner in several cases but do not consider that I have a financial interest in the accounts or assets.)  Now the instructions, in somewhat confused format, adopts special rules that reverse the normal constructions of the terminology it uses in the form.  That just makes no sense to me if you expect citizens to comply.