Tuesday, November 13, 2012

McBride #2 - Proof of Willfulness (11/13/12)

In the prior blog, I addressed the McBride court's holding that the Government's burden to prove willfulness was by a preponderance of the evidence rather than by clear and convincing evidence.  I address here the Court's holding that the Government had established McBride's willfulness in failing to file the FBARs.

I recommend that the reader go to the first blog to review the detailed and damning findings made by the Court.  See McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (Federal Tax Crimes Blog 11/11/12), here.

In holding that the Government established McBride's willfulness, the Court's reasoning was as follows:

1.  Citing Safeco, the Court held that willfulness in a civil context covers "not only knowing violations of a standard, but reckless ones as well." Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2004).  Then, citing the recent civil holding in Global Tech, the Court found comfort in the willful blindness concept.  Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068-69 (2011).  [JAT Note: For my discussion on Global-Tech, see Supreme Court Speaks on Willful Blindness (Federal Tax Crimes Blog 6/2/11), here; for all Federal Tax Crimes Blog discussions of willful blindness, see here.]

2.  The Court cited standard holdings (i) that civil willfulness is conduct that is voluntary, rather than accidental or unconscious and (ii) willfulness can be inferred from the circumstances, since direct proof the taxpayer's intent is rarely available, citing the lead tax evasion case of Spies v. United States, 317 U.S. 492, 499 (1943).

3.  The Court found that McBride had knowledge of his duty to comply with the FBAR requirements.

4. In reaching this conclusion, the Court said that McBride had constructive knowledge by virtue of signing the Forms 1040 with the foreign bank account question and reference to the FBAR on Schedule B.  The Court read the Fourth Circuit's affirmance in Williams as so holding.

5.  Further explaining, the court cited some cases for the proposition that an inference can be drawn that a taxpayer signing a return under penalty of perjury knew the contents of the return (hence the Schedule B question and instructions).  (JAT Note:  the inference is just a permissible inference, which the McBride Court chose to make on the facts before it; it is not a compelled inference from a signature on a return; for example, if this issue (and others like it) are submitted to a jury, the jury is permitted to make the inference but not compelled to do so; this court, under these facts, chose to make the inference; and if the facts were not so otherwise damning as in McBride, it is doubtful that a court would make the inference.)

6.  The Court then, under a separate heading, starts with the bold-face proposition:  "Knowledge of the law, including knowledge of the FBAR requirements, is imputed to McBride.   The knowledge of the law regarding the requirement to file an FBAR is sufficient to inform McBride that he had a duty to file a Form TD F 90-22.1 for any foreign account in which he had a financial interest."  [JAT Note:  All I can respond is that is an incorrect statement; the sole function of the statutory requirement of willfulness is to change the usual presumption that ignorance of the law is an excuse; it may well be that some lesser conscious avoidance (which is still an affirmative consciousness) may be treated as willful, but mere ignorance of the law is not willfulness as to the FBAR requirements.]

7.  After detouring down this plainly erroneous path, the Court then noted that McBride was not merely ignorant; rather he had read the marketing materials some of which referred to the duty.  So said the Court:
More importantly, McBride actually read the marketing and promotional materials provided to him by Merrill Scott. FOF, ¶ 142. The marketing and promotional materials informed McBride of the duty imposed by federal law that U.S. taxpayers are required to report their interest in foreign bank and financial accounts. FOF, ¶¶ 21-23 ("As a U.S. taxpayer, the law requires you to report your financial interest in, or signature authority over, any foreign bank account, securities account, or other financial account"). McBride even testified that "the purpose of Merrill Scott" was to avoid disclosure and reporting the existence of interests "because . . . if you disclose the accounts on the form, then you pay tax on them, so it went against what [he] set up Merrill Scott for in the first place." FOF, ¶ 149.
McBride's claim that he did not know he had a legal duty to file FBARs is not credible. During his interviews with the IRS, McBride admitted to misleading the IRS, lying about several pertinent factual details, withholding information, and failing to disclose documentary evidence. FOF, ¶¶ 155-161. McBride has not only lied to the IRS, but has also made contradictory statements in his sworn responses to interrogatories and his testimony on the stand. Compare FOF, ¶¶ 26, 28 with ¶ 27. Moreover, once it was apparent the IRS was considering imposing the FBAR penalty, McBride has had every incentive to continue to conceal his awareness of the FBAR requirement. As a result, McBride's evasive course of conduct in lying to the IRS and concealing information is circumstantial evidence of McBride's willfulness. See Sturman, 951 F.2d at 1476 (holding that where a taxpayer "concealed his signature authority, his interests in various transactions, and his interest in corporations transferring cash to foreign banks" was conduct adequate to infer willfulness); 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)).
The Court thus made a finding that he knew and that he lied when he claimed he did not know.  That was well within the province of the Court to find, particularly given the damning evidence.  [JAT Note:  Thus, since McBride had actual knowledge, the court's musings about conscious avoidance or presumed knowledge of the law are just the wildest form of dictum.]

8.  The Court then goes back, unnecessarily, to the notions of reckless conduct and conscious avoidance supplying willfulness.  [JAT Note:  I suppose that is an alternative holding, but the major holding, fully confirmed by the fact findings, is that McBride knew.  I understand why the court is doing this, but again suggest that it is a frolic and detour and in many respects just wrong.]

I may offer more thoughts / speculations later.

Related Resources:

On answering the FBAR question No

  1. Practitioner Experience with No Answers to the FBAR Question on Form 1040 (Federal Tax Crimes Blog 10/5/10), here.
  2.  IRM (07-01-08) FBAR Willfulness Penalty - Willfulness, here.  This IRM has good discussion, including "The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness."  Willful blindness may be a proxy for willfulness.

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