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.
5.  For the tax year 2007, a new accountant took over.  The income tax return for 2007, for the first time, answer the Schedule B question about foreign accounts yes, but did not report any income from either account.  For the tax year 2007, Bedrosian also filed an FBAR, but only reported one UBS account with high amount of about $240,000 but omitting the other account with high amount of about $2.3 million.  (Court Memo 3.)

6.   "Sometime after 2008, UBS told Bedrosian that it would be providing his account information to the United States government." (Court Memo p. 3-4.)  The Government's statement of facts, from which the foregoing sentence was paraphrased, fleshes this out as follows:  "Bedrosian had previously believed that his name was not 'on the list to be provided.'" (US Stmt of Facts par. 41, p. 6.)

7.  In 2010, Bedrosian amended his 2007 income tax return to report the income from both accounts and his 2007 FBAR to report the additional account previously undisclosed (the larger account).  (Court Memo pp. 3-4.)  By this time, the IRS had already discovered the accounts from UBS.  (Court Memo p. 4.)

8.  At some point, Bedrosian tried to join OVDP but was rejected.  (US Stmt of Facts par. 45, p. 6.) It is unclear from the Stmt of Facts whether he tried to do that before filing the amended return, but I infer that he did.  (I suspect that the timing  could be better bracketed from  the underlying exhibits but I have not reviewed those exhibits).  If that inference is correct, I would further infer that, knowing the jig was up, Bedrosian wanted to shoehorn himself into the traditional voluntary disclosure so as to at least avoid criminal prosecution.  And, many of the U.S. taxpayers disclosed by UBS and thus known to the IRS did not get a pass on criminal prosecution.  Bedrosian may have had some good facts, as suggested by the initial IRS decision not to assert the willful penalty, or, alternatively, his "disclosures" may have so muddied the waters that the Government may not have wanted to fight the Kastigar hearing fight.  In any event, avoiding criminal prosecution on these facts seems to be an amazing victory for Bedrosian and his lawyers.

9.  This part of the Court Memo is too delicious not to quote it (Court Memo  p. 4), I eliminate the references to the court record for easier reading):

The IRS initiated its investigation of Bedrosian in April 2011, with a focus on tax year 2008. Beginning then, Bedrosian engaged with the Service cooperatively, providing them with all documentation requested. Id., The investigation culminated in a case panel of IRS agents recommending that Bedrosian be penalized for non-willful violations of the FBAR reporting requirement and that the case against him be closed.  For reasons unclear in the record, the case was not closed but instead was re-assigned to another IRS agent, Pamela Christensen, who conducted her own review and concluded that Bedrosian's violation of Section 5314 had been willful. On July 18, 2013, the IRS sent Bedrosian a letter stating that it was imposing a penalty for his willful failure to file TDF 90-22.1, the FBAR form, for tax year 2007. The proposed penalty was $975,789.17, 50% of the maximum value of the account ($1,951,578.34) and therefore the largest penalty possible under the regulations. 

ISSUES DISCUSSED AND DECIDED (WITH SOME COMMENTS)

I quote this in full because it is short and at least bitter-sweet (with the judge punting on granting either motion but indicating his tilt in application of the willful penalty based on the few -- three decided cases).

The crux of this case is Bedrosian's level of culpability in failing to file an FBAR for one of his two Swiss bank accounts in 2007; that is, did he act willfully under the pertinent statute and regulations, or non-willfully? The parties do not dispute that Bedrosian meets the other requirements of the relevant laws - (1) he is a citizen of the United States, (2) he had an interest in a financial account during 2007, (3) the account had a balance that exceeded $10,000 during 2007, (4) the account was in a foreign country, and (5) Bedrosian failed to disclose the account. See 31 C.F.R. § 1010.350; 31 U.S.C. § 5314. Therefore, the only issue in dispute is whether Bedrosian's violation of Section 5314 was willful. 

We start from the premise that the precise contours of the term "willful" as used in Section 5321, the civil penalty provision, have not been clearly established by statute or precedent. Authorities ranging from various federal courts, the Internal Revenue Manual, and the Office of Chief Counsel for the Internal Revenue Service reach different conclusions about the level of intent necessary to satisfy the willfulness requirement. To ground our discussion, we will summarize the approach taken by the only three federal courts to have engaged in this analysis thoroughly. See United States v. Williams, 489 F. App'x 655 (4th Cir. 2012); United States v. Bohanec, No. 15-4347, 2016 U.S. Dist. LEXIS 170149, 2016 WL 7167860 (C.D. Cal. Dec. 8, 2016); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012). 

Williams, Bohanec, and McBride all stand for the proposition that a defendant has willfully violated Section 5321 not only when he knowingly violates the rule but also when he recklessly does so. See Williams, 489 F. App'x at 660; Bohanec, 2016 U.S. Dist. LEXIS 170149, 2016 WL 7167860, at *5; McBride, 908 F. Supp. 2d at 1204. Those holdings are grounded on the Supreme Court's decision in Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 127 S. Ct. 2201, 167 L. Ed. 2d 1045 (2007), where the Court discussed how to determine civil liability for "willfully fail[ing] to comply" with the Fair Credit Reporting Act ("FCRA"). Id. at 57 (alteration in original). The Court there began by characterizing "willfully" as a "word of many meanings whose construction is often dependent on the context in which it appears." Id. (internal quotations omitted) (quoting Bryan v. United States, 524 U.S. 184, 191, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998)). Importantly, it then stated that, "where willfulness is a statutory condition of civil liability, [the Court has] generally taken it to cover not only knowing violations of a standard, but reckless ones as well." Id. (collecting cases in which the Court so defined the term in the context of civil statutes). Consistent with that trend, the Court concluded that the FCRA's requisite willful intent was satisfied by a finding that the defendant recklessly violated the statute. Id. at 57-58. 

Bedrosian does not reference Safeco in his motion or opposition to the United States' motion; rather, he relies on two Supreme Court cases that examine willfulness in the criminal tax penalty context to advocate for an identical definition in the civil one. He cites Cheek v. United States, 498 U.S. 192, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991) and Ratzlaf v. United States, 510 U.S. 135, 114 S. Ct. 655, 126 L. Ed. 2d 615 (1994), for the proposition that "[i]n order to sustain a 'willful' penalty under 31 U.S.C. § 5321(a)(5), the government must show that [P]laintiff's actions amount to a 'voluntary, intentional violation of a known legal duty.'" Pl.'s Mot. at 5 (quoting Cheek, 498 U.S. at 201). As noted, these cases arise in the criminal context, and we are highly skeptical that the Court's reasoning therein will be applicable in the instant case. Certain dicta in Safeco discussing the distinction between the civil and criminal contexts in terms of the willfulness standard compel that conclusion. Specifically, the Court in Safeco emphasized the importance of "limiting [criminal] liability to knowing violations" because, in order to harbor the requisite criminal intent, a defendant must "act[] with knowledge that his conduct was unlawful." Safeco, 551 U.S. at 57 n.9 (quoting Bryan, 524 U.S. at 193). It then stated "[c]ivil use of the term, however, typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing," and concluded that "[t]he standard civil usage . . . counsels reading the phrase" to include reckless violations." Id. at 57, 57 n.9. 

At this juncture, we need not hold what the appropriate standard of willfulness is, but we note that the jurisprudential trend is towards one that would encompass reckless violations of Section 5314. Regardless, the key question here is whether either party has pointed to a lack of genuine dispute of material fact on their affirmative claims. We answer that in the negative. The determinative issue for both Bedrosian's illegal exaction claim and the United States' claim for payment of the proposed penalty is Bedrosian's intent. Whether Bedrosian willfully failed to submit an accurate FBAR for 2007 is an inherently factual question and one that cannot be resolved at this stage. Genuine disputes exist as to what Bedrosian knew regarding his reporting requirements, and when, especially as those issues relate to his relationship with his accountant, Seymour Handleman. Although there is no good cause exception for willful violations of Section 5314, we nevertheless find that Bedrosian's testimony regarding the information provided to him by Handleman and what exactly Bedrosian did with that information, if anything, would be relevant to a determination of Bedrosian's intent. For those reasons, summary judgment is not warranted as to either party.

MISCELLANEOUS COMMENTS:

1.  I have discussed the proper standard for willfulness in the FBAR penalty many times before and will not cover that ground again.  I think that willfulness for this civil penalty analog to the criminal penalty should be the same as the criminal penalty, with the only difference being the burden of proof.  That is true for the income tax civil fraud penalty in § 6663, here, and the civil fraud penalty is far less onerous in in dollars and percentage of the culpable conduct than the FBAR willful penalty (even with a single year penalty rather than the multiple year penalties asserted in prior cases).   And, while on the subject, I also believe that the burden of proof the Government should bear is the clear and convincing burden for the same reasons that the burden is imposed in income tax cases.  Readers interested in pursuing the willfulness standard issue and some of my comments on it, might click here (which is my search on williams mcbride known legal) or craft their own Boolean search in the search block (note that the & connector is implied).

2.  I have said before that the two key cases -- Williams and McBride -- are distinguishable and not as strong authorities as the Government would have it and courts are assuming without critical analysis.

3.  The judge's comment that Bedrosian had not briefed Safeco seems to be a mild slap.  The conventional wisdom is that a party to litigation facing negative authority is better off to raise the negative authority and distinguish it so that, properly considered, it is not negative authority.

MISCELLANEOUS CONCLUDING COMMENTS:

1.  Jurisdiction alleged under 28 USC § 1346(a), here.  Complaint par. 3, p. 1.  U.S. denies this allegation but asserts that the Court has jurisdiction under 28 USC § 1355, here.  I haven't really dug into that issue, but I do note that Bedrosian's payment of only $9,747.80 (Complaint part. 32, p. 5) suggests that he was trying to stay under the jurisdictional limit for district courts in § 1346(a)(2), the Little Tucker Act.  In any event, 28 USC § 1355 seems to fit the case and does not have a jurisdictional limit.  However, having noted that, in the Kentera case, which I discussed in Court Denies FBAR Penalty Relief Under APA, Requiring Alternative Paths to Remedy (Federal Tax Crimes Blog 2/3/17), here, the Court said (in footnote 6):

   n6 The government argues, for the first time in its reply, that 28 U.S.C. § 1355 also affords an adequate alternative to the present request for APA review. (Docket #19 at 2). Section 1355 provides that federal district courts have original jurisdiction "of any action or proceeding for the recovery or enforcement of any fine, penalty, or forfeiture, pecuniary or otherwise, incurred under any Act of Congress, except matters within the jurisdiction of the Court of International Trade." 28 U.S.C. § 1355(a). Whether or not this statute provides an adequate alternative, Plaintiffs were not given a chance to respond to the government's position. The Court will, therefore, disregard it. Studio & Partners v. KI, No. 06-C-0628, 2008 WL 426496, at *6 (E.D. Wis., Feb. 14, 2008) (citing TAS Distributing Co., Inc. v. Cummins Engine Co., Inc., 491 F.3d 625, 630-31 (7th Cir. 2007)).

2.  Presumably, by admitting jurisdiction (and presumably consent), the Government is admitting  that a Flora-type full payment rule does not apply.  In this regard, I have been concerned about which is in the companion section to refund jurisdiction (28 USC § 1346(a)(1)) which the Supreme Court interpreted in Flora to require full payment.