Court Dismisses Government Complaint for FBAR Willful Penalty with Leave to Amend for Failure to Allege Facts Supporting Willfulness (6/12/17; 6/26/17)

UPDATE 6/26/17:  On 6/23/17, DOJ Tax filed an amended complaint, here.  I have not studied the complaint in detail, but my quick review suggests that it does address the judge's concerns or confusions.  Note particularly that civil tax cases for the years involved were resolved with the taxpayer agreeing to the civil fraud penalty with the base including, in part, earnings on the offshore accounts.  While this may not be preclusive on the issue of FBAR willfulness, it is certainly not neutral.

We have this unusual order dismissing the Government case seeking to reduce the FBAR assessment to judgment in United States v. Pomerantz (6/8/17 WD WA 2:16cv00689), here.  The Complaint in the case is here; the docket entries as of today are here.  The judge dismissed with leave to amend because the Government failed to plead facts from which a fair inference could be drawn that the defendant acted willfully in failing to file the FBAR.  The Court also denied Pomerantz' motion to dismiss for improper venue and his motion to transfer the case to the District of Columbia.  The latter holdings are unexceptional.  However, under the notice pleading environment, it would be the rare case that would be dismissed for failure to state a claim, so I will just provide excerpts from the opinion on that issue.

The FBAR willful penalty requires, well, willfulness.  If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.  The Government did allege willfulness but ---

[I]n order to state a claim to reduce a civil penalty to a judgment, the Government must allege sufficient facts to support a reasonable inference that (1) the government assessed a civil penalty, and (2) the penalty was valid. To adequately allege that the penalty was valid, the Government must allege facts supporting each element of the underlying penalty. 

* * * *  

The Government alleges that Mr. Pomerantz’s failure to timely file FBAR Forms “was willful within the meaning of 31 U.S.C. § 5321(a)(5),” implying that Mr. Pomerantz had either constructive or actual knowledge of the reporting duty. (Id. ¶¶ 23, 37, 45.) However, these allegations are precisely the “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements” that are insufficient to state a claim. Iqbal, 556 U.S. 662, 678, (2009) (citing Twombly, 550 U.S. at 555). They do not plausibly support the inference that Mr. Pomerantz knew of the reporting duty. Instead, the Government must allege sufficient facts to plausibly support the inference that Mr. Pomerantz knew—actually or  constructively—of the reporting requirement. United States v. Williams, 489 F. App’x 655, 659 (4th Cir. 2012). 

i. Actual Knowledge 

Actual knowledge of the duty to report may be inferred from a course of conduct that demonstrates a conscious attempt to conceal the failure to report. See United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (citing Spies v. United States, 317 U.S. 492, 499 (1943)). The Government alleges that the company Mr. Pomerantz used to open the Swiss accounts—Chafford Limited—“conducted no active business, but was a shell entity used to hold and manage [Mr.] Pomerantz’ personal investments.” (Compl. ¶¶ 6-7.) 

Similar allegations, combined with the taxpayer’s failure to pursue knowledge of further reporting requirements, sufficiently supported a finding of “willfulness” in Sturman. See 951 F.2d at 1476-77. The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report. 

However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl. ¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC Accounts. (See id.) The court declines to infer from Mr. Pomerantz’s creation of the Chafford Limited Accounts knowledge of the duty to file FBAR Forms for the CIBC Accounts. The Government has not provided the court with any authority in which a court inferred from obfuscating conduct with no connection to a particular account an intent to evade a reporting obligation for that account, and the court finds such an inference implausible. (See generally Resp.) Thus, with regard to the CIBC Accounts, the Government makes only speculative and conclusory allegations regarding Mr. Pomerantz’s actual knowledge. 

ii. Constructive Knowledge 

Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge. Id. The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.) 

However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See
Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d
at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents). 

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report. 

Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful. The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts. Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

JAT Comments:
1.  As presented this is one odd holding.  I think the Court had already held the pleading adequate for the accounts held in the name of the foreign entity.  So, based solely on the pleadings, the failure to file the FBARs in question was willful.  Once the failure to file is willful, the willful penalty may apply.  I suppose that a defendant having foreign accounts as to which there is some doubt as to the legal duty to report on the FBAR he willfully failed to file, he may have a defense as to the penalty base.  The Court apparently thinks that the penalty is separately tested as to willfulness with respect to each account.  That is odd and, I suspect, wrong.  Of course, the better part of wisdom would be for the Government to just amend the pleadings and move on.

2.  According to the complaint, the FBAR penalty was assessed on May 26, 2014 for 2007 and on March 11, 2015 for 2008 and 2009.  This case was timely filed during the key 2-year window to file such suits.  But a dismissal, if it holds and the Government does not redeem by filing a sufficient amended complaint, will preclude the Government from using its judicial remedy.

3.  The Government asserted the FBAR willful penalty for three years.  There is no indication whether the willful penalty was the maximum that could be asserted -- 50% of the amounts in the accounts on the key dates -- June 30 of 2008, 2009 and 2010.  Readers will recall that in May 2015, after the penalties here were assessed, the IRS adopted a general rule for FBAR penalties that the maximum amount of the penalty would be 50% of the high amount in the years for which the statute of limitations was still open.  Because, at least in some cases, that high amount might exceed the high amount on any given 6/30, the maximum penalty as thus quantified could be spread among open years to insure that the penalty amount quantified could be assessed.  It is not indicated whether the penalties here are based on that general rule (so that the aggregate penalties do not exceed 50% of the high amounts in the accounts during the period) or whether there are indeed 3 separate penalties at the high amounts on the key dates 6/30 of each of the filing years.

4.  The guidance that adopted the new policy has since been incorporated in IRM 4.26.16.6.5.3  (11-06-2015), subpar. 2, Penalty for Willful FBAR Violations - Calculation, here.