District Court Holds Government FBAR Willful Penalty Burden of Proof is Preponderance and Recklessness is Willfulness for FBAR Willful Penalty (4/5/18)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018), here, a Government suit to reduce the willful FBAR penalty to judgment, the Court held:

1.  The Government's burden of proof on the willful penalty is preponderance of the evidence.

2.  "T]he Government may prove the element of willfulness in this case with evidence that Mr. Garrity, Sr. acted recklessly."

The opinion is relatively short and straight-forward, so I refer readers to the opinion.

This case has a lot of commotion in it, so readers with particular interest might want to review the docket entries which as of today are here.  I make some comments about it below.

JAT Comments:

1.  As I have often noted, I do not believe that the preponderance of the evidence standard should apply because I think the case is sufficiently like the civil fraud penalty that the same burden should apply.  The court dismisses the civil fraud penalty analog in footnote 3 as follows:

   n3 In light of the presumption in favor of applying the preponderance standard in all civil actions, the few structural similarities that Defendants point out between the civil FBAR statute and the civil tax fraud statute are not sufficient to warrant applying a higher standard of proof. (See ECF No. 106 at 2-3.) It is also worth noting that the Second and Eighth Circuits have applied the preponderance of the evidence standard to the tax statute imposing civil penalties for aiding and abetting tax underpayments, i.e., 26 U.S.C. § 6701. See Barr v. United States, 67 F.3d 469 (2d Cir. 1995); Mattingly v. United States, 924 F.2d 785 (8th Cir. 1991). In doing so, the Mattingly decision, on which the Barr decision relied, suggested that the clear and convincing evidence standard is limited to civil tax fraud cases brought under 26 U.S.C. § 7454(a), which requires proof of "fraud with intent to evade tax." 26 U.S.C § 7454(a); Mattingly, 924 F.2d at 787 ("[A]bsent fraud with the intent to evade tax pursuant to § 7454(a), a preponderance standard is applicable in civil tax cases.").

I should note that the reliance on § 7454(a) is misplaced.  Section 7454 relates to Tax Court proceedings - i.e., it is under subchapter C titled "Tax Court."  That statute does not govern income tax proceedings in other courts where the Government must prove fraud by clear and convincing evidence.  Moreover, the Court's curt analysis does not address the issue that the the civil fraud penalty, like the FBAR civil willful penalty, bears the same structural relationship to the criminal fraud penalty, which is like the FBAR criminal penalty.  Both are civil counterparts to criminal fraud penalties.  To simply say that they are different penalties does not really address the issue.  Still, there is a lot of contrary authority at this stage so getting courts to hold otherwise may be almost impossible.

2.  I also disagree with the holding that recklessness can meet the willfulness standard.  I have spoken to that on many occasions, but the nutshell is the willfulness is the Cheek standard of specific intent to violate a known legal duty.  Recklessness is not specific intent.  Nevertheless, the extant limited authority seems to support the Court's holding.  (Note that recklessness seems even farther removed from specific intent than willful blindness.)

3.  The Defendant moved to consolidate the FBAR case with a parallel later Government suit to reduce related income tax penalties to judgment.  The motion is here.  The income tax penalty case was

to reduce to judgment outstanding civil penalties assessed under 26 U.S.C. § 6677 against Paul G. Garrity, Sr., for his failure to timely file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) for tax years 1996, 1997, 1998, and 2004, and for his failure to ensure that the Lion Rock Foundation (a foreign trust of which he was the primary beneficiary) timely filed Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner) for tax years 1997 through 2008.

The Government opposed consolidation.  See opposition here and the defendant's reply here.

4.  In both cases, the Government demanded a jury.  The Government must think its facts will play well before a jury.

5.  During the proceedings before the order linked above, there was a lot of sparring about discovery.  Perhaps the most interesting was sparring about the assertion of the Fifth Amendment by two nominally non-parties who were sons of the decedent.  The Court sustained their assertion of privilege.  Then, the Government filed a motion in limine, here, to permit an adverse inference against the estate if, at trial, they persisted in asserting the privilege.  The motion requests that: "Specifically, the government requests that the Court allow the government to call Kevin and Sean Garrity as witnesses at trial, ask them questions regarding the foreign account, and  if the non-parties continue to invoke their Fifth Amendment privilege, then the Court provide an adverse inference instruction against the Estate."  The motion is here, and memorandum in support is here.  As of this writing the defendant has filed no response.

6.  The Government filed a motion in limine to exclude the testimony  "The Defendants Diane M. Garrity, Paul G. Garrity, Jr., and Paul Sterczala, as the personal representatives of Estate of Paul G. Garrity, Sr., intend to offer Mr. Epstein as an 'expert' to present evidence that (1) a “reasonable person” or generic “individual taxpayer” did not know that that there was a requirement to file a Report  of Foreign Bank and Financial Accounts (“FBAR”); and (2) the IRS should not have determined that the decedent, Paul G. Garrity, Sr., willfully failed to file an FBAR."  The motion is here and memorandum in support is here.  As of this writing the defendant has filed no response.