In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (12/28/19)

In an earlier Memorandum and Order in United States v. Toth (D. Mass. Dkt. No. 15-cv-13367-ADB 10/15/18), GS here and CL here, the district court imposed sanctions against the defendant in an FBAR collection suit for discovery deficiencies.  The sanctions were (from the Conclusions of the Memorandum and Order (emphasis supplied by JAT):

For the reasons explained above, the Government's amended motion for sanctions is GRANTED and it is hereby ORDERED that the following facts are taken as established for purposes of this litigation:
1. Defendant had legal control over, and the legal authority to direct the disposition of the funds in, the Account (and any sub-accounts), by investing the funds, withdrawing the funds, and/or transferring the funds to third-parties, between the date the Account was opened and at least December 31, 2008.
2. Should the United States establish that Defendant is liable for the penalty alleged in the complaint, for the purposes of calculating the amount of such penalty, the Account (and any sub-accounts) contained $4,347,407 as of the penalty-calculation date.
3. Defendant had a legal obligation to timely file an FBAR regarding the Account in each calendar year that the Account was open, including with regard to calendar year 2007.
4. Defendant willfully failed to file an FBAR regarding the Account with respect to calendar year 2007.
The Government may file an itemized statement of costs and attorney's fees documenting the costs and fees that it incurred in preparing the amended motion for sanctions within 30 days of this order, should it wish to recover fees and costs.
SO ORDERED.

A key fact in this debacle was that the defendant represented herself pro se up to the date of the Memorandum and Order.  After that Memorandum and Order, the defendant engaged counsel, but apparently even then the defendant’s compliance with discovery fell short.

In United States v. Toth (D. Mass. Dkt. No. 15-cv-13367-ADB 12/20/19), GS here and CL here here, the district court rejected the defendant’s motion for reconsideration (erroneously styled a motion to vacate) of the original Memorandum and Order.  What comes through from this Memorandum and Order (as well as the prior one) was that the court was frustrated with the defendant’s continuing obfuscation.

A review of the docket entries at Court Listener (CL), here, should give some sense of the court's frustrations.

Key excerpts from the current Memorandum and Order are:

In seeking to vacate the sanctions, the Defendant focuses her arguments on her belief that the sanction that establishes as fact her willful failure to file an FBAR for 2007 is particularly unjust. See, e.g., [ECF No. 130 at 2, 15-16; ECF No. 147 at 6-10]. In support of her contention that her failure wasn't willful, Defendant claims that she "only learned of an obligation to file FBARs after receiving a notice from her bank, UBS, in 2010...." [ECF No. 147 at 2]. UBS sent Defendant a "notice to UBS accountholders" on March 9, 2010, alerting U.S. accountholders that their accounts were within the scope of an IRS treaty request for information. [ECF No. 139-12 at 1]. The letter asked accountholders to consult with a U.S. tax advisor to decide whether to consent to UBS providing their account information to the IRS and/or to consent to the IRS sharing FBAR forms with the Swiss Federal Tax Administration. [Id.]. Finally, the letter provided accountholders with information about the IRS's voluntary disclosure program for taxpayers with U.S. tax and filing obligations stemming from their offshore accounts with UBS. [Id. at 4]. 

It is Defendant's position that she "mistakenly believed [UBS] as a fiducial custodian, automatically took care of all reporting and paying to the government which was required. This specifically included the Bank's withholding and remitting taxes if any were due." [ECF No. 93-2 at 12; see ECF No. 147 at 8]. Defendant states that when she learned of the need to report her account to the IRS through the March 2010 communication from UBS, Defendant contacted the IRS to determine what was required and sent FBARs for the appropriate years, including 2007, to the Department of the Treasury in early November 2010. [ECF No. 130 at 16; ECF No. 93-2 at 5; ECF No. 131-5 at 2; ECF No. 139-17 at 179-80]. Although she initially sent incomplete forms indicating that she would provide more complete information at a later date, by late November 2010 she had provided complete forms, albeit to an incorrect postal address. [ECF No. 130 at 4-5; ECF No. 131-10 at 2, 4]. Due to Defendant's mailing error, the IRS did not receive the FBARs until she provided copies to an IRS auditor in 2011. [ECF No. 130 at 6]. 

The Government counters that it has demonstrated that Defendant's conduct in failing to file a timely 2007 FBAR was willful, and that the Court's Order establishing as fact that Defendant willfully failed to file an FBAR for 2007 was warranted and not clearly unjust. [ECF No. 141 at 11-12; ECF No. 110 at 12]. The Government cites legal authority to support its contention that willfulness under 31 U.S.C. § 5321(a)(5) can be proven through conduct that is either reckless or willfully blind and asserts that Defendant's conduct was both. [ECF No. 141 at 11-12].

Focusing on the period after defendant retained counsel (apparently after the original Memorandum and Order):

The Government has provided the Court with e-mail correspondence from November 2018 in which the Government asked Defendant to sign a waiver allowing UBS to provide the Government with records of the Account. [ECF No. 139-1; ECF No. 139-3 at 1]. Counsel for Defendant refused to sign the waiver. [ECF No. 139-4]. The Government also provided the Court with a copy of a letter sent by counsel for Defendant to UBS on February 7, 2019, in which counsel for Defendant requested materials from UBS regarding the Account with limitations as to content ("communications" and "bank statements") and time period. [ECF No. 139-5 at 1-2]. Counsel for Defendant represented to the Government in June 2019 that they had made a new request to UBS for all materials related to the Account "without limitation" [ECF No. 139-7], and the Government has provided a declaration that it received 2,500 pages of UBS records regarding the Account from Defendant on August 5, 2019, [ECF No. 152 at 1]. 

Defendant's approach to producing the UBS records was inconsistent with the Court's January 2018 Order, which required Defendant to answer all Rule 34 production requests unless she could claim that requested documents were protected by privilege. [ECF No. 84 at 1-2]. Counsel for Defendant took nine months—from the time counsel entered their appearance in this matter in November 2018 until August 2019—to comply with the Court's Order and provide all documents relating to the Account. See [ECF Nos. 116; 117; 152].[5] In addition to Defendant failing to timely comply with the Court's Order when representing herself pro se, Defendant's counsel also failed to comply with the Court's Order in a timely manner. See [ECF Nos. 84; 139-3; 139-4; 139-5].
[5] Defendant claims in her sur-reply that "not once in the approximate four years that [the Government] litigated against Ms. Toth did it specifically seek to compel Ms. Toth to produce her UBS bank records." [ECF No. 157 at 2]. To the extent Defendant is arguing that the Government did not move to compel production of UBS records specifically, the Court observes that the Government sought to compel the production of all documents responsive to its requests given Defendant's failure to provide any documents, let alone the UBS records. [ECF No. 83 at 2 ("More than 2 months after the response deadline, Ms. Toth has not provided a single document or response to the discovery.")]. 

Further, Defendant's failure to comply with the Court's January 2018 discovery Order was only one basis for the Court's imposition of the sanctions at issue. [ECF No. 110 at 4-5, 8, 10]. In light of the Court's assessment in its October 2018 Order of Defendant's failure to comply with the Court's January 2018 discovery Order and also considering documents provided by the Government evidencing Defendant's continued failure to comply through at least early August 2019, it was not unjust as a legal or factual matter to deem Defendant's conduct as willful.

Additional Documents (from CL):

• The complaint is here (in it, the Government makes a jury demand, and seeks judgment for a willful penalty assessed of $2,173,703 plus statutory additions and accruals:
• Order on Government Motion for Sanctions (Dkt.120 11/29/18), here (substantially rejecting the Government’s claim for inadequate documentation, with the following for flavor: “Here, the Government seeks to recover an incredible 115 hours purportedly attributed to the amended motion for sanctions” and it goes down from there..

JAT Comments:

1.  As best I see it, the record as recounted in the current Memorandum and Order already contains sufficient evidence, at least on the reckless standard, for the Court to have granted summary judgment to the Government that Toth’s FBAR failure to file was willful.  That the court effectively disposed of the case by sanctions would not seem to be critical.  The district court must still enter judgment and perhaps that will take some pro forma motion for summary judgment.

2.  The Court has this cryptic holding toward the end of the current Memorandum and Order:  " The Government has also asked the Court to order Defendant to pay the costs of the expert witness it retained in support of its opposition to Defendant's motion. [ECF No. 141 at 21; ECF No. 140]. The Government's request is DENIED."  I have not tried to dig through the docket entries to see exactly what the Government's request was for.  But, I did note that earlier in the order, the Court says:  "The Government also references records of UBS communications with Defendant and a declaration from an expert in Swiss law to argue that Defendant knew as early as 2004 that transfers from the Account to her U.S. bank account would soon be required to record the name and account number of the transferring account."

3.  In footnote 6, the district court says (emphasis supplied by JAT):

[6] The First Circuit has not yet had an opportunity to consider the willfulness standard in the context of 31 U.S.C. § 5321(a)(5)(C) penalties. In the context of other tax reporting violations that require a finding of willful conduct, however, the First Circuit has held that a finding of willfulness can apply to conduct that is reckless or willfully blind. Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989) ("In the civil context, `willful conduct denotes intentional, knowing and voluntary acts. It may also indicate a reckless disregard for obvious or known risks.'" (quoting Monday v. United States, 421 F.2d 1210, 1215 (7th Cir. 1970))). In addition, although not binding authority on the Court, the IRS issued a Program Manager Technical Advice memorandum in 2018 which states that willfulness "includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements." IRS, Burden of Proof and Standard for Willfulness Under 31 U.S.C. 5321(a)(5)(C), PMTA 2018-013 (May 23, 2018), https://www.irs.gov/pub/lanoa/pmta_2018_13.pdf.

The citation of the PMTA is interesting.  Even though the district court says that the PMTA is not binding authority, the suggestion is that it is some type of authority even if not binding.  Obviously, the PMTA is not entitled to Chevron deference as an interpretation of the statutory term willful.  Nor, really, is it even entitled to Skidmore deference (whatever that is).  See Even More on Skidmore (Including Equipoise as to Interpretation)(Federal Tax Procedure Blog 7/7/19), here, where I discuss the Supreme Court oral argument where two Supreme Court justices (Breyer and Roberts) suggested that Skidmore deference may not be much, if anything).  So, on any real scale, the PMTA is no authority at all other than one litigant's pre-litigation position entitled to no deference and thus not authority for anything.  (Long-time readers of this blog may remember that the IRS's internal positions on standards of willfulness and how it is proved have shifted over time; thus the internal positions like the PMTA do not even have the characteristic of consistency.)

4.  Also, a nit.  In the next paragraph, the Court says: “FBARs "shall be filed with the Commissioner of Internal Revenue on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year." 31 C.F.R. § 1010.306(c).”  I don’t know which version of the CFR the Court claims to be quoting, but the LII version I usually use, here, is (bold face for different wording): “(c)  Reports required to be filed by § 1010.350 shall be filed with FinCEN on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.”  And, of course, that is right.