District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20)

In United States v. Bittner 2020 U.S. Dist. LEXIS 113416 (E.D. Tex. 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (Federal Tax Crimes Blog 4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

U.S. Brings Summons Enforcement Suit against Del. Dept of Insurance re Micro-Captives (6/23/20)

DOJ Tax has brought a summons enforcement suit against the Delaware Department of Insurance (“DDOI”) to obtain documents and testimony that DDOI has failed to provide regarding microcaptive insurance companies.  United States v. Delaware Department of Insurance (D. Del. Dkt. 1:20-cv-00829).  The petition and IRS agent declaration are available on CourtListener here and here.  The CourtListener docket entries are here.

Excerpts from the complaint (cleaned up):

4. The Internal Revenue Service issued a summons to the DDOI for testimony and certain records relating to filings by and/or communications  ith Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC  “Tribeca”) or others working with Artex and/or Tribecca. With this petition, the United States seeks an order enforcing Request 1 of the [*2] summons to the extent the DDOI has not already provided those records to the Internal Revenue Service, and also requiring the DDOI provide the summonsed testimony to the IRS. 

5. The Internal Revenue Service is conducting an investigation for the purpose of determining the role of Artex in  transactions involving micro-captive insurance plans organized under 26 U.S.C. § 831(b), as well as other potentially  abusive transactions. Tribeca is fully owned by Artex as of 2010, and the IRS is also investigating its role in transactions involving micro-captive insurance plans and other potentially abusive transactions. Among other things, the Internal Revenue is looking at whether Artex or Tribeca have promoted micro-captive insurance schemes and whether their actions may result in penalties pursuant to 26 U.S.C. § 6700, which Congress designed as penalty provisions specifically directed towards promoters of abusive tax shelters and other abusive tax avoidance schemes.  * * * see also Keltner Decl. ¶ 4 (investigation to determine whether Artex and Tribeca are subject to penalties under 26 U.S.C. § 6700, which permits imposition of penalty against any person who makes or furnishes or causes another person to make or furnish certain statements which the person knows or has reason to know are false or fraudulent as to any material matter). 

6. Micro-captive insurance schemes were designated a “Transaction of Interest” by the IRS. Transactions of Interest are those the IRS believes have the potential for tax avoidance or evasion. The United States Tax Court has found these schemes can be used to avoid or evade taxes. In the last three years, the United States Tax Court has struck down three separate micro-captive insurance transactions where the taxpayer sought to shield income from taxation through sham insurance companies [*3] Avrahami v. Commissioner, 149 T.C. 144, 179-180 (Tax Ct. 2017) (describing micro-captive transactions); Reserve Mech. Corp. v. Commissioner,  Tax Ct. Memo. 2018-86, 2018 WL 3046596, at *16 (Tax Ct. 2018) (finding transactions did not constitute insurance where they involved circular flow of funds, were not the product of arm’s-length considerations, used premiums that were not actuarially determined, covered nonexistent risks, and involved unlicensed insurance companies created for no legitimate non-tax purposes) (appeal docketed at No. 18-9011 (10th Cir.)); Syzygy v. Commissioner, T.C. Memo. 2019-34, 2019 WL 1559540, at *45 (Tax Ct. 2019) (invalidating Delaware micro-captive insurance company because arrangement did not distribute risk and did not meet commonly accepted definition of insurance). In at least one case,  the United States Tax Court noted the participation of promoters in the micro-captive insurance scheme it invalidated. Avrahami v. Commissioner, 149 T.C. at 206 (taxpayers cannot rely on “promoters” of tax avoidance schemes to avoid  penalties under 26 U.S.C. § 6662).

* * * *

8. The DDOI has issued approximately 191 insurance certificates of authority to micro-captive insurance companies associated with Artex. The informationsought by the IRS summons is likely to be relevant to a determination of whether the Artex or Tribeca transactions were abusive tax shelters and whether Artex or Tribeca made false and fraudulent statements in organizing those abusive tax shelters.   

Swiss Financial Institution Clients May Have Claims for Hidden Fees (6/12/20)

I picked up this article, reporting that investors may have some relief for Swiss financial institutions receipt of hidden undisclosed fees related to their investment of client funds.  Leon Harris, How to turn the tables on the Swiss banks – opinion (Jerusalem Post 6/11/20), here.  According to the article, bribery and kickbacks are normally illegal, but Swiss financial institutions for many years took so-called “retrocession fees” or “portfolio maintenance commissions” from funds or other investment vehicles that reduced the yield to the financial institutions' customers without disclosure to the customers.  The example is:

Annual return, say: 5%
Undisclosed “Portfolio maintenance commission”: 2%
Disclosed return to the investor: 3%
Disclosed bank fee: 1%
Net disclosed return: 2% (less than half the 5%)
In other words, the bank or financial institution may have received not only a disclosed fee appearing on your bank statement, but also a hidden fee from the fund or similar where they invested your money.

The article reports

This lucrative business model helped the Swiss banks to enjoy billions of dollars of retrocession fees that are due to the investors and can therefore be claimed back. According to a study, around $4 billion  of retrocessions were apparently collected by the banking institutions in 2012 alone.

The article says that, pursuant to Swiss Federal Court decisions, clients of the banks suffering the economic cost of these hidden fees may have a remedy.  The process, as described, is:

Extradited E&Y Tax Shelter Enabler Sentenced (6/9/20/ 6/10/20)

I have often posted on the Government’s criminal prosecution of persons promoting abusive tax shelters.  There were a number of prosecutions starting around 2005 as the Government focused on major accounting firms, law firms and financial firms and the persons involved with them.  One set of the prosecutions related to principals at Ernst & Young, the accounting giant.  I blogged on a major Second Circuit decision in the prosecutions and included further links to the blogs on the E&Y prosecutions.  Major CA2 Decision on E&Y Tax Shelter Convictions (Federal Tax Crimes Blog 11/29/12), here; see also E&Y Admits Wrongdoing on Bullshit Tax Shelters; Will Pay $123 Million (Federal Tax Crimes Blog 3/1/13), here.

One of the E&Y defendants in the prosecution, David Smith, reached a plea agreement but left the country before he could be sentenced and serve whatever time would be imposed.  After fighting extradition for years, Smith, an attorney and one of the major facilitators at E&Y, was extradited and sentenced yesterday to three years in prison, the maximum that he could be sentenced under his plea agreement.  The Bloomberg news report is here:  Chris Dolmetsch, Lawyer Who Ran From Ernst & Young Tax Shelter Case Gets 3 Years (Bloomberg News Wire 6/8/20), here. 

According to the article, Smith requested that “he be sentenced to the 11 months he’d already served in New York’s Metropolitan Correctional Center,” after extradition.  Apparently, he also cooperated earlier during the initial investigation phase and reached the plea agreement before he fled the country, so that would be a positive factor for him.  And, in mitigation, Smith claimed that he did not go on the lam to avoid incarceration, but because of the 9/11 events; moreover, he claimed, "he feared prosecutors would renege on promises of leniency after he fully cooperated with their investigation."  The judge imposed the harshest sentence he could under the plea agreement.  I gather that the judge did not buy Smith's claims.  

It is a good thing that his attorneys negotiated a plea with a maximum possible sentence of three years.  The plea was to tax perjury, § 7206(2).  Attached here is a copy of the judgment on CourtListener.  The plea agreement was quite very favorable for Smith given his apparent role in the overall scheme.

Note the last paragraph was revised 6/10/20 12:00pm to reflect that the plea agreement was to § 7206(1), tax perjury, rather than § 7212(a), tax perjury, as I had speculated in the original version.  Either way, the incarceration period is limited to three years.  And, the major point was that the plea was a sweet deal given his apparent role.  Of course his time being held from the date of extradition to the sentencing does not count toward the sentence, but that period is really attributable to the fact that he fled the country rather than punishment for the underlying crime.

District Court Denies Gov't Summary Judgment in FBAR Collection Suit (6/4/20)

In United States v. de Forrest (D. Nev. Dkt. # 2:17-cv-03048 Dkt entry 52, Order dated 5/31/20), here (with docket entries here), the court denied the Government’s motion for summary judgment in an FBAR willful penalty collection suit.  I don’t think the Order offers anything material to the discussion of FBAR willful penalty matters, except that, on the facts recounted, I speculate that other judges might have granted the Government’s motion.  And, on the facts recounted, if this judge were the “fact decider” (she is not because de Forrest demanded a jury), I am not sure de Forrest would prevail because the facts do not look particularly good.  I did note that the court says (Slip Op. at 3):  “Defendant asserts that over the course of their relationship, Mr. de Forrest [the money guy who started the offshore accounts] warned Defendant 'not to say anything about anything' regarding the the Swiss accounts. (Def. Dep. 42:22–43:1).2,” with the footnote saying:  “n2 In her Response, Defendant asserts that her husband threatened to murder her if she told anyone about the accounts. (Resp. at 2). However, there is no citation supporting this claim.”

The Defendant in the case demanded a jury.  I have previously discussed a jury trial in FBAR refund and collection suits in Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18), here.  I wonder which party a jury might favor as compared to a judge (this judge in particular).  The Government did not demand a jury on the original complaint.  There is no explanation for why the Government did not demand a jury, but it may have been simply because bench trials are easier and more expeditious than jury trials.  (At the margins, some judges might prefer to punt the fact issue to a jury rather than actually deciding the issue on motion for summary judgment.)  I do know that, from my experience in refund litigation with DOJ Tax, my attention was heightened when I got a refund suit with no jury demand by the taxpayer and I would sometimes demand a jury if there were some reason to believe that a jury would be more favorable to the Government.  Where I litigated, in the deep South in the mid-1970s,  the general understanding was that, except in some types of cases, a jury would not be more favorable – indeed likely to have at least one juror hostile -- to the Government (have war stories there, but won’t digress here).  Most tax litigators in the South knew that and would almost routinely demand a jury in a tax refund suit, so when the taxpayers did not demand a jury, that was worthy of attention.