Tuesday, April 20, 2021

CFC Grants Summary Judgment Based on Bank Account Record Ownership Even Though Others May Have Been Beneficial Owners (4/20/21)

In Landa v. United States, 2021 U.S. Claims LEXIS 635 (Fed. Cl. Apr. 19, 2021), here, the Court entered summary judgment for the Government on the FBAR civil willful penalty.  The facts are not good for the plaintiff, Leon Landa, hence the summary judgment.  

The funds in issue came from his grandfather, who a citizen and resident of Ukraine who deposited funds in a Swiss bank in WW II before moving first to Israel and then the U.S.  The grandfather “apparently intended [the] money “for the family” to be preserved and used for emergencies ‘in case another situation like World War II . . . happen[ed].’”  Over time, at the various Swiss banks involved at for the year involved in the FBAR penalty [UBS, Credit Suisse and BSI], the record ownership of the accounts appeared solely in the name of Leon Landa, the plaintiff in the case and person who drew the FBAR civil willful penalty.  At some times, other family members were listed as having power of attorney at a couple of the banks.  But, at the key relevant times, Leon Landa only appeared as record owner of the accounts.  Regarding the UBS account, the Court found (p. 5) that in 2009 (as we all know) UBS under pressure closed accounts for U.S. taxpayers and a UBS represented "advised [Leon Landa] to open an account at a bank that “doesn’t do any operation in the United States.” Regarding a key account, the BSI account opened in 2009 apparently in response to the UBS advice, the Court found (p.5 & 6, cleaned up and footnote omitted):

The plaintiff applied to open the BSI account, identifying only himself as the account holder on the application, and he included his address and passport number. The account was opened as a numbered account. Mr. Landa signed a “Declaration of US Person,” which allowed him the choice between providing BSI with a form W-9, used by third parties to gather information on U.S. taxpayers to submit to the IRS, or, in the alternative, not authorizing the disclosure of his name. Mr. Landa signed his name under paragraph (b), which provided: “I do not authorise disclosure of my name. I am aware that the Bank will not invest in US securities on my account.” The plaintiff also signed a document titled “Declaration of identity of beneficial owner,” identifying “Landa Leon” as the contracting partner. Mr. Landa did not take a copy of any paperwork from BSI with him back to the United States. 

Mr. Landa directed BSI to hold mail at the bank so he would not receive mail about the account in the United States. On March 25, 2011, the plaintiff signed a held-mail receipt directing BSI to destroy 142 pages of correspondence dated between September 15, 2009, and March 23, 2011. 

Then, the Court found the following related to the IRS investigation (p. 7, cleaned up):

The Landa family first received notice of a potential IRS investigation through a letter sent by UBS on November 17, 2009, to the plaintiff’s father, notifying him that the IRS was seeking information with respect to certain U.S. persons holding UBS accounts. In 2010, the plaintiff’s father received a letter directly from the IRS related to the Swiss accounts. The IRS subsequently examined the Landa family’s federal income-tax returns.

In conjunction with the IRS examination, the Landa family, in consultation with their attorney, drafted documents intended to indicate that the foreign accounts were held in trust. (See M. Landa Dep. 127:18-25 (noting that after the investigation began the family “came to the conclusion that maybe this is a trust”).) The family’s attorney prepared in his own handwriting a handwritten document dated February 2, 2011, providing that Gersh Landa [Leon’s father] was holding the funds in Switzerland in trust. A second document dated March 9, 2011, titled “Trustee Instruction,” provided that Mark and Leon Landa were appointed by Gersh Landa as “successor trustees.” The family’s attorney prepared a third document, dated February 25, 2012, and titled “Landa Trust Arrangement (“Trust”), Minutes of the Meeting of Trustees.” 

No documents reflecting the existence of any trust are dated prior to 2011. The plaintiff testified at his deposition that “a formal trust was not necessary to prove [that the funds were held in trust]” and that he identified himself as a trustee of the BSI account on his 2009 FBAR because the “money did not belong to me, it was given to me in trust.” 

The Court held that given the expansive definition of “financial interest” for FBAR reporting, Leon Landa had a financial interest even if the funds were held for family use such as allegedly described by the grandfather.  The Court held (p. 13):

Even if the plaintiff held the funds for the benefit of his family, his name was the only one on the BSI account; he was the owner of record of the account. By virtue of opening the BSI account in his name, Mr. Landa became the owner of record of that account in 2009 and was required to file an FBAR.

The Court also finds that no trust was in existence in 2009. The Court remains sympathetic to the unusual circumstances presented in this case and recognizes that the account may have been intended to benefit the Landa family rather than Leon Landa specifically. The plaintiff’s family history suggests that the funds were meant to support the Landa family in an emergency like the situation in which the family found itself in World War II. As the plaintiff testified, even when the family was desperately short of money, upon leaving communist Ukraine for the West, the Swiss funds were left untouched. The plaintiff acknowledges, however, that no formal trust was established prior to 2011. While the funds understandably may not have belonged to the plaintiff in a practical sense, the law nevertheless defines “financial interest” in a manner that includes the facts of this case—the broad definition encompasses an account held for the benefit of others. The Court finds that Mr. Landa had a financial interest in the BSI account as the owner of record and was required to file an FBAR.

As to whether Landa was “willful” – the predicate for the civil willful penalty – the Court held (pp. 15– 17 that, although Landa may have waived the issue by not  raising  it in his complaint, he was willful under the definition of willful in the Federal Circuit which includes reckless conduct which Leon Landa’s conduct clearly was.  I comment on this holding below.

Finally, the Court rejected (pp. 17-21) Landa’s claims (i) for relief for late filing under Treasury Notice 2010-23, (ii) Eighth Amendment excessive fines and (iii) IRS’s imposition of penalty was arbitrary and capricious (the APA review standard under 5 USC § 706.

In concluding (pp. 21-22), the Court says:

The Court appreciates the plaintiff’s unusual family history. These funds were hidden from the Nazis and subsequently hidden from the Communist authorities in the Soviet Union, where the Landa family resided until fleeing to the West. That history may help explain the plaintiff’s behavior, but it cannot relieve the plaintiff of a broadly applicable filing requirement. The law is unambiguous in its application to cases like the plaintiff’s.

Mr. Landa was subject to the FBAR-filing requirement for the BSI account opened in 2009 because he (1) was the owner of record for the BSI account as defined by the IRS; (2) had a financial interest in the account and, accordingly, could not take advantage of the extended deadline provided by Treasury Notice 2010-23; and (3) acted recklessly in regard to the filing requirement. Because he willfully failed to file a timely FBAR for 2009, he was subject to a late-filing penalty for a willful violation of the FBAR requirement.

The civil money penalty imposed on the plaintiff for his willful failure to file a timely FBAR was not a fine under the eighth amendment, so the amount of the penalty is not subject to judicial review for constitutional infirmity. Finally, the IRS did not abuse its discretion in imposing a penalty of 50 percent of the account balance. 

JAT Comments:

1.  In holding that Landa acted at least recklessly thus establishing his willfulness for purposes of the FBAR civil willful penalty, the Court held that it need not address the issue of willful blindness.  I have discussed willful blindness in the criminal penalty context where I have argued that the willful blindness for the specific intent a la Cheek (specific intent to violate a known legal duty), applicable for tax crimes and the FBAR crime is not a substitute for a specific intent finding but is a circumstantial factor from which a jury can infer the required specific intent.  If that concept is correct, then applying the willful blindness in a civil context should functioning similarly – to be considered in determining whether the Government  has proved by a preponderance of the evidence (including willful blindness) that the taxpayer (or filer) had the required intent.  However, it seems to me  that in the case, the Government may have been arguing for willful blindness as a factor  in  showing that Landa acted recklessly, in which case the willful blindness would be more like direct proof of recklessness which is not the same as specific intent to violate a known legal duty.

2.  Landa certainly knew that there was a serious problem in 2009 when UBS notified him.  He could have then joined the 2009 version of OVDP with a 20% penalty which sure beats 50%.  Furthermore, if  there were some logical way to sort of the family members "shares" of the "pot" and some family members were not subject to FBAR reporting requirements (i.e., were not U.S. taxpayers or residents), then perhaps those family members' shares of the pot could have avoided the penalty because those shares did not avoid / evade U.S. income tax.

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