Thursday, November 4, 2021

District Court Upholds Repatriation Order for FBAR Willful Penalty While Liability on Appeal (11/4/21; 11/5/21))

I have written before several posts on the trial level saga at the trial level in United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart) an FBAR collection suit.  See particularly District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/21/20; 3/24/20), here.  Basically, after trial, the district court entered an FBAR willful penalty judgment of $12,555,813.  That judgment is now on appeal to the Eleventh Circuit and was recently argued.  11th Circ. Mulls If IRS Should Revisit $12.5M FBAR Penalty, 2020 (Law360 315-118) (no link, subscription required); the oral argument on 10/5/21 is on the Court’s web page here.

In United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart 10/26/12), GS here and Cl here, the district court, sustaining the Magistrate Judge’s Report and Recommendation, held that the Government was entitled to an order granting repatriation of funds in offshore accounts in support of collection of the judgment.  The Court supported the repatriation on the basis of the the Federal Debt Collection Procedures Act of 1990, 28 U.S.C. §§ 3001, et seq. (“FDCPA”) and the incorporation of the All Writs Act, 28 U.S.C. § 1651.

The reason the Government wanted an order of repatriation is that, according to the Government, Schwarzaum was placing or had placed assets outside the collection power of the U.S., so that repatriation was necessary to collect the judgment.  Some interesting parts of the opinion are:

From Slip Op. 4 fn. 2

   n2 In the Motion, the Government asserts that Schwarzbaum has taken steps to render himself judgment proof by selling his home in Palm Beach County, and moving to Switzerland, where he keeps over $49 million in three Swiss banks. Id. at 3-4. In addition, the Government details the efforts that it has undertaken to attempt to collect the Judgment. See id. at 3-6. Specifically, the Government sent Schwarzbaum demand letters, to which Schwarzbaum did not respond. Id. at 5. The Government also served Schwarzbaum with post-judgment discovery, through which it confirmed that he has no collection potential from assets in the United States, but $49 million in assets held in Switzerland that can be used to satisfy the Judgment. Id. at 5. The Government asserts that Schwarzbaum has taken steps to render himself judgment proof and "secreted" assets to Switzerland, but other than recently selling his house in Jupiter and moving back to Switzerland, the Government recognizes that "Schwarzbaum transferred the bulk of his liquid assets from the United States to . . . Switzerland" in October and November, 2009—years before the Complaint in this case was filed. Id. at 5 n.5.

From Slip Op. 11 fn. 3

   n3 Nevertheless, to the extent that the Government is requesting that the repatriated funds be deposited in the form of an appeal bond or in the Court's registry, the Court finds no basis to do so in the statute or case law. The Court will therefore permit Schwarzbaum to repatriate the funds into a United States bank account. 

JAT Comments:

1. (Added 11/5/21 2:30pm):  When (and if) Schwarzbaum repatriates the funds to a U.S. bank account, they can be levied easily provided that the Government times the levy right.

2. (Added 11/5/21 2:30pm):  As noted in footnote 2 excerpted above, Schwarzbaum “transferred he bulk of his liquid assets” to Switzerland in 2009, well before the IRS assessed the willful FBAR penalty.  The FBAR penalties related to 2006-2009 (with 2006 ultimately dropping off).  There is no statement that Schwarzbaum’s purpose for the transfers was to avoid having to pay the FBAR penalty that might be (and was) subsequently assessed.  A penalty is not a debt until it is assessed (or otherwise lawfully imposed).  I don’t know if there are potential criminal or civil penalties that might apply to an anticipatory transfer to avoid payment before an FBAR penalty is assessed.  In the tax arena, for example, consider this example.  In year 01, T files tax return fraudulently underreporting his tax liability by $1 million.  In year 02, after filing the year 01 return, T moves his assets outside the U.S. (say $10 million total assets) and moves his person outside the U.S.   In year 03, the IRS audits and determines that taxpayer underreported year 01 tax by $1 million and is subject to a civil fraud penalty $750k.  The Government could charge T with tax evasion on the basis of the year 01 return.  The Government could charge T with tax evasion or tax obstruction on the basis of the year 02 transfers of assets.  Both of those charges would relate to the tax itself and not any potential civil fraud penalty (or accuracy related penalty) for that matter.  That is because tax penalties are not due until the IRS assesses, whereas the underlying tax is due on the original due date of the return.  If it is appropriate to infer in the FBAR context from the tax context, I ask the question (and do not know the answer) as to whether some criminal penalty might apply for Schwarzbaum transfers if it could be shown that the transfers were motivated by unassessed but potential FBAR penalties (civil or willful).

3. (Added 11/5/21 2:30pm): I am sure what the downside would be for Schwarzbaum, who apparently resides in Switzerland to not comply with the repatriation order.  I don't know whether Switzerland would extradite for any contempt holding for violation of the repatriation order.  (I will say that, if Switzerland could extradite and had some discretion in the matter, it might exercise the discretion and extradite in order to help the U.S. hoping for some reciprocity in some cases or at least to curry some favor after falling out of the U.S. graces on this genre of issues.)

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