Fox Rothschild LLP
Jerald David August
November 19 2012
The
United States District Court for the District of Utah, Central Division, on
November 8, 2012, Judge Nuffer, granted the United States its motion for
summary judgment for the taxpayer-defendant’s, Jon McBride, willful failure to
report his interest in foreign bank accounts in contravention of 31 U.S.C.
Section 5314 for the years 2001 and 2002. (U.S. v. McBride, No. 2:09-cv-00378
(D. Utah 2012). Penalties were assessed of approximately $200,000 plus
interest.
Mc
Bride had engaged in a scheme to launder U.S. business income through foreign
shell companies that he established. He employed a financial management firm to
set up accounts in the name of several international business corporations to
shelter or non-report, U.S. business income and then repatriated the funds. He
did not file FBAR reports for the tax years in which the accounts existed. The
government filed a civil suit to collect an FBAR penalty from Jon McBride,
alleging that he had failed to properly report interest in several foreign
accounts for the 2000 and 2001 tax years. McBride had entered into an elaborate
scheme to launder his U.S. business income through foreign shell companies.
A
key question before the Court was the standard to be used in whether the
government’s request to impose FBAR penalties in the subject proceeding would
be granted. Would it be a “by a preponderance of the evidence” standard, or a
“clear or convincing standard”? Granted the case was civil in nature. Judge
Nuffer cited U.S. v. Williams, No. 1:09-cv-00437 (E.D. Va. 2010) as the only
court to consider this issue. That court held that because the FBAR penalty is
monetary only, preponderance was the correct standard, pointing to acceptance of
that standard by federal appellate courts in other civil tax penalty cases. The
Utah federal district court in the Mc Bride case agreed. In applying this
standard it held that the government met its burden of proof based on a
preponderance of the evidence as to the elements of: (i) ownership of the
funds; (ii) willful failure of the defendant-taxpayer to file FBAR reports
either by reckless disregard of a known duty or by willful blindness or neglect
to read the contents of the income tax return; and (iii) the taxpayer was found
to have purposely kept this information about his foreign bank accounts (and
tax evasion scheme) from his tax return preparer. See Global-Tech Appliances,
Inc. v. SEB S.A., 131 S. Ct. 2060, 2068-69 (2011) ("persons who know enough
to blind themselves to direct proof of critical facts in effect have actual
knowledge of those facts") (citing United States v. Jewell, 532 F.2d 697,
700 (9th Cir. 1976) (en banc)). The civil penalty for FBAR willful failures to
file is up to 50% of the account balance for each year the offense is
committed.
After
making a substantial number of findings of fact, the Court then addressed the
standard of proof and then the taxpayer’s willful failures to file the FBAR
reports. f. McBride's Failure to Report His Interest in the Foreign Accounts
was willful. See Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997)
(defining "willfulness" in the context of a civil penalty for
willfully failing to disclose required information to the IRS as conduct that
"requires only that a party act voluntarily in withholding requested
information, rather than accidentally or unconsciously."); accord Denbo v.
United States, 988 F.2d 1029, 1034-35 (10th Cir. 1993) (defining
"willful" conduct as a "voluntary, conscious and intentional
decision") (quoting Burden v. United States, 486 F.2d 302, 304 (10th Cir.
1973), cert. denied, 416 U.S. 904 (1974)). Conduct that evidences
"reckless disregard of a known or obvious risk" or a "failure to
investigate . . . after being notified [of the violation]" also satisfies
the civil standard for willfulness in such contexts.
Willfulness
may also "be proven through inference from conduct meant to conceal or
mislead sources of income or other financial information." United States
v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991). Moreover, willful intent
may be proved by circumstantial evidence and reasonable inferences drawn from
the facts because direct proof of the taxpayer's intent is rarely available.
Spies v. United States, 317 U.S. 492, 499 (1943)).
The
Court found that the defendant was fully aware that he was engaged in a plan to
avoid income taxes by hiding his interest in assets in overseas shell
corporations and also the FBAR filing requirements, which filings would in
effect interfere with his scheme.
On
this issue of imputing willful failure to file FBAR reports when taxpayer
check-the-foreign bank account “no” on their income tax return, the Court
surveyed the law in this area and turned to United States v. Williams,
supra, as the “only case to examine willfulness in the context of
a civil FBAR penalty”. In Williams, the Fourth Circuit recently held that a
taxpayer was willful in failing to comply with FBAR requirements when he signed
a federal tax return that failed to disclose the existence of foreign accounts,
"thereby declaring under penalty of perjury that he had 'examined this
return and accompanying schedules and statements' and that, to the best of his
knowledge the return was 'true, accurate, and complete.'" The Fourth
Circuit reversed the district court's findings of fact as "clearly
erroneous," on the grounds that the district court failed to consider the
taxpayer's signature on his returns sufficient evidence of his knowledge of his
failure to comply with the FBAR requirement. "A taxpayer who signs a tax
return will not be heard to claim innocence for not having actually read the
return, as he or she is charged with constructive knowledge of its
contents." At a minimum, "line 7a's directions to '[s]ee instructions
for exceptions and filing requirements for Form TD F 90-22.1'" puts a taxpayer
"on inquiry notice of the FBAR requirement." Id. As a result, the
Fourth Circuit held that Williams's explicit statement that he never consulted
Form TD F 90-22.1 or its instructions, never read line 7a, and "never paid
any attention to any of the written words on his federal tax return"
constituted a "'conscious effort to avoid learning about reporting
requirements,'" and his false answers on his federal tax return
"evidence conduct that was 'meant to conceal or mislead sources of income
or other financial information.'" Id. (quoting Sturman, 951 F.2d at 1476).
A
taxpayer's signature on a return is sufficient proof of a taxpayer's knowledge
of the instructions contained in the tax return form and in other contexts.
"In general, individuals are charged with knowledge of the contents of
documents they sign -- that is, they have 'constructive knowledge' of those
contents." Consol. Edison Co. of N.Y., Inc. v. United States, 221 F.3d
364, 371 (2d. Cir. 2000).
While
there are cases that have stated that "[a] taxpayer's signature on a
return does not in itself prove his knowledge of the contents, but knowledge
may be inferred from the signature along with the surrounding facts and
circumstances, and the signature is prima facie evidence that the signer knows
the contents of the return." See, e.g., United States v. Mohney, 949 F.2d
1397, 1407 (6th Cir 1991); accord Hayman v. Comm'r, 992 F.2d 1256, 1262 (2d
Cir. 1993) (holding that where a taxpayer "claims to have signed the
returns without reading them, [he or] she nevertheless is charged with
constructive knowledge of their contents").
Inferring
knowledge of the contents of a return signed by the taxpayer is consistent with
the conclusion drawn by the Sixth Circuit in United States v. Sturman, which
held that, "It is reasonable to assume that a person who has foreign bank
accounts would read the information specified by the government in tax
forms," including the reference on Schedule B to the FBAR. 951 F.2d at
1477. Moreover, the line of criminal cases dealing with whether or not a
taxpayer's signature on a return demonstrates knowledge of the contents has
upheld convictions where the jury was permitted to infer knowledge of the
contents of the return from the signature on the return alone. See, e.g.,
United States v. Olbres, 61 F.3d 967, 971 (1st Cir. 1995) (in prosecution for
tax fraud, "jury may permissibly infer that a taxpayer read his return and
knew its contents from the bare fact that he signed it"); United States v.
Romanow, 509 F.2d 26, 27 (1st Cir. 1975) (jury could believe from the
uncontested signature of the defendant on return that he had read the form,
despite his claim that he merely signed the return that was prepared by
bookkeeper).
Judge
Nuffer also cited a recent Northern District Court of Illinois case, Thomas v.
UBS, AG, No. 1C4798, 2012 WL 2396866, where the plaintiffs alleged that a bank
had a duty to inform its depositors of the FBAR requirement. In response, the
Thomas court rejected the plaintiffs’ argument of justifiable or reasonable
reliance on any advice given (or not given) by the bank in interpreting the
instructions on the tax return.
The
District Court in McBride held that the defendant had knowledge of his
obligation to file FBAR reports for the foreign accounts, and failed to do so.
Such knowledge can easily be imputed. Indeed the tax return speaks to such
obligation and filing of Form TD F 90-22.1. Accordingly, McBride is charged
with having reviewed his tax return and having understood that the federal
income tax return asked if at any time during the tax year, he held any
financial interest in any foreign bank or financial account. McBride's
willfulness is supported by evidence of his false statements on his tax returns
for both the 2000 and the 2001 tax years, and his signature, under penalty of
perjury, that those statements were complete and accurate. Moreover, McBride actually read the marketing and
promotional materials provided to him by
the financial advisor who helped him carry out the scheme that under
federal law he was required to report his interest in foreign banks and
financial accounts. This led to the finding by Judge Nuffer that McBride “had
actual knowledge of his duty to file an FBAR for any account in which he had a
financial interest prior to filing his 2000 and 2001 tax returns. McBride even
testified that "the purpose of Merrill Scott" was to avoid disclosure
and reporting the existence of interests "because . . . if you disclose
the accounts on the form, then you pay tax on them, so it went against what
[he] set up Merrill Scott for in the first place.’ "
If
that wasn’t enough, the Court also found McBride’s conduct reckless sufficient
to rise to the level of willful.
Continuing on, the Court stated that “’[A]n individual's actions may be
deemed willful if the individual recklessly ignores the risk that conduct is
illegal by failing to investigate whether the conduct is legal. Taxpayers have
long been cautioned that they have a responsibility to "investigate claims
when they are likely 'too good to be true.'" Pasternak v. Comm'r, 990 F.2d
893, 903 (6th Cir. 1993) .
The Court did not
stop here but went further to block any escape route on appeal for the
defendant. The effort of the Court to go over every path that leads to a
finding to willfulness and precluding the presence of any path that would
excuse
