Mr. Pomerantz meets Mr. #FBAR in the Homeland: The “willful” FBAR penalty requires proof of “willfulness”

Looking for Mr. FBAR

This is one more in a series of posts discussing the FBAR rules. The FBAR rules were born in 1970, laid virtually dormant until the 2000s and then were then unleashed in their full “ferocity” on U.S. persons. A good review of the history of Mr. FBAR is here. A discussion of how the discovery of Mr. FBAR can lead to larger problems is here. Finally, a discussion of of why people must exercise caution in “fixing problems with FBAR” is here.

Mr. FBAR has not visited Canada, but he has visited Canadian citizens

Mr. Pomerantz returns …

Readers of this blog (particularly those in Canada) may recall that I have previously written about the adventures of Mr. Jeffrey P. Pomerantz (currently of Vancouver, Canada) with Mr. FBAR. At that point (March 2017) it was clear that the U.S. Department of Justice planned to sue Mr. Pomerantz to collect the FBAR penalties to which it felt entitled. It is worth noting that FBAR penalties are assessed under the Bank Secrecy Act (Title 31 of U.S. laws) which is different from the Internal Revenue Code (Title 26 of U.S. laws.) In order to collect FBAR penalties the U.S. Government must sue, and sue it did. The purpose of this post is to tell the story of what happened when the U.S. Government sued Mr. Pomerantz in U.S. District Court in Seattle.

But, before we begin our story, this post is more about “Civil Procedure” than it is about “Mr. FBAR” …

Bottom line: Although the U.S. Government suffered a temporary (probably) defeat, the defeat was because the Government failed to follow the rules of “Civil Procedure”. In other words, whether Mr. Pomerantz actually violated the FBAR statute was NOT the issue in this case. The issue was whether the Government followed the rules that they were required to follow in order to win their case. The Government did NOT follow the rules. Therefore, the Government lost. With that disclosure, we are no ready to begin yet another example of an adventure with Mr. FBAR.

Once upon a time in District Court in Seattle …

It appears that the hearing took place in early June of 2017. In any event, the court’s judgement was dated June 8, 2017.

Interesting fact: Mr. Jeffrey P. Pomerantz appeared “pro se” – he represented himself at the hearing. He may have had “legal advice” prior to the hearing. On the other hand, he may have had the assistance of the judge who recognized that he did NOT appear with a lawyer.

The judgement references the fact that Mr. Pomerantz sought to transfer the venue from Washington State to Washington, DC. Apparently his “lawyer of choice” was in Washington, DC. The court (for various procedural reasons) denied his request for this “change in venue”. In other words, the hearing took place in Seattle.

What the Government must prove:

It is important to remember that Mr. Pomerantz was assessed a “willful” FBAR penalty. As was reported by Jack Townsend:

The FBAR willful penalty requires, well, willfulness. If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.

To prove “willfulness”, the Government must allege facts which suggest “willfulness”

The Government is required to “allege” (state facts) evidence of “willfulness”. It is NOT sufficient for the Government to just say:  (“Jeffrey Pomerantz willful because we say so“) that Mr. Pomerantz’s failure to file Mr. FBAR was “willful”. The “willfulness” must be proven. In order to prove “willfulness”, the Government must allege facts that prove “willfulness”.

Therefore, the Government is required to:

– allege facts which

– if true

– would support the allegation that Mr. Pomerantz’s failure to file Mr. FBAR was willful (defined as per the standard in Ratzlaf v. United States, 510 U.S. 135, 154 n.5 (1994) as “the intentional violation of a known legal duty“). This requires the Government to prove much MORE than the mere failure to file an FBAR.

With respect to the bank accounts that generated the FBAR penalties:

Because of the requirement to prove “willfulness”:

The Government must allege sufficient facts to plausibly support the inference that Mr.
Pomerantz knew — actually or constructively -of the reporting requirement. (Alleging these facts is a NECESSARY but NOT a SUFFICIENT condition to prove willfulness. The probative value of the facts alleged must be evaluated.)

Did the Government meet its evidentiary responsibilities?

Accounts in Switzerland – (the “Grand Turk Oppenheim Accounts,” the “2003 Oppenheim Portfolio Accounts,” and the “2007 Oppenheim Portfolio Accounts” (collectively, the “Chafford Limited Accounts”)):

It appears that the Government did adduce evidence of “willfulness” with respect to the accounts in Switzerland. The reasons included that: (1) Mr. Pomerantz opened a “shell” company (a company that was for the sole purpose of holding his investments AND not for the purpose of carrying on a business).

The judge explained:

“The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report.”

Interestingly the Judge is saying that opening a “shell company” is evidence of “willfulness”. Willfulness can be rebutted with evidence from Mr. Pomerantz.

Accounts in Canada CIBC – Mr. Pomerantz’s personal bank accounts:

First, on “actual knowledge” of the FBAR requirement:

The judge explained:

“However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl.¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC
Accounts.”

Interestingly the Judge is saying that opening a bank account in one’s own name is NOT by itself evidence of the “willful” failure to file an FBAR. (Thank God for that!) Can you imagine if the Judge had ruled that the mere fact of opening a bank account outside the USA was evidence of “willfulness”?

Second, on “constructive knowledge” of the FBAR requirement:

The judge explained:

Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge.

The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.)

However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents).

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report.

Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful.

Mr. Pomerantz loses on the Swiss bank accounts and wins on the CIBC accounts? Why then was the case “thrown out”? Shouldn’t the Government have a partial win?

The Government lost because it did NOT ascribe separate FBAR penalties to separate accounts. The Government failed to specify how much of the penalties were assessed on the Swiss accounts and which were assessed on the CIBC accounts. As a result, the Government lost the whole thing.

The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts.Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

But, the Government is free to try again!

The Government is permitted to simply amend its “paper work” (curing the deficiencies) and try again. I think this is likely. Somehow, the words:

I’ll be back!

come to mind!

Some concluding musings …

It’s interesting that the Government’s claim would fail based on such a universal and simple rule of Civil Procedure. Obviously, a claim must include allegations of the facts necessary to justify the judgement sought. Yet, the Government failed to meet its burden on this simple rule. It’s as though the Government views Mr. FBAR as an instrument of civil forfeiture and/or confiscation.

Of course, Mr. FBAR really is a mechanism for Civil Forfeiture!

John Richardson

Appendix – If this isn’t enough

These desiring more are invited to review the following:

A. The complete text of the June 8, 2017 Pomerantz Judgement

20170608PomerantzOrder

B. The original complaint against Mr. Pomerantz dated May 13, 2016

20160513PomerantzComplaint

C. The court docket entries as of June 12, 2017

20170612PomerantzDktEntries

D. Excerpts from the decision which explain the decision of the court (Note that I have separated various parts into paragraphs and added my own commentary indicating relevance)

JR Commentary: What the case is about

The civil penalties that the Government seeks to reduce to a judgment result from

Mr. Pomerantz’s alleged failure to file Treasury Form TD F 90-22.1 (an “FBAR Form”),

which reports foreign bank and financial accounts. (Compl. at 1.)

JR Commentary: The duty to file Mr. FBAR

A duty to file an FBAR form arises if: (1) a “U.S. Person”; (2) has a direct financial interest in, an

indirect financial interest in, signatory authority over, or some other type of authority

over one or more financial accounts located in a foreign country; and (3) the aggregate

value of such account or accounts was greater than $10,000.00 at any time during the

calendar year at issue. 31 U.S.C. § 5314; see also 31 C.F.R. § 1010.350.

JR Commentary: Mr. FBAR – The willful version

Additionally, because the Government assessed a penalty greater than $10,000.00 for each

alleged failure to file (Compl. ¶¶ 24, 46, 48), Mr. Pomerantz’s failure to file must have been

willful, 31 U.S.C. § 5321.

JR Commentary: What the Government must prove

Thus, in order to state a claim the Government must plead facts supporting the reasonable inferences

that (1) Mr. Pomerantz was a “U.S. Person,”

who (2) had an interest in or authority over the subject foreign accounts, which (3) had an

aggregate value of $10,000.00 or more, and (4) that he willfully failed to file an FBAR

Form for the accounts. Mr. Pomerantz contends that the Government fails to adequately

allege his “interest in or authority” over foreign accounts and willful failure to file.

a. Interest or Authority over Foreign Financial Accounts

The “interest or authority” element may be met by showing that the taxpayer: (1)

had a direct financial interest in a foreign account, (2) had an indirect financial interest in

a foreign account, or (3) served as a signatory or had other authority over a foreign

account. 31 C.F.R. § 1010.350(b).

JR Commentary: What bank accounts are at issue and where are they located?

The Government alleges two sets of foreign accounts

provide the basis for the penalties assessed: (1) Mr. Pomerantz’s personal accounts

located in Canada (the “CIBC Accounts”), and (2) Mr. Pomerantz’s accounts in

Switzerland (the “Grand Turk Oppenheim Accounts,” the “2003 Oppenheim Portfolio

Accounts,” and the “2007 Oppenheim Portfolio Accounts” (collectively, the “Chafford

Limited Accounts”)).

The Government alleges that the CIBC Accounts are located in Canada and that

Mr. Pomerantz had a direct financial interest in them. (Id. ¶ 5.) The Government

further alleges that Mr. Pomerantz formed a corporation named Chafford Limited, in

whose name the Chafford Limited Accounts were opened, and that Mr. Pomerantz

“retained full powers to exercise any and all rights to act on behalf of” Chafford Limited.

(Id. ¶ 6.) These allegations plausibly support the inferences that Mr. Pomerantz had a

“financial interest” in the CIBC Accounts and an “other financial interest” in the

Chafford Limited Accounts, and that both sets of accounts were foreign. See 31 C.F.R.

§ 1010.31(e)(ii)(2).

JR Commentary: It’s about willfulness – what the Government must prove

b. Willful Failure to File

Because the civil penalties exceed the statutory limit for a non-willful failure to

file an FBAR Form, the Government must allege facts supporting the inference that Mr.

Pomerantz acted “willfully” in his failure to file. See 31 U.S.C. § 5321(a)(5)(c).

Generally, a “willful” failure for purposes of the Bank Secrecy Act is “an intentional

violation of a known legal duty to report.” Ratzlaf v. United States, 510 U.S. 135, 154

n.5 (1994); see also United States v. Zwerner, No. 13-22082-CIV, 2014 WL 11878430, at

*3, n.3 (S.D. Fla. Apr. 29, 2014) (adopting the Ratzlaf definition for civil FBAR

penalties); accord IRS CCA 200603026, 2006 WL 148700 at *1-2 (Jan. 20, 2006) (An

IRS chief counsel advisory opinion addressing in part the definition of “willful” FBAR

reporting violations.).

JR Commentary: Alleging willfulness is NOT the same thing as offering evidence to prove willfulness

The Government alleges that Mr. Pomerantz’s failure to timely file FBAR Forms

“was willful within the meaning of 31 U.S.C. § 5321(a)(5),” implying that Mr. Pomerantz

had either constructive or actual knowledge of the reporting duty. (Id. ¶¶ 23, 37, 45.)

However, these allegations are precisely the “threadbare recitals of the elements of a

cause of action, supported by mere conclusory statements” that are insufficient to state a

claim. Iqbal, 556 U.S. 662, 678, (2009) (citing Twombly, 550 U.S. at 555). They do not

plausibly support the inference that Mr. Pomerantz knew of the reporting duty. Instead,

the Government must allege sufficient facts to plausibly support the inference that Mr.

Pomerantz knew—actually or constructively—of the reporting requirement. United

States v. Williams, 489 F. App’x 655, 659 (4th Cir. 2012).

i. Actual Knowledge

Actual knowledge of the duty to report may be inferred from a course of conduct

that demonstrates a conscious attempt to conceal the failure to report. See United States

v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (citing Spies v. United States, 317 U.S.

492, 499 (1943)). The Government alleges that the company Mr. Pomerantz used to

open the Swiss accounts—Chafford Limited—“conducted no active business, but was a

shell entity used to hold and manage [Mr.] Pomerantz’ personal investments.” (Compl. ¶¶ 6-7.)

Similar allegations, combined with the taxpayer’s failure to pursue knowledge of

further reporting requirements, sufficiently supported a finding of “willfulness” in

Sturman. See 951 F.2d at 1476-77. The court can plausibly infer an intent to evade the

foreign bank account reporting requirement based on the creation of foreign bank

accounts in the name of a shell company. See id. Thus, with regard to the Chafford

Limited Accounts, the Government has adequately pleaded facts supporting the inference

that Mr. Pomerantz knew of his duty to report.

However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl.

¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly

“duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr.

Pomerantz took steps to conceal or mislead sources of income by opening the CIBC

Accounts, and since the accounts were created well before the allegedly “duplicitous”

actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC

Accounts. (See id.) The court declines to infer from Mr. Pomerantz’s creation of the

Chafford Limited Accounts knowledge of the duty to file FBAR Forms for the CIBC

Accounts. The Government has not provided the court with any authority in which a

court inferred from obfuscating conduct with no connection to a particular account an

intent to evade a reporting obligation for that account, and the court finds such an

inference implausible. (See generally Resp.) Thus, with regard to the CIBC Accounts,

the Government makes only speculative and conclusory allegations regarding Mr.

Pomerantz’s actual knowledge.

ii. Constructive Knowledge

Knowledge of the duty to report may be actual or constructive. Williams, 489 F.

App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are

treated as if they knew of the requirement, under the theory of constructive knowledge.

Id. The Government alleges that Mr. Pomerantz “failed to report income deposited into,

and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government

argues that the court can reasonably infer from this allegation that Mr. Pomerantz was

willfully ignorant of the FBAR reporting obligation. (Resp. at 4.)

However, the cases the Government cites in support of this argument have found

“willful ignorance” of the FBAR reporting duty because the government showed that the

taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax

form, which directs filers to the FBAR filing instructions and requirements. See

Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting

requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d

at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR

reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents).

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a

Schedule B Form or was otherwise aware of its contents and instructions regarding the

FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged

any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably

infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report.

Based on the foregoing analysis, the court concludes that the Government fails to

sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts

was willful.

JR Commentary: Why the Government loses

The court cannot disaggregate the amount of the penalty that resulted from

the failure to report the CIBC accounts from the failure to report the Chafford Limited

Accounts. Because the CIBC Accounts were part of the basis for levying each of the

penalties that the Government seeks to reduce to judgment, the court accordingly

dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

E. Further commentary from the Jack Townsend blog