Mr. Bedrosian (a pioneer in FBAR history) meets Mr. #FBAR: The good, the bad and the ugly

Why the Arthur Bedrosian meeting with Mr. FBAR is important

Synopsis:

The Bedrosian FBAR case is an incredibly important victory for taxpayers. Judge Baylson first ruled that FBAR “willfulness” in the “civil” context did NOT require knowledge that filing an FBAR was a legal duty (the criminal standard). He then ruled that Mr. Bedrosian’s failure to report the account was a form of negligence that did NOT meet the required standard of “willfulness”.

Perhaps the message is:

The failure to file an FBAR will be “willful”, if the circumstances of the failure, were evidence of conduct that the FBAR statute was designed to punish.

 

In other words, it is possible to know about Mr. FBAR, fail to file Mr. FBAR and NOT be “willful”!

The “Readers Digest” Version …

The Bad …

The District Court held that the test for what constitutes “willfulness” in the “civil FBAR penalty” context is not the test used in a criminal context – “the intentional violation of a known legal duty”. All that is required is that the person voluntarily NOT file an FBAR. (One need not know that he is violating a legal duty).

The Good …

The failure to file an FBAR can be a form of “negligence” that falls short of “willfulness”. In other words, one can know about the FBAR requirement, fail to file the FBAR and still fall short of “willfulness”.

The Ugly …

The IRS had initially taken the position that Mr. Bedrosian’s misadventures in FBAR were nonwillful. But, they changed their mind.

Round 1 goes to Mr. Bedrosian. Will the IRS appeal?

Mr. Bedrosian has earned a place in FBAR history. He is a true “FBAR Pioneer”. His “Adventures in FBAR” place him in the club of: Mr. Pomerantz, Mr. Hom , Mr. Kentera, Mr. Horsky and Mr. Warner. Fortunately, mere visitors to American do not yet have to file the FBAR. Interestingly, Mr. FBAR appears to have been the “role model” for a Russia foreign bank account reporting laws.

To learn more about the FBAR Odyssey of Mr. Arthur Bedrosian …

Introduction – just the facts

The meeting between Mr. Arthur Bedrosian and Mr. FBAR has been the subject of much commentary.

April 2017 – Setting the stage for the trial …

The facts are described in the decision of Baylson, J., delivered on April 13, 2017. The “Readers Digest” version of the facts includes:

– Mr. Bedrosian opened a Swiss Bank account in the 1970s. The account was used in conjunction with his frequent business trips to Switzerland

– eventually his first Swiss bank account became two Swiss bank accounts

– the accounts eventually became UBS accounts

– the accounts were NOT reported on an FBAR and the income from the accounts was not reported on his tax returns

– the evidence suggests that Mr. Bedrosian’s original accountant did NOT know about the Swiss accounts until approximately 1994

– after the original accountant died, Mr. Bedrosian received advice from his new accountant and a lawyer that he needed to fix his FBAR (non) compliance problems

– eventually Mr. Bedrosian filed an FBAR and amended his 2007 tax return to report interest from the accounts

– by the time that the 2007 return had been filed, UBS had reported the accounts to the IRS

– it is not clear whether Mr. Bedrosian attempted to enter the Offshore Voluntary Disclosure Program, but it is clear that he was NOT a participant in it

– the IRS imposed a 50% FBAR penalty (willful) on Mr. Bedrosian (approximately $900,000)

– Mr. Bedrosian sued the IRS “alleging that the United States committed illegal exaction by imposing an unwarranted tax penalty on him. The United States countersued for full payment of the penalty it had assessed.” Each side moved for “summary judgement” on the basis that there were no material facts in dispute.

– Judge Baylson denied “summary judgement” to each party on the basis that Mr. Bedrosian’s “intention” was a material fact

The determinative issue for both Bedrosian’s illegal exaction claim and the United States’ claim for payment of the proposed penalty is Bedrosian’s intent. Whether Bedrosian willfully failed to submit an accurate FBAR for 2007 is an inherently factual question and one that cannot be resolvsed at this stage. Genuine disputes exist as to what Bedrosian knew regarding his reporting requirements, and when, especially as those issues relate to his relationship with his accountant, Seymour Handleman. Although there is no good cause exception for willful violations of Section 5314, we nevertheless find that Bedrosian’s testimony regarding the information provided to him by Handleman and what exactly Bedrosian did with that information, if anything, would be relevant to a determination of Bedrosian’s intent. For those reasons, summary judgment is not warranted as to either party.

The issues were identified as:

A. What kind of intent is required to satisfy the requirement of a “willful violation” under S. 5321 of the Bank Secrecy Act; and

B. Did Mr. Bedrosian’s level of intent satisfy the standard of “willfulness” under S. 5321?

The statute authorizing the FBAR penalty reads as follows:

(5) Foreign financial agency transaction violation.—

(A)Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(i)In general.—

Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii)Reasonable cause exception. — No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C)Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

Therefore, the issue for the trial centered on the meaning of “willful”. Specifically, what sort of knowledge and/or intention surrounding the FBAR filing was requirement was needed to make the failure to file the FBAR “willful”? Possible questions/issued include:

1. Was Mr. Bedrosian required to actually know of the FBAR filing requirement? Would “recklessness” suffice?

2. Was Mr. Bedrosian’s failure to file the FBAR accompanied by the knowledge that filing the FBAR was a legal duty?

What did Mr. Bedrosian know about Mr. FBAR and when did he know it?

These were the issues that the trial was to decide.

September 2017 – The trial …

Judge Baylson held that:

The parties have never disputed that Bedrosian meets all requirements of the relevant reporting laws—he is a U.S. citizen with a financial interest in a bank account in a foreign country that contained more than $10,000 during 2007. Where they disagree, and the only issue explored at trial, is whether Bedrosian’s failure to file his 2007 FBAR was done with the
requisite “willful” mental state. We discussed in our summary judgment memorandum that the precise definition of that term as used in Section 5321, the civil penalty provision, has not been clearly established by statute or precedent. But, we also noted that every federal court to have considered the issue has found the correct standard to be the one used in other civil contexts— that is, a defendant has willfully violated Section 5314 when he either knowingly or recklessly
fails to file an FBAR. See, e.g., Williams, 489 F. App’x at 658; Bohanec, 2016 WL 7167860, at *5; McBride, 908 F. Supp. 2d at 1204. That definition contrasts with the one proposed by Bedrosian, which is that in order for the government to sustain a willful FBAR penalty, it must meet the standard used in the criminal context and show that his actions amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991). Although on summary judgment we declined to hold what the appropriate standard of willfulness was, we indicated that the civil standard stood on far stronger precedential footing.

Consistent with those dicta, we now hold that Section 5321’s requisite willful intent is satisfied by a finding that the defendant knowingly or recklessly violated the statute. The government need not prove improper motive or bad purpose.

To further elucidate the definition of “willfulness” in this context, we note that acting with “willful blindness” to the obvious or known consequences of one’s actions will satisfy the standard. See McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., __ U.S. __, 131 S.Ct. 2060, 2068-69 (2011)). Willful blindness is established when an
individual “takes deliberate actions to avoid confirming a high probability of wrongdoing and [when he] can almost be said to have actually known the critical facts.” Global-Tech Appliances, Inc., 131 S.Ct. at 2070-71. In the tax reporting context, the government can show willful blindness by evidence that the taxpayer made a “conscious effort to avoid learning about
reporting requirements.” Williams, 489 F. App’x at 659-60.

In order for an individual to act “willfully” in a situation “involving a requirement to report or disclose certain information to the IRS,” he must engage in “conduct which is voluntary, rather than accidental or unconscious.” McBride, 908 F. Supp. 2d at 1205; see Brounstein v. United States, 979 F.2d 952, 955-56 (3d Cir. 1992) (in case involving willful
failure to pay taxes, holding that “willfulness is ‘a voluntary, conscious and intentional decision to prefer other creditors over the Government’”). Further, reckless disregard satisfies the willfulness standard. McBride, 908 F. Supp. 2d at 1204. “While ‘the term recklessness is not self-defining,’ the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that
is either known or so obvious that it should be known.’” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68 (2007) (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). Finally, in terms of the type of evidence capable of establishing willfulness, the government can meet its burden “through inference from conduct meant to conceal or mislead sources of income or other
financial information,” and may use “circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer’s intent is rarely available.” McBride, 908 F. Supp. 2d at 1205 (quoting United States v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991)).

Did Mr. Bedrosian’s conduct meet the “willfulness” standard?

As stated above, this inquiry requires a probing of the factual circumstances of this case
to determine whether Bedrosian had the requisite mental state. Having done so, it is simply not sufficiently clear from the record developed that he was willful in submitting his inaccurate 2007 FBAR. Rather, his actions were at most negligent, which does not satisfy the willfulness standard. There is no question that Bedrosian could have easily discovered that what had previously been one UBS account was now two, via the statements he occasionally received from the bank and the meetings he had annually with a UBS representative. In addition, the fact that he signed his 2007 FBAR two weeks prior to sending two separate letters to UBS to close his accounts sways in favor of an inference that he was aware of the existence of the second account at the time he filed the FBAR. Nevertheless, as discussed below, even if he did know that he had a second account yet failed to disclose it on the FBAR, there is no indication that he did so with the requisite voluntary or intentional state of mind; rather, all evidence points to an unintentional oversight or a negligent act. …

In summary, the only evidence supporting a finding that Bedrosian willfully violated Section 5314 is: (1) the inaccurate form itself, lacking reference to the account ending in 6167, (2) the fact that he may have learned of the existence of the second account at one of his meetings with a UBS representative, which is supported by his having sent two separate letters closing the accounts, (3) Bedrosian’s sophistication as a businessman, and (4) Handelman’s having told Bedrosian in the mid-1990s that he was breaking the law by not reporting the UBS accounts. None of these indicate “conduct meant to conceal or mislead” or a “conscious effort to avoid learning about reporting requirements,” even if they may show negligence. Williams, 489 F. App’x at 658.