United States v. de ForrestUnited States v. de Forrest
Case Information
UNITED STATES DISTRICT COURT DISTRICT OF NEVADA
UNITED STATES OF AMERICA, )
) Plaintiff, ) Case No.: 2:17-cv-03048-GMN-DJA
vs. ) ) ORDER SANDRA J. DE FORREST, )
)
Defendant. ) )
Pending before the Court is the Government’s Motion for Partial Summary Judgment, (ECF No. 26). Defendant Sandra J. de Forrest (“Defendant”) filed a Response, (ECF No. 34), and the Government filed a Reply, (ECF No. 40). [1] For the reasons stated herein, the Government’s Motion is denied.
I. BACKGROUND
The Government brings this action to collect from Defendant outstanding civil penalties
for Defendant’s alleged willful failure to timely file a Report of Foreign Bank and Financial
Accounts, Form TDF 90-22.1, commonly referred to as an “FBAR,” in violation of
In 1985, Defendant, a U.S. citizen, met Henri de Forrest (“Mr. de Forrest”), an affluent engineer, and the two became romantically involved. (Def.’s Answer ¶ 5, ECF No. 7); (FBAR Penalty Background, Ex. E to Mot., ECF No. 26-2). In the early 1990s, prior to her marriage to Mr. de Forrest, “Defendant learned that Mr. de Forrest had bank accounts outside the United States and owned several foreign companies.” (Def.’s Answer ¶ 5).
In 1994, in Zurich, Switzerland, Mr. de Forrest granted “Sandra Joyce Conrow” (Defendant’s name at that time) Power of Attorney over the account ending in 8669 by submitting a document to Swiss Bank Corporation that had been signed by both Defendant and Mr. de Forrest. (1994 Power of Att’y, Ex. 4 to Def. Dep., ECF No. 26-1). Defendant and Mr. de Forrest also signed an application for a VISA GOLD card in the name of Defendant, linked to the account at Swiss Bank Corporation (now known as UBS) ending in 8669. (Visa Appl., Ex. 4 to Def. Dep., ECF No. 26-1).
In December 1995, Defendant married Mr. de Forrest. (Def.’s Answer ¶ 11). According to Defendant, the couple had a good relationship, but after marriage Mr. de Forrest became controlling and abusive. (Def. Dep. 30:6–33:25, Ex. A to Pl.’s Mot. Summ. J. (“Mot.”), ECF No. 26-1). At some point prior to 2000, Defendant hired CPA Thomas Brooks based on a referral from her estate lawyer, Douglas Rossi, to prepare income tax returns for herself and her husband. (Brooks Dep. 11:3–12:21, Ex. B to Mot., ECF No. 26-1). Brooks provided these services for each tax year from the time he was hired until Mr. de Forrest’s passing, and continued to prepare the income tax returns of Defendant through the 2011 tax year. ( Id. 104:3– 105:9).
Brooks’s normal course of action concerning the preparation of the de Forrests’ joint tax returns was to collect documents from Defendant, fill out the income tax returns based on those documents, then sit down with Defendant and go over the tax returns with her. ( 14:19– 15:13; 16:25–18:21). Defendant did not ask questions very often. ( 18:3–21); (Def. Dep. 39:8–16). Once Brooks obtained the necessary signatures, he would take the documents back to his office and mail them. (Def. Dep. 39:14–19); (Brooks Dep. 17:14–21). In completing this process, Brooks mostly consulted with Defendant and rarely spoke with Mr. de Forrest. ( 17:22–18:3; 25:10–13). This same pattern was used for the income tax returns prepared by Brooks from the time his engagement began through the 2005 income tax year. ( 14:19– 15:13; 16:25–18:21; 25:10–13).
On May 30, 2001, in Zurich, Switzerland, Defendant and Mr. de Forrest signed a General Power of Attorney over the account ending in 8669, giving Defendant authority to take any actions with respect to that account. (Def. Dep. 12:8–13:7); (2001 Power of Att’y, Ex. 4 to Def. Dep., ECF No. 26-1). Further, Defendant opened an account in her name at UBS with an account number ending in number 5479 and signed a declaration requesting that all mail, statements, and correspondence related to the account be retained at the bank in Zurich and not sent to her home address. (Def. Dep. 17:12–19:1) (Def. Decl., Ex. 3 to Def. Dep., ECF No. 26- 1). Defendant asserts that over the course of their relationship, Mr. de Forrest warned Defendant “not to say anything about anything” regarding the the Swiss accounts. (Def. Dep. 42:22–43:1). [2]
Toward the end of Mr. de Forrest’s life, when it became more difficult to care for him, Defendant placed him in a convalescent facility. ( See Def. Dep. 75:7–77:15). On June 8, 2006, Mr. de Forrest passed away. (Death Cert., Ex. 8 to McManus Decl.). Prior to the death of her husband, Defendant did not reveal the existence of the 8669 account or the 5479 account to Brooks or Rossi. (Brooks Dep. 19:18–20:4); (Rossi Dep. 15:21–17:18, Ex. C to Mot., ECF No. 26-1). At some point in fall 2006, after Mr. de Forrest’s death, Defendant told Rossi that her husband had an account or accounts at UBS in Zurich. (Rossi Dep. 32:19–33:16). Defendant, Rossi, and Brooks then had a meeting at Rossi’s office. ( See id. 32:4–35:12). Defendant falsely represented to Brooks that she had only discovered the existence of the foreign accounts after her husband’s death while going through “some papers.” (Brooks Dep. 32:9–33:20; 38:7–12); (Def. Dep. 41:12–42:19).
In order to take possession of the funds in the Swiss accounts, Rossi and Defendant contacted UBS in Zurich; however, UBS’s agents were “not talking” about the accounts and informed Defendant that she would have to travel to Zurich in order to speak in person. (Rossi Dep. 35:7–24). Defendant asked Rossi to join her on the trip and he agreed to accompany her. ( Id. ). Prior to the trip, Rossi learned that a friend’s brother by the name of Hansruedi Schumacher was an investment adviser in Zurich and had previously worked for UBS. (Rossi Dep. 43:7–45:7). Rossi arranged to have Schumacher assist during the UBS meeting. ( ). Once in Zurich, Rossi, Defendant, and Schumacher went to UBS. ( 45:16–49:17). The meeting lasted about half an hour and they successfully arranged for the accounts to be transferred to UBS Santa Barbara. ( See id. ).
Sometime before leaving Zurich, Defendant opened an additional eight accounts at another Swiss bank, Zurcher Kantonalbank (“ZKB”), and signed documents directing that
2,500,000 be transferred into one of the accounts. (ZKB Account Docs., Ex. D to Mot., ECF No. 26-2). Further, Defendant signed a declaration requesting that all mail, statements, and € correspondence related to the accounts be retained at the bank in Zurich and gave investment decision-making authority to Schumacher. ( ). The parties dispute Defendant’s motive for opening the eight ZKB accounts.
Defendant’s 2005 income tax return was prepared by Brooks and was untimely submitted to the IRS in February 2007. (Brooks Dep. 80:21–81:81, 123:23–125:16). The 2005 tax return did not contain a Schedule B, where foreign account ownership and income is normally reported, even though by that time, Brooks knew of the UBS accounts. ( See id. ).
In August 2009, Brooks sent a letter to Defendant and enclosed completed FBAR forms for 2003, 2004, and 2005, with instructions to sign and mail them to the U.S. Department of Treasury. (Brooks Dep. 88:4–92:12). Defendant did not sign or submit the FBAR forms for 2003, 2004, or 2005. ( ).; (Def. Dep. 50:24–51:17). However, Defendant maintains she did not receive Brooks’s letter or the enclosed FBARs. ( 51:8–52:19). To date, Defendant has not filed an FBAR for tax year 2005. ( See Dep’t Treasury Letter, Ex. E to Mot., ECF No. 26-2).
In 2011, the IRS initiated an examination of Defendant’s tax and FBAR compliance. (Form 886A, Ex. 14 to Resp., ECF No. 35-15). In 2016, the IRS imposed an FBAR penalty equal to 50 percent of the account balance ending in 8669. (8669 Account, Ex. F to Mot., ECF No. 26-2); (Penalty Assessment, Ex. H to Mot., ECF No. 26-2) ($2,521,341.00 penalty). The IRS also imposed a penalty equal to 50 percent of the account balance ending in 5479. (5479 Account, Ex. G to Mot., ECF No. 26-2); (Penalty Assessment, Ex. H to Mot.) ($40,779.50 penalty).
On December 12, 2017, the Government filed its Complaint, (ECF No. 1), seeking a judgment for the FBAR penalties assessed against Defendant with regard to the 2005 and 2006 reporting periods, as well as associated penalties and interest, in the total amount of $2,982,291.81 (as of November 30, 2017), plus statutory accruals. On February 13, 2018, Defendant filed an Answer, (ECF No. 7), to the Government’s Complaint and one counterclaim for illegal exaction. The Government’s Motion for Partial Summary Judgment now follows.
II. LEGAL STANDARD
The Federal Rules of Civil Procedure provide for summary adjudication when the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that “there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”
In determining summary judgment, a court applies a burden-shifting analysis. “When
the party moving for summary judgment would bear the burden of proof at trial, it must come
forward with evidence which would entitle it to a directed verdict if the evidence went
uncontroverted at trial. In such a case, the moving party has the initial burden of establishing
the absence of a genuine issue of fact on each issue material to its case.”
C.A.R. Transp.
Brokerage Co. v. Darden Rests., Inc.
,
If the moving party satisfies its initial burden, the burden then shifts to the opposing
party to establish that a genuine issue of material fact exists.
Matsushita Elec. Indus. Co. v.
Zenith Radio Corp.
,
III. DISCUSSION
The Bank Secrecy Act (“BSA”),
The Internal Revenue Service (IRS) is authorized to assess FBAR penalties against
individuals who violate the FBAR reporting requirements.
See
The Government bears the burden of proving each element of its claim for a civil FBAR
penalty by a preponderance of the evidence, including the key question here of whether an
individual’s failure to report was “willful.”
Williams
,
The Government moves for partial summary judgment asking that the Court find, as a matter of law, that Defendant’s failure to file an FBAR for 2005 was willful. [4] Defendant counters that she had no duty to file an FBAR for 2005 and that even if she had a duty, Defendant did not possess the requisite willful state of mind to incur this heightened penalty. The Court now turns to the parties’ respective arguments.
A. Whether Defendant had an Interest in, or Authority Over, the UBS Accounts As an initial matter, Defendant argues that she was not obligated to file an FBAR for 2005 because she did not have the requisite financial or signature authority over the UBS accounts. (Resp. at 22, ECF No. 34). Defendant maintains that the accounts were her husband’s. ( ). She further contends that the regulations in place in 2006 did not provide guidance as to the terms “financial interest,” “signature authority,” or “other authority.” ( ). According to Defendant, her duty to file an FBAR was not triggered given the vague language of the statute, regulation, and FBAR forms. ( ). However, Defendant fails to point to any vague language. And the bank documents Defendant signed in relation to the accounts leave little doubt as to Defendant’s authority. Indeed, the account ending in 5479 was in her own name and she opened the account herself. The document conveying Power of Attorney to Defendant over the account ending in 8669 stated that Defendant is authorized to, inter alia , “dispose of all or any assets deposited at any time in my/our name with the Bank and to incur liabilities on my/our behalf.” (1994 Power of Att’y, Ex. 4 to Def. Dep., ECF No. 26-1). Further, Defendant was empowered to “deposit, buy, sell, pledge, convert and withdraw in my/our name, to lodge or withdraw funds in any manner whatsoever, . . . to sign settlements of account, receipts, discharges, transfers, and assignments . . . to receive communications, . . . to do everything, she/they/he may deem expedient or necessary.” ( ).
Defendant also disputes “that she had a financial interest in either of [Mr. de Forrest’s] UBS accounts in 2005, that she was the beneficial owner of either account, that she was the record owner, or that the so-called powers of attorney that were produced by UBS as part of its records were legally effective in 2005.” (Resp. at 22). Defendant provides no legal authority in support of these propositions. As such, Defendant fails to show a genuine dispute as to her interest in, and authority over, the UBS accounts.
B. Whether Defendant’s Failure to File an FBAR for 2005 was Willful
Although the term “willful” is not defined in the code section, in civil cases, willfulness
includes both knowing and reckless violations of a standard.
See
Courts have reviewed de novo whether the account holder was willful.
See United States
v. Williams
,
Here, the Government submits that “[a]s a matter of law, all taxpayers who sign and file
a federal tax income return know or should know about the requirement to file an FBAR.”
(Mot. at 15). “[T]axpayers are charged with the knowledge, awareness, and responsibility for
their tax returns, signed under penalties of perjury, and submitted to the IRS.”
McBride
, 908 F.
Supp. 2d at 1206. Courts have also held that “‘individuals are charged with knowledge of the
contents of documents they sign—that is, they have “constructive knowledge” of these
documents.’” (quoting
Consol. Edison Co. of N.Y., Inc. v. United States
,
The Government also explains that Schedule B, Part III, Line 7a, of a Form 1040 asks:
“At any time during [a particular year], did you have an interest in or a signature or other
authority over a financial account in a foreign country, such as a bank account, securities
account, or other financial account? See page B-2 for exceptions and filing requirements for
Form TDF 90-22.1.” (Mot. at 16). Therefore, this simple yes-or-no question “makes it
inconceivable that [a taxpayer] could have misinterpreted this question.” ( ) (quoting
McBride
,
Because Defendant signed her 2005 tax return, which omitted foreign income and, through the omission of a Schedule B, claimed that she owned no interest in any foreign bank account, the Government argues Defendant was willfully blind in failing to file an FBAR for 2005. (Mot. at 21). Further, the Government points out that Defendant’s contention that she did not read her tax returns does not make her innocent. ( ). Rather, it reinforces that Defendant was willfully blind because she failed to pursue knowledge of reporting requirements related to her UBS accounts. ( ).
The Government places great emphasis on Brooks’s testimony that he sent Defendant a tax return preparation questionnaire each year, which included a question concerning foreign bank accounts, and that Defendant never filled it out. (Mot. at 19, 21). Defendant attempts to refute this by stating that neither Brooks nor the Government have produced a copy of the questionnaire. (Resp. at 13). But this does not create a genuine dispute of material fact. Notably, Defendant does not deny receiving the questionnaire. Nor does she claim to have requested it from the Government, the IRS, or Brooks. However, Defendant is correct that there is no evidence that Brooks ever expressly asked Plaintiff about foreign accounts, or that she affirmatively lied and said that no such accounts existed. (Brooks Dep. 21:4–7).
The Government further attests:
it is undisputed that Defendant has not filed an FBAR for tax year 2005, or for any tax years prior to that. This is despite the fact that Mr. Brooks explained to Defendant what an FBAR was, informed her there were penalties if the form was not timely and accurately filed, and eventually prepared and mailed to her a completed 2005 FBAR. Defendant did not follow the instructions accompanying the FBAR that she should sign and file it. These facts establish that Defendant willfully failed to file an FBAR for 2005. (Mot. at 20). However, genuine disputes of material fact do exist. First, while Brooks testified that after learning of the UBS accounts, Brooks informed Defendant that FBARs would need to be filed for all the open years and that there would be penalties otherwise, Defendant denies this took place. (Mot. at 16). Defendant argues that she took Brooks’s advice with respect to filing amended income tax returns for the all the open years. ( ). But Defendant insists it would not make sense to adhere to that piece of advice while rejecting Brooks’s purported FBAR guidance. ( ).
Additionally, there is no explanation as to Brooks’s August 2009 letter to Defendant, which enclosed prepared FBAR forms for 2003, 2004, and 2005. Assuming Brooks advised Defendant about the importance of FBAR compliance in 2006, then his three-year delay in helping her comply with the filing requirement is inconsistent with his own advice. Further, as Defendant notes, the language in the August 2009 letter suggests that Brooks had only recently learned of the FBAR filing requirement: “The [IRS] recently indicated that funds with a situs of outside the U.S. would be subject to disclosure.” (Aug. 26, 2009 Brooks Letter, Ex. 10 to Brooks Dep., ECF No. 26-1). Furthermore, evidence shows that in 2009, Defendant was either living in Las Vegas, Nevada, or splitting her time between her home in Las Vegas and her home in Santa Barbara. (Brooks Dep. 88:4–92:12); (Def. Dep. 51:7–52:19); (IRS Exam R., Ex. 7 to McManus Decl., ECF No. 35-8). Depending on the address Brooks sent the letter to, there is a chance that Defendant did not receive it. Indeed, Defendant testified that she had not seen the August 2009 letter before. ( ).
The Court also notes that throughout Brooks’s testimony, Brooks admitted inadvertently omitting information from Defendant’s tax-related documents. For example, the 2004 amended tax return checked “no” on the Schedule B foreign accounts and trusts question 7a. When asked about it, Brooks stated it was “[j]ust an oversight. We didn’t get it corrected on the amended return. I mean, this is—this was before FBAR was even a big deal.” (Brooks Dep. 79:4–12). Again, Brooks uses language suggesting he did not understand the FBAR filing requirements until years later.
Defendant’s original 2005 return similarly checked “no” on the Schedule B foreign accounts and trusts question 7a. ( 81:1–83:11). It also failed include income from the UBS accounts. ( ). When asked why this information was omitted despite his knowledge of the USB accounts, Brooks stated that he did not have knowledge of the accounts at that time. He was then reminded that the 2005 returns were submitted on February 26, 2007, months after he learned of the UBS accounts. At that point he indicated: “I have a foggy recollection that there was one year where [Defendant] called me and found a tax return in, like, a drawer. And I just said, ‘Get it filed as soon as you can.’” ( 124:5–21). But this explanation is inconsistent with testimony regarding Brooks’s tax preparation process. Specifically, Brooks testified that once he had Defendant and Mr. de Forrest’s returns prepared, Defendant would either come to his office to sign them, or he would go to Defendant’s home, go over the returns, obtain signatures, and “[he’d] bring them back [to his office] and mail them.” (Brooks Dep. 17:14–21). If this was the same pattern he followed for the preparation of tax returns from the time his engagement began through the 2005 tax year, then the original 2005 returns would not have been in a drawer in Defendant’s house. That is not to say that there is no reasonable explanation for this. But none has been provided.
Lastly, there is a genuine dispute as to the purpose of the eight Swiss bank accounts Defendant opened during her trip to Zurich in 2006. While the Government insists the accounts are further evidence of Defendant’s reckless state of mind, Defendant asserts she signed the documents believing USB would repatriate the account funds. (Resp. at 18). Moreover, Brooks’s billing invoices indicate he was aware, in 2006, that the USB funds had been transferred to an intermediary bank. ( ).
Because the Government’s allegations as to Defendant’s purported recklessness and
willful blindness are grounded in genuinely disputed material facts, and all facts and inferences
are viewed in the light most favorable to Defendant, the Government’s Motion for Partial
Summary Judgment is denied.
Eagle Produce Ltd. P’ship
, at
IV. CONCLUSION
IT IS HEREBY ORDERED that the Government’s Motion for Partial Summary Judgment, (ECF No. 26), is DENIED .
IT IS FURTHER ORDERED that the parties shall have 30 days from the date of this Order to submit a joint pretrial order.
DATED this _____ day of May, 2020.
___________________________________ Gloria M. Navarro, District Judge United States District Court
Notes
[1] In addition, Defendant filed the Declaration of Brian McManus, (ECF No. 35), and several exhibits in support of her Response.
[2] In her Response, Defendant asserts that her husband threatened to murder her if she told anyone about the accounts. (Resp. at 2). However, there is no citation supporting this claim.
[3] The Supreme Court has held that “particularly important individual interests or rights” warranting a heightened,
clear and convincing burden of proof in civil matters are those such as parental rights, involuntary commitment,
and deportation.
Herman & MacLean
,
[4] The Government is not moving for summary judgment on the issue of whether Defendant willfully filed an incomplete FBAR for 2006.
[5] Defendant argues that the proper willfulness standard is the criminal standard, which requires more than a
showing of careless disregard for the truth and generally connotes a voluntary, intentional violation of a known
legal duty. (Resp. at 23) (citing
Cheek v. United States
,