United States v. FlumeUnited States v. Flume
Plaintiff United States of America brought this suit to recover civil penalties assessed against Defendant Edward Flume for willful failure to report his interest in a foreign bank account during tax years 2007 and 2008. The case was tried before the Court on April 23 and 24, 2019. Pursuant to Federal Rule of Civil Procedure 52(a)(1), the Court finds the following facts by a preponderance of the evidence and makes the following conclusions of law. To the extent that any finding of fact is more aptly characterized as a conclusion of law, or any conclusion of law is more
Procedural Background
On April 5, 2016, the Government filed suit to collect penalties originally assessed against Defendant Flume by the IRS in 2014.
Jurisdiction and Venue
The Court has subject-matter jurisdiction pursuant to
Findings of Fact
Defendant Edward Flume is a U.S. citizen who has lived and worked in Mexico since 1990.
Flume sold the Whataburger franchises in the late 1990s. (RT1 66:11-13.) Since then, Flume, together with his wife Martha, business partner Victor Mendez Tornell, and Tornell's wife, has developed residential real estate in Guadalajara and San Miguel de Allende. (Id. at 66:14-67:7; see Reporter's Simultaneous Transcript Day 2 (RT2) 26:22-28:8.) In 1999, the Flumes became clients of Leonard Purcell's Mexico City-based tax-preparation firm. (RT1 112:20-21; RT2 61:12-20.) In each tax year at issue, either Purcell himself or his employee, Adriana Bautista Luna, prepared the Flumes' U.S. tax returns. (See Pl.'s Ex. 1-4, 47.)
To manage his real estate projects, Flume incorporated Wilshire Holdings, Inc. in the Bahamas in 2000. (Pl.'s Ex. 23.) The following year, Flume reincorporated Wilshire Holdings in Belize, a country identified by IRS Agent Raphaelle Johnson as a "tax haven" that "advertises that they don't cooperate with the U.S. authorities" in civil tax investigations. (RT1 48:11-15; see
In 2005, Flume opened an account at Swiss UBS in Wilshire's name. (RT1 80:4-7.) According to UBS's account-opening documents, the purpose of the account was to manage the Flumes' retirement funds.
Despite having a legal obligation to do so, Flume failed to report his financial interest in the UBS account to the IRS in both 2007 and 2008. (Dkt. 75, Attach. 2 at 3.) In 2007, the average monthly balance of the UBS account was $899,342.02; in 2008, its average monthly balance was $718,811.24. (Dkt. 75 at 2; see Pl.'s Ex. 14 at DOJ000243.) By mid-2008, Flume had become aware that the IRS was investigating UBS's involvement in tax evasion on behalf of its American clients. (RT1 83:17-84:14; see Pl.'s Ex. 9 at DOJ000979-80.) Flume soon began transferring all his assets out of the UBS account. (RT1 84:15-97:11.) First, he directed the transfer of $245,000 into Wilshire's Laredo National Bank account, almost all of which he then moved to his personal Banco Monex account. (Pl.'s Ex. 40.) Flume then moved the UBS account's remaining balance into a Fidelity account in the United States, most of which he subsequently transferred to himself as well. (Dkt. 75, Attach. 2 at 4; see Pl.'s Ex. 22 at 17; Pl.'s Ex. 46.)
In 2010, UBS ended its longtime nondisclosure practice and agreed to comply with an IRS summons by releasing the names of its American clients-among them Edward Flume-to the IRS. (RT1 5:7-17, 16:3-17:15; see Pl.'s Ex. 38-39.) As part of a deferred prosecution agreement with U.S. law enforcement, UBS had announced in early 2009 that it would no longer provide offshore banking services to Americans. (See Pl.'s Ex. 44 at 41-42.) In June of 2010, Flume filed delinquent FBARs for tax years 2006 through 2009. (Dkt. 75, Attach. 2 at 3-4; RT1 32:1-41:8; see Pl.'s Ex. 5-6.) Even then, however, he significantly underrepresented the value of his UBS account. (RT1 32:1-41:8, 127:16-131:17.) Moreover, despite being eligible, Flume did not apply to the IRS's Offshore Voluntary Disclosure Initiative (OVDI), which could have reduced his financial liability in exchange for full disclosure of the Swiss account. (Dkt. 75, Attach 2 at 5; RT1 18:5-23.)
Flume's tardy efforts at transfer and disclosure were insufficient to avoid IRS
Finally, and most relevant here, Johnson found that Flume had failed to file timely FBARs for his Swiss bank account in 2007 and 2008.
At trial, Purcell and Luna, who together prepared Flume's personal income tax returns from 1999 to 2010 (RT2 6:20-25), both testified that Flume never disclosed the Swiss UBS account to them (id. at 51:3-55:19, 74:21-81:3). They stated they had never seen Wilshire's general ledgers listing the UBS account balance (id. at 55:20-56:24, 84:24-86:18; see Pl.'s Ex. 24-27), which were prepared by a bookkeeper in San Miguel (RT1 97:12-100:25). Purcell and Luna further testified that they sent all their clients, including Flume, a form letter each year reminding them of their obligation to report all foreign bank accounts and financial interests. (RT2 58:3-60:1, 86:19-88:13, 98:25-99:24; see Pl.'s Ex.
Conclusions of Law
The 1970 Currency and Foreign Transactions Reporting Act, also known as the Bank Secrecy Act (BSA), "regulates offshore banking and contains a number of recordkeeping and inspection provisions." United States v. Under Seal ,
Section 5314's reporting requirement operates in two steps. First, when filling out line 7a of Schedule B of their federal tax return, taxpayers must declare whether they have an interest in or signature authority over a foreign bank account. 2 Comisky, Field & Harris, Tax Fraud & Evasion § 11.06, at 31 (updated Nov. 2018); see United States v. Flume ,
The penalty for failure to file a timely FBAR varies according to the level of the taxpayer's culpability. A willful violation can result in a civil penalty of up to 50% of the balance of each foreign account or $100,000, whichever is greater.
In this case, the parties stipulated that only the sixth element-willfulness-was in dispute. (Dkt. 75 at 3.) The Government bears the burden to prove by a preponderance of the evidence that a defendant willfully violated the FBAR requirements. See United States v. Garrity ,
With respect to IRS requirements in particular, a person acts recklessly when he "(1) clearly ought to have known that (2) there was a grave risk that the filing requirement was not being met and if (3) he was in a position to find out for certain very easily."
Having considered the case law, the evidence in the record, and the witnesses' testimony at trial, the Court concludes for the following reasons that Flume's 2007 and 2008 FBAR filing failures were willful within the meaning of
1. Flume's testimony is not credible. Numerous contradictions within his testimony raise serious doubts about his veracity. For example, Flume testified that he opened the Swiss account not to evade taxation but to avoid the consequences of bank failures in the United States. (RT1 141:6-16.) He specifically cited the collapse of Lehman Brothers as a leading cause for his concern. (Id. at 141:8-9.) However, as the Government pointed out on cross-examination, Lehman Brothers did not collapse until 2008-three years after Flume opened the UBS account. (RT2 14:7-10.) In fact, no U.S. banks failed until 2007. (Id. at 18:13-24; see Pl.'s Ex. 48.) Moreover, Flume's maintenance of numerous personal accounts in the United States and Mexico belies his supposed concern about the American and Mexican banking systems. (RT2 14:14-15:8.) At trial, Flume admitted that throughout the years in question, he maintained personal bank accounts,
In addition, Flume has changed his account of when and how he first learned of the FBAR reporting requirement at least twice. In his 2015 Tax Court trial, Flume testified that he first learned of the requirement in 2008 or 2009. (Pl.'s Ex. 30 at 34.) At that time, he made no mention of a financial seminar. (Id. ) Then, in his 2017 deposition in this case, he testified that Purcell told him about the FBAR reporting requirement in 2010. (RT2 12:18-13:17.) Finally, Flume testified at trial that he did not learn of the FBAR reporting requirement until he attended a financial seminar in Mexico in 2010. (See RT1 133:3-134:3; RT2 11:9-12:12.)
Finally, Flume's account of the discrepancies between his delinquent FBARs and the actual balance of his UBS account strains credulity. Flume testified that his FBARs consistently underrepresented the UBS account's value because he did not possess "a lot of the bank account information" in 2010 and instead had to rely on spotty documentation and memory to complete the delinquent FBARs. (RT2 10:9-16.) He admitted, however, that he had electronic access to all his UBS statements. (Id. at 25:19-26:4.) Moreover, the Wilshire general ledgers showing the true balance for each year were prepared by a local San Miguel bookkeeper at Flume's own request. (RT1 97:12-100:25.) It is clear to the Court that Flume could have obtained accurate records of his UBS account balance with minimal effort. His failure to do so represents, at the very least, a reckless disregard for his reporting obligations. See Bedrosian ,
In short, given the numerous inconsistencies in Flume's statements and the countervailing credible testimony of the other witnesses, the Court cannot rely on Flume's testimony. See Norman v. United States ,
2. Particularly when viewed in light of his disingenuous testimony, Flume's financial structure reflects a sophisticated tax-evasion scheme. (See Pl.'s Ex. 45.) Having operated businesses in Mexico for nearly three decades, Flume has developed a detailed understanding of his personal and corporate tax obligations-and how to avoid them. See United States v. Bohanec ,
When asked about the Federal Deposit Insurance Corporation's coverage limits, for example, Flume immediately responded that all American bank accounts are insured up to $100,000. (RT2 15:21-16:7.) Flume's decision to waive his right to invest his UBS account funds in U.S. securities, though far from dispositive, also suggests that he understood-and sought to avoid-the withholding and disclosure requirements that accompany U.S. investments. (Dkt. 76 at 2; Pl.'s Ex. 10 at DOJ001001; see RT1 19:25-20:16.) see Norman ,
Flume also understands how to avoid unpleasant legal obligations. For example, even after Flume sold his Whataburger franchises in the late 1990s, FFM-the Mexican corporation he had created to manage the franchises-remained intact and continued to pay Flume's salary. When asked during his 2016 Tax Court trial to explain why his salary was coming from a defunct restaurant-operating company rather than Wilshire Holdings, Inc.-the corporation he ostensibly set up to manage his real estate business-Flume testified that he transferred money from Wilshire's real estate earnings to FFM before paying it out to himself because he did not want Mexican tax authorities to know that his income was coming from an offshore corporation. (Pl.'s Ex. 34 at 34; see RT1 152:9-154:1.) While it has not been established whether this structure is illegal in Mexico, Flume testified that it is "much better" under Mexican law to "receive[ ] your income from a Mexican corporation and not from an offshore corporation." (Pl.'s Ex. 34 at 34.) Flume also acknowledged that, despite being incorporated and doing business in Mexico, FFM had not filed Mexican tax returns since the 1990s (id. at 35), and at trial Purcell testified that he believed Flume disregarded his obligation to file personal income tax returns in Mexico as well (RT2 103:22-104:25).
3. Purcell and Luna's testimony that they sent Flume an annual reminder of the foreign-account reporting requirements is credible. (RT2 58:3-60:1, 86:19-88:13, 98:25-99:24.) Accordingly, the Court disregards Flume's assertion that he did not receive Purcell and Luna's letter in any of the years at issue (RT2 10:17-11:4) and finds that Flume was on notice of his FBAR filing obligations well before he opened the UBS account.
4. The fact that Flume disclosed his Mexican account on Schedule B of his tax returns suggests that he was aware of the foreign-account reporting requirement and made a conscious choice not to disclose his Swiss account. (See, e.g. , Pl.'s Ex. 1 at 3; Pl.'s Ex. 2 at 3.) see Kelley-Hunter ,
5. Together, UBS's client-contact records and Flume's trial testimony establish that Flume was aware of the IRS investigation into UBS by mid-2008. (See Pl.'s Ex. 9 at DOJ000979; RT1 83:17-84:14.) However, Flume did not file any FBARs until after UBS agreed to turn over its American clients' records to the IRS. (Pl.'s Ex. 5-6; Pl.'s Ex. 44 at 6-9.) This timing strongly suggests that Flume knew he was breaking the law but continued to believe he could get away with it until it became clear that U.S. authorities would learn of his Swiss account. See Kelley-Hunter ,
6. Even if the Court were to accept Flume's claim that he did not know about the FBAR requirement until 2010, his testimony at trial clearly established that he acted with extreme recklessness by failing to review his tax returns before signing them. (RT1 115:21-116:10; RT2 5:9-16.) see Bedrosian ,
Flume's attempt to blame Purcell and Luna for his filing failures is unavailing. First, the Court credits the tax preparers' testimony that Flume never disclosed the UBS account to them, meaning they could not have known Flume had an obligation to file an FBAR for that account. (RT2 51:3-55:19, 74:21-81:3). As the case law recognizes, a defendant's failure to inform his accountant about the existence of a foreign account is a strong indicator of a conscious intent to violate the law. See, e.g. , Bohanec ,
Moreover, Flume's total "rel[iance] on [Purcell and Luna's] professional skills" is reckless in and of itself. (RT2 7:11-15.) Flume never conducted any research on Purcell or Luna's educational background or credentials, nor did he inquire as to whether they were licensed CPAs. (RT1 111:25-113:17; see RT2 7:1-15.) In fact, although Luna has a Mexican accounting degree and Purcell has considerable work experience in Mexican and American tax preparation, neither is a CPA. (RT2 43:11-45:5, 68:25-70:24.) Given his large international holdings and complex business arrangements, Flume was reckless in failing to investigate the credentials of the people he claims to have entrusted with his tax liability.
Conclusion
For the foregoing reasons, the Court finds that Defendant Edward Flume willfully failed to disclose his interest in a foreign bank account in tax years 2007 and 2008. The IRS's assessment of $456,509.00 in penalties is therefore proper.
The Government is hereby ORDERED to submit an updated damages calculation, which must include all fees and interest the Government seeks to collect, by June 25, 2019. The Government is further ORDERED to advise the Court by June 28,
Notes
On the Government's motion, the Court issued writs of garnishment against seven banks at which the Government suspected Flume had deposited non-exempt assets: Capital One, NA; Wells Fargo, NA; Scottrade, Inc.; Broadway National Bank; BBVA Compass (as successor-in-interest to Laredo National Bank); Fidelity Investments; and National Financial Services, LLC. (Dkts. 6, 32.) See
The facts contained herein were either stipulated by the parties (see Dkt. 75, Attach. 2) or result from the Court's evaluation of documentary evidence and witness testimony. In determining the credibility of each witness, the Court considered all the circumstances under which the witness testified, including: the relationship of the witness to the parties; any interest the witness might have in the outcome of the case; the witness's appearance, demeanor, manner of testifying, and apparent candor and fairness; the reasonableness of the witness's testimony; the opportunity of the witness to acquire knowledge concerning the facts to which he or she testified; the extent to which the witness was contradicted or supported by other credible evidence; and whether any such contradiction related to an important factor in the case. Martin v. Trend Personnel Servs. ,
Flume claimed he made the change on the advice of Leonard Purcell, who allegedly told him that "using a Bahamas domicile [would be] best as far as no corporate income tax and what have you." (RT1 139:7-140:2; see id. at 73:24-74:10.) In his own testimony, however, Purcell denied having advised Flume on any business or investment matters. (RT2 110:17-22, 73:23-74:4.) Purcell's testimony is cast into doubt by the fact that Wilshire's documents were mailed to Purcell's personal post office box in Houston. (RT1 74:6-19; Pl.'s Ex. 23 at 32.) Purcell's explanation-that he merely received and forwarded corporate documents on Flume's behalf so as to avoid the unreliable Mexican mails-is somewhat less than convincing. (RT2 91:9-93:8.) At the very least, though, Flume understood that the move to Belize was a strategy to avoid taxation and government oversight.
The account-opening documents indicated that the UBS account might also be used to obtain a "loan for [a] flat in Paris." (Pl.'s Ex. 10 at DOJ001008.) At trial, however, Flume vehemently denied any intention to purchase property in Paris. (RT1 78: 2-11.)
Tax Court documents indicate that Wilshire's articles of incorporation were later amended to give one of Flume's Mexican business partners a 73% interest in the company and reduce Flume's personal interest to 9% and his family's total interest to 27%. (Pl.'s Ex. 32 at 4; see Pl.'s Ex. 30 at 22.) As the Tax Court observed, Flume's 9% interest is conspicuously close to the 10% threshold for mandatory information reporting. (Pl.'s Ex. 32 at 9-15.) See
Although Flume's 2006 FBAR was also delinquent, the IRS could not assess penalties for 2006 due to the six-year statute of limitations for civil-penalty assessments. See
Specifically, the IRS assessed penalties of $356,509 for 2007 and $100,000 for 2008. (Dkt. 75 at 3.) The 2007 penalty represents half of the balance rounded to the nearest dollar of Flume's UBS account on June 30, 2008, the date the FBAR form for 2007 was due. (Id. ) On June 30, 2009-the date Flume's 2008 FBAR became due-the UBS account had a zero balance because Flume had already transferred out all his funds. (Id. ; see Dkt. 75, Attach. 2 at 4.) Because the IRS determined he had acted willfully, however, he remained subject to a $100,000 penalty. (Dkt. 75 at 3.) See
When questioned about why he did not introduce this letter into evidence, Flume stated only: "It's not here but it's at my desk." (RT2 25:2-15.) In light of the numerous indicia of dishonesty in Flume's testimony, discussed more fully below, the Court credits Agent Johnson's testimony that the Treasury Department never received any such letter (RT1 51:15-19) and Purcell's testimony that Flume did not call him to discuss FBARs in 2010 (RT2 90:8-91:7). See infra pp. 854-55.
During the tax years at issue in this case, taxpayers submitted their FBARs by mail using Form TD F 90-22.1. See
As of the 2016 tax year, FBARs are due on April 15, not June 30. See Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Pub. L. No. 114-41, § 2006(b)(11),
McBride and Williams both accepted a "constructive knowledge" theory for proving knowing violations. McBride ,