Case Information
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
Plaintiff,
No. 18-CV-7910 (KMK) v. OPINION & ORDER
HEINZ GENTGES, Defendant.
Appearances:
Samuel H. Dolinger, Esq.
U.S. Attorney’s Office, SDNY
New York, NY
Counsel for Plaintiff
Michael J. Pisko, Esq.
Pillsbury Winthrop Shaw Pittman LLP
New York, NY
Counsel for Defendant
Richard Sapinski, Esq.
Sills Cummis & Gross, P.C.
Newark, NJ
Counsel for Defendant
KENNETH M. KARAS, United States District Judge:
The United States of America (“Plaintiff” or the “Government”) brings this Action against Heinz Gentges (“Defendant”) to collect civil penalties assessed against Defendant based on his failure to disclose two foreign bank accounts in violation of the Bank Secrecy Act, 31 U.S.C. §§ 5314 and 5321. Currently before the Court is the Government’s Motion for Summary Judgment. ( Not. of Mot. (Dkt. No. 29).) For the reasons discussed below, the Motion is granted in part and denied in part.
I. Background
A. Factual History
Unless otherwise noted, the following facts are taken from the Parties’ Rule 56.1 Statements and Counterstatements. ( Pl.’s 56.1 Statement in Supp. of Pl.’s Mot. (“Pl.’s 56.1”) (Dkt. No. 32); Def.’s Counter 56.1 Statement in Opp’n to Pl.’s 56.1 (“Def.’s Counter 56.1”) (Dkt. No. 38).) [1]
[1]
Local Civil Rule 56.1(a) requires the moving party to submit a “short and concise
statement, in numbered paragraphs, of the material facts as to which the moving party contends
there is no genuine issue to be tried.” The nonmoving party, in turn, must submit “a
correspondingly numbered paragraph responding to each numbered paragraph in the statement of
the moving party, and if necessary, additional paragraphs containing a separate, short[,] and
concise statement of additional material facts as to which it is contended that there exists a
genuine issue to be tried.” Local Civ. R. 56.1(b). “If the opposing party . . . fails to controvert a
fact set forth in the movant’s Rule 56.1 statement, that fact will be deemed admitted pursuant to
the local rule.”
Baity v. Kralik
,
Where the Parties identify disputed facts but with semantic objections only or by
asserting irrelevant facts, the Court will not consider these purported disputes, which do not
actually challenge the factual substance described in the relevant paragraphs, as creating disputes
of fact.
See Baity
,
Any party’s failure to provide record support for its challenge to another party’s factual
statement could allow the Court to deem the challenged facts undisputed.
See Holtz v.
Rockefeller & Co.
,
1. Defendant’s Failure to File an FBAR for Calendar Year 2007 In 2007, Defendant was a U.S. citizen with financial interests in two foreign bank accounts—one ending in -4959 (the “4959 Account”), and another ending in -4337 (the “4337 Account”)—at UBS AG (“UBS”) in Switzerland. (Pl.’s 56.1 ¶¶ 1–2.) During 2007, the balance of both accounts exceeded $10,000. ( Id. ¶ 3.) Under 31 U.S.C. § 5314(a) and supporting regulations, Defendant was therefore required to file Form TD F 90-22.1 (“Report of Foreign Bank and Financial Accounts”), commonly known as the “FBAR,” for calendar year 2007. See 31 U.S.C. § 5314(a); 31 C.F.R. §§ 103.24, 103.27, amended and recodified at 31 C.F.R. § 1010.350 (2011). ( See also Pl.’s 56.1 ¶ 4.)
Defendant failed to do so. ( Id. ) Between December 2013 and August 2016, Defendant’s representative agreed in writing to extend the period in which the Treasury Secretary could assess a penalty against Defendant based on his failure to file an FBAR for 2007. ( Id. ¶ 51.) On October 7, 2016, the IRS assessed two penalties based on Defendant’s allegedly willful failure to comply with the FBAR filing requirements. ( Id. ¶ 52.) One penalty, in the amount of $679,365, was based on the 4959 Account, while the other penalty, for $224,488, was based on the 4337 Account. ( Id. ¶ 53.) The IRS examiner’s report set forth the agency’s basis for concluding that Defendant had willfully failed to disclose his UBS accounts, as well as its determination of the penalty amounts. ( ¶ 54.)
“responses that do not point to any evidence in the record that may create a genuine issue of material fact do not function as denials, and will be deemed admissions of the stated fact.” (alteration and quotation marks omitted)). Therefore, where the Court cites to only one of the Parties’ Rule 56.1 Statements or Counterstatements, that fact is materially undisputed unless noted otherwise.
2. Defendant’s Foreign Accounts
a. The 4959 Account Although Defendant avers that the 4959 Account was not technically “open[ed]” in 2001, as the Government claims, but had in fact been opened years earlier at a different Swiss bank that was subsequently acquired by UBS, he nevertheless concedes that he “partially filled out a UBS form entitled ‘Opening of an Account/Custody Account’ relating to [the 4959 Account]” in 2001. (Def.’s Counter 56.1 ¶¶ 5–6.) Defendant identified himself as the beneficial owner of the account and listed his address in Hawthorne, New York. ( ¶ 7.) It is undisputed that the 4959 Account at UBS was established as a “numbered” account, as opposed to a “named” account, ( See Pl.’s 56.1 ¶ 6; Def.’s Counter 56.1 ¶ 6), even though Defendant testified that he did not intend to establish such an account, “and did not think of the 4959 Account as a numbered account,” (Def.’s Counter 56.1 ¶ 6). [2]
As part of the documentation provided by UBS, Defendant also signed an instruction to UBS that stated: “I would like to avoid disclosure of my identity to the US Internal Revenue Service under the new tax regulations. To this end, I declare that I expressly agree that my account shall be frozen for all new investments in US securities as from 1 November 2000.” ( See Pl.’s 56.1 ¶ 8; Def.’s Counter 56.1 ¶¶ 8–9.) Although Defendant protests that he was merely signing his name next to a handwritten “X” that indicated where he should sign, and further asserts “that he did not understand the form to mean that he wanted to conceal his identity from IRS by avoiding US securities investments,” he does not dispute having signed the declaration. ( See Def.’s Counter 56.1 ¶¶ 8–9.) [3] The form signed by Defendant also acknowledged that he was “liable to tax in the USA as a US person.” ( Pl.’s 56.1 ¶ 9; Def.’s Counter 56.1 ¶¶ 8–9.) Defendant professes that he understood this language “as confirming that he was a US citizen.” (Def.’s Counter 56.1 ¶¶ 8–9.)
It is also undisputed that Defendant had UBS retain his mail related to the 4959 Account at the bank, for a fee, instead of having it mailed to his address in New York. (Pl.’s 56.1 ¶ 10; Def.’s Counter 56.1 ¶ 10.) Although Defendant contends that he did not manually select this option, but rather, “someone else inserted an ‘x’ in a box he left unchecked,” (Def.’s Counter 56.1 ¶ 10), he does not dispute that he retrieved his mail related to the 4959 Account whenever he visited the bank in Switzerland—including during three visits in 2007—and authorized UBS to destroy any mail he did not take with him, ( id. ¶ 11). And although Defendant disputes how actively he was involved in managing the 4959 Account, he concedes that he “was involved in any buy/sell decisions.” ( Id. ¶ 12.) Finally, Defendant concedes that UBS often corresponded with him using an address in Switzerland. ( Id. ¶ 13.) [4]
In June 2008—the deadline for filing the FBAR for 2007—the balance in the 4959 Account was $1,358,730.01. ( Id. ¶ 14.)
b. The 4337 Account Just as he had done several months earlier with respect to the 4959 Account, in February 2002 Defendant signed various documents provided by UBS with respect to the 4337 Account. ( See Def.’s Counter 56.1 ¶ 15.) As with the 4959 Account, the 4337 Account was also established as a numbered account. ( See id. ) Without substantively disputing this point, Defendant avers that he “was periodically asked to sign many UBS forms and thought of it as ‘routine’ . . . and did not review what he signed in detail or question what it meant” because “he had dealt with UBS for many years and trusted it was a routine request.” ( Id. ) Defendant identified himself as the beneficial owner of the 4337 Account and listed his address in Hawthorne, New York. ( ¶ 16.)
As part of the documentation he completed regarding the 4337 Account, Defendant stated that he was “liable to tax in the USA as a US person” and agreed that the account would be “frozen for all new investments in US securities.” ( Id. ¶ 17.) [5] Again, without disputing that he made this representation, Defendant avers “that he understood the form to be simply an acknowledgement of his US citizen status (which he never denied or sought to conceal) although he admittedly did not read the form carefully because he believed it was just routine paperwork UBS needed signed.” ( Id. ) As with the 4959 Account, Defendant instructed UBS to hold any mail pertaining to the 4337 Account at the bank and retrieved the mail while visiting the bank in Switzerland, including on three occasions in 2007. ( See id. ¶¶ 18–19.) Without substantively challenging this proposition, Defendant explains that he “had no problem with UBS holding his mail because . . . he was frequently in Switzerland for extended periods and could easily retrieve his mail at any UBS branch while there.” ( Id. ) [6] At the end of 2007, the balance for the 4337 Account was $448,975. ( ¶ 20.)
3. Defendant’s Formation of Trusts In 2003, Defendant and his wife formed various trusts for estate planning purposes. (Pl.’s 56.1 ¶ 21; Def.’s Counter 56.1 ¶ 21.) But although they transferred the ownership of their New York home and all U.S. accounts into these trusts, Defendant did not transfer his UBS accounts into these trusts. ( Def.’s Counter 56.1 ¶ 22.) Moreover, Defendant did not disclose the existence of the UBS accounts to the attorney he consulted in forming the trusts, nor did he seek any advice about the UBS accounts from this attorney or anyone else. ( See id. ¶¶ 23–24.) Though Defendant does not dispute these assertions, he maintains that he “intended the trusts only to address his U.S. assets[,]” and that his “failure to tell the attorney who formed the U.S. trusts about his UBS accounts is understandable since he felt his UBS accounts could pass to [his son] without any problem upon his death . . . .” ( ¶¶ 22–24.)
4. Defendant’s 2007 Income Tax Return For “decades” before Defendant submitted his 2007 U.S. income tax return, he had used the same accountant, Richard Surico (“Surico”), to prepare his tax returns. (Pl.’s 56.1 ¶ 27.) Defendant does not dispute this point. (Def.’s Counter 56.1 ¶¶ 26–27.) He contends, however, that “[o]ver the entire time Surico did [Defendant’s] returns, their contact was minimal[,]” and, from 2001 onward, Defendant “never had any actual contact with Surico in person or otherwise,” but would “either drop[] off the tax information he assembled to Surico’s New York office,” which would in turn mail the information to Florida (where Surico moved in 2004), or Defendant would simply mail the information directly to Surico’s Florida address himself. ( Id. )
Surico prepared Defendant’s tax return for 2007. ( See id. ) According to Defendant, Surico would take the information Defendant provided and input this information into Computax, a software program, which would in turn “generate[] a draft tax form.” ( Id. ) Surico would then review the draft form and mail it to Defendant with instructions on “where to send it, what to pay, etc. along with a comparison to the prior years.” ( Id. ) Defendant concedes that he “had the opportunity to review this tax return after it was prepared” by Surico, (Pl.’s 56.1 ¶ 26), and that, “for 2007 and other hears [sic], he simply briefly looked at the comparison sheet, and then signed the return and mailed it without any significant substantive review,” (Def.’s Counter 56.1 ¶¶ 26–27).
Defendant also concedes that he never disclosed the existence of his UBS accounts to Surico, and never sought Surico’s advice regarding the income he received from those accounts. ( See id. ¶¶ 28–29.) Defendant’s explanation for this fact is that he “always viewed the money [in those accounts, which] he inherited from his German parents[,] as his ‘European heritage[,]’ and had scrupulously kept it separate from his U.S. assets,” apparently under the belief that this money “had nothing to do with his U.S. tax obligations” and therefore “was [not] relevant to his U.S. tax return preparation.” ( Id. ¶ 28.) Defendant also states that Surico “never asked [Defendant] or any of his clients any questions about having foreign accounts or assets in all the years he prepared his taxes,” ( id. ), and thus, there was no reason that Defendant “might have [been] alerted . . . to the need to tell [Surico]” about these assets, ( id. ¶ 29).
It is undisputed that Defendant submitted a U.S. income tax return for the year 2007. ( Id. ¶ 25.) Part III of Schedule B of this return asked Defendant to state whether he had an interest in a foreign financial account in 2007. (Pl.’s 56.1 ¶ 30.) Specifically, the instructions for this section stated that a taxpayer “must complete this part if [he] . . . (b) had a foreign account,” and required the taxpayer to select “Yes” to question 7(a) if he had an “interest in or a signature or other authority over a financial account in a foreign country.” ( Id. ¶¶ 32–33.) If the taxpayer selected “Yes” to this question, Schedule B directed the taxpayer to filing requirements for the FBAR. ( ¶ 34.) Defendant does not dispute that his 2007 return incorrectly responded “No” to question 7(a), thereby indicating that he did not have an interest in any foreign financial accounts. ( Def.’s Counter 56.1 ¶ 35; see also id. ¶ 36 (conceding that Defendant later acknowledged this answer was incorrect, because in fact he did have foreign accounts in Switzerland in 2007).) According to Defendant, however, neither he nor Surico manually entered the answer “No.” ( See id. ¶¶ 30–34.) What happened, Defendant explains, is that “Computax software prepared a return for 2007 which automatically defaulted to a ‘No’ answer on Schedule B because Surico did not enter anything suggesting the answer was otherwise and there was no place on the Computax data input sheets for him to make such an entry.” ( Id. ; see also id. ¶ 35 (“As Surico never asked [Defendant] about having a foreign account, there was no data input for that and the Computax program automatically populated a ‘No’ answer on the tax return it generated in the absence of anything on the data input sheet suggesting a different answer.”).) Defendant represents that he “did not even see the ‘No’ answer in Schedule B during in [sic] his unguided review of what Surico sent him.” ( Id. ¶¶ 30–34.) Instead, “[h]e trusted Surico knew what he was doing and just signed what he received.” ( Id. )
5. Defendant’s Use of His Foreign Accounts Between 2001 and 2007, Defendant withdrew approximately $140,000 worth of cash, in different currencies, from the UBS accounts. (Pl.’s 56.1 ¶ 37.) During this same period, Defendant withdrew $116,560 from U.S. dollar-denominated sub-accounts within the UBS accounts, including on a number of dates in 2007. ( Id. ¶¶ 38–39.) Similarly, on various dates in 2008, Defendant withdrew approximately $100,000 in cash from these accounts, in different currencies, including $83,033 from U.S. dollar-denominated sub-accounts. ( Id. ¶¶ 40–41.) Defendant was aware that U.S. regulations required him to declare the transportation of currency exceeding $10,000 into the United States. ( ¶ 42.) Although Defendant does not dispute these facts, he denies that he withdrew these amounts in order “to secretly bring them back to the United States.” ( Def.’s Counter 56.1 ¶¶ 37–42.)
6. Defendant’s Relocation of His Foreign Accounts Sometime around September 2008, Defendant decided to move his Switzerland accounts from UBS to another bank. ( Def.’s Counter 56.1 ¶¶ 43–45.) Although there is some disagreement as to why he made this decision—the Government contends that UBS told Defendant he had to close his accounts, while Defendant maintains that UBS gave him a choice to close his accounts or agree to let UBS manage his funds in a different type of account, ( see id. ¶ 43)—it is undisputed that Defendant closed his UBS accounts and transferred them to Migros Bank, another Swiss financial institution, ( see id. ¶¶ 44–45). Although Defendant does not challenge the Government’s assertion that he never considered moving these accounts into the United States, ( see Pl.’s 56.1 ¶ 44), he argues that this decision was “hardly surpris[ing]” given his “mindset”—that is, his belief that “his parents [sic] inheritances where [sic] his ‘European heritage,’” ( see Def.’s Counter 56.1 ¶¶ 44–45). At the time Defendant transferred his funds to Migros Bank, he provided instructions that his retained UBS mail be sent to his son’s address in Lyss, Switzerland. (Pl.’s 56.1 ¶ 46; see Def.’s Counter 56.1 ¶ 46.)
Several years after Defendant had transferred his funds to Migros Bank, this bank advised him that he had to close his account there because the bank was “not doing business anymore with American citizen[s].” (Pl.’s 56.1 ¶ 47 (alteration in original).) Defendant then transferred his funds to another institution, Raiffeisen Bank, which he chose because it was one of a dwindling number of Swiss banks willing to do business with American customers. ( Id. ¶ 48.) Eventually, Raiffeisen Bank also stopped dealing with American customers, and Defendant transferred his funds to another Swiss bank, Privatbank Von Graffenried, which required fees that were “quite a bit more expensive.” ( ¶¶ 49–50 (record citation omitted).)
B. Procedural History
The Government filed its Complaint on August 29, 2018, ( see Dkt. No. 1), and Defendant answered on January 17, 2019, ( see Dkt. No. 7). Following an Initial Pretrial Conference on March 18, 2019, ( see Dkt. (minute entry for Mar. 18, 2019)), the Parties adopted a Case Management and Scheduling Order, ( see Dkt. No. 11), which was subsequently revised on July 25, 2019, ( see Dkt. No. 18), October 2, 2019, ( see Dkt. No. 20), October 30, 2019, ( see Dkt. No. 22), and January 15, 2020, ( see Dkt. No. 24). The case was referred to Magistrate Judge Paul E. Davison for general pretrial matters, including discovery. ( See Order (Dkt. No. 9).)
On March 12, 2020, the Government filed a Pre-Motion Letter seeking leave to file a motion for summary judgment. ( See Dkt. No. 25.) Pursuant to a briefing schedule set by the Court, ( see Dkt. No. 26), the Government filed the instant Motion and supporting papers on April 30, 2020, ( see Not. of Mot.; Pl.’s Mem. of Law in Supp. of Mot. for Summ. J. (“Pl.’s Mem.”) (Dkt. No. 30); Dolinger Decl.; Pl.’s 56.1). After the Court set a revised briefing schedule, ( see Dkt. No. 34), Defendant filed his opposition papers on June 30, 2020, ( see Def.’s Mem. of Law in Opp’n to Pl.’s Mot. (Dkt. No. 35); Sapinski Opp’n Decl.; Decl. of Heinz Gentges in Opp’n to Pl.’s Mot. (“Gentges Opp’n Decl.”) (Dkt. No. 37); Def.’s Counter 56.1). Reply papers were filed on July 15, 2020. ( See Dkt. No. 39.) On July 23, 2020, Defendant sought leave to file a revised opposition brief to comply with the Court’s 25-page limit for briefs, ( see Dkt. No. 40), the Court granted the request, ( see Dkt. No. 41), and Defendant subsequently filed his revised brief on the same day, ( see Def.’s Opp’n). On July 28, 2020, the Government requested leave to file an amended reply in response to Defendant’s revised opposition brief. ( Dkt. No. 43.) The Court granted the request, ( see Dkt. No. 44), and the Government filed its revised reply the same day, ( see Am. Reply Mem. of Law in Further Supp. of Pl.’s Mot. (“Pl.’s Reply”) (Dkt. No. 45)). On October 27, 2020, the Government filed a letter alerting the Court to supplemental authority from the Fourth Circuit Court of Appeals. ( Dkt. No. 46.)
II. Discussion
A. Standard of Review
Summary judgment is appropriate where the movant shows that “there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a);
see also Psihoyos v. John Wiley & Sons, Inc.
,
“To survive a [summary judgment] motion . . . , [a nonmovant] need[s] to create more
than a ‘metaphysical’ possibility that his allegations were correct; he need[s] to ‘come forward
with specific facts showing that there is a genuine issue for trial,’”
Wrobel v. County of Erie
, 692
F.3d 22, 30 (2d Cir. 2012) (emphasis omitted) (quoting
Matsushita Elec. Indus. Co. v. Zenith
Radio Corp.
,
“On a motion for summary judgment, a fact is material if it might affect the outcome of
the suit under the governing law.”
Royal Crown Day Care LLC v. Dep’t of Health & Mental
Hygiene
,
B. Analysis
Under 31 U.S.C. § 5314(a), part of the Bank Secrecy Act of 1970, the Treasury Secretary “shall require” U.S. residents or citizens “to keep records, file reports, or keep records and file reports,” when they “make[] a transaction or maintain[] a relation for any person with a foreign financial agency.” 31 U.S.C. § 5314(a). During the relevant time period in this case, the implementing regulation for this statute provided that:
[e]ach person subject to the jurisdiction of the United States . . . having a financial interest in, or signature or other authority over, a bank, securities[,] or other financial account in a foreign country shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists, and shall provide such information as shall be specified in a reporting form prescribed by the Secretary to be filed by such persons.
31 C.F.R. § 103.24,
amended and recodified at
31 C.F.R. § 1010.350 (2011). As noted, a
taxpayer subject to this requirement was required to submit Form TD F 90-22.1, the “FBAR,”
(
see
Pl.’s 56.1 ¶ 4), by “June 30 of each calendar year with respect to foreign financial accounts
exceeding $10,000 maintained during the previous calendar year,”
see id.
§ 103.27(c),
amended
and recodified at
31 C.F.R. § 1010.350 (2011).
[7]
Under 31 U.S.C. § 5321, the Treasury
Secretary may impose a civil penalty of up to $10,000 based on a taxpayer’s non-willful failure
to comply with the FBAR reporting requirement. 31 U.S.C. § 5321(a)(5)(B)(i). If, however,
a person “willfully violat[es], or willfully caus[es] any violation of,” this requirement, the
Secretary may impose a maximum penalty of either $100,000 or an amount equal to 50 percent
of the assets in the unreported account, whichever is greater.
See id.
§ 5321(a)(5)(C)(i);
see also
United States v. Bernstein
, –– F. Supp. 3d ––,
Defendant does not dispute that he failed to timely file an FBAR for calendar year 2007, and therefore violated the reporting requirement under 31 U.S.C. § 5314(a) and its implementing regulations. The only questions presented by the Government’s Motion are (1) whether Defendant’s violation was willful , and (2) whether the IRS appropriately calculated the penalty assessed against Defendant. The Court will consider each question in turn.
1. Whether Defendant Willfully Failed to File the FBAR
The term “willful” is not defined in the relevant statute or regulations,
see Bernstein
,
Numerous district courts around the country—including, most recently, the Eastern
District of New York—have adopted the same interpretation of this standard.
See Bernstein
,
Given this overwhelming weight of authority, the Court now holds that, for purposes of
the civil penalties provision in § 5321(a)(5)(C)(i), a willful violation of the FBAR reporting
requirement includes both knowing and reckless violations of the statute. Although “‘willfully’
is a word of many meanings whose construction is often dependent on the context in which it
appears,” the Supreme Court has observed that “where willfulness is a statutory condition of
civil liability, . . . it . . . cover[s] not only knowing violations of a standard, but reckless ones as
well.”
Safeco Ins. Co. of Am. v. Burr
,
“In the civil context, ‘recklessness’ encompasses an objective standard—specifically, ‘the
civil law generally calls a person reckless who acts or (if the person has a duty to act) fails to act
in the face of an unjustifiably high risk of harm that is either known or so obvious that it should
be known.”
Horowitz
,
Here, the Government argues that “the record includes numerous undisputed indications of [Defendant’s] willfulness,” namely:
(a) his submission of a federal tax return in which he falsely stated that he had no foreign accounts in 2007; (b) his failure to consult with his accountant and trust adviser concerning disclosure requirements or tax consequences of the UBS accounts—or even to reveal the existence of the accounts to them; (c) his interactions with UBS, including signing an instruction preventing UBS from investing in U.S. securities on his behalf in order to ‘avoid disclosure of [his] identity to the US Internal Revenue Service,’ using a numbered bank account, instructing the bank to hold his mail in Switzerland rather than mailing it to him in New York, and moving his money sequentially to three other Swiss banks as each stopped dealing with U.S.-citizen customers; and (d) his largely unexplained withdrawals of more than . . . one hundred thousand dollars in cash from his U.S. dollar-denominated UBS accounts.
(Pl.’s Mem. 2.) The Court will consider these factors only to the extent necessary to determine whether the Government has established Defendant’s liability on summary judgment.
a. Defendant’s 2007 Income Tax Return Here, Defendant concedes that his 2007 tax return erroneously stated that he did not have a financial interest in any foreign bank accounts. ( See Def.’s Counter 56.1 ¶ 36.) But, as noted, Defendant argues that neither he nor Surico manually made this representation, which was the result of a quirk in the software used by Surico. ( Def.’s Opp’n 13 (explaining that “[t]he ‘No’ answer was a computerized default because [Defendant’s] preparer did not provide anything on the input sheet from which the software company generated the physical tax return”).) This may be true, but there still is no dispute that Defendant received his finalized 2007 tax return from Surico and had an opportunity to review it before signing and submitting it to the IRS. As Defendant admits, however, “for 2007 and other hears [sic], he simply briefly looked at the comparison sheet [provided by Surico], and then signed the return and mailed it without any significant substantive review .” (Def.’s Counter 56.1 ¶¶ 26–27 (emphasis added).)
This admission dooms Defendant’s argument on summary judgment. Under similar facts, most courts have held that where, as here, a defendant provides false information regarding foreign bank accounts by failing to review carefully his income tax return, that defendant has shown reckless disregard toward, and thus has willfully violated, the FBAR reporting obligation.
In
Williams
, for example, although the defendant had signed his tax return and declared
under penalty of perjury that he had reviewed its contents and found them to be “true, accurate,
and complete,” he later testified that he had “never paid any attention to any of the written
words” in his return, including Question 7(a).
A number of lower courts have taken this same approach. In
United States v. Rum
, No.
17-CV-826,
Following the weight of authority from appellate and district courts around the country, the Court concludes that Defendant recklessly disregarded the FBAR reporting obligation by failing to carefully review his 2007 income tax return and erroneously representing that he had no financial interest in foreign accounts. Although Defendant acknowledges that courts have granted summary judgment based “primarily . . . on the Taxpayers’ failure to read their returns and thus, . . . [willfully] ignoring [their FBAR filing obligations],” he argues that cases such as Kimble and Rum erroneously granted summary judgment “because they essentially decided the disputed issue of willfulness by weighing the evidence and making credibility determinations” that should appropriately be resolved at trial. (Def.’s Opp’n 16.) Without directly addressing the persuasive appellate authority from the Fourth Circuit ( Williams ) or the Federal Circuit ( Norman ), Defendant urges the Court to follow a handful of district court cases that have gone the other way. But for the reasons that follow, the Court finds each of these cases factually distinguishable or analytically flawed.
In one such case,
United States v. Clemons
, No. 18-CV-258,
The second case cited by Defendant is
United States v. Flume
, No. 16-CV-73, 2018 WL
4378161 (S.D. Tex. Aug. 22, 2018). There, as here, the defendant relied on his tax specialist to
prepare his income tax return and then signed the document without carefully reviewing its
contents.
See id.
at *6. The court denied summary judgment, concluding there was a “genuine
dispute as to [the defendant’s] willfulness in failing to file timely FBARs reporting his UBS
account.” at *9. In reaching this conclusion, the court expressly “decline[d] to follow the
holdings of
Williams
or
McBride
,”
id.
at *7, in which courts had charged the defendants with
constructive knowledge of information in the tax returns they had signed,
see Williams
, 489 F.
App’x at 659 (observing that a taxpayer is charged with constructive knowledge of the contents
in a tax return he signs, and concluding that the defendant’s signature on such a return was
“prima facie evidence that he knew the contents of the return,” and that Question 7(a)’s
directions to consult the instructions for filing an FBAR “put [the defendant] on inquiry notice of
the FBAR requirement”);
McBride
,
First, the
Flume
court said this theory “ignores the distinction Congress drew between
willful and non-willful violations of [§] 5314,” and that, “[i]f every taxpayer, merely by signing a
tax return, is presumed to know of the need to file an FBAR, it is difficult to conceive of how a
violation could be non[-]willful.”
Flume
,
Second, the court in
Flume
claimed that it “would be exceeding its summary-judgment
authority if it presumed that [the defendant] ‘examined’ his returns, and thus knew about the
FBAR requirements by 2008, merely because he signed the returns under penalties of perjury.”
Id.
In light of the defendant’s subsequent testimony that he did not know about the FBAR
requirements until 2010, the court observed that it “is the factfinder’s role, not the [c]ourt’s at
summary judgment, to decide which of the two sworn statements carries more weight.”
Id.
In
this Court’s view, that was a dodge. Concluding as a matter of law that a defendant had
constructive knowledge of a particular requirement in 2008—despite his own, self-serving
testimony that he did not learn about this requirement until 2010—does not require a credibility
determination by the factfinder. It is well established that a taxpayer who signs his tax return
without reading it is nevertheless “charged with constructive knowledge of [its] contents.”
Hayman v. Comm’r
,
Third, the
Flume
court argued that the constructive-knowledge theory “is rooted in faulty
policy arguments.”
In explaining why factual questions precluded such a determination, the
Flume
court
relied exclusively on
Bedrosian v. United States
, No. 15-CV-5853,
Four months after
Flume
was decided, however, the Third Circuit concluded that
Bedrosian I
had not used the proper standard to evaluate the defendant’s conduct.
See
Bedrosian
,
On remand, the district court concluded that the defendant’s “actions were willful because he recklessly disregarded the risk that his FBAR was inaccurate.” Bedrosian II , 2020 WL 7129303, at *4. Relying principally on the Fourth Circuit’s decision in Horowitz , the district court observed: “even if the [defendants in Horowitz ] did not review their taxes, they signed them and were thus representing their answers to the government under penalty of perjury. [The defendant] also claims to not have reviewed his FBAR closely, but he like the [defendants in Horowitz ] signed the form.” Id. at *5. The objective recklessness standard, the court concluded, “suggest[s] that . . . a taxpayer is responsible for errors that would have been apparent had [he] reviewed such forms and checks closely[,]” and, under Third and Fourth Circuit authority, “claiming to not have reviewed [a] form does not negate recklessness.” Id.
Thus, quite apart from Flume ’s questionable treatment of the constructive-knowledge doctrine, its exclusive reliance on Bedrosian I ’s faulty application of the civil recklessness standard further undermines any persuasive authority this decision might have offered. The Court therefore declines to follow Flume .
Though Defendant relies primarily on
Flume
and
Clemons
, (
see
Def.’s Opp’n 16–21), he
also cites
United States v. de Forrest
,
As noted, Defendant recklessly disregarded the FBAR reporting obligation by failing to
review his 2007 tax return and inaccurately representing that he had no foreign accounts.
Because a “willful violation” of the FBAR statute “includes both knowing and reckless
violations,”
Horowitz
,
b. Other Indicia of Defendant’s Recklessness
Although Defendant “trusted” and had “years of dealing” with the same tax preparer,
(Def.’s Counter 56.1 ¶¶ 26–27), he never disclosed the existence of his foreign accounts or
sought his tax preparer’s advice regarding these accounts, (
id.
¶¶ 28–29). Facing similar facts,
courts have repeatedly held that such an omission constitutes evidence of recklessness or willful
blindness toward the FBAR reporting obligation.
See United States v. Ott
,
To explain why he never discussed his foreign accounts with his tax preparer, Defendant
invokes his long-held belief that this money was his “European heritage” and “had no relevance
to his U.S. tax reporting.” (Def.’s Counter 56.1 ¶ 29;
see also id.
¶¶ 28, 47–50.) But a
defendant’s subjective belief does not negate a finding of recklessness or willful blindness,
particularly where, as here, a defendant could easily have determined whether his belief was
accurate by speaking with a longtime tax preparer. In
Ott
, for example, the defendant—who was
“not a tax expert with any financial or legal training in tax accounting”—erroneously believed he
did not have to recognize gain on a foreign financial account until it was liquidated, a view that
was based on advice he had received from a tax preparer decades earlier.
Here, as in
Ott
and
Horowitz
, Defendant tries to defeat a finding of recklessness by
invoking a purportedly honestly held but erroneous belief regarding his foreign accounts. But
like the defendants in these other cases, Defendant, who possesses no financial or tax expertise
himself, made no effort to consult his longtime tax preparer to determine whether his belief was
correct. If anything, the case for recklessness is stronger here than in
Ott
or
Horowitz
. Whereas
the defendants in those cases at least attributed their erroneous beliefs to faulty advice they had
received from others, here, Defendant points only to his own vague notion that the UBS accounts
were his “European heritage,” and therefore stood beyond the reach of U.S. tax laws. ( Def.’s
Counter 56.1 ¶ 29.) In the many years he worked with Surico, Defendant easily could have
verified whether this notion was correct. His failure to do so suggests “a conscious effort to
avoid learning about [FBAR] reporting requirements[,]” or, at the very least, “reckless conduct in
disregard of potential reporting requirements.”
See Ott
,
Also significant is the fact that both of Defendant’s foreign accounts were set up as
numbered accounts with “hold mail” service. (
See
Pl.’s 56.1 ¶¶ 6, 10; Def.’s Counter 56.1 ¶¶ 6,
10, 15, 18–19.) Although he, like one of the defendants in
Horowitz
, essentially “denie[s]
[having] fill[ed] in the boxes on the agreement with the bank that elected the use of a numbered
account and the hold mail service, he surely became aware of their effect as he thereafter
communicated with the bank and received no mail from it.”
Finally, as was also true in Horowitz , Defendant’s “Swiss bank accounts were by no means small or insignificant and thus susceptible to being overlooked by [Defendant].” Id. Just as the foreign accounts in Horowitz served as the defendants’ “nest-egg retirement account,” id. , Defendant viewed his accounts as his “European heritage” that he hoped to pass on to his son, ( see Def.’s Counter 56.1 ¶¶ 23–24, 28). Accordingly, Defendant made frequent visits to Switzerland—including three trips in 2007—during which he made withdrawals from the accounts and retrieved his mail from UBS. ( See id. ¶¶ 11, 18–19, 37–42.) Cf. Horowitz , 978 F.3d at 90 (noting that the defendants “tended to [their] next egg, traveling twice to Switzerland specifically to look after it”).
Between Defendant’s false submission on his 2007 tax return and the additional factors
discussed above, the Court finds undisputed evidence to conclude that Defendant recklessly
disregarded the FBAR reporting obligation. The factors relied upon by the Court today are the
same as those which supported a grant of summary judgment in
Horowitz
.
2. Whether IRS Appropriately Calculated Defendant’s Penalty As noted, the IRS assessed two penalties against Defendant—one penalty for $679,365 based on the 4959 Account, and another penalty for $224,488 based on the 4337 Account. (Pl.’s 56.1 ¶¶ 52–53.) Defendant argues that the IRS improperly calculated the penalty assessed with respect to the 4337 Account. (Def.’s Counter 56.1 ¶ 53; Def.’s Opp’n 24.)
Under 31 U.S.C. § 5321, the maximum civil penalty assessed against a defendant who willfully violates the FBAR filing requirement “shall be increased” to either (i) $100,000 or (ii) 50 percent of the “balance in the [defendant’s foreign] account at the time of the violation[,]” whichever amount is greater. 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii). Under the Internal Revenue Manual, “[t]he date of a violation for failure to timely file an FBAR is the end of the day on June 30th of the year following the calendar year for which the accounts are being reported[,]” and thus, “[t]he balance in the account at the close of June 30th is the amount to use in calculating the filing violation.” IRM 4.26.16.6.5. Accordingly, to calculate the penalty amount for the 4959 Account, the IRS took 50 percent of the balance in that account as of June 30, 2008. (Dolinger Decl. Ex. I (“FBAR Penalty Lead Sheet”), at unnumbered 1 (Dkt. No. 31- 9).) However, because the IRS did not have the 4337 Account’s balance information as of June 30, 2008, it decided to calculate the penalty based on the account’s balance as of December 31, 2007, which was $448,975. ( See id. ) The question is whether that was a permissible exercise of agency discretion.
Courts have reviewed IRS penalty calculations for abuse of discretion under the
“arbitrary and capricious” standard of the Administrative Procedure Act (“APA”).
See
5 U.S.C.
§ 706(2)(A);
Jones v. United States
, No. 19-CV-4950,
Emphasizing the highly deferential standard of review, the Government has cited two
cases in which the reviewing court upheld the IRS’s penalty calculation. ( Pl.’s Mem. 23
(citing
Rum
,
The more persuasive authority comes from a recent pair of cases in which the IRS was
accused of using the wrong data when determining the defendant’s penalty. In
Schwarzbaum
,
for example, the IRS calculated the defendant’s FBAR penalty using “the highest aggregate
balance in each account for each year, [rather than] the balance in the account as of June 30 of
each year.”
This case falls more closely in the
Jones
-
Schwarzbaum
line of cases than it does in the
Rum
-
Williams
line of cases. Here, as in
Jones
and
Schwarzbaum
, the IRS failed to use the June
30 account balance when calculating the FBAR penalty for the preceding year, thereby departing
from its own internal guidelines. “It is a fundamental principle of administrative law[,]”
however, “that an agency is bound to adhere to its own regulations.”
Fuller v. Winter
, 538 F.
Supp. 2d 179, 186 (D.D.C. 2008);
see also Service v. Dulles
,
III. Conclusion
For the reasons stated above, the Government’s Motion is granted in part and denied in part. The Clerk of Court is respectfully directed to terminate the pending Motion, (Dkt. No. 29), and remand the case to the IRS for a proper determination of the penalty related to the 4337 Account.
SO ORDERED.
Dated: March 31, 2021
White Plains, New York
KENNETH M. KARAS United States District Judge
Notes
[2] A “numbered” account means that a number, instead of a name, identifies the account
holder in correspondence.
See United States v. Horowitz
,
[3] The Court pauses to reiterate its observation,
supra
note 1, that where the Parties
identify disputed facts but with semantic objections only or by asserting irrelevant facts, the
Court will not consider these purported disputes as creating genuine disputes of fact.
See Baity
,
[4] Defendant has challenged the admissibility of certain records pertaining to the 4959 Account. ( Def.’s [Corrected] Mem. of Law in Opp’n to Pl.’s Mot. (“Def.’s Opp’n”) 22–24 (Dkt. No. 42); Decl. of Richard J. Sapinski, Esq., in Opp’n to Pl.’s Mot. (“Sapinski Opp’n Decl.”) ¶¶ 15–18 (Dkt. No. 36).) The records in question, bearing the Bates Stamps USA0018 and USA0040–48, can be found within Exhibit B to the Dolinger Declaration filed in support of Plaintiff’s Motion for Summary Judgment. ( See Dolinger Decl. Ex. B (Dkt. No. 31-2); cf. Sapinski Opp’n Decl. Ex. 14 (Dkt. No. 36-15) (discussing and attaching the challenged records, a subset of which were included by the Government in Exhibit B to the Dolinger Declaration).) Because the Court has not relied on the challenged records in resolving this Motion, it need not reach Defendant’s admissibility argument.
[5] As he has done throughout his Counter 56.1 Statement, Defendant objects to this assertion without offering any substantive basis for the objection. Here, for example, Defendant contends that “[u]nlike the form relating to [the 4959 Account] signed in November 2001[,] the form for [the 4337 Account] says nothing about disclosing or not disclosing the signer’s identity to the IRS.” (Def.’s Counter 56.1 ¶ 17.) Maybe so, but the Government’s assertion in ¶ 17 is not to the contrary. ( Pl.’s 56.1 ¶ 17.)
[6] Defendant also explains that “[u]nlike the similar form completed in November 2001 for [the 4959 Account,] which [Defendant] at least partially completed in his own hand, the form for [the 4337 Account] is fully typed except for [Defendant’s] signature . . . . Among the typed entries is an ‘x’ in the box directing UBS to hold the account – related mail.” (Def.’s Counter 56.1 ¶¶ 18–19.) Defendant does not explain—and the Court is unaware—what significance this distinction might hold, nor is it clear why this would provide a basis to object to the Government’s assertion. ( See id. )
[7] “The regulations relating to the FBAR were formerly published at 31 C.F.R. §§ 103.24
and 103.27, but were recodified in a new chapter effective March 1, 2011.”
United States v.
Williams
,
[8] The government subsequently conceded that the defendant was not liable for the 2012
FBAR penalty.
Jones
,