United States v. GentgesUnited States v. Gentges
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
OPINION & ORDER
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,
A. Factual History
Unless otherwise noted, the following facts are taken from the Parties’ Rule 56.1 Statements and Counterstatements. (See 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. 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
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. (Id. ¶ 54.)
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. (Id. ¶ 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
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
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. (Id. ¶ 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
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
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
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. (Id. ¶ 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. (See 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
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. (Id. ¶ 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.” (See Def.‘s Counter 56.1 ¶¶ 37–42.)
Sometime around September 2008, Defendant decided to move his Switzerland accounts from UBS to another bank. (See 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.” (Id. ¶¶ 49–50 (record citation omitted).)
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. (See 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.
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.”
“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., 475 U.S. 574, 586–87 (1986)), “and cannot rely on the mere allegations or denials contained in the pleadings,” Guardian Life Ins. Co. v. Gilmore, 45 F. Supp. 3d 310, 322 (S.D.N.Y. 2014) (citation and quotation marks omitted); see also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009) (“When a motion for summary judgment is properly supported by documents
“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, 746 F.3d 538, 544 (2d Cir. 2014) (citation and quotation marks omitted). At this stage, “[t]he role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried.” Brod, 653 F.3d at 164 (citation omitted). Thus, a court‘s goal should be “to isolate and dispose of factually unsupported claims.” Geneva Pharm. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 495 (2d Cir. 2004) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986)). However, a district court should consider only evidence that would be admissible at trial. See Nora Beverages, Inc. v. Perrier Grp. of Am., Inc., 164 F.3d 736, 746 (2d Cir. 1998). “[W]here a party relies on affidavits . . . to establish facts, the statements ‘must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant . . . is competent to testify on the matters stated.‘” DiStiso v. Cook, 691 F.3d 226, 230 (2d Cir. 2012) (quoting
B. Analysis
Under
[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.
Defendant does not dispute that he failed to timely file an FBAR for calendar year 2007, and therefore violated the reporting requirement under
1. Whether Defendant Willfully Failed to File the FBAR
The term “willful” is not defined in the relevant statute or regulations, see Bernstein, 2020 WL 5517315, at *4, and the Second Circuit has not yet addressed this standard under the civil penalty provision of the FBAR statute. However, the Circuit Courts for the Third, Fourth, and Federal Circuits have all considered this standard and are in agreement regarding its meaning. According to these courts, “willfulness” under
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, 2020 WL 5517315, at *5–7 (adopting Bedrosian‘s treatment of the “willfulness” standard under the civil penalty provision of the FBAR statute); United States v. Garrity, 304 F. Supp. 3d 267, 273–74 (D. Conn. 2018) (gathering authority in support of the court‘s “conclu[sion] that the Government may prove the element of willfulness in [the context of a civil FBAR penalty] with evidence that [the defendant] acted recklessly“); United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017) (observing that, for purposes of establishing willfulness in the context of a civil FBAR penalty, “willful blindness or reckless disregard satisfies the required mental state“); United States v. Katwyk, No. 17-CV-3314, 2017 WL 6021420, at *4 (C.D. Cal. Oct. 23, 2017) (“A reckless disregard to statutory duty may be sufficient to satisfy willfulness [for purposes of collecting a civil FBAR penalty].“); United States v. McBride, 908 F. Supp. 2d 1186, 1204 (D. Utah 2012) (holding, in the context of a civil FBAR penalty, that willfulness “covers not only knowing violations of a standard, but reckless ones as well” (citation and quotation marks omitted)). Notably, Defendant does not contest this interpretation of the willfulness standard, conceding that “in the civil FBAR penalty context, willfulness includes both knowing and reckless conduct.” (Def.‘s Opp‘n 13.)
Given this overwhelming weight of authority, the Court now holds that, for purposes of the civil penalties provision in
“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, 978 F.3d at 89 (alteration omitted) (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)); see also Bedrosian, 912 F.3d at 153 (observing same standard). “The civil law uses it for the same purpose that the criminal law sometimes uses ‘willful blindness,’ that is, to prevent an actor from denying the patently obvious.” Bernstein, 2020 WL 5517315, at *7 (citing Viacom Int‘l, Inc. v. YouTube, Inc., 676 F.3d 19, 35 (2d Cir. 2012)). Thus, “willful blindness or reckless disregard satisfies the required mental state” for purposes of a willful violation of the FBAR reporting statute. Kelly-Hunter, 281 F. Supp. 3d at 124. “At the same time,” however, “civil recklessness requires proof of something more than mere negligence: ‘It is the high risk of
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. (See 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
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). See 489 F. App‘x at 659. The Fourth Circuit concluded that the defendant had therefore “made a conscious effort to avoid learning about reporting requirements“—conduct that “constitute[d] willful blindness to the FBAR requirement.” See id. at 659 (citation and quotation marks omitted). Although Williams was an unpublished decision, the Fourth Circuit explicitly “adhere[d] to [Williams‘s] interpretation of
A number of lower courts have taken this same approach. In United States v. Rum, No. 17-CV-826, 2019 WL 3943250 (M.D. Fla. Aug. 2, 2019), for example, the court concluded on a motion for summary judgment that the defendant’s “pattern of signing his tax returns without reviewing them, along with falsely answering ‘no’ to question 7(a)[,] suffices to support a finding of willfulness to report under the FBAR,” id. at *8, report and recommendation adopted, 2019 WL 5188325 (M.D. Fla. Sept. 26, 2019), appeal docketed, No. 19-14464 (11th Cir. Nov. 7, 2019). Likewise, in Kimble v. United States, 141 Fed. Cl. 373 (Fed. Cl. 2018), the court held—again on summary judgment—that a taxpayer had “exhibited a ‘reckless disregard’ of the legal duty . . . to report foreign bank accounts” where she “answered ‘No’ to Question 7(a) on her 2007 income tax return” without reviewing the return for accuracy, id. at 385–86, appeal docketed, No. 19-1590 (Fed. Cir. Feb. 26, 2019); see also McBride, 908 F. Supp. 2d at 1212–13 (observing that “even if [the defendant] were not charged with knowledge of the contents of a tax return by virtue of having signed it, the fact that [he] signed a federal income tax return without having an understanding as to its contents, while simultaneously engaging in transactions with foreign entities designed to avoid or defer tax, constitutes evidence of either willful blindness or recklessness”). Similarly, a district court in the Third Circuit recently concluded that a defendant who submitted inaccurate information on an FBAR after failing to review the form carefully had willfully violated the FBAR statute “because he recklessly disregarded the risk that his FBAR was inaccurate.” Bedrosian v. United States, No. 15-CV-5853, 2020 WL 7129303, at *4–5 (E.D. Pa. Dec. 4, 2020) (“Bedrosian II”) (noting that, “based on Third and Fourth Circuit precedent, claiming to not have reviewed [a] form does not negate recklessness”).
In one such case, United States v. Clemons, No. 18-CV-258, 2019 WL 7482218 (M.D. Fla. Oct. 9, 2019), the defendant had “answered yes to question 7(a) on Schedule B” of his 2008, 2009, and 2010 tax returns, and had identified the countries in which his accounts were held. See id. at *8. He also maintained that the foreign account in question “was opened with money for which he had already paid U.S. taxes,” and that he had initially opened the account because he planned to move to Europe. Id. at *7. His reason for not filing an FBAR was that he was “unaware of [this] obligation . . . because he was not prompted by TurboTax to do so.” Id. Under these circumstances, the court concluded that questions of fact precluded summary judgment. See id. at *8. Although Clemons does share some factual similarities with the instant case—for example, the defendant in Clemons also testified that he did not recall asking UBS to
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.” Id. 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
First, the Flume court said this theory “ignores the distinction Congress drew between willful and non-willful violations of [
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, 992 F.2d 1256, 1262 (2d Cir. 1993) (concluding that a defendant who asserts an innocent-spouse defense to tax evasion cannot claim ignorance regarding the contents of the tax returns she signed); accord Greer v. Comm’r, 595 F.3d 338, 347 n.4 (6th Cir. 2010) (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”); United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (observing that a defendant who “signed [a] fraudulent tax form . . . may be charged with knowledge of its contents”); Park v. Comm’r, 25 F.3d 1289, 1299 (5th Cir. 1994) (“Although [the appellant] signed the return without reviewing it, by signing the return she undertook responsibility for it which she cannot escape by simply ignoring its contents.”). On summary judgment, courts may—and regularly do—impute
Third, the Flume court argued that the constructive-knowledge theory “is rooted in faulty policy arguments.” 2018 WL 4378161, at *7. The government had argued that by disregarding the constructive-knowledge doctrine, the court would “encourage taxpayers to sign tax returns without reading them in the hope of avoiding any negative consequences from inaccurate reporting.” Id. (record citation omitted). The court rejected this argument, noting that “a taxpayer who tried to escape liability in this way might be found willful on a recklessness theory[,]” and thus, “there is no policy need to treat constructive knowledge as a substitute for actual knowledge.” Id. Assuming this conclusion is true, it still suggests the court could have
In explaining why factual questions precluded such a determination, the Flume court relied exclusively on Bedrosian v. United States, No. 15-CV-5853, 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017) (“Bedrosian I”), in which a Pennsylvania district court held, after trial, that the defendant had not willfully violated the FBAR requirement by submitting an inaccurate version of the FBAR itself, which he had failed to closely examine, see id. at *6–7. Invoking Bedrosian I for the proposition that “recklessness is a high bar,” the Flume court reasoned that because the defendant “had a tax-return preparer, it was arguably not reckless for him to . . . [ignore] the FBAR instructions,” and that it was “not so obvious that he took an unjustifiably high risk in doing so.” Flume, 2018 WL 4378161, at *8–9.
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, 912 F.3d at 153. The Third Circuit explained, for example, that Bedrosian I’s analysis “impl[ied] [that] the ultimate determination of non-willfulness was based on findings related to [the defendant’s] subjective motivations and the overall ‘egregiousness’ of his conduct, which are not required to establish willfulness in this context.” Id. Moreover, the Third Circuit was left with “the impression [that the district court] did not consider whether [the defendant’s] conduct satisfies the objective recklessness standard articulated in similar contexts.” Id. The court therefore remanded the case for further consideration. See id.
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
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, 463 F. Supp. 3d 1150 (D. Nev. 2020), another case in which the defendant had signed her tax return without carefully reviewing its contents, see id. at 1158. (See Def.’s Opp’n 16.) The tax return erroneously omitted the defendant’s interest in a foreign bank account, and the defendant failed to file the required FBAR. See 463 F. Supp. 3d at 1158. Despite this fact, the court concluded that the “[d]efendant’s purported recklessness and willful blindness [were] grounded in genuinely disputed material facts,” and thus declined to hold as a matter of law that the defendant’s FBAR violation was willful. Id. at 1160. While the record in de Forrest contained a number of factual disputes, particularly regarding whether and when the defendant’s tax preparer advised her of the FBAR requirement, see id. at 1159–60, the court failed to distinguish—or, for that matter, even address—the considerable case authority holding that a taxpayer’s submission of an erroneous tax return he or she signed is per se
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, 978 F.3d at 88, the Court concludes that Defendant willfully violated the FBAR reporting obligation. Though the analysis could end here, the Court will also consider several additional factors that support granting summary judgment to the Government.
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, 441 F. Supp. 3d 521, 530 (E.D. Mich. 2020) (finding that the defendant’s “failure to discuss his foreign investments with his long-time accountant . . . indicate[d] ‘a conscious effort to avoid learning about reporting requirements’” (citation omitted)); Horowitz, 361 F. Supp. 3d at 529 (finding that the defendants’ failure to discuss the tax liabilities on their foreign accounts with “the accountants they [had] entrusted with their taxes for years . . . easily show[ed] ‘a conscious effort to avoid
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. 441 F. Supp. 3d at 530. According to the court, the defendant’s “lack of experience in tax accounting suggests that he knew, or should have known, that relying solely on advice he received as a young adult, without consulting his accountant, was reckless conduct in disregard of potential reporting requirements.” Id. “Therefore,” the court concluded, “[the defendant’s] claim that he relied on his own beliefs as to his legal reporting obligations, without verifying those beliefs with his long-
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. (See 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
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.” 978 F.3d at 90. “This conduct further evinces more than mere negligence.” Id.
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. See 978 F.3d at 89–90. There, as here, “the record indisputably establishes not only that [Defendant] clearly ought
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
Courts have reviewed IRS penalty calculations for abuse of discretion under the “arbitrary and capricious” standard of the
Emphasizing the highly deferential standard of review, the Government has cited two cases in which the reviewing court upheld the IRS’s penalty calculation. (See Pl.’s Mem. 23 (citing Rum, 2019 WL 3943250, at *9; Williams, 2014 WL 3746497, at *1).) Both, however, are factually distinguishable. Whereas the instant challenge concerns the IRS’s alleged departure from cut-and-dry instructions in its own internal guidelines, the cases cited by the Government involve the agency’s substantive exercise of discretion in matters where it is given significant
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.” See 2020 WL 1316232, at *13. Having found that “the IRS used the incorrect base amounts to calculate the FBAR penalties[,]” the court concluded that these penalties were
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, 354 U.S. 363, 388 (1957) (stating that an agency may not “proceed without regard” to the “substantive and procedural standards” it has “impose[d] upon [itself]”); Salazar v. King, 822 F.3d 61, 76 (2d Cir. 2016) (“[W]here the rights of individuals are affected, it is incumbent upon agencies to follow their own procedures.” (citation omitted)); Frizelle v. Slater, 111 F.3d 172, 177 (D.C. Cir. 1997) (observing that
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
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, 51 F. Supp. 3d at 418 (“Many of [the] [p]laintiff‘s purported denials—and a number of his admissions—improperly interject arguments and/or immaterial facts in response to facts asserted by [the] [d]efendants, often speaking past [the] [d]efendants’ asserted facts without specifically controverting those same facts.“); id. (“[A] number of [the] [p]laintiffs’ purported denials quibble with [the] [d]efendants’ phraseology, but do not address the factual substance asserted by [the] [d]efendants.“); Pape v. Bd. of Educ. of Wappingers Cent. Sch. Dist., No. 07-CV-8828, 2013 WL 3929630, at *1 n.2 (S.D.N.Y. July 30, 2013) (explaining that the plaintiff‘s 56.1 statement violated the rule because it “improperly interjects arguments and/or immaterial facts in response to facts asserted by [the] [d]efendant, without specifically controverting those facts,” and “[i]n other instances, . . . neither admits nor denies a particular fact, but instead responds with equivocal statements“); Goldstick v. The Hartford, Inc., No. 00-CV-8577, 2002 WL 1906029, at *1 (S.D.N.Y. Aug. 19, 2002) (noting that the plaintiff‘s 56.1 statement “does not comply with the rule” because “it adds argumentative and often lengthy narrative in almost every case[,] the object of which is to ‘spin’ the impact of the admissions [the] plaintiff has been compelled to make“).
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., 258 F.3d 62, 73 (2d Cir. 2001) (explaining that the court is not required to search the record for genuine issues of material fact that the party opposing summary judgment failed to bring to the court‘s attention); Baity, 51 F. Supp. 3d at 418 (collecting cases holding that