The United States District Court for the District of Utah, Central Division, on November 8, 2012, Judge Nuffer, granted the United States its motion for summary judgment for the taxpayer-defendant’s, Jon Mc Bride, willful failure to report his interest in foreign bank accounts in contravention of 31 U.S.C. Section 5314 for the years 2001 and 2002. (U.S. v. McBride, No. 2:09-cv-00378 (D. Utah 2012). Penalties were assessed of approximately $200,000 plus interest.
Mc Bride had engaged in a scheme to launder U.S. business income through foreign shell companies that he established. He employed a financial management firm to set up accounts in the name of several international business corporations to shelter or non-report, U.S. business income and then repatriated the funds. He did not file FBAR reports for the tax years in which the accounts existed. The government filed a civil suit to collect an FBAR penalty from Jon McBride, alleging that he had failed to properly report interest in several foreign accounts for the 2000 and 2001 tax years. McBride had entered into an elaborate scheme to launder his U.S. business income through foreign shell companies.
A key question before the Court was the standard to be used in whether the government’s request to impose FBAR penalties in the subject proceeding would be granted. Would it be a “by a preponderance of the evidence” standard, or a “clear or convincing standard”? Granted the case was civil in nature. Judge Nuffer cited U.S. v. Williams, No. 1:09-cv-00437 (E.D. Va. 2010) as the only court to consider this issue. That court held that because the FBAR penalty is monetary only, preponderance was the correct standard, pointing to acceptance of that standard by federal appellate courts in other civil tax penalty cases. The Utah federal district court in the Mc Bride case agreed. In applying this standard it held that the government met its burden of proof based on a preponderance of the evidence as to the elements of: (i) ownership of the funds; (ii) willful failure of the defendant-taxpayer to file FBAR reports either by reckless disregard of a known duty or by willful blindness or neglect to read the contents of the income tax return; and (iii) the taxpayer was found to have purposely kept this information about his foreign bank accounts (and tax evasion scheme) from his tax return preparer. See Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2068-69 (2011) ("persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts") (citing United States v. Jewell, 532 F.2d 697, 700 (9th Cir. 1976) (en banc)). The civil penalty for FBAR willful failures to file is up to 50% of the account balance for each year the offense is committed.
After making a substantial number of findings of fact, the Court then addressed the standard of proof and then the taxpayer’s willful failures to file the FBAR reports. f. McBride's Failure to Report His Interest in the Foreign Accounts was willful. See Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997) (defining "willfulness" in the context of a civil penalty for willfully failing to disclose required information to the IRS as conduct that "requires only that a party act voluntarily in withholding requested information, rather than accidentally or unconsciously."); accord Denbo v. United States, 988 F.2d 1029, 1034-35 (10th Cir. 1993) (defining "willful" conduct as a "voluntary, conscious and intentional decision") (quoting Burden v. United States, 486 F.2d 302, 304 (10th Cir. 1973), cert. denied, 416 U.S. 904 (1974)). Conduct that evidences "reckless disregard of a known or obvious risk" or a "failure to investigate . . . after being notified [of the violation]" also satisfies the civil standard for willfulness in such contexts.
Willfulness may also "be proven through inference from conduct meant to conceal or mislead sources of income or other financial information." United States v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991). Moreover, willful intent may be proved by circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492, 499 (1943)).
The Court found that the defendant was fully aware that he was engaged in a plan to avoid income taxes by hiding his interest in assets in overseas shell corporations and also the FBAR filing requirements, which filings would in effect interfere with his scheme.
On this issue of imputing willful failure to file FBAR reports when taxpayer check-the-foreign bank account “no” on their income tax return, the Court surveyed the law in this area and turned to United States v. Williams, supra, as the “only case to examine willfulness in the context of a civil FBAR penalty”. In Williams, the Fourth Circuit recently held that a taxpayer was willful in failing to comply with FBAR requirements when he signed a federal tax return that failed to disclose the existence of foreign accounts, "thereby declaring under penalty of perjury that he had 'examined this return and accompanying schedules and statements' and that, to the best of his knowledge the return was 'true, accurate, and complete.'" The Fourth Circuit reversed the district court's findings of fact as "clearly erroneous," on the grounds that the district court failed to consider the taxpayer's signature on his returns sufficient evidence of his knowledge of his failure to comply with the FBAR requirement. "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." At a minimum, "line 7a's directions to '[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1'" puts a taxpayer "on inquiry notice of the FBAR requirement." Id. As a result, the Fourth Circuit held that Williams's explicit statement that he never consulted Form TD F 90-22.1 or its instructions, never read line 7a, and "never paid any attention to any of the written words on his federal tax return" constituted a "'conscious effort to avoid learning about reporting requirements,'" and his false answers on his federal tax return "evidence conduct that was 'meant to conceal or mislead sources of income or other financial information.'" Id. (quoting Sturman, 951 F.2d at 1476).
A taxpayer's signature on a return is sufficient proof of a taxpayer's knowledge of the instructions contained in the tax return form and in other contexts. "In general, individuals are charged with knowledge of the contents of documents they sign -- that is, they have 'constructive knowledge' of those contents." Consol. Edison Co. of N.Y., Inc. v. United States, 221 F.3d 364, 371 (2d. Cir. 2000).
While there are cases that have stated that "[a] taxpayer's signature on a return does not in itself prove his knowledge of the contents, but knowledge may be inferred from the signature along with the surrounding facts and circumstances, and the signature is prima facie evidence that the signer knows the contents of the return." See, e.g., United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir 1991); accord Hayman v. Comm'r, 992 F.2d 1256, 1262 (2d Cir. 1993) (holding that where a taxpayer "claims to have signed the returns without reading them, [he or] she nevertheless is charged with constructive knowledge of their contents").
Inferring knowledge of the contents of a return signed by the taxpayer is consistent with the conclusion drawn by the Sixth Circuit in United States v. Sturman, which held that, "It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms," including the reference on Schedule B to the FBAR. 951 F.2d at 1477. Moreover, the line of criminal cases dealing with whether or not a taxpayer's signature on a return demonstrates knowledge of the contents has upheld convictions where the jury was permitted to infer knowledge of the contents of the return from the signature on the return alone. See, e.g., United States v. Olbres, 61 F.3d 967, 971 (1st Cir. 1995) (in prosecution for tax fraud, "jury may permissibly infer that a taxpayer read his return and knew its contents from the bare fact that he signed it"); United States v. Romanow, 509 F.2d 26, 27 (1st Cir. 1975) (jury could believe from the uncontested signature of the defendant on return that he had read the form, despite his claim that he merely signed the return that was prepared by bookkeeper).
Judge Nuffer also cited a recent Northern District Court of Illinois case, Thomas v. UBS, AG, No. 1C4798, 2012 WL 2396866, where the plaintiffs alleged that a bank had a duty to inform its depositors of the FBAR requirement. In response, the Thomas court rejected the plaintiffs’ argument of justifiable or reasonable reliance on any advice given (or not given) by the bank in interpreting the instructions on the tax return.
The District Court in McBride held that the defendant had knowledge of his obligation to file FBAR reports for the foreign accounts, and failed to do so. Such knowledge can easily be imputed. Indeed the tax return speaks to such obligation and filing of Form TD F 90-22.1. Accordingly, McBride is charged with having reviewed his tax return and having understood that the federal income tax return asked if at any time during the tax year, he held any financial interest in any foreign bank or financial account. McBride's willfulness is supported by evidence of his false statements on his tax returns for both the 2000 and the 2001 tax years, and his signature, under penalty of perjury, that those statements were complete and accurate. Moreover, McBride actually read the marketing and promotional materials provided to him by the financial advisor who helped him carry out the scheme that under federal law he was required to report his interest in foreign banks and financial accounts. This led to the finding by Judge Nuffer that McBride “had actual knowledge of his duty to file an FBAR for any account in which he had a financial interest prior to filing his 2000 and 2001 tax returns. McBride even testified that "the purpose of Merrill Scott" was to avoid disclosure and reporting the existence of interests "because . . . if you disclose the accounts on the form, then you pay tax on them, so it went against what [he] set up Merrill Scott for in the first place.’ "
If that wasn’t enough, the Court also found McBride’s conduct reckless sufficient to rise to the level of willfull. Continuing on, the Court stated that “’[A]n individual's actions may be deemed willful if the individual recklessly ignores the risk that conduct is illegal by failing to investigate whether the conduct is legal. Taxpayers have long been cautioned that they have a responsibility to "investigate claims when they are likely 'too good to be true.'" Pasternak v. Comm'r, 990 F.2d 893, 903 (6th Cir. 1993) .
The Court did not stop here but went further to block any escape route on appeal for the defendant. The effort of the Court to go over every path that leads to a finding to willfulness and precluding the presence of any path that would excuse the taxpayer-defendant was quite obvious.