First Taxpayer Victory in a “Willful” FBAR Penalty Case ......possible resolution of this case...

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Taxpayers with unreported foreign ac-counts have faced a lot of bad news inrecent years, as the U.S. governmentclaimed victory in four straight casesstarting in 2012, asserting the highestpossible penalties for “willful” violationsof the duty to file Forms TD F 90-22.1or FinCEN Forms 114 (FBARs). ingschanged in late 2017, though, when ataxpayer managed to buck the trend,convincing a district court that, despitea fairly significant amount of unfavorableevidence, the omission of a multimilliondollar account from his 2007 FBAR con-stituted mere negligence, not willful be-havior.

is case, Bedrosian,1 has triggeredconsiderable excitement within the taxcommunity, which is both logical andpredictable. e job now is to closelyanalyze the case to understand whether,or to what extent, the positive result inBedrosian can benefit other taxpayers

facing steep FBAR penalties assessed bythe IRS and litigated by the U.S. Depart-ment of Justice (DOJ). is task is farless exciting than simply jumping onthe Bedrosian bandwagon, and it requiresa detailed review of the first four taxpayerlosses in the FBAR arena. is two-partarticle embraces the challenge and, forthose readers with the stamina to getthrough all the material, describes theevolution of civil “willful” FBAR cases,with insights available only to those dili-gent enough to scour all documents filedwith the courts in each case. Part one ofthis article will discuss the backgroundof FBAR penalties and the first two tax-payer loss cases.

Background on FBAR Duties and PenaltiesCongress enacted the Bank SecrecyAct in 1970.2 One purpose of this leg-

First Taxpayer Victory ina “Willful” FBAR PenaltyCase: Analyzing theSignificance of Bedrosianfor Future Foreign AccountDisputes (Part 1)

HALE E. SHEPPARD

After a series of disappointing taxpayer losses in “willful” FBAR cases, tax-payers finally scored a victory in Bedrosian.

EDITED BY HERBERT H. ALPERT, SANFORD H. GOLDBERG, AND MICHAEL J. MILLER

INTERNATIONAL I

islation was to require the filing of cer-tain reports, l ike the FBAR, wheredoing so would be helpful to the U.S.government in carrying out criminal,tax, and regulatory investigations.3 Ap-plicable law, regulations, and FBARinstructions require the filing of anFBAR in cases where: (1) a U.S. person,(2) had a direct financial interest in,an indirect financial interest in, sig-nature authority over, or some othertype of authority over, (3) one or morefinancial accounts, (4) located in a for-eign countr y, (5) and the aggregatevalue of such account or accounts ex-ceeded $10,000, (6) at any point duringthe calendar year at issue.4

Concerned with widespread non-compliance, the U.S. government hastaken certain actions in recent years.Notably, the Treasury Department trans-ferred authority to enforce FBAR dutiesto the IRS in 2003.5 e IRS is now em-powered to investigate potential FBARviolations, issue summonses, assess civilpenalties, issue administrative rulings,and take “any other action reasonablynecessary” to enforce the FBAR rules.6

Congress, for its part, enacted newFBAR penalty provisions in 2004 as partof the American Jobs Creation Act (JobsAct).7 Under the law in existence beforethe Jobs Act, the government could assertcivil penalties against taxpayers onlywhere it could demonstrate that they“willfully” violated the FBAR rules.8 Ifthe government managed to satisfy thishigh evidentiary standard, it could im-pose relatively small FBAR penalties,ranging from $25,000 to $100,000.9

anks to the Jobs Act, the IRS maynow impose a civil penalty on any personwho fails to file an FBAR when required,period.10 In the case of non-willful vio-lations, the maximum penalty is$10,000.11 e Jobs Act calls for highermaximum penalties where willfulnessexists. Specifically, in situations wherea taxpayer deliberately failed to file anFBAR, the IRS may now assert a penalty

equal to $100,000 or 50% of the balancein the account at the time of the violation,whichever is greater.12 Given the astro-nomical balances in some unreportedaccounts, FBAR penalties under the JobsAct can be enormous.

Generally, U.S. citizens and residentshave four main duties when they holda reportable interest in a foreign financialaccount: (1) report all income generatedby the account on their federal incometax return (i.e., Form 1040, U.S. Indi-vidual Income Tax Return); (2) checkthe “yes” box in Part III, Foreign Ac-counts and Trusts, of Schedule B, Interestand Ordinary Dividends, to Form 1040to disclose the existence and locationof the foreign account; (3) electronicallyfile an FBAR; and (4) report the foreignaccount on a Form 8938, Statement ofSpecified Foreign Financial Assets, de-pending on the facts.13

With respect to the second duty de-scribed above, Part III of Schedule B toForm 1040 contains an FBAR inquiryand a cross-reference. e IRS hasslightly modified and expanded this lan-guage over the years, with the materialsfor 2016 stating the following:

At any time during 2016, did youhave a financial interest in or a signa-ture aut hority over a financi alaccount (such as a bank account,securities account, or brokerageaccount) located in a foreign country?See instructions. If “Yes,” are yourequired to file FinCEN Form 114,

Report of Foreign Bank and FinancialAccounts (FBAR), to report thatfinancial interest or signature author-ity? See FinCEN Form 114 and itsinstructions for filing requirementsand exceptions to those require-ments. If you are required to file aFinCEN Form 114, enter the name ofthe foreign country where the finan-cial account is located.

First Case Addressing “Willful” FBAR Civil Penalties: Williamse first case concerning the impositionof a civil “willful” FBAR penalty wasWilliams, a multi-year, multi-issue case,with stops in the U.S. Tax Court(Williams I),14 the district court (WilliamsII),15 and, ultimately, the Fourth CircuitCourt of Appeals (Williams III).16

The Key Facts in WilliamsSynthesizing various court documentsand decisions, the facts underlying theWilliams cases are as follows.17 e tax-payer was a U.S. citizen at all relevanttimes. He earned an undergraduate de-gree from the University of North Car-olina, followed by a law degree from oneof the top law schools in the country,New York University. He began his legalcareer as an associate attorney with amajor international firm. He later workedfor Mobil Oil Corporation, where he

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Hale E. Sheppard, B.S., M.A., J.D., LL.M., LL.M.T.,is a Shareholder in the Tax Controversy Section ofChamberlain Hrdlicka, Chair of the InternationalTax Group, and Member of the ExecutiveCommittee. Hale specializes in tax audits, taxappeals, and tax litigation. You can reach Hale byphone at (404) 658-5441 or by e-mail [email protected].

1120 AFTR2d 2017-5832 (DC PA, 2017).

2P.L. 91-508, Title I and Title II (10/26/70).

3Id. at section 202.

431 USC section 5314; 31 CFR section 1010.350(a).

568 Fed. Reg. 26489 (5/16/03).

631 CFR section 103.56(g), 68 Fed. Reg. 26489(5/16/03).

7P. L. 108-357 (10/22/04).

831 USC section 5321(a)(5)(A) (as in effect before10/22/04).

931 USC section 5321(a)(5)(B)(ii) (as in effect be-fore 10/22/04).

1031 USC section 5321(a)(5)(A).

1131 USC section 5321(a)(5)(B)(i). This penalty can-not be asserted if the taxpayer was “non-willful”and there was “reasonable cause” for the viola-tion. See 31 USC section 5321(a)(5)(B)(ii).

1231 USC section 5321(a)(5)(C)(i).

13For a detailed analysis of the Form 8938 filingrequirement, see Sheppard, “The New Duty toReport Foreign Financial Assets on Form 8938:Demystifying the Complex Rules and SevereConsequences of Noncompliance,” 38(3) Inter-national Tax Journal 11 (2012); Sheppard, “Form

8938 and Foreign Financial Assets: A Compre-hensive Analysis of the Reporting Rules after IRSIssues Final Regulations,” 41(2) International TaxJournal 25 (2015); and Sheppard, “Specified Do-mestic Entities Must Now File Form 8938: Sec-tion 6038D, New Regulations in 2016, and Ex-panded Foreign Financial Asset Reporting,”42(3) International Tax Journal 5 (2016).

14Williams, 131 TC 54 (2008).

15Williams, 106 AFTR2d 2010-6150 (DC Va., 2010).

16Williams, 489 Fed. Appx. 655, 110 AFTR2d 2012-5298 (CA-4, 2012).

17The facts were derived from various pleadings,briefs, and other documents filed by the partiesin Williams I, Williams II, and Williams III, as wellas the decisions in Williams, TCM 2009-81 (TaxCourt decision granting the IRS’s motion for par-tial summary judgment on the issue of whetherthe taxpayer’s guilty plea to tax evasion in theearlier criminal trial collaterally estopped himfrom contesting in the subsequent civil tax litiga-tion that he fraudulently underpaid his federalincome taxes for 1993 through 2000); andWilliams, TCM 2011-89 (Tax Court decision up-holding the federal income taxes and civil penal-ties for 1993 through 2000).

NOTES

held various legal and business positionsover a span of some 25 years.

In 1991, the taxpayer, on Mobil’s be-half, started exploring strategic businessopportunities in the former republicsof the Soviet Union. Two years later, in1993, the taxpayer opened two accountsat Credit Agricole Indosuez, S.A. (thenknown as Banque Indosuez) in the nameof ALQI Holdings, Ltd. (ALQI), a BritishVirgin Islands corporation controlledby the taxpayer. e accounts were de-signed to hold funds the taxpayer earnedfrom 1993 through 2000 in connectionwith his oil trading in Russia and hisconsulting for various companiesthrough ALQI.

e taxpayer used the same U.S. ac-countant for all relevant years, 1993 to2000. He did not discuss the foreign ac-

counts with this accountant. Moreover,when the accountant sent him a ques-tionnaire/organizer in early 2001 to becompleted by the taxpayer in order toassist the accountant in preparing the2000 Form 1040, the taxpayer indicatedthat he did not have a reportable interestin a foreign account.

Swiss government officials notifiedthe taxpayer in August 2000 of their de-sire to interview him with respect to theALQI accounts. e Swiss authorities,who were apparently coordinating withtheir U.S. counterparts, interviewed thetaxpayer in November 2000. e nextday, the U.S. government directedSwitzerland to freeze the accounts, andit did so.

In early June 2001, the taxpayer re-tained U.S. tax attorneys at a reputablenational firm to advise him with re-spect to the ALQI accounts and relatedtax issues. The firm met with IRS at-torneys in January 2002 to discuss apossible resolution of this case on anon-criminal basis. No such settlementwas reached.

The IRS announced a tax amnestyprogram, the Offshore Voluntary Com-

pliance Initiative (OVCI), in January2003.18 The OVCI offered lenient set-tlement terms to those taxpayers whocame forward of their own free will.The taxpayer, enticed by this offer, sub-mitted his OVCI application in Feb-ruar y 2003. The IRS rejected hisapplication, citing the fact that theOVCI was not available to taxpayerswhose applications arrived after theIRS had already initiated a civil auditor criminal investigation of the tax-payer or a related entity, or after theIRS had received information from athird-party alerting the IRS to the tax-payer’s noncompliance.19

The IRS pursued criminal chargesagainst the taxpayer. In May 2003, heagreed to plead guilty to one count ofcriminal tax evasion and one count of

criminal conspiracy to defraud the U.S.government. This plea agreement wasconfirmed in June 2003, when the tax-payer allocuted to the following: (1)He opened two bank accounts in thename of ALQI; (2) The purpose of theaccounts was to hold funds that he re-ceived from foreign sources; (3) Duringthe relevant years, he deposited morethan $7 million into the accounts, andthese funds generated more than$800,000 in passive income; (4) Heknew that the funds in the accountsconstituted taxable income, but he chosenot to report the income to the IRS inorder to avoid U.S. taxes; and (5) Hewas guilty of evading taxes and of con-spiring with others to defraud the U.S.of tax revenues. The taxpayer said rel-atively little in his allocution regardingthe nonreporting of foreign accounts,and he never specifically mentionedthe FBAR:

I also knew that I had the obligationto rep or t to t he IRS and/or t heDepartment of the Treasury the exis-tence of the Swiss accounts, but forthe calendar year tax returns 1993through 2000, I chose not to in order

to assist in hiding my true incomefrom the IRS and evade taxes thereon,until I filed my 2001 tax return.

At the criminal sentencing hearingin September 2003, the court imposedthe following punishment on the tax-payer: nearly four years in jail, threeyears of supervised release, a $25,000fine, and more than $3.5 million in resti-tution.

e IRS initiated a civil examinationagainst the taxpayer approximately oneyear aer the criminal sentence was an-nounced. e revenue agent assignedto the case asked the taxpayer, in January2007, to file an FBAR for 2000. e tax-payer claimed that this was the first timethat he learned of the FBAR filing re-quirement. As part of the examinationprocess, the revenue agent indicatedthat he would not conclude the matteruntil the taxpayer filed FBARs for allyears going back to 1993. e taxpayerdid so.

In May 2007, under the FBAR lawin effect for 2000, the revenue agent as-serted the maximum penalty of $100,000per account for the two ALQI accountson the grounds that the taxpayer “will-fully” violated the law.

In addition to asserting the FBARpenalty for 2000, the IRS issued a noticeof deficiency in October 2007, proposingsignificant federal income tax liabilities,accuracy-related penalties, and civilfraud penalties for all eight years, 1993through 2000. e IRS was able to attackthe taxpayer on tax issues going back tothe beginning because no statute of lim-itations exists in cases involving fraud-ulent Forms 1040.20

Williams I: Tax Court Opines on Novel Jurisdictional Issuese taxpayer filed a timely petition withthe Tax Court contesting all the pro-posed adjustments set forth in the noticeof deficiency, as well as the FBAR penal-ties that were not included therein. eIRS, predictably, filed a motion to dis-miss the case for lack of jurisdiction asto the FBAR penalties.21 e IRS’s theorywas that the provision under whichFBAR penalties are asserted (i.e., 31USC section 5321) does not fall withinthe Tax Court’s jurisdiction. is is based

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Bedrosian, has triggered considerableexcitement within the tax community,which is both logical and predictable.

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on Section 7442, which provides thatthe Tax Court and its divisions “shallhave such jurisdiction as is conferredon them by this title [26] . . . .”

No Preassessment Tax Court Jurisdiction.e Tax Court began the opinion inWilliams I by explaining that Section6212(a) authorizes the IRS to issue anotice of deficiency in certain situations.For its part, Section 6213(a) providesthat the tax in question may not beassessed until the IRS has issued the req-uisite notice of deficiency. It further pro-vides that the tax assessment must bedelayed pending a possible redetermi-nation by the Tax Court if the taxpayerfiles a timely petition. e Tax Courtpointed out, however, that these twoprovisions expressly state that the noticeof deficiency is to be sent in the case oftaxes imposed by subtitle A of Title 26(i.e., income taxes), by subtitle B of Title26 (i.e., estate and gi taxes), or by chap-ters 41, 42, 43, or 44 in subtitle D of Title26 (i.e., miscellaneous excise taxes).erefore, by negative implication, anyother taxes and items fall outside thelimited jurisdiction of the Tax Court.Extending this logic, the Tax Court rea-soned as follows with respect to FBARpenalties:

e same conclusion must be reachedas to the FBAR penalties imposed inTitle 31: e Secretary of the Treasuryis authorized by 31 U.S.C. sec.5321(b)(1) to assess the FBARpenalty; no notice of deficiency isauthorized by Section 6212(a) norrequired by Section 6213(a) beforethat assessment may be made; andthe penalty therefore falls outsideour jurisdiction to review deficiencydeterminations.22

No Post-Assessment Tax Court Jurisdiction e issue of whether the Tax Courtwould have jurisdiction over a subse-quent action by the government to col-lect FBAR penalties was not raised inthe taxpayer’s petition in Williams I, norwas it broached in the IRS’s motion todismiss. Nevertheless, the Tax Courtaddressed this topic. A brief overviewon the normal tax collection processhelps put this second issue in context.e IRS is required to send a taxpayer

a notice of intent to levy at least 30 daysbefore it seizes his or her property tosatisfy tax debts.23 To dispute the in-tended governmental taking, a taxpayermay file a Form 12153, Request for Col-lection Due Process or Equivalent Hear-ing, which triggers a collection dueprocess (CDP) hearing.24 At the CDPhearing, the IRS settlement officer ischarged with deciding whether the levy“balances the need for efficient collectionof taxes with the legitimate concern ofthe person that any collection action beno more intrusive than necessary.”25 esettlement officer ultimately issues a no-tice of determination, which representsthe IRS’s final administrative decisionregarding the propriety of the levy. Ifthe notice of determination upholds thelevy, the taxpayer may seek further re-view, this time from the judiciary. Heexercises this right by filing a petitionwith the Tax Court.26

In Williams I, the Tax Court explainedthat the provisions under which the IRSmay place a lien or effectuate a levy arenarrow. ey apply only to “taxes,” aswell as the additions to tax, additionalamounts, and penalties described inChapter 68 of Title 26 (i.e., Sections 6651through 6751).27 e Tax Court thenmade three points as to why it wouldlack jurisdiction to address any FBAR-penalty-collection issue: (1) ere is nostatute expanding the definition of “tax”as used in the lien and levy provisionsof the Code to include the FBAR penalty;(2) e collection mechanism in the ap-plicable FBAR statute, 31 USC section5321(b)(2), is not a lien or levy, but rathera “civil action to recover a civil penalty;”and (3) Even if the FBAR penalty werea tax subject to the IRS’s lien and levyprovisions, the IRS had not issued a no-

tice of determination, which is a pre-requisite to filing a petition with the TaxCourt.28

In summary, the Tax Court set im-portant precedent in Williams I, holdingthat it lacks jurisdiction to address FBARissues at both the preassessment stageand collection stage.29

Williams II: District Court Refuses to Uphold FBAR Penalties A Chronicle of the Briefing Battle. etaxpayer in Williams did not hand overthe $200,000 to the IRS aer the rev-enue agent asserted the maximumpenalty in May 2007; rather, he took theposition that he did not “willfully” failto file an FBAR for 2000, so the penaltycould not apply. e government, there-fore, filed a complaint in the districtcourt in April 2009 “for the purpose ofcollecting outstanding civil penalties.”e government did so pursuant to 31USC section 5321(b)(2), which pro-vides that the government may com-mence a civil action to recover an FBARpenalty within two years of the date onwhich it is assessed.

The government then filed a motionfor summary judgment on the FBARpenalty issue, with the focus beingwhether the taxpayer “willfully” failedto file an FBAR for 2000. The govern-ment, citing Ratzlaf,30 (a case involvinga criminal violation of the structuringprovisions of the Bank Secrecy Act)and Sturman,31 (a criminal FBAR case),argued that it only has to prove thatthe taxpayer intentionally violated “aknown legal duty” to prevail. Referringto his earlier guilty plea from 2003, thegovernment maintained that the tax-payer had already admitted in the crim-inal trial that he knew he had an


18Rev. Proc. 2003-11, 2003-1 CB 311, section 1.

19Rev. Proc. 2003-11, section 4.

20Section 6501(c)(1).

21The motion raised other issues that are beyondthe scope of this article.

22Williams, note 14, supra.

23Section 6330(a).

24Sections 6330(a)-(c).

25Conference Report 105-599, 105th Cong., 2dSess., 6/24/98, p. 263; Section 6330(c)(3)(C).

26Section 6330(d); U.S. Tax Court Rule 331(b).

27Sections 6301, 6230, 6231, 6330, 6331, and6665.


29The Tax Court later issued an opinion on the sub-stantive tax issues, holding that the taxpayer, for1993 through 2000, was liable for federal incometaxes on the net consulting income deposited intothe ALQI accounts, federal income taxes on theinvestment income generated by the ALQI ac-counts, civil fraud penalties on both the consult-ing income and investment income, and accuracy-related penalties related to tax underpaymentsresulting from disallowed charitable contributiondeductions. Williams, TCM 2011-89.

30510 U.S. 135 (1994).

31951 F.2d 1466 (CA-6, 1991).

NOTES

obligation to report the existence ofthe Swiss accounts; that the foreignsource income deposited into and gen-erated by the such accounts constitutedtaxable income to him; and that he wasconspiring with others to escape de-tection by the IRS. Thus, reasoned thegovernment, the taxpayer acted “will-fully” in not filing the FBAR. In a sub-sequent brief on the issue, thegovernment contended that the tax-payer’s guilty plea to the criminalcharges had the “collateral consequence”of subjecting him to a $200,000 civilFBAR penalty. The government alsoclaimed that the taxpayer was tryingto “have his cake and it eat too” by al-locuting at the criminal trial to obtaina reduced sentence for acceptance ofresponsibility, and then attempting toavoid civil FBAR penalties by retractinghis earlier statements.

The district court was dissuaded bythe government’s argument. In rejectingits motion for summary judgment, thecourt made two main points. First, thedistrict court noted that the primaryissue, whether the taxpayer “willfully”failed to file an FBAR, was an “inher-ently factual question” that was inap-propriate for summar y judgment.Second, while acknowledging that thetaxpayer generally cannot disaffirm ina subsequent civil action the facts un-derlying an earlier criminal guilty plea,the district court explained that thereal issue in this case is defining whichspecific facts were actually part of thetaxpayer’s plea in 2003. The taxpayerpreviously admitted that he intention-ally omitted income from his Forms1040 for 1993 through 2000, but “thereis a disconnect between this broad fac-tual basis underlying his plea and thespecific question at issue here: whetheron June 30, 2001, [the taxpayer] willfullyfailed to submit [an FBAR] for tax year2000.”

e case thus advanced to trial. Inits post-trial briefs, the government rec-ognized that “willfulness” is rarelydemonstrated with direct evidence sinceit involves the taxpayer’s state of mind.erefore, the government pointed to-ward the taxpayer’s overall course ofconduct, focusing on his guilty plea totax evasion and conspiracy to defraud,

his actions to conceal the unreportedincome, and his willful ignorance, i.e.,his “conscious effort to avoid learningabout reporting requirements.”

e taxpayer’s counsel countered byarguing here, as he had in previous briefs,that: (1) the taxpayer did not “willfully”fail to file the FBAR for 2000; (2) thegovernment waived its right to assertthe FBAR penalty when it took controlof the accounts by having them frozenbefore the FBAR deadline of 6/30/01;(3) the government abused its admin-istrative discretion in asserting the max-imum FBAR penalty of $100,000 peraccount when Congressional reportsconfirm that thousands of other taxpay-ers in similar situations had receivedlittle to no penalties; and (4) even ifpenalties were appropriate, only one ac-count (divided into sub-accounts foradministrative purposes) instead of twoaccounts existed, thereby cutting thepenalty to $100,000.

District Court Finds that the Taxpayer DidNot Act “Willfully”. e district court inWilliams II issued its opinion in favor ofthe taxpayer in September 2010, basingits determination on two principal fac-tors.

e district court first indicated thatthe government did not adequately dif-ferentiate between simply failing and“willfully failing” to disclose an interestin foreign accounts.32 In this regard, thecourt explained that, aer examiningall of the surrounding facts and circum-stances presented during the trialprocess, it was not persuaded that thetaxpayer was lying about his ignoranceof the law and the contents of his Form1040. e district court acknowledgedthat the box on Schedule B to the tax-payer’s Form 1040 for 2000 was checked“no” in response to the foreign-accountquestion, and further understood thatthe taxpayer did not initially file anFBAR for 2000. However, the districtcourt underscored that both of theseactions (or inactions) occurred aerthe taxpayer discovered that the Swissand U.S. authorities knew about theALQI accounts. Indeed, the FBAR filingdeadline for accounts existing in 2000(i.e., 6/30/01) was approximately eightmonths aer the interview with the

Swiss authorities and the resulting freez-ing of the accounts. According to thecourt, these facts “strongly indicate tothe Court that [the taxpayer] lackedany motivation to willfully conceal theaccounts from authorities aer thatpoint.”33 e district court also notedthat subsequent disclosures by the tax-payer, through his representatives, cor-roborated his lack of willfulness withrespect to 2000. In particular, the districtcourt identified the disclosures madeby the taxpayer’s attorneys in their meet-ing with the IRS attorneys in January2002 and the revelations made in thecourse of applying for the OVCI in Feb-ruary 2003. ese disclosures, notedthe district court, indicate the taxpayer’s“consciousness of guilt for evading in-come taxes, which he never equatedwith the foreign banking disclosure.”34

e district court next stressed thata guilty plea to certain charges in a pre-vious criminal trial does not necessarilysupport all civil penalties in a subsequentmatter. It held the following on this score:

e G overnment argues t hatWilliams’ guilty plea should estophim from arguing that he did notwillfully violate § 5314 for the taxyear 2000. However, the evidenceintroduced at trial established that thescope of the facts established byWilliams’ 2003 guilty plea are not asbroad as the Government suggests,and there remains a factual incongru-ence between those facts necessary tohis guilty plea to tax evasion andthose establishing a willful violationof § 5314. at Williams intention-ally failed to report income in aneffort to evade income taxes is a sep-arate matter from whether Williamsspecifically failed to comply with dis-closure requirements contained in §5314 applicable to the ALQI accountsfor the year 2000. As Williams put itin his testimony at trial, “I was pros-ecuted for failing to disclose income.To the best of my knowledge I wasn’tprosecuted for failing to check thatbox.”35

Williams III: Court of Appeals FindsWillfulnessThe Government’s Arguments on Appeal.e government, dissatisfied with thetaxpayer-favorable decision rendered bythe district court, filed a notice of appeal


in November 2010, followed by itsopening brief with the Fourth CircuitCourt of Appeals. e governmentraised just two issues in its brief. First,the government asked the Court ofAppeals to determine whether the tax-payer, aer making various admissionsin his prior criminal case, was estopped(judicially, collaterally, or both) fromarguing in the subsequent civil case thathis failure to file an FBAR for 2000 wasnot willful. Second, assuming that thetaxpayer was not estopped from raisingsuch arguments, the government urgedthe Court of Appeals to decide that thedistrict court erred in ruling that the tax-payer did not act willfully.36 Given thenature of its analysis and holding, theCourt of Appeals never addressed thegovernment’s first issue. is article fol-lows suit, focusing solely on the “will-fulness” issue.

e government’s position on appealwas that the district court erred, as amatter of law, in determining which el-ements must be present to prove “will-fulness” in the context of a civil FBARviolation, as opposed to a criminal one.37

Citing various decisions from theSupreme Court and appellate courts,the government maintained that, wherewillfulness is a condition of civil liability:(1) the concept of willfulness is broadenough to cover both reckless andknowing violations; (2) it is not neces-sary to prove that the taxpayer had animproper motive or bad purpose toshow willfulness; and (3) evidence of ataxpayer’s actions to conceal income,in conjunction with the taxpayer’s failureto seek information about foreign ac-count reporting requirements, sufficesto show willfulness.38 e governmentargued that the district court arrived atits conclusion that the taxpayer did notwillfully violate the FBAR rules becauseof its belief that the taxpayer lacked“motivation to willfully conceal” theforeign accounts aer November 2000,i.e., aer the time that the Swiss author-ities had interviewed the taxpayer andfrozen the ALQI accounts at the requestof the U.S. government. According tothe government, the issue of whetherthe taxpayer had an improper motivefor not filing a timely FBAR for 2000 isnot determinative of the willfulness

question, so the district court erred inbasing its findings on the supposed ab-sence of improper motivation.39

Aer suggesting that the district courtapplied the wrong legal standard, thegovernment attacked the facts on whichthe district court rendered its decision.e government began by emphasizingthat the taxpayer’s plea in his earliercriminal case was a strong indication ofwillfulness on the FBAR matter, whichthe district court wrongly elected todownplay.40 e government seized onthe following language from the tax-payer’s allocution:

I also knew that I had the obligation toreport to the IRS and/or the Depart-ment of the Treasury the existence ofthe Swiss accounts, but for the calen-dar year tax returns 1993 through2000, I chose not to in order to assistin hiding my true income from theIRS and evade taxes thereon, until Ifiled my 2001 tax return.

e government essentially arguedthat a Form 1040 goes to the IRS, whilean FBAR gets sent to a special office ofthe Treasury Department. us, the gov-ernment contended, when the taxpayerpreviously acknowledged in the criminalcase that he knew of his obligation toreport the existence of the Swiss accounts“to the Department of the Treasury,”logic dictates that he was referring tothe FBAR.41

e government next argued that,even if the taxpayer’s motivation werethe proper standard in determining will-fulness in the civil FBAR context, thedistrict court failed to recognize thatthe taxpayer had a significant reason fornot disclosing the foreign accounts; thatis, to hide the millions of pre-tax dollarsdeposited into the foreign accounts andto hide the passive income generatedby such accounts.42

Interestingly, the government thensuggested that, despite all the publicfanfare to the contrary, the IRS maynot be all that effective at identifyingforeign accountholders. The taxpayerindicated at various stages of the casethat he had no reason whatsoever toconceal anything from the IRS after hemet with Swiss authorities about theaccounts and his accounts were frozenby the Swiss authorities in November

2000 at the U.S. government’s insistence.Stated more colloquially, the taxpayerprofessed that he had no reason to fur-ther hide anything from the IRS oncethe jig was up. The government, in itsopening brief, strained to suggest that:(1) because the taxpayer was using anominee to hold the account, ALQI,“there was no guaranty that the IRSwould be able to connect the dots,” and(2) there was no specific evidence inthe record as to whether the taxpayeradmitted to the Swiss authorities inNovember 2000 that the ALQI accountsbelonged to him or whether he contin-ued to distance himself from such ac-counts.43

The government then argued thatthe district court’s conclusion that thetaxpayer had no motive to further con-ceal the foreign accounts after Novem-ber 2000 cannot be reconciled with hisinteractions with his accountant. Inparticular, the government pointed outthat in January 2001, the taxpayer’s ac-countant sent him the tax question-naire/organizer related to the Form1040 for 2000 (i.e., two months afterthe meeting in Switzerland and thefreezing of the accounts), yet the tax-payer checked the “no” box in responseto the question about foreign accounts.This, argued the government, showsthe taxpayer’s ongoing intent to hidethe accounts.44

The taxpayer’s high level of sophis-tication was the next target for the gov-ernment. It noted that the taxpayer wasa well-educated attorney and interna-tional businessman, who had practicedlaw at a prominent New York law firm,worked as a high-level oil executive,and enjoyed multiple opportunities to


32Williams, note 15, supra, at Slip Opinion 7.

33Id., at Slip Opinion 8-9.

34Id., at Slip Opinion 9.

35Id., at Slip Opinion 9-10.

36Williams, note 16, supra, Opening Brief for U.S.Government, filed 2/25/11, at pp. 2-3.

37Id. at p. 33.

38Id. at pp. 34-35.

39Id. at pp. 35-36.

40Id. at p. 36.

41Id. pp. 36-37.

42Id. at p. 38.

43Id. at p. 39.

44Id. at pp. 39-40.

NOTES

learn about the duty to f i le annualFBARs.45 Against this backdrop, thegovernment suggested that it was“highly improbable” that the taxpayerwas unaware of his FBAR duties.46

Finally, the government tried todownplay some of the taxpayer’s be-haviors and highlight others, dependingon whether they hurt or helped thegovernment’s case. Certain actions bythe taxpayer in later years could beviewed as favorable to the taxpayer.These included meeting with IRS rep-resentatives, applying for the OVCI,filing Forms 1040X for past years, andultimately filing FBARs as part of theexamination process. The government

tried to completely disregard suchevents, underscoring that the case in-volved only the duty to file an FBARas of 6/30/01, and that “disclosures in2002 and 2003 have no bearing on thatquestion.”47

Rebuttal by the Taxpayer. e taxpayerwas remarkably brief in his rebuttal tothe government’s main arguments.Regarding the government’s contentionthat the district court erred, as a matterof law, in determining that a taxpayer’smotivation as a factor in gauging will-fulness, the taxpayer dismissed this asmeritless.48 Citing various legal author-ities, the taxpayer reasoned that, whilewillfulness does not require the taxpay-er to have an improper motive, a tax-payer’s incentives to conceal or discloseinformation to the IRS are indeed rele-vant to determining his subjectiveintent.49

The government’s secondary argu-ment was that, even if the district courtused the correct legal standard, its de-cision not to uphold the FBAR penaltywas clearly erroneous as a factual mat-ter for various reasons. The taxpayercountered this argument as follows.

He first explained that his actions inlater years (i.e., hiring reputable attor-neys and accountants, meeting withIRS attorneys, applying for the OVCI,filing Forms 1040X, etc.) should factorinto the analysis. The taxpayer’s attor-ney framed his argument as a rhetoricalquestion:

If, as the government postulates, [thetaxpayer] knew of the FBAR require-ment in June 2001 and willfully failedto comply with it, why did he notbackfile FBAR reports in the succeed-ing two years when he and his advi-sors executed every other conceivablegovernment disclosure, including anamnesty application? Only one rea-

son makes sense: [e taxpayer] hadno knowledge of the FBAR require-ment, and his advis ors ne verinformed him of it.50

Next, the taxpayer suggested that hisallocution in the criminal case nearly adecade earlier never specifically men-tioned the FBAR filing duty or his knowl-edge thereof. Consequently, it cannotbe, as the government contends, highlyprobative of his willfulness.51

e taxpayer then challenged thenotion that his denial of the existenceof foreign accounts in the tax question-naire/organizer given to his accountantin January 2001 constitutes evidenceof his willfulness to conceal the accounts,even aer the Swiss authorities inter-viewed him, and even aer the U.S. au-thorities had frozen his Swiss accounts.e taxpayer had already retained newtax attorneys when his accountant waspreparing the Form 1040 for 2000 andhe understood that he should not dis-cuss the foreign account matters withanyone other than the attorneys.52 etaxpayer also suggested that, at thattime, he was already assembling a teamto rectify all issues concerning the for-eign accounts.53

Finally, the taxpayer took issue withthe government’s assertion that he hadsome reason for not disclosing the for-eign accounts aer November 2000. etaxpayer pointed out that: (1) the appli-cation and other documents related tothe accounts for ALQI specifically iden-tified the taxpayer as the beneficial ownerof the accounts; (2) the Swiss authoritiesspecifically summoned the taxpayer toSwitzerland to discuss the accounts; and(3) if the taxpayer were such an educatedand sophisticated person, as the gov-ernment contends, he certainly wouldhave known that the U.S. governmentwould readily link him to ALQI and theaccounts held in its name.54

Decision by the Fourth Circuit Court ofAppeals. The Fourth Circuit Court ofAppeals began its analysis by criticizingthe legal standards on which the dis-trict court made its taxpayer-friendlydecision. In particular, the Court ofAppeals indicated that the districtcourt should not have focused on thetaxpayer’s motivation for not filing atimely FBAR for 2000, and, inasmuchas it did, the district court made animpermissible leap:

In making its determination, the dis-trict court emphasized [the taxpay-er’s] motivation rat her t han t herelevant issue of his intent. To theextent the district court focused onmotivation as proof of the lack ofintent, it simply drew an unreason-able inference from the record. InNovember 2000, Swiss authoritiesmet with [the taxpayer] to discussthe ALQI accounts and thereafterfroze them at the request of the Unit-ed States Government. Although the[U.S.] Government knew of the exis-tence of the accounts, nothing in there cord indic ates t hat , w hen t heaccounts were frozen, the [U.S.]Government knew the extent, con-trol, or degree of [the taxpayer’s]interest in the accounts or the totalfunds held in the accounts. As [thetaxpayer] admitted in his allocution[at the criminal trial], his decisionnot to report the accounts was partof his tax evasion scheme that con-tinued until he filed his 2001 taxreturn. Thus, his failure to disclosei n for m at i on ab out t he A L QIaccounts on his 2000 tax return inMay 2001 was motivate d by his


The Tax Court set important precedent in Williams I, holding that it lacksjurisdiction to address FBAR issues at both the preassessment stage andcollection stage.

I

desire not to admit his interest in theaccounts, even after authorities hadb een aware of t hem for over sixmonths. Rarely does a person whoknows he is under investigation bythe [U.S.] Government immediatelydisclose his wrongdoing because heis not sure how much the [U.S.] Gov-ernment knows about his role in thatwrongdoing. Thus, without ques-tion, when [the taxpayer] filed inMay of 2001, he was clearly motivat-ed not to admit his interest in theALQI accounts.55

en, noting various judicial prece-dents in the criminal arena, the Courtof Appeals went on to explain what itconsidered the proper legal standardto be applied. e Court of Appeals ex-plained that: (1) willfulness can be in-ferred from taxpayer conduct designedto conceal financial information, and(2) willfulness can also be inferred froma taxpayer’s conscious effort to avoidlearning about reporting requirements,i.e., “willful blindness” exists where ataxpayer knew of a high probability ofa tax liability yet intentionally avoidedthe pertinent facts.56 In situations wherewillfulness is a condition for civil liability,the Court of Appeals indicated that thiscovers both knowing violations andreckless violations of a standard.57 Itthen clarified that the taxpayer’s actionsor inactions in this case constituted, ata minimum, “reckless conduct, whichsatisfies the proof requirement [for civilFBAR violations under 31 U.S.C.5314.]”58

Sparing no punches, the Court ofAppeals stated that “the evidence as awhole leaves us with a definite and firmconviction that the district court clearlyerred in finding that [the taxpayer] didnot willfully violate [the FBAR rules for2000].”59 e Court of Appeals supportedits decision on the following grounds.

First, the Court of Appeals pointedout that the taxpayer signed his Form1040 for 2000 under penalties of per-jury, thereby swearing that he had ex-amined the Form 1040, as well as allSchedules and Statements attached tosuch Form 1040, and that all items weretrue, accurate, and complete. The Courtof Appeals then explained that taxpay-ers who execute a tax return are deemed

to have constructive knowledge of suchreturn, and the taxpayer in this casewas no exception to that principle. Ac-cording to the Court of Appeals, theinstructions on Line 7a in Part III ofSchedule B to the 2000 Form 1040 (i.e.,“see instructions and exceptions andfiling requirements for Form TD F 90-22.1”) put the taxpayer on inquiry no-tice of the FBAR duty.60 The taxpayertestified that he did not review his 2000Form 1040 in general or read the in-formation in Schedule B in particular.The Court of Appeals interpreted thisinaction as conduct designed to concealfinancial information, a conscious effortto avoid learning about reporting re-quirements, and “willful blindness” tothe FBAR requirement.61

Second, the Court of Appeals heldthat the taxpayer’s allocution at the ear-lier criminal proceeding further con-firms that his failure to file a timelyFBAR for 2000 was willful.62 Seizing onone tiny portion of the taxpayer’s 2003allocution, the Court of Appeals con-cluded that the taxpayer admitted hisknowledge of the FBAR duty becausehe used the phrase “Department of theTreasury.” is tenuous line of reasoningis as follows:

During that allocution, [the taxpayer]acknowledged that he willfully failedto report the existence of the ALQIaccounts to the IRS or Department ofthe Treasur y as part of his largerscheme of tax evasion. is failure torep or t t he ALQI accounts is anadmission of violating [the FBARrules] because a taxpayer complies

with the [FBAR rules] by filing anFBAR with the Department of theTreasury.63

Reasons Why the WilliamsTrilogy Is Interesting e Williams cases were long, fact-in-tensive, and featured some ambiguousreasoning from the courts. Moreover,as this article demonstrates, WilliamsIII turns out to be a groundbreakingcase, the first in a line of victories forthe government involving civil FBARpenalties. Given the importance ofthe Williams trilogy, a description ofthe significant (and oen overlooked)issues is provided below.

Tax Court Lacks Jurisdiction Over CivilFBAR Matters. In Williams I, the taxpay-er attempted to dispute not only the taxissues under the Code (i.e., the federalincome taxes, accuracy-related penal-ties, and civil fraud penalties for 1993through 2000 identified by the IRS inits notice of deficiency), but also theFBAR penalty for 2000 under Title 31of the U.S. Code. e Tax Court, rulingon this novel issue, held that it lacksauthority to hear FBAR issues, both atthe assessment stage and the collectionstage. Simply put, “[t]he Tax Court hasno jurisdiction to review the [IRS’s]determination as to [taxpayers’] liabilityfor FBAR penalties.”64

Appreciating Different AssessmentPeriods. Although not unduly high-lighted in the Williams cases, theydemonstrate the importance of appre-


45Id. at pp. 42-43.

46Id. at p. 43.

47Id. at p. 41.

48Williams, note 16, supra, Opening Brief for Tax-payer-Appellee, filed 4/28/11, at p. 35.

49Id. at p. 35.

50Id. at pp. 37-38.

51Id. at p. 38.

52Id. at p. 39.

53Id.

54Id. at p. 40. The taxpayer raised some otherminor arguments in his Opening Brief, which arenot featured in this article.

55Williams, note 16, supra, at footnote 5.


57Id.

58Id. The Court of Appeals includes, in a footnote,another basis for reversing the district court. Itexplained that, to the extent that the taxpayerwas claiming ignorance of the FBAR filing re-quirement in connection with reasonable re-liance on qualified tax professionals, such igno-rance was a result of his own recklessness. Thisis because the taxpayer never informed his ac-countant of the existence of the foreign accountsfrom 1993 to 2000, “even after retaining counsel[in early 2001] and with the knowledge [in No-vember 2000] that the authorities were aware ofthe existence of the accounts.” Id. at footnote 6.


60Id.

61Id.

62Id.

63Id.


NOTES

ciating differing assessment periods.As explained above, the IRS conducteda civil audit and proposed adjustmentsto income and various civil penaltieswith respect to 1993 through 2000,including FBAR penalties. In the caseof false or fraudulent tax returns, theI R S f a c e s n o t i m e c o n s t r a i nt s o nassessment.65Where FBAR violationsare concerned, however, the IRS mustassess the penalty within six years ofthe violation.66Accordingly, while thet a x p ay e r i n Wi l l i a m s m i g ht h av e“admitted” his noncompliance by filingdelinquent FBARs for 1993 through2000 with the revenue agent in 2007,t he IRS was on ly able to ass er t anF BA R p e na lt y for one ye ar, 2 0 0 0 ,b e c au s e t h e s i x - y e a r s t atute h a da lre ady expired for t he precedingyears.

Reasonable Reliance on Qualified TaxProfessionals. e reasonable-reliance-on-a-qualified-tax-professional defensewas unique in Williams II. e govern-ment presented evidence that the tax-payer never provided any informationwhatsoever about the foreign accountsor foreign-s ource income to hisaccountant from 1993 through 2000.e government also demonstrated thatthe accountant sent the taxpayer a ques-tionnaire/organizer each year, whichspecifically asked whether he had aninterest in or authority over a foreignaccount. e taxpayer completed it for2000, affirmatively checking the “no”box to the foreign-account inquiry.67

Distancing himself from this reality, thetaxpayer focused on the fact that hehired U.S. tax attorneys with a reputablenational firm in early June 2001, andthey failed to advise him to file an FBARbefore 6/30/01.

e district court did not address thereliance issue in its decision in WilliamsII, centering the discussion instead onthe taxpayer’s motives and the distinctionbetween not reporting income on Forms1040 and not reporting foreign accountson FBARs. e Court of Appeals, how-ever, made short order of the reliancedefense in Williams III, underscoringthe following:

[T]o the extent [the taxpayer] assertshe was unaware of the FBAR require-

ment b ecaus e his attorne ys oraccountants never informed him, hisignorance also resulted from his ownrecklessness. [e taxpayer] concedest hat f rom 1993-2000 he ne verinformed his accountant of the exis-tence of the foreign account aerret aining couns el and wit h t heknowledge that authorities wereaware of t he existence of t heaccounts.68

Questioning the Amount of the FBARPenalty. The scope of FBAR “collec-tion actions” was examined and clari-fied in Williams II. The parties haddivergent opinions on the districtcourt’s role. On one hand, the govern-ment argued that the amount of theFBAR penalty asserted by the IRS isnot subject to judicial review, and thatthere is no authority for the proposi-tion that a district court, hearing a“collection action” under 31 USC sec-tion 5321(b)(2), can review the IRS’sadministrative record or the factorsconsidered by the IRS in determiningthe penalty. As summarized by thegovernment on brief, “[a]s this casesimply concerns the United States’effort to collect a debt, the Court’sre v i e w i s l i m ite d to d e te r m i n i ngwhether or not the FBAR penalty is avalid debt.”69 In other words, the gov-ernment maintained that the districtcourt’s sole job is to determine whethera taxpayer “willfully” failed to file theFBAR.

e taxpayer, on the other hand, re-peatedly argued that the court had theauthority under the Administrative Pro-cedures Act to review decisions by ad-ministrative agencies, such as the IRS,for abuse of discretion and with respectto arbitrary and capricious actions. etaxpayer further suggested that, if thecourt were to hold that he acted willfully,it should schedule a separate briefing toaddress the proper amount of thepenalty.70

Because the district court held thatthe taxpayer did not “willfully” fail tofile the FBAR and no penalties were sus-tained, this issue was not specificallyaddressed in Williams II. Moreover, thetaxpayer did not renew this issue inWilliams III. is issue, therefore, wentunresolved.

Assessing the Weight of UnpublishedDecisions. Williams III , as the firstdecision by a federal Court of Appealsto wrangle wit h tr icky civi l FBARissues, is important. However, it wasissued as an “unpublished” opinion,expressly noting in the decision itselfthat “[u]npublished opinions are notbinding precedent in this circuit .”Many taxpayers and practit ionerswou ld l i ke not hing b e tter t han toignore or demote the case on this basis,but doing so would be imprudent. Thisis because the potential use and valueof “unpublished” decisions is surpris-ingly broad.

Federal Rules of Appellate ProcedureRule 32.1(a) generally provides that acourt may not prohibit or restrict thecitation of federal judicial opinions, or-ders, judgments, or other written dis-positions that have been designated as“unpublished,” “not for publication,”“non-precedential,” “not precedent,” orthe like. Moreover, the Advisory Com-mittee Notes to Rule 32.1 state the fol-lowing:

Rule 32.1 is extremely limited. Itdoes not require any court to issuean unpublished opinion or forbidany court from doing so. It does notdictate the circumstances underwhich a court may choose to desig-nate an opinion as “unpublished” orspecify the procedure that a courtmust follow in making that deter-mination. It s ays nothing aboutwhat effect a court must give to oneof its unpublished opinions or tothe unpublished opinions of anoth-er court . . . Under Rule 32.1(a), acourt of appeals may not prohibit aparty from citing an unpublishedopinion of a federal court for itspersuasive value or for any otherre ason. In addition, under Rule32.1(a), a court may not place anyrestriction on the citation of suchopinions. For example, a court maynot instruct parties that the citationof unpublished opinions is discour-aged, nor may a court forbid partiesto cite unpublished opinions whena published opinion addresses thesame issue. The preceding procedural rule and

related commentary create ambiguityregarding how much weight WilliamsIII will carry in the future. One thingis for sure, though, as the IRS continues


to assert large civil FBAR penalties,and as taxpayers keep challenging suchpenalties, the U.S. government will beciting Williams III often.

Varying Interpretations of Willful-ness. Other cases have pre viouslyaddressed the concept of “willfulness”i n t he c onte x t of c r i m i n a l i ssu e s ,including criminal FBAR violations.Those cases stand for the propositionthat willfulness means a “voluntary,intentional violation of a known legalduty.”71 Williams II and III are impor-t a nt b e c au s e t h e y a re t h e f i r s t i nwhich the courts have interpreted theconcept of “willfulness” in the civilFBAR context.

The Court of Appeals in WilliamsIII indicated that the taxpayer’s conduct(i.e., checking the “no” box in responseto the foreign-account question onSchedule B to his Form 1040 for 2000,not reviewing the Schedule B or itscross-references to the FBAR filing re-quirement, etc.) constituted “recklessconduct” and “willful blindness” to hisFBAR duty. Interestingly, the legal stan-dard applied by the Court of Appealsin Williams III is significantly lowerthan that previously indicated by theIRS. In other words, even the IRS ini-tially believed that it had to reach amuch higher level in order to success-fully assert and collect a civil FBARwillful penalty. This is evident fromthe following IRS materials.72

e IRS issued a legal memorandumin 2006, CCA 200603026, in connectionwith two of its international enforcementprograms. One of the issues addressedwas the proper interpretation of the“willfulness” standard in the context ofcivil FBAR penalties. e IRS’s directnesson this point was remarkable: “e firstquestion is whether the phrase ‘willfulviolation (or willfully causes any viola-tion)’ has the same definition and in-terpretation under 31 U.S.C. § 5321(the civil penalty) and § 5322 (the crim-inal penalty). e answer is yes.” Lest anydoubt remain, CCA 200603026 goes onto state the following:

Both Section 5321(a)(5), providingfor a civi l p enalty, and S ection5322(a) , providing for criminal

penalties, contain a similar “willful-ness” requirement . . . e same word,willful, is used in both of these sec-tions. Statutory construction ruleswould suggest that the same wordused in related sections should beconsistently construed.

In referring to a dissenting opinionin the Supreme Court case Ratzlaf, theIRS then explained the following in CCA200603026:

[W]e agree with his conclusion thatin the case of the FBAR penalty, inorder for there to be a voluntar yintentional violation of a knownlegal duty, the accountholder wouldjust have to have knowledge that hehad a duty to file an FBAR, sinceknowledge of the duty to f i le anFBAR would entail knowledge thatit is illegal not to file the FBAR. Acorollary of this principle is that thereis no willfulness if the accountholderhas no knowledge of the duty to filethe FBAR.

Similar to CCA 200603026, the IRSacknowledges in the Internal RevenueManual (IRM) that, in the context ofwillful FBAR penalties, the test iswhether “there was a voluntary, inten-tional violation of a known legal duty”and “willfulness is shown by the person’sknowledge of the [FBAR] reporting re-quirements and the person’s consciouschoice not to comply with the require-ments.”73

Second Case Addressing“Willful” FBAR Civil Penalties: McBride

Williams III sparked much controversyand confusion, but the debate over itssignificance did not last long becausethe second case addressing civil “willful”FBAR penalties, McBride,74 was decidedless than four months later by a districtcourt in Utah.

The Key Facts75

Mr. McBride, a U.S. citizen, was a part-ner in a domestic partnership calledthe Clip Company, LLC, which soldaccessories that al lowed people tocarry mobile phones on their belts.Mr. McBride was in charge of the fi-nancial operations of the Clip Com-pany. As with many modern products,the phone accessories were not madein the U.S.; they were produced by anoutfit in Tawain (Taiwanese Manufac-turer).

Starting in 1999, the Clip Companyentered into various lucrative contractsfor the sale of its belt accessories tomajor mobile phone producers and re-tailers, including Ericsson, AT&T, BestBuy, and Motorola. Mr. McBride an-ticipated that a significant increase inrevenue (approximately $2 million)would result from such contracts, sohe began seeking ways to reduce ordefer taxes that he, as half-owner of the


65Sections 6501(c) (1) and (2).

6631 USC section 5321(b)(1).

67Williams, note 15, supra, U.S. Proposed Findingsof Fact and Conclusions of Law filed 4/26/10;U.S. Post-Trial Brief filed 7/1/10, at p. 10.

68Williams, note 16, supra, at footnote 6.

69Williams, note 15 supra, U.S.’s Post-Trial Brief,filed 7/1/10, at p. 14.

70Williams, Id., Defendant Williams’ Response toGovernment’s Post-Trial Brief, filed 7/15/10, atpp. 8-10.

71Cheek, 498 U.S. 192, 67 AFTR2d 91-344 201(1991); Sturman, 951 F.2d 1466, 1476 (CA-6,1991); Bishop, 412 U.S. 346 AFTR2d 73-5018,360 (1973).

72Several articles explain how the legal standardfor “willfulness” developed by the Court of Ap-peals in Williams III would not only conflict withpublished guidance from the IRS on the civilFBAR issue, but also with various court deci-sions. See, e.g., Skarlatos and Sardar, “TheFourth Circuit Goes Too Far by Imposing a WillfulFBAR Penalty on Reckless Conduct in theWilliams Case,” 14(4) Journal of Tax Practice &Procedure 9-12 (2012); Sardar, “What Consti-

tutes ‘Willfulness’ for Purposes of the FBAR Fail-ure-to-File Penalty?” 113 JTAX 183 (September2010).

73IRM section 4.26.16.4.5.3 (7/1/08); IRM section4.26.16.6.5.1 (11/6/15).

74908 F.Supp.2d 1186, 110 AFTR2d 2012-6600 (DCUtah, 2012), Findings of Fact, Conclusions ofLaw, and Order.

75The facts, analysis, and holdings were derivedprimarily from McBride, note 74, supra. The au-thor also obtained and reviewed the followingmaterials filed by the parties, which provided ad-ditional data: (1) Complaint, 4/29/09; (2) An-swer, 6/18/09; (3) Plaintiff’s Motion for SummaryJudgment, 10/15/10; (4) Defendant’s Memoran-dum in Opposition of Plaintiff’s Motion for Sum-mary Judgment; (5) Plaintiff’s Reply to Defen-dant’s Opposition to Motion for SummaryJudgment; (6) Order Denying Motion for Sum-mary Judgment, 2/24/11; (7) Notice of Supple-mental Authority by Plaintiff, 5/13/11; (8) Plain-tiff’s Trial Brief, 5/14/12; (9) Defendant’s TrialBrief, 5/14/12; (10) Transcript of Bench Trial Vol-umes I and II, 7/2/12; (11) Plaintiff’s ProposedFindings of Fact, 7/23/12; and (12) Defendant’sProposed Finding of Facts, 8/22/12.

NOTES

Clip Company, would normally be re-quired to pay. This effort led him in1999 to Merrill Scott and Associates(MSA), whose operations he had seenadvertised.

MSA portrayed itself as a financialmanagement f irm t hat a l lowed itsclients to achieve two main goals, taxminimization and asset protection.Mr. McBride went to the offices ofMSA in Ju ly 1999, where he wastreated to a presentation about a po-tential strategy. MSA labeled the strat-egy the “Financial Master Plan.” Withrespect to the goal of tax minimiza-tion, the promotional materials fromMSA: (1) suggested the creation of a

“decontrolled” environment, achievedthrough the use of sophisticated fi-nancial instruments, foreign entities,and foreign accounts; (2) stated thatcertain foreign entities “will be usedas vehicles to capture business incomeoffshore and U.S. tax-free;” (3) ex-plained that certain funds sent to aforeign manufacturer would be “cap-tured offshore in [a foreign entity] al-lowing for tax-f ree growt h andaccumulation;” and (4) “by redirectingtaxable income into various expensecenters, you are able to save on nettaxes.” Apparently, after hearing thepitch about the Financial Master Plan,Mr. McBride announced his initial im-pression that it was tantamount to “taxevasion.” The representatives of MSA,of course, refuted his claims and as-sured him that the Financial MasterPlan was legal.

During the meeting in 1999, the MSArepresentatives gave Mr. McBride severalpamphlets describing the Financial Mas-ter Plan, including how it affected U.S.tax and reporting duties. One of thepamphlets stated the following: “U.S.citizens are subject to specific U.S. re-porting requirements for interests inforeign corporations, trusts and bank

accounts. U.S. citizens and others filingInternal Revenue Service returns arenot immune from requisite declarationof ownership interests in foreign entities.”e pamphlet also contained this warn-ing: “As a U.S. taxpayer, the law requiresyou to report your financial interest in,or signature authority over, any foreignbank account, securities account, orother financial account [and] intentionalfailure to comply with the foreign ac-count reporting rule is a crime and theIRS has means to discover such unre-ported assets.” In addition to the pam-phlets, the folks at MSA also gave Mr.McBride a written legal opinion aboutthe Financial Master Plan. e opinion

was prepared by the Estate Planning In-stitute, P.C., which Mr. McBride learnedwithin a week of the meeting in July1999 was an entity controlled by or re-lated to MSA.

Mr. McBride entered into a “imple-mentation agreement” with MSA in July1999, whereby he purchased the Finan-cial Master Plan for $75,000 and obli-gated himself to pay additional monthlyfees for ongoing services from MSA.e memo field of the checks that Mr.McBride used to make the initial pay-ment to MSA indicated that the purposeof the payments was “[b]ank accountoffshore.”

In August 1999, Craig Taylor (Ac-countant Taylor), the accountant for Mr.McBride’s business partner, sent Mr.McBride a memo expressing certainconcerns about the Financial MasterPlan and enclosing a newspaper articleexplaining that holding foreign bankaccounts was oen associated with taxevasion and fraudulent activity. is didnot dissuade Mr. McBride from pro-ceeding.

e Financial Master Plan was con-voluted, presumably by design, and thefactual findings by the district court levarious aspects rather ambiguous. Ac-

cordingly, what follows is a good-faithdescription of the major aspects of theFinancial Master Plan, including themain entities and money flow.

Pursuant to the Financial MasterPlan, MSA either formed or made avail-able to Mr. McBride two foreign entities:Drehpunkt Ltd. (Foreign Entity One)and Lombard & Associates, Ltd. (For-eign Entity Two).76 ese entities werecontrolled, at least nominally, by indi-viduals who were either employed byor otherwise associated with MSA. Sep-arate accounts were then opened at theRoyal Bank of Scotland, in the Bahamas,for Foreign Entity One and Foreign En-tity Two. MSA also established two ad-ditional entities, in Canada, at therequest of Mr. McBride, Phoenix Over-seas Advisors, Ltd. (Foreign Entityree) and Global Securities Corpora-tion (Foreign Entity Four). Foreign bro-kerage accounts were then opened undereach of these two Canadian entities toenable Mr. McBride to engage in secu-rities transactions.

Also pursuant to the Financial Mas-ter Plan, Mr. McBride, through theClip Company, entered into an agree-ment with the Tawainese Manufacturer,whereby the Clip Company would paythe Taiwanese Manufacturer an inflatedprice for the phone accessories. Thisdeliberate overpayment (which theClip Company likely treated as a com-ponent of cost-of-goods-sold) wouldresult in “excess funds” for the Tai-wanese Manufacturer, which wouldnormally have been treated as taxableprofits to the Clip Company. TheTawainese Manufacturer then sent the“excess funds” by wire transfer to theBahamanian account of Foreign EntityOne. It is unclear whether the Tai-wanese Manufacturer received a feefor this accomodation.

Let us take a simplified, hypotheticalexample to see how this might havefunctioned. If the Taiwanese Manufac-turer produced and sold each phoneaccessory to the Clip Company for $10,and the Clip Company, in turn, couldsell each accessory to the ultimate con-sumer for $30. This would normallyrender a taxable profit for the ClipCompany of $20 per accessory. How-ever, if the Taiwanese Manufacturer


Williams II and III are important becausethey are the first in which the courts haveinterpreted the concept of “willfulness”in the civil FBAR context.

I

raised its price to $20 per accessory,the Clip Company would show a tax-able profit of only $10 per accessory.The key is what happens to the extra$10 per accessory, i.e., the “excess funds”on which the IRS focused.

The next step was to get the untaxed“excess funds” back to Mr. McBrideand/or the Clip Company. This was ac-complished in multiple ways, including,but not limited to, the use of a “loan”arrangement. Apparently, funds weretransferred from the Bahamanian ac-count of Foreign Entity One to anotherforeign company controlled by MSA.Then, this company purportedly madea “loan” to the Clip Company in theform of a line-of-credit. According tothe district court, this essentially al-lowed the Clip Company to “borrow”its own (untaxed) money. Wheneverthe Clip Company reached its creditlimit, MSA, through the foreign com-pany, would simply raise the limit andhonor all additional requests for fundsby Mr. McBride. The district court in-dicated that Mr. McBride instructedMSA on how, when, and where to trans-fer funds.

Once the untaxed funds had beenrepatriated, either through the “loan”arrangement or otherwise, they wereused for a variety of purposes. For ex-ample, they were used for the paymentof regular business expenses for the ClipCompany, distributions in the form of“partner draws” to Mr. McBride, mort-gage payments for Mr. McBride’s formerwife, the purchase of Christmas presentsfor Mr. McBride’s parents, airline travel,automobile leases, investments in variousentities, and satisfaction of outstandinglegal fees.

In early 2001, Mr. McBride stoppedreceiving status reports from MSA aboutthe foreign assets and interest paymentsmade on the line-of-credit. is halt ofinformation triggered Mr. McBride’sconcern about the legitimacy of MSA.erefore, in an attempt to recoup hisfunds, Mr. McBride persuaded MSA inMarch 2001 to further increase the line-of-credit for the Clip Company by$665,000 and then immediately with-drew all such funds.

Let us talk numbers. During 2000and 2001, approximately $2.7 million

of otherwise taxable business profits tothe Clip Company were ultimatelyrouted to Mr. McBride. e highest bal-ances in the unreported foreign accountsare relevant, too. e district court, look-ing to the documentation presented bythe U.S. Department of Justice, deter-mined that in both 2000 and 2001, Mr.McBride had a reportable interest infour acccounts whose balances rangedfrom $10,900 to $736,902.

With respect to his Form 1040 for2000, Mr. McBride worked with CraigStayner (Accountant Stayner), whoalso served as the accountant for theClip Company. Mr. McBride never dis-cussed with Accountant Stayner hisinvolvement with MSA, provided himwith any documentation related toMSA, or mentioned that AccountantTaylor might have some informationor expertise regarding the FinacialMaster Plan and international tax andreporting obligations. Part III to Sched-ule B of Mr. McBride’s Form 1040 for2000 had the “no” box checked in re-sponse to the question about the ex-istence of foreign accounts, andMcBride did not file an FBAR for 2000with the Treasury Department by the6/30/01 deadline. Of course, Mr.McBride signed and dated his Form1040, thereby declaring under penaltiesof perjury that he had examined theForm 1040, as well as all accompanyingSchedules and Statements, and, to thebest of his knowledge, everything wastrue, correct, and complete.

Mr. McBride made a switch the nextyear, shiing his tax-related work to Ac-countant Taylor. His representative mayhave changed, but his actions did not:Mr. McBride checked the “no” box inPart III of Schedule B, thereby denyingthat he had a reportable interest in anyforeign account, he neglected to file anFBAR for 2001 with the Treasury De-partment by 6/30/02, and he signed anddated his Form 1040, again swearingthat he had reviewed and approved theentire Form 1040 for 2002, includingall Schedules and Statements.

e IRS began examining Mr.McBride in 2004 for potential noncom-pliance issues related to his participationin the Financial Master Plan. He adopteda defensive position, refusing to provide

certain documents to the revenue agent,denying that he had used the FinancialMaster Plan, professing ignorance ofwire transfers from the foreign accountsof Foreign Entity One and Foreign EntityTwo, claiming that the line-of-credit tothe Clip Company was a legitimate loan,and refusing to complete and submitFBARs for 2000 and 2001. e revenueagent eventually asserted a civil FBARpenalty for each of 2000 and 2001 “inthe amount of $100,000 ($25,000 peraccount) for his willful failure to reporthis interest in the foreign accounts.”77 Inother words, the revenue agent asserteda total “willful” FBAR penalty of$200,000, i.e., $100,000 for each year,which he presumably believed was themaximum penalty allowed under thelaw applicable to those two years.

The District Court’s HoldingBurden of Proof in Civil FBAR Collec-t ion Cases. e d istr ic t cour t inMcBride began its analysis by address-ing t he burden of pro of i ssue. Itexplained that the relevant statute, 31USC section 5321(b)(2), simply allowsthe U.S. government to “commence acivil action to recover a civil penaltyassessed” under the relevant FBAR pro-visions, but does not specify the legalstandard that applies. e district courtthen pointed out that only one federalcourt has directly spoken to this issue,i.e., the district court in Williams II.ere, it was determined that the gov-ernment’s burden of proof is “the pre-ponderance of the evidence” on allissues, including the issue of whether ataxpayer’s failure to file an FBAR was“willful.” Wrapping itself in the logic ofWilliams II , t he d istr ic t cour t inMcBride reasoned as follows:

e preponderance of the evidencestandard applied by the district courtin [Williams II] is the correct stan-


76The materials filed with or issued by the districtcourt in McBride indicate that another entity inthe Bahamas, Palisades & Associates, Ltd., wasformed or made available to Mr. McBride. It ap-pears that no foreign accounts were openedunder such entity and it was not otherwise piv-otal to the case. Accordingly, Palisades & Asso-ciates Ltd. is not further addressed in this arti-cle.

77McBride, note 74, supra, Slip Opinion, at p. 24.

NOTES

dard. As with Government penaltyenforcement and collection casesgenerally, absent a statute that pre-scribes the burden of proof, imposi-tion of a higher burden of proof iswarranted only where ‘particularlyimportant individual interests orrights’ are at stake. Because the FBARpenalties at issue in this case onlyinvolve money, it does not involve‘particularly important individualinterests or rights’ as that phrase isused in [the relevant cases].78

Analysis of the Willfulness Issue. Withthe burden of proof issue resolved, thedistrict court turned to the elements thatthe U.S. government must establish inorder to collect a “willful” FBAR penalty.e majority of t he elements wereundisputed, leaving the focus squarelyon the question of whether Mr. McBridehad “willfully” failed to file FBARs for2000 and 2001. Indeed, 18 pages of thedistrict court’s 25-page legal analysiswere devoted solely to the “willfulness”issue. Breaking this into digestible piecesis thus required.

Standard for Determining Willfulness inCivil FBAR Cases. Adhering to a line ofreasoning presented earlier by the FourthCircuit Court of Appeals in WilliamsIII, the district court indicated that “will-fulness” in this context includes not onlyknowing FBAR violations, but also reck-less ones.79 e district court, citing toprecedent from the Supreme Court aswell as Williams III, then explained that“willful blindness” satisfies the willfulnessstandard in both criminal and civil con-texts.80 Finally, the district court notedthat willful intent can be proven by cir-cumstantial evidence, and reasonableinferences can be drawn from the factsbecause direct proof of a taxpayer’s intentis rarely available.81

Taxpayer Had Constructive Knowledgeof the FBAR Requirement. The districtcourt next turned to Mr. McBride’s levelof knowledge of the FBAR filing re-quirement. Its ultimate conclusion onthis issue is remarkably clear, but thedistrict court’s analysis meanderedsomewhat. The court cited the generalrule that all taxpayers are charged withknowledge, awareness, and responsi-bility for all tax returns executed under

penalties of perjury and filed with theIRS. It then underscored that the onlycase thus far to examine willfulness inthe context of civil FBAR penalties isWilliams III and summarized the gov-ernment-favorable holdings in thatcase. Next, the court recognized thatseveral cases stand for the propositionthat the taxpayer’s signature on a taxreturn does not, by itself, prove thatthe taxpayer had knowledge of the con-tents of the return. The district courtdistinguished such cases, though, byemphasizing that the language thereinabout “knowledge of the contents ofthe return” refers to the taxpayer’s aware-ness about specific figures on the return.When dealing with the FBAR situation,the court pointed out that “knowledgeof what instructions are containedwithin the form is directly inferablefrom the contents of the form itself,even if it were blank.”82 Fortifying itsposition, the district court went on tocite and quote various criminal cases,including a criminal FBAR case, wherethe courts attributed to the taxpayerknowledge of the contents of a returnbased solely on the taxpayer’s signatureon the tax return.83 The court, elimi-nating any ambiguity about its stanceon constructive knowledge, renderedthe following holding:

Knowledge of the law, includingknowledge of the FBAR require-ments, is imputed to McBride. Theknowledge of the law regarding therequirement to file an FBAR is suf-ficient to inform McBride that hehad a duty to file [an FBAR] for anyforeign account in which he had afinancial interest. McBride signedhis federal income tax returns forboth the tax year 2000 and 2001.Accordingly, McBride is chargedwith having reviewed his tax returnand having understood that the fed-eral income tax return asked if atany time during the tax year he heldany financial interest in a foreignbank or financial account. The fed-eral income tax return contained aplain instruction informing individ-u a l s t h at t h e y h av e t h e dut y toreport their interest in any foreignfinancial or bank accounts held dur-ing the taxable ye ar. McBride istherefore charged with having hadknowledge of the FBAR require-ment to disclose his interest in anyforeign financial or bank accounts,

as evidenced by his statement at thetime he signed the returns, underpenalty of perjur y, that he read,reviewed, and signed his own feder-al income tax returns for the taxyears 2000 and 2001, as indicated byhis signature on the federal incometax returns for both 2000 and 2001.As a result, McBride’s willfulness issupported by evidence of his falsestatements on his tax returns forb ot h t he 2000 and t he 2001 t axye ars , and h i s s i g n atu re, u nd e rpenalty of perjury, that those state-ments were complete and accu-rate.84

Taxpayer Had Actual Knowledge of theFBAR Requirement. More importantly,explained the district court, Mr. McBridehad actual knowledge of the FBAR filingrequirement. e court identified fouritems in support of this determination.First, Mr. McBride read the pamphletsand other promotional material pro-vided by MSA, which explained theduty to report an interest in foreign fi-nancial accounts. Second, Mr. McBridetestified at trial that the purpose ofadopting the Financial Master Plan wasto avoid disclosure of certain assets andthe payment of taxes thereon. ird,Mr. McBride engaged in an evasivecourse of conduct with the revenueagent during the audit, lying about cer-tain facts and withholding informationand documentation. Finally, Mr.McBride made statements at trial thatcontradicted his earlier sworn state-ments during the discovery phase ofthe trial.

Taxpayer Acted with Reckless Disregardor Willful Blindness. The district courtidentified a long list of items that, to-gether, supposedly demonstrated thatMr. McBride either willfully or reck-lessly disregarded the obvious risk oftax-related problems (including FBARviolations) because of his participationin the Financial Master Plan. Theseitems included the following: (1) Mr.McBride reviewed the memo and en-closed newspaper article from Account-ant Taylor in August 1999 expressingconcern about the validity of the Fi-nancial Master Plan; (2) Mr. McBridewas already concerned about MSA inMarch 2001, well before he filed hisForm 1040 for 2000; (3) Mr. McBride


knew that the purpose of the FinancialMaster Plan was to avoid taxation andcertain reporting requirements; (4) Mr.McBride knew the Financial MasterPlan involved the use of foreign entitiesheld by nominees; (5) Mr. McBride’sinitial impression of the Financial Mas-ter Plan was that it constituted “tax eva-sion;” (6) Mr. McBride did not seek alegal opinion or guidance from outside,independent counsel; (7) Part III ofSchedule B to Form 1040 contained a“plain instruction” regarding disclosureof foreign accounts; and (8) Mr.McBride did not discuss with or provideinformation to either of his two ac-countants regarding the Financial Mas-ter Plan.85

Reason Why McBride Is Interesting.The obvious reason that McBride isnoteworthy is that it constitutes onlythe second case to wrangle with novellegal issues related to the collection of“wil lful” FBAR penalties. Anotherapparent reason is that it followed, to acertain degree, the government-favor-able holding in Williams III that a tax-payer’s constructive knowledge of theFBAR filing requirement suffices toprove willfulness. There are severalmore obscure reasons why McBride issignificant, too. Some of these reasons,which likely went unnoticed by manytaxpayers and practitioners, are exam-ined below.

Government Reverses Course on Burdenof Proof. As explained above, the districtcourt in McBride, adhering to the ju-dicial reasoning in Williams II, heldthat the proper legal standard in FBARcollection cases is preponderance ofthe evidence, because the relevantstatute is silent on the issue and becausethe civil FBAR penalty only involvesmoney, not “important individual in-terests or rights.”86 McBride is note-worthy because it shows (to those whoare paying close attention) how theIRS has radically changed its positionon this issue since the courts startedrendering unexpected, helpful deci-sions.

In 2006, the IRS issued a legal mem-orandum on offshore issues, coveringseveral items, including the burden on

the IRS in civil FBAR penalties. is wasthe infamous CCA 200603026. e IRS’sposition at that time, looking into theproverbial crystal ball, was that the courtswould obligate the IRS to reach a tougherthreshold, clear and convincing evidence.

We expect that a court will find theburden in civil FBAR cases to be thatof providing “clear and convincingevidence,” rather than merely a “pre-ponderance of the evidence.” eclear and convincing evidence stan-dard is the same burden the [IRS]must meet with respect to civil taxfraud cases where the [IRS] also hasto show the intent of the taxpayer atthe time of the violation. Courts havetraditionally applied the clear andconvincing standard with respect tofraud cases in general, not just to taxfraud cases, because, just as it is diffi-cult to show intent, it is also difficultto show a lack of intent. e higherstandard of clear and convincing evi-dence offers some protection for anindividu al who may b e wronglyaccused of fraud . . . Because theFBAR penalty is not a tax or a taxpenalty, the presumption of correct-ness with respect to tax assessmentswould not apply to an FBAR penaltyassessment for a willful violationanother reason we believe that the[IRS] will need to meet the higherstandard of clear and convincing evi-dence.87

It is interesting to witness the IRS’sshift of position on the burden of proofissue during McBride. The governmentattorneys, anticipating that counselfor Mr. McBride might point to theIRS’s legal memorandum cited above,essentially explained to the districtcourt on brief that the IRS’s positionback in 2006 was wrong and it shouldbe ignored altogether. The followingshows more accurately how the IRStried to distance itself from its earlieranalysis:

Though McBride may attempt toassert that the applicable burden ofproof with respect to the issue ofwillfulness is the ‘clear and convinc-ing standard,’ that assertion is wrongand unsupported by any law. Mor-ever, McBride may not cite to Inter-n a l R e ve nu e S e r v i c e L e g a lMemorandum [because] 26 U.S.C. §6110 specifically prohibits ChiefCounsel Advice memoranda like theone me nt i one d by c ou ns e l forMcBride from being either used orcited as precedent. Therefore, thatmemorandum has no controllingeffect, and moreover should nothave any persuasive value . . .88

It is equally interesting to see the IRSattempt to put a final spin on the burdenof proof debate aer the IRS-favorableholdings in Williams II and McBride.High-ranking IRS attorneys at the fore-front of all things FBAR stated, in early2013, that the issue has been resolved,at least from their perspective.

[T]he IRS office of Chief Counsel ini-tially took a conservative positionwhen it advised field agents on thestandard of proof the governmentmust satisfy to show willfulness forthe FBAR penalty, in part because theissue had not been litigated. But thecourts have since agreed with the IRSthat preponderance of the evidence,rather than clear and convincing evi-dence, is the correct standard to applyin the civil [FBAR] context.89

Confusion Created About the ReasonableReliance Defense. Most taxpayers facingtax adjustments and/or penalties oftenlook outward to justify their transgres-sions, and Mr. McBride was no differ-ent. He maintained that he reasonablyrelied on three different persons, suchthat FBAR penalties should be miti-gated.

Mr. McBride began by arguing thathe reasonably relied on Accountant


78McBride, note 74, supra, Slip Opinion, at p. 27(internal citations omitted).


80McBride, note 74, supra, Slip Opinion, at pp. 32-33.




84McBride, note 74, supra, Slip Opinion, at pp. 38-39 (internal citations omitted).



87“Service Discusses Foreign Bank and FinancialAccounts Report Penalty,” 2006 Tax Notes Today,Doc. 2006-1196 (2/10/06); CCA 200603026.

88McBride, note 74, supra, Plaintiff’s Trial Brief,5/14/12, pp. 8-9.

89Coder, “Taxpayers Face Hurdles and Risks WhenOpting-Out of U.S. Offshore Voluntary Disclo-sure Program,” 2013 Worldwide Tax Daily 12-4(1/17/13).


NOTES

Stayner with respect to his Form 1040for 2000. The district court quickly dis-pensed with this argument because Mr.McBride did not fully inform Account-ant Stayner about his involvment withMSA and the Financial Master Plan.90

This ruling raises no concerns. Mr. McBride then contended that

he relied on MSA and its attorneys,

presumably the ones that prepared thelegal opinion about the Financial Mas-ter Plan. The district court also swiftlyrejected this position because such ad-visors lacked the necessary independ-ence.91 This ruling does not cause anyconcerns either.

Lastly, Mr. McBride maintained thathe relied on Accountant Taylor with re-spect to his Form 1040 for 2001. As ex-plained earlier, the district court foundthat Accountant Taylor sent Mr. McBridein August 1999 a memo expressing con-cerns about the Financial Master Planand enclosing an article addressing legaland compliance issues related to foreignbank accounts. e district court cameto the following conclusion about thesupposed dependence on AccountantTaylor:

Even if [Accountant] Taylor was ful-ly aware of the [MSA] scheme yetfailed to properly advise McBride toreport his interests in the foreignaccounts, this would not excuseMcBride. The taxpayer, not the pre-parer, has the ultimate responsibilityto file his or her return and to pay

the tax due. This duty generaly can-not b e avoided by relying on anagent. McBride knew, or at leastmade himself willfully blind, aboutthe need to report his interests in theforeign accounts when he signed his2000 return. That [Accountant] Tay-lor may have f ur t her faci l itatedMcBride’s willful blindness a yearlater [in 2001] by failing to dispense

prop e r a d v i c e d o e s not re nd e rMcBride’s failure to report his inter-est in the foreign accounts any lesswillful.92

This holding raises questions fortwo main reasons. First, the broad open-ing statement (i.e., that no reasonablecause would exist even if AccountantTaylor were “fully aware” of the offshoreissues and failed to properly advise Mr.McBride) seems inconsistent with well-established law. The regulations rec-ognize that a taxpayer’s reasonablereliance on an independent, informed,qualified tax professional often reachesthe level of reasonable cause.93 For pur-poses of the reasonable-reliance defense,the regulations also broadly define theconcept of “advice” to cover “any com-munication” from a qualified advisorand clarify that “[a]dvice does not haveto be in any particular form.”94 TheSupreme Court, for its part, has con-cluded that the IRS must liberally con-strue the reliance defense, stating that“[w]hen an accountant or attorney ad-vises a taxpayer on a matter of tax law

. . . it is reasonable for the taxpayer torely on that advice” and further ac-knowledging that “[m]ost taxpayersare not competent to discern error inthe substantive advice of an accountantor attorney.”95

Second, in stating that Mr. McBridecould not rely on others to file a returnand pay the proper tax, the districtcourt seems to blur the long line of taxcases distinguishing between relianceon tax advice (which can constitute“reasonable cause”) and reliance onothers to perform non-delegable min-isterial tasks (which cannot constitute“reasonable cause”).96 The Tax Courthas previously explained this distinc-tion, which seemed to escape the dis-trict court in McBride:

In general, a taxpayer’s duty to file areturn when due is a personal, non-delegable duty. Thus, reliance uponan accountant to file is ordinarily noexcuse for filing a return beyond thedue date. However, the SupremeCourt has distinguished betweenthe case in which a taxpayer reason-ably relies on the substantive taxadvice of an accountant or attorneythat no return need be filed . . . Sim-ilarly, this Court has held that rea-sonable cause . . . can be shown byproof that the taxpayer supplied allrelevant information to a competenttax adviser and relied in good faithon the incorrect advice of the advis-er that no return was required to befiled.97

Edging Toward Strict Liability. TheMcBride case is also interesting becauseof the district court’s broad interpre-tation of “willfulness” in the FBAR con-text, which seemingly pushes theconcept toward one of strict liability.Although not entirely clear, it appearsthat Mr. McBride argued that he wasaware of the FBAR filing requirement,but decided not to comply because ofhis belief, based to a certain extent onthe analysis of Accountant Taylor, thathe did not possess a sufficient interestin the foreign accounts under the pe-culiar FBAR attribution rules. As theculmination to its 18-page analysis ofthe “willfulness” issue, the district courteffectively concluded that, if a taxpayerexecutes and files his Form 1040, thenall failures to file FBARs, regardless ofthe validity of the taxpayer’s rationale


The obvious reason that McBride isnoteworthy is that it constitutes only thesecond case to wrangle with novel legalissues related to the collection of“willful” FBAR penalties.

I



93Reg. 1.6664-4(c)(1).

94Reg.1.6664-4(c)(2).

95Boyle, 469 U.S. 241, 55 AFTR2d 85-1535, 251(1985).

96McMahan, 114 F.3d 366, 79 AFTR2d 97-2808(CA-2, 1997).

97Zabolotny, 97 TC 385, 400-401 (1991) (internalcitations omitted) (holding that reasonable

cause existed where two CPAs, fully informed ofthe facts, led the taxpayer to believe that no tax-able event was created by the relevant transac-tions for which any federal excise tax returnswould be required to be filed).

98McBride, note 74, supra, Slip Opinion, at pp. 48-49 (internal citations omitted).



NOTES

for not filing, are willful and vulnerableto maximum sanctions.

[E]ven if the decision not to discloseMcBride’s interest in the foreignaccounts was based on McBride’sbelief that he did not hold sufficientinterest in those accounts to warrantdisclosure, that failure to disclosethose interests would constitutewillfulness. Because McBride signedhis tax returns, he is charged withknowledge of the duty to complyw it h t h e F BA R re qu i re m e nt s .Wh e t h e r Mc B r i d e b e l i e v e d[Accountant] Taylor had deter-mined that a disclosure was notrequired is irrelevant in light of [theapplicable case], which states thatthe only question is whether thedecision not to disclose was volun-tary, as opposed to accidental. Thegovernment does not dispute thatMcBride’s failure to comply with

FBAR [sic.] was the result of hisb e l i e f t h at h e d i d n ot h av e areportable financial interest in theforeign accounts. However . . . theFBAR requirements did require thatMcBride disclose his interest in theforeign accounts during both the2000 and 2001 tax years. As a result,McBride’s failure to do so was will-ful.98

is final ruling by the district courtin McBride is noteworthy because itseems contrary to the position takenby the IRS, historically and recently.For instance, in the portion of the In-ternal Revenue Manual discussing thenotion of “willful blindness,” the IRSindicates that “[t]he mere fact that aperson checked the wrong box, or nobox, on a Schedule B is not sufficient,by itself, to establish that the FBAR vi-olation was attributable to willful blind-

ness.”99 It goes on to explain that, evenin situations where a taxpayer admitsknowledge about the FBAR questionon Schedule B to Form 1040, willfulnessonly exists where the taxpayer is inca-pable of providing the IRS a “reasonableexplanation” for not properly respondingto the question on Schedule B and notfiling an FBAR.100

Conclusione first two willful FBAR penalty casesin which the taxpayer lost, Williams IIIand McBride, began to lay the groundwork for similar cases. Part two of thisarticle will look at two more such cases,Bussell and Bohanec. It will also analyzeBedrosian, which does not change theexisting foundation, but adds three im-portant points. �


First Taxpayer Victory in a “Willful” FBAR Penalty Case ......possible resolution of this case...

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