DOJ: IRS Analysis Won’t Help Decide Willfulness Charge in FBAR Case

 

 

ARTHUR BEDROSIAN,
Plaintiff,
v.
UNITED STATES OF AMERICA, et al.,
Defendants.

IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF PENNSYLVANIA

MEMORANDUM OF LAW IN SUPPORT OF THE
UNITED STATES’ MOTION IN LIMINE

At issue for trial in this case is whether Arthur Bedrosian 1) willfully failed to file a Report of Foreign Bank and Financial Account (“FBAR”) for 2007 reporting his interest in a $2 million foreign bank account and 2) whether the $9,500 Bedrosian paid with respect to a civil penalty assessed against him for his failure to report his account constituted an illegal exaction. The United States requests that the Court preclude Bedrosian from arguing, presenting evidence, or eliciting testimony concerning the procedures, actions, analyses, or viewpoints of the Internal Revenue Service and its personnel at the administrative level regarding willfulness. This evidence is irrelevant to the issues to be tried and would only serve to cause undue delay and waste time of the Court and parties. To the extent the court finds the procedures, actions, analyses, and interim conclusions relevant, its should nevertheless limit the evidence offered since most of it is repetitive and would constitute cumulative evidence.

Introduction

Bedrosian filed this suit alleging that the small amount he paid with respect to the civil penalty assessed against him was an illegal exaction and that the United States should be ordered to return those funds. An illegal exaction claim is a claim that money was “’improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.’” Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005), quoting, Eastport S.S. Corp. v. United States, 372 F.2d 1002, 1007 (Cl. Ct. 1967). “The classic illegal exaction claim is a tax refund suit alleging that taxes have been improperly collected or withheld by the government.” Id.; see also Cencast Services, L.P. v. United States, 94 Fed. Cl. 425, 451 (2010) (stating that a tax refund suit involves a claim that the government, through the Internal Revenue Service, exacted money belonging to the taxpayer).

While this matter involves a penalty imposed by Title 31 and not Title 26, much of the paradigm for analysis and determination should carry over from tax refund cases since both types of cases are suits for the return of an illegal exaction, a common law action for money had and received. An action for refund of taxes claimed to have been erroneously collected is in the nature of the common-law action for money had and received and is governed by equitable principles. See Stone v. White, 301 U.S. 532, 534 (1937); Lewis v. Reynolds, 284 U.S. 281 (1932); Hodoh v. United States, 153 F. Supp. 822, 825 (N.D. Ohio 1957); see also, Wilkes Barre Lace Mfg. Co. v. Mundy, 18 F. Supp. 65 (W.D.Pa. 1937) (providing historical background of actions for money and had and received against collector of taxes).¹

The United States filed a counterclaim contending that Bedrosian was liable for the remainder of the civil penalty assessed against him under 31 U.S.C. § 5321(a)(5) for willfully failing to report his $2 million bank account at UBS in Switzerland. Under the foreign bank account reporting requirements contained in Title 31, United States citizens who have interests in foreign accounts must keep records and report certain information about those accounts to the government. 31 U.S.C. § 5314(a). The FBAR is the form used to report the information required by section 5314. 31 C.F.R. § 1010.350. Filing an FBAR is in addition to the requirement that United States citizens report on their federal income tax returns whether they own foreign accounts and all income earned from such accounts. See 26 U.S.C. § 61(a); 26 C.F.R. § 1.1-1(b); https://www.irs.gov/uac/about-schedule-b-form-1040.

It is undisputed that in 2007 Bedrosian had two foreign bank accounts that he was required to report on an FBAR for 2007 filed with the government. It is also undisputed that Bedrosian filed an FBAR for 2007 disclosing only one of his foreign accounts, the smaller account, and that he failed to report the larger of his two foreign bank accounts, his $2 million UBS account ending in 6167. The only issue before the Court is whether, at the time he filed his 2007 FBAR form, Bedrosian acted willfully in failing to report his larger $2 million foreign account. Bedrosian acted willfully if he knowingly failed to report his larger UBS account or if he recklessly disregarded a risk that he failed to comply with the FBAR requirements. See Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007).

The Service learned that Bedrosian omitted the $2 million foreign account and assessed a penalty in accordance with 31 U.S.C. § 5321. Bedrosian commenced this action challenging his liability for the penalty and the United States counterclaimed for the unpaid balance. The Court’s review is de novo, that is review based on the evidence admitted at trial. The Third Circuit adopted the definition of de novo as “[a]new, afresh, a second time[.]” Holland v. New Jersey Dep't of Corr., 246 F.3d 267, 278 (3d Cir. 2001). The evidence considered by the Service, the weight given to specific pieces of evidence, and the Service’s determinations of credibility are of no significance in the Court’s de novo review.

Bedrosian seeks to admit testimony and other evidence of the Service’s actions, procedures, analyses, and the viewpoints of its personnel prior to assessment of the penalty at issue.² This testimony and other evidence is irrelevant, because the question for the Court in this case is whether Bedrosian willfully failed to report his $2 million account on his FBAR, not whether the actions that Service personnel took were right or wrong or what the Service thought about Bedrosian’s intent in hiding the more valuable of his UBS accounts. Additionally, even if the Court finds that such evidence is nominally relevant, the bulk of the evidence should be excluded as causing undue delay, wasting time, and needlessly presenting cumulative evidence.

Argument

Under the Federal Rules of Evidence, only relevant evidence is admissible at trial. Fed. R. Evid. 402 (“irrelevant evidence is not admissible”). Relevant evidence is evidence that has any tendency to make the existence of any fact that is of consequence to the determination of the action more or less probable than it would be without the evidence. Fed. R. Evid. 401. Relevant evidence can be excluded, however, if its probative value is substantially outweighed by the risk that the evidence would cause undue delay, waste time, or constitute needless presentation of cumulative evidence. Fed. R. Evid. 403.

The evidence that Bedrosian seeks to admit regarding the administrative proceeding has no bearing on any facts that are necessary to determine whether he willfully failed to report his UBS account. The evidence would also cause an undue delay, waste time, and constitute cumulative evidence because it would substantially prolong the trial without contributing to the de novo determination regarding willfulness. Therefore, the evidence should be excluded under Rule 402, or in the alternative, under Rule 403.

I. The Administrative Proceeding has no Bearing on this Court’s De Novo Determination Regarding Willfullness

Whether Bedrosian’s failure to comply with the FBAR requirements was willful is determined de novo, which means “’that it is a decision based on the merits of the case and not on any record developed at the administrative level.’” United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sept. 1, 2010), rev’d on other grounds, United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), quoting, Eren v. Comm’r, 180 F.3d 594, 597-598 (4th Cir. 1999); see also United States v. McBride, 908 F.Supp.2d 1186, 1201 (D. Utah 2012). As the court explained in Williams, applying a de novo standard of review in FBAR cases is consistent with other contexts in which the government seeks to enforce a civil penalty. United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sept. 1, 2010). In those contexts, the government bears the burden to prove its case by a preponderance of the evidence introduced at trial. Id.

Thus, what occurred at the administrative level is irrelevant, because the enforcement action is not a review of an existing administrative record. See National Right to Work Legal Def. & Educ. Fund. v. United States, 487 F. Supp. 801, 805 (E.D.N.C. 1979) (in tax cases, “the court does not sit in judgment of the Commissioner; the court places itself in the shoes of the Commissioner”). Even when the Service reaches the right result for the wrong reason, the plaintiff still owes the penalty. The Court’s determination is simply not made based on a deferential review of the administrative record.

When seeking to enforce a civil penalty for the failure to comply with the FBAR requirements, the government is required to prove liability for the penalty by a preponderance of the evidence. See Herman & MacLean v. Huddleston, 459 U.S. 375, 390 (1983); see also Grogan v. Garner, 498 U.S. 279, 286 (1991); United States v. Bohanec, No. 2:15-cv-4347, 2016 WL 7167860 (C.D. Cal. Dec. 8, 2016). Thus, courts determine de novo whether a person is liable for the FBAR penalty based on the evidence admitted at trial. In this case, the Court will consider the statutory provision and determine whether Bedrosian acted willfully based on the evidence presented at trial. See United States v. Farley, 11 F.3d 1385, 1390 (7th Cir. 1993) (in evaluating defendant’s liability and his claimed defense, agency opinion not relevant because “[t]his defense requires only that the district court interpret the statutory exemption and determine whether Farley's purchases were within the scope of that exemption”).

Evidence regarding the thoughts, analysis, application of facts to law, and determinations at the administrative level with respect to willfulness have no place in the Court’s de novo review of whether Bedrosian willfully failed to comply with the FBAR requirements. United States v. Farley, 11 F.3d at 1390 (“The suppositions of FTC staff members expressed in internal memoranda as to requirements of the Act are not pertinent to this task. In its attempt to decipher the meaning of a statute a court may rely on various tools, including official agency interpretations . . . Courts may not, however, rely on unpublished opinions of agency staff”). Such evidence is therefore irrelevant and inadmissible.

Although the FBAR penalty is not a tax penalty, the principles that guide the judicial review of tax assessments are instructive.³ In tax cases, courts conduct a de novo review of the tax assessment and the taxpayer bears the burden of showing based on the evidence at trial that he is not liable for the tax or that he is entitled to a refund. United States v. Janis, 428 U.S. 433, 440 (1976); Francisco v. United States, 267 F.3d 303, 319 (3d Cir. 2001); R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 (2d Cir. 1991); Wells Fargo & Co. and Subsidiaries v. United States, 91 Fed. Cl. 35, 75 (2010) (“a tax refund suit is not an appellate review of the administrative decision that was made by the IRS; instead, the Court must make an independent decision as to whether the taxpayer is due a refund”) (internal quotation omitted).

In conducting the de novo review, the factual and legal analysis employed by the Service at the administrative level is of no consequence to the court. R.E. Dietz Corp. v. United States, 939 F.2d at *4; see also Katz v. United States, No. 91-5623, 1992 WL 103006 (E.D. Pa. May 6, 1992) (finding that because the standard of review is de novo, “it is not necessary to have any ancillary determination as to the procedures employed by the government in levying their assessment”); Ruth v. United States, 823 F.2d 1091, 1093-1094 (7th Cir. 1987) (finding that courts generally do not “look behind an assessment to evaluate the procedure and evidence used in making the assessment”); Rupert v. United States, 225 F.R.D. 154, 157 (M.D. Pa. 2004) (“Because the court must independently evaluate the Plaintiff's' claim, the recommendations of the Appeals Officer are not relevant to our review”).

Instead, the government prevails if the tax assessment is right based on any theory, even if the Service did not consider that particular theory when making the assessment. Excel Energy, Inc. v. United States, 237 F.R.D. 416, 418-419 (D. Minn. 2006) (internal quotations omitted); Kincaid v. United States, 682 F.2d 1220, 1222-1223, n. 3 (5th Cir. 1982); Griffin v. United States, 42 F.Supp.2d 700, 707 (W.D. Tex. 1998); Cook v. United States, 46 Fed. Cl. 110, 114-115 (2000) (“courts have repeatedly held that the government may support a tax assessment based on any admissible evidence, including that first disclosed in discovery, and, conversely, need not rely solely, or at all, on the evidence reviewed administratively by the Service”); Cooper v. United States ex rel. C.I.R., No. 07-10761, 2008 WL 2325644, at *2, n. 4 (5th Cir. June 6, 2008), citing, King v. United States, 641 F.2d 253 (5th Cir. 1981) (noting that the Service relied on one theory at the administrative level, discarded that theory, relied on and discarded a second theory and then offered a third theory; before trial, the government returned to the first theory).

Because the Service’s internal analysis is of “no consequence” to whether a taxpayer owes a tax or is entitled to a refund, courts have consistently held that the factual and legal analyses of Service personnel at the administrative level are irrelevant and inadmissible. See Katz v. United States, No. 91-5623, 1992 WL 103006 (E.D. Pa. May 6, 1992) (granting motion in limine to preclude the plaintiff from entering any evidence of the administrative proceedings regarding the tax assessment); Fisher v. United States, No. 1:08-cv-00908, 2011 WL 1528450 (S.D. Ind. Apr. 19, 2011) (excluding as irrelevant evidence of the minority interest discount used by the Service because the issue before the court in the de novo proceeding was the proper discount, not what the Service previously determined the discount to be); LPCiminelli Interests, Inc. v. United States, No. 09-cv-274, 2012 WL 5499444 (W.D.N.Y. Nov. 13, 2012) (finding factual considerations and legal analysis used by audit team irrelevant and declining to consider evidence of them); Louisiana Health Care Self Ins. Fund v. United States, No. 12-766, 2014 WL 4828940 (M.D. La. Sept. 29, 2014) (excluding evidence of administrative proceding to prove merits of the case); see also, Mayes v. United States, No. 84-5157, 1986 WL 10093, at *3 (W.D. Mo. June 12, 1986) (finding Service employee’s legal analysis irrelevant, because the court would not be reviewing the Service’s analysis or reasons for making the assessment).

Courts have reached the same conclusion in cases involving the trust fund recovery penalty, in which the relevant issues are whether a person is responsible for withholding employment taxes and willfully fails to pay the taxes to the government. See 26 U.S.C. § 6672. In Tarpoff v. United States, the court found that because the trial was a de novo review of whether the plaintiff was liable for the trust fund recovery penalty, the Service’s factual and legal analysis, as well as its decisions in general, were irrelevant and inadmissible. United States v. Tarpoff, No. 09-cv-00411, 2011 WL 863292, at *2 (S.D. Ill. Mar. 10, 2011); Ruth v. United States, 823 F.2d at 1094 (upholding the district court’s ruling that the plaintiff was barred from conducting extensive inquiries into the procedures behind the assessment); see also De Simone v. United States, No. 08-1857, 2009 WL 5173498 (D.N.J. Dec. 29, 2009). The Tarpoff court observed that the evidence regarding the administrative proceeding would not make it more or less probable that the plaintiff was a responsible person who willfully failed to pay the taxes. Id. Thus, the court found that the plaintiff could not introduce evidence of the Service’s analysis, policies, procedures, decisions, and alleged motives in assessing the penalties against the plaintiff. Id.; see also Lewis v. United States, No. 02-2958, 2014 WL 3880207 (W.D. Tenn. Mar. 28, 2014) (finding that evidence of what occurred during the administrative proceeding, as well as the sufficiency of the Service’s investigation, was both irrelevant and inadmissible).

The internal analysis underlying agency determinations has also been found to be inadmissible in other civil contexts. In Sulton v. Lahood, the plaintiff filed an employment discrimination suit and sought to introduce an agency determination from the Department of Transportation at trial. The court found that the agency determination was not relevant evidence to the de novo review of the plaintiff’s claim, because the evidence was not probative of whether the defendant discriminated against the plaintiff. Sulton v. Lahood, No. 08-cv-2435, 2009 WL 3815764 (S.D.N.Y. Nov. 6, 2009); see also Diaz v. Prudential Ins. Co. of America, 499 F.3d 640 (7th Cir. 2007) (in ERISA cases, the district court must make an independent determination on the legal analysis and factual issues; question is whether employee was entitled to benefits, and not whether agency selectively reviewed evidence).

In the current case, the issue before the Court is whether Bedrosian acted willfully when failing to disclose his $2 million UBS account on his 2007 FBAR. As in other civil actions and tax cases, including penalty cases involving willfulness, the court independently determines willfulness based on the evidence admitted at trial. To prevail on its counterclaim, the United States must show by a preponderance of the evidence that Bedrosian either knowingly failed to disclose his account or recklessly disregarded the risk of noncompliance.

This trial, however, is not about what the Service believed or did not believe years after Bedrosian failed to comply with the FBAR requirements, the facts considered and not considered, nor alleged flaws in its analysis. Nor is this trial about whether the Service could have reached a different conclusion. Even evidence that Service employees disagreed about the facts and anaylsis prior to the final administrative determination is not probative of whether Bedrosian’s noncompliance was willful. It is for this Court to determine based on the evidence before it at trial if Bedrosian willfully kept his $2 million UBS account secret, not to review an administrative record. Consistent with tax cases and other civil actions in which courts conduct a de novo review, the Court should exclude as irrelevant evidence of the Service’s factual and legal analysis regarding Bedrosian’s intent in failing to comply with the FBAR requirements.

II. Even if Relevant, Evidence of the Administrative Proceeding Regarding Willfulness should be Excluded as Causing Undue Delay, Wasting Time, and Needlessly Presenting Cumulative Evidence

If this Court finds that evidence of the administrative proceeding regarding willfulness is relevant, the evidence should be exluded under Rule 403. Under Rule 403, courts have discretion to exclude relevant evidence if the probative value of the evidence is substantially outweighed by the risk that the evidence would cause undue delay, waste time, or comprise a needless presentation of cumulative evidence. Fed. R. Evid. 403. Rule 403 requires the court to apply a balancing test and consider the subtleties of the particular case. Prescott v. R&L Transfer, Inc., No. 3:11-203, 2015 WL 12567260 (W.D. Pa. Apr. 28, 2015), citing, United States v. Vosburgh, 602 F.3d 512, 537 (3d Cir. 2010). Courts have broad discretion to determine whether evidence should be excluded under Rule 403. Egan v. Delaware River Port Authority, 851 F.3d 263, 275 (3d Cir. 2017) (internal quotation omitted).

To the extent the Court concludes that that any evidence of the administrative proceeding regarding willfulness is relevant, that relevance is outweighed by the undue delay and waste of time that consideration of the evidence would cause. Bedrosian seeks to turn what should be a one-day trial regarding his intent when he failed to disclose his $2 million UBS account into a multi-day trial of the Service’s procedures, actions, analyses, and conclusions at the administrative level. Allowing Bedrosian to introduce such evidence would more than double the number of witnesses and documents.⁴ Expanding the trial to this extent would waste time and cause unnecessary delay because it would needlessly confuse the issues before the court; this risk of confusion outweighs any possible relevance of the evidence Bedrosian seeks to admit.

In addition to causing undue delay and wasting time, allowing Bedrosian to introduce all such evidence would constitute a needless presentation of cumulative evidence. Evidence is cumulative if “it adds very little to the probative force of the other evidence in the case, so that if it were admitted, its contribution to the determination of truth would be outweighed by its contribution to the length of trial.” United States v. Cross, 308 F.3d 308, 326 (3d Cir. 2002), quoting, United States v. Williams, 81 F.3d 1434, 1443 (7th Cir. 1996). Engaging in a long foray into the administrative proceeding will contribute nothing to the determination of whether Bedrosian’s noncompliance was willful. It would only needlessly prolong the trial.

Bedrosian seeks to transform the trial into a struggle over how the evidence regarding willfulness considered by the Service compares to the evidence admitted at trial. Allowing such evidence to be admitted would give rise to the precise problem that was at issue in Sulton v. Lahood. See Sulton v. Lahood, No. 08-cv-2435, 2009 WL 3815764 (S.D.N.Y. Nov. 6, 2009). In Sulton, the district court found that excluding an agency determination was particularly appropriate where evidence would be presented at trial that was not presented to the agency. Id. Otherwise, the trial would turn into an improper “protracted and unproductive struggle over how the evidence admitted at trial compare[s] to the evidence considered by the agency.” Id. (internal quotation omitted). Like the Sulton court, even if the Court finds that evidence of the administrative proceeding regarding willfulness is relevant, the evidence should be excluded under Rule 403.

Conclusion

For the foregoing reasons, the United States’ motion in limine should be granted.

Date: August 11, 2017

Respectfully submitted,

LOUIS D. LAPPEN
Acting United States Attorney

DAVID A. HUBBERT
Acting Assistant Attorney General

KATHERINE M. REINHART
KAVITHA BONDADA
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 227
Washington, D.C. 20044
202-307-6528/6536 (v)
202-514-6866 (f)
Katherine.Reinhart@usdoj.gov
Kavitha.Bondada@usdoj.gov