Individual Argues His FBAR Violation Wasn’t Willful

ARTHUR BEDROSIAN,
Plaintiff-Appellee,
v.
UNITED STATES OF AMERICA, DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE,
Defendants-Appellants

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

On Appeal From The Judgment Of The
United States District Court For The
Eastern District Of Pennsylvania

BRIEF FOR THE APPELLEE, ARTHUR BEDROSIAN

Patrick J. Egan, Esquire
Beth L. Weisser, Esquire
FOX ROTHSCHILD LLP
2000 Market Street, 20^th Floor
Philadelphia, PA 19103
(215) 299-2000
pegan@foxrothschild.com
bweisser@foxrothschild.com

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TABLE OF CONTENTS

JURISDICTIONAL STATEMENT

STATEMENT OF ISSUES PRESENTED FOR REVIEW

STATEMENT OF THE CASE

STATEMENT OF THE STANDARD OF REVIEW

SUMMARY OF ARGUMENT

ARGUMENT

CONCLUSION

CERTIFICATE OF BAR MEMBERSHIP

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Anderson v. City of Bessemer, N.C., 470 U.S. 564 (1985)

Baker Indus., Inc. v. Cerberus Ltd., 764 F.2d 204 (3d Cir. 1985)

Cheek v. United States, 498 U.S. 192 (1991)

Country Floors, Inc. v. Partnership Composed of Getner and Ford, 930 F.2d 1056 (3d Cir. 1991)

Edward Lifesciences AG v. CoreValve, Inc., 2011 WL 446203 (D. Del. Feb. 7, 2011)

Fuji Photo Film Co. Ltd. v. Jazz Photo Corp., 249 F.Supp.2d 434 (D. N.J. 2003)

Glenn Elec. Co., Inc. v. Donovan, 755 F.2d 1028 (3d Cir. 1985)

Gov't. of the Virgin Islands v. Gereau, 502 F.2d 914 (3d Cir. 1974)

Hoots v. Pennsylvania, 703 F.2d 722 (3d Cir. 1983)

Ratzlaf v. United States, 510 U.S. 135 (1994)

Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007)29,

Spies v. United States, 317 U.S. 492 (1943)

Trans World Airlines, Inc. v. Thurston, 469 U.S. 111 (1985)

Travelers Cas. and Sur. Co. v. Ins. Co. of North America, 609 F.3d 143 (3d Cir. 2010)

United States v. Bishop, 412 U.S. 346 (1973)

United States v. Bohanec, 2016 WL 7167860 (C.D. Cal. Dec. 8, 2016)

United States v. Colliot, 2018 WL 2271381 (W.D. Tx., May 15, 2018)

United States v. Figueroa, 687 Fed.Appx. 187 (3d Cir. 2017)

United States v. Harris, 507 F.2d 197 (3d Cir. 1975)

United States v. Kole, 164 F.3d 164 (3d Cir. 1998)

United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)

United States v. Murdock, 290 U.S. 389 (1933)

United States v. Williams, 489 F. App'x 655 (4th Cir. 2012)

Wainwright v. Witt, 429 U.S. 412 (1985)

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969)

Statutes

26 U.S.C. § 7201

26 U.S.C. § 7203

28 U.S.C. § 1291

31 U.S.C. § 5314

31 U.S.C. § 5321(a)(5)

Age Discrimination in Employment Act

Amendments to Implementing Regulations Under the Bank Secrecy Act

Bank Secrecy Act

Fair Credit Reporting Act

Other Authorities

31 C.F.R. § 103.57

31 C.F.R. § 1010.820

Fed. R. Civ. P. 52(a)(6)

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JURISDICTIONAL STATEMENT

Plaintiff-Appellee Arthur Bedrosian (“Bedrosian”) submits that this Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 1291 as an appeal from a final decision of the United States District Court for the Eastern District of Pennsylvania.

STATEMENT OF ISSUES PRESENTED FOR REVIEW

1. Was the District Court, as the finder of fact and finder of law, correct in holding that Bedrosian's conduct did not constitute a willful violation of 31 U.S.C. § 5314?

STATEMENT OF THE CASE

Introduction

This case called upon the District Court to determine whether Bedrosian's conduct in 2007 constituted a willful violation of 31 U.S.C. § 5314. At the underlying trial, both parties were given the opportunity to present evidence. The government had the burden of proving its case by a preponderance of the evidence. The government failed to meet that burden.

During trial, the District Court learned that in 2007, Bedrosian checked “yes” in the appropriate section of his annual tax return indicating he possessed or controlled a foreign bank account and identifying Switzerland as the country of location. (A97 (Tr.)). Bedrosian filed an FBAR in 2007 indicating the financial institution where his accounts were located. (A99 (Tr.)) Unfortunately, due to an unintentional oversight, he identified only one of the two accounts he maintained. It strains credulity that an individual attempting to conceal a foreign bank account would alert the government that they have an account, identify the country, and identify the bank where both accounts are located. Further, these actions are similarly inconsistent with reckless behavior. They are, at most, negligent.

Once Bedrosian became concerned about the status of his foreign bank accounts, he retained lawyers who engaged forensic accountants to develop a plan to ensure that his filings, or amended filings, were accurate, complete, and all taxes were paid. (A104-A105 (Tr.)). Bedrosian took all of these steps prior to the government ever contacting him regarding his foreign account. Importantly, the District Court found Bedrosian to be a credible witness. (A9 (Dist. Ct. Findings of Fact and Conclusions of Law)).

It was the government's burden to prove willfulness. Remarkably, the government presented no evidence to meet its burden. It failed to call a single witness to testify regarding anything Bedrosian did that could support a willful violation. In fact, it opposed Bedrosian's efforts to call the IRS revenue agents who conducted the underlying investigation. (A561 (Docket Entries No. 43 and 47)). Instead, the government asked the District Court to make a tremendous leap and simply “infer” willfulness merely because Bedrosian filed an incomplete FBAR. The District Court declined to make such a leap.

The District Court adopted the lower standard of willfulness advocated by the government, that is, a knowing or reckless violation of a statutory duty. However, the District Court explained that this determination could not be made in a vacuum, “rather, disposition of this case requires a fact- and context-specific inquiry into Bedrosian's actions.” (A9 (Dist. Ct. Findings of Fact and Conclusions of Law). Relying on the “narrative developed at trial, largely via the credible testimony of Bedrosian”, the District Court was unable to square the facts of this case with the facts of those cases from other courts that have found a willful FBAR violation (A11-A13 (Dist. Ct. Findings of Fact and Conclusions of Law)). The District Court noted the paucity of evidence supporting a finding that Bedrosian had acted willfully. (A13-A14 (Dist. Ct. Findings of Fact and Conclusions of Law)).

Additionally, the government failed to present sufficient evidence to sustain its burden of proof with regard to the calculation of the penalty. However, the District Court did not reach that issue due to its finding of non-willfulness. The District Court's decision, based on credibility determinations and well-reasoned factual findings, should be affirmed.

Factual Background

Bedrosian obtained his first job in the pharmaceutical industry in May 1968 and began travelling overseas for business in 1970. (A69 (Tr.)). At the suggestion of a colleague, Bedrosian opened an account with a Swiss bank to avoid having to use travelers' checks, which he found inconvenient and potentially unsafe in foreign countries. (A72 (Tr.)). Bedrosian chose a Swiss bank because they are well-known throughout Europe and recognized in many countries. (A72 (Tr.)). Bedrosian opened a savings account with Swiss Bank Corp. in 1972, where he made deposits of after tax dollars. (A71-A73 (Tr.)).

At some point thereafter, Union Bank of Switzerland (“UBS”) acquired Swiss Bank Corp and Bedrosian's account was automatically transferred. (A74 (Tr.)). Bedrosian did not ask UBS to hold his mail in Switzerland, nor does he recall signing a document asking UBS to hold his mail. (A81-A82 (Tr.)). UBS representatives would visit New York usually once per year and if Bedrosian could meet with them to discuss his account, he would. (A83-A84 (Tr.)).

In 2005, Bedrosian entered into an agreement with UBS whereby UBS loaned him 750,000 Swiss francs (at the time equivalent to approximately $900,000.00) at an interest rate of 1.75% (A85-A86 (Tr.); A253 (Exh. P6)). UBS loaned Bedrosian the money so that UBS could invest it for him, but Bedrosian did not consider the loan from UBS to be his money. (A86 (Tr.)). In late 2008, UBS told Bedrosian that he had to pay back the loan and close his account, at which time Bedrosian transferred the account to a bank called Hyposwiss. (A87-A88 (Tr.); A254 (Exh. P8)).

Up until 1972, Bedrosian prepared his own taxes. Starting in 1972, he hired an accountant named Seymour Handelman (“Handelman”) to prepare his taxes because it had become too confusing to do it himself. (A89-A90 (Tr.)). Handelman prepared Bedrosian's returns until Handelman died in 2007. (A90 (Tr.)). Bedrosian would assemble all the documents that could potentially be related to his tax return in a folder and provide that information to his accountant. (A91 (Tr.)). In the mid-90's, Bedrosian read an article in the Wall Street Journal about Swiss bank accounts and then told Handelman about the article. (A92 (Tr.)). When Handelman asked why he cared, Bedrosian told him that he had an account in Switzerland. (A93 (Tr.)). Handleman then told Bedrosian that he should have been checking a box on his tax return to indicate that he had an overseas account but that there was nothing he could do about it at that point. (A93-A94 (Tr.)). Bedrosian told Handelman that he would be leaving the money in the Swiss bank account to his children and Handleman told him that when his children brought the money back to the United States they would have to pay taxes on it. (A94 (Tr.)). Bedrosian had no further discussions with Handleman about the foreign account. (A95 (Tr.)).

When Handelman died in 2007, his widow turned the files over to Sheldon Bransky who began preparing Bedrosian's tax returns. (A95-A96 (Tr.)). Bransky prepared Bedrosian's 2007 tax return. (A96-A97 (Tr.)); A256-A262 (Exh. P9)). On his 2007 tax return, Bedrosian responded yes to the question of “at any time in 2007 did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account.” (A97 (Tr.)); A260 (Exh. P9)). When asked to identify what foreign country the account was in, Bedrosian responded Switzerland. (A97 (Tr.)); A260 (Exh. P9)). Bedrosian's responses to these questions on his 2007 return were truthful and accurate. (A97 (Tr.)). Bransky testified that either he asked Bedrosian or Bedrosian told him the information he needed to answer these questions. (A172-A173 (Docket Entry No. 42, Exhibit D (Bransky Dep. 50:10-14)).

Bedrosian filed a Report of Foreign Bank and Financial Accounts, TD F 90-22.1 (“FBAR”) for 2007. (A263 (Exh. P10)) (the “2007 FBAR”). The 2007 FBAR stated that Bedrosian had one account and that the account was at UBS. (A99 (Tr.); A263 (Exh. P10)). At the time his accountant filed the 2007 FBAR, Bedrosian thought he had one account at UBS. (A99 (Tr.)). Bedrosian did not realize that UBS had issued him another account number. (A100 (Tr.)). The 2007 FBAR stated that Bedrosian had between $100,000 and $1,000,000 in the account. (A263 (Exh. P10)). At the time the 2007 FBAR was filed, Bedrosian thought he had approximately that much money in his UBS account net of the UBS loan. (A100 (Tr.)). The 2007 FBAR identified Switzerland as the country in which the account was held. (A101 (Tr.); A263 (Exh. P10)).

Bransky also prepared Bedrosian's 2008 tax return. (A101 (Tr.); A264-A274 (Exh. P11)). Just as in 2007, Bedrosian responded yes to the question of “at any time in 2008 did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account” and identified Switzerland as the foreign country. (A102 (Tr.); A267 (Exh. P11)). Bedrosian's response to these questions on his 2008 return were truthful and accurate. (A102 (Tr.)). Bedrosian also filed an FBAR in 2008 which indicated that the account was at UBS and that it was closed. (A102 (Tr.); A275 (Exh. P12)).

Bedrosian Hires Professionals To File Amended Returns and FBARs

Bedrosian became more aware of the significance and seriousness of reporting foreign bank account issues in 2008-2009. (A103 (Tr.)). He also became more concerned when Bransky's opinion differed from Handelman's opinion on how to handle the foreign bank accounts and he felt he needed to do something about it. (A104 (Tr.)). Because of this concern, Bedrosian went to his personal lawyer Steven Davis and told him what had transpired with regard to the foreign account. (A104 (Tr.)). Because Mr. Davis is not a tax lawyer, he brought in one of his partners, Paul Ambrose. (A105 (Tr.)). As a result of the discussion with Mr. Ambrose, Bedrosian decided on a plan to move forward, amend all the returns and FBARs, and pay any taxes on the gains in the account. (A105 (Tr.)). Through Mr. Ambrose and his law firm, Bedrosian engaged a forensic accountant named Stewart Farber to amend the returns and fix any mistakes. (A105 (Tr.)). Bedrosian retained Mr. Ambrose and Mr. Farber in early 2009 and, as a result of his discussions with Mr. Ambrose, also hired a lawyer in Switzerland named Christian Meyer. (A105-A106 (Tr.)). Bedrosian retained Mr. Meyer to obtain all of his files from the bank in Switzerland in order to file amended returns. (A106-A107 (Tr.)). At some point, Mr. Meyer advised Bedrosian that UBS had provided plaintiff's account information to the IRS. (A108 (Tr.)).¹ Bedrosian did not change what he planned to do regarding filing amended returns as a result of learning that UBS had turned his information over to the IRS but instead continued to instruct Farber to file whatever forms were necessary — income tax returns and FBARs — to rectify the situation with his foreign accounts. (A108-A110 (Tr.)).

By the summer of 2010, Bedrosian's accountant had filed all amended returns and original/amended FBARs as far back as 2003. Bedrosian had amended his tax returns to show the income on the accounts and paid all taxes and penalties associated with the foreign bank accounts.(A111 (Tr.)). After discussion with Attorney Ambrose, Bedrosian prepared a voluntary disclosure to the IRS. (A114 (Tr.)). In his voluntary disclosure form, Bedrosian advised the IRS that he had been informed that UBS was going to provide information about his account to them. (A154-A155 (Tr.)). Bedrosian subsequently received a letter from the IRS dated April 25, 2011 advising him that it was going to audit his returns and asking him to provide information to aid in the audit. (A116 (Tr.); A365 (Exh. P28)).

Bedrosian's Interview with Revenue Agents

Bedrosian assembled all of the documents the IRS asked for and sent them to the IRS in advance of meeting with the agents. (A117 (Tr.)). On October 4, 2011, Bedrosian and his forensic accountant attended an interview with IRS revenue agents in Philadelphia. (A118 (Tr.)). During the interview, Bedrosian answered the revenue agents' questions for three hours, was absolutely truthful, and gave the revenue agents everything they asked for. (A118 (Tr.)).

Revenue Agent John West participated in the IRS interview of Bedrosian. (A38 (West Dep); A156-A160 (Tr.)). Revenue Agent West found Bedrosian to be “very, very cooperative” during the investigation. (A38 (West Dep.); A156-A160 (Tr.)). Revenue Agent West testified that Bedrosian had either brought the documents to the interview or given them to the IRS ahead of time and even went so far as to say that Bedrosian made representations that if he [Bedrosian] had to fly to Switzerland to get certain documents requested by the IRS, he would do that. (A38 (West Dep.); A159-A160 (Tr.)). Agent West also testified that Bedrosian was “very cooperative with everything we [the IRS] asked for” and “completely cooperative during the examination.” (A39 (West Dep.); A159-A160 (Tr.)). Bedrosian even agreed to sign a statute of limitations extension as part of his cooperation with the IRS. (A39 (West Dep.); A159-A160 (Tr.)).

Group Manager Michael Enz also participated in the interview and likewise testified that Bedrosian was cooperative and that he was “up-front and answered all our questions during the interview.” (A43 (Enz Dep.); A159-A160 (Tr.)). Enz believed that plaintiff was going to assist in the examination and plaintiff fully cooperated. (A43 (Enz Dep.); A159-A160 (Tr.)).

District Court Proceedings

The District Court held a one-day bench trial on September 7, 2017. Bedrosian testified on his own behalf and District Court Judge Michael M. Baylson had the chance to directly question Bedrosian. Judge Baylson found Bedrosian's testimony to be credible (A9 (Dist. Ct. Findings of Fact and Conclusions of Law)). The government admitted Bedrosian's testimony was truthful. (A196 (Tr.)).

Notably, Bedrosian sought to call the IRS revenue agents who conducted the examination of his FBAR accounts as witnesses at trial. The government vehemently opposed having the agents testify at trial or introducing their deposition testimony — even going so far as to file a motion in limine to preclude their testimony and documents relating to their investigation (A561 (Docket Entry No. 43)), and filing Objections to Bedrosian's deposition designations for these witnesses. (A561 (Docket Entry No. 47)). Judge Baylson granted the government's motion in limine (A561 (Docket Entry No. 53)) and Bedrosian filed supplemental deposition designations for the revenue agents in compliance with the Court's order. (A33-A43). Bedrosian's supplemental designations were admitted during the trial. (A159-A160 (Tr.)).

At trial, the government offered the testimony of Nancy Beasley. (A162 (Tr.)). In pre-trial proceedings, Bedrosian asked the government to provide information regarding the scope of Ms. Beasley's testimony. The government responded “[w]e expect to offer Ms. Beasley's testimony to authenticate records of the Internal Revenue Service with respect to the amount of the penalty assessed against the plaintiff and to explain the calculation of the penalty, as well as interest and late-payment penalty.” (A540). However, at trial Beasley testified that she had no role in determining the penalty assessed against plaintiff. (A166 (Tr.)). Beasley further testified that she receives the penalty information from someone else and has “no idea” how the government determined the penalty. (A166 (Tr.)). Further, she did not know where the information came from that defendant relied upon to determine the penalty or whether the person calculating the penalty took into account whether certain assets in a foreign account were the proceeds of a loan. (A166 (Tr.)). Beasley testified that she had no idea what issues related to the individual's account may or may not impact how the penalty was determined or if it is even accurate. (A167 (Tr.)).

The government had no other witness to explain its calculation of the penalty, and the government called no witnesses to testify as to how Bedrosian willfully violated the FBAR statute. The government did not even call Revenue Agent Pamela Christensen, who overruled the initial determination that Bedrosian had not acted willfully and changed the determination to a willful violation of the statute. In fact, it opposed the admission of Christensen's testimony, either in person or by way of her deposition.

At the close of trial, Judge Baylson noted that “there was no evidence by the government as to any wrongdoing by Mr. Bedrosian other than what was in his filing on the 2007 return” and further noted that the government “could've introduced” that type of evidence. (A205 (Tr.)). As Judge Baylson rightly pointed out: “a standard we apply in civil cases is that if a — if a particular party, doesn't really matter if it's plaintiff or defendant, has available certain evidence and they don't introduce it the finder of fact can infer that the that [sic] evidence would not be favorable.” (A204 (Tr.)). At the close of evidence, the District Court directed counsel to answer two questions in their post-trial memoranda: 1) in light of the stark contrast between Bedrosian's actions and the actions of taxpayers who had previously been found to have acted willfully, has any other court, particularly any appellate court, made a finding of willfulness based upon conduct similar to that of Bedrosian and 2) did the government sustain its burden of proof when it presented no evidence on the record regarding how the penalty was calculated? (A536). As Bedrosian argued in his post-trial brief, the answer to both questions is no.²

STATEMENT OF THE STANDARD OF REVIEW

The standard of review is clearly erroneous. “After a bench trial, appellate review of findings of fact is for clear error.” Country Floors, Inc. v. Partnership Composed of Getner and Ford, 930 F.2d 1056, 1062 (3d Cir. 1991) (internal citations omitted); Fed. R. Civ. P. 52(a)(6) (“the reviewing court must give due regard to the trial court's opportunity to judge the witnesses' credibility”). “To the extent that [a] District Court's conclusions rested on credibility determinations, our review is particularly deferential.” Travelers Cas. and Sur. Co. v. Ins. Co. of North America, 609 F.3d 143, 157 (3d Cir. 2010), citing Anderson v. Bessemer City, 470 U.S. 564, 575 (1985) (“When findings are based on determinations regarding the credibility of witnesses, . . . even greater deference to the trial court's findings [is required]; for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said.”).

The District Court's finding of non-willfulness, as a question of fact, is likewise subject to the clearly erroneous standard. See Baker Indus., Inc. v. Cerberus Ltd., 764 F.2d 204, 209-210 (3d Cir. 1985) (“The district court's finding of willfulness on Cravath's part, as a finding of fact, is subject to reversal only if clearly erroneous.”); United States v. Williams, 489 F. App'x 655 (4th Cir. 2012) (“whether a person has willfully failed to comply with a tax reporting requirement is a question of fact.”).

SUMMARY OF ARGUMENT

Finding Bedrosian to be a credible witness, the District Court determined that he had not willfully violated the FBAR statute. The issue of willfulness turns on a credibility determination. The fact finder is in the best position to make that determination. Moreover, the fact finder's determination of credibility is not subject to appellate review. An appellate court may not reverse a district court's finding of fact even if it believes that it would have weighed the evidence differently if it had been sitting as the trier of fact. Here the evidence supports the district court's determination. Bedrosian's actions are consistent with negligence, not recklessness or willful blindness.

The government urges a standard that borders on strict liability. Should the Court accept this argument it would result in the evisceration of the two-tiered liability scheme envisioned by Congress. Such a determination would turn any violation of § 5314 into a willful violation. There must be some standard for a willful violation.

Recklessness or willful blindness should not suffice for a finding that a taxpayer has willfully violated the FBAR statute.³ The government should be required to prove a knowing violation in order to satisfy the willful standard, as has long been recognized in other contexts, due to the complexity of tax law. Failing to adopt a “knowing” standard for a willful violation undermines the two-tiered liability scheme envisioned by Congress and turns any violation of § 5314 into a willful violation.

ARGUMENT

A. The Issue of Willfulness Turns On A Credibility Determination Best Made By The Fact Finder

A finding of willfulness inherently turns on a credibility determination. See Fuji Photo Film Co. Ltd. v. Jazz Photo Corp., 249 F.Supp.2d 434, 456-57 (D. N.J. 2003) (denying motion for judgment as a matter of law in a patent infringement case, finding that the willfulness issue depended on whether a particular witness' testimony was truthful and noting that “[c]redibility issues of this kind are squarely within the province of the jury”); Edward Lifesciences AG v. CoreValve, Inc., 2011 WL 446203, *5 (D. Del. Feb. 7, 2011) (holding that willfulness would hinge both on the fact finder's assessments of the credibility of witnesses and the fact finder drawing inferences from the evidence presented to it; denying motion for judgment as a matter of law on non-willfulness in light of the fact finder's determination of willful conduct).

Here, the District Court's finding that Bedrosian had not acted willfully was largely based on its determination that Bedrosian was a credible witness. (A9 (Dist. Ct. Findings of Fact and Conclusions of Law)).

1. The Fact Finder's Determination of Credibility Is Not Subject To Appellate Review

“'It is the law of this Circuit, as well as many others, that a fact-finder's determination of credibility is not subject to appellate review.'” United States v.Harris, 507 F.2d 197, 198 (3d Cir. 1975), citing Gov't. of the Virgin Islands v. Gereau, 502 F.2d 914, 921 (3d Cir. 1974); see also United States v. Kole, 164 F.3d 164, 177 (3d Cir. 1998) (holding that “credibility determinations are the unique province of a fact finder, be it a jury, or a judge sitting without a jury. Where the record supports a credibility determination, it is not for an appellate court to set it aside.” (internal citations omitted)); Hoots v. Pennsylvania, 703 F.2d 722 (3d Cir. 1983) (it is the “responsibility of the appellate court to accept the ultimate factual determination of the fact finder unless that determination either is completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to supportive evidentiary data.”). In addition to being “not subject to appellate review,” credibility determinations are something of which this Court “typically steer[s] clear . . . because those conclusions 'may be influenced by factors such as a witness' demeanor, his tone of voice and other matters not subject to appellate scrutiny.” United States v. Figueroa, 687 Fed.Appx. 187 (3d Cir. 2017) (internal citations omitted).

Anderson v. City of Bessemer, N.C., 470 U.S. 564 (1985) is particularly instructive regarding the intersection of credibility determinations and the clearly erroneous standard of review that applies in this case. In Anderson, the plaintiff filed a Tile VII action in the Western District of North Carolina, arguing that she was passed over for the position of Bessemer City Recreation Director solely because she was a woman. 470 U.S. at 567. After hearing testimony from the plaintiff and various defense witnesses, the court found in favor of the plaintiff. Id. at 568. The Fourth Circuit reversed, finding that three of the district court's findings were clearly erroneous. Id. at 571. The Supreme Court granted cert to determine if the Court of Appeals erred in its holding that the District Court's finding of discrimination was clearly erroneous. Id. at 573,

First, the Court elaborated on the meaning of the phrase “clearly erroneous.” It explained that a finding is “ 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Id. (internal citations omitted, emphasis added). The standard “does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently. The reviewing court oversteps the bounds of its duty under Rule 52(a) if it undertakes to duplicate the role of the lower court.” Id. The Court cautioned that a reviewing court must remember it is not charged with deciding factual issues de novo. Id., citing Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123 (1969). The Court of Appeals may not reverse “even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Id. at 574. The Court went even further by saying that “[w]hen findings are based on determinations regarding the credibility of witnesses, Rule 52(a) demands even greater deference to the trial court's findings, for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said.” Id. at 575, citing Wainwright v. Witt, 429 U.S. 412 (1985).

Here, the District Court served as the finder of fact and finder of law. It heard the testimony and evaluated the witnesses, including the “variations in demeanor and tone of voice” that bear so heavily on one's understanding of and belief in what was said. Id. The District Court explicitly found Bedrosian's testimony to be credible. (A9 (Dist. Ct. Findings of Fact and Conclusions of Law)).

In contrast, the District Court found that the government's only witness, Nancy Beasley, was “very limited in her role in this matter. . . . she's not a decision-maker and she didn't have any knowledge of how the penalty was calculated and so if there's no evidence in the record of how the penalty is calculated I just question where the government has sustained its burden of proof.” (A181 (Tr.)).

Based on Bedrosian's credible testimony and the lack of evidence from the government, as well as the rest of the record and the post-trial briefing, the District Court could not conclude that the government had proven, by a preponderance of the evidence, that Bedrosian's conduct was willful. This credibility determination was central to the district court's conclusion and, accordingly, is entitled to a “particularly deferential” review by this Court. Travelers Cas. and Sur. Co., 609 F.3d at 157.

B. The Government's Argument Transforms Any Violation Into a Willful Act and Eviscerates a Two-Tiered Liability Scheme

The government argues that Bedrosian violated the reporting requirements of 31 U.S.C. § 5314 (A30 (Government Answer and Counterclaim)) and that the penalty it assessed was appropriate under 31 U.S.C. § 5321(a)(5). Section 5321(a)(5) (“Civil Penalties — Foreign Financial Agency Transaction Violation”) clearly envisions a two-tiered structure for assessing liability and fines. It states:

(A) Penalty Authorized — The Secretary of the Treasury may impose a civil money penalty on any person who violated, or causes any violation of, any provision of section 5314.

(B) Amount of Penalty —

(i) In General — Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii) Reasonable Cause Exception — No penalty shall be imposed under subparagraph (A) with respect to any violation if —

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C) Willful Violations — In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314 —

(i) the maximum penalty under subparagraph (B)(i) shall be Increased to the greater of —

(I) $100,000, or

(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

31 U.S.C. § 5321(a)(5).

The clear intent of the statute is to provide a penalty for a violation of § 5314 ($10,000 and subject to a reasonable cause exception) and to provide a significantly higher penalty for a willful violation of § 5314. The government argued that the District Court should simply “infer” willfulness by Bedrosian based on the documents. (A196 (Tr.)). The District Court noted that the only evidence the government had of untruthfulness by Bedrosian was the omission of one of his two accounts from his 2007 FBAR. (A196 (Tr.)). The government argues that such an oversight constitutes a willful violation, even weighed against evidence demonstrating that Bedrosian identified the institution and country where the accounts were located, took corrective measures before the government pursued him, hired a team of professionals to help ensure his filings were accurate and lawful, and overwhelmingly cooperated with the government throughout its investigation.

The District Court correctly drew a distinction between these facts and the facts in previous cases finding a willful FBAR violation, namely, United States v. Williams, 489 F. App'x 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012); and United States v. Bohanec, 2016 WL 7167860 (C.D. Cal. Dec. 8, 2016). The District Court noted that “perhaps most important to this decision are the crucial differences between this case and those in which a civil FBAR penalty has been sustained.” (A11 (Dist. Ct. Findings of Fact and Conclusions of Law)). It went on to note that the defendant's actions in Williams “stand in contrast to Bedrosian's in 2007 and 2008. Crucially, in Williams the defendant 'acknowledged that he willfully failed to report the existence of the [Swiss] accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion,” via his guilty plea allocution. Here, there obviously has been no such acknowledgment.” (A11 (Dist. Ct. Findings of Fact and Conclusions of Law)). The District Court also found that the willful finding in McBride was “hard to map onto the instant facts, which are significantly less egregious and show nothing close to the carefully planned and complex tax evasion scheme perpetrated by the defendant in that case.” (A12 (Dist. Ct. Findings of Fact and Conclusions of Law)).

The government argues that the District Court erred in comparing the facts of this case to the facts of prior cases finding a willful violation of the FBAR statute because “the contours of the penalty are just beginning to take shape as the decision in this case. . . . demonstrates.” (Government Br. 36). Nevertheless, the government automatically assumes that the “contours of the penalty” will support its position and its all-encompassing view of willfulness. In fact, the District Court's decision is doing precisely what the government predicts: helping to define the contours of the penalty. The District Court has added to the body of caselaw interpreting this statute and is helping to draw the line between what constitutes a willful violation and what does not. It is black letter law that courts will interpret the facts of a given case against the precedent that already exists; which is precisely what the District Court did here.

Additionally, a very recent decision from the United States District Court for the Western District of Texas helps to further “define the contours of the penalty” for willful FBAR violations. In United States v. Colliot, 2018 WL 2271381 (W.D. Tx., May 15, 2018), the district court granted summary judgment in favor of a taxpayer against whom willful FBAR penalties were assessed. Id. at *1. That court reviewed the history of the FBAR provision, noting that “[i]n 2004, Congress amended § 5321 to increase the maximum civil penalties that could be assessed for willful failure to file an FBAR . . . to a minimum of $100,000 and a maximum of 50 percent of the balance in the unreported account at the time of the violation.” Id. at *2. However, the district court noted that 31 C.F.R. § 103.57 (now renumbered as 31 C.F.R. § 1010.820) a related regulation promulgated by the Department of the Treasury in reliance on the prior version of the FBAR statute had not been changed. Id. That regulation held — and still holds — that “ '[f]or any willful violation committed after October 26, 1986 . . . the Secretary may assess upon any person, a civil penalty [ ] . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.'” Id. at *1, citing Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987). Despite the 2004 amendment to § 5321, the Financial Crimes Enforcement Network (FinCEN) did not revise the regulation on account of the increased penalty. Id.

Colliot argued that the IRS “acted arbitrarily and capriciously by assessing penalties against [her] in excess of those allowed by § 1010.820. Id. at *2. The IRS argued that § 1010.820 is inconsistent with the 2004 amendments and “therefore implicitly superseded or invalidated by those statutory revisions.” Id. The district court disagreed, finding:

Section 5321(a)(5) sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, § 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C). And § 1010.820 — a regulation validly issued by the Treasury via notice-and-comment rulemaking — purports to cabin that discretion by capping penalties at $100,000. Thus, considered in conjunction with § 5321, § 1010.820 is consistent with § 5321's delegation of discretion to determine the amount of penalties to be assessed.

Id. (internal citations omitted).

Finding that § 1010.820 was still good law, the district court in Colliot held that the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties it had assessed against the taxpayer for FBAR violations. Id. at *3. The finding in Colliot, like the District Court here, places well-reasoned limits on the government's apparent belief in its limitless ability to assert that every violation is a willful violation warranting excessive penalties.

Even though it applied the lower, civil standard of willfulness (which the government acknowledges it believes is the correct standard), the District Court here explained that it simply did not “see Bedrosian's as the sort of conduct intended by Congress or the IRS to constitute a willful violation.” (A14 (Dist. Ct. Findings of Fact and Conclusions of Law)). The District Court was correct in this finding. “Absent legislative history to the contrary, we must presume that the legislative purpose is expressed by the ordinary meaning of the words used, and that language must be regarded as conclusive.” Glenn Elec. Co., Inc. v. Donovan, 755 F.2d 1028, 1033 (3d Cir. 1985). The District Court rightfully interpreted willful by its ordinary meaning, even while applying the lower standard of willfulness advanced by the government. The government argues that Congress intended to “expand the willful FBAR penalty substantially” in 2004 but the statute still provides for both a willful and non-willful violation. Had Congress intended for any violation of the statute to be a willful violation it could have drafted or amended the statute to provide for that type of penalty. It did not do so.

If, as the government argues, Bedrosian's conduct was willful then there can be no such thing as a non-willful violation of § 5314. Such a result would render § 5321(a)(5)(A) and (B) meaningless. Courts have considered this issue before when interpreting other statutes. They have refused to adopt a reading that would eviscerate a two-tiered liability scheme when it is clear that is what Congress intended. See Trans World Airlines, Inc. v. Thurston, 469 U.S. 111 (1985) (holding that a violation of the Age Discrimination in Employment Act would not be “willful” if the employer simply knew of the applicability of the ADEA because “[b]oth the legislative history and the structure of the statute show that Congress intended a two-tiered liability scheme” and declining to interpret the ADEA in a manner that would frustrate that intent). Adopting the government's argument here would similarly frustrate Congress' intent with regard to the FBAR penalty statute.

C. Recklessness or Willful Blindness Does Not Apply To Other Tax Violations and Should Not Suffice For a Willful FBAR Finding

Relying on Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), the government argues that recklessness or willful blindness is sufficient to find a willful violation under Section 5321(a)(5) (Government Br., p. 26, 31-32). The District Court adopted the lower standard of willfulness advanced by the government yet even under that lower standard, found that Bedrosian's conduct was not willful. However, Safeco is distinguishable from the instant case for a significant reason. In Safeco, the issue was what constituted a “willful failure” under the Fair Credit Reporting Act (“FCRA”), a violation committed in reckless disregard of that statute's notice obligation to consumers or a knowing violation of that provision. Id. at 52. In concluding that the reckless disregard standard applied, the Court examined the specific language of the statute, which provides that “[a]ny person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer.” This provision is followed by two specific provisions identifying two distinct measures of damages for a willful violation of the statute. The Court held:

As a general matter, the consumer may get either actual damages or 'damages of not less than $100 and not more than $1,000.' § 1681n(a)(1)(A). But where the offender is liable 'for obtaining a consumer report under false pretenses or knowingly without a permissible purpose,' the statute sets liability higher: 'actual damages . . . or $1,000, whichever is greater.' § 1681n(a)(1)(B). If the companies were right that “willfully” limits liability under § 1681n(a) to knowing violations, the modifier 'knowingly' in § 1681n(a)(1)(B) would be superfluous and incongruous; it would have made no sense for Congress to condition the higher damages under § 1681n(a) on knowingly obtaining a report without a permissible purpose if the general threshold of any liability under the section were knowing misconduct. If, on the other hand, 'willfully' covers both knowing and reckless disregard of the law, knowing violations are sensibly understood as a more serious subcategory of willful ones, and both the preamble and the subsection have distinct jobs to do.

Id. at 59.

Therefore “willfully” could not be read to mean a knowing violation under the FCRA because subsection § 1681n(a)(1)(B) spelled out the penalties for a knowing violation, and those penalties differed from those in § 1681n(a)(1)(A). The FBAR statute at issue here makes no such distinction. It does not provide for certain penalties for “knowing” violations as a subset of “willful” violations. See supra at p.21. The language of the FCRA was crucial to the Supreme Court's conclusion that willful, as used therein, was not meant to be limited to knowing violations.

Further, the tax law prior to FBAR cases was well-settled that one is not deemed to know what is on their tax return — this principle was always an exception to the general rule that one is deemed to know the law. See Cheek v. United States, 498 U.S. 192, 201 (1991). Cheek examined the meaning of “willfully” as it is used in 26 U.S.C. §§ 7201 and 7203. The Court in Cheek explained that “[t]he proliferation of statutes and regulations has sometimes made it difficult for the average citizen to know and comprehend the extent of the duties and obligations imposed by the tax laws.” Id. at 200. In fact, it is the complexity of the tax laws that prompted the Court to “carve out” an exception — that is, the interpretation of “willfully to mean a knowing violation” — to the traditional rule that ignorance of the law or a mistake of law is no defense to criminal prosecution. In Cheek, the Court discussed a previous line of criminal tax cases that “construed the willfulness requirement in the criminal provisions of the Internal Revenue Code to require proof of knowledge of the law.” Cheek, 498 U.S. at 205. The Court went on to say that “[t]his was because 'in our complex tax system, uncertainty often arises even among taxpayers who earnestly wish to follow the law,' and '[i]t is not the purpose of the law to penalize difference of opinion or innocent errors made despite the exercise of reasonable care.'” Id., citing United States v. Bishop, 412 U.S. 346, 360-61 (1973) (quoting Spies v. United States, 317 U.S. 492, 496 (1943)). In United States v. Murdock, 290 U.S. 389 (1933), the Court interpreted the term “willfully” as used in the criminal tax statutes generally to mean “an act done with a bad purpose” or “with an evil motive.” 290 U.S. at 394-395.

In order to establish willfulness, the government should be required to show that Bedrosian had a specific intent to violate the statute at issue, that the law imposed a duty on Bedrosian, that he knew of this duty, and that he voluntarily and intentionally violated that duty. See Cheek, 498 U.S. at 201. The government should not be permitted to rely on a taxpayer's mistake or misunderstanding of a “complex tax system” to support a willful violation.

In Ratzlaf v. United States, 510 U.S. 135 (1994), the Court addressed the willfulness element of a structuring violation under the Bank Secrecy Act. Ratzlaf was charged with “structuring” transactions with financial institutions in such a way to evade the requirement that the institution report transactions in excess of $10,000. 510 U.S. at 137. He was convicted under a statute that made it illegal to “willfully” structure transactions in order to avoid the reporting requirements. His conviction was based on a jury instruction that only required a finding that the defendant was aware of the reporting obligation and attempted to evade the obligation, without requiring a specific finding that the defendant was aware that his attempt to avoid the reporting was illegal. Id.at 137-138. The court reversed, and held that in order to convict Ratzlaf of the crime with which he was charged, a jury had to find that he knew the structuring in which he engaged was unlawful. Id. at 149 (emphasis added).

Finally, the Internal Revenue Manual provides the following hypothetical to help elucidate the willfulness standard:

A person files the FBAR, but omits one of three foreign bank accounts. The person had previously closed the omitted account at the time of filing the FBAR. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax return. The penalty for a willful violation should not apply absent other evidence that may indicate willfulness.

IRM 4.26.16.6.5.1 (11-06-2015). This hypothetical — in the Internal Revenue Manual — bears striking similarities to Bedrosian's situation.His 2007 FBAR disclosed one account but, due to unintentional oversight, neglected to list a second account. (A263). During the examination, the plaintiff provided all information requested with respect to the omitted account (A38) and that information did not disclose anything suspicious. Further, plaintiff had voluntarily filed an amended return for the year in question, as well as other years, prior to the examination. The amended return disclosed both accounts. (A339-A340). The standard for finding a willful violation of the FBAR requirement should not differ from the standard for finding a willful violation in other tax contexts.

CONCLUSION

For all of the foregoing reasons, Appellee Arthur Bedrosian respectfully requests that this Court affirm the decision of the District Court.

Respectfully submitted,

Patrick J. Egan, Esquire
Beth L. Weisser, Esquire
FOX ROTHSCHILD LLP
2000 Market Street, 20^th Floor
Philadelphia, PA 19103
(215) 299-2000 (telephone)
(215) 299-2150 (fax)

Attorneys for Appellee Arthur Bedrosian

Date: May 24, 2018