Individual Argues FBAR Violation Wasn’t Willful

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

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 APPELLANT, ARTHUR BEDROSIAN

Patrick J. Egan, Esquire
Ian M. Comisky, Esquire
Siana Danch, Esquire
FOX ROTHSCHILD LLP
2000 Market Street, 20^th Floor
Philadelphia, PA 19103
(215) 299-2000
pegan@foxrothschild.com
icomisky@foxrothschild.com

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TABLE OF CONTENTS

JURISDICTIONAL STATEMENT

STATEMENT OF THE ISSUES

STATEMENT OF RELATED CASES

STATEMENT OF THE CASE

Introduction

STANDARD OF REVIEW

SUMMARY OF ARGUMENT

ARGUMENT

CONCLUSION

Certificate of Bar Membership

Certificate of Compliance

Joint Appendix, Volume 1 (A1-A22)

Certificate of Service

TABLE OF AUTHORITIES

Cases

In re Abel, 200 B.R. 816 (E.D.Pa. 1996)

Bankers Trust Co. v. Bethlehem Steel Corp., 761 F.2d 943 (3d Cir. 1985)

Barnes Found. v. Twp. of Lower Merion, 242 F.3d 151 (3d Cir. 2001)

Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018)

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

Eid v. Thompson, 740 F.3d 118 (3d Cir. 2014)

Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011)

Harte-Hanks Commc'ns, Inc. v. Connaughton, 491 U.S. 657 (1989)

Pub. Int. Rsch. Grp. of New Jersey, Inc. v. Magnesium Elektron, Inc., 123 F.3d 111 (3d Cir. 1997)

S.E.C. v. Hughes Cap. Corp., 124 F.3d 449 (3d Cir. 1997)

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

In re Seagate Technology, 497 F.3d 1360 (2007) (en banc)

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

Trout v. Pennsylvania R. R. Co., 300 F.2d 826 (3d Cir. 1962)

United States v. Carrigan, 31 F.3d 130 (3d Cir. 1994)

United States v. Collins, No. 18-1069, 2021 WL 456962 (W.D.Pa. Feb. 8, 2021)

United States v. Gentges, No. 18-CV-7910 (KMK), 2021 WL 1222764 (S.D.N.Y. Mar. 31, 2021)

United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020)

United States v. Pelullo, 173 F.3d 131 (3d Cir. 1999)

United States v. Pelullo, 964 F.2d 193 (3d Cir. 1992)

United States v. Schwarzbaum, 2020 WL 1316232 (S.D. Fla. Mar. 20, 2020), appeal dismissed (Nov. 25, 2020)

United States v. Smith, 751 F.3d 107 (3d Cir. 2014)

United States v. Tyler, 281 F.3d 84 (3d Cir. 2002)

United States v. Vespe, 868 F.2d 1328 (3d Cir. 1989)

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

Statutes

15 U.S.C. § 1681n(a)

26 U.S.C. § 6672

28 U.S.C. § 1291

28 U.S.C. § 1345

31 U.S.C. § 5314

31 U.S.C. § 5321

31 U.S.C. § 5321(a)(5)(C)

31 U.S.C. § 5413

Other Authorities

Fed. R. App. P. 4(a)(1)(B)

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

Fed. R. Evid. 40147, 49

Fed. R. Evid. 801(c)(1)-(2)

Fed. R. Evid. 803(6)

I.R.M. 4.26.16.4.6.3(3)(d.)

I.R.M. 4.26.16.4.5.5(4)

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JURISDICTIONAL STATEMENT

The District Court had jurisdiction over this case pursuant to 28 U.S.C. §1345. See Bedrosian v. United States (“Bedrosian II”), 912 F.3d 144, 150 (3d Cir. 2018). After the District Court entered judgment in favor of Plaintiff-Appellant Arthur Bedrosian, Defendant-Appellee, the United States, filed a timely notice of appeal with this Court. This Court had jurisdiction pursuant to 28 U.S.C. § 1291. Bedrosian II, 912 F.3d at 150-151. This Court remanded for further proceedings. Id. at 153.

On December 4, 2020, the District Court reversed its prior judgment and entered orders in favor of the government on December 4, 2020, and January 29, 2021. (A14 and A19 (Docket Entries No. 87 and 95)). Appellant filed a timely notice of appeal on March 24, 2021, within 60 days from the later entry of judgment. (A1 (Docket Entry No. 96)); Fed. R. App. P. 4(a)(1)(B). This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

STATEMENT OF THE ISSUES

1. Did the District Court commit clear error when it exceeded the scope of remand by changing its factual conclusions from a closed factual record and ruled that Appellant willfully violated 31 U.S.C. § 5413 by filing an incomplete FBAR for 2007? (A3 (Docket Entry No. 86)).

2. Should this Court review and revise its prior holding establishing an objective recklessness standard for a “willful” FBAR violation in order to prevent manifest injustice?

3. Did the District Court err in finding the government established the amount of the penalty? (A180-187 (Tr.); A543, A666, A705, A15 (Docket Entries No. 62, 90, 92, 94)).

STATEMENT OF RELATED CASES

This case was previously before this Court on an appeal in which this Court vacated the entry of judgment the district court. Bedrosian II, 912 F.3d 144. There are no pending related cases or proceedings.

STATEMENT OF THE CASE

Introduction

This case involves (1) whether the conduct of Arthur Bedrosian (“Mr. Bedrosian”) in 2008 constituted a “willful” violation of 31 U.S.C. § 5314, and if so, (2) what is the correct penalty amount under 31 U.S.C. § 5321(a)(5)(C). The District Court held a full-day bench trial at which Mr. Bedrosian and the government presented evidence on these two issues. The government bears the burden of establishing both issues by preponderance of the evidence. The government did not carry their burden on either issue, and the District Court clearly erred in holding otherwise. In deciding the “willfulness” issue, the District Court used a standard for willfulness that included “reckless disregard” and actions that objectively entailed “an unjustifiably high risk of harm that is either known or should have been known.” (A592 (Docket Entry No. 64)). Applying this standard to the evidence and comparing Mr. Bedrosian's acts to those at issue in other cases of alleged willful violations of 31 U.S.C. § 5314, the District Court found that Mr. Bedrosian's actions were neither intentional nor reckless; the credible evidence showed that his conduct was “unintentional” and “at most negligent.” (A594 (Docket Entry No. 64)). The District Court concluded that Mr. Bedrosian's acts were not a “willful” violation of 31 U.S.C. § 5314. (A598 (Docket Entry No. 64)).

In the first appeal in this case, the government challenged the District Court's conclusions. This Court did not disagree with the District Court's ultimate finding that Mr. Bedrosian's acts in 2008 were not willful. But, this Court did use this case as a vehicle to resolve the standard of willfulness that applies to an alleged violation of the FBAR statute, then an issue of first impression in this Circuit. In particular, this Court largely agreed with the District Court's standard, holding “that the usual civil standard of willfulness applies for civil penalties under the FBAR statute,” and is an “objective standard” that includes “both knowing and reckless conduct.” 912 F.3d at 147. This Court remanded for further proceedings because it was “not sure” whether the District Court evaluated the evidence under the precise standard announced by this Court on appeal. Id. at 153. The District Court received no additional evidence on remand. The District Court, nonetheless, reversed its prior finding of negligence and held that Mr. Bedrosian willfully violated the FBAR statute.

This was a serious error. Indeed, en route to reversing itself, the District Court determined that the exact same evidence it had previously found to show that Mr. Bedrosian's 2008 actions were “at most negligent,” instead suddenly showed that Mr. Bedrosian was reckless. The District Court made a similar error in reviewing the case law, determining that the exact same case that it had previously found to be “in contrast” to and “distinguishable” from the facts surrounding Mr. Bedrosian's 2008 actions, now had “very few differences” with the facts of this case. (A8 (Docket Entry No. 86)). Thus, the District Court's reversal on remand — finding that Mr. Bedrosian willfully violated the FBAR statute — was unsupported by the evidence, exceeded the scope of remand, and was clearly erroneous. It should be vacated.

The District Court's errors on remand did not end there. After reversing itself as to the willfulness issue, the District Court then held that the government “has not abused its discretion in the amount of the penalty imposed” under 31 U.S.C. § 5321(a)(5)(C) on Mr. Bedrosian. (A17 (Docket Entry No. 94)). This holding was flawed for two reasons. First, the government failed to meet its burden of presenting admissible evidence to support the penalty amount, and the District Court abused its discretion in relying on the materials the government presented. Second, even if there had been admissible evidence supporting the penalty amount, that evidence did not establish that the penalty imposed on Mr. Bedrosian was determined in compliance with the appropriate Internal Revenue Manual Guidelines. That error is necessarily arbitrary and capricious. Even if the evidence supporting the penalty amount was admissible, it was insufficient to establish the balance of the account, as required by statute. The District Court erred by failing to apply the correct analysis as to the penalty amount. These errors on the penalty imposed require that the District Court's order as to the penalty be reversed and vacated. The District Court entered judgment against Mr. Bedrosian for a willful FBAR penalty in the amount of $975,789.17 and statutory additions thereon. (A22 (Docket Entry No. 95)).

The factual background of this case follows.

A. Mr. Bedrosian Establishes an European Bank Account to Help Him Pay for Expenses While Traveling Overseas for his Job in the Pharmaceutical Industry.

Mr. Bedrosian began working in the pharmaceutical industry in May 1968 and by 1970 his job was taking him overseas to Europe. (A73 (Tr.)). When he first began his foreign travel for business, Mr. Bedrosian relied on traveler's checks for expenses. (A75 (Tr.)). He found these inconvenient and unsafe. (A76 (Tr.)). A colleague suggested that he could open an account with a foreign bank as an alternative to traveler's checks. (A76 (Tr.)). Mr. Bedrosian ultimately opened a savings account with Swiss Bank Corp. in 1972, making deposits of after-tax dollars into that account. (A75-A77 (Tr.)). Mr. Bedrosian chose Swiss Bank Corp. because he believed it to be well-known throughout Europe and recognized in many countries. (A76 (Tr.)).

In the late 1990s, Swiss Bank Corp. was acquired by Union Bank of Switzerland (“UBS”) and Mr. Bedrosian's account was automatically transferred to UBS. (A78 (Tr.)). UBS representatives typically would visit New York once per year, and during those visits Mr. Bedrosian would openly meet with the representatives, if his schedule allowed. (A87-A88 (Tr.)).

In 2005, UBS proposed to Mr. Bedrosian that he participate in an investment vehicle, whereby UBS would invest 750,000 Swiss francs (at the time equivalent to approximately $900,000) of UBS funds on Mr. Bedrosian's behalf, with Mr. Bedrosian paying 1.75% interest to UBS on the “loan,” but otherwise retaining the gains on the investments. (A89-A90 (Tr.); A57 (Exh. P6)). UBS told Mr. Bedrosian that UBS would invest those loan proceeds for him. (A90 (Tr.)). Mr. Bedrosian did not consider the funds from the loan to be his money; rather, he believed those funds to be the property of UBS. (A90 (Tr.)). As part of UBS providing this loan, but unbeknownst to Mr. Bedrosian, UBS opened a second account in Mr. Bedrosian's name. (A103-A104 (Tr.)).

In late 2008, UBS was instructed by the United States government to close all accounts held by U.S. citizens. (A91-A92 (Tr.)). UBS thus required Mr. Bedrosian to return the loaned proceeds to UBS and close the account holding them. (A91-A92 (Tr.); A258 (Exh. P8)). Mr. Bedrosian did so, and transferred the remaining funds held in the UBS account with the original loan proceeds to Hyposwiss. (A91 (Tr.); A258 (Exh. P8)).

B. Mr. Bedrosian's Accountants Advise Him on How to Deal with the Foreign Account on his Taxes.

Mr. Bedrosian used to do his own taxes. (A93 (Tr.)). By 1972, though, the process had become too complicated for him, and he hired an accountant named Seymour Handleman (“Mr. Handleman”) to prepare his tax returns. (A93-A94 (Tr.)). Mr. Handleman prepared Mr. Bedrosian's returns for the next 35 years, until his death in 2007. (A94 (Tr.)). Each year, Mr. Bedrosian would gather what he believed to be the relevant documents, put them in a folder, and provide them to Mr. Handleman. (A95 (Tr.)).

In the mid-1990s, Mr. Bedrosian mentioned to Mr. Handleman an article he had seen in the Wall Street Journal about Swiss bank accounts. (A96-A97 (Tr.)). When Mr. Handleman asked Mr. Bedrosian why he cared about Swiss bank accounts, Mr. Bedrosian told Mr. Handleman that he had an account in Switzerland. (A97 (Tr.)). Mr. Handleman advised that such an account would generally be disclosed via a “check box” on Mr. Bedrosian's tax returns. (A97 (Tr.)). Inquiring further, however, Mr. Handleman learned that the money in the Swiss bank account would ultimately be left to Mr. Bedrosian's children upon his death. (A98 (Tr.)). Mr. Handleman then clarified his advice: Mr. Bedrosian did not need to check the box to disclose the account, but rather his children could just pay taxes on any growth in the account when they brought the money back to the United States after Mr. Bedrosian's death. (A98-A99 (Tr.)). Mr. Bedrosian relied on this advice from his accountant and had no further discussions with Mr. Handleman about that account. (A99 (Tr.)).

As noted, Mr. Handleman died in 2007. (A99 (Tr.)). His widow turned Mr. Bedrosian's files over to another accountant, Sheldon Bransky (“Mr. Bransky”), who then began preparing Mr. Bedrosian's tax returns. (A99-A100 (Tr.)). In 2008, Mr. Bransky prepared Mr. Bedrosian's 2007 tax return. (A100-A101 (Tr.); A260 (Exh. P9)). During the preparation of that return, Mr. Bedrosian provided Mr. Bransky information about the account in Switzerland. (A101 (Tr.); A176-A177 (Docket Entry No. 42, Exhibit D (Bransky Dep. 50:10-14))). On that return, based on the information provided to Mr. Bransky by Mr. Bedrosian, Mr. Bedrosian truthfully and accurately responded “yes” to the question of whether in 2007 he had a bank account in a foreign country. (A101 (Tr.); A264 (Exh. P9)). Mr. Bedrosian's 2007 return also truthfully and accurately informed the IRS that the account was in Switzerland. (A101 (Tr.); A264 (Exh. P9)).

Relatedly, certain foreign financial accounts must be reported by filing a “Report of Foreign Bank and Financial Accounts” — often called an “FBAR” and then published as a form “TD F 90-22.1.” The FBAR is filed with the Financial Crimes Enforcement Network (“FinCEN”), a bureau in the Department of the Treasury that is separate from the IRS.¹ Accordingly, Mr. Bransky prepared, and filed, an FBAR on Mr. Bedrosian's behalf for tax year 2007 (the “2007 FBAR”). (A267 (Exh. P10)). The 2007 FBAR reported that Mr. Bedrosian had one account and that the account was at UBS, which is what Mr. Bedrosian believed to be true. (A103 (Tr.); A267 (Exh. P10)). Mr. Bedrosian was unaware that UBS actually had issued him a second account number for the loan that originated in 2005. (A104 (Tr.)).

The 2007 FBAR reported that Mr. Bedrosian had between $100,000 and $1,000,000 of his own funds in the account, which is what Mr. Bedrosian believed to be true. (A104 (Tr.); A267 (Exh. P10); A415 (Exh. Gov. G)). The 2007 FBAR accurately identified Switzerland as the country in which the account was held. (A105 (Tr.); A267 (Exh. P10)).

The following year, Mr. Bransky prepared Mr. Bedrosian's 2008 tax return. (A105-A106 (Tr.); A268 (Exh. P11)). Just as in 2007, Mr. Bedrosian truthfully and accurately reported to the IRS on his individual income tax return that he had a foreign bank account in Switzerland. (A106 (Tr.); A269 (Exh. P11)). Mr. Bransky also had Mr. Bedrosian file a 2008 FBAR that indicated that the account had been at UBS and that the UBS account was now closed. (A106 (Tr.); A279 (Exh. P12)).

C. Mr. Bedrosian Seeks Additional Professional Advice, and Ultimately Directs his Accountant to Voluntarily File Amended Returns and FBARs, in the Interest of Complete Disclosure.

That same year, 2009, as the 2008 FBAR was to be filed, Mr. Bedrosian grew concerned that his new accountant was giving him different advice — and recommending different tax disclosures — than his now-deceased accountant. (A108 (Tr.)). Mr. Bedrosian thus hired Paul Ambrose — a tax lawyer — to advise him further. (A108-A109 (Tr.)).

After speaking with Mr. Ambrose, Mr. Bedrosian decided to amend his prior tax returns and FBARs, and pay any taxes he might owe on any gains in the account — the taxes that Mr. Handelman had told Mr. Bedrosian that his children could just pay upon Mr. Bedrosian's death. (A97-A98, A109 (Tr.)). Mr. Bedrosian also engaged Stewart Farber, a forensic accountant, to amend the prior returns and correct any potential errors. (A109 (Tr.)). Finally, Mr. Bedrosian hired Christian Meyer, a lawyer in Switzerland. (A110-A111 (Tr.)). Mr. Bedrosian retained Mr. Meyer to obtain all of his files from the bank in Switzerland to aid in the filing of amended returns as necessary. (A110-A111 (Tr.)).

At some point, Mr. Meyer advised Mr. Bedrosian that UBS had provided Mr. Bedrosian's account information to the IRS. (A112 (Tr.)). This information did not change Mr. Bedrosian's plans; he continued to instruct Mr. Farber to file whatever forms were necessary — including income tax returns and FBARs — to rectify any outstanding issues with his foreign account. (A112-A114 (Tr.)).

By the summer of 2010, Mr. Bedrosian's accountant had filed amended tax returns and original or amended FBARs back to 2003, all at Mr. Bedrosian's direction. (A114-A115 (Tr.); A283 and A302 (Exh. P15 and 16)). Mr. Bedrosian revealed on those returns that he had earned income on his foreign accounts. (A283 and A302 (Exh. P15 and 16)). He also paid all back taxes and penalties associated with that income. (A115 (Tr.)). It is undisputed that the tax returns and FBARs filed at that point were completely accurate.

Importantly, the records obtained from Switzerland revealed the second UBS account. The amended 2007 FBAR reported this second account. (A343-A344 (Exh. P19)).

In September 2010, following his submission of amended returns and FBARs, Mr. Bedrosian also filed a “voluntary disclosure” with the IRS, explaining the oversight and the steps Mr. Bedrosian had taken to fix it. (A118 (Tr.); A365 (Exh. P27)). But, the IRS rejected this voluntary disclosure, claiming that the IRS already had the information about the account based on the FBAR that had been filed. (A524 (Exh. Gov. P)). A few months later, the IRS notified Mr. Bedrosian that it would be auditing his returns and asked him to provide additional information that would assist with the audit. (A120 (Tr.); A369 (Exh. P28)). Mr. Bedrosian assembled all of the requested documents and sent them to the IRS. (A121 (Tr.)).

D. Mr. Bedrosian's Interview with Revenue Agents.

On October 4, 2011, Mr. Bedrosian and Mr. Farber attended an interview with IRS revenue agents in Philadelphia. (A122 (Tr.); A371 (Exh. P29)). Mr. Bedrosian brought to the meeting additional documents that the IRS had requested. (A122-A123 (Tr.)). IRS agents interviewed Mr. Bedrosian for three hours. (A122 (Tr.)). Mr. Bedrosian truthfully answered all the agents' questions. (A122 (Tr.)).

The revenue agents later confirmed that Mr. Bedrosian had been fully cooperative with their investigation. For example, Group Manager Michael Enz testified that Mr. Bedrosian was “up-front and answered all our questions during the interview.” (A47 (Enz Dep.); A173-A1740 (Tr.)). Revenue Agent John West confirmed that Mr. Bedrosian was “completely cooperative” with the IRS. (A42 (West Dep.); A173-A174 (Tr.)). Revenue Agent West also confirmed that Mr. Bedrosian gave the IRS all requested documents, either in advance of the meeting or at the meeting itself, and that Mr. Bedrosian also offered to provide any additional documents to the IRS, even if that meant Mr. Bedrosian had to fly to Switzerland himself to get the documents. (A42 (West Dep.); A173-A174 (Tr.)). Mr. Bedrosian even agreed to sign a tolling agreement, extending the statute of limitations to give the IRS time to complete its review. (A43 (West Dep.); A173-A174 (Tr.)).²

E. The IRS Finds Mr. Bedrosian Not to Have Acted Willfully, Then a New IRS Investigator Reversed Course and Levied a Massive Penalty.

The IRS originally determined that Mr. Bedrosian's filing of an inaccurate FBAR for 2007 was not willful and informed Mr. Bedrosian that his case was going to be closed with only non-willful FBAR penalties imposed. (A724 (Docket Entry No. 46)).

Then, due to the extended sick leave of Revenue Agent West, the IRS assigned a new revenue agent to officially close Mr. Bedrosian's now-completed matter — someone who was not involved before and who was not in the room during Mr. Bedrosian's three-hour interview. (A724 (Docket Entry No. 46)). Rather than close the file and proceed with the non-willful determination that had been made by the agents who had actually performed the investigation, the new revenue agent instead caused the IRS to reverse itself, determining that Mr. Bedrosian's 2008 conduct relating to the filing of the 2007 FBAR was a willful violation of the FBAR statute after all and that he was subject to the maximum statutory penalty. (A724 (Docket Entry No. 46)). The IRS then imposed a penalty of $975,789 on Mr. Bedrosian. (A374 (Exh. Gov. B)).³

F. The District Court Holds a Bench Trial on Willfulness and the Proper Tax Penalty, Siding with Mr. Bedrosian.

The District Court held a one-day bench trial on September 7, 2017.

On the first issue of a willful violation of the FBAR statute, Mr. Bedrosian testified on his own behalf and District Court Judge Michael M. Baylson directly questioned Mr. Bedrosian as well. The Court found Mr. Bedrosian's testimony to be credible. (A593 (Docket Entry No. 64)). Indeed, the government concedes that Mr. Bedrosian's trial testimony was truthful. (A200 (Tr.)).⁴

At the close of trial, the District Court found 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. (A208-A209 (Tr.)).⁵ The District Court further found — correctly — that the government's failure to introduce that evidence supported an adverse inference against the government and in favor of Mr. Bedrosian. (A209 (Tr.)).

The evidence supporting the government's million-dollar statutory maximum penalty was lacking. The only “evidence” offered by the government at trial were two documents — one showing a summary of (allegedly) monthly account balances for 2002-2009 and the other showing a conversion between Swiss francs and US Dollars over time. (A180-A187 (Tr. referring to Exhibits R and T)). Mr. Bedrosian timely objected to these documents as inadmissible hearsay. (A180-A182 (Tr.)). Indeed, the government could not produce a witness to explain where the documents came from, or how they were otherwise admissible. (A185 (Tr.)). The government offered the testimony of Nancy Beasley — the IRS FBAR penalty coordinator — but she admitted that she had no role in determining the penalty assessed against Mr. Bedrosian. (A170-A171 (Tr.)).⁶ The government had no other witness to explain its calculation of the penalty.

Upon review of all the evidence presented during trial regarding Mr. Bedrosian's actions surrounding his 2007 FBAR, the District Court found that Bedrosian had not willfully violated the FBAR statute. (A599 (Docket Entry No. 64)). The District Court, therefore, did not reach the question of whether the government sustained its burden of proof regarding the amount of the penalty.

G. The Government Appeals the District Court's Finding that Mr. Bedrosian Merely Acted Negligently.

The government appealed the District Court's judgment in favor of Mr. Bedrosian on three grounds. Bedrosian II, 912 F.3d at 151 n.3. This Court addressed only one of those grounds on appeal: whether the District Court evaluated Bedrosian's conduct under the correct legal standard for willfulness. Bedrosian II, 912 F.3d at 151. This Court decided that the District Court correctly held the proper standard for willfulness is “the one used in other civil contexts — that is, a defendant has willfully violated [31 U.S.C. § 5314] when he either knowingly or recklessly fails to file [a] FBAR.” Id. at 152. Relying on the standard for recklessness enunciated in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68 (2007), this Court concluded that, in general, a person commits a reckless violation of the FBAR statute by engaging in conduct that violates an objective standard: action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” 912 F.3d at 153. The Court further explained that a person “recklessly” fails to comply with an IRS filing requirement when he or she (1) clearly ought to have known that (2) there was a grave risk that the filing requirement was not being met and if (3) he or she was in a position to find out for certain very easily. Id. (citing United States v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994) (quoting United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989)) (internal quotations omitted). Even though the District Court had considered — and rejected — the possibility that Mr. Bedrosian acted recklessly, (A594 (Docket Entry No. 64)), this Court said it was “not sure” if the District Court had considered whether, when his 2007 FBAR filing came due, Mr. Bedrosian's conduct satisfied the objective recklessness standard articulated in similar contexts and, particularly, the standard in Carrigan. Safeco, 912 F.3d at 153. The District Court's order was vacated and the case remanded for further proceedings consistent with this Court's opinion. Id.

H. The District Court on Remand.

On remand, the District Court did not receive any new evidence. Nevertheless, it supplemented its prior findings of fact by adopting five new factual findings proposed by the government, applying these “new” facts to the standard announced by this Court. (A3 (Docket Entry No. 86)). In addition, the District Court reversed its determination of certain facts it had found three years prior at the time of trial, when the evidence was fresh. (A5-A6 (Docket Entry No. 86)). For example, the District Court now found that it had “erred when it concluded . . . that Bedrosian fully cooperated with the IRS and did not make false statements.” (A9 (Docket Entry No. 86)).

The District Court changed its reading of an unpublished decision from the Fourth Circuit, and then relied on this changed reading to support its new outcome. In its first opinion, the District Court found the conduct of the defendant in United States v. Williams (“Williams II”), 489 F. App'x 655 (4th Cir. 2012), to be completely different from that of Mr. Bedrosian. (A595 (Docket Entry No. 64)). On remand, though, the District Court concluded — on the same evidence — that there were “very few differences” between the two defendants' conduct. (A8 (Docket Entry No. 86)).

The District Court also examined another Fourth Circuit decision, United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020), concluding that it was “[t]he most factually similar case” to this. (A11 (Docket Entry No. 86)). The District Court reasoned that “if Mr. Bedrosian had looked at the forms he signed, it is reasonable to conclude that he should have noticed the amount stated for the accounts was not accurate.” (A12 (Docket Entry No. 86)).

On these “new” facts and “new” law, the District Court reversed itself, finding that Mr. Bedrosian acted willfully after all.

I. The District Court's Review of the Penalty Imposed on Mr. Bedrosian.

After reversing itself on willfulness, the District Court then addressed whether the government could support the $975,789 penalty imposed on Mr. Bedrosian. As a threshold matter, the District Court rejected the government's contention that Mr. Bedrosian's counsel admitted that the amount of the penalty was correct. (A17 (Docket Entry No. 94)). But, the District Court then exclusively relied on the two summary documents (Exhibits R and T) that had never been authenticated — and for which no witness had been willing to vouch — in considering the penalty charged by the government. (A17 (Docket Entry No. 94)).

Exhibit R was a one-page document with a table titled “Monthly Balances,” showing figures for all twelve months for calendar years 2001 through 2008. It also bears a hand-written notation, though no one ever testified as to whose handwriting it was or what it meant. As relevant here, the figure shown for the month of June 2008 is 2,197,477.21. The government claims that the figures in the table titled “Modified Balances” are the balances, in Swiss francs, for the account Mr. Bedrosian's 2007 FBAR did not report. Exhibit T is a one-page document with conversions of amounts from Swiss francs to United States dollars. The conversion of 2,197,477.21 Swiss francs yields, according to Exhibit T, $1,951,578.34. From those exhibits, the District Court concluded that the IRS had not “abused its discretion in imposing the maximum statutory penalty on Bedrosian.” (A17 (Docket Entry No. 94)).

The District Court then entered judgment in favor of the government for the full amount of the penalty, with statutory interest and additions thereon. Mr. Bedrosian's appeal followed.

STANDARD OF REVIEW

The standard of review is de novo for legal issues, including whether the trial court applied the correct standard of proof. United States v. Pelullo, 173 F.3d 131, 135 (3d Cir. 1999). Review is likewise plenary for the sufficiency of the evidence. Barnes Found. v. Twp. of Lower Merion, 242 F.3d 151, 157 (3d Cir. 2001).

Factual findings should be reversed only if clearly erroneous. Country Floors, Inc. v. Partnership Composed of Getner and Ford, 930 F.2d 1056, 1062 (3d Cir. 1991) (internal citations omitted). In particular, substantial deference is offered to the credibility determinations of the lower courts. See Fed. R. Civ. P. 52(a)(6) (“[T]he reviewing court must give due regard to the trial court's opportunity to judge the witnesses' credibility.”); Travelers Cas. and Sur. Co. v. Ins. Co. of North America, 609 F.3d 143, 157 (3d Cir. 2010) (“To the extent that [a] District Court's conclusions rested on credibility determinations, our review is particularly deferential.”).

The question of whether the district court exceeded the scope of remand by reversing this factual finding without taking any new evidence is a legal question, reviewed de novo. United States v. Smith, 751 F.3d 107, 122 (3d Cir. 2014).

The trial court's rulings on the admissibility of evidence, including its decision to admit evidence over a hearsay objection, is reviewed for abuse of discretion. United States v. Tyler, 281 F.3d 84, 98 (3d Cir. 2002) (internal citation omitted). The question of whether the IRS abused its discretion in imposing the penalty amount is reviewed de novo under the abuse of discretion standard. Eid v. Thompson, 740 F.3d 118, 122 (3d Cir. 2014).

SUMMARY OF ARGUMENT

This case was remanded to the District Court to apply a clarified standard for willfulness to the facts the District Court had already found after trial. This Court did not ask the District Court to modify or change its factual findings. When it did so anyway, the District Court exceeded the scope of remand — an error of law. See United States v. Smith, 751 F.3d at 122 (holding that the district court exceeded the scope of the Court's mandate when it revisited its initial order of restitution against the defendant, even though counsel had asked the district court to do just that).

Worse still, on remand the District Court adopted the supplemental findings of fact proposed by the government, then leveraged these findings to support a finding the Mr. Bedrosian was reckless. (A5 (Docket Entry No. 86 referring to Docket Entry No. 77)). Articulating little to no explanations, the District Court determined that the exact same evidence it had previously found to show that Mr. Bedrosian's 2008 actions were “at most negligent,” now showed that Mr. Bedrosian was reckless. Thus, the District Court's reversal on remand — finding that Mr. Bedrosian willfully violated the FBAR statute — was unsupported by the evidence, exceeded the scope of remand, and was clearly erroneous.

Second, Mr. Bedrosian respectfully asks for this Court to revise, or at least further clarify, the proper standard for “willfulness” this Court sought to establish in its opinion on the first appeal. Conduct that is “at most negligent” — like Mr. Bedrosian's — should not meet the willfulness standard.

Moreover, there are competing lines of Supreme Court authority applying a subjective test of recklessness rather than the objective one adopted by this Court. These authorities that focus on the conduct of the individual, should be applied to willful FBAR decisions. “Willfulness” has many connotations, and the Title 26 cases relied on by this Court on the first appeal are, upon closer examination, inapposite. The even more expansive standard applied by the District Court would work manifest injustice and should not be the law. Finding willfulness on the facts of this case will allow penalties based on 50% of an account balance, in most if not all, FBAR cases. FBAR filers make errors and the standard applied should not result in a finding of recklessness in almost every case.

Third, the District Court erred when it concluded that the government had met its burden to support the penalty amount. The District Court abused its discretion in relying on the materials the government presented that were hearsay and not admissible. Further, the District Court failed to recognize that the government failed to show that the penalty imposed on Mr. Bedrosian was determined in compliance with the appropriate Internal Revenue Manual Guidelines. The District Court erred by failing to apply the correct analysis as to the penalty amount because it erroneously focused on the IRS's decision to impose the statutory maximum penalty. Thus, it ignored the crucial piece of missing evidence required by the statute when imposing the maximum penalty – the balance of the account not reported on the 2007 FBAR as of June 30, 2008. These errors on the penalty imposed require that the District Court's order as to the penalty be reversed and vacated.

ARGUMENT

A. The District Court Clearly Erred in Finding Mr. Bedrosian's Conduct was Reckless After Already Having Determined that the Evidence Showed his Conduct was at most Negligent.

In 2017, the District Court correctly determined that Mr. Bedrosian's FBAR violation was not willful; it was unintentional and merely negligent. This finding was made shortly after the bench trial — when the District Court had the opportunity to make the credibility determinations that ordinarily are so difficult to upset on appeal. See Fed. R. Civ. P. 52(a)(6); Travelers Cas. and Sur. Co. v. Ins. Co. of North America, 609 F.3d at 157. On remand, however, the District Court reversed itself on the exact same evidentiary record, concluding that Mr. Bedrosian's conduct was reckless, and thus willful. But negligence is not the same as recklessness. The District Court's apparent conclusion that they are the same was clearly erroneous.

This Court did not ask the District Court to upset its findings of fact, but rather to apply a clarified standard (one that the District Court had already applied) to those same facts. The District Court did not do that, but instead adopted a different view of the facts and, after reinterpreting one Fourth Circuit unpublished opinion and interpreting another Fourth Circuit opinion, reversed itself. In so doing, the District Court exceeded the scope of the remand and committed clear error. And, in any event, even assuming it was proper for the District Court to change its interpretation of the evidence and facts on remand, the evidence still did not support a finding of willfulness, and the District Court's analysis of and reliance on the Fourth Circuit's opinions in Horowitz and Williams II to conclude that Mr. Bedrosian willfully violated the FBAR statute was erroneous.

1. The District Court Exceeded the Scope of Remand.

“It is axiomatic that on remand for further proceedings after decision by an appellate court, the trial court must proceed in accordance with the mandate and the law of the case as established on appeal. . . . A trial court must implement both the letter and spirit of the mandate, taking into account the appellate court's opinion and the circumstances it embraces.” Bankers Trust Co. v. Bethlehem Steel Corp., 761 F.2d 943, 949 (3d Cir. 1985). Upon remand, the trial court “may consider, as a matter of first impression, those issues not expressly or implicitly disposed of by the appellate decision.” Id. at 950. (internal citations omitted). A trial court is thereby free to make any order or direction in further progress of the case, not inconsistent with the decision of the appellate court, as to any question not settled by the decision. Id.

Review of the District Court's analysis and conclusion on willfulness on remand demonstrates that the District Court exceeded the scope of the remand because the further proceedings were not consistent with the mandate. Thus, the ruling that Mr. Bedrosian committed a willful violation of the FBAR statute should be reversed.

In the prior appeal, this Court sought to determine the law as to the standard to be applied by a district court in reviewing a willful FBAR violation. It then remanded the case to the District Court, not because it believed that the District Court had made the wrong findings, but simply to confirm that the District Court's result would be the same under the now-settled standard. This Court did not direct the District Court to reopen the evidentiary record, make additional findings of fact, or reverse the findings of fact it had already made. There was no reason to do so.

But, even though this Court merely remanded for application of the Carrigan willfulness standard to the established facts, the District Court viewed the remand as a directive to reach a different conclusion.⁷Thus, despite not receiving any additional evidence, the District Court made supplemental findings of fact and even reversed findings of fact that it had previously made. This was beyond the scope of remand.

The District Court exceeded the scope of remand in three ways.

First, the Court inexplicably reversed itself about certain facts that it had found from the evidence at trial, opining on remand that it had erred “when it concluded . . . that Bedrosian fully cooperated with the IRS and did not make false statements.” (A9 (Docket Entry No. 86)). But, the degree of cooperation is a purely factual question — not one that turns on the application of an objective or subjective standard for the making of false statements. This Court did not ask for these facts to be upset, nor was it appropriate for the District Court to do so when that was not the issue before it on remand.

Second, none of the Court's five supplemental findings of fact (adopted straight from the government's supplemental briefing) have any connection to the application of an “objective” standard. And, the District Court did not even try to tie them to the standard established by this Court.

Finally, the District Court had already applied an objective standard the first time around. The District Court found Mr. Bedrosian's conduct to be “at most negligent” at that time. The District Court even noted that “recklessness” equated with “willfulness.” (A592 (Docket Entry No. 64)). Against that backdrop, the District Court found that Mr. Bedrosian's conduct failed to meet the “objective” standard for liability. (A598 (Docket Entry No. 64)). All the District Court needed to do on remand was to either explain that it applied the proper standard the first time, or to explain how the existing facts fit in to the newly-announced standard.

2. The District Court Misapplied the Facts to the Case Law — Especially Non-Binding Caselaw from the Fourth Circuit.

The District Court clearly erred in concluding that Mr. Bedrosian's conduct was factually similar to the FBAR filers in United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020), and thus was a willful violation of the FBAR statute. Quite the contrary, there are very few similarities between the acts of Mr. Bedrosian and those of the Horowitzes. For example, the Horowitzes failed to inform UBS of their current address, making it impossible for UBS to send them correspondence and thus effectively hiding their account from the IRS. 978 F.3d at 83. In addition, after moving their money to a new bank, the Horowitzes created a numbered account (one that contained no identifying information) and agreed to a mail hold. Id. In contrast, Mr. Bedrosian did not consciously and intentionally seek to hide his account from the IRS by having a numbered account or withholding his address information from UBS. Although Mr. Bedrosian appears to have twice agreed to a mail hold (once in 1993 and once in 2004), he had no recollection of having done so. (A84-A87 (Tr.)). And, unlike the situation in Horowitz, there is no evidence, direct or circumstantial, that Mr. Bedrosian's agreement to a mail hold in 1993 and 2004 was connected to the opening of a foreign account. Mr. Bedrosian never agreed to have a numbered account.

The most important distinction between the cases though, and where the District Court's analysis was clearly in error, is that Horowitzes affirmatively checked “no” to question that required the disclosure of the existence of any foreign accounts (question 7a on Schedule B to Form 1040, U.S. Individual Tax Return). Horowitiz, 978 F.3d at 85. There can be no greater failure to comply with the requirement to report a foreign account than to deny the existence of a foreign account altogether. Mr. Bedrosian, however, did the exact opposite of the Horowitzes. He checked “yes” on Schedule B, affirmatively disclosing that he had a foreign account, and he accurately reported the country of the foreign account. (A264 (Exh. P9)).

The District Court's inappropriate analogy to and reliance on Horowitz continued when it found that both the Horowitzes and Mr. Bedrosian had substantial amounts in the foreign account. While the substantial amount in the account in Horowitz ($1.6 million) understandably allows an inference that the Horowitzes knew or should have known about the account's existence and therefore disclosed it, that same inference is inapplicable to Mr. Bedrosian's case because unlike the Horowitzes, Mr. Bedrosian did disclose his foreign account. And, nothing about the substantial amount of money in the account reported by Mr. Bedrosian should have caused him to “investigate further.” The 2007 FBAR reported a balance between $100,000 to $1 million, and the District Court held that Mr. Bedrosian should have realized that this could not be accurate: “In this instance, if Bedrosian had looked at the forms he signed, it is reasonable to conclude that he should have noticed the amount stated for the accounts was not accurate.” (A12 (Docket Entry No. 86)).

Although Mr. Bedrosian gave a singular answer to a singular question that there was “over a million dollars” in his UBS account, (A137 (Tr.)), the full context of the evidence at trial showed that Mr. Bedrosian's 2007 FBAR accurately reported what he believed was the approximate amount of his funds held by UBS. (A104 (Tr.)). Thus, there was no basis in the evidence from which the District Court could infer that Mr. Bedrosian would have been prompted to “investigate further” if he had looked at the 2007 FBAR. A review of the information on the 2007 FBAR would have simply revealed that the form correctly reported what Mr. Bedrosian truthfully believed to be the approximate account balance.⁸

Finally, the Fourth Circuit's finding that the Horowitzes were reckless was largely based on their “compound knowledge.” Horowitz, 978 F.3d at 89. That appellate court held that the Horowitzes could not reasonably conclude that the interest income from their Swiss accounts was not subject to taxes when they knew their income from U.S. accounts was. Id. And, the very least, this tension should have triggered a question for their accountant. Id. But, there is no such “compound knowledge” here. At the direction of his accountant, Mr. Bedrosian filed a tax return indicating what he thought was his foreign holdings, and sought to comply with the reporting requirement in the 2007 FBAR by reporting that he had funds in a foreign bank. The District Court clearly erred in concluding on remand that the Fourth Circuit's ruling on the inapposite facts of Horowitz compelled a finding that Mr. Bedrosian's conduct surrounding his 2007 FBAR, conduct that the District Court previously found to be “merely negligent,” supported a conclusion of willfulness.

The District Court also sought to justify its reversal on remand by changing its conclusion as to the applicability of the Fourth Circuit's unpublished holding in Williams II. The District Court initially held that the facts of this case stood “in contrast” to the facts of Williams II. (A595 (Docket Entry No. 64)). On remand, however, the Court inexplicably determined that that “there are very few differences between the conduct in Williams II and Bedrosian.” (A8 (Docket Entry No. 86)). This determination was based on the District Court concluding that it had previously erred when it held that Mr. Bedrosian had cooperated with the IRS and did not make false statements. Yet, the District Court provided no explanation for this complete reversal, and indeed, even if the supplemental facts are credited, they do not support this self-identified change. There is nothing in record suggesting that Mr. Bedrosian did not fully cooperate with the IRS. In short, nothing on remand, neither the supplemental facts nor application of the clarified standard, justifies the District Court's new and opposite conclusion that few differences exist between Mr. Bedrosian's conduct and the conduct in Williams II. The factual gap between the two cases remained just as wide as it had been before remand.

3. The Evidence, Both Before and After Remand, Does Not Support a finding of a Willful Violation by Mr. Bedrosian.

Both after the trial and on remand, Mr. Bedrosian was a credible witness. (A593 (Docket Entry No. 64)). And, Mr. Bedrosian's credible testimony showed the following: Mr. Bedrosian reported on Schedule B attached to his 2007 federal income tax return that he had a bank account in Switzerland. (A264 (Exh. P9)). He filed an FBAR for 2007 specifying the foreign financial institution that held his money. (A267 (Exh. P10)). He identified only one of the two accounts in his name at that bank, not because he was trying to conceal something, but because he was unaware that the second account existed. (A103 (Tr.)). It is unreasonable to infer, as the District Court did on remand, that because Mr. Bedrosian revealed to the government what he thought to be the extent of his foreign holdings, he was reckless (and therefore “willful”) in not investigating further to confirm the accuracy of his information. Such an inference, that a truthful belief requires a further investigation of those same facts, would create a never-ending loop in which no matter how truthful and accurate one believed the information provided to be, there would always be an obligation to investigate further. No FBAR filer would be considered to have acted negligently under this standard. This flawed inference cannot support a finding of willfulness under any standard.

The credible evidence showed that once Mr. Bransky's approach to Mr. Bedrosian's taxes caused Mr. Bedrosian to become concerned about the status of his foreign bank holdings, he retained lawyers and engaged forensic accountants to develop a plan to ensure that his filings, or amended filings, were accurate and complete, and all taxes were paid. (A107-A115 (Tr.)). Mr. Bedrosian took all of these steps prior to the government ever contacting him regarding his foreign account. (A112-A115 (Tr.)). This evidence shows that Mr. Bedrosian was diligent, not reckless.

It was the government's burden to prove a willful withholding by Mr. Bedrosian of information about his foreign holdings, and it failed to carry that burden. The District Court clearly erred in reversing itself on remand and concluding that Mr. Bedrosian had committed a willful violation of the FBAR statute.

B. This Court Should Clarify or Revise the Proper Standard for a Willful Violation of the FBAR Statute to Prevent Manifest Injustice.

If this Court determines that the District Court did not commit clear error in reversing itself on remand with respect to the standard applied to the evidence presented, Mr. Bedrosian respectfully submits that this Court should clarify or reconsider the legal standard for willfulness established by this Court's prior opinion.

1. The District Court Misunderstood This Court's Statement of the Willfulness Standard.

In the first appeal, this Court established that “reckless conduct” for alleged FBAR violations should be determined consistent with the concept of “reckless conduct” as articulated in Carrigan. But, as the District Court's reversed determination on willfulness shows, there is substantial risk that the lower courts will apply the Carrigan standard in a way that erases the distinction between recklessness and negligence. If the District Court were correct, then virtually any and all errors on an FBAR would support, in the view of the IRS, a finding of recklessness under a strict objective test, regardless of the filer's reasonable belief as to the accuracy of the filed FBAR. Instead, full consideration of all the relevant facts should be rejected, and a District Court should not be able to rely solely on something the FBAR filer should have done in hindsight.

2. This Court Should Clarify or Revisit the Standard Announced in the First Appeal in This Case.

Mr. Bedrosian acknowledges that the Court's willfulness standard in the prior appeal constitutes the law of the case. But, Mr. Bedrosian respectfully submits that the “law of the case” doctrine should not strictly apply here. The law of the case doctrine does not limit a federal court's power; rather, it directs its exercise of discretion. Pub. Int. Rsch. Grp. of New Jersey, Inc. v. Magnesium Elektron, Inc., 123 F.3d 111, 116 (3d Cir. 1997) (citing Arizona v. California, 460 U.S. 605, 619 (1983); Messinger v. Anderson, 225 U.S. 436, 444 (1912)). A court may properly revisit prior decisions of its own, or of a coordinate court, when extraordinary circumstances require, such as when the prior decision was clearly erroneous and would work a manifest injustice. Pub. Int. Rsch. Grp. of New Jersey, Inc., 123 F.3d at 116 (citing Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 816 (1988) (citation omitted)).

In the first appeal, this Court based its holding on the Safeco and Carrigan cases. It concluded that, generally speaking, the “usual civil standard of willfulness applies for civil penalties under the FBAR statute,” and relied on Safeco to hold that “willfulness” includes “recklessness,” and that recklessness is evaluated under an objective standard. Bedrosian II, 912 F.3 at 152. Because this conclusion was in line with “prior cases addressing civil penalties assessed by the IRS under the tax laws,” this Court instructed the District Court to examine its conclusion consistent with the definition of recklessness in Carrigan. Bedrosian II, 912 F.3 at 154. Mr. Bedrosian respectfully suggests that this conclusion was in error.

In Safeco, the Supreme Court considered what constituted a “willful failure” under the Fair Credit Reporting Act (“FCRA”) — reckless disregard of the statute's consumer-notice requirements or a knowing violation of that provision with respect to a reporting entity. 551 U.S. at 47. The FCRA imposes liability on any person “who willfully fails to comply” with the notice requirement. See 15 U.S.C. § 1681n(a). Then, the statute imposes a smaller damages amount for run-of-the-mill violations, but higher damages for a “knowing” violation. 15 U.S.C. § 1681n(a)(1)(A) and (B). The Supreme Court explained that “where willfulness is a statutory condition of civil liability, we have generally taken it to cover . . . reckless ones as well” and concluded that both the words Congress chose and the common-law usage supported the interpretation that “willful” included “reckless” for FCRA violations. 551 U.S. at 57 (internal citation omitted).

The Supreme Court's analysis did not end with the reference to the common-law usage; instead, the opinion proceeded to analyze how the statutory text provided additional support. “[I]t would have made no sense,” the Supreme Court explained, “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.” Safeco, 551 U.S. at 60. In other words, “willfully” must include recklessness, otherwise every violation would be a “knowing” violation and there would be no need for the statute to allow for a smaller damages award. Id. Thus, the Supreme Court's holding that an objectively reckless violation was a willful violation of the FCRA relied substantially on the statutory analysis of the two-tier penalty structure for “willful” violations of the FCRA. Stated differently, common-law usage of “willful” was an insufficient basis for the Supreme Court in Safeco to define the scope of “willful.”

The FBAR statute provides for violations that are (a) non-willful or (b) willful. Unlike the willful penalty structure in the FCRA, the FBAR penalty statute provides for a single-tier willful penalty. See 31 U.S.C. § 5321(a)(5)(C) and (D). This single-tier willful-penalty structure has a statutory floor of $100,000 and a ceiling that is equal to 50% of the account balance as of the date of violation. Unlike the FCRA, Congress did not include a qualifier in 31 U.S.C. § 5321, like “knowing,” to direct the IRS as to what types of willful FBAR violations are more appropriately penalized at or closer to the $100,000 floor as opposed to those violations deserving the statutory maximum. Congress left it entirely within the IRS's discretion to set the rules as to how the IRS determines the amount of the penalty for a willful violation of 31 U.S.C. § 5413 within the statutory floor and ceiling.

As Congress decided to leave the agency with this enormous degree of discretion, the courts should construe a “willful” violation of 31 U.S.C. § 5413 narrowly to ensure the IRS does not misuse its virtually unfettered discretion to impose the statutory maximum penalty. By holding that “willful” includes an objectively reckless violation and by way of this Court's definition of that term, this precise situation has become possible as evidenced by the District Court's conclusions on remand.

This Court placed great emphasis on the holding in Safeco that “recklessness” in the civil context should be measured from an objective standpoint. However, it failed to articulate a reason as to why in the views of this Court objective recklessness fell within a “willful” FBAR violation. Instead, this Court relied on a non-binding FBAR case from another circuit, a Supreme Court case that reached the reckless-is-determined-objectively conclusion after an in-depth statutory analysis, and an inapposite Title 26 decision.

Recklessness, and where it falls within willfulness, is not exclusively objective in the civil context. The Supreme Court has, on multiple occasions, recognized that a heightened or subjective standard should apply to determine recklessness. In Halo Elecs., Inc. v. Pulse Elecs., Inc., __U.S.__ 136 S. Ct. 1923, 1933 (2016), the Supreme Court dealt with a Patent Act provision that allowed treble damages in an infringement case. In reversing a holding of the Federal Circuit in In re Seagate Technology, 497 F.3d 1360 (2007) (en banc), the Court discussed the Federal Circuit's finding that willfulness could be established by an objective standard of recklessness. The Supreme Court held that the subjective conduct of the alleged infringer had to be considered, not solely the objective facts.

In Harte-Hanks Commc'ns, Inc. v. Connaughton, 491 U.S. 657, 688 (1989), the Court reviewed a libel action by a candidate against a newspaper. The Court again considered the standard of recklessness. In the context of a libel action, the Court held that the plaintiff was required, at a minimum, to establish reckless disregard for the truth, and held that this could be established only where defendant entertained serious doubts as to the truth evaluated under a subjective standard. See also Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011) (liability for induced patent infringement requires subjective knowledge that the induced acts constitute patent infringement, and willful blindness, as defined in criminal context and applied to civil, can satisfy the requirement).

The Supreme Court's Safeco opinion noted that “willful” is a word of many meanings and its meaning depends on context. 551 U.S. at 57. The Supreme Court has thus treated willfulness differently in different types of proceedings and adopted a subjective, rather than objective, test where appropriate.

This Court and the other courts to have reached the issue thus far to date have adopted Safeco without any consideration of the competing lines of authority for the treatment of recklessness under the civil law. The filing of an FBAR is a prototypical activity by each individual. As such, a purely objective standard of what others should do or have done, should not control. More flexibility in each case is necessary and a subjective standard is allowed or required. For the reasons above, this Court should revisit its conclusion that Safeco supported its holding that a willful violation of 31 U.S.C. § 5413 includes an objectively reckless violation and hold that subjective recklessness is required.

If this Court declines to do so, it should, at the least, revisit its conclusion that the District Court, on remand, was to evaluate this case applying the standard enunciated in Carrigan because that standard appropriately included reckless violations of “the tax laws” and not the law dealing with the filing of an FBAR.

A “willful” violation of the FCRA that is “reckless,” as defined in Safeco, does not have the same scope as a willful-due-to-reckless violation under Carrigan and Vespe. Carrigan and Vespe involved the question of whether a person was liable for the Trust Fund Recovery Penalty (“TFRP”) for unpaid payroll taxes under 26 U.S.C. § 6672. Under that Section, any “person required to collect, truthfully account for, and pay over any tax [for federal payroll] who willfully fails to collect such tax, or truthfully . . . pay over such tax, . . . shall . . . be liable to a penalty equal to the total amount of the tax . . . not collected, or not accounted for and paid over.” Id.

Liability for the TFRP under 26 U.S.C. § 6672 is a two-part inquiry, requiring first that a person be a “responsible person” and then, only if they are a “responsible person,” be “willful” in failing to pay over the payroll taxes. A person cannot be liable under 26 U.S.C. § 6672 solely because the failure to pay over the payroll taxes was willful — as a threshold, the person must be a “responsible person.” “Responsibility is a matter of status, duty, or authority, not knowledge.” Carrigan, 31 F.3d at 133. A responsible person must ensure that federal payroll returns are timely filed and that federal payroll taxes are timely paid.

A person who is subject to the FBAR reporting requirements must comply with the reporting requirement – but there is no tax or penalty associated with the amounts shown on the FBAR itself. Thus, the person who is a responsible person is situated in a markedly different position (an affirmative duty to file and remit federal payroll taxes) than a person who is required to a file an FBAR (duty to file). See In re Abel, 200 B.R. 816, 824-26 (E.D.Pa. 1996) (outlining elements and finding that conduct was not reckless under Vespe).

The Carrigan standard is specific to violations under 26 U.S.C. § 6672 and, arising from that specific context, developed a third element that is absent from the Safeco standard: “[the person] was in a position to find out for certain very easily.” 31 F.3d at 134. (What the “responsible person” was supposed to easily find out was whether federal payroll taxes were paid because he had a duty to do so. Id.) By applying the Carrigan standard without taking into consideration that “willfulness” is the second step of the inquiry under 26 U.S.C. § 6672, and only applies to individuals with specific obligations, this Court incorporated a framework that was ill-suited for the FBAR context. Under 26 U.S.C. § 6672, once one is determined to be a responsible person, the test is binary determining if the payroll taxes were paid to the IRS or another creditor. In the FBAR context, the factual determination is much more complex, as illustrated by the facts at issue here. This Court, by adopting Carrigan, effectively changed the meaning of “reckless” to include negligent conduct for purposes of a “willful” FBAR violation. Only a “responsible person” can be “reckless” (and thus “willful”) for purposes of 26 U.S.C. § 6672, and it is appropriate to hold a “responsible person” liable for the TFRP where further inquiry would have been easy. But the law should not require the same of a person required to file a FBAR.

This Court further concluded that compliance with FBAR filing should be evaluated like it is an “IRS filing.” This Court's opinion stated that the standard enunciated in Carrigan applies to “IRS filings.” More precisely, the standard enunciated in Carrigan applies to the inquiry whether a responsible person recklessly pays other creditors over the IRS. 31 F.3d at 134 (citing Vespe, 868 F.2d at 1335 (“Willfulness also encompasses the payment of other creditors with reckless disregard for whether taxes have been paid. This standard is satisfied if the taxpayer '(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.'”) (internal citations and quotation marks omitted)).

At issue here is not the payment of third-parties to the detriment of the IRS. It is a filing with FinCEN. Though the IRS is tasked with administering compliance with FBAR reporting, FBAR violations arise under Title 31 and the FBAR itself must be filed with FinCEN, not with the IRS (like an individual income tax return).

On remand, the District Court acknowledged that the cases applying the Carrigan standard do not pertain to FBAR filings. It found that these cases stand for the proposition that taxpayers are responsible for errors on tax forms that would have been apparent had they reviewed such forms closely. All that Mr. Bedrosian seemed to have done wrong is that he failed to review a form that, if he had reviewed, he would not have found to show inaccurate information based on his belief as to the number of accounts at the time and their balances. This Court should recognize that the application of the Carrigan standard to the facts of this case blurs the line between the standards as recklessness is no longer distinguishable from negligence for purposes of willful FBAR violations. Going forward, all the IRS would have to show is that there was an error, regardless of whether the FBAR filer reviewed the FBAR and his or her beliefs at that time on the accuracy of the information reported. The “objective” analysis that this Court identified will have become the entirety of the analysis, with no consideration of the FBAR filer's particular facts or state of mind. Mr. Bedrosian does not believe that such a standard is what the Court intended, nor is such a standard supported by the law.

C. The District Court Erred in Concluding that the Government Established the Amount of the Penalty Because the Government Did Not Present Any Admissible Evidence as to the Appropriate Amount of the Penalty.

The District Court concluded that the government established that the amount of the penalty was $975,789. This conclusion was erroneous for two reasons. First, the documents, specifically Exhibit R from which the District Court determined that the penalty was correct, were hearsay. The District Court abused its discretion in using that inadmissible hearsay evidence to rule that the penalty was correct. Second, even if Exhibit R was admissible, it did not, and cannot, establish the balance of Mr. Bedrosian's account as of June 30, 2008. The Internal Revenue Manual in effect for Mr. Bedrosian's FBAR examination dictates that the maximum statutory penalty for a willful violation of the FBAR statute when the account balance is over $1,000,000 is “the greater of $100,000 or 50% of the closing balance in the account as of the last day for filing the FBAR.” (I.R.M. 4.26.16.4.6.3(3)(d.), available at 2008 WL 5900939). But, Exhibit R upon which the District Court relied does not establish the account balance on “the last day for filing the FBAR” – in this case June 30, 2008. Thus, the government's imposition of the maximum statutory penalty in an amount of $975,789 was a violation of the IRS's own internal guidelines and thus arbitrary and capricious. And, because the government could not prove, from the record, the balance of Mr. Bedrosian's account on June 30, 2008 if the case were remanded, judgment must be entered in Mr. Bedrosian's favor. See United States v. Gentges, No. 18-CV-7910 (KMK), 2021 WL 1222764, at *16 (S.D.N.Y. Mar. 31, 2021).

1. The District Court Abused its Discretion in Using Inadmissible Hearsay to Support the Penalty Amount.

The District Court abused its discretion when it implicitly admitted the government's Exhibits R and T over Mr. Bedrosian's hearsay objections.

To support the imposed penalty of $975,789, the government offered Exhibits R and T. According to the government, Exhibit T summarizes currency exchange conversions to the figures shown in Exhibit R, and the penalty imposed against Mr. Bedrosian in the amount of $975,789 is 50% of the figure shown in Exhibit T for June 2008. The government does not argue that Exhibit T on its own establishes the requisite account balance for penalty imposition purposes; admissibility of Exhibit T thus depends on the admissibility of Exhibit R.

The government offered no witness to testify about Exhibit R, making it textbook hearsay. See Fed. R. Evid. 801(c)(1)-(2). The government argued that Exhibit R was encompassed within the government's Exhibit U (“Certification of Business Records”) and therefore qualified as an exception to the hearsay rule. But, this argument lacks merit and should have been rejected.

Federal Rule of Evidence 803(6) sets forth the hearsay exception for Records of a Regularly Conducted Activity. The so-called “business records exception” only applies to documents that are inherently reliable and trustworthy. See S.E.C. v. Hughes Cap. Corp., 124 F.3d 449, 456 (3d Cir. 1997) (excluding photocopies of cancelled checks showing notations and alterations for lack of trustworthiness under business records exception because testimonial evidence did not establish the nature of the changes). Furthermore, records that are prepared in anticipation of litigation are not admissible under the business records exception to the hearsay rule. Trout v. Pennsylvania R. R. Co., 300 F.2d 826, 830 (3d Cir. 1962).

This Court's opinion in United States v. Pelullo, 964 F.2d 193 (3d Cir. 1992), shows this Court's demanding adherence to the foundational requirements of the Rules of Evidence. In Pelullo, the defendant appealed his conviction for various RICO violations. The Court held there that wire transfer documents were inadmissible under the business records exception. 964 F.2d at 200. The government argued that the documents were admissible because there were sufficient “circumstantial guarantees of trustworthiness:” the documents had been obtained in response to grand jury subpoenas directed to the corporations and the bank; testimony of witnesses involved in the transactions corroborated the information in the records; and defendant had not stated any reason why the records were not reliable. Id. at 201. The Court rejected these arguments, holding that there was no authority that “the court may admit into evidence under the business exception to the hearsay rule documents containing hearsay simply because there are some indicia of the trustworthiness of the statement.” Id. (emphasis added).

The government here offered significantly less indicia of trustworthiness than the government did in Pelullo. Exhibit R lacks any indicia of reliability and trustworthiness, and the government failed to offer any foundation at trial, let alone sufficient foundation, to justify its admission. Exhibit R fails to even identify what the document is, and the government offered no testimony or other evidence to tell the District Court what it is.⁹ Further, Exhibit R does not mention (i) Mr. Bedrosian's name, (ii) the bank from which it allegedly originated, or (iii) from which bank account the purported monthly balances were collected. It fails to state when it was prepared or by whom. And, separate from the hearsay objection, Exhibit R is not even relevant. Evidence is only relevant if it “has any tendency to make a fact more or less probable than it would be without the evidence.” Fed. R. Evid. 401. Exhibit R fails to make anything more or less probable. In fact, without testimony to explain what it is or why it matters (and the government presented no such testimony), Exhibit R is meaningless. The District Court thus abused its discretion when relying on Exhibit R to support its conclusion on the penalty amount.

The business records certification at Government Exhibit U failed to cure the problem. Most notably, the certification did not tie Exhibit R to Mr. Bedrosian, to his bank accounts, or to this case. In fact, it is obvious from the heavy redactions to the attachment to Exhibit U that the certification was nothing more than a generic document prepared more than seven years before trial and in no way specific to Mr. Bedrosian or his accounts. Even the most detailed review of Exhibit R and Exhibit U leaves the reader clueless as to what Exhibit R is, where it came from, or to whom it applies. Exhibit R is not relevant; it certainly does not qualify as an exception to the rule against hearsay; and it cannot be the basis for assessing a penalty against Mr. Bedrosian.

For these reasons, the District Court abused its discretion when it implicitly admitted Exhibits R and T and relied on them to conclude that the government had proved the penalty amount imposed on Mr. Bedrosian was correct.

2. The Documents Relied on by the District Court to Support the Amount of the Penalty Imposed Do Not Show the Account Balance on June 30, 2008.

Even assuming that the government's proposed Exhibit R was admissible, the District Court's conclusion that that exhibit supported the penalty was arbitrary and capricious. The IRS guidelines state that the penalty to be applied when the account at issue has over $1,000,000 is the statutory maximum penalty for willful violations: the greater of $100,000 or 50% of the account balance as of the last day for filing the FBAR — “the date of the violation.” The date of a violation for failure to timely file an FBAR is the end of the day on June 30th of the year following the calendar year for which the accounts are being reported. (I.R.M. 4.26.16.4.5.5(4), available at 2008 WL 5900934). The balance in the account at the close of June 30th is the amount that must be used calculating the filing violation. Id. In this case, then, to support the imposition of a maximum statutory penalty of $975,789 on Mr. Bedrosian, the government must have presented evidence that on June 30, 2008, the balance of Mr. Bedrosian's account with UBS that was not reported on the 2007 FBAR was twice that — $1,951,578.34. As there is no such evidence, the government failed to carry its burden to prove the amount.

It is not sufficient for the government to approximate the balance of the account on the relevant date in order to impose the maximum statutory penalty amount. Courts examining the government's failure to use the exact account balance regularly hold that this is a departure from the IRS's own internal guidelines and, thus, arbitrary and capricious. See United States v. Schwarzbaum, No. 18-81147, 2020 WL 1316232 (S.D. Fla. Mar. 20, 2020) (concluding that the penalties imposed were arbitrary and capricious because the IRS did not use the balance in the account as of June 30 each year to calculate the penalties), appeal dismissed (Nov. 25, 2020). See also United States v. Gentges, No. 18-7910, 2021 WL 1222764, at *16 (S.D.N.Y. Mar. 31, 2021) (holding that the IRS's decision to use a December 2007 account balance instead of a June 30 account balance was arbitrary and capricious).

Here, the government presented no evidence of the balance of Mr. Bedrosian's relevant account on June 30, 2008. In fact, there is no explanation or evidence in the record as to that account balance on that date. Instead, the government presented, and the District Court accepted, Exhibit R, that the government's lawyer claimed to show the account balance, but in reality is not informative as to that issue. (A528 (Exh. Gov. R)). At best, even if the government lawyer's ipse dixit is to be credited, the spreadsheets presented by the government to support the maximum penalty showed balances in the account at various points, but never on June 30, 2008 — the only date that matters. Without evidence of the June 30, 2008 account balance, the government's imposition of a maximum statutory penalty of $975,789 was arbitrary and capricious.

The District Court's flawed analysis on the penalty arises from its failure to analyze whether the amount of the penalty was correct. Instead, following the district court in Williams II it analyzed whether the decision of the government to impose the statutory maximum penalty was correct. (“[T]he Court finds that the government has not abused its discretion in imposing the maximum penalty against Bedrosian.”) (A17 (Docket Entry No. 94)). But, imposition of the maximum statutory penalty was not the disputed issue here; Mr. Bedrosian acknowledged that there was over $1,000,000 in his account on June 30, 2008. (A137 (Tr.)). The issue was whether the penalty was appropriately imposed at the amount of $975,789. And, on that issue, the government presented no evidence, admissible or otherwise, that the account balance on that date was $1,951,578. See 31 U.S.C. § 5321(a)(5)(C), (D)(ii). Thus, there was no evidence to support the amount of the penalty and the District Court's conclusion that the penalty was appropriate must be reversed and vacated.

3. The Government could not Prove the Penalty Amount on Remand.

The government cannot prove that it imposed the correct statutory maximum penalty if the case were remanded on that issue. As discussed, the maximum penalty for a willful violation for the failure to report the existence of an account on an FBAR is 50% of “the balance of the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(C), (D)(ii). The District Court is tasked with reviewing the propriety of a penalty amount by review of the record that actually “formed the basis for the agency's decision, unless there was such a failure to explain administrative action as to frustrate effective judicial review.” United States v. Collins, Civil Action No. 18-1069, 2021 WL 456962, at *6 (W.D.Pa. Feb. 8, 2021) (internal citation omitted). To be complete, this record must include the “fundamental documents” that would have formed the basis for the agency's decisions. Id. (citing NVE, Inc. v. Dep't of Health & Human Servs., 436 F.3d 182, 195 (3d Cir. 2006)). “The Court cannot consider trial exhibits or testimony beyond the documents that comprise the administrative record.” Collins, 2021 WL 456962, at *6.

The evidentiary record is closed, and the government had ample opportunity during trial to prove the penalty amount by showing the balance of the account not reported on the 2007 FBAR as of June 30, 2008 (the date of the violation). But, the government failed to offer the same type of fundamental documents from Mr. Bedrosian's administrative file as were present in Collins. It provided no FBAR lead sheets and no penalty calculation charts. It did not offer the testimony of the IRS agent who ultimately decided to impose the willful penalty. All the record includes is a Form 13448, Penalty Assessment Certification (Title 31 “FBAR”) (A373 (Exh. Gov. A)), and the government's sole witness on the penalty testified that she had no involvement in determining the penalty. (A170-A171 (Tr.)).¹⁰

Remand to the District Court for further review of the penalty issue would be inappropriate — the government did not just fail to present the appropriate evidence of the penalty decision when it had the chance, it fought Mr. Bedrosian's efforts to admit evidence on that point. With the evidentiary record closed, the government has waived any right to present additional evidence. The District Court's judgment on the penalty amount should be reversed and vacated, and this Court should direct entry of judgment on the penalty amount in Mr. Bedrosian's favor.

CONCLUSION

For the foregoing reasons, this Court should reverse the judgments of the District Court holding that Mr. Bedrosian willfully violated the FBAR reporting statute and the penalty amount is $975,789.

Dated: August 2, 2021

Respectfully Submitted,

Patrick J. Egan, Esquire
Ian M. Comisky, Esquire
Siana Danch, Esquire
FOX ROTHSCHILD LLP
2000 Market Street, 20th Floor
Philadelphia, PA 19103
(215) 299-2000
pegan@foxrothschild.com
icomisky@foxrothschild.com
sdanch@foxrothschild.com

Attorneys for Plaintiff/Appellant