Couple Says They Asserted Privilege, Not Liable for FBAR Penalties

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA,
Plaintiff,
v.
DANIEL BERNSTEIN and YANA BERNSTEIN,
Defendants.

Judge Brian M. Cogan

DEFENDANTS' REPLY MEMORANDUM IN SUPPORT OF THE MOTION FOR SUMMARY JUDGMENT

CAPLIN & DRYSDALE, CHARTERED

By: Zhanna A. Ziering
Zhanna A. Ziering (Member of the Firm)
NY State Bar No.: 036482006
EDNY Bar No.: ZZ0216
CAPLIN & DRYSDALE, CHARTERED
600 Lexington Avenue, 21^st Floor
New York, New York 10022
zziering@capdale.com
Tel: (212) 379-6075
Fax: (212) 379-6000

Scott D. Michel (Admitted Pro Hac Vice)
(Member of the Firm)
NY State Bar No.: 2569572
CAPLIN & DRYSDALE, CHARTERED
One Thomas Circle, N.W., Suite 1100
Washington, DC 20005
smichel@capdale.com
Tel: 202-862-5030
Fax: 202-429-3301

Attorneys for Defendants

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TABLE OF CONTENTS

ARGUMENT

I. A Valid Invocation of the Fifth Amendment Privilege Cannot Itself Be A Violation of the Reporting Requirement

II. Imposition of FBAR Willful Penalties in This Case Is An Impermissible Coercive Economic Sanction in Violation of the Fifth Amendment

III. The Bernsteins Did Not Engage in a Willful FBAR Violation

CONCLUSION

TABLE OF AUTHORITIES

Cases

Anderson v. U.S., 1977 WL 1252 (W.D. La. Sept. 22, 1977)

Andover Data Servs., Inc. v. Statistical Tabulation Corp., 876 F.2d 1080 (2d Cir. 1989)

Baxter v. Palmigiano, 425 U.S. 308 (1976)

Bedrosian v. U.S., 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017)

Conway v. U.S., 647 F.3d 228 (5th Cir. 2011)

Dimminie v. U.S., 522 F. Supp. 1192 (E.D. Mich. 1981)

Eagle Hosp. Physicians LLC v. SRG Consulting, Inc., 561 F.3d 1298 (11th Cir. 2009)

Feinberg v. Comm'r, 808 F.3d 813 (10th Cir. 2015)

Feinberg v. Comm'r, 916 F.3d 1330 (10th Cir. 2019)

Fuentes v. CAI Intl., Inc., 728 F. Supp. 2d 1347 (S.D. Fla. 2010)

Garrity v. New Jersey, 385 U.S. 493 (1967)

Graco, Inc. v. Binks Mfg. Co., 60 F.3d 785 (Fed. Cir. 1995)

Gray Line Co. v. Granquist, 237 F.2d 390 (9th Cir. 1956)

In re Martin-Trigona, 732 F.2d 170 (2d Cir. 1984)

Lefkowitz v. Cunningham, 431 U.S. 801 (1977)

Maness v. Meyers, 419 U.S. 449 (1975)

Mirlis v. Greer, 952 F.3d 36 (2d Cir. 2020)

Neonatology Assoc., P.A. v. Comm'r, 299 F.3d 221 (3rd Cir. 2002)

Pillsbury Co. v. Conboy, 459 U.S. 248 (1983)

Rockwood Computer Corp. v. Morris, 94 F.R.D. 64 (E.D.N.Y. 1982)

Skoczylas v. U.S., 906 F. Supp. 2d 161 (E.D.N.Y. 2012)

Slodov v. U.S., 436 U.S. 238 (1978)

Stewart v. Sonneborn, 98 U.S. 187 (1879)

T.W. Warner Co. v. Andrews, 73 F.2d 287 (2d Cir. 1934)

Troublé v. Wet Seal, Inc., 179 F. Supp. 2d 291 (S.D.N.Y. 2001)

U.S. ex rel. Lutz v. Berkeley Heartlab, Inc., 2017 WL 1282012 (D.S.C. Apr. 05, 2017)

U.S. v. Bonanno Organized Crime Family of La Cosa Nostra, 683 F. Supp. 1411 (E.D.N.Y. 1988), aff'd, 879 F.2d 20 (2d Cir. 1989)

U.S. v. Boyle, 469 U.S. 241 (1985)

U.S. v. Doe (In re Grand Jury Subpoena Duces Tecum Dated March 25, 2011), 670 F.3d 1335 (11th Cir. 2012)

U.S. v. Flume, 390 F. Supp. 3d 847 (S.D. Tex. 2019)

U.S. v. Giddins, 858 F.3d 870 (4th Cir. 2017)

U.S. v. Ianniello, 824 F.2d 203 (2d Cir. 1987)

U.S. v. Jones, 703 F.2d 473 (10th Cir. 1983)

U.S. v. Schwarzbaum, No. 9:18-81147 (S.D. Fla. Mar. 20, 2020)

U.S. v. Stein, 440 F. Supp. 2d 315 (S.D.N.Y. 2006)

U.S. v. Sullivan, 274 U.S. 259 (1927)

Winter v. U.S., 196 F.3d 339 (2d Cir. 1999)

Wohlstrom v. Buchanan, 180 Ariz. 389 (1994)

Youssefzadeh v. Comm'r, T.C. Dk. No. 14868-14L (Nov. 6, 2015)

Constitutional Provisions

U.S Const. amend. V

Statutes

26 U.S.C. § 6672(a)

Fair Labor Standards Act, 29 U.S.C. § 201 et. seq

Rules

Fed. R. Civ. P. 37

Local Civil Rule 56.1

Other Authorities

Andrew Velarde, Practitioners Balk at Potential DOJ Willful FBAR Argument, 164 Tax Notes Federal 1331 (Aug. 19, 2019)

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ARGUMENT

Summary judgment should be granted to the Defendants because: i) irrespective of any “adverse inference,” Defendants' invocation of the privilege itself does not violate the FBAR reporting requirement; ii) imposition of the 50% willful FBAR penalty in this case is an unconstitutionally coercive economic sanction; and iii) in light of Defendants' conduct in 2011 and reliance on counsel, they did not engage in a willful violation.

I. A Valid Invocation of the Fifth Amendment Privilege Cannot Itself Be A Violation of the Reporting Requirement

The fundamental flaw in the Government's “adverse inference” argument is that the act being penalized here is the assertion of privilege itself, not a “fact” as to which an adverse inference may be drawn. The Government concedes that this is precisely its argument, i.e., that the Court may “infer” a willful FBAR violation and impose a penalty solely because of the privilege claim.¹

The invocation of privilege cannot itself be the violation. In none of the Government's adverse inference cases did the Court hold the claim of privilege itself as the proper basis for civil liability. Instead, the liability arose from a separate violation, and the combination of the adverse inference and other evidence was sufficient to establish liability. See, e.g., U.S. v. Ianniello, 824 F.2d 203, 208 (2d Cir. 1987). In this case, while the “adverse inference,” with additional evidence, might justify a finding that the Bernsteins had a reportable foreign account in 2010, the 2010 FBAR itself is not a willful violation of the reporting requirements.

At its core, the Government claims the power to subject FBAR filers who invoke their privilege against self-incrimination to substantial civil penalties (and even suggests potential criminal punishment). Such automatic economic sanctions are unconstitutional when imposed solely for a valid invocation of the Fifth Amendment. Lefkowitz v. Cunningham, 431 U.S. 801, 808, n. 5. (1977) (refusal to waive the privilege cannot lead automatically and without more to the imposition of sanctions). The Government does not contest that the elements of the privilege — compulsion, testimony, and self-incrimination — are satisfied as to the 2010 FBARs; thus rendering the asserted FBAR penalties constitutionally impermissible sanctions for a valid privilege claim.

Courts routinely reject sanctions for a valid invocation of the privilege. For example, had the Bernsteins invoked the privilege in a grand jury (without immunity), a court would not impose economic or more severe sanctions for contempt.² Pillsbury Co. v. Conboy, 459 U.S. 248 (1983) (civil defendant cannot be held in contempt for valid invocation of the Fifth Amendment privilege); Maness v. Meyers, 419 U.S. 449 (1975) (contempt finding rejected against attorney even where good faith advice to a client to invoke privilege was later deemed improper); Andover Data Servs., Inc. v. Statistical Tabulation Corp., 876 F.2d 1080 (2d Cir. 1989) (civil contempt and coercive monetary sanctions improper where witness in a civil action validly invoked privilege absent immunity); compare In re Martin-Trigona, 732 F.2d 170, 174 (2d Cir. 1984) (contempt sanction proper after debtor with statutory immunity refused to testify).³

The Government's reliance on Feinberg v. Comm'r, 916 F.3d 1330 (10th Cir. 2019) is misplaced. (Gov. Opp. p. 7-9). There, the taxpayers, cannabis dealers, contested the allocation of the burden of proof to taxpayers seeking to challenge the IRS's disallowance of deductions. They argued that such allocation violated the Fifth Amendment because to substantiate their deductions they would have to admit violations of federal controlled substances laws. The Tenth Circuit disagreed, holding it proper to allocate the burden to taxpayers challenging the IRS's administrative determination. The taxpayers were not compelled to do anything, and the Government did not assess a penalty based on their invocation of the privilege.⁴ Cf. Youssefzadeh v. Comm'r, T.C. Dk. No. 14868-14L (Nov. 6, 2015) (rejecting the IRS's assertion of frivolous return penalty where taxpayers invoked Fifth Amendment privilege in response to the Form 1040, Schedule B question regarding the ownership of foreign bank accounts).⁵

II. Imposition of FBAR Willful Penalties in This Case Is An Impermissible Coercive Economic Sanction in Violation of the Fifth Amendment

The Government attempts to gloss over the substantial and unconstitutionally coercive sanctions it seeks here, arguing that i) the FBAR penalty is “merely an economic sanction,” whereas coercion occurs only as to sanctions that implicate “grave consequences” for one's livelihood, professional reputation, or standing with the community; and ii) the Fifth Amendment does not prohibit every “hard choice” between providing incriminating information and facing a sanction for failing to do so. These arguments are wrong as a matter of simple economics and contravene applicable judicial precedent.

The proposed line — for which there is no cited authority — between a “monetary sanction” and other impairments on one's livelihood or reputation ignores basic economics. The Government acknowledges that it would be impermissible to coerce incriminating testimony from an employee, who if discharged might lose, say, $600,000 in wages, or if debarred from federal contracts might forego $600,000 in business. Yet such sanctions are no more punitive than a civil monetary penalty that would cost the Bernsteins approximately $600,000 in cash. The precise form of sanction is irrelevant — the core issue is the magnitude of the sanction and whether it has an impermissibly coercive effect on the valid exercise of the Fifth Amendment. That some cases find coercion where one's livelihood or reputation is at stake does not preclude “mere monetary sanctions” from also constituting unconstitutional economic coercion.

Indeed, courts have often held that the Fifth Amendment can bar coercive monetary sanctions, even in amounts less than $600,000. For example, in U.S. v. Giddins, 858 F.3d 870 (4th Cir. 2017), the police threatened to seize and hold the defendant's Ford Focus unless he waived his Fifth Amendment privilege and answered their questions. Comparing Mr. Giddins' plight to other “coercion” cases, the Court found that the police had acted unconstitutionally:

We must consider the realities of the circumstances, and compare apples to apples. No one contends that Giddins, was enjoying a position of public trust such as the officers in Garrity or the political party official in Cunningham. But we cannot consider the threatened economic consequences to Giddins as being any less severe simply because Giddins may not have held as “prestigious” of a position. Giddins relied on his car to get him to his job, and it was the means of maintaining his livelihood. The threatened economic consequences for him were just as great as the threatened consequences to the police officer in Garrity and the political party in Cunningham.

Id., at 882-883. See also U.S. v. Stein, 440 F. Supp. 2d 315, 331-33 (S.D.N.Y. 2006) (employer's conditioning of payments of attorney fees up to $400,000 on employees' cooperation with the Government was impermissible economic coercion where the testimony was compelled as a result of such coercion); Rockwood, 94 F.R.D. at 67 (judgment for $60,000 in salary reimbursement and $250,000 in punitive damages is significant cost on defendant's silence and “would run afoul of the constitutional protection”).⁶

Moreover, the Government exaggerates Defendants' position in arguing that the Fifth Amendment does not prohibit every “hard choice” between protecting incriminating information and suffering a consequence. Some limited forms of sanction on assertion of the privilege are permitted, but some consequences are too “costly” and unconstitutional. See Baxter v. Palmigiano, 425 U.S. 308, 316-321 (1976). The Government's authorities simply do not support a finding that a $600,000 penalty against the Bernsteins is non-coercive under settled Fifth Amendment jurisprudence. If anything, they show how limited the sanction must be to survive scrutiny.⁷

Plainly, a willful FBAR penalty equal to the 50% of the account value in this case is a substantial economic consequence. Whether the amount of the penalty is by “Congressional design” (Gov. Opp. p. 7) is not determinative; Congress did not bless the imposition of the willful FBAR penalty for the invocation of the Fifth Amendment privilege. Doing so here would improperly place an FBAR filer with potential criminal exposure between “a rock and a whirlpool,” Garrity v. New Jersey, 385 U.S. 493, 496 (1967), creating a binary choice between self-incrimination and payment of a substantial and possible multi-year and confiscatory penalty for the valid exercise of the Fifth Amendment privilege. Under the clear Supreme Court and other authority cited in our supporting Memoranda, this is unconstitutional economic coercion.

III. The Bernsteins Did Not Engage in a Willful FBAR Violation

The Government's position on willfulness, argued in two separate sections of its opposition, ignores the undisputed factual record and the axiomatic principle that a person acting in good faith reliance on the advice of informed counsel cannot be said to have intentionally or willfully violated the law.

The first discussion of willfulness arises as the Government advances its adverse inference argument. (Gov. Opp. p. 4). The Government recognizes that willfulness cannot be based solely on the “adverse inference” drawn from the invocation of privilege on the 2010 FBAR, and that additional evidence is required.⁸ Thus, to support a finding of willfulness, the Government cites both Defendants' conduct long pre-dating the 2010 FBAR and, apparently, the adverse inference from the invocation of privilege thereon. (Gov. Opp. p. 3-4).⁹

This argument ignores the undisputed facts in this case as to the Bernsteins' conduct in 2011 concerning the very FBARs at issue for 2010. The pivotal inquiry is whether in filing those FBARs, Defendants willfully violated the reporting statute. See U.S. v. Schwarzbaum, No. 9:18-81147 (S.D. Fla. Mar. 20, 2020); U.S. v. Flume, 390 F. Supp. 3d 847, 854 (S.D. Tex. 2019); Bedrosian v. U.S., 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017). The Government's attempt to bootstrap the Bernsteins' pre-2011 conduct with the adverse inference based on the FBAR itself ignores the uncontroverted evidence of their actual conduct as to the very FBARs at issue:

• In June 2011, there was a realistic possibility that the IRS would refer the Defendants for criminal investigation in connection with their previously unreported foreign bank accounts. As such, the information sought on the FBAR was compelled, testimonial, and, at that time, potentially incriminating.

• Upon learning the material facts, Defendants' experienced and well-regarded attorney, Lawrence S. Feld, advised the Defendants that i) they were required to file 2010 FBARs or face civil and criminal sanctions; ii) the information sought on the FBAR would be incriminating; and iii) they should file the FBARs but invoke their constitutional privilege in lieu of providing the incriminating testimony.

• Defendants followed Mr. Feld's advice and filed the FBARs, asserting their Fifth Amendment privilege in connection with the incriminating information and, in an explanatory addendum, offering to waive the privilege upon receipt of immunity.

These specific and uncontroverted 2011 events demonstrate the Bernsteins' good faith attempt to comply with the FBAR filing requirement for 2010, and plainly support a finding that they did not engage in a willful violation as to the 2010 FBARs notwithstanding their pre-2011 conduct.

The Government separately argues that as a matter of law the Bernsteins' reliance on counsel is not available as a defense to a willful FBAR violation and if it were, it would not apply in this case. (Gov. Opp. p. 9-11). The Government posits that there is no “statutory basis” for a reliance defense. Id. This draws too narrow of a test — reliance goes directly to the concept of willfulness. Whether developed from case law concerning the SEC or otherwise, where any form of statutory (or other) liability has an element of scienter, it is a longstanding principle that good faith reliance on advice of fully-informed counsel can negate that element.¹⁰ Failure to consider reliance on counsel as a factor in defense to willfulness does not just violate common sense, it reads out willfulness as an element of the penalty, effectively resulting in strict liability.¹¹

Indeed, last month Judge Bloom in U.S. v. Schwarzbaum, No. 9:18-81147, *18-20 (S.D. Fla. Mar. 20, 2020) held that good faith reliance on a professional is a defense to a willful FBAR penalty. The Court acknowledged that the willful penalty lacked a statutory reasonable cause exception but nevertheless recognized the validity of the reliance defense. The Court relied upon U.S. v. Boyle, 469 U.S. 241 (1985), where the Supreme Court recognized:

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. “Ordinary business care and prudence” do not demand such actions.

469 U.S. at 251 (internal citation omitted). Based on the Court's language in Boyle, Schwarzbaum held that in one of the years at issue, defendant's reasonable reliance on his accountant sufficiently explained his incomplete FBAR filings.¹² Likewise, under Boyle, the Bernsteins cannot be held to have acted “willfully” when they timely filed their 2010 FBARs with a Fifth Amendment privilege claim in reliance on advice of their attorney.¹³

The Government also argues that because the statute provides a reasonable cause exception to the nonwillful FBAR penalty but not the willful penalty, and because the issue of reliance goes to “reasonable cause,” reliance cannot be a defense to willfulness. (Gov. Opp. p. 10). There is no logic to this argument — reasonable cause can be derived from many factors, not just reliance, and that one can argue reliance as an element of reasonable cause is no bar also to arguing it to negate willfulness. This is reflected in cases where courts have upheld the concept of a reliance defense to a statutory willfulness penalty even without an explicit reasonable cause exception. For example, courts have held as such under 26 U.S.C. § 6672(a), which imposes a penalty on “responsible persons” for the willful failure to pay over withholding and related “trust-fund” taxes such as Medicare and Social Security. Even with the statute lacking an explicit reasonable cause exception, courts have ruled that reliance on advice of counsel is nonetheless a potential defense to willfulness under § 6672(a).¹⁴ The Government's contention that the Defendants cannot contest willfulness based on their reliance on advice of counsel is meritless.

Finally, the Government disputes whether the Bernsteins have a valid reliance defense, arguing that Mr. Feld did not specifically advise as to the civil penalty. (Gov. Opp. p. 11). This is both wrong and irrelevant. The Government concedes that Mr. Feld advised Defendants to file FBARs invoking privilege and that Defendants did so in reliance on this advice in full belief that they satisfied the statutory filing requirements.¹⁵ (Gov. Resp. to Def. Rule 56.1 Statement ¶¶ 17-20). Moreover, as previously explained, the Government's contention that Mr. Bernstein was aware that filing FBARs in such manner may subject him to a “fine” takes the statement out of context and misrepresents Mr. Bernstein's deposition testimony.¹⁶ Besides, even if Mr. Feld did not specifically address the civil willful FBAR penalty, and irrespective of whether he issued an “opinion letter,” the Bernsteins were entitled to rely on his expertise and they did exactly what he told them to do. Their actions are sufficient for the Court to determine that they did not willfully violate the FBAR filing requirements, especially where the so-called “violation” implicates their constitutional right against self-incrimination.

CONCLUSION

For the reasons set forth above and in the Defendants' Memorandum of Law in Support of its Motion for Summary Judgment, the Court should deny the Government's motion for partial summary judgment and grant summary judgment in favor of the Defendants.

Dated: April 1, 2020
New York, New York

Respectfully submitted,
CAPLIN & DRYSDALE, CHARTERED

By: 

Zhanna A. Ziering (Member of the Firm)
NY State Bar No.: 036482006
EDNY Bar No.: ZZ0216
600 Lexington Avenue, 21st Floor
New York, New York 10022
zziering@capdale.com
Tel: (212) 379-6075
Fax: (212) 379-6000

Scott D. Michel (Admitted Pro Hac Vice)
(Member of the Firm)
NY State Bar No.: 2569572
CAPLIN & DRYSDALE, CHARTERED
One Thomas Circle, N.W., Suite 1100
Washington, DC 20005
smichel@capdale.com
Tel: 202-862-5030
Fax: 202-429-3301

Attorneys for Defendants