Government Argues Wrong Willfulness Standard Applied in FBAR Case

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

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

BRIEF FOR THE APPELLANTS

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
ANDREW M. WEINER (202) 305-2701
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
WILLIAM M. MCSWAIN
United States Attorney

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TABLE OF CONTENTS

Table of contents

Table of authorities

Statement of subject matter and appellate jurisdiction

Statement of the issue

Statement of related cases and proceedings

Statement of the case

Summary of argument

Argument

I. The District Court erred by applying the wrong standard of willfulness to determine whether Bedrosian willfully violated the FBAR requirement

II. Bedrosian was at least reckless, and therefore willful, as a matter of law

III. The Government's evidence was sufficient to prove that Bedrosian knowingly violated the FBAR requirement

Conclusion

Certificate of bar membership

Certificate of compliance

Joint appendix, volume I (pages A1 - A18):

Certificate of service

TABLE OF AUTHORITIES

Cases:

Blackledge v. Blackledge, 866 F.3d 169 (3d Cir. 2017)

Bryan v. United States, 524 U.S. 184 (1998)

Chabal v. Reagan, 822 F.2d 349 (3d Cir. 1987)

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

Denbo v. United States, 988 F.2d 1029 (10th Cir. 1993)

Diebold Found., Inc. v. Commissioner, 736 F.3d 172 (2d Cir. 2013)

Greenberg v. United States, 46 F.3d 239 (3d Cir. 1994)

Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349 (3d Cir. 2013)

Herman & Maclean v. Huddleston, 459 U.S. 375 (1983)

Lefcourt v. United States, 125 F.3d 79 (2d Cir. 1997)

Monday v. United States, 421 F.2d 1210 (7th Cir. 1970)

Pignataro v. Port Authority, 593 F.3d 265 (3d Cir. 2010)

Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007)

Smith v. Orr, 855 F.2d 1544 (Fed. Cir. 1988)

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

United States v. Bohanec, 263 F. Supp. 3d 881 (C.D. Cal. 2016)

United States v. Bussell, No. 15-2034, 2015 U.S. Dist. LEXIS 175952 (C.D. Cal. Dec. 8, 2015)

United States v. Chabot, 793 F.3d 338 (3d Cir. 2015)

United States v. Dollar Bank Money Market Account No. 1591768456, 980 F.2d 233 (3d Cir. 1992)

United States v. Garrity, No. 3:15-cv-243, 2018 U.S. Dist. LEXIS 56888 (D. Conn. Apr. 3, 2018)

United States v. Hohri, 482 U.S. 64 (1987)

United States v. Kelley-Hunter, 281 F. Supp. 3d 121 (D.D.C. 2017)

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

United States v. Sturman, 951 F.2d 1466 (6th Cir. 1991)

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

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

United States v. Williams, No. 1:09-cv-437, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. Sept. 1, 2010)

Wright v. United States, 809 F.2d 425 (7th Cir. 1987)

Statutes:

26 U.S.C. § 6672

28 U.S.C.:

31 U.S.C.:

American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821(a), Title VIII, Subtitle B, Part I, 118 Stat. 1418, 1586

Bank Secrecy Act of 1970, Pub. L. No. 91-508, 84 Stat. 1114

USA PATRIOT Act of 2001, Pub. L. No. 107-56, § 361(b), 115 Stat. 272, 329-30

Regulations:

31 C.F.R.:

Miscellaneous:

Department of the Treasury, “Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements” (Apr. 2, 2003), available at https://www.irs.gov/irm/part4/irm_04-026-001

Department of the Treasury, “A Report to Congress in Accordance with § 361(b) of the USA PATRIOT ACT” (Apr. 24, 2003), available at https://www.fincen.gov/sites/default/files/shared/fbar3613.pdf

Evan Perez, “Feds Press Swiss Bank to Name U.S. Clients,” Wall St. J., A1 (July 1, 2008)

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

H.R. Rep. No. 91-975 (1970), reprinted in 1971-1 C.B. 559

H.R. Rep. No. (Conf. Rep.) 108-755 (2004), reprinted in 2004 U.S.C.C.A.N. 1341

Hale E. Sheppard, Evolution of the FBAR: Where We Were, Where We Are, and Why It Matters, 7 Houston Bus. & Tax Journal 1, 19 (2006)

Internal Revenue Manual:

IRS 2007 Form 1040

Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 No 32 (I.R.S.), 2005 WL 5783636 (May 2005)

S. Rep. No. 97-275 (1981)

S. Rep. No. 108-192 (2004)

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STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

1. On October 27, 2015, Arthur Bedrosian filed a complaint in the United States District Court for the Eastern District of Pennsylvania against the United States of America, the Department of the Treasury (“Treasury”), and the Internal Revenue Service (“IRS”) for the return of funds that Bedrosian claimed were illegally exacted by imposing a civil penalty against him for a willful violation of the requirement under 31 U.S.C. § 5314(a) to file a Report of Foreign Bank and Financial Accounts, or “FBAR,” with Treasury. (A19-24.)¹ On February 26, 2016, the United States answered the complaint and asserted a counterclaim for the full amount of the penalty plus accrued statutory additions. (A25-31.) The District Court had jurisdiction over Bedrosian's claim under 28 U.S.C. § 1346(a)(2), referred to as the Little Tucker Act, and had jurisdiction over the Government's counterclaim under 28 U.S.C. §§ 1345 and 1346(c).

On September 20, 2017, the District Court entered judgment in favor of Bedrosian. (A16.) That judgment was final, disposing of all claims of all parties. On November 17, 2017, within 60 days after the entry of the final judgment, the Government timely filed a notice of appeal. (A17); see Fed. R. App. P. 4(a)(1)(B). As explained below, we believe this Court has jurisdiction under 28 U.S.C. § 1291, although the issue presents a question of first impression in any court.

2. In cases such as this, where the district court's jurisdiction is based in whole or in part on the Little Tucker Act, 28 U.S.C. § 1295(a)(2) provides that “the Federal Circuit shall have exclusive jurisdiction” of an appeal from a final decision of the district court, with one exception that we believe applies here:

jurisdiction of an appeal in a case brought in a district court under section 1346(a)(1), 1346(b), 1346(e), or 1346(f) of this title or under section 1346(a)(2) when the claim is founded upon an Act of Congress or a regulation of an executive department providing for internal revenue shall be governed by sections 1291, 1292, and 1294 of this title[.]

28 U.S.C. § 1295(a)(2) (emphasis added).

Although the FBAR penalty at issue here is not a tax or a tax penalty, an “Act of Congress . . . providing for internal revenue” is not synonymous with the tax laws under Title 26. This is clear from 28 U.S.C. § 1346(a)(1), which is another exception in section 1295(a)(2) and confers jurisdiction on the district courts and the Court of Federal Claims to hear claims for refund of an amount wrongly collected under “the internal-revenue laws.” Congress used the broader language “providing for internal revenue” in section 1295(a)(2), and that language must be construed more broadly if the exception for cases brought under section 1346(a)(2) is to have any effect independent of the exception for cases brought under section 1346(a)(1).

The statutes and regulations at issue here, 31 U.S.C. §§ 5314, 5321, and 31 C.F.R. § 1010.350, “provid[e] for internal revenue” by facilitating tax compliance and enforcement. The FBAR requirement and applicable penalty have their origins in the Bank Secrecy Act of 1970, Pub. L. No. 91-508, 84 Stat. 1114, codified at 31 U.S.C. § 5311 et seq., requiring “certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” 31 U.S.C. § 5311; see United States v. Chabot, 793 F.3d 338, 344 (3d Cir. 2015) (explaining that government agencies use information secured by the Bank Secrecy Act “for tax collection, development of monetary policy, and conducting intelligence activities”). Among the issues Congress sought to address were “[s]ecret foreign financial facilities, particularly in Switzerland,” that offered the wealthy a “grossly unfair” but “convenient avenue of tax evasion.” H.R. Rep. No. 91-975 at 13 (1970), reprinted in 1971-1 C.B. 559, 561. In 2001, Congress required that Treasury study compliance with the FBAR requirement. USA PATRIOT Act of 2001, Pub. L. No. 107-56, § 361(b) 115 Stat. 272, 329-30. In response to Treasury's findings that there may be hundreds of thousands of taxpayers still hiding assets offshore to evade tax, Congress increased the penalty for willful FBAR violations in a piece of tax legislation called the American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821(a), Title VIII, Subtitle B, Part I, 118 Stat. 1418, 1586. See H.R. Rep. No. (Conf. Rep.) 108-755 at 615 (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1679; S. Rep. No. 108-192 at 192 (2004). It is this 2004 version of the FBAR penalty, enacted in legislation “providing for internal revenue,” see 28 U.S.C. § 1295(a)(2), that is at issue in this case.

Treasury meanwhile redelegated its authority to enforce the FBAR requirements from the Financial Crimes Enforcement Network to the IRS in 2003. See Department of the Treasury, “Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements” (Apr. 2, 2003)²; see also 31 C.F.R. § 1010.810(g). One reason for the change was that “the FBAR is directed more towards tax evasion, as opposed to money laundering or other financial crimes,” and thus fell within the IRS's primary area of jurisdiction. Department of the Treasury, “A Report to Congress in Accordance with § 361(b) of the USA PATRIOT ACT,” at 4 (Apr. 24, 2003).³ Accordingly, the IRS has developed a comprehensive scheme for enforcing and assessing the FBAR penalty. See Internal Revenue Manual 4.26 & 8.11.6. This legislative and administrative history, coupled with the FBAR's primary purpose as a tax investigation tool, bring the penalty within the broad scope of laws and regulations “providing for internal revenue” referred to in 28 U.S.C. § 1295(a)(2).

Moreover, this case is exactly the type of case Congress intended to be heard in the regional circuit courts. Congress created the Federal Circuit partly in response to a “'special need for nationwide uniformity' in certain areas of the law.” United States v. Hohri, 482 U.S. 64, 71 (1987) (quoting S. Rep. No. 97-275, at 2 (1981)). Congress did not consider tax to be one of those areas, and so it provided in section 1295(a)(2) that appeals of district court decisions in tax refund cases and other tax-related cases against the United States proceed in the normal course to the regional courts of appeals under 28 U.S.C. § 1291. See id. at 72 (explaining that claims against the United States for less than $10,000 are appealable only to the Federal Circuit “so long as they are not related to federal taxes”).

As further support, most FBAR litigation is brought by the Government under 28 U.S.C. § 1345 to reduce penalties to judgment, and those suits must proceed in the district courts and up to the regional courts of appeals. See, e.g., United States v. Bussell, No. 15-2034, 2015 U.S. Dist. LEXIS 175952 (C.D. Cal. Dec. 8, 2015), aff'd, 699 F. App'x 695 (9th Cir. 2017); United States v. Williams, No. 1:09-cv-437, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. Sept. 1, 2010), rev'd, 489 F. App'x 655 (4th Cir. 2012). FBAR cases brought by individuals in district courts should follow the same course, especially considering that the area of law cannot be avoided by the regional courts of appeals or made uniform by the Federal Circuit.

3. Although we have found no case directly on point and believe this is an issue of first impression, we note that there is a significant body of law addressing the general question whether an appeal lies in the regional court of appeals or the Federal Circuit. In such cases, both this Court and the Federal Circuit have recognized that “[w]ell established among the judicial powers of all appellate courts is the inherent power of the courts to determine for themselves . . . whether they have subject matter jurisdiction over an appeal before them.” Smith v. Orr, 855 F.2d 1544, 1552 (Fed. Cir. 1988); accord Chabal v. Reagan, 822 F.2d 349, 352 (3d Cir. 1987). Thus, there can be no doubt that the threshold jurisdictional question is properly before this Court. As explained above, we submit that this Court has jurisdiction over this appeal, but if this Court concludes otherwise, we respectfully request that this appeal be transferred to the Federal Circuit to cure the want of jurisdiction pursuant to 28 U.S.C. § 1631.

STATEMENT OF THE ISSUE

This case concerns the civil penalty for willfully violating the statutory requirement that United States citizens report interests in foreign financial accounts on a form called the FBAR. There is no dispute that Bedrosian violated this requirement by failing to disclose for 2007 (or anytime previously) a Swiss bank account he maintained for 35 years. At issue, rather, is whether Bedrosian acted willfully. The District Court concluded that the Government did not meet its burden of proof that Bedrosian's violation was willful. The issues presented on appeal are:

STATEMENT OF RELATED CASES AND PROCEEDINGS

This case has not been before this Court previously, and we are not aware of any case pending in this or any other court that will directly affect or be directly affected by this Court's decision in this appeal.

STATEMENT OF THE CASE

A. Nature of the case and the course of proceedings below

In 2008, Arthur Bedrosian, the chief executive officer of a pharmaceutical company, had two bank accounts in Switzerland — one account that he opened in 1972 that had approximately $2 million, and another newer account with the same bank that had approximately $240,000. Under the Bank Secrecy Act, 31 U.S.C. § 5311 et seq., citizens of the United States having an interest in bank or other financial accounts in a foreign country that exceed $10,000 in the aggregate must file a report each year with Treasury called the Report of Foreign Bank and Financial Accounts, or “FBAR” for short. A willful violation of the FBAR requirement is subject to a maximum penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.

Bedrosian had never previously filed an FBAR or disclosed his foreign accounts on his tax return and paid tax on the income, despite having been told by his longtime accountant that he was breaking the law every year. In 2008, the Swiss bank abruptly informed Bedrosian that he had 60 days in which to close his accounts, and Bedrosian filed an FBAR (for 2007) for the first time. Bedrosian, however, only disclosed his smaller Swiss bank account, and transferred the assets in the larger account to another Swiss bank. Bedrosian thus violated the FBAR requirement with respect to his larger Swiss bank account. The primary issue in this case is whether Bedrosian's violation was willful.

The IRS assessed a willful FBAR penalty against Bedrosian in the amount of $975,789. Bedrosian made a partial payment of $9,757, and then brought this action to recover that amount as an illegal exaction. The Government filed a counterclaim for the balance of the penalty plus interest and a late-payment penalty. The District Court (Judge Michael M. Baylson) denied the parties' motions for summary judgment and conducted a one-day trial, hearing testimony from Bedrosian and an IRS specialist on FBAR penalties. On September 20, 2017, the District Court entered its opinion, reported at 2017 U.S. Dist. LEXIS 154625, concluding that the Government did not carry its burden to show that Bedrosian's FBAR violation was willful. The court therefore entered judgment for Bedrosian in the amount of $9,757.

The Government now appeals.

B. Statement of the facts

1. Bedrosian's Swiss bank accounts

Arthur Bedrosian was, at the time of the trial in this case, the chief executive officer of Lannett Company, Inc., a manufacturer of generic pharmaceuticals. (A1 (Op.).) He began his career in the pharmaceutical industry in the 1970s as a salesman for Zenith Labs, which required him to travel frequently to Europe. (A2 (Op.); A70-71 (Tr.).) Rather than use traveler's checks, he opened a savings account at a Swiss bank that was later acquired by Union Bank of Switzerland (“UBS”). (A2 (Op.); A71-74 (Tr.).) Sometime during the 1980s, Bedrosian converted his UBS savings account to an investment account. (A127 (Tr.).) Bedrosian elected to stop receiving mail from UBS (agreeing to pay a hold-mail fee) in 1993, and subsequently renewed his election in 2004. (A4 (Op.); A82-83 (Tr.); A251-52 (Pl. Exs. 4 & 5).) Instead, he stayed on top of his account by phone or through face-to-face meetings with a UBS representative in New York City. (A2 (Op.); A84 (Tr.).)

In 2005, Bedrosian agreed to borrow 750,000 Swiss Francs from UBS to be invested by the bank, which involved converting his UBS investment account into a managed account. (A2 (Op.); A86 (Tr.); A253 (Pl. Ex. 6).) During that year, Bedrosian also opened a second account with UBS. (A2 (Op.); A374 (Gov't Ex. D).) By the end of 2007, Bedrosian had gross assets of approximately $2.3 million in his longstanding account, with account number ending in 6167, and approximately $240,000 in his newer account, with account number ending in 5316. (A3 (Op.); A411 (Gov't Ex. G); A442 (Gov't Ex. H).)

From 1972 until 2007, Bedrosian used Seymour Handelman, an accountant, to prepare his tax returns. (A2 (Op.); A90 (Tr.).) Initially, Bedrosian did not mention his UBS investment account to Handelman, but then brought it up in the 1990s when Bedrosian saw a Wall Street Journal article about the federal government tracing mail from Switzerland through postage meter numbers. (A2 (Op.); A92-93 (Tr.).) Bedrosian testified that Handelman informed him that “there's a box you're supposed to check on your tax return . . . that you have an overseas account,” and that “you've been breaking the law for 20 years,” but that “there's nothing you can do about it.” (A93-94 (Tr.).) According to Bedrosian, Handelman explained that, so long as he did not need the money, he could leave it to his estate to pay tax on the income when the money is repatriated. (A3 (Op.); A94 (Tr.).) For the duration of their working relationship, Bedrosian did not disclose the existence of either of his UBS accounts on his tax returns, or pay tax on the investment income, or file FBARs. (A3 (Op.).)

2. Bedrosian filed a 2007 FBAR disclosing only his smaller UBS account and transferred the assets in his larger UBS account to another Swiss bank

Handelman died in 2007, and Bedrosian began working with a new accountant, Sheldon Bransky. (A3 (Op.); A95-96 (Tr.).) In 2008, following a district court order enforcing a “John Doe” summons against UBS for account records of U.S. clients who may be committing tax fraud, see Dep't of Justice, Press Release, July 1, 2008, “Federal Judge Approves IRS Summons for UBS Swiss Bank Account Records,”⁴ UBS informed Bedrosian that he had 60 days to close his accounts. (A2 (Op.); A88 (Tr.).) Around the same time in 2008, Bransky prepared Bedrosian's 2007 federal income tax return, reporting for the first time that Bedrosian had an account in Switzerland. (A3; A96-97 (Tr.); A260 (Pl. Ex. 9).) He also prepared a 2007 FBAR for Bedrosian, disclosing a single UBS account, i.e., the newer account, ending in 5316 and indicating a balance between $100,000 and $1 million. (A3 (Op.); A98-100 (Tr.); A263 (Pl. Ex. 10).)

Bedrosian testified that he was not aware how Bransky knew about his UBS account. He claimed that he did not speak with Bransky about the accounts or instruct Bransky to report that he had a Swiss bank account. (A3 (Op.); A98 (Tr.).) Bedrosian therefore assumed that Bransky discovered one of his UBS accounts from records he provided: “I g[a]ve him all my files, so I would've had to give him the information on these — the accounts, the account in Switzerland. I would've had to have done that.” (A97 (Tr.); see also A144-45 (Tr.).)

Bedrosian filed his 2007 tax return and FBAR on or around October 14, 2008. (A3 (Op.); A258 (Pl. Ex. 9); A263 (Pl. Ex. 10).) Bedrosian testified that he signed and mailed the documents in accordance with Bransky's written instructions, and did not review them. (A3 (Op.); A98 & A101 (Tr.).) Bedrosian did not file a 2007 FBAR disclosing his older UBS account ending in 6167 with a balance at the time of nearly $2 million. (A3 (Op.); A524 (Gov't Ex. R).) He also did not report or pay tax on the income from either UBS account on his 2007 return. (A260 (Pl. Ex. 9).)

On November 5, 2008, after UBS told Bedrosian that he had 60 days in which to close his accounts, and after Bedrosian filed his 2007 tax return and FBAR, Bedrosian sent a letter to UBS directing the bank to close his older account ending in 6167, and transfer the assets therein to a different Swiss bank, Hyposwiss Privatbank (“Hyposwiss”). (A4 (Op.); A135 (Tr.); A478 (Gov't Ex. J).) A month later, on December 2, 2008, Bedrosian sent a second letter to UBS directing the bank to close his newer account ending in 5316, and transfer the assets to Wachovia Bank (“Wachovia”) in the United States. (A135-36 (Tr.); A479 (Gov't Ex. K).)

3. Bedrosian's subsequent actions regarding his UBS accounts

In late 2008 or early 2009, Bedrosian consulted his personal attorney, Steven Davis, about his handling of his UBS accounts. (A3-4 (Op.); A103-06 (Tr.).) Davis brought in a tax attorney, Paul Ambrose, and together they advised Bedrosian to amend his tax returns as far back as 2004 to include income from the UBS accounts and to hire a forensic accountant to do that correctly. (A4 (Op.); A105 (Tr.).) Bedrosian hired an accounting firm as well as an attorney in Switzerland to obtain the necessary information from UBS. (A105-06 (Tr.).)

But, in October 2009, Bedrosian again filed a 2008 tax return and FBAR that did not disclose his larger UBS account ending in 6167 (or the new Hyposwiss account to which the funds in his larger UBS account were transferred), nor did he report and pay tax on income from either account. (A267 (Pl. Ex. 11); A275 (Pl. Ex. 12).) Bedrosian's 2008 FBAR disclosed only his UBS account ending in 5316 (which had been closed with the funds transferred to Wachovia), and that the account had a maximum value of $100,000. (A275 (Pl. Ex. 12).) Bedrosian testified that he did not know where that figure came from. (A103 (Tr.).)

About a year later, between August and October 2010, Bedrosian filed FBARs for 2003 through 2006, as well as revised FBARs for 2007 and 2008, reporting both of his UBS accounts where appropriate. (A277-78 (Pl. Ex. 14); A313-14 (Pl. Ex. 17); A339-43 (Pl. Exs. 19-21); A355-56 (Pl. Ex. 23).) He also filed amended tax returns for 2006 through 2008 reporting income from both accounts. (A279-312 (Pl. Exs. 15-16; A317-38 (Pl. Ex. 18).) And on September 10, 2010, Bedrosian applied for admission into the IRS's Offshore Voluntary Disclosure Program, which offers taxpayers financial incentives and some assurance that they will not be criminally prosecuted if they voluntarily disclose assets held offshore. (A361 (Pl. Ex. 27).) On his application, Bedrosian indicated that he knew that UBS would be providing his name to the IRS as a result of the John Doe summons: “Originally, I was under the impression that my name was not on the list to be provided to the IRS by UBS. However, I was advised recently that the IRS will be notified by UBS.” (A362 (Pl. Ex. 27).) Bedrosian was not accepted into the program. (A115 (Tr.); A520 (Gov't Ex. P).)

Instead, on April 25, 2011, the IRS informed Bedrosian that his returns would be audited. (A4 (Op.); A365 (Pl. Ex. 28).) In January 2015, the IRS assessed against Bedrosian a penalty for willful failure to disclose his larger UBS account on his 2007 FBAR. (A370 (Gov't Ex. B).) The amount of the penalty was the statutory maximum, $975,789, i.e., 50 percent of the non-disclosed account. (Id.) Bedrosian paid $9,757 (or one percent of the penalty) and then brought this suit claiming that the penalty was an illegal exaction. (A1 (Op.).) The Government counterclaimed for the full amount of $1,007,345, including interest and a late-payment penalty. (A1 (Op.); A373 (Gov't Ex. C).)

4. The proceedings below

The primary issue before the District Court was whether Bedrosian's failure to disclose his $2 million UBS account ending in 6167 on his 2007 FBAR was willful. There was no dispute as to any of the other elements of a willful FBAR penalty: (1) Bedrosian is a U.S. citizen, (2) he had an interest in financial accounts in a foreign country that exceeded $10,000, and (3) he failed to file a timely FBAR with respect to one of the accounts. (A7 (Op.).) The District Court conducted a one-day trial on the issues of willfulness and the amount of the penalty.

Following trial, the District Court agreed with the Government that the civil standard of willfulness applies, requiring the Government to prove by a preponderance of the evidence that Bedrosian “knowingly or recklessly violated the statute,” and not that he had an “improper motive or bad purpose.” (A7.) As to whether the Government met that standard, however, the District Court stated that “we cannot conclude, based on a comparison of the facts of this case compared with those of cases in which a willful FBAR penalty was imposed, that the Government has proved, by a preponderance of the evidence, that Bedrosian's violation of Section 5314 was willful.” (A10.)

In particular, the District Court contrasted this case with United States v. Williams, 489 F. App'x 655 (4th Cir. 2012), United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012), and United States v. Bussell, No. 15-2034, 2015 U.S. Dist. LEXIS 175952 (C.D. Cal. Dec. 8, 2015), in which willful FBAR penalties were sustained. (A11-13.) The court observed that, in those cases, the individuals had either admitted to criminal tax evasion or had repeatedly lied to IRS investigators and refused to cooperate. (A11-12.) The court noted the absence of those facts here and held that because Bedrosian's conduct was “significantly less egregious” (A12), his conduct should not be considered “willful” (A13).

The District Court also determined that the Government did not show by a preponderance of the evidence that Bedrosian knew his 2007 FBAR omitted his $2 million account. It stated that Bedrosian “undoubtedly did not give the form the requisite attention, but it is not apparent that he submitted it knowing that it omitted the second UBS account.” (A13; see also A10.) The court recognized that there was support for finding that Bedrosian acted willfully, including the form itself, evidence that Bedrosian knew he had two UBS accounts, Bedrosian's sophistication as a businessman, and Handelman's pronouncement in the 1990s that Bedrosian had been breaking the law every year by keeping his Swiss bank account a secret. (A13-14.) But the court stated that, “[n]one of these indicate 'conduct meant to conceal or mislead' or a 'conscious effort to avoid learning about the reporting requirements,' even if they may show negligence.” (A14 (quoting Williams, 489 F. App'x at 658).) It further did “not see Bedrosian's as the sort of conduct intended by Congress or the IRS to constitute a willful violation,” in light of the facts that Bedrosian disclosed his ownership of a Swiss bank account on his 2007 tax return, and that he was working with his attorneys and an accounting firm to bring himself into compliance prior to learning that UBS turned his account information over to the IRS. (A14.)

Because the Government, in the District Court's view, did not show that Bedrosian's FBAR violation was willful, it followed that there was no need to address the propriety of the IRS's imposition of the maximum penalty. (A14.) The court instead determined that the willful FBAR penalty was improper, and accordingly that Bedrosian's partial payment constituted an illegal exaction. (A14-15.)

SUMMARY OF ARGUMENT

The District Court correctly recognized that willfulness for purposes of the civil FBAR penalty means a knowing or reckless violation of the reporting requirement, but it concluded that the Government did not meet its burden of proving by a preponderance of the evidence that Bedrosian willfully omitted his $2 million UBS account from his 2007 FBAR. Notwithstanding its recitation of the correct legal standard for willfulness, the District Court based its conclusion on a perceived lack of evidence that Bedrosian intended to evade tax or otherwise intended to conceal assets or mislead the IRS. In this manner, the court incorrectly imposed a heightened standard of willfulness beyond knowing or reckless conduct, and ultimately failed to address the issue of recklessness entirely. Additionally, the court misconstrued the record on key points demonstrating that Bedrosian knew that he failed to disclose his larger UBS account. For each of these reasons, the District Court's decision cannot stand.

1. The District Court departed from the correct standard of willfulness by improperly focusing on whether Bedrosian had an improper motive or bad intent when he failed to disclose his $2 million UBS account. Courts are in agreement that the applicable standard in the context of this civil penalty is whether the person's conduct was knowing or reckless. Subjective bad intent is not required. Here, however, the District Court decided the issue primarily by comparing Bedrosian's conduct to that in other cases imposing a willful FBAR penalty where individuals used Swiss bank accounts to perpetrate complex schemes to evade tax. The court stated that Bedrosian's conduct was less “egregious,” and therefore not willful. (A12.) The court also found no indication that Bedrosian failed to disclose both of his Swiss bank accounts “with the requisite voluntary or intentional state of mind” (A10), or that he “meant to conceal or mislead” (A14).

The court thus did not judge willfulness by Bedrosian's knowledge of his FBAR violation, but by his intent to do wrong. And the court never considered whether Bedrosian's conduct was reckless. The District Court's opinion cannot be squared with the civil standard of willfulness that applies in FBAR penalty cases, requiring only that Bedrosian acted knowingly or recklessly.

2. The undisputed facts demonstrate that Bedrosian's failure to file an FBAR with respect to his $2 million UBS account was at least reckless. Recklessness is established by conduct entailing an unjustifiably high risk that is either known or so obvious it should be known. That standard was met here. Bedrosian was a sophisticated businessman who failed to disclose his account for 35 years, notwithstanding that his longtime accountant had told him that he was breaking the law every year. After that accountant died, Bedrosian did not mention his Swiss bank accounts to his new accountant, who prepared a 2007 tax return and FBAR for Bedrosian disclosing his smaller UBS account for the first time. Bedrosian professed to have simply signed and filed his FBAR notwithstanding that he had no idea how his accountant knew to prepare an FBAR or what it included, and notwithstanding that the filing constituted his first disclosure following decades of willfully violating the law. This cavalier disregard of his legal obligation to fully disclose his foreign accounts was reckless.

3. Beyond Bedrosian's palpable recklessness, the District Court clearly erred in determining that the Government failed to prove by a preponderance of the evidence that Bedrosian knew his 2007 FBAR omitted his larger UBS account. UBS had informed Bedrosian that he had to close his accounts, and Bedrosian decided to repatriate the funds in the smaller account and transfer the funds in the larger account to a different Swiss bank. His accountant had told him that he would have to disclose his UBS accounts when he brought the funds back to the United States, so he knew he had to disclose the smaller account. But Bedrosian continued to hide his larger account from the IRS — as he had done for decades — by omitting the account and the $2 million he left in Switzerland from his FBAR. The District Court overlooked the intentional nature of Bedrosian's omission, because it failed to grasp that Bedrosian directed the funds in each account differently, compelling the disclosure of one account but not the other. The court also disregarded the events surrounding Bedrosian's transfers, specifically, the fact that they were precipitated by the sudden notice from UBS to close his accounts following a successful summons enforcement action against the bank for account information of U.S. taxpayers. Bedrosian responded by disclosing his smaller UBS account and taking a wait-and-see approach with respect to his larger account, which he finally disclosed two years later, about the time he became aware that UBS would be providing his account information to the IRS.

The District Court's judgment should be reversed, and the case remanded to address Bedrosian's arguments regarding the amount of the penalty.

ARGUMENT

The District Court committed errors of law and fact in holding that the Government did not meet its burden of proof that Bedrosian willfully violated the FBAR requirement by failing to disclose his Swiss bank account of 35 years with a balance of approximately $2 million. In particular, (1) the court improperly applied a heightened standard of willfulness, (2) it failed to recognize that Bedrosian's undisputed actions were objectively reckless and therefore met the applicable standard for willfulness, and (3) it clearly erred in refusing to find that Bedrosian knew his 2007 FBAR omitted his longstanding account, which also satisfies the proper standard. This Court should reverse the judgment of the District Court and remand to address the Bedrosian's arguments regarding the amount of the penalty, which the District Court declined to reach.

Following a brief summary of the FBAR requirement and the specific penalties enacted by Congress to enforce the requirement, we turn to the aforementioned arguments that compel reversal of the District Court's judgment.

* * * *

The Bank Secrecy Act, 31 U.S.C. § 5311 et seq., was enacted in 1970 to require “certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” 31 U.S.C. § 5311. As relevant here, 31 U.S.C. § 5314(a) provides that “the Secretary of the Treasury shall require a resident or citizen of the United States . . . to keep records, file reports, or keep records and file reports when the [person] makes a transaction or maintains a relation for any person with a foreign financial agency.” The regulations implementing section 5314(a) provide that “[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists.” 31 C.F.R. § 1010.350(a).

This reporting requirement is limited to foreign financial accounts that exceed $10,000 in the aggregate. 31 C.F.R. § 1010.306(c). The prescribed form is the Report of Foreign Bank and Financial Accounts (TD F 90-22.1), or “FBAR.” 31 C.F.R. § 1010.350(a). IRS Form 1040, the U.S. individual income tax return, requires taxpayers to disclose whether they had “an interest in or a signature or other authority over a financial account in a foreign country,” and directs taxpayers to consult the “filing requirements for Form TD F 90-22.1.” IRS 2007 Form 1040, sch. B, ln. 7a. The deadline for filing an FBAR for the year in issue was June 30 of the next year. 31 C.F.R. § 1010.306(c).

Congress has authorized the Secretary to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” 31 U.S.C. § 5321(a)(5)(A). “[I]n general,” the penalty “shall not exceed $10,000” and is subject to a “[r]easonable cause exception.” 31 U.S.C. § 5321(a)(5)(B). But “[i]n the case of any person willfully violating, or willfully causing any violation of” section 5314, the maximum penalty is increased to the greater of $100,000 or 50 percent in the balance of the account at the time of the violation, and there is no reasonable-cause exception.⁵ 31 U.S.C. § 5321(a)(5)(C), (D). The IRS has been delegated authority to assess and collect the penalty. 31 C.F.R. § 1010.810(g).

The Government bears the burden of proving the propriety of an FBAR penalty by a preponderance of the evidence. See United States v. Dollar Bank Money Mkt. Account No. 1591768456, 980 F.2d 233, 238 n.2 (3d Cir. 1992) (“In a civil penalty or criminal case under 31 §§ U.S.C. 5321-5322 (1988), the government has the burden.”); United States v. McBride, 908 F. Supp. 2d 1186, 1201 (D. Utah 2012) (“The preponderance of the evidence standard . . . is the correct standard” in a civil FBAR case); United States v. Garrity, No. 3:15-cv-243, 2018 U.S. Dist. LEXIS 56888, *6 (D. Conn. Apr. 3, 2018) (“Every court that has answered the question . . . has held that the preponderance of the evidence standard governs suits by the government to recover civil FBAR penalties.”) (listing cases); see generally Herman & Maclean v. Huddleston, 459 U.S. 375, 389-90 (1983) (“[I]mposition of even severe civil sanctions that do not implicate [important individual] interests has been permitted after proof by a preponderance of the evidence.”). As discussed in detail below, every court that has addressed the issue of willfulness as a condition to impose the higher FBAR penalty has applied the civil standard of willfulness, requiring only knowing or reckless conduct. See, e.g., United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012); Garrity, 2018 U.S. Dist. LEXIS 56888, at *14-16; United States v. Bohanec, 263 F. Supp. 3d 881, 889 (C.D. Cal. 2016); McBride, 908 F. Supp. 2d at 1204.

I. The District Court erred by applying the wrong standard of willfulness to determine whether Bedrosian willfully violated the FBAR requirement

Standard of review

Whether the District Court applied the correct legal standard of willfulness is a legal issue this Court reviews de novo. See Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349, 354 (3d Cir. 2013).

A. The District Court misconstrued prior FBAR cases as effectively requiring the Government to prove improper motive or bad purpose

The District Court was right to follow other courts in holding that the “correct standard” of willfulness is “the one used in other civil contexts — that is, a defendant has willfully violated Section 5314 when he either knowingly or recklessly fails to file an FBAR.” (A7.) Under this standard, “[t]he government need not prove improper motive or bad purpose,” as the court acknowledged. (Id.) In Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), the Supreme Court explained that “'willfully' is 'a word of many meanings whose construction is often dependent on the context in which it appears.'” Id. at 57 (quoting Bryan v. United States, 524 U.S. 184, 191 (1998)). In the criminal tax context, the Supreme Court has construed willfulness to require the voluntary and intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991). But “where willfulness is a statutory condition of civil liability,” the Supreme Court has “generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins., 551 U.S. at 57. It is the latter standard of willfulness that applies in the context of a civil FBAR penalty.

Accordingly, a taxpayer willfully violates the FBAR requirement when the violation is “voluntary, rather than accidental or unconscious.” McBride, 908 F. Supp. 2d at 1205; see generally Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997); Denbo v. United States, 988 F.2d 1029, 1034-35 (10th Cir. 1993). That includes when a taxpayer acts “with 'willful blindness' to the obvious or known consequences of one's action.” McBride, 908 F. Supp. 2d at 1205; accord Williams, 489 F. App'x at 658. A taxpayer, moreover, commits a willful violation when he acts recklessly — “an objective standard that looks to whether conduct entails 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Bohanec, 263 F. Supp. 3d at 889 (quoting Safeco Ins., 551 U.S. at 68); accord McBride, 908 F. Supp. 2d at 1205. In all respects, “[a]n improper motive or bad purpose is not necessary to establish willfulness in the civil context.” McBride, 908 F. Supp. 2d at 1204; see generally Lefcourt, 125 F.3d at 83; Monday v. United States, 421 F.2d 1210, 1216 (7th Cir. 1970).

The District Court, however, departed from the correct standard of willfulness in this case. Notwithstanding its statement that the “[t]he Government need not prove improper motive or bad purpose” (A7), the court effectively required the Government to do just that. This is apparent in several portions of the court's opinion. First, the court stated that it deemed the government's evidence insufficient because the court concluded that the evidence did not show “conduct meant to conceal or mislead” or a “conscious effort to avoid learning about reporting requirements.” (A14.) Second, the court stated that the government failed to establish the “requisite voluntary or intentional state of mind.” (A10 (emphasis added).) And third, the court deemed it “important to [its] decision” that “crucial differences” existed between this case and prior FBAR cases involving willful violations (A11), but those prior cases involved intentionally deceptive concealment and not the minimum showing for civil willfulness.

In this latter regard, the District Court distinguished this case from those imposing a willful FBAR penalty — namely, Williams, McBride and United States v. Bussell, No. 15-2034, 2015 U.S. Dist. LEXIS 175952 (C.D. Cal. Dec. 8, 2015) — on the ground that the defendants in those cases were all found to have willfully failed to file FBARs in furtherance of a scheme to evade tax. To wit, the court stated that, “[c]rucially, in Williams the defendant 'acknowledged that he willfully failed to report the existence of the [Swiss] accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion.'” (A11 (quoting Williams, 489 F. App'x at 660).) The court stated that Bedrosian, in contrast, did not acknowledge that he willfully failed to file an FBAR with respect to his larger Swiss bank account in order to evade tax. (A11.) And he did not continue to mislead after he became a target of an IRS investigation. (A11-12.) Similarly, with respect to McBride, in which the defendant “repeatedly lied” to the IRS and “refused to produce requested documents,” the District Court stated that, “[a]gain, the willful finding . . . is hard to map onto the instant facts, which are significantly less egregious and show nothing close to the carefully planned and complex tax evasion scheme perpetrated by the defendant in that case.” (A12.) Finally, the District Court pointed out that “[i]n Bussell,” unlike this case, “the court found that the defendant had 'clearly acted with reckless disregard [of the statutory duty]' because she had been convicted of bankruptcy fraud and tax fraud for failing to disclosing [sic] offshore accounts.”⁶ (A12.)

The District Court erred in concluding that because Bedrosian's conduct was not as egregious as the conduct in those cases, he should not be liable for a willful FBAR penalty. As an initial matter, the court's logic operates from the incorrect assumption that Williams, McBride and Bussell mark the minimum threshold for finding willfulness. Neither the cases themselves nor their place in the expanding jurisprudence supports that assumption. The expansion of the maximum penalty for willful failure to file an FBAR occurred in 2004, American Jobs Creation Act of 2004, Pub. L. 108-357, Title VIII, Subtitle B, Part I, § 821, 118 Stat. 1418, 1586; see supra 29 n.5, and it has only become prominent after investigations of the foreign holdings of U.S. taxpayers began to take off in 2008 following the summons enforcement action against UBS, see supra 14. Thus, challenges to willful FBAR penalties have just recently begun to work their way through the courts and, correspondingly, the contours of the penalty are just beginning to take shape as the decision in this case — discussing the standard of willfulness that applies in FBAR penalty cases for the benefit of “future litigants” (A5) — demonstrates. By treating the first three cases to impose willful FBAR penalties as setting the boundary on willfulness, the District Court artificially narrowed the penalty based on nothing more than the happenstance of the facts of those initial cases.

More to the point, the District Court's approach to deciding whether Bedrosian's FBAR violation was willful by comparing his conduct to that of the defendants in Williams, McBride and Bussell cannot be squared with the civil standard of willfulness that the court purported to apply. The Government met that standard by showing that Bedrosian knowingly or recklessly failed to disclose his $2 million UBS account on his 2007 FBAR, as discussed below, infra 41-60. In reaching the opposite conclusion, the court effectively held the Government to a standard more akin to the criminal standard of willfulness, requiring proof that Bedrosian sought to evade tax, like the defendants in Williams, McBride and Bussell. Accordingly, it “[could] [ ]not conclude, based on a comparison of the facts of this case compared with those of cases in which a willful FBAR penalty was imposed, that the government has proved, by a preponderance of the evidence, that Bedrosian's violation of Section 5314 was willful.” (A10.) But as the court itself recognized (A7), the civil standard of willfulness does not require proof of “improper motive or bad purpose.” See supra 31.

B. The District Court erroneously held that the evidence of Bedrosian's willfulness was lacking absent proof that he intended to conceal or mislead

The District Court's misapplication of the willfulness standard moreover is not limited to the discussion of prior cases, but permeates the court's opinion. The court stated that none of the evidence on which the Government relied “indicate[s] 'conduct meant to conceal or mislead' or a 'conscious effort to avoid learning about reporting requirements.'” (A14 (quoting Williams, 489 F. App'x at 658).) But that was not the Government's burden: proof that Bedrosian violated the FBAR requirement in order to conceal or mislead goes beyond the civil standard of willfulness that his conduct be voluntary or reckless. McBride, 908 F. Supp. 2d at 1205; see generally Safeco Ins., 551 U.S. at 57. Indeed, the language “conduct meant to conceal or mislead” has its origins in criminal cases requiring the heightened mens rea that the taxpayer intended to violate laws aimed at prohibiting tax evasion. See Spies v. United States, 317 U.S. 492, 499 (1943) (stating that the felony charge of willfully attempting to evade or defeat tax is shown by “conduct, the likely effect of which would be to mislead or to conceal”); United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (“Willfulness” required by a criminal failure-to-file statute “may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information” and “can be inferred from a conscious effort to avoid learning about reporting requirements.”). Certainly, the type of evidence the District Court was looking for — that Bedrosian sought to conceal income or assets held in Switzerland for an illicit purpose — would have made the Government's case that much more compelling. But such evidence was not necessary to meet the Government's burden.

The District Court also relied on the facts that Bedrosian filed a 2007 FBAR in which he disclosed one of his two UBS accounts and subsequently consulted his lawyer and an accounting firm about his reporting and tax noncompliance prior to learning that UBS had turned his account information over to the IRS. (A14.) The court appeared to have been convinced by these actions that Bedrosian did not have an improper motive or bad intent when he violated the FBAR requirement, and therefore that he lacked what the court believed (albeit incorrectly) was the requisite mens rea. These facts do not bear the significance the court ascribed to them. Bedrosian testified that his new accountant presented him with a 2007 FBAR to sign and that he had not instructed his accountant to prepare one, so the fact that Bedrosian filed a (partially complete) FBAR for 2007 does not signal a change of heart. As for his meeting with his attorney, that did not occur until months after the 2007 FBAR was filed, and it is therefore not indicative of Bedrosian's state of mind when he filed the FBAR. Regardless, it is another illustration of the court's misapplication of the willfulness standard, which does not turn on Bedrosian's intent behind his failure to include his larger UBS account on his 2007 FBAR, but rather on whether he did so knowingly or recklessly.

Still further, the District Court stated that the Government could not meet its burden by showing that Bedrosian knew he had two Swiss bank accounts when he filed his 2007 FBAR, because “even if he did know that he had a second account yet failed to disclose it on his FBAR, there is no indication that he did so with the requisite voluntary or intentional state of mind.” (A10.) The court acknowledged that Bedrosian probably did know that he had two separate accounts given that “he signed his 2007 FBAR two weeks prior to sending two separate letters to UBS to close his accounts.” (A10.) But absent proof that Bedrosian filed his FBAR with the intent to conceal the $2 million account or mislead the IRS, the court saw no reason to decide the issue.

Finally, the court's belief that Bedrosian's conduct was not “the sort of conduct intended by Congress or the IRS to constitute a willful violation” is wrong. (A14.) Notably, the court thought this was so due to “the dearth of precedent finding a willful violation on comparable facts” (id.), but as we have explained, these cases are just beginning to percolate through the courts. Moreover, the court's supposition is contradicted by Congress's move in 2004 to expand the willful FBAR penalty substantially. As explained, supra 29 n.5, Congress was responding to persistent non-compliance with the FBAR requirement by taxpayers who maintained undisclosed offshore accounts in order to evade tax. See S. Rep. 108-192, at 108 (2004); H.R. Rep. No. (Conf. Rep.) 108-755, at 615 (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1679. Bedrosian — who admitted to knowingly failing to report income from his UBS account for decades — falls precisely within the class of persons that Congress hoped to target when it increased the penalty. As several tax commentators noted, “the message from Congress [was] unmistakable: 'taxpayers must disclose, disclose, disclose, or suffer the consequences.'” Hale E. Sheppard, Evolution of the FBAR: Where We Were, Where We Are, and Why It Matters, 7 Houston Bus. & Tax Journal 1, 19 (2006).

II. Bedrosian was at least reckless, and therefore willful, as a matter of law

Standard of review

“[W]hether the facts satisfy the relevant legal standard is a mixed question of law and fact,” which is a question this Court separates “into its respective parts, applying the clearly erroneous test to the factual component, and the plenary standard to the legal.” Blackledge v. Blackledge, 866 F.3d 169, 177 (3d Cir. 2017) (citation omitted). The issue whether Bedrosian was willful based on facts that were undisputed or found by the District Court fits within the legal component of the mixed question in this case and is reviewed de novo. See Diebold Found., Inc. v. Commissioner, 736 F.3d 172, 187 (2d Cir. 2013); see, e.g., Williams, 489 F. App'x at 660 (“[W]e are convinced that, at a minimum, William's undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314.”).

A. Bedrosian took an obvious and unjustifiable risk that the 2007 FBAR he signed and filed was wrong

The District Court, despite correctly reciting that “reckless disregard satisfies the willfulness standard” (A8), disregarded Bedrosian's recklessness. Because reckless conduct satisfies the willfulness standard, the District Court erred as a matter of law by nowhere addressing that aspect of the inquiry.

As the District Court stated, the common law standard of recklessness is an objective one: “action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” (A8 (quoting Safeco Ins., 551 U.S. at 68) (internal quotation marks omitted).) In the comparable context of the penalty under 26 U.S.C. § 6672 for willful failure to pay over the employee portion of employment taxes withheld by the employer, this Court recognizes that the recklessness standard is met “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.'” United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989) (quoting Wright v. United States, 809 F.2d 425, 427 (7th Cir. 1987)); accord Greenberg v. United States, 46 F.3d 239, 244 (3d Cir. 1994).

The issue here is whether Bedrosian unjustifiably risked violating the FBAR requirement and either knew or should have known that was the case. Although the District Court did not decide this issue, and instead confined its opinion to whether Bedrosian knowingly violated the FBAR requirement, it all but said that Bedrosian acted recklessly: “It is obvious that Bedrosian should have handled the situation differently and, in 2007-2008, should have been more careful about reviewing the 2007 FBAR and in being aware of the fact that he had not one but two accounts at UBS.” (A14.) The District Court's findings and the undisputed record confirm that Bedrosian acted recklessly as a matter of law.

The court recognized that Bedrosian was “an educated and highly financially literate businessman who took a calculated risk for several years by not complying with his tax reporting obligation.” (A9-10.) Bedrosian, according to the court, “admitted as much — that Handelman told him he had been breaking the law every year he did not report his Swiss accounts, and that he nevertheless continued to fail to report them.” (A10.) Handleman, who was Bedrosian's longstanding accountant, explained that “there's a box you're supposed to check on a tax return . . . that you have an overseas account.” (A93 (Tr.).) That refers to line 7 of Schedule B, which reads as follows: “At any time during [the tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions for exceptions and filing requirements for Form TD F 90-22.1.” IRS 2007 Form 1040, sch. B, ln. 7a; (see, e.g., A260 (Pl. Ex. 9)). “Form TD F 90-22.1,” as previously mentioned, is the prescribed form for an FBAR for the year in issue. Thus, Bedrosian had long been on notice that he was required to file an FBAR, and Handleman had even called his attention to the issue.

Bedrosian, however, did not discuss his Swiss bank accounts with his new accountant, Bransky, who prepared his 2007 FBAR, and was unsure how Bransky even knew of the existence of any such accounts. (A3 (Op.); A97-100 (Tr.).) He recounted that “I g[a]ve him all my files, so I would've had to give him the information on these — the accounts, the account in Switzerland. I would've had to have done that.” (A97 (Tr.); see A3 (Op.).) But Bedrosian could not say what bank records he had maintained (A97-98 & A100 (Tr.)) — possibly because he had long since elected to put a hold on any mail from UBS.

Bedrosian nevertheless testified that when he got the 2007 FBAR from Bransky, he simply signed and filed it:

Q. Now do you remember like looking at [the 2007 FBAR] or give it a lot of attention or what do you remember about it?

A. No. It's typical of the way I did with the accountant and apparently other accountants did the same thing they give you forms, they tell you where to sign with post-it notes or sticky things and, you know you sign and you mail it in the envelope they give you. It's usually all prepared and all you have to do is sign it and send it in and you're either getting a refund or you're getting — you have to pay a check. If you have to pay a check they tell you who the check should be made out to. All those instructions are attached to the envelope and then you just mail it.

(A101 (Tr.); see A3 (Op.).)

Given that Handleman had told Bedrosian that he was “breaking the law” every year by not disclosing his Swiss bank accounts (A94 (Tr.)), and that Bedrosian had no idea what Bransky put on the FBAR because he never spoke to Bransky about the accounts, it is inexplicable that Bedrosian, a highly sophisticated businessman and CEO, did not review the FBAR that purported to disclose his Swiss bank accounts for the first time. Bedrosian had taken a “calculated risk” for decades and piled on top of that the additional risk of not addressing the issue with his new accountant. It was objectively unreasonable to treat the FBAR as just another document to sign and blindly trust that Bransky had correctly disclosed accounts that Bedrosian had never discussed with him. Yet that is exactly what Bedrosian himself contended that he did. His conduct was plainly reckless.

It was no excuse that Bedrosian claimed to have thought he had only the one Swiss bank account identified on the FBAR (a dubious claim considering that he signed separate letters closing his separate accounts just a few weeks later). (A3 & A10 (Op.); A99-100 (Tr.).) Considering that he did not review the FBAR in the first place, his purported misconception made no difference. Bedrosian's recklessness resulted in his disregarding even his own knowledge of his holdings.

Moreover, as the District Court recognized, “Bedrosian could have easily discovered that what had previously been one UBS account was now two, via the statements he occasionally received from the bank and the meetings he had annually with a UBS representative.” (A10.) Thus, even if Bedrosian had reviewed the FBAR, it would have been reckless under the circumstances not to have verified the contents. After decades of not disclosing the accounts and not receiving regular records, and after not consulting Bransky, Bedrosian ran an obvious risk that his FBAR was wrong. Indeed, Bedrosian would have known that the FBAR was wrong simply by looking at the box checked on the form stating that his account had a maximum value of “$100,000 to $1,000,000.” (A263 (Pl. Ex. 10).) Bedrosian had well over $2 million in his UBS accounts at the time he filed his 2007 FBAR (A3 (Op.)), and it is simply implausible that he would have forgotten about $1 million. Still further, after he unquestionably knew that he had two accounts, Bedrosian did nothing for years to disclose the larger account.

B. Courts have recognized recklessness and imposed willful FBAR penalties under comparable facts

These facts are comparable to the salient facts in Williams, in which the Fourth Circuit reversed the district court's judgment that the defendant did not owe a willful FBAR penalty, because, “at a minimum, Williams's undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314.” 489 F. App'x at 660. Bedrosian's actions make an equally compelling case that the District Court made the same error here.

In Williams, the defendant opened two Swiss bank accounts and, from 1993 through 2000, he did not file an FBAR or disclose the accounts on his tax return. Following his agreement to plead guilty to criminal charges of tax evasion, the IRS assessed two willful FBAR penalties for 2000. The Fourth Circuit reversed the district court's finding that the defendant was not willful and sustained the penalties principally on two grounds. First, it stated that “Williams acknowledged that he willfully failed to report the existence of the [Swiss bank] accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion.” Id. at 660. Similarly, Bedrosian admitted to willfully failing to report his Swiss bank accounts to the IRS after Handlemen told him that he was breaking the law by not doing so. Whether or not he did so in order to evade tax, as discussed, see supra 31-41, is beside the point. Willfulness for purposes of the FBAR penalty requires only that the violation be knowing or reckless, which in Bedrosian's case, it was.

Second, the Fourth Circuit reasoned that Williams's professed ignorance did not negate his willfulness. Williams testified that he did not pay any attention to line 7 of Schedule B of his tax return or the direction to consult the instructions for filing an FBAR. Id. at 659. Regardless, the Court pointed out that the defendant signed his return, attesting that he examined it, and conceded that he did not inform his accountant of the existence of his Swiss bank accounts, which meant that he was reckless, if not willfully blind, with respect to the FBAR requirement. Id. at 659 & 660 n.6. The Court also noted that, “[c]learly, Williams was aware of the FBAR at the time of his allocution,” id. at 660 n.6, admitting to the criminal charges, and still he did nothing.

Bedrosian professed ignorance of a slightly different sort, namely, that he filed his 2007 FBAR without reviewing it and without realizing that he had a second Swiss bank account that the FBAR omitted. But this difference does not work in Bedrosian's favor. Like the defendant in Williams, Bedrosian did not consult his accountant about his Swiss bank accounts. But he was presented with an FBAR to sign anyway, and still he disregarded his obligation by failing to review or verify the contents. Also like the defendant in Williams, he did not remedy his violation after he conclusively knew only a few weeks later that he had two accounts. The evidence here is that much stronger that Bedrosian's actions were reckless.

United States v. Kelley-Hunter, 281 F. Supp. 3d 121 (D.D.C. 2017), also lends support for the conclusion that Bedrosian was reckless as a matter of law. The defendant in that case exercised control over a UBS account by contacting UBS representatives. She prepared her own tax returns and reported interests in another foreign account on returns for prior years. Id. at 123. “So,” according to the district court, “she clearly knew of the requirement” to file an FBAR. Id. at 124. But she did not file a 2007 FBAR, disclosing the UBS account, until after the bank informed her that it shared her account information with the IRS. Id. at 123.

The present facts are comparable. Bedrosian was equally aware of the FBAR requirement, and, as discussed in greater detail below, infra 57-59, he did not disclose his larger UBS account until almost two years after he filed his 2007 FBAR, about the time he learned that UBS would be sharing his account information with the IRS. The defendant in Kelley-Hunter also essentially confessed in emails to hiding her UBS account, but the district court viewed this evidence as unnecessary: “In any event, willful blindness or reckless disregard satisfies the required mental state, and Kelley-Hunter certainly acted with at least that degree of intent.” Id. at 124. The same is true in this case.

In sum, the undisputed record in this case demonstrates that Bedrosian was reckless, and other FBAR cases confirm that conclusion. As in Williams, this Court should therefore hold that the Government met its burden, proving that Bedrosian's FBAR violation was willful.

III. The Government's evidence was sufficient to prove that Bedrosian knowingly violated the FBAR requirement

Standard of review

Whether Bedrosian filed his 2007 FBAR knowing that it omitted one of his two UBS accounts is an issue of fact reviewed for clear error. See Pignataro v. Port Auth., 593 F.3d 265, 273 (3d Cir. 2010).

* * * *

The District Court concluded that “it is simply not sufficiently clear from the record developed that [Bedrosian] was willful in submitting his inaccurate 2007 FBAR,” explaining that “he undoubtedly did not give the form the requisite attention, but it is not apparent that he submitted it knowing that it omitted the second UBS account.” (A10 & A13.) The court acknowledged evidence supporting a finding that Bedrosian knew he was violating the FBAR requirement, but resolved that there was just not enough of it. (A13-14.) Notably, the District Court did not find that Bedrosian did not know of the omission on his FBAR; rather, it found the Government's evidence insufficient to meet the preponderance standard. The District Court, however, mistook the probative value of that evidence and misstated certain undisputed facts that support the logical inference that Bedrosian knew exactly what he was doing.

Proof that Bedrosian intentionally violated the FBAR requirement builds off the same evidence demonstrating that he acted recklessly in doing so. As discussed, Bedrosian was highly sophisticated and knew that he was breaking the law by not disclosing and paying tax on his Swiss bank accounts. (A2-3 & A9-10 (Op.); A93-94 & A141-43 (Tr.).) Bedrosian testified that he did not discuss the accounts with Bransky, and that Bransky somehow figured out that Bedrosian had a UBS account and completed a 2007 FBAR for him to sign and file. (A3 (Op.); A97-101 (Tr.).) Yet, according to Bedrosian, he did not review the FBAR, despite the fact that it would be his very first disclosure to the IRS after decades of not reporting his Swiss bank accounts or the taxable income they earned. (A3 (Op.); A101 (Tr.).) Bedrosian's claim that he viewed the FBAR as just another document to sign is belied by the record.

First, around the time he filed the FBAR, Bedrosian received notice from UBS stating that he had 60 days to close his accounts. (A2 (Op.); A88 (Tr.).) He therefore knew he had to transfer those funds elsewhere, and he knew (because Handelman had previously told him) that if he repatriated the funds to the United States, he would have to disclose the accounts and pay taxes he had long avoided. (A94 (Tr.).)

Bedrosian decided to repatriate the $240,000 in his newer and smaller UBS account (ending in 5316), and he directed UBS to transfer those funds to Wachovia Bank. (A479 (Gov't Ex. K).) Notably, that is the account disclosed on his 2007 FBAR, filed shortly before Bedrosian repatriated those funds. (A263 (Pl. Ex. 10).) Bedrosian intentionally disclosed that account — but not the account that he owned for decades with upwards of $2 million, which he told UBS to transfer to Hyposwiss Privatbank. Bedrosian knew that he had to disclose his UBS account ending in 5316 that held funds he repatriated, but there was no equivalent impetus to disclose his larger account because those funds would stay in Switzerland.

Bedrosian's reason for disclosing the smaller account but not the larger was lost on the District Court, because the court mistakenly thought that Bedrosian moved all of his money with UBS to Hyposwiss. The District Court stated that “[i]n 2008, UBS informed [Bedrosian] that he had sixty days within which the repay the loan, close his accounts, and transfer all assets therein to another bank,” and that Bedrosian responded by moving “the funds to a different bank called Hyposwiss.” (A2.) In fact, Bedrosian moved only funds in his larger UBS account, which he omitted from his 2007 FBAR, to Hyposwiss. (A89 & A135 (Tr.); A478 (Gov't Ex. J).)

Bedrosian's 2007 FBAR is also telling because it omits the value of the larger account that would stay put in Switzerland. The FBAR lists a single UBS account with a value between $100,000 and $1 million (A263 (Pl. Ex. 10)), but Bedrosian had over $2 million in his larger (and much older) UBS account. As previously mentioned, supra 47, it is inconceivable that Bedrosian was unaware or forgot about more than $1 million in assets. Thus, even if Bedrosian thought his two UBS accounts were a single account, he should have reported a higher account balance on the FBAR. The fact that he did not do so indicates that he knew that his 2007 FBAR was inaccurate.

Moreover, Bedrosian plainly knew that he had two separate UBS accounts. Bedrosian had been notified by UBS that he had 60 days to close his accounts, so he was necessarily considering where to transfer the funds. As the District Court acknowledged, “the fact that [Bedrosian] signed his 2007 FBAR two weeks prior to sending two separate letters to UBS to close his accounts sways in favor of an inference that he was aware of the existence of the second account at the time he filed the FBAR.” (A10.) But the court stopped short of resolving the question one way or the other. The additional fact — overlooked by the court — that Bedrosian did not just send separate letters closing each account, but left the funds in the larger account in Switzerland and repatriated the funds in the smaller account, betrays a preceding awareness of both accounts. Bedrosian's transfers and his omission from his 2007 FBAR were coordinated, showing that Bedrosian made the deliberate choice to disclose only one of his two UBS accounts.

Additional context underscores that Bedrosian intended to disclose only his smaller UBS account. As mentioned, Bedrosian filed his 2007 FBAR around the time that UBS abruptly gave him 60 days in which to close his accounts and end his relationship with the bank after approximately 35 years. (A2 (Op.); A88 (Tr.).) The reason for the notice was obvious, especially for someone like Bedrosian who was “an avid reader of the Wall Street Journal.” (A92 (Tr.).) Indeed, Bedrosian testified that he took note of an article in the 1990s about a little-known investigative technique of the federal government involving “xeroxing the front of the mail that came from Switzerland and then tracing the postage meter number back to a bank.” (Id.) In July 2008, the federal government made much bigger news by enforcing a summons against UBS for account records of U.S. clients. See Evan Perez, “Feds Press Swiss Bank to Name U.S. Clients,” Wall St. J., A1 (July 1, 2008). Bedrosian could easily see the cracks emerging in Swiss bank secrecy and knew that some degree of disclosure was in order. Thus, he filed an FBAR for the first time disclosing his smaller UBS account. The District Court, for its part, disregarded the events leaded up to Bedrosian's filing that support his intentional violation of the FBAR requirement. (A13-14.)

Still further, Bedrosian's 2007 FBAR follows a pattern of half measures calibrated to the prevailing risk as the federal government closed in. The District Court thought that the FBAR was the first step in Bedrosian's efforts to “come clean,” but the record shows that he was not so forthcoming. First, the 2007 FBAR was due in June 2008, but Bedrosian did not file one until October 2008 — after UBS informed him that he had to close his accounts. And although Bedrosian disclosed his smaller UBS account, he still did not report any income from that account (or from his larger UBS account) on his 2007 tax return or pay tax on any such income. (A260 (Pl. Ex. 9).) Such income was not trivial: by Bedrosian's own estimate, it exceeded $221,000 in 2007 alone. (A517 (Gov't Ex. O).) A year later, Bedrosian again disclosed only the smaller UBS account and did not report any income from the larger account on his 2008 tax return. (A264-74 (Pl. Ex. 11).)

It was not until 2010 — after Bedrosian learned that UBS would be providing his account information to the IRS — that he amended his tax returns and filed FBARs for prior years, reporting and paying taxes on income from both UBS accounts. Bedrosian testified that it was “December 2010” when Christian Myer, an attorney he hired in Switzerland to obtain his account information, “told me that they've [UBS] turned your account over to the IRS,” informing the IRS of “the existence of the account in Switzerland.” (A108 (Tr.).) On September 10, 2010, however, Bedrosian applied for admission into the IRS's Offshore Voluntary Disclosure Program. (A361 (Pl. Ex. 27).) The application makes clear that Bedrosian already knew that UBS would be providing his information: “Originally, I was under the impression that my name was not on the list to be provided to the IRS by UBS. However, I was advised recently that the IRS will be notified by UBS.” (A362 (Pl. Ex. 27).) Thereafter, on October 4, 2010, Bedrosian filed an amended 2007 FBAR, disclosing both of his UBS accounts.⁷ (A339-40 (Pl. Ex. 19).)

The District Court incorrectly stated that Bedrosian consulted his lawyers in late 2008, and “[f]rom that point forward, Bedrosian heeded the advice of counsel, amended his returns, and paid taxes on the gains from his Swiss accounts.” (A4.) On the contrary, Bedrosian took a wait-and-see approach, as demonstrated by the facts that he waited almost two years to disclose his larger UBS account (and pay taxes on either account), and only disclosed his larger account after he knew that UBS would be providing information that would reveal the existence of the account to the IRS.

Finally, the District Court considered Bedrosian's omission from his 2007 FBAR an oversight in part because the court misunderstood the nature of Bedrosian's accounts. The court stated — incorrectly — that Bedrosian “did not take a particularly active role in managing the [larger] account” and only converted it from a savings account into an investment account in 2005. (A2.) The conversion actually occurred in the 1980s. (A127 (Tr.).) And bank records show that Bedrosian was anything but passive about managing the account in the years leading up to the filing of his 2007 FBAR. From 2003 to 2008, UBS logged at least four communications each year with Bedrosian (in person, by phone, etc.) and as many as seven. (A471-77 (Gov't Ex. I).) Bedrosian, moreover, conceded that he “didn't like the idea of giving someone control of my money” and was concerned that UBS would “lose it all or steal it all or made [sic] bad investments.” (A130 (Tr.).) Accordingly, Bedrosian kept close tabs and took a hands-on approach with respect to his accounts. That included the filing of his 2007 FBAR, disclosing only his smaller UBS account.

CONCLUSION

For the foregoing reasons, the judgment of the District Court should be reversed and the case remanded for further proceedings.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
FRANCESCA UGOLINI (202) 514-1882
ANDREW M. WEINER (202) 305-2701
D.C. Bar No. 435515
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
WILLIAM M. MCSWAIN
United States Attorney

APRIL 2018