Government Urges Court to Affirm FBAR Penalty Decisions

ARTHUR BEDROSIAN,
Plaintiff-Appellant
v.
INTERNAL REVENUE SERVICE,
Defendant-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

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

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI
(202) 514-3361
MICHAEL J. HAUNGS
(202) 514-4343
PAUL A. ALLULIS
(202) 514-5880
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
JENNIFER A. WILLIAMS
Acting 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:

Conclusion

Certificate of bar membership

Certificate of compliance

TABLE OF AUTHORITIES

Cases

Amanat v. SEC, 269 F. App'x 217 (3d Cir. 2008)

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

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

Bedrosian v. United States, No. 15-5853, 2017 WL 3887520 (E.D. Pa. Sept. 5, 2017)

Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006)

Doe v. United States, 372 F.3d 1347 (Fed. Cir. 2004)

Estate of Duncan v. Commissioner, 890 F.3d 192 (5th Cir. 2018)

East Wind Indus., Inc. v. United States, 196 F.3d 499 (3d Cir. 1999)

Florida Power & Light Co. v. Lorion, 470 U.S. 729 (1985)

Frisby v. U.S. Dept. of Hous. and Urb. Dev., 755 F.2d 1052 (3d Cir. 1985)

Glick v. White Motor Co., 458 F2d 1287 (3d Cir. 1972)

Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010)

Halo Elecs., Inc. v. Pulse Elecs., Inc, 136 S. Ct. 1923 (2016)

Harte-Hanks Communications, Inc. v. Connaughton, 491 U.S. 657 (1989)

In re Ins. Brokerage Antitrust Litigation, 579 F.3d 241 (3d Cir. 2009)

Jarnagin v. United States, 134 Fed. Cl. 368 (2017)

Kimble v. United States, 991 F.3d 1238 (Fed. Cir. 2021), cert. denied, ___ U.S. ___, 2021 WL 4507782 (Oct. 4, 2021)

New Mexico Health Connections v. U.S. Dep't of Health and Hum. Servs., 946 F.3d 1138 (2019)

New York Times Co. v. Sullivan, 376 U.S. 254 (1964)

Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019)

Pennsylvania Dep't of Pub. Welfare v. U.S. Dep't of Health & Hum. Servs., 647 F.3d 506 (3d Cir. 2011)

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

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

Sampathacar v. Fed. Kemper Life Assur. Co., 186 F. App'x 227 (3d Cir. 2006)

San Luis Obispo Mothers for Peace v. United States Nuclear Regulatory Comm'n, 789 F.2d 26 (D.C. Cir. 1986)

Sultan Chemists, Inc. v. EPA, 281 F.3d 73 (3d Cir. 2002)

In re Tri-State Financial, LLC, 885 F.3d 528 (8th Cir. 2018)

United States v. Bogart, 715 F. App'x 161 (3d Cir. 2017)

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

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

United States v. Collins, No. 18-cv-1069, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), appeal pending, No. 21-1935 (3d Cir.)

United States v. Doherty, 233 F.3d 1275 (11th Cir. 2000)

United States v. Gentges, No. 18-cv-7910, 2021 WL 1222764 (S.D.N.Y. 2021)

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

United States v. Mohney, 949 F.2d 1397 (6th Cir. 1991)

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

United States v. Rum, 995 F.3d 882 (11th Cir. 2021)

United States v. Schwarzbaum, No. 18-cv-81147, 2020 WL 1316232 (S.D. Fla. 2020)

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

W.R. Grace & Co. v. EPA, 261 F.3d 330 (3d Cir. 2001)

Statutes:

Internal Revenue Code (26 U.S.C.):

American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004)

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

Fair Credit Reporting Act, 15 U.S.C. § 1681m(a)

Regulations:

31 C.F.R.:

Miscellaneous:

Dep't of Justice, Press Release, July 1, 2008, “Federal Judge Approves IRS Summons for UBS Bank Account Records”, available at https://www.justice.gov/archive/tax/txdv08584.htm

Federal Rules of Evidence:

H.R. Conf. Rep. No. 108-755, at 615 (2004), reprinted in 2004 U.S.C.C.A.N. 1341

H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394

Internal Revenue Manual:

S. Rep. No. 108-192 (2003)

U.S. Dep't of the Treasury, A Report to Congress 6 (Apr. 26, 2002), available at https://www.treasury.gov/press-center/press-releases/Documents/fbar.pdf

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STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

The Government agrees with the jurisdictional statement included in the brief of appellant Arthur Bedrosian.¹

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 a Report of Foreign Bank and Financial Accounts (“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. The only issue is whether he did so willfully. After a trial, the District Court initially concluded that the Government did not meet its burden of proof that Bedrosian’s violation was willful. (A585, Bedrosian v. United States, 2107 WL 4946433 (E.D. Pa. Sept. 20, 2017) (“Bedrosian I”).) This Court reversed and remanded for “further consideration and to render a new judgment” because it was not clear that the District Court had applied the correct legal standard for willfulness in this context. See Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018) (“Bedrosian II”). Applying the correct legal standard, the District Court found on remand that Bedrosian’s violation was willful. The court also held that the IRS had not abused its discretion in imposing a penalty equal to 50 percent of the value of the account at issue at the time of the violation. The questions on appeal are:

STATEMENT OF RELATED CASES AND PROCEEDINGS

This case was previously before this Court. See Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018). We are not aware of any other related proceedings.

STATEMENT OF THE CASE

A. The FBAR filing requirement

In the Bank Secrecy Act (“BSA”), Pub. L. No. 91-508, 84 Stat. 1114 (1970), Congress confronted the “serious and widespread use,” for the “purpose of violating American law,” of “foreign financial facilities located in” jurisdictions that provided secrecy to account holders. H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397. To combat the use of such accounts, Congress required U.S. persons who have relationships with foreign financial agencies to file FBARs. See 31 U.S.C. § 5314(a). This annual reporting requirement applies to, inter alia, all U.S. citizens who have an interest in foreign financial accounts with an aggregate value greater than $10,000. 31 C.F.R. § 1010.306(c). An FBAR is not a tax form, and it is not filed with a tax return. For 2007, the deadline for filing an FBAR was June 30, 2008.

Congress has also given the Secretary of the Treasury (“Secretary”) the authority to impose “a civil money penalty on any person” who fails to file a required FBAR. 31 U.S.C. § 5321(a)(5)(A). Prior to 2004, non-willful violations were not subject to penalty, and the maximum penalty for willful violations was the greater of $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of such violation.” 31 U.S.C. § 5321(a)(5)(B)(ii) (2003). Congress amended this provision in 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004), and provided that the maximum penalty for willful violations thereafter would be the greater of $100,000 or 50 percent of the “balance in the account at the time of the violation.” Id. § 5321(a)(5)(C) & (D)(ii). Congress made this change in response to a report from the Secretary (see H.R. Conf. Rep. No. 108-755, at 615 (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1667) estimating that only about 20 percent of taxpayers required to file an FBAR actually did so, and that 800,000 individuals each year failed to comply with the requirement (U.S. Dep't of the Treasury, A Report to Congress 6 (Apr. 26, 2002), available at https://www.treasury.gov/press-center/press-releases/Documents/fbar.pdf). Congress also determined that improved FBAR compliance “is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams.” S. Rep. No. 108-192, at 108 (2003).²

B. Bedrosian's failure to report his $2-million Swiss bank account

1. Bedrosian's business and law background and his first Swiss bank account

Arthur Bedrosian was, at the time of the trial, the chief executive officer of Lannett Company, Inc., a manufacturer of generic pharmaceuticals. (A130.) He began his career in the 1970s as a salesman for Zenith Labs, and rose quickly through the executive ranks, including positions as vice president of sales and vice president of subsidiary operations. (A84.) In 1976, he founded a wholesale drug and manufacturers representation company called Parmerall Incorporated. (A95, A130.) His first position at Lannett was vice president of business development. (A127.) He became a member of the board in 2000 (id.) and president in 2002 (A128). In 2006 he became the chief executive officer. (A130.)

Meanwhile, in 1997, Bedrosian graduated from law school. (A88.)

Bedrosian's work as a salesman for Zenith Labs in the 1970s required him to travel frequently to Europe. (A83-87.) 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”). (Id.) Bedrosian used this account as his primary savings account and testified that he had no recollection of a separate savings account in the United States. (A84.) Sometime during the 1980s, Bedrosian converted his UBS savings account to an investment account ending in number “6167.” (A131; A133; A143-44.) Bedrosian testified that this was “the main account” and “had over a million dollars in it” in 2007. (A137.)

2. Bedrosian's failure to report his Swiss bank account

From 1972 until 2007, Bedrosian used Seymour Handelman, an accountant, to prepare his tax returns. (A94-96.) For many years, Bedrosian never mentioned his UBS account to Handelman, and never reported its existence on an FBAR. (Id.) In the mid-1990s, however, Bedrosian read a Wall Street Journal article about the federal Government tracing mail from Switzerland through postage meter numbers. (A96.) This article prompted Bedrosian to tell Handelman about his UBS account. (A96-97.) Handelman then told 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 he “can't unbreak the law” or “go back and change the documents.” (A97-98.) 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. (Id.) For the duration of their working relationship, approximately another decade, Bedrosian did not disclose the existence of any overseas account on his tax returns, file FBARs, or pay tax on the investment income. (A147-48.)

In the same mid-1990s time period when Bedrosian read the Wall Street Journal article about the government's tracing mail from Switzerland, he signed a document directing UBS not to send him account-related correspondence via the mail, but rather to “place said communications in a folder made out in his/her name at the Bank for safekeeping therein.” (A84-86; A255.) Bedrosian renewed this direction in 2004. (A86-87; A256.)

Because he was not receiving account statements via mail, Bedrosian met in person with UBS representatives, usually in New York. (A87-88.)

3. Bedrosian's second Swiss bank account, and the filing of an FBAR disclosing the smaller of the accounts

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. (A89-90; A257.) During that same year, Bedrosian opened a second account with UBS, with account number ending in “5316.” (A378; A478-479.) Internal UBS account notes from September 2005 indicate plans to “open[ ] a name account which he might declare.” (A478; see also A479 (March 2006 notes memorializing email to Bedrosian discussing “the new account with the $200k”).) By the end of 2007, Bedrosian had gross assets of approximately $2.3 million in his longstanding (6167) account, and approximately $240,000 in his newer (5316) account. (A413; A444.)

Handelman died in 2007, and Bedrosian retained a new accountant, Sheldon Bransky. (A100.) 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 Bank Account Records,”³ UBS informed Bedrosian that he had 60 days to close his accounts. (A137-138.) 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. (A100-101; A260.) 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. (A102-103; A267.) Bedrosian signed that FBAR on October 14, 2008. (A103; A267.)

Bedrosian testified that he was not aware how Bransky knew about his UBS account. He claimed that he did not speak with Bransky about his accounts or instruct Bransky to report that he had a Swiss bank account. (A101-102.) Notwithstanding that UBS had not sent Bedrosian account statements in many years (A84-87; A255; A256), he 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.” (A101-102.) Although he knew that he had an account ending in number 6167, Bedrosian testified that he did not notice that the FBAR reported a different account number, because he did not give it a lot of attention before signing it. (A105.) He also testified that he believed at that time (i.e., October 2008) that he only had one account at UBS. (A104-105.) Bedrosian did not file a 2007 FBAR disclosing his older “main” UBS account ending in 6167 with a balance at the time of nearly $2 million. (A528.)

4. Bedrosian's transfer of the (disclosed) smaller account to the United States and the (undisclosed) larger account to a different Swiss bank

Within weeks of filing the 2007 FBAR disclosing only the single smaller 5136 account, Bedrosian took two distinct actions to close both the 6167 and 5136 accounts. On November 14, 2008, Bedrosian signed a letter to UBS directing the bank to close his older 6167 account — the one not disclosed on his 2007 FBAR filed in October 2008 — and to transfer the assets therein, totaling approximately $2 million, to a different Swiss bank, Hyposwiss Privatbank (“Hyposwiss”). (A91; A258.) On December 2, 2008, Bedrosian signed a second letter to UBS directing the bank to close his newer 5136 account — the one disclosed on the FBAR he had just filed — and to transfer the assets to Wachovia Bank in the United States. (A139; A483.)

5. Bedrosian's FBAR for 2008 disclosing only the smaller (and closed) account

In late 2008 or early 2009, Bedrosian consulted his personal attorney, Steven Davis, about his handling of his UBS accounts. (A108; A109-110.) Davis brought in a tax attorney, Paul Ambrose, and together they advised Bedrosian to amend his tax returns going back to 2004 to include income from the UBS accounts and to hire a forensic accountant to do that correctly. (A109.) Bedrosian then hired an accounting firm as well as an attorney in Switzerland. (A.109-112.)

But, in October 2009, Bedrosian nevertheless filed a 2008 tax return and FBAR that again did not disclose his larger UBS account ending in 6167 (or the new Hyposwiss account into which Bedrosian had transferred the 6167 funds in November 2008), nor did he report and pay tax on income from either account. (A106; A268; A279.) Instead, Bedrosian again reported only the smaller 5136 account, with a maximum value of $100,000, and noted on the FBAR, “Account Closed 2008.” (A106; A279.) Bedrosian testified that the $100,000 value was not accurate, but that he does not know where that amount came from. (A107.) At trial he did not offer any explanation for his failure to report the $2-million 6167 account on that 2008 FBAR.

6. Bedrosian's amended FBAR for 2007 disclosing for the first time the existence of his larger Swiss bank account

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. (See A281; A317; A343; A345; A347; A359). On his revised 2007 FBAR, dated August 13, 2010, Bedrosian reported the 5316 account with a value between $100,000 and $1,000,000, and reported the 6167 account with a value over $1,000,000. (A343-344.) On his revised 2008 FBAR, dated October 1, 2010, Bedrosian reported the 5316 account with a maximum value during 2008 of $154,305, and reported the 6167 account with a maximum value during 2008 of $2,156,588. (A359-360.) Bedrosian also filed amended tax returns for 2006 through 2008 reporting income from both accounts. (A283; A302; A319.)

In September 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. (A118; A520.) 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.” (A366.) Bedrosian was not accepted into the program. (A119; A524.)

Instead, in April 2011, the IRS informed Bedrosian that his returns would be audited. (A120; A369.) In January 2015, the IRS assessed against Bedrosian a penalty for willful failure to disclose his larger UBS account on his 2007 FBAR. (A374.) 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. (A23). The Government counterclaimed for the full amount of $1,007,345, including interest and a late-payment penalty. (A29.)

C. Prior proceedings

1. Initial District Court proceedings: Bedrosian I

The District Court held a one-day trial on the issue of willfulness and the amount of the penalty. Following the trial, the District Court held that the civil standard for 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.” (A591.) Purporting to apply that standard, the District Court held that the Government had not proved that Bedrosian's violation of § 5314 was willful. (A585-599.) It said that the evidence did not “indicate 'conduct meant to conceal or mislead' or a 'conscious effort to avoid learning about the reporting requirements,' even if [it] may show negligence.” (A598.) It accordingly determined that the IRS's imposition of the FBAR penalty here was improper and therefore an illegal exaction. (A599.)

2. The first appeal: Bedrosian II

The Government appealed, and this Court reversed and remanded because it was not clear that the District Court had applied the correct standard of willfulness. Bedrosian II, 912 F.3d 144. The correct standard, this Court explained, “cover[s] not only knowing violations . . . but reckless ones as well.” Id. at 152 (quoting Fuges v. Sw. Fin. Servs., Ltd., 707 F.3d 241, 248 (3d Cir. 2012)). And “a person commits a reckless violation of the FBAR statute by engaging in conduct that violates 'an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Id. at 153 (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 68 (2007)). Accordingly, “a person 'recklessly' fails to comply with an IRS filing requirement when he or she '(1) clearly ought to have known that (2) there was a grave risk that [the filing requirement was not being met] and if (3) he [or she] was in a position to find out for certain very easily.” Id. (quoting United States. v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994) (alterations in original)).

Although the District Court had correctly held that “the usual civil standard of willfulness applies for civil penalties under the FBAR statute” (Bedrosian II, 912 F.3d at 152), it had incorrectly focused on “Bedrosian's subjective motivations and the overall 'egregiousness' of his conduct, which are not required to establish willfulness in this context.” Id. at 153. Further, the District Court incorrectly neglected to consider “whether, when his 2007 FBAR filing came due, he '(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily.'” Id. (quoting Carrigan, 31 F.3d at 134). Accordingly, this Court remanded “for further consideration and to render a new judgment.” Id.

3. Proceedings after remand: Bedrosian III

a. Willfulness

After remand, the District Court ordered the parties to submit additional briefs on the issue of willfulness. The Government argued that Bedrosian's FBAR violation was willful because, at a minimum, he was reckless. (A600.) More specifically, the Government argued that Bedrosian's “failure to ensure the accuracy of his FBAR, after he knew his failure to report was illegal, when he could have easily discovered the facts . . . and [to] correct his omission before or soon after filing . . . amounts to reckless disregard for the risk that his FBAR was inaccurate.” (A618.) “Whether Bedrosian reviewed the 2007 FBAR before he mailed it in, knowing that a failure to report foreign bank accounts was against the law, and being in a position to easily determine his FBAR was incorrect — his actions were at a minimum reckless.” (A619-20.)

Bedrosian argued in contrast that “the evidence did not support a finding of recklessness both because [his] credible testimony established that he did not know that there was a grave risk that an accurate FBAR was not being filed and because [the Government] presented no evidence to support the assertion that he did.” (A.630.)

The District Court agreed with the Government. (A3.) After a “review of the entire record,” the court vacated its prior judgment, supplemented its findings and conclusions, and entered judgment for the Government. (Id.) The District Court agreed with this Court that its “prior analysis was focused almost entirely on Bedrosian's subjective intent and did not adequately consider whether the evidence warranted a conclusion, from an objective point of view, whether Bedrosian acted either 'knowingly or recklessly' in failing to file a FBAR.” (A6.) Accordingly, consistent with this Court's mandate in Bedrosian II, the District Court conducted a “further review of the evidence from the standpoint of whether, viewed objectively, Bedrosian's conduct was reckless and therefore willful.” (A5.) The court found that it was because Bedrosian “recklessly disregarded the risk that his FBAR was inaccurate.” (A11.)

The District Court explained that it previously “did not consider whether, when his 2007 FBAR filing came due, Bedrosian '(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily.” (A11 (quoting Carrigan, 31 F.3d at 132 (alterations in original).) Applying that objective standard, the District Court held that Bedrosian's conduct was willful. (A13.) To support that conclusion, the court supplemented its prior findings of fact by noting “several items of evidence which the Court agrees support a finding that Bedrosian's conduct was reckless” including:

(A5-6.) These findings supplemented the court's earlier findings of fact supporting a finding of willfulness, including:

(A6.)

Based upon all of these facts, the District Court found that “Bedrosian's actions were willful because he recklessly disregarded the risk that his FBAR was inaccurate.” (A11.) The court found significant similarities between Bedrosian's conduct and the conduct of two taxpayers found to have willfully violated their FBAR filing requirements in United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020). In particular, the District Court emphasized that “Bedrosian knew about the FBAR requirement because his prior accountant told him about it.” (A11.) Also, like in Horowitz, Bedrosian used a hold-mail service, and had a significant amount of money in his account which is “not easily overlooked.” (Id.) And, like Horowitz, by signing his FBAR while claiming not to have reviewed it, Bedrosian “represented [his] answers to the government under penalty of perjury.” (Id. at 11-12.) Here, “if Bedrosian had looked at the forms he signed, it is reasonable to conclude that he should have noticed the amount stated for the accounts was not accurate.” (Id. at 12.) “Even if he did not know that there were two accounts, the stated amount should have prompted him to investigate further, which he could have done easily by contacting the bank.” (Id.) Accordingly, “Bedrosian had reason to know of his second overseas account and that he did not disclose it.” (Id.) He “knew or should have known the form which he signed was inaccurate.” (A13.)

b. Penalty calculation

The parties also briefed the propriety of the penalty amount. Bedrosian argued that the Government had failed to introduce at trial adequate evidence supporting the penalty amount, and that accordingly the penalty should be $0. (A638.) He argued that the exhibits that the Government submitted to support the penalty determination were inadmissible hearsay not encompassed by a business records declaration also submitted by the Government. (A642; A666; A708.) The Government countered that (1) Bedrosian had previously admitted that the penalty had been calculated as 50 percent of the value of the undisclosed account and accordingly was bound by those prior judicial admissions, and in any event (2) the Government submitted business records of UBS establishing the value of the account, and the penalty was 50 percent of that amount. (A658; A676; A705.)

The District Court held that “the government has not abused its discretion in the amount of penalty imposed.” (A17.) It noted that “[a]t no point does Bedrosian argue that the stated amount in his account is incorrect, he only argues that the documents presented by the government are not admissible.” (Id.) The court disagreed, and “based on the Exhibits [submitted by the Government at trial] the Court [found] that the government has not abused its discretion in imposing the maximum penalty against Bedrosian.” (Id.) Accordingly, the court entered judgment in favor of the Government in the amount of $1,371,371.43 as of January 4, 2021[.]” (A18.)

SUMMARY OF ARGUMENT

Appellant Arthur Bedrosian failed to report his Swiss bank accounts as required by federal law for many years even after his accountant advised him that he was breaking the law. Pursuant to 31 U.S.C. § 5321(a)(5)(C), after determining that the violation was willful, the IRS imposed a single penalty equal to 50 percent of the value of one account for one year that the account was unreported. Applying the applicable civil standard for willfulness, the District Court found that Bedrosian's failure was willful and that the IRS had not abused its discretion in imposing the penalty here. The District Court's judgment was correct.

1. Willfulness in this context includes objectively reckless conduct. The District Court correctly found here that Bedrosian's failure to report his $2-million Swiss bank account in 2007 was objectively reckless because he (1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed, and (3) he was in a position to find out for certain very easily. That finding is well-supported by the record. First, Bedrosian knew that failing to report his Swiss accounts was a violation of federal law because his accountant had told him so. Second, Bedrosian asked the Swiss bank not to send him any mail, thereby reducing documentation to connect him to the account, and chose to meet with bank representatives in person instead. Third, Bedrosian knew that he had multiple Swiss accounts at least as early as a few weeks following his filing an FBAR reporting only one account, yet he took no steps to correct that erroneous filing. Fourth, Bedrosian filed an inaccurate FBAR the following year, again omitting his main, and largest, Swiss account. Fifth, Bedrosian was aware of the large sums of money held in his unreported account. And sixth, Bedrosian is a sophisticated businessman and law-school graduate, who filed his FBAR in 2007 without reviewing it for accuracy. All of these undisputed facts support the District Court's finding that Bedrosian's failure was at least objectively reckless and therefore willful.

Bedrosian's arguments to the contrary are unavailing. The District Court did not misapply any legal principle or precedent. Nor did it exceed the scope of this Court's mandate after the first appeal of this matter. And there is no basis for this Court to revisit its decision in that first appeal.

2. The District Court also correctly held that the IRS did not abuse its discretion in the amount of the penalty imposed. Sections 5321(a)(5)(C)(i)(II) and (D)(ii) authorize a penalty of up to 50 percent of the value of the unreported account at the time of the violation. The date of the violation here was June 30, 2008, the date that Bedrosian's 2007 FBAR was due. The IRS reasonably relied upon the bank's monthly statement for Bedrosian's unreported account to determine the balance on that date. Nothing in the statute, regulations, or the Internal Revenue Manual dictated how the IRS should go about determining the account balance on the relevant date, and it was neither arbitrary nor capricious for the IRS to rely on the monthly account balance reported by the bank. Even if this Court were to determine that it was an abuse of discretion, the correct remedy would not be, as Bedrosian argues, to order entry of judgment in his favor (i.e., order a penalty of $0), but rather to remand to the IRS for further explanation.

ARGUMENT

I. The District Court correctly found that Bedrosian willfully failed to report his $2-million Swiss bank account on his 2007 FBAR

Statement of the standard or scope of review

“[A] district court's determination in a bench trial as to willfulness under the FBAR statute is reviewed for clear error.” Bedrosian II, 912 F.3d at 152.

A. Applying the correct legal standard, the District Court correctly found that Bedrosian willfully failed to file an FBAR reporting his $2-million Swiss bank account

1. Willfulness in the FBAR context includes reckless conduct

As this Court explained in Bedrosian II, “the usual civil standard of willfulness applies for civil penalties under the FBAR statute.” 912 F.3d at 152. And “where 'willfulness' is an element of civil liability, '[this Court] [has] generally taken it to cover not only knowing violations of a standard, but reckless ones as well.'” Id. (quoting Fuges, 707 F.3d at 248). “[A] person commits a reckless violation of the FBAR statute by engaging in conduct that violates 'an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Id. (quoting Safeco, 551 U.S. at 68). “[S]ubjective motivations and the overall 'egregiousness' of” a person's conduct “are not required to establish willfulness in this context.” Id. at 153. Rather, the question is whether, when Bedrosian's FBAR came due, “he '(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily.” Id. (quoting Carrigan, 31 F.3d at 134).

2. The District Court correctly found that Bedrosian ought to have known that there was a grave risk that an accurate FBAR was not being filed, and that he was in a position to find out for certain very easily

On remand, the District Court faithfully applied the standard this Court set forth in Bedrosian II. The District Court explained that it had not considered the three-part test discussed above when it rendered its first opinion (A11), and found that, under that objective standard of recklessness, Bedrosian's conduct was willful “because he recklessly disregarded the risk that his FBAR was inaccurate.” (A11.) There was no error in that finding — let alone clear error.

There is no dispute that Bedrosian's 2007 FBAR was inaccurate. (A6.) It failed to disclose the existence of Bedrosian's Swiss bank account ending in 6167 — the vastly larger of his two accounts — and it failed to correctly state the true value of his accounts. (See A267.) The record amply supports the District Court's finding that Bedrosian ought to have known that that FBAR was inaccurate, and that he was in a position to find out for certain very easily.

Although Bedrosian casts the inaccuracies in his original 2007 FBAR as mere oversights (see, e.g., Br. 28-33), there are several surrounding facts that belie that contention.

First, as the District Court explained, “Bedrosian knew about the FBAR requirement because his prior accountant told him about it.” (A11; A12-13.) Indeed, Bedrosian's accountant, Handelman, told him as early as the mid-1990s that he had already been in violation of federal law for at least 20 years by failing to file an annual FBAR reporting his Swiss bank account. (A98.) Although Bedrosian testified that Handelman told him there was “nothing [he] can do” about his past violations of law (A98), that does not negate Bedrosian's choice to continue violating the law every year thereafter by not filing FBARs, knowing all the while that he was required to accurately report his Swiss bank accounts.⁴ Year after year, Bedrosian knowingly continued to violate federal law by failing to file FBARs. While the IRS did not impose penalties for that earlier conduct (it was prevented from doing so by the statute of limitations), that plainly willful conduct nevertheless casts light on Bedrosian's conduct when he finally did file an FBAR for 2007 in October 2008.

Second, Bedrosian candidly concedes that he utilized his bank's hold-mail services. As the District Court found (A5-6), in the mid-1990s Bedrosian read an article in The Wall Street Journal discussing the Government's efforts to trace mail from Switzerland (A96), and in that same general time period, Bedrosian signed a document directing UBS not to send him account-related correspondence via the mail, but rather to “place said communications in a folder made out in his/her name at the Bank for safekeeping therein” (A84-86; A255). Bedrosian renewed this direction in 2004, several years after Handelman told him he was violating federal law by not disclosing his Swiss account. (A86-87; A256.) Although Bedrosian testified that he did not recall signing the hold-mail orders (A86-87), he obviously was aware that he was not receiving mail concerning his accounts. Rather, he obtained information about his accounts through face-to-face meetings with his Swiss bankers. (A88.)

Third, although Bedrosian testified that he did not realize that he maintained two Swiss accounts when he initially filed his 2007 FBAR in October 2008 (A104-105), he obviously knew that he had two accounts within weeks — at the latest — of filing that FBAR. As the District Court found, “[s]hortly after filing the 2007 FBAR, Bedrosian sent two letters to his Swiss bank directing closure of two accounts, but only one of these accounts [the smaller one] had been disclosed on his FBAR. The second account [the far larger one] was moved to a different Swiss bank and the funds were not repatriated to the United States.” (A5; see A91; A258; A483.) Yet Bedrosian took no steps to amend or correct the FBAR that he had just filed disclosing only the one small account representing only approximately 10 percent of his Swiss holdings — at least not until years later, after it was clear that UBS would give information about Bedrosian to the Government.⁵ Rather, he chose to allow the inaccurate FBAR — reporting only one account containing a fraction of his Swiss holdings — to remain on file.⁶

Fourth, the record demonstrates that that decision was no mere oversight. Indeed, the following year — again, after Bedrosian had signed two separate letters disposing of his two UBS accounts in different ways — Bedrosian filed an FBAR for 2008 that again disclosed only the smaller, and now closed, account, and completely ignored the larger account that he had transferred to a different Swiss bank. (A106-107; A279.) And that 2008 FBAR again grossly underreported the maximum value of Bedrosian's accounts at that time as $100,000 (A106; A279), when in fact Bedrosian's Swiss accounts were then worth over $2 million (A359-60.) Bedrosian testified that the $100,000 value was not accurate, but that he does not know where that amount came from. (A107.) Bedrosian even took care to indicate on that FBAR “Account Closed 2008” with respect to the smaller (5316) account, but said nothing about the funds in the larger (6167) account that had also been closed and that remained in Switzerland, having been transferred to Hyposwiss. And Bedrosian filed this inaccurate FBAR after consulting his personal and tax attorney. (A108; A109-110.) He offered no explanation for his failure to report the larger account that had been transferred to Hyposwiss on that 2008 FBAR. Although Bedrosian claims “dilgen[ce]” (Br. 33), the fact remains that he omitted that $2 million Swiss account on the 2008 FBAR. This conduct suggests, at worst, a conscious omission, and at best, reckless disregard for the accuracy of his FBAR.

Fifth, as the District Court found, Bedrosian “was aware of the significant amount of money held in his foreign bank accounts” (A6) and such significant amounts are “not easily overlooked.” (A11.) As the court explained, “if Bedrosian had looked at the forms he signed, it is reasonable to conclude that he should have noticed the amount stated for the accounts was not accurate.” (A11.) That is, the 2007 FBAR indicated that Bedrosian had less than $1 million in Swiss holdings, even though Bedrosian knew that his “main” (6167) account alone had over $1 million. (A12; see A137.) “Even if Bedrosian did not know that there were two accounts, the stated amount should have prompted him to investigate further, which he could have done easily by contacting the bank.” (A12.)

Sixth, Bedrosian is a sophisticated and financially literate businessman with a law degree. He knows that signing a document has consequences. A taxpayer who signs a tax return or FBAR cannot claim ignorance of its contents for having not read the form, and is charged with constructive knowledge of its contents. See, e.g., United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012); Horowitz, 2019 WL 265107 at *3; see also, Greer v. Commissioner, 595 F.3d 338, 347 n.4 (6th Cir. 2010); United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000); United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991); Jarnagin v. United States, 134 Fed. Cl. 368, 375 (2017) (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”). And as the District Court found, even a cursory review of the 2007 FBAR here would have alerted Bedrosian to its inaccuracy, since it reported assets less than $1million, while Bedrosian knew that his larger account alone held over $1 million. (A137.)

Bedrosian argues (Br. 30) that the stated account balance would not have put him on notice that the FBAR was inaccurate because he actually believed that his accounts contained approximately $1 million at that time. And he faults the District Court for its citation to a “single answer to a single question” (id.) in support of that finding (see A12 (citing A137)). But Bedrosian himself counters only with a single record citation. Such weighing of the evidence is a classic exercise of the District Court's factfinding function. And, in any event, Bedrosian's argument cannot account for the fact that within weeks of filing the inaccurate FBAR, Bedrosian closed both accounts and was thus aware of both the accounts' existence and value. Yet he took no steps to correct his inaccurate 2007 FBAR until years later.

All of these facts could lead a factfinder to conclude that an accountholder knowingly filed an inaccurate FBAR. They certainly are sufficient to support the District Court's finding that Bedrosian recklessly did so. Had he simply taken the time to review the form, Bedrosian should have noted that the form grossly understated the value of his Swiss accounts, and thus “ought to have known” that “there was a grave risk” (indeed it was certain) that an inaccurate FBAR was being filed, and he “was in a position to find out for certain very easily” by simply contacting the bank to ensure that the information on the form was correct. Bedrosian II, 912 F.3d at 152.

And, as discussed above, even if Bedrosian somehow did not know that he had two UBS accounts when he first filed his 2007 FBAR (but see A478, A479 (referencing a “new account”)), the evidence shows that he knew of both accounts within weeks of filing that FBAR, yet took no steps to correct the FBAR's inaccuracies. Indeed, he doubled down the following year by filing a second FBAR — for 2008 — again disclosing only the smaller 5136 account and omitting the larger 6137 account. All of this points to at least reckless conduct in filing the 2007 FBAR. Certainly the District Court did not clearly err in so finding.

B. Bedrosian's remaining arguments to the contrary are inapt

1. The District Court did not exceed the scope of the mandate

Bedrosian argues that the District Court exceeded the scope of the mandate in Bedrosian II when it held on remand that Bedrosian was willful, because, according to Bedrosian, this Court remanded the matter “simply to confirm that the District Court's result would be the same under the now-settled standard.” (Br. 25-26.) That argument seriously misconstrues the nature of this Court's decision in Bedrosian II.

As is explained above, in Bedrosian II this Court reversed the District Court's holding that Bedrosian had not been willful because the District Court's opinion “did not consider whether, when his 2007 FBAR filing came due, he '(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily.'” Bedrosian II, 912 F.3d at 153. Accordingly, this Court “remand[ed] for further consideration and to render a new judgment.” Id; see also id. at 154 (“we remand the case for further proceedings consistent with this opinion”). That is, this Court directed the District Court to “further consider[ ]” the record in light of the “objective recklessness standard.” Id. at 153. And that is precisely what the District Court did.

Indeed, the District Court confirmed that its “prior analysis was focused almost entirely on Bedrosian's subjective intent and did not adequately consider whether the evidence warranted a conclusion, from an objective point of view, whether Bedrosian acted either 'knowingly or recklessly' in failing to file a FBAR.” (A6.) Accordingly, after additional briefing by the parties, the District Court conducted “further review of the evidence from the standpoint of whether, viewed objectively, Bedrosian's conduct was reckless and therefore willful.” (A5.) Based upon that further review, the District Court concluded that the evidence supported a finding that Bedrosian's conduct was objectively reckless. In this way, the District Court “implement[ed] both the letter and spirit of the mandate, taking into account [this Court's] opinion [in Bedrosian II] and the circumstances it embraces.” Bankers Tr. Co. v. Bethlehem Steel Corp., 761 F.2d 943, 949 (3d Cir. 1985).

There was nothing improper in the District Court's supplementing its factual findings after remand. Indeed, “upon a reversal and remand for further consistent proceedings, the case goes back to the trial court and there stands for a new determination of the issues presented as though they had not been determined before, pursuant to the principles of law enunciated in the appellate opinion[.]” Id. at 950. Even a newly assigned judge is free to revisit factual findings after remand, so long as the appellate court did not adopt those findings in its decision. See In re Tri-State Financial, LLC, 885 F.3d 528, 533 (8th Cir. 2018). And the District Court clearly explained how its supplemental factual findings — based upon evidence already in the record — supported its application of the objective-recklessness standard articulated by this Court in Bedrosian II. (A10-12.)

Nor was there any error (see Br. 27) in the District Court finding recklessness on remand when it previously stated that Bedrosian's conduct “may show negligence” (see A594). The court made that statement in the context of juxtaposing what it incorrectly thought were the two options before it, i.e., knowing/intentional conduct and negligent conduct. It thus originally held that the evidence did not “indicate 'conduct meant to conceal or mislead' or a 'conscious effort to avoid learning about reporting requirements,' even if [it] may show negligence.” (A598.) When it made that statement, the District Court was “focused almost entirely on Bedrosian's subjective intent” (A6) and not on the objective recklessness of Bedrosian's conduct. On remand, however, the District Court evaluated the evidence in light of the correct objective test for recklessness, and found that Bedrosian's conduct satisfied that standard. Far from being erroneous or beyond this Court's prior mandate, the District Court's judgment after remand properly reflected further consideration of the evidence in light of the correct legal standard.

2. There is no basis for this Court to revisit its holding in Bedrosian II

Bedrosian argues that “this court should clarify or revisit” Bedrosian II (Br. 34), but he offers no convincing reason for doing so. Indeed, every Circuit Court to have considered the question to date has agreed that “the usual civil standard of willfulness applies for civil penalties under the FBAR statute,” and that that “cover[s] not only knowing violations of a standard, but reckless ones as well” including by “engaging in conduct that violates 'an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Bedrosian II, 912 F.3d at 152 (quoting Safeco, 551 U.S. at 68). See United States v. Rum, 995 F.3d 882 (11th Cir. 2021); Kimble v. United States, 991 F.3d 1238, 1242-43 (Fed. Cir. 2021), cert. denied, ___ U.S. ___, 2021 WL 4507782 (Oct. 4, 2021); United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020); Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019); United States v. Williams, 489 F. App'x 655 (4th Cir. 2012).

Bedrosian argues that this Court and the other Circuit Courts erred in their reliance on Safeco, because that decision relied on a unique aspect of the statute at issue there that is not present in 31 U.S.C. § 5321. But he is wrong.

Safeco involved a statute, the Fair Credit Reporting Act, 15 U.S.C. § 1681m(a), that imposed civil liability for willful failure to provide notice to a consumer when an adverse action is taken by a defendant based upon information in a consumer credit file. 551 U.S. at 52. In holding that the statute intended to reach reckless violations, the Supreme Court expressly relied on the general common-law usage of the term “willful” in civil contexts. It explained that “where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” 551 U.S. 57; see also id. (interpreting willfulness to include recklessness is “standard civil usage”).⁷ That “construction reflects common law usage, which treats actions in 'reckless disregard' of the law as 'willful' violations.” Id. Two canons of statutory construction counseled in favor of reading “willfully” to include “recklessly” in the statute at issue there: (1) “Congress knows how we construe statutes and expects us to run true to form,” and (2) “the general rule that a common law term in a statute comes with a common law meaning, absent anything pointing the other way[.]” Id. at 58. Those same two canons apply equally here.

Bedrosian correctly notes (Br. 36) that the Supreme Court's analysis in Safeco found “additional support” for its holding in the structure of the statute at issue there. That is, while the statute created liability for all willful violations, it allowed heightened damages where the willful violation was also “knowing.” See Safeco, 551 U.S. at 58. Bedrosian argues that the Supreme Court's reliance on this “additional support” demonstrates that the “common-law usage of 'willful' was an insufficient basis for the Supreme Court in Safeco to define the scope of 'willful.'” (Br. 36-37.) That argument is wrong. On the contrary, the Supreme Court referred to the textual “clue” of the two-tiered penalty structure involved there only to rebut the “shaky” argument “that 'willfully' limits liability under [that statute] to knowing violations.” Id. at 59-60. It simply explained that that argument would render “the modifier 'knowingly'” in the heightened-damages provision to “be superfluous and incongruous.” Id.

But the Supreme Court further explained that “the common law has generally understood [the term recklessness] in the sphere of civil liability as conduct violating an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Id. at 68 (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). “It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law.” Id. (citing Prosser and Keeton on Law of Torts § 34, at 213 (5th ed. 1984)). It held that there was “no reason to deviate from the common law understanding in applying the statute” there, where “[t]here [was] no indication that Congress had something different in mind.” Id. Here, too, there is no indication that Congress had anything different than the common law understanding in mind when it authorized penalties for willful violations of § 5314 in § 5321.

Bedrosian cites to cases that departed from the general understanding that civil “willfulness” includes objective “recklessness” in certain unique contexts. (Br. 38-39.) But those cases do nothing to undermine Bedrosian II. As the Supreme Court itself noted in Safeco, “'willfully' is a 'word of many meanings whose construction is often dependent on the context in which it appears[.]'” 551 U.S. at 57. Similarly, “'the term recklessness is not self-defining[.]'” Id. at 68 (quoting Farmer, 511 U.S. at 836). Bedrosian's reliance on cases arising in specific and unique contexts do not undermine this Court's interpretation of those terms in the FBAR context in Bedrosian II.

Halo Elecs., Inc. v. Pulse Elecs., Inc, 136 S. Ct. 1923 (2016), for example, involved discretionary awards of treble damages for patent infringement. And Harte-Hanks Communications, Inc. v. Connaughton, 491 U.S. 657 (1989), involved the unique context of public-figure libel which implicates serious First Amendment concerns. See New York Times Co. v. Sullivan, 376 U.S. 254 (1964). In describing the applicable actual-malice standard there, the Supreme Court reiterated that “the concept of 'reckless disregard' 'cannot be fully encompassed in one infallible definition.'” Id. (quoting St. Armant v. Thompson, 390 U.S. 727, 730 (1968)). And in that unique — and constitutionally circumscribed — context, the Supreme Court explained that it had applied that term to mean that the defendant must “have 'entertained serious doubts as to the truth of his publication'” or “must have made the false publication with a 'high degree of awareness of . . . probable falsity.'” Id. at 667 (citations omitted).

Those holdings do nothing to further Bedrosian's cause. They simply illustrate the uncontroversial proposition that the meaning of the term “reckless,” like “willful,” depends on the context in which it is used. As this Court held in Bedrosian II, and as every other Circuit Court to have considered the question has held, Safeco (which involved the failure to provide consumers notice of adverse reporting by credit agencies) and the jurisprudence under I.R.C. § 6672 regarding Trust Fund Recovery Penalty (“TFRP”) liability best illuminate the meaning of that term as used in the context at issue here.

Bedrosian nevertheless takes issue with this Court's comparison to TFRP cases in Bedrosian II. (Br. 40.) Section 6672 imposes penalties on any person who is required to do so (a “responsible party”) but willfully fails to “collect,” or “truthfully account for and pay over” any federal payroll tax. I.R.C. § 6672(a). This Court has held that a responsible party willfully “fails[ ] to truthfully account for and pay over” such taxes “if he demonstrates a reckless disregard for whether taxes have been paid,” a standard that 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. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994). In Bedrosian II, this Court adopted this “reckless disregard” formulation for use in determining whether a taxpayer recklessly failed to file an accurate FBAR. 912 F.3d at 153.

Contrary to Bedrosian's argument (Br. 40), analogizing FBAR penalties to TFRP liability is wholly appropriate. Bedrosian first argues that the TFRP statute is different because it applies only to a “responsible party.” See I.R.C. § 6672(a). But the statute defines a responsible party simply as a person who is required to ensure that the payroll taxes are collected, or accounted for and paid. Id. Similarly, in the FBAR context, the reporting obligation applies to a “United States person having a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country.” 31 C.F.R. § 1010.350(a). Bedrosian does not dispute that he has a reporting obligation. And, as in the TFRP context, he is subject to a penalty when he recklessly fails to fulfill it.

Bedrosian further suggests that the obligation to “file and remit” payroll taxes (Br. 41) distinguishes a “responsible party” in the TFRP context from an accountholder in the FBAR context who merely has a “duty to file” (id.). But this is a distinction without a difference. Indeed, the Supreme Court has recognized this “reckless disregard” standard in other failure-to-file contexts as well. See, e.g., United States v. Boyle, 469 U.S. 241, 245 (1985) (term “willful neglect” as used in statute imposing penalty for failure to timely file income-tax return, I.R.C. § 6651(a)(1), means “a conscious, intentional failure or reckless indifference”). And this Court has held that the Boyle formulation, i.e. “reckless indifference,” should apply equally to penalties imposed for failures to file as well as failures to pay taxes when due. See East Wind Indus., Inc. v. United States, 196 F.3d 499, 504 & n.5 (3d Cir. 1999).

And in Safeco, too, the defendants only had an obligation to give “notice” to a consumer when an adverse action was based upon information in a credit file — there was no duty of payment. Safeco, 551 U.S. at 52. The statute there only imposed liability on anyone “who 'willfully fails' to provide notice[.]” Id. While the actions that may constitute recklessness in the TFRP context may differ from the actions that may constitute recklessness in the FBAR context, the standard of recklessness reasonably is the same in both contexts: “action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Safeco, 551 U.S. at 68; see also id. at 57 (willful violation of notice requirement includes “reckless disregard of statutory duty”). The three-part test articulated in Carrigan and adapted to FBARs in Bedrosian II is simply an expedient test of whether an accountholder has recklessly disregarded a known or obvious risk that he has not complied with his obligation to accurately report foreign financial holdings. Bedrosian II was correctly decided.

3. The District Court's comparison to other FBAR cases was not erroneous

Bedrosian argues (Br. 28-32) that the District Court erred when it compared the facts here to the facts in Williams and Horowitz (see A8, A11). But there was no error. First, the District Court did not hold that those cases “compelled” (Br. 31) a finding of willfulness here. The District Court merely noted factual similarities between the cases. And the cases are indeed similar. As the District Court explained (A11), the taxpayers in Horowitz should have been aware of their obligation to file an FBAR and here it is undisputed that Bedrosian did know. In both cases, the accountholders used “mail hold” services. The accounts in both cases held significant amounts of money. And the accountholders in both cases signed their forms without reviewing them. See Horowitz, 978 F.3d at 81-85. That the Horowitzes checked “no” on the line of their federal tax return that asked whether they held any foreign accounts while Bedrosian checked “yes” does not, as Bedrosian argues (Br. 29), establish “clear[ ] error” by the District Court here. There is no dispute that Bedrosian (eventually) reported an account on his 2007 FBAR — his smaller Swiss account numbered 5136. That says nothing about Bedrosian's recklessness in failing to report on that FBAR his other Swiss account numbered 6167, which indeed comprised the vast majority of his Swiss holdings.

Nor did the District Court err in comparing Bedrosian to the accountholder in Williams even though it initially had found the cases to be dissimilar (see A8). In its original (and reversed) decision, the District Court had distinguished Bedrosian from Williams because Williams “'acknowledged that he willfully failed to report the existence of the [Swiss] accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion,' via his guilty plea allocution.” (A595). And, the District Court originally noted (A596), Williams committed his violation “after he was already the target of a government investigation regarding his noncompliance with federal tax law, showing a continued interest in misleading the authorities,” while “Bedrosian was fully cooperative and honest with the IRS from the moment it began investigating him.” But on remand, the District Court explained (A8) that those distinctions were not relevant to a proper objective-recklessness analysis as mandated by this Court in Bedrosian II. That conclusion was undoubtedly correct. That Williams' FBAR violation was part of an intentional tax-evasion scheme does not negate Bedrosian's own objective recklessness. Similarly, that Bedrosian cooperated with the IRS during its investigation years later says nothing about his objective recklessness when he filed the inaccurate FBAR for 2007. The District Court's finding of willfulness on remand was not erroneous in any way — let alone clearly so.

II. The District Court correctly held that the IRS did not abuse its discretion in imposing the penalty here

Statement of the standard or scope of review

The IRS's imposition of an FBAR penalty is reviewed for an abuse of discretion. See, e.g., Kimble, 991 F.3d at 1242. This Court reviews de novo the District Court's conclusion that the IRS did not abuse its discretion. See, e.g., Pennsylvania Dep't of Pub. Welfare v. U.S. Dep't of Health & Hum. Servs., 647 F.3d 506, 511 (3d Cir. 2011). The abuse-of-discretion standard of review is “highly deferential,” Sampathacar v. Fed. Kemper Life Assur. Co., 186 F. App'x 227, 231 (3d Cir. 2006), and an agency's choice of a particular sanction can only be overturned if it is “unwarranted in law or without justification in fact.” Amanat v. SEC, 269 F. App'x 217, 219-20 (3d Cir. 2008); see also Sultan Chemists, Inc. v. EPA, 281 F.3d 73, 83 (3d Cir. 2002) (“The EPA is charged with choosing the means by which to enforce and achieve the goals of FIFRA. In such a case, heightened deference is due to the agency's penalty [calculation]”). “In considering whether agency action is rational, a reviewing court must determine whether the agency considered the relevant data and articulated an explanation establishing a 'rational connection between the facts found and the choice made.'” Frisby v. U.S. Dept. of Hous. and Urb. Dev., 755 F.2d 1052, 1055 (3d Cir. 1985) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962).)

A. Bedrosian is bound by his judicial admissions regarding the IRS's penalty calculation

Bedrosian admitted numerous times that the IRS calculated the penalty amount by taking 50 percent of the June 2008 account balance as stated in UBS records, and that that was the highest possible penalty. For example, in his response to the Government's statement of undisputed material facts, Bedrosian admitted that the “penalty was calculated as 50% of Bedrosian's account balance for the account ending in 6167, or fifty percent of $1,951,578.34, which equals $975,789.17. Gov. Ex. D.”⁸ (RE 22-3 at 7; RE 26-1 at 5.) Indeed, in his own statement of undisputed material facts, Bedrosian averred that the “maximum value of the account was $1,951,578.34 and the amount of the penalty was $975,789.19 — half the value of the account and the highest penalty that could be imposed. US0030-US0036 (Exhibit I).”⁹ (RE 25-1 at 5 (emphasis added).) Bedrosian repeated that statement in his pretrial brief. (RE 49 at 5.) The District Court — relying on Bedrosian's statements — found that it was “undisputed” that the penalty was “the largest penalty possible under the regulations.” (RE 31 at 4.) And at trial Bedrosian's counsel “conced[ed] that at the time there was about 2 million U.S. dollars in that account give or take[.]” (A66.)

Even when, after trial, Bedrosian began to dispute that the Government had submitted sufficient evidence to substantiate the penalty amount, Bedrosian nevertheless agreed that he had previously “acknowledg[ed]” that this is “how the penalty was calculated.” (A709.)

All of these admissions bind Bedrosian. “Judicial admissions are concessions in pleadings or briefs that bind the party who makes them.” Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 211 n.20 (3d Cir. 2006). A “judicial admission is an assertion of fact that is binding on a party.” United States v. Bogart, 715 F. App'x 161, 171 n.8 (3d Cir. 2017). Such admissions are “binding for the purpose of the case in which the admissions are made including appeals[.]” Glick v. White Motor Co., 458 F2d 1287, 1291 (3d Cir. 1972). And even “an admission of counsel during the course of trial is binding on his client.” Id. An attorney's “statement of his conception of the legal theory of the case” is not a binding judicial admission, but “matters of fact which otherwise would require evidentiary proof” are. Id.

Here, Bedrosian admitted multiple times the fact that the penalty was calculated as half the value of the account as indicated by UBS monthly account records, and that that was the maximum possible penalty. Those are admissions of fact that bind Bedrosian for all purposes of this case, including this appeal. Accordingly, Bedrosian should not now be heard to argue (Br. 43) that the Government did not establish that the penalty was within the statutory maximum.

B. The District Court correctly held that the IRS did not abuse its discretion

1. The IRS's basing the penalty on the monthly account balance for June 2008 was rational

As noted above, this Court reviews the IRS's choice of penalty amount for an abuse of discretion, and there is no abuse of discretion where there is a “'rational connection between the facts found and the choice made.'” Frisby, 755 F.2d at 1055. There is such a rational connection here.

As noted, Bedrosian admits that the IRS relied on the June 2008 monthly account balance as stated in UBS's records to calculate the 50-percent penalty. The only question then is whether doing so was an abuse of discretion, i.e. arbitrary or capricious. The answer to that question undoubtedly is “no.”

Bedrosian argues that relying on the monthly statement of account was an abuse of discretion because it does not explicitly state the account value on June 30, 2008. (Br. 49.) As an initial matter, Bedrosian never made that argument below and accordingly has waived it.¹⁰ See In re Ins. Brokerage Antitrust Litigation, 579 F.3d 241, 261 (3d Cir. 2009) (“'Absent exceptional circumstances, this Court will not consider issues raised for the first time on appeal.'”) (quoting Delaware Nation v. Pennsylvania, 446 F.3d 410, 416 (3d Cir. 2006)). In any event, relying on the monthly statement for June 2008 is rational here.

Relying on the 2008 version of Internal Revenue Manual (“IRM”) 4.26.16.4.5.5(4), Bedrosian argues (Br. 48-49) that the “balance in the account at the close of June 30th is the amount that must be used calculating the filing violation.” And, relying on two district court opinions, he argues that “failure to use the exact account balance” on June 30, 2008, “is a departure from the IRS's own internal guidelines and, thus, arbitrary and capricious.” (Br. 49.) See United States v. Gentges, No. 18-cv-7910, 2021 WL 1222764 (S.D.N.Y. 2021) (IRS's penalty calculation was erroneous because it relied on the balance in the account as of December of the prior year, not June of the year of the violation); United States v. Schwarzbaum, No. 18-cv-81147, 2020 WL 1316232 (S.D. Fla. 2020) (penalty was erroneous because IRS calculated it based upon the “highest aggregate balance in each account for each year”).

Although Bedrosian is correct that the maximum penalty that can be imposed is 50 percent of the account balance on June 30, 2008, he is wrong in arguing that the evidence does not support the valuation used by the IRS here and that the IRS's internal guidelines require exact proof of the account balance on June 30.

First, the IRM “'does not have the force of law,'” Rum, 995 F.3d at 893, and is “not legally binding on courts[,]” Norman, 942 F.3d at 1115. It does “'not create rights in the taxpayer.'” Estate of Duncan v. Commissioner, 890 F.3d 192, 200 (5th Cir. 2018) (quoting Oxford Capital Corp. v. United States, 211 F.3d 280, 285 n.3 (5th Cir. 2000).

Second, at all relevant times, nothing in the statute or the IRM detailed how to determine the account balance on any given date.¹¹ The IRM then in effect simply provided, consistent with §§ 5321(a)(5)(C) & (D)(ii), that the maximum penalty amount was 50 percent of the account balance on June 30 of the year when the FBAR was due. See IRM 4.26.16.4.6.3(3)(d), 2014 WL 7993524. Bedrosian seems to believe that that requires a document showing daily account balances, including the exact balance on June 30. But nothing in the IRM at that time directed any particular method for determining that amount, or prohibited the IRS from using the data it had available to it to determine the account balance on that date. The IRM certainly did not require any document detailing daily balances. Nor does any principle of administrative law require such precision. It is enough that there is “a 'rational connection between the facts found and the choice made.'” Frisby, 755 F.2d at 1055.

And there certainly is a rational connection between UBS's account statement reporting the monthly balance in Bedrosian's account for June 2008 and the IRS's determination that that amount reflected the balance as of June 30, 2008. Daily running balances are frequently not available, especially for secret Swiss bank accounts that taxpayers, like Bedrosian, have hidden for decades. Relying on a monthly balance report under such circumstances is hardly arbitrary or capricious — especially where, as here, there is evidence to suggest that the reported monthly balances are as of the last day of the month. (See, e.g., A444 (statement of account as of “31 December 2007”)). This case thus is far different from the cases on which Bedrosian relies, Gentges and Schwarzbaum, where the balances used were not from the same month. See Gentges, 2021 WL 1222764 (balance in the account as of December of the prior year); Schwarzbaum, 2020 WL 1316232 (highest aggregate balance in each account for each year).

Bedrosian thus is wrong to conclude that reliance on the monthly balance was arbitrary and capricious because it was not in accordance with the IRS's own internal guidelines. Those guidelines were silent as to the information or methodology to be used in determining the balance on June 30. And, indeed, the IRM was recently updated to explicitly confirm that the methodology used here is acceptable. See IRM 4.26.16.5.5.3(8)(a.) (June 24, 2021) (“If, after reasonable efforts by the examiner to obtain it, the valuation date balance is not available, the examiner may estimate it using available information, including the balance in the account on another date.”).

And indeed, another district court within this Circuit recently granted the Government summary judgment upholding the imposition of a willful FBAR penalty based on exactly the same type of UBS monthly account data as what the IRS used here. See United States v. Collins, No. 18-cv-1069, 2021 WL 456962, at *2 (W.D. Pa. Feb. 8, 2021), appeal pending, No. 21-1935 (3d Cir.) (“For the balance of Mr. Collins's UBS account on June 30, 2008, the IRS used $760,490, based on a UBS treaty document showing a June 2008 monthly balance of $776,113.89 in Swiss Francs and a conversion rate of 0.97987.”).

2. Although unnecessary, the Government's evidence demonstrated the account balance

Bedrosian argues that this Court should hold that the penalty for his willful violation of his FBAR filing obligations is $0 (Br. 52), because, according to Bedrosian, the Government's evidence showing his account balance (Exs. R & T, see A528, A531), and thus supporting the 50-percent penalty calculation, was inadmissible. Bedrosian's argument assumes that the District Court was proceeding de novo with respect to the penalty calculation. Because the District Court — and this Court — need only determine whether the IRS abused its discretion, the Government was not required to prove anew the balance in Bedrosian's account. Indeed, “the party challenging an agency's action as arbitrary and capricious bears the burden of proof.” San Luis Obispo Mothers for Peace v. United States Nuclear Regulatory Comm'n, 789 F.2d 26, 37 (D.C. Cir. 1986); see also New Mexico Health Connections v. U.S. Dep't of Health and Hum. Servs., 946 F.3d 1138, 1162 (2019); Doe v. United States, 372 F.3d 1347, 1359 (Fed. Cir. 2004).

Thus, it was Bedrosian's burden to show an abuse of discretion in the penalty calculation. The Government rebutted his arguments by showing that there was a rational connection between the penalty and the facts used by the IRS to assess that penalty. In fact, as discussed above, Bedrosian conceded the facts that establish the propriety of the penalty calculation, i.e., that the IRS calculated the penalty as 50 percent of the monthly account balance for June 2008 as stated in account records obtained from UBS.¹²

In any event, the District Court did not abuse its discretion when it held the Government's documents to be admissible and relevant to establish the account balance. (A17.) Exhibit R is the UBS statement showing monthly account balances for Bedrosian's 6137 account stated in Swiss francs (A528). Exhibit T is a chart converting those account balances to U.S. dollars (A531). Exhibit R was admissible as a business record under Fed. R. Evid. 803(6), because it was shown to satisfy the relevant conditions by a certification complying with Fed. R. Evid. 902(12) (Ex. U (A532)).

Bedrosian's reliance on cases holding specific records inadmissible in circumstances not present here is misplaced. S.E.C. v. Hughes Cap. Corp., 124 F.3d 449, 456 (3d Cir. 1997), for example, concerned the exclusion of copies of check stubs that were admittedly “'altered' before photocopying.” Given that fact, this Court merely held that “it would be impossible to say that the district court abused its discretion” by excluding those documents. Id. But here there are no allegations that the UBS records were altered. United States v. Pelullo, 964 F.2d 193 (3d Cir. 1992) is similarly inapposite. In that case, this Court upheld the exclusion of certain financial records because the witness offered to lay the foundation for admission under Rule 803(6) “did not purport to have familiarity with the record-keeping system of the banks, nor did he attest to any of the other requirements of Rule 803(6).” Id. at 201-202. Here, in contrast, the Government submitted a certification establishing that the record of Bedrosian's account satisfied the requirements of Rule 803(6) in that it (1) was “made at or near the time of the occurrence of the matters set forth therein,” (2) was “kept in the course of a regularly conducted business activity,” (3) was “made by the said business activity as a regular practice,” and (4) “if not original records, are duplicates of original records.” (A532.)

Bedrosian is wrong in arguing that that certification does not “tie Exhibit R to Mr. Bedrosian, to his bank accounts or to this case.” (Br. 47.) The certification contained an attachment detailing document Bates ranges encompassed by the certification, including documents within the ranges “D3.US.64.2/174-01540,” “D3.US.64.2/174-01540_2_00001” through “D3.US.64.2/174-01540_6_00921.” (A534.) Exhibit R (the statement of monthly account balances) bears Bates number “D3.US.64.2/174-01540_2_00001,” which is within the range identified by the business records certification. (A528.) And other exhibits, to which Bedrosian did not object, confirm that this Bates range concerns Bedrosian. For example, Exhibit E (the UBS 2005 statement for Bedrosian's 6167 account) bears Bates numbers D3.US.64.2/174-01540_6_00001-000025. (A386.) Exhibit F (the hold-mail documents) identify Bedrosian as the accountholder and bear Bates numbers D3.US.64.2/174-01540_4_00001 and _00015. (A411-412.) And Exhibit I (the record of contacts between Bedrosian and UBS) specifically references Bedrosian at pages bearing Bates numbers D3.US.64.2/174-01540_3_00007 and _00009. (A477, A479.) In short, the record amply demonstrates that Exhibit R is the record of Bedrosian's 6167 account balances for 2007 and 2008.

And, contrary to Bedrosian's contention (Br. 47), that document is plainly relevant because it tends to make more probable the fact that the balance in Bedrosian's account on June 30, 2008 was $1,951,578.34. See Fed. R. Evid. 401.

3. If there were any error, the proper remedy would be remand to the IRS

Even if this Court determines that the IRS's calculation of the penalty was arbitrary or capricious, “the proper course” is not, as Bedrosian argues, to hold that the penalty should be $0, but rather “to remand to the agency for additional explanation or investigation.” Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985). See W.R. Grace & Co. v. EPA, 261 F.3d 330, 338 (3d Cir. 2001).

Bedrosian argues that remand would be inappropriate because the record does not contain the “'fundamental documents' that would have formed the basis for the agency's decisions.” (Br. 52 (quoting Collins, 2021 WL 456962, at *6).) But, again, as discussed above, Bedrosian has admitted that the IRS calculated the penalty by taking 50 percent of the 6167 account balance for June 2008 as stated in U.S. dollars. This calculation was based upon the account statements produced by UBS and submitted at trial as Exhibit R (A528). Taken together, those facts provide the information necessary to evaluate whether the penalty selected was arbitrary or capricious.

Also, some historical context is in order. Bedrosian faults the Government for failing to introduce evidence of the IRS's administrative decision-making process. (Br. 51-52.) But when this case was tried, the appropriate standard of review for FBAR penalty calculations remained unsettled. See, e.g., Collins, 2021 WL 456962, at *4-*7 (making alternative conclusions of law under either a de novo or abuse-of-discretion standard of review). The Government, based upon the District Court's rulings, proceeded below under the understanding that a District Court conducts de novo review in refund suits such as this one. See Bedrosian v. United States, No. 15-5853, 2017 WL 3887520, at *2 (E.D. Pa. Sept. 5, 2017) (Memorandum re: Motion in Limine) (finding informative “cases in which courts conduct[ed] de novo review of tax assessments”). Under such de novo review, the IRS's decision-making process is irrelevant: the court decides in the first instance the appropriate penalty. Accordingly, the Government introduced at trial the evidence discussed above to establish the account balance from which the District Court could calculate the maximum 50-percent penalty. After remand, the parties and the court agreed that the correct standard of review was abuse of discretion. If this Court determines that the current record is insufficient to conduct an abuse-of-discretion review, the proper remedy is to remand to the IRS for “additional explanation,” Florida Power & Light, 470 U.S. at 744, subject to further abuse-of-discretion review in the District Court.

CONCLUSION

The judgment of the District Court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI
(202) 514-3361
MICHAEL J. HAUNGS
(202) 514-4343
PAUL A. ALLULIS
(202) 514-5880
D.C. Bar No. 463972
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
JENNIFER A. WILLIAMS
Acting United States Attorney

OCTOBER 15, 2021