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Fifth Amendment Doesn’t Insulate Couple From FBAR Penalties

APR. 1, 2020

United States v. Daniel Bernstein et ux.

DATED APR. 1, 2020
DOCUMENT ATTRIBUTES
  • Case Name
    United States v. Daniel Bernstein et ux.
  • Court
    United States District Court for the Eastern District of New York
  • Docket
    No. 1:19-cv-02912
  • Institutional Authors
    U.S. Department of Justice
  • Cross-Reference

    Reply to United States v. Bernstein, No. 1:19-cv-02912 (E.D.N.Y. 2020).

    Related coverage.

  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-12524
  • Tax Analysts Electronic Citation
    2020 TNTF 66-27
    2020 TNTI 66-35
    2020 TNTG 66-45

United States v. Daniel Bernstein et ux.

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

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

Hon. Brian M. Cogan

UNITED STATES' REPLY TO DEFENDANTS' OPPOSITION TO UNITED STATES'
MOTION FOR PARTIAL SUMMARY JUDGMENT

UNITED STATES OF AMERICA

By: THOMAS PETER COLE
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 55
Washington, D.C. 20044
202-514-9611 (v)
202-514-5238 (f)
Thomas.P.Cole@usdoj.gov


TABLE OF CONTENTS

TABLE OF CONTENTS

PRELIMINARY STATEMENT

ARGUMENT

A. Defendants' incomplete FBARs do not constitute valid assertions of the Fifth Amendment

B. Lefcourt's application of the civil willfulness standard is the correct one to apply in the instant case

CONCLUSION


PRELIMINARY STATEMENT

In the early 2000s, Defendants opened two secret bank accounts at UBS AG. In 2009, they transferred their funds, around $1 million, to a third Swiss bank account at Bank Sol. Oppenheim (collectively, the “foreign account”). They did not want anyone to know about this foreign account and they decided not to report it — or the income they earned from it — on their income tax returns they filed from 2002-2009. Defendants knew they had a foreign account holding about $1 million, knew they were subject to the laws of the United States, had an accountant, decided not tell their accountant about their foreign account because it would defeat the purpose of having a secret foreign account, and signed tax returns stating they had no foreign accounts. Moreover, instead of entering an IRS voluntary disclosure program UBS told them about in 2009, Defendants figured they would probably not get caught, and decided not to enter the voluntary disclosure program.

Notwithstanding these facts, Defendants argue that they did not act willfully in the 2010 year because: a) they sought legal advice after they learned their 2007 return had been selected by the IRS for examination, and b) filed one-page FBARs that did not report their foreign account information but claimed the Fifth Amendment. Congress decided to try and combat the use of secret foreign accounts by requiring U.S. citizens to report their relationships with foreign financial agencies, and in fact increased civil penalties after September 11, 2001 in an effort to improve compliance. Defendants chose to hold a secret foreign account, chose to keep it secret for almost a decade, and chose to file “Fifth Amendment” FBARs in an effort to avoid criminal charges. Their failure to report their foreign account until they got caught was willful as a matter of law, and they are liable for the civil penalties assessed against them.

Defendants attempt to muddy the waters, and avoid significant factual evidence of willfulness, by re-characterizing the government's legal arguments as eroding the protections under the Fifth Amendment. Among other arguments, Defendants assert that the government's “sole basis for imposing the penalty” is the “invocation” of the privilege against self-incrimination. (Def. Opp. (ECF No. 20) at 1.) This is not the government's position. The government's position is that there is sufficient evidence to show willfulness without the Court having to address whether there has been a valid assertion of the Fifth Amendment on Defendants' FBAR. However, if the Court believes a ruling on the Fifth Amendment is required, the government's position is that the Defendants' assertion of the Fifth Amendment does not insulate them from civil penalties.

ARGUMENT

A. Defendants' incomplete FBARs do not constitute valid assertions of the Fifth Amendment.

Defendants mischaracterize the government's argument when they contend that the government has admitted there has been a valid assertion of the Fifth Amendment by submitting an FBAR form with the words “Fifth Amendment” written on the parts of the form that seek foreign account information. The government has merely argued that partial summary judgment can be entered in the government's favor without the need for a ruling on whether there has been a valid assertion of the Fifth Amendment, because the forms purporting to be FBARs filed by Defendants do not comply with 31 U.S.C. § 5314 and the regulations thereunder and the government has shown that undisputed evidence exists for finding willfulness within the meaning of 31 U.S.C. § 5321. This evidence includes the UBS documents provided to Defendants in 2009 about the risks they would face if they did not become compliant with their FBAR obligations and the advice they received from their attorney in May 2011 about the requirements the Bank Secrecy Act imposed on them to report their foreign accounts. In any event, the government contends there has not been a valid Fifth Amendment assertion in this case that would allow the Defendants to avoid identifying the information the FBAR requires.

Defendants premise their argument that the Fifth Amendment allows them to avoid furnishing required information on the FBAR on the contention that completing the 2010 FBAR would require them to furnish information about the account in 2010 that would allow the United States to obtain evidence about crimes that may have been committed prior to the submission of the FBAR. This is the so-called “link in the chain” argument that attorney Feld identified at his deposition. But the “link in the chain” argument in the instant case does not justify Defendants' failure to report their foreign account information on their FBARs for the 2010 year or absolve them from the civil penalties that stem from that failure.

The Fifth Amendment does not grant a person a wholesale right to avoid making required disclosures in a civil context merely because such information has the potential for self-incrimination.1 In California v. Byers, 402 U.S. 424 (1971), the Court upheld as constitutional a California “hit and run” statute that required the driver of a motor vehicle in an accident to stop at the scene and give his or her name and address. The Court held that compliance with an essentially regulatory statute does not violate the Fifth Amendment privilege against self-incrimination, where (1) self-reporting is essential to the fulfillment of its objective, (2) the burden is placed upon the general public rather than a “highly selective group inherently suspect of criminal activities,” (3) the general activity is lawful and (4) the possibility of incrimination is not substantial. Byers, 402 U.S. at 427-31. Citing a number of disclosure requirements in the commercial and industrial sectors, Byers acknowledged that “[i]n each of these situations there is some possibility of prosecution — often a very real one — for criminal offenses disclosed by or deriving from the information that the law compels a person to supply,” and that “[i]nformation revealed by these reports could well be 'a link in the chain' of evidence leading to prosecution and conviction.” Byers, 402 U.S. at 427-28. But the Court held that “under our holdings the mere possibility of incrimination is insufficient to defeat the strong policies in favor of a disclosure called for by statutes like the one challenged here.” Byers, 402 U.S. at 427-28.

Applying Byers, the Second Circuit has ruled that the Fifth Amendment cannot be used to absolve a failure to comply with a disclosure requirement that is essentially regulatory in nature. In United States v. Stirling, 571 F.2d 708 (2d Cir. 1978), defendants contended that a conviction for failure to make a required disclosure under the securities laws violated their Fifth Amendment right to avoid self-incrimination, because the act of complying with the securities disclosure laws would have required “admitting facts sufficient to form the basis for a criminal prosecution.” Stirling, 571 F.2d at 727. The Second Circuit rejected that argument, saying that where the information that was required to be disclosed related to what was “generally a completely lawful” activity and the “disclosure [was] not an admission of an inherently suspect activity,” the Fifth Amendment did not excuse their failure to comply with the reporting requirement. Stirling, 571 F.2d at 727 (internal quotation marks omitted). Observing that “[a]ppellants chose to engage in a lawful activity in an unlawful manner,” the Second Circuit concluded “[t]hat unlawfulness cannot now be used to excuse them from regulatory disclosure requirements, even though such disclosures could lead to criminal prosecution under other statutory schemes.” Stirling, 571 F.2d at 728. See also Sloan v. S.E.C., 547 F.2d 152, 154 (2d. Cir. 1976) (section of Securities Exchange Act of 1934 requiring brokers to disclose certain information in registration statements was “not criminal but clearly regulatory in nature” and therefore did not infringe on petitioner's privilege against self-incrimination); SEC v. Radio Hill Mines Co., 479 F.2d 4, 7 (2d Cir. 1973) (defendant found to have violated antifraud provisions of Securities Act of 1933 and Securities Exchange Act of 1934 could not invoke Fifth Amendment privilege as defense to SEC-initiated injunction compelling him to disclose record of all past transactions).

The information required to be furnished under the Bank Secrecy Act is comparable to the information that is required to be furnished under the disclosure laws identified above in that it is essentially financial in nature and an important piece of the government's financial regulatory apparatus. See, e.g., United States v. Doe (In re Grand Jury Subpoena Dated Feb. 2, 2012), 741 F.3d 339, 349 (2d Cir. 2013) (finding that “the BSA's [foreign account] recordkeeping requirement . . . is still essentially regulatory.”). Nor is the information inherently criminal in nature, as it is not a crime to hold money in an overseas account. On the contrary, holding money in an overseas account is a perfectly legal activity. Id. at 348. But because foreign banks do not supply to the government the same type of information that domestic banks provide (mainly, the interest those accounts earn, but also information about certain types of deposits and withdrawals), the government has deemed it essential that foreign accountholders personally supply sufficient information for the government to initiate its own investigations when it is deemed appropriate. That information — the identification on an FBAR of the identity of the foreign bank, the foreign bank account, and the balance of the account during the year — is precisely the type of information that the courts have ruled are not subject to a Fifth Amendment right against self-incrimination. In United States v. Dichne, 612 F.2d 632, 640 (2d Cir. 1979), for example, the Second Circuit held that information reporting requirements of the BSA do not trigger a substantial risk of self-incrimination because they are generally applicable and “do not involve a direct link to any related criminal activity.” Lastly, the mere possibility that the information could be incriminating, by itself, is insufficient for a finding that the Fifth Amendment can be used to excuse a failure to comply with the civil reporting statute.

We have argued previously that this Court can resolve the issue of whether Defendants willfully violated § 5314 in favor of the United States without ruling on the Fifth Amendment issue because — regardless of whether Defendants' assertion of the Fifth Amendment was valid — it is undisputed that Defendants did not timely report their foreign account, and the evidence presented is sufficient to sustain a finding of willfulness under 31 U.S.C. § 5321. That remains true. But to the extent the Court deems it necessary to resolve the Fifth Amendment issue, the government's position is that an FBAR is the type of disclosure that is essentially regulatory in nature, such that a failure to furnish information required by an FBAR cannot be excused on the grounds that supplying it would violate the reporter's Fifth Amendment right against self-incrimination.

The two circuit courts of appeals to have issued decisions construing the Fifth Amendment and the reporting obligations imposed by the Bank Secrecy Act have ruled that the Act's reporting obligations are not unconstitutional under the Fifth Amendment. Applying Byers and pointing to the important purpose of the Bank Secrecy Act, the Second Circuit held in Dichne that the requirement to report the transportation of over $5,000 into or out of the country under the Bank Secrecy Act did not violate the Fifth Amendment. Dichne, 612 F.2d at 638-40. Applying Marchetti v. United States, 390 U.S. 39 (1968), and Grosso v. United States, 390 U.S. 62 (1968), which are in the same line of cases as Byers, the Sixth Circuit held in United States v. Sturman, 951 F.2d 1466 (6th Cir. 1991), that the requirement to report foreign financial accounts on an FBAR under the Bank Secrecy Act did not violate the Fifth Amendment. The Second and Sixth circuits found that the Bank Secrecy Act reporting requirement at issue in their respective cases was not directed at a “selective group inherently suspect of criminal activity,” was not imposed in an “area permeated with criminal statutes,” and did not create a “substantial risk” or “real danger” of self-incrimination. Dichne, 612 F.2d at 638-640; Sturman, 951 F.2d at 1487.

Defendants' reliance on case law supporting the select invocation of the Fifth Amendment on an income tax return to support the invocation of the Fifth Amendment on their purported FBARs is misplaced. Rather, their invocation is equivalent to an invalid Fifth Amendment invocation on a return. The purpose of an income tax return is to determine the taxpayer's income tax liability, and a purported return that does not contain “sufficient data to calculate tax liability” does not constitute a valid return. See Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986). Accordingly, courts have repeatedly held that returns that withhold substantial income information based on an assertion of the Fifth Amendment are frivolous and subject to frivolous return penalties. See, e.g., Leogrande v. United States, 811 F.2d 147, 148 (2d Cir. 1987); Sochia v. Comm'r, 23 F.3d 941, 943 (5th Cir. 1994); Eicher v. United States, 774 F.2d 27, 29 (1st Cir. 1985); Ricket v. United States, 773 F.2d 1214, 1215 (11th Cir. 1985); Brennan v. Comm'r, 752 F.2d 187, 189 (6th Cir. 1984); Baskin v. United States, 738 F.2d 975, 977 (8th Cir. 1984). Unlike an income tax return where the purpose is to determine tax liability, the purpose of the FBAR is to provide the government with information regarding foreign financial accounts. Accordingly, Defendants' purported FBARs, which withheld all foreign account information based on an assertion of the Fifth Amendment, are equivalent to tax returns that withhold all income information based on an assertion of the Fifth Amendment. Such returns and the Fifth Amendment assertions included in them are invalid. Defendants' purported FBARs and the blanket Fifth Amendment assertions included in them should likewise be found invalid.

B. Lefcourt's application of the civil willfulness standard is the correct one to apply in the instant case.

In our moving brief, we said that the civil willfulness standard of 31 U.S.C. § 5321 can be met through a demonstration of “voluntary, conscious, and intentional” conduct. Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997) (saying “intentional disregard” within the context of the civil penalty imposed by 26 U.S.C. § 6721 meant conduct that is willful, and explaining that standard); Kalb v. United States, 505 F.2d 506, 511 (2d Cir. 1974) (construing meaning of “willful” within context of 26 U.S.C. § 6672); Bedrosian v. United States, 912 F.3d 144, 152 (3d Cir. 2018) (determining the willful standard under § 5321(a)(5) and explaining that the “general consensus among courts is that, in the civil context, the term [“willfulness”] often denotes that which is intentional, or knowing, or voluntary, as distinguished from accidental”) (internal quotation marks omitted). Defendants contend that it is improper to apply the Lefcourt standard in this case, making an argument that it would be improper to use the § 6721 mens rea standard without also applying other provisions of § 6721 that afford relief from that penalty where reasonable cause has been established. But in making that argument, Defendants seek the application of a statute that they wish existed, rather than the one that Congress has enacted.

The text of the two statutes — 31 U.S.C. § 5321 and 26 U.S.C. § 6721 — demonstrates that it is not inconsistent to apply the Lefcourt mens rea standard while also declining to consider a reasonable cause defense. On the contrary, Congress specifically designed § 5321 to operate in this fashion. 31 U.S.C. § 5321(a)(5)(A) allows the Secretary of the Treasury to impose a civil money penalty on any person who violates, or causes any violation of, any provision of 31 U.S.C. § 5314. The default rule under § 5321(a)(5) is a penalty shall not be imposed if a violation “was due to reasonable cause.” 31 U.S.C. § 5321(a)(5)(B)(ii). However, Section 5321(a)(5)(C) raises the amount of the money penalty “[i]n the case of any person willfully violating, or willfully causing any violation of section 5314,” while at the same time not providing for a reasonable cause exception. 31 U.S.C. § 5321(a)(5)(C)(ii). Thus, Section 5321 permits a reasonable cause defense for non-willful violations, but strikes that defense where there has been willful violation of the statute. In contrast, 26 U.S.C. § 6721(e) imposes penalties for the failure to provide an information return if that failure is “due to intentional disregard of the filing requirement (or the correct information reporting requirement).” But there can be no Section 6721(e) penalty if the underlying failure is “due to reasonable cause and not to willful neglect.” 26 U.S.C. § 6724(a). The reasonable cause defense allowed for penalties imposed under 26 U.S.C. § 6721 is a specific exception granted by Congress, the same Congress that enacted a reasonable cause exception for non-willful penalties imposed under of 31 U.S.C. § 5321(a)(5) but not for willful penalties. This different treatment of reasonable cause under the two statutes is not an accident. Instead, it is what Congress designed, drafted, and enacted. Defendants' efforts to thwart the statute by embedding a reasonable cause style analysis into the determination of willfulness with their reliance-on-counsel defense should be rejected.

There is no meaningful difference between the mens rea components of the two statutes. The Second Circuit certainly did not find one. In Lefcourt, the Second Circuit said that, although Section 6721(e) did not use the term “willful,” the Treasury Regulations defined “'intentional disregard' as synonymous with 'willfulness'.” Lefcourt, 125 F.3d at 83 (quoting 26 C.F.R. § 301.6721-1(f)). The Second Circuit concluded that “'intentional disregard' set forth in § 6721's penalty provision means conduct that is willful, a term which in this context requires only that a party act voluntarily in withholding requested information, rather than accidentally or unconsciously.” Lefcourt, 125 F.3d at 83. In reaching that conclusion, the Second Circuit also relied upon Kalb v. United States, 505 F.2d 506, 510 (2d Cir. 1974), which construed the phrase “willfully attempts” within the context of 26 U.S.C. § 6672 to mean “voluntary, conscious, and intentional” conduct. The mens rea standard required for a penalty under 31 U.S.C. § 5321(a)(5)(C) is no different than the standard the Second Circuit used in Lefcourt to impose liability under 26 U.S.C. § 6721(e). See United States v. McBride, 908 F. Supp. 2d 1186, 1213–14 (D. Utah 2012) (relying on Lefcourt analysis to hold that defendant willfully failed to report his interest in foreign bank accounts as required under § 5314). That standard is met here, where each defendant knew an FBAR had to be filed, but voluntarily chose to submit an incomplete FBAR, one in which the required information concerning the identity of the foreign institution, the identity of the account, and the balance information for the account, was not provided.

CONCLUSION

The United States requests that the Court enter an order of partial summary judgment, finding that each defendant committed a willful violation of 31 U.S.C. § 5314, such that they can be liable for the penalty assessed against each of them pursuant to 31 U.S.C. § 5321.

UNITED STATES OF AMERICA

By: THOMAS PETER COLE
202-514-9611 (v)
Thomas.P.Cole@usdoj.gov

FOOTNOTES

1The government's Fifth Amendment required-records argument, contained in its moving brief (ECF No. 17-2), has nothing to do with whether the case or the sanction is criminal or civil. Cf. Def. Opp. (ECF No. 20) n.4. The Second Circuit has explained the Fifth Amendment does not apply to a recordkeeping or reporting requirement that is a condition of engaging in a bona-fide regulated activity, which is why the doctrine applies in both civil summons cases (e.g. United States v. Chen, 815 F.3d 72 (1st Cir. 2016)) and in criminal grand jury contexts. United States v. Doe (In re Grand Jury Subpoena Dated Feb. 2, 2012), 741 F.3d 339, 349 (2d Cir. 2013) Because one requirement of having a foreign bank account is a periodic report to the government, Defendants did not have a right to refuse to make that report by invoking the Fifth Amendment. Whether the case is civil or criminal has nothing to do with it — although in any event, as Defendants note, the “issue is not directly presented.” (ECF No. 20, n.4.)

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    United States v. Daniel Bernstein et ux.
  • Court
    United States District Court for the Eastern District of New York
  • Docket
    No. 1:19-cv-02912
  • Institutional Authors
    U.S. Department of Justice
  • Cross-Reference

    Reply to United States v. Bernstein, No. 1:19-cv-02912 (E.D.N.Y. 2020).

    Related coverage.

  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-12524
  • Tax Analysts Electronic Citation
    2020 TNTF 66-27
    2020 TNTI 66-35
    2020 TNTG 66-45
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