Government Seeks Judgment in FBAR Penalty Case

UNITED STATES OF AMERICA,
Plaintiff,
v.
NANCY E. KELLEY-HUNTER, Individually
and as Representative of the Estate of Burt Hunter,
Defendant.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

MOTION FOR SUMMARY JUDGMENT AGAINST NANCY KELLEY-HUNTER

Plaintiff, the United States of America, moves for summary judgment against Nancy Kelley-Hunter in her individual capacity for the penalties assessed by the Internal Revenue Service under 31 U.S.C. § 5321(a)(5) (the Foreign Bank Account Reporting statute or “FBAR” statute). The Court previously entered a default judgment against Kelley-Hunter in her capacity as representative of her husband’s estate. See Dkt. 20. Because Kelley-Hunter has not yet complied with the Court’s orders that she answer the United States’ outstanding discovery requests (see Minute Orders dated August 17, 2017 and October 10, 2017), the United States reserves the right to supplement this motion following the completion of discovery.

The uncontested evidence presents a quintessential example of willful failure to disclose a foreign bank account. Kelley-Hunter controlled an account worth over $3.4 million at UBS, a Swiss bank. She could pay bills from the account simply by faxing handwritten requests to the UBS account representative. She deposited her inheritance in the account and arranged so that in the event that she and her husband died, control of the account would pass to her son in the United States. She prepared her own taxes during the relevant period, and even though Schedule B of Form 1040 (a schedule she had personally prepared and filed with the IRS on three occasions) asked whether she had “an interest in or a signature or other authority over a financial account in a foreign country,” she did not disclose the account or contact anyone to inquire about the reporting requirement. This was despite the fact that she had recently signed a professionally-prepared FBAR report for a previous year disclosing accounts of lesser value.

Later, after learning that UBS disclosed the account to the IRS, she told her accountant that “they’re so far behind us with the UBS junk, that they won’t catch up with [Burt] in his lifetime and I’ll be on my way to Tahiti . . .” She admitted in a letter that the account was “beneficially owned by us.” And she continued to explore ways of thwarting the IRS, this time by inquiring on two occasions with her accountant as to whether she could hide money from IRS collection by putting it in a trust. In short, Kelley-Hunter was not a taxpayer who had made a good-faith error on her return. Rather, the uncontested facts show that she knew her Swiss bank account was meant to be a secret and willfully failed to disclose it.

I. Summary Judgment Standard

Summary judgment is appropriate if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Matsushita Electronics Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

With respect to FBAR liability, a district court determines de novo whether a defendant is liable for the FBAR penalty. Moore v. United States, 2015 WL 1510007 at *4 (W.D. Washington April 1, 2015). The United States bears the ultimate burden of proof under a preponderance of the evidence standard. Id.; see also United States v. McBride, 908 F.Supp.2d 1186, 1201 (D. Ut. 2012).

With respect to the IRS’s calculation of the amount of the penalty, courts are split as to whether the appropriate standard is de novo or arbitrary or capricious. See Moore, 2015 WL 1510007 at *4 (collecting cases). There do not appear to be any decisions from this circuit addressing the issue. However, as discussed below, there is no dispute as to the value in 2007 of the UBS account at issue in this case (the “Swiss Bank Account,” UBS Account No. 240-207489, as described in ¶ 6 of the Complaint). As a result, the calculation of the amount of the penalty is not contested.

II. Background Facts

Kelley-Hunter graduated from Queens College in 1963, later obtaining a master’s degree in Art and a separate secondary degree in Education. See Ex. G at 18:12-19:15. She worked as an elementary school teacher; then as a sales engineer for store fixtures; and finally, as an industrial glass salesperson. See id. 20:11-20:22. In 1997, she married Burt Hunter, and the two moved to France in 1998. See id. 20:1-9. They bought a house in Veyrier du Lac, France, approximately one hour south of Geneva, Switzerland. See id. 21:10-22:2.

In approximately 2006, the Hunters opened and transferred money to the Swiss Bank Account at UBS. See id. at 29:6-7; 28:22-29:3; 31:18-32:2; 32:16-19. The money consisted of the proceeds of the sale of Burt Hunter’s business; the sale of his sailboat; and Kelley-Hunter’s inheritance. See id. 32:6-15. Kelley-Hunter first became aware of the UBS account in approximately 2006. See id. 32:16-19. The Hunters met the UBS account representative in person in Geneva a couple of times per year. See id. 28:22-30:1; see also See Ex. B at p. 1 (Interrogatory 2). Kelley-Hunter would also communicate with the account representative by phone and fax. See Ex. G at 30:5-20.

When Kelley-Hunter had a bill to pay, she would contact the UBS account representative, forward him the bill with a notation asking him to pay it, and he would pay it from the Swiss Bank Account. See id. at 30:17-20; 52:15-19; 221:13-21; Ex. I (faxes from Kelley-Hunter to UBS account representative instructing him to pay bills). Kelley-Hunter also believed that she had the authority to instruct the UBS account representative as to how to invest the money in the Swiss Bank Account. See id. 55:6-10; 59:14-20. Kelley-Hunter did not know specifically how much money was in the Swiss Bank Account but generally “thought there was unlimited money.” Id. at 221:22-222:6.

The funds in the Swiss Bank Account had been transferred from a prior bank account at Bank Sarasin, also in Geneva. See Ex. G at 200:16-22; 183:2-184:1 (discussing Ex. Y). Kelley-Hunter and her husband would travel to Geneva to meet in person with the Sarasin account representative. Id. at 183:4-13. Kelley-Hunter stated that “everything was kept secret by this bank,” the bank gave her “no paper,” and in general, the account representative was “very cloak and dagger.” Id. at 193:16-184:1. Kelley-Hunter could contact the Sarasin representative and have her pay bills from the account (as she would later do with UBS). See id. at 189:18-22; 217:6-20. She never told her then-accountant about the existence of the account at bank Sarasin. See id. 66:11-13.

The Swiss Bank Account was nominally held in the name of Towers International, Inc. (“Towers”). See Ex. F (Account Statement). A management company sometimes served as a conduit between Towers and the Hunters, although as discussed above, Kelley-Hunter could also contact UBS directly to pay bills. See id. at 42:6-10; 43:12-14; 44:1-6. Statements for the Swiss Bank Account would arrive at the Hunters’ residence, although Kelley-Hunter stated that she never looked at them. Id. 48:9-49:8; 274:8-17.

Although the Hunters had previously used professional tax preparers for their U.S. income tax returns, after moving to France (but prior to the opening of the Swiss Bank Account), Kelley-Hunter began personally preparing the Hunters’ U.S. income tax returns. See id. 73:14-19. She prepared the returns for tax years 2003 through 2007. 85:8-16. For the first three years she prepared the tax returns, she personally completed IRS Schedule B and attached it to her return. See Ex. T at 4 (2003 Return); Ex. U at 3 (2004 Return); Ex. V at 4 (2005 Return). Schedule B states in pertinent part:

At any time during [the tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See Page B-2 for exceptions and filing requirements for Form TF F 90-22.1.

Ex. T at 4. When she completed and signed her return for 2007, Kelley-Hunter knew of the existence of the Swiss Bank Account, but did not disclose the account or the income from it. See Id. at 105:11-15; Ex. B at p. 2 (Interrogatory 6); Ex. W (2007 Return). During 2007, she had received an email from the UBS account representative stating that “The dividends between [June 13, 2006] and [December 7, 2007] were €46,817 EUR.” Ex. R. She made no effort and took no steps to determine whether the Swiss Bank Account should be disclosed. See Ex. G at 85:8-20; 87:14-88:13. She had previously submitted FBARs, including in 2003, when she signed an FBAR disclosing an account at Banque National de Paris with a value of $10,000 to $99,000. Ex. Q; see also Ex. G at 99:9-20.

In February 2009, Kelley-Hunter received a letter, addressed to her from UBS and delivered by courier, informing that UBS had disclosed to the IRS the existence of the Swiss Bank account. See Ex. S at 1. Four months later, she filed an FBAR disclosing the Swiss Bank Account and listing its value as $3.8m. See Ex. A at 1.

III. Kelley-Hunter Was Obligated To Report The Swiss Bank Account But Willfully Failed To Do So.

Section 5314(a) of Title 31 mandates that the Secretary of the Treasury require U.S. citizens to “file reports . . . when the resident, citizen, or person . . . maintains a relation for any person with a foreign financial agency.” Pursuant to that statute, the Secretary requires that individuals “having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country shall report such relationship . . . for each year in which such relationship exists.” 31 C.F.R. § 1010.350(a).¹ This requirement only applies to accounts exceeding $10,000. 31 C.F.R. § 1010.306(c).²

The Secretary implemented a two-step reporting process. McBride, 908 F.Supp.2d at 1200 n. 2. Form 1040, Schedule B instructs taxpayers to indicate an interest in a financial account in a foreign county by checking “Yes” or “No” in the appropriate box. Id. Form 1040 further refers taxpayers to Form TD F 90–22.1 which provides specific instructions for reporting a financial interest in or authority over bank accounts, securities accounts, or other financial accounts in a foreign country. Id.; See, e.g., Ex. U p. 3.

Penalties apply to taxpayers who fail to report foreign accounts. Where the failure is “willful,” 31 U.S.C. § 5321(a)(5)(C)(i) authorizes the Secretary to assess a penalty equal to 50% of the value of the undisclosed account. There is no “reasonable cause” exception for a willful violation. 31 U.S.C. § 5321(a)(5)(C)(ii).

In sum, the United States must show that during 2007, (a) Kelley-Hunter was a citizen of the United States; (b) she had a financial interest in, or signatory or other authority over, a bank, securities or other financial account; (c) the bank, securities or other financial account had a balance that exceeded $10,000; (d) the bank, securities or other financial account was in a foreign country; (e) Kelley-Hunter failed to disclose the bank, securities or other financial account; (f) the failure to report was willful; and (g) the amounts of the penalties were proper. See McBride, 908 F.Supp.2d at 1201. As discussed below, each of these elements is established by the defendant’s admissions and/or undisputed evidence.

a. Kelley-Hunter Is A U.S. Citizen.

Kelley-Hunter has been a U.S. Citizen her entire life. See Dkt 10 (Answer) at ¶ 3; Ex. A (Second Interrogatory Responses) at p. 1 Interrogatory 1; Ex. G. at 17:18-22.

b. Kelley-Hunter Had Both “A Financial Interest In” And “Signature Or Other Authority Over” The Swiss Bank Account.

The FBAR reporting requirement applies to persons with “a financial interest in,” or “signature or other authority over” a foreign financial account. 31 C.F.R. § 1010.350(a).

Kelley-Hunter had both of these things.

Financial Interest

A “financial interest” exists where the nominal owner of the account is “acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account.” 31 C.F.R. § 1010.350(e).

The Swiss Bank Account was nominally held by Towers International, Inc. (“Towers”).

See Ex. F (Account Statement). However:

• Kelley-Hunter admitted that she had the power to directly instruct the UBS account representative to pay bills from the account — and that she did this repeatedly in order to pay personal bills. See Ex. G (Depo. of Kelley-Hunter) at 30:17-20; 52:15-19; 221:13-21; see also Ex. I (faxes from Kelley-Hunter to UBS account representative instructing him to pay bills).

• A Power of Attorney form on file with UBS appears to bear Kelley-Hunter’s signature and grants her authority to control the account. See Ex. J (UBS Power of Attorney form).³

• A letter signed by Kelley-Hunter and her husband on September 3, 2007, to the company that managed Towers⁴ states that “[y]ou hold the shares of the above company to our order” and directs that if both Kelley-Hunter and her husband should die, the company should pass control of the shares to Kelley-Hunter’s son. Ex. L at 1; Ex. G at 201:12-19.

• In a letter signed by Kelley-Hunter to UBS regarding the Swiss Bank Account, she admitted that the account was “beneficially owned by us at UBS.” Ex. K p. 1.

• Kelley-Hunter admitted that when she received an inheritance from the death of her father, she had it deposited in the Swiss Bank Account. See Ex. G at 32:6-15; Ex. H at 1 (“After my father died . . . I thought that it was better to give that money to my husband to invest with UBS . . .”).

Under 31 C.F.R. § 1010.350(e), all that is necessary is that the nominal owner act “as an agent, nominee . . . or in some other capacity on behalf of” the taxpayer. The facts above establish that Towers was acting on direct instructions from, on behalf of, and for the benefit of Kelley-Hunter.

Signature or Other Authority

Separately, the FBAR reporting requirement can be triggered under the more general standard of “signature or other authority.” 31 C.F.R. § 1010.350(f). Regulations define such authority as “the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.” 31 C.F.R. § 1010.350(f). Courts have repeatedly found that “other authority” exists where a foreign account is nominally held by an entity that is indirectly controlled by a U.S. person. See, e.g., US v. Clines, 958 F.2d 578 (4^th Cir. 1992) (defendant held “other authority” where defendant had “actual control of the funds,” despite ownership structure); McBride, 908 F.Supp.2d 1186 at 1202 (defendant had “other authority” where he could direct disbursement of funds despite “deliberately disguised ownership structure.”).

As discussed above, Kelley-Hunter admits that she could control the funds in the account directly, by instructing the UBS account representative to pay bills. Under the plain language of 31 C.F.R. § 1010.350(f), this is sufficient to establish “other authority” and therefore trigger the reporting requirement.

c. The Account Exceeded $10,000 (It Held $3.4 Million).

The reporting requirement applies only to accounts with a value greater than $10,000. 31 C.F.R. § 1010.306(c). The account statement establishes a value of €2,330,742, or approximately $3.4 million, on December 31, 2007. See Ex. F at 2. When Kelley-Hunter eventually began disclosing the account, she signed an FBAR listing the value for tax year 2008 as $3,876,168. Ex. P at 1. Kelley-Hunter stated that she does not have information to dispute the value of the account at the time of the violation. See Ex. A at p. 1-2 (Answer to Interrogatories 3 and 4).

d. The Account Was Held In Switzerland.

The reporting requirement applies only to accounts in “a foreign country,” defined as “all geographic areas located outside of the United States. . . .” 31 C.F.R. § 1010.350(d).

Kelley-Hunter does not dispute that the Swiss Bank Account was located in Switzerland. When Kelley-Hunter eventually disclosed the Swiss Bank Account on an FBAR, she indicated its location as Switzerland. Ex. P at 1. Kelley-Hunter admitted that she and her husband traveled from their home in France to Geneva, Switzerland, every few months to meet with the UBS account representative. See Ex. B at p. 1 (Interrogatory 2). Kelley-Hunter received a letter from UBS in Zurich, Switzerland, referencing the account number and informing her that UBS disclosed account information to the IRS pursuant to an agreement between Switzerland and the United States. See Ex. S.

e. Kelley-Hunter Failed To Disclose The Account For Tax Year 2007.

Kelley-Hunter admits that she did not disclose the Swiss Bank Account for tax year 2007. See Ex. B at p. 2 (Interrogatory 6).

f. Her Failure To Report Was Willful.

Neither Section 5321 nor its implementing regulations define “willfulness.” But courts have held that “willfulness has been defined as conduct which is voluntary, rather than accidental or unconscious.” McBride, 908 F.Supp.2s at 1205 (collecting cases). “An improper motive or bad purpose is not necessary to establish willfulness in the civil context.” Id.; United States v. Williams, 489 Fed. Appx. 655 at n. 5 (4^th Cir. 2012). Willful intent “may be proved by circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer's intent is rarely available.” McBride, 908 F.Supp.2s at 1205.

Willfulness may also be shown through reckless disregard or willful blindness. Reckless disregard occurs where a person takes “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” United States v. Bohanec, 2016 WL 7167860 at *5 (C.D.Ca. December 8, 2016) (internal citation omitted); see also McBride, 908 F.Supp.2s at 1205. Similarly, willful blindness occurs “[w]here a taxpayer makes a “conscious effort to avoid learning about reporting requirements.” McBride, 908 F.Supp.2s at 1205.

Kelley-Hunter Knew of the Both the FBAR Requirement and the Existence of the Account, Which Establishes Willfulness As A Matter Of Law

A person willfully fails to file an FBAR if they know of both the reporting requirement and the existence of the account, but fail to file. See, e.g., Williams, 489 Fed. Appx. at *659-*670. All taxpayers have constructive knowledge of the contents of their returns; Courts have found that taxpayers who complete Schedule B have constructive knowledge of the FBAR filing requirement. See, e.g., McBride, 908 F.Supp.2d at 1201 (“Constructing knowledge of the reporting requirement it imputed to taxpayers who sign their federal tax returns); Williams, 489 Fed.Appx. at 659.

Kelley-Hunter had constructive knowledge of the FBAR filing requirement many times over. She personally signed an FBAR form in 2003. See Ex. Q. As discussed above, she also personally filled out and completed three Schedule Bs and attached them to her Form 1040, twice checking the “yes” box for the presence of foreign accounts, but never disclosing the $3.4m Swiss Bank Account. See Ex. T at 4 (2003 Return); Ex. U at 3 (2004 Return); Ex. V at 4 (2005 Return). Kelley-Hunter also admitted that she knew of the existence of the Swiss Bank Account during 2007 at the time she filed her return; after all, she could pay bills from the account through direct communication with UBS. See Ex. G at 105:11-15.

In short, because Kelley-Hunter had constructive knowledge of the reporting requirement, and actual knowledge of the account and her control over it, willfulness is present as a matter of law.

The “Secret” Predecessor Account, and Post-Hoc Emails to Her Accountant, Provide Direct Evidence Of Willfulness

Kelley-Hunter knew that the predecessor account, which was transferred to the Swiss Bank Account, was meant to be a secret account. Moreoever, post-hoc communications to her accountant, Peter Kent, provide direct evidence of willfulness. For example:

• As discussed above, Kelley-Hunter knew that with respect to the predecessor account at Bank Sarasin, “everything was kept secret by this bank,” the bank gave her “no paper,” and in general, the account representative was “very cloak and dagger.” Id. at 193:16-184:1.

• On June 6, 2012, Kelley-Hunter instructed Kent to leave out a dividend she received on a French “Assurance Vie” account, writing: “We’re in enough trouble with the irs already, so what’s one more arrow in their quiver. And I also think they’re so far behind us with the UBS junk, that they won’t catch up with [Burt] in his lifetime and I’ll be on my way to Tahiti . . .” Ex. C p. 3. She instructed Kent to “make it look similar to last year and I don’t think anybody will notice.” Id. p. 2.

• On September 4, 2012, she told Kent: “I am afraid that they can attach our funds in the US to pay all the huge fines, back taxes and penalties. Does the Hunter Family Trust actually exist and could our retirement monies be safely put into it?” Ex. D p. 1. A year later, she again asked whether a trust “still exists and, if it does, if that might be a place to put some money.” Ex. E p. 2.

• On June 6, 2012, Kelley-Hunter admitted to Kent that “we don’t pay income tax in France, only two residence taxes and the worldwide wealth tax (which we’ve never paid, but owe).” Ex. C p. 3. Later that year, she told an IRS revenue officer that “we pay the appropriate French taxes . . .” Ex. D p. 3.

In short, Kelley-Hunter’s knowledge of the previous secret account, and her post-2007 emails, provide direct evidence of willfulness.

At a Minimum, Kelley-Hunter Acted With Reckless Disregard or Willful Blindness

As discussed above, Kelley-Hunter had signed an FBAR form as recently as 2003 and prepared, on her own, three Schedule B forms that warned her of the reporting requirement for any foreign accounts. Nonetheless, she admits that she never took a single step to understand or determine her obligation regarding the reporting of foreign accounts. See Ex. G at 85:8-20; 87:14-88:13. Under McBride, Bohanec, and Williams, this conduct satisfies the willfulness standard.

g. The Amount Of The Penalty Was Proper.

As discussed above, Kelley-Hunter does not dispute the value of the account, which is stated on the account statements and confirmed by her own subsequent FBAR filings. See Ex. A at p. 1-2 (Answer to Interrogatories 3 and 4).

IV. Conclusion

The admitted and/or uncontested facts show that Kelley Hunter knew about the existence of a $3.4 million Swiss bank account; knew the account was meant to be kept a secret; and knew she could control the assets in the account. She had signed FBARs and tax returns warning her of the need to file reports for accounts for which she has an “interest” or “control.” And she contacted no one in order to clarify her responsibilities. Her failure to report was at best reckless disregard, and at worst, willful failure to file. The Court should therefore grant summary judgment in favor of the United States, and against Nancy Kelley-Hunter, for $857,625 for the penalties assessed against her under 31 U.S.C. § 5321(a)(5), plus interest and statutory additions as allowed by law from December 11, 2013 to the date of payment. A proposed order is attached hereto.

DATED: October 16, 2017

DAVID A. HUBBERT
Acting Assistant Attorney General

NELSON WAGNER
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 227
Ben Franklin Station
Washington, DC 20044
Telephone: 202-616-3369
Email: nelson.wagner@usdoj.gov