Litigation in federal court is analogous to a game of chess. Although each side has a limited number of moves, one party ultimately wants to checkmate the other in as few moves as possible. Accordingly, in litigation motions for summary judgment often become extremely important.
At its basics, a party files a motion for summary judgment when it believes that there is no genuine dispute regarding any material fact. Because juries or bench trials are necessary only to weigh evidence and make disputed factual findings, summary judgment dispositions avoid costly and lengthy trials where a party is otherwise entitled to judgment as a matter of law solely on the uncontested facts.
Government attorneys in willful FBAR penalty cases recognize all too well the value of a well-timed motion for summary judgment. Moreover, the government’s practice of filing motions for summary judgment in these cases has increased over the years, particularly with its success in convincing federal courts that willfulness means more than intentionally failing to file an FBAR—i.e., that it also includes objective recklessness. Under this relaxed standard, a taxpayer’s state of mind becomes irrelevant and therefore less likely to create a disputed fact which would preclude summary judgment.
A recent decision from the United States District Court for the District of Colorado provides a good example of the government’s success in this area of law. See U.S. v. Harrington, No. 1:19-cv-02965 (D. Col. Feb. 28, 2024).
Background
George and Monica Harrington were a married couple. In 2002, they traveled to the Cayman Islands to establish foreign accounts with UBS in Switzerland. In 2006 or 2007, they created a Liechtenstein stiftung and moved the funds from the UBS account to another UBS account held in the stiftung’s name.
In 2009, UBS informed the Harringtons that it was closing the account because all of the beneficiaries were U.S. citizens (around this same time, UBS had entered into a deferred prosecution agreement with the U.S. government related to charges that it had conspired to defraud the government by impeding the IRS). Rather than return the funds to the U.S., George transferred those funds to set up two life insurance policies held by a Liechtenstein company. The Harringtons were named beneficiaries of the policies, and each policy allowed them to surrender the policy at any time for their present cash value. The policies remained in the couple’s names until December 2012, when they cashed them out and moved the cash proceeds to an LGT Bank account in Liechtenstein.
George submitted timely FBARs for the 2005, 2008, 2009, and 2010 tax years. However, these FBARs disclosed solely his interests in accounts held with the Bank of New Zealand. The FBARs did not disclose his interests in the UBS account or the life insurance policies. In addition, George prepared the couple’s federal income tax returns. On Schedule B of those returns, he disclosed that they held interests in foreign accounts, but George did not identify the location of the foreign accounts (other than in 2008, where he reported “New Zealand”).
In 2012, the IRS initiated an audit of George’s 2007 through 2010 tax year filings. During the civil examination, George filed amended FBARs for 2008, 2009, and 2010 and an original FBAR for 2007. The Harringtons also amended their federal income tax returns for 2007 through 2010.
At the conclusion of the audit, the IRS determined that George had failed to report approximately $800,000 in foreign investment income from 2005 through 2010. The agency assessed additional taxes related to this income and also imposed civil fraud penalties. In addition, the IRS sought roughly $1.7 million of willful FBAR penalties against George for his 2007 through 2010 FBAR filings.
Prior to trial, the government moved for summary judgment on the willful FBAR penalty matter. In addition to the facts above, the government relied on: (1) George’s deposition testimony in which he stated that he had learned of the FBAR reporting requirements in the early 2000s, and (2) evidence that George had declined to receive mail or other correspondence in the U.S. from UBS and the life insurance company.
Analysis
To prove willfulness, the court held that the government had to show that George’s conduct was at least objectively reckless. Under this standard, the government had to prove that George “(1) clearly ought to have known that (2) there was a grave risk that [the FBAR filing requirements were not being met] . . . (3) [and that he] was in a position to find out for certain very easily.” The court held that the undisputed facts set forth by the government in its motion for summary judgment satisfied this three-prong test.
First, the court found significant George’s deposition testimony where he stated that he was aware of the FBAR reporting requirements in the early 2000s. Because George had knowledge of the FBAR reporting requirements prior to the years at issue—i.e., 2007 through 2010—the court reasoned that his knowledge supported a recklessness finding.
Second, the court believed that evidence supported the government’s theory that George had attempted to conceal the UBS account and the life insurance policies from U.S. authorities. Specifically, George’s decision to decline receiving correspondence in the U.S. from either UBS or the life insurance company further supported a recklessness finding.
Third, the court concluded that George had the ability to easily determine that the UBS account and the life insurance policies should have been disclosed. In this regard, the court reasoned that George had prepared the couple’s joint income tax returns and his FBAR filings, evidencing his knowledge of the tax and reporting rules. Moreover, he had experience and contacts with attorneys and bankers in setting up the foreign accounts and life insurance policies.
Summary
Similar to other federal courts, the Harrington court refused to entertain an argument that willfulness should be limited to the taxpayer’s subjective intent. Rather, the court held that the government may prove willfulness under an objective standard of recklessness.
This objective standard of recklessness is more summary-judgment friendly than a standard that would require analyzing subjective intent. Accordingly, taxpayers should expect the government to continue to use summary judgment motions to dispose of willful FBAR penalty cases. Taxpayers who fail to adequately plan for a later summary judgment motion may very well find themselves playing checkers while the government continues its game of chess.
Read the full article here
