In an opinion filed yesterday in the Southern District of New York, U.S. District Judge Mary Kay Vyskocil denied a motion for summary judgment filed by the government that sought a ruling that a taxpayer's failure to file an FBAR was willful as a matter of law, rejecting the government's position that a taxpayer' mere negligence can amount to “willful” conduct.
The March 8, 2022 opinion was filed in United States v. Walter Schik, 20-cv-02211 (MKV) (SDNY) (see Docket Entry No. 47). As the court explained, Mr. Schik is almost 100 years old. He is a Holocaust survivor who opened Swiss bank accounts to deposit money that had belonged to family members who had died in concentration camps, and to serve as a “safety-net” to hedge against the risk of another Holocaust. Mr. Schik did not manage the Swiss accounts himself, but instead relied on Swiss asset managers (one of whom was eventually indicted in the SDNY). One of the accounts at issue was held in the name of a Panamanian company. The Swiss accounts collectively held over $17 million and, after the IRS determined that Mr. Schik's failure to file an FBAR for the 2007 tax year was willful, Mr. Schik was assessed with an almost $9 million FBAR penalty (i.e., 50% of the aggregate high balance in the relevant accounts). Mr. Schik declined to remit the penalty to IRS, and the Department of Justice filed a civil action to reduce the IRS assessment to judgment.
As an initial matter, Judge Vyskocil joined several other federal courts and held that the applicable evidentiary standard in civil FBAR cases is proof by a preponderance of the evidence, rejecting Mr. Schik's position that the clear and convincing evidence standard should apply.
The court next turned to the only issue in dispute in the case: whether Mr. Schik's failure to file his 2007 FBAR was the result willful conduct. Mr. Schik argued that willful in the FBAR context must amount to the intentional disregard of a known legal duty (i.e., the standard articulated by the Supreme Court in Cheek vs. United States, 498 U.S. 192 (1991)). The government argued that willful conduct is conduct that is “objectively reckless toward the relevant reporting requirements.”
Judge Vyskocil joined several other courts and agreed that willful conduct does not require a showing of malicious intent and may include “reckless” conduct. The court went on to conclude, however, that Mr. Schik was entitled to a jury trial on the question of whether or not his failure to file “was willful rather than merely negligent.” Judge Vyskocil recognized that her ruling represents a departure from other recent decisions that have granted summary judgment in the government's favor in civil FBAR cases after concluding that the only permissible inference a jury could make was that a defendant who had failed to file an FBAR had acted willfully, including cases where (as with Mr. Schik) a taxpayer had not disclosed an interest in foreign accounts to his or her accountant, or where (also as with Mr. Schik) the taxpayer admitted he or she had not read his or her tax return closely before filing it (and, at least in Mr. Schik's case, his 2007 tax return checked the box “no” on Schedule B in the section of the form that asks taxpayers if they had an interest in any foreign accounts during the course of that tax year).
The court explained that, because Congress expressly provided for both non-willful and willful FBAR penalties, “willfulness…must mean something more than mere negligence” and the government's argument that a taxpayer acted willfully even when he did not know about the FBAR requirement and had relied on an accountant to prepare his tax returns would effectively undermine Congressional intent. Lastly, Judge Vyskocil joined two other district courts and found that simply signing an income tax return does not automatically give a taxpayer constructive knowledge of his or her FBAR filing obligations, as doing so would result in strict liability for willful FBAR violations in every case in which a tax return fails to disclose an interest in a foreign account.
Judge Vyskocil's decision provides some hope for taxpayers facing FBAR litigation and represents somewhat of a pause to a recent line of pro-government decisions that have watered down the traditional definition of “willfulness” in tax cases and that have made it easier and easier for the Department of Justice to prevail in FBAR cases without ever having to prove a taxpayer's willful state of mind to a jury.
[Note: Walter Schik is represented by my former law firm, Kostelanetz & Fink LLP]