This is one more in a series of posts discussing the FBAR rules. The FBAR rules were born in 1970, laid virtually dormant until the 2000s and then were then unleashed in their full “ferocity” on U.S. persons.
Mr. FBAR has not visited Canada, but he has visited Canadian citizens
Readers of this blog (particularly those in Canada) may recall that I have previously written about the adventure of Mr. Jeffrey P. Pomerantz, currently of Vancouver, Canada, with Mr. FBAR. At that point—March 2017—it was clear that the U.S. Department of Justice planned to sue Mr. Pomerantz to collect the FBAR penalties to which it felt entitled. It is worth noting that FBAR penalties are assessed under the Bank Secrecy Act (Title 31 of U.S. laws) which is different from the Internal Revenue Code (Title 26 of U.S. laws.) In order to collect FBAR penalties, the U.S. Government must sue, and sue it did. The purpose of this post is to tell the story of what happened when the U.S. Government sued Mr. Pomerantz in U.S. District Court in Seattle.
But, before we begin our story, this post is more about “Civil Procedure” than it is about Mr. FBAR.
Bottom line: Although the U.S. Government suffered a temporary (probably) defeat, the defeat was because the Government failed to follow the rules of “Civil Procedure”. In other words, whether Mr. Pomerantz actually violated the FBAR statute was NOT the issue in this case. The issue was whether the Government followed the rules that they were required to follow in order to win their case. The Government did NOT follow the rules. Therefore, the Government lost. With that disclosure, we are no ready to begin yet another example of an adventure with Mr. FBAR.
Once upon a time in District Court in Seattle
It appears that the hearing took place in early June of 2017. In any event, the court’s judgement was dated June 8, 2017.
Interesting fact: Mr. Jeffrey P. Pomerantz appeared “pro se” – he represented himself at the hearing. He may have had “legal advice” prior to the hearing. On the other hand, he may have had the assistance of the judge who recognized that he did NOT appear with a lawyer.
The judgement references the fact that Mr. Pomerantz sought to transfer the venue from Washington State to Washington, DC. Apparently his lawyer of choice was in Washington, DC. The court (for various procedural reasons) denied his request for this change in venue. In other words, the hearing took place in Seattle.
What the Government must prove:
It is important to remember that Mr. Pomerantz was assessed a willful FBAR penalty. As was reported by Jack Townsend:
The FBAR willful penalty requires, well, willfulness. If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.
To prove willfulness, the Government must allege facts which suggest willfulness.
The Government is required to “allege” (state facts) evidence of willfulness. It is NOT sufficient for the Government to just say: (Jeffrey Pomerantz willful because we say so) that Mr. Pomerantz’s failure to file Mr. FBAR was willful. The willfulness must be proven. In order to prove willfulness, the Government must allege facts that prove willfulness.
Therefore, the Government is required to:
—allege facts which, if true, would support the allegation that Mr. Pomerantz’s failure to file Mr. FBAR was willful (defined as per the standard in Ratzlaf v. United States, 510 U.S. 135, 154 n.5 (1994) as “the intentional violation of a known legal duty”). This requires the Government to prove much MORE than the mere failure to file an FBAR.
With respect to the bank accounts that generated the FBAR penalties, because of the requirement to prove willfulness:
The Government must allege sufficient facts to plausibly support the inference that Mr. Pomerantz knew — actually or constructively -of the reporting requirement. (Alleging these facts is a NECESSARY but NOT a SUFFICIENT condition to prove willfulness. The probative value of the facts alleged must be evaluated.)
Did the Government meet its evidentiary responsibilities?
According to accounts in Switzerland – (the “Grand Turk Oppenheim Accounts,” the “2003 Oppenheim Portfolio Accounts,” and the “2007 Oppenheim Portfolio Accounts” (collectively, the “Chafford Limited Accounts”)):
It appears that the Government did adduce evidence of willfulness with respect to the accounts in Switzerland. The reasons included that: (1) Mr. Pomerantz opened a “shell” company (a company that was for the sole purpose of holding his investments AND not for the purpose of carrying on a business).
The judge explained:
The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report.
Interestingly the Judge is saying that opening a shell company is evidence of willfulness. Willfulness can be rebutted with evidence from Mr. Pomerantz.
Accounts in Canada CIBC – Mr. Pomerantz’s personal bank accounts
First, on “actual knowledge” of the FBAR requirement:
The judge explained:
However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl.¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC Accounts.
Interestingly the Judge is saying that opening a bank account in one’s own name is NOT by itself evidence of the willful failure to file an FBAR. (Thank God for that!) Can you imagine if the Judge had ruled that the mere fact of opening a bank account outside the USA was evidence of willfulness?
Second, on “constructive knowledge” of the FBAR requirement
The judge explained:
Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge.
The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.)
However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents).
Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report.
Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful.
Mr. Pomerantz loses on the Swiss bank accounts and wins on the CIBC accounts? Why then was the case “thrown out”? Shouldn’t the Government have a partial win?
The Government lost because it did NOT ascribe separate FBAR penalties to separate accounts. The Government failed to specify how much of the penalties were assessed on the Swiss accounts and which were assessed on the CIBC accounts. As a result, the Government lost the whole thing.
The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts. Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)
But, the Government is free to try again!
The Government is permitted to simply amend its “paper work” (curing the deficiencies) and try again. I think this is likely.
Somehow, the words, “I’ll be back!,” come to mind!
Some concluding musings
It’s interesting that the Government’s claim would fail based on such a universal and simple rule of Civil Procedure. Obviously, a claim must include allegations of the facts necessary to justify the judgement sought. Yet, the Government failed to meet its burden on this simple rule. It’s as though the Government views Mr. FBAR as an instrument of civil forfeiture and/or confiscation.
Of course, Mr. FBAR really is a mechanism for Civil Forfeiture!