One of the classic Paper Chase cases, albeit from a different first-year course than the one that the late, great John Houseman taught, is 1891’s O’Brien v. Cunnard S.S. Co., Ltd. Mary O’Brien, an Irish immigrant on board a ship from Queenstown to Boston, held up her arm to be vaccinated against smallpox, a duty which the ship’s surgeon dutifully performed. She later claimed that the vaccination was an assault because the doctor “used force on the plaintiff against her will” and that he was “negligent” during the procedure, although the facts are a bit hazy as to exactly what this learned physician did, or did not, do. Although Ms. O’Brien was a new citizen, she apparently knew enough about the system to call a lawyer and sue everyone in sight.
The Massachusetts Supreme Court eventually ruled that Ms. O’Brien consented to the shot, simply because she raised her arm. Specifically, “the surgeon had a right to presume that she and the other women who were vaccinated understood the importance and purpose of vaccination.”
From Implied Consent to Implied Knowledge
Justice Marcus Perrin Knowlton really started something. The concept of implied consent soon spread to many other areas. Today, for example, all 50 states have implied consent laws that authorize a police officer to extract a breath or blood sample from almost any driver at almost any time. The concept also found its way into tax law. Two recent cases, U.S. v. Williams and U.S. v. McBride, held that signing a tax return is enough to impute willfulness, if the taxpayer later fails to file a Report of Foreign Banks and Financial Accounts (FBAR).
In a recent article in the American Bar Journal, Georgetown University’s Kyle Niewoehner strongly disagreed with the courts’ approach in Williams and McBride. He argued that the “strict liability approach” is fundamentally flawed, and that, going forward, courts should apply a standard that better protects the rights of defendants in tax law cases.
31 U.S.C. 5314(a) requires all U.S. taxpayers to report any “financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country.” Predictably, there are stiff penalties for noncompliance.
In the first case, Bryan Williams deposited about $7 million into a Swiss account from 1993 to 2000, and he never filed an FBAR. The government argued that Mr. Williams’ signature on his 2000 return was “prima facie evidence” that he knew about the FBAR requirement and, by a rather shaky extension, that the violation was willful. The Fourth Circuit ultimately agreed, reasoning that willfulness “may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information” or “inferred from a conscious effort to avoid learning about reporting requirements.” Mr. Williams did not advance his cause by testifying that he “never paid any attention to any of the written words” on his return.
In the second case, Fredrick McBride, a partner in a cell phone chip company, basically overpaid a Taiwanese manufacturer to conceal assets. The IRS began an investigation in 2004, and, according to the Fourth Circuit, Mr. McBride was dishonest and uncooperative throughout the process. Similarly to Williams, the court concluded that Mr. McBride was “charged with having had knowledge of the FBAR requirement to disclose his interest in any foreign financial or bank accounts, as evidenced by his statement at the time he signed the returns, under penalty of perjury, that he read, reviewed, and signed.”
One of the problems with this approach is that it ignores Supreme Court precedent. Nearly a decade ago, Ratzlaf v. U.S. held that the willfulness standard in general, and Section 5314 in particular, requires that an actor have “a known legal duty.” The only exception is if the actor was exceptionally naughty and intentionally concealed sources of income. So, in most cases, you can infer knowledge, but not intent.
The strict liability analysis also runs afoul of 1998’s Bryan v. U.S. The Supreme Court worried that an overly-broad willfulness test “presented the danger of ensnaring individuals engaged in apparently innocent conduct.”
Going forward, courts should probably take an approach between McBride and Williams. Unless the actor is clearly financially savvy and is trying to play a game of 3-card monte with the IRS, there should be some direct evidence of both knowledge of the FBAR requirement and a specific intent to violate it.
Original Post By: Michael DeBlis