Summary Judgment Denied in $9 Million FBAR Penalty Case

(Parker Tax Publishing March 2022)

A district court denied the government's motion for summary judgment against a Holocaust survivor in a case in which the government is seeking to collect almost $9 million in civil penalties for the taxpayer's willful failure to file a foreign bank account report in 2007. The court concluded that the evidence, taken in the light most favorable to the taxpayer, created a genuine dispute of material fact and thus the government was not entitled to summary judgment as a matter of law on the issue of willfulness. U.S. v. Schik, 2022 PTC 61 (S.D. N.Y. 2022).

Background

Walter Schik is an almost one hundred-year-old Holocaust survivor. At just thirteen years of age, Mr. Schik was forcibly separated from his family in Austria and sent to a Hungarian concentration camp. The Holocaust interrupted Mr. Schik's formal education, leaving him with only an elementary-level education. Mr. Schik's family died in the concentration camps, but he survived. After the war ended and he was liberated from the Hungarian camp, Mr. Schik moved to the United States and became a U.S. citizen. Shortly after becoming a citizen, Mr. Schik opened a bank account at UBS AG (UBS) in Switzerland to deposit money "recovered from the Holocaust" from relatives who died in the concentration camps. Because Switzerland was neutral during World War II, Mr. Schik's accounts there served "as a safety-net in case of another Holocaust." The money had no ties to the United States, and Mr. Schik did not touch the money. Mr. Schik also did not manage the money in the Swiss account. He left that task to David Beck, a Swiss money manager, and his son, Josef Beck.

Mr. Schik's tax forms that year were prepared by his accountant, Kenneth Laufer. Mr. Laufer never asked if Mr. Schik had funds outside the United States, and Mr. Schik never discussed his Holocaust safety net with Mr. Laufer. Mr. Laufer also never asked Mr. Schik to complete a tax preparation questionnaire. Question 7(a) of Schedule B of his 2007 tax return asked whether Mr. Schik had an interest in or signature or other authority over any foreign financial accounts in 2007, and directed completion of the form if he had a foreign account. The prefilled answer to Question 7(a) of Schedule B, apparently inputted by his tax preparer's software, was "no." While Mr. Schik had the opportunity to review his 2007 tax return after it was prepared by Mr. Laufer, he did not do so before signing. Instead, he "looked generally at his 2007 tax return before signing it."

A few years later, Josef Beck was indicted on charges of conspiring with U.S. taxpayers and foreign financial institutions, including UBS, to enable Beck's U.S. taxpayer clients to hide Swiss bank accounts and income generated in those accounts from the IRS. UBS agreed to provide the government the identities of certain U.S. customers pursuant to a deferred prosecution agreement.

In 2010, Mr. Schik submitted a voluntary disclosure to the IRS regarding his foreign accounts. That disclosure was rejected by the IRS "due to timeliness and/or completeness." Mr. Schik then filed a Foreign Bank Account Report (FBAR) for 2007, reporting the holdings in his accounts. The IRS subsequently assessed an FBAR penalty of almost $9 million for the 2007 failure to disclose his foreign bank account and his willful failure to comply with the FBAR filing requirements. The government took the case to a district court and moved for summary judgment to collect the penalty.

Mr. Schik argued he was not liable for the penalty because he did not willfully violate the FBAR reporting requirements since he relied on his tax return preparer. He asserted that he was unaware that he was required to report his foreign bank accounts.

Analysis

The district court denied the government's motion for summary judgment. The court noted that there was no dispute that (1) Mr. Schik did not himself manage the foreign accounts located in Switzerland; (2) Mr. Schik did not prepare his 2007 tax returns himself; (3) Mr. Schik is an individual with almost no formal education who was unaware of his obligation to disclose the foreign accounts; (4) Mr. Schik's tax preparer did not ask him about accounts abroad; and (5) the facts, viewed in the light most favorable to Mr. Schik, clearly showed that Mr. Schik did not withhold disclosure of the foreign accounts for any nefarious purpose.

The issue framed by the government's motion, the court said, is whether, as a matter of law, the evidence is such that a reasonable jury could return a verdict for the government and find that Mr. Schik's actions in not filing an FBAR were willful. The court noted that the Second Circuit, the court to which this case could be appealable, has held that, for purposes of a similar tax provision, "an individual's bad purpose or evil motive in failing to collect and pay the taxes properly plays no part in the civil definition of willfulness." Thus, while the Second Circuit has not yet opined on the meaning of "willful" in the FBAR context, the district court found that it has signaled that "willful" in the civil context is an action that requires no malicious intent, i.e., a reading in line with a reckless standard. Every circuit court that has addressed this issue, the court observed, reads "willful" to include reckless conduct.

The district court found that Mr. Schik presented evidence from which a reasonable jury could conclude that he did not act willfully because he did not manage his Holocaust safety net, he did not know of the requirement to disclose those funds, his tax preparer never informed him of the requirement, he relied on his tax preparer in connection with the submission of his 2007 tax returns, and his tax preparer's software auto-filled key portions of the deficient filing.

The court noted that, when Congress included penalties for "willful violations" of the FBAR requirement, it explicitly delineated between failures to report that are and are not willful. Thus, the court found that "willfulness" must mean something more than mere negligence. The court found that the government's suggested reading of the word - that willfulness should be found categorically even when an unsophisticated taxpayer does not know of an obligation to report and relies on a tax preparer - would abrogate that distinction. Thus, the court observed, whether Mr. Schik's conduct was "willful," rather than merely negligent, is a question of fact. The court said that it could not conclude that Mr. Schik's failure to disclose his accounts was willful as a matter of law. The court concluded that the evidence, taken in the light most favorable to Mr. Schik, created a genuine dispute of material fact and thus the government was not entitled to summary judgment as a matter of law on the issue of willfulness.

For a discussion of r the requirement to file an FBAR and the related penalties for failing to do so, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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