Court Upholds $3 Million Penalty for Willful Failure to Report Foreign Bank Account

(Parker Tax Publishing May 2021)

The Court of Federal Claims held that a taxpayer who failed to file with the IRS a timely Report of Foreign Bank Account (FBAR) to report a Swiss bank account was liable for a penalty equal to 50 percent of the balance of the foreign account because he willfully failed to report the account. The court found that, as the owner of record of the account, the taxpayer was required to file the FBAR even though he claimed to hold the account for the benefit of his family, and the court rejected the taxpayer's argument that the penalty is an excessive fine under the Eighth Amendment. Landa v. U.S., 2021 PTC 114 (Fed. Cl. 2021).

Background

Leon Landa emigrated to the United States from Ukraine in 1975 and became a U.S. citizen in 1980. In early 1980, Leon learned from his father, Gersh Landa, that Leon's grandfather had deposited money into an account in Switzerland during World War II. The money was apparently intended to be preserved for the Landa family and used for emergencies in case another situation like World War II happened. The funds were held in Switzerland in accounts at Credit Suisse and UBS AG (UBS). In 1985, Gersh and Leon traveled to Switzerland to monitor the accounts. Gersh gave Leon, Leon's brother, and Leon's mother power of attorney on the UBS account in 1985 and a power of attorney on the account at Credit Suisse in 1998.

Due to a criminal investigation by U.S. authorities, UBS announced that it would no longer provide private banking services to U.S. clients starting in July 2008. In June 2009, Leon travelled to Switzerland and visited Credit Suisse to withdraw the balance of the account. The same day, he visited UBS, where he was told he was required to close the account. Leon went back to Credit Suisse intending to transfer the funds in the UBS account to Credit Suisse, but was advised by a Credit Suisse employee that it was not a good idea in the wake of the UBS investigation. A Credit Suisse advisor suggested that Leon open an account at BSI AG (BSI). Leon opened an account at BSI at its Zurich office. He identified only himself as the account holder on the application. The account was opened as a numbered account, and Leon signed a document identifying himself as the beneficial owner of the account. Beginning in 2010, Leon visited Switzerland on a yearly basis to monitor the BSI account. No other member of the Landa family visited BSI to check on the account. Leon directed BSI not to invest in U.S. securities on his behalf. He also instructed BSI to hold mail at the bank so he would not receive mail about the account in the United States. In 2011, Leon directed BSI to destroy 142 pages of correspondence dated between September 2009 and March 2011. Leon withdrew funds from the BSI account on limited occasions.

Leon filed his 2009 U.S. federal income tax return with the help of a tax preparer, Jack Rapp. Leon did not tell Rapp about the BSI account and did not investigate his tax responsibilities pertaining to the Swiss accounts. On his 2009 return, Leon answered "no" in response to a question on Schedule B on whether at any time during 2009 he had an interest in or signature authority over a foreign bank account. Leon also did not disclose income from the BSI account on his 2009 tax return, and did not know if anyone else in his family reported income from the account on their tax return.

In 2010, the IRS issued Notice 2010-23, which provided that persons with signature authority over, but no financial interest in, a foreign bank account in 2009 had until June 30, 2011, to file a Report of Foreign Bank Account (FBAR). Leon filed a 2009 FBAR on February 1, 2011, disclosing the accounts at Credit Suisse, UBS, and BSI. He included an attachment stating that the funds in the Credit Suisse and UBS accounts were held in trust, with Gersh Landa as trustee. The attachment did not reference the BSI account. Leon reported a maximum value of the BSI account in 2009 of $6.3 million. The IRS subsequently examined the Landa family's tax returns. In 2014, the IRS assessed a willful FBAR penalty against Leon under 31 U.S.C. Section 5321(a)(5)(C) in the amount of $3.1 million (i.e., 50 percent of the account balance) for the failure to file the FBAR on the BSI account. Leon paid the penalty in 2016 and filed a complaint in the Court of Federal Claims in 2018 seeking a refund.

Leon argued that he had no financial interest in the BSI account because the funds were not his. Rather, he claimed he was only the trustee and the funds were held for the benefit of others. Leon contended that the court should look not to the IRS definition of a financial interest but instead to the laws of Switzerland, where the account was maintained. Leon further argued that even if he was required to file an FBAR, he was not required to do so until 2011 under the extension provided by Notice 2010-23. Finally, Leon argued that the amount of the penalty - 50 percent of the account balance - was grossly disproportionate to the gravity of his actions and constituted an excessive fine in violation of the Eighth Amendment. The government filed a motion for summary judgment, asserting that the FBAR penalty was properly imposed and was not excessive.

Analysis

The Court of Federal Claims granted summary judgment for the United States after finding that Leon was subject to the FBAR filing requirement and willfully failed to file a timely FBAR for 2009.

The court rejected Leon's argument that Swiss law should determine the nature of his interest in the BSI account. The court found that the Bank Secrecy Act requires U.S. persons to disclose a financial interest, as defined by the IRS, in foreign bank accounts. According to the court, the IRS's definition of "financial interest" specifically contemplates ownership of an account intended to benefit others, as reflected by the 2009 FBAR instructions which stated that a U.S. person has a financial interest in each account for which the person is the owner of record or has legal title, regardless of whether the account is maintained for the benefit of others. The court noted that, even if Leon held the funds for the benefit of his family, his name was the only one on the BSI account and he was its owner of record. The court found that, by virtue of opening the BSI account in his name, Leon became the owner of record of that account in 2009 and was required to file an FBAR. The court further found that the extended deadline provided in Notice 2010-23 applied only to persons with signature authority over, but no financial interest in, a foreign bank account, and therefore did not apply to Leon.

Next, even though Leon did not challenge the IRS's finding of willfulness, the court said that the facts supported a finding that he acted willfully. In the court's view, this case presented many of the same factors that were found to satisfy the willfulness element in Kimble v. U.S., 2021 PTC 75 (Fed. Cir. 2021), and Norman v. U.S., 2019 PTC 435 (Fed. Cir. 2019). For instance, Leon opened the BSI as a numbered account, failed to disclose the account to his accountant, and never asked his accountant how to report the income from the foreign account. Further, Leon indicated on his tax return that he did not have any interest or authority over a foreign account. The court noted that Leon directed BSI not to invest in U.S. securities on his behalf, directed BSI to retain correspondence at the bank, and later directed BSI to destroy that correspondence. The court further found that Leon's failure to file the FBAR was reckless because he should have known there was a grave risk that an accurate FBAR was not being filed given that he had years of experience maintaining the Credit Suisse and UBS accounts before opening the BSI account in 2009. The court said that, at the very least, Leon could have found out about his FBAR reporting requirement had he disclosed the foreign account to his accountant and was on notice of the possible relevance of the account due to Schedule B of his 2009 tax return.

Finally, the court rejected Leon's argument that the FBAR penalty was an unconstitutional excessive fine. The court explained that a fine may be excessive under the Eighth Amendment only if the penalty imposed is punitive rather than remedial. The court noted that although neither the Supreme Court nor the Federal Circuit have considered whether the FBAR penalty is remedial or penal, in U.S. v. Est. of Shoenfeld, 344 F.Supp. 3d 1354 (M.D. Fla. 2018), a district court held that the FBAR penalty is remedial in nature, and the court agreed with the district court's analysis. The court noted that the FBAR penalty is expressly referred to as a civil money penalty rather than a fine. Moreover, the provision for both civil and criminal penalties for violating the FBAR requirement established in the court's view distinct and discrete punitive and remedial sanctions. To read the civil penalty as punitive, the court reasoned, would render superfluous the separate civil and criminal sanctions regimes Congress specifically enacted.

For a discussion of FBAR reporting requirements, 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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