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Questions Exist as to Whether CEO Willfully Failed to File an Accurate FBAR; Summary Judgment Denied

(Parker Tax Publishing May 2017)

A district court denied summary judgment and held that a question of fact existed as to whether an individual willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to one of his two Swiss bank accounts. According to the court, the taxpayer's testimony regarding the information provided to him by his long-time CPA and what exactly he did with that information, if anything, would be relevant to a determination of his intent. Bedrosian v. IRS, 2017 PTC 180 (E.D. Pa. 2017).

Arthur Bedrosian is a U.S. citizen and the chief executive officer of a manufacturer and distributor of generic medications. Bedrosian opened a savings account with Swiss Credit Corporation, a Swiss bank, in the 1970s. The account was transferred to UBS when UBS acquired Swiss Credit Corporation. As early as 2005, a second account was added. The account number for the first account ended in 6167; the second ended in 5316. Bedrosian met with a UBS banker approximately once a year to review the performance of the accounts. During 2007, the year at issue, both accounts had balances significantly in excess of $10,000. Bedrosian closed both accounts in 2008. He transferred the assets in the account ending in 6167 to another Swiss bank account and the assets for the account ending in 5316 to a domestic bank account.

Throughout the decades, Bedrosian had his accountant, Seymour Handleman, prepare his tax returns. He did not tell Handleman about the UBS accounts until the 1990s. Handleman told him that he should have been reporting the accounts on his tax returns, but that he should not start reporting them because, on Bedrosian's death, the assets would be repatriated as part of his estate and the taxes would be paid at that time. Bedrosian did not report either account until 2007, when Handleman died and Bedrosian hired a new accountant.

Bedrosian's 2007 return reflected, for the first time, that he had assets in a foreign account in Switzerland. Bedrosian also filed a Report of Foreign Bank and Financial Accounts (FBAR) for 2007. However, he reported only the existence of the account ending in 5316, which had assets of approximately $240,000. He did not report the other account, which had assets of approximately $2.3 million. Bedrosian did not report any of the income earned on either account on his 2007 return.

Sometime after 2008, UBS told Bedrosian that it would be providing his account information to the IRS. Before the IRS began its investigation, Bedrosian hired an attorney to determine Bedrosian's reporting obligations. In 2010, Bedrosian filed an amended 2007 return and reported approximately $220,000 of income from the UBS accounts. He also filed an amended FBAR for 2007 on which he reported both UBS accounts.

The IRS began investigating Bedrosian in 2011. In 2013, the IRS notified Bedrosian that it was imposing a penalty of approximately $975,000 for Bedrosian's willful failure to file an FBAR for 2007. The proposed penalty was 50 percent of the maximum value of the account and therefore the largest penalty possible under the regulations.

Bedrosian sued the IRS in 2015, claiming that the IRS had imposed an unwarranted penalty on him resulting in an illegal exaction. In late 2016, both parties moved for summary judgment. The district court denied both parties' motions and held that a question of material fact existed as to whether, under 31 U.S.C. Section 5321, Bedrosian had willfully failed to file an FBAR for his second UBS account.

Under 31 U.S.C. Section 5314, a U.S. citizen must annually file an FBAR to report any financial interest in or signature authority over a foreign bank account. A penalty is imposed under 31 U.S.C. Section 5321 for failing to file an FBAR if the taxpayer's interest in a foreign account exceeds $10,000. The penalty for non-willful failure to file an FBAR cannot exceed $10,000. For willful failures, the penalty is the greater of $100,000 or 50 percent of the account balance at the time of the violation.

The district court began by noting that the term "willful" as used in 31 U.S.C. Sec. 5321, a civil penalty provision, is not clearly defined. Bedrosian argued that the definition of willfulness that applies in the criminal tax penalty context should apply. That standard requires the voluntary, intentional violation of a known legal duty.

The district court ultimately sidestepped the issue and did not articulate a definition of willfulness under 31 U.S.C. Section 5321. It noted that the decisions of other courts considering the issue had concluded that willfulness under that provision means either a knowing or reckless violation. The court also said that it was highly skeptical that the criminal definition should apply in the case of a civil penalty for the failure to file an FBAR. The court concluded by asserting that the jurisprudential trend is toward a definition of willfulness that includes reckless violations.

Under either standard, the court found that whether Bedrosian willfully failed to file an FBAR for 2007 is an inherently factual question. Genuine disputes existed, the court said, as to the extent and timing of Bedrosian's knowledge about his reporting requirements. Further, although 31 U.S.C. Section 5321 does not provide a reasonable cause defense, the court thought that the advice from Handleman would be relevant in determining Bedrosian's intent. For these reasons, summary judgment was denied.

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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