September 25, 2018
from the United States District Court for the Eastern
District of Pennsylvania (D.C. Civil Action No.
2:15-cv-05853) District Judge: Honorable Michael M. Baylson
Richard E. Zuckerman Principal Deputy Assistant Attorney
General Travis A. Greaves Deputy Assistant Attorney General
Gilbert S. Rothenberg, Esquire Francesca Ugolini, Esquire
Andrew M. Weiner, Esquire (Argued) United States Department
of Justice, Tax Division Counsel for Appellant
Patrick J. Egan, Esquire (Argued) Beth L. Weisser, Esquire
Fox Rothschild Counsel for Appellee
Before: AMBRO, CHAGARES, and GREENAWAY, JR., Circuit Judges
appeal presents two issues of first impression in our Court
concerning the Internal Revenue Service's assessment of
civil penalties for violation of 31 U.S.C. § 5314 and
its implementing regulations, which require certain persons
annually to file a Report of Foreign Bank and Financial
Accounts (colloquially called a "FBAR" or simply
"Report"). First, we examine federal court
jurisdiction over actions challenging the IRS's
assessment of civil FBAR penalties. We conclude that
jurisdiction exists here but reserve the question whether it
is established in the District Court when a taxpayer files
suit to challenge a FBAR penalty before fully paying it.
Second, we clarify that, to prove a "willful" FBAR
violation, the Government must satisfy the civil willfulness
standard, which includes both knowing and reckless conduct.
To ensure this action accords with that standard, we remand
for further proceedings consistent with our opinion.
passed the Bank Secrecy Act of 1970 to require certain
reports and records that may be useful in "criminal,
tax, or regulatory investigations or proceedings, or in the
conduct of intelligence or counterintelligence activities . .
. ." 31 U.S.C. § 5311. One provision of the Act, 31
U.S.C. § 5314, instructs the Secretary of the Treasury
to prescribe rules that require persons to file an annual
report identifying certain transactions or relations with
foreign financial agencies. The Secretary has implemented
this statute through various regulations, including 31 C.F.R.
§ 1010.350, which specifies that certain United States
persons must annually file a Report with the IRS. Covered
persons must file it by June 30 each year for foreign
accounts exceeding $10, 000 in the prior calendar year. 31
C.F.R. § 1010.306(c). The authority to enforce the FBAR
requirement has been delegated to the Commissioner of
Internal Revenue. Id. § 1010.810(g); see
also Internal Revenue Manual § 4.26.1, Ex. 4.26.1-3
(U.S. Dep't of Treasury Memorandum of Agreement and
Delegation of Authority for Enforcement of FBAR
civil penalties for a FBAR violation are in 31 U.S.C. §
5321(a)(5). The maximum penalty for a non-willful violation
is $10, 000. Id. § 5321(a)(5)(B)(i). By
contrast, the maximum penalty for a willful violation is the
greater of $100, 000 or 50% of the balance in the unreported
foreign account at the time of the violation. Id.
Facts and Procedural History
Arthur Bedrosian is a successful businessman who has worked
in the pharmaceutical industry since the late 1960s. By 1973
he had opened a savings account in Switzerland so that he
could make purchases while traveling abroad for work without
relying solely on traveler's checks to do so. Bedrosian
initially used the account for convenient access to funds
while traveling abroad, but in later years he began to use it
more as a savings account. Union Bank of Switzerland
("UBS") thereafter acquired the bank where
Bedrosian had opened his account, which caused the account to
become a UBS account.
1973 until 2007 Bedrosian used the services of accountant
Seymour Handelman to prepare his income tax returns. Sometime
in the 1990s according to Bedrosian, he informed Handelman
for the first time that he maintained a bank account in
Switzerland. Handelman told Bedrosian that he had been
breaking the law every year he did not report the Swiss
account to the IRS. Handelman also told him that his estate
could deal with the consequences after he was dead. With this
advice, Bedrosian continued not to report his UBS account
when he filed his annual tax returns.
UBS approached Bedrosian and proposed that it loan him 750,
000 Swiss Francs and convert his savings account into an
investment account. Bedrosian accepted the proposal, and the
loan transaction that followed resulted in ...