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Bedrosian v. United States, Department of Treasury

United States Court of Appeals, Third Circuit

December 21, 2018


          Argued September 25, 2018

          Appeal 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



         This 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.

         I. Background

         A. Legal Background

         Congress 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 Requirements).

         The 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. § 5321(a)(5)(C)(i).

         B. Facts and Procedural History

         Plaintiff-appellee 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.

         From 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.

         In 2005 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 ...

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