Bedrosian v. United States, 17-3525

Decision Date21 December 2018
Docket NumberNo. 17-3525,17-3525
CourtU.S. Court of Appeals — Third Circuit

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, 950 Pennsylvania Avenue, N.W., P.O. Box 502, Washington, DC, 20044, Counsel for Appellant

Patrick J. Egan, Esquire (Argued), Beth L. Weisser, Esquire, Fox Rothschild, 2000 Market Street, 20th Floor, Philadelphia, PA 19103, Counsel for Appellee

Before: AMBRO, CHAGARES, and GREENAWAY, JR., Circuit Judges


AMBRO, Circuit JudgeThis 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 the creation of a second account under Bedrosian's control at UBS.

In 2007 Handelman died, and Bedrosian began filing his taxes through a new accountant, Sheldon Bransky. In preparation, Bedrosian authorized Bransky to obtain his records from Handelman's offices and gave Bransky the same materials that he was accustomed to giving Handelman in prior years. Bransky then prepared Bedrosian's 2007 tax return, on which he indicated that Bedrosian owned a foreign bank account. Bransky also prepared a FBAR for Bedrosian, which identified one of Bedrosian's two accounts at UBS. The account identified had assets totaling approximately $240,000; the account omitted had assets totaling approximately $2 million.

At trial Bedrosian testified that he had no recollection of discussing his Swiss bank accounts with Bransky. Bedrosian also testified that he did not know how Bransky knew to acknowledge the existence of a foreign bank account on the tax return or how Bransky knew to prepare the Report. Bedrosian also did not review the 2007 tax return and Report. He simply signed them.

After submitting these documents for tax year 2007, Bedrosian became more aware of the seriousness of not reporting foreign bank accounts to the IRS. After seeking legal counsel, he began correcting the inaccuracies on his prior tax filings. Nonetheless, in April 2011 the IRS notified Bedrosian that it would audit his recent tax returns.

In January 2015 the IRS assessed against Bedrosian a penalty for "willful" failure to disclose the larger UBS account on his 2007 Report. The penalty assessed was equal to the statutory maximum of $975,789, i.e. , 50% of the undisclosed account. Bedrosian paid $9,757.89 (one percent of the penalty assessed) and then filed a complaint in the District Court seeking to recover his $9,757.89 payment as an unlawful exaction. The Government answered Bedrosian's complaint and filed a counterclaim for the allegedly full penalty amount of $1,007,345, which included interest and a late-payment penalty.

In the District Court, the only disputed issue on the merits was whether Bedrosian's failure to disclose his $2 million UBS account on his 2007 Report was "willful." The Court held a one-day bench trial to resolve the issue. After trial it issued findings of fact and conclusions of law, concluding that the Government had failed to establish Bedrosian's Report violation was willful. Accordingly, the Court entered judgment in favor of Bedrosian both on his claim against the Government and on its counterclaim against him. The Government appeals to us.

II. Jurisdiction

The parties contend we have jurisdiction under 28 U.S.C. § 1291 to review the District Court's entry of final judgment. But we have "an independent duty to satisfy ourselves of our appellate jurisdiction regardless of the parties' positions." Papotto v. Hartford Life & Acc. Ins. Co. , 731 F.3d 265, 269 (3d Cir. 2013) (quoting Kreider Dairy Farms, Inc. v. Glickman , 190 F.3d 113, 118 (3d Cir. 1999) ).

The jurisdictional inquiry in this case is a matter of first impression. Unlike most cases involving the IRS's assessment of a civil FBAR penalty, in which the IRS files suit to recover the penalty, this case began when Bedrosian paid one percent of the assessed penalty and then filed a complaint in the District Court seeking to recover his partial payment. The Government did not challenge that Court's jurisdiction over Bedrosian's claim; as noted, it instead answered the complaint and filed a counterclaim seeking the full penalty amount.

The parties contend the District Court had jurisdiction over Bedrosian's claim under the so-called Little Tucker Act, 28 U.S.C. § 1346(a)(2), which provides district courts with original jurisdiction, concurrent with the U.S. Court of Federal Claims, over certain claims against the United States not exceeding $10,000 in amount, including certain claims "founded ... upon the Constitution ... or [an] Act of Congress." The parties contend Bedrosian's claim qualified for jurisdiction under the Little Tucker Act because it did not exceed $10,000 in amount (Bedrosian's initial claim seeking to recover his partial payment of $9,757.89) and was founded on the FBAR statute, 31 U.S.C. §§ 5314 & 5321.

We decline to hold that Bedrosian's initial claim against the Government gains jurisdiction under the Little Tucker Act. A claim may qualify only if it does not fall within the scope of the so-called tax refund statute, 28 U.S.C. § 1346(a)(1). See id. § 1346(a)(2) (applying to claims "other" than those within 28 U.S.C. § 1346(a)(1) ). The tax refund statute encompasses, among other things, claims to seek recovery of any "penalty" that is wrongfully collected "under the internal-revenue laws." Id. § 1346(a)(1). The parties concede that a civil penalty under the FBAR statute is a "penalty" under § 1346(a)(1), but they contend it was not assessed "under the internal-revenue laws" because the FBAR statute, 31 U.S.C. §§ 5314 & 5321, is in Title 31 of the U.S. Code, not Title 26 (the Internal Revenue Code). We are skeptical of this argument's elevation of form over substance, and, for reasons stated in the margin, we are inclined to believe that Bedrosian's initial claim did not qualify for district court...

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