United States v. McBride

• Decision Date: 08 November 2012
• Docket Number: Case No. 2:09–cv–378 DN.
• Citation: 908 F.Supp.2d 1186
• Parties: UNITED STATES of America, Plaintiff, v. Jon McBRIDE, Defendant.
• Court: U.S. District Court — District of Utah

908 F.Supp.2d 1186

UNITED STATES of America, Plaintiff,

v.Jon McBRIDE, Defendant.

Case No. 2:09–cv–378 DN.

United States District Court,

D. Utah,

Central Division.

Nov. 8, 2012.

Curtis C. Smith, U.S. Department of Justice, Dallas, DC, Jared C. Bennett, John K. Mangum, U.S. Attorney's Office, Salt Lake City, UT, Rickey Watson, Richard A. Schwartz, U.S. Department of Justice, Washington, DC, Michael G. Pitman, U.S. Attorney's Office, San Francisco, CA, for Plaintiff.

Philip J. Hardy, Hardy & Hardy PC, Salt Lake City, UT, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

DAVID NUFFER, District Judge.

Plaintiff United States of America brought this case to collect a civil penalty assessed to Defendant Jon McBride for his alleged willful failure to report his interest in four foreign bank accounts during tax years 2000 and 2001 as required under 31 U.S.C. § 5314 and related regulations. The matter was tried to the bench on May 21–22, 2012, and the court took the matter under advisement. The parties have submitted competing proposals as to the facts and legal conclusions that should be reached.¹ Having carefully considered the parties' proposals, along with the record of the hearing and applicable law, the court enters the following findings of fact and conclusions of law.

FINDINGS OF FACT

A. McBride Was the Co–Owner of The Clip Company.

1. Jon McBride is a citizen of the United States, was a citizen of the United States in 2000 and 2001, and has been since at least 1999. (Tr. 310:12–15, May 22, 2012).

2. McBride and Scott Newell (“Newell”) were equal partners in The Clip Company, LLC (the “Clip Company”), a company which sold belt clip accessories for cellular telephones. (Tr. 315:12–317:7, May 22, 2012).

3. The Clip Company was in continuous operation from 1994 to 2008. (Tr. 268:10–12, May 22, 2012).

4. McBride was responsible for the financial operations of the Clip Company, including keeping accounting records, and preparing quarterly and yearly reports for the Clip Company. (Tr. 268:13–269:7, May 22, 2012).

5. The only individual other than McBride involved in the financial operations of the Clip Company was the Clip Company's accountant, Craig Stayner. (Tr: 268:25–269:7, May 22, 2012).

6. The Clip Company utilized a manufacturer located in Taiwan, Piao Shang, Ltd., (“Piao Shang”), for the production of its inventory. (Tr. 118:17–119:22); (Tr. 318:15–22, May 22, 2012).

7. Beginning in approximately 1999, the Clip Company entered into several lucrative contracts for the sale of its products to retailers including Ericsson, AT & T, Best Buy and Motorola. (Tr. 269:8–11, May 22, 2012).

8. As a result of the Clip Company's new contracts, McBride knew that the Clip Company was about to obtain a large increase in revenue. (Tr. 269:12–15, May 22, 2012).

9. In anticipation of this increase in revenue, McBride sought a way to reduce or defer the income taxes that would normally be paid on this revenue. (Tr. 269:16–20, May 22, 2012).

B. Merrill Scott and Associates Was a Financial Management Firm that Employed Strategies Designed to Disguise the Ownership of Its Clients' Assets.

10. Merrill Scott and Associates (“Merrill Scott”) held itself out as a financial management firm that employed strategies that would allow its clients to avoid or defer the recognition of income for tax purposes and to shield their assets from the reach of creditors by utilizing, amongst other financial strategies and instruments, foreign variable annuities and foreign financial accounts. See (Pl. Exs. 10, 11, 12, 13, 81); (Pl. Ex. 118, Ackerson Dep. Tr. 15:7–14; 15:21–16:13; 25:24–26:10; 69:24–70:13).

11. In reality, Merrill Scott's strategies were designed to allow its clients to avoid reporting income and their ownership of assets by having the clients' assets held by nominees holding the legal title of shell corporations and foreign bank accounts. See (Pl. Exs. 10, 11, 12, 13, 81); (Pl. Ex. 118, Ackerson Dep. Tr. 15:7–14; 15:21–16:13; 25:24–26:10; 69:24–70:13); (Tr. 36:24–37:21, May 21, 2012).

12. Among other strategies, Merrill Scott and its clients purchased foreign variable annuities, set up International Business Corporations (“IBCs”) that were incorporated in foreign countries for the benefit of individual clients, established bank and securities accounts in foreign countries, and created foreign trusts and other vehicles that would hold assets for the benefit of Merrill Scott's clients. See (Pl. Exs. 10, 11, 12, 13, 81); (Pl. Ex. 118, Ackerson Dep. Tr. 15:7–14; 15:21–16:13; 25:24–26:10; 69:24–70:13).

13. In 2002, a complaint was filed against Merrill Scott and its principals by the Securities and Exchange Commission for various securities violations, including various Securities Act violations and fraud. See (Ex. 81); (Tr. 69:20–70:23, May 21, 2012); (Tr. 347:7–14, May 22, 2012).

C. McBride Retained the Services of Merrill Scott in Order to Avoid or Defer Taxation.

14. In 1999, after seeing an advertisement for Merrill Scott, McBride contacted Merrill Scott in order to see if Merrill Scott could provide financial services that would result in avoiding or deferring the recognition of $2 million in income that McBride expected to receive. (Tr. 39:21–41:1, May 21, 2012); (Tr. 320:12–321:11, May 22, 2012).

15. On or around July 20, 1999, McBride went to Merrill Scott's offices where he was given a presentation by several employees of Merrill Scott that described the various strategies that might be utilized by McBride, Newell, and the Clip Company. See (Pl. Ex. 12).

16. Merrill Scott's employees described that the various strategies available would be implemented in a “Master Financial Plan,” which would utilize various IBCs, foreign financial accounts, foreign variable annuities, all for the benefit of McBride, Newell, and the Clip Company. See (Pl. Ex. 12).

17. After McBride was given an explanation of Merrill Scott's program, he responded, “This is tax evasion.” (Tr. 321:22–23, May 22, 2012).

18. Merrill Scott employees responded that their programs were legal. (Tr. 321:24, May 22, 2012).

19. Merrill Scott employees told McBride that “your plan will be one of the cleanest we have.” (Tr. 323:6–7, May 22, 2012).

20. McBride expressed his intention that Merrill Scott set up a structure that would move profits of the Clip Company offshore. (Tr. 40:17–22, May 21, 2012); (Tr. 108:8–13, May 21, 2012); (Tr. 393:12–14, May 22, 2012).

D. McBride Purchased Merrill Scott's Master Financial Plan Without First Obtaining an Outside Legal Opinion.

21. Merrill Scott provided McBride with several pamphlets and materials containing questions and answers regarding how the strategies employed by Merrill Scott interacted with extant income tax and reporting regulations. See (Pl. Exs. 10, 11); (Tr. 322:4–10, May 22, 2012).

22. One of these pamphlets, entitled “Going Offshore: What is it and is it safe,” included the following language under the heading “Tax Savings”: “US citizens are subject to specific U.S. reporting requirements for interests in foreign corporations, trusts and bank accounts. US citizens and others filing Internal Revenue Service returns are not immune from requisite declaration of ownership interests in foreign entities.” See (Pl. Ex. 10).

23. In that meeting, McBride was provided a legal opinion prepared by the Estate Planning Institute, P.C. (Tr. 322:4–8, May 22, 2012).

24. No later than July 29, 1999, McBride was informed that the Estate Planning Institute, P.C. was an entity controlled by or related to Merrill Scott. See (Pl. Ex. 13).

25. McBride did not understand the process by which Merrill Scott proposed to somehow legally move the Clip Company's U.S. revenue offshore. (Tr. 323:9–15, May 22, 2012).

26. On December 10, 2009, McBride stated, under penalty of perjury, that he “reviewed and considered all [Merrill Scott]-based literature and marketing information, including its ‘due diligence’ information on each of its officers and its track record pertaining to being in ‘good standing’ with Utah. This information includes (but is not all-inclusive) ... the legal opinion included as part of McBride's initial disclosures, and the packet of [Merrill Scott] literature ...” (Pl. Ex. 3, Response 6).

27. McBride testified at trial that he did not read the legal opinion provided to him by the Estate Planning Institute. (Tr. 402:6–16, May 22, 2012).

28. On November 17, 2010, under penalty of perjury, McBride stated that he specifically read and asked questions from the pamphlet entitled “Questions and Answers.” (Pl. Ex. 71, ¶ 4).

29. The pamphlet entitled “Questions and Answers,” contains the following language under a heading entitled, “Why not just hide all my assets in a Swiss Account?”: “As a U.S. taxpayer, the law requires you to report your financial interest in, or signature authority over, any foreign bank account, securities account, or other financial account.... Intentional failure to comply with the foreign account reporting rule is a crime and the IRS has means to discover such unreported assets.” See (Pl. Ex. 11, pp. MB0130–MB0131).

30. McBride never obtained an outside legal opinion from an attorney about the legality of Merrill Scott's financial strategies. (Tr. 271:11, May 22, 2012).

31. McBride never sought advice from his accountant at the time, Craig Stayner, on whether or not to purchase a Master Financial Plan from Merrill Scott. (Tr. 270:18–25, May 22, 2012).

32. McBride was “gung ho” on Merrill Scott and the Master Financial Plan. See (Pl. Ex. 117, Newell Dep. Tr. 37:1–3).

33. Even though Craig Taylor, Scott Newell's accountant at the time, expressed concerns, McBride would not change his decision to enter into an agreement with Merrill Scott. Taylor did not raise any concerns about the FBAR reporting requirement. See (Pl. Ex. 9) (Pl. Ex. 117, Newell Dep. Tr. 36:22–37:7) (Tr. 161:9–162:14, May 21, 2012).

34. Even though he had not obtained an outside opinion regarding the legal consequences...