United States v. Schwarzbaum

• Decision Date: 20 March 2020
• Docket Number: Case No. 18-cv-81147-BLOOM/Reinhart
• Citation: 611 F.Supp.3d 1356
• Parties: UNITED STATES of America, Plaintiff, v. Isac SCHWARZBAUM, Defendant.
• Court: U.S. District Court — Southern District of Florida

611 F.Supp.3d 1356

UNITED STATES of America, Plaintiff,

v.Isac SCHWARZBAUM, Defendant.

Case No. 18-cv-81147-BLOOM/Reinhart

United States District Court, S.D. Florida.

Signed March 20, 2020

John P. Nasta, Jeffrey N. Nunez, Michael N. Wilcove, U.S. Department of Justice, Washington, DC, Mary Elizabeth Smith, Dallas, TX, for Plaintiff.

Jose Angel Casal, Daniel I. Small, Holland & Knight, LLP, Miami, FL, Andrea Darling de Cortes, Pro Hac Vice, Chad M. Vanderhoef, Holland & Knight LLP, Tampa, FL, Nicole M. Elliott, Pro Hac Vice, Holland & Knight LLP, Washington, DC, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BETH BLOOM, UNITED STATES DISTRICT JUDGE

THIS CAUSE is before the Court following a five-day bench trial that commenced on October 2, 2019 and ended on October 11, 2019. The parties submitted their closing arguments in writing and proposed findings of fact and conclusions of law following the filing of the trial transcripts. See ECF No. [83] (Defendant's Proposed Findings of Fact and Conclusions of Law); ECF No. [84] (Plaintiff's Proposed Findings of Fact and Conclusions of Law). The Court has carefully considered the evidence presented at trial, the applicable law, and the parties' submissions, including the parties' rebuttals, ECF Nos. [87], [88-1]. Set forth below are the Court's relevant findings of fact and conclusions of law.

I. INTRODUCTION

This case involves an attempt by the United States of America ("USA") to collect outstanding civil penalties assessed against Isac Schwarzbaum ("Schwarzbaum") for his alleged willful failure to timely file a complete and accurate Report of Foreign Bank and Financial Accounts ("FBAR"), Form TD F 90-22.1, as required by 31 U.S.C. § 3514 for tax years 2006, 2007, 2008 and 2009. See generally , ECF No. [1] ("Complaint"). In the Complaint, the USA asserts four counts seeking to reduce to judgment the previously assessed FBAR penalties for each applicable year (2006-2009), pursuant to 31 U.S.C. § 5321(a)(5), as well as interest and late payment penalties pursuant to 31 U.S.C. §§ 3717 (a)(1) and (e)(2). The IRS assessed FBAR penalties against Schwarzbaum for 2006 through 2009 in the amount of $13,729,591.00. The central issue in this case is whether Schwarzbaum's failure to comply with the FBAR reporting requirements for tax years 2006 through 2009 was willful.

II. FINDINGS OF FACT

A. Schwarzbaum's background

Schwarzbaum was born in Germany in 1955, and has lived in Germany, Spain, the United States, Costa Rica, and Switzerland. His assets are derived from his father's gifts and bequests. His father became successful in the textile business in Stuttgart, Germany, and then later in real estate. In the early 1990s, Schwarzbaum's parents left Germany for Switzerland. At the time, Schwarzbaum's father sold his businesses and had accumulated between $60 and $70 million, which continued to grow. In Switzerland, Schwarzbaum's father kept his money in a number of accounts at Swiss banks in order to diversify his wealth. Schwarzbaum received his first large gift from his father in 2001, when his father transferred an existing Swiss bank account into Schwarzbaum's name. In 2007, he received another large gift from his father.

Schwarzbaum received his high school diploma in Germany. He was not a strong student academically and did not take any courses in accounting, investing, or law. He thereafter completed a real estate internship in Germany and worked in real estate leasing. He then moved to Spain, where he opened a gym and worked in real estate sales and commercial real estate leasing. He speaks English, as well as German, Spanish, Hebrew, Portuguese and Yiddish. He received his real estate agent license in the United States sometime in the 1990's. He also formed several corporations in the United States, including U.S. World Publishing Group, U.S. World Trade, Inc., and Global Research Marketing Group. From 1993 to 2010, he spent part of each year in Costa Rica, part in Switzerland, and part in the United States. Schwarzbaum moved to the United States in 1993 but spent most of his time in Costa Rica because his girlfriend lived there. Schwarzbaum became a legal permanent resident of the United States in 1995, and a United States citizen in 2000. In September of 2010, Schwarzbaum moved and lived full time in Switzerland, eventually returning to live in the United States in 2016.

Schwarzbaum is a single father of two children. His son was born in 2007 and his daughter was born in 2009. Both children were born via surrogacy. Schwarzbaum traveled back and forth to California in 2006 and 2007 and again in 2008 to 2009 for the surrogacy process involving his children.

Schwarzbaum depended on his father for financial support while his father was alive and has lived off his father's bequests following his father's death in 2009. For many years, Schwarzbaum received between $100,000.00 and $200,000.00 per year from his father. In 2001, the pattern changed. Beginning in 2001, Schwarzbaum had an interest in certain financial accounts located in Switzerland. In 2004, Schwarzbaum opened foreign accounts in Costa Rica. His father began giving him large sums of money in 2001, when Schwarzbaum's father signed over one of his Swiss bank accounts, at Bank Raiffeisen, which contained approximately $3 million. Schwarzbaum kept the money invested in the same manner that his father had it invested. After his father's death, the money continued to be managed by the bankers based upon his father's instructions to keep the money conservatively. Schwarzbaum never directed how the money should be invested, nor did he disagree with a recommendation made by the bankers.

B. CPAs

Schwarzbaum always utilized certified public accountants ("CPAs") to prepare his United States tax returns. Brian Gordon ("Gordon") was the CPA who prepared Schwarzbaum's U.S. tax returns from approximately 1995 through 2005. Doris Shaw ("Shaw") was the CPA who prepared his tax return for tax year 2006. Gilman & Ciocia was the firm that prepared his tax returns for tax years 2007 through 2009. An individual named Robert Silver, who was Steve Weitz's ("Weitz") assistant and also a CPA seasonally employed at Gilman & Ciocia, prepared Schwarzbaum's 2007 tax return, and Weitz prepared Schwarzbaum's 2008 and 2009 returns.

At some point prior to the tax years at issue, Schwarzbaum told Gordon that his father supported him financially and that he was living off his father's gifts. When he told Gordon about the 2001 gift from his father, Gordon told him that since the assets were outside the U.S., there were no reporting requirements. Schwarzbaum told Gordon about subsequent gifts each year. Gordon never filed a FBAR or Schedule B to Form 1040, nor did he provide Schwarzbaum with a tax planner or organizer. Gordon told Schwarzbaum that gifts from a non-U.S. source were not taxable. However, Gordon did not tell Schwarzbaum that he did not have to pay taxes on any interest earned on a gift from a non-U.S. source. Schwarzbaum did not tell Gordon specifically about his interest in the Bank Raiffeisen account, nor did he tell Gordon about his Costa Rican bank account. Similarly, when Schwarzbaum told Shaw about the money he received from his family in Switzerland, she told him that gifts are not reportable, unless there is a U.S. connection. Schwarzbaum testified that in the years that Gilman & Ciocia prepared his tax returns, he met with Weitz once each year and took documents with him to the meeting. The tax return was prepared, Schwarzbaum received a letter saying how much he owed, and he then paid the amount. Schwarzbaum signed a form consenting to allow his return to be filed electronically and did not review his return with Weitz prior to filing. Schwarzbaum never hired anyone to translate or interpret the tax returns for him, and he never discussed whether he had to pay taxes on interest earned on non-U.S. accounts. Nobody ever told him that he did not have to pay taxes on the interest earned on non-U.S. accounts.

C. Foreign accounts

The USA presented evidence that for tax years 2006 through 2009, Schwarzbaum had an interest in eleven (11) Swiss bank accounts, including Aargauische Kantonalbank, two accounts at Union Bank of Switzerland, United Mizrahi Bank, Raiffeisen, Bank Linth, Banca della Swizzera Italiana, Clariden Leu, St. Galler Kantonalbank, Societe Generale, and Banca Arner. During the relevant years, Schwarzbaum also had an interest in two accounts at Scotiabank De Costa Rica in Costa Rica.

Bank Name	Last 4 Digits of Account No.	Date Opened	Date Closed
Aargauische Kantonalbank	2002	Nov. 2003	Open as of Mar. 2011
Union Bank of Switzerland ("UBS")	6308	Mar. 2004	June 2008
United Mizrahi Bank ("UMB")	4201	Mar. 2004	Oct. 2010
UBS	9250	Apr. 2005	June 2008
Raiffeisen	0824	Mar. 2008	Nov. 2009
Bank Linth	2004	June 2008	Oct. 2010
Banca della Swizzera Italiana ("BSI")	2142	June 2008	Open as of Mar. 2011
Clariden Leu	1119	June 2008	Nov. 2010
St. Galler Kantonalbank	1000	June 2008	Open as of Mar. 2011
Societe Generale ("SG")	0302	Oct. 2009	Dec. 2010
Banca Arner	5228	Nov. 2009	Nov. 2010
Scotiabank De Costa Rica S.A. ("Scotiabank")	1472	2004	2009
Scotiabank	0588	2006	2009

The USA also presented evidence that in opening several of the Swiss bank accounts, Schwarzbaum elected to have the banks retain his correspondence for a fee, assigned his accounts pseudonyms, and selected the option to refrain from investing in U.S. stocks. In addition, Schwarzbaum used his German passport to open several additional Swiss accounts, rather than his American passport.

D. 2006 tax return

In 2007, Schwarzbaum retained Shaw to prepare his tax return for the 2006 tax year. Schwarzbaum switched to Shaw for tax preparation services because he was not living in Miami and Gordon's office was in Miami. When he met with Shaw in 2007, he told her that he received gifts from his father and that his main residence was in Costa Rica. He brought bank documents and previous tax returns with him. He informed Shaw about his interest...