Court Affirms Willful FBAR Penalty & Rejects No Financial Interest Claim

Court Affirms Willful FBAR Penalty & Rejects No Financial Interest Claim

Court Affirms Willful FBAR & Rejects No Financial Interest Claim

Court Affirms Willful FBAR, Rejects No Financial Interest Claim: In recent months, Taxpayers hit with willful FBAR penalties have had a tough go at it with the Court of Federal Claims. In the FBAR Penalty case of Landa v US, the Court of Claims affirmed a willful IRS FBAR penalty of more than $3 million. The penalty involved a Swiss Bank Account worth several million dollars. Taxpayer’s main argument was that he did not have financial interest in the account under ownership laws in Switzerland. Unfortunately for Mr. Landa, there were many facts weighing against him, including:

  • He was the only name on the account
  • He requested the account be opened as a Numbered Account
  • He requested more than 100-pages of transaction history be destroyed
  • He claimed a trust relationship, but had no trust in place
  • He marked “No” on Schedule B and did not report the income
  • He always remained the only name on the BSI account; and
  • He visited the Bank to check on his account and was the only person who made the visits

Let’s take a look at what happened in Leon Landa v US and why the Court Affirms Willful FBAR Penalty issued by the IRS.

Landa v US (Case 1:18-cv-00365-RAH)

This case is post-Kimble at the Court of Claims, which again finds for the fact that Schedule B noncompliance mixed with anything that resembles willfulness involving foreign accounts compliance may have the makings of a willful FBAR violation.

Who Must File the FBAR?

      • “An individual required to file an FBAR must do so on or before June 30 of the year following the calendar year for which the report is made.

        An individual must file an FBAR for any foreign financial account with a balance exceeding $10,000 at the close of the relevant calendar year.”

Late or Missed FBAR Filing

      • “The Bank Secrecy Act grants the Secretary of the Treasury the authority to impose a “civil money penalty” on any person who fails to file a required FBAR. 31 U.S.C. § 5321(a)(5).

        The Secretary delegated this authority to the IRS. 31 C.F.R. § 103.56(g).”

What Happened in Landa v. US

      • In June 2009, Mr. Landa traveled to Switzerland alone.

        On June 12, 2009, Mr. Landa visited Credit Suisse to withdraw the balance of the account.

        Later that day, Mr. Landa visited UBS. At UBS, he was told he was required “to close the account.”

      • Landa returned to Credit Suisse on the same day intending to transfer the balance of funds in the UBS account to Credit Suisse.

        Upon arrival at Credit Suisse’s office in Zurich, an employee advised him that it was “probably not a good idea” to transfer money from UBS to Credit Suisse because, in the wake of the UBS investigation, the U.S. government would “check Credit Suisse.

      • Mr. Landa testified at his deposition that he was advised to open an account at a bank that “doesn’t do any operation in the United States. The Credit Suisse advisor suggested to Mr. Landa that he open an account at BSI, which was located only a few blocks away. 

      • The Credit Suisse advisor referred the plaintiff to a banker at BSI. 

BSI Account in Switzerland

      • That same day, June 12, 2009, the plaintiff opened an account in person with BSI, AG (“BSI”), at its Zurich office. The plaintiff applied to open the BSI account, identifying only himself as the account holder on the application, and he included his address and passport number.

      • The account was opened as a numbered account.

      • Landa signed his name under paragraph (b), which provided: “I do not authorise disclosure of my name. I am aware that the Bank will not invest in US securities on my account.”

      • In September 2009, the plaintiff traveled again to Switzerland and visited the Zurich office of Credit Suisse. On September 14, 2009, the plaintiff signed a document directing Credit Suisse to “close my account and hand out this [sic] proceeds by cheque.”

      • Landa endorsed the check and deposited the Credit Suisse funds into the BSI account.

      • That same day, Mr. Landa directed UBS to close his account, issue a check payable to Leon Landa.

      • UBS issued a check in the amount of $2,154,000.66 (USD).

      • Beginning in spring 2010, the plaintiff visited Switzerland on a yearly basis to monitor the BSI account. No other member of the Landa family visited BSI to check on the account.

      • Landa directed BSI to hold mail at the bank so he would not receive mail about the account in the United States.

      • On March 25, 2011, the plaintiff signed a held-mail receipt directing BSI to destroy 142 pages of correspondence dated between September 15, 2009, and March 23, 2011. (Id.) The plaintiff has withdrawn funds from the BSI account on limited occasions.

What does this Mean?

It means that the Taxpayer took great lengths to open an account at an institution in Switzerland in which he would avoid detection by the US government. He opened a “Numbered Account” which is used to avoid being personally associated with the account, so instead of having the Taxpayer’s name for account identification purposes — it substitutes the name for a number. In addition, he paid the institution an additional fee for them to hold his Mail so that he would not receive any information about the account — as well as affirmed that the bank would not be investing in any US Securities — in an attempt to avoid detection by the US Government.

Schedule B, Form 1040

      • “Included with Mr. Landa’s 2009 tax return was a Schedule B form for reporting income from “Interest and Ordinary Dividends.” At the bottom of Schedule B, on line 7a, the form asked taxpayers: “At any time during 2009, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” (Id.)

      • In response, the plaintiff ticked the “No” box.

      • Landa did not disclose income from the BSI account on his 2009 federal income tax return.

      • In February 2010, the IRS issued Treasury Notice 2010-23. This Notice extended the filing deadline for some taxpayers required to file a 2009 FBAR. 2010-11 I.R.B. 441, 2010 WL

      • The Notice provided that: “Persons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts.” Id.

      • It instructed that “[w]hen completing an FBAR that is subject to the extension provided in this paragraph, persons must adhere to FBAR guidance in effect at the time the FBAR is filed.”

Petitioner Claims He Had No Financial Interest

      • “The plaintiff challenges the IRS’s determination that he had a financial interest in the BSI account.

        He argues that he had no financial interest in the account because he was merely a trustee, and the funds were held for the benefit of others.

      • Because Gersh Landa was never well enough to travel to Switzerland, however, the BSI account opened in 2009 remained only in the name of Leon Landa, both during that calendar year and until it was subsequently closed in 2013.”

But His Own Swiss Attorney Disputes This Fact

      • “The defendant notes that even the plaintiff’s Swiss counsel’s opinion acknowledged that the plaintiff was the “formal account holder under Swiss law,” even if not necessarily the beneficial owner.”

The Court is Sympathetic But Finds No Formal Trust in Place

      • “The Court also finds that no trust was in existence in 2009. The Court remains sympathetic to the unusual circumstances presented in this case and recognizes that the account may have been intended to benefit the Landa family rather than Leon Landa specifically. The plaintiff’s family history suggests that the funds were meant to support the Landa family in an emergency like the situation in which the family found itself in World War II.

      • As the plaintiff testified, even when the family was desperately short of money, upon leaving communist Ukraine for the West, the Swiss funds were left untouched.

      • The plaintiff acknowledges, however, that no formal trust was established prior to 2011. While the funds understandably may not have belonged to the plaintiff in a practical sense, the law nevertheless defines “financial interest” in a manner that includes the facts of this case—the broad definition encompasses an account held for the benefit of others.

      • The Court finds that Mr. Landa had a financial interest in the BSI account as the owner of record and was required to file an FBAR.”

But Was Taxpayer in Willful FBAR Violation?

Unfortunately, a technical/procedural glitch prevented Taxpayer from formally opposing willfulness at this tage, but the Court decided to summarize their position on willfulness nonetheless.

      • “The plaintiff failed to raise the issue of willfulness in Count I of his amended complaint, which challenges the imposition of the FBAR penalty; he did not allege that his failure to file a timely FBAR was not willful.

      • Rather, the plaintiff’s only claim in his complaint regarding willfulness arises in connection with Count II, relating to his eighth amendment argument that the fine imposed was excessive.

      • The plaintiff acknowledged at oral argument that willfulness, insofar as it relates to the imposition of the penalty itself, was not pleaded in his complaint. Because the plaintiff did not challenge the IRS’s finding that he acted willfully in his complaint, the plaintiff has waived this issue.”

Claims Court Still Finds Taxpayer was FBAR Willful

      • “For the sake of completeness, the Court nevertheless addresses the willfulness issue and finds that, even if the plaintiff had not waived the issue, the undisputed facts in the case support a finding that the plaintiff acted willfully.

      • This case presents many of the same factors the Federal Circuit and other judges of this court considered in Kimble and Norman. Mr. Landa opened the BSI account as a numbered account.

      • He declined to allow BSI to file a W-9.

      • He failed to disclose this foreign account to his accountant and never asked his accountant how to report the income from the foreign account, as in Kimble.

      • He filed his 2009 tax return on April 14, 2010, and admits that “he did not report income earned from the BSI account” on his “original Form 1040 federal income tax return for the 2009 tax year.”

      • He further indicated on Schedule B of his 2009 Form 1040 that he did not have any interest or signature or other authority over an overseas account.

      • As additional factors, Mr. Landa directed BSI not to invest in U.S. securities on his behalf…and directed BSI to retain correspondence at the bank; he later directed BSI to destroy that correspondence.

      • This case bears none of the hallmarks of the type of case the Federal Circuit indicated would allow a taxpayer to claim a non-willful violation of the FBAR requirement.”

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