Bedrosian v. United States (FBAR Series)

Bedrosian v. United States, 3rd Cir. | September 25, 2018 | Ambro, J. | No. 17-3525

Short Summary: Taxpayer brought action to contest assessment of civil penalties by Internal Revenue Service (IRS) for not annually filing Report of Foreign Bank and Financial Accounts (FBAR). IRS counterclaimed for alleged full penalty amount, which included interest and late-payment penalty. The United States District Court for the Eastern District of Pennsylvania granted judgment for taxpayer after bench trial. IRS appealed.

Key Issue: First, whether there is federal jurisdiction over actions challenging the IRS’s assessment of civil FBAR penalties. Second, which standard the government must satisfy to prove a “willful” FBAR violation.

Primary Holdings:

District court had jurisdiction to render judgment, and therefore Court of Appeals had jurisdiction over appeal;
The government had to satisfy civil willfulness standard, which included both knowing and reckless conduct, to prove “willful” FBAR violation;
Remand was required because the court was unsure whether the district court applied the above standard at trial.

Key Points of Law:

Jurisdiction: Even if Bedrosian’s initial claim was not within the Court’s original jurisdiction for Bedrosian’s complaint, it had the authority to act by virtue of the Government’s counterclaim, which supplied jurisdiction under 28 U.S.C. § 1345. See Rengo Co. v. Molins Mach. Co., 657 F.2d 535, 539 (3d Cir. 1981) (“[A] jurisdictional defect in the complaint will not preclude adjudication of a counterclaim over which the court has an independent basis of jurisdiction.”). The Court therefore had jurisdiction under 28 U.S.C. § 1291 to review the District Court’s final judgment, unless another statute takes away our jurisdiction.
Standard of Review: No precedent required which standard of review applies to a district court’s willfulness determination under the FBAR statute. In the context of other civil penalties, this Court held that a district court’s determination of willfulness is a primarily factual determination that is reviewed for clear error. See Pignataro v. Port Auth. of N.Y. & N.J., 593 F.3d 265, 273 (3d Cir. 2010) (“Whether a violation of the FLSA is willful is a question of fact that is reviewed for clear error.”). Similarly, this circuit held that the Tax Court’s determination of willfulness in tax matters is reviewed for clear error. See Estate of Spear v. Comm’r, 41 F.3d 103, 114 (3d Cir. 1994). And the Supreme Court has held that clear error review applies to a trial court’s determination of “willful neglect” in the context of civil penalties for failure to pay federal taxes. See United States v. Boyle, 469 U.S. 241, 249 n.8, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985); accord Wind Indus., Inc. v. United States, 196 F.3d 499, 504 (3d Cir. 1999). We follow suit and hold that a district court’s determination in a bench trial as to willfulness under the FBAR statute is reviewed for clear error.
Willfulness standard: The court held that the proper standard for willfulness is the one used in other civil contexts—that is, a defendant has willfully violated [31 U.S.C. § 5314] when he either knowingly or recklessly fails to file [a] FBAR. Though “willfulness” may have many meanings, general consensus among courts is that, in the civil context, the term “often denotes that which is intentional, or knowing, or voluntary, as distinguished from accidental, and that it is employed to characterize conduct marked by careless disregard whether or not one has the right so to act.” Wehr v. Burroughs Corp., 619 F.2d 276, 281 (3d Cir. 1980). This holds true as well for recklessness in the context of a civil FBAR penalty. That is, a person commits a reckless violation of the FBAR statute by engaging in conduct that entails ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’ ”

Insight:

With regard to the jurisdiction question, an important distinction discussed in the court’s opinion is that the FBAR statute falls under Title 31 of the United States Code, not Title 26, the IRS title of the Code.[1] Therefore, the court did not have original jurisdiction over Bedrosian’s initial claim under the Little Tucker Act.[2] However, the subsequent counterclaim by the government gave the Court jurisdiction.[3] Therefore, because the district court properly exercised jurisdiction, the Third Circuit may exercise appellate jurisdiction.[4] Also, on the subject of jurisdiction, the court found that the United States Court of Appeals for the Federal Circuit does not have exclusive jurisdiction over FBAR penalty cases because these cases’ arise out of laws that provide for internal revenue.[5]

On the issue of willfulness, the third circuit remanded this case because it found that the district court did not properly inquire into Bedrosian’s behavior in assessing whether his FBAR violation was willful. While the district court did discuss whether Bedrosian acted knowingly, it did not consider whether, when his 2007 FBAR filing came due, he “(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily.” Carrigan, 31 F.3d at 134 (quoting Vespe, 868 F.2d at 1335 (internal quotation omitted).[6] So, this gives some guidance on how a trial court would properly assess the willfulness standard, depending on whether the defendant should have known that an accurate FBAR should be filed and the amount of information available to them on such a matter.[7]

[1] Bedrosian v. United States of America, 912 F.3d 144, 149 (3rd Cir. 2018).

[2] Id.

[3] Id. at 150.

[4] Id.

[5] Id.

[6] Id. at 153.

[7] Id.