Court Rejects FBAR Summary Judgment For Holocaust Survivor, Schik

Court Rejects FBAR Summary Judgment For Holocaust Survivor, Schik

Denial of FBAR Summary Judgment Against Holocaust Survivor

In recent years, the Internal Revenue Service and US Government have aggressively pursued foreign account penalties against US Taxpayers who may have missed their annual reporting on the FBAR Form (Foreign Bank and Financial Account Reporting aka FinCEN Form 114). Sometimes, penalties and court enforcement is warranted — but oftentimes it is not. In the case of Schik, he is literally a 100-year old man and a Holocaust Survivor — who at 13-years old was separated from his family and forced to live in a concentration camp. These facts alone should have required the IRS and US Government to take their foot off the gas pedal for a moment and reconsider their strategy. Instead, they dropped the hammer and pursued this man for summary judgment on nearly $10,000,000 of FBAR Penalties. Since the Government refused to slam the brakes, the court went ahead and slammed the brakes for them. And, not only did the Court reject the government’s motion for Summary Judgment, but they also (clearly) laid-out exactly why there were genuine issues of material fact regarding willfulness. Here are some key excerpts from the case:

An Elderly Holocaust Survivor

      • Walter Schik is an almost one hundred-year-old Holocaust survivor. 56.1 ¶¶ 61-62. At just thirteen years of age, Mr. Schik was forcibly separated from his family in Austria and sent to a Hungarian concentration camp. 56.1 ¶ 61.

      • The Holocaust interrupted Mr. Schik’s formal education, leaving him with only an elementary-level education, which he had begun prior to internment. 56.1 ¶¶ 61-62. Mr. Schik’s family died in the concentration camps, but, somehow, he survived. 56.1 ¶¶ 61, 63.

      • After the war ended and he was liberated from the Hungarian camp, Mr. Schik moved to the United States in 1947. 56.1 ¶ 63. Ten years later, he became a United States citizen. 56.1 ¶ 63.

Swiss Bank Account for Legitimate Reasons

      • Shortly after becoming a citizen, Mr. Schik opened a bank account at UBS AG (“UBS”) in Switzerland to deposit money “recovered from the Holocaust” from relatives that died in the concentration camps. 56.1 ¶ 63.

      • Because Switzerland was neutral during World War II, Mr. Schik’s accounts there served “as a safety-net in case of another Holocaust.” 56.1 ¶¶ 64-65. The money had no ties to the United States, and Mr. Schik did not touch the money. 56.1 ¶¶ 63-65.

He Hired a Professional Money Manager

      • Mr. Schik did not manage the money in the Swiss account. He left that task to David Beck, “a Swiss money manager,” and his son, Josef Beck, who later took over his father’s business. 56.1 ¶¶ 14, 65.

      • At various times, David and Josef Beck “opened” accounts on behalf of Mr. Schik, who “did not fill out any of [the] documents aside from signing his name” to “stack[s] of forms.” See 56.1 ¶ 13. Mr. Schik “spoke by phone with David Beck a few times per year,” 56.1 ¶ 29, later working with Josef Beck when he succeeded his father, 56.1 ¶ 30.

      • Over the years, the Beck’s opening and closing of various accounts ultimately resulted in two bank accounts relevant here: one account with an account number terminating in 8030 (the “8030 Account”), and one terminating in 6451 (the “6451 Account”) (collectively, “the Accounts”). 56.1 ¶¶ 5, 63.

Mistake on Schedule B

      • Question 7(a) of Schedule B of his 2007 tax return asked “whether [Mr. Schik] had an interest in or signature or other authority over any foreign financial accounts in 2007,” and directed completion of the form if he “had a foreign account.” 56.1 ¶¶ 38-39.

      • The pre-filled answer to Question 7(a) of Schedule B, apparently inputted by his tax preparer’s software, was “no.” 56.1 ¶ 41. Mr. Schik admits the answer was “incorrect” because, “in fact, [Mr.] Schik had an interest in or signature or other authority over foreign financial accounts at UBS in 2007.” 56.1 ¶¶ 41-42.

      • While Mr. Schik “had the opportunity to review his 2007 tax return after it was prepared by Mr. Laufer,” he did not do so before signing. 56.1 ¶¶ 45. Instead, he “looked generally at his 2007 tax return before signing it.” 56.1 ¶ 45.

What Constitutes a Willful FBAR Violation?

      • To be found liable for a willful violation under 31 U.S.C. § 5321(a)(5), the United States must prove by a preponderance of the evidence that:

        • (1) Mr. Schik is a United States citizen,

        • (2) Mr. Schik had an interest in, or authority over a foreign financial account;

        • (3) the account had a balance exceeding $10,000.00 at some point during the reporting period; and

        • (4) Mr. Schik willfully failed to disclose the account and file a FBAR. 31 U.S.C. §§ 5314, 5321(a)(5)(A); 31 C.F.R. §§ 1010.350(a) and (b). There is no dispute with respect to the first three elements. 56.1 ¶¶ 1, 5-6; see also Opp. at 9 (arguing only the willfulness prong). Mr. Schik also concedes that he did not timely file an FBAR for 2007. 56.1 ¶ 7.

      • The Parties vigorously dispute whether Mr. Schik’s failure to file the 2007 FBAR was a willful violation of § 5321.

Genuine Issues of Material Fact Regarding Willfulness

      • On summary judgment, the Court is obligated to construe all facts and draw all possible inferences in favor of Mr. Schik as the non-moving party. See Scott, 550 U.S. at 380. On the record before it, and drawing all reasonable inferences in favor of Mr. Schik, the Court concludes that there are genuine issues of material fact regarding whether Mr. Schik’s failure to file the 2007 FBAR was willful rather than merely negligent. Those issues should be resolved by a jury and not by the Court on summary judgment.

Sidenote: IRS Concedes The Penalty is Incorrect

      • A penalty amount calculated by the IRS may be reviewed to ensure that it is not arbitrary and capricious. See 5 U.S.C. § 706(2)(A). The Government concedes that errors in the penalty assessment render the amount incorrect, and that its process was deficient. Mem. at 14 (arguing that the matter “should be remanded to the IRS for calculation of the correct penalty amount.”). In particular, the Government “has been unable to identify the records supporting the revenue agent’s conclusion as to the . . . balance [in the accounts needed for penalty calculation] as of December 31, 2007.” Mem. at 15.

      • “If the record before the agency does not support the agency action . . . the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation.” Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985); see also Citizens Against the Pellissippi Parkway Extension, Inc. v. Mineta, 375 F.3d 412, 416 (6th Cir. 2004) (it may be “an abuse of discretion to prevent an agency from acting to cure the very legal defects asserted by plaintiffs challenging federal action.”).

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm for assistance with getting compliant.