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United States v. Horowitz

United States District Court, D. Maryland, Southern Division

January 18, 2019

PETER HOROWITZ, et al., Defendants.


          Paul W. Grimm United States District Judge

         United States citizens Peter Horowitz and Susan Horowitz lived in Saudi Arabia for most years between 1984 and 2001. Beginning in 1988, they maintained a Swiss bank account at the Union Bank of Switzerland (“UBS”), with money that Peter earned working as an anesthesiologist in Saudi Arabia. When they returned to the United States they did not close their Swiss bank account; by 2008, its balance was almost $2 million. Toward the end of 2008, Peter transferred the money to another Swiss bank account, at Finter Bank (“Finter”), this time in his name only. Yet, Peter, who communicated for the couple with their accountant, never mentioned the accounts, and they signed their tax returns each year without ever answering “Yes” to the income tax return question about whether they had money in an overseas account or filing a file Form TD F 90-22.1 (“FBAR”) to disclose either account. In 2010, they disclosed the funds for the first time, and in June 2014, the Government assessed penalties of $247, 030 against each of them for their alleged willful failure to disclose the UBS account for the 2007 tax year and penalties of $247, 030 against each of them for their alleged willful failure to disclose the Finter account for the 2008 tax year.

         The Government has brought this action to collect those penalties, and it moves for summary judgment on its claims. ECF No. 66.[1] The Horowitzes have filed a cross-motion for summary judgment, ECF No. 68, arguing that the IRS reversed the 2014 penalties, such that the penalties the Government is trying to collect were not assessed until 2016, at which time they were untimely. They also argue that their failure to disclose was not willful-a point that would reduce the maximum penalties from 50% of the amount in the foreign account at the time of the violation to $10, 000. Because the Horowitzes have not shown that the IRS actually reversed the penalties in 2014, they have not established that the statute of limitations ran before the penalties were assessed. Further, the undisputed facts show that their failure to disclose the UBS account on their 2007 tax return was willful, and that Peter's failure to disclose the Finter account on their 2008 tax return also was willful. Therefore, the Government's motion will be granted and Defendants' denied with regard to the penalties for 2007 and those assessed against Peter for 2008.

         But, as noted, in October 2008, Peter transferred the funds out of their joint Swiss bank account into a Swiss bank account in his name only at Finter Bank. Despite the undisputed evidence that the parties intended for Susan to be a holder on that account as well, and that they added her to the account in 2009, Susan was not an account holder on the Finter account in 2008. Nor has the Government shown that she had any financial interest in or authority over the Finter account in 2008. Therefore, she had no obligation to disclose the Finter account, and FBAR penalties against her for 2008 are not appropriate.[2] Accordingly, Susan's individual motion for partial summary judgment on this claim regarding 2008 penalties is granted, and the Government's motion with regard to 2008 penalties against Susan will be denied.

         FBAR Penalties

         Individuals who pay taxes to the United States must “report annually to the Internal Revenue Service (‘IRS') any financial interests they have in any bank, securities, or other financial accounts in a foreign country.” United States v. Williams, 489 Fed. App'x 655, 656 (4th Cir. 2012) (citing 31 U.S.C. § 5314(a)). To do so, a taxpayer must file “a completed form TD F 90-22.1 (‘FBAR') with the Department of the Treasury . . . . on or before June 30 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year.” Id. (citing 31 U.S.C. § 5314; 31 C.F.R. §§ 1010.350, 1010.306(c)). If a taxpayer fails to file a timely FBAR, “the Secretary of the Treasury may impose a civil money penalty.” Id. (citing 31 U.S.C. § 5321(a)(5)(A)).

         When a violation is not “willful, ” the amount of civil penalty is capped at $10, 000. 31 U.S.C. § 5321(a)(5)(B)(i). In contrast, “[i]n the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314, . . . the maximum penalty [of $10, 000 for a non-willful violation] shall be increased to the greater of-(I) $100, 000, or (II) 50 percent of the [balance in the account at the time of the violation].” 31 U.S.C. § 5321(a)(5)(C)(i); see United States v. Shinday, No. 18-CV-6891-CAS-EX, 2018 WL 6330424, at *3 (C.D. Cal. Dec. 3, 2018) (quoting 31 U.S.C. § 5321(a)(5)(C) and noting that Congress removed the original $100, 000 cap on penalties for willful violations when it amended the statute in 2004).

         The Horowitzes do not dispute the statutory provision. Defs.' Am. Reply 14. Nonetheless, they argue that “the Department of the Treasury, via notice and comment rulemaking promulgated regulations, limited the maximum amount of willful FBAR penalties to $100, 000.” Id. (citing 31 C.F.R. § 103.27). And, relying on United States v. Colliot, 2018 WL 2271381, at *3 (W.D. Texas 2018), they insist that “the IRS cannot act outside of its own regulation.” Id. at 15.

         It is true that 31 C.F.R. § 103.27, which is now 31 C.F.R. § 1010.820(g)(2), provides that “[f]or any willful violation committed after October 27, 1986 . . . the Secretary may assess upon any person, a civil penalty[] . . . not to exceed the greater of the amount (not to exceed $100, 000) equal to the balance in the account at the time of the violation, or $25, 000.” 31 C.F.R. § 1010.820(g)(2) (reorganized and renumbered, with technical corrections, eff. Mar. 1, 2011). But, as the Court of Federal Claims recently explained:

On October 22, 2004, Congress enacted a new statute that increased the statutory maximum penalty for a “willful” violation to “the greater of [ ] $100, 000, or [ ] 50 percent of the ... balance in the account at the time of the violation.” See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, 1586, § 821 (Oct. 22, 2004) (“Jobs Creation Act”). And, on July 1, 2008, the IRS issued I.R.M. §, that stated: “At the time of this writing, the regulations at [31 C.F.R. § 1010.820] have not been revised to reflect the change in the willfulness penalty ceiling.” I.R.M. § The IRS, however, warned that, “the statute [i.e., the Jobs Creation Act] is self-executing and the new penalty ceilings apply.” I.R.M. § Although, the Jobs Creation Act is inconsistent with 31 C.F.R. § 1010.820(g)(2), it is settled law that an agency's regulations “must be consistent with the statute under which they are promulgated.” United States v. Larionoff, 431 U.S. 864, 873, 97 S.Ct. 2150, 53 L.Ed.2d 48 (1977). Since the civil penalty amount for a “willful” violation in 31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i) (2004), the April 8, 1987 regulations are “no longer valid.” Norman, 138 Fed.Cl. at 196.

Kimble v. United States, No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018) (emendations in original). The Kimble Court persuasively rejected the Colliot Court's conclusion that “the IRS is still bound by the maximum penalty in the pre-2004 statute, ” reasoning that the conclusion “conflicts with the decision of the United State Court of Appeals for the Federal Circuit in Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997), where the Federal Circuit concluded that the fact that regulations “had not been formally withdrawn from the Code of Federal Regulations [did] not save them from invalidity” based on a conflicting federal statute. Id. (quoting Barseback, 121 F.3d at 1480). On that basis, the Kimble Court affirmed a civil penalty of $697, 229, representing 50% of the relevant account balance.

         Moreover, the IRS's Internal Revenue Manual (“I.R.M.”) § now provides that “[f]or violations occurring after October 22, 2004, the statutory ceiling is the greater of $100, 000 or 50% of the balance in the account at the time of the violation.” I.R.M. § (Nov. 6, 2015).

The purpose of the IRS Manual is to govern the internal affairs of the Internal Revenue Service. See United States v. Horne, 714 F.2d 206, 207 (1st Cir.1983). The provisions of the manual do not have the force of law and are not mandatory or binding for the IRS. See Id. See also Anderson v. United States, 44 F.3d 795, 799 (9th Cir.1995). Despite these weaknesses, the manual has been used, on a limited basis, to provide guidance in interpreting terms in regulations. See United States v. Boyle, 469 U.S. 241, 243 n. 1, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985) (citing IRM section 4350(24) for what constitutes reasonable cause for filing a late tax return). Thus, it is possible for sections of the IRS manual to bear a limited relevance to actions such as the one at hand.

Vons Cos. v. United States, 51 Fed.Cl. 1, 13 n.12 (2001), modified, No. 00-234T, 2001 WL 1555306 (Fed. Cl. Nov. 30, 2001), and abrogation on other grounds recognized by Alpha 1, L.P. ex rel. Sands v. United States, 83 Fed.Cl. 279, 288 (2008). I agree with the Kimble Court that 31 C.F.R. § 1010.820(g)(2) cannot be enforced in light of its conflict with 31 U.S.C. § 5321(a)(5)(C)(1) and this more recent provision from the IRS's Internal Revenue Manual. See Kimble, 2018 WL 6816546, at *15; I.R.M. §

         “The authority to enforce such assessments has been delegated to the IRS.” Williams, 489 Fed. App'x at 656 (citing 31 C.F.R. § 1010.810(g)). The statute of limitations for assessing civil penalties for FBAR violations of 31 U.S.C. § 5314 is six years, and it begins to run on the date that the FBAR is due. 31 U.S.C. § 5321(b)(1); see United States v. Bussell, No. CV1502034SJOVBKX, 2015 WL 9957826, at *6 (C.D. Cal. Dec. 8, 2015) (“The Secretary of the Treasury may assess a civil penalty for willfully failing to timely report financial interests in foreign accounts “at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed.”).


         Defendants Peter Horowitz, M.D. and Susan Horowitz, Ph.D. are U.S. citizens who have been married since 1969. Jt. Stip. of Facts 1. They lived and worked in Saudi Arabia from 1984 to 1992 and 1994 to 2001. Id. ¶¶ 4, 9, 10. Susan, who only worked part of the time they resided in Saudi Arabia, was paid in cash, which she spent on family living expenses. Id. ¶¶ 10, 13, 14. From 1984 to 1988, Peter “deposited most of his salary into a Saudi Arabian account at Al-Rajhi Bank, which had a branch at the King Feisal Hospital where he worked.” Id. ¶ 12.

         Using funds from his Al-Rajhi Bank account, Peter established an account at the Swiss bank Foreign Commerce Bank (“FOCO”) in 1988. Id. ¶ 16. When the Horowitzes returned to the United States in 1992, “Peter withdrew the remaining balance in his account at Al-Rajhi Bank.” Id. ¶ 18.

         In 1994, the Horowitzes returned to Saudi Arabia, and Peter closed the FOCO bank account and opened an account at the Union Bank of Switzerland (“UBS”), “using funds transferred from his FOCO account.” Id. ¶¶ 19, 21, 22. Peter and Susan jointly owned the UBS account, and the “account opening documents listed an address for Peter and Susan [in] Saudi Arabia.” Id. ¶¶ 23, 27. Peter used his account at the Al-Rajhi Bank again beginning in 1997 and transferred his savings to the UBS account. Id. ¶ 25.

         When the Horowitzes left Saudi Arabia for the United States in 2001, Peter again withdrew the funds that remained in his Saudi Arabian bank account. Id. ¶ 26. The Horowitzes left the UBS account open. Id. ¶ 26.

         From 2001 to 2008, Peter monitored the UBS account “by calling the bank every year or two, ” and neither of the Horowitzes made any deposits into or withdrawals from the account. Id. ¶¶ 28-29. After “read[ing] troubling news articles concerning UBS, ” Peter called UBS and then traveled to Switzerland in October 2008 and closed the account. Id. ¶¶ 30, 32, 34-35.

         Peter transferred the account balance to an account that he opened at another Swiss bank, Finter Bank (“Finter”). Id. ¶ 36. Peter had brought Susan's passport with him “to designate her as a joint account owner of the Finter account at the time that he opened that account, ” but Finter would not allow him to do so because Susan was not present. Id. ¶ 37. When Peter opened the account, he filled out a “List of Authorized Signatories and Powers of Attorney for Natural Persons, ” designating Susan as a person to whom he gave “an unlimited power of attorney.” Finter Bank Docs., ECF No. 87-8, at 1-2. Because she was not present, Susan could not sign the “signature specimen” box on the form. See id.

         According to the Government,

The UBS account was a “hold mail” account in which the bank agreed to hold statements at the bank for pickup or inspection by the account holders rather than mailing them to account holders on a periodic basis. “BLST Zurich” is the only information that appeared in the address field of the Defendants' UBS bank account statements. UBS typically charged a fee for this “hold mail” service.

Compl. ¶ 13, ECF No. 1. Peter Horowitz neither admitted nor denied this allegation. P. Horowitz Ans. ¶ 13, ECF No. 17. Peter did, however, admit in his Answer that “Finter Bank designated the account as a numbered account and a hold mail account.” Id. ¶ 21 (emphasis added). Yet, Peter testified on November 9, 2017 that when he identified the UBS account as a hold mail account on an IRS Offshore Voluntary Disclosure Program form, he did so incorrectly, as it was not. P. Horowitz Dep. 127:19 - 129:16, 131:12-19; see also Forms, ECF No. 87-1.

         The Horowitzes did not make any additional deposits after opening the Finter account. Jt. Stip. of Facts ¶ 40. In October 2009, they traveled to Switzerland and added Susan “as a joint owner of record of the Finter account.” Id. ¶ 41.

         Accountant Jack Weiss began preparing Peter's personal tax returns beginning in about the late 1970's and continuing through the time the Horowitzes lived in Saudi Arabia, during which time he prepared their joint income tax return. Id. ¶¶ 42-45. Weiss would prepare the tax returns and mail them to the Horowitzes for signature, and the Horowitzes would sign them and submit them to the IRS. Id. ¶¶ 46-47. Accountant Ivan Sokoloff began preparing the Horowitzes tax returns sometime after they returned from Saudi Arabia, and he prepared their 2007 and 2008 joint tax returns, which Donald Hilker, a partner at the firm where Sokoloff worked, “reviewed and signed as the ‘paid preparer.'” Id. ¶¶ 51, 53, 54. The Horowitzes' tax returns, “including those for 2007 and 2008, were prepared relying on summaries of tax-pertinent information that Peter prepared and mailed to the return preparer each year”; those “summaries never listed the UBS or Finter account.” Id. ¶¶ 48, 49. Additionally, Peter, who communicated with the accountants on behalf of himself and his wife, id. ¶ 49, never asked whether he should disclose either account. P. Horowitz Dep. 168:6-9, ECF No. 87-1.

         The 2007 tax return included “Part III: Foreign Accounts and Trusts, ” which stated:

You must complete this part if you (a) had over $1, 500 of taxable interest or ordinary dividends; or (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
7a At any time during 2007, 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? See page B-2 for exceptions and filing requirements for Form TD F 90-22.1 [FBAR].
b If “Yes, ” enter the name of the foreign country.
8 During 2007, did you receive a distribution from, or were you the grantor of, or ...

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