DEAN D. PREGERSON, UNITED STATES DISTRICT JUDGE.
Plaintiff, United States of America, seeks to collect a civil penalty assessed to Defendants August Bohanec and Maria Bohanec (collectively, "Defendants" or "the Bohances") for willful failure to report their interest in foreign bank accounts during tax year 2007, as required under 31 U.S.C. § 5314 and its implementing regulations. This matter was tried before the court on November 1, 2016. Having considered the submissions and arguments of the parties, as well as the evidence in the record, the court hereby makes the following findings of facts and conclusions of law.
1. August Bohanec was born in 1933 in Slovenia.
2. August Bohanec immigrated to the United States in 1961 and became a naturalized citizen of the United States in the mid-to-late 1960s.
3. Before immigrating to the United States, August Bohanec was trained as a tool-and-die maker.
4. Maria Bohanec was born in 1943 in Mexico.
5. Maria Bohanec immigrated to the United States in the 1960s and became a naturalized citizen of the United States in the 1990s.
6. The highest level of education Maria Bohanec has is the 6
7. August Bohanec and Maria Bohanec have been continuously married since at least 1970.
8. August Bohanec owns two camera-related patents. (Reporter's Transcript ("RT") 32:2-3.)
9. August Bohanec obtained the two patents without any assistance from a lawyer or anyone else. (RT 32:6-19.)
10. In the 1970s, the Bohanecs purchased a camera shop in Pasadena, California, called Alvin's ("the camera shop").
11. The Bohanecs knew that they had to file tax returns for the camera shop business and that if they earned money, they had to pay taxes. (RT 7:11-13, 22-23.)
12. The Bohanecs always had a tax preparer prepare the camera shop's tax returns. (RT 7:17-19, 24-25; 8:1-2.)
13. The Bohanecs initially sold many different brands of cameras at the camera shop.
14. The camera shop lost sales to larger discount stores that sold Japanese cameras. (RT 25:7-11.)
15. The Bohanecs came to an agreement with Leica, a German camera manufacturer, to become an exclusive Leica dealer.
16. The camera shop was the only exclusive Leica dealer in the world. (RT 25:15-17.)
17. The Bohanecs initially obtained their Leica merchandise from Leica's distributor in New Jersey, which was the exclusive distributor of Leica products in the United States.
18. After other retailers complained about the deals the camera shop received from Leica's New Jersey distributor, the distributor began restricting
19. Leica had a subsidiary in Canada called Leitz Canada.
20. Through the camera shop, the Bohanecs became acquainted with the president of Leitz Canada, Walter Kluck ("Kluck").
21. Sometime in the late 1970s or the early-to-mid 1980s, Kluck offered to sell Leica cameras to the Bohanecs directly from Leitz Canada.
22. By purchasing Leica cameras from Leitz Canada, the camera shop was able to avoid the supply constraints imposed by Leica's exclusive United States distributor. (RT 26:12-20.)
23. The camera shop gained a worldwide reputation for repairing and refurbishing certain Leica camera parts. (RT 27:3-6.)
24. The camera shop shipped to customers around the world, including in the United States, the Philippines, England, South Korea, and Hong Kong. (RT 8:9-21.)
25. During the 1980s, the Bohanecs brokered transactions between Leitz Canada and various camera retailers around the world. Kluck contacted the Bohanecs requesting their assistance in finding international buyers, for which the Bohanecs would earn a commission.
26. Commissions for international sales were deposited into an account at UBS AG in Switzerland in the Bohanecs' name.
27. UBS AG is a Swiss financial-services company.
28. Kluck opened the Swiss account on the Bohanecs' behalf. (RT 11:3-4, 29:1-3.)
29. The Bohanecs did not provide UBS AG with their home address. (RT 29:10-14.)
30. The Bohanecs did not tell anyone in the United States, other than their two children, of the existence of the Swiss account. (RT 33:9-21.)
31. By the time the Bohanecs had the Swiss account, they no longer used a bookkeeper or kept any books. (RT 13:1-8.)
32. The Bohanecs never discussed the Swiss account with an accountant, lawyer, or banker. (RT 13:14-21, 29:20-25, 30:1-8.)
33. In addition to the Leitz Canada commission deposits, the Bohanecs directed their international customers, on at least a few occasions, to deposit money directly into the Swiss UBS account.
34. The Bohanecs did not report the commission income they received from Leitz Canada on their federal income-tax returns.
35. The UBS account was managed by Walter Kluck while he was alive and, thereafter, by UBS.
36. At some point, Kluck told the Bohanecs that the Bohanecs' UBS account had a balance in excess of $700,000.
37. The Bohanecs closed Alvin's Camera sometime in the late 1980s.
38. Beginning in the early 2000s and continuing through at least 2009, the Bohanecs sold Leitz cameras and parts on Ebay.
39. The Bohanecs would occasionally withdraw money from their UBS account.
40. In June 2003, the Bohanecs transferred $10,000 from their UBS account in Switzerland to their daughter, Yolanda Reischer-Bohanec. Exhibit 11 is a copy of the UBS notice regarding this transfer.
41. In July, 2003, the Bohanecs transferred $25,000 from their UBS account
42. In December 2003, the Bohanecs transferred $20,000 from their UBS account in Switzerland to their bank account in Austria. Exhibit 13 is a copy of the UBS notice regarding this transfer.
43. In February 2006, the Bohanecs opened a bank account in Mexico and transferred $25,000 from their UBS account in Switzerland to Mexico for expenses related to a house they were building in Mexico. Exhibit 14 is a copy of the UBS notice regarding this transfer. (RT 18:18-23.)
44. In November 2006, the Bohanecs transferred $7,500 from their UBS account in Switzerland to their Bank of America account in Pasadena, California. Exhibit 15 is a copy of the UBS notice regarding this transfer.
45. In addition, from October 2004 through October 2008, the Bohanecs made several other withdrawals from their UBS account in Switzerland. Exhibits 17 through 22 are copies of statements from UBS with notations reflecting these withdrawals.
46. The UBS account had the following balances on the following dates as reflected in Exhibit 10:
Date Balance January 31, 1997 $1,049,900 December 31, 1997 $1,015,900 December 31, 1998 $962,600 December 30, 1999 $1,096,500 December 29, 2000 $931,200 December 31, 2001 $732,200 December 31, 2002 $647,600 December 31, 2003 $693,600 December 31, 2004 $645,800 December 31, 2005 $668,300 December 29, 2006 $654,200 December 31, 2007 $687,600
47. United States citizens who have a financial interest in, or signature authority over, a foreign bank account are required to file a Report of Foreign Bank and Financial Accounts ("FBAR").
48. The deadline for filing the FBAR for 2007 was June 30, 2008.
49. In 2007, in addition to the UBS account in Switzerland, August Bohanec had the bank account in Austria, into which were deposited periodic disability payments he received for an eye
50. In 2007, in addition to the bank accounts in Austria and Switzerland, the Bohanecs also maintained the bank account in Mexico, into which they would deposit money from their UBS account in Switzerland to build and maintain the house in Mexico.
51. The Bohanecs did not file an FBAR for 2007.
52. As of June 30, 2008, the Bohanecs' UBS account had a balance of $643,662 as reflected on Exhibit 8.
53. Before June 30, 2008, the most recent tax return the Bohanecs filed was for tax year 1998.
54. In their 1998 tax return, the Bohanecs reported an adjusted gross income of $62,237 and a federal income tax of $7,480, which was timely paid. A copy of the IRS transcript for this account is exhibit 38.
55. Part III to Schedule B of the 1998 tax form 1040 concerns foreign accounts and trusts. (Ex. 39.)
56. Question 7a in Part III to the Schedule B asks the following question: "At any time during 1998, 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." (Ex. 39.)
57. Page B-2 of the instructions for Schedule B for 1998 states: "See [FBAR] Form TD F 90-22.1 to find out if you are considered to have an interest in or signature or other authority over a financial account in a foreign country (such as a bank account, securities account, or other financial account)." (Ex. 40.)
58. Page B-2 of the instructions for Schedule B for 1998 also states: "If you checked the Yes box on line 7a, file [FBAR] Form TD F 90-22.1 by June 30, 1999, with the Department of the Treasury at the address shown on that form." (Ex. 40.)
59. In May and June of 2009, the Bohanecs transferred a total of $522,796.55 from their UBS account to a new account at Steiermärkische Bank. Exhibit 16 is a letter from Steiermärkische Bank und Sparkassen AG enclosing records for these transfers.
56. On January 29, 2010, the Bohanecs closed the Austrian account at Steiermärkische Bank and transferred the balance of $523,677.40 to their account at Bank of America in Pasadena, California. Exhibit 16 is a letter from Steiermärkische Bank und Sparkassen AG enclosing records for these transfers.
57. Between the filing of their 1998 federal income-tax return and May 19, 2011, the Bohanecs did not file any federal income-tax returns.
58. Between the opening of the UBS account and May 19, 2011, the Bohanecs did not file any FBARs.
59. On January 6, 2010, the Bohanecs executed an application to participate in the IRS's Voluntary Disclosure Program for Offshore Accounts. Exhibit 23 is a copy of this application.
60. The Bohanecs' application, submitted under penalty of perjury, represented that the "original balance and all funds deposited into the [Swiss UBS] account were after-tax earnings from our used camera business." (Ex. 23.)
61. On January 19, 2010, the Bohanecs were preliminarily accepted into the Voluntary Disclosure Program for Offshore Accounts. Exhibit 24 is a copy of this application.
63. On May 19, 2011, the Bohanecs executed and filed federal income-tax returns for 2003, 2004, 2005, 2006, 2007, and 2008. Exhibits 31 through 36 are copies of these tax returns.
64. While the FBARs filed by the Bohanecs in May 2011 for 2003, 2004, 2005, 2006, 2007, and 2008 included the UBS account, they did not include the Austrian account, which was in existence during 2003 through 2008.
65. The FBARs for 2006, 2007, and 2008 filed by the Bohanecs in May 2011 did not include the Mexican account, which was in existence during 2006 through 2008.
66. The Bohanecs were ultimately rejected by the IRS for the Voluntary Disclosure Program for Offshore Accounts.
67. While the federal income-tax returns for 2003, 2004, 2005, 2006, 2007, and 2008 included the interest earned on the UBS accounts, they did not include the income earned by the Bohanecs from their EBay sales.
68. On October 3, 2013, the IRS issued a notice of deficiency for tax year 2003 through 2010. Exhibit 37 is a copy of this notice of deficiency.
69. As reflected in the October 3, 2013, notice of deficiency, after audit, the IRS determined the additional tax and penalties:
Year Additional tax Failure-to-file penalty Fraud penalty (IRC §
(IRC § 6651(a)(1)) 6663)
2003 $16,651 $4,162.75 $7,341
2005 $53,330 $13,332.50 $39,997.50
2006 $23,221 $5,806 $17,415.75
2007 $50,148 $12,537.75 $37,611
2008 $8,253 $2,063.25 $6,189.75
2009 $20,690 __ $14,052
2010 $698 $174.50
70. The Bohanecs did not file a suit in Tax Court challenging the tax deficiencies reflected in the October 3, 2013, notice of deficiency.
71. The IRS subsequently assessed the additional tax liabilities and penalties specified the October 3, 2013, notice of deficiency.
72. As of September 19, 2016, the out-standing balance on the Bohanecs' federal income-tax liabilities for 2003, 2005, 2006, 2007, 2008, 2009, and 2010 is as follows:
Tax year Outstanding balance as of September 19, 2016 2003 $25,788.63 2005 $181,082.53 2006 $71,752.07 2007 $147,596.88 2008 $23,252.12 2009 $41,627.03 2010 $1,064.35 Total $492,163.61
73. Each year, U.S. citizens who hold a financial account in a foreign country must report certain details about the account to the Treasury Department.
74. The report must be made each year by filing an FBAR with the Treasury Department no later than June 30 of the following year.
75. Failure to file an FBAR can result in a fine up to $10,000. 31 U.S.C. § 5321(a)(5)(B).
76. If a foreign account holder "willfully" failed to report the account on an FBAR, the maximum penalty is increased from $10,000 to the greater of $100,000 or fifty percent of the balance in the account at the time of violation. 31 U.S.C. §§ 5321(a)(5)(C), (D)(ii).
77. The only dispute in this matter is whether the Bohances' failure to timely file an FBAR disclosing their financial interest in their foreign accounts for 2007 was willful.
78. Section 5321(a)(5) of Title 31 does not define willfulness. 31 U.S.C. § 5321(a)(5).
79. The Supreme Court has explained that "willfully is a word of many meanings whose construction is often dependent on the context in which it appears."
80. Although Defendants assert that "willfulness" encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties, no court has adopted that principle in a civil tax matter. The only cases Defendants cite to support their argument that "willful" means that a defendant must have knowledge and specific intent are criminal cases.
81. Where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering "not only knowing violations of a standard, but reckless ones as well."
83. Several other courts, citing
84. Defendants argue that the Chief Counsel of the Internal Revenue Service has opined, prior to
85. The Internal Revenue Manual's interpretation of "willfulness" for purposes of 31 U.S.C. § 5321, cited by Defendants, does not have the force of law, and is not relevant here.
86. The Supreme Court has held that a heightened, clear and convincing burden of proof applies in civil matters "where particularly important individual interests or rights are at stake."
87. The government has proved by a preponderance of the evidence that Defendants were at least recklessly indifferent to a statutory duty for the following reasons:
Defendants' failure to timely file an FBAR for 2007 was willful. The maximum penalty is therefore increased to the greater of $100,000 or fifty percent of the balance in the foreign accounts on June 30, 2008.
