ELIZABETH A. WOLFORD, District Judge.
The United States District Court for the Western District of New York ("District Court") presents its salutations to the Greek Central Authority, and requests assistance in obtaining evidence to be used in civil proceedings before this Court. This request is made pursuant to, and in conformity with, Chapter I of the Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters ("Hague Evidence Convention"), to which both the United States and Greece are contracting parties.
Specifically, the District Court requests assistance in obtaining documents and oral testimony from Georgios Maraghakis, a citizen of Greece, for use at trial. Mr. Maraghakis is married to the defendant Marika M. Katholos and is also represented by the defendant's counsel. This Letter of Request is submitted in both English and Greek.
The plaintiff United States of America brought this civil action under 31 U.S.C. § 3711(g)(4)(C) to collect an outstanding civil assessment, along with associated late-payment penalties and interest, assessed against the defendant Ms. Marika Katholos for her failure to timely report her financial interest in and signature authority over a foreign bank or other financial account during the 2007 calendar year as required by 31 U.S.C. § 5314 and its implementing regulations.
In summary, the United States seeks to prove that Ms. Katholos failed to disclose her foreign bank account at UBS Group AG, i.e., UBS, on a Report of Foreign Bank and Financial Accounts, i.e., an FBAR, for the calendar year 2007 despite Ms. Katholos' obligation to do so pursuant to U.S. law.
This is a civil matter pursuant to U.S. law and carries no criminal liability for Ms. Katholos. As to how "civil or commercial" is to be defined within the context of the Hague Evidence Convention, the Practical Handbook on the Operation of the Evidence Convention clearly states that the term civil or commercial should be "interpreted in an autonomous manner", without just referring to the law of the Requesting State or Requested State. Hague Conference on Private Int'l Law, Practical Handbook on the Operation of the Evidence Convention ¶ 50, at 21 (3d ed. 2016) ("Handbook").
Furthermore the civil assessment at issue in this matter is imposed against Ms. Marika Katholos pursuant to Title 31 ("Money and Finance") of the United States Code, not Title 26 (the Internal Revenue Code, i.e., the U.S. Tax Code). The civil assessment at issue, which is known as an FBAR assessment, originated in the U.S. Bank Secrecy Act, Pub.L. 91-508, 84 Stat. 1114 (1970); and after the terrorist attacks of September 11, 2001, Congress directed, in the USA Patriot Act, that attempts should be made to improve compliance with these provisions. Section 5321(a) of Title 31 provides for civil compensation for violations of the reporting requirements of section 5314. and section 5321(b)(1) provides that the United States may make that assessment.
In summary, this case serves to cover a civil compensation resulting from the breach of the obligations to report foreign accounts. The U.S. Tax Code is inapplicable to FBAR assessments because such assessment are not considered a "tax liability" as a matter of law, 31 U.S.C. § 5321(b)(2) (the collection mechanism authorized in the FBAR statute itself is not tax lien or levy but a civil action to recover a civil assessment). Indeed, an FBAR is a foreign banking reporting form, related to the record keeping and filing requirements for reportable interests in foreign bank accounts, and is controlled by Title 31, U.S.C., not Title 26. There is no underlying tax with which the FBAR assessment could be linked. The FBAR assessment is not a function of income, is not a property or estate tax determined by value, and is not a sales or excise tax determined by receipts or expenditures. As stated above, 31 U.S.C. § 5321, which authorizes FBAR assessments, is titled "civil" assessments — not "tax" assessments. This matter therefore qualifies as civil and commercial matter and is within the scope of the Hague Evidence Convention.
Ms. Katholos, who is a United States citizen residing in Greece, is the beneficial owner of the Storchen Family Foundation and Storchen Finance Limited. Ms. Katholos controls/controlled two UBS bank accounts, including an UBS Account ending 65569. She was involved with the decision-making regarding the performance and investments of an UBS Account ending 65569, and she also instructed UBS to make a transfer from the account to Greece so that she could invest in the Romanian real estate market.
By way of background, in February 2005, the Storchen Family Foundation was formed in Vaduz, Liechtenstein. On March 3, 2005, on the Form A. "Verification of the beneficial owner's identity," Ms. Katholos was identified as one or the beneficial owners of the Storchen Family Foundation for the UBS account ending in 36795. The Form A was signed by members of the board, which included Dr. Martin Batliner. Also on that date, members of the board instructed UBS in the "Basic document for account/custody account relationship (firms, corporations, and other institutions)" to send all correspondence to Consilia Anstalt in Vaduz, Liechtenstein. English was selected as the preferred language of the correspondence.
On December 23, 2005, Ms. Katholos and others had dinner in Athens, Greece, with UBS client advisors, and discussed a new account and the creation of a Hong Kong entity to be the accountholder. A few days later, on December 29, 2005, a representative from UBS signed the Certificate of Incorporation for Storchen Finance Limited creating an entity that is registered in Hong Kong, with an UBS Account ending 65569. On January 3, 2006, on the Form A, "Verification of the beneficial owner's identity," Ms. Katholos was identified as one of the beneficial owners of the Storchen Finance Limited, for the account ending in 65569. In addition, on said date and on June 1, 2006, Dr. Batliner, as a director, signed several Corporations and Complex Trusts Certifications of Beneficial Owner and Non-US Person Status for the primary and sub-accounts, indicating that Storchen Finance Limited was a corporation organized in Hong Kong.
On January 3, 2006, documents were signed by member(s) of the Board, inter alia instructing UBS to send all correspondence to Consilia Anstalt in Vaduz. On January 18, 2006, a "Base Document for Non-U.S. Domiciliary Companies for U.S. Tax Withholding" was prepared indicating that the accountholder, Storchen Finance Limited, is domiciled in Hong Kong and wants to invest in U.S. securities. On January 18, 2006, a "Domiciliary Companies decision" sheet was prepared by UBS indicating that the tax haven will be Hong Kong. In February 2006, UBS account ending 36795 was closed when the balance in the account was transferred to the UBS account ending 65569. On February 14, 2006, an asset management agreement instructed UBS to invest in aggressive securities for the UBS account ending in 65569.S3 and account ending in 265569.S4. The reference currency is in United States' dollars.
The United States contends that Ms. Katholos took steps to conceal or mislead her sources of income by opening the UBS Account ending 65569. The 2007 Report of Foreign Bank and Financial Accounts, i.e., FBAR, assessment against the defendant Marika Katholos remains unpaid, and the total balance due on the penalties, along with statutory additions and interest, pursuant to 31 U.S.C. § 3717, is $4,474.320.29 as of December 2, 2016.
Ms. Katholos contends, inter alia, that the administrative record and Complaint fail to establish any factual basis for assertion of a willful Report of Foreign Bank and Financial Accounts, i.e., FBAR, assessment against her. To provide additional information, Marika Katholos describes the defenses in the case, as follows.
The administrative record and Complaint fail to establish any factual basis for assertion of a willful FBAR penalty against Marika. 31 U.S.C. § 5321(a)(5)(C) imposes a civil money penalty for willful failures to file certain reports required to be filed under 31 U.S.C. § 5314, including the FBAR. As outlined in the statute, the amount of the willful penalty may be 50 percent of the high balance in the account at the time of the alleged failure to file the FBAR form. On the other hand, if a taxpayer does not act willfully—for example, if she failed to file the FBAR because she did not know the form existed or was required to be filed—the civil money penalty under 31 U.S.C. § 5321 shall not be greater than $10,000.
Willfulness is a required element of the penalty asserted by the Government against Marika. The Government's effort to reduce the FBAR penalties to judgment fails because the Government cannot meet its heavy burden to establish a necessary element for enforcement of the penalty—that Marika knew of the FBAR filing obligation and willfully failed to file the form for the 2007 tax year.
The Complaints case for willfulness appears to rest on three major factual allegations, all of which are either incorrect or misleading. First, the Government alleges that Marika was on "inquiry notice" about [BAR reporting because of a 2007 federal income tax return. At the time of the filing of the Complaint, however, the Government possessed information demonstrating that Marika did not sign the 2007 federal income tax return that allegedly put her on "inquiry notice" regarding her FBAR obligations. Further demonstrating that she did not review this return, the 2007 return filed for Marika contains numerous, obvious errors: Marika's name is misspelled and her address is incorrectly given in Elma, New York.
Marika's history of filing U.S. returns since her move to Greece in 1994 demonstrates that she was not fully aware of the relevant U.S. tax rules for reporting income overseas. Prior to 2009, federal tax returns were filed for Marika to report her interests in family assets that generated income in the U.S., such as annuities or rental income from real estate. When there was no U.S. income in a particular year, returns generally were not filed. In many or most cases prior to early 2009, Marika did not see or sign federal tax returns filed for her.
Second, the Internal Revenue Service's ("IRS's") interview with Marika's return preparer Charles Koelemeyer, conducted more than four years after the relevant events, only demonstrates that he knew of FBAR reporting requirements well after the time period at issue. It does not demonstrate that he ever advised Marika about these requirements—or even that he ever spoke to her directly about taxes or U.S. reporting—prior to January 2009. Instead, once Marika learned of the relevant U.S. reporting requirements, she attempted to make a voluntary disclosure to the IRS in February 2009, months before the start of the formal Offshore Voluntary Disclosure Program. Marika's effort was rejected as untimely because, on information and belief, UBS had delivered her name to the IRS within one week prior to her disclosure.
Finally, the Government alleges that Swiss bankers took actions, including signing forms, to conceal the relevant accounts from U.S. authorities. These are simply not allegations that Marika acted willfully: the allegations describe actions taken by Swiss bankers, not by her and her family. Instead, the long history of Marika and her family in Greece demonstrates that the UBS accounts were not set up for a U.S. tax-avoidance purpose. Marika moved to Greece in 1994, shortly after college, and has been a homemaker and caretaker of her children since that time. Marika's father Theodore Katholos (now deceased) ("Mr. Katholos") immigrated to the U.S. in the mid-1960s with a second-grade education in Greece, and became successful in the painting and contracting business in Buffalo, New York through hard work and determination, not through formal schooling. Mr. Katholos was largely unable to read or write in English. He was very successful in business, particularly given his background, but he lacked sophistication and training in tax matters. In the 1980s, Mr. Katholos seriously considered emigrating back to Greece, and so did Marika. When Mr. Katholos retired in 1997, he had intended to move back to Greece permanently.
The Katholos family set up accounts in Switzerland in 1998, moving their funds from Greek banks because of concerns about privacy and security. They felt there was a great risk that the Greek banks were corrupt, and that there were no true guarantees for' deposits. Also, in dealings with Marika's and her husband George's local bank in Greece, there seemed not to be a policy on secrecy. Information on account values was easily discussed (basically, gossiped about) among employees, a great deal of whom were local residents. These concerns only heightened when Marika and George contemplated starting a family. Their first child was born in 1999, shortly after the Swiss accounts were established. The occurrences of kidnapping are unfortunately not so uncommon in Greece.
In dealings with the Swiss bank, Marika's father Theodore Katholos was the primary decision-maker. Marika had signatory authority because of Mr. Katholos' limited reading and writing skills and because she was the one member of the family located in Europe, with more convenient access to the bank.
In short, the security offered by the Swiss banking system—and not tax avoidance in the U.S.—was the motivating factor in setting up the relevant accounts. Marika's meetings and conversations with Swiss banking advisors are consistent with the purpose of opening the accounts in Switzerland—to ensure privacy and security for Katholos and Maragakis family assets, in contrast to the unstable Greek banking system where these assets had been previously held. There is no factual allegation in the Complaint (other than summary legal assertions) supporting a conclusion that the accounts were established for any U.S. tax purpose.
Further, the Government has failed to state a claim upon which relief may be granted under Fed. R. Civ. P. 8 and 12(b)(6) because it has alleged no facts in the Complaint—beyond summary legal conclusions—that support a finding of willfulness.
Moreover, the administrative record is devoid of any reasoning supporting a finding that Marika acted willfully. In fact, the Internal Revenue Service's guidance regarding mitigation of the FBAR penalty fails to take into account the specific facts and circumstances of each case, and focuses solely on the high balance in the relevant financial accounts. See Internal Revenue Manual 4.26.16-1. Accordingly, the IRS assessment of the FBAR penalty against Marika is unreasonable, arbitrary, capricious, and an abuse of discretion under 5 U.S.C. § 706.
The IRS has been delegated civil enforcement authority over the FBAR. See 31 CFR § 1010.810(g) (referencing a Memorandum of Agreement between the Financial Crimes Enforcement Network ("FinCEN") and the IRS). The IRS has established specific procedures for the examination, approval, and assessment of the FBAR penalty under 31 U.S.C. § 5321. See Internal Revenue Manual 4.26.16 and 4.26.17. For example, a willful FBAR penalty must be reviewed by the SB/SE Counsel FBAR Coordinator, and findings must be made supporting the assertion of the penalty. See Internal Revenue Manual 4.26.17.4.3. The taxpayer has the right to administratively appeal an initial determination that the penalty should be assessed, and an IRS group manager must also make findings when approving the penalty. See Internal Revenue Manual 4.26.17.4.6. In addition, a series of notices and letters must be sent to the taxpayer before the penalty is assessed. See Internal Revenue Manual 4.26.17.
The Government's efforts to collect an FBAR penalty for Marika fail because the IRS's assessment of the FBAR penalty was procedurally defective. Based on the incomplete correspondence and notices that Marika and her counsel have received, it appears that the IRS may not have followed its own procedures in making the assessment of the FBAR penalty. As referenced above, the notices and reports that Marika received contain little to no reasoning supporting a willful FBAR penalty, also rendering the assessment procedurally defective. Because the IRS did not validly assess the FBAR penalty before the expiration of the relevant statute of limitations, the Government cannot reduce this penalty to judgment.
The deadline for an FBAR to be filed for Marika for the 2007 tax year would have been on or before June 30, 2008. Under 31 U.S.C. § 5321(b)(1), the Government was required to assess any FBAR penalty within six years of June 30, 2008, or by June 30, 2014.
There is no grant of statutory authority for extension of this statutory deadline. In the Complaint, paragraph 38. the Government alleges that the FBAR penalty for 2007 was assessed against Marika on June 15, 2015, after the expiration of the six-year statute of limitations. Accordingly, the Government is barred from collecting the FBAR penalty against Marika for the 2007 tax year because the assessment was made after the expiration of the relevant statute of limitations under 31 U.S.C. § 5321(b)(1).
The relevant statutes, 31 U.S.C. § 5321(a) and (b)(1), provide that a willful FBAR penalty of 50 percent of the balance in the relevant financial account may be assessed upon the same funds for each year within a six-year statute of limitations. As written, the statute essentially allows the Government to assess an FBAR penalty of 300 percent of the highest balance of a financial account—three times the entire value of the account.
In addition to the penalty at issue in this suit, the Internal Revenue Service is seeking to assess and collect other civil penalties from Marika under the Internal Revenue Code for the exact same funds at issue here.
The assessed FBAR penalty has been improperly imposed on the entire value of the UBS accounts. A substantial portion of these funds were owned by Marika's husband George Maragakis, and were not taxable or subject to penalties in the United States. George is a Greek citizen and not a U.S. taxpayer. In the late 1990s, the family initially moved their funds out of Greece into accounts held in the names of Marika, George, and Mr. Katholos at a different Swiss bank. In 2004 or thereabouts, these accounts were moved to UBS, also in their individual names. Upon instruction and advice of the Swiss bankers at UBS, the accounts were consolidated in early 2005 into the accounts at issue because the family was advised that this structure would allow for additional investment opportunities and flexibility. Thus, to the extent the calculation of the FBAR penalty is based upon amounts held in the Storchen accounts but actually owned by George, those amounts were never taxable in the United States, and should be excluded from any penalty calculation.
The FBAR penalty under 31 U.S.C. § 5321 and the penalties asserted under the Internal Revenue Code are excessive, punitive, improperly stacked, and disproportionate to any harm suffered by failure to file the relevant forms disclosing the accounts. In short, 31 U.S.C. § 5321(a)(5)(C)(i), as written and as applied to Marika, violates the Excessive Fines Clause of the Eighth Amendment of the United States Constitution, and the penalty should not be enforced for this reason.
The assistance requested of Greece consists of the following:
1. Obtaining copies of documents in the possession of Mr. Maraghakis and obtaining oral testimony from him. The requested documents, including the topics and questions to be utilized in obtaining oral testimony of Mr. Maraghakis, are described in the attached
The documents and oral testimony sought from Mr. Maraghakis go to the core of material allegations and contentions described above and are to be used at trial and other proceedings relating to the matter described. Specifically, the defendant claims that:
In addition, the United States believes that Mr. Maraghakis, as Ms. Katholos' husband, has knowledge of the lengths Ms. Katholos went through to hide her assets in the foreign bank account(s) beyond the United States' purview. Absent the Greek Central Authority authorization to gather this evidence pursuant to the Hague Evidence Convention, the United States would not be able to obtain material evidence from Mr. Maraghakis because he is a Greek citizen and thus beyond the jurisdiction of T.S. Courts.
In short, the information sought in
Please refer to
It is requested that copies of the documents or electronic records described in the attached
If agreeable to the Greek Central Authority, it is hereby requested as follows:
a. It is requested that the oral testimony of Mr. Maraghakis be taken under affirmation in accordance with the laws of Greece before an appropriate judicial official of Greece.
b. It is further requested that the affirmation be administered, and that the oral examination be conducted, in both Greek and English. The cost of the interpreters will be covered by the United States. The requested questions in
c. The United States has authorized the Law Firm of Bazinas to represent its interests in the execution of this Request in Greece. Please contact Mr. George B. Bazinas for any questions and notices regarding this Letter of Request and notify the Court that shall be designated to execute this Letter of Request that Mr. George Bazinas shall represent the United States in connection with any procedures, hearings, and motions that shall be taken and heard in connection with the examination of the witness and presentation of documents.
d. It is requested that the oral testimony be taken through direct questioning by counsel for the United States in Greece, Mr. George Bazinas, or by attorneys from the United States Department of Justice, with an opportunity afforded to counsel for the defendant to cross examine the witness.
e. It is requested that counsel for the United States be notified in advance of the time and place of the proceedings and that counsel for all parties be permitted to attend in person, or by video or audio teleconference for those not able to attend in person. Mr. George Bazinas shall thereafter inform the other parties by email (as previously agreed by the parties in this matter) of the procedures to be followed in the proceeding, including such arrangements as are necessary to attend in person, or by video or audio teleconference.
f. It is further requested that the affirmation and oral examination be video-recorded and also transcribed verbatim stenographically: or recorded by a method permitted under Greek law, and that the video and transcript be provided to:
With a Copy to the parties /gal Representatives:
g. It is further requested that, if any portion of this Request is deemed to be unacceptable under the laws of Greece, that counsel for the United States, Mr. George Bazinas, please be informed of that fact and be allowed to respond substantively prior to the Decision and that the Greek Court please comply with as much of the Request as possible.
Please see Item 12 above.
Please see Item 12(e) above. Please send documents described on
With a copy to the parties' Legal Representatives:
Regarding oral testimony, please see Item 12 above.
Please see Item 12 above.
In responding to this Letter of Request, Mr. Maraghakis need not disclose documents and electronic records that constitute communications for which either party sought for legal advice. This privilege may be waived, however, if the communication has been disclosed to third parties.
This Court understands that certain fees and costs incurred in the execution of this Request may be reimbursable under the second paragraph of Article 14 or under Article 26 of the Hague Evidence Convention. These fees and costs will be reimbursed by the United States. up to $10,000 USD. Mr. George Bazinas should be informed about anticipated costs and before the costs exceed this amount.
This United States District Court expresses its gratitude to the judicial authorities of Greece for their assistance and courtesy under the terms of the Hague Evidence Convention.
a. The documents and electronic records requested are intended to cover any and all documents and things in the control and/or possession of any Mr. Georgios Maraghakis, as well as those subject to their custody and/or control, whether in his possession, at the office of his attorneys, accountants, and/or at any other place and/or in the possession of any other person and/or entity subject to Mr. Georgios Maraghakis' control.
b. In responding to the requests, Mr. Georgios Maraghakis is requested to state which documents and electronic records he will produce for inspection and copying. If Mr. Georgios Maraghakis objects to a particular request, he is requested to state the precise grounds upon which his objections rests and state whether any responsive materials are being withheld on the basis of that objection. An objection to part of a request must specify the part and permit inspection of the rest.
c. With respect to each document and/or electronic record withheld from production, on any basis whatsoever, including, without limitation, document or electronic record withheld on the basis of the attorney-client privilege and/or the work product doctrine, a separate list of all such documents and/or electronic records shall be served with the responses to the document requests herein that states and identifies the following:
d. All documents must be produced as they are kept in the usual course of business or must be organized and labeled to correspond to the categories in the requests. In the case of electronic records, the records should be produced in electronic or optical format which can be accessed, indexed and searched with accepted computer programs and with all of their metadata. If electronic records responsive to this document request are held in electronic or optical folders and sub-folders that are utilized for organization of the records into specific groups cat'' records (such as documents pertaining to a certain transaction, or agreements of a certain nature or with a certain party) the documents should be produced within the said electronic or optical folders and subfolders.
e. If Mr. Georgios Maraghakis is aware that a document and/or electronic record (and/or a group of documents and/or electronic records) once existed, but has been destroyed, Mr. Georgios Maraghakis is requested to specifically identify such document and/or electronic record, when the document and/or electronic record was destroyed, the reason for such destruction, and the circumstances under which such destruction occurred.
f. In the event that Mr. Georgios Maraghakis is able to produce only some of the documents and/or electronic records responsive to these requests within the allotted time, he is requested to produce the documents and/or electronic records which can be produced, and to state the reason for the asserted inability to provide the remaining documents and/or electronic records. Once the remaining responsive documents and/or electronic records are obtained and/or become available, those documents and/or electronic records should be produced promptly at a mutually agreeable time.
30. Identify and describe Ms. Katholos' knowledge of UBS's public announcement that it was the target of a criminal investigation in 2008 by the Internal Revenue Service and the United States Department of Justice and that it would be exiting and no longer accepting certain U.S. clients.
31. After learning of the UBS investigation, what if anything did Ms. Katholos do in connection with her interest in the Storchen Family Foundation, as well as the Storchen Finance Limited?
1. Identify and describe your personal, educational and employment background.
19. Identify and describe the circumstances leading up to the formation of the Storchen Family Foundation, as well as the Storchen Finance Limited.
