United States v. Gentges

Background

The United States sued Heinz Gentges under the Bank Secrecy Act to collect civil penalties for failing to report two foreign bank accounts for calendar year 2007. Gentges had financial interests in two UBS AG accounts in Switzerland, identified in the opinion by the numbers ending in 4959 and 4337. Both accounts exceeded $10,000, so he was required to file a Report of Foreign Bank and Financial Accounts, commonly called an FBAR. He did not file one for 2007.

The Internal Revenue Service assessed a $679,365 penalty for the 4959 Account and a $224,488 penalty for the 4337 Account. The Government moved for summary judgment, a procedure allowing judgment without a trial when there is no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law.

Willfulness

The court held that, for civil penalties under 31 U.S.C. § 5321(a)(5)(C)(i), a willful violation includes both a knowing violation and a reckless violation. Civil recklessness requires more than ordinary negligence: it involves failing to act despite an unjustifiably high risk of harm that was known or should have been obvious.

The court concluded that Gentges willfully violated the FBAR reporting requirement because he signed his 2007 tax return, which incorrectly stated that he had no foreign financial accounts, without conducting a significant substantive review. The court treated this conduct as reckless disregard of the reporting obligation. It also relied on evidence that Gentges did not disclose the accounts to his longtime tax preparer, did not seek advice about the accounts’ reporting consequences, used numbered accounts and held mail at UBS, and maintained and visited the accounts.

The court rejected Gentges’s arguments that he relied on his tax preparer, believed the funds were part of his “European heritage,” and did not understand or carefully review the relevant forms. The court stated that a taxpayer who signs a return is charged with constructive knowledge of its contents, and that these circumstances did not prevent a finding of recklessness.

Penalty calculations

For a willful FBAR violation, the statute permits a penalty of up to the greater of $100,000 or 50 percent of the account balance at the time of the violation. The court explained that the IRS’s Internal Revenue Manual instructed the agency to use the account balance at the close of June 30 of the year following the reported calendar year.

For the 4959 Account, the IRS used the balance as of June 30, 2008, and the court granted summary judgment concerning that penalty. For the 4337 Account, the IRS lacked the June 30, 2008 balance and instead used the December 31, 2007 balance of $448,975. The court concluded that using the December balance departed from the IRS’s own guidelines and was arbitrary and capricious, meaning inadequately justified under the governing administrative-law standard.

Disposition

The court granted the Government’s motion for summary judgment in part and denied it in part. It granted summary judgment regarding the penalty calculation for the 4959 Account. It denied the motion regarding the penalty calculation for the 4337 Account and remanded that issue to the IRS for additional investigation or explanation. The Clerk was directed to terminate the pending motion, and the case was remanded to the IRS for a proper determination of the 4337 Account penalty.