Standard for Financial Reporting Murky After Justices’ Denial

The US Supreme Court disappointed practitioners around the country on June 20 when it declined to hear arguments in Bedrosian v. United States.

The petitioner, Arthur Bedrosian, had asked the justices to determine whether an objective or a subjective standard should be used to determine willfulness or recklessness when information is omitted in a Report of Foreign Bank and Financial Accounts, or FBAR.

Practitioners hoped the high court would reverse the recent trend that has seen many court rulings erode the distinction between willful and non-willful FBAR penalties and morph into a de facto strict liability penalty.

History of Case

The IRS, believing Bedrosian willfully failed to disclose a UBS account, imposed a $975,789.17 penalty—by its calculation, half the balance of his undisclosed account. IRS penalties for willful omissions are far greater than omissions made accidentally.

The US District Court for the Eastern District of Pennsylvania initially concluded that Bedrosian didn’t willfully fail to disclose one of his two UBS accounts. But the US Court of Appeals for the Third Circuit said the lower court didn’t adequately articulate the standard that it applied, and remanded the case.

The district court, on remand, then held that Bedrosian did act willfully, based on the same facts on which it based its original non-willful determination. These inconsistent outcomes demonstrate the difference between the subjective and objective standards. The appropriate standard to determine willfulness for FBAR purposes was the issue in Bedrosian’s petition.

The government’s position in opposing Bedrosian’s petition for certiorari was unsurprising—an analysis of the facts and district and appellate court rulings didn’t warrant granting cert, and the high court’s recent decision in Bittner v. US (which examined the statutory provisions of the Bank Secrecy Act that authorize FBAR penalties) wasn’t pertinent.

The government argued that once the objective standard was applied, the lower court correctly decided the case based on Safeco Ins. Co. of Am. v. Burr. In the brief, it acknowledged that the appellate court relied on “tax cases” when applying the Safeco standard to define recklessness. An example would be someone who recklessly fails to comply with an IRS filing requirement when the person clearly ought to have known there was a grave risk the requirement wasn’t being met and was in a position easily to find out for certain.

In Safeco, the Supreme Court held that willfulness for purposes of the Fair Credit Reporting Act included recklessness. Despite the court’s language that “willful” is a word with many meanings whose construction depends on the context in which it appears, the government and several courts have latched on to the Act’s definition and applied it the FBAR context.

The justices in Safeco noted that willfulness covers knowing violations as well as reckless ones evidenced by conduct violating an objective standard—an unjustifiably high risk of harm that is known or so obvious that it should be known. In opposing Bedrosian’s petition, the government further argued that every appeals court to have considered this issue has defined willfulness to include reckless conduct determined using an objective standard. Thus, the government argued, the absence of a circuit split “is itself a sufficient reason to deny the petition.”

Bedrosian, in his reply brief, took aim at the objective standard of Safeco on which the government relied in its opposition. He argued that the government’s interpretation yields an untenable result—the same set of facts can result in a non-willful or willful penalty determined solely at the examining agent’s discretion.

In support, he looked at Bittner and noted that as a result of the decision, the government has a financial incentive to seek harsher willful penalties and that Congress couldn’t have intended discretion to be the guardrail. The statute should only apply “to those individuals who deliberately violated the FBAR filing requirement,” he argued.

Another Avenue?

In denying Bedrosian’s petition, no justice authored a dissent, leaving practitioners to speculate why it was denied. But perhaps all is not lost.

On June 1, the Supreme Court issued its opinion in United States ex rel. Schutte v. Supervalu Inc., a False Claims Act case. The justices held that the law’s scienter element refers to a defendant’s knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed. In the ruling, the court stated that Safeco “did not purport to set forth the purely objective safe harbor that respondents invoke,” and that nothing in Safeco “suggests that we should look to facts that the defendant neither knew nor had reason to know at the time he acted.”

The justices acknowledged that Safeco didn’t establish a universal willfulness standard: “Respondents read a footnote in Safeco to establish the sort of purely objective safe harbor for which they argue. But that footnote—even if it does deem subjective intent to be irrelevant in the Fair Credit Reporting Act context—certainly was not meant to establish the general rule for the terms ‘knowing’ or ‘reckless’ in all contexts.”

Thus, Schutte indicates that the Supreme Court agrees that Safeco is not a per se willfulness standard for which the government has vigorously advocated. It will be interesting how parties raise Schutte and Safeco in future FBAR litigation.

The case is: Bedrosian v. United States, U.S., No. 22-598, cert denied 6/20/23

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

James “Jim” Dawson is a partner at Holland & Knight. His practice focuses on representing corporations and individual taxpayers in tax controversy, tax litigation, and FBAR litigation matters.

Chad M. Vanderhoef is a partner at Holland & Knight. He focuses his practice on tax controversy and litigation, cross-border tax matters, and offshore tax and reporting compliance, including FBARs and international information returns.

Alexander R. Olama is an associate at Holland & Knight. His practice focuses on tax controversy and litigation, cross-border tax and expatriation planning, and offshore tax compliance, including international information return and FBAR matters.

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