Monday, May 30, 2016

Wrongful Disclosure Counterclaim in FBAR Willful Penalty Suit Dismissed Because Decedent Taxpayer Did Not Assert the Wrongful Disclosure (5/30/16)

In United States v. Garrity, 2016 U.S. Dist. LEXIS 66372 (D. Conn. 2016), here, the United States filed a complaint, here, seeking judgement on a willful FBAR penalty assessment for the year 2005. Key background paragraphs of the complaint are:
7. In November 1989, Paul G. Garrity, Sr., established the Lion Rock Foundation, a Liechtenstein Shiftung. Paul G. Garrity, Sr., was the primary beneficiary of the Lion Rock Foundation from the time it was founded until his death in 2008. 
8. In November 1989, Paul G. Garrity, Sr., opened an account in the name of Lion Rock Foundation with LGT Bank, a bank located in Liechtenstein, having a number ending in 718 (“Account”). The Account continued in existence until after the death of Paul G. Garrity, Sr. After his death, in 2009, the funds held in the account were distributed equally to each of his three sons, Kevin S. Garrity, Paul G. Garrity, Jr., and Sean R. Garrity. 
9. On or about the time the Account was opened, Paul G. Garrity, Sr., entered into an Agency Agreement with BIL Treuhand AG (“BIL Treuhand”) to appoint members of the Lion Rock Foundation Board. The agreement required BIL Treuhand “as well as the person(s) appointed by [it] . . . to act in accordance with the Instructions imparted by [Paul G. Garrity, Sr.,] or persons empowered to act on behalf of [Paul G. Garrity, Sr.]” At all times relevant to this matter, Paul G. Garrity, Sr., exercised complete control over the Lion Rock Foundation.
[Money was shunted to the foundation through a related offshore  company which billed Garrity's U.S. taxable entity for "inspection services."  That offshore company never performed any services.]
14. At various times, an entity known as Tamino Trading, Ltd., and Grant Thornton International, Ltd., both also deposited monies into the Account.
16. Paul G. Garrity, Sr., did not report any income or loss from the Account, or otherwise disclose the existence of the Account to the IRS, on his 2005 federal income tax return, or at any other time. Moreover, Paul G. Garrity, Sr., did not advise the accountant who prepared his 2005 federal income tax return of the existence of the Account at any time. 
18. In May 2008, the IRS initiated an audit as to the tax liability of Paul G. Garrity,
Sr., for the 2005 taxable year. In connection with that audit, the IRS was investigating matters related to the Account. 
19. On October 14, 2009, Diane M. Garrity, a representative of the estate of Paul G. Garrity, Sr., deceased, filed Treasury Forms TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), for the 2003 through 2008 calendar years with the IRS. The FBAR filed for the 2005 calendar year indicates that the maximum amount held in the Account during that year was $1,873,382.00.
[There is no indication whether this was filed under the 2009 iteration of OVDP.  If it was, then the estate apparently opted out, which was necessary for the IRS to assert the FBAR penalty rather than the then applicable MOP of 20%; however, one would think that the IRS would have alleged that in the complaint; hence, the audit may have been a regular audit, perhaps generated by information from some source; moreover, readers should note that only one FBAR penalty apparently was asserted or, if asserted, only one is subject to the complaint, consistent with the position announced after the penalty was asserted.]
26. As of June 30, 2006, the balance of the Account was at least $1,873,382.00. 
27. On February 26, 2013, in accordance with 31 U.S.C. § 5321(a)(5)(C)(i), a delegate of  the Secretary of the Treasury assessed a civil penalty against the estate of Paul G. Garrity, Sr., deceased, in the amount of $936,691.00, due to the willful failure of Paul G. Garrity, Sr., to disclose the Account to the IRS (“FBAR Penalty”). 
30. In addition to the FBAR Penalty, the estate of Paul G. Garrity, Sr., deceased, owes a late-payment penalty pursuant to 31 U.S.C. § 3717(c)(2) and 31 C.F.R. § 5.5(a) in the amount of $106,705.79, as of February 20, 2015.  
31. In addition to the FBAR Penalty, and the late-payment penalty described in the previous paragraph, the estate of Paul G. Garrity, Sr., deceased, owes accrued interest in the amount of $17,784.30 as of February 20, 2015. 
32. The estate of Paul G. Garrity, Sr., deceased, is liable to the United States of America for the FBAR Penalty, as well as associated penalties and interest, in the total amount of $1,061,181.09 as of February 20, 2015, plus statutory accruals from that date until the liability is paid in full.
The defendants sought to amend the answer to assert a counterclaim under § 7431 for wrongful disclosures of § 6103 information.  The Court in its order dated May 20, 2016, here, describes the attempt to amend as follows:
After the July 24 deadline for amending the pleadings passed, Defendants' counsel discovered that certain publicly-available IRS training materials contained information about the IRS's investigation of Paul G. Garrity, Sr. (ECF No. 40 at 1-2.) Specifically, Defendants allege that Dennis Brager of the Brager Tax Law Group submitted a Freedom of Information Act ("FOIA") request to the IRS by letter dated April 3, 2014. (ECF No. 40-2 at 16.) On September 30, 2014, the IRS produced 6,601 pages of documents in response to the FOIA request, including "unredacted PowerPoint slides from an IRS training program" that "included a case study discussing the IRS investigation of Paul G. Garrity, Sr. that was the genesis of the Title 31 and 26 penalties and proposed income tax deficiencies against" Paul G. Garrity, Sr. (the "Case Study Materials"). (Id. at 16-17.) The Brager Tax Law Group posted the Case Study Materials on its website, where Defendants later found it and immediately recognized that it contained Paul G. Garrity, Sr.'s return information. (Id.) On June 29, 2015, Defendants served their First Request for Production of Documents on the Government in this action. (Id.) Defendants argue that the Case Study Materials are responsive to this request, but the Government disagrees, and did not produce the Case Study Materials. (ECF No. 44 at 3 n.1; ECF No. 40 at 3.) 
Defendants have now filed a motion to amend the scheduling order to extend the deadline to amend pleadings and allow them to file an amended answer and assert a counterclaim. (ECF No. 40 at 4.) In their proposed counterclaim, Defendants allege that the Government violated 26 U.S.C. § 6103(a) by disclosing the Case Study Materials to IRS agents not directly concerned with the investigation and the law firm, which disclosed the information to the public through its website. n1 (ECF No. 40-2 at 15-16.) Section 6103(a)(1) provides, in relevant part, that "no officer or employee of the United States . . . shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise or under the provisions of this section." Section 7431(a) provides a private right of action for damages against the Government for such unauthorized disclosures.
   n1  Defendants represent that they "do not seek damages for each of the untold number of third-parties who read, copied, or downloaded the disclosed information from the third-party law firm website or from websites or platforms to which the information may have been transferred or re-posted." (ECF No. 45 at 8-9.)
The Government opposed the attempt to amend on the grounds that the parties in the dispute attempting to assert the claim were not the taxpayer who allegedly suffered the injury.  The Court accepted the Government's argument, reasoning that

Given the clear text of the statute and the strict construction of waivers of sovereign immunity, this Court agrees that the private cause of action in Section 7431 is limited to claims brought by taxpayers whose return information has been disclosed. Here, the allegations in the counterclaim make clear that the "taxpayer" whose "return information" was disclosed was Paul G. Garrity, Sr., and not the Estate. Therefore, the plain reading and the one consistent with construing waivers of sovereign immunity narrowly is that the Estate is not "such taxpayer" and may not bring suit. 
Defendants contend that the Estate may sue under Section 7431 because the Estate "is a legal continuation of the deceased taxpayer" (ECF No. 45 at 5), but the plain language of the statute does not embrace such a broad class of plaintiffs, which would also sweep in assignees and all other manner of successors-in-interest. [10]  Nor does it matter if the right of action under Section 7431 is considered to be a property interest of the type that would ordinarily pass upon death, as the court found in Schachter v. United States, 847 F. Supp. 140 (N.D. Cal. 1993). Declining to follow Shapiro v. Smith, 652 F. Supp. 218, 218-19 (S.D. Ohio 1986)—which had held that an older version of Section 7431 was akin to a tort action protecting personal privacy rights and did not survive the taxpayer's death—the Schachter court held that Section 7431 creates "a property interest which should survive death," and allowed the substitution of the estate of a plaintiff who had died after bringing suit. Schachter, 847 F. Supp. at 141. Schachter reasoned that: (1) "all taxpayers, not just individuals, can sue under § 7431, while under tort law a corporation or association has no right to privacy," (2) Section 7431 "provides for 'actual' damages, an indication that property rights were to be taken into account," and (3) allowing a right of survival is consistent with the legislative aim of discouraging "governmental intimidation through disclosure." Id. Even if the Court accepts the reasoning in Schachter that Section 7431 creates a property right, the disclosure of Paul G. Garrity, Sr.'s return information occurred years after Paul G. Garrity, Sr.'s death, according to the allegations in the proposed counterclaim. n4 Thus, Paul G. Garrity, Sr., never had a property right in such a cause of action during his lifetime, and there was, at the time of his death, no such property right to pass to the Estate. n5
   n4 Paul G. Garrity, Sr. died on February 10, 2008. (ECF No. 40 at 1.)
   n5 It is worth noting that, at common law, no right of action for invasion of personal privacy, and thus no property right in such an action, could have accrued to Paul G. Garrity, Sr., after his death. A dead person has no cognizable right of action when his privacy is invaded. See Restatement (Second) of Torts § 652I, cmt. b. ("In the absence of statute, the action for the invasion of privacy cannot be maintained after the death of the individual whose privacy is invaded."). 
JAT Comments:

1.  It is interesting that the defendants' counsel learned of the possible disclosure by studying the FOIA materials posted by Dennis Brager.  I discussed those disclosures earlier at IRS Documents On OVDI/P From FOIA Request (Federal Tax Crimes Blog 11/17/14), here.  Thanks, Dennis.

2.  Kudos to Defendants' Counsel for catching this.  Although the district court rejected the attempt, there might be an appeal and the issue might still have some gravitas in a settlement of the case.  Defendants' Counsel per Pacer are:
Daniel F. Brown
Andreozzi, Bluestein, Weber, Brown LLP - Clarence
9145 Main Street
Clarence, NY 14031  
Michael Menapace
Wiggin & Dana-Htfd
20 Church St.
Hartford, CT 06103  
Randall P. Andreozzi
Andreozzi, Bluestein, Weber, Brown LLP - Clarence
9145 Main Street
Clarence, NY 14031 
3.  I am reminded of a case I handled while with the DOJ Tax Division was back in Estate of John Morris v. Commissioner, 454 F.2d 208 (4th Cir. 1972), here, affirming 55 T.C. 636 (1971) (Tax Court Reviewed Decision).  In that case, the IRS asserted that a testamentary estate of the deceased taxpayer who had suffered the involuntary conversion could not replace the property and thereby qualify the deceased taxpayer for tax exemption under § 1033.  The taxpayer won in the Tax Court.  DOJ Tax appealed.  I was assigned to brief the appeal.  My argument was the same as the IRS asserted in the Tax Court.  In the Fourth Circuit, at oral argument, Judge Sobeloff (then very senior) asked me how many judges were in the Tax Court.  I said I was not sure, but my opposing counsel said that it was some number like 15 or 17 (I can't remember what exactly he said).  It was not clear from the opinion how many judges agreed with the majority holding but it was clear that only 4 judges dissented.  Thus, Judge Sobeloff silently made a quick math calculation and decided that, whatever the number, the Tax Court was overwhelmingly against the IRS's position which I was dutifully asserting.  His next comment was something to the effect, "Well, isn't that the end of it."  Of course he knew that merely affirming a majority in the Tax Court because the majority was the majority was not the role he served.  But he was signaling that I needed a powerful argument to win and that I had not made that argument.  And, as they say, the rest is history.

4.  But the equitable basis for the Morris decision does have overtones of the argument the defendants asserted in Garrity.  The decedent's death precluded him from pursuing the benefit clearly conferred by Congress - in Morris, exemption of the gain, and in Garrity, the wrongful disclosure suit.  Should there be a different result in Garrity?  There are many downsides to death, but should denial of the wrongful disclosure action be one of them?

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