In a recent FBAR case involving an unreported foreign account maintained at none other than UBS in Switzerland, the court was called upon to decide whether the FBAR civil “willful” penalty assessed against the taxpayer survived his death. The case is United States v. Schoenfeld (Middle District, Fla. 3:16-cv-1248-J-34PDB), dated 9/25/18, and the court order is available here.
The short answer to the question was “yes”, the FBAR penalty indeed has everlasting life! The reasoning employed by the court in reaching this conclusion was quite interesting. (My blog post does not discuss the various procedural issues raised in the case, but focuses only on why the penalty survived the death of the taxpayer.)
Facts of the Case
Briefly, the facts of the case were as follows: In 1993, a US citizen, Steven Schoenfeld, established a foreign account with UBS AG in Switzerland with funds he acquired from the sale of a New York apartment. The account was not reported on any FBAR and the income it generated was not reported on Steven’s US tax returns. In 2009, UBS notified account holders that it might provide their account information to the IRS. In response, Steven Schoenfeld told his tax representative that he would not authorize UBS to release such information. In the summer of 2010, UBS closed Steven’s account and wired its funds to a U.S.-based brokerage firm, to an account in the name of Steven Schoenfeld, with his son, Robert Schoenfeld, designated as “the sole beneficiary and trading agent.”
On September 30, 2014, the IRS assessed a civil FBAR penalty against Steven for willfully failing to file an FBAR for the calendar year 2008. The penalty was in the amount of $614,300—50 percent of the account’s $1,228,600 balance. Steven Schoenfeld did not pay it and by the summer of 2016, the amount due had grown to $690,188.69, consisting of the FBAR penalty and interest and penalties for late payment. Meanwhile, unbeknownst to the US Government, Steven Schoenfeld had died in August 2015. On September 29, 2016, the Government initiated its lawsuit against Steven Schoenfeld to reduce the assessed penalty to judgment.
Death and FBAR Penalties
The issue was whether the Government’s claim abated upon Steven Schoenfeld’s death; in other words, did the Government’s FBAR penalty claim die along with Mr. Schofield? An action brought against a deceased party cannot continue “unless the cause of action, on account of which the suit was brought, is one that survives by law.” The court noted that in the FBAR context, Congress had not specifically expressed its intention as to whether the Government’s claim survives death. In the absence of such clear direction, the court looked to the federal common law for guidance. Citing precedent, the court stated that it is well-settled that “remedial” actions survive the death of a party, whereas “penal” actions do not. So the question boiled down to whether the FBAR civil “willful” penalty is “remedial” or “penal” in nature.
A remedial action “compensates an individual for specific harm suffered,” whereas a penal action “imposes damages upon the defendant for a general wrong to the public.” [citations omitted/emphasis added]. The court placed significant reliance on the idea that “where Congress has indicated an intention to establish a civil penalty, . . . ‘only the clearest proof could suffice'” to establish that the penalty is “penal” in nature.
While I am sure I am not alone in the view that the FBAR penalty is draconian, its severity is not enough to make it “penal”. In conclusion of its analysis, the court determined that the FBAR civil “willful” penalty is “remedial” in nature. As such, it survived Steven Schoenfeld’s death and his estate must pay up.
Death and the Unreported Foreign Account
When it comes to unreported foreign accounts, family members who are estate executors or beneficiaries are often put in a very difficult position when they learn of the unreported account.
Upon death, a decedent’s unpaid income tax liability becomes a liability of the estate. It does not disappear! This liability cannot be ignored, and in fact, it puts both the estate executors and heirs at risk. The estate executors are personally liable for any unpaid claim of the United States, to the extent they make any distribution of the estate assets before paying the US government. Thus, the Estate executor will face fiduciary liability for unpaid taxes if he transfers assets from the estate prior to paying the Internal Revenue Service. As for the heirs who have received property from the estate, they too can be held liable for unpaid taxes of the decedent. The theories vary, but fall into the general categories of “Nominee Liability”, “Alter-Ego Liability” and “Transferee Liability”. More on this topic at my earlier blog post here.
Posted Nov. 11, 2018
All the US tax information you need, every week –
Just follow me on Twitter @VLJeker (listed in Forbes, Top 100 Must-Follow Tax Twitter Accounts 2017 and 2018).
Subscribe to Virginia – US Tax Talk to receive my weekly US tax blog posts in your inbox.