United States v. DeMauro

483 F.Supp.3d 68

UNITED STATES of America

v.Annette B. DEMAURO

Case No. 17-cv-640-JL

United States District Court, D. New Hampshire.

Signed August 28, 2020

Angela R. Foster, Thomas P. Cole, US Dept. of Justice, Washington, DC, for USA.

Rosario M. F. Rizzo, Rizzo Law Offices, Concord, MA, Gerard J. Levins, Pro Hac Vice, Levins Tax Law, Framingham, MA, Kurt S. Olson, Olson & Olson PA, Salisbury, NH, for Annette P. DeMauro.

MEMORANDUM ORDER AND VERDICT AFTER BENCH TRIAL

Joseph N. Laplante, United States District Judge

This is a civil tax case that turns on whether the defendant "willfully" failed to provide tax information to the Internal Revenue Service or did so with the specific, fraudulent intent to evade taxation. The United States, with the authority of the Secretary of the Treasury and at the direction of the Attorney General, seeks enhanced money penalties against Annette B. DeMauro for failing to file foreign bank account reports ("FBARs") with the IRS. DeMauro concedes that she failed to do so and that she was required to do so by law. Nevertheless, she contends that her failure was not "willful"—a necessary element for the enhanced FBAR penalties the United States seeks. She also counterclaims that the United States should remit the enhanced penalties she has already paid for late-filing her tax returns because her failure to file was not fraudulent in intent, as required for the assessment of separate, enhanced penalties for her late tax filings.

After considering the testimony and evidence adduced at trial, the court finds in favor of the United States on its willful FBAR-penalty claim, see 31 U.S.C. §§ 5314, 5321, but against the United States on DeMauro's counterclaims challenging the IRS's fraudulent-failure-to-file penalties, see 26 U.S.C. § 6651. With respect to FBAR, the United States showed by a preponderance of the evidence that DeMauro acted recklessly, and thus "willfully," by failing to seek professional tax advice on foreign accounts she knew were earning income, even though she had consistently relied on professionals in the past and also had paid taxes on real property gained through her divorce. Even if DeMauro did not consciously avoid learning about the FBAR reporting requirement, she at the very least should have surmised that there was a grave risk she was not meeting her tax-filing obligations. Her conduct therefore constitutes a willful civil violation.

For DeMauro's counterclaims, however, the United States did not meet its burden of showing by clear and convincing evidence that DeMauro failed to timely file returns with the specific, fraudulent intent to evade taxes. While the United States correctly notes that DeMauro took steps to conceal her foreign bank accounts and money transfers, she credibly testified that she did so in an attempt to hide assets from her abusive ex-husband—an explanation that even the IRS investigating agent believed and found compelling—and because she trusted the many professionals around her to handle the finer details of her finances. Given these mitigating explanations, the counterclaims pose a closer question than the affirmative FBAR claim. On this record, the court finds that the United States did not meet its burden for assessing enhanced late-filing penalties by clear and convincing evidence, and thus orders the return of penalties already exacted. A separate entry of judgment shall follow this order.

I. Factual Background

The following generally draws from the parties’ statement of agreed facts¹ and, where specifically indicated, the witness testimony adduced at trial or the documents admitted into evidence.

A. DeMauro's marriage and divorce

Annette DeMauro is an 82-year old woman residing in Rye Beach, New Hampshire.² After completing high school, she married an Air Force lieutenant colonel, had two children, and spent most of her time living on military bases around the world.³ In 1975, she divorced the lieutenant colonel and, in 1976, married Joseph DeMauro.⁴ She then spent most of her time living with her husband in Saudi Arabia until at least 1985.⁵

In 1993, DeMauro initiated a contested divorce proceeding against her husband on the grounds of adultery, which ultimately cost her at least $1 million in legal fees.⁶ She was represented by numerous lawyers, including S. James Boumil.⁷ After nearly nine years of litigation, the court issued a divorce decree awarding her a $35 million cash judgement, which was never paid, and three properties located in Florida, Tennessee, and Rye Beach.⁸ In the divorce decree, the court found that:

[Joseph DeMauro] indicated to ... [Ms. DeMauro] that unless she acceded to his offers for the payment of alimony and division of marital property, she will never receive anything from him and that he would continue, with the aid of his vast financial resources, to avoid service of process and arrest, a threat which proved to be all too accurate.⁹

The decree also provided, with respect to taxes:

[T]o the extent that any income and/or gift taxes may be owing to the United States of America, and State of the United States, or any foreign jurisdiction, the defendant [Joseph DeMauro] is hereby ordered to indemnify and hold harmless the plaintiff [Ms. DeMauro] from any and against the same and to be solely responsible for the payment of any costs and reasonable attorney's fees incurred by the plaintiff [Ms. DeMauro] in defense of same.¹⁰

DeMauro testified that her "understanding was that whatever I received from the -- my divorce decree was mine and mine alone and that went for anything that I had received and it was nontaxable."¹¹

B. Opening of a foreign bank account at UBS

In 2000—the same year she finalized her divorce—DeMauro opened a numbered bank account with UBS AG, a Swiss bank.¹² At that time, she maintained domestic accounts at both USAA and TD Bank, which, according to DeMauro, her ex-husband attempted to access during their separation and divorce.¹³ DeMauro testified that, during her divorce, her ex-husband repeatedly harassed her, frequently damaged her vehicles, sent groups of people around her home to threaten or intimidate her, attempted to burn the backside of her house, and one time tried to run her vehicle off the road.¹⁴ She further testified that, given her ex-husband's local bank contacts, she opened the foreign bank account to "protect" her money from him.¹⁵

In establishing a UBS account, DeMauro formed a client relationship with UBS client advisor Hannes Rosch.¹⁶ At trial, DeMauro testified that she chose UBS because her son's boarding school in Switzerland used that bank.¹⁷ After Rosch and DeMauro met in-person twice, Rosch allegedly sent DeMauro unfilled account opening documents by fax, which she signed, but did not fill out, before faxing them back.¹⁸ The application materials admitted at trial reflect that DeMauro signed documents that instructed UBS to hold onto any correspondence with her until she claimed it, and that UBS could destroy unclaimed correspondence after a period of three years.¹⁹

DeMauro testified that at the time she opened the account, she did not understand that she would not receive UBS documents in the mail.²⁰ Nevertheless, she agreed that she understood her account would generate income and that Rosch had promised her a return of approximately 5% per year.²¹ According to banker's notes maintained by UBS and admitted into evidence, DeMauro consulted with bank employees at times, either in person or on the phone, about the state of her account.²² According to DeMauro, she did not seek advice from an attorney or financial advisor about opening a foreign account.²³

C. Retention of a CPA in connection with sale of real property

In 2001, DeMauro sold the Florida property she received from her divorce for approximately $7 million.²⁴ She earned about $3.5 million in net sale proceeds after paying approximately $2.5 million in property taxes and legal fees and remitting $1 million to the IRS in anticipation of her 2001 federal income tax liability.²⁵ The sale proceeds were deposited in DeMauro's client account at Boumil's law firm.²⁶

In 2002, DeMauro instructed Boumil to transfer her real estate proceeds to her UBS account in Switzerland.²⁷ That August, UBS received a $3.5 million deposit into DeMauro's account.²⁸ In the following years, DeMauro's account annually accumulated tens of thousands of dollars in interest.²⁹ In 2003 and again in 2004, DeMauro transferred $250,000 from her UBS account to her domestic USAA bank account, both times through the client account at Boumil's law firm.³⁰

Around the time of Florida property sale, DeMauro's attorneys retained CPA Ronald Ouellet to prepare a tax return reporting the sale for DeMauro and claiming a refund for an overpayment of tax, which was timely filed.³¹ Ouellet testified that before he prepared the return, he met with DeMauro, and that he was "sure" he would have asked if she had any interest income for the 2001 calendar year.³² He agreed that by 2003, he understood that DeMauro had transferred a significant amount of money to her Swiss bank account, but did not understand why interest earned from the account was not included in future returns, as it was something he would have asked about.³³ He further testified that he had no understanding as to the specific FBAR requirement in 2001 up through at least 2005.³⁴

In 2004, DeMauro received a house in Tyngsboro, Massachusetts as part of her divorce.³⁵ She sold the house in 2005 and, in 2006, hired Ouellet to prepare a Form 1040 federal income tax return for the 2005 calendar year.³⁶ The prepared return included a Schedule B, which included the interest earned from DeMauro's domestic bank accounts, but not her UBS accounts.³⁷ Part III of that schedule, entitled "Foreign Assets and Trusts," asked in question 7a if DeMauro had a financial interest or signature authority over a financial account in a foreign country.³⁸ Although the box on the return was checked "no;" DeMauro never filed...