United States v. Katholos

1

UNITED STATES OF AMERICA, Plaintiff, v. MARIKA MARAGHKIS KATHOLOS, Defendant.

No. 17-CV-531 (JLS) (HKS)

United States District Court, W.D. New York

August 10, 2022

DECISION AND ORDER

JOHN L. SINATRA, JR. UNITED STATES DISTRICT JUDGE.

The United States commenced this action pursuant to 31 U.S.C § 3711(g)(4)(C), seeking judgment against Defendant Marika Maraghkis Katholos for an outstanding penalty of $4,474,320.29 assessed against her, pursuant to 31 U.S.C § 5321(a)(5), for failure to report timely her financial interest in, or signature or other authority over, a foreign financial account during the 2007 calendar year, as required under 31 U.S.C. § 5314 and implementing regulations. See Dkt. 1; Dkt. 6 (redacted Complaint).

There are three motions before the Court: (1) Katholos's motion to strike allegations in the Complaint or, alternatively, to designate a tax law expert, Dkt. 81; (2) the Government's motion for summary judgment, Dkt. 83; and (3) Katholos's motion to amend her amended answer, Dkt. 96.

For the following reasons, Katholos's motion to strike and to designate a tax law expert is denied, the Government's motion for summary judgment is granted in part and denied in part, and Katholos's motion to amend is denied as moot.

PROCEDURAL HISTORY

Katholos filed an answer to the Complaint on August 11, 2017, Dkt. 7 which was amended with consent of the Government and the Court on December 11, 2018, Dkt. 31, 32. After numerous extensions of time, see Dkt. 14, 28, 35, 43, 48, 50 53, 56, 63, all discovery was completed by February 28, 2021. Dkt. 63.

Katholos filed the pending motion to strike on June 9, 2021, Dkt. 81 and the Government filed its response on June 23, 2021. Dkt. 82.

On July 16, 2021, the Government filed a motion for summary judgment. Dkt. 83. On September 20, 2021, Katholos responded, Dkt. 98, and moved to amend her answer, Dkt. 96. On October 28, 2021, the Government filed a reply in support of summary judgment, Dkt. Ill,^[1] and a response to Katholos's motion to amend, Dkt. 112. Katholos filed a response in further support of her motion to amend on November 18, 2021. Dkt. 116.

After the parties briefed the pending motions, the Court referred the case to mediation. Dkt. 120. The parties engaged in mediation on March 22, 2022, but were unable to settle the case. See Dkt. 125.

BACKGROUND^[2]

Katholos was born and grew up in Buffalo, New York. Dkt. 83-2, ¶¶ 1, 3; Dkt. 98-1, ¶¶ 1, 3. Her father, Theodore Katholos, was a Greek immigrant and successful businessman. Dkt. 83-2, ¶¶ 1, 2; Dkt. 98-1, ¶¶ 1, 2. After completing college, Katholos moved to Greece in 1994 and has lived there since. Dkt. 83-2, ¶ 4; Dkt. 98-1, ¶ 4.

Katholos and her father, who did not speak or read English well, Dkt. 83-2, ¶ 2; Dkt. 98-1, ¶ 2, went to Zurich, Switzerland, and opened two accounts ending in 83394 and 71711 with UBS. Dkt. 83-2, ¶¶ 10, 15; Dkt. 98-1, ¶¶ 10, 15 (stating that, although Katholos accompanied her father, it was Mr. Katholos who opened the accounts). Katholos's name is on both accounts as an accountholder of record. Dkt. 90-5 at 1, 8; Dkt. 90-6 at 1, 8. Both were “numbered” accounts. Dkt. 83-2, ¶¶ 11, 16; Dkt. 98-1, ¶¶ 11, 16. As to the first UBS account, any correspondence was sent to a P.O. Box in Athens, Greece, and as to the second UBS account, correspondence was directed to be held at UBS. Dkt. 83-2, ¶¶ 11, 16; Dkt. 98-1, ¶¶ 11, 16.

The Government states that, when opening these accounts, Katholos signed a document indicating that she was not a U.S. citizen and did not have dual citizenship. Dkt. 83-2, ¶¶ 12, 17. Katholos states that she presented her United States and Greek passports to UBS bankers, and that her Greek passport indicates that her place of birth is the United States. Dkt. 98-1, ¶¶ 12, 17. Katholos states that she would “just sign[|” forms because she and her father trusted UBS. Dkt. 981, ¶ 13.

In February 2005, Katholos met with a UBS representative, Carmen Kaufmann, in Zurich to discuss the accounts. Dkt. 83-2, ¶ 19; Dkt. 98-1, ¶ 19. During the meeting, UBS recommended the formation of a Liechtenstein entity called the Storchen Family Foundation (the “Foundation”), which was ultimately formed on February 28, 2005. Dkt. 83-2, ¶¶ 19, 20, 21; Dkt. 98-1, ¶¶ 19, 20, 21. Katholos also asked Kaufmann about obtaining “good tax advice” in Greece, but did not ask about obtaining tax advice in the United States. Dkt. 83-2, ¶ 19; Dkt. 98-1, ¶19.

On March 3, 2005, another UBS account ending in 36795 was opened (the “Foundation Account”) under the name Storchen Family Foundation c/o Consilia Anstalt, signed by members of the Foundation's board. Dkt. 83-2, ¶ 22; Dkt. 98-1, ¶ 22. The funds from the prior UBS accounts as well as funds from an account of Katholos's husband “pooled together and funded the foundation.” Dkt. 83-2, ¶ 24; Dkt. 98-1, ¶ 24. In the account opening documents, Katholos is identified as one of the beneficial owners of the assets in the Foundation Account. Dkt. 83-2, ¶ 25; Dkt. 98-1, ¶ 25. Copies of Katholos's family members' United States passports were included in those documents. Dkt. 83-2, ¶ 25; Dkt. 98-1, ¶ 25. A copy of Katholos's Greek passport is included in the account opening documents, but her United States passport is not. Dkt. 83-2, ¶ 25. Katholos maintained contact with UBS representatives concerning account activity and investment options. Dkt. 83-2, ¶ 26; Dkt. 98-1, ¶ 26.

At some point, UBS proposed creation of a Hong Kong entity to facilitate different investments. Dkt. 83-2, ¶ 28; Dkt. 98-1, ¶ 28; Dkt. 111-1, ¶ 28. The Government asserts that Katholos signed and sent a letter to the Foundation's board asking that it consider creating a private investment company in Hong Kong and transfer the assets and account held in the Foundation's name to the new, Hong Kong entity. Dkt. 83-2, ¶ 29. Katholos does not dispute that the letter contains her signature, but disputes that she requested anything because all decisions were made by her father. Dkt. 98-1, ¶ 29. She states that she did not create the letter, but that anything her father or UBS told her to sign, she signed. Id.

On December 29, 2005, Hong Kong issued a certificate of incorporation for Storchen Finance Ltd. Dkt. 83-2, ¶ 34; Dkt. 98-1, ¶ 34. On January 3, 2006, Storchen Finance Ltd. board members established a UBS account ending in 65569 (“Storchen Finance Account”) in the name of Storchen Finance Ltd. Dkt. 83-2, ¶ 35; Dkt. 98-1, ¶ 35.

Katholos is listed as one of the beneficial owners of the Storchen Finance Account. Dkt. 83-2, ¶ 35; Dkt. 98-1, ¶ 35.

Katholos maintained communication with UBS bankers regarding investment strategies, performance of the accounts, and instructions on how to invest better. Dkt. 83-2, ¶ 39; Dkt. 98-1, ¶ 39 (not disputing that Katholos communicated with UBS on her father's behalf).

On February 27, 2007, Katholos sent a request to UBS to transfer 35,000 euros from the Storchen Finance Account, which she described as “my account Storchen 1,” to her personal account in Athens. Dkt. 83-2, ¶ 45; Dkt. 98-1, ¶ 45. The transfer was made on February 28, 2007. Dkt. 83-2, ¶ 45; Dkt. 98-1, ¶ 45. On June 11, 2007, Katholos emailed UBS requesting a transfer of 50,000 euros to the Bank of Cyprus from the Storchen Finance Account, which was executed that day. Dkt. 83-2, ¶ 48; Dkt. 98-1, ¶ 48. On November 27, 2007, Katholos emailed UBS stating that she would like to make a loan to an investor with funds from the Storchen Finance Account, and that transfer was made the same day. Dkt. 83-2, ¶ 49; Dkt. 98-1, ¶ 49. Also, in December 2017, a transfer of 10,000 euros was made from the Storchen Finance Account for the benefit of Katholos. Dkt. 83-2, ¶ 50; Dkt. 98-1, ¶ 50.

For decades, the Katholos family used the same certified public accountant- Charles Koelemeyer-to prepare their federal income tax returns. Dkt. 83-2, ¶ 59; Dkt. 98-1, ¶ 59. The Government contends that Mr. Koelemeyer prepared an individual income tax return for Katholos in 2007. Dkt. 83-2, ¶ 69. Katholos contends she is unaware of who prepared the return. Dkt. 98-1, ¶ 69. Katholos never spoke to Mr. Koelemeyer about the preparation of her returns from 2005 to 2007, and she never reviewed, signed, or filed those returns. Dkt. 83-2, ¶ 72; Dkt. 98-1, ¶ 72. On her individual tax return for 2007, questions relating to interest in or signature authority over foreign accounts and trusts were answered in the negative. Dkt. 83-2, ¶ 70. Katholos did not file a Report of Foreign Bank and Financial Accounts (“FBAR”) for 2007. Dkt. 83-2, ¶ 58; Dkt. 98-1, ¶ 58.

On July 17, 2008, because of a criminal investigation by United States authorities, UBS announced that it would no longer provide cross-border services to United States clients or offshore trusts, foundations, and non-operating corporations beneficially owned by United States citizens. Dkt. 83-2, ¶ 73; Dkt. 981, ¶ 73. Katholos went to Zurich and was told that, “[a] 11 U.S. people had to leave the bank.” Dkt. 83-2, ¶ 75; Dkt. 98-1, ¶ 75. UBS even offered to carry the money out for her. Dkt. 83-2, ¶ 75; Dkt. 98-1, ¶ 75. Katholos refused, Dkt. 83-2, ¶ 75; Dkt. 98-1, ¶ 75, and the Storchen Finance Account remained open until at least 2013. Dkt. 83-2, ¶ 80; Dkt. 98-1, ¶ 80.

In February 2009, Katholos attempted to make a voluntary disclosure to the Internal Revenue Service (“IRS”), but it was rejected as untimely. Dkt. 83-2, ¶ 81; Dkt. 98-1, ¶ 81. Katholos timely submitted an FBAR for calendar years 2008 and 2009, but she did not mention the Storchen Finance Account. Dkt. 83-2, ¶¶ 83, 84; Dkt. 98-1, ¶¶ 83, 84.

The IRS investigated Katholos for potential violations of FBAR reporting requirements. Dkt. 83-2, ¶ 89; Dkt. 98-1 ¶ 89. The IRS assessed and imposed a...