Court Denies Summary Judgment to Party with Burden of Persuasion Because that Party's Testimony Evidence May Not Be Believed (11/24/19)

In Martinelli v.Commissioner, (T.C. Dkt No. 4122-18 Designated Order 9/20/19), here, the IRS issued a deficiency against Martinelli and separately apparently assessed a penalty under § 6038D(d) for failure to report a foreign financial account on Form 8938, Statement of Specified Foreign Financial Assets.  Readers may recall that foreign financial accounts have, for some time now, been reportable to Treasury on the FBAR and, beginning for years after 2010, on an IRS form, now designated Form 8938.  The §6038D(d) penalty is an assessable penalty, meaning that a notice of deficiency is not required, so, bottom line the Tax Court order holds that the penalty is not within the Court’s deficiency jurisdiction.

I will discuss the Designated Order below, but first offer the following introduction from my Federal Tax Procedure Book (footnotes omitted):

Reporting Foreign Financial Assets on Form 8938.

  In 2010, Congress enacted a tax return reporting requirement for foreign financial assets that parallels, but is different from the FBAR. The reporting is on Form 8938 which is attached to the income tax return.  Form 8938 is required in the following circumstances with the reporting thresholds as indicated: (i) an unmarried taxpayer having specified foreign financial assets that have a value of more than $50,000 on the last day of the year or $75,000 at any time during the year; (ii) married taxpayers residing in the U.S. and filing a joint return having specified foreign financial assets of more than $100,000 on the last day of the year or $150,000 at any time during the year; (iii) married taxpayers filing separate returns and residing in the U.S. having specified foreign financial assets of $50,000 on the last day of the tax year or more than $75,000 at any time during the year; and (iv) taxpayers living abroad (either for the entire tax year or for 330 days during 12 consecutive months ending in the tax year) (a) not filing a joint return and having specified foreign assets of  $200,000 on the last day of the year or $300,000 at any time during the year and (b) filing a joint return and having specified assets of $400,000 on the last day of the year or $600,000 at any time during the year.  There are certain limited exceptions for reporting assets that are reported elsewhere on tax forms (not the FBAR).

Reportable “specified foreign financial assets” are (1) depository or custodial accounts at foreign financial institutions and (2) to the extent not held in an account at a financial institution, (i) stocks or securities issued by foreign persons, (ii) any other financial instrument or contract held for investment that is issued by or has a counter-party that is not a U.S. person, and (ii) any interest in a foreign entity.  The IRS interprets these terms broadly, so IRS pronouncements must be consulted each time the issue arises, particularly during the early years of implementation when the IRS’s interpretations may be in a period of flux.  The assets and foreign institutions and the maximum values during the year must be reported. 

The criminal penalties related to the form are the standard criminal penalties for tax obligations.  The most likely criminal penalties are evasion (§ 7201) for underreported or underpaid taxes related to income from the assets required to be disclosed and tax perjury (§ 7206(1)) either for underreporting the related income or presenting false information on the Form.  The criminal statute of limitations is six years, but various conditions (including most prominently, the period a U.S. person is outside the United States) can suspend the statute of limitations. 

The civil penalty for failure to file the form or failure to file a complete and correct form is $10,000 with an additional incrementing penalty if the taxpayer fails to provide the information to the IRS after the IRS notifies the individual of the failure to disclose.  The penalty increases by $10,000 for each 30 day period after the notice.  There is a reasonable cause exception to this failure to disclose penalty but “[t]he fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause..  The penalty is an assessable penalty, meaning that the deficiency notice and advance litigation procedure prior to payment is not available. 

In addition, a 40% new accuracy related penalty applies to any understatement attributable to undisclosed foreign financial assets.  This penalty provision not only applies to this new section but older sections requiring disclosure of foreign financial assets (such as Form 5471).  Finally, of course, the traditional 75% civil fraud penalty can apply to the related understatement. 

Contemporaneously with enacting this new provision, Congress provided two special extended civil assessment statutes of limitations related to these assets and the income from them.  First, if the taxpayer omits gross income exceeding $5,000 attributable to the foreign assets (regardless of whether the assets themselves are reported), the statute of limitations is 6 years rather than the normal 3 years. Second, the failure to report this foreign financial asset information and other types of information regarding foreign activity (i) generally subjects the entire return to an open statute of limitations that does not expire until three years from the date the taxpayer furnishes the information required to be disclosed but (ii) if the failure to provide that information was due to reasonable cause and not willful neglect, extended statutory period in (i) does not apply to any tax liability except as related to the information required to be reported.  The second extension applies whether or not the taxpayer reported the income from the foreign financial assets or other types of specified activity. 

The IRS is authorized to promulgate regulations necessary to carry out the intent of the Code provision. 

Form 1040 Schedule B will continue to ask for information about foreign accounts and advising the taxpayer of the obligation to file the FBAR.  The requirement to file the FBAR is independent of the obligation to file Form 8938 with the tax return.  As a tax return filing, the Form 8938 is subject to § 6103's secrecy rules, and thus not generally available to other law enforcement agencies. 

Finally, the IRS has announced that it will better coordinate the information it has from foreign financial institution (“FFI”) reporting on Form 8966, FATCA Report, with individual Forms 8938.   On the Form 8966, the FFI reports the name, address, and Taxpayer Identification Number of each accountholder who is a specified U.S. person; the account number; the account balance or value; and the gross receipts and gross withdrawals or payments from the account.

Now, back to the Designated Order in Martinelli, Martinelli claimed that the foreign financial account was not his account and that he did not even know about the account.  Based on that underlying claim, Martinelli claimed that he was entitled to summary judgment on the issues of (i) his liability for the § 6038D(d) penalty, (ii) an order enjoinng the IRS from assessing or collecting the § 6038D(d) penalty, and (iii) his income tax liability excluding any income from the foreign account.  The Court held that (i) the § 6038D(d) penalty is not subject to notice of deficiency procedures requiring a notice of deficiency giving the Court jurisdiction, hence the Tax Court cannot determine his liability for that penalty, (ii) the Court cannot restrain the IRS as to that penalty, and (iii) the facts as presented on the motion as to his ownership or knowledge of the foreign account were not of sufficient quality to support summary judgment.  A discussion of the case can be found here:  Patrick Thomas, Affidavits in Summary Judgment – Designated Orders: September 16 – 21, 2019 (Procedurally Taxing Blog 11/19/19), here.

On the issue of Martinelli’s knowledge of the account and the quality of the evidence for summary judgment, the Court said:

Petitioner's Knowledge of the Account 

Petitioner, however, could not have withdrawn funds from an account of which he was unaware. And petitioner claims to have been unaware of the existence of the Italian bank account until around September 2012. If we were to accept petitioner's claim that he was unaware of the account throughout 2011, we would have to consider whether it entitled him to summary judgment for that year.  

But respondent disputes petitioner's claim that he was unaware of the Italian account through 2011. Under Rule 121(d), a party opposing a motion for summary judgment cannot rest on "mere * * * denials". Instead, the opposing party must generally "set forth specific facts showing that there is a genuine dispute for trial." Rule 121(d). And respondent offers no evidence that petitioner did learn of the Italian account before the end of 2011. But evidence to that effect may not exist. 

It may be that the question of when petitioner first learned of the account can be answered only by evaluating the credibility of his claim. We must therefore consider Rule 121(e), which provides: - 7 - If it appears from the affidavits or declarations of a party opposing * * * [a] motion [for summary judgment] that such party's only legally available method of contravening the facts set forth in the supporting affidavits or declarations of the moving party is through cross-examination of such affiants or declarants or the testimony of third parties from whom affidavits or declarations cannot be secured, then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed. 

Respondent did not invoke Rule 121(e) in his opposition to petitioner's motion or accompanying memorandum of law. But he does claim repeatedly that he "should not be forced to take information contained in declarations at face value without the right of cross-examination of witnesses under oath." Those claims implicitly invoke Rule 121(e). 

We agree with respondent that he should be allowed to cross-examine petitioner about when he learned of the Italian bank account (as well as other matters in regard to which petitioner's statements provide the only evidence). If petitioner did learn of the account's existence before September 2012, evidence of that fact may not exist and in any event would not be readily available to respondent. Denial of petitioner's motion thus should not turn on respondent's ability to produce evidence to that effect. Petitioner's testimony about when he first learned of the Italian account may be the only available evidence of that potentially critical fact. Therefore, we will not accept petitioner's testimony until respondent has had the opportunity to challenge it through cross-examination (and we have the opportunity to observe petitioner's demeanor and judge his credibility). 

We conclude that the question of whether petitioner learned of the Italian account before the end of 2011 is a disputed question of material fact whose existence justifies the denial of petitioner's motion for partial summary judgment for 2011. And the question of petitioner's control over the account and ability to withdraw funds from the account is a disputed question of material fact whose existence justifies the denial of petitioner's motion for the remaining years in issue.

JAT Comments:

1.  The holding on knowledge of the account for summary judgment is correct.  Martinelli has the burden of persuasion on the issue of whether the account was his and he had knowledge of the account.  That information is the type that is principally or exclusively within the knowledge of Martinelli, so since he has the burden of persuasion he cannot win on summary judgment because the credibility of his denials is essential to meeting the burden of persuasion.

2.  With regard to summary judgment on this type of issue, there is a critical nuance that is addressed in a marvelous opinions by Judges Learned Hand, here (majority) and Jerome Frank, here (concurring) in Dyer v. MacDougall, 201 F.2d 265 (2d Cir. 1952), here. I discussed that case in a comment to the Procedurally Taxing Blog (cited and linked above) and here cut and paste the comment:

The summary judgment discussion reminds me of the marvelous discussion in Dyer v. MacDougall, 201 F.2d 265 (2d Cir. 1952). 

Basically, two powerhouse judges (Learned Hand and Jerome Frank) weigh in on the issue of whether, on a motion for summary judgment, the party having the burden of persuasion in a slander case can get avoid summary judgment where the opponent and those who allegedly heard the slander deny the slander. It is conceivable that, on trial, the trier could judge the testimony and the demeanor evidence and believe that the opposite of the denials are true. But, as to the party bearing the burden of persuasion, on summary judgment there must be something more than the possibility that the jury will reject the denials and find the opposite. 

Tax Court Rule 121(e) seems consistent with Dyer v. MacDougall because the IRS did not seek summary judgment based on what, at trial, would be only demeanor testimony of a witness or witness denying the fact. Rather, it is the taxpayer with the burden of persuasion who asks that summary judgment be given although, upon the trial, the trier may either (i) not be persuaded by the testimonial denial (i.e., be in a state of equipoise) or (ii) even be persuaded the opposite of the denials.