DOJ Sues for Willful FBAR Penalty Offshore Entity Accounts

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DOJ Sues for Willful FBAR Penalty Offshore Entity Accounts

DOJ Sues for Willful FBAR Penalty Offshore Entity Accounts

DOJ Sues for Willful FBAR Penalty 

The US Government is still going strong on all matters involving offshore non-compliance, with an emphasis on Civil willful FBAR Penalties under 31 USC 5321(a)(5). In the case of US v Galliani, the Government alleges Taxpayer acted willfully in creating offshore entities in known tax shelter jurisdictions such as Guernsey — and not reporting foreign accounts associated with the structures on the FBAR. The IRS further alleged that Defendant had not cooperated when it came to an examination — noting, that the examination was for 16+ years (2000-2016), which could try the patience of even the most reasonable of taxpayers. Since Defendant did not pay the penalty, the DOJ now sues to reduce the penalty to Judgment.

We have reproduced portions of the Government’s Complaint below:

Mr. Galliani’s Foreign Accounts & Offshore Entities

      • 13. Mr. Galliani had a financial interest in, or signatory or other authority over, the foreign financial accounts at issue in this action in two offshore “structures,” containing trusts, limited liability companies, nominee entities, and corporations. These two structures are (i) the Janet Trust Structure and (ii) the Orange LLC Structure. 

Bank Accounts Held by the Janet Trust Structure 

      • 32. The Janet Trust Structure had four foreign bank accounts. 

      • 33. As part of the Janet Trust Structure, Blenheim held three foreign bank accounts in its name: two at Investec Specialist Bank (“Investec”) in Guernsey on behalf of Carbonel; and one at the Royal Bank of Scotland International (“RBSI”) in Guernsey on behalf of the Janet Trust. 

      • 34. Carbonel also held an account in its own name at the RBSI in Guernsey.

Mr. Galliani is the True Accountholder of the Janet Trust Structure Accounts 

      • 36. Mr. Galliani exerted complete authority and control over the Janet Trust Structure and directed the assets among the four bank accounts. 

      • 37. Carbonel was incorporated to channel service income earned by Mr. Galliani through the Janet Trust, which would reclassify this income as loans or distributions before transferring the income to Mr. Galliani. 

      • 38. The Janet Trust Structure was set up to take in ordinary income earned by Mr. Galliani, recharacterize that income, and distribute this income back to Mr. Galliani at a lower tax rate. 

      • 39. Mr. Galliani could obtain funds from the assets of the Janet Trust Structure whenever he wanted with no interference or approval from anyone else. He also had direct access and control over the four bank accounts held as part of the Janet Trust Structure described in paragraphs 32-35, above. 

      • 40. In 2015, Mr. Galliani decided unilaterally to terminate the Janet Trust Structure. 

      • 41. With advice from Blenheim and his attorney in the United States, Mr. Galliani controlled when the Janet Trust Structure terminated, who received the asset distribution, and the income tax characterization of that distribution. 

      • 42. Furthermore, the purported settlor of the trust, Mr. Galliani’s daughter’s Italian mother-in-law, does not appear to have been consulted or considered as a viable recipient of the Janet Trust’s assets upon termination despite being the trust’s purported settlor. 

      • 43. Mr. Galliani was effectively the settlor and beneficiary of the Janet Trust Structure and had complete authority over the four accounts of the Janet Trust Structure and the funds within those accounts. 

      • 44. Mr. Galliani also was the beneficial owner of the Janet Trust from its inception until its termination. 

II. The Orange LLC Structure 

      • 45. The Orange LLC Structure was another offshore structure utilized by Mr. and Mrs. Galliani to hide their income from the IRS while at the same time receiving that income through disguised payments referred to as annuity payments. 

      • 46. Orange LLC was registered in the Island of Nevis on December 24, 1999, with Clyde Trading Limited, an entity controlled by Peter Howe, CEO of Blenheim, holding a 90% membership interest. Eventually, after 2012, Orange LLC’s sole member became a company called Greising Properties Limited. 

A. Accounts Within the Orange LLC Structure 

      • 57. The Orange LLC Structure had four foreign bank accounts. 

      • 58. As part of the Orange LLC Structure, Butterfield maintained two accounts: one held in the name of Titan and one held in the name of Saturn. 

      • 59. Butterfield labeled and treated these accounts as “Due from Banks-Demand.” “Due from Banks” accounts allow fund transfers between banks both domestically and internationally. Butterfield maintained correspondent bank accounts with the Bank of New York Mellon to facilitate transfers from and to United States banks. 

      • 60. The Titan and Saturn accounts received deposits from Morgan Stanley accounts located in the United States. These cash deposits funded Mr. and Mrs. Galliani’s purported annuity payments and paid certain expenses incurred by Mr. and Mrs. Galliani. 

      • 61. Orange LLC also held an account in its own name at RBSI in Guernsey. 

      • 62. Blenheim held a separate account for activities associated with Orange LLC at Investec in Guernsey. 

WILLFUL FAILURE TO FILE FBARs 

A. Mr. Galliani’s Efforts to Conceal Assets 

      • 75. Mr. Galliani is a sophisticated taxpayer. He was educated at a prestigious American university in economics and business. He spent his career working in insurance and dealing with complex financial products. 

      • 76. Starting the mid-1990s, Mr. Galliani established a maze of offshore entities to conceal his beneficial ownership of entities and foreign financial accounts holding millions of dollars. 

      • 77. Mr. Galliani established the Janet Trust Structure, the Orange LLC Structure, and had authority over an RBSI account in Guernsey holding $8.7 million in 2000. 

      • 78. Those millions of dollars were transferred to domestic brokerage accounts (at Morgan Stanley) in the United States. 

      • 79. Mr. and Mrs. Galliani disguised their ownership of these domestic brokerage accounts by holding them in the name of multiple foreign nominee entities such as Gresham Nominees (a nominee entity used by Butterfield), Titan, and Saturn, over which Mr. Galliani directed and controlled. 

      • 80. These structures and entities existed to shelter Mr. Galliani’s assets from the United States. 

      • 81. In a further effort to conceal his assets, Mr. Galliani instructed Butterfield to avoid sending him banking documents through email. 

      • 82. In September 2016, after the IRS had opened income tax and FBAR examinations against Mr. and Mrs. Galliani, Mr. Galliani closed the two domestic brokerage accounts (at Morgan Stanley) and transferred roughly $9 million from those two accounts into the Titan and Saturn accounts located offshore 

B. Mr. Galliani’s Knowledge of FBAR Reporting Requirements 

      • 83. Since the mid-1990s, Karen Stepper, CPA, has prepared Mr. and Mrs. Galliani’s domestic federal income tax returns. 

      • 84. Ms. Stepper provided Mr. and Mrs. Galliani with tax organizers and questionnaires each year she prepared their domestic federal income tax returns. 

      • 85. Mr. Galliani would provide Ms. Stepper with income information which included “annuity” income amounts and computations splitting the “annuity” income into ordinary and capital gain income. Ms. Stepper used the information to complete Mr. and Mrs. Galliani’s domestic federal income tax returns. 

      • 86. Mr. Galliani completed the tax questionnaires. 

      • 87. The tax questionnaires asked, “Do you have an interest in any foreign bank or brokerage account?” For at least tax years 2013, 2014, 2015, and 2016, Mr. Galliani checked the box for “no.” 

      • 88. For the 2013, 2014, and 2015 tax years, Ms. Stepper sent a letter to Mr. and Mrs. Galliani along with their prepared domestic federal tax returns. The letter advised the following: 

      • You are required to file Form TDF 90.22-1, Report of Foreign Bank and Financial Accounts by June 30 for any year in which your accounts exceed $10,000 at any time during the year. Furthermore, on Schedule B, if you hold a foreign bank, brokerage, or retirement account, then you must answer the first question affirmatively on Schedule B Question 7a. 

      • 89. But on the Schedules B filed with Mr. and Mrs. Galliani’s domestic federal income tax returns (Forms 1040) for tax years 2013, 2014, 2015, and 2016, Mr. and Mrs. Galliani checked “no” in response to the question of whether they held an interest in foreign accounts, foreign corporations, or foreign trusts. 

      • 90. For tax years 2013, 2014, 2015, and 2016, Mr. and Mrs. Galliani also did not file any information returns with the IRS showing ownership in a foreign corporation or owning interests in foreign trusts. 

      • 91. Mr. Galliani did not file FBARs for calendar years 2013, 2014, 2015, and 2016. 

B. Assessment and Collection of the Civil Penalty 

      • 103. On June 8, 2020, a delegate of the Secretary of the Treasury timely assessed FBAR penalties against Mr. Galliani in the total amount of $4,570,750, due to Mr. Galliani’s willful failure to file FBARs to disclose his interest in the Accounts (plus two additional accounts) to the IRS for calendar years 2013, 2014, 2015, and 2016. The IRS had proposed a total assessment of $4,587,737 but due to an error, the initial assessed amount was $16,987 less for a total of $4,570,750. 

      • 104. On November 24, 2020, a delegate of the Secretary of the Treasury timely assessed the additional $16,987 of FBAR penalties against Mr. Galliani that the IRS had previously proposed to assess due to Mr. Galliani’s willful failure to file FBARs to disclose the Accounts (plus two additional accounts) to the IRS for calendar years 2013, 2014, 2015, and 2016. 

      • 105. A delegate of the Secretary of Treasury sent a notice of the assessments and demand for payment to Mr. Galliani’s last known address. 

      • 106. The United States does not seek a judgment against Mr. Galliani for his failure to report two financial accounts that the IRS included in its original assessment. The Accounts at issue in this complaint do not include these two additional accounts. 

      • 107. However, because the manner and methodology the IRS employed in calculating the amount of the willful FBAR penalties for calendar years 2013, 2014, 2015, and 2016 against Mr. Galliani included consideration of those two additional financial accounts and the balances contained therein, the United States does not seek a judgment in the amount of the willful FBAR penalties the IRS assessed against Mr. Galliani. 

      • 108. Instead, the United States alleges that the amount of the willful FBAR penalties Mr. Galliani owes should be recalculated in further proceedings after this Court determines that Mr. Galliani is liable for willful FBAR penalties for the calendar years 2013, 2014, 2015, and 2016. 

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