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The hidden side to to the McBride FBAR judgment

I was fortunate enough to speak with Jon McBride, the defendant in US v. McBride, a case that ruled in favor of the United States government, allowing the IRS to impose a $200,000.00 FBAR penalty against him. Mr. McBride was kind enough to allow me to record our conversation about this decision, a conversation I hope to have posted as soon as we can work out some technical difficulties with our recording equipment. While there were many interesting aspects of our conversation — McBride has certainly become an FBAR expert in his own right, I want to focus on three very important points.

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1. McBride did not attempt to evade taxes.

McBride’s entire involvement in Merrill Scott, the now defunct ponzi-scheme, was to simply defer taxes. He was told — by ex-IRS attorneys and others at Merrill Scott — that this scheme, while controversial and often misunderstood, was entirely legal.

In fact, deferral is a legitimate goal of international tax planning. It is what companies and individuals do all day, every day. Other examples of deferral are traditional 401(k) plans. It allows you to grow your assets, tax-free and you are only taxed when you actually receive money.

And this is how McBride treated the money he would receive back from Merrill Scott. He reported on his taxes what Merrill Scott gave back to him.

The IRS thought different. During a lengthy audit procedure (in which McBride admitted he should have hired legal counsel and not represented himself pro se) the IRS believed substance should trump the form and found that McBride should be taxed for earnings that the Merrill Scott assets made on his behalf.

McBride paid taxes on all the money he took and received from Merrill Scott. What he did not pay taxes on and did not report the income he thought he was deferring and the IRS sent him a bill for the outstanding balance.


2. McBride was never charged nor convicted of any crime

Even I was confused by the court’s opinion. I originally thought, that like in Williams, there was a plea to tax evasion. McBride tells me that no — there was never a threat to a tax evasion charge. He actually was trying to help the IRS to try to prosecute Merrill Scott as if they never sold him on this this fraudulent tax avoidance scheme, he would have never lost half a million dollars and been involved in this nightmare for the last 10 years. McBride tells me that rather, many of the quotes the court uses to paint him as a criminal are from when McBride was under tax audit. He admits that was outraged the IRS was going after him — not Merrill Scott. He admits he should not have taken his his anger out on the IRS auditor. He admits letting his anger get the best of him and he made regrettable claims to the IRS that were later used against him. 


3. McBride did not have signatory authority on any accounts

The Court held that “tacit” control counted as control for FBAR-penalty purposes. McBride further explained that he could not force Merrill Scott to give him any money. His point is further underlined by this fact: If  he did have control over the accounts,  then how was Merrill Scott able to steal $500,000 from him?


Conclusion: McBride’s Advice for those with unfiled FBARs

I asked McBride whether or not someone who currently has unfiled FBARs and/or questionable income sources, well, if those people should use the 2012 Offshore Voluntary Disclosure Program. His response was terse:

It’s a total no-brainer.” He further adds “look, they got me and I didn’t even have signatory authority. I would love to have been able to get into this program.”


 Additional Note: McBride’s resources were limited at the time of trial. He was able to convince his personal friend, Philip J. Hardy, Esq., a family law attorney, to represent him. Our impression of Mr. Hardy’s brief and evidence are very favorable. For an attorney who was new to the offshore storm, we believe that Mr. Hardy and his client did an admirable job of explaining the facts and applying the law. They should be proud of the fight they put up against the most powerful government in the world. The important issues were raised, it was simply that, Judge David Nuffer, on his first trial since being appointed judge, simply disregarded them. Of particular note: McBride had no power to make distributions from the Merrill Scott accounts, yet Judge Nuffer’s found that “tacit control” is tantamount to “actual control” thus enough to trigger penalties. This is a novel FBAR concept and completely contradictory to the IRS’ own FAQs. This is bad law and deserves to be struck down. Taxpayers should be able to rely on clear IRS guidance, no? 


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1 Comment
  1. The biggest problem here is that the court confuses too many separate and distinct legal issues. Basically, the judge decided “I don’t like McBride, so let’s give the government what they are asking for.”

    But – see – when it’s your job to make a determination based on the LAW, then that’s what you should do.

    What would happen if other courts decide to adopt the same sort of tactics? Would creditors be able to reach the corpus of a discretionary trust just because the trustee had made distributions when a beneficiary had requested them in the past?

    It’s the same principal at work — when distributions are DISCRETIONARY you lack CONTROL and creditors can’t reach it.

    Here, McBride lacked CONTROL, he lacked REAL CONTROL, and that – at the end of the day – means he should not have been required to file and FBAR.

    And don’t even get me started on the court’s “analysis” of the requirement that the failure to file an FBAR be willful. When a court begins to impute PRESENT knowledge to a time several years earlier in order to find “willful blindness,” well – can you explain that? Because I can’t

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