The hidden side of the McBride FBAR defendant judgement
Recently, I was fortunate enough to speak with Jon McBride — the defendant in U.S. v. McBride — about his case, which ruled in favor of the United States government and allowed the IRS to impose a $200,000 FBAR penalty against him. Mr. McBride was kind enough to allow me to record our conversation, and I hope to have it posted as soon as we can work out some technical difficulties with our recording equipment. While there were many interesting aspects to our discussion — especially since Mr. McBride has certainly become an FBAR expert in his own right — I want to focus on three very important points.
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. As a matter of fact, it is what many 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. This is how McBride treated the money he received back from Merrill Scott; he made sure to report everything Merrill Scott gave back to him. It would seem that McBride did everything right; however, the IRS thought differently. 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 form and found that McBride should be taxed for earnings that Merrill Scott made on his behalf. This was such a wild conclusion as 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 was the income he thought he was deferring. You can imagine his surprise when 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 — like in U.S. v. Williams — there was a plea to tax evasion. McBride tells me that no, there was never a threat of a tax evasion charge. He was actually trying to help the IRS prosecute Merrill Scott. If they had 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 spanning the last decade. McBride tells me that instead, many of the quotes the court used to paint him as a criminal were from when McBride was under tax audit. He admits that he was outraged that the IRS was going after him and turning a blind eye to Merrill Scott. He also admits he should not have taken his anger out on the IRS auditor; the last thing you want is an auditor that has a bone to pick with you. McBride admits to letting his anger get the best of him and he made regrettable claims to the IRS that were later used against him. I can’t stress this point enough – when dealing with the IRS, you have to keep a cool head. They’re not the ones that are going to suffer if you get frustrated. Instead, they’re going to drop the hammer and make you wish you had kept your frustration under control.
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 — with the position he was in — he could not force Merrill Scott to give him any money. His point was 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 should consider using the 2012 Offshore Voluntary Disclosure Program. His response was immediate: “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 — disregarded them. Of particular note: McBride had no power to make distributions from the Merrill Scott accounts, yet Judge Nuffer 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’s own FAQs. This is a truly terrible law and deserves to be struck down. If taxpayers are unable to rely on clear IRS guidance, then how can anyone proceed safely?