Mrs. Fairbank was assessed fees and penalties for failure to report certain foreign assets. The foreign assets were bank accounts that reflected her as the beneficial owner. One was a UBS account in Switzerland and another, funded from the UBS account, was a NPB account in Dubai, UAE. Mrs. Fairbank was divorced from Mr. Hagaman, who owned significant assets and companies globally. Through their years of negotiating their divorce, Mr. Hagaman agreed to pay child support, and then agreed verbally, subsequent to the written child support agreement, to supplement the child support payments with additional money. The first oral amendment had him pay an additional $40,000/year (from 1984 to 1988) to Mrs. Fairbank, and the second oral amendment had him pay $190,000/year (from 1990 to 1993) more. He did, in fact, make these payments, with the aid of Swiss lawyers, by transferring funds into Mrs. Fairbank’s UBS account. The foreign accounts were tied to foreign businesses, and there were designated individuals who managed the business interests/accounts overseas, and received all account statements, in lieu of sending them to Mrs. Fairbank at her residence in Florida. In the early 2000’s, Mrs. Fairbank did withdraw funds from her foreign accounts, at times in the form of travelers checks or a travel cash card. When Mrs. Fairbank and her husband, Mr. Fairbank, filed their tax returns, they always indicated they had no foreign accounts.
In 2008, based on a U.S. DOJ investigation, UBS admitted to engaging in a scheme of aiding U.S. clients hide income from the IRS, and ultimately agreed to provide the U.S. government with the identities and account information for certain U.S. customers of UBS’s cross-border business. In April 2010, UBS alerted Mrs. Fairbank that this was happening. Based on the account information received by UBS, the U.S. government took action against Mr. and Mrs. Fairbank. Subsequently, Mr. and Mrs. Fairbank filed certain FBARs, and Forms 5471 for prior years. They sue here asserting certain defenses.
The Tax Court classified the foreign business that held the foreign accounts as trusts (for federal tax purposes). In other words, Mr. Hagaman (the settlor) established the business (trust) for the benefit of a beneficiary (Mrs. Fairbank) and he contributed property to the trust (the money he was using to pay child support), and there was a designated trustee (the individuals who managed the accounts). It does not matter if this entity might be a corporation under the laws of the country where it was created. The trust is a foreign trust, because there is nothing in the record to suggest that a court of the United States is able to exercise primary supervision over its administration. U.S. owners and beneficiaries of foreign trusts have certain reporting obligations to the IRS. Mrs. Fairbank is both the beneficial owner and beneficiary of the trust, and therefore had these reporting obligations.
Mr. and Mrs. Fairbank made several arguments against the IRS in their lawsuit, including a statute of limitations argument, and an argument that she had no control over the accounts. The court did not agree with either argument. Mrs. Fairbank did not file all requisite forms (despite filing some back forms when she was alerted by UBS in 2010), so the statute of limitations had not yet run. Documents further showed that she had control over the account. She further argued that the funds deposited into the UBS account were nontaxable child support payments. But, this does not extinguish her obligation to report activities within her foreign accounts on income tax returns.
Without getting too far into the weeds, this case simply serves as a reminder to international family lawyers. Know your client’s assets. Check tax returns. Know what forms need to be filed, and what discovery should be requested. And, be careful when negotiating settlements re. the transfer and establishment of assets, payment of support and to where it goes, etc.
