This is the fourth of a series of four posts exploring some of the more difficult and “interesting” areas of (possible) FBAR obligations.The first post explains the FBAR filing obligations of trusts. The second post explains when individuals may have to file an FBAR because of their relationship to a trust. The third post explains how/why one may be required to file an FBAR based on control of an account rather than ownership of the account. This fourth post continues the discussion of when beneficial ownership without legal ownership triggers an FBAR obligation. The four posts are based on Podcasts with US tax lawyer Virginia La Torre Jeker.
Podcast 1: February 23, 2002 – FBAR Obligations Attaching To A Trust
Podcast 2: March 4, 2022 – FBAR Obligations Attaching To People Because Of Their Relationship To A Trust
Podcast 3: May 25, 2022 – Looking For Mr. FBAR – A New Sighting – ”exercised control over and had access to the account”
Podcast 4: September 29, 2022 – When ”Beneficial Ownership” Constitutes A Financial Interest And Triggers An FBAR Requirement
A necessary condition for the obligation to file an FBAR is that one have a “financial interest” in an account. As the following excerpt from the FBAR instructions makes clear:
There are two ways one may have a “financial interest”. They are:
Deemed financial interest where one is the holder of legal title (signature authority) over an account; and
Financial interest based on the facts and circumstances regardless of who holds the legal title. This is a determination based on the facts.
This is confirmed by reading the following excerpt from the FBAR instructions.
FBAR Line Item Filing Instructions
Part A – What Is A Financial Interest? What The The FBAR Instructions Say
Financial Interest. A United States person has a financial interest in a foreign financial account for which:
1. the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or
2. the owner of record or holder of legal title is one of the following:
a. An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
b. A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
c. A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;
d. A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a
e. A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or or interest in profits.
Part B – Acting On Behalf Of The United States Person With Respect To The Account – A Question Of Fact
On August 10, 2022 a US District Court issued a ruling on the ongoing Katholos FBAR saga.
Of particular interest is the following paragraph:
“Here, it is undisputed that Katholos was a beneficial owner of the Storchen Finance Account. In general, a “beneficial owner” is “[o]ne recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else; esp., one for whom property is held in trust.-Also terms equitable owners Owner, Black’s Law Dictionary (11th ed. 2019). Though Katholos denies that her status as a beneficial owner is “tantamount to having a ‘financial interest’ in the account that may give rise to the FBAR reporting requirements,” Dkt. 98-1, ¶ 25, the Court concludes that, as a beneficial owner, Katholos had an equitable claim or right to the Storchen Finance Account- even if she did not have legal title. And because “interest” includes equitable rights to property, Katholos’s arguments regarding legal title, who funded the account, and direct interest are not dispositive. See Continental Cas. Co. v. Bowen, No. 2:09-cv-00810-TC, 2011 WL 222340, *4 (D. Utah Jan. 21, 2011) (“Although an ownership interest in an entity would certainly be considered a financial interest in that entity, ownership is not necessary to have a financial interest.”). Thus, based on her status as a beneficial owner, the Court concludes that Katholos had a financial interest in the Storchen Finance Account.”
Bottom Line: The Katholos decision reinforces the principle that one can’t avoid the FBAR filing requirement by keeping your name off the account.
John Richardson – Follow me on Twitter @Expatriationlaw