- US motion for summary judgment, here;
- Moore's Response to the US Motion, here; and
- the US Reply to Moore's Response, here.
In summary, on opt out from the OVDI/P, the IRS imposed 4 years of maximum nonwillful penalties against the taxpayer (Moore). The record before the court was inconclusive as to precisely why the IRS chose to impose 4 years of nonwillful penalties and why to max out the nonwillful penalties. In the de novo proceeding in the district court, the court determined that the taxpayer was liable for the nonwillful penalties. The caption for that part of the opinion tells the conclusion: “On De Novo Review, the Court Concludes that Mr. Moore Violated the Law By Not Filing FBARs and is Subject to a Civil Penalty.”
The court then held that it could not determine on the record whether the IRS had followed the proper procedures under the APA. The Court rejected the taxpayer's arguments on due process and excessive fines. There will be further submissions on the APA issue; it is unclear where that is going. (I include below the portion of the opinion dealing with the APA issue.) There might be a remand to the IRS for further consideration, but presumably the IRS would just clean up the administrative record and impose the same penalty now that the district court has held that he is liable for the penalty. Alternatively, since the $10,000 per year penalty is an “up to” penalty, the Court may enter the fray on whether the IRS should have imposed the maximum penalty or some lesser penalty. That same issue applies to the willful penalty in other cases; what is the appropriate court (or jury in jury cases) review of the of the quantum where the penalty is a maximum without any minimum?
Here is the key part of the Court's opinion on the APA issue:
3. The Court Cannot, On the Record Before It, Determine if the IRS Acted Arbitrarily, Capriciously or Abused Its Discretion in Assessing the Penalties.
To determine if an agency acted arbitrarily or capriciously or in abuse of its discretion, the court conducts a "thorough, probing, in-depth review." Volpe, 401 U.S. at 415. The court presumes that the agency acted correctly, and is not permitted to substitute its judgment for the agency's. Id. at 415, 417. The court must nonetheless be certain that the agency acted within the scope of its authority, and its must determine whether the "decision was based on a consideration of relevant factors and whether there has been a clear error of judgment." Id. at 415-16; see also Ocean Advocates v. Army Corps of Engineers, 361 F.3d 1108, 1118 (9th Cir. 2004) (explaining review under § 706(2)(A) of the APA). The court's conclusion that Mr. Moore lacked reasonable cause is sufficient to answer any question about the IRS's authority to impose penalties.
The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS's decision to impose penalties. The IRS's December 2012 "appeals" letter to Mr. Moore contains three sentences of "explanation" that do nothing to illuminate what the IRS considered or why it arrived at its decision. The letter at least mentions the "reasonable cause" standard; it says nothing at all about why it choose a $40,000 maximum penalty as opposed to a smaller amount. The court looks for a "rational connection between the facts found and the choice [the agency] made." Nat'l Ass'n of Home Builders v. Norton, 340 F.3d 835, 841 (9th Cir. 2003). That connection must, however, come from the administrative record. Id.
The administrative record is, with one exception, devoid of any explanation of the IRS's reasons for imposing the maximum penalty. Agent Tjoa's 2011 Summary Memo is in the record before the court, but (so far as the court is aware), Mr. Moore did not see the Summary Memo until the IRS produced it in discovery in this case. Even then, the IRS redacted portions of the Summary Memo. The Summary Memo at least arguably provides an explanation of Agent Tjoa's decision to recommend the maximum penalty. Indeed, Agent Tjoa cited the portions of the IRM that are relevant to determining the amount of an FBAR penalty, and explained many other facets of her recommendation. What the Government ignores in its motion, however, is that the Summary Memo is not an explanation of the ultimate decision to impose a penalty. n6 The Summary Memo was, at least on the record before the court, the basis for the IRS to require Mr. Moore to either accept the assessment of penalty or "appeal" it before the assessment. The issue before the court is the basis for the IRS's decision to actually impose the penalties. As to the 2005 penalty, the court can only guess. The IRS disregarded its own promise and assessed the penalty before Mr. Moore could request an "appeal."
n6 The APA's informal adjudication procedures exempt a decision "affirming a prior denial" from the requirement that an agency provide a "brief statements of the grounds for denial" of a request for relief. 5 U.S.C. § 555(e). The Government invokes that section, but does not acknowledge that there is no "prior denial" in the record in this case. The only denial of Mr. Moore's request that no penalty be imposed came in the December 2012 letter closing the "appeal" process.
As to its decision on "appeal" to assess four penalties, the IRS has already refused to produce the only document (so far as the court is aware) that addresses the material Mr. Moore submitted in support of his appeal or provides explanation of the reasons for imposing the maximum penalty. On January 8, 2015, the court denied Mr. Moore's motion to compel production of an "Appeals Memo" that Agent Batman authored at some point in the "appeal" process. The IRS claimed that the deliberative process privilege protected the Appeals Memo. The court agreed. What the court did not know at the time is that the Appeals Memo is apparently the only contemporaneous source of explanation for the IRS's decision to assess maximum penalties against Mr. Moore.
The Government asks the court to rubber-stamp a decision that lacks any explanation in the administrative record. That the Government offers an explanation for that decision in the briefing before the court is irrelevant. What the court requires is evidence from which it could conclude that the IRS did not act arbitrarily, capriciously, or in abuse of its discretion when it imposed $40,000 in penalties on Mr. Moore. That evidence is absent.
The court cannot, however, overturn the agency's decision merely because it failed to articulate a basis for it:
If the record before the agency does not support the agency action, if the agency has not considered all relevant factors, or if the reviewing court simply cannot evaluate the challenged agency action on the basis of the record before it, the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation. The reviewing court is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclusions based on such an inquiry.
Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985). When there is "such failure to explain administrative action as to frustrate effective judicial review, the remedy . . . [is] to obtain from the agency, either through affidavits or testimony, such additional explanation of the reasons for the agency decision as may prove necessary." Camp v. Pitts, 411 U.S. 138, 142-143 (1973). What is preferable is contemporaneous evidence of the factors the agency considered when it made its decision. Volpe, 401 U.S. at 420; see Alaska Dep't of Environmental Conservation v. EPA, 540 U.S. 461, 497 (2004) ("Even when an agency explains its decision with less than ideal clarity, a reviewing court will not upset the decision on that account if the agency's path may reasonably be discerned.") (internal quotations omitted). That may, in appropriate cases, permit the court to rely on contemporaneous evidence (like the Appeals Memo) that the agency did not disclose during the decisionmaking process. For example, in Tourus Records, Inc. v. Drug Enforcement Admin., 259 F.3d 731, 737-38 (D.C. Cir. 2001), the court permitted an agency to supplement its bare-bones written decision with memoranda that explained the basis for that decision. In any event, that is preferable to an after-the-fact rationalization of the agency's decision. See Volpe, 401 U.S. at 420.
The court will permit the Government to supplement the record to provide some basis for the court to conduct review of its penalty assessment. Specific instructions for that supplementation will come in Part IV of this order. For now, the court concludes only that unless the Government provides evidence articulating its reasons for assessing a maximum penalty against Mr. Moore, the court will have no recourse but to hold that it acted arbitrarily and capriciously.
The Government may also choose to supplement the record to provide contemporaneous explanation of its decision to assess the 2005 penalty without providing the "appeal" it promised Mr. Moore. On the record before the court, that decision is baffling. The only reason the Government offered, its concern that the statute of limitations would expire, is nonsensical on the record before the court. The statute of limitations would not have expired until at least the end of June 2012; the IRS assessed the penalty in January 2012. The court acknowledges that the IRS's inexplicable conduct was perhaps harmless. The IRS apparently considered Mr. Moore's "appeal" of the 2005 penalty just as it considered the "appeal" as to later years. Nonetheless, the IRS assessed a penalty without providing Mr. Moore the "appeal" it promised. The Government can perhaps supplement the record to provide an explanation for its failure to honor its promise, or clear explanation that the failure was harmless. If it does not, the court will rule that assessing the 2005 penalty in January 2012 was arbitrary and capriciousJAT Further Comments:
1. It is important to note that this was an opt out. One question is whether Moore was a good candidate for opt out. Of course, I know the final result and don't know all the facts, so I really cannot second guess. But it seems to me that, based on statements of fact in the pleadings and the opinion, one might have been concerned before opting out that a willful penalty might be asserted or that fallback maximum nonwillful penalties mightbe asserted.
2. In this regard, I wonder whether four years of maximum nonwillful penalty may have been in some way a proxy for a willful penalty for what the IRS perceives as a bad actor but didn't want to spend the resources to develop. I have not seen the IRS assert the maximum nonwillful penalty on the first round of opt out. (In truth, I have seen maximum multiple year nonwillful penalties in one case where the IRS asserted multiple year willful penalties; we finally settled an amount that the IRS characterized as maximum nonwillful for three years; my client did not owe that (best opt out case I have ever seen), but litigating the issue did not seem cost-effective and would require many months of distraction for the client.)
3. In that same vein, the amount of nonwillful penalties in Moore would not seem to justify litigation. At least from the opinion, prevailing on the merits seems a long shot and it is not clear that the procedural issues will ultimately be resolved favorably. Hence, there is a long shot case with only $40,000 in issue.