Friday, December 1, 2017

Court of Federal Claims Sustains Nonwillful FBAR Penalty (j12/1/17)

In Jarnagin v. United States, 2017 U.S. Claims LEXIS 1483 (2017), here, the Court granted summary judgment sustaining the nonwillful multi-year FBAR penalties in 31 USC § 5321(a)(5).  The only issue was whether the Jarnagins had reasonable cause which is a defense to the nonwillful FBAR penalty and the Court held that they did not have reasonable cause. 

The IRS assessed the penalty of $10,000 for each of them for four years.  The penalty aggregated to $80,000.  The Jarnagins paid the assessed penalties and "filed a Form 843, seeking an abatement and refund of the penalty amounts paid."

The facts were essentially that (i) the Jarnagins were successful business people; (ii) the Jarnagins had a Canadian account; (iii) they had return preparers over the relevant years but did not tell them about the Canadian account; and (iv) the Jarnagins claimed they did not know of the FBAR filing obligation and feel that their preparers had enough information to raise the issue but did not.

The Courts holding proceeded in the following steps:

1.  Jurisdiction.  The Court held that it was a suit to recover for an illegal exaction, thus giving the Court jurisdiction under the Tucker Act, 28 U.S.C. § 1491(a).

2. Reasonable Cause Standard.  The Court found sparse authority of the meaning of reasonable cause in the statute (31 USC § 5321(a)(5)(B)(ii)) but found the meaning of reasonable cause in the tax statutes (§§ 6651(a) and 6664(c)(1)) to offer guidance.  The Court cited Moore v. United States, No. C13-2063RAJ, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015) (concluding that "[t]here is no reason to think that Congress intended the meaning of 'reasonable cause' in the Bank Secrecy Act to differ from the meaning ascribed to it in tax statutes"). 

3.  Application of the Reasonable Cause Standard.  The Court then reasoned:
In light of the foregoing, the Court concludes that in order to show reasonable cause under 31 U.S.C. § 5321(a)(5)(B)(ii), the Jarnagins must establish that they exercised "ordinary business care and prudence" with respect to their obligation to file FBARs for tax years 2006 through 2009. As noted, they assert that they have met their burden of proving their entitlement to the defense by showing that 1) "they hired a competent CPA to prepare all required forms"; 2) "the CPA was aware of the CIBC account in Canada through the financial statements provided to him by Plaintiffs before he filed the returns"; and 3) "Plaintiffs actually relied in good faith on the CPA." Pls.' Br. at 6. 
For purposes of ruling on the cross-motions for summary judgment, the Court assumes that the accountants the Jarnagins hired were "competent . . . to prepare all required forms" and were aware that the Jarnagins had a bank account in Canada. Nonetheless, the Court concludes that, as a matter of law, the Jarnagins did not exercise ordinary business care and prudence in the handling of their reporting obligations.
The basic reasoning for its fact finding of absence of reasonable cause was (i) the Jarnagins' business sophistication with multiple interests and significant wealth; (2) their signing of the tax returns stating under penalty of perjury that it was true, correct and complete and their failure to read the returns which would have alerted them via the foreign account question on Schedule B (relying on United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012) which was a willful FBAR case and United States v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991)); and (3) the mere fact that the returns were prepared by professionals does not constitute reasonable cause. 

In making these holdings, the Court relied heavily on United States v. Boyle, 469 U.S. 241 (1985) where the Court held that a reasonably prudent business person should have known about the estate tax return filing date.  The Court said in concluding its holding:
In fact, in Boyle, the Supreme Court rejected a similar argument by an estate that it had reasonable cause for the untimely filing of its tax return because it had relied upon the estate's tax attorney to prepare and file the return. 469 U.S. at 249-52. The Court reasoned that the duty to promptly file is "fixed and clear" and placed directly on the taxpayer, "not on some agent or employee of the [taxpayer]." Id. at 249; see also Baccei v. United States, 632 F.3d 1140, 1148 (9th Cir. 2011) (noting that "a taxpayer cannot rely on its employee or agent to escape responsibility for the nonperformance of nondelegable tax duties" and that "reliance upon [a professional advisor] to competently file a payment extension request does not constitute reasonable cause excusing [the taxpayer's] failure to timely pay the estate taxes owed" (quotation omitted)). The Court acknowledged that "[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice." Boyle, 469 U.S. at 251 (emphasis in original). Such "reliance" however, "cannot function as a substitute for compliance with an unambiguous statute." Id. The Court thus held that "failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not 'reasonable cause.'" Id. at 252.
JAT Comments:

1.  Since the Court made the decision on summary judgment assuming the facts favorable to the Jarnagins, the reasoning appears to be a legal holding that a person who did not read the return and correctly ascertain that a timely FBAR was due can never establish reasonable cause.  And, under the theory of Boyle, I suppose that a taxpayer would not even have reasonable cause if he discussed the timely FBAR filing obligation with his return preparer or other tax adviser.  I do suppose, also, however, that if that discussion concluded with advice that no FBAR obligation existed, then there might be reasonable cause (depending upon the nature of that conversation).  In Boyle, the executor knew there was an estate tax return due but simply should not have relied upon the attorney for the filing date.

2.  I question with the heavy reliance on Boyle.  In Boyle, the executor knew that there was an estate tax return due but, the Court felt, should have independently known or determined the date of filing.  In Jarnagin, the citizens generally and the Jarnagins in particular did not know that there was an FBAR due to be filed.  In this case, there was no indication that the Jarnagins knew an FBAR was due or were willfully blind as to the obligation.  I guess the link is that, if they had read their returns, they presumably would have known from the foreign account question on Schedule B.

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