District Court Approves FBAR Willful Penalties Under Post 2004 Law; Rejects Colliot and Wadhan (3/7/19)

In United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019), here, the Court rejected the argument that the FBAR willful penalty was subject to the pre-2004 statutory amendment maximum amount of $100,000 because the IRS had not changed the regulations.  In effect, the Court rejected the district court holdings in Colliot and Wadhan as have courts since those cases.  The Garrity opinion cites the decided cases in footnote 2 on page 2.

Other Comments:

1.  Judge Shea rejects the argument that the FBAR willful penalty was an excessive fine violating the Eighth Amendment (Slip Op. 11-20).  Judge Shea offers a very thoughtful and persuasive analysis, one of the better that I have seen.

2.  The only other parts of the opinion that particularly attracted my attention were the following:

Slip Op. p. 7 n. 4 

   n4 Thus, one of the premises of the decision in Colliot, on which the Defendants rely, is incorrect.  There, the court emphasized that Treasury was bound by the 1987 regulation because it had been promulgated through notice and comment and could only be repealed through notice and comment. Colliot, 2018 WL 2271381, at *2–3 (W.D. Tex. May 16, 2018). As noted above, the August 1986 notice of proposed rulemaking in the Federal Register makes no reference to  the civil penalty provision for account holders, which was not authorized by Congress until two months later. The penalty provision was added to the final rule without notice and comment procedures. The civil penalty provision in the 1987 regulation was at most an interpretive rule based on a now-obsolete version of the statute. 

Slip Op. 10-11: 

Ultimately, the Defendants' reliance on these regulatory actions (or inactions) is misplaced. As noted above, the civil FBAR penalty provision in the 1987 regulation was an interpretive rule that lacked the "force and effect of law." See Perez, 135 S. Ct. at 1203-04. It did not create or expand account holders' rights, and it merely parroted a statute that has now been amended. No amount of "reaffirming" references of the sort Defendants point to can make it an operative limit on the Secretary's current authority. If the Secretary wanted to categorically limit his discretion to impose FBAR penalties above $100,000 after Congress conferred such authority on him by statute, he could do so, if at all, only through notice and comment rulemaking under the Administrative Procedure Act, clearly indicating his intent to surrender by regulation some of the authority Congress has bestowed on him. See id. ("Rules issued through the notice-and-comment process are often referred to as legislative rules because they have the force and effect of law."); 5 U.S.C. § 553(b) (requiring notice of proposed rulemaking to include "either the terms or substance of the proposed rule or a description of the subjects and issues involved."). It is undisputed that he has not taken such a step.

I found this interesting because I am currently in the throes of trying to finish the final draft (hopefully) of an article currently titled "The Report of the Death of the Interpretive Regulation Is an Exaggeration" where I discuss the difference between legislative and interpretive rules (principally regulations).  In high level summary, under the Administrative Procedure Act (APA),

• The legislative regulation is promulgated pursuant to express statutory delegation of authority to the agency (Treasury here) to effectively create "the law" (think consolidate return regulations under § 1502).  The legislative regulation must be promulgated after notice and comment, must state the basis for the regulation, and, like statutes, must generally be prospective in application 30 days after promulgation.
• The interpretive regulation, by contrast, merely interprets a statute.  The statute is the law, not the interpretation.  (OK, there's nuance there under Chevron, but I do think it is a correct statement under APA, setting Chevron aside.)  The interpretive regulation need not be issued with notice and comment (Treasury usually does use notice and comment for interpretive regulations) and the interpretation may apply back to the date of the statute (retroactive, although that perhaps is not the best word).  

In the article,I push back on Professor Kristin Hickman's claim that there is no such thing as an IRS interpretive regulation.  Many readers will recognize Professor Hickman's name and gravitas in the administrative law area.  She is the best in this area; I am an outlier but my interest was piqued incident to my Federal Tax Procedure book. In April, Professor Hickman and I (and a couple of others) will be on a panel at the Virginia Tax Study Group discussing this genre of issue. (I am the moderator so my opportunities to display my confusion will be limited.)  Suffice it to say at this point, I think Judge Shea's comments in Garrity are well taken in this APA/Chevron Deference area which is ripe with much confusion beyond my own.