Court Grants Government Partial Summary Judgment on FBAR NonWillful Penalty (8/14/19)

In United States v. Ott, 2019 U.S. Dist. LEXIS 132013 (E.D. Mich. 2019), here, the court granted the Government's motion for partial summary judgment on the $10,000 nonwillful penalties on 2 separate accounts for each of 3 years.  The penalties aggregated $60,000 plus interest and further nonpayment penalties.  Since the defendant failed to report the accounts, she was subject to penalties unless she could establish reasonable cause.

Reasonable cause is an affirmative defense, meaning that the person claiming reasonable cause must plead and the prove the defense.  On a motion for summary judgment by the party not bearing the burden on the defense (the United States in Ott), the party bearing the burden (Ott in Ott) must submit sufficient evidence to show that there is a fact reasonably in dispute. The Court framed it this way:

The Government moves for summary judgment against Ms. Ott, asserting there is no dispute that she violated 31 U.S.C. § 5314 when she failed to report her financial interest in, or authority over, her foreign financial accounts. Ms. Ott opposes the Motion, arguing there is a genuine dispute of material fact as to whether the affirmative defense of reasonable cause excuses her failure. The Court will disagree.

The steps in the Court's disagreement and thus entry of summary judgment for the U.S. are:

1.  "Ott does not dispute that she violated § 5314's reporting requirements, but maintains that assessing penalties under § 5321 would be inappropriate because she had reasonable cause for her omission."

2.  31 U.S.C. § 5321(a)(5)(B)(ii), here and quoted below in this blog, allowing the reasonable cause defense, does not define reasonable cause.  The Court, as have other courts, looked to the reasonable cause defense to tax penalties, citing Moore v. United States, 2015 U.S. Dist. LEXIS 43979, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015); and Jarnagin v. United States, 134 Fed. Cl. 368, 376 (2017).  The Court also cites the regulation under § 6664, 26 CFR § 1.6664-4(b)(1).

3.  The Court then held (Slip Op. at 6-7):

Here, Ms. Ott has not met her burden of establishing a material question of fact as to whether she had reasonable cause for the failure to disclose her foreign financial accounts. See ATL & Sons Holdings, Inc. v. Comm'r of Internal Revenue, 2019 U.S. Tax Ct. LEXIS 8, 2019 WL 1220942, at *10 (U.S. Tax Court Mar. 13, 2019) ("In litigation a taxpayer's contention of 'reasonable cause' is in the nature of an affirmative defense, which the taxpayer is obliged to raise."). Critically, she has not shown that she took any steps to learn whether she was required to report her foreign financial accounts. To the contrary, she notes that she hired an advisor to complete her tax returns, but fails to even suggest that she informed the advisor of these accounts. See Jarnagin, 134 Fed. Cl. at 378-79 ("[T]he Jarnagins neither requested nor received any advice one way or the other from their accountants regarding whether they were required to file FBARs . . . [t]he Jarnagins . . . cannot use as a shield reliance upon advice that they neither solicited nor received."). This certainly does not constitute ordinary business care and prudence. Ms. Ott's limited education and experience does not excuse this misstep. 

Ms. Ott's primary argument is that she "has yet to present evidence on this critical issue for trial." See Dkt. No. 20, p. 16 (Pg. ID 123). But the time for her to present facts and evidence demonstrating a genuine issue for trial was now, and unfortunately, that opportunity has passed. See Highland Capital, Inc. v. Franklin Nat. Bank, 350 F.3d 558, 564 (6th Cir. 2003) ("[T]he non-moving party cannot rest on its pleadings, but must identify specific facts that can be established by admissible evidence that demonstrate a genuine issue for trial."). Because there is no dispute that Ms. Ott violated § 5314's reporting requirements, and because she has not met her burden of establishing reasonable cause for that violation, the Court will Grant the Government's Motion for Partial Summary Judgment.

For background, I attach the briefings on the motion for partial summary judgment (without the exhibits in support) as follows:

• Motion, here.
• Response, here.
• Reply, here.

JAT Comments:

1.  I can't speak to the state of the record on the Motion for Summary Judgment (I attach only the briefing on the motion for partial summary judgment and not the exhibits), but the disposition is simply a variation of failure of proof -- the minimal proof that would be required to survive a motion for summary judgment (basically like the proof required at trial to survive a motion for directed verdict if there were a jury trial).

2.  The decision discussed above is a partial summary judgment against Mrs. Ott.  The Government filed the case against Mr. and Mrs. Ott.  The Motion explains:

   n3 Note that the United States is moving for partial summary judgment against only Ms. Ott for her “non-willful” FBAR penalties; however, in this case, the United States is also attempting to collect “willful” FBAR penalties that were assessed against Ms. Ott’s husband.

3.  I do want to say something about the reasonable cause defense as stated in the statute.  The pertinent provision of the statute (31 U.S.C. § 5321(a)(5)(B)(ii), here) is:

(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—
  (I) such violation was due to reasonable cause, and
  (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

There are two conjunctive requirements--both reasonable cause and accurate reporting in the account.  Ott's attorneys described the second requirement cryptically--it kicks in if "the taxpayer later filed correct FBARs." (Response p. 6 (p. 13 of the pdf)).  (I will discuss in comment 4 (below) what Ott actually filed, at least as alleged by the Government.)

The Ott decision did not discuss that second requirement.  In my draft for the third 2019 supplement to Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), which I just submitted (and has not yet been finalized, so please note that this is a draft), I offered this as a change to ¶12.04[3][b] FBAR n. 474:

The exception to the non-willful penalty has two conjunctive requirements: a reasonable cause requirement and a reporting requirement. Reasonable cause is a frequently encountered concept avoiding tax penalties. The reporting requirement is unusual. In the case of a failure to report (either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report properly is the act that causes the filer/non-filer to be at risk for the penalty in the first place. Surely, if the reporting requirement means proper and timely FBAR reporting in the first instance, the issue of the non-willful penalty never arises and a reasonable cause escape is meaningless. Assuming the reasonable cause requirement means something, some interpretation is required for meaning.  Prior to November 2015, the IRM provided that meaning with respect to failure to file the FBAR as follows: “This means that the examiner must receive the delinquent FBARs from the non-filer in order to avoid application of the non-willfulness penalty.” IRM 4.26, ¶ 16.4.4.2, Non-Willfulness Penalty (July 1, 2008). This permitted a  delinquent FBAR filing during the audit that might lead to the penalty, then permitting the reasonable cause defense if it applied. This IRM language has been changed as of November 2015. The IRM currently says for the reporting requirement that “The person files any delinquent FBARs and properly reports the previously unreported account.” IRM ¶ 4.26.16.6.4, Penalty for Nonwillful FBAR Violations (Nov. 6, 2015). Like the statute, the description of the reporting requirement is not as clear as it should be. Does it mean that the person must file delinquent FBARs and on those delinquent FBARs properly report the previously unreported account? The use of present tense verbs suggests that. If that is what it means, the change to the IRM would not appear to be material, so that the taxpayer perfects his right to claim reasonable cause by filing delinquent FBARs. However, the statutory text uses past tense for the reporting requirement: that the amount “was properly reported.” In Jarnagin v. United States, 134 Fed. Cl. 368 (2017), the Government argued that that the reporting requirement means the taxpayer must have made the IRS aware of the account by proper reporting of the income on Form 1040 (citing legislative history to that effect) but because the court held that the taxpayer did not establish reasonable cause, it did not need to decide the proper interpretation of the reporting requirement.  (See 134 Fed. Cl., at 376 10 n. 5.)

So, too, in Ott, the Government focused its argument for summary judgment only on the reasonable cause  requirement, so the Ott decision did not have to interpret the reporting requirement.

4.  A little diversion on the Ott FBAR delinquent reporting facts.  According to the Government Motion, p. 7 n. 4:

   n4  Ms. Ott and her husband participated in the IRS’s voluntary disclosure program, which required them to submit FBARs to report their foreign accounts—the FBARs filed by Ms. Ott are attached as Exhibit 4. Note that on the FBARs that Ms. Ott submitted in 2011, she reported that she had a single account with Octagon Capital with an account number ending in “589.” It seems that Ms. Ott merely added the maximum balances from her two accounts and reported them under a single account number. For instance, on Exhibit 2, Ms. Ott reported that she had two accounts in 2007 with maximum balances of $1,061,405 and $842,072, but on the 2007 FBAR, she reported that she had a single account with a maximum balance of $1,903,477, which is the combined value of the two accounts. Ms. Ott and her husband subsequently opted-out of the voluntary disclosure program.

Had that gambit worked, on the opt out, there would have been only 3 nonwillful $10,000 penalties rather than 6.