Sunday, November 10, 2019

Court of Appeals for Federal Circuit Affirms CFC Norman Holding that Taxpayer is Subject to FBAR Willful Penalty (11/10/19; 11/13/19)

In Norman v. United States, (Fed. Cir. 11/8/19), here, the Federal Circuit sustained an FBAR willful penalty, holding:

1. FBAR willfulness includes recklessness, as held by two other Circuits:  Bedrosian v. United States, 912 F.3d 144, 152–53 (3d Cir. 2018); United States v. Williams, 489 F. App’x 655, 658–59 (4th Cir. 2012).

2.  The Court of Federal Claims ("CFC") did not err in holding that Norman was willful for the following reasons (Slip Op. 7-8):
The Court of Federal Claims did not clearly err in finding that Ms. Norman’s failure to file an FBAR was willful. Ms. Norman signed her 2007 tax return under penalty of perjury, and this return falsely indicated that she had no interest in any foreign bank account. She did so after her accountant sent her a questionnaire that specifically asked whether she had a foreign bank account. In addition, the evidence shows that Ms. Norman took the following steps, each of which had the effect of inhibiting disclosure of the account to the IRS: (1) Ms. Norman opened her foreign account as a “numbered account”; (2) she signed a document preventing UBS from investing in U.S. securities on her behalf; and (3) the one time she withdrew money from the account, her Swiss bank account manager delivered the money to her in cash. 
Moreover, once the IRS opened an audit of Ms. Norman, she made many false statements to the IRS about her knowledge of, and the circumstances surrounding, the account. Ms. Norman told the IRS, both during an interview and in a letter, that she first learned of the account in 2009. In her letter, she stated that she “was shocked to first hear about the existence of foreign accounts” in her name. In 2014, after retaining counsel, Ms. Norman sent the IRS another letter “to correct several misstatements.” Although Ms. Norman admitted in this 2014 letter that she knew [*8] “more than a decade ago” that she had an “interest” in a foreign bank account, she maintained in the 2014 letter that “none of the money in the Swiss account(s) was mine[,] and I did not consider myself to have any kind of control over the account.” J.A. 146. In fact, Ms. Norman knew long before 2009 that she owned a foreign bank account and controlled its assets. She opened the account in 1999, actively managed the account for many years, and even withdrew money from the account in 2002.
3.  In making the holding, the Court rejected that argument that her mother advised her do it.  (Slip Op. 8.)

4.  Also, the Court rejected the claim that she did not know because she did not read the return she signed.  Even if she did not, she had constructive knowledge and acted recklessly.  (Slip Op. 8-9.)

6.  The Court rejected her argument that the unamended regulations after the 2004 amendment increasing the penalty to $100,000 or 50% of the acccount prevented a penalty exceeding $100,000 (the maximum under the pre-amendment statute).  Basically, the court held that the amendment trumped the regulations that preceded the amendment.

7.  The Court declined to reach Norman's argument, launched too late, that the FBAR willful penalty was an excess fine under the Eighth Amendment.

8.  For an excellent discussion of the Norman case, see Robert S. Horwitz, Federal Circuit Upholds Liability for FBAR Willful Penalty, Determines the Regulation Limiting Penalty to $100,000 Is Invalid (Tax Litigator Blog 11/11/19), here.

JAT Comments:
1.  The key, I think, factor is the fact that Norman was untruthful in the audit.  I think that infected the entire resolution, in the CFC and the Federal Circuit.

2.  I think Norman might have had a better shot with better facts.  OK, I now that is not a startling statement.  I do think that there are taxpayers who do not file an FBAR, answer the Form 1040 Schedule B question no, and fail to include foreign account income on the Form 1040 who could be nonwillful.  Norman's facts just did not make her a sympathetic figure for presenting the argument.  In this regard, the Court says (Slip Op.):
Ms. Norman argues that willfulness in this context requires a showing of actual knowledge of the obligation to file an FBAR. See Appellant’s Br. 30–31. Ms. Norman reasons that, if willfulness includes recklessness, then every failure to file an FBAR is willful, which would inappropriately render superfluous the portions of § 5321 relating to penalties for non-willful violations. Id. at 31. We disagree. For example, an FBAR violation would generally not be willful where a taxpayer did not know about, and had no reason to know about, her overseas account. Accordingly, our interpretation of willfulness does not render superfluous the portions of § 5321 relating to non-willful conduct.
Note that the Court gives this as an example where FBAR willfulness would not exist.  The clear suggestion is that there can be other examples that might apply in facts less egregious than Norman.

3.  Prior Federal Tax Crimes Blogs on the CFC holding in Norman are:
  • Court of Federal Claims Rejects Colliot; FBAR Willful Penalty Not Limited to $100,000 (Federal Tax Crimes Blog 8/1/18), here.
  • Peter Hardy Post on Reckless Conduct for BSA Civil Penalties (Federal Tax Crimes Blog 8/2/18), here.

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