Friday, May 15, 2020

District Court Denies Summary Judgment on Willfulness But Finds Penalty Allocation Arbitrary and Capricious (5/15/20)

In Jones v. United States (C.D. Cal. Dkt. 19-04950 Order Dated 5/11/20), CourtListener here, the Court held that, whether or not the plaintiff (Mrs. Jones) acted willfully was a question of fact and denied motions for summary judgment accordingly.  (Slip Op. 9-14; 16-19.) Further, the Court held that the willful penalty assessments were within the statutory maximum for each year. (Slip Op. 19-20.)  Finally, the Court held that the method whereby the IRS determined and allocated the willful penalty was arbitrary and capricious. (Slip Op. 14-16.)

For the latter arbitrary and capricious holding, the Court relied on the Schwarzbaum district court case that I discussed here.  District Court Muddles an FBAR Willful Penalty Case (3/21/20; 3/24/20), here.  I just refer readers to that discussion.  But I thought it might be helpful to illustrate the IRS's method for allocating the single 50% high year high balance penalty amount among the years that the person is liable for the willful penalty

The method the IRS uses is as follows: (11-06-2015)
Penalty for Willful FBAR Violations - Calculation 
(1) For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful. 
(2) After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.
For example, if you assume the following facts, the allocation among the years where the willful penalty otherwise applies is:

High Balance
Balance June 30 Foll Yr
Max Poss Pen
IRM Allocation

IRM Penalty Max (50% of high year highest balance)

With different numbers, the allocated amount for a particular year might exceed the maximum allowed based on the June 30 balance.  (Those wanting an Excel spreadsheet to play around with the numbers may use mine, here; I do provide an extra column in the spreadsheet to calculate the cap based on June 30 amounts; please let me know if there are any busts in the calculations,for I am not a spreadsheet guru.)

In any event, there is a method to the allocation.  A single all-year high balance 50% penalty is made in a manner that, for each year, does not exceed the 50% willful penalty in a year for which the person is willful and thus subject to the 50% willful penalty.  In many, perhaps most situations (illustrated by the example calculation above), the actual penalty under the allocation is less, much less, than the 50% penalty had it applied to the June 30 balances for all years for which the person was subject to the willful penalty.

The Court in Jones held that the method of allocating the penalty was arbitrary and capricious.
The Court remands to the IRS to make adjust the assessments so that they are not arbitrary and capricious.  And the Court deals with assessment statute of limitations issue as follows which would become an issue if Mrs. Jones is found willful after trial: “If the Court remands to the IRS this would not be a new assessment of penalties, but rather a recalculation of the initial penalty based upon an upheld finding of willfulness."  But, what if the IRS were to adopt a penalty determination method that results in higher penalties for some or all years?  For example, the IRS could just choose to assert the 50% FBAR willful penalty for all years.  The Court certainly could not complain that that determination expressly allowed by the statute is arbitrary and capricious.  (Of course, the statute of limitations may prevent the higher assessment.)

Mrs. Jones’ deceased husband also had penalty assessments and the parallel opinion in his case is Jones v. Commissioner (C.D. Cal. Dkt. 19-00173 Order Dated 5/11/20), here. The opinion in the husband case is the same as in Mrs. Jones’ case except that the penalty calculation was not declared arbitrary and capricious.  (I have not dug into why that issue was not in the case.)

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