Supreme Court Holds in Bittner that FBAR Nonwillful Penalties are Per Form Rather Than Per Account (2/28/23; 3/5/23)

In Bittner v. United States, 598 U. S. ____ (2/28/2023), here, the Court held that the best interpretation of the nonwillful FBAR penalty is that it applies per form rather than per unreported account. The nonwillful penalty is in 31 U. S. C. §§5321(a)(5)(A) and (B)(i). Five Justices (Gorsuch, the author of the Court opinion, joined by Justices Jackson, Roberts, Alito, and Kavanaugh, so held. Justice Gorsuch included in the opinion a section on the application of lenity (referred to as II-C), in which only Justice Jackson, joined. The opinion of the Court joined by 4 Justices addresses only the interpretation of the nonwillful penalty provision and not Justice Gorsuch’s lenity discussion.

Four Justices dissented—Justices Barret (writing the dissenting opinion) joined by Justices Thomas, Sotomayor, and Kagan and would have held that the best interpretation of the nonwillful penalty was per account rather than per form.

The holding that the nonwillful penalty is per form rather than per account is a significant holding for all with multiple foreign reporting accounts potentially subject to nonwillful penalties. Beyond deciding that issue—per form vs. per account—the opinions merely interpret the statute. I see nothing of systemic value beyond the resolution of the bare issue of per form or per account that is of ongoing importance.  (It is interesting to note that avowed textualists came down on both sides of the issue.)

This is the type of case where it is important to deal with conflicts among the Circuits and, like the doctrine of stare decisis, "because in most matters it is more important that the applicable rule of law be settled than that it be settled right." Burnet v. Coronado Oil & Gas Co., 285 US 393, 406 (1932) (Brandeis dissenting in a tax case). I am mostly agnostic as to the "right" answer to the question of per form or per account. I think I could have credibly argued it both ways. Still, if I were the decider, I think I would have gone with per form rather than per account. My point here, though, is that it is good to have a settled answer.

As a bit of an aside, I note the part of Justice Gorsuch’s opinion—II-C—relating to lenity that attracted only one other Justice and hence is not part of the opinion of the Court. I am reminded of Justice Gorsuch's famous rant in his concurring opinion describing Chevron “elephant in the room” diatribe while on the Tenth Circuit in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149 (10th Cir. 2016), here. Then Judge Gorsuch wrote the opinion of the panel but then authored a separate concurring opinion with which the other Judges did not agree.

If I understand the earlier portions of the opinion of the Court (Justice Gorsuch with four others concurring) then the best interpretation of the statute was per form rather than per account. That really should have been the end of the matter (as three Justices concurring except with respect to lenity apparently agreed) because lenity requires interpretive ambiguity in the statute (those which do not have a best reading). So the lenity discussion is superfluous in any event and also Justice Gorsuch’s discussion strikes me as a stretch in legal logic. (We of course do not know why the other three concurring justices did not concur in the lenity discussion.)

Finally, one picky point. Justice Gorsuch says that the nonwillful penalties “accrue” per form rather than per account. E.g., Slip Op. 1, 4, 6, 8 (Gorsuch opinion of the Court); and Slip Op. 3, 6 & 8 (Barrett, dissenting).   Penalties, whether FBAR or tax penalties, do not “accrue” and are not even due until the Government assesses the penalties. I know, Picky, Picky.

Added 3/5//23 2:00 pm:

I corresponded with a reader in the period since posting this blog. I thought I would offer key points of the correspondence to add some nuance to the Bittner decision:

1. On Bittner’s effect on criminal prosecutions for FBAR violations.   I don’t think the Bittner decision will affect criminal prosecutions either in charging decisions or how they are presented in a criminal case requiring willfulness. The IRS already has enough FBAR criminal cases to make its point. Further the beyond a reasonable doubt burden of proof in criminal cases means that they have already picked the best cases for criminal prosecution. That process for choosing cases for criminal prosecution is not likely to be affected by the Bittner decision. The one caveat to that is that I could imagine a case where the per account nonwillful penalty would have produced a significant penalty for some egregious actors where the IRS would have not devoted the resources to assert either civil or criminal willful violations. If the IRS then feels it appropriate to devote the resources to investigate the civil willful penalty, it might uncover facts that tip the scales in favor of both criminal prosecution and the civil willful penalty.

2. On Bittner's potential effect on IRS asserting the FBAR willful penalty. I think that, at the margins, the Bittner decision may cause the IRS to assert the civil willful FBAR penalty in more cases. Keep in mind that, unlike the criminal cases, for the civil willful penalty, the Government must prove willfulness by a preponderance of the evidence rather than beyond a reasonable doubt and the definition of willfulness for the FBAR civil willful penalty is broader than in the criminal case. My sense is that the IRS in some cases, maybe many cases, asserted the nonwillful penalty where it could have asserted the willful penalty because, on a per account basis, the amount of the nonwillful penalty was significant relative to the amount of the willful penalty that might have applied. That certainly was the case for Bittner where, I speculate, the IRS would likely have asserted the willful penalty if it had known it would have only one nonwillful penalty of $10,000 per year. Of course, the IRS and DOJ Tax have to work harder (resource allocation) for the willful penalty than for the nonwillful penalty. So, I speculate, some will benefit from the Bittner decision but some will not benefit in that they will get willful penalties and incur great expense fighting the willful penalties. So, bottom line, overall, the Bittner decision will help in most cases but may prove costly in some cases.

3. The Bittner decision gave the taxpayer the stronger bargaining hand on the nonwillful penalty. But, as I said, at the margins in the process, the IRS will have more incentive to assert the willful penalty to try to scale the penalty to the underlying conduct (as the IRS sees it). That means that the IRS will assert the willful penalty whereas pre-Bittner it might have asserted only the nonwillful penalty. The taxpayer will then have to litigate his or her willfulness with the risk that a court might find the taxpayer willful. Even beyond the monetary cost of a willful penalty, some taxpayers would prefer to avoid a willful penalty litigated in a public forum because it is in effect a holding that the taxpayer intended to cheat (although not in a Cheek sense). In the end, though, if the IRS does at the margins expand the number of taxpayers against whom the willful penalty is asserted, those affected taxpayers will face the choice of litigating or trying to reach some settlement that is more than the nonwillful penalty allowed by Bittner but less than the maximum willful penalty.

4. Keep in mind that the fact space between the willful and nonwillful penalties is a continuum, from the clearly nonwillful to the clearly willful. That is true in both criminal and civil FBAR cases. In many of these cases, the taxpayer’s facts are somewhere between those extremes and where those facts fall may strengthen the IRS’s hands. All I am saying is that, in civil penalty cases, the Bittner decision might make the IRS more aggressive in viewing where the facts fall on that continuum.