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.

Supreme Court Oral Argument in Bittner Re FBAR NonWillful Penalty Per Account or Per Form (11/3/22)

Yesterday, the Supreme Court held oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.)  The link for the typed transcript is here; the link for the audio is here. 

I listened to the audio and thumbed through the transcript.  The oral arguments were outstanding.  The advocates were

Daniel L. Geyser, for Bittner, here.
Matthew Gaurnieri, Assistant to the Solicitor General, DOJ, for the United States

I have posted earlier on the trajectory of Bittner, but the two postings most relevant to the Supreme Court consideration are:

• Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here.
• Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (Federal Tax Crimes Blog 10/12/22), here.

I offer some snippets (copy and paste) of portions of the transcript related to criminal conduct I found interesting]

[*20]

MR. GEYSER: Yes, Your Honor, it's -it's the same definition of violation, I think, carries throughout the statute, both in 5321 and in 5322, by the way, which is why, in our case, had Petitioner acted willfully in a criminal sense, under the government's reading, he would be exposed to a prison sentence of 1300 years in jail, which seems pretty egregious for what is really a prophylactic paperwork error.

   * * * *

Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (10/12/22)

I previously blogged that the Supreme Court granted Bittner's petition for writ of certiorari. Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here. The Supreme Court docket sheet for the case (No. 20-40597) is here, with links to all filings in the case.  (Because for some reason, the Supreme Court docket sheet link does not work all the time, the parallel SCOTUSblog docket sheet is here with appropriate links.)

I write today on the amicus briefs in the case (also linked on the docket sheet). Both parties in the case gave blanket consent to filing amicus briefs on the merits. Here is the breakdown of the amicus briefs:

Amicus briefs in support of Bittner:  National Federation of Independent Business Small Business Legal Center; American College of Tax Counsel (note that the docket entry for this brief says it is filed in support of neither party, but the actual brief says it is in support of Bittner); Center for Taxpayer Rights; and The Chamber of Commerce of the United States of America,.

Amicus brief in support of the United States (IRS): National Whistleblower Center.

Amicus brief in support of Neither Party:  American College of Trust and Estate Counsel.

JAT Comments:

3rd Circuit Affirms Bedrosian FBAR Will Penalty Liability Based on His Counsel's Judicial Admissions as to Amount (7/23/22)

In Bedrosian v. United States, 42 F.4th 174 (3rd Cir. 7/22/22), CA3 here, and GS here, the Court sustained the district court’s application of the FBAR willful penalty. Given the history which I cover in earlier blogs, the holding on the issue of Bedrosian’s willfulness is not surprising. See Bedrosian on Remand -- Held Bedrosian Acted Recklessly and thus Subject to FBAR Civil Willful Penalty (Federal Tax Crimes Blog 12/6/20), here; and Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 1/10/19), here. The earlier Third Circuit opinion is Bedrosian v. United States, Dep't of Treasury, IRS, 912 F.3d 144 (3d Cir. 2018), 3^rd Cir. here and GS here.

The one interesting aspect of the appeal is that the Court, although finding the Government’s proof was deficient as to the amount in the accounts subject to the penalty (thus precluding calculation of the penalty), Bedrosian through counsel made “judicial admissions” as to the amount that the Court of Appeals could invoke to supply the missing proof. The Court said (Slip Op. pp. 18-19, cleaned up): 

Still, even though the District Court did not address this argument, we may affirm on any basis supported by the record, even if it departs from the District Court’s rationale. And while arguably some of the statements Bedrosian made in the District Court proceedings are not judicial admissions, the statement made in opening argument acknowledged the true state of the facts. The concession that “there was about 2 million U.S. dollars” in the undisclosed account makes the IRS’s $975,789.17 penalty below the statutory maximum (50% of the account balance). We therefore affirm the District Court’s judgment on this alternative ground.

 JAT Comments:

Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (6/21/22; 6/22/22)

The Supreme Court today granted certiorari in the Bittner case to address the issue of whether the FBAR nonwillful penalty is per form or per account.  See Order List, p. 2, here.  I covered the key points at this stage in a prior blog.  Solicitor General Acquiesces in Bittner Petition for Cert on Issue of FBAR Nonwillful Penalty Per Form or Per Account (Federal Tax Crimes Blog 5/19/22), here.  So I will defer further comment now.

The docket entries where the briefings and other documents as they are filed may be retrieved in the following web pages:

• Supreme Court here.
• Scotusblog here (Note, as of this posting the cert granted entry has not been posted but should be posted by the end of the day.

Added 6/22/22 at 1:40 pm: 

Based on some of my current diversions on the APA and Chevron (see e.g., my blog Reply to Professor Hickman's Response to My PT Article (Federal Tax Procedure Blog 6/17/22; 6/22/22), here), it occurs to me that we may use some of the constructs in that discussion here to either clarify or further confuse.  Using that lingo:

1. What if the normal tools of statutory construction do not resolve whether the statute applies the nonwillful penalty per form or per account?  Included in the normal tools of statutory interpretation is what is often called Skidmore deference.  (Actually Skidmore is not deference at all because it requires that the court be persuaded by consideration of the agency interpretation; some therefore call it Skidmore respect or even the respect due for any position asserted by a litigant in litigation.)

2. That would almost certainly mean that the statute is ambiguous and that the interpretation might be subject to Chevron analysis if incorporated in a Chevron entitled rule (usually a regulation).  But I don’t think there is a Chevron entitled rule for this issue.

3. What then if the Supreme Court is in interpretive equipoise – neither interpretation is the best interpretation?  See Chevron and Equipoise In Statutory Interpretation (Federal Tax Procedure Blog 5/26/22), here; and Even More on Skidmore (Including Equipoise as to Interpretation)( Federal Tax Procedure Blog 7/7/19), here.  Should the Court just flip a coin when in equipoise or, more likely, have to affirm the Circuit Court because it could not conclude that the Circuit Court was wrong.  Of course, the advantage of a Supreme Court opinion in a systemic sense is not that the Supreme Court necessarily gets it right, but that it gets a uniform interpretation that all courts must apply.  So, a coin flip or equivalent (even if made mentally and not acknowledged in the opinion) might be OK.

If anyone has an answer to the conundrum, I would appreciate having it either by comment or separate email.

Solicitor General Acquiesces in Bittner Petition for Cert on Issue of FBAR Nonwillful Penalty Per Form or Per Account (5/19/22)

I previously discussed United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21), CA5 here, and GS here, in which the Court held that the FBAR civil nonwillful penalty is applied per account rather than per form. See Fifth Circuit Applies FBAR NonWillful Penalty Per Account and Not Per Form (Federal Tax Crimes Blog 11/30/21), here. That holding conflicted with a prior holding of the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), CA9 here and GS here. On February 28, Bittner filed a Supreme Court petition for writ of certiorari. The docket entries for documents related to that petition are here. On May 17, the Solicitor General filed the U.S. response, here, advising that the U.S. acquiesces in the petition (acquiesce was the term of art I recall from working at DOJ Tax Appellate in the 1970s) as follows (p. 12, bold supplied by JAT):

DISCUSSION

The court of appeals correctly determined that the Bank Secrecy Act authorizes the Secretary of the Treasury to impose a civil penalty of up to $10,000 on a U.S. person for each foreign financial account that the person fails to report as required by the Act and its implementing regulations, because each failure to report a qualifying account is a separate “violation,” 31 U.S.C. 5321(a)(5)(A), for which the Secretary may impose a separate penalty. Yet, as petitioner explains (Pet. 13-25), the decision below conflicts with a recent decision by a divided panel of the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (2021). The question presented is important and will often recur, and this case would be an appropriate vehicle in which to address it. Accordingly, the petition for a writ of certiorari should be granted.

Further, the Solicitor General said (pp. 18-19):

3. The division of authority between the Fifth and Ninth Circuits on the question presented is recent, and no other court of appeals has yet addressed whether the Secretary may assess a civil penalty of up to $10,000 for each foreign account that  a U.S. person fails to report on a single FBAR. Nonetheless, the question presented is important and likely to recur, and the government agrees with petitioner that the issue—a fairly straightforward and discrete question of statutory construction—warrants this Court’s review at this time.

In early March, I discussed Bittner’s petition with a friend, offering the following on the possibility of the Court granting cert.

More District Court Thrashing Around on Arbitrary and Capricious Calculation of Willful FBAR Penalties (3/30/21)

I have written before on the saga of Timberly Hughes.  Court Sustains Willful FBAR Penalty for Two of Four Years (Federal Tax Crimes Blog 10/15/21), here.  Hughes is back in the news, so to speak.  In United States v. Hughes (N.D. Cal 18-cv-05931-JCS 3/29/22), here, Magistrate Judge Spero is trying to wrap up the case so that it goes to the District Judge and then, apparently, to the Ninth Circuit.  (The docket entries in CourtListener are here.)

 In high level summary:

1. The court confirms that for the two years it previously found nonwillful, that while losing on the willful penalty for the 2 years, there would be no nonwillful penalty for those years.  The court says (p. 3, n 4):

   n4 “The United States does not seek nonwillful penalties against Ms. Hughes for 2010 and 2011, though the United States reserves its right to appeal the Court’s  willfulness determination as to 2010 and 2011.” Pl.’s Reply (dkt. 168) at 2

I have never thought about whether nonwillful and willful penalties can be assessed and litigated in the alternative (something like a lesser included offense concept).  Since the IRS never assessed the nonwillful penalty, I suppose it is out of time to assert assess.  I don't know whether such alternative assessments and/or litigation could be made under the statutes or procedures.  For example, in the Hughes case, applying the nonwillful penalty to the years the court found were not willful.

2. The Court found that there were errors in the calculations and methodology in several respects and remanded to the IRS to reconsider the penalties.  There is no discussion of potential statute of limitations issues from a recalculation and reassessment.  The issue is whether a new assessment would be permitted or only an adjustment downward to the prior assessment.  I am not sure whether the normal APA remand to the agency holds or forces open the statute of limitations (sort of the way a petition to the Tax Court in a deficiency cases suspends the statute of limitations so that the correct number after litigation gets assessed).

3.  In paragraph 2 my prior blog here, I discussed a potential glitch where the IRS uses its methodology to quantify the willful penalty by spreading the amount quantified at 50% of the single high amount over the willful years.  The example I gave was a high amount of $2 million over four willful years and for simplicity assumed that high amount was static at all times during the year.  The maximum penalty authorized by the statute would be 50% per year, for an aggregate of $4 million.  Under the IRS policy to apply only a 50% to the high amount for all willful years (that's not each year), the willful penalty would be the same $1,000,000, but applied to each of the four years.  Now, with two years dropping out, does $500,000 allocated to the now nonwillful years drop off or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained.  I don’t know.  And, if you vary the amounts so that only in one year the high amount was $2 million, you can get weird results to this type of issue.  And what if in that varying scenario, the high amount were in a year judicially determined to be nonwillful?

Fifth Circuit Applies FBAR NonWillful Penalty Per Account and Not Per Form (11/30/21)

In United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21), CA5 here, and GS here, the Court held that the FBAR nonwillful penalty in 31 USC § 5314 and the underlying regulations  31 CFR §§ 1010.306 and 1010.350 applies on a per account rather than a per form basis, so that, in this case where Bittner had a financial interest in well over 25 accounts per year for each of three years, the per account penalties aggregated $1.77 million.

The Bittner opinion, a unanimous opinion, conflicts with the panel majority opinion in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), but draws heavily on Judge Ikuta’s dissenting opinion in Boyd.  See CA9 Holds in Boyd that Nonwillful FBAR Civil Penalty Is Per Form Rather Than Per Account When Correct Delinquent FBA`R Is Filed (Federal Tax Crimes Blog 3/24/21; 3/31/21)), here

Bittner may petition for certiorari, but the Supreme Court may want the issue to bubble around a bit more in the Circuits to see if a consensus can be reached, with all courts then moving to the consensus view.  Alternatively, the Court might take certiorari to resolve the conflict, treating this as one of the few “tax” (or tax-related) cases it must take every year.  It does not appear to me that either of the two alternatives the Court takes would create that much mischief, an affliction the Court not uncommonly exhibits in tax cases.

District Court holds (1) FBAR Penalty Statute of Limitations is Waivable and (2) FBAR Nonwillful Penalty is Per Account (11/8/21)

In United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021), CL here, in a nonwillful FBAR collection suit, the Court held:

1. The FBAR assessment statute of limitations is an affirmative defense that may be waived by the person assessed the penalty (no distinction here between willful and nonwillful).  The FBAR assessment statute of limitations has no provision such as § 6501(c)(4) that requires that extensions by agreement must be made while the otherwise applicable period of limitations for tax assessments is still open; perhaps the implication is that, except for that explicit limitation on waivers by agreement, a taxpayer could waive with an untimely agreement. (In this regard, the Solomon court does conclude that the FBAR statute of limitations is not jurisdictional and thus can be waived.)  Accordingly, the execution of the agreement to extend for the FBAR penalties was a waiver of the statute of limitations that had already expired.  (On the jurisdictional issue, see Keith Fogg, IRS Succeeds in Jurisdictional Argument – With a Twist (Procedurally Taxing Blog 11/4/21), here.)

2.  The nonwillful penalty is per account rather than per form, adopting the Government’s position on this issue.  As the court notes in the following footnote (Slip Op. 10 n. 4):

n4 Of the courts that have addressed this issue to date, all but one have rejected the government's view, ruling or otherwise suggesting that a non-willful “violation” of the reporting requirement in 31 U.S.C. § 5314 is the failure to file an annual FBAR report — not the failure to “report” the citizen's interest in each foreign financial account. See United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) (rejecting government's view); United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020) appeal docketed, No. 20-40612 (5th Cir. Sept. 18, 2020) (same); United States v. Kaufman, 3:18-CV-00787 (KAD), 2021 WL 83478, **8–11 (D. Conn. Jan. 11, 2021) (same); United States v. Giraldi, CV202830SDWLDW, 2021 WL 1016215, *5 n.8 (D.N.J. Mar. 16, 2021) (same). But see United States v. Stromme, No. 20-24800-CIV (S.D. Fla. Jan. 25, 2021) (ECF No. 18 p. 3) (granting judgment in favor of United States for the full amount of penalties sought, agreeing that “each unreported relationship with a foreign financial agency constitutes an FBAR violation”). 

The Court’s analysis is comprehensive and well-reasoned, adopting in part Judge Ikuta's dissent in Boyd.  (That is not to say that the court's conclusion is right, for I think the issue is the type of issue that really can go either way; as I view these "go either way" issues, they proceed in search of a consensus (either in the courts or by statutory amendment) so that similarly situated citizens at some point get treated similarly but until consensus is reached, it is messy.)  

District Court Holds that FBAR Nonwillful Penalty Survives Death (7/5/21)

In United States v. Gill, 2021 U.S. Dist. LEXIS 12203 (S.D. Tex. 6/30/21), CL here, the court held that an FBAR nonwillful penalty survives the death of the person subject to the penalty.  The decision turned on whether the FBAR nonwillful penalty was remedial or penal in nature.  The general rule is that remedial liabilities survive death, but penal liabilities do not.  The difference between these two categories is based on tests formulated in Hudson v. United States, 522 U.S. 100-101 (1997) (invoking the multi-factor test under Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168–69, 83 S. Ct. 554 (1963)).  Where the cause of action does not fall “neatly” in these categories, the decision is made by “primary purpose of the statute.” (Slip Op. p. 8.)  Applying these tests, the Court finds the FBAR civil nonwillful penalty remedial.

A number of cases (cited by the court in the opinion) have held that the FBAR willful penalty (which in its typical application by the IRS produces larger penalties than would have applied under the nonwillful penalty) was remedial, thus permitting the penalty to survive death. Accordingly, it is not surprising that the nonwillful penalty survives death.

CA9 Holds in Boyd that Nonwillful FBAR Civil Penalty Is Per Form Rather Than Per Account When Correct Delinquent FBAR Is Filed (3/24/21; 3/31/21))

Added 3/31/21 3:30pm:  Lavar Taylor, here, Boyd's lawyer and a force in the national tax community, emailed me some comments on my offering on the Boyd case.  Lavar authorized me to include his comments at the end of this blog.  I highly recommend his comments to readers interest in the general subject matter.

In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), CA9 here and TN here, the Court held that the FBAR nonwillful penalty is per annual form rather than per account that should have been reported on the form.  With this opinion, there seems to be a consensus on this holding that is likely to continue.

I have not tried to delve deeply into the majority and dissenting opinions to determine which of the two presents the best case (or whether neither of them does).  So, this blog is not about the merits of the bottom-line holding, but about some of the distractions I found in the opinions.

1. I was particularly surprised to see the dissenter (Judge Ikuta, Wikipedia here) say this as a concluding shot at the majority (Slip op. 31) :  “By holding otherwise, the majority misinterprets the relevant statutes and regulations in a manner that unfairly favors the tax evader.”  The dissenter is just wrong.  There was no tax evader in the case and the opinion does not favor tax evaders.  The case involved the nonwillful penalty, not the willful penalty.  The willful penalty is the one that would apply if tax evasion (a term of art) were involved.  Tax evasion is penalized under criminal and civil penalty regimes--§ 7201 (tax evasion) and 6663 (civil fraud), respectively.  The standard for both penalties is Cheek’s intentional violation of a known legal duty.  I explain that claim in Federal Tax Procedure 320-321 (Practitioner Ed. 2020), here. There is no suggestion in the case that Boyd was a tax evader or that any other taxpayer subject to the nonwillful penalty is a tax evader or subject to any of the income tax penalties (criminal or civil) applying to tax evaders.  Indeed, if the IRS thought Boyd (or any other taxpayer) were tax evaders, surely the IRS would assert the willful FBAR penalty for the failure to file the FBAR on its original due date.  Keep in mind in  this regard that the willful FBAR penalty, as interpreted  is subject to a looser standard than the Cheek standard, permitting the willful penalty for recklessness which could not support a criminal or civil tax penalty for criminal evasion or its civil counterpart, tax fraud.  So, in my opinion, Judge Ikuta is way out of bounds to make the closing sound bite, as cute as it is, of helping the tax evader.  And Judge Ikuta is particularly out of bounds to make the claim implicit in the quote that Boyd is a tax evader being helped by the majority's interpretation. 

2.  On the merits, the majority seems to limit its per account holding to cases where the following elements are both present:  (i) the FBAR was not timely filed and (conjunctive) (ii) a delinquent but correct FBAR was filed.  Is the Court saying that the result would be different (nonwillful penalty per account) if the taxpayer had not filed a delinquent correct FBAR (either not filed a delinquent FBAR or filed an incorrect delinquent FBAR)?  I thought the penalty applied on the date the FBAR was due (then 6/30) and not filed timely rather than anything that happened later. If that is correct, it should not matter whether a delinquent FBAR (whether correct or incorrect) was filed.  Of course, the delinquent filing of an incorrect FBAR, if  willful,  would subject the taxpayer to the willful penalty (but even there the date for measuring that penalty, I thought, was the filing date and the IRS should have to show willfulness in failing to file on that date).  As to the willful penalty, the correctly reported accounts on a delinquent return does not affect the penalty base for all accounnts willfully not reported on the filing due date.    The majority seems to adopt this view on p. 16 n. 10:  “Under both scenarios [willful and nonwillflul], the violation flows from the failure to file a timely and accurate FBAR.”  If the Court is correct on the conjunctive requirements, taxpayers missing the filing dates should always file correct delinquent FBARs if audited just to protect against the possibility that failure to do so might permit the penalty to apply per account (even as unlikely that a court would sustain that interpretation).

Another Court Adopts Nonwillful Penalty Per Form Rather than Per Account (3/19/2)

In United States v. Giraldi (D. N.J. 3/16/21), TN here and TN pdf here, the Court held (Slip op. 8): “[T]his Court aligns with the more persuasive reasoning in Bittner and Kaufman. Accordingly, pursuant to Section 5321(a)(5)(B)(i) of the BSA, penalties for non-willful reporting violations attach to each FBAR form rather than any undisclosed foreign financial account.”

The Court distinguishes the only contrary precedent, Boyd, as follows (Slip op. 15): “Significantly, the court merely reiterated the Government's arguments and conducted no analysis in coming to its conclusion.”

I see a trend developing for per form rather than per account.  For what it is worth, I think that is the right answer.  I do note, however, that the judge indicated that the opinion was not to be published.  I don’t know what that is about because it is a well written opinion in an area of law still not settled.

Another District Court Holds FBAR Nonwillful Civil Penalty Is Per Form Rather Than Per Account (1/15/21)

In United States v. Kaufman, 2021 U.S. Dist. LEXIS 4602 (D. Conn. Jan. 11, 2021), Tax Notes here and CourtListener here, the Court: 

• Granted the Government summary judgment holding that the summary judgment facts precluded reasonable cause.
• Granted Kaufman summary judgment holding that the nonwillful FBAR civil penalty was per annual form rather per account (basically $10,000 max each year for deficiencies or delinquencies on FBARs) rather than $10,000 for each account that was not or was incorrectly reported on the annual FBAR.

 The holding on reasonable cause is straight-forward.  Kaufman just had bad facts.

The holding on the nonwillful penalty being per form or per account is not so straight-forward.  The Courts – only three district court cases -- are not in agreement.  See the discussion in the Kaufman opinion.  Of the two cases agreeing with the Government position, the lead on is currently pending after oral argument in the Ninth Circuit.   United States v. Boyd, No. CV 18-803-MWF (JEMx), 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), appeal argued No. 19-55585 (9th Cir. Sept. 1, 2020).  See Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19), here.  The other district court case holding for the taxpayer that maximum penalty is per form is United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020), appeal docketed No. 20-40597 (5th Cir. Sept. 11, 2020).  See District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20), here

So, it appears to me that at this point the issue is not yet settled and, ultimately, the issue might go either way.

For another treatment of Kaufman, see Robert S. Howitz, IRS Loses Another Non-Willful FBAR Case (Tax Litigator Blog 1/14/21), here.

New IRM provision on Offers in Compromise Including FBAR Penalties (10/8/20)

I just picked up this provision in the IRM, here:

5.8.4.24.2 (09-24-2020)

Foreign Bank and Financial Reporting (FBAR) Assessments

An offer may be submitted which includes FBAR assessments or a taxpayer who submitted an offer to compromise their tax liabilities also has assessments based on FBAR. Since, the IRS does not have authority to compromise assessments based on FBAR, the taxpayer should be requested to submit an amended offer to remove FBAR liabilities which are included on the Form 656.

Note: FBAR penalties are assessed under Title 31 and do not appear in IDRS.

If the taxpayer has a liability for assessments under FBAR, an offer for tax liabilities other than the FBAR may be investigated. During the review of the taxpayer’s financial information, the OE/OS should conduct additional investigation actions to determine if the taxpayer continues to have assets outside the United States. Review the ICS history to determine what research may have been conducted by a field revenue officer. The OE/OS may also issue an other investigation (OI) to an ATAT or International RO group to research FinCEN and/or CBRS to assist in identifying current foreign assets in which they retain an interest.

Note: The taxpayer may also have pending assessments related to Offshore Voluntary Disclosure Initiative.

If the taxpayer is unable or unwilling to submit an amended offer removing the FBAR liabilities, the offer should be closed as a processable return.

JAT Comments:

1.  I am not sure how or if compromises of the FBAR penalties may be achieved.  I assume that there is some way to do that outside the IRS processes for tax liabilities.

2.  The known route to compromises of tax liabilities may be a side benefit of avoiding an FBAR penalty assessment under the various IRS programs (e.g., OVDP and Streamlined) where a substitute penalty is assessed as a miscellaneous tax penalty (sometimes called the “in lieu of” penalty).

This blog is cross-posted on the Federal Tax Procedure Blog, here.

District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20)

In United States v. Bittner 2020 U.S. Dist. LEXIS 113416 (E.D. Tex. 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (Federal Tax Crimes Blog 4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

Court Grants Summary Judgment on FBAR NonWillful Penalty Collection Suit (12/15/19)

In United States v. Agrawal (E.D. Wisc. Dkt. 18-C-0504 Order Dtd. 12/9/19) (CL here and GS here), the Court granted summary judgment to the Government on its complaint (CL here) for judgment on 4 years of nonwillful FBAR penalty at $10,000 per penalty (plus interest and costs).  (Note:  CL is Court Listener and GS is Google Scholar.)  Since he had the account, his only defense to the nonwillful penalty was reasonable cause.  He tried to defend himself against the penalty, acting pro se without an attorney.

His deposition testimony quoted in the opinion is interesting and shows that he was lucky to have avoided the willful penalty.  (Of course, the IRS did not have his deposition testimony when it imposed the penalty.)  The following is from the opinion:

At his deposition, Agrawal testified that he prepared his own tax returns in 2006 and 2007, but relied on CPAs to prepare his tax returns in 2008 and 2009. He testified that he did not tell the CPAs of the existence of the UBS account. Regarding the 2008 tax return preparation, Agrawal testified as follows: 

Q. Did [the CPA] ask you whether you had a foreign financial account?
A. I said no.
Q. You told him no?
A. Yes.
Q. But at this time you still had the UBS account, correct?
A. Yes.
Q. Why did you tell [the CPA] no?
A. Because again, the word of [the UBS representative] that these — this account is not — non-taxable in the U.S.
. . .
Q. You didn't tell [the CPA] that you had a UBS account but were told that it was non-taxable and didn't need to be reported?
A. I didn't tell him.
Q. Okay. Why not?
A. Because when I trust somebody, like [the UBS representative], I didn't tell him.

ECF # 32-17 at 65-66. Regarding the 2009 tax return, Agrawal testified as follows: 

Q: Did you review the Form 1040 of your tax return to 2009 with [the CPA] before you filed it?
A: Yes.
. . .
Q. The Part III, the information about foreign accounts and trusts is blank?
A. Yeah.
Q. Did you ask [the CPA] why it was blank before you filed your return?
A. No.
Q. It didn't cause you any concern?
A. No.
Q. Why not?
A. Because I didn't notice. He should have said no.
Q. Did [the CPA] ask you if you had any accounts in a foreign country?
A. No. 

Id. at 68. However, with his response to plaintiff's motion for summary judgment, Agrawal submitted an affidavit reversing some of this testimony; he now claims that both CPAs asked whether he had foreign accounts; that he told them he did have a foreign account; that the CPAs did not file FBARs on his behalf or report the UBS account on his tax returns; and that he relied on the CPAs' expertise. ECF # 36 at 2-3. Along with this affidavit, Agrawal also filed an errata list amending portions of his deposition testimony, including the portions cited above. Many of these amendments simply change "yes" answers to "no" or vice versa; Agrawal's explanation for these amendments is that he "misspoke." ECF # 37-1 at 11-13.

 And, as often the case, he had other bad facts.

But, to repeat, he is lucky to have avoided the willful penalty which would have been much more.

JAT Comment:

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.

Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19)

I write today on two cases which are the first I am aware of that has sustained FBAR NonWillful penalties on a per account basis rather than per FBAR basis.  One of the cases is a default judgment case that did not discuss the issue of whether the NonWillful penalty should be per account or per FBAR.  United States v. Gardner, 2019 U.S. Dist. LEXIS 68032 (CD CA 2019), here.  I will not discuss that decision (but those who do read it will see that there is some odd wording in it.)

In United States v. Boyd (CD CA CV 18-803-MWF) Order (4/23/19), here, the Court did directly address the issue.  Boyd joined OVDP and then opted out.  The IRS then assessed a mitigated NonWillful penalty for 2010 on each of 13 accounts, for an aggregate NonWillful penalty of $47,279.

Just pausing right there, it appears that Boyd's opting out of OVDP penalty structure achieved a substantial savings.  Even at the lowest OVDP rate of 20%, the OVDP penalty would have been $155,943 (considering 2010 as the high unreported year with $779,716 aggregate high amount in the accounts).

Boyd felt that the penalty exceeded the amount legally allowed based on the purely legal claim that the NonWillful penalty statute required that the pertinent violation on which the maximum $10,000 penalty is based is the FBAR rather than per account.  The statute, 31 U.S.C. 5321(a)(5)(A), bases the penalty on the violation.  The maximum penalty is $10,000 per violation.  § 5321(a)(5)(B)(i). So the question is what is the violation -- the failure to file the FBAR or the failure to report each account on the FBAR not filed.

The Court resolves the issue as follows:

District Court Rejects Motion to Dismiss Based on Colliot and Wadhan Because Each Year Willful Penalty Less than $100,000 (12/10/18)

In United States v. Shinday, 2018 U.S. Dist. LEXIS 205372 (C.D. Cal. 2018), an FBAR collection suit, the defendants (husband and wife) had foreign accounts at UBS and at State Bank of India. I excerpt some of the history of the accounts below.  The Government assessed multi-year willful penalties against the husband and five single year $10,000 nonwillful penalties against the wife.  The Government is suing to obtain judgment on the assessments.  The defendants moved to dismiss, and the Government opposed.  (The motion to dismiss is here and the opposition is here.) The Court denied the motion (here with Court Listener copy here; the Docket Entries on Court Listener here permit some of the documents to be downloaded).  ).

Key excerpts (don't tell the full story but enough that, I think, readers will get the key points):

The government alleges that in 2002, UBS prepared a memorandum indicating that defendants asked UBS whether Nila’s brother could withdraw $50,000 of defendants’ funds from UBS’s London branch without it being reported. Id. 

* * * * 

In 2008, UBS again notified defendants of new laws applying to U.S. citizens with foreign bank accounts, and recommended that defendants close their UBS account. Id. ¶ 23. Defendants soon after transferred the funds in their UBS account to their accounts at the State Bank of India (“SBI”), a bank in India, and eventually closed their UBS account. Id. 

The government alleges that before defendants closed their UBS account, defendants’ UBS account had year-end balances of $350,019 in 2005, $361,819 in 2006, $420,893 in 2007, and $15,003 in 2008. Id. ¶ 9. Defendants also had “as many as twenty-nine and as few as seven fixed deposit accounts at the State Bank of India[,]” from the years 2005 to 2011. Id. ¶ 10. Defendants’ SBI accounts had aggregate year-end balances of $444,035 in 2005, $669,729 in 2006, $258,079 in 2007, $306,647 in 2008, $411,502 in 2009, $216,530 in 2010, and $362,506 in 2011. 

* * * * 

C. Defendants’ Failure to Disclose their UBS and SBI Accounts 

Defendants filed joint federal income tax returns for the 2005 to 2011 tax years, utilizing a certified public accountant to file those returns. Id. ¶ 25. The returns included a Schedule B, Interest and Dividends, which, inter alia, requires defendants to (1) report domestic or foreign interest or dividends, and (2) state whether they have  a financial account in a foreign country. Id. ¶¶ 26–27. Defendants did not report the interest or dividends associated with their UBS and SBI accounts for 2005 to 2010. Id. ¶ 26. They checked a box on the Schedule B form for their 2005 to 2010 tax returns indicating that they did not have foreign accounts during those years. Id. ¶ 27. Defendants signed those returns, under penalty of perjury. Id. 

For defendants’ 2011 tax return, defendants disclosed their SBI accounts, but failed to do so in a timely manner. Id. ¶ 29. The IRS then audited defendants’ 2005 to 2011 tax returns. During the audit, defendants ultimately disclosed two Canadian investment accounts, as well as the UBS and SBI accounts. Id. ¶ 30. 

D. IRS Penalty Assessments against Defendants 

The government alleges that the IRS thereafter assessed penalties against defendants based on their UBS and SBI accounts. Id. ¶¶ 31–32. The government claims that on or around August 23, 2016, the IRS assessed non-willful FBAR penalties against Nila for the tax years 2007 to 2011. Id. ¶ 31. Each penalty was $10,000, totaling $50,000. Id. The government alleges that on or about August 23, 2016, the IRS also assessed willful FBAR penalties against Money for the tax years 2007 to 2011. Id. ¶ 32. The aggregate amount of the penalty was $257,888, which represents 25% of the combined 2006 year-end balance of defendants’ UBS and SBI accounts, equaling $1,031,548. Id. This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011. Id. 

* * * * 

As the government argues, the facts of Colliot and Wadhan are thus inapposite to this case because the five penalties assessed against Money are individually all less than $100,000. Compl. ¶ 32; Opp’n at 3. Although in the aggregate the penalties against Money total $257,888, the yearly, individual penalties are each approximately $51,578. Id. Each time Money allegedly willfully failed to timely file an FBAR, the IRS assessed a penalty. Compl. ¶ 32. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from defendants’ failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011. Id. This is within the bounds of 31 C.F.R. § 1010.820(g) (“For any willful violation committed . . . the Secretary may assess upon any person, a civil penalty . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.”) (emphasis added). n1 
   n1 In addition to arguing that its penalties do not violate 31 C.F.R. § 1010.820’s $100,000 cap, the government also argues that 31 C.F.R. § 1010.820 was invalidated by the 2004 amendment to Section 5321. Opp’n at 5, 9 (citing Norman, 138 Fed. Cl. at 195 – 96 (involving Mindy Norman, finding that the $100,000 penalty cap established by 31 C.F.R. § 1010.820 is invalid because “Congress clearly raised the maximum civil money penalty in § 5321 to the greater of $100,000 or one half of the balance of the account”)). In essence, the government argues that even if the $100,000 penalty cap applied in the aggregate, the amendment in Section 5321 would permit the government to apply a penalty in excess of
$100,000. The Court need not reach this issue, however. Irrespective of whether Section 5321 invalidates the Department of Treasury’s implementing regulations, there was no year in which Money was penalized for more than $100,000.

JAT Comments:

Court Grants Default Judgment on FBAR Nonwillful Penalty (10/2/18)

In United States v. Marstellar, 2018 U.S. Dist. LEXIS 164706 (W.D. Va. 2018), here, the Court granted default judgment against Marstellar for FBAR nonwillful penalties.  Marsteller failed to appear and respond.  Accordingly, the Court granted default judgment on the Government's complaint and a submission by the IRS FBAR Penalty Coordinator.  The penalty amount was $40,000 ($10,000 per year for four years).  The judgment amount was $44,295.89. including accrued interest and late-payment penalties.