Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (11/16/16)

I have written before about the burden of proof the Government must meet in order to sustain an FBAR willful penalty.  I offer at the end of this blog some of the key blog entries on that issue.  Briefly, the issue is whether the Government must prove willfulness by a preponderance of the evidence or by clear and convincing evidence.  Although there is no universally agreed definition of either standard, many conceptualize the standards as follows:  (i) preponderance of the evidence on a fact issue is the evidence which, in the trier of fact's mind, indicates that the fact issue is more likely than not, sometimes stated as 50+% likely; and (ii) clear and convincing is higher than more preponderance but less than the reasonable doubt standard applicable in criminal cases.  Now, readers will note that I did not put a percentage construct on the clear and convincing standard because that certainly is not agreed upon, so perhaps the best statement is that clear and convincing is higher than preponderance and lower than reasonable doubt.  Of course, we don't know what percentage to assign to reasonable doubt, so that won't help up figure out a percentage for clear and convincing.  I include at the end of this blog some materials on this issue as presented in my Federal Tax Procedure book on the civil fraud penalty.  Suffice it to say now that there are cases in which the Government, bearing the civil burden of proof, might be able to prove a fact by a preponderance of the evidence, but could not prove the fact by clear and convincing evidence.  Those who have tried cases involving the civil fraud penalty, where the Government must prove fraud by clear and convincing evidence, know that the clear and convincing burden is substantial indeed, compared to the preponderance standard.

In a case now pending before the Court of Appeals for the Fifth Circuit, Guber v. IRS (No. 16-40948), the plaintiff-appellant, Gubser, had filed a complaint in district court asking for a declaratory judgment that the proper standard was the clear and convincing standard.  The FBAR penalty is not a tax penalty and thus not subject to the prohibitions on injunctions and declaratory judgments for tax matters.  But declaratory judgments do have some minimum justificability requirements in order to invoke the jurisdiction and action of the federal courts.  Therein lay the problem.

Gubser had not yet suffered the practical injury that might come from the imposition of the lower preponderance of the evidence standard because the FBAR penalty had not been assessed against.  All Gubser apparently had was some indication from the Appeals Officer that, if the standard were preponderance, the Appeals Officer would sustain the examining officer's assertion of the FBAR willful penalty, but that if the standard were clear and convincing the Appeals Officer would not sustain the penalty.  Gubser was claiming that the mere uncertainty as to the proper standard impacted his rights to fair processing of the Appeals hearing.

I offer here the brief in the Fifth Circuit by Gubser, by the Government and by Amicus representing other persons potentially impacted.  After offering links to those documents, I offer the summary of the argument in the Gubser's opening brief, in the Government's opening brief and in the Amicus brief.

• Gubser's Opening Brief, here.
• Government Answering Brief, here.
• Gubser's Reply Brief, here.
• Amicus Brief (supporting Gubser's position), here.

Summary of the Arguments:

Gubser's Opening Brief

Bernhard Gubser has established standing to sue for a declaration of the proper standard of proving a willful FBAR penalty. He pleaded sufficient facts to show (1) imminent harm (2) caused by the FBAR penalty proposed by the IRS (3) that the district court can redress with a declaratory judgment. Before filing suit, Gubser tried to settle the controversy with an IRS Appeals officer. ROA.17, 152-53, 156-57. The Appeals officer identified the standard of proof as dispositive and asked Gubser to seek guidance on this uncertain area. ROA.17, 109, 114-115. So Gubser sued for a declaration that the IRS must prove that he willfully violated the FBAR filing requirement by clear-and-convincing evidence (and not merely by a preponderance of the evidence).
The district court erroneously dismissed his suit for lack of standing, solely emphasizing the failure to establish redressability. ROA.85-86. The district court committed legal error when it mistakenly determined that declaratory judgment would be proper only if its order would legally bind the Appeals officer or would prevent the IRS from assessing the penalty. ROA.85-86. This Court reviews that legal error de novo. Time Warner Cable, Inc. v. Hudson, 667 F.3d 630, 635 (5th Cir. 2012) (“We review questions of standing de novo.”). 

Declaratory judgment, unlike injunctive relief or a writ of mandamus, is not a coercive remedy. Instead, it interprets the parties’ rights and legal relations.  Declining relief because the court’s order would not compel the Appeals officer to act undermines the purpose of the declaratory remedy and contradicts decades of case law. 

Longstanding Supreme Court precedent establishes that a plaintiff’s injury is redressable if it is substantially likely that the declaratory defendant will abide by the court’s statement of the applicable law. The declaration need not compel the defendant to act, and the plaintiff’s injury is redressable even if the defendant retains some discretion in the case. Moreover, declaratory judgment need not resolve the plaintiff’s every injury; it is enough that it addresses and clarifies at least one aspect of the controversy. 

Here, the court’s declaration will resolve the current legal uncertainty about the proper standard of proof and will allow the Appeals officer to determine the proper penalty (i.e., the willful or non-willful FBAR penalty). Because the Appeals officer specifically asked for guidance on this legal issue, it is substantially likely that he will follow that guidance when it is received, which will resolve the dispute over the proposed penalty. This is exactly the kind of case that declaratory judgment was made to resolve.

Government's Answering Brief:

The District Court correctly dismissed this case for lack of jurisdiction because the case is not ripe for review, because Gubser lacks standing, and because there is no independent statutory basis for jurisdiction. Although the court below addressed only Gubser’s lack of standing, this Court may affirm the dismissal on any ground supported by the record. 

1. This action is not ripe because there is no final agency action for this Court to review. The Supreme Court has instructed that in determining whether administrative action is ripe for review, courts should evaluate the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration. Both factors weigh against judicial intervention here. Gubser elected to avail himself of the administrative appeals process, and that process is ongoing. No penalty has been assessed, and Gubser owes no FBAR penalty to the Government in the meantime. It is entirely speculative whether, and to what extent, a penalty will be assessed because the Office of Appeals has discretion not to sustain the proposed penalty, to settle it, or to reduce the amount.  

The relief that Gubser seeks in this case – clarification of the standard for proving willful failure to file an FBAR – will not accelerate the resolution of the penalty issue. Gubser claims that the Appeals Officer took the position that the Government can meet a preponderance-of-the-evidence standard, but that it cannot meet a clear-and-convincing-evidence standard. The Government disputes that the Appeals Officer made these statements, but accepting the allegations as true, resolution of the standard of proof would not result in any particular outcome in the administrative appeal. Thus, a declaratory judgment as to the standard of proof would be nothing more than an advisory opinion. 

Nor is there any hardship in waiting for the administrative appeal process to end. If a penalty is ultimately assessed, Gubser can seek judicial review of the assessment in the district court or Court of Federal Claims. In the meantime, the Government would not be able to immediately collect the penalty. There is no imminent harm warranting review at this premature stage.  

2. Gubser also lacks standing to bring this action. Gubser has failed to show a cognizable injury-in-fact because there has been no assessment here. Even assuming the proposed penalty were an injury-in-fact, the District Court correctly concluded that it was not redressable because a declaratory judgment about the standard of proof would not prevent a penalty assessment, as Gubser conceded below. Contrary to Gubser’s argument on appeal, the District Court’s conclusion did not rest on whether the declaratory judgment would compel the Appeals Officer to act or otherwise bind him, but, instead, rested on the simple and unavoidable fact that the requested declaratory relief would not prevent a penalty from being assessed. Gubser’s newly-raised argument on appeal that uncertainty about the standard of proof is itself a discrete injury that can be redressed with a ruling by the District Court – independent of whether the proposed penalty is assessed – is meritless. 

3. Finally, this case warrants dismissal because there is no subject matter jurisdiction. It is well established that to bring a declaratory judgment action, the plaintiff must show that the court otherwise has jurisdiction over the case; and when the defendant is the United States, there must be a waiver of sovereign immunity. The Declaratory Judgment Act does not confer such jurisdiction. The statutes that Gubser relies on, 28 U.S.C. §§ 1331 and 1355, are general jurisdictional grants that do not waive sovereign immunity.
The District Court’s order dismissing this case should be affirmed.

Amicus Brief

The current legal uncertainty over the standard of proof for willfulness in assessing penalties for FBAR violations is a source of concrete injury, which would be redressed by Appellant’s declaratory judgment action. 

Good faith violations of the FBAR rules are common and understandable. Yet, innocent violators nonetheless face a very real prospect of being accused of willful violations, given that willfulness must generally be assessed based on circumstantial evidence of the individual’s state of mind. The cost of error in this context can be catastrophic for affected individuals – the taxpayer stands to lose half the value of the relevant accounts, which, as Mr. Gubser’s case illustrates, may hold a person’s entire life savings. Accordingly, the standard of proof for willfulness is critical to a taxpayer’s assessment of how to navigate the IRS’s complex system for resolving belated admissions of FBAR violations. Specifically, the standard of proof may determine whether a taxpayer sticks to her guns and insists on the truth, or yields to IRS demands that she pay more than she owes in order to avoid the prospect of devastating penalties. Knowing that the IRS may only assess those penalties upon clear and convincing proof of willfulness could lead many taxpayers to refuse to capitulate and thereby avoid serious financial injury.

Significant Prior blogs on the issue of the proper standard for the FBAR willful penalty

• Burden of Proof for Willfulness in FBAR Violations (Federal Tax Crimes Blog 9/6/11), here.
• 11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (Federal Tax Crimes Blog 6/14/14), here.
• U.S. Taxpayer Seeks Declaratory Judgment that Government Must Prove Willfulness for the FBAR Willful Penalty by Clear and Convincing Evidence (Federal Tax Crimes Blog 12/22/15) (on the initial filing in Gubser), here.
• McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (Federal Tax Crimes Blog 11/11/12), here.

From JAT Federal Tax Procedure Book on clear and convincing:

In order to prevail on the civil fraud penalty, the IRS is first required to prove that some portion of the understatement is attributable to fraud by clear and convincing evidence.  § 7454(a). n1100  Like the criminal standard “beyond a reasonable doubt,” there is no satisfactory language to inform precisely what “clear and convincing” is; perhaps the best that can be said is that it lies somewhere on the continuum between “more likely than not” (the usual civil burden) and “beyond a reasonable doubt” (the criminal burden). n1101  If the IRS meets that burden, the entire understatement will be subject to the penalty except to the extent that the taxpayer establishes by a preponderance of the evidence that it does not arise from fraud.  § 6663(b).
   n1102  Section 7454(a) provides that the IRS must prove fraud; that the IRS prove fraud by clear and convincing evidence is nonstatutory, but has developed as a consistently applied rule consistent with historic pleading and proof rules.  See e.g., Tax Court Rule 142(b).
Section 7454(a) was initially enacted in a 1928 Revenue Act provision that applied by its terms only in the Tax Court.  Revenue Act of 1928, c. 852, § 601, 45 Stat. 791; see Paddock v. United States, 280 F.2d 563 (2d Cir. 1960).  Indeed, the section refers to “petitioners,” the term used for the taxpayer in Tax Court deficiency proceedings; notwithstanding that reference, however, the few courts addressing the issue say that the burden is on the IRS to prove fraud regardless of the forum that the fraud issue arises.  Leo P. Martinez, Tax Collection and Populist Rhetoric: Shifting the Burden of Proof in Tax Cases, 39 Hastings L.J. 239, 263-264 (1988) (citing Paddock and Carter v. Campbell, 264 F.2d 930, 937-38 (5th Cir. 1959); Trainer v. United States, 145 F. Supp. 786, 787 (E.D. Pa. 1956); see Lee v. United States, 466 F.2d 11, 14 (5th Cir. 1972)).
   n1101  One author says that “typical jury instructions” require persuasion that the fact is “highly probably true.”  Michael S. Pardo, Second-Order Proof Rules, 61 Fla. L. Rev. 1083, 1097 n. 80 (2009) (citing 7th Circuit Pattern Jury Instructions and See McCormick on Evidence § 340 (John W. Strong ed., 5th ed. 1999) (1954)).  Playing the numbers game, Judge Jack B. Weinstein, certainly one of the deeper thinkers in this area, observed that the lesser clear and convincing standard of proof (the standard applicable in civil fraud matters such as a civil fraud penalty under § 6663) might be quantified as proof above 70%.  See United States v. Copeland, 379 F. Supp. 2d 275 (ED NY 2005), aff’d United States v. Copeland, 2007 U.S. App. LEXIS 19794 (2d Cir. 2007), quoting United States v. Fatico, 458 F. Supp. 388, 411 (E.D.N.Y. 1978).  Other thoughtful observers quantify the proof for “clear and convincing” at 75%.  See Lewis Kaplow, Burden of Proof, 121 Yale L.J. 738, 779 n. 77 (2012) (citing a survey of federal judges showing a range of 70% to 80%, with an average of 74.99%.
Based on empirical studies, some authors suggest that juries actually, and erroneously, perceive the “clear and convincing” standard to be greater than the “beyond a reasonable doubt standard.”  See Lawrence Solan, Refocusing the Burden of Proof in Criminal Cases: Some Doubt about Reasonable Doubt, 78 Tex L Rev 105, 128-129 (1999); Michael S. Pardo, Second-Order Proof Rules, 61 Fla. L. Rev. 1083, 1097 (2009).  Bench trials, presumably would not present this logical inconsistency but perhaps suffer from some judges relaxed assessments of the quantum of proof required for proof “beyond a reasonable doubt.”