Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (12/21/18; 1/10/19)

In Bedrosian v. United States, 912 F.3d 144 (3rd Cir. 2018), CA3 here and GS here, the Court held:  

1. On the threshold issue of the district court's jurisdiction, the Court questioned whether the district court had jurisdiction under the Little Tucker Act, 28 U.S.C. § 1346(a)(2).  That concern was mooted because the court concluded that it was a tax claim under 28 U.S.C. § 1346(a)(1).  Tax claims are, at least facially, subject to the Flora full payment rule.  Bedrosian did not make full payment hoping that the Little Tucker Act avoided that requirement.  So, since this was a tax refund action, according to the Court's concern, Flora required full payment.  But, according to the Court, the district court did have jurisdiction over the Government's counterclaim.  So, the district court had some jurisdiction and, as a result, the Court of Appeals had jurisdiction to consider the merits of the appeal.

2. On the merits, the Court held that, for the FBAR penalty, the Government must satisfy the civil willfulness standard, which includes both knowing and reckless conduct.  The Court thus was consistent with the consensus of the previously decided cases.  The Court said that willfulness, as interpreted, required both a subjective and objective inquiry.

3.  The Court remanded because the Court was not certain that the district court's finding of nonwillfulness considered the objective aspect of willfulness.

I have previously posted on the lower court Bedrosian trajectory (reverse chronological order):

• Big Win for Taxpayer/Filer in FBAR Willful Penalty Case (Federal Tax Crimes Blog 9/21/17; 9/23/17), here. 
• Order on Motion In Limine and Trial Briefs in Case Involving FBAR Willful Penalty (Federal Tax Crimes Blog 9/11/17), here.
• Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (Federal Tax Crimes Blog 4/13/17), here.

JAT Comments (added 12/22/18):

1.  The Court developed its jurisdictional analysis to ultimately find jurisdiction on a combination of its conclusions (i) that the FBAR penalty was an internal revenue provision ("part of the IRS's machinery for the collection of federal taxes," thus subject to the Flora full payment rule on refund suits and (ii) although Bedrosian had not made full payment on the refund suit, the Government's counterclaim (a collection suit) conferred jurisdiction in the district court. Since the Court ultimately found jurisdiction regardless of whether the suit was properly characterized as a tax suit (refund and collection) or a Little Tucker Act suit, the analysis might be considered dicta except for the reason noted in paragraph 2.  

2.  Part of the jurisdictional analysis was consideration of 28 USC § 1295(a)(2), here, which, as to cases brought under the Little Tucker Act, the district court has jurisdiction but the appeal is solely to the Federal Circuit unless the case involved "an Act of Congress or a regulation of an executive department providing for internal revenue."  The Court basically said § 1295(a)(2) did not force appellate jurisdiction to the Federal Circuit because of its conclusion that the FBAR penalty was a provision for internal revenue.  That was the key conclusion that permitted the Court to reach the merits, so in this sense the analysis getting to the merits is likely not dicta.  In other words, its holding that the FBAR penalty was a revenue measure was required to reach the merits, otherwise the appeal would have been to the Federal Circuit.  

3.  The Court did ask the the parties to brief the jurisdictional issues.  In their letter briefs, both parties asserted that jurisdiction is under the Little Tucker Act and that appellate venue was in the Third Circuit rather than the Third Circuit.  That took so dancing around.  So, readers who want to dive deep into the weeds on this issue should review.  Here they are:

• The Court's Letter Requesting Briefing, here.  The content of the request is short, so I just cut and paste it.

At the direction of the Court, the panel requests that each party submit a single-spaced letter brief no more than 5 pages long, by 4:00 p.m. on October 5, 2018, addressing the following question: Did Bedrosian’s initial claim in the District Court fall within the scope of 28 U.S.C. § 1346(a)(1)? As part of the submission, please explain whether and why the jurisdictional basis of a claim seeking to recover the payment of an FBAR penalty is or is not the same as that of a claim seeking to recover the payment of a penalty assessed under 26 U.S.C. § 6038(b). See Dewees v. United States, 2017 WL 8185850 (Fed. Cir. Nov. 3, 2017).

• The Government's Letter Brief, here.
• Bedrosian's Letter Brief, here.

4.  The take away is that, if the Third Circuit's analysis prevails, persons subject to the FBAR penalties may not have a path to instituting a partial payment refund suit for FBAR penalties.  The Government could file a collection suit and, perhaps, the person could flush out the collection suit by filing a partial payment refund suit (albeit without jurisdiction).  Of course, unless the unpaid FBAR penalty would be a compulsory counterclaim (not sure a jurisdictionless original claim could force a compulsory counterclaim), the Government could forego the collection suit via counterclaim at the time and move to dismiss the refund suit.

5.  But, in the final analysis, the Government would have to file a collection suit in the two year period anyway.  Except, and I have not done anything on this, if indeed the FBAR penalty is a revenue measure, would the collection rules in the IRS apply rather than those otherwise thought applicable for FBAR penalties.

6.  Another collateral issue is whether, for that refund suit, the taxpayer would have to follow the requirements for predicate claim for refund.

7.  On the willfulness analysis, the Court's analysis is short, so I just quote it (bold face in text by JAT):

B. "Willfulness" under the FBAR Statute 

In assessing the inquiry performed by the District Court, we first consider its holding that the proper standard for willfulness is "the one used in other civil contexts-that is, a defendant has willfully violated [31 U.S.C. § 5314] when he either knowingly or recklessly fails to file [a] FBAR." (Op. at 7.) We agree. Though "willfulness" may have many meanings, general consensus among courts is that, in the civil context, the term "often denotes that which is intentional, or knowing, or voluntary, as distinguished from accidental, and that it is employed to characterize conduct marked by careless disregard whether or not one has the right so to act." Wehr v.Burroughs Corp., 619 F.2d 276, 281 (3d Cir. 1980) (quoting United States v. Illinois Central R.R., 303 U.S. 239, 242-43 (1938)) (internal quotation marks omitted). In particular, where "willfulness" is an element of civil liability, "we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well." Fuges v. Sw. Fin. Servs.,Ltd., 707 F.3d 241, 248 (3d Cir. 2012) (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007)). We thus join our District Court colleague in holding that the usual civil standard of willfulness applies for civil penalties under the FBAR statute. 

This holds true as well for recklessness in the context of a civil FBAR penalty. That is, a person commits a reckless violation of the FBAR statute by engaging in conduct that violates "an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'" Safeco, 551 U.S. at 68 (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). This holding is in line with other courts that have addressed civil FBAR penalties, see, e.g., United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012), as well as our prior cases addressing civil penalties assessed by the IRS under the tax laws, see, e.g., United States v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994). With respect to IRS filings in particular, a person "recklessly" fails to comply with an IRS filing requirement when he or she "(1) clearly ought to have known that (2) there was a grave risk that [the filing requirement was not being met] and if (3) he [or she] was in a position to find out for certain very easily." Id. (quoting United States v.Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989) (internal quotation omitted)).

So, according to the Court, the standard is an ought to have known standard.  It is really weird how lax the standard has become over the years from the time the IRS first pronounced that it was the Cheek specific intent to violate a known legal duty standard with a clear and convincing standard for the Government to prove.

8.  The Court remanded because it was not sure that the district court, in holding that the Government had not proved willfulness, had applied the ought to know test.  I wonder whether the Court is sending a signal to the district court and, if so, what that signal is?

Addendum 1/10/19:

Keith Fogg has an excellent write up on Bedrosian covering some points I didn't or in more detail.  Like the First Amphibian Crawling Out of the Swamp onto Land, the Flora Rule Emerges from Title 26 to Possibly Infest Title 31 (Procedurally Taxing Blog 1/7/19), here.