Tuesday, June 30, 2020

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 (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):
The Government advances two primary arguments for why non-willful FBAR violations relate to specific financial accounts rather than to FBAR forms. First, the Government argues that, because the reasonable cause exception forgives the penalty for a non-willful FBAR violation and references the “balance in the account,” the non-willful violation itself must relate to each account. That is, if the exception applies on an account-by-account basis, then the violation that the exception forgives must also apply on an account-by-account basis. While the Court recognizes this logic, it is unpersuaded. The Government has not provided any good reason for why the exception to a rule should somehow inform the calculation of the penalty for a violation of that rule. Here, Congress assesses a maximum $10,000 fine for a non-willful violation—which is an account holder’s non-willful failure to submit her annual FBAR—while also providing a statutorily permissible excuse for noncompliance—the reasonable cause exception—that is completely independent from the violation itself. It does not follow that the penalty is calculated on an account-by-account basis just because Congress provided that a taxpayer’s accurate reporting of the balance in her account(s) is a possible ground for excusing that penalty. Congress can forgive non-willful FBAR violations any way it likes—even in ways that have nothing to do with the underlying violation. And why Congress elected to forgive non-willful FBAR violations in the particular way it did is not the issue before this Court; any attempt by this Court to comment [*15] on why the reasonable cause exception mentions “balance in the account” while the penalty provision does not would be pure conjecture. n4
  n4 What the Government also fails to consider is that the reasonable cause exception does not necessarily apply on an account-by-account basis. An account holder may be entitled to invoke the reasonable cause exception to avoid paying the non-willful civil penalty by having shown reasonable cause and having properly reported “the amount of the transaction.” See 31 U.S.C. § 5321(a)(5)(B)(ii)(II). Thus, it is not necessarily the case that the reasonable cause exception, and by extension the underlying non-willful FBAR violation, relate to specific financial accounts because they can instead relate to “transactions.”  
The Government also argues that, because the penalty for willful violations simply modifies the penalty for non-willful violations, the underlying violation must also be the same. And because “the willful variant of the penalty is assessed with reference to each account,” the non-willful variant of the penalty should also be understood to relate to each account (Dkt. #29). The Court acknowledges that the willful and non-willful variants of the penalty are connected, but the problem with this argument is it overlooks the fact that Congress may have had perfectly good reasons for choosing to compute the penalty for willful violations different from the penalty for non-willful violations. Indeed, willful violators pose a fundamentally different obstacle to the Government’s ability to monitor foreign financial transactions than non-willful violators do, and perhaps Congress drafted the provisions with different language to reflect those differences. n5 Ultimately, the most the Court can safely do is rely on the plain language that appears in the statute; because the penalty for willful violations includes explicit reference to “the existence of an account” and “the balance in the account” while the penalty for non-willful violations does not, the Court can infer that Congress intended the penalty for willful violations to relate to specific accounts and the penalty for non-willful violations not to.
   n5 For example, Congress specifically excluded the reasonable cause safe harbor from the willfulness provision.

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