First Circuit Sustains Willful Penalty Where Willfulness Found as Discovery Sanction (5/2/22)

In United States v. Toth, 33 F.4th 1 (1st Cir. 4/29./22), CA1 here and GS here, the Court affirmed the district court’s grant of summary judgment which had imposed a willful determination as a discovery sanction.   See In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here; and District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20), here.  The opinion, written by Judge Barron (Wikipedia here) is a bit of a slog (42 pages in pdf of Slip Op.), so I just focus on the parts of the opinion that I found interesting.

1. The opinion says (Slip Op. 3) that Toth had filed her first FBAR in 2010.  I infer that the Court means 2010 FBAR which would have been filed in 2011.  The Court then says (Slip Op. 3) “the IRS filed the delinquent FBAR forms on her behalf for the relevant period (2005-2009).”  I may have missed something over the years, but I don’t recall hearing that the IRS files delinquent FBARs for taxpayers.  (Compare by analogy, substitutes for returns filed under § 6020.)   I  am aware of no such authority for the IRS or FinCEN to file substitutes for FBARs. (But then I am often unaware.)

2. The Court has considerable discussion (Slip Op. 21-31) of the issue of whether the FBAR penalty was limited under the regulation originally promulgated in1987 under the statute then capping the FBAR penalty at $100,000 which was not changed after the 2004 amendment increasing the willful penalty to the greater $100,000 or 50% of the unreported accounts precluded.  The consensus in the Courts of Appeals is that the old regulation (now updated effective 12/23/21) did not apply to limit the maximum penalty under the 2004 revision.

Although not a tax crimes issue, the Court does note (Slip Op. 26-27) the history of the 1987 regulation. The regulation was a notice and comment regulation (in the APA sense), but the particular provision in the regulation was not in the original notice of proposed rulemaking (NPRN) because it was not in the statute when the NPRM was issued.  The statute was amended after the NPRM and thus Treasury added the provision in the final regulation to state that which the new statute stated (a so-called “parroting” regulation citing Gonzalez v. Oregon, 546 U.S. 243, 257 (2006), as to which opportunity to comment would be meaningless).  So, I guess technically the “parroting” provision had not gone through notice and comment even though it appeared in a notice and comment regulation.

3. The Court had earlier (Slip Op. 6) said: “Congress passed the Act in 1970 to curb the use of foreign bank accounts to evade taxes. See Cal. Bankers Ass'n v. Shultz, 416 U.S. 21, 28-30 (1974).”  FBAR enthusiasts know that tax evasion was only one of the concerns motivating Congress to enact the FBAR filing and penalty regime.  Then, the Court later addresses (Slip Op. 34-36, footnotes omitted) the Excessive Fines issue as to whether the FBAR willful penalty is punitive or remedial:

            Moreover, we conclude that, even if those points of distinction are not themselves dipositive, the civil penalty here is like the civil forfeitures in One Lot Emerald Cut Stones and One Ring v. United States, 409 U.S. 232 (1972), Stockwell v. United States, 80 U.S. 531 (1871), and the other early customs laws that Bajakajian itself recognized did not constitute punishment for purposes of the Excessive Fines Clause, 524 U.S. at 342-43 (explaining that the "early monetary forfeitures," such as the ones discussed Stockwell and One Lot Emerald Cut Stones, "were - 35 - considered not as punishment for an offense, but rather as serving the remedial purpose of reimbursing the [g]overnment for the losses accruing from the evasion of customs duties"). And, too, it is like the civil tax penalties found not to be punishment for Double Jeopardy purposes in Helvering v. Mitchell, 303 U.S. 391, 398 (1938), and Excessive Fines purposes in McNichols v. C.I.R., 13 F.3d 432, 434-435 (1st Cir. 1993) (quoting Helvering, 303 U.S. at 401); see also Thomas v. C.I.R., 62 F.3d 97, 98 (4th Cir. 1995) ("[T]he Excessive Fines Clause is not implicated, since the addition to [the] tax[es] [owed] is not a punitive measure."); United States v. Alt, 83 F.3d 779, 784 (6th Cir. 1996) (same); Tyler v. Hennepin Cty., 26 F.4th 789, 794 (8th Cir. 2022); Little v. C.I.R., 106 F.3d 1445, 1455 (9th Cir. 1997) (same); Kitt v. United States, 277 F.3d 1330, 1337 (Fed. Cir. 2002) (same); cf. United States v. Dunkel, 182 F.3d 923 (7th Cir. 1999) (unpublished table decision).

            We make that assessment because -- unlike the forfeiture at issue in Bajakajian, which was ordered notwithstanding that there "was no fraud on the United States, and [the subject of the forfeiture] caused no loss to the public fisc," id. at 329, 339 -- here there was such a fraud and loss. Indeed, Congress authorized the imposition of a penalty of this size for willfully failing to comply with the Act's reporting requirements to address the fact that "[i]t has been estimated that hundreds of millions in tax revenues [were] lost" due to the secret use of foreign financial accounts -- which Congress characterized as the "largest single tax loophole permitted by American law," H.R. Rep. No. 91- 975, at 4397-98 (1970), and that it was very difficult for law enforcement to police the use of these accounts, causing costly investigations to stretch on for years, id. at 4397. Cf. Bajakajian, 524 U.S. at 343 (explaining that the monetary penalty at issue in One Lot Emerald Cut Stones was remedial in part because - 37 - the penalty was proportioned on the value of the non-reported goods); One Lot Emerald Cut Stones, 409 U.S. at 237 (holding that the forfeiture of goods for a failure to pay import duties on them is a "reasonable form of liquidated damages," as the more expensive the illegally imported good, the more the government has likely missed out on revenue); Stockwell, 80 U.S. at 533, 546-47 (finding that a statutory scheme that permitted the government to impose on an individual who deals in illegally imported goods a penalty equal to double the value of those goods was "remedial" because "[t]he act of abstracting goods illegally imported, receiving, concealing, or buying them, interposes difficulties in the way of a government seizure, and impairs, therefore, the value of the government right" such that "[i]t is . . . hardly accurate to say that the only loss the government can sustain from concealing the goods liable to seizure is their single value").