Thursday, November 3, 2022

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]


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.

   * * * *

MR. GEYSER: No. It --it --it's -it is a requirement that serves important functions, but this isn't a malum in se offense. [*21] There's nothing inherently wrong with not filing a document listing your accounts. This is only to prevent other criminal conduct or other substantive misconduct. And it's pretty unusual to see a draconian punishment of millions of dollars of fines for not filing, accidentally in our case, and even in a willful violation doing it on purpose, you know, a single document.

    * * * *


JUSTICE GORSUCH: Then, secondly, there was some discussion in the briefs about the government's guidance documents in this area, which seemed to favor your position.

The government isn't asking for Chevron deference for its interpretations of the statute and argues that you shouldn't be allowed to use them to estop the government either.

What do we make of all of that?

MR. GEYSER: Well, I --I think there are a couple things you can make of it. The first is that when the government itself is reading the statute, even if they're doing it as they suggest kind of in a casual way, they come to our interpretation of the statute. They've said repeatedly over time that the failure to [*40] file an FBAR is subject to a maximum $10,000 penalty.

Now the government's correct that they didn't go on and say, oh, by the way, if you have multiple accounts, it's the same rule. But the fact that they're reading the statute when they're simply giving notice to the regulated stakeholders the same way that we're reading the statute, I think that's a point in our favor on the plain text.

I think it's certainly a suggestion that it's a reasonable construction that would be entitled to the rule of lenity if the Court thinks that our --our readings are actually in equipoise, although I --I'd like to say that we have a better textual reading than they do.

* * * *


CHIEF JUSTICE ROBERTS: Counsel, does the United States agree, as the Fifth Circuit put it, that there is a longstanding canon of construction that if the words of a tax statute are doubtful, the doubt must be resolved against the government and in favor of the taxpayer?


CHIEF JUSTICE ROBERTS: Now I know your position is that you dispute that this is a tax statute, but -

MR. GUARNIERI: Mr. Chief Justice, I --I don't think that there is a legitimate sort of pro tax avoidance canon. This Court hasn't applied a canon like that in --in decades.

CHIEF JUSTICE ROBERTS: Your --your friends -

MR. GUARNIERI: Again, of course, our first line -


MR. GUARNIERI: --our first line response here is that, you know, this is not a tax case anyway. These penalties are authorized by the Bank Secrecy Act. So, even if there were such a canon, it wouldn't apply to this case.


JUSTICE ALITO: What about criminal violations? Do you have the same reading?

MR. GUARNIERI: Yes, we do. We think that each --if you satisfy the other elements of the criminal offense in Section 5322(a), that each failure --or each willful failure to disclose to the United States one of your foreign bank accounts could be the basis for a separate criminal prosecution.

I know, you know, Petitioner has made a big deal about that, including this morning repeating this fantastical figure about 1300 years in prison. I think the Court should be assured that there are other significant constraints on the scope of the criminal prohibition in the Bank Secrecy Act, including, in particular, this Court's decision in Ratzlaf against the United States, which interpreted that provision and construed it to require willfulness in the heightened criminal law sense. We can only bring a Bank Secrecy Act criminal prosecution if we can prove beyond a reasonable doubt that the defendant knew that [*68[ when he was acting what he was doing was unlawful.

So those are rare cases, and that's certainly not this case. We're not making an allegation in this case that Petitioner had satisfied that --that heightened willfulness. This is a --a non-willful case, and I don't think the criminal statute really has anything to do with the question before this Court.

CHIEF JUSTICE ROBERTS: Well, you're not making the allegation here, but your brief recites facts that suggest that you think you could.

MR. GUARNIERI: That's right, Mr. Chief Justice. I think this case came pretty close to the line, and I --I think that's why the agency chose to go up to the maximum available civil penalty in this case. I mean, Petitioner earned more than $70 million in his time in Romania. He filed multiple Form 1040s that --multiple individual income tax returns during the period that he was living in Romania.

If you had read carefully the instructions to the Form 1040 during the years in which he filed those forms, there are [*69] instructions in --in the Form 1040 process about your foreign account reporting requirements. There is a question on Schedule B of 1040 that asks, do you have foreign bank accounts? And I'm paraphrasing here, but in substance, it says, if you have foreign bank accounts, please see Treasury Department Form 90-22.1 for your FBAR filing obligations.

And I think that's actually another piece of --of the puzzle here in terms of the equities of the case. We are not trying to trip people up in the Form 1040 individual income tax return filing process. There is --there are instructions there about the FBAR. We are trying to bring it to people's attention so that they are aware of these filing requirements and they can comply with them.

Petitioner was --has tried to make the case that his violations here were --were inadvertent. But there was substantial evidence to the contrary. The district court rejected his reasonable cause --his assertion of the reasonable cause defense. The Fifth Circuit affirmed that on de novo review. And --and he didn't seek this Court's review on that issue.

            * * * *



And I know my friend says, well, willfulness is a very high bar, and it certainly is, but the point --that misses the point. Was Congress in looking at this saying, if you willfully violate a reporting requirement with no other criminal misconduct, a prison sentence in the --in the thousands is an appropriate punishment?

JAT Comments:

1. The point missed in the extravagant claims of potential sentences is that the Sentencing Guidelines will mitigate what appears to be severe (if not cruel and unusual) punishment. Indeed, I doubt that considering the Sentencing Guidelines and Booker variance, a judge would impose more than the 5-year single count of conviction even if there are multiple counts of conviction, although I might imagine that if some other criminal conduct were involved that was not appropriately dealt with.

2. The claim is made that a willful criminal penalty can apply "with no other criminal misconduct."  I don't recall that I have seen an FBAR prosecution that had no other criminal misconduct.  My recollection of my anecdotal forays into the criminal cases is that, invariably, there will be (i) related tax evasion related to the failure to report income on the accounts, and/or (ii) some other serious criminal misconduct, whether charged or not.

3. I liked the comment on equipoise and lenity as to the law.  On equipoise as to the law in the Chevron context, see (reverse chronological order):

  • What is the Best Interpretation for Purposes of Determining a Not Best Interpretation for Chevron Deference? (Federal Tax Procedure Blog 10/21/22; 10/25/22), here.
  • Chevron and Equipoise In Statutory Interpretation (Federal Tax Procedure Blog 5/26/22), here.
  • Justices Discuss Limited Ambiguity Role for Lenity and by Analogy Chevron Deference (Federal Tax Procedure Blog 3/11/22), here.
  • The Impact of Chevron Deference is Exaggerated (Federal Tax Procedure Blog 8/19/21; 8/21/21), here.
  • Even More on Skidmore (Including Equipoise as to Interpretation) (Federal Tax Procedure Blog 7/7/19), here.
  • More on Fact Finding Tools and Statutory Interpretation through Chevron Deference (Federal Tax Procedure Blog 1/21/19; 1/25/19), here.

4. I make no prediction as to the outcome.

5. On whether the IRS had issued guidance inconsistent with the position it is taking in Bittner, Justice Gorsuch and Mr. Guarnieri engage in a long dialog (pp. 63-66). Mr. Guarnieri argues basically, that while inartfully worded, read closely, the IRS various subregulatory guidance was not inconsistent. In the course of that discussion, Justice Gorsuch makes the following statement (really misstatement as to the bold-faced statement, with bold-facing added by me):



What do we do with the government's guidance documents, which I would --if --if it favored the government, I would fully expect the government to have an argument about Chevron deference before us, or maybe it wouldn't these days, I don't know. But we would at least be asked to give it Skidmore deference.

And --and, here, you --you're -you're --they're like garlic to a vampire for the government. You don't want to --you don't want to touch them. What do we do with that?


MR. GUARNIERI: Well, I --there's a --there's a logical explanation for that, Justice Gorsuch, and that is that, you know, the penalty --the --the specific question this Court is being asked to resolve in this case is what is the meaning of the phrase "violation of Section 5314" -

JUSTICE GORSUCH: But if the government's telling taxpayers -

MR. GUARNIERI: --as that phrase is used in Section 5321(a)(5). The Secretary has not promulgated a regulation interpreting -

JUSTICE GORSUCH: It's --it's going to lead --no --nobody promulgates regulations anymore. It's too troublesome. They issue guidance documents.

And so the government has issued legions of guidance documents. We've got them all over the briefs, and --and I just want to hear on the merits what's your response to them.

MR. GUARNIERI: Sure. The --the -the critical guidance document here is the Internal Revenue Manual, which is the guidance document that IRS examiners apply in assessing penalties in these cases. It is publicly [*65] available to taxpayers. If you look at the Internal Revenue Manual, it expresses the same per-account view that we are defending in this case.

I don't know what to make of Justice Gorsuch's claim that "nobody promulgates regulations anymore." I speculate that he may have meant to say that nobody -- meaning no agency -- does formal rulemaking but most agencies, certainly the IRS, do informal rulemaking requiring promulgation of regulations.  I offer the following Federal Tax Procedure (2022 Practitioner Ed.), SSRN here, at p. 57 n. 256.

  n256 The informal rulemaking process is described in 5 U.S.C. § 553, whereas the formal rulemaking process is described in § 556. David L. Franklin, Legislative Rules, Nonlegislative Rules, and the Perils of the Short Cut, 120 Yale L.J. 276, 282 (2010) (“The first technique, so-called ‘formal’ rulemaking, involves onerous trial-type hearings and is rarely required unless a specific statute calls for rules to be ‘made on the record after opportunity for an agency hearing.’ Far more common is the second technique, variously known as ‘informal,’ ‘notice-and-comment,’ or ‘section 553' rulemaking.”).  The formal rulemaking process is rarely used in agencies generally.  See Perez v. Mortgage Bankers Assn., 575 U. S. 92, 128 n5 (2015) (Thomas, concurring) (noting that (i) “almost all rulemaking is today accomplished through informal notice and comment,” in contrast to the formal rulemaking process requiring “elaborate trial-like hearings in which proponents of particular rules would introduce evidence and bear the burden of proof in support of those proposed rules,” citing 5 U. S. C. §556; and (ii) “formal rulemaking is the Yeti of administrative law” with “isolated sightings of it in the ratemaking context, but elsewhere it proves elusive.”). Informal rulemaking is permitted unless the authorizing statute mandates formal rulemaking.  United States v. Florida East Coast R. Co., 410 US 224, 236-238 (1973). 

I am not trying to pick on Justice Gorsuch, but he is an administrative law wannabe expert as shown by his ranting about Chevron and related confusion I address in my article The Report of the Death of the Interpretive Regulation Is an Exaggeration  (SSRN December 14, 2021), here, at pp.  110-116 discussing Gorsuch's related claims under the caption "b. Gorsuch’s Imagined Elephant in the Room.").

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