11th Circuit on Third Consideration Seals FBAR Willful Penalty Except for Relatively Small Amount Held Excessive Fine under 8th Amendment (9/4/24)

In United States v. Schwarzbaum, 114 F.4th 1319 (11th Cir. 2024), 11Cir here and GS here [to come], the Court:

(1)  (a) held the FBAR civil willful penalties are “fines” within the meaning of the Eighth Amendment; (b) held the minimum $100,000 penalties applying to Schwarzbaum’s accounts with small amounts (those $16,000 or less) are disproportional and excessive; (c) held the penalties on the accounts with significantly larger amounts are not disproportional and thus not excessive; and (d) remanded to the district court to determine the effect of the $300,000 reduction required by the (1)(b) holding.

(2)   (a) rejected Schwarzbaum’s attack that, in a prior appeal, the court held the assessment was “arbitrary and capricious” and thus rendered the assessments invalid from inception; instead holding that the prior holding was that the assessment was “not in accordance with law,” a different standard under APA § 706(2)(A), requiring a remand to the IRS to fix the calculation mistake rather than wipe out the assessments; (b) rejected a related statute of limitations argument that the remand required a new out of time assessment, holding the issue had been decided against Schwarzbaum in an earlier appeal; (c) sustained a lower assessment rather than the correct assessment which would have been higher; and (d) held the district court properly remanded the case to the IRS and retained jurisdiction of the case to consider after the IRS recalculated the penalties.

The unanimous opinion is quite long (53 pages) and offers a lot of interesting discussion of the history of the FBAR penalties. Those relatively new to the subject, can learn from reading the opinion closely. Those who are veterans to the subject can probably skim through the opinion and understand the holdings.

JAT Comments:

1. I always thought that the statute of limitations argument may gain traction. The solution applied by the court was that the remand was simply to correct the original timely assessments. (That may have been why the Government sought only the amount of the original assessments; rather than the higher re-calculated amount,)

2. The only thing I found interesting is the Court’s rejection of Schwarzbaum’s claim that one of the Court’s prior holdings was based on the arbitrary and capricious standard. The panel rejected Schwarzbaum’s claim by reading its prior opinion as being under the “not in accordance with law” standard in APA § 706(2)(A). The current panel is correct. I confess that I had missed that point in the earlier opinion. See 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (Federal Tax Procedure Blog 1/26/22), here. After the prior case, I had occasion to focus on the APA standard “not in accordance with law.” See John A. Townsend, The Tax Contribution to Deference and APA § 706 (SSRN December 14, 2023), here. In that article, I conclude that the “not in accordance with law” standard relates to deference to agency interpretations. I had previously in an earlier article concluded that, based on Judulang v. Holder, 565 U.S. 42, 52 n. 7 (2011), the “arbitrary and capricious” standard was a different standard than the general deference standard. John A. Townsend. The Report of the Death of the Interpretive Regulation Is an Exaggeration 94-95 (SSRN December 14, 2021), here. Other than to now flag that as a possible issue with respect to the new Schwarzbaum opinion, I don’t think it would be in my or the readers’ interest to plumb that issue further here.

3. For students and even practitioners relatively new to tax procedure, I have a quibble with the court’s references (pp. 20 n. 2 & 25) to Helvering v. Mitchell, 303 U.S. 391 (1938), a leading case on Code penalties. On p. 25, the court shorthands the case to just “Helvering.” As I discuss in my Federal Tax Procedure book (Practitioner Ed. 2024), p. 112, n. 523, older tax cases were brought in the name of the Commissioner (Helvering was a Commissioner) and sometimes the name of the local Director or Collector. For example, a leading case that even new tax procedure students know is Helvering v. Taylor, 293 U.S. 507 (1935). The shorthand expression for that case is Helvering v. Taylor, otherwise  mere reference to the Helvering case doesn't tell which of the many Helvering cases is reference, Helvering case unless that is contextually clear as it was in Schwarzbaum; even so, I still think it is better to give more than just Helvering as the shorthand. 

This blog post is cross posted on the Federal Tax Procedure Blog here.