ALICE KIMBLE, Plaintiff, v. THE UNITED STATES,
Defendant.
No. 17-421
UNITED STATES COURT OF FEDERAL CLAIMS
141 Fed. Cl. 373; 2018 U.S. Claims LEXIS 1761;
2019-1 U.S. Tax Cas. (CCH) P50,118
December 27, 2018, Filed
CORE TERMS: irs, willful,
reply, tax return, willfulness, foreign bank, maximum, summary judgment, tax
years, willful violation, refund, civil penalty, reporting requirements,
calendar years, willfully, maximum penalty, foreign country, bank account,
financial institutions, financial interest, assess, Jobs Creation Act, penalty
assessments, accountant, signature, blindness, reckless, co-owner, disclose,
currency
HEADNOTES
26 U.S.C. §
6511 (Limitations On Credit Or Refund); 26 U.S.C. § 6672 (Failure To Collect
And Pay Over Tax); 26 U.S.C. § 7121 (Closing Agreements); 26 U.S.C. § 7422
(Civil Actions For Refund); 28 U.S.C. § 1346 (United States As Defendant); 28
U.S.C. § 1491 (Tucker Act); 31 U.S.C. § 5314 (Records And Reports On Foreign
Financial Agency Transactions); 31 U.S.C. § 5321 (Civil Penalties); 26 C.F.R. §
301.7701(b)-2(d)(1) (Closer Connection Exception); 31 C.F.R. § 1010.350
(Reports Of Foreign Financial Accounts); 31 C.F.R. § 1010.820 (Civil Penalty);
RCFC 11(b) (Representations To The Court); RCFC 56 (Summary Judgment).
COUNSEL: [**1] James O. Druker, Kase &
Druker, Garden City, New York, Counsel for Plaintiff.
Jason S. Selmont, United
States Department of Justice, Tax Division, Washington, D.C., Counsel for the
Government.
JUDGES: SUSAN G.
BRADEN, Senior Judge.
OPINION BY: SUSAN G.
BRADEN
OPINION
[*374] MEMORANDUM OPINION AND FINAL ORDER
GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
BRADEN, Senior
Judge.
This case
presents two issues arising under 31 U.S.C. § 5321(a)(5) (2004) that
currently [*375] are before the United States Court of
Appeals for the Federal Circuit in a pending appeal: (1) whether the Internal
Revenue Service ("IRS") must establish that a taxpayer had knowledge
of the legal duty under federal tax law to report foreign bank accounts, but
acted in "reckless disregard" of that duty, before it may impose a
civil penalty for a willful violation of 31 U.S.C. § 5314; and (2) whether the
maximum penalty for a willful violation of 31 U.S.C. § 5314, as set forth in 31
U.S.C. § 5321(a)(5)(C)(i) (2004), supersedes 31 C.F.R. § 1010.820(g)(2). See
Appellant's Br., Norman v. United States, Fed. Cir. No. 18-2408 (Nov.
20, 2018).
I. RELEVANT FACTUAL
BACKGROUND.1
1 The facts
recited herein were derived from: the June 27, 2018 Stipulation Of Facts
("Stip."); Exhibits attached to the June 27, 2018 Motion For Summary
Judgment ("Def. Ex. 1-37"); the deposition transcripts of Alice
Kimble ("Alice Kimble Tr."), Michael Kimble ("Michael Kimble
Tr."), and Steven Weinstein ("Weinstein Tr."); documents
attached to the Declaration of Melissa Irons ("Irons Decl. 006-604");
and Exhibits attached to Plaintiffs' July 24, 2018 Cross-Motion For Summary
Judgment ("Pl. Ex. A-B").
A. Alice Kimble's
Foreign Bank Accounts.
Alice Green
is a United States citizen, born in 1951. Stip. ¶ 1. Her father, Harold Green,
died in 1997; her mother, Frances Green, died in 2016. Stip. ¶ 10.
[**2] Sometime prior to 1980,
Harold Green and Frances Green opened an investment account at the Union Bank
of Switzerland ("UBS account"); Harold Green designated Alice as a
joint owner. Stip. ¶¶ 12, 13.
According to
Harold Green's daughter, the purpose of the UBS account was, as follows:
As you know,
ever since you have been a little girl, I have taught you that we need to have
a safe haven because I am Jewish. You are half Jewish and our family was killed
in the Holocaust and my parents escaped prosecution. So we have an account that
we are not going to use the money for in case we ever have to escape America
and it's in Switzerland and you must never tell anybody about this account.
Alice Kimble Tr.
18:24-19:8.
Neither
Harold nor Frances Green filed a gift tax return reporting that Alice Green was
a co-owner. Alice Kimble Tr. 18:1-13.
In 1983 or
1984, Alice Green married Michael Kimble. Compare Stip. ¶ 7 with
Michael Kimble Tr. 25:6. Sometime afterwards, Harold Green told Michael Kimble
about the UBS account. Stip. ¶ 15; Michael Kimble Tr. 38:21-39:1 ("[Harold
Green] feared . . . a repeat of the Holocaust. And to the extent that anyone
knew about this bank account that would defeat the whole [**3] purpose."); 41:13-16 ("You
cannot touch this, except for dire emergency. Life-and-death emergency. You
need to get out of the country."). Michael Kimble promised to "always
respect" Harold Green's wishes. Alice Kimble Tr. 22:14-15.
Alice and
Michael Kimble had one son, David Kimble, born in 1985. Stip. ¶ 8. Alice Kimble
told David Kimble about the UBS account when he was a teenager and instructed
him to keep it "totally secret[,] because one day we [may] need to escape
the United States." Alice Kimble Tr. 23:7-8, 116:19.
In or around
1998, Alice and Michael Kimble opened a bank account at HSBC ("HSBC
account") in Paris, France to pay expenses associated with a Paris
apartment they owned. Stip. ¶¶ 32, 35. Michael Kimble made the initial deposit
opening the HSBC account. Stip. ¶ 33. No money in the HSBC account was derived
from illegal activities or used for illegal purposes. Stip. ¶ 34.
On July 22,
1998, Alice Kimble signed a "Numbered Account Agreement" that
directed UBS physically to retain all correspondence about the UBS account at
the bank in Switzerland and paid a fee for that service. Stip. ¶ 23. That same
day, Alice Kimble also signed a "Basic Trust Agreement" that instructed
UBS [**4] "to effect
capital investments in the form of time deposits." Stip. ¶ 22.2
2 The
Parties' Stipulation Of Facts states that "June 22, 2018," was the
date that Alice Kimble signed the Numbered Account Agreement and Basic Trust
Agreement. Stip. ¶¶ 22, 23. Those documents, however, were dated
"22.07.98." Defs. Ex. 1, 2.
[*376] During his marriage to Alice Kimble,
Michael Kimble handled the couple's finances and prepared their joint federal
tax returns, but never reported any investment income derived either from the
HSBC or UBS accounts. Michael Kimble Tr. 61:24, 62:22-63:1. Nor did Michael
Kimble and Alice Kimble report the existence of their foreign bank accounts on
their joint federal tax returns. Michael Kimble Tr. 63:2-8. According to
Michael Kimble, he did not know about the federal requirement to report foreign
bank accounts until he learned about it in the "[l]ate '90s," while
using Turbo Tax. Michael Kimble Tr. 65:12-17.
In 2000,
Alice and Michael Kimble divorced. Stip. ¶ 7. Alice Kimble did not disclose the
UBS account in any of the documents produced during the divorce. Stip. ¶ 17.
However, after the divorce, Alice Kimble became the sole owner of the HSBC
account. Stip. ¶ 36. Michael Kimble continued to provide Alice Kimble with
financial advice and attended meetings with UBS representatives. Stip. ¶¶ 18,
29.3 According to Alice Kimble, she and Michael Kimble continued to
keep the UBS account secret out of respect for Harold [**5] Green. Alice Kimble Tr. 98:15.
3 Between
1998 and 2008, Alice and Michael Kimble met with UBS representatives in New
York at least six times to discuss the account. Stip. ¶¶ 28, 29. Alice Kimble
also met with a UBS representative in Switzerland at least once. Stip. ¶ 28.
In or around
2000, Alice Kimble hired Steven Weinstein, a certified public accountant
licensed in New York, to prepare her federal and New York state income tax
returns. Stip. ¶ 41. Mr. Weinstein never asked Alice Kimble if she had a
foreign bank account. Weinstein 15:15. At that time, Alice Kimble did not
disclose the existence of either the UBS or HSBC accounts to Steven Weinstein.
Stip. ¶ 43. Alice Kimble also never asked Steven Weinstein whether foreign
investment income needed to be reported on her federal income tax returns.
Stip. ¶¶ 44, 45.
In 2005,
Alice Kimble granted David Kimble and Frances Green a general Power of Attorney
over the UBS account. Stip. ¶ 19. The Power of Attorney provided that David
Kimble and Frances Green "are authorized to act severally and by their
sole signature." Def. Ex. 6. Alice Kimble testified that she gave Michael
Kimble a "certain type" of Power of Attorney over the UBS account in
2005, but Michael Kimble's name does not appear on any authorization document
and Michael Kimble testified that he was not aware that he was granted a Power
of Attorney. Compare Alice Kimble Tr. 96:2-6 with Def. Ex. 6;
Michael Kimble Tr. [**6]
44:2.
On April 15,
2005, Alice Kimble signed three documents concerning the USB account. Def. Exs.
3, 4, 5. The first document was a "Basic Document for Account/Custody
Account Relationship," that provided: "Except for special
circumstances, correspondence is . . . to be retained for a fee and held
available at UBS." Def. Ex. 5. The second document was a "Supplement
for New Account US Status Tax Form US Withholding Tax/Natural Person Assets and
Income Subject to United States Withholding Tax Declaration of Non-US
Status." Stip. ¶ 25. Question 2 of this document provided: "The
undersigned account holder hereby declares that he/she is the beneficial owner
of the assets and income to which this declaration relates in accordance with
[United States] tax law." Def. Ex. 3. The third document was a
"Verification of the beneficial owner's identity" and provided:
"The contracting partner hereby declares" and then listed two
options. Def. Ex. 4. Alice Kimble checked the box next to the option indicating
that "the contracting partner is the sole beneficial owner of the assets
concerned." Def. Ex. 4. Frances Green was a co-owner of the UBS account at
that time; therefore, Alice Kimble's representation [**7] to UBS that she was the sole beneficial
owner was not accurate. Alice Kimble Tr. 49:2-3.
Prior to
2008, Alice Kimble did not make any deposits into or withdrawals from the UBS
account. Stip. ¶ 30. The UBS account earned investment income each year from
2003 through 2008. Stip. ¶ 49. In or around 2008, Alice Kimble added David
Kimble as a co-owner on the UBS account. Alice Kimble Tr. 17:19-22. Thereafter,
David Kimble continued to attend meetings between Alice [*377] Kimble and UBS representatives. Alice
Kimble Tr. 28:22.
In 2008,
Alice Kimble also learned from an article in the New York Times that the
United States was "putting pressure on UBS to reveal the names of people
who had secret accounts in UBS." Alice Kimble Tr. 55:7-18. Prior to
reading the New York Times article, Alice Kimble did not know that she
had an obligation to disclose her foreign bank accounts. Alice Kimble Tr. 87:3;
100:20-101:8. Around that time, Alice Kimble retained counsel to comply with
foreign reporting requirements. Alice Kimble Tr. 56:20-22.
On June 30,
2008, the balance in the UBS account was $1,365,661.65. Stip. ¶ 31. On June 30,
2008, the balance in the HSBC account was $134,129.67. Stip. ¶ 40.
In 2009, UBS
entered [**8] a deferred
prosecution agreement with the United States that required UBS to provide the
IRS with the names and account information of United States citizen clients.
Def. Ex. 31 at 161. On October 24, 2009, Alice Kimble signed a document
authorizing UBS to comply with the IRS's request. Def. Ex. 32 at 199.
In or around
2010, Alice Kimble sold the Paris apartment, closed the HSBC account, and
deposited the proceeds into the UBS account. Stip. ¶ 38; Alice Kimble Tr.
59:1-6.
B. Alice Kimble's
Federal Tax Returns.4
4 All
relevant statutes and regulations are produced in the Court Appendix, attached
to this Memorandum Opinion And Final Order.
Alice Kimble
timely filed Form 1040s for tax years 2004 through 2008. Stip. ¶ 47; Def. Ex.
10-14.5 But, on those Form 1040s, Alice Kimble did not report any
investment income, either from the UBS or HSBC accounts. Stip. ¶ 50; Def. Exs.
10-14. Alice Kimble also did not review the accuracy of any federal income tax
returns filed on her behalf for tax years 2003 through 2008. Stip. ¶ 46.
5 Alice
Kimble timely filed Form 1040s for tax years 2003 through 2008. Stip. ¶ 47. The
only Form 1040s, attached as an Exhibit to the June 27, 2018 Motion For Summary
Judgment, were for tax years 2004 through 2008. Def. Ex. 10-14. Therefore, the
court did not rely on the parties' representations regarding Alice Kimble's Form
1040 for tax year 2003 in resolving the pending motions. See RCFC 56(a)
("A party asserting that a fact cannot be or is genuinely disputed must
support the assertion by: (A) citing to particular parts of materials in the
record.").
Question 7(a)
of IRS Federal Form 1040, U.S. Individual Income Tax Return, Schedule B -
Interest and Ordinary Dividends, Part III, Foreign Accounts and Trusts, for the
tax years 2004 through 2007 asked: "At any time during [that tax year],
did you have an interest in or a signature or other authority [**9] over a financial account in a foreign
country, such as a bank account, securities account, or other financial
account?" Def. Ex. 13 at 82.
In each tax
year 2003 through 2008, the IRS also published instructions to Schedule B. See,
e.g., Def. Ex. 27. For example, the 2007 instructions for completing
Schedule B stated that a taxpayer should reply "Yes" to Question 7(a)
if either:
1. You own
more than 50% of the stock in any corporation that owns one or more foreign
bank accounts.
2. At any
time during 2007 you had an interest in or signature authority over a financial
account in a foreign country (such as a bank account, securities account, or
other financial accounts).
Def. Ex. 27 at 137.
The 2007
instructions also provided:
See [the
Report of Foreign Bank and Financial Accounts ("FBAR")] to
find out if you are considered to have an interest in or signature or other
authority over a financial account in a foreign country (such as a bank
account, securities account, or other financial account). You can get [a FBAR]
by visiting the IRS website at www.irs.gov/pub/irs-pdf/f90221.pdf .
If you
checked the "Yes" box on line 7a, file [a FBAR] by June 30,
2008, with the Department of the Treasury at [**10] the address shown on that form. Do not
attach it to Form 1040.
Def. Ex. 27 at 137.
On each Form
1040 for tax years 2004 through 2007, Alice Kimble checked the box next to
Question 7(a) labeled "No." Stip. ¶ 48; [*378] see, e.g., Def. Ex. 13 at 82. On
the Form 1040 for 2008, Alice Kimble left the spaces next to Question 7(a)
blank. Def. Ex. 14 at 88.
Alice Kimble
did not timely file a FBAR for calendar years 2003 through 2008. Stip. ¶
61. In July 2000, the IRS issued specific FBAR instructions, that
stated:
Who Must File
this Report Each United States person, who has a financial interest in
or signature authority, or other authority over any financial accounts,
including bank, securities, or other types of financial accounts in a foreign
country, if the aggregate value of these financial accounts exceeds $10,000 at
any time during the calendar year, must report that relationship each calendar
year by filing [a FBAR] with the Department of the Treasury on or before
June 30, of the succeeding year.
Def. Ex. 28 at 140 (bold
in original).
The FBAR
instructions define a "financial interest" as:
Financial
Interest
A financial interest in a bank, securities, or other financial account in a
foreign country [**11] means
an interest described in either of the following two paragraphs:
(1) A United
States person has a financial interest in each account for which such person is
the owner of record or has legal title, whether the account is maintained for
his or her own benefit or for the benefit of others including non-United States
persons.
Def. Ex. 28 at 140 (bold
in original).6
6 The
instructions for completing the FBAR were again revised in October 2008;
those instructions materially are identical to the July 2000 instructions. Compare
Def. Ex. 28 with Def. Ex. 29.
On April 8,
2009, Alice Kimble applied to the Offshore Voluntary Disclosure Program
("OVDP"), a "voluntary disclosure program specifically designed
for taxpayers with exposure to potential criminal liability and/or substantial
civil penalties due to a willful failure to report foreign financial assets and
pay all tax due in respect of those assets." Def. Ex. at 33.
On October
16, 2009, Alice Kimble was accepted into the OVDP. Stip. ¶ 64; Irons Decl. 351.
Around that time, however, Alice Kimble "switched" the UBS account
number to a new one, to reflect that David Kimble was no longer a co-owner on
the UBS account. Alice Kimble Tr. 37:1-24.
On January
27, 2011, Alice Kimble filed Form 1040X, Amended U.S. Individual Income Tax
Return, for tax years 2003 through 2008, as part of her participation in the
OVDP. Stip. ¶ [**12] 51;
Def. Ex. 15-20.
o On the
amended return for tax year 2003, Alice Kimble reported an underpayment of
$14,564. Stip. ¶ 52; Def. Ex. 15 at 92.
o On the
amended return for tax year 2004, Alice Kimble reported an underpayment of
$9,473. Stip. ¶ 53; Def. Ex. 16 at 97.
o On the
amended return for tax year 2005, Alice Kimble reported an underpayment of
$11,165. Stip. ¶ 54; Def. Ex. 17 at 101.
o On the
amended return for tax year 2006, Alice Kimble reported an underpayment of
$25,643. Stip. ¶ 55; Def. Ex. 18 at 105.
o On the
amended return for tax year 2007, Alice Kimble reported an underpayment of
$26,391. Stip. ¶ 56; Def. Ex. 19 at 111. Alice Kimble also changed her answer
to Question 7(a) on Schedule B - Interest and Ordinary Dividends from
"No" to "Yes." Stip. ¶ 60; Def. Ex. at 111.
o On the
amended return for tax year 2008, Alice Kimble reported an underpayment of
$12,130. Stip. ¶ 57; Def. Ex. 20 at 118.
Each of these
underpayments were caused by Alice Kimble's failure to report foreign income to
the IRS. Stip. ¶ 58.
On the
amended returns for tax years 2003 to 2006 and 2008, Alice Kimble also did not
amend her answer to Question 7(a), although income from both the UBS and HSBC
accounts was [**13] included
on amended Schedule B for each of those years. Stip. ¶ 59. Alice Kimble
proffered no explanation as to why her answer to Question 7(a) for those years
was never amended. Alice Kimble Tr. 82:15.
[*379] On September 25, 2012, Alice Kimble
filed a FBAR for calendar years 2003 through 2008. Stip. ¶ 62; Def. Ex.
21-26. On each FBAR, Alice Kimble reported the existence of the UBS or
HSBC accounts. Stip. ¶ 63; Def. Ex. 21-26.
On October 5,
2012, Alice Kimble and the IRS negotiated a Closing Agreement7 that
required an amendment to her income tax returns 2003 through 2008 to report
undisclosed foreign income and pay the tax liability due. Def. Ex. 34 at 202.
In addition, the October 5, 2012 Closing Agreement required Alice Kimble to pay
a miscellaneous penalty of $377,309.00. Def. Ex. 34 at 202 ¶ 3. But, Alice
Kimble did not know whether the Closing Agreement, bearing her signature, was
ever submitted to the IRS. Alice Kimble Tr. 107:10.
7 Section
7121 of the Internal Revenue Code provides that:
(a) The
Secretary is authorized to enter into an agreement in writing with any person
relating to the liability of such person (or of the person or estate for whom
he acts) in respect of any internal revenue tax for any taxable period.
26 U.S.C. §
7121.
In or around
February 2013, [**14] Alice
Kimble attempted to withdraw from the OVDP and declined to pay the miscellaneous
penalty. Irons Decl. 334, 336. A letter from Alice Kimble's attorney to the
IRS, relaying her decision to withdraw from the OVDP, is dated "January
23, 2013," but a follow-up letter dated "February 26, 2013"
clarified that her decision was effective on the later date. Irons Decl. 334,
336. Alice Kimble testified that she decided to "take her chances"
with the IRS. Stip. ¶ 66; Alice Kimble Tr. 103:10-11 ("The penalty was so
high that I was advised to appeal the penalty."). Thereafter, the IRS sent
Alice Kimble a letter informing her that any opt-out from the OVDP would be
irrevocable and might cause her to incur a higher penalty. Stip. ¶ 65.
C. The Internal Revenue
Service Examination.
Sometime in
2013, the IRS began an examination of Alice Kimble's FBAR filings for
the 2007 calendar year. Stip. ¶ 67. After an IRS Revenue Agent conducted an
audit of the UBS and HSBC accounts, it was determined that Alice Kimble's
failure to file a FBAR for 2007 was "willful." Irons Decl.
025-037. Specifically, the IRS found: Alice Kimble was "required to file [FBARs]
annually for many years but failed to do so;" she [**15] qualified for mitigation, because she
satisfied the four regulatory criteria;8 but her failure to file FBARs
nevertheless was "willful." Irons Decl. 025-033. The
"willfulness" finding was based on eight factual findings:
1. Alice
Kimble had "direct financial interest in the accounts as she was listed as
the sole owner of each account." Irons Decl. 030.
2. "All
original Schedule B's-Part III [Question 7(a)] per returns were checked
'No.'" Irons Decl. 031. "It is reasonable to assume that a person
inheriting a Swiss bank account worth over a million dollars would inform
themselves of their obligations related to such an account." Irons Decl.
031.
3. Alice
Kimble "failed not only to disclose her accounts and [sic] but also
omitted all income associated with them, repeatedly. This went on for decades,
and [Alice] Kimble only choose [sic] to correct her returns and participate in
[OVDP] after advisement from UBS, once the [July 8, 2008] John Doe [S]ummons
was issued to the bank." Irons Decl. 031.
4. Alice
Kimble "took efforts to conceal the existence of her accounts." Irons
Decl. 031.
5. Alice
Kimble "had active management of both accounts." Irons Decl. 032.
[*380] 6. Alice Kimble "has no business or
[**16] family connection to
either France, or Switzerland." Irons Decl. 032. Fear of persecution
"does not represent reasonable cause for noncompliance with U.S.
law." Irons Decl. 032.
7. "Even
after entering into and opting out of [OVDP] the [sic] [Alice] Kimble has
remained non-compliant." Irons Decl. 032.
8. Alice
Kimble "had significant involvement with her accounts[,] and has generated
sizable offshore income that she chose to conceal (52% of her overall earnings
in 2007 were related to concealed foreign accounts)." Irons Decl. 033.
8 The four
regulatory criteria were:
o No prior
history of past FBAR penalty assessments.
o No money in
the foreign accounts was from illegal sources or used for criminal purposes,
based on available information.
o [Alice
Kimble] is cooperating with the [IRS].
o The civil
fraud penalty was not asserted for any underpayments of tax that were connected
to her failure to file FBARs.
Irons Decl.
025; see also I.R.M. § 4.26.16.4.6.1. Unless otherwise noted, all
citations to Internal Revenue Manual ("I.R.M.") §§ 4.26.16 et seq.
reference the I.R.M., issued on July 1, 2008.
The IRS also
rejected Alice Kimble's request to apply a "reasonable cause"
standard,9 because her violation was "willful" and
"the facts do not support that ordinary business care and prudence were
exercised." Irons Decl. 034. Therefore, the IRS calculated the applicable
penalty, in accordance with I.R.M. § 4.26.16.3.610 and I.R.M. [**17] Exhibit 4.26.16-2.11 Irons
Decl. 035. Next, the IRS added 50 percent of the balance in the UBS account, as
of June 30, 2008 ($682,832), to 10 percent of the balance in the HSBC account,
as of December 31, 2007 ($14,397). Irons Decl. 037, 092.12 The total
penalty amount was determined to be $697,229. Irons Decl. 037.
9 Title 31,
U.S.C. § 5321(a)(5)(B)(ii) states that, for non-willful violations, "[n]o
penalty shall be imposed" if:
(I) such
violation was due to reasonable cause, and
(II) the
amount of the transaction or the balance in the account at the time of the
transaction was properly reported.
31 U.S.C. §
5321(a)(5)(B)(ii).
10 See
Court Appendix, infra, for the text of I.R.M. § 4.26.16.3.6.
11 See
Court Appendix, infra, for the text of I.R.M. Exhibit 4.26.16-2.
12 The
fractional balance for each account was rounded to the nearest dollar, before
adding them together. Irons Decl. 037.
On April 7,
2014, the IRS issued Letter 3709, advising Alice Kimble that she owed a penalty
of $697,229, pursuant to 31 U.S.C. § 5321(a)(5),13 for the willful
failure to file a FBAR for 2007. Stip. ¶ 68; Iron Decl. 013-015.
13 See
Court Appendix, infra, for the text of 31 U.S.C. § 5321(a)(5) (2004).
On July 15,
2016, the IRS assessed a penalty in the amount of $697,229. Stip. ¶ 69. On or
about August 3, 2016, Alice Kimble paid the full amount of the assessed
penalty. Stip. ¶ 70.14 On September 8, 2016, Alice Kimble filed a
Claim For Refund And Request For Abatement with the IRS. Compl. Ex. A.15
14 The
Parties' Stipulation states that Alice Kimble paid the assessed penalty on
August 3, 2016. Stip. ¶ 70.
15 See
RCFC 56(c)(3) ("The court need consider only the cited materials, but it
may consider other materials in the record.").
II. PROCEDURAL HISTORY.
On March 24,
2017, Alice Kimble ("Plaintiff") filed a Complaint in the United
States Court of Federal Claims for a refund of the assessed penalty. ECF No. 1.16
16 The March
24, 2017 Complaint alleged that Alice Kimble paid the assessed penalty on
August 8, 2016. Compl. ¶ 8. But, the September 8, 2016 Claim For Refund states
that Alice Kimble paid the assessed penalty on "8/11/2016." Compl.
Ex. A. The March 24, 2017 Complaint also alleged that Alice Kimble's parents
were "Holocaust survivors." Compl. ¶ 16. But, Alice Kimble testified
that both her parents were born in the United States. Alice Kimble Tr.
92:19-24. These discrepancies should have been addressed by an amendment to the
March 24, 2017 Complaint. See RCFC 11(b).
On [**18] May 16, 2017, the Government filed an
Unopposed Motion For An Enlargement Of Time to answer the March 24, 2017
Complaint. ECF No. 5. On May 30, 2017, the court granted that Motion.
On July 24,
2017, the Government filed a Second Unopposed Motion For An Enlargement Of Time
to answer the March 24, 2017 Complaint. ECF No. 6. On July 26, 2017, the
Government filed a Motion For Leave To File Answer Out Of Time. ECF No. 7. On
July 28, 2017, the court granted both the July 24, 2017 and July 26, 2017
Motions. On July 31, 2017, the Government filed an Answer. ECF No. 8.
[*381] On September 19, 2017, the parties filed
a Joint Preliminary Status Report. ECF No. 9.
On November
9, 2017, the court issued a Scheduling Order setting a May 18, 2018 deadline
for the close of fact discovery and May 29, 2018 as the trial date. ECF No. 13.
On December
7, 2017, Plaintiff filed a Status Report requesting the court's assistance in
"narrowing down, and perhaps resolving, the issues in this case." ECF
No. 14 at 1.
On January 8,
2018, the Government filed a Motion For Order Compelling Production Of
Documents. ECF No. 15. On January 10, 2018, the parties filed a Joint Status
Report requesting that the court vacate the May [**19] 29, 2018 trial date. ECF No. 16. On
January 11, 2018, the court granted the January 8, 2018 Motion To Compel. ECF
No. 17.
On March 12,
2018, the parties submitted a Joint Status Report. ECF No. 18. On March 20,
2018, Plaintiff filed a letter requesting that the court convene a discovery
conference. ECF No. 22. On March 27, 2018, the Government filed an Unopposed
Motion For An Enlargement Of Time to respond to the March 20, 2018 letter. ECF
No. 23. On April 2, 2018, the court granted the March 27, 2018 Motion. ECF No.
24.
On April 2,
2018, Plaintiff filed a Motion To Withdraw the March 20, 2018 letter. ECF No.
25. That same day, the court granted the Motion To Withdraw. On April 6, 2018,
the parties filed a Joint Status Report again requesting that the court vacate
the May 29, 2018 trial date. ECF No. 26. On April 10, 2018, the court issued a
Scheduling Order canceling the May 29, 2018 trial date and setting deadlines
for briefing on a motion for summary judgment. ECF No. 27.
On June 27,
2018, the parties filed a Stipulation Of Facts. ECF No. 28. That same day, the
Government filed a Motion For Summary Judgment ("Gov't Mot."). ECF
No. 29.
On July 24,
2018, Plaintiff filed a Response And [**20] Cross-Motion For Summary Judgment
("Pl. Resp."). ECF No. 30. That same day, Plaintiff filed a letter
urging the court to consider a case Plaintiff had omitted from its Response And
Cross-Motion. ECF No. 31.
On August 16,
2018, the Government filed an Unopposed Motion For An Enlargement Of Time And
Motion For Leave To Exceed Page Limit. ECF No. 32. That same day, the court
granted the August 16, 2018 Motion. ECF No. 33. On August 24, 2018, the
Government filed a Response And Reply In Support Of Summary Judgment
("Gov't Reply"). ECF No. 34. On August 30, 2018, Plaintiff filed an
Unopposed Motion For An Enlargement Of Time to file a Reply. ECF No. 35. That
same day, the court granted the August 30, 2018 Motion. ECF No. 36.
On October 4,
2018, Plaintiff filed a Reply In Support Of The Cross-Motion For Summary
Judgment ("Pl. Reply"). ECF No. 37.
On November
8, 2018, the Government filed a Notice Of Recent Decision to inform the court
about the decision of the United States District Court for the Middle District
of Florida in United States v. Estate of Schoenfeld, No.
3:16-CV-1248-J-34PDB, 344 F. Supp. 3d 1354, 2018 U.S. Dist. LEXIS 163679, 2018
WL 4599743 (M.D. Fla. Sept. 25, 2018). ECF No. 38.
III. DISCUSSION.
A. Subject Matter
Jurisdiction.
Subject
matter jurisdiction is a threshold [**21] issue that a court must determine at the
outset of a case. See Steel Co. v. Citizens for a Better Env't, 523 U.S.
83, 94-95, 118 S. Ct. 1003, 140 L. Ed. 2d 210 (1998) ("The requirement
that jurisdiction be established as a threshold matter 'spring[s] from the
nature and limits of the judicial power of the United States' and is
'inflexible and without exception.'") (quoting Mansfield, C. &
L.M.R. Co. v. Swan, 111 U.S. 379, 382, 4 S. Ct. 510, 28 L. Ed. 462 (1884)).
The Tucker
Act authorizes the United States Court of Federal Claims with jurisdiction to
adjudicate "any claim against the United States founded either upon the
Constitution, or any Act of Congress or any regulation of an executive
department, or upon any express or implied contract with the United States, or
for liquidated damages in cases not sounding in tort." 28 U.S.C. §
1491(a)(1).
The United
States Court of Appeals for the Federal Circuit has held that [*382] the United States Court of Federal
Claims does not have jurisdiction to adjudicate claims that arise under the Due
Process Clause of the Fifth Amendment to the United States Constitution. See,
e.g., Wheeler v. United States, 11 F.3d 156, 159 (Fed. Cir. 1993). But, in Norman
v. United States, 429 F.3d 1081 (Fed. Cir. 2005), our appellate court
recognized that the United States Court of Federal Claims has jurisdiction to
adjudicate an illegal exaction, as it "involves a deprivation of property
without due process of law, in violation of the Due Process Clause of the Fifth
Amendment to the Constitution." Id. at 1095. "The classic
illegal exaction claim is a tax refund suit alleging that taxes have been
improperly collected or withheld by the [**22] government." Id. at 1095.
Therefore, to invoke the Tucker Act, a plaintiff must demonstrate that a
"statute or provision causing the exaction itself provides, either
expressly or by necessary implication, that the remedy for its violation
entails a return of money unlawfully exacted." Id. (quotations
omitted). In subsequent cases, the United States Court of Appeals for the
Federal Circuit has clarified that "jurisdiction over illegal exaction
claims is subject to the administrative refund scheme that Congress established
in the Internal Revenue Code," i.e., filing an administrative claim
for refund, and complying with applicable statutory time limits. See
Strategic Hous. Fin. Corp. of Travis Cty. v. United States, 608 F.3d 1317,
1324 (Fed. Cir. 2010) (citing United States v. Clintwood Elkhorn Min. Co.,
553 U.S. 1, 4, 128 S. Ct. 1511, 170 L. Ed. 2d 392 (2008)); see also Taha v.
United States, No. 2018-1879, 2018 U.S. App. LEXIS 35160, 2018 WL 6600221,
at *3 (Fed. Cir. Dec. 14, 2018) (summarizing the administrative refund scheme).
Although the
March 24, 2017 Complaint does not invoke jurisdiction under the Due Process
Clause, it does allege that Plaintiff did not commit a willful violation of 31
U.S.C. § 5314, and, even if Plaintiff did commit a willful violation, the IRS
assessed an unlawful penalty in excess of $10,000. Stip. ¶ 69. Therefore, if
Plaintiff can establish that her violation of 31 U.S.C. § 5314 was not willful,
the IRS's penalty assessment ipso facto is contrary to law and the court
has jurisdiction to order the return of those funds. [**23] See 28 U.S.C. § 1346(a);17
see also Jarnagin v. United States, 134 Fed. Cl. 368, 375 (Fed. Cl.
2017) (determining that the United States Court of Federal Claims has subject
matter jurisdiction to adjudicate a violation of 31 U.S.C. § 5321(a)(5)
(2004)).18
17 See
Court Appendix, infra, for the text of 28 U.S.C. § 1346(a). Section 1346
complements, but does not displace, the Tucker Act. See Hinck v. United
States, 64 Fed. Cl. 71, 76 (Fed Cl. 2005), aff'd, 446 F.3d 1307
(Fed. Cir. 2006), aff'd, 550 U.S. 501, 127 S. Ct. 2011, 167 L. Ed. 2d
888 (2007).
18 In Jarnagin,
Plaintiffs did not appeal the decision of the United States Court of Federal
Claims and the time to file a Notice of Appeal has passed.
The September
8, 2016 Claim For Refund19 is sufficient to satisfy Congress's
administrative refund scheme. See 26 U.S.C. § 7422(a) ("No suit or
proceeding shall be maintained . . . until a claim for refund or credit has
been duly filed[.]"); see also 26 U.S.C. § 6511(a) (establishing
time limits for refund claims).20
19 The
September 8, 2016 Claim For Refund was attached as an Exhibit to the March 24,
2017 Complaint. The court may consider that Exhibit in ruling on the June 27,
2018 Motion For Summary Judgment. See RCFC 56(c)(3) ("The court
need consider only the cited materials, but it may consider other materials in
the record.").
20 See
Court Appendix, infra, for the text of 26 U.S.C. § 6511(a). Plaintiff
filed the September 8, 2016 Claim For Refund approximately one month after she
paid the IRS the full amount of the assessed penalty, well within the 2-year
and 3-year time limits set by 26 U.S.C. § 6511(a). Compare Compl. Ex. A with
Stip. ¶ 70. Therefore, the court does not need to determine whether Section
6511 applies to an administrative claim requesting refund of a FBAR
penalty assessed, pursuant to 31 U.S.C. § 5321(a)(5).
For these
reasons, the court has determined that it has subject matter jurisdiction to
adjudicate the claim alleged in the March 24, 2017 Complaint.
B. Standing.
The United
States Court of Federal Claims, although an Article I court, "applies the
same standing requirements enforced by
[*383] other federal
courts created under Article III." Weeks Marine, Inc. v. United States,
575 F.3d 1352, 1359 (Fed. Cir. 2009). Article III of the United States
Constitution limits the jurisdiction of federal courts to "Cases" and
"Controversies." Bank of Am. Corp. v. City of Miami, Fla., 137
S. Ct. 1296, 1302, 197 L. Ed. 2d 678 (2017). To demonstrate the existence of a
case or controversy, a plaintiff must show "an 'injury in fact' that is
'fairly traceable' to the defendant's conduct and 'that is likely to be
redressed by a favorable judicial decision.'" Id. (quoting Spokeo,
Inc. v. Robins, 136 S. Ct. 1540, 1547, 194 L. Ed. 2d 635 (2016)).
The IRS
assessed a $697,229 penalty against Plaintiff. Stip. ¶ 69. Plaintiff [**24] paid that penalty in full. Compl. ¶ 8.
That is sufficient to establish an injury in fact. See Janus v. Am. Fed'n of
State, Cty., & Mun. Employees, Council 31, 138 S. Ct. 2448, 2462, 201
L. Ed. 2d 924 (2018) (holding that an employee had standing to challenge agency
fees automatically deducted from his wages). Plaintiff's monetary injury was
"fairly traceable" to the IRS's penalty assessment. See Spokeo,
136 S. Ct. at 1547. And, if the court orders the IRS to refund the penalty,
that will redress Plaintiff's alleged monetary injury. Id.
For these
reasons, the court has determined that Plaintiff has standing to seek an
adjudication of the claims alleged in the March 24, 2017 Complaint.
C. Standard Of Review.
Rule 56 of
the United States Court of Federal Claims ("RCFC") authorizes a party
to file a motion for summary judgment, that a court should grant "if the
movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law." RCFC 56. "A
genuine dispute exists when the evidence is such that a reasonable [factfinder]
could return a verdict for the nonmoving party." 8x8, Inc. v. United
States, 854 F.3d 1376, 1380 (Fed. Cir. 2017) (citations omitted). "A
material fact is one that might affect the outcome of the case." Id.
(citations omitted). "The party seeking summary judgment has the initial
burden of establishing that there is no genuine [**25] dispute as to any material fact." Id.
In addition, the court must "draw all factual inferences in favor of the nonmovant."
Zafer Taahhut Insaat ve Ticaret A.S. v. United States, 833 F.3d 1356,
1361 (Fed. Cir. 2016).
D. Whether Plaintiff
Willfully Failed To File A Foreign Bank Account Report.
The parties
stipulated that Plaintiff failed to file a FBAR for 2007. Stip. ¶ 48. In
addition, Plaintiff admitted that she is "not disput[ing] the FBAR
penalty for the HSBC account." Def. Ex. 30 at 154. Plaintiff also admitted
that she "is not seeking recovery of the 2007 FBAR penalty imposed
for the HSBC account." Def. Ex. 30 at 154. As such, the court does not
need to determine whether the penalty assessed by the IRS against the HSBC
account was lawful. See RCFC 36(b) ("A matter admitted under this
rule is conclusively established unless the court, on motion, permits the admission
to be withdrawn or amended."). Therefore, the threshold issue the court
must determine is whether Plaintiff's failure to file a FBAR for the
2007 tax year was "willful."
1. The Government's
Motion For Summary Judgment.
The
Government argues that summary judgment is appropriate to resolve
"willfulness," because Plaintiff "(1) knew that she had funds in
a Swiss bank account and in a French bank account; [**26] and (2) did not report her interest in
the accounts on a timely FBAR, but despite that knowledge, falsely
represented on her income-tax return that she had no foreign bank
accounts." Gov't Mot. at 2. In addition, Plaintiff: "manag[ed] her
foreign accounts with the help of her UBS bankers;" "did not maintain
the account in her own name;" "hid the account from the United States
by not investing in U.S. securities;" and "failed to tell her
accountant that she had a foreign bank account." Gov't Mot. at 2-3.
Then-applicable
IRS regulations required Plaintiff to file a FBAR for 2007, on or before
June 30, 2008. Gov't Mot. 17. Plaintiff failed to file a FBAR on that
date, either for the UBS or HSBC accounts. Gov't Mot. 17. A [*384] violation of 31 U.S.C. § 5321(a)(5)
(2004) is "willful[]" where a taxpayer: (1) violates the law
"voluntarily rather than accidentally;" (2) is "willfully
blind" to the legal duty to report; or (3) engages in conduct that is in
"reckless disregard" of the legal duty to report. Gov't Mot. at 18.
Plaintiff's conduct was willful under each of these standards. Gov't Mot. at
18.
First,
Plaintiff's failure to report was voluntary, because she signed her 2007
federal tax return knowing of the obligation [**27] to report. Gov't Mot. 19-23. Plaintiff
had actual knowledge of the filing requirement, but decided not to inform the
IRS about the UBS account. Gov't Mot. at 21. In addition, Plaintiff maintained
a numbered account and instructed UBS not to send any account-related
correspondence to the United States. Gov't Mot. at 22. And, Plaintiff did not
inform her accountant about the existence of her foreign bank accounts. Gov't
Mot. at 22.
Second, as a
matter of law, a taxpayer is charged with knowledge of the representations made
on federal tax returns. Gov't Mot. at 19 (citing Jarnagin, 134 Fed. Cl.
at 378). Plaintiff also had knowledge of the FBAR requirement posited by
Question 7(a) on Form 1040 of her 2007 income tax return. Gov't Mot. at 20. In
addition, Plaintiff was "willfully blind" to the requirement that she
file a FBAR. Gov't Mot. at 23-25. To be "willfully blind,"
"a [person] must subjectively believe that there is a high probability
that a fact exists and the [person] must take deliberate actions to avoid
learning that fact." United States v. McBride, 908 F. Supp. 2d
1186, 1210 (D. Utah 2012) (modifications in original). Plaintiff admitted that
she never read her tax returns or any of the documents she signed related to
the UBS account. Stip. ¶ 46. Therefore, Plaintiff was [**28] "willfully blind" of her duty
to comply with IRS reporting requirements. Gov't Mot. at 24.
In sum,
Plaintiff engaged in reckless disregard of the statutory duty to: file a FBAR;
answer Question 7(a) accurately on her 2007 income tax return; and ask her
accountant for advice on any reporting requirements or other federal tax issues
that might arise in connection with the UBS account. Gov't Mot. at 25-28.
Therefore, Plaintiff's conduct was "willful." Gov't Mot. at 8.
2. Plaintiff's Response
And Cross-Motion For Summary Judgment.
Plaintiff
responds that "willfulness" is a "voluntary, intentional
violation of a known legal duty." Pl. Resp. at 12. The Government's
interpretation of 31 U.S.C. § 5321 would render the term "willful"
superfluous, because every taxpayer who fails to file a FBAR does so
willfully. Pl. Resp. at 13. In this case, Plaintiff never read her tax returns
and had no knowledge of the FBAR or other federal tax reporting
requirements. Pl. Resp. at 17. "[C]onduct properly characterized as
willful must meet a higher standard than a simple failure to check the box on
the tax return showing the existence of a foreign account, pay taxes on the
income[,] and file a FBAR." Pl. Resp. at 14. In addition, [**29] each case cited by the Government
"involved conduct significantly more egregious than that evidenced
here." Pl. Resp. at 15.
I.R.M. §
4.26.16.6.5.1, Willful FBAR Violations-Evidence (Nov. 6, 2015) defines
"willfulness" as "knowledge of the reporting requirements and
[a] conscious choice not to comply." Pl. Resp. at 18. Plaintiff was not
aware that she had a legal duty to report her foreign bank accounts to the IRS
until 2008. Pl. Resp. at 13-14. Therefore, she made no conscious choice not to
comply. Pl. Resp. at 14. In addition, I.R.M. § 4.26.16.6.5.2, Willful FBAR
Violations-Defining Willfulness (Nov. 6, 2015) provides a list of documents
that the IRS references to determine whether a failure to comply with reporting
requirements is "willful;" none of those documents, however, were
proffered by the Government in this case. Pl. Resp. at 19-20. Congress created
a higher penalty for willful violations to punish "bad actors." Pl.
Resp. at 20. Plaintiff is not a bad actor; she did not use the UBS account for
any illegal activities. Pl. Resp. at 20.
3. The Government's
Reply And Response To Plaintiff's Cross-Motion.
The
Government replies that Plaintiff's definition of "willfulness"
concerns criminal activity; a less exacting [**30] standard applies to [*385] activity that is civil in nature. Gov't
Reply at 3. A number of courts have determined that a willful failure to file a
FBAR evidences recklessness and willful blindness. Gov't Reply at 4
(citing United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012)
(holding that "willful blindness" in certain circumstances "may
be inferred")). Moreover, Plaintiff's failure to report the UBS account on
her federal income tax returns was part of a broader effort to conceal the
account's existence from the IRS. Gov't Reply at 5. Plaintiff designated the
UBS account as a numbered account, elected not to receive account-related
correspondence in the United States, and instructed her son that the account
was to remain secret. Gov't Reply at 5. It does not make any difference if
Plaintiff did not read her tax returns; as a matter of law, a taxpayer is
charged with constructive knowledge of the contents of a signed income tax
return. Gov't Reply at 7. Likewise, the fact that others have committed more
egregious FBAR violations does not shield Plaintiff from liability.
Gov't Reply at 8-9.
4. Plaintiff's Reply.
Plaintiff
reiterates that the Government's position would render most FBAR
violations as willful, contrary to Congress's intent in establishing [**31] a multi-tiered system of penalties. Pl.
Reply at 3-5. More importantly, when the IRS assessed a penalty against
Plaintiff, it did not proffer any evidence that she knew about the reporting
requirement prior to 2008. Pl. Reply at 6.
5. The Court's
Resolution.
On October
22, 2004, Congress authorized the Secretary of the Treasury to impose a "civil
money penalty" for a violation of 31 U.S.C. § 5314, with a heightened
penalty reserved for "willful[]" violations. See 31 U.S.C. §
5321(a)(5)(C)(i) (2004). The United States Supreme Court has held that, since
"willfulness is a statutory condition of civil liability," it is
"generally taken[] to cover not only knowing violations of a standard, but
reckless ones as well." Safeco Ins. Co. of Am. v. Burr, 551 U.S.
47, 57, 127 S. Ct. 2201, 167 L. Ed. 2d 1045 (2007) (holding that a
"willful" violation of the Fair Credit Reporting Act, 15 U.S.C. §
1681n, includes reckless conduct). Therein, the United States Supreme Court
defined "recklessness" as "violating an objective standard:
action entailing an unjustifiably high risk of harm that is either known or so
obvious that it should be known." Id. at 68 (internal quotations
omitted); see also Godfrey v. United States, 748 F.2d 1568, 1577 (Fed.
Cir. 1984) (holding in the context of federal tax law that "willful
conduct" includes "a reckless disregard of an obvious and known risk
that taxes might not be remitted") (citations [**32] and quotation marks omitted).
On November
6, 2015, the IRS issued I.R.M. §§ 4.26.16.6.5.1 and 4.26.16.6.5.2. I.R.M. §
4.26.16.6.5.1 defined "willfulness" as "knowledge of the
reporting requirements and [a] conscious choice not to comply."21
I.R.M. § 4.26.16.6.5.2 identified thirteen documents that "may be
helpful" to the IRS in "establishing willfulness."22
Plaintiff argues that any violation of 31 U.S.C. § 5314 was not
"willful," because the Government did not proffer any of the
documents listed in I.R.M. § 4.26.16.6.5.2 in this case. Pl. Resp. at 19-20.
There are two problems with Plaintiff's argument. First, I.R.M. § 4.26.16.6.5.2
does not state that the existence of one of the listed documents is a
prerequisite to establishing a willful FBAR violation. Second, the
Government did proffer several of the listed documents, i.e., bank
statements from the UBS account and the IRS examiner's work product. See
I.R.M. § 4.26.16.6.5.2(2)(A), (M) (Nov. 6, 2015).
21 See
Court Appendix, infra, for the text of I.R.M. § 4.26.16.6.5.1.
22 See
Court Appendix, infra, for the text of I.R.M. § 4.26.16.6.5.2.
The relevant
stipulated facts in this case are as follows:
o Plaintiff
did not disclose the existence of the UBS account to her accountant until
approximately 2010. Stip. ¶ 43.
o Plaintiff
never asked her accountant how to properly report foreign investment income.
Stip. ¶ 44.
o Plaintiff
did not review her individual income tax returns for accuracy for [**33] tax years 2003 through 2008. Stip. ¶ 46.
o Plaintiff
answered "No" to Question 7(a) on her 2007 income tax return, falsely
representing under penalty of perjury, that she had no foreign bank accounts.
Stip. ¶ 48.
[*386] In the court's judgment, stipulations ¶¶
46 and 48 together evidence conduct by Plaintiff, as a co-owner of the UBS
account that exhibited a "reckless disregard" of the legal duty under
federal tax law to report foreign bank accounts to the IRS by filing a FBAR.
See Godfrey, 748 F.2d at 1577; see also Norman v. United States,
138 Fed. Cl. 189, 194 (Fed. Cl. 2018) (determining that a taxpayer was
"put on inquiry notice of the FBAR requirement when she signed her
tax return") (internal quotations omitted), appeal docketed, No.
18-2408 (Fed. Cir. Sept. 18, 2018); see also Jarnagin, 134 Fed. Cl. at
378 ("A taxpayer who signs a tax return will not be heard to claim
innocence for not having actually read the return, as he or she is charged with
constructive knowledge of its contents.") (citations omitted).23
Although Plaintiff had no legal duty to disclose information to her accountant
or to ask her accountant about IRS reporting requirements, these additional
undisputed facts do not affect the court's determination that Plaintiff's
conduct in this case was "willful."
23 A May 23,
2018 Memorandum the IRS Office of Chief Counsel distributed to IRS program
managers states that, "[t]he standard for willfulness under 31 U.S.C. §
5321(a)(5)(C) is the civil willfulness standard, and includes not only knowing
violations of the FBAR requirements, but willful blindness to the FBAR
requirements as well as reckless violations of the FBAR
requirements." Burden of Proof and Standard [**34] for Willfulness Under 31 U.S.C. §
5321(a)(5)(C), PMTA-2018-13, at 1 (May 23, 2018). For a comprehensive
discussion of how other federal courts have construed whether a FBAR
violation is "willful," see Hale E. Sheppard, "What
Constitutes A 'Willful' FBAR Violation?," 129 J. TAX'N 24 (Nov.
2018) (collecting cases).
For these
reasons, the court has determined, viewing the evidence in the light most
favorable to Plaintiff, that there is no genuine issue of material fact that
Plaintiff violated 31 U.S.C. § 5314 and that her conduct was
"willful." See 31 U.S.C. § 5321(a)(5) (2004); see also
RCFC 56.
E. Whether The Internal
Revenue Service Abused Its Discretion In Assessing Plaintiff A Civil Penalty Of
$697,229.
1. The Government's
Motion For Summary Judgment.
The
Government argues that Congress amended 31 U.S.C. § 5321(a)(5) in 2004 to
increase the maximum penalty for FBAR violations, and thereby superseded
31 C.F.R. § 1010.820(g)(2). Gov't Mot. at 34. Thereafter, if the IRS determined
a willful violation of 31 U.S.C. § 5321(a)(5) (2004) occurred, the IRS had
authority to impose a civil penalty "up to the greater of $100,000 or 50%
of the balance in the account at the time of the violation." Gov't Mot. at
28.
In this case,
the IRS considered I.R.M. Exhibit 4.26.16-2, Normal FBAR Penalty
Mitigation Guidelines For Violations Occurring After October 22, 2004, in
calculating the penalty to be assessed to Plaintiff regarding the UBS and HSBC
accounts. Under those Guidelines, the IRS properly exercised discretion in
finding that Plaintiff's HSBC [**35] account should be treated as a
Mitigation Level of II; but Plaintiff's UBS account should be treated as a
Mitigation Level of IV. Gov't Mot. at 30. The penalties that the IRS assessed
were "within the range authorized by Congress." Gov't Mot. at 33.24
24 In that
regard, the Government suggests that the non-precedential decision of the
United States District Court for the Western District of Texas in United
States v. Colliot, No. 16-1281, 2018 U.S. Dist. LEXIS 83159, 2018 WL
2271381 (W.D. Tex. May 16, 2018), determining that 31 C.F.R. § 1010.820(g)(2)
continues to cap FBAR penalties at $100,000 is erroneous and should not
be followed. Gov't Mot. at 35-37.
2. Plaintiff's Response
And Cross-Motion For Summary Judgment.
Plaintiff
responds that the IRS abused its discretion when it assessed a penalty for the
2007 FBAR violation, because it did not consider factors other than the
size of the account, in determining the penalty. Pl. Resp. at 22. The IRS also
abused its discretion when it found that Plaintiff was the "sole
beneficiary" of the UBS account after her father's death, since she was a
co-owner with her mother. Pl. Resp. at 23. In addition, the IRS abused its
discretion when it found that Plaintiff did not have any personal connection to
Switzerland, when she did have a [*387] connection by "inherit[ing] an
account domiciled there." Pl. Resp. at 23. And, the IRS abused its
discretion when it found that Plaintiff "actively managed" the UBS
account. Pl. Resp. at 23. In fact, Plaintiff resisted her husband's urgings to
invest the funds in the UBS account more aggressively and followed her father's
[**36] instructions that the
account be used only in an emergency. Pl. Resp. at 23-24.
The IRS's
assessment of the maximum penalty against Plaintiff also was an abuse of
discretion, because the IRS did not adhere to regulations that set the maximum
penalty of $100,000, but were not changed after Congress amended 31 U.S.C. §
5321(a)(5) in 2004. Pl. Resp. at 28. And, the penalty assessed was an
"excessive fine," in violation of the Eighth Amendment to the United
States Constitution. Pl. Resp. at 26-27.
3. The Government's
Reply And Response To Plaintiff's Cross-Motion.
The Government
replies that the IRS properly utilized I.R.M. § 4.26.16.3.6 in evaluating
Plaintiff's FBAR violation and determined that she satisfied the
requirements for a mitigated penalty. Gov't Reply at 10. But, the IRS declined
to mitigate the maximum statutory penalty assessed in 2016, with respect to the
UBS account, because of the eight factual determinations made by the IRS
examiner. Gov't Reply at 10-11. In addition, Plaintiff did "not explain
how the IRS's allegedly erroneous findings would affect the outcome of the
decision-making process." Gov't Reply at 11. For example, the fact that
Plaintiff was added as a co-owner of the UBS account does not establish a
personal connection with Switzerland. Gov't [**37] Reply at 12. Plaintiff was involved in
management of the UBS account, as evidenced by meetings she attended with
representatives from the bank annually to review investments. Gov't Reply at
13. In addition, Plaintiff's April 15, 2005 "Verification of the
beneficial owner's identity" evidences that she was the sole beneficiary
of the UBS account. Def. Ex. 4.
The IRS
penalty assessment also did not violate the Eighth Amendment to the United
States Constitution, because the penalty was not a "fine," nor was it
"excessive." Gov't Reply 15-28. The IRS applied the maximum penalty
established by Congress at 31 U.S.C. § 5321(a)(5)(C)(i) (2004). Gov't Reply at
29. As a matter of law, when Congress increased the maximum penalty above
$100,000 on October 22, 2004, 31 C.F.R. § 1010.820(g)(2) no longer had any
effect. Gov't Reply 30-34.
4. Plaintiff's Reply.
Plaintiff
replies that the IRS's penalty assessment violated the Eighth Amendment to the
United States Constitution, because it was a disproportionate fine that was
punitive in nature. Pl. Reply at 8-11. When Congress increased the maximum
penalty that could be assessed for FBAR violations, it did not mandate
that a penalty, greater than $100,000, be assessed in any individual case. Pl.
Reply at 13. The IRS is bound by the agency's regulations and the IRS's
decision not to remove the pre-2004 regulations [**38] from the Code of Federal Regulations was
not unintentional; Plaintiff is entitled to rely on those regulations. Pl.
Reply at 14-15.
5. The Court's
Resolution.
On July 15,
2016, the IRS assessed a maximum penalty against Plaintiff with respect to the
UBS account, pursuant to 31 U.S.C. § 5321(a)(5)(C)(i) (2004), and properly
referenced I.R.M. § 4.26.16.3.6 in doing so. Irons Decl. 035. Plaintiff does
not identify why that assessment violated any statute or applicable regulation.
See generally Compl.; Pl. Resp.; Pl. Reply. Instead, Plaintiff argues
that the IRS's decision was an abuse of discretion, because: (1) Plaintiff was
not the "sole beneficiary" of the UBS account; (2) Plaintiff did have
a personal connection to Switzerland; (3) Plaintiff did not "actively
manage" the UBS account; and (4) the IRS did not rely on the documents
listed in I.R.M. § 4.26.16.6.5.2 that evidence willfulness. Pl. Resp. at 23-24.
Therefore, Plaintiff reasons that she is entitled to rely on the $100,000
maximum penalty set forth in 31 U.S.C. §5321(a)(5) (2003). Pl. Resp. at 23-24.
As to the
ownership of the UBS account, although the record evidences that Plaintiff was
not the "sole beneficiary" of the UBS account, Plaintiff represented
that she was the sole beneficiary in an April [**39] 15, 2005 "Verification of the
beneficial owner's identity." [*388] Def. Ex. 4. Assuming arguendo
that the IRS erroneously determined Plaintiff was the sole beneficiary,
Plaintiff nevertheless failed to establish why being only a co-owner
necessarily rendered the IRS's penalty assessment unlawful or an abuse of
discretion. Compare Pl. Resp. at 23 with Irons Decl. at 030.
As to the
IRS's finding that Plaintiff did not have a personal connection to Switzerland,
as a matter of law, only having a property interest in a bank account is not
sufficient to establish a "significant contact with a foreign
country." See 26 C.F.R. § 301.7701(b)-2(d)(1).25
25 See
Court Appendix, infra, for the text of 26 C.F.R. § 301.7701(b)-2(d)(1).
As to
Plaintiff's role in managing the UBS account, the parties stipulated that
between 1998 and 2008, Alice Kimble met with representatives of UBS in New York
at least six times and met with a UBS representative in Switzerland at least
once. Stip. ¶¶ 28, 29. Therefore, the IRS did not abuse its discretion in
finding that Plaintiff actively was involved with the UBS account. Irons Decl.
at 032. As to the documents listed in I.R.M. § 4.26.16.6.5.2, the court
previously addressed this issue at D.5, supra.
Plaintiff is
also no longer entitled to be assessed a maximum civil penalty of $100,000, as [**40] set forth in 31 U.S.C. § 5321(a)(5)
(2003).26 On October 22, 2004, Congress enacted a new statute that
increased the statutory maximum penalty for a "willful" violation to
"the greater of [] $100,000, or [] 50 percent of the . . . balance in the
account at the time of the violation." See American Jobs Creation
Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, 1586, § 821 (Oct. 22, 2004)
("Jobs Creation Act"). And, on July 1, 2008, the IRS issued I.R.M. §
4.26.16.4.5.1, that stated: "At the time of this writing, the regulations
at [31 C.F.R. § 1010.820] have not been revised to reflect the change in the
willfulness penalty ceiling." I.R.M. § 4.26.16.4.5.1. The IRS, however,
warned that, "the statute [i.e., the Jobs Creation Act] is
self-executing and the new penalty ceilings apply." I.R.M. §
4.26.16.4.5.1. Although, the Jobs Creation Act is inconsistent with 31 C.F.R. §
1010.820(g)(2), it is settled law that an agency's regulations "must be
consistent with the statute under which they are promulgated." United
States v. Larionoff, 431 U.S. 864, 873, 97 S. Ct. 2150, 53 L. Ed. 2d 48
(1977). Since the civil penalty amount for a "willful" violation in
31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i)
(2004), the April 8, 1987 regulations are "no longer valid." Norman,
138 Fed. Cl. at 196.
26 See
Court Appendix, infra, for the text of 31 U.S.C. § 5321(a)(5) (2003).
The court's
research has found two recent United States District Court cases determining
that, although the IRS theoretically may assess a penalty greater than $100,000
for a FBAR violation [**41]
committed after 2004, the IRS is still bound by the maximum penalty in
the pre-2004 statute. See Colliot, 2018 U.S. Dist. LEXIS 83159, 2018 WL
2271381, at *3;27 United States v. Wadhan, 325 F. Supp. 3d
1136, 1141 (D. Colo. 2018).28
[*389] The reasoning
of these cases, however, conflicts with the decision of the United States Court
of Appeals for the Federal Circuit in Barseback Kraft AB v. United States,
121 F.3d 1475 (Fed. Cir. 1997). In that case, nuclear energy companies sued to
enforce contracts for uranium with the United States Department of Energy
("DOE"). Id. at 1477. The contracts provided that prices would
be set in accordance with "DOE pricing policy for such services." Id.
at 1478. After the parties executed the contracts, Congress enacted legislation
that transferred responsibility for administering uranium sales to a new
federal agency, and "changed the government's pricing strategy from one
based on recovering just its costs to one aimed at profit maximization." Id.
The uranium companies argued that the new agency was bound by DOE's pricing
regulations, but the United States Court of Appeals for the Federal Circuit
held that the "DOE could not have had any valid uranium enrichment pricing
policy in 1993 and 1994[,] because Congress had stripped it of its authority to
sell uranium enrichment services." Id. at 1480. "The fact that
DOE's [pricing regulations] had not been formally withdrawn from the
Code [**42] of Federal
Regulations [did] not save them from invalidity." Id. (emphasis
added). Like the legislation that stripped DOE of authority over uranium
pricing, the Jobs Creation Act replaced the prior penalty for willful
violations of federal tax law in 31 U.S.C. § 5321(a)(5) (2003), thereby
nullifying any inconsistent regulations governing the pre-2004 statute.
27 In Colliot,
the United States District Court for the Western District of Texas determined
that 31 C.F.R. § 1010.820(g)(2) survived the enactment of the Jobs Creation
Act, because "[r]ules issued via notice-and-comment rulemaking must be repealed
via notice-and-comment rulemaking." 2018 U.S. Dist. LEXIS 83159, 2018 WL
2271381, at *3 (citing Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199,
1205, 191 L. Ed. 2d 186 (2015)). In Perez, the United States Supreme
Court held that agencies must "use the same procedures when they amend or
repeal a rule as they used to issue the rule in the first instance." 135
S. Ct. at 1206. The Jobs Creation Act, however, is not an agency rule and
Congress has authority prospectively to alter the effect of agency regulations.
See Robertson v. Seattle Audubon Soc., 503 U.S. 429, 438-40, 112 S. Ct.
1407, 118 L. Ed. 2d 73 (1992) (holding that a statutory amendment affecting
ongoing litigation over forest management did not violate Article III of the
United States Constitution, because it "compelled changes in law, not
findings or results under old law").
28 In Wahdan,
the United States District Court for the District of Colorado determined that
the Secretary of the Treasury adjusted the maximum FBAR penalty for
inflation several times in the past decade. See 325 F. Supp. 3d at 1140.
According to that court, "[t]his suggests that the Secretary was aware of
the penalties available under 31 U.S.C. § 5321(a)(5)(C) and elected to continue
to limit the IRS'[s] authority to impose penalties to $100,000." Id.
Although this inference is plausible, it is more likely that the Secretary of
the Treasury determined that I.R.M. § 4.26.16.4.5.1 correctly determined that
the Jobs Creation Act was "self-executing." Regardless, any
legitimate inference that may be drawn from a series of routine inflation
adjustments after 2004 does not alter the text of the Jobs Creation Act.
Neither of
the aforementioned United States District Court decisions explain why the Jobs
Creation Act should be construed to retain the $100,000 maximum penalty set
forth at 31 C.F.R. § 1010.820(g)(2), but supersede the remainder of the
regulation.
For these
reasons, the court has determined, viewing the evidence in the light most
favorable to Plaintiff, that there is no genuine issue of material fact as to
whether the IRS abused its discretion, when it assessed a civil penalty against
Plaintiff of $697,229, i.e., 50 percent of the balance in the UBS
account in 2007. See 31 U.S.C. § 5321(a)(5)(C)(i) (2004); see also
RCFC 56.29
29 The court
does not need to address Plaintiff's argument that the penalty assessment
violated the Eighth Amendment to the United States Constitution, because the
March 24, 2017 Complaint did not allege such a claim. See Casa de Cambio
Comdiv S.A., de C.V. v. United States, 291 F.3d 1356, 1366 (Fed. Cir. 2002)
("No mention of this theory appears in [Plaintiff's] complaint. Under the
circumstances, we hold that [Plaintiff] waived any claim it may have against
the government based on such a theory."). In any event, the only other
court that considered this issue determined that the FBAR penalty was
not punitive. See Estate of Schoenfeld, 2018 U.S. Dist. LEXIS 163679,
2018 WL 4599743, at *11 (determining that the FBAR penalty is
"remedial," not "penal").
IV. CONCLUSION.
For the
reasons discussed herein, the June 27, 2018 Motion For Summary Judgment is
granted; the July 24, 2018 Cross-Motion For Summary Judgment is denied. The
Clerk of Court is directed to enter judgment for the Government.
IT IS SO ORDERED.
/s/ Susan G.
Braden
SUSAN G.
BRADEN
Senior Judge
COURT APPENDIX
A. Relevant Statutes.
26 U.S.C. §
6511(a)
provides:
Claim for
credit or refund of an overpayment of any tax imposed by this title in respect
of which tax the taxpayer is required [**43] to file a return shall be filed by the
taxpayer within 3 years from the time the return was filed or 2 years from the
time the tax was paid, whichever of such periods expires the later, or if no
return was filed by the taxpayer, within 2 years from the time the tax was
paid. Claim for credit or refund of an overpayment of any tax imposed by this
title which is required to be paid by means of a stamp shall be filed by the
taxpayer within 3 years from the time the tax was paid.
26 U.S.C. § 6511(a).
31 U.S.C. §
5314
provides:
(a)
Considering the need to avoid impeding or controlling the export or import of
monetary instruments and the need to avoid burdening unreasonably a person
making a transaction with a foreign financial [*390] agency, the Secretary of the Treasury
shall require a resident or citizen of the United States or a person in, and
doing business in, the United States, to keep records, file reports, or keep
records and file reports, when the resident, citizen, or person makes a transaction
or maintains a relation for any person with a foreign financial agency. The
records and reports shall contain the following information in the way and to
the extent the Secretary prescribes:
(1) the
identity and address of participants [**44] in a transaction or relationship.
(2) the legal
capacity in which a participant is acting.
(3) the
identity of real parties in interest.
(4) a
description of the transaction.
(b) The
Secretary may prescribe--
(1) a
reasonable classification of persons subject to or exempt from a requirement
under this section or a regulation under this section;
(2) a foreign
country to which a requirement or a regulation under this section applies if
the Secretary decides applying the requirement or regulation to all foreign
countries is unnecessary or undesirable;
(3) the
magnitude of transactions subject to a requirement or a regulation under this
section;
(4) the kind
of transaction subject to or exempt from a requirement or a regulation under
this section; and
(5) other
matters the Secretary considers necessary to carry out this section or a
regulation under this section.
(c) A person
shall be required to disclose a record required to be kept under this section
or under a regulation under this section only as required by law.
31 U.S.C. § 5314.
31 U.S.C. §
5321(a)(5)
provides:
(A) Penalty
authorized.--
The Secretary
of the Treasury may impose a civil money penalty on any person who violates, or
causes any violation of, any provision of section 5314.
(B) Amount [**45] of penalty.--
(i) In
general.--
Except as
provided in subparagraph (C), the amount of any civil penalty imposed under
subparagraph (A) shall not exceed $10,000.
(ii)
Reasonable cause exception.--No penalty shall be imposed under subparagraph (A)
with respect to any violation if--
(I) such
violation was due to reasonable cause, and
(II) the
amount of the transaction or the balance in the account at the time of the
transaction was properly reported.
(C) Willful
violations.--In the case of any person willfully violating, or willfully
causing any violation of, any provision of section 5314--
(i) the
maximum penalty under subparagraph (B)(i) shall be increased to the greater
of--
(I) $100,000,
or
(II) 50
percent of the amount determined under subparagraph (D), and
(ii)
subparagraph (B)(ii) shall not apply.
31 U.S.C. § 5321(a)(5)
(2004).
31 U.S.C. §
5321(a)(5) (2003) provided:
Foreign
financial agency transaction violation.--
(A) Penalty
authorized.--The Secretary of the Treasury may impose a civil money penalty on
any person who willfully violates or any person willfully causing any violation
of any provision of section 5314.
(B) Maximum
amount limitation.--The amount of any civil money penalty imposed under
subparagraph (A) shall not exceed--
(i) in the
case of violation of [**46]
such section involving a transaction, the greater of--
(I) the
amount (not to exceed $100,000) of the transaction; or
(II) $25,000;
and
(ii) in the
case of violation of such section involving a failure to report [*391] the existence of an account or any
identifying information required to be provided with respect to such account,
the greater of--
(I) an amount
(not to exceed $100,000) equal to the balance in the account at the time of the
violation; or
(II) $25,000.
31 U.S.C. § 5321(a)(5)
(2003).
28 U.S.C. §
1346(a)
provides:
The district
courts shall have original jurisdiction, concurrent with the United States
Court of Federal Claims, of:
(1) Any civil
action against the United States for the recovery of any internal-revenue tax
alleged to have been erroneously or illegally assessed or collected, or any
penalty claimed to have been collected without authority or any sum alleged to
have been excessive or in any manner wrongfully collected under the
internal-revenue laws;
(2) Any other
civil action or claim against the United States, not exceeding $10,000 in
amount, founded either upon the Constitution, or any Act of Congress, or any
regulation of an executive department, or upon any express or implied contract
with the United States, or [**47]
for liquidated or unliquidated damages in cases not sounding in tort,
except that the district courts shall not have jurisdiction of any civil action
or claim against the United States founded upon any express or implied contract
with the United States or for liquidated or unliquidated damages in cases not
sounding in tort which are subject to sections 7104(b)(1) and 7107(a)(1) of
title 41. For the purpose of this paragraph, an express or implied contract
with the Army and Air Force Exchange Service, Navy Exchanges, Marine Corps
Exchanges, Coast Guard Exchanges, or Exchange Councils of the National
Aeronautics and Space Administration shall be considered an express or implied
contract with the United States.
28 U.S.C. § 1346(a).
B. Relevant Internal
Revenue Service Regulations.
26 C.F.R. §
301.7701(b)-2(d)(1) provides that:
In general.
For purposes of section 7701(b) and the regulations under that section, an
alien individual will be considered to have a closer connection to a foreign
country than the United States if the individual or the Commissioner
establishes that the individual has maintained more significant contacts with
the foreign country than with the United States. In determining whether an
individual has maintained more significant contacts with a foreign country than
[**48] the United States,
the facts and circumstances to be considered include, but are not limited to,
the following -
(i) The
location of the individual's permanent home;
(ii) The
location of the individual's family;
(iii) The
location of personal belongings, such as automobiles, furniture, clothing and
jewelry owned by the individual and his or her family;
(iv) The
location of social, political, cultural or religious organizations with which
the individual has a current relationship;
(v) The
location where the individual conducts his or her routine personal banking
activities;
(vi) The
location where the individual conducts business activities (other than those
that constitute the individual's tax home);
(vii) The
location of the jurisdiction in which the individual holds a driver's license;
(viii) The
location of the jurisdiction in which the individual votes;
(ix) The
country of residence designated by the individual on forms and documents; and
(x) The types
of official forms and documents filed by the individual, such as Form 1078
(Certificate of Alien Claiming Residence in the United States), Form W-8
(Certificate of Foreign Status) or [*392] Form W-9 (Payer's Request for Taxpayer
Identification Number). [**49]
26 C.F.R. §
301.7701(b)-2(d)(1).
31 C.F.R. §
1010.820
provides:
(a) For any
willful violation, committed on or before October 12, 1984, of any reporting
requirement for financial institutions under this chapter or of any recordkeeping
requirements of §§ 1010.311, 1010.313, 1020.315, 1021.311 or 1021.313, the
Secretary may assess upon any domestic financial institution, and upon any
partner, director, officer, or employee thereof who willfully participates in
the violation, a civil penalty not to exceed $1,000.
(b) For any
willful violation committed after October 12, 1984 and before October 28, 1986,
of any reporting requirement for financial institutions under this chapter or
of the recordkeeping requirements of § 1010.420, the Secretary may assess upon
any domestic financial institution, and upon any partner, director, officer, or
employee thereof who willfully participates in the violation, a civil penalty
not to exceed $10,000.
(c) For any
willful violation of any recordkeeping requirement for financial institutions,
except violations of § 1010.420, under this chapter, the Secretary may assess
upon any domestic financial institution, and upon any partner, director,
officer, or employee thereof who willfully participates in the violation, a
civil penalty not to exceed $1,000.
(d) For any
failure [**50] to file a
report required under § 1010.340 or for filing such a report containing any
material omission or misstatement, the Secretary may assess a civil penalty up
to the amount of the currency or monetary instruments transported, mailed or
shipped, less any amount forfeited under § 1010.830.
(e) For any
willful violation of § 1010.314 committed after January 26, 1987, the Secretary
may assess upon any person a civil penalty not to exceed the amount of coins
and currency involved in the transaction with respect to which such penalty is
imposed. The amount of any civil penalty assessed under this paragraph shall be
reduced by the amount of any forfeiture to the United States in connection with
the transaction for which the penalty was imposed.
(f) For any
willful violation committed after October 27, 1986, of any reporting
requirement for financial institutions under this chapter (except § 1010.350, §
1010.360 or § 1010.420), the Secretary may assess upon any domestic financial
institution, and upon any partner, director, officer, or employee thereof who
willfully participates in the violation, a civil penalty not to exceed the
greater of the amount (not to exceed $100,000) involved in the transaction or
$25,000.
(g) For any
willful violation [**51]
committed after October 27, 1986, of any requirement of § 1010.350, §
1010.360 or § 1010.420, the Secretary may assess upon any person, a civil
penalty:
(1) In the
case of a violation of § 1010.360 involving a transaction, a civil penalty not
to exceed the greater of the amount (not to exceed $100,000) of the
transaction, or $25,000; and
(2) In the
case of a violation of § 1010.350 or § 1010.420 involving a failure to report
the existence of an account or any identifying information required to be
provided with respect to such account, a civil penalty not to exceed the
greater of the amount (not to exceed $100,000) equal to the balance in the
account at the time of the violation, or $25,000.
(h) For each
negligent violation of any requirement of this chapter, committed after October
27, 1986, the Secretary may assess upon any financial institution a civil
penalty not to exceed $500.
(i) For
penalties that are assessed after August 1, 2016, see § 1010.821 for rules
relating to the maximum amount of the penalty.
31 C.F.R. § 1010.820.
C. Internal Revenue
Service Manual.
I.R.M. §
4.26.16.3.6 provided:
(1) The FBAR
is required for each calendar year during which the aggregate [*393] amount(s) in the account(s) exceeded
$10,000 valued in U.S. dollars at any time during the calendar year. The
maximum value [**52] of an
account is the largest amount of currency and non-monetary assets that appear
on any quarterly or more frequent account statement issued for the applicable
year. For example, if the statement closing balance is $9,000 but at any time
during the year a balance of $15,000 appears on a statement, the maximum value
is $15,000.
(2) If
periodic account statements are not issued, the maximum account asset value is
the largest amount of currency and non-monetary assets in the account at any
time during the year.
(3) Convert
foreign currency by using the official exchange rate in effect at the end of
the year in question for converting the foreign currency into U.S. dollars. In
valuing currency of a country that uses multiple exchange rates, use the rate
that would apply if the currency in the account were converted into U.S.
dollars at the close of the calendar year. The official Treasury Reporting
Rates of Exchange for the previous quarter year can be obtained at
http://fms.treas.gov/intn.html#rates or by calling the Department of the
Treasury, Financial Management Service [("FMS")] International Funds
Team at (202) 874-7994. As these rates are published quarterly, the rates
should be [**53] accessed
during the first quarter of the following year to obtain the previous December
31 valuation. The rates posted on the FMS website are the current exchange
rates. Historical exchange rates will be needed to determine the value in a
foreign account in prior years. For historical exchange rates, call FMS at
(202) 874-8001 or (202) 874-8004. These phone numbers may be subject to change.
Check the FMS website (http://www.fms.treas.gov ) for the most current
information.
(4) The value
of stock, other securities, or other non-monetary assets in an account reported
on the FBAR is the fair market value at the end of the calendar year, or
if withdrawn from the account earlier in the year, at the time of the
withdrawal.
(5) If the
filer had a financial interest in more than one account, each account is valued
separately in accordance with the previous paragraphs.
(6) If a
person had a financial interest in one or more but fewer than 25 accounts and
is unable to determine whether the maximum value of these accounts exceeded
$10,000 at any time during the year, the FBAR instructions state that
the person is to complete Part II of the FBAR and if needed, the
continuation page(s) for each of [**54] these accounts. If the maximum aggregate
value of the accounts was not in excess of $10,000, then there would be no FBAR
violation if the person did not file the FBAR, whether or not the person
knew the value of the accounts at the time the FBAR was due. This is
because section 103.27(c) of the Title 31 regulations only requires FBARs
to be filed when the value of the accounts exceeds $10,000 during a calendar
year. For rules regarding a person with a financial interest in 25 or more
accounts, see I.R.M. § 4.26.16.3.9.
I.R.M. § 4.26.16.3.6
(July 1, 2008).
I.R.M. §
4.26.16.6.5.1 provides:
(1) The test
for willfulness is whether there was a voluntary, intentional violation of a
known legal duty.
(2) A finding
of willfulness under the BSA must be supported by evidence of willfulness.
(3) The
burden of establishing willfulness is on the Service.
(4)
Willfulness is shown by the person's knowledge of the reporting requirements
and the person's conscious choice not to comply with the requirements. In the FBAR
situation, the person only need know that a reporting requirement exists. If a
person has that knowledge, the only intent needed to constitute a willful
violation of the requirement is a conscious choice not to file the FBAR.
(5) Under the
concept [**55] of "willful
blindness," willfulness is attributed to a person who made a conscious
effort to avoid learning about the FBAR reporting and recordkeeping
requirements.
EXAMPLE:
[*394] Willful blindness may be present when a
person admits knowledge of, and fails to answer questions concerning, his
interest in or signature or other authority over financial accounts at foreign
banks on Schedule B of his Federal income tax return. This section of the
income tax return refers taxpayers to the instructions for Schedule B, which
provides guidance on their responsibilities for reporting foreign bank accounts
and discusses the duty to file the FBAR. These resources indicate that
the person could have learned of the filing and recordkeeping requirements
quite easily. It is reasonable to assume that a person who has foreign bank
accounts should read the information specified by the government in tax forms.
The failure to act on this information and learn of the further reporting
requirement, as suggested on Schedule B, may provide evidence of willful
blindness on the part of the person.
Note: The
failure to learn of the filing requirements coupled with other factors, such as
the efforts taken to conceal the [**56] existence of the accounts and the
amounts involved, may lead to a conclusion that the violation was due to
willful blindness. The mere fact that a person checked the wrong box, or no
box, on a Schedule B is not sufficient, in itself, to establish that the FBAR
violation was attributable to willful blindness.
(6) The
following examples illustrate situations in which willfulness may be present:
(a.) A person
files the FBAR, but omits one of three foreign bank accounts. The person
had previously closed the omitted account at the time of filing the FBAR.
The person explains that the omission was due to unintentional oversight.
During the examination, the person provides all information requested with
respect to the omitted account. The information provided does not disclose
anything suspicious about the account, and the person reported all income
associated with the account on his tax return. The penalty for a willful
violation should not apply absent other evidence that may indicate willfulness.
(b.) A person
filed the FBAR in earlier years but failed to file the FBAR in
subsequent years when required to do so. When asked, the person does not
provide a reasonable explanation for failing [**57] to file the FBAR. In addition,
the person may have failed to report income associated with foreign bank
accounts for the years that FBARs were not filed. A determination that
the violation was willful would likely be appropriate in this case.
(c.) A person
received a warning letter informing him of the FBAR filing requirement,
but the person continues to fail to file the FBAR in subsequent years.
When asked, the person does not provide a reasonable explanation for failing to
file the FBAR. In addition, the person may have failed to report income
associated with the foreign bank accounts. A determination that the violation
was willful would likely be appropriate in this case.
I.R.M. § 4.26.16.6.5.1
(Nov. 6, 2015).
I.R.M. §
4.26.16.6.5.2 provides:
(1)
Willfulness can rarely be proven by direct evidence, since it is a state of
mind. It is usually established by drawing a reasonable inference from the
available facts. The government may base a determination of willfulness on
inference from conduct meant to conceal sources of income or other financial
information. For FBAR purposes, this could include concealing signature
authority, interests in various transactions, and interests in entities
transferring cash to foreign [**58]
banks.
(2) Documents
that may be helpful in establishing willfulness include:
(a.) Copies
of statements for the foreign bank account.
(b.) Notes of
the examiner's interview with the foreign account holder/taxpayer about the
foreign account.
(c.)
Correspondence with the account holder's tax return preparer that may address
the FBAR filing requirement.
[*395] (d.) Documents showing criminal activity
related to the non-filing of the FBAR (or non-compliance with other BSA
provisions).
(e.)
Promotional material (from a promoter or offshore bank).
(f.)
Statements for debit or credit cards from the offshore bank that, for example,
reveal the account holder used funds from the offshore account to cover
everyday living expenses in a manner that conceals the source of the funds.
(g.) Copies
of any FBARs filed previously by the account holder (or FinCEN Query
printouts of FBARs).
(h.) Copies
of Information Document Requests with requested items that were not provided
highlighted along with explanations as to why the requested information was not
provided.
(i.) Copies
of debit or credit card agreements and fee schedules with the foreign bank,
which may show a significantly higher cost than typically associated [**59] with cards from domestic banks.
(j.) Copies
of any investment management or broker's agreement and fee schedules with the
foreign bank, which may show significantly higher costs than costs associated
with domestic investment management firms or brokers.
(k.) The
written explanation of why the FBAR was not filed, if such a statement
is provided. Otherwise, note in the workpapers whether there was an opportunity
to provide such a statement.
(l.) Copies
of any previous warning letters issued or certifications of prior FBAR
penalty assessments.
(m.) An
explanation, in the workpapers, as to why the examiner believes the failure to
file the FBAR was willful.
(3) Documents
available in an FBAR case worked under a Related Statute Determination
under Title 26 that may be helpful in establishing willfulness include:
(a.) Copies
of documents from the administrative case file (including the Revenue Agent
Report) for the income tax examination that show income related to funds in a
foreign bank account was not reported.
(b.) A copy
of the signed income tax return with Schedule B attached, showing whether or
not the box pertaining to foreign accounts is checked or unchecked.
(c.) Copies
of tax returns (or [**60]
RTVUEs or BRTVUs) for at least three years prior to the opening of the
offshore account and for all years after the account was opened, to show if a
significant drop in reportable income occurred after the account was opened.
(Review of the three years' returns prior to the opening of the account would
give the examiner a better idea of what the taxpayer might have typically
reported as income prior to opening the foreign account).
(d.) Copies
of any prior Revenue Agent Reports that may show a history of noncompliance.
(e.) Two sets
of cash T accounts (a reconciliation of the taxpayer's sources and uses of
funds) with one set showing any unreported income in foreign accounts that was
identified during the examination and the second set excluding the unreported
income in foreign accounts.
(f.) Any
documents that would support fraud (see IRM 4.10.6.2.2 for a list of items to
consider in asserting the fraud penalty).
I.R.M. § 4.26.16.6.5.2
(Nov. 6, 2015).
I.R.M.
Exhibit 4.26.16-2, Normal FBAR Penalty Mitigation
Guidelines For Violations Occurring After October 22, 2004, in part: [*396]
|
Willfulness Penalties |
|
|
To Qualify for Level I
- |
If the maximum
aggregate balance for all |
|
Determine Aggregate
Balances |
accounts to which [**61] the violations relate did |
|
|
not exceed $50,000,
Level I applies to all |
|
|
accounts. Determine
the maximum balance at |
|
|
any time during the
calendar year for each |
|
|
account. Add the
individual maximum balances |
|
|
to find the maximum
aggregate balance. |
|
Level I Penalty is |
The greater of $1,000
per violation or 5% of |
|
|
the maximum balance
during the year of the |
|
|
account to which the
violations relate for |
|
|
each violation. |
|
To Qualify for Level
II - |
If Level I does not
apply and if the maximum |
|
Determine Account
Balance |
balance of the account
to which the |
|
|
violations relate at
any time during the |
|
|
calendar year did not exceed
$250,000, Level |
|
|
II applies to that
account. |
|
Level II Penalty is
per |
The greater of $5,000
per violation or 10% of |
|
account |
the maximum balance
during the calendar year |
|
|
for each Level II
account. |
|
To Qualify for Level
III |
If the maximum balance
of the account to |
|
|
which the Level III
violations relate at any |
|
|
time during the
calendar year exceeded |
|
|
$250,000 but did not
exceed $1,000,000, Level |
|
|
III applies to that
account. |
|
Level III Penalty is
per |
The greater of (a) or
(b): (a) 10% of the |
|
account |
maximum balance during
the calendar year for |
|
|
each Level III
account, or (b) 50% of the |
|
|
closing balance in the
account as of the last [**62] |
|
|
day for filing the FBAR. |
|
To Qualify for Level
IV |
If the maximum balance
of the account to |
|
|
which the violations
relate at any time |
|
|
during the calendar
year exceeded $1 million, |
|
|
Level IV, the
statutory maximum, applies to |
|
|
that account. |
|
Level IV Penalty is
per |
The greater of (a) or
(b): (a) $100,000, or |
|
account the statutory
maximum |
(b) 50% of the closing
balance in the account |
|
|
as of the last day for
filing the FBAR. |
I.R.M.
Exhibit 4.26.16-2 (July 1, 2008)