UNITED STATES OF AMERICA
v. MONEY SHINDAY ET AL.
2:18-cv-06891-CAS-Ex
UNITED STATES DISTRICT COURT FOR THE CENTRAL
DISTRICT OF CALIFORNIA
2018 U.S. Dist. LEXIS 205372
December 3, 2018, Decided
December 3, 2018, Filed
CORE TERMS: cap, compl, assess, penalty assessments, aggregate, willfully,
willful, tax returns, government claims, promulgated, invalidated, foreign
bank, tax years, transferred, year-end, dividends, failure to file, foreign
country, calendar year, assessed penalties, legal theory, reasonable
inferences, leave to amend, civil penalty, implementing, cognizable, exceeding,
resident, totaling, exceeded
COUNSEL: [*1] Attorneys for Plaintiffs:
Robert Conte, John Ellis.
Attorneys for
Defendants: Ismael Bautista.
JUDGES: CHRISTINA A.
SNYDER.
OPINION BY: CHRISTINA A.
SNYDER
OPINION
CIVIL MINUTES -- GENERAL
Proceedings: DEFENDANTS
MONEY SHINDAY AND NILA SHINDAY'S MOTION TO DISMISS PLAINTIFF'S COMPLAINT (Dkt. 10, filed October 12, 2018)
I. INTRODUCTION
On August 10,
2018, plaintiff United States of America filed suit against defendants Money Shinday ("Money") and Nila
Shinday ("Nila"),
seeking to collect unpaid federal penalty assessments and interest, and to
reduce those assessments to judgment. Dkt. 1 ("Compl."). The
penalty assessments stem from defendants' failure to file a Report of Foreign
Bank and Financial Accounts ("FBAR") with the Internal Revenue
Service ("IRS") in the years 2007 through 2011. Id.
On October
12, 2018, defendants filed the instant motion to dismiss the complaint. Dkt. 10
("Mot."). On November 13, 2018, the government filed its
opposition. Dkt. 12 ("Opp'n").
Defendants did not file a reply brief.
The Court
held a hearing on December 3, 2018. Having carefully considered the parties'
arguments, the Court finds and concludes as follows.
II. BACKGROUND
The
government alleges the following in its complaint.
Defendants,
who [*2] are husband and wife,
reside within Santa Barbara County, California. Compl.
¶ 3. They were, and now are, naturalized citizens of the United States at times
relevant to the complaint. Id. ¶ 7.
A. Statutory Framework
Pursuant to
31 U.S.C. § 5314, United States citizens must "report certain transactions
and relationships with foreign financial agencies." Id. ¶ 4; 31 U.S.C.A. §
5314 (West) ("[T]he 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."). Section 5314's implementing regulations, promulgated by the
Department of the Treasury, require that "[e]ach
United States person having a financial interest in, or signature or other
authority over, a bank, securities, or other financial account in a foreign
country shall report such relationship to the Commissioner of Internal Revenue
for each year in which such relationship exists . . . ." 31 C.F.R. § 1010.350(a) (West); Compl.
¶ 5 (citing 31 C.F.R. § 1010.350). The regulation
further specifies that United States citizens must report to the IRS, [*3] no later than June 30
of each calendar year, foreign financial accounts exceeding $10,000 maintained
during the previous calendar year. Id. ¶ 6 (citing 31 C.F.R.
§ 1010.306(c)).
B. Defendants' Foreign
Accounts History
Money opened
defendants' account at UBS AG ("UBS"), a bank in Switzerland, in 1998
with an initial deposit of $5,000. Id. ¶ 16. Money
then transferred the account to Nila, who granted
Money the "power of attorney," providing Money control of the
account. Id. ¶ 17. Money arranged transfers into and
out of the account, and before 2002, provided instructions to UBS to use
defendants' account to purchase and sell securities and currencies. Id. ¶ 19. Additionally, defendants frequently transferred
money from their account to their relatives. Id. ¶ 21.
The government alleges that in 2002, UBS prepared a memorandum indicating that
defendants asked UBS whether Nila's brother could
withdraw $50,000 of defendants' funds from UBS's London branch without it being
reported. Id.
In 2002, UBS
notified defendants of changes to U.S. tax law that would require UBS to report
defendants' securities transactions to U.S. tax authorities or to withhold and
pay taxes to the IRS on the transaction proceeds. Id. ¶ 22.
[*4] UBS and defendants then
agreed that UBS would no longer accept defendants' instructions for the
purchase and sale of securities. Id. In 2008, UBS again notified defendants of
new laws applying to U.S. citizens with foreign bank accounts, and recommended
that defendants close their UBS account. Id. ¶ 23.
Defendants soon after transferred the funds in their UBS account to their
accounts at the State Bank of India ("SBI"), a bank in India, and
eventually closed their UBS account. Id.
The
government alleges that before defendants closed their UBS account, defendants'
UBS account had year-end balances of $350,019 in 2005, $361,819 in 2006, $420,893
in 2007, and $15,003 in 2008. Id. ¶ 9. Defendants also
had "as many as twenty-nine and as few as seven fixed deposit accounts at
the State Bank of India[,]" from the years 2005
to 2011. Id. ¶ 10. Defendants' SBI accounts had
aggregate year-end balances of $444,035 in 2005, $669,729 in 2006, $258,079 in
2007, $306,647 in 2008, $411,502 in 2009, $216,530 in 2010, and $362,506 in
2011. Id. Because these foreign bank accounts had balances greater than
$10,000, defendants were required to file FBARs for each of the years
2005 through 2011. Id. ¶¶ 11-12 [*5] .
C. Defendants' Failure
to Disclose their UBS and SBI Accounts
Defendants
filed joint federal income tax returns for the 2005 to 2011 tax years,
utilizing a certified public accountant to file those returns. Id. ¶ 25. The returns included a Schedule B, Interest and
Dividends, which, inter alia, requires
defendants to (1) report domestic or foreign interest or dividends, and (2)
state whether they have a financial account in a foreign country. Id. ¶¶ 26-27. Defendants did not report the interest or
dividends associated with their UBS and SBI accounts for 2005 to 2010. Id. ¶ 26. They checked a box on the Schedule B form for
their 2005 to 2010 tax returns indicating that they did not have foreign
accounts during those years. Id. ¶ 27. Defendants
signed those returns, under penalty of perjury. Id.
For
defendants' 2011 tax return, defendants disclosed their SBI accounts, but
failed to do so in a timely manner. Id. ¶ 29. The IRS
then audited defendants' 2005 to 2011 tax returns. During the audit, defendants
ultimately disclosed two Canadian investment accounts, as well as the UBS and
SBI accounts. Id. ¶ 30.
D. IRS Penalty
Assessments against Defendants
The
government alleges that the IRS thereafter [*6] assessed
penalties against defendants based on their UBS and SBI accounts. Id. ¶¶ 31-32. The government claims that on or around August
23, 2016, the IRS assessed non-willful FBAR penalties against Nila for the tax years 2007 to 2011. Id.
¶ 31. Each penalty was $10,000, totaling $50,000. Id. The government
alleges that on or about August 23, 2016, the IRS also assessed willful FBAR
penalties against Money for the tax years 2007 to 2011. Id. ¶
32. The aggregate amount of the penalty was $257,888, which represents 25%
of the combined 2006 year-end balance of defendants' UBS and SBI accounts,
equaling $1,031,548. Id. This total was then divided equally, in order to apply
penalties equally for each year starting in 2007 and ending in 2011. Id.
The
government further alleges that the assessments were timely. Id.
¶ 33. Under 31 U.S.C. § 5321, the IRS must assess FBAR penalties
no later than six years after the date of the violation. Id.
¶ 33 (citing 31 U.S.C. § 5321(b)(1)). Therefore, the last day the IRS
could have assessed defendants' 2010 and 2011 FBAR penalties was June
30, 2017 and June 30, 2018, respectively. Id. The assessments for the FBAR
penalties for the years 2005 to 2009 were also deemed timely, however, because [*7] defendants signed
agreements extending the date for the IRS to assess their FBAR penalties
until June 30, 2017. Id.
III. LEGAL STANDARD
A motion
pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the legal
sufficiency of the claims asserted in a complaint. Under this Rule, a district
court properly dismisses a claim if "there is a 'lack of a cognizable
legal theory or the absence of sufficient facts alleged under a cognizable
legal theory.'" Conservation Force v. Salazar, 646 F.3d
1240, 1242 (9th Cir. 2011) (quoting Balistreri v.
Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988)). "While a
complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed
factual allegations, a plaintiff's obligation to provide the 'grounds' of his
'entitlement to relief' requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). "[F]actual allegations must be enough to raise a right to
relief above the speculative level." Id.
In
considering a motion pursuant to Rule 12(b)(6), a court must accept as true all
material allegations in the complaint, as well as all reasonable inferences to
be drawn from them. Pareto v. FDIC, 139 F.3d 696, 699 (9th
Cir. 1998). The complaint must be read in the light most favorable to
the nonmoving party. Sprewell v. Golden State Warriors, 266
F.3d 979, 988 (9th Cir. 2001). However, "a court considering a
motion to dismiss can choose to begin by identifying pleadings that, because
they are no more [*8] than conclusions, are
not entitled to the assumption of truth. While legal conclusions can provide
the framework of a complaint, they must be supported by factual
allegations." Ashcroft v. Iqbal, 556 U.S. 662,
679, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009); see Moss v. United States
Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) ("[F]or
a complaint to survive a motion to dismiss, the non-conclusory
'factual content,' and reasonable inferences from that content, must be
plausibly suggestive of a claim entitling the plaintiff to relief.").
Ultimately, "[d]etermining
whether a complaint states a plausible claim for relief will . . . be a
context-specific task that requires the reviewing court to draw on its judicial
experience and common sense." Iqbal, 556 U.S. at 679.
As a general
rule, leave to amend a complaint which has been dismissed
should be freely granted. Fed. R. Civ. P. 15(a). However, leave to amend may be
denied when "the court determines that the allegation of other facts
consistent with the challenged pleading could not possibly cure the
deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d
1393, 1401 (9th Cir. 1986).
IV. DISCUSSION
Section 5321
vests the Secretary of the Treasury with the discretion to impose a civil money
penalty on a person who fails to file an FBAR. 31 U.S.C.A. § 5321 (West)
("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."); see U.S. v. Colliot, No.
AU-16-CA-01281-SS, 2018 U.S. Dist. LEXIS 83159, 2018 WL 2271381, at *2 (W.D.
Tex. May 16, 2018) [*9]
(noting the discretion vested in the Secretary of the Treasury); Norman v. United States, 138 Fed. Cl. 189, 195 (2018)
(same). In 1987, the Department of the Treasury promulgated 31 C.F.R. § 103.57,
which provided that the Secretary of Treasury could assess a civil penalty
against a person who willfully fails to file an FBAR, but that this
penalty could not exceed $100,000. See 31 C.F.R. § 103.57
(West 2011) (reorganized in 2010 as 31 C.F.R. § 1010.820); Amendments to
Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987). However, in 2004, Congress
amended Section 5321 to establish that "in the case of any person
willfully violating, or willfully causing any violation of, any provision of
section 5314," which includes the FBAR filing requirement,
"the maximum penalty under subparagraph (B)(i)
shall be increased to the greater of $100,000, or 50 percent of the
amount" of the balance in the account at the time of the violation. 31 U.S.C.A. § 5321(a)(5)(C) (West). This second option could
be greater than $100,000. The statute previously provided that the amount of a
willful FBAR penalty could not exceed $100,000. 31
U.S.C.A. § 5321(a)(5)(B) (West 2001). The Department of the Treasury has
not amended the regulation's $100,000 willful FBAR penalty cap since
Congress amended the governing statute. See 31 C.F.R. § 1010.820. There is now
disagreement amongst district courts as to whether the 2004 statutory amendment
invalidated the $100,000 [*10] cap
established by 31 C.F.R § 1010.820.
Defendants
argue that the government's claim to reduce Money's penalty assessments to
judgment must be dismissed because the government has assessed penalties
totaling $269,839, which exceeds the $100,000 penalty cap established by 31
C.F.R. §1010.820. Mot. at 2, 5-6. Relying on two
out-of-district cases, U.S. v. Colliot, No.
AU-16-CA-01281-SS, 2018 U.S. Dist. LEXIS 83159, 2018 WL 2271381 (W.D. Tex. May
16, 2018) and U.S. v. Wahdan, 325 F. Supp. 3d 1136,
No. 17-DV-1287-MSK, 2018 WL 3454973 (D. Colo. July 18, 2018), defendants
contend that 31 C.F.R. §1010.820's cap controls because it is consistent with
31 U.S.C. § 5321, the statute under which it was issued. Mot. at 5.
Neither case,
however, supports defendants' position. In Colliot,
the court found that the IRS could not assess FBAR penalties exceeding
the $100,000 cap promulgated under 31 C.F.R. § 1010.820, but the Colliot court only considered FBAR penalties that
exceeded $100,000 in a given year. 2018 U.S. Dist. LEXIS 83159, 2018 WL
2271381, at *1. For this reason, while the IRS in Colliot
had assessed FBAR penalties against the defendant for the years 2007 to
2010, the court only considered and invalidated the penalties from 2007 and
2008, when the penalties of $548,773 and $196,082, respectively, each exceeded
$100,000. 2018 U.S. Dist. LEXIS 83159 [WL] at *1. The court did not consider
the "smaller penalties" from 2009 and 2010, which only amounted to
$88,843 and $10,400, respectively. Id.; No. AU-16-CA-01281-SS,
dkt. 16 (Colliot compl.) at [*11] 10.
Similarly,
the court in Wahdan concluded that the IRS "is
not empowered to impose yearly penalties in excess of $100,000 per
account." 325 F. Supp. at 1141 (emphasis added).
In Wahdan, the IRS had assessed FBAR penalties
against the defendant in the amounts of $1,108,645.41 for the year 2008,
$599,234.54 for the year 2009, and $599,234.54 for the year 2010. Id. at 1137.
As the
government argues, the facts of Colliot and Wahdan are thus inapposite to this case because the five
penalties assessed against Money are individually all less than $100,000. Compl. ¶ 32; Opp'n
at 3. Although in the aggregate the penalties against Money total
$257,888, the yearly, individual penalties are each approximately $51,578. Id.
Each time Money allegedly willfully failed to timely file an FBAR, the
IRS assessed a penalty. Compl. ¶ 32. The penalties
were imposed for separate, if successive, alleged FBAR violations
resulting from defendants' failure to file FBAR reports in 2007, 2008,
2009, 2010, and 2011. Id. This is within the bounds of 31 C.F.R. § 1010.820(g)
("For any willful violation committed . . . the Secretary may
assess upon any person, a civil penalty . . . not to exceed the greater of the
amount (not to exceed $100,000) equal to the balance in [*12] the account at the
time of the violation, or $25,000.") (emphasis
added).1
1 In addition
to arguing that its penalties do not violate 31 C.F.R. § 1010.820's $100,000
cap, the government also argues that 31 C.F.R. § 1010.820 was invalidated by
the 2004 amendment to Section 5321. Opp'n at 5, 9
(citing Norman, 138 Fed. Cl. at 195-96 (finding that the $100,000 penalty cap
established by 31 C.F.R. § 1010.820 is invalid because "Congress clearly
raised the maximum civil money penalty in § 5321 to the greater of $100,000 or
one half of the balance of the account")). In essence, the government argues
that even if the $100,000 penalty cap applied in the aggregate, the amendment
in Section 5321 would permit the government to apply a penalty in excess of
$100,000. The Court need not reach this issue, however. Irrespective of whether
Section 5321 invalidates the Department of Treasury's implementing regulations,
there was no year in which Money was penalized for more than $100,000.
Accordingly,
the Court DENIES defendants' motion to dismiss.
V. CONCLUSION
In
accordance with the foregoing, the Court DENIES defendants' motion to
dismiss the government's claim.