UNITED STATES OF AMERICA, Plaintiffs, v. URAYB
WADHAN, and SAID WADHAN, Defendants.
Civil Action No. 17-CV-1287-MSK
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
COLORADO
325 F. Supp. 3d 1136; 2018 U.S. Dist. LEXIS
119910; 2018-2 U.S. Tax Cas. (CCH) P50,343
July 18, 2018, Decided
July 18, 2018, Filed
CORE TERMS: cap, civil
penalties, willful violations, maximum penalty, legislative history, assess,
impose penalties, agency's action, empowered, preamble, bank accounts, impose a
penalty, claims asserted, safe harbor', inconsistency, inflationary,
conjunction, capricious, nonwillful, willfully,
inflation, offshore, adjusted, maximum, fullest, willful
COUNSEL: [**1] For USA, Plaintiff: Alex Ryan
Halverson, Rick Watson, U.S. Department of Justice-DC-#683, Washington, DC.
For Urayb
Wahdan, Said Wahdan,
Defendants: Alexander H. Bailey, T. Markus Funk, Perkins Coie
LLP-Denver, Denver, CO; Christopher Sigmund, Thomas M. Newman, Perkins Coie LLP-San Francisco, San Francisco, CA.
JUDGES: Marcia S.
Krieger, Chief United States District Judge.
OPINION BY: Marcia S.
Krieger
OPINION
[*1137] OPINION AND ORDER ON MOTION FOR JUDGMENT
ON THE PLEADINGS
THIS MATTER comes before
the Court on the Defendants' Motion for Judgment on the Pleadings (# 33),
the Plaintiff's response (# 34), the Defendants' reply (# 35),
and the Plaintiff's surreply (# 44).
I. JURISDICTION
The Internal
Revenue Service (IRS) seeks a judgment for civil penalties assessed against
Defendants Urayb Wadhan and
Said Wadhan (the Wadhans),
who had interests in multiple overseas bank accounts, each with a balance
greater than $10,000. The Wadhans contend that the
IRS lacked the authority to impose any penalty in excess of $100,000. To
resolve this dispute, the Court exercises jurisdiction pursuant to 28 U.S.C. §
1331.
II. BACKGROUND1
1 The Court
recounts and accepts as true the well-pled facts alleged in Complaint (# 1).
See Dudnikov v. Chalk & Vermilion Fine Arts
Inc., 514 F.3d 1063, 1069-70 (10th Cir. 2008).
According to
the Complaint, the Wadhans failed to file or filed
inaccurate Forms TD F 90.22-1, Report of Foreign Bank [**2] and Financial Accounts (FBAR) for
2008, 2009, and 2010. As a consequence, the IRS assessed numerous penalties for
multiple FBAR violations, many of which were flat amounts of $100,000.
But for three violations, the IRS assessed penalties of $1,108,645.41 for 2008,
$599,234.54 for 2009, and $599,234.54 for 2010.
The Defendants
move for judgment on the pleadings (# 33) contending that the penalties
for years 2008, 2009 and 2010 must be capped at $100,000.
III. LEGAL STANDARD
Typically, an
"agency's action is entitled to a presumption of validity, and the burden
is upon the petitioner to establish the action is arbitrary or
capricious." Sorenson Commc'ns Inc. v. FCC,
567 F.3d 1215, 1221 (10th Cir. 2009). Once agency action is challenged, a
district court reviews the action as if it were an appellate [*1138] court, applying the Administrative
Procedure Act. See Olenhouse v. Commodity Credit
Corp., 42 F.3d 1560, 1580 (10th Cir. 1994). The Court can set aside agency
action if it is "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. § 706(2)(A).
The factual
record in conjunction with a motion for judgment on the pleadings under Federal
Rule of Civil Procedure 12(c) is the same as that under Rule 12(b). See
Ramirez v. Dep't of Corr., 222 F.3d 1238, 1240 (10th Cir. 2000). The Court
accepts all well-pleaded allegations in a complaint as true and views those
allegations in the light most favorable to the nonmoving party. [**3] Stidham
v. Peace Officer Standards & Training, 265 F.3d 1144, 1149 (10th Cir.
2001) (quoting Sutton v. Utah State Sch. for the Deaf & Blind, 173
F.3d 1226, 1236 (10th Cir. 1999)). The Court also limits its consideration to
the four corners of a complaint, any exhibits attached thereto, and any
external documents referred to in the complaint if such document is central to
the claim and the parties don't dispute the authenticity of the document. See
Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009). Alvarado v.
KOB-TV LLC, 493 F.3d 1210, 1215 (10th Cir. 2007).
Ordinarily, a
Rule 12(c) motion is directed to the claims asserted in the Complaint such that
"judgment on the case can be achieved by focusing on the content of the
pleadings." SKS Investments Ltd. v. Gilman Metals Co., No.
12-CV-0806, 2013 U.S. Dist. LEXIS 9042, 2013 WL 249099 at *1 (D. Colo. Jan. 23,
2013). In the Complaint, the IRS asserts only two claims -- one against each
Defendant for penalties pursuant to 31 U.S.C.§ 5321(a)(5) for willful failure to
file accurate forms for numerous off-shore bank accounts (Report of Foreign
Bank and Financial Accounts) for 2008, 2009 and 2010. In contrast, the issue
presented in the subject motion only concerns penalties imposed on certain
accounts, but as to both Defendants.
Because the
issue raised in the extant motion is much narrower, and not configured to match
the claims asserted, the Court inquired of counsel how a ruling might be
fashioned. Based on their representations at a hearing conducted on July 17, 2018,
the Court understands that the parties have submitted all evidence that would
bear on this issue in conjunction [**4] with this motion. The Court therefore
converts the motion to one brought pursuant to Rule 56(a), and finds that there
is no genuine issue of material fact. Accordingly, the issue raised can be
determined as a matter of law. Fed. R. Civ. P. 56(a).
IV. DISCUSSION
The focus of
the dispute is upon the interplay between statutory and regulatory law. The
applicable statute with regard to offshore accounts is 31 U.S.C. § 5321(a)(5).
It authorizes the Secretary of the Treasury to impose civil penalties for
violations of FBAR requirements, and for willful violations sets the
maximum penalty at the greater of $100,000 or 50 percent of the balance in the
relevant account.2
2 ß 5321
(a)(5)(C) provides that, 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)."
Several
regulations implement the statute. They are all found in Title 31 of the Code
of Federal Regulations governing Money and Finance for the Department of
Treasury. The first is 31 C.F.R. § 1010.810(g), which provides that "[f]or
any willful violation [of the FBAR implementing regulations] involving a
failure to report the existence of an account or any [*1139] identifying information required to be
provided with respect to such account," the Secretary "may
assess" a civil penalty of $25,000 or up to the balance in the account but
no greater than $100,000. The second regulation is 31 C.F.R. § 1010.810(g) in
which the Secretary delegates [**5]
his/her authority to "assess and collect civil penalties under 31
U.S.C. § 5321 and 31 C.F.R. § 1010.820" to the Commissioner of Internal
Revenue by means of a memorandum of Agreement between FinCen
and the IRS.
Under this
scheme, the statute (31 U.S.C. § 5321(a)(5)(C)) permits the Secretary to
impose a penalty of up to 50 percent of the account balance, but under 31 C.F.R.ß 1010.810(g) the Secretary has limited the penalty
to be enforced to $100,000. The parties agree that the disjunction between the
statute and the regulation occurred in 2004 when the statutory penalty cap was
increased,3 but no corresponding change was made in 31 C.F.R. §
1010.810(g). Believing the statutory amendment superseded ß 1010.820, the IRS
enforced FBAR violations under the limits set forth in the current ß
5321(a)(5)(C) against the Wadhans.
3 American
Jobs Creation Act of 2004, Pub. L. No. 108-357 ß 821, 118 Stat. 1418 (2004).
The
Defendants argue that the assessments were improper because the IRS only had
that authority limited by 31 C.F.R. § 1010.810(g). The IRS argues that it was
obligated to impose the penalties in the statute, that the reference to
"may" in the statute does not reflect any discretion to impose
penalties smaller than the full amount authorized by Congress, and that the
2004 amendment to the statute supersedes any inconsistency in by 31 C.F.R. §
1010.810(g).
The Court
finds the Defendants' arguments more persuasive. Beginning with the text of 31
U.S.C. § 5321, the Court [**6]
notes that both the pre-2004 version and the current version
specifically grant the Secretary discretion to assess penalties. Both versions
state that the Secretary "may assess" the described penalties. The
statutory language is clear, and there is nothing in the legislative history offered
by the IRS that suggests that Congress intended to limit the discretion of the
Secretary to determine what penalties should be imposed. Congress' intent and
directive ends with the statute.
For a statute
to supersede a regulation, it has to be clearly inconsistent with the
regulation. The IRS argues that the different penalty caps in 31 U.S.C. § 5321
and 31 C.F.R. § 1010.810(g) demonstrates an inconsistency such that the statute
trumps the regulation. United States v. Larionoff,
431 U.S. 864, 873, 97 S. Ct. 2150, 53 L. Ed. 2d 48 (1977). The Court is unpersuaded for several reasons.
First, the
statute and the regulation are not inconsistent on their face. The statute sets
a higher cap than does the regulation; instead, the penalty cap in the
regulation is, in essence, a subset of the penalties that could be imposed
under the statute. The statute does not mandate imposition of the maximum
penalty, but instead gives the Secretary discretion to impose penalties below
the statutory cap. This means that compliance with the lower [**7] cap set in 31 C.F.R. § 1010.810(g) also
complies with 31 U.S.C. § 5321.
Second, there
is a simple and straightforward interpretation that gives coherent meaning to
both the statute and the regulation -- in the exercise of statutory discretion,
the Secretary limited the penalties that the IRS could impose to $100,000 (plus
the amount adjusted for inflation).
Third,
although the penalty caps in the statute and regulation differ, one cannot
assume that the Secretary simply overlooked [*1140] the difference between them. The
difference has existed since 2004 -- essentially 14 years. During that time,
the Secretary made regular adjustments to another regulation, 31 C.F.R. §
1010.821, that adjusted penalties to account for inflation. Among the penalties
affected by this regulation is that created by 31 U.S.C. § 5321(a)(5)(C), for
which the inflationary increases have been made at least five times in the last
eight years4, but at no time was the listed penalty cap raised above
$100,000. See Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg.
42,503, 42,504-05 (June 30, 2016). The periodic revisions of the inflationary
calculation required focus on the penalty cap, but it was never changed to
comport with 31 U.S.C. § 5321(a)(5)(C). This 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' authority to impose penalties to $100,000 as [**8] specified in 31 C.F.R. § 1010.820.
4 Amendments
have been made in 2010, 2015, 2016, 2017, and 2018.
Finally, the
IRS' reliance upon legislative history is misplaced. The IRS argues that
congressional intent as evident from the legislative history for the 2004
amendment to 31 U.S.C. § 5321(a)(5)(C) shows that Congress intended the statute
to supersede 31 C.F.R. § 1010.820. The Court pauses to note that, ordinarily,
it does not resort to legislative history unless the text of a statute is
ambiguous. Mohamad v. Palestinian Auth.,
566 U.S. 449, 458, 132 S. Ct. 1702, 182 L. Ed. 2d 720 (2012). There is no
apparent ambiguity in 31 U.S.C. § 5321(a)(5)(C) -- it simply changed that
maximum penalty that could be imposed.
But assuming
that such legislative history is relevant, it does not support the IRS'
argument. The Senate Report discusses threats arising from offshore accounts in
the context of adding civil penalties for nonwillful
violations but there is no discussion about willful violations. See S.
Rep. No. 108-192 at 108 (2003). Willful violations are mentioned only in the
Conference Report, which states only that the increase in penalties is based on
a Senate amendment and that the committee accepted the amendment. See
H.R. Rep. No. 108-755 at 615 (2004) (Conf. Rep.). Although Congress5
favored higher penalties for FBAR noncompliance, there is nothing here
that suggests that Congress believed that the maximum penalties for willful [**9] violations should be mandatorily
imposed.
5 The IRS
also cites a report from the Joint Committee on Taxation. The report is
unhelpful because it was published well after ß 5321 was amended and it states
that increasing the penalties for willful violations and creating the
new civil penalties for nonwillful violations would
improve the reporting of foreign financial accounts. See Joint Committee
on Taxation, General Explanation of Tax Legislation Enacted in the 108th
Congress, JCS-5-05 at 378 (2005).
The IRS also
argues the Secretary has never intended 31 C.F.R. § 1010.820 to limit the IRS
in its ability to impose the maximum penalties authorized. The IRS points to
the preamble to 31 C.F.R. § 1010.820 when its predecessor provision (ß 103.57)
was issued in 1987. It reads: "Treasury has been given the authority and
responsibility to enforce the Bank Secrecy Act, and intends to do so to the
fullest extent possible. There will be no 'safe harbor' of allowable
violations." Amendments to Implementing Regulations Under the Bank Secrecy
Act, 52 Fed. Reg. 11,436, 11,440 (Apr. 8, 1987). The IRS contends that this
language suggests that the Secretary anticipated that the regulations would
keep pace with statutory provisions.
The IRS reads
more into this provision than does the Court. It is true that this preamble
evidences an intent to prosecute [*1141] all violations, but it does not
expressly address the scope of penalties to be imposed, nor can it be fairly
understood as directing how regulations would be updated. For example, if the
Secretary intended that 31 C.F.R. § 1010.820 would automatically incorporate
changes in 31 U.S.C. § 5321, the regulation could have referred to the statute,
but in the past 31 years, it has not done so.
In the
absence of such clear direction, the Court is left with the question of what is
meant by enforcement [**10]
to the "fullest extent possible". This phrase could have a
variety of meanings -- prosecuting every violator and imposing maximum
sanctions are just two. But the next statement in the preamble indicates the
most likely meaning has to do with scope of prosecution -- that there be no
"safe harbors".
The Court's
reasoning is congruous with the Western District of Texas' determination on the
same issue in United States v. Colliot, No.
16-CA-1281-SS, 2018 U.S. Dist. LEXIS 83159, 2018 WL 2271381 (May 16, 2018). Although
the IRS believes that it is empowered by 31 U.S.C. § 5321 to act, it is not. It
is empowered by the Secretary who has discretion to determine what penalties
are imposed. ß 1010.820 remains in effect until amended or repealed. See
Perez v. Mortgage Bankers Ass'n, 135 S. Ct. 1199,
1206, 191 L. Ed. 2d 186 (2015) ("[A]gencies
[must] use the same procedures when they amend or repeal a rule as they used to
issue the rule in the first instance."). As a result, the IRS lacks
authority to impose a penalty in excess of $100,000 as prescribed by 31 C.F.R.ß 1010.820.
V. CONCLUSION
For the
foregoing reasons, the Defendants' Motion, as reconfigured, (# 33) is GRANTED.
The IRS is not empowered to impose yearly penalties in excess of $100,000.00
per account, and therefore claimed penalties, if proven, will be limited to
such sum.
Dated this
18th day of July, 2018.
BY THE COURT:
/s/ Marcia S.
Krieger
Marcia S.
Krieger
Chief
[**11] United States
District Judge