Government Argues FBAR Violation Was Willful in Penalty Refund Suit

ALICE KIMBLE,
Plaintiff
v.
THE UNITED STATES,
Defendant

IN THE UNITED STATES COURT OF FEDERAL CLAIMS
(Senior Judge Susan G. Braden)

DEFENDANT'S BRIEF IN OPPOSITION TO PLAINTIFF'S
CROSS-MOTION FOR SUMMARY JUDGMENT
AND REPLY BRIEF IN FURTHER SUPPORT OF
DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General
Tax Division
U.S. Department of Justice

DAVID I. PINCUS
JASON S. SELMONT
ELIZABETH A. KANYER
Attorneys, Tax Division
U.S. Department of Justice
Court of Federal Claims Section
Post Office Box 14198 Ben Franklin Station
Washington, D.C. 20044
Tel: (202) 616-3338
Fax: (202) 514-9440
jason.s.selmont@usdoj.gov

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TABLE OF CONTENTS

DEFENDANT'S BRIEF IN OPPOSITION TO PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT AND REPLY BRIEF IN FURTHER SUPPORT OF DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

INTRODUCTION

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases:

Aerolineas Argentinas v. United States, 77 F.3d 1564 (Fed. Cir. 1996)

Austin v. United States, 509 U.S. 602 (1993)

Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989)

Cheek v. United States, 498 U.S. 192(1991)

Dewees v. United States, 272 F. Supp. 3d 96 (D.D.C. 2017)

Farrell v. United States, 313 F.3d 1214 (9th Cir. 2002)

Flo-Con Systems, Inc. v. Pension Benefit Guar. Corp., 39 F. Supp. 2d 995 (C.D. Ill. 1998)

Helvering v. Mitchell, 303 U.S. 391 (1938)

Jarnagin v. United States, 134 Fed. Cl. 368 (2017)

Kelly v. U.S. EPA, 203 F.3d 519 (7th Cir. 2000)

Kitt v. United States, 277 F.3d 1330 (Fed. Cir. 2002)

Korangy v. FDA, 498 F.3d 272 (4th Cir. 2007)

Louis v. Commissioner, 170 F.3d 1232 (9th Cir. 1999)

Mason v. Shinseki, 743 F.3d 1370 (Fed. Cir. 2014)

McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988)

Moore v. United States, 2015 WL 1510007 (W.D. Wash. Apr. 1, 2015)

Morse Diesel Int'l, Inc. v. United States, 79 Fed. Cl. 116 (2007)

Newell Recycling Co. v. U.S. EPA, 231 F.3d 204 (5th Cir. 2000)

Norman v. United States, 2018WL 3629293 (Fed. Cl. July 31, 2018)

One Lot Emerald Cut Stones v. United States, 409 U.S. 233 (1972) (per curiam)

Peck v. Thomas, 697 F.3d 767 (9th Cir. 2012)

Qwest Corp. v. Minn. Pub. Utils. Comm'n, 427 F.3d 1061 (8th Cir. 2005)

Safeco Insurance Company of America v. Burr, 551 U.S.47 (2007)

Sanders v. Szubin, 828 F. Supp. 2d 542 (E.D.N.Y. 2011)

Scofield v. Lewis, 251 F.2d 128 (5th Cir. 1958)

Thomas Jefferson University v. Shalala, 512U.S. 504 (1994)

Trans World Airlines, Inc. v. Thurston, 469 U.S. 111 (1985)

U.S. Sec. & Exch. Comm'n v. Metter, 706 Fed. App'x 699 (2d Cir. 2017)

United Dominion Industries, Inc. v. United States, 532 U.S. 822 (2001)

United States v. Bajakajian, 524 U.S. 321 (1998)

United States v. Bohanec, 263 F. Supp. 3d 881 (C.D. Cal. 2016)

United States v. Bussell (Bussell I), No. 15-02034, 2015 WL 9957826 (C.D. Cal. Dec. 8, 2015)

United States v. Bussell (Bussell II) 699 Fed. App'x 695, 696 (9th Cir. 2017)

United States v. Castello, 611 F.3d 116 (2d Cir. 2010)

United States v. Chaplin's, Inc., 646 F.3d 846 (11th Cir. 2011)

United States v. Colliot, No. 16-1281, 2018 WL 2271381 (W.D. Tex. May 16, 2018)

United States v. Fogg, 666 F.3d 13 (1st Cir. 2011)

United States v. Garrity, 304 F. Supp. 3d 267 (D. Conn. 2018)

United States v. Halper, 490 U.S. 435 (1989)

United States v. Kelley-Hunter, 281 F. Supp. 3d 121 (D.D.C. 2017)

United States v. Larionoff, 431 U.S. 864

United States v. Lippert, 148 F.3d 974 (8th Cir. 1998)

United States v. Mackby, 339 F.3d at 1019 (9th Cir. 2014

United States v. Malewicka, 664 F.3d 1099 (7th Cir. 2011)

United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)

United States v. Nat'I Dairy Prods. Corp., 372 U.S. 29 (1963)

United States v. Sims, 578 Fed. App'x 218 (4th Cir. 2014)

United States v. Sperrazza, 804 F.3d 1113 (11th Cir. 2015)

United States v. Varrone, 554 F.3d 327 (2d Cir. 2009)

United States v. Viloski, 814 F.3d 104 (2d Cir. 2016)

United States v. Wadhan, No. 17-1287, 2018 WL 3454973 (July 18, 2018 D. Colo.)

United States v. Williams (Williams II), 489 Fed. App'x 655 (4th Cir. 2012)

United States v. Williams (Williams III), No. 09-437, 2014 WL 3746497 (E.D. Va. Jun. 26, 2014)

Vons Cos., Inc. v. United States, 51 Fed. Cl. 1 (2001)

In re Wyly, 552B.R.338 (Bankr. N.D. Tex. 2016)

Statutes:

26 U.S.C. § 6038

31 U.S.C. § 5311

31 U.S.C. § 5314

31 U.S.C. § 5321

Other Authorities

26 C.F.R. § 301.7701(b)-2(d)(1)

31 C.F.R. § 103.57

31 C.F.R. § 1010.820

Final Rule, 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987)

H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394

H.R. Rep. No. 108-755 (2004)

https://www.nasdaq.eom/investing/glossary/p/paper-gain)

Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005)

Internal Revenue Manual (I.R.M.):

S. Rep. No. 108-192

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Defendant hereby respectfully provides its response in opposition to Plaintiff's Cross-Motion for Summary Judgment and its reply in further support of its Motion for Summary Judgment.

INTRODUCTION

Plaintiff does not dispute that she was required to file the FBAR for 2007 to disclose her ownership interest in two foreign bank accounts. The crux of the parties' dispute is whether her failure to file the FBAR for 2007 was “willful” and whether, as a result, the IRS properly assessed Mrs. Kimble with a willful-violation penalty under 31 U.S.C. § 5321(a)(5)(C). Notwithstanding that, by her own admission, her intent was to keep her account at UBS a “total secret” from everyone, including the United States government, plaintiff contends that her failure to file the FBAR was not willful. This contention is without merit.

As noted in our opening brief (at 18), a taxpayer failing to file a timely FBAR acts willfully, and is subject to a penalty under 31 U.S.C. § 5321(a)(5)(C), if he or she (1) failed to file the report voluntarily, and not accidentally; (2) was willfully blind to the legal obligation and to the facts giving rise to the obligation; or (3) recklessly disregarded the legal duty to file the report. Here, the undisputed facts clearly establish that Mrs. Kimble was willful under all three alternative standards. Furthermore, the administrative documents demonstrate that the IRS appropriately exercised its discretion in determining the amount of the FBAR penalty assessed against Mrs. Kimble, and that the penalty amount was neither an excessive fine under the Eighth Amendment nor outside the IRS's authority.

For the reasons stated below and in our opening brief, there is no genuine dispute as to the material facts, and those facts entitle the United States to judgment as a matter of law as to Mrs. Kimble's willful failure to file the FBAR for 2007. Accordingly, the Court should deny plaintiff's Cross-Motion for Summary Judgment, grant defendant's motion, and enter judgment in favor of the United States.

ARGUMENT

I. Mrs. Kimble's Failure to File an FBAR for the 2007 Calendar Year Was Willful.

It is undisputed that Mrs. Kimble did not file an FBAR for the 2007 year on or before June 30, 2008, as the regulations required. (Stip. 61.) Rather, Mrs. Kimble appears to challenge whether she acted “willfully” within the meaning of 31 U.S.C. § 5321(a)(5), but only with respect to her UBS Account. Because Mrs. Kimble does not challenge that she acted willfully in her failure to file the FBAR for her HSBC Account (Ex. 30 at 154, ¶ 40 (“Plaintiff admits that Plaintiff does not dispute the FBAR penalty for the HSBC account referenced above.”)), the discussion below focuses solely on the UBS Account.

A. The court should apply a civil willfulness standard.

Plaintiff argues that the government must prove that Mrs. Kimble intentionally violated a known legal duty in order to satisfy the element of willfulness, and that proof of reckless conduct is insufficient. (Pl. Cross-Mot. at 17.) Plaintiff states that “[w]illfulness is a voluntary, intentional violation of a known legal duty” and cites to a criminal case in support of her argument. (Id.) In essence, plaintiff seeks to have a criminal standard of willfulness apply in this civil case. Furthermore, plaintiff takes issue with the government's application of the civil willfulness standards to the facts of plaintiff's case, arguing that the government's interpretation “renders the word 'willfully' meaningless.”¹ (Pl. Cross-Mot. at 13.) Plaintiff's argument is without merit and should be rejected as no court that has addressed the issue of willfulness has applied anything but a civil willfulness standard. See, e.g., United States v. McBride, 908 F. Supp. 2d 1186, 1204 (D. Utah 2012). And, plaintiff's position fails to “account for the well-established distinction between civil and criminal formulations of willfulness." See United States v. Garrity, 304 F. Supp. 3d 267, 273 (D. Conn. 2018).

In Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), the Supreme Court explained that “'willfully' is 'a word of many meanings whose construction is often dependent on the context in which it appears.'” Id. at 57 (quoting Bryan v. United States, 524 U.S. 184, 191 (1998)). In the criminal tax context, the Supreme Court has construed willfulness to require the voluntary and intentional violation of a known legal duty. See Cheek v. United States., 498 U.S. 192, 201 (1991). But “where willfulness is a statutory condition of civil liability,” the Supreme Court has “generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins., 551 U.S. at 57; see also McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132-33 (1988); Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125-26 (1985). “Civil use of the term . . . typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.” Safeco Ins., 551 U.S. at 57 n.9. It is the latter standard of willfulness that applies in the context of a civil FBAR penalty.

In the civil FBAR context, numerous courts have found that willfulness includes reckless conduct and willful blindness. See United States v. Williams (Williams II), 489 Fed. App'x 655, 658 (4th Cir. 2012) (“at a minimum, Williams's undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314”); United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017) (“willful blindness or reckless disregard satisfies the required mental state”); McBride, 908 F. Supp. 2d at 1204 (same); accord United States v. Bohanec, 263 F. Supp. 3d 881, 888-89 (C.D. Cal. 2016); United States v. Bussell (Bussell I), No. 15-02034, 2015 WL 9957826, at *5 (C.D. Cal. Dec. 8, 2015); Garrity, 304 F. Supp. 3d at 274.

As we demonstrated in our opening brief, based on undisputed evidence, Mrs. Kimble's conduct was willful under all three of the alternative civil standards of willfulness. (Def. Mot. for Summ. J. at 17-28 [Dkt. #29].) The standards, which are set forth, for example, in United States v. McBride, 908 F. Supp. 2d at 1210, are: (1) failing to comply with a legal duty voluntarily rather than accidentally; (2) willful blindness to a legal duty and the attendant facts; and (3) reckless disregard of a legal duty. In particular, Mrs. Kimble acted voluntarily in failing to disclose her UBS Account to the United States, as she had constructive knowledge of her obligation to file the FBAR and, by her own admission, intended to keep the UBS Account a secret from everyone, including the United States government. Additionally, she was willfully blind to her duty to file an FBAR, as she took deliberate steps to avoid obtaining actual knowledge of the FBAR requirement itself and of the facts that might trigger the requirement. And, finally, she knew or should have known of the FBAR filing requirement and acted recklessly in failing to file it.

Plaintiff nevertheless suggests that the government's argument is that Mrs. Kimble is willful for her failure to file the FBAR because she failed to “check the box [on her tax return] acknowledging that she had a foreign bank account.” (Pl. Cross-Mot. at 14.) Plaintiff misapprehends the government's position. Plaintiff's failure to “check the box” is, of course, a strong indication of her intent to conceal her account. This failure, when taken with her stated intent to keep the UBS Account a “total secret,” the documents she executed to conceal the account, and her failure to report the income from the UBS Account (because it was “secret money”), compels the conclusion that Mrs. Kimble's failure to file the FBAR was willful.² (See Def. Mot. for Summ. J. at 17-28.)

Notwithstanding the overwhelming evidence, Mrs. Kimble asserts that she was a “benign” actor. This is false. Mrs. Kimble admitted that her intent was to keep the UBS Account a secret from everyone including the U.S. government. In furtherance of this intent, Mrs. Kimble, like her parents before her, maintained the UBS Account as a numbered account, directed UBS to withhold all correspondence, and avoided investing in U.S. securities so as to avoid any potential reporting requirements. On her tax returns, signed under penalty of perjury, Mrs. Kimble claimed not to have a foreign account and avoided paying income taxes on the earnings in the UBS Account for nearly thirty years.³ Although the IRS did not criminally prosecute Mrs. Kimble for tax evasion, it is noteworthy that for decades she did avoid paying taxes on income in the UBS Account to the detriment of the U.S. treasury.

Plaintiff believes that her intent to conceal this account is immaterial and is “adequately explained” by her “adherence to her father's directives” to keep the account secret.⁴ (Pl. Cross-Mot. at 19.) Whatever the purpose behind the account, Mrs. Kimble ignored her statutory duty to report the account on the FBAR. There isn't any exception to the FBAR filing requirement for circumstances like Mrs. Kimble's. Moreover, for the year of the FBAR violation at issue in this case and for the ten years prior, it was Mrs. Kimble, not her father, who was in control of the account and who affirmatively decided to conceal the UBS Account. See Norman v. United States, 2018 WL 3629293, *5 n.11 (Fed. Cl. July 31, 2018) (finding plaintiff acted to conceal her income and foreign account notwithstanding any “deference often due elder family members”).

Plaintiff also contends that she “never read her tax returns and did not understand that income earned in the overseas bank accounts should be declared.” (Pl. Cross-Mot. at 17.) However, that contention is insufficient to shield her from liability. First, courts have also long held that '“individuals are charged with knowledge of the contents of documents they sign — that is, they have “constructive knowledge” of these documents.'” Id. (quoting Consol. Edison Co. of N.Y., Inc. v. United States, 221 F.3d 364, 371 (2d Cir. 2000)); accord Jarnagin, 134 Fed. Cl. 368, 378 (2017). Second, “[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.” Williams II, 489 Fed. App'x at 659 (4th Cir. 2012) (quoting Greer v. Commissioner, 595 F.3d 338, 347 n.4 (6th Cir. 2010)). Lastly, Mrs. Kimble should have realized “that the account had tax implications,” given the fact that she had similar U.S. sourced interest, dividend, and capital gain income and undoubtedly knew that those items had tax implications. See Norman, 2018 WL 3629293 at *5. Had she disclosed her UBS Account to her accountant, he could have explained any tax implications to her. Rather, as Mrs. Kimble admitted, she didn't tell Mr. Weinstein about her UBS Account because it “was secret money.” (Alice Tr. 71:20-24.)

Finally, Mrs. Kimble's shifting stories during the course of her FBAR audit and in this litigation further demonstrates her willful behavior. For example, in her complaint, Mrs. Kimble alleges that her parents were holocaust survivors. (Compl. ¶ 16.) However, during the course of discovery, the government learned that this was untrue; rather, Mrs. Kimble's father had distant relatives who were holocaust survivors and both of her parents were born in and lived their entire lives in the United States. (See Alice Tr. 18:23-19:8, 92:17-24.) Additionally, in plaintiff's cross-motion for summary judgment, she states that she was added to the account shortly before her father's death and “inherited” the account. (Pl. Cross-Mot. at 13.) This statement is in direct conflict with her deposition testimony and stipulation of fact whereby it was established that Mrs. Kimble was added as a joint owner of the account prior to 1980 — that is, at least 17 years before his death in 1997. (Alice Tr. 14:10-18; Dkt. #28, ¶ 13.)

B. Plaintiff's comparison of her conduct to that of other FBAR violators results in the application of an incorrect standard of proof.

Plaintiff attempts to show that she was not willful because her conduct was less egregious than that of other willful FBAR violators. Because plaintiff alleges that her conduct was not as egregious as the conduct in Williams and McBride, she believes that her actions, including her intent to conceal the UBS Account from the U.S. government, did not rise to the level of willfulness in the context of the FBAR penalty. This is erroneous, as we discuss below.

As an initial matter, plaintiff's logic operates from the incorrect assumption that Williams and McBride mark the minimum threshold for finding willfulness. By treating some of the first cases to impose willful FBAR penalties as setting the boundary on willfulness, plaintiff seeks to artificially narrow the limits on the FBAR penalty based on nothing more than the happenstance of the facts of those initial cases.

More to the point, plaintiff's attempt to show that her FBAR violation was not willful by comparing her conduct to that of the defendants in Williams and McBride cannot be squared with the civil standard of willfulness to be applied. The Government has met that standard by showing that Mrs. Kimble knowingly or recklessly failed to disclose her UBS Account notwithstanding her obligation to do so, or was willfully blind to this obligation. Plaintiff essentially seeks to hold the government to a standard more akin to the criminal standard of willfulness, requiring proof that Mrs. Kimble sought to evade tax, like the defendants in Williams and McBride. But, the civil standard of willfulness does not require proof of “improper motive or bad purpose.” McBride., 908 F. Supp. 2d at 1204.

Furthermore, plaintiff's attempt to equate her behavior to that of the defendants in the non-willful FBAR cases of Jarnagin and Moore is likewise misguided. See Vons Cos., Inc. v. United States, 51 Fed. Cl. 1, 10 n.10 (2001) (rejecting a "least common denominator" approach to federal income taxation). Contrary to plaintiff's argument, neither the Jarnagin court nor the Moore court found those accountholders' FBAR violations to be non-willful. Rather, the issue in those cases was whether the accountholders had reasonable cause for their failure to file FBARs. Moreover, this Court should decline to draw any inference from the conduct of the Jarnagins or of Mr. Moore as there is no evidence in the record to establish why the IRS did not impose a willful penalty in those cases. And, in any event, in certain aspects, the case at bar is stronger for the government than Jarnagin or Moore. For example, here, Mrs. Kimble concealed her UBS Account, including from her accountant, evidencing willfulness, whereas the Jarnagins' foreign bank account was not a secret and was disclosed to their bookkeeper, accountants, and lenders.

II. The Amount of the Penalty Imposed Against Plaintiff Was an Appropriate Exercise of the IRS's Discretion.

The FBAR penalty assessed against plaintiff was an appropriate exercise of the IRS's discretion, and the penalty is proportionate to Mrs. Kimble's failure to report her two foreign accounts — and the income therefrom — for many years. Plaintiff nevertheless argues that the IRS acted arbitrarily because it “failed to apply any other mitigation, and failed to explain any reason for the failure to mitigate the penalty.” (Pl. Cross-Mot. at 22.) Plaintiff also argues that the IRS “relied upon erroneous findings and half-truths in making its determination.” (Id.) Plaintiff is incorrect on both scores.

A. The IRS's determination to impose the maximum FBAR penalty for Mrs. Kimble's UBS Account was reasoned and considered.

As discussed in the government's opening brief, the IRS's determination to impose the FBAR penalty of $682,832 for the UBS Account relied on all the facts and circumstances of Mrs. Kimble's case and the provisions of the Internal Revenue Manual (“I.R.M.”). Here, Revenue Agent Irons followed the provisions of the I.R.M. to determine the amount of the penalty. Revenue Agent Irons analyzed the threshold conditions for mitigation and determined that Mrs. Kimble satisfied those conditions. (Irons Decl, at 0025.) Contrary to plaintiff's contention, those mitigations provisions were applied to determine the amount of the penalty for both accounts.⁵ Because Revenue Agent Irons found that the totality of Mrs. Kimble's conduct met the criteria of an egregious willful-violation, Revenue Agent Irons determined that the penalty should not be reduced beyond the mitigation guidelines. (Irons Decl. at 0030.) Accordingly, the IRS imposed the maximum penalties in accordance with the mitigation guidelines' penalty structure of the I.R.M. (Irons Decl. at 0037.)

Plaintiff nevertheless contends that the IRS “arbitrarily failed to apply any other mitigation, and failed to explain any reason for the failure to mitigate the penalty.” (Pl. Cross-Mot. at 22.) This contention is incorrect; the IRS's reasoning for its decision to impose the maximum penalty is documented in Revenue Agent Irons' report. As an initial matter, the IRS is not required to minimize the FBAR penalty imposed against an accountholder. Rather, the IRS is required to exercise its discretion in determining the amount of the FBAR penalty. United States v. Williams (Williams III), No. 09-437, 2014 WL 3746497, *2 (E.D. Va. Jun. 26, 2014) (“Although the IRS may impose a lower penalty where the violating taxpayer meets certain criteria, . . . such departures are within the discretion of the agency.”). Furthermore, Revenue Agent Irons found Mrs. Kimble's conduct to be an egregious willful violation, which warranted the imposition of the maximum FBAR penalty. (See Irons Decl. at 0030; Def. Mot. for Summ. J.at 31-33.) Revenue Agent Irons evaluated eight separate factors and presented detailed explanations as to why these factors demonstrated egregious willful conduct. (See Irons Decl. at 0030-0033; Def. Mot. for Summ. J. at 31-33.) These factors included her pattern of concealing the accounts from her tax return preparer, her failure to report income from the account on her tax return, her concealment of account documents, and her consistent and active involvement with the account. (See id.)

Here, the IRS's decision should be upheld because, as detailed in Revenue Agent Irons' case summary, the decision had a reasonable basis, meaning that the IRS “considered the relevant factors and articulated a rational connection between the facts found and the choices made.” Peck v. Thomas, 697 F.3d 767, 772 (9th Cir. 2012) (quoting Arrington v. Daniels, 516 F.3d 1106, 1112 (9th Cir. 2008)); see also Williams III, 2014 WL 3746497, at *1 (applying arbitrary and capricious standard of review).

B. Plaintiff has failed to demonstrate that the IRS's determination of the penalty amount was an abuse of its discretion.

Plaintiff has failed to show that the IRS's determination of the penalty amount was an abuse of discretion. Although plaintiff argues that the IRS “relied upon erroneous findings and halt-truths in making its determination,” plaintiff does not explain how the IRS's allegedly erroneous findings would affect the outcome of the decision-making process. (Pl. Cross-Mot. at 22.) Moreover, the conclusions that plaintiff contends are “erroneous” are, in fact, accurate, or otherwise based on the documentary evidence presented to the IRS.

The information that the IRS relied upon in making its determination was correct, or was reasonable based upon the facts available at the time of the IRS's determination. Plaintiff suggests that the IRS erroneously found that Mrs. Kimble did not have a “'business or personal connection' with the countries in which her two accounts were located.” (Pl. Cross-Mot. at 23.) Rather, as to the UBS Account, Mrs. Kimble suggests that “her connection to Switzerland is established by the fact that she inherited an account domiciled there.” Aside from the incorrect assertion that she inherited the account (see Stip. ¶ 13), that her foreign account was located in Switzerland does not show a personal connection to the country. A personal connection with a foreign country may be demonstrated by: the location of the accountholder's permanent home, family, personal belongings, social, political, cultural or religious organizations with which the accountholder maintains a current relationship; where the accountholder conducts her routine personal banking activities; the jurisdiction in which the accountholder holds a driver's license; the jurisdiction in which the individual votes; and the country of residence designated by the accountholder on forms and documents. See Treas. Reg. § 301.7701(b)-2(d)(1) (providing facts and circumstances considered in determining a taxpayer's connection to a foreign country). Mrs. Kimble cannot demonstrate a personal connection to Switzerland nor can she offer any fact to explain why she would maintain an account in Switzerland except for its bank secrecy laws.

Plaintiff also argues that the IRS's determination that Mrs. Kimble actively managed the UBS Account “fail[s] to acknowledge that she was not involved in the management of the account, but deferred to her ex-husband.” (Pl. Cross-Mot. at 23.) This argument stands in opposition to the information the IRS learned during the administrative process. As detailed in Revenue Agent Irons' report, during a telephone interview with plaintiff on August 22, 2013, the IRS learned that “[Michael] Kimble provides [plaintiff] investment advice regularly regarding her foreign accounts. . . . [and] that although he 'could' move funds within the account without her approval, he never would.” (Irons Decl. at 0027.) Additionally, from that same interview, the IRS learned that “[i]nvestment decisions are always first discussed and made jointly; once they have made a decision the pair will conference call UBS to make the transaction.” (Id. (emphasis in original).) Likewise, when meeting with UBS representatives in New York, Mrs. Kimble and Mr. Kimble “jointly meet with [the UBS representative] to discuss investment strategy.” (Id.) Moreover, the IRS's review of UBS Account revealed that “[t]ransactions were frequent beginning in 2006," which included “stock sales, and purchases, corporate bonds, money market funds and currency transactions.” (Id.) These facts concerning Mrs. Kimble's “consistent and active involvement of her accounts” were then incorporated into Revenue Agent Irons' analysis of Mrs. Kimble's willfulness in her failure to file the FBAR. (See Irons Decl. at 0032 ¶ 5.) Plaintiff's contention that “she was not involved in the management of the account” is factually untrue. (See also Def. Mot. for Summ. J. at 5-6.) And, in any event, the IRS's conclusion that Mrs. Kimble was actively involved in managing the UBS Account is amply supported in the administrative documents.

Lastly, plaintiff suggests that the IRS “incorrectly determined that [Mrs. Kimble] was the sole beneficiary on the account at her father's death, and that she 'added' her mother, as well as her son.” (Pl. Cross-Mot. at 23.) Plaintiff states that her mother “had been an owner of the account since its inception, and was not added by [Mrs. Kimble].” (Id.) In her case summary, Revenue Agent Irons noted that Mrs. Kimble became the sole owner of the UBS Account at the time of her father's death. (Irons Decl. at 0029.) This statement was based on the documentary evidence provided during the audit. For example, Revenue Agent Irons reviewed the “Basic document for account/custody account relationship,” on which only Mrs. Kimble's name, and not that of her mother, was listed as the account holder, and the “Verification of the beneficial owner's identity,” which Mrs. Kimble signed stating that she was the sole beneficial owner of the account. (Irons Decl. at 0383.) Revenue Agent Irons also reviewed two documents signed by Mrs. Kimble purporting to give her mother power of attorney over the UBS Account. (Irons Supp. Decl. at 0607-0609.) The inference that can be drawn from these documents is that Mrs. Kimble was the sole owner of the account at the time of her father's death.

During the course of litigation, however, Mrs. Kimble testified that her mother had always been a co-owner of the account. (Alice Tr. 14:4-9.) When confronted with the UBS document that she signed identifying the beneficial owners of the UBS Account — one which the IRS relied on in its administrative determination — Mrs. Kimble could not explain why her mother was not listed as a beneficial owner as her mother “was also, to [her] knowledge,” a beneficial owner of the account. (Alice Tr. 48:25-49:6.) As plaintiff, who signed documents that identified her as the sole beneficial owner or that gave her mother power of attorney, could not explain why her mother, a purported co-owner of the account, was not included on the documents, it stands to reason that it was appropriate for the IRS to rely on documentary evidence to support its conclusion that Mrs. Kimble was the sole owner of the UBS Account after her father's death.

More importantly, even if the IRS had learned during the administrative process that Mrs. Green was a co-owner of the UBS Account, plaintiff has failed to show the effect that this fact should have had on the IRS's determination. That is to say, if the IRS were aware that Mrs. Kimble and her mother were co-owners of the account following Mr. Green's death, plaintiff has failed to show how this fact demonstrates that the IRS should have exercised its discretion to impose a lower penalty amount. If anything, knowledge of this fact could have lead the IRS to impose the FBAR penalty against both plaintiff and Mrs. Green.

At bottom, the IRS had sufficient evidence of Mrs. Kimble's egregious conduct in failing to file FBARs to warrant the imposition of the FBAR penalty of $682,832 on the UBS Account, and none of these purported errors, even if true, undercut the IRS's reasoning.

III. The FBAR Penalty Is Not Unconstitutional Under the Eighth Amendment.

Plaintiff argues that the FBAR penalty assessed against her is unconstitutional under the Eighth Amendment because it violates the Excessive Fines Clause. (See Pl. Cross-Mot. at 26-27.) Plaintiff bears the burden to show that the FBAR penalty is unconstitutionally excessive. See United States v. Castello, 611 F.3d 116, 120 (2d Cir. 2010); United States v. Bussell (Bussell II), 699 Fed. App'x 695, 696 (9th Cir. 2017). This she cannot do.

The Eight Amendment provides that “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” U.S. Const, amend. VIII. To establish that a civil penalty is unconstitutional under the Excessive Fines Clause, plaintiff must show: (1) that the exaction at issue is a “fine” within the scope of the Eighth Amendment; and (2) that the fine is “excessive.” See United States v. Viloski, 814 F.3d 104, 109 (2d Cir. 2016); Dewees v. United States, 272 F. Supp. 3d 96, 100 (D.D.C. 2017).

A. The civil FBAR penalty is not a “fine” for purposes of the Eighth Amendment.

It appears that no court has expressly decided that an FBAR penalty is a fine subject to the Eighth Amendment. Although an Eighth Amendment inquiry has been applied in civil FBAR cases, those cases simply “assumed” an FBAR penalty to be a fine before considering whether it was excessive. See, e.g., Bussell I, 2015 WL 9957826 at *7-9 (C.D. Cal. Dec. 8, 2015) (analyzing claim that willful FBAR penalty violated Excessive Fines Clause by addressing only excessiveness and not considering whether it was a fine); Bussell II, 699 Fed. App'x at 696 (same); Moore v. United States, 2015 WL 1510007, at *12 (W.D. Wash. Apr. 1, 2015) (“The court assumes without deciding that civil FBAR penalties are 'fines' within the meaning of the Eighth Amendment[.]” (emphasis added)). Similarly here, plaintiff labels the FBAR penalty a “forfeiture” and assumes without explanation that it was a fine within the meaning of the Eighth Amendment. See United States v. Bajakajian, 524 U.S. 321, 337-340 (1998).

The Supreme Court has differentiated between certain exactions that are remedial, and thus are not “fines” within the Eighth Amendment's meaning, and others that are punitive and therefore are “fines” that violate the Constitution if they are “excessive.” See Austin v. United States, 509 U.S. 602, 610 (1993) (explaining that a government-ordered payment is a “fine” for purposes of the Eighth Amendment if “it can only be explained as serving in part to punish.”); United States v. Halper, 490 U.S. 435, 448 (1989); Kitt v. United States, 277 F.3d 1330, 1337 (Fed. Cir. 2002)(“A fine under the Eighth Amendment is a payment to the government that constitutes punishment for an offense.” (internal citation omitted)); see also Korangy v. FDA, 498 F.3d 272, 277 (4th Cir. 2007) (“Civil fines serving remedial purposes do not fall within the reach of the Eighth Amendment.”); Dewees, 272 F. Supp. 3d at 100. Thus, application of the Supreme Court guidance to the FBAR penalty requires a close analysis. See United States v. Lippert, 148 F.3d 974, 977-78 (8th Cir. 1998); see also U.S. Sec. & Exch. Common v. Metter, 706 Fed. App'x 699, 703 (2d Cir. 2017).

The case law on the Excessive Fines Clause arises almost entirely from forfeiture actions, not civil refund (or collection) actions regarding monetary penalties like the FBAR penalty. In Bajakajian, 524 U.S. at 328, the Supreme Court held that a criminal forfeiture was subject to the Excessive Fines Clause, but it is unclear to what extent that the reasoning from Bajakajian might be applicable outside its specific context. "Bajakajian was the first — and to date is the only — Supreme Court case that actually applies the Excessive Fines Clause.” In re Wyly, 552 B.R. 338, 606 (Bankr. N.D. Tex. 2016); see also Bajakajian, 524 U.S. at 327.

The conclusion in Bajakajian that the forfeiture was an Eighth Amendment “fine” depended, in part, on the fact that the forfeiture was “imposed at the culmination of a criminal proceeding and require[d] conviction of an underlying felony.” 524 U.S. at 328. The Supreme Court has contrasted this fact pattern with other types of forfeiture where “no criminal offense, much less a criminal conviction, is required.” One Lot Emerald Cut Stones v. United States, 409 U.S. 233, 236 n.6 (1972) (per curiam). Because the civil FBAR penalty can be imposed regardless of the existence of any underlying criminal offense, Bajakajian is arguably distinguishable on this basis, with One Lot Cut Emerald Stones plausibly being seen as more closely comparable to our case. See also Louis v. Commissioner, 170 F.3d 1232, 1236 (9th Cir. 1999) (tax penalties for fraud are not fines under Eighth Amendment because “unlike the forfeiture at issue in Bajakajian, additions to tax for fraud can be imposed regardless of whether the taxpayer has been convicted of a felony”) (citing Helvering v. Mitchell, 303 U.S. 391, 406 (1938)).

In One Lot Emerald Cut Stones, the Supreme Court held that a customs statute requiring forfeiture of undeclared goods and levying a monetary penalty equal to their value imposed “remedial rather than punitive sanctions” because it “provides a reasonable form of liquidated damages for violation” of tariff regulations. 409 U.S. at 237. The FBAR penalty can likewise be viewed as providing a reasonable form of liquidated damages for any potential tax loss (and associated expense of investigation) that the government frequently suffers when offshore accounts are not reported by taxpayers. See Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., 492 MS. 257, 265 n.7 (1989) (noting historical “dichotomy between fines and damages”); see also Bajakajian, 524 U.S. at 342.

Such damages need not track the actual loss to the public fisc with perfect accuracy because “the Government is entitled to rough remedial justice, that is, it may demand compensation according to somewhat imprecise formulas, such as reasonable liquidated damages or a fixed sum plus double damages.” Halper, 490 U.S. at 446.⁶ Although an FBAR penalty can be imposed in the absence of any identifiable tax loss, the likelihood that an FBAR violation is related to a tax loss, as is the case here, may be enough for the FBAR penalty to fall outside the Eighth Amendment's scope. See Bajakajian, 524 U.S. at 342 n.17 (that certain forfeitures were related to offenses “likely to cause the Government losses in customs revenue” was enough to make such forfeitures remedial and non-punitive).

Another reason why the FBAR penalty is not limited by the Excessive Fines Clause is its similarity to civil tax penalties. There is no question that civil tax penalties are remedial, and thus not Eighth Amendment “fines,” and the FBAR penalty is readily analogized to civil tax penalties in terms of its functioning and purpose. See Mitchell, 303 U.S. at 401 (noting “[t]he remedial character of sanctions imposing additions to tax,” which are “provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud.”); Louis, 170 F.3d at 1236; Wyly, 552 B.R. at 603.

An instructive recent case is Dewees, 272 F. Supp. 3d at 98, where a taxpayer challenged the IRS's assessment of $120,000 in civil tax penalties for his failure to meet an information reporting requirement by not filing Form 5471 — a close cousin of the FBAR — on which he was required to disclose his ownership of a foreign corporation. That $120,000 consisted of 12 consecutive years of statutory $10,000 annual penalties, see 26 U.S.C. § 6038(b)(1).⁷ The court found the $120,000 in penalties to be remedial and not subject to the Eighth Amendment. Id. at 100-01. This was despite the fact that, “[t]he total penalty was based entirely on Dewees' failure to file; he was not liable for any unpaid taxes.” Id. at 99. As noted above, an FBAR penalty can similarly be assessed in the absence of any tax loss. See also Wyly, 552 B.R. at 613 (holding that penalties under 26 U.S.C. § 6677 for failing to report foreign trusts are not Eighth Amendment “fines”). Thus, it is far from a settled issue that civil FBAR penalties are “fines” subject to Eighth Amendment analysis. If the Court determines that the civil FBAR penalty at issue in this case is not a fine, then there is no need for the Court to engage in the second step of the analysis.

B. The FBAR penalty assessed against Mrs. Kimble is not unconstitutionally excessive.

If the Court determines that the FBAR penalty is a “fine” subject to the Eighth Amendment, then it should find that the FBAR penalty assessed against Mrs. Kimble was not unconstitutionally excessive. A fine is “excessive” under the Eighth Amendment only if it is “grossly disproportional” to the gravity of the offense. Bajakajian, 524 U.S. at 336-337 (emphasis added). In Bajakajian the Supreme Court observed that “judgments about the appropriate punishment for an offense belong in the first instance to the legislature,” and that “any judicial determination regarding the gravity of a particular criminal offense will be inherently imprecise.” Id. at 336. “Both of these principles counsel against requiring strict proportionality between the amount of a punitive forfeiture and the gravity of a criminal offense.” Id.

Although the Federal Circuit has not analyzed factors to guide the “grossly disproportional” analysis, the Second Circuit has recognized four factors, distilled from Bajakajian:

[1] the essence of the crime of the defendant and its relation to other criminal activity, [2] whether the defendant fits into the class of persons for whom the statute was principally designed, [3] the maximum sentence and fine that could have been imposed, and [4] the nature of the harm caused by the defendant's conduct.

Castello. 611 F.3d at 120 (edits in original). It is worth noting that the references in the Bajakajian factors to “crime,” “criminal activity,” and “maximum sentence” indicate the extent to which Excessive Fines Clause cases almost always concern forfeiture in criminal offenses, making the application of Bajakajian to statutory civil penalties tenuous. Still, in applying these four factors to this case, the Court should find that the FBAR penalty assessed against Mrs. Kimble was not unconstitutional.

1. Mrs. Kimble's crime was serious and there was evidence that she engaged in other criminal activity.

Turning to the first Bajakajian factor, “the essence of the crime of the [plaintiff] and its relation to other criminal activity,” the Court should find that Mrs. Kimble willfully failed to report her foreign financial account — thus her “crime” would be a reporting offense. In weighing the essence of the crime involving a reporting offense, it is appropriate to take into account the larger regulatory scheme that makes Mrs. Kimble's conduct a “crime.” For example, in Sanders v. Szubin, 828 F. Supp. 2d 542, 553 (E.D.N.Y. 2011), the court analyzed the first Bajakajian factor involving a civil fine imposed on the defendant for willfully failing to respond to a request for information regarding his suspected trip to Cuba. Id. In that context, the court noted that the request for information was “part of a complex regulatory scheme,” which was necessary for the government to undertake to ensure compliance with the Cuban embargo. Id. “Without such penalty power and without across the board resort to it to impose penalties, compliance would quickly wither and, obviously, the cumulative effects of nonenforcement and noncompliance would eviscerate [the government's] ability to administer the embargo.” Id. The court also recognized that the defendant's “willful” failure to report “[r]ais[ed] the ante” because “outright defiance of the obligation . . . no matter how small” threatened the regulatory scheme. Id. After considering the complex regulatory scheme and the defendant's willful failure the court concluded, “[i]n weighing proportionality, the sin — substantively and procedurally — [was] serious.” Id.

Likewise, here, Mrs. Kimble's obligation to report her foreign account is part of a larger enforcement scheme. As discussed in the government's opening brief, Congress enacted the FBAR requirement to protect the public fisc; Congress recognized that strong penalties for willful violations of the law were necessary to increase compliance. Because Mrs. Kimble willfully failed to abide by this requirement, the nature of her crime is serious “substantively and procedurally.” Thus, on the essence of the crime alone, the Court should find that the first factor cuts for the government.

Moreover, Mrs. Kimble's willful failure to file an FBAR was not a “one off” violation. She became a co-owner of the account at least as early as 1980 and never reported it to the government. To hide this account for such a long-period of time, Mrs. Kimble not only failed to file an FBAR year after year, but she also submitted false statements on her personal income tax returns for every year by failing to disclose the foreign account on her Schedule B and by failing to report the income from the account. Thus, Mrs. Kimble's criminal activity included not only crimes of omission but commission as well.

In opposition, plaintiff argues that “all of the money in the UBS Account had been legally earned, and all taxes had been paid on it.” (Pl. Cross-Mot. at 27.) However, the only evidence that the funds were derived from Mr. Green's law practice and were taxed prior to being deposited at UBS is from Mrs. Kimble's self-serving statements. Mr. Green never reported the foreign account while he was alive so the government did not have the opportunity to timely investigate the source of the funds that were deposited in his foreign account or discover his purpose for opening and hiding the foreign account. The funds Mr. Green used to seed his foreign account could have been part of a tax scheme or could have been untaxed, but because Mr. Green did not timely disclose this account, the government could not effectively investigate.

The absence of these facts distinguish this case from Bajakajian. There, Bajakajian tried to leave the country with $357,144 in cash and was arrested for failing to declare the funds to United States Customs. 524 U.S. at 325. The government demanded the entire $357,144 under a statute mandating forfeiture of any property “involved in” a broad range of criminal offenses. Id. The Supreme Court held that the criminal forfeiture of $357,144 was disproportionate to the defendant's particular offense, which was “solely a reporting offense” and was “unrelated to any other illegal activities.” Id. at 337-38. Important to the Supreme Court's opinion were the facts found by the district court, specifically, that “the funds were not connected to any other crime,” and that Bajakajian “was transporting the money to repay a lawful debt.” Id. at 326.

Unlike the defendant in Bajakajian., Mrs. Kimble has not offered any evidence (other than her self-serving testimony) that the money in the UBS Account was derived from “legal activity," or that income taxes were paid on the funds prior to being deposited in the UBS Account.⁸ Thus, plaintiff cannot meet her burden to show that the FBAR penalty was unconstitutionally excessive. See, e.g., United States v. Sims, 578 Fed. App'x 218, 223 (4th Cir. 2014) (where the defendant did not show that forfeiture of his car was excessive, in part, because the defendant “offered no evidence regarding the value of the [car].”); United States v. Fogg, 666 F.3d 13, 19 (1st Cir. 2011). Moreover, as discussed in more detail in the section below dealing with the fourth Bajakajian factor (harm), the whole point of the FBAR requirement is timely disclosure so the government has an opportunity to investigate. It would therefore be inequitable to allow Mrs. Kimble to profit from her father's (and her) nondisclosure by defeating the legislatively authorized penalty for nondisclosure. Thus, the Court should find that this first factor weighs for the government.

2. Mrs. Kimble is within the class of persons for whom the FBAR requirement was designed.

The second Bajakajian factor, “whether the defendant fits into the class of persons for whom the statute was principally designed,” also favors the government. Plaintiff argues that she is “not a member of the class of people at whom the statute was aimed, e.g., money launderers and those who use the accounts to hide untaxed or illegal income.” (Pl. Cross-Mot. at 27.) Mrs. Kimble is incorrect; she is exactly the type of person for whom the Bank Secrecy Act was designed, i.e., she is a United States citizen who hid assets in an undisclosed financial account in a foreign county with bank secrecy laws and evaded taxes on the income from the account. See, e.g., H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397-98 (observing that “[s]ecret foreign financial facilities, particularly in Switzerland” offered the wealthy a “grossly unfair” but “convenient avenue of tax evasion”).

Plaintiff states that, as in Bajakajian, Mrs. Kimble was, “appropriately,” not criminally prosecuted. (Pl. Cross-Mot. at 27.) In applying this factor, however, it does not matter that Mrs. Kimble was not charged with a crime for failing to disclose the account. See Castello, 611 F.3d at 122 (where the Second Circuit disagreed with the district court's conclusion that the second Bajakajian factor was neutral because the defendant “was not convicted of the offenses that the [reporting] statute aim[ed] to expose,” and stating “[t]he inquiry . . . is whether [the defendant] was the kind of person to whom the statute is directed — as he clearly [was]”); see also United States v. Malewicka, 664 F.3d 1099, 1105-06 (7th Cir. 2011). Rather, the only inquiry is whether the defendant is the “kind of person” contemplated by the statute, which Mrs. Kimble clearly was.

3. The FBAR penalty assessed against Mrs. Kimble is within the statutory maximum established by Congress.

The third Bajakajian factor, “the maximum sentence and fine that could have been imposed,” shows that the FBAR penalty assessed against Mrs. Kimble is presumptively constitutional because it is within the maximum penalty provided by Congress. “[J]udgments about the appropriate punishment for an offense belong in the first instance to the legislature,” Bajakajian, 524 U.S.at 336, as acts of Congress are generally afforded a strong presumption of constitutionality, see United States v. Nat'I Dairy Prods. Corp., 372 U.S. 29, 32 (1963). See also United States v. Viloski, 814 F.3d 104, 112 (2d Cir. 2016), cert. denied, 137 S. Ct. 1223 (2017) (“Our role in reviewing criminal forfeitures is solely to examine them for gross disproportionality; in other respects, we must defer to Congress.”).

Thus, a penalty imposed within legislative boundaries is presumptively proportional. See Newell Recycling Co. v. U.S. EPA, 231 F.3d 204, 210 (5th Cir. 2000) (“No matter how excessive (in lay terms) an administrative fine may appear, if the fine does not exceed the limits prescribed Qwest Corp. v. Minn. Pub. Utils. Comm'n, 427 F.3d 1061, 1069 (8th Cir. 2005); Kelly v. U.S. EPA, 203 F.3d 519, 524 (7th Cir. 2000); Wyly, 552 B.R. at 608 (“Significantly, neither party has cited a case to the Court, nor has the Court been able to locate one through its own research, invalidating a nonforfeiture, legislative civil penalty under the Excessive Fines Clause”); United States v. Varrone, 554 F.3d 327, 331-32 (2d Cir. 2009) (and cases cited therein). Here, Congress authorized a 50-percent penalty for willful violations of the FBAR requirement. See 31 U.S.C. § 5321(a)(5)(C). The penalty assessed against Mrs. Kimble was within this statutory amount; accordingly, the penalty assessed against Mrs. Kimble is presumptively proportional.

In Bajakajian, the Supreme Court also looked to the difference between the maximum civil penalty as compared to the maximum criminal penalty. However, such a comparison is unnecessary in the FBAR context in light of the fact that the civil FBAR penalty at issue is in accord with the penalty amount set by Congress. See 31 U.S.C. § 5321(a)(5)(C). Congress was no doubt aware that the potential maximum civil penalty that it set could exceed the criminal maximum fine that it also determined — if Congress were concerned it could have capped the maximum civil penalty at the same amount as the maximum criminal fine. See Morse Diesel Int'l, Inc. v. United States, 79 Fed. Cl. 116, 128-129 (2007) (Braden, J.) (“in raising the statutory maximum civil penalty under the False Claims Act in 1986 from $2,000 to $10,000 and creating a $10,000 'per occurrence' penalty under the Anti-Kickback Act, Congress was focused on eradicating fraud in federal government contracting”); see also United States v. Chaplin's, Inc., 646 F.3d 846, 855 (11th Cir. 2011) (“But Congress has authorized both a fine and forfeiture as part of the punishment for both § 1956 and § 5324, which suggests that Congress does not consider a punishment somewhat above the statutory fine range to be excessive.”) (citations and internal quotations omitted);.

4. Mrs. Kimble caused significant harm to the government by failing to timely report her foreign account.

Turning to the fourth (and final) Bajakajian factor, “the nature of the harm caused by the defendant's conduct,” Mrs. Kimble's willful failure to disclose her foreign account was significantly harmful in the eyes of Congress. The statute authorizes a 50-percent penalty only for “willful” FBAR violations. See 31 U.S.C. § 5321(a)(5)(C). This substantial maximum penalty shows that Congress believed the willful failure to file an FBAR to be a serious offense. By contrast, the civil penalty for a non-willful FBAR violation is capped at $10,000 and subject to a reasonable cause exception. See 31 U.S.C. § 5321(a)(5)(B). The differences between the willful and non-willful penalties reflects Congress's considered choice that a willful violation presents a serious harm to the government.

The legislative history confirms the serious nature of a willful FBAR violation. In enacting the Bank Secrecy Act, Congress explained that “secret foreign bank accounts” enabled crime, including tax evasion, securities violations, and fraud. H.R. Rep. No. 91-975, reprinted in 1970 U.S.C.C.A.N. at 4397-98; see also 31 U.S.C. § 5311 (“certain reports or records . . . have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings”). After the Treasury later reported poor FBAR compliance, Congress announced that improving compliance was “vitally important.” S. Rep. No. 108-192, at 108. Secretive offshore activity — like that engaged in by Mrs. Kimble — has “vast” consequences and does significant harm to the integrity of the tax system. H.R. Rep. No. 91-975, reprinted in 1970 U.S.C.C.A.N. at 4397.

That Congress chose not to tie the amount of the willfulness penalty to any particular amount of loss to the public fisc reflects a legislative judgment that the harm to the public fisc logically increases with the balance in the unreported account. See Chaplin's, Inc., 646 F.3d at 852 (“Congress, as a representative body, can distill the monetary value society places on harmful conduct”). The FBAR penalty therefore need not be correlated with any loss to the public fisc in a particular case. Cf. Mackby, 339 F.3d at 1019 (“The government has a strong interest in preventing fraud,” and the harm of false claims “extends beyond the money paid out of the treasury.”); United States v. Sperrazza, 804 F.3d 1113, 1128 (11th Cir. 2015).

These principles were applied by the Seventh Circuit in an analogous case, Malewicka, 664 F.3dat 1104. There, the defendant was convicted of “structuring transactions for the purpose of avoiding bank reporting requirements.” Id. at 1102–03. As part of her sentence, the district court ordered her to forfeit $279,500. Id. On appeal, the defendant claimed that the forfeiture was unconstitutionally excessive because, if her crime went undetected, then the government would only have been “deprived . . . of information that she made certain cash withdrawals.” Id. at 1107. In analyzing the fourth Bajakajian factor, the circuit court recognized that, “[w]hile it is true that her acts deprived the government of nothing but information, this characterization greatly downplays the significance of her crime.” It stated that “[t]he concerns underlying her crime were significant enough that Congress enacted a statute to ensure that such information [was] collected[.]” The court highlighted that the “intent” of the reporting statute was “to aid the government's efforts to uncover and prosecute crime and fraud,” and “[b]y structuring her transactions to avoid reporting requirements, [the defendant] inhibited the government's ability to effectively uncover and identify fraud.” Id.

Similarly, in this case, plaintiff implies that Mrs. Kimble's failure to file an information return was insignificant. (See Pl. Cross-Mot. at 15 (“There was no harm caused by her conduct except for the failure to pay taxes on the gains. She has since fully paid both the taxes and the interest.”). However, Mrs. Kimble only paid taxes on income earned in the UBS Account for three years (2006-2008), leaving nearly thirty years of gains untaxed. Moreover, the loss of timely information is exactly the harm that the Bank Secrecy Act is meant to address — the loss of information harms the government because it prevents the government from timely investigating any financial crimes associated with the undisclosed foreign account. The FBAR statute does not require proof of financial harm or loss caused by the individual before assessing the civil penalty. Thus, in enacting the FBAR statute, Congress determined that the need to report a foreign account was so important, and the harm caused by willful failures was so significant, that a 50-percent penalty was appropriate. Therefore, this fourth Bajakajian factor — like the other three before it — favors the government. The Court should find that even if the FBAR penalty is a fine, the FBAR penalty assessed against Mrs. Kimble, which was in line with the penalty authorized by Congress, is not unconstitutionally excessive.

IV. This Court Should Follow the Decision of the Court of Federal Claims in Norman v. United States and Not the Decision of the Western District of Texas in United States v. Colliot Regarding the Maximum FBAR Penalty.

As discussed in the government's opening brief, the Court should not follow the decision in United States v. Colliot regarding the maximum amount of the FBAR penalty. While the court in Colliot determined that superseded regulations govern the determination of the FBAR penalty, the government demonstrated in its brief that the IRS was required to impose FBAR penalties against Mrs. Kimble in conformity with the amended statute, not the superseded regulations.⁹

Since the filing of the government's Motion for Summary Judgment and plaintiff's Cross-Motion for Summary Judgment, the Court of Federal Claims has addressed the precise issue in Colliot, but came to the opposition conclusion of that reached by the Western District of Texas. In Norman v. United States, Judge Damich declined to follow the decision in Colliot. 2018 WL 3629293 at *7 (Fed. Cl. July 31, 2018). Specifically, Judge Damich held that “because § 5321(a)(5)(C)(i) mandates that the maximum penalty be set to the greater of $100,000.00 or 50 percent of the balance of the account, the regulation is no longer consistent with the amended statute.” and that the regulation “is no longer valid.” Norman, at *9. In reaching this conclusion, the Norman court relied on the text of § 5321 after it was amended, Congressional intent behind the amendment, and the Colliot court's mischaracterization of the statutory text.

More specifically, the Norman court first looked to the statutory text of § 5321 after the penalty regime was amended. When § 5321 was amended in 2004, the Treasury Secretary was given discretion to impose a penalty for both willful and non-willful penalties. For non-willful violations, the statute as amended provides that toe Secretary “may impose a civil monetary penalty on any person who violates . . . any provision of section 5314.” Norman, at 8 (quoting § 5321(a)(5)(A)) (emphasis in original). For willful violations, however, the statute as amended provides that “the maximum penalty . . . shall be increased to the greater of [ ] $100,000, or [ ] 50 percent” of the balance of the account.” Norman, at 8 (quoting § 5321(a)(5)(C)(i)) (emphasis in original). The Norman court concluded that the unambiguous language of the statute “mandates that the maximum penalty allowable for willful failure to report a foreign bank account be set at a specific point: the greater of $100,000, or 50 percent of the account's balance.” Norman at 8.

Second, the Norman court reviewed the clearly stated intent behind the 2004 amendments to the FBAR statute. Relying on the Senate Report and the Conference Report, the court found that “Congress clearly stated its intent to raise the maximum amount of FBAR penalties.” Id. at 9; see infra IV.B at 32. As noted by the court, because “improving compliance with [the FBAR] reporting requirement is vitally important to sound tax administration,” “Congress believed that increasing the [previous law's] penalty for willful non-compliance would improve the reporting of foreign financial accounts.” Id. at 8 (internal citations omitted).

Lastly, the Norman court found that the mandatory language embodied in the 2004 statutory amendment “removed the Treasury Secretary's discretion to regulate any other maximum.” Id. at 9. The Colliot court reasoned that the 2004 amendment “sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead § 5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by § 5321(a)(5)(C).” Colliot, at 5-6. In Norman, however, the court found that this interpretation “mischaracterizes the language of § 5321(a)(5)(C), by ignoring the mandate created by the amendment in 2004.” Norman, at 8. The 2004 “amendment did not merely allow for a higher 'ceiling' on penalties . . . Congress raised the new ceiling itself, and in so doing, removed the Treasury Secretary's discretion to regulate any other maximum.” Id. at 8-9. As the regulation, by virtue of the amendment to the statute, is no longer consistent with the statute, the regulation is no longer valid. Id. at 9.

Although plaintiff fails to provide any analysis of the decision in Colliot or otherwise explain why the regulation at issue, and not the statute, should control, plaintiff points out an erroneous conclusion from the Colliot decision in support of a $100,000 cap of the FBAR penalty: Because the statute “sets a ceiling for the amount of penalties . . . but not a floor, . . . the IRS had to change its own regulation if it wished to enact higher penalties.” (Pl. Cross-Mot. at 28.) Plaintiff's reliance on this conclusion is misplaced.

A. The IRS properly assessed the FBAR penalty in accordance with the revised statute.

As discussed in the government's opening brief, in 2004, Congress substantially increased the penalties for individuals failing to file FBARs. For willful violations after October 22, 2004, the maximum penalty was increased to the greater of $100,000 or fifty percent of the account balance. See 31 U.S.C. § 5321(a)(5)(C). The amendment both: (1) discarded the $100,000 upper limit in the earlier statute, and (2) used half of the account balance (rather than the entire balance) as a factor in determining the maximum penalty. Id. Here, because Mrs. Kimble's willful violation occurred for the 2007 reporting year — well after Congress had increased the maximum penalty — the IRS assessed the penalty under the new statute, rather than under the outdated regulation issued under the prior statute. As the IRS explained in the Internal Revenue Manual, although the regulations at 31 C.F.R. § 103.57 “ha[d] not been revised to reflect the change in the willfulness penalty ceiling,” the new “statute is self-executing and the new penalty ceilings apply.” I.R.M. § 4.26.16.4.5.1 (07-01-2008), available at 2008 WL 5900930.

B. Congress intended to increase the maximum willful FBAR penalty, and the statutory change, which gave effect to that intent, superseded the outdated regulations.

As the 2004 statutory amendment both added an additional civil penalty for non-willful violations and increased the prior penalty for willful violations, see H.R. Rep. No. 108-755 at 615 (2004) (Conf. Rep.), the intent of Congress was clear. In choosing the Senate Amendment (which increased the willful penalty from that in the prior law) over the original House Bill (which did not), the Conference Committee made a specific decision to discard the maximum penalties in the prior statute and outdated regulation. Id. “The Congress believed that increasing the prior-law penalty for willful non-compliance with [the FBAR] requirement” would “improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005). Congress clearly called for a change to the civil penalties for FBAR violations to increase compliance and to ensure effective tax administration. See id.

The Treasury Department's outdated regulation was superseded by statute and cannot now be relied upon to prevail over Congress's clearly defined statutory mandate. See Aerolineas Argentinas v. United States, 77 F.3d 1564, 1575 (Fed. Cir. 1996) (“[A] regulation cannot override a clearly stated statutory enactment.”). As the Federal Circuit explained, “[w]hen a statute has been repealed, the regulations based on that statute automatically lose their vitality. Regulations do not maintain an independent life, defeating the statutory change.” Id. at 1576. Accordingly, where, as here, an older regulation is inconsistent with a newly enacted statute, the new statute supersedes the regulation. See Norman, at *9 (“the regulation is no longer consistent with the amended statute . . . and is no longer valid”). An agency's failure to withdraw an outdated regulation does not immunize it against a change of law made by Congress.¹⁰ More importantly, the Treasury Department cannot, by inaction, override a statutory change that Congress clearly intended to make and did, in fact, enact.

Both inside and outside of the tax context, courts have declined to enforce outdated regulations that are inconsistent with a newly enacted statute. See, e.g., Scofield v. Lewis, 251 F.2d 128, 132 (5th Cir. 1958) (invalidating regulations that were inconsistent with “the intent of Congress” in amending a section of the Internal Revenue Code); Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002) (holding a Treasury regulation obsolete where it was “contradicted by [a later] version” of the Internal Revenue Code, even though the regulation had “remain[ed] on the books”); Flo-Con Sys., Inc. v. Pension Benefit Guar. Corp., 39 F. Supp. 2d 995, 1001 (C.D. Ill. 1998). In such cases, “[i]t is well settled that when a regulation conflicts with a subsequently enacted statute, the statute controls and voids the regulation.” Farrell, 313 F.3d at 1219. The regulation, although “valid when promulgated, becomes invalid upon the enactment of a statute in conflict.” Schofield, 251 F.2d. at 132.

Moreover, in enacting the now-outdated regulation in 1987 under the prior version of the statute, the Treasury Department did not express any intent to limit its discretion to assess penalties for willful FBAR violations. Final Rule, 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987) (“Discussion of Comments,” No. (20)). The regulation's sole purpose was to “reflect” the “civil penalties for violations” of the statute “after October 1986” and, accordingly, it tracked but did not alter the rules for calculating the maximum penalty in the recently amended statute. Id. (emphasis added). The Treasury Department did not, in any way, implement a regulatory requirement that — independently of the statute — would “cabin” the Treasury Secretary's “discretion by capping penalties at $100,000.” Compare Colliot, at 4.

Here, the clear intent of Congress was to “increas[e] the prior-law penalty for willful noncompliance with [the FBAR] requirement” in order to “improve the reporting of foreign financial accounts.” Joint Committee, General Explanation, at 387. And Congress effectuated that intent by its 2004 amendment to § 5321 — the amendment that clearly authorized the Treasury Secretary to assess higher FBAR penalties than those provided both in the prior statute and in the outdated regulation that Treasury had issued merely to “reflect” the “civil penalties” in the prior statute. 52 Fed. Reg. at 11440. Because the outdated regulation simply mirrored the statutory penalty scheme that Congress discarded in 2004, Congress necessarily was discarding the regulation as well.

C. The Court should give “controlling weight” to the government's interpretation of its own regulation.

The cornerstone of Colliot was the district court's determination that the outdated regulation was intended to limit the Treasury Secretary's “discretion by capping penalties at $100,000.” Colliot, at 4. As already shown, that determination was wrong, because 31 C.F.R. § 1010.820 merely tracks an old statute, because the regulation was superseded when the statute was subsequently amended, and because Treasury did not express any intention to limit its discretion to assess FBAR penalties when it proposed and finalized the regulation. In any event, the Court can decide this issue in favor of the government on another basis: the principle that the judiciary should give deference to an agency's construction of its own regulation.

Because the Treasury Department was the issuer of 31 C.F.R. § 1010.820, its construction of its own regulation “must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Where an agency's interpretation of its own regulation “is not plainly inconsistent with the wording,” the Court must “accept the Government's reading of th[e] regulation[ ] as correct.” United States v. Larionoff 431 U.S. 864, 872-73.

In 2003, the Financial Crimes Enforcement Network (“FinCEN”) — the component of the Treasury Department responsible for enforcing the Bank Secrecy Act — delegated to the IRS the authority to enforce the FBAR provisions of 31 U.S.C. § 5314 and to assess and collect civil penalties for violations of that statute. I.R.M. § 4.26.1.2 (04-05-2011) & I.R.M. Ex. 4.26.1-3 (04-05-2011). As the component of the Treasury Department with responsibility for assessing civil FBAR penalties, the IRS is uniquely positioned to interpret the Treasury Department regulations governing those activities. In the Internal Revenue Manual, the IRS specifically construed “the regulations at 31 C.F.R. § 103.57" not to apply to "violations occurring after October 22, 2004," because the statutory “change in the willfulness penalty ceilings” in 31 U.S.C. § 5321(a)(5)(A) “is self-executing and the new penalty ceilings apply.” I.R.M. § 4.26.16.4.5.1 (07-01-2008), available at 2008 WL 5900930. The IRS adopted the same construction of the regulation in a later version of the Internal Revenue Manual, as well. See I.R.M. § 4.26.16.6.5.3(1) (11-06-2015) (“For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C).”). Thus, contrary to Colliot, the IRS interpreted the outdated regulation not to establish a penalty ceiling that was independent of the statute that the regulation was designed to track.

The Court should give controlling weight to the IRS interpretation of the regulation. A case supporting this proposition is Mason v. Shinseki, 743 F.3d 1370, 1374-76 (Fed. Cir. 2014). There, the Federal Circuit found controlling the Veterans' Administration's interpretation of its own regulation, published in the VA's Claim Adjudication Manual. As noted by the Court, the interpretation in the VA Manual reflected the “considered views” of the agency and were not “merely a post hoc rationalization of past agency action.” Id. at 1375. Here, as well, the statement in an analogous IRS “Manual” also was not a post hoc statement, and it reflected a considered view of the IRS regarding the construction and effect of the regulation at issue here. Thus, the principle of Mason is applicable here.

CONCLUSION

For the reasons set forth herein, plaintiff is not entitled to a refund of the FBAR penalties. Accordingly, the United States respectfully requests that the Court grant its motion for summary judgment, deny plaintiff's cross-motion for summary judgment, and enter judgment in favor of the United States and against the plaintiff.

Date 8/24/2018

Respectfully submitted,

JASON S. SELMONT
Attorney of Record
U.S. Department of Justice Tax Division
Court of Federal Claims Section
Ben Franklin Station, PO Box 26
Washington, D.C. 20044
Tel: (202)616-3338
Fax: (202) 514-9440
jason.s.selmont@usdoj.gov

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

DAVID I. PINCUS
Chief, Court of Federal Claims Section

ELIZABETH A. KANYER
Trial Attorney