Government Urges Circuit Court to Affirm FBAR Penalty Decision

UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
SAID RUM,
Defendant-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF FLORIDA

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

JOSHUA WU
Deputy Assistant Attorney General

FRANCESCA UGOLINI (202) 514-1882
DEBORAH K. SNYDER (202) 305-1680
GEOFFREY J. KLIMAS (202) 307-6346
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
MARIA CHAPA LOPEZ
United States Attorney

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT

Counsel for the United States of America, appellee herein, hereby certifies, pursuant to Federal Rule of Appellate Procedure 26.1 and Eleventh Circuit Rule 26.1-1, that the following persons have an interest in the outcome of this appeal or have participated in this case as attorneys or judges:

Venar R. Ayar, attorney for Defendant-Appellant

Laura M. Conner, attorney for Plaintiff-Appellee

Michael J. Desmond, Chief Counsel, Internal Revenue Service

Mary Apostolakos Hervey, attorney for Plaintiff-Appellee

Geoffrey J. Klimas, attorney for Plaintiff-Appellee

The Honorable Anthony E. Porcelli, United States Magistrate Judge

Said Rum, Defendant-Appellant

Ashraf Salem, attorney for Defendant-Appellant

The Honorable Mary S. Scriven, United States District Judge

Deborah K. Snyder, attorney for Plaintiff-Appellee

Francesca Ugolini, Chief, Appellate Section, U.S. Department of Justice, Tax Division

United States of America, Plaintiff-Appellee

Joshua Wu, Deputy Assistant Attorney General, U.S. Department of Justice, Tax Division

Richard E. Zuckerman, Principal Deputy Assistant Attorney General, U.S. Department of Justice, Tax Division

STATEMENT REGARDING ORAL ARGUMENT

Appellant Said Rum raises numerous challenges to the District Court's adjudication of his civil penalty liability for failing to report his interest in a foreign bank account on a Report of Foreign Bank and Financial Accounts, including statutory, evidentiary, and regulatory challenges. In light of the number of issues, as well as their administrative importance, counsel for the United States respectfully inform the Court that they believe oral argument would be beneficial.

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TABLE OF CONTENTS

Certificate of interested persons and corporate disclosure statement

Statement regarding oral argument

Table of contents

Table of citations

Glossary

Statement of jurisdiction

Statement of the issues

Statement of the case

Summary of argument

Argument

Conclusion

Certificate of Compliance

Addendum

TABLE OF CITATIONS

Cases:

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

Alabama Great S. R.R. Co. v. Louisville and Nashville R.R. Co., 224 F.2d 1 (5th Cir. 1955)

*Alabama Public Service Comm'n v. I.C.C., 765 F.2d 1516 (11th Cir. 1985)

*Atlanta Gas Light Co. v. F.E.R.C., 140 F.3d 1392 (11th Cir. 1998)

Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997)

*Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018)

Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281 (1974)

Bryan v. United States, 524 U.S. 184 (1998)

Bryant v. Jones, 575 F.3d 1281 (11th Cir. 2009)

California Trout v. F.E.R.C., 572 F.3d 1003 (9th Cir. 2009)

*Camp v. Pitts, 411 U.S. 138 (1973)

*Matter of Carlson, 126 F.3d 915 (7th Cir. 1997)

*Citizen's Nat'l Bank of Waco v. United States, 417 F.2d 675 (5th Cir. 1969)

Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971)

Consolidated Edison Co. of N.Y. v. United States, 221 F.3d 364 (2d Cir. 2000)

D'Angelo v. United States, 410 F. App'x 288 (11th Cir. 2011)

Eastern Associated Coal Corp. v. Director, OWCP, 724 F.3d 561 (4th Cir. 2013)

*Electronic Privacy Info. Ctr. v. IRS, 910 F.3d 1232 (D.C. Cir. 2018)

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016)

*Fargo v. Commissioner, 447 F.3d 706 (9th Cir. 2006)

*Florida Power & Light Co. v. Lorion, 470 U.S. 729 (1985)

Freeman v. United States Dep't of Interior, 83 F. Supp. 3d 173 (D.D.C. 2015)

Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010)

Independent Electrical Contractors of Houston, Inc. v. N.L.R.B., 720 F.3d 543 (5th Cir. 2013)

Interstate Erectors, Inc. v. Occupational Safety and Health Review Comm'n, 74 F.3d 223 (10th Cir. 1996)

Jardin De Las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127 (1st Cir. 2014)

Kimble v. United States, 141 Fed. Cl. 373 (2018), appeal docketed, No. 19-1590 (Fed. Cir.)

Mach Mining, LLC v. E.E.O.C., 575 U.S. 480 (2015)

*Malloy v. United States, 17 F.3d 329 (11th Cir. 1994)

Maze v. I.R.S., 862 F.3d 1087 (D.C. Cir. 2017)

Mazo v. United States, 591 F.2d 1151 (5th Cir. 1979)

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

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

Moore v. United States (“Moore II”), 2015 WL 4508688 (W.D. Wash. July 24, 2015)

Nebraska v. E.P.A., 331 F.3d 995 (D.C. Cir. 2003)

Newsome v. United States, 431 F.2d 742 (5th Cir. 1970)

Ninestar Tech. Co., Ltd. v. International Trade Comm'n, 667 F.3d 1373 (Fed. Cir. 2012)

*Norman v. United States, 942 F.3d 1111 (2019)

Nowicki v. Commissioner, 262 F.3d 1162 (11th Cir. 2001)

In re Paris, 245 F. App'x 929 (11th Cir. 2007)

Porter v. Califano, 592 F.2d 770 (5th Cir. 1979)

*Preserve Endangered Areas of Cobb's History, Inc. (“PEACH”) v. U.S. Army Corps of Engineers, 87 F.3d 1242 (11th Cir. 1996)

Public Serv. Co. of New Mexico v. F.E.R.C., 832 F.2d 1201 (10th Cir. 1987)

Ratzlaf v. United States, 510 U.S. 135 (1994)

*Romano-Murphy v. Commissioner, 816 F.3d 707 (11th Cir. 2016)

Ross v. Bank S., N.A., 885 F.2d 723 (11th Cir. 1989) (en banc)

Rum v. United States, No. 8:18-cv-02714 (M.D. Fla.)

Rykoff v. United States, 40 F.3d 305 (9th Cir. 1994)

*Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007)

Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678 (11th Cir. 2014)

*Schweiker v. Hansen, 450 U.S. 785 (1981)

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

Shaw v. AutoZone, Inc., 180 F.3d 806 (7th Cir. 1999)

*State of Ga. v. Heckler, 768 F.2d 1293 (11th Cir. 1985)

*Tavano v. Commissioner, 986 F.2d 1389 (11th Cir. 1993)

*Taylor v. District Engineer, U.S. Army Corps of Engineers, 567 F.2d 1332 (5th Cir. 1978)

*Thibodeau v. United States, 828 F.2d 1499 (11th Cir. 1987)

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

Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003)

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

United States v. Boyd, 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), appeal docketed, No. 19-55585 (9th Cir.)

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

United States v. Cohen, 2019 WL 4605709 (C.D. Cal. Aug. 6, 2019)

United States v. Colliot, 2018 WL 2271381 (W.D. Tex. May 16, 2018)

United States v. Doherty, 233 F.3d 1275 (11th Cir. 2000)

*United States v. Garrity, 2019 WL 1004584 (D. Conn. Feb. 28, 2019)

United States v. Gregory, No. 3:18cv80-TKW-HTC, slip op. 4-5 (N.D. Fla. Oct. 7, 2019)

United States v. Horowitz, 361 F. Supp. 3d 511 (D. Md. 2019), appeal docketed, No. 19-1280 (4th Cir.)

United States v. Hovind, 305 F. App'x 615 (11th Cir. 2008)

*United States v. Ill. Cent. R.R., 303 U.S. 239 (1938)

United States v. Kahn, No. 1:17-cv-07258-KAM-VMS, slip op. 8-32 (E.D.N.Y. Sept. 23, 2019)

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

United States v. Mohney, 949 F.2d 1397 (6th Cir. 1991)

United States v. Murdock, 290 U.S. 389 (1933)

United States v. Park, 2019 WL 2248544 (N.D. Ill. May 24, 2019)

*United States v. Schoenfeld, 2019 WL 2603341 (M.D. Fla. June 25, 2019)

United States v. Schwarzbaum, 2020 WL 1316232 (S.D. Fla. Mar. 20, 2020)

United States v. Sturman, 951 F.2d 1466 (6th Cir. 1991)

United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018)

United States v. Williams, 2014 WL 3746497 (E.D. Va. June 26, 2014)

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

Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir. 1983)

* Cases or authorities chiefly relied upon have asterisks.

Statutes:

Administrative Procedure Act § 551, et seq.

Internal Revenue Code (26 U.S.C):

28 U.S.C.:

Federal Civil Penalties Inflation Adjustment Act of 1990,

28 U.S.C. § 2461

31 U.S.C.:

Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)

Miscellaneous:

Treasury Regulation (31 C.F.R.):

51 Fed. Reg. 30233-01 (Aug. 25, 1986)

52 Fed. Reg. 11436 (Apr. 8, 1987)

73 Fed. Reg. 66414-01 (Nov. 7, 2008)

75 Fed. Reg. 8844-01 (Feb. 26, 2010)

75 Fed. Reg. 65806-01 (Oct. 26, 2010)

81 Fed. Reg. 42503-01 (June 30, 2016)

82 Fed. Reg. 10434-01 (Feb. 10, 2017)

Fed. R. App. P. 4(a)(1)(B)

H.R. Conf. Rep. No. 108-755, reprinted in 2004

U.S.C.C.A.N. 4394

Burden of Proof and Standard for Willfulness Under 31 U.S.C. 5321(a)(5)(C), PMTA 2018-013 (May 23, 2018), available at https://www.irs.gov/pub/lanoa/pmta_2018_13.pdf

IRS Chief Counsel Advice 200603026 (Jan. 20, 2006)

Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05, at 378General Explanation of Tax Legislation Enacted in the 108th Congress

OMB, Memorandum for the Heads of Executive Departments and Agencies (Feb. 24, 2016), available at http://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2016/m-16-06.pdf

* Cases or authorities chiefly relied upon have asterisks.

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GLOSSARY

Acronym	Definition
APA	Administrative Procedure Act, 5 U.S.C. § 551, et seq.
Br.	Appellant Said Rum's opening brief on appeal
BSA	Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)
Doc.	Docket entry in the District Court
FBAR	Report of Foreign Bank and Financial Accounts
FinCEN	Financial Crimes Enforcement Network
I.R.C.	Internal Revenue Code (26 U.S.C.)
IRS	Internal Revenue Service
Secrtary	Secretary of the Treasury
UBS	Union Bank of Switzerland

STATEMENT OF JURISDICTION

1. Jurisdiction in the District Court

The United States filed a complaint in the United States District Court for the Middle District of Florida, seeking to reduce to judgment a civil penalty that the Internal Revenue Service (“IRS”) assessed against Said Rum for willfully failing to report his ownership of a foreign bank account on a Report of Foreign Bank and Financial Accounts (“FBAR”) for the 2007 calendar year. (Doc. 1.) The court had jurisdiction pursuant to 28 U.S.C. §§ 1331, 1345, and 1355.

2. Jurisdiction in the Court of Appeals

On October 25, 2019, the District Court entered an amended judgment in favor of the United States. (Doc. 81.) The amended judgment was final, disposing of all claims of all parties. Rum filed a timely notice of appeal on November 6, 2019. (Doc. 84; Fed. R. App. P. 4(a)(1)(B).) This Court has jurisdiction under 28 U.S.C. § 1291.

STATEMENT OF THE ISSUES

1. Whether the District Court correctly held that Rum willfully failed to report his foreign bank account on an FBAR for 2007.

2. Whether the District Court correctly held that the IRS did not abuse its discretion by imposing a penalty of approximately $690,000, representing 50 percent of the balance in Rum's Swiss bank account for one year.

3. Whether Congress's 2004 amendment to 31 U.S.C. §5321(a)(5)(C), which increased the maximum civil penalty for willful FBAR violations to the greater of $100,000 or 50 percent of the value of the undisclosed account, supersedes a prior regulation stating a different maximum penalty.

4. Whether the District Court correctly held that the IRS did not abuse its discretion by imposing interest and a late-payment penalty.

STATEMENT OF THE CASE

(i) Course of proceedings and disposition in the court below

In 2007, as in many preceding years, Rum owned a Swiss bank account with a substantial balance that he was required, but failed, to report to the Government on an FBAR. The IRS determined that Rum's failure to report the account on an FBAR was willful and assessed a penalty against him, calculated as a percentage of the account balance. After Rum failed to pay the penalty, the Government brought this suit to reduce the assessment to judgment.

The Government moved for summary judgment, and Rum cross-moved for partial summary judgment. The motions were referred to the Magistrate Judge, who issued a report and recommendation providing that summary judgment should be granted to the Government. Rum filed a timely objection. After reviewing the record, the District Court overruled Rum's objection, adopted the Magistrate's report and recommendation, and entered judgment in the Government's favor.

(ii) Statement of the facts

a. The FBAR

In the Bank Secrecy Act (“BSA”), Pub. L. No. 91-508, 84 Stat. 1114 (1970), Congress confronted the “serious and widespread use,” for the “purpose of violating American law,” of “foreign financial facilities located in” jurisdictions that provided secrecy to account holders. H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397. To combat the use of such accounts, Congress required U.S. persons who have relationships with foreign financial agencies to report those relationships to the Government, which is accomplished by filing the FBAR. See 31 U.S.C. § 5314(a); 31 C.F.R. § 1010.350(a). This annual reporting requirement applies to, inter alia, all U.S. citizens who have an interest in foreign financial accounts with an aggregate value of more than $10,000. 31 C.F.R. § 1010.306(c). For 2007, the filing deadline was June 30, 2008.

Congress has also authorized the Secretary of the Treasury (“Secretary”) to impose “a civil money penalty on any person” who violates the requirement to report such an account. 31 U.S.C. § 5321(a)(5)(A). As amended in 2004, the BSA caps the penalty at $10,000 if the violation is non-willful. 31 U.S.C. § 5321(a)(5)(B). For a willful violation, however, “the maximum penalty * * * shall be increased to the greater of” $100,000 or 50 percent of “the balance in the account at the time of the violation.” Id. § 5321(a)(5)(C) & (D)(ii). For convenience, we refer to these as “non-willful penalties” and “willful penalties.”

The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of the Treasury, has “[o]verall authority for enforcement and compliance” of the FBAR requirement. 31 C.F.R. §1010.810(a). It has, however, delegated examination and penalty authority to the IRS. (I.R.M. 4.26.16.4.1(1); Doc. 31-21, p. 13.)

b. Rum's Swiss bank account at UBS

Rum was born in 1955 in Jerusalem. (Doc. 31-5, pp. 10-12.) By the mid-1980s, he had immigrated to the United States, become a U.S. citizen, and earned an associate's degree. (Id., pp. 11, 16, 22-23.) He has since worked as a banquet manager and owned a delicatessen, a pet store, and a convenience store. (Id., pp. 17-20.)

Rum held substantial funds in a U.S. bank account. (Id., p. 22.) An attorney advised Rum that he should transfer those funds to a foreign account to hide them from a potential judgment creditor and secure a higher rate of return. (Id., pp. 45-49.) That attorney did not, however, provide any advice regarding the legal obligations connected with foreign accounts. (Id., p. 50.)

In 1998, Rum opened a Swiss bank account at Union Bank of Switzerland (“UBS”) that he funded with $1.1 million. (Id., pp. 22, 24, 69.) He read financial newspapers and actively managed the account's investments. (Doc. 31-11, p. 3.)

When completing a mortgage application with a U.S. lender, Rum disclosed the account to demonstrate his strong financial position. (Doc. 31-10, pp. 3-4.) In other contexts, however, he concealed the account and the income it generated. When he completed college-aid applications for his children, Rum did not disclose the account. (Id.) In 1998 and again in 2004, Rum signed documents electing to have the account maintained as a numbered account, i.e., an account associated with a number rather than his name and address, and directing the bank to hold the account's periodic statements, rather than mailing them to him. (Doc. 31-7, pp. 44-45, 49.) And when UBS informed him that earnings from U.S. securities had to be reported to the IRS, Rum declined to complete Form W-9 and instead waived his right to invest in U.S. securities. (Id., pp. 35, 48; Doc. 31-10, pp. 4-5, 10-11.)

At no point between 1998 and 2008 did Rum disclose the UBS account to the Government. He did not file FBARs disclosing the account. (Doc. 31-10, p. 2.) He did not report income from the account on his tax returns or pay taxes on that income. (Id., p. 3.) And in each year from at least 2005 to 2009, Rum represented on his tax returns, signed under penalty of perjury, that he did not own a foreign account. (Id., p. 2; e.g., Doc. 31-2, p.3.)

UBS provided Rum with annual statements summarizing his account's earnings, which were “intended to * * * assist you in preparing your US Federal Income Tax Return.” (E.g., Doc. 31-9, p. 169.) UBS directed Rum that the statements “should be reviewed by yourself or your tax consultant with regard to existing legal requirements in your country.” (Id.) UBS further directed Rum that he “should consult your tax adviser regarding the information contained herein.” (E.g., id., p. 165.) However, Rum never obtained any advice regarding the legal obligations connected with the account. (Doc. 31-5, p. 50.)

On July 8, 2008, the IRS served a summons on UBS seeking information about U.S. accountholders. (Doc. 31-10, p. 8.) After Rum was informed of the summons, he requested that UBS provide him copies of any of his records that were remitted to the IRS. (Id.)

According to Rum, a UBS employee called him in October 2008 and told him that “[y]our portfolio is losing [value] badly, and you have to come right away to take the money out.” (Doc. 31-5, p. 28.) He flew to Switzerland, opened a new account at Arab Bank (also located in Switzerland), and transferred the UBS funds to Arab Bank. (Id., ap. 28-29.) Just as he had done with UBS, Rum directed Arab Bank to hold the account's periodic statements. (Doc. 31-17, p. 1.)

Also in 2008, the IRS commenced an examination of Rum's 2006 tax year. (Doc. 31-5, p. 87.) Rum told the examining agent that he had closed his UBS account, but did not tell her that he had moved the funds to another foreign account. (Doc. 31-10, pp. 5-7.) The agent imposed additional taxes, but not an FBAR penalty. (Doc. 58-12, p. 20.)

On October 6, 2009, UBS notified Rum that (i) the IRS had requested information about UBS's U.S. accountholders pursuant to a treaty and (ii) his account information appeared be within the scope of that request. (Doc. 31-16.) On October 22, 2009, Rum filed an untimely FBAR for the 2008 year that reported the UBS account for the first time. (Doc. 31-20.) But he never filed FBARs for the 1998 through 2007 or 2009 years. (Doc. 31-10, p. 17.)

In November 2009, Arab Bank advised Rum that it was closing his account. (Doc. 31-17, p. 1.) He then transferred the funds — which had grown to approximately $1.4 million — to a U.S. account. (Doc. 31-5, ap. 29-30.) In February 2010, Rum filed a tax return for the 2009 year that reported approximately $40,000 of the $300,000 of investment income generated by the UBS and Arab Bank accounts. (Doc. 31-13, pp. 1-2, 7.) Until the IRS selected him for examination, however, he did not report the remaining $260,000. (Doc. 31-10, p. 4.)

c. IRS examinations

In 2011, the IRS commenced an examination that (i) ultimately encompassed Rum's 2005 and 2007 through 2010 tax years and (ii) led to a further examination of his failure to report his foreign accounts during that period. (Doc. 31-10; Doc. 58-18.) Rum told the examining agent that he had opened the UBS account because he was the defendant in a lawsuit, which he variously characterized as involving a slip-and-fall or a car accident, and wanted to hide his money from this potential judgment creditor. (Doc. 31-10, pp. 3, 9; Doc. 30-29, p. 2.) Rum represented that he kept his money in the UBS account after the lawsuit was dismissed because closing the account would have resulted in a penalty. (Doc. 31-10, p. 9.)

Although each of his tax returns was marked self-prepared (e.g., Doc. 31-2, p. 2), Rum told the agent that an accountant actually prepared them (Doc. 31-10, p. 12.).¹ Rum also said that he had not reported or paid taxes on the approximately $300,000 of investment income that his foreign accounts generated because he thought the earnings were taxable upon repatriation, even though he reported and paid taxes on only $40,000 when he repatriated the funds. (Id., p. 4.)

The examining agent determined that Rum had understated his income by hundreds of thousands of dollars during the years at issue (and even more when considering years not under examination). (Doc. 58-16, p. 3; Doc. 58-18.) The agent therefore asserted tax deficiencies and civil fraud penalties. (Docs. 58-18, 58-40.)

The agent also determined that Rum was liable for a penalty for failing to report his UBS account for 2007. (Doc. 58-8.) However, because the IRS had not imposed an FBAR penalty during the examination of Rum's 2006 year, the agent and her manager believed that they could not impose a willful penalty for 2007. (Id., p. 2.) Accordingly, they recommended a non-willful penalty. (Id., p. 1.) However, the agent and her manager were subsequently advised that (i) the IRS's failure to assert an FBAR penalty during a prior examination was irrelevant and (ii) the facts supported a willful penalty. (Id., pp. 2-3.) After receiving that advice, the agent asserted a willful FBAR penalty that was calculated as 50 percent of the balance in the account, or approximately $690,000. (Doc. 30-21, pp. 1-5.)

In his administrative appeal, Rum represented, for the first time, that he had continued to keep his money in the UBS account because he was satisfied with the rate of return (as opposed to wanting to avoid a penalty). (Doc. 58-30, p. 1; Doc. 58-35, p. 1.) Following an appeals conference, the IRS sustained both the civil fraud and FBAR penalties.² (Doc. 58-22, p. 114; Doc. 58-34.)

d. Proceedings in the District Court

After Rum failed to pay the FBAR penalty, the Government brought this suit to obtain a judgment. (Doc. 1.) Following discovery, the Government moved for summary judgment, arguing that (i) the undisputed facts demonstrated that Rum willfully failed to file an FBAR and (ii) the agency record demonstrated that the penalty amount was not arbitrary and capricious. (Docs. 31, 60.) In response, Rum argued that factual disputes precluded summary judgment. (Doc. 58.)

Rum also filed a cross-motion for partial summary judgment, arguing that (i) the FBAR penalty was limited to $100,000 based on a regulation promulgated in 1987 and (ii) the IRS's imposition of interest and a late-payment penalty was arbitrary and capricious. (Docs. 30, 61.) The Government responded that (i) the 1987 regulation had been superseded by a 2004 statutory amendment and (ii) it was entitled to interest and the late-payment penalty as a matter of law. (Doc. 55.)

The parties also submitted supplemental briefs regarding the scope of review. (Docs. 66, 67.) The parties agreed that willfulness was determined de novo based on the record developed through discovery, but disagreed about how the penalty amount should be reviewed. The Government argued, consistent with its moving papers, that the amount was reviewed for abuse of discretion based on the agency record. (Doc. 66, pp. 5-6.) Notwithstanding his prior concession that the penalty amount was reviewed for abuse of discretion (Doc. 61, p. 10), Rum argued that it should be reviewed de novo (Doc. 67, pp. 1-20).

The Magistrate Judge recommended that summary judgment be granted to the Government. (Doc. 77.) In the Magistrate's view, Rum's failure to report the UBS account on a 2007 FBAR was willful as a matter of law, where he (i) was put on inquiry notice of the FBAR reporting requirements, (ii) never sought advice about those requirements, (iii) repeatedly signed tax returns falsely representing that he had no foreign accounts, (iv) provided inconsistent statements to the IRS, and (v) engaged in a pattern of concealment. (Id., pp. 15-19, 22-27.)

Also in the Magistrate's view, the penalty amount was properly reviewed for abuse of discretion, where there was no evidence of agency bad faith. (Id., pp. 20-22, 27-33.) Moreover, the IRS had a rational basis for imposing a 50-percent penalty, where the agency record demonstrated “a plethora of implausible and inconsistent explanations of behavior” by Rum, “an intent to mislead and conceal,” and “a pattern of consistent failure over numerous years to report income fully, and involv[ing] a substantial amount of money.” (Id., pp. 21-27 (emphasis in original).)

The Magistrate further rejected Rum's argument that a regulation limited the penalty to $100,000, where the regulation was “inconsistent with the amended statute” and “no longer valid.” (Id., pp. 10-15.) Finally, the Magistrate rejected Rum's argument that the Government was not entitled to the interest and late-payment penalty that were prescribed by statute. (Id., pp. 33-35.)

After reviewing Rum's objection to the Magistrate's report and recommendation, the District Court adopted the report and recommendation in full. (Doc. 76.)

(iii) Statement of the standard of review

This Court reviews de novo the grant and denial of motions for summary judgment. Preserve Endangered Areas of Cobb's History, Inc. (“PEACH”) v. U.S. Army Corps of Engineers, 87 F.3d 1242, 1246 (11th Cir. 1996).

SUMMARY OF ARGUMENT

The District Court correctly sustained the FBAR penalty asserted against Rum for his willful failure to report his Swiss bank account for the 2007 calendar year.

1. Controlling precedent makes clear that, in the civil context, willfulness generally includes reckless disregard. The Federal, Third, and Fourth Circuits have held that this standard applies in the civil FBAR penalty context. Here, the District Court correctly applied this standard to the undisputed facts and concluded that Rum's failure to report his UBS account was willful.

Rum repeatedly signed tax returns falsely representing that he owned no foreign accounts. He did so without ever reviewing the FBAR filing requirements to which those returns directed him or obtaining advice about the UBS account. And Rum engaged in a decade-long pattern of concealment where he maintained the account as a numbered account, paid UBS to hold the account's periodic statements, and failed to pay taxes on the investment income that the account generated.

2. The District Court also correctly held that the IRS acted within its discretion in imposing an approximately $690,000 penalty, representing 50 percent of the account balance. The penalty amount was consistent with non-binding guidance contained in the Internal Revenue Manual, under which a 50-percent penalty was supported by the IRS's imposition of a civil fraud penalty and the size of Rum's account. It was also consistent with the facts reflected in the agency record, including Rum's active concealment of the account, his failure to pay taxes on the account's substantial earnings for a decade, and his inconsistent, evolving, and contradictory statements to IRS agents.

In resisting this result, Rum argues that the IRS's determination of the proper penalty amount was tainted by violations of procedures in the Internal Revenue Manual. However, the manual is a non-binding compilation of internal procedures that imposes no enforceable duties and confers no enforceable rights. At all events, it is clear that the IRS complied with the manual.

3. The District Court further correctly rejected Rum's argument that willful FBAR penalties are limited to $100,000, just as the Federal Circuit recently rejected an identical argument in Norman v. United States, 942 F.3d 1111, 1117-18 (2019). To be sure, from 1986 until 2004, both the governing statute (31 U.S.C. § 5321(a)(5)(C)) and the 1987 regulation (31 C.F.R. § 1010.820(g)(2)), which repeated the language of that statute, set a $100,000 maximum penalty. In 2004, however, Congress amended § 5321(a)(5)(C) and mandated that the maximum penalty “shall be” the greater of $100,000 or 50 percent of the account balance at the time of the violation. Congress thereby superseded the maximum penalty in the prior version of § 5321(a)(5)(C). As controlling precedent makes clear, when Congress did so, it also superseded the regulation that repeated language from the earlier statute.

4. Finally, the District Court correctly rejected Rum's argument that the IRS abused its discretion by imposing interest and a late-payment penalty. These additions are prescribed by statute, and the procedural defects of which Rum complains are illusory.

ARGUMENT

The District Court correctly granted summary judgment to the Government and sustained the FBAR penalty assessed against Rum

I. Rum willfully failed to report his foreign account for the 2007 calendar year

A. In the context of civil FBAR penalties, willfulness includes recklessness

Congress provided a heightened penalty amount for failures to report foreign accounts that are determined to be willful, but did not define the term “willful.” See 31 U.S.C. § 5321(a)(5)(C) & (D). The Supreme Court, however, has made clear that “where willfulness is a statutory condition of civil liability,” the term generally covers “not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007); see also United States v. Ill. Cent. R.R., 303 U.S. 239, 242-43 (1938); Malloy v. United States, 17 F.3d 329, 332 (11th Cir. 1994).

Nothing in the text of § 5321 suggests that a different standard applies here. The Federal, Third, and Fourth Circuits have held that reckless conduct is sufficient for the imposition of heightened penalty amounts under § 5321. Norman, 942 F.3d at 1115; Bedrosian v. United States, 912 F.3d 144, 152-53 (3d Cir. 2018); United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012). Individuals are therefore liable for an enhanced penalty amount if they “made a 'conscious effort to avoid learning about reporting requirements,'” (Williams, 489 F. App'x at 659 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991))), or if they “ought to have known” that “there was a grave risk that the filing requirement was not being met,” (Bedrosian, 912 F.3d at 153 (internal quotation marks and alteration omitted)).³

Rum nonetheless argues that this Court should hold that a civil willfulness penalty applies only if an individual has actual knowledge of the FBAR reporting requirements. (Br. 21-27.) The linchpin of Rum's erroneous argument is that the Supreme Court's decision in Safeco represents an exception to the general rule regarding willfulness. (Br. 24-25.) In fact, Safeco reiterated the Supreme Court's longstanding rule that, in the civil context, willfulness “generally” includes recklessness. 551 U.S. at 57 (citing McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132-133 (1988); Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125-26 (1985); Ill. Cent. R.R., 303 U.S. at 242-43; United States v. Murdock, 290 U.S. 389, 395 (1933)).

Two rationales undergird this rule. First, because courts have consistently construed civil willfulness to include recklessness, Congress understands that this standard will be applied to legislation it enacts. Id. at 57-58. Second, the common-law meaning of willfulness includes recklessness, and a common-law term used in a statute will ordinarily be accorded its common-law meaning. Id. at 58. Both rationales provide strong justification for applying the recklessness standard to § 5321.

Rum identifies (Br. 22-23) numerous criminal cases in which courts have construed willfulness to require actual knowledge. E.g., Bryan v. United States, 524 U.S. 184, 194-96 (1998). However, he fails to identify a single civil case in which courts have done so. By asking this Court to import the criminal standard into the civil penalty context, Rum ignores the Supreme Court's admonition that the term “willfulness” should be construed based on the context in which it appears. See Ratzlaf v. United States, 510 U.S. 135, 141 (1994).

For this reason, there is no merit to Rum's argument (Br. 23) that, because criminal penalties for willful violations of the BSA are conditioned upon actual knowledge, civil penalties should also be so conditioned. In the analogous context of a willful failure to collect, account for, and pay over employment taxes, individuals are only subject to criminal penalties under Section 7202 of the Internal Revenue Code (26 U.S.C.) (“I.R.C.”) where they knowingly violate a duty imposed by the law. United States v. Hovind, 305 F. App'x 615, 620-21 (11th Cir. 2008). Nonetheless, civil penalties under I.R.C. § 6672(a) may be imposed for the willful failure to collect, account for, and pay over employment taxes where individuals act with reckless disregard. Malloy, 17 F.3d at 332. So too here.⁴

Rum relies (Br. 24) on Rykoff v. United States, 40 F.3d 305 (9th Cir. 1994), but that case is not to the contrary. There, the Ninth Circuit stated that, for purposes of civil liability under I.R.C. § 6672(a), an individual acts willfully by taking a “voluntary, conscious, and intentional act” to prefer other creditors. Id. at 307 (citation and internal quotations omitted). Rykoff did not, however, depart from the longstanding rule that willfulness under § 6672(a) includes recklessness. See Malloy, 17 F.3d at 332 (willfulness is established where an individual takes “voluntary, conscious, and intentional” acts “with a reckless disregard of a known or obvious risk”) (citation, internal quotations, and alterations omitted).

Rum also argues that, as a policy matter, actual knowledge of the FBAR reporting requirements should be required for willful penalties to avoid “ensnaring” innocent individuals in the BSA's “highly technical” requirements. (Br. 23, 25-26.) It is true that, in the criminal context, the Supreme Court has sometimes departed from “the traditional rule that ignorance of the law is no excuse” and required the Government to prove a knowing violation. Bryan, 524 U.S. at 194-95 n.21-22 (citation and internal quotations omitted). But the Supreme Court has made clear that the imposition of civil penalties “typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.” Safeco, 551 U.S. at 57 n.9. Indeed, Rum offers no convincing explanation why the FBAR reporting requirements are difficult to comply with (Br. 26), given that individuals are asked on their tax returns whether they have a foreign bank account and directed to the FBAR requirements (Doc. 31-2, p. 3, line 7a.) “It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms.” Sturman, 951 F.2d at 1477.

B. The undisputed facts demonstrate a willful violation

Because willfulness is determined by comparing an individual's conduct to an objective standard, courts make that determination de novo based on the evidence developed through discovery.⁵ E.g., United States v. Horowitz, 361 F. Supp. 3d 511, 522 (D. Md. 2019), appeal docketed, No. 19-1280 (4th Cir.); Moore v. United States (“Moore I”), 2015 WL 1510007, at *4 n.3 (W.D. Wash. Apr. 1, 2015) (collecting cases); United States v. McBride, 908 F. Supp. 2d 1186, 1201 (D. Utah 2012). Here, the undisputed facts clearly establish a willful violation.

1. On his 2007 tax return, as on each of his returns for several preceding years, Rum was asked whether he owned a foreign bank account and directed to the FBAR filing requirements. (Doc. 31-2, p.3; Doc. 31-10, p. 2.) On each return, Rum falsely represented that he had no such account. (Id.) And Rum signed the returns under penalty of perjury, certifying that he had examined the contents and that they were true, accurate, and complete to the best of his knowledge. (Id.) Rum was therefore “charged with constructive knowledge of [the return's] contents” and “put * * * on inquiry notice of the FBAR requirement.” Williams, 489 F. App'x at 659 (citations and internal quotations omitted); Norman, 942 F.3d at 1116-17. These facts provide compelling evidence that Rum acted with reckless disregard. Williams, 489 F. App'x at 659; Norman, 942 F.3d at 1116-17; Horowitz, 361 F. Supp. 3d at 528-29; Kimble v. United States, 141 Fed. Cl. 373, 385-86 (2018), appeal docketed, No. 19-1590 (Fed. Cir.).

Rum concedes (Br. 28) that, when seeking relief from joint and several liability under the innocent-spouse provisions of I.R.C. § 6015, taxpayers are charged with constructive knowledge of the returns they sign. E.g., Greer v. Commissioner, 595 F.3d 338, 347 n.4 (6th Cir. 2010). However, he argues that this holding has historically been limited to the innocent-spouse context. (Br. 28-29.) Rum is wrong.

“In general, individuals are charged with knowledge of the contents of documents they sign — that is, they have 'constructive knowledge' of those contents.” Consolidated Edison Co. of N.Y. v. United States, 221 F.3d 364, 371 (2d Cir. 2000). This general rule has been applied in a variety of contexts, including charging individuals with knowledge of employee handbooks (Shaw v. AutoZone, Inc., 180 F.3d 806, 811 (7th Cir. 1999)), investment prospectuses (Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518 (10th Cir. 1983), fuel tickets (Consolidated Edison, 221 F.3d at 371), and tax returns outside the innocent-spouse context (United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000); Jardin De Las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127, 134 (1st Cir. 2014)).

Rum relies (Br. 29-30) on numerous criminal cases for the proposition that an individual's signature, without more, is insufficient to establish actual knowledge of a return's contents. E.g., United States v. Mohney, 949 F.2d 1397, 1407-08 (6th Cir. 1991). However, those cases have limited import in the civil FBAR context, where actual knowledge is not required to establish willfulness. Supra, pp. 17-22.

Nor is there merit to Rum's suggestion (Br. 26) that charging taxpayers with constructive knowledge “effectively reduc[es] § 5321's willful penalties to strict liability.” See United States v. Schwarzbaum, 2020 WL 1316232, at *8 (S.D. Fla. Mar. 20, 2020). For example, an individual may act non-willfully where he failed to file an FBAR based on an incorrect belief that the aggregate value of his accounts was less than $10,000. See also Norman, 942 F.3d at 1115.

2. Moreover, despite Rum's contrary assertion (Br. 27), the District Court did not base its willfulness determination solely on his signing tax returns that falsely represented he had no foreign accounts. Rather, as the court recognized (Doc. 71, pp. 19 n.21, 22-27), additional undisputed evidence reinforces the conclusion that Rum acted with reckless disregard.

Rum never sought advice about his Swiss account (Doc. 31-5, p. 50), despite UBS's repeated admonitions that he do so (e.g., Doc. 31-9, pp. 165, 169). Rum also never disclosed his Swiss account or its earnings to the accountant whom he says prepared his tax returns. (Doc. 31-5, pp. 79-80.) These actions had the direct and predictable effect of walling Rum off from information about the FBAR requirements.

In addition, Rum took affirmative steps to conceal his Swiss account and the investment income it generated. Rum elected to have UBS maintain the account as a numbered account, with neither his name nor his address appearing on the periodic statements, and paid fees to have UBS hold those statements rather than mailing them to him. (Doc. 31-7, pp. 44-45, 49.) After UBS informed him that earnings from U.S. securities would be reported to the IRS, Rum elected not to invest in U.S. securities. (Id., pp. 35, 48; Doc. 31-10, pp. 4-5, 10-11.) Rum also failed to report or pay taxes on the account's earnings, even though he reported and paid taxes on earnings from investments held in domestic accounts. (Doc. 31-10, p. 3.) Although he told the IRS that he believed the $300,000 of investment income from his UBS and Arab Bank accounts was taxable upon repatriation, Rum reported only $40,000 when he repatriated it. (Id., p. 4.) And this was part of a larger pattern of behavior where Rum reported the UBS account when it was beneficial to do so and concealed it when it was not. (Id., pp. 3-4 (Rum reported account on his mortgage application, but not his children's college-aid applications).)

Finally, in subsequent years, Rum moved the funds to another foreign account and provided inconsistent, evolving, and contradictory statements to IRS agents. Supra, pp. 6-10.

3. Rum argues that, even if he meets the civil willfulness standard articulated by the courts, he does not meet the standard articulated by the Internal Revenue Manual. (Br. 24.) That argument misses the mark.

The manual is a compilation of “[p]rocedures * * * intended to aid in the internal administration of the IRS.” Matter of Carlson, 126 F.3d 915, 922 (7th Cir. 1997). As such, the manual's provisions are not legally binding and serve only as persuasive authority regarding the IRS's interpretation. Romano-Murphy v. Commissioner, 816 F.3d 707, 719 (11th Cir. 2016); Tavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir. 1993) (collecting cases); Norman, 942 F.3d at 1115; cf. Schweiker v. Hansen, 450 U.S. 785, 789-90 (1981). The manual's provisions do not impose enforceable duties on the IRS, render noncomplying IRS actions invalid, or confer rights on taxpayers. Electronic Privacy Info. Ctr. v. IRS, 910 F.3d 1232, 1244 (D.C. Cir. 2018); Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006); Carlson, 126 F.3d at 922.

This conclusion is not changed by Rum's citation (Br. 43-45) to Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016) and California Trout v. F.E.R.C., 572 F.3d 1003 (9th Cir. 2009). These decisions hold that, when an agency's longstanding regulations or course of adjudication have fostered public reliance, the agency must provide a reasoned explanation before promulgating contrary regulations or departing from its usual rules of decision. Encino Motorcars, 136 S. Ct. at 2125-26; California Trout, 572 F.3d at 1023. They have no application to the IRS's non-binding internal procedures, on which the public is not entitled to rely.

In any event, the Internal Revenue Manual supports the conclusion that Rum acted willfully. While the manual provides that willfulness can be shown by an individual's voluntary and intentional violation of “a known legal duty” (I.R.M. 4.26.16.4.5.3(1); Doc. 31-21, p. 16), it also “acknowledges that actual knowledge may not be required” (Norman, 942 F.3d at 1115). “[T]he failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion” that the reporting violation was willful. (I.R.M. 4.26.16.4.5.3(6); Doc. 31-21, pp. 16-17.) The undisputed facts make that description manifestly applicable here.

4. Rum further argues that, as a matter of law, willfulness cannot be resolved on summary judgment. (Br. 32.) Rum is wrong.

Although the issue of willfulness is often reserved for trial, it “does not present a jury question in all cases.” Thibodeau v. United States, 828 F.2d 1499, 1505 (11th Cir. 1987). In the analogous context of civil penalties for the failure to collect, account for, and pay over employment taxes, this Court and its predecessor have regularly held that, where the relevant facts are undisputed, willfulness can be determined as a matter of law. E.g., id. at 1505-07; D'Angelo v. United States, 410 F. App'x 288, 290-91 (11th Cir. 2011); In re Paris, 245 F. App'x 929, 932-34 (11th Cir. 2007); Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir. 1979); Newsome v. United States, 431 F.2d 742, 748-49 (5th Cir. 1970).

Rum's citation (Br. 32) to Ross v. Bank S., N.A., 885 F.2d 723 (11th Cir. 1989) (en banc) and Alabama Great S. R.R. Co. v. Louisville and Nashville R.R. Co., 224 F.2d 1 (5th Cir. 1955), does not compel a different result. In Ross, this Court affirmed the district court's decision that the plaintiffs' claims were subject to summary disposition, notwithstanding that they turned on a question of scienter. 885 F.2d at 728-31. Although Rum cites Ross for the proposition that “summary judgment is inappropriate to decide questions of scienter” (Br. 32), he fails to note that this language appears in the dissent (Ross, 885 F.2d at 751 n.8). In Alabama Great S. R.R., the Court merely restated the well-worn adage that, in circumstances in which “examination and cross-examination [are] necessary instruments in obtaining the truth,” intent cannot be established on summary judgment. 224 F.2d at 5. It did not preclude summary disposition in cases where, as here, the relevant facts are undisputed.

As a last resort, Rum contends that summary judgment is inappropriate unless the Government can establish that he intended to conceal income or avoid taxes. (Br. 32-33.) As the Third Circuit has explained, however, neither particular subjective motivations nor egregious conduct are required to establish willfulness under § 5321. Bedrosian, 912 F.3d at 153; cf. Malloy, 17 F.3d at 332.

II. The IRS acted within its discretion in assessing a 50-percent penalty

A. The IRS has substantial discretion in determining the appropriate penalty amount

Although § 5321 prescribes a maximum penalty for willful violations, it does not otherwise circumscribe the IRS's discretion to set the penalty amount for a particular violation, based on the facts and circumstances. The IRS's determination of the appropriate penalty amount will therefore be set aside only if it was arbitrary, capricious, or an abuse of discretion. United States v. Boyd, 2019 WL 1976472, at *4 (C.D. Cal. Apr. 23, 2019), appeal docketed, No. 19-55585 (9th Cir.); Moore I, 2015 WL 1510007, at *7; United States v. Williams, 2014 WL 3746497, at *1 (E.D. Va. June 26, 2014); accord United States v. Bussell, 699 F. App'x 695, 697 (9th Cir. 2017). This is consistent with the standard that courts use to review an agency's selection of an appropriate penalty in other contexts. E.g., Ninestar Tech. Co., Ltd. v. International Trade Comm'n, 667 F.3d 1373, 1379 (Fed. Cir. 2012); Interstate Erectors, Inc. v. Occupational Safety and Health Review Comm'n, 74 F.3d 223, 229 (10th Cir. 1996).

So framed, judicial review is “narrow” and does not permit a court to “substitute [its] judgment for that of the agency.” Atlanta Gas Light Co. v. F.E.R.C., 140 F.3d 1392, 1397 (11th Cir. 1998) (citation and internal quotations omitted). “Under the arbitrary and capricious standard, all the agency must do is articulate a rational connection between the facts and its conclusion.” Alabama Public Service Comm'n v. I.C.C., 765 F.2d 1516, 1521 (11th Cir. 1985) (citation and internal quotations omitted). Even “a decision of less than ideal clarity” will be upheld “if the agency's path may reasonably be discerned.” Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974).

B. The agency record demonstrates that the IRS's decision to impose a 50-percent penalty was not arbitrary, capricious, or an abuse of discretion

The IRS acted well within its discretion when it imposed a single 50-percent penalty for Rum's willful failure to disclose the UBS account. Far from being arbitrary and capricious, the penalty finds ample support in the agency record. The penalty is also consistent with the non-binding guidance in the Internal Revenue Manual.

1. Under § 5321(a)(5)(C) & (D)(ii), Rum's willful failure to disclose his UBS account exposed him to a potential penalty of $690,000, representing 50 percent of the account balance at the time of the violation. The Internal Revenue Manual provides mitigation guidelines under which accountholders may be subject to less than the statutory maximum penalty if they satisfy four threshold conditions. (I.R.M. 4.26.16.4.5.1(1); Doc. 31-21, p. 20.) Accountholders who fail to satisfy those threshold conditions are not eligible for mitigation (I.R.M. 4.26.16.4.5.6(1), 4.26.16.4.6.1(1), Exhibit 4.26.16-2; Doc. 31-21, pp. 19-20, 27), as Rum conceded in the proceedings below (Doc. 30, p. 15; Doc. 30-2, p. 6).

As relevant here, mitigation is contingent upon the IRS having not imposed a civil fraud penalty for an underpayment allocable to unreported income from a foreign account. (I.R.M. 4.26.16.4.6.1(2)(d), Exhibit 4.26.16-2; Doc. 31-21, pp. 20, 28.) Here, the IRS imposed a civil fraud penalty for 2007, where Rum had a tax deficiency allocable to his failure to report over $30,000 of income from his UBS account that year. (Doc. 58-18, p. 1; Doc. 58-40, p. 3.) Consequently, Rum was ineligible for mitigation (Doc. 30-29, p. 10; Doc. 58-23, p. 49; Doc. 67-1, p. 5), and his penalty was “50% of the balance in the account” (I.R.M. 4.26.16.4.5.6(3)(b); Doc. 31-21, p. 20).

Notwithstanding that the 50-percent penalty represented the maximum that could be imposed for Rum's failure to report the UBS account in 2007, the IRS made a discretionary decision not to impose any FBAR penalties against Rum for the other years that he failed to report his foreign accounts. (Doc. 30-29, p. 7.)

2. The agency record confirms that there was no basis for a reduced penalty. Rum was the owner of the UBS account and actively managed it. (Id., pp. 2-3.) He established the account for the stated purpose of hiding funds from a potential judgment creditor. (Id.) Despite receiving repeated admonitions from UBS to seek advice about the account, Rum never did so. (Id., pp. 6-7.) Instead, he took affirmative steps to conceal it, including maintaining it as a numbered account, paying UBS to hold mail associated with it, and falsely denying ownership of it on his tax returns. (Id., pp. 5-6; Doc. 31-7, ap. 44-45, 49.) This was not a one-time error in judgment, but a course of conduct that went on for a decade. (Doc. 30-29, pp. 5-7.)

Indeed, this pattern continued even beyond the year at issue. In 2008, Rum traveled to Switzerland and moved the funds from UBS to another Swiss bank. (Id., pp. 3, 7.) Later that year, Rum told an IRS agent that he had closed his UBS account, but did not tell her that he had opened another Swiss account. (Doc. 31-10, pp. 5-7.) In 2009, after UBS told Rum that his account was within the scope of a U.S. treaty request, Rum filed an untimely FBAR for 2008 but never filed FBARs for other years he held the Swiss accounts. (Id., p. 17; Doc. 31-16.) And during the examination, Rum provided inconsistent, evolving, and contradictory statements to IRS agents. Supra, pp. 8-10.

Moreover, at no time since Rum opened the Swiss accounts did he report or pay taxes on $260,000 of the investment income they generated, prior to submitting amended returns after he was selected for audit. (Doc. 30-29, pp. 2, 4, 6.) In fact, Rum omitted that income from his returns despite reporting similar income from domestic accounts. (Id., p. 5.) Tellingly, Rum told the IRS that he believed income from the foreign accounts was taxable upon repatriation, but he reported only $40,000 of the $300,000 of income when he repatriated it. (Id., pp. 2, 4, 6, 8.)

3. During the administrative proceedings and in the court below, Rum provided four reasons why the IRS should consider a reduced penalty.⁶ (See Doc. 31-12, p. 4.) However, he did not raise any of these reasons in his opening brief, and they should therefore be deemed waived. See Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678, 680-83 (11th Cir. 2014). In any event, the IRS correctly determined (Doc. 58-34, p. 2) that none of the reasons warranted a reduced penalty.

First, Rum stated that he made things right after the examination began. (Doc. 31-12, p. 10.) In actuality, Rum's after-the-fact attempts to do so were inconsistent and incomplete at best. Supra, pp. 7-10. Second, Rum stated that he should receive the reduced penalty structure available under the Offshore Voluntary Disclosure Program. (Doc. 30-27.) Yet Rum never applied, and was ineligible, for that settlement initiative. (Doc. 31-10, p. 13; Doc. 58-12, pp. 2-3.) Third, Rum stated that he was left with approximately $40,000 of business debts after closing his pet store. (Doc. 58-26.) But the state of Rum's business is irrelevant to the FBAR penalty determination. Finally, Rum stated that he had provided incriminating information to the IRS about his business partner. (Doc. 30-28.) While this might serve as the basis for a whistleblower claim under I.R.C. § 7623, it is immaterial to the FBAR penalty determination.

C. Rum's arguments do not establish that the IRS's decision was arbitrary, capricious, or an abuse of discretion

Rum raises three complaints regarding the procedures that the IRS used in determining the proper penalty amount. (Br. 43-48.) All of those complaints are predicated on purported violations of the Internal Revenue Manual, which as discussed at pp. 27-28, supra, have no legal significance. At all events, none of those complaints has merit.

1. Rum begins by arguing that the IRS improperly “withheld” the manual's mitigation guidelines. (Br. 19, 44-45.) That argument is meritless, given that the manual is available on the IRS's website and both current and historical versions are available on Westlaw and LexisNexis. Rum has identified no authority that obligates agencies to affirmatively produce materials that are publicly available and, indeed, agencies are not even obligated to include such materials in the administrative record. E.g., Eastern Associated Coal Corp. v. Director, OWCP, 724 F.3d 561, 575 n.13 (4th Cir. 2013); Nebraska v. E.P.A., 331 F.3d 995, 999 n.3 (D.C. Cir. 2003).

Rum directs the Court (Br. 41, 44-45) to I.R.M. 4.10.8.12.4(1) (Sept. 12, 2014), which provides that the examination function should provide taxpayers with an explanation containing “enough information * * * to challenge the issue” on appeal. He contends that, had the IRS affirmatively disclosed the mitigation guidelines, he “may have been able to obtain an abatement of a portion of the penalty.” (Br. 44.) Rum's contention fails for two reasons.

a. First, the guidelines were inapplicable. As a condition precedent to an examining agent applying the mitigation guidelines, an accountholder must first satisfy four threshold conditions. Supra, p. 33. Here, Rum did not satisfy the fourth threshold condition, i.e., that the IRS had not imposed a civil fraud penalty. Supra, pp. 33-34.

To be sure, as part of the settlement of a subsequent Tax Court proceeding involving multiple tax years, the Government ultimately conceded the 2007 civil fraud penalty in exchange for other concessions by Rum. (Doc. 31-6, p. 92; Docs. 58-19, 58-20.) However, as the District Court correctly held, the IRS's selection of a particular penalty amount must be reviewed ex ante, not ex post. (Doc. 71, p. 32.) Here, the court concluded that the IRS had a rational basis for imposing a civil fraud penalty and, therefore, that it appropriately declined to apply the mitigation guidelines. (Id., pp. 22-27.) That conclusion is firmly grounded in the record (Doc. 58-12, pp. 18-21; Doc. 58-30), and Rum does not challenge it in his opening brief. Any challenge to that conclusion should therefore be deemed waived. See Sapuppo, 739 F.3d at 680-83.

b. Second, assuming that the mitigation guidelines applied, they would not have resulted in a reduced penalty here. Reflecting Congress's judgment that the harm to the tax system increases with the size of the account, the guidelines provide that the penalty for an account that exceeded $1 million is 50 percent of the account balance. (I.R.M. 4.26.16.4.6.3(2), (3); Doc. 31-21, pp. 21-22.) Thus, Rum's penalty would have been $690,000 even under the mitigation guidelines. While a penalty calculated under the mitigation guidelines can be reduced if warranted by “the facts and circumstances” (I.R.M. 4.26.16.4(6); Doc. 31-21, p. 12), Rum proffered no reasons warranting such a reduction (pp. 36-37, supra).

Although Rum baldly asserts that he would have “develop[ed] the factual record” with “different kinds of evidence” if he had known about the mitigation guidelines (Br. 38), his opening brief does not identify which of his four reasons he would have developed, much less particular evidence he would have submitted. Nor has he explained why he would have prosecuted his administrative appeal differently had he known that a penalty calculated under the mitigation guidelines can be reduced based on “the facts and circumstances of each case.” (I.R.M. 4.26.16.4(6); Doc. 31-21, p. 12.)

c. Pivoting, Rum directs the Court (Br. 36, 44, 53-54) to Section 554(b)(3) of the Administrative Procedure Act (“APA”), 5 U.S.C. §551, et seq., which requires that an agency timely inform individuals of “the matters of fact and law asserted.” But Section 554 is limited to “adjudication[s] required by statute to be determined on the record after opportunity for an agency hearing.” 5 U.S.C. § 554(a); Taylor v. District Engineer, U.S. Army Corps of Engineers, 567 F.2d 1332, 1335 (5th Cir. 1978). Section 554 is thus inapplicable here, as no statute imposes such a requirement for FBAR penalties.

In any event, Rum had notice of the factual information on which the FBAR penalty was based, since it was (i) provided by him, his counsel, and his bank and (ii) reflected in the agent's report produced following the examination. (Doc. 31-10, pp. 6-7, 9-17.) Rum also had notice of the legal issue, as the IRS informed him that it was imposing a penalty under 31 U.S.C. § 5321(a)(5) for his willful failure to file an FBAR disclosing his UBS account for the 2007 year, calculated as 50 percent of the account balance. (Doc. 30-21, pp. 1-5.)

Rum relies (Br. 38, 54) on Independent Electrical Contractors of Houston, Inc. v. N.L.R.B., 720 F.3d 543 (5th Cir. 2013), but that case is inapposite. There, an agency prosecuted the plaintiff for allegedly violating one code section. Id. at 552. The hearing board sua sponte determined that the plaintiff had violated a different code section. Id. The Fifth Circuit held that, by deciding the case “under a novel theory of liability” without allowing the plaintiff to respond, the board violated the plaintiff's due process rights. Id. This bears no resemblance to the facts here, where the examination function asserted a willful penalty under § 5321(a)(5) and the appeals function sustained a willful penalty under § 5321(a)(5).

2. Rum next contends that, under the Internal Revenue Manual, “the examining agent is the only one who can exercise discretion as to whether to assess penalties and in what amount.” (Br. 42.) Because the examining agent followed directions from her manager, Rum contends that the penalty was improper. (Id., 40-42, 47-48.) That argument does not withstand scrutiny.

Congress authorized the Secretary to exercise discretion in setting the penalty amount for a particular violation. See 31 U.S.C. §5321(a)(5). Nothing in the non-binding Internal Revenue Manual could limit this congressional authorization and grant unfettered authority to agents. Nor does anything in the manual purport to do so. Instead, the manual subjects the relevant decisions to review and approval by a manager and the Office of Chief Counsel. (I.R.M. 4.26.16.4.7(2), 4.26.17.4.3; Doc. 31-21, p. 24; Doc. 58-21, pp. 9-10.)

The manual further conditions agents' discretion on the accountholder satisfying threshold conditions, which Rum did not. Supra, pp. 33-34. Accordingly, as reflected in the contemporaneous notes of both the examining agent and the appeals officer, there was no basis to consider a reduced penalty. (Doc. 30-29, p. 10; Doc. 58-23, p. 49; Doc. 67-1, p. 5.) It is thus unremarkable that the agent's manager directed her to impose a 50-percent penalty. As the agent testified, “that's what the guidelines called for: 50% if the facts supported it.” (Doc. 58-6, p. 107.) She further testified that the facts supported a 50-percent penalty here (id., pp. 108-11), for the reasons reflected in her contemporaneous notes (Doc. 31-10, pp. 9-17) and discussed above.⁷

3. Rum further complains that the IRS engaged in improper “bargaining about penalties.” (Br. 37-38, 40-41, 45, 47.) This badly misstates the record.

Congress has authorized the IRS to both impose penalties (e.g., I.R.C. § 6672(a)) and compromise penalties (I.R.C. §§ 7121-22). To guide their exercise of this authority, the Internal Revenue Manual instructs agents to provide taxpayers with “a reasonable opportunity to provide evidence,” give “full and fair consideration to [such] evidence,” and determine “penalties when a full and fair consideration of the facts and the law support doing so.” (I.R.M. 1.2.20.1.1(9); Doc. 58-17, p. 4.) “This means that penalties are not a 'bargaining point' in resolving the taxpayer's other tax adjustments.” (Id.)

Here, the agency record shows no improper behavior. Rather, the agent proposed a global settlement in which Rum agreed to the proposed income tax adjustments (including civil fraud penalties) in exchange for the imposition of an FBAR penalty representing 20 percent of the UBS account balance (rather than 50 percent). (Doc. 58-12, p. 20; Doc. 58-15, p. 1.) This represents an authorized attempt to negotiate a settlement, not an improper threat of unwarranted penalties as a bargaining point.

Deposition testimony confirms that the agent did nothing wrong. The agent testified, consistent with her contemporaneous notes, that the facts supported the imposition of civil fraud penalties and a 50-percent FBAR penalty. (Doc. 58-6, pp. 65-66, 107-11; see also Doc. 31-10, pp. 9-17; Doc. 58-30.) Because Rum was already under examination, he was not eligible for the Offshore Voluntary Disclosure Program, a settlement initiative in which qualifying taxpayers agreed to pay accuracy-related penalties and a 20-percent FBAR penalty. (Doc. 31-10, p. 13.) Nonetheless, the agent proposed a settlement that was not identical, but “roughly equal,” to the terms that Rum would have received had he been eligible for that settlement initiative. (Doc. 58-6, p. 64; Doc. 58-9, p. 89-90.) After Rum declined that settlement proposal (Doc. 58-38, p. 7), the IRS imposed the penalties that the agent had determined. The penalties were not imposed as retaliation (Doc. 58-6, pp. 104-05, 112, 117; Doc. 58-9, p. 88), and Rum has offered nothing but his “belie[f]” and “intuition” to suggest otherwise (Doc. 58-38, p. 7).

On appeal, Rum speculates that the agent's settlement proposal constituted a bad-faith attempt at “entrapment,” whereby the IRS attempted to induce him to agree to a civil fraud penalty and thereby disqualify himself, under the mitigation guidelines, from an FBAR penalty below 50 percent. (Br. 40-41.) That speculation reflects a fundamental misunderstanding of IRS procedures. Had Rum agreed to the settlement proposal, he and the IRS would have entered into a written closing agreement that resolved all the issues in his Title 26 and Title 31 examinations, just as taxpayers did in the Offshore Voluntary Disclosure Program. See Maze v. I.R.S., 862 F.3d 1087, 1090 (D.C. Cir. 2017). There would have been no potential for misunderstanding, much less entrapment.

D. Rum has established no basis for de novo review of the penalty amount

Perhaps realizing that the IRS's selection of a penalty amount easily clears arbitrary-and-capricious review, Rum alternatively argues that the penalty amount should have been reviewed de novo. (Br. 34-43.) Rum's argument fails.

A bedrock principle of administrative law is that courts judge an agency's decision based on the record that was before it when the decision was made. PEACH, 87 F.3d at 1246-47. “The reviewing court is not generally empowered to conduct a de novo inquiry into the matter being reviewed and to reach its own conclusions based on such an inquiry.” Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985). Rather, “de novo review is appropriate only where there are inadequate factfinding procedures.” Camp v. Pitts, 411 U.S. 138, 141-42 (1973) (reversing lower court decision that permitted additional factfinding). And even then, “the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation.” Florida Power, 470 U.S. at 744; Freeman v. United States Dep't of Interior, 83 F. Supp. 3d 173, 186 n.13 (D.D.C. 2015) (collecting cases).

To justify his requested deviation from the foregoing principles, Rum invokes (Br. 34-35) Section 706(2)(F) of the APA, which provides that agency determinations can be set aside if they are “unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.” 5 U.S.C. § 706(2)(F); Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971). In Rum's view, numerous procedural defects render the IRS's factfinding procedures so inadequate that the IRS would be unable to cure them on remand. (Br. 36-42.) But once again, each defect is predicated on a purported violation of the Internal Revenue Manual, which as discussed at pp. 27-28, supra, has no legal significance. At all events, each purported defect is illusory.

1. Rum begins by reiterating his charges that the IRS improperly (a) withheld the mitigation guidelines and failed to explain the penalty, (b) prevented the examining agent from exercising discretion regarding the penalty amount, and (c) engaged in bargaining about penalties. (Br. 36-42.) It is not clear how the latter two charges bear on the adequacy of the IRS's factfinding procedures. In any event, all three charges are meritless, as discussed at pp. 37-46, supra.

2. Rum next complains that the IRS improperly “merged” his tax and FBAR examinations. (Br. 40.) He did not raise this argument in the proceedings below, however, and it should be deemed waived. See Bryant v. Jones, 575 F.3d 1281, 1296 (11th Cir. 2009). Furthermore, it is not clear how this argument bears on the adequacy of the IRS's factfinding procedures.

The argument is also meritless. To protect against inadvertent violations of I.R.C. § 6103, which governs the inspection and disclosure of taxpayers' returns and return information, the Internal Revenue Manual provides that agents should obtain a related statute memorandum before expanding a tax examination to include FBAR issues.⁸ (I.R.M. 4.26.17.2; Doc. 58-21, pp. 3-4). Although Rum insinuates that the IRS failed to obtain such a memorandum here (Br. 40), he identifies no support for this insinuation. Nor could he, as the Government produced the memorandum in discovery at Bates #ADM000351.

3. Rum finally argues that, because the examination function did not rely on his failure to cooperate when determining the penalty amount, it was improper for the appeals function to rely on that “new issue” when it sustained the penalty. (Br. 41.) Rum's argument confuses new issues (which the Internal Revenue Manual instructs appeals officers not to consider) with new theories or alternative arguments in support of an existing issue (which the manual expressly permits appeals officers to consider). (I.R.M. 8.6.1.6.2(1), (3)-(4) (Nov. 14, 2013).) Here, Rum's lack of cooperation was an alternative argument in support of the determination that he did not qualify for mitigation, not a new issue.⁹ (Doc. 58-22, pp. 66-69.) At all events, as the District Court correctly concluded, any error in this regard was harmless because the IRS's imposition of a civil fraud penalty was an independent basis for not applying mitigation. (Doc. 71, p. 31 n.28.)

Rum relies (Br. 39-41) on Porter v. Califano, 592 F.2d 770 (5th Cir. 1979), but that case is readily distinguishable. There, the plaintiff was suspended from federal employment after accusing two supervisors of corruption. Id. at 774-75. The Fifth Circuit held that the agency's factfinding procedures were inadequate, where (i) the factfinding was conducted by one of the accused supervisors, (ii) the disciplinary proceedings were conducted by an employee who reported to the accused supervisors, and (iii) the accused supervisors provided testimony against the employee without being cross-examined. Id. at 782-84. This bears little resemblance to the facts here, where there is no evidence of bias and the relevant information was provided by Rum, his counsel, and his bank.

III. When Congress increased the maximum willful FBAR penalty in 2004, it superseded the 1987 regulation stating a lower maximum

A. In 2004, Congress deliberately provided for maximum willful FBAR penalties that exceed $100,000

The plain text of 31 U.S.C. § 5321, as amended by Congress in 2004, makes clear that a willful penalty may exceed $100,000. Under § 5321(a)(5)(C), “[i]n the case of any person willfully violating” that requirement, “the maximum penalty * * * shall be * * * the greater of — (I) $100,000, or (II) 50 percent of the amount determined under” §5321(a)(5)(D). Section 5321(a)(5)(D), in turn, states that where the taxpayer has failed “to report the existence of an account,” the alternate maximum under prong (II) above is one-half of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(D). The current maximum penalty for willful violations of the reporting requirement is thus the greater of $100,000 or 50 percent of the account's value at the time of the violation.

Moreover, Congress specified in 31 U.S.C. § 5321(a)(5)(C) that the maximum penalty “shall be” the greater of those two alternatives. The use of “shall” makes what follows mandatory, not discretionary. Norman, 942 F.3d at 1117; Mach Mining, LLC v. E.E.O.C., 575 U.S. 480, 486 (2015). Congress therefore set a maximum penalty that must function as the ceiling whenever the IRS imposes a willful FBAR penalty.

This maximum penalty is higher than the maximum penalty set by the prior version of § 5321. Under the statutory language in effect from 1986 until 2004, the maximum penalty was “the greater of” $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(B)(ii) (2003). Thus, until 2004, $100,000 was the absolute maximum civil penalty for a single willful FBAR violation. Congress, however, removed that hard ceiling for accounts worth more than $200,000 (i.e., accounts for which 50 percent of the value exceeds $100,000) and instead provided for a variable maximum penalty based on the account value.¹⁰

In short, Congress deliberately increased the maximum penalty for willful FBAR violations, and it did so in language that made the increased maximum mandatory. As the Federal Circuit recently held in rejecting an identical argument in Norman, 942 F.3d at 1117-18, the plain language of the statute compels rejection of Rum's argument that the maximum penalty is $100,000.

B. Congress's 2004 amendment supersedes the regulation reflecting the prior statutory maximum

A regulation promulgated in 1987, 31 C.F.R. § 1010.820(g)(2), states a maximum penalty different from the one now found in 31 U.S.C. § 5321(a)(5)(C). That regulation, however, was rendered “void” and “no longer valid” by Congress's 2004 amendment to the statute. Norman, 942 F.3d at 1117-18.

The 1987 regulation did nothing more than track the maximum penalty language in the 1986 version of 31 U.S.C. § 5321. The relevant statutory language in 1986 provided that “in the case of [a willful] violation * * * involving a failure to report the existence of an account,” the penalty shall not exceed “the greater of — (I) an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation; or (II) $25,000.” 31 U.S.C. § 5321(a)(5)(B)(ii) (1987). The regulation repeats that language, stating that in the case of “a failure to report the existence of an account,” the Secretary may impose “a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.” 31 C.F.R. § 1010.820(g)(2). When Congress superseded the earlier statutory language setting the maximum penalty, it necessarily also superseded the regulation that repeated the same language.

That commonsense conclusion is confirmed by controlling precedent. A regulation that contravenes a statute is invalid. Citizen's Nat'l Bank of Waco v. United States, 417 F.2d 675, 679 (5th Cir. 1969). Thus, “[a] Regulation, valid when promulgated, becomes invalid upon the enactment of a statute in conflict with the Regulation,” to the extent of the conflict. Scofield v. Lewis, 251 F.2d 128, 132 (5th Cir. 1958); State of Ga. v. Heckler, 768 F.2d 1293, 1299 (11th Cir. 1985). The reason is simple: “Regulations do not maintain an independent life, defeating the statutory change.” Aerolineas Argentinas v. United States, 77 F.3d 1564, 1575 (Fed. Cir. 1996).

That rule applies here, as recognized by the Federal Circuit, the Court of Federal Claims, the District Court below, and seven other district courts. Norman, 942 F.3d at 1117-18; Kimble, 141 Fed. Cl. at 388-89; United States v. Kahn, No. 1:17-cv-07258-KAM-VMS, slip op. 8-32 (E.D.N.Y. Sept. 23, 2019); United States v. Gregory, No. 3:18cv80-TKW-HTC, slip op. 4-5 (N.D. Fla. Oct. 7, 2019); United States v. Cohen, 2019 WL 4605709, at *3-*5 (C.D. Cal. Aug. 6, 2019); United States v. Schoenfeld, 2019 WL 2603341, at *3-*7 (M.D. Fla. June 25, 2019); United States v. Park, 2019 WL 2248544, at *7-*9 (N.D. Ill. May 24, 2019); United States v. Garrity, 2019 WL 1004584, at *1-*5 (D. Conn. Feb. 28, 2019); Horowitz, 361 F. Supp. 3d at 514-16. The 1987 regulation, which states that the maximum penalty is $100,000, cannot be squared with the subsequent statutory language stating that the maximum penalty “shall be” the greater of $100,000 or half the balance in the account. The obsolete regulatory cap is therefore no longer valid.

C. Rum's contrary arguments are unpersuasive

1. The statute does not give the Secretary discretion to set a generally applicable maximum penalty that differs from the statutory maximum

Rum's primary contention is that 31 U.S.C. § 5321(a)(5)(A) gives the Secretary the discretion to set a lower maximum penalty. (Br. 51-52.) That contention misreads the statute. The language on which Rum relies states that the Secretary “may impose a civil money penalty on any person who violates” the FBAR requirement. 31 U.S.C. § 5321(a)(5)(A).

In other words, the Secretary has discretion to impose, or not impose, a penalty in any given case. Further, because the statute specifies a maximum penalty but not a minimum penalty (see id. §5321(a)(5)(C)), the Secretary has the discretion to impose a penalty below the maximum in any given case. Here, for instance, the Secretary exercised his discretion not to impose a penalty for any year in which Rum held a foreign account except 2007. And the Secretary could have imposed a penalty below the statutory maximum for 2007, but elected against doing so.

That does not, however, mean that the Secretary has the authority to set a generally applicable maximum penalty that is lower than the one that Congress mandated. To the contrary, although Congress used the discretionary “may” in discussing whether a penalty applies in any given case (31 U.S.C. § 5321(a)(5)(A)), it used the mandatory “shall” in setting the maximum penalty (id. § 5321(a)(5)(C)). The Secretary therefore lacks “discretion to 'override Congress's clear directive'” by setting a generally applicable maximum penalty that departs from Congress's chosen cap. Park, 2019 WL 2248544, at *8 (quoting Garrity, 2019 WL 1004584, at *3); Norman, 942 F.3d at 1117-18.

2. Assuming arguendo that the statute gave the Secretary discretion to set a different maximum penalty, the Secretary never exercised that discretion

Even if the FBAR statute granted discretion to the Secretary to set a generally applicable maximum penalty that was lower than the maximum penalty chosen by Congress, Rum would need to show that the Secretary actually exercised that discretion. Rum cannot do so.

There is no reason to believe that the Treasury Department made a discretionary decision regarding the maximum penalty amount when it promulgated § 1010.820(g)(2) in 1987. The statute in effect at the time provided a maximum penalty of $100,000, and the penalty language — which repeated the text of the statute — provided that the maximum penalty was $100,000. See Garrity, 2019 WL 1004584, at *5. The preamble to the 1987 regulation further “stated that Treasury intended to enforce the BSA 'to the fullest extent possible.'” Id. at *3 (quoting 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987)). Thus, Rum cannot seriously contend that Treasury intended the regulation to categorically limit the Secretary's discretion to impose otherwise lawful penalties.

Moreover, the Government has never suggested that §1010.820(g)(2) is an interpretation of the current version of 31 U.S.C. §5321(a)(5)(C). To the contrary, both the IRS and FinCEN have recognized that the amended maximum penalty enacted in 2004 now governs. Since 2008, the Internal Revenue Manual has stated that, notwithstanding the fact that the 1987 regulation has “not been revised to reflect” Congress's 2004 amendment, “the new penalty ceilings apply.” (I.R.M. 4.26.16.4.5.1(4); Doc. 31-21, p. 16.) And in 2010, FinCEN noted that “[a] person who willfully fails to” file a required FBAR “may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.” Amendment to the Bank Secrecy Act Regulations — Report of Foreign Financial Accounts, 75 Fed. Reg. 8844-01, 8854 (Feb. 26, 2010).

The Secretary has never acted contrary to the understanding expressed by the IRS and FinCEN. Rum contends (Br. 50) that periodic updates to 31 C.F.R. § 1010.821, which lists the amounts of various penalties as adjusted for inflation, amounted to a re-promulgation of the $100,000 maximum in § 1010.820(g)(2). He is wrong. As required by the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. §2461, the Secretary has periodically issued rules adjusting the penalties listed in § 1010.821 for inflation. See, e.g., Inflation Adjustment of Civil Monetary Penalties, 82 Fed. Reg. 10434-01 (Feb. 10, 2017); Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42503-01 (June 30, 2016). And that table does include adjustments to the $100,000 penalty that, under § 5321(a)(5)(C), represents the maximum willful FBAR penalty for accounts with less than $200,000.

That fact, however, cannot imply that the Secretary believes $100,000 (as adjusted for inflation) is the maximum penalty. Schoenfeld, 2019 WL 2603341, at *6; Garrity, 2019 WL 1004584, at *4. By statute, the inflation adjustments apply only to penalties that are (i) “for a specific monetary amount as provided by Federal law,” or (ii) have “a maximum amount provided for by Federal law.” 28 U.S.C. § 2461 note. The Office of Management and Budget has advised agencies that this language does not include “penalties written as functions of violations,” such as penalties based on “the value of the transaction.” OMB, Memorandum for the Heads of Executive Departments and Agencies, at 2 (Feb. 24, 2016), available at http://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2016/m-16-06.pdf. The Secretary has more specifically recognized, in the preamble to the 2016 inflation adjustments, that those adjustments do not apply to BSA penalties that “lack a stated dollar amount and are instead written solely as functions of violations.” 81 Fed. Reg. at 42504.

In short, although the $100,000 penalty in § 5321(a)(5)(C) is one that Congress has said must be adjusted for inflation, the alternate maximum based on the value of the account is not. It is therefore no surprise that only the $100,000 penalty (and not the 50-percent penalty) appears in the regulation listing inflation adjustments.

The fact that FinCEN renumbered the regulation at issue as part of its general reorganization of BSA regulations also does not amount to a re-promulgation of the $100,000 maximum. FinCEN made clear that the renumbering and reorganization would be accomplished “without substantive change.” Transfer and Reorganization of Bank Secrecy Act Regulations, 73 Fed. Reg. 66414-01, 66414 (Nov. 7, 2008). It treated all comments that suggested substantive changes — including to regulations “that were perceived as no longer relevant” — as “outside the scope of [the] rulemaking.” Transfer and Reorganization of Bank Secrecy Act Regulations, 75 Fed. Reg. 65806-01, 65806-07 (Oct. 26, 2010).

Nor can FinCEN's failure to repeal § 1010.820(g)(2) (see Br. 50) be seen as a continuing endorsement of that regulation's vitality. The Supreme Court has recognized that “Treasury's relaxed approach to amending its regulations to track Code changes is well documented.” United Dominion Indus., Inc. v. United States, 532 U.S. 822, 836 (2001). Thus, no “affirmative intention” should be read into Treasury's failure to amend a regulation. Id. at 837; see also Barseback Kraft AB v. United States, 121 F.3d 1475, 1480 (Fed. Cir. 1997) (agency's failure to withdraw preexisting regulations that conflict with amended statute “does not save them from invalidity”); Umbach v. Commissioner, 357 F.3d 1108, 1112 (10th Cir. 2003).

3. The district court opinions in Colliot and Wahdan are unpersuasive and should not be followed

Rum relies heavily on the district court opinions in United States v. Colliot, 2018 WL 2271381 (W.D. Tex. May 16, 2018), and United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018), both of which held that the regulation remains valid. (See Br. 18-19, 21.) Those district courts are in the minority, pp. 54-55, supra, and for good reason. This Court should reject Rum's invitation to create a circuit split by following these poorly reasoned district court opinions.

Colliot held that Congress's 2004 amendment to § 5321(a)(5) did not supersede the $100,000 cap in 31 C.F.R. § 1010.820(g)(2) because the statute “sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor.” Colliot, 2018 WL 2271381, at *2. That is beside the point. By their plain language, the statute and the regulation set competing and inconsistent ceilings. As discussed above, the statute must control.

The Colliot court further believed that § 1010.820(g)(2) “purports to cabin [the Secretary's] discretion by capping penalties at $100,000.” Colliot, 2018 WL 2271381, at *2. That belief is inconsistent with the history of the FBAR penalty. As discussed above, Treasury promulgated the $100,000 regulatory cap at a time when the statute contained the same cap, and both FinCEN and the IRS have consistently recognized that Congress's 2004 amendment superseded § 1010.820(g)(2).¹¹

The court in Wahdan advanced two additional rationales, both of which are unpersuasive. First, the court suggested that the adjustments to the inflation calculations in 31 C.F.R. § 1010.821 “suggest[ ] that the Secretary” consciously “elected to continue to limit the IRS' authority to impose penalties to $100,000.” Wahdan, 325 F. Supp. 3d at 1140. As we have just explained, the inflation-calculation changes suggest no such thing.

Second, the court in Wahdan rejected reliance on legislative history on the ground that the text of § 5321(a)(5)(C) is clear. 325 F. Supp. 3d at 1140. But that clarity cuts the other way. As explained above, the clear text of the statute increased the maximum penalty and, in doing so, superseded both the prior statutory maximum and the portion of § 1010.820(g)(2) repeating the prior statutory language.

IV. The IRS's imposition of interest and a late-payment penalty was not arbitrary, capricious, or an abuse of discretion

In 31 U.S.C. § 3717(a)(1), Congress directed that the Secretary “shall charge” interest on outstanding debts. In 31 U.S.C. § 3717(e)(2), Congress directed that the Secretary “shall assess” a late-payment penalty on outstanding debts over 90 days past due. The judgment in this case therefore includes interest and the late-payment penalty that had accrued on Rum's FBAR penalty liability. (Doc. 81.)

Notwithstanding Congress's clear command to impose interest and late-payment penalties, Rum argues that the IRS abused its discretion by doing so. (Br. 53-55.) To support this argument, Rum relies (id.) on Moore v. United States (“Moore II”), 2015 WL 4508688 (W.D. Wash. July 24, 2015). That case has no application here.

In Moore II, the IRS told a taxpayer that an FBAR penalty would not be assessed until after the appeals conference. Id. at *1-*2. The court concluded that the IRS not only “broke its * * * promise,” but also failed to produce the examining agent's report prior to the appeals conference. Id. at *1. In litigation, the Government produced the agent's report, but withheld the appeals case memorandum. Id. In disallowing pre-judgment interest and the late-payment penalty, the court held that “[t]he IRS's refusal to disclose anything about the basis for its decision until this litigation, and in particular its decision to withhold [the appeals case] memorandum until after the court ordered it produced, was arbitrary and capricious.” Id. Here, by contrast, the IRS made no promise regarding when the FBAR penalty would be assessed; provided Rum with the agent's report prior to the appeals conference; and, once discovery commenced in this case, promptly produced the appeals case memorandum.

Rum's attempts to shoehorn this case into the facts of Moore II are unpersuasive. First, he argues that, in addition to disclosing the statutory provision under which it was imposing a willful penalty and the facts supporting its willfulness determination, the IRS was obligated to disclose case law. (Br. 54-55.) But Rum has not cited, and the Government is unaware, of any authority that requires the IRS to provide taxpayers with case-law research. See supra, pp. 37-38, 40-42. In any event, the examining agent's report did provide case law. (Doc. 31-10, p. 17.)

Rum also criticizes (Br. 54-55) the appeals officer's letter sustaining the FBAR penalty, which identified several indicia of willfulness before concluding that Rum's arguments “do not support a different [penalty] determination” (Doc. 58-34, p. 2.). While this explanation may appear conclusory at first blush, it should be read in the context of the four facially meritless arguments that Rum provided in support of a reduced penalty, which he does not even bother to renew on appeal. Supra, pp. 36-37. In addition, this explanation should be read in conjunction with the examining agent's report (Doc. 31-10, ap. 9-17), lead sheet (Doc. 67-1), and summary memorandum (Doc. 58-23, p. 49); appeals officer's memorandum (Doc. 30-29); chief counsel memorandum (Doc. 58-8); bank records (Docs. 31-7 to 31-9); and publicly available Internal Revenue Manual. Together, these materials “reflect a considered response * * * [and] allow for a thoughtful judicial review.” Public Serv. Co. of New Mexico v. F.E.R.C., 832 F.2d 1201, 1206 n.5 (10th Cir. 1987) (citation and internal quotations omitted).

Consequently, there is no basis to impose what amounts to a sanction by disallowing interest and the late-payment penalty.

CONCLUSION

The judgment of the District Court should be affirmed.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

JOSHUA WU
Deputy Assistant Attorney General

Geoffrey J. Klima

FRANCESCA UGOLINI (202) 514-1882
DEBORAH K. SNYDER (202) 305-1680
GEOFFREY J. KLIMAS (202) 307-6346
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Appellate.TaxCivil@usdoj.gov
Geoffrey.J.Klimas@usdoj.gov

Of Counsel:

MARIA CHAPA LOPEZ
United States Attorney

APRIL 2020

ADDENDUM

United States v. Gregory, No. 3:18cv80-TKW-HTC, slip op. (N.D. Fla. Oct. 7, 2019)

United States v. Kahn, No. 1:17-cv-07258-KAM-VMS, slip op. (E.D.N.Y. Sept. 23, 2019)