Individuals Seek Dismissal of FBAR Penalties Exceeding IRS Reg Cap

UNITED STATES OF AMERICA,
Plaintiff,
v.
URAYB WAHDAN and SAID WAHDAN,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO

MOTION FOR JUDGMENT ON THE PLEADINGS PURSUANT TO FED. R. CIV. P. 12(c)

Certain of the penalties the IRS assessed (and which the government now seeks to enforce) against Defendants Said and Urayb Wahdan violate the IRS's own regulations. As to those penalties, the Wahdans are entitled to judgment on the pleadings as a matter of law.

The penalties at issue are based on alleged failures by the Wahdans to file accurate Reports of Foreign Bank and Financial Accounts (“FBAR”) for the years 2008, 2009, and 2010. The penalties — which were imposed for each allegedly unreported or misreported foreign bank account in which the Wahdans purportedly had an interest — are listed, account-by-account, in charts on pages 10-11 and 13-14 of the Complaint, and are of two types: (1) for most of the accounts, the IRS assessed a penalty in the exact amount $100,000; and (2) for three of the accounts, the IRS assessed substantially higher penalties in the following odd-dollar amounts: $1,108,645.41, $599,234.54, and $599,234.54. While the Wahdans dispute all the penalties, this motion pertains only to the latter penalties exceeding $100,000.

Pursuant to Fed. R. Civ. P. 12(c), the Court should dismiss the government's attempt to recover penalties exceeding $100,000 because those assessments exceed the penalty amounts the IRS is authorized to impose. The authority to assess FBAR penalties is delegated to the IRS pursuant to 31 CFR § 1010.810(g). As part of the delegation order, the IRS is granted “authority to assess and collect civil penalties under 31 U.S.C. § 5321 and 31 CFR § 1010.820.” Id.¹ In pertinent part, 31 CFR § 1010.820 authorizes penalty assessments “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 CFR § 1010.820(g)(2). The court should dismiss the portions of the Complaint seeking to recover penalties in the amounts $1,108,645.41, $599,234.54, and $599,234.54 (for 2008, 2009, and 2010, respectively), because those assessments violate the IRS's own regulations, and, therefore, are an abuse of discretion as a matter of law.

BACKGROUND

A. Penalties At Issue

On May 26, 2017, the United States filed a Complaint seeking to reduce to judgment FBAR penalties imposed pursuant to 31 U.S.C. § 5321(a)(5). Compl. [Dkt. No. 1] ¶ 1. According to the Complaint, the IRS assessed the penalties because the Wahdans either did not file or inaccurately filed forms disclosing their foreign financial accounts in 2008, 2009, and 2010. Id. The amounts of the penalties are shown in charts on pages 10-11 and 13-14 of the Complaint. As pertinent to this motion, three of the penalties the IRS imposed are as follows:

YEAR	BANK ACCOUNT	PENALTY AMOUNT
2008	UBS '036	$1,108,645.41
2009	Arab Bank of Jordan '536	$599,234.54
2010	Arab Bank of Jordan '536	$599,234.54

Compl. [Dkt. No. 1] ¶ 59.

According to the Complaint, the penalty for 2008 in the amount $1,108,645.41 — assessed with respect to a Swiss UBS account owned by the Wahdans — is premised on the Wahdans “never fil[ing] an FBAR for 2008. . . .” Compl. [Dkt. No. 1] ¶ 48. In contrast, the penalties assessed for 2009 and 2010 — each in the amount $599,234.54, with respect to an Arab Bank of Jordan account — are not premised on the Wahdans' failure to file an FBAR for 2009 or 2010; instead, such penalties are based on alleged inaccuracies in the FBAR forms that the Wahdans (as the United States concedes) timely filed in those years. Compl. [Dkt. No. 1] ¶¶ 51, 55, 69, & 73. The IRS claims that the problem with the Wahdans' FBAR disclosures for 2009 and 2010 with respect to these disclosed accounts is that they “did not accurately list the maximum balance of each account, stating only that the balances exceeded $10,000.” Compl. [Dkt. No. 1] ¶¶ 52, 56, 70, & 74. (The FBAR returns in use for calendar years 2009 and 2010 mandate disclosure of accounts only if the aggregate value of the accounts exceeds $10,000.²)

That said, regardless of the particular bases for these three penalties assessed in 2008, 2009, and 2010, all are improper because they exceed the maximum authorized penalty amount.

B. Applicable Regulations

In its Complaint, the government states that the IRS imposed the penalties pursuant to 31 U.S.C. § 5321(a)(5). Compl. [Dkt. No. 1] ¶ 1. That section sates that the Secretary of the Treasury “may impose a civil money penalty on any person who violates . . . any provision of section 5314,” which is the section that establishes FBAR reporting requirements. 31 U.S.C. § 5321(a)(5)(A). After authorizing the Secretary to impose such penalties, section 5321(a)(5) sets forth the maximum amounts of such penalties. For willful FBAR violations, the maximum statutorily authorized penalty is the greater of $100,000 or 50 percent of the relevant account balance. 31 U.S.C. § 5321(a)(5)(C).

That, however, is not the end of the story. By regulation, the authority to enforce FBAR reporting requirements is delegated to the Commissioner of Internal Revenue, who is authorized to “assess and collect civil penalties under 31 U.S.C. 5321 and 31 CFR 1010.820[.]” 31 CFR § 1010.810(g). The referenced Section 31 CFR § 1010.820 provides that “[f]or any willful violation [of the FBAR implementing regulations] involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account,” the Secretary “may assess . . . 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 CFR § 1010.820(g).

Thus, while the statute permits the Secretary to impose a penalty for a willful FBAR violation up to the greater of $100,000 or 50 percent of the account balance (31 U.S.C. § 5321(a)(5)(C)), the Secretary's implementing regulation caps the penalty at $100,000 (31 CFR § 1010.820(g)). This is consistent with the discretion granted the Secretary: the statute provides that the Secretary “may impose a civil money penalty” up to varying amounts (31 U.S.C. § 5321(a)(5)); the regulation capping the penalty at an amount within the statutory maximum is a permissible exercise of that discretion. See, e.g., Big Sky Network Canada, Ltd. v. Sichuan Provincial Gov't, 533 F.3d 1183, 1186 (10th Cir. 2008) (statute's use of the word “may” renders it “permissive, rather than mandatory”); Conservancy of Sw. Fla. v. U.S. Fish & Wildlife Serv., 677 F.3d 1073, 1083–84 (11th Cir. 2012) (“[T]he statute's permissive language makes it all the more apparent that the decision at issue is committed to agency discretion.”); Neuwirth v. Louisiana State Bd. of Dentistry, 845 F.2d 553, 557 (5th Cir. 1988) (“Use of the word 'may' as opposed to mandatory language as 'shall' has been found to indicate a legislature's intention to bestow discretion on the [ ] agency charged to apply the statute.”).

Moreover, it is clear that the regulation's lower penalty cap relative to the statute is no accident. The regulation (though previously differently numbered) has had substantively identical language since 1987. See 52 Fed. Reg. 11445, Apr. 2, 1987. In 2004, the applicable statute — 31 U.S.C. § 5321 — was amended to permit maximum penalties of $100,000 or 50% of the account balance. But Congress did not require, and the Treasury Secretary did not implement, any equivalent change to the regulation — to the contrary, notwithstanding the statutory change, in 2011, as part of a renumbering of regulations, the Treasury Secretary reaffirmed the $100,000 maximum penalty permitted by 31 CFR § 1010.820(g). See Transfer and Reorganization of Bank Secrecy Act Regulations, Notice of Proposed Rulemaking and Request for Comments, 73 FR 66414-01, 2008 WL 4820239; see also IRM § 4.26.7 (“effective March 1, 2011,” “31 CFR Part 103 were renumbered to 31 CFR Chapter X.”); cf. Korth v. Mountain City Copper Co., 174 F.2d 295, 297 (10th Cir. 1949) (“With knowledge of the existence of the regulation, Congress has from time to time revised the income tax statutes without indicating disapproval of the regulation. It must be presumed, therefore, that the regulation has congressional approval and it should not be invalidated by the courts unless it is clearly inconsistent with the statutes.”).

DISCUSSION

A. Rule 12(c) Standard

A motion for judgment on the pleadings under Rule 12(c) is decided under the same standard applicable to a motion under Rule 12(b)(6). Landmark Am. Ins. Co. v. VO Remarketing Corp., 619 F. App'x 705, 708 (10th Cir. 2015). Thus, “[g]ranting a motion for judgment on the pleadings requires the movant to establish an absence of any issue of material fact and entitlement to judgment as a matter of law.” Id. While the court views the facts in the light most favorable to the non-moving party, it is not obliged to ignore facts set forth in the complaint that undermine the plaintiff's claim, nor give weight to assertions that are merely conclusions of law. N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir. 1998).

In ruling on a motion for judgment on the pleadings, the Court may take judicial notice of agency rules and regulations without converting the motion to dismiss to one for summary judgment. See, e.g., Muniz v. Kaspar, No. 07–cv–01914–MSK–MJW, 2008 WL 3539270, at *3 (D. Colo. Aug. 12, 2008) (taking judicial notice of administrative regulation describing grievance process in ruling on motion to dismiss). In keeping with that approach, the Wahdans rely on the complaint and the agency regulations applicable to the penalties at issue.

B. The IRS abused its discretion as a matter of law by assessing penalties exceeding the maximum amount permitted by IRS regulations.

As framed by the government, “the suit in this case is to collect a debt owed to the United States but the amount of the debt is left to the Secretary's discretion.” Scheduling Order [Dkt. 20] at p. 3. The government recognizes that one “phase” of this case entails “the Court review[ing] the amount of the penalty to determine whether the IRS abused its discretion in setting the amount.” Id.; see also Moore v. United States, No. C13-2063-RAJ, 2015 WL 1510007, at *7 (W.D. Wash. Apr. 1, 2015) (reviewing FBAR penalty amount based on abuse of discretion standard); 5 U.S.C. § 706(2)(A). By regulation, the Secretary mandated that the “civil penalty [is] 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.” 31 CFR § 1010.820. As a matter of law, the IRS abused its discretion by imposing penalties exceeding that cap. The portion of the complaint seeking to collect penalties exceeding $100,000 must, therefore, be dismissed.

It is axiomatic that a federal agency is bound to follow its own regulations. United States v. Nixon, 418 U.S. 683, 695–96 (1974). Indeed, “failure on the part of an agency to act in compliance with its regulations is fatal to its actions,” Township of South Fayette v. Allegheny County Housing Authority, 27 F.Supp.2d 582, 595 (W.D. Penn. 1998) (citing Kelly v. R.R. Ret. Bd., 625 F.2d 486, 492 (3d Cir. 1980)), and an abuse of discretion. Padilla-Padilla v. Gonzales, 463 F.3d 972, 980 (9th Cir. 2006) (“The BIA's failure to follow its own regulation constitutes an abuse of discretion.”); Carter v. Sullivan, 909 F.2d 1201, 1202 (8th Cir. 1990) (“[A]n agency's failure to follow its own binding regulations is a reversible abuse of discretion.”); see also Health Sys. Agency of Oklahoma, Inc. v. Norman, 589 F.2d 486, 491–92 (10th Cir. 1978) (“It would be a rare case indeed in which an administrative decision flatly contrary to articulated agency policy would be found a proper exercise of discretion.”).

These rules apply in equal force to the IRS. United States. v. Thompson, 579 F.2d 1184, 1191 (10th Cir. 1978) (Seth, J., dissenting) (“It would not seem necessary to discuss at length the cases which require an agency to adhere to the policy and regulations its promulgates. The cases are especially clear in the Internal Revenue Service rule problems.”); United States v. Heffner, 420 F.2d 809, 811 (4th Cir. 1969)”) (applying same rationale to the IRS and noting that “[a]n agency of the government must scrupulously observe rules, regulations, or procedures which it has established. When it fails to do so, its action cannot stand and courts will strike it down.”).

The regulations setting forth the FBAR penalty limits are clear. Pursuant to 31 CFR §§ 1010.810 and 1010.820(g), the IRS may assess penalties for willful violations of 31 U.S.C. § 5314 in an amount “not to exceed $100,000.” Id. The Secretary periodically reaffirmed this same delegation of authority when the applicable regulations were republished and subsequently moved.³ For that same reason, any argument that the regulations were impliedly repealed fails.⁴ While the applicable statute, 31 U.S.C. § 5321, was amended in 2004 to permit maximum penalties of $100,000 or 50% of the account balance, the authority delegated to the IRS was unchanged. Notwithstanding the statutory change, in 2011 the Secretary reaffirmed the $100,000 maximum penalty amount permitted by 31 CFR § 1010.820(g).

The odd-dollar penalties assessed by the IRS against the Wahdans for 2008, 2009, and 2010 — in the amounts $1,108,645.41, $599,234.54, and $599,234.54 — exceed the amount allowed by the IRS's own regulations. They are, therefore, an abuse of discretion, and the government's efforts to collect them must be dismissed. Heffner, 420 F.2d at 811.

Any other result would work an obvious injustice. Among the critical purposes of rulemaking are “notice and predictability.” Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 158 (2012). Those purposes would be wholly defeated in this case if the IRS, despite its own regulations capping willful FBAR violations at $100,000, is allowed to collect penalties exceeding that cap by over $2 million — an unfairness underscored by the irony of the IRS seeking to penalize the Wahdans for failing to strictly adhere to regulations when the IRS itself is not “scrupulously observ[ing its] rules, regulations, [and] procedures.” Heffner, 420 F.2d at 811.⁵

For the reasons stated above, the $1,108,645.41, $599,234.54, and $599,234.54 exceed the maximum amount allowed by regulations and should be dismissed.

CONCLUSION

As a matter of law, the IRS abused its discretion by assessing penalties exceeding the $100,000 cap set by the IRS's own regulations. See 31 CFR § 1010.820(g). Accordingly, the IRS's effort to enforce penalties in the amounts $1,108,645.41, $599,234.54, and $599,234.54 (for 2008, 2009, and 2010, respectively) should be dismissed pursuant to Fed. R. Civ. P. 12(c).

DATED this 1st day of March, 2018

PERKINS COIE LLP

By: Thomas Newman
TNewman@perkinscoie.com
505 Howard Street, Suite 100
San Francisco, CA 94105
Telephone: 415.344.7028
Facsimile: 415.344.7228

Alexander H. Bailey, #45219
ABailey@perkinscoie.com
1900 Sixteenth Street, Suite 1400
Denver, CO 80202-5255
Telephone: 303.291.2300
Facsimile: 303.291.2400

Attorneys for Defendants