Individuals Challenge Government Claim That FBAR Decision Was Wrong

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

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO

DEFENDANTS RESPONSE TO UNITED STATES' SURREPLY TO
DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS

The recent Order in United States of America v. Colliot found against the government on the identical legal issue pending in this case. Cause No. AU-16-CA-01281-SS (W.D. Tex. May 16, 2018) (finding "the IRS cannot assess penalties in excess of the threshold set by 31 C.F.R. § 1010.820.") (herein, the "Colliot Order"). In its attempt to blunt this directly adverse outcome, government counsel accuses the Colliot court of incorrectly presuming the intent of the Secretary of Treasury, and improperly "resuscitat[ing] the outdated regulation." (Surreply to Defendant's Motion for Judgment on the Pleadings (Dkt. No. 44) at 1, 9.) This gives short shrift to the Colliot court's analysis, which looked closely at both the plain language of the statute and the history of the provision. See Colliot Order at 2–3. As the Colliot court aptly stated:

If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321(a)(5)'s maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.

Colliot Order at 5 n.3.

Notably, the Colliot court also focused on the notice-and-comment rulemaking aspect of the regulations at issue, stating that "[r]ules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking." Colliot Order at 5 (citing Perez v. Mortg. Bankers Ass'n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to "use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance.")). The government's only response is that, instead of focusing on the legal requirements for rulemaking, the Court should keep in mind Treasury's "relaxed approach" and "inattention" when it comes to revising its own regulations. (Dkt. No. 44 at 9.) In other words, Treasury should get a pass because its neglect of proper rulemaking has become institutionalized. This, of course, would undermine the whole point of notice-and-comment rulemaking.

Here, the Court is not faced with Treasury's inaction to revoke or modify a regulation that on its face conflicts with the governing statute. As the Colliot court notes, § 1010.820 does not conflict with § 5321 but rather is "a regulation validly issued by the Treasury via notice-and-comment rulemaking [that] purports to cabin [Treasury's] discretion by capping penalties at $100,000." Colliot Order at 5. Defendants have made this same argument, most recently in their Reply. (Dkt. No. 35 at 4–5 (citing Fitzgerald v. Dep't of Homeland Sec., 837 F.3d 1346, 1356 (Fed. Cir. 2016) (these "regulations do not conflict with the statute; instead, they merely cabin it by restricting entitlement. . . ."); United States v. Nacchio, 573 F.3d 1062 (10th Cir. 2009); United Telecomms, Inc. v. Commr of Internal Revenue, 589 F.2d 1383, 1387 (10th Cir. 1978)).

The government's surreply states the Colliot court "erred in focusing solely on the 'text of § 5321(a)(5)'" and argues this Court should ignore the fact that the operative regulation was renumbered and amended in the years following the change in the statutory language. (Dkt. No. 44 at 7, 9–10.) But "[u]nfortunately for the IRS, there is little reason to believe § 5321(a)(5)(C) implicitly superseded or invalidated § 1010.820." because, as detailed in the Colliot Order and in Defendants' prior briefing, the regulation and statute are not in conflict. Colliot Order at 4.¹

In its surreply, the government strains to manufacture a conflict between the statute and regulation, arguing, for instance, that "[t]he methodology for computing the FBAR penalty ceiling in the . . . regulation and the methodology in the current statute are irreconcilable." (Dkt. No. 44 at 8.) What the government continues to studiously ignore, however, is that the statute does not require the Treasury to impose any penalty on FBAR offenders. Instead, the statute provides the Treasury discretion — up to a ceiling but without a floor — to impose FBAR penalties. Section 1010.820 is an entirely proper exercise of that discretion, and is entirely consistent with the statute.

In short, it is undisputed that the IRS did not follow its own regulation (§ 1010.820) in assessing penalties against Defendants. As a matter of law, the IRS abused its discretion by assessing penalties exceeding the $100,000 cap set forth in its own regulations, and Defendants, therefore, respectfully ask the Court to grant their Rule 12(c) motion and dismiss the government's efforts to enforce penalties exceeding that cap.

* * *

DATED this June 27, 2018

Respectfully submitted,

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

Christopher Sigmund
CSigmund@perkinscoie.com
505 Howard Street, Suite 100
San Francisco, CA 94105
Telephone: 415.344.7056
Facsimile: 415.344.7256

Attorneys for Defendants