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Couple Argues Willfulness Wasn’t Established in FBAR Penalty Case

JUL. 18, 2019

United States v. Peter Horowitz et ux.

DATED JUL. 18, 2019
DOCUMENT ATTRIBUTES

United States v. Peter Horowitz et ux.

UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
PETER HOROWITZ and SUSAN HOROWITZ,
Defendants-Appellants.

United States Court of Appeals
for the
Fourth Circuit

Appeal from the United States District Court
for the District of Maryland

REPLY BRIEF OF DEFENDANTS-APPELLANTS
PETER AND SUSAN HOROWITZ

James N. Mastracchio
Daniel G. Strickland
EVERSHEDS SUTHERLAND (US) LLP
700 Sixth Street, NW, Suite 700
Washington, DC 20001
202.383.0100

Stacey M. Mohr
EVERSHEDS SUTHERLAND (US) LLP
999 Peachtree Street, NE, Suite 2300
Atlanta, Georgia 30309-3996
404.853.8000

Attorneys for Defendants-Appellants
Peter and Susan Horowitz


TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

ARGUMENT

A. The Government Has Not Established Willfulness as a Matter of Law.

1. Under the FBAR statutory scheme, a willful violation cannot be established through mere recklessness.

2. Rather than undisputed facts, the Government's “evidence” of recklessness consists of a series of inferences improperly drawn in its favor.

3.The Government's attempts to limit Williams show how this case is distinguishable.

4. The payroll-tax cases cited by the Government further demonstrate why summary judgment should not have been granted here.

B. The Government's Position That Its Own Regulation Is Obsolete Is Contrary to Settled Law.

C. Semantics Matter in Statutory Interpretation, and the FBAR Penalties Never Were “Compromised.”

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE


TABLE OF AUTHORITIES

Cases

Barnhart v. Sigmon Coal Co., 534 U.S. 438 (2002)

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

Bedrosian v. United States, No. 15-5853, 2017 WL 1361535 (E.D. Pa. Apr. 13, 2017)

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

Black & Decker Corp. v. Commissioner, 986 F.2d 60 (4th Cir. 1993)

Conn. Nat'l Bank v. Germain, 503 U.S. 249 (1992)

Consumer Products Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102 (1980)

Erwin v. United States, 591 F.3d 313 (4th Cir. 2010)

Farmer v. Brennan, 511 U.S. 825 (1994)

Gonzales v. Oregon, 546 U.S. 243 (2006)

Johnson v. United States, 734 F.3d 352 (4th Cir. 2013)

Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963)

Kimble v. United States, 141 Fed. Cl. 373 (2018), appeal docketed, No. 19-1590 (Fed. Cir. Feb. 26, 2019)

Knochelmann v. Commissioner, 455 F. App'x 536 (6th Cir. 2011)

Lyon v. United States, 68 F. App'x 461 (4th Cir. 2003)

Newbill v. United States, 441 F. App'x 184 (4th Cir. 2011)

Norman v. United States, 138 Fed. Cl. 189 (2018), appeal docketed, No. 18-2408 (Fed. Cir. Sept. 21, 2018)

Patchak v. Zinke, 138 S.Ct. 897 (2018)

Plett v. United States, 185 F.3d 216 (4th Cir. 1999)

Ragsdale v. Wolverine World Wide, Inc., 535 U.S. 81 (2002)

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

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

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. Colliot, No. AU 16 CA 01281 SS, 2018 WL 2271381 (W.D. Tex. May 16, 2018)

United States v. Flume, No. 5:16-cv-73, 2018 WL 437861 (S.D. Tex. Aug. 22, 2018)

United States v. Flume, No. 5:16-cv-73, ECF 86 (S.D. Tex. June 11, 2019)

United States v. Garrity, No. 3:15-cv-243(MPS), 2019 WL 1004584 (D. Conn. Feb. 28, 2019), appeal docketed, No. 19-1145 (2d Cir. Apr. 25, 2019)

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

United States v. Park, No. 16 C 10787, 2019 WL 2248544 (N.D. Ill. May 24, 2019)

United States v. Schoenfeld, No. 3:16-cv-1248, 2019 WL 2603341 (M.D. Fla. June 25, 2019)

United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. July 18, 2018)

United States v. Williams, No. 1:09-cv-437, 2010 WL 2842931 (E.D. Va. Mar. 19, 2010)

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

United States v. Zwerner, No. 13-22082, 2014 WL 11878430 (S.D. Fla. Apr. 19, 2014)

Variety Stores, Inc. v. Wal-Mart Stores, Inc., 888 F.3d 651 (4th Cir. 2018)

W. Union Tel. Co. v. Kansas ex rel. Coleman, 216 U.S. 1 (1910)

Statutes

26 U.S.C. § 6672(a)

26 U.S.C. § 7122

31 U.S.C. § 3711(a)(2)

31 U.S.C. § 5321

31 U.S.C. § 5322

Regulations

31 C.F.R. § 1010.820(g)

Other Authorities

Compromise, Black's Law Dictionary (10th ed. 2014)

Internal Revenue Manual 4.26.16.6.5.1(1), 2007 WL 9418680 (Nov. 6, 2015)

IRS CCA 200603026, 2006 WL 148700 (Jan. 20, 2006)


ARGUMENT

A. The Government Has Not Established Willfulness as a Matter of Law.

The Government's attempt to cast the Horowitzes' FBAR violations as willful relies on improper inferences in its favor mischaracterized as “undisputed facts.” The Government all but ignores the procedural posture of this case, in which the Court “must 'view the evidence in the light most favorable to the nonmoving party' and refrain from 'weigh[ing] the evidence or mak[ing] credibility determinations.'” Variety Stores, Inc. v. Wal-Mart Stores, Inc., 888 F.3d 651, 659 (4th Cir. 2018).

The issue before this Court is whether the undisputed facts, viewed in the light most favorable to the Horowtizes and with all inferences drawn in their favor, establish that both Peter and Susan Horowitz violated the FBAR requirement for each of the years at issue. As explained in the Horowitzes' principal brief, they do not. Nothing in the Government's response brief changes that reality.

1. Under the FBAR statutory scheme, a willful violation cannot be established through mere recklessness.

The Government spends much of its response arguing that a willful FBAR violation may be established by reckless conduct. (Resp. 32–36.) As the Horowitzes have acknowledged, many courts have so indicated, including a panel of this Court in an unpublished, 2–1 decision in United States v. Williams, 489 F. App'x 655 (4th Cir. 2012). (Br. at 24–25.) And, contrary to the Government's implication, the Horowitzes have never argued that “an improper motive or bad purpose” is necessary to establish willfulness. (Resp. at 33.)

The level of knowledge required to establish a willful FBAR violation, however, must be viewed against the backdrop of the statutory scheme, which provides differentiated civil penalties for willful and non-willful violations. The Government urges this Court to adopt the willfulness standard set out in Safeco Insurance Co. of America v. Burr, 551 U.S. 47, 57 (2007), for violations of the Fair Credit Reporting Act (FCRA). As the Supreme Court explained in Safeco, “where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” 551 U.S. at 57 (emphasis added). The Court also explained, however, that “'willfully' is a 'word of many meanings whose construction is often dependent on the context in which it appears.'” Id. (citation omitted)).

In the context of the Bank Secrecy Act, the Supreme Court has interpreted “willfully” to require more than mere recklessness: “To establish that a defendant 'willfully violat[ed]' [a provision of the Act], the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Ratzlaf v. United States, 510 U.S. 135, 137 (1994) (first alteration in original).). Although Ratzlaf dealt with criminal liability under 31 U.S.C. § 5322, not civil liability under 31 U.S.C. § 5321, the same term (“willfully”) is used in both statutes and should be given the same meaning. See Ratzlaf, 510 U.S. at 143 (“A term appearing in several places in a statutory text is generally read the same way each time it appears.”).

Moreover, unlike in the FCRA, willfulness is not “a statutory condition of civil liability” for an FBAR violation. Section 5321 creates civil liability for non-willful violations, so a person who recklessly violates the FBAR requirement is already subject to civil liability. A finding that the violation was willful will not simply subject the violator to civil liability, but to a heightened civil liability. The “willful” FBAR penalty is therefore punitive in nature and acts more like a criminal penalty than a mere threshold for civil liability as in Safeco. See Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168–69 (1963) (listing factors indicating that a civil penalty is criminal in nature).

Indeed, the IRS's own guidance has adopted the Ratzlaf willfulness standard — requiring “a voluntary intentional violation of a known legal duty” — in the context of FBAR civil penalties. Internal Revenue Manual (IRM) 4.26.16.6.5.1(1), 2007 WL 9418680 (Nov. 6, 2015); IRS CCA 200603026, 2006 WL 148700 (Jan. 20, 2006). As the IRS has advised, this can be established by showing that the taxpayer had “knowledge that he had a duty to file an FBAR.” 2006 WL 148700. In other words, although “willfulness can be inferred where an entire course of conduct establishes the necessary intent,” “there is no willfulness if the accountholder has no knowledge of the duty to file the FBAR.” Id. The Government's argument that simple recklessness is enough to establish a willful FBAR violation must be rejected.

2. Rather than undisputed facts, the Government's “evidence” of recklessness consists of a series of inferences improperly drawn in its favor.

Even if mere recklessness were sufficient for a willful violation of the FBAR requirement, the undisputed facts here do not establish “recklessness” or “willful blindness” even under the standard set out by the Government. That standard still requires proof that the Horowitzes' conduct “entail[ed] 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Safeco, 551 U.S. at 68 (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). In other words, recklessness requires proof that (1) the Horowitzes “ought to have known” that “there was a grave risk that the filing requirement was not being met” and (2) the Horowitzes were “in a position to find out for certain very easily.” (Resp. at 34–35 (quoting Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018)).) And, the Government argues, willful blindness requires proof that the Horowitzes “made a 'conscious effort to avoid learning about reporting requirements.'” (Resp. at 35 (quoting Williams, 489 F. App'x at 659).)

But, under either formulation — recklessness or willful blindness — willfulness cannot be found as a matter of law based on the undisputed facts here. To find that Peter and Susan both acted willfully as of June 30, 2008, and June 30, 2009 (the due dates for filing their respective FBARs for the 2007 and 2008 calendar years), the finder of fact would have to determine — by a preponderance of the evidence — what each of them “ought to have known” (and how “grave” of a risk he or she ought to have known about); how “easily” he or she could “find out for certain”; and whether he or she made a “conscious effort” to avoid learning. Even without any “subjective intent” requirement, these questions will rely on the factfinder's assessment of the Horowitzes' credibility as well as a number of “inferences” based on the record. Bedrosian, 912 F.3d at 153 (remanding case to the trial court for findings of fact regarding these determinations); cf. United States v. Flume, No. 5:16-cv-73, 2018 WL 4378161, at * 2 (S.D. Tex. Aug. 22, 2018) (“Flume's testimony — self-serving though it may be — creates a genuine dispute as to whether Flume knowingly disregarded his FBAR obligations[.]”); Bedrosian v. United States, No. 15-5853, 2017 WL 1361535, at *5 (E.D. Pa. Apr. 13, 2017) (“Genuine disputes exist as to what [he] knew regarding his reporting requirements, and when, especially as those issues relate to his relationship with his accountant.”); United States v. Williams, No. 1:09-cv-437, 2010 WL 2842931, at *3 (E.D. Va. Mar. 19, 2010) (denying summary judgment where “Williams claims he had no knowledge that Form TDF 90-22.1 existed, nor had his attorneys advised him as to its existence or significance before [the FBAR due date].”).

That evidence, viewed in the light most favorable to the Horowitzes, and the inferences that can be drawn in their favor, are far from “the embodiment of recklessness” asserted by the Government. (Resp. at 44.) The factual disputes ignored and improper inferences made by the district court are discussed at length in the Horowitzes' principal brief. (E.g., Br. at 26–30.) The Government's response brief simply restates many of these same disputed facts and improper inferences while casting them as “undisputed.”

For example, the Horowitzes testified that they had received advice from trusted other physician friends in Saudi Arabia that if income earned in Saudi Arabia were subject to U.S. taxes, the later investment of that income held outside the U.S. were not subject to tax: “I really believed that, honestly believed that.” (JA1254 at 172:2–173:4, JA1507 at 186:16–187:6.) A factfinder could reasonably infer from these facts that the Horowitzes had no reason to later affirmatively ask their long-time tax preparers about an FBAR form, especially when the tax preparers knew the Horowitzes were living aboard, shipped their income tax returns to Saudi Arabia for over fourteen years to obtain the Horowitzes' signatures, never asked them about ownership of foreign accounts in Saudi Arabia or any other country, and never discussed the existence of the FBAR form with them. (JA1254 at 166:16–167:2; see also JA2400 at 82:23–83:9.) The Government's brief casts these facts in another light — one unfavorable to the Horowitzes — claiming they show that the Horowitzes were so “concerned” about reporting requirements as to ask their friends about them. (Resp. at 23.) But the Horowitzes never testified about such a “concern” or that the discussions with their colleagues — which had to do with tax liability, not FBAR reporting — were the result of any concern that they may need to file an FBAR form. (JA1254 at 172:14–173:4; JA1507 at 186:16–187:6.)

The Government also makes much of the fact that the Horowitzes did not affirmatively tell their tax preparers about the accounts (Resp. at 23), ignoring that (unlike in Williams) those trusted, long-time, tax preparers never asked about foreign accounts despite yearly correspondence with the Horowitzes living abroad. (JA1026 ¶¶12–13; JA1029 ¶¶17–18, JA1254 at 161:2–10, 163:18–164:8, 166:16–167:7.) A factfinder easily could determine that a reasonable person in either Peter or Susan's position would not think to ask a tax preparer about whether he or she should be reporting the existence of a foreign bank account on a separate form, given their testimony that they had never heard of the FBAR form (which is not filed with a tax return but instead filed separately with the U.S. Treasury in Detroit, Michigan by June 30 of the succeeding year).

The Government, like the district court, also points to the fact that the Horowitzes signed tax returns with a “no” marked next to a question about foreign bank accounts. (Resp. at 23–24.) This ignores the Horowitzes' testimony that they did not prepare their returns, did not instruct the tax preparer to mark the return “no,” and did even know that the tax return preparer made such a designation, because they simply did not review each line of their income tax returns before signing the electronic consent. (JA0756–57; JA1254 at 163:18–164:8; JA1507 at 161:16–162:8, 170:9–171:17, 175:11–21, 177:22–179:15.) The Government's inference that this was “willful blindness” ignores the trust that the Horowitzes placed in their tax-return preparers who for decades filed their returns with no problems and never once mentioned that an FBAR form existed or might be required, despite knowing they lived abroad and corresponding with the Horowitzes while they lived in Saudi Arabia. (See JA1026 ¶¶12–13; JA1029 ¶¶17–18; JA1254 at 161:2–10, 163:18–164:8, 166:16–167:7.)

The Government also presents a bulleted list of “facts” that it claims are undisputed but again ignores other facts that do not fit its narrative. (Resp. at 37–40.) For example, the Government makes a generalization that Peter and Susan are “highly educated,” ignoring that neither had any education or work experience in business, finance, law, or taxation. (JA1026 ¶4; JA1029 ¶4.) The Government also mentions the wages and U.S. interest income that the Horowitzes reported on their returns and paid U.S. taxes on, implying that they somehow should have known to file an FBAR form, despite their testimony that their accountant never mentioned one and they had no knowledge that the form existed. (See JA1026 ¶¶12–13; JA1029 ¶¶17–18, JA1254 at 161:2–10, 163:18–164:8, 166:16–167:7.) The “facts” about Peter's transfer of the account from UBS to Finter Bank ignores Peter's testimony that he did not select the numbered account or the “hold mail” options on the Finter account. (JA1254 at 122:5–123:1, 195:1–6.) The Government also fails to note that the Horowitzes testified that they never read any news articles about UBS's intention to name account holders (JA1026 ¶¶19–27; JA1029 ¶¶7–15). And there is nothing in the record indicating that the Horowitzes were aware of the “facts” listed by the Government as to Finter Bank. (See JA676–94.) Indeed, how could a letter signed in May 2015 bear any relation to whether Peter or Susan was willful in June of 2008 or June of 2009)? How is a letter from UBS to Peter dated, November 10, 2009 (JA0936–41) — more than four months after the 2008 FBAR was due and more than a year after Peter closed the account — relevant to whether Peter or Susan was willful when failing to file an FBAR in June 2008 or June 2009?

Moreover, the Government treats its version of the facts as applying to each of the FBAR penalties at issue, drawing no distinction between Peter and Susan, the USB and Finter accounts, or the two different calendar years and separate and distinct FBAR filing obligations. This is particularly puzzling given the Government's own references to Susan's lack of involvement. (E.g., Resp. at 6 (“Susan did not communicate with the bank at all.”), 10 (“Susan did not communicate with [the return preparers].”).

A reasonable factfinder, crediting the Horowitzes' testimony, could infer that, under the circumstances, the Horowitzes did not act willfully. A reasonable inference in favor of the nonmoving party supports that there is no reason the Horowitzes “ought to have known” about a “grave risk” of violating an obscure reporting requirement.

3. The Government's attempts to limit Williams show how this case is distinguishable.

Conceding that “willfulness is generally a question of fact” (Resp. at 35), the Government's argument that summary judgment was nevertheless proper is based primarily on the unpublished, 2–1 decision in Williams (see Resp. at 41).1 But even the Government's characterization of that case confirms that the facts here do not require a finding of willfulness. As the Government explains, the finding of willful blindness in Williams was based on two facts that had been established at trial: “the defendant provided false answers on both a tax return and in a tax organizer.” (Resp. at 36.) The second fact is not present here. Peter and Susan did not receive a tax organizer (or other tax questionnaire) at any point from their tax-return preparers. The Horowitzes testified that their preparers never asked them about having a foreign bank account and that they had no reason to inquire about a reporting requirement about which they were innocently unaware. There were no other intentional acts, as there were in Williams, only innocent omissions, which were promptly rectified after the Horowitzes discovered their mistaken understanding and missing FBAR filings.

Under Williams, there must be something more established; something beyond signing an incorrect tax return. At the summary judgment stage that something more must be established through undisputed evidence, not through inferences against the taxpayer. As explained in the Horowitzes' principal brief, any reading of Williams (or the FBAR statute) that would allow for a finding of willfulness based solely on the fact that a taxpayer signed an incorrect tax return (the only undisputed fact relied on by the district court here) would make the non-willful penalty provisions meaningless.

Attempting to avoid this result, the Government provides a number of examples of what “could be” considered non-willful FBAR violations. (Resp. at 45–46.) These examples, however, illustrate the limits of Williams and the role of the factfinder in determining willfulness. Each of the examples provided by the Government turns on a different factual determination: negligence; knowledge of account balances; reliance on professional advice; and awareness of the foreign account. And, in each example, the Government suggests that the taxpayer “could be liable” for only a non-willful violation. (Resp. at 45–46.) In other words, the Government concedes that there are occasions where constructive knowledge of the FBAR requirement does not require a finding of willfulness, depending on the surrounding facts. In attempting to show that Williams does not create a de facto strict-liability standard for willfulness, the Government exemplifies why summary judgment should not have been granted here.2

Finally, the Government contends that allowing the Horowitzes to “claim innocence based on their own failure to read their return because they are charged with constructive knowledge of its contents . . . would undermine th[e] bedrock principle” to the contrary. (Resp. at 42.) This is wrong on two counts. First, neither Peter nor Susan seeks a determination that they are innocent of failing to satisfy their FBAR filing requirements; rather, they contend that these violations were non-willful and that any penalty therefore must be limited to those allowed for non-willful violations. Second, no such finding is required by this Court, which is asked simply to reverse a grant of summary judgment and to remand so that the issue may be tried.

4. The payroll-tax cases cited by the Government further demonstrate why summary judgment should not have been granted here.

With no factually analogous cases finding a willful FBAR violation as a matter of law, the Government cites to cases affirming summary judgment on the issue of willful failure to pay past-due payroll taxes under 26 U.S.C. § 6672(a). (Resp. at 35–36.) But, as illustrated by those very cases, the unique standard for “willful failure” to remit past-due payroll tax relies on evidence of a different nature — and more readily established — than that required to show that a taxpayer “willfully violated” the FBAR requirement.

Section 6672(a) provides that a person may be liable for a company's failure to withhold and remit payroll taxes if that person is responsible for collecting and remitting the taxes and “willfully fails” to do so. 26 U.S.C. § 6672(a). That is, the conduct that must be willful is the failure to pay taxes that one was responsible for paying. This of course is distinct from the FBAR context, where the question is whether the taxpayer was “willfully violating” the FBAR statute. 31 U.S.C. § 5321(a)(5). As this Court has held, a person “responsible” for a company's payment of payroll taxes “may act 'willfully' for purposes of § 6672” if the person learned about prior unpaid taxes but “thereafter knowingly permits payments of corporate funds to be made to other creditors.” Johnson v. United States, 734 F.3d 352, 364 (4th Cir. 2013).

Each of the cases cited by the Government relies on this unique standard for establishing willfulness after a “responsible person” has become aware of a past-due payroll tax deficiency. In Johnson, for example, the employer's chairman and president had directed that company funds be paid to other creditors (including herself) even after she received a notice from the IRS that the company had unpaid payroll taxes that were due to the IRS. Id. at 364–65. This Court therefore rejected her argument that she did not know of the unpaid taxes before receiving the IRS notice and concluded that her conduct after that point established willful failure to pay as a matter of law. Id.

The other cases likewise relied on the payroll-tax-specific principle that “[a] responsible person's intentional preference of other creditors over the United States establishes the element of willfulness under § 6672(a).” Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999); see id. at 222–23 (supervisor who “managed essentially all aspects” of business's operations was notified of unpaid payroll tax obligations needed to be paid “as soon as $ is adequate” but continued to pay other creditors and himself); Erwin v. United States, 591 F.3d 313, 326 (4th Cir. 2010) (“Erwin's failure to assess and remedy the payroll tax deficiencies immediately upon learning of their existence in August 1999 constitutes unreasonable willful conduct.”); Newbill v. United States, 441 F. App'x 184, 189 (4th Cir. 2011) (company's president and sole shareholder signed checks to other creditors after becoming aware of the company's past-due payroll tax obligations); Lyon v. United States, 68 F. App'x 461, 470 (4th Cir. 2003) (corporate president made payments to other creditors even after he “met on three occasions” with IRS officer “who repeatedly informed Lyon of the unpaid taxes and explained the consequences of a continued failure to pay”). The taxpayer in Lyon did not even offer any evidence to counter the Government's evidence of willfulness. 68 F. App'x at 469.

In these cases, willfulness was established based on the taxpayer's actions after learning of past-due tax delinquency, not before. Indeed, in Erwin, this Court explicitly found a disputed question of fact as to whether the taxpayer's failure to pay was willful before he learned of the deficiency: “Arguably, a fact finder fully crediting this testimony might conclude that Erwin's actions, although negligent, did not rise to the level of recklessness.” 591 F.3d at 325.

Here, unlike in the cases cited by the Government, the conduct at issue undisputedly occurred before the Horowitzes learned of any FBAR reporting deficiency. These cases therefore are not instructive in determining whether the Horowitzes' FBAR failure was willful, and they certainly do not support the district court's conclusion that the Horowitzes' failure was willful as a matter of law. That determination relies on disputed facts that cannot be adjudicated — and inferences that cannot be drawn — on summary judgment.

B. The Government's Position That Its Own Regulation Is Obsolete Is Contrary to Settled Law.

The Government argues that its own regulation is obsolete and should be ignored when applying a $100,000 cap to willful FBAR penalties. (Resp. at 48.) It asks this Court to look behind the unambiguous statute to infer that Congress's increase in the allowable willful FBAR penalty cap overrode a regulation setting forth the $100,000 limit. But when a statute is unambiguous, the function of the court is to enforce it according to its terms. Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253–54 (1992). Because the regulation here can be read in harmony with the statute both before and after the statutory change, the regulation is not obsolete and should be enforced as written. Black & Decker Corp. v. Comm'r, 986 F.2d 60, 65 (4th Cir. 1993) (noting that “constructions which render regulatory provisions superfluous are to be avoided” (citation omitted)).

Two district courts have concluded that the regulation does not conflict with the statute's unambiguous terms and have enforced the $100,000 limit to the willful FBAR penalty as set by FinCEN. United States v. Wahdan, 325 F. Supp. 3d 1136, 1139–40 (D. Colo. 2018); United States v. Colliot, No. 16-01281, 2018 WL 2271381, at *2 (W.D. Tex. May 16, 2018). As explained in Wahdan, “the statute and the regulation are not inconsistent on their face” because “[t]he statute does not mandate imposition of the maximum penalty, but instead gives the Secretary discretion to impose penalties below the statutory cap. This means that compliance with the lower cap set in 31 C.F.R. § 1010.820(g) also complies with 31 U.S.C. § 5321.” 325 F. Supp. 3d at 1139. In light of this “simple and straightforward interpretation that gives coherent meaning to both the statute and the regulation,” there is no reason to read in a conflict that does not exist. Id.3 This Court should adopt that reasoning as well.

The Government argues that the district court “correctly rejected” the arguments raised by the Horowitzes regarding the regulatory cap on willful FBAR penalties. (Resp. at 49.) This argument ignores the fact that the district court declined to respond to the Horowitzes' request for the opportunity to file a motion for summary judgment on the issue. (JA0364, 400.) No briefing by the Horowitzes ever occurred. Nevertheless, the district court further erred because it misinterpreted Congress' use of the word “shall” in the statute. See 31 U.S.C. § 5321(a)(5)(C). The Government contends that the words that follow “shall” are mandatory and, therefore, the maximum penalty “must function as the ceiling — whenever the IRS imposes a willful FBAR penalty.”4 (Resp. at 50–51.) The Horowitzes agree that the word “shall” as used in 31 U.S.C. § 5321(a)(5)(C) creates a ceiling for willful FBAR penalties. But when read in context, the meaning is clear and unambiguous and not a mandate. FBAR penalties contained in 31 U.S.C. § 5321 come in one of two varieties: non-willful and willful. And for each variety, the amount of the penalty imposed is discretionary, up to the statutory maximum. The word “shall,” as used in the implementing statute simply mandates changing the general, non-willful penalty ceiling of $10,000 to the higher, willful penalty ceiling. “Shall” does not refer to the original $100,000 statutory cap nor does it imply the regulatory ceiling is removed.

Thus, the upper limit created by the new version of the statute was permissive, and FinCEN did not expand the regulation's upper limit from $100,000. The lack of an amendment was not fatal because the regulation and statute are not in conflict. The parties agree that if a regulation is in conflict with the plain text of a statute, the regulation is invalid. (Resp. at 52–53.) Here, Congress allowed FinCEN to adopt a more expansive penalty structure up to a maximum of 50% of the account balance for a willful violation. FinCEN did not take action to adopt that framework and left the $100,000 maximum in the regulations as of June 30, 2009, and June 30, 2008 (the due dates for the Horowitzes' FBARs). Imposing a $100,000 penalty does not violate Congress's allowable maximum. If Congress limited the maximum penalty to $99,999, the regulatory cap of $100,000 would be inconsistent with the maximum allowed by statute — but Congress simply allowed FinCEN to increase the cap if it chose to do so.

The parties also agree that regulations cannot alter statutory framework. (Resp. at 53 (citing Ragsdale v. Wolverine World Wide, 535 U.S. 81, 96 (2002)).) In Ragsdale, the Court was presented with regulations that exceeded the authority granted by Congress. 535 U.S. at 96. That issue is not present here, because the regulatory cap of $100,000 falls within the Secretary's existing authority to determine the amount of all willful FBAR penalties — up to 50% of the account balance, within which $100,000 resides.

The Government acknowledges that “[t]he Secretary, in other words, has the discretion to impose a penalty, or not impose a penalty, in any given case.” (Resp. at 55.) And the Government concedes that “the Secretary also has the discretion to impose a penalty below the maximum in any given case.” (Resp. at 55.) Yet the Government incongruously argues that the Secretary lacks the authority to limit itself — or its delegates — by regulation. (Id. at 55.) This is an apt instance of the Holmesian principle that “the greater includes the lesser.” See W. Union Tel. Co. v. Kansas ex rel. Coleman, 216 U.S. 1, 53 (1910) (Holmes, J., dissenting); see also Patchak v. Zinke, 138 S. Ct. 897, 906 (2018) (“Congress' greater power to create lower federal courts includes its lesser power to 'limit the jurisdiction of those Courts.'” (citation omitted)).

As discussed in the Horowitzes' principal brief, Treasury delegated both enactment and enforcement of FBAR penalties to FinCEN. In turn, FinCEN delegated FBAR penalty enforcement — not regulatory enactment — to the IRS. When the Government cites to the IRM for authority to impose a willful FBAR penalty in excess of $100,000, the Government only highlights the impermissible action taken by the IRS. FinCEN never delegated regulatory authority to the IRS; the IRS could not change the implementing regulation. Rather, FinCEN delegated enforcement authority of the pre-existing regulation. The fact that the IRS wanted to impose — and subsequently did impose — a penalty that exceeded the $100,000 cap violated the limit set by FinCEN in its promulgated regulation and exceed the IRS's delegated authority.

Lastly, the Government argues that failure to amend the regulation is meaningless and cannot be used to support “any affirmative intention.” (Resp. at 57.) In support of this position, it cites United Dominion Industries v. United States, 532 U.S. 822, 836 (2001), Umbach v. Commissioner, 357 F.3d 1108, 1112 (10th Cir. 2003), and Knochelmann v. Commissioner, 455 F. App'x 536, 539 (6th Cir. 2011). The cases are inapposite. The Court in United Dominion ultimately found in favor of the taxpayer, holding that “[t]o the extent the Government disagrees, it may amend its regulations.” 532 U.S. at 838; see also id. at 839 (Thomas, J., concurring) (noting “the traditional canon that construes revenue-raising laws against their drafter”). The Tenth Circuit in Umbach, though dismissing the taxpayer's argument because it wasn't presented to the Tax Court, noted the merit in the argument that the Government's failure to amend its regulation should preclude the imposition of additional tax until the regulation is amended. 357 F.3d at 1112. And in Knochelmann, the regulation in question was amended to resolve the explicit conflict prior to the trial court's involvement — something that FinCEN did not accomplish here. 455 F. App'x at 539 & n.6.5

If the Government wanted the $100,000 cap no longer to apply to the Horowitzes' 2007 and 2008 FBAR filings, it was free to remove it from the Code of Federal Regulations prior to the due date of those forms. No change was made by FinCEN. The regulation therefore limited the IRS's authority to impose willful FBAR penalties to $100,000 per willful violation.

C. Semantics Matter in Statutory Interpretation, and the FBAR Penalties Never Were “Compromised.”

The Government argues that the statute of limitations did not expire because Ms. Beasley — the sole person within the IRS responsible for assessing FBAR penalties (JA1787 at 9:17–18) — lacked authority to reverse a prior FBAR assessment because to do so would be to “compromise” a governmental debt (Resp. at 62–65). Rather than stick to the language of the statute, which uses the word “compromise,” the Government urges this Court to expand the definition to include the phrase “the assessments could not lawfully be reversed, reduced, compromised or undone in any way without DOJ approval.” (Resp. at 65 (emphasis added).) Words matter in statutory interpretation, and Congress used the word “compromise,” not the words “reversed, reduced . . . or undone in any way” in limiting the actions of the IRS.

Where Congress elects to use a term without providing a definition, the ordinary meaning is used:

[The court's] role is to interpret the language of the statute enacted by Congress. . . . [C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there. When the words of a statute are unambiguous, then, this first canon is also the last: “judicial inquiry is complete.” We will not alter the text in order to satisfy the policy preferences of the Commissioner. These are battles that should be fought among the political branches[.]

Barnhart v. Sigmon Coal Co., 534 U.S. 438, 461–62 (2002) (citation omitted). Any effects of construing the definition of “compromise” in accordance with its plain meaning must be respected absent “clearly expressed legislative intention to the contrary.” Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). The Government provides no contrary legislative intent.

The word “compromise” contained in 31 U.S.C. § 3711(a)(2) is unambiguous. Black's Law Dictionary defines “compromise” as “[a]n agreement between two or more persons to settle matters in dispute between them; an agreement for the settlement of a real or supposed claim in which each party surrenders something in concession to the other,” or “[a] debtor's partial payment coupled with the creditor's promise not to claim the rest of the amount due or claimed.” Compromise, Black's Law Dictionary (10th ed. 2014). The Government has never — at any time — agreed “not to claim the rest of the amount due or claimed.” The IRS has always claimed that 100% of the willful FBAR penalties were due from the Horowitzes. There was no meeting of the minds to accept less than the full amount due at any time — during the IRS Examination, IRS Appeals process, or the district court litigation.

The Government contends that “the absence of DOJ approval is fatal to any claim that the Government has compromised a claim exceeding $100,000.” (Resp. at 63.) But that is not what happened in this case. There was no compromise of any of the FBAR penalties. (Br. at 51–54.) Instead, the IRS sought to give the Horowitzes the IRS Office of Appeals opportunity to which they were entitled — proceeding in a pre-assessed posture. (JA0893–94.) At no point did the IRS “compromise” the amount of the FBAR penalties at issue. There was never a meeting of the minds whereby both parties agreed that the amount due from one party to another would be decreased — thus compromised. This never happened, and the Government cites to no facts supporting its contention.

Instead, the Government seeks to analogize the current situation with that under 26 U.S.C. § 7122. (Resp. at 63.) That statute addresses a specific Internal Revenue Code section that involves a specific procedure for taxpayers who make an “offer-in-compromise.” That phrase, and the resulting administrative procedures for handling “offers-in-compromise,” are specific to income tax, not FBAR penalties under Title 31 of the U.S. Code. Importantly, that statute applies to taxpayers who do not have the ability to pay the full amount of their taxes due to financial hardship. If financial hardship exists, taxpayers can request a reduction of the amount due by making a so-called “offer-in-compromise.” If the taxpayer's offer-in-compromise is accepted by the IRS pursuant to 26 U.S.C. § 7122, the IRS agrees to take less from the taxpayer and the taxpayer agrees to pay less than the amount initially due. Thus, under the offer-in-compromise statute cited by the Government, there is indeed a “compromise” of the outstanding debt. That is, the taxpayer and the IRS have a meeting of the minds as to how much less will be paid in order to “compromise” the outstanding debt.

Again, there was no “compromise” of the FBAR penalties here under the common meaning of that word. Neither side ever agreed to pay less or accept less. And this Court would have to read into the statute additional words — as suggested by the Government — in order to contort the word “compromise” from its unambiguous meaning.

As a result, Ms. Beasley did not need to seek DOJ approval when she unassessed the FBAR penalties and then re-assessed the FBAR penalties on the records of the U.S. Treasury. What concerns the Government is that her actions support the uncontroverted conclusion that the date of the re-assessment of the FBAR penalties took place after the statute of limitations for assessing FBAR penalties had already expired.

The Government seeks to complicate the Horowitzes' straightforward argument by suggesting that they have changed positions with respect to material facts. The response is simple: The Horowitzes have contended that there are no material facts in dispute regarding whether the FBAR penalty assessment was reversed by Ms. Beasley and later re-assessed by her. The case therefore should be dismissed, because the re-assessment of the FBAR penalties occurred after the expiration of the statute of limitations for assessing FBAR penalties. If the Court disagrees, and concludes that there is a question of material fact regarding whether Ms. Beasley's actions unassessed and then re-assessed the FBAR penalties, then a trial is needed to develop those facts, and the trier of fact needs to hear testimony from Ms. Beasley to assess her credibility.

CONCLUSION

For these reasons, and those set forth in the Horowitzes' principal brief, the district court's judgment should be reversed and the case remanded for further proceedings.

James N. Mastracchio
Daniel G. Strickland
EVERSHEDS SUTHERLAND (US) LLP
700 Sixth Street, NW, Suite 700
Washington, DC 20001
202.383.0100

Stacey M. Mohr
EVERSHEDS SUTHERLAND (US) LLP
999 Peachtree Street, NE, Suite 2300
Atlanta, Georgia 30309-3996
404.853.8000

Attorneys for Defendants-Appellants
Peter and Susan Horowitz

FOOTNOTES

1 The Government also cites decisions from district courts in United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017), and Kimble v. United States, 141 Fed. Cl. 373, 385–86 (2018), but neither case is dispositive. The taxpayer in Kelley-Hunter “filed no opposition” to the government's motion. Kelley-Hunter, 281 F. Supp. 3d at 122. And although the court in Kimble did determine willfulness at the summary judgment stage, it is an outlier and is presently on appeal to the Federal Circuit. Kimble v. United States, No. 19-1590 (Fed. Cir. Feb. 26, 2019); cf. United States v. Schoenfeld, No. 3:16-cv-1248, 2019 WL 2603341 (M.D. Fla. June 25, 2019) (denying the taxpayer's motion for summary judgment in a case where willful FBAR violations are alleged and proceeding to trial to determine the facts and to judge credibility of witnesses); United States v. Zwerner, No. 13-22082, 2014 WL 11878430 (S.D. Fla. Apr. 19, 2014) (denying Government's motion for summary judgement and concluding that willfulness of taxpayer's FBAR violations “clearly remains an issue to be decided by the trier of fact”).

2 Contrary to the Government's contention, the summary-judgment decision in United States v. Flume, No. 5:16-cv-73, 2018 WL 4378161 (S.D. Tex. Aug. 22, 2018), is not undercut by the subsequent finding of willfulness after trial, No. 5:16-cv-73, 2019 WL 2807386, at *6 n.11 (S.D. Tex. June 11, 2019) (“Citations to McBride and Williams in this Order should not be understood as a reversal of the Court's position that '[t]he constructive knowledge theory is unpersuasive' as a justification for penalties based on knowing conduct.”).

3 The Government — along with the courts in Kimble, Norman, Garrity, and Park — misinterprets the grammar and syntax used by Congress to support its conclusion that the regulation “cannot be squared” with the updated willful penalty ceiling. See Kimble, 141 Fed. Cl. at 388–89; Norman v. United States, 138 Fed. Cl. 189, 196 (2018), appeal docketed, No. 18-2408 (Fed. Cir. Sept. 21, 2018); United States v. Garrity, No. 3:15-CV-243, 2019 WL 1004584, at *1 (D. Conn. Feb. 28, 2019), appeal docketed, No. 19-1145 (2d Cir. Apr. 25, 2019); United States v. Park, No. 16-10787, 2019 WL 2248544, at *7–9 (N.D. Ill. May 24, 2019). As described in the Horowitzes' principal brief, there is no conflict because there is a way to read the regulation and statute together. (Br. at 39.)

4 The suggestion that this ceiling must apply to the IRS is unavailing, because the IRS is subject to rules and regulations created by FinCEN and has no authority to change them.

5 The Government also cites Barsebäck Kraft AB v. United States, 121 F.3d 1475, 1480 (Fed. Cir. 1997), to support its positon that it need not formally withdraw regulations that are invalid. (Resp. at 57–58 (citing also Gonzales v. Oregon, 546 U.S. 243, 257 (2006).) As discussed in the Horowitzes' principal brief, the court's holding in Barsebäck is inapposite since the regulation in this case is valid. (Br. at 44.) Gonzales involves the proper deference given to an agency's interpretation of its own words though an amicus brief. In this case, the Government does not suggest that either FinCEN's note or the IRM provision is entitled to deference.

END FOOTNOTES

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