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Amici Argue Non-Willful Reporting Penalty Is Not for Each Account

NOV. 8, 2019

Jane Boyd v. United States

DATED NOV. 8, 2019
DOCUMENT ATTRIBUTES
  • Case Name
    Jane Boyd v. United States
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 19-55585
  • Institutional Authors
    DTMtax
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-42947
  • Tax Analysts Electronic Citation
    2019 TNTI 220-19
    2019 TNTF 220-42

Jane Boyd v. United States

JANE BOYD,
Defendant-Appellant,
v.
UNITED STATES OF AMERICA,
Plaintiff-Appellee.

In the
UNITED STATES COURT OF APPEALS
for the NINTH CIRCUIT

On Appeal from the
United States District Court for
the Central District of California
Case No. 2:18-cv-00803
Honorable Michael W. Fitzgerald

BRIEF OF AMICI CURIAE LAXMAN, JASHU, HITEN, AND ANITA
PATEL IN SUPPORT OF DEFENDANT

David Michaels
DTMtax
310 Maui Drive
Placentia, CA 92870
Telephone: (714) 742-9561
Attorney for Amici Curiae,
Laxman, Jashu, Hiten, and Anita Patel


TABLE OF CONTENTS

TABLE OF AUTHORITIES

REQUEST TO PARTICIPATE IN ORAL ARGUMENT

INTEREST OF AMICI CURIAE

ARGUMENT

I. THE BANK SECRECY ACT OF 1970

A. The Big Four

B. Both the Supreme Court and the Ninth Circuit Recognize that the BSA Is Not Self-Executing . . . the BSA's Civil and Criminal Penalties Attach Only Upon Violation of Regulations Promulgated by the Secretary

C. Congress Directs the Secretary to Require the Filing of Reports

D. “Reporting Requirements” Is Synonymous with Filing Reports

E. The Provisions of the Big Four as Implemented by the Secretary

1. Section 5313

2. Section 5316

3. Section 5331

4. Section 5314

II. THE PROPER APPLICATION OF PENALTIES

A. How the District Court Should Have Resolved the Issue

B. The Reasonable Cause Exception

A Reasonable Cause Example

C. The Enhanced Willful Penalties

A willful Example

III. CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

California Bankers Assoc. v. Schultz, 416 U.S. 21 (1974)

Hibbs v. Winn, 542 U.S. 88 (2004)

Patel, et al. v. U.S., 8:18-cv-238 (C.D. Ca. Feb. 12, 2018)

Ratzlaf v. U.S., 510 U.S. 135 (1994)

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

U.S. v. Boyd, 2:18-cv-803 (C.D. Ca. April 23, 2019)

U.S. v. Boyle, 469 U.S. 241 (1985)

U.S. v. Ibarra-Alcarez, 830 F.2d 968, 971 (9th Cir. 1987)

U.S. v. Patel, et al., 8:19-cv-792 (C.D. Ca. Apr. 30, 2019)

Statutes

26 U.S.C. 6051I

26 U.S.C. 6051I(f)

31 U.S.C. 5313

31 U.S.C. 5314

31 U.S.C. 5316

31 U.S.C. 5331

31 U.S.C. 5321(a)

31 U.S.C. 5321(a)(5)

31 U.S.C. 5321(a)(5)(A)

31 U.S.C. 5321(a)(5)(B)

31 U.S.C. 5321(a)(5)(B)(ii)

31 U.S.C. 5321(a)(5)(C)

31 U.S.C. 5321(a)(5)(D)

31 U.S.C. 5321(a)(5)(D)(ii)

31 U.S.C. 5324 (a)(1)

31 U.S.C. 5324 (a)(2)

31 U.S.C. 5324 (b)(1)

31 U.S.C. 5324 (b)(2)

31 U.S.C. 5324 (c)(1)

31 U.S.C. 5324(c)(2)

Regulations

31 C.F.R. 1010.306(a)

31 C.F.R. 1010.306(a)(1)

31 C.F.R. 1010.306(b)(1)

31 C.F.R. 1010.306(b)(2)

31 C.F.R. 1010.306(c)

31 C.F.R. 1010.306(d)

31 C.F.R. 1010.311

31 C.F.R. 1010.330(a)(1)

31 C.F.R. 1010.330(b)(1)

31 C.F.R. 1010.330(b)(2)

31 C.F.R. 1010.340(a)

31 C.F.R. 1010.340(b)

31 C.F.R. 1010.350(a)

Reports to Congress

Treasury, “A Report to Congress in Accordance With Section 361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act),” (April 26, 2002)

Proposed Amendments

FinCEN, “Amendment to the Bank Secrecy Act Regulations — Reports of Foreign Accounts,” 81 F.R. 12613, 12612 (March 10, 2016)

Internal Revenue Manual

IRM 4.26.5.4(5)

IRM 4.26.16.4.5(2)

IRM 4.26.16.6.2(2)

IRM 4.26.16.6.4(2)(b)

IRM 9.5.13.3.2(3)(e)

Other Authority

David Michaels, FBAR Penalties: The IRS's Crumbling Case for a Per-Account Interpretation, Tax Notes Federal, Vol. 164, No. 10, pg. 1575 (Sept. 2, 2019)

Robert S. Fink, Tax Controversies — Audits, Investigations, Trials § 1703 (2018)


Request to Participate in Oral Argument

Fed. R. App. Proc. 29(a)(8)

I, David Michaels, as counsel for Amici Curaie Laxman, Jashu, Hiten, and Anita Patel, respectfully request permission to participate in oral argument in this matter.

INTEREST OF AMICI CURIAE1

Laxman, Jashu, Hiten, and Anita Patel filed a lawsuit in the Central District of California alleging that the IRS had unlawfully assessed penalties per offshore account for their non-willful failure to file the Title 31 calendar year report known as FinCEN Report 114 for each of years 2010-2013. Patel, et al. v. U.S., 8:18-cv-238 (C.D. Ca. Feb. 12, 2018). The IRS did not answer the complaint for 10 months. Later, out of concerns over jurisdiction, the U.S. filed its own suit to reduce the unlawful assessments to judgment. The parties agreed to dismiss the original case and have all discovery carried over to the new action. U.S. v. Patel, et al., 8:19-cv-792 (C.D. Ca. Apr. 30, 2019).

Three days prior to the summary judgment hearing on this novel issue, the district court stayed the proceedings pending Boyd's Ninth Circuit appeal. The Patels urged the district court to hear their case given the dearth of expertise presented in Boyd and the existence of discovery admissions in Patel which wholly contradicted the government's position taken in Boyd on which the district court substantially relied. The Patels further highlighted that the principles of judicial economy mandated a decision be rendered on the issue because Ms. Boyd failed to raise a dispositive question that will need to be addressed at the time of a reversal of the district court's decision — whether the assessments are void. Unfortunately, the Patels have been relegated to amicus status and will find themselves, along with Ms. Boyd, returning to the Ninth Circuit to decide that issue years from now after this Circuit rights the ship on this novel issue. So much for judicial economy.

As for Laxman, he is not only the recipient of the largest standard audit non-willful penalty ever assessed under Title 31 — $440,000 in the aggregate for committing only four delinquent report-filing violations (filing FinCEN Report 114 after June 30th in violation of reg. 1010.306(c)2 for each of years 2010-2013), he is also the recipient of the largest penalty assessed for a single delinquent report-filing violation — $130,000 for filing FinCEN Report 114 late for year 2013. Those assessments include $10,000 penalties on accounts with balances of $30, $50, $64, $83, $393, $437, $816, $1,776, $2,589, $4,574, $4,708, and $7,480. Indeed, something is not right, and certainly constitutionally suspect with the district court's indolent construal of Title 31.

It is remarkable that an issue of such significance merited no discussion by the district court of the following:

(1) How section 5314 does nothing but authorize the Secretary to impose report-filing requirements via implementing regulations;

(2) That penalties attach only upon violations of the regulations promulgated under that authority, a point made clear by the Supreme Court3 as to all report-filing provisions of the BSA;

(3) How the Secretary construed that authority under the singular-plural rule as requiring that ONE Title 31 report be filed per year, not a separate report for each bank account, and only if an aggregate offshore account balance of greater than $10,000 was maintained;

(4) The Big Four BSA provisions (sections 5313, 5314, 5316, and 5331) and how each of those provisions each require the filing of a requisite Title 31 report (the trigger being greater than $10,000 in each context), by a fixed due date, and when filed, must be accurate in all respects;

(5) The burden provision in section 5314, the only such provision appearing in the BSA, and how that provision was respected in the Secretary's report-filing regulations set forth in (3) above (each transaction, i.e., account, does not have a separate report-filing requirement, a notable distinction from other sections of the Big Four);

(6) The three potential violations of the provisions of section 5314 as implemented in the Secretary's regulations to which penalties may attach under section 5321(a)(5), and the IRS's acknowledgment of those report-filing violations in the IRM (failure to file the report, filing it late, or filing same containing a material omission or misstatement);

(7) The bifurcated nature of reg. 1010.350(a) (Title 26 reporting obligation/Title 31 filing requirement), which would have unearthed the government's sham argument that the regulation speaks of “relationships” so as to justify a separate report-filing penalty for each account when it knows that such language relates to the Title 26 mandate in the regulation to report offshore relationships to the Commissioner on Schedule B of a tax return; or

(8) Treasury's 2002 Report,4 which informed Congress that the Secretary construed its language in section 5314 “file reports, when the . . . person . . . maintains a relation for any person with a foreign financial agency” under the singular-plural rule as requiring that one Title 31 Report be filed per calendar year, regardless of the number of accounts a person may have, and only if the aggregate offshore balance exceeded $10,000; and that all information requested in the report be furnished when filed, to which the Secretary offered no objection (and more importantly, learned with that information, whilst considering revising the penalty structure to include a non-willful penalty, that the potential violations to which that new penalty may attach included the failure to file FinCEN Report 114 when the requisite aggregate balance was maintained (failure-to-file violation), failure to file the report by June 30th (delinquency violation), and the filing of the report containing a material omission or misstatement (accuracy violation)).

Instead, the district court provided a mere paragraph of analysis on this complex issue and relied on a wholly inaccurate statement in a treatise that is devoid of the above-referenced items pertinent to this discussion — that section 5321's plain language “is unclear as to whether the $10,000 [non-willful] penalty applies per year or per account.” Robert S. Fink, Tax Controversies — Audits, Investigations, Trials, § 1703 (2018). Given the dearth of information available on this issue to federal courts, tax practitioners, and U.S. persons, Patels' counsel published the most comprehensive scholarly article to date on the nuances of offshore bank reporting and the consequences for failing to comply with those report-filing requirements, explaining in great detail how the plain language of section 5321(a)(5) examined under tools of construction authorizes the Secretary to impose a discretionary penalty for report-filing violations, not accounts. See David Michaels, FBAR Penalties: The IRS's Crumbling Case for a Per-Account Interpretation, Tax Notes Federal, Vol. 164, No. 10, pg. 1575 (Sept. 2, 2019).

The failure to respect what constitutes a “violation” of the provisions of section 5314 as implemented in the regulations, an answer the district court was begging for and correctly noted at oral argument as determinative on the issue (though never analyzed in its opinion or given assistance by either party), is the source of the egregious assessments, and, by its holding, the district court has rendered the terms “violates,” “violating,” and “violation” as they appear in section 5321(a)(5)(A) & (C) meaningless. See Hibbs v. Winn, 542 U.S. 88, 101 (2004) (“The rule against superfluities complements the principle that courts are to interpret the words of a statute in context. A statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant . . .” (internal citations and quotations omitted)).

And what the district court would have readily uncovered had it examined the Big Four is that the term “violation” in the context of the BSA to which a penalty may attach means the same thing. The IRS agrees, concluding that violations to which penalties may attach uniformly include “a complete failure to file a report, a failure to timely file a report, and filing a report with material false statements or omissions.” IRM 4.26.5.4(5). This was not brought to the attention of the district court. Accounts are not violations — the failure to file FinCEN Report 114 at all, filing the Title 31 report late, or filing an inaccurate report are. See Ratzlaf v. U.S., 510 U.S. 135, 141 (1994) (explaining that in construing the term “willful” in the context of the BSA, “we view §§ 5322(a) and 5324(3) mindful of the complex of provisions in which they are imbedded.”).

The phrase “balance in the account” in section 5321(a)(5) does not work to upend the statutory scheme or to create a new account violation penalty as the district court and the IRS would have it. Instead, as fully developed infra, the contextual flexibility the singular-plural rule provides, a construction tool Congress is well aware of when it drafts its statutes, ensures the terms “violates,” “violating,” and “violation” are not treated as mere surplusage — words of no consequence. Simply put, a failure-to-file violation to which a penalty may attach will necessarily involve the failure to report the “balance in [all] the account(s)” maintained offshore, because a U.S. person is required to file a single Title 31 report, not a separate filing for each account.

The IRS knows that section 5314 and its implementing regulations are not about “reporting relationships,” but instead the filing of reports. As set forth above, the IRS expressly acknowledges the three potential report-filing violations to which penalties may attach, yet committed legal alchemy in transmogrifying the Title 26 language of reg. 1010.350(a) to report offshore “relationships” to the Commissioner on Schedule B of a U.S. person's tax return into a Title 31 requirement that a separate Title 31 report is required to be filed for each bank account to which a separate $10,000 discretionary penalty may attach. And the district court fell for it — hook, line, and sinker.

What is disturbing is that the IRS took that position in Boyd despite acknowledging in Patel that FinCEN's recently proposed change to the regulation's language to clarify its bifurcated nature — “shall report such relationship to the Commissioner of Internal Revenue on a return for each year such relationship exists”5 — was consistent with its explanation of reg. 1010.350(a)'s two-part reporting process on its website:

Reporting [Title 26] and Filing Information [Title 31]

The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.6

The IRS admitted in Patel that the italicized language of the excerpt was consistent with FinCEN's proposed change to the regulation,7 as well as the Secretary's explanation of the two-part reporting process of reg. 1010.350(a) in his 2002 Report.8 Notably, the Supreme Court highlighted those dual mandates 45 years ago, in line with FinCEN's proposal, the Secretary's explanation, and the IRS's website statements:

The regulations require each person subject to the jurisdiction of the [U.S.] to make a report on yearly tax returns of any “financial interest in, or signature authority over, a bank, securities or other financial account in a foreign country.” [(reg. 1010.350(a))]. [Title 26] Violations of the reporting requirement(s) of [section 5314] as implemented by the regulations are also subject to civil and criminal penalties.9 [Title 31]

Counsel for the Patels approached Thomas Coker, Chief, Tax Division, to discuss the propriety of his position prior to the release of the Boyd decision, i.e., that it is “clear that a violation relates to an . . . improperly disclosed relationship.”10 Mr. Coker did nothing, and a few days later the language his office admitted was consistent with FinCEN's proposed change to the Title 26 language of reg. 1010.350(a) was deleted from the IRS website, language critical for U.S. persons to understand the bifurcated nature (Title 26 reporting/Title 31 report-filing) of offshore bank reporting. Title 26 concerns reporting of “relationships” to the Commissioner on a tax return; Title 31 concerns the filing of FinCEN Report 114 when required to do so, in a timely fashion, and when filed, be in all ways materially accurate (i.e., bank account numbers, balances, addresses, etc).

ARGUMENT

I. THE BANK SECRECY ACT OF 1970

A. The Big Four

The BSA, as amended, directs the Secretary to prescribe, through implementing regulations, “reporting requirements” for (1) domestic banks and other financial institutions when customers deposit or withdraw more than $10,000 in cash (section 5313), (2) U.S. persons who maintain an aggregate offshore account balance in excess of $10,000 (section 5314), (3) persons who transport more than $10,000 in cash in or out of the U.S. or who receive more than $10,000 in cash from outside of the U.S. (section 5316), and (4) persons engaged in a non-financial trade or business who receive payments in currency exceeding $10,000 (section 5331).

B. Both the Supreme Court and the Ninth Circuit Recognize that the BSA Is Not Self-Executing . . . the BSA's Civil and Criminal Penalties Attach Only Upon Violation of Regulations Promulgated by the Secretary

Critically, the Supreme Court highlighted that the Big Four's provisions are not self-executing, providing that the BSA's “civil and criminal penalties attach only upon violation of regulations promulgated by the Secretary; if the Secretary were to do nothing, the [BSA] itself would impose no penalties on anyone.” California Banks Assoc., 416 U.S. at 26. In other words, Congress expressly delegated the duty to prescribe conduct to the Treasury Secretary, and we must look to his implementing regulations to discover what constitutes a violation of the BSA's report-filing provisions. See U.S. v. Ibarra-Alcarez, 830 F.2d 968, 971 (9th Cir. 1987) (citing California Bankers the 9th Cir. highlighted same, providing that section 5316 does not proscribe conduct, and the court looked to the Secretary's implementing regulations to discern the report-filing duties he imposed to which penalties may attach).

C. Congress Directs the Secretary to Require the Filing of Reports

Treasury has specifically acknowledged its construal of the congressional mandates in the Big Four, without objection from Congress, providing that the BSA authorizes it “to issue regulations requiring financial institutions and other persons to . . . file reports that are determined to have a high degree of usefulness in criminal, tax, regulatory, intelligence, and counter-terrorism matters.”11 Indeed, the language in all of the Big Four statutes plainly and unambiguously directs that the Secretary “shall” require the filing of a Title 31 report. How and when that is done is a matter Congress left to the Secretary to breathe life into the Big Four statutes, because without the Secretary's regulations, the BSA is a corpse.

D. “Reporting Requirements” Is Synonymous with Filing Reports

The phrase “reporting requirements” has a specific meaning in regards to the BSA, and this Court should not be led astray by the IRS's tomfoolery in this regard. The BSA gives the Secretary broad authority to impose specific “reporting requirements” — a phrase Congress uses to describe the filing of the requisite Title 31 reports prescribed by the Secretary. See sections 5324(a)(1) & (2) (no person shall for purposes of evading the “reporting requirements” of section 5313 cause a bank to “fail to file a report” or “file a report . . . that contains a material omission or misstatement of fact”; sections 5324(b)(1) & (2) (section 5331) (same); and section 5324(c)(1) & (2) (section 5316) (same). The Supreme Court recognizes that the BSA imposes “report-filing requirement[s],” a phrase it uses interchangeably with “reporting requirement.” See Ratzlaf v. U.S., 510 U.S. 135, 138-139, fn. 3 (1994) (discussing report-filing requirements under section 5313) and U.S. v. Bajakajian, 524 U.S. 321, 328, fn. 3 (1998) (in discussing the report-filing requirements of section 5316, the Court refers to a report-filing violation — “failure to file the required report” — as a “reporting offense”). See also Ibarra-Alcarez, 830 F.2d at 971-72 (9th Cir. provides that section 5316's implementing regulations require that “every person who transports more than $10,000 in currency in or out of the United States must file a report . . . [A]ny person who knowingly violates this reporting requirement” is subject to a penalty.) (Emphasis added).

E. The Provisions of the Big Four as Implemented by the Secretary

1. Section 5313

This section instructs the Secretary to issue regulations requiring domestic banks to “file a report” when a customer deposits currency in an amount the Secretary prescribes. Congress further instructs the Secretary to instruct banks on when and how the Title 31 report is to be filed. Recall that the Supreme Court made clear that penalties attach only upon a violation of the Secretary's implementing regulations. The Secretary requires banks to file a report [FinCEN Report 112] of each deposit greater than $10,000 within 15 days. Regs. 1010.311 (failure-to-file violation) and 1010.306(a)(1) (delinquency violation). The report must be filed with FinCEN, and “all information called for in [FinCEN Report 112] shall be furnished” in the filed report. Regs. 1010.306(a) and (d) (accuracy violation). Congress expressly acknowledges those potential report-violations in the BSA's structuring statute. See sections 5324(a)(1) & (2).

2. Section 5316

Section 5316 instructs the Secretary to require a person to “file a report” if he transports more than $10,000 in cash in or out of the U.S. or receives more than $10,000 from a place outside of the U.S. Congress authorizes the Secretary to prescribe the time and place the report is to be filed and what information is to be included in the filed report. Under that authority, the Secretary requires a person who transports more than $10,000 in currency in or out of the U.S. or receives more than $10,000 in cash from a place outside the U.S. to file FinCEN Report 105, regs. 1010.340(a) & (b) (failure-to-file violation), upon entry into the U.S. or at the time of departure, mailing or shipping from the U.S., or within 15 days of receiving the currency from outside of the U.S. Regs. 1010.306(b)(1) & (2) (delinquency violation). The Secretary further mandates that all information called for in the report shall be furnished. Id. at (d) (accuracy violation). Congress's affirmation of those report-filing violations is again reflected in the BSA's structuring statute. See sections 5324(c)(1) & (2).

3. Section 5331

Section 5331 instructs the Secretary to require the “filing of a report” when a person engaged in a non-financial trade or business receives more than $10,000 in cash. The Secretary is given broad authority to establish the time for filing the report, its form, and the information to be included therein. This reporting requirement is nearly identical to that found in section 6051I of the tax code.

Under the regulations, this dual reporting requirement (Title 26/Title 31), unlike reg. 1010.350(a), which requires the filing of a return (Title 26) and the filing of FinCEN Report 114 (Title 31), is discharged with the filing of a single report, FinCEN Form 8300. Reg. 1010.330(a)(1) (failure-to-file violation). The report must be filed within 15 days of the payment exceeding $10,000. Id. at (b)(1) & (2) (delinquency violation). When filed, Form 8300 must contain all information specified. Id. at (e)(1) (accuracy violation). Congress acknowledges those potential report-filing violations in its structuring statute, see sections 5324(b)(1) & (2), and its companion statute, 26 U.S.C. 6051I(f) (failure-to-file return or file an inaccurate return).

4. Section 5314

Section 5314 instructs the Secretary to require U.S. persons who maintain an offshore account to “file reports” and to supply specified information in those reports in a way and to the extent he prescribes. The Secretary determined that the Title 31 report “prescribed under 31 U.S.C. 5314 to be filed . . . is the Report of Foreign Bank and Financial Accounts” (FinCEN Report 114), reg. 1010.350(a), if an aggregate offshore account balance greater than $10,000 is maintained, reg. 1010.306(c) (failure-to-file violation). The calendar year report is due to be filed by June 30th of the following year, reg. 1010.306(c) (delinquency violation), and the person filing “shall provide such information as shall be specified in” the report, regs. 1010.350(a) and 1010.306(d) (“All information called for in [FinCEN Report 114] shall be furnished” in the filed report) (accuracy violation).

The IRS agrees with the Patels that the foregoing represents the potential report-filing violations of the provisions of section 5314 as implemented in the regulations. The IRM reflects the IRS's interpretation of statutes and regulations and can be used as an interpretative tool by courts. U.S. v. Boyle, 469 U.S. 241, 243 n.1 (1985). The IRS states that report-filing violations of the BSA “not only include[ ] a complete failure to file a report, [they] also include[ ] a failure to timely file a report and filing a report with material false statements or omissions.” IRM 4.26.5.4(5). In discussing potential civil penalties for report-filing violations of section 5314 under section 5321(a)(5), the IRS posits that “a person who . . . fails to file [FinCEN Report 114] with a material omission or misstatement . . . may be assessed a penalty.” IRM 9.5.13.3.2(3)(e). The IRS specifically recognizes that “filing violation occurs at the end of the day on June 30 of the year following the calendar year to be reported (the due date for filing [FinCEN Report 114]).” IRM 4.26.16.6.2(2) (emphasis added). And the IRS reaffirms the timeliness requirement while highlighting that, when filed, FinCEN Report 114 must be accurate: “It remains the responsibility of the filer to ensure that filing takes place timely and the report is accurate.” IRM 4.26.16.4.5(2).

II. THE PROPER APPLICATION OF PENALTIES

In 2004, after a thorough review of the 2002 Report, Congress amended section 5321(a) to allow the Secretary to impose a non-willful discretionary penalty for any violation of the provisions of section 5314 as implemented in his regulations.

A. How the District Court Should Have Resolved the Issue

The Supreme Court emphasized that the BSA's “civil and criminal penalties attach only upon violation of regulations promulgated by the Secretary[.]” As set forth ad nauseum above, in implementing the provisions of section 5314, the Secretary requires a U.S. person who maintains an aggregate offshore account balance greater than $10,000 at any time during a calendar year to file one Title 31 report, FinCEN Report 114, by June 30th of the following year. The Secretary further mandates that all information specified in FinCEN Report 114 be furnished when the report is filed. Thus, the failure to comply with any of those three regulatory report-filing mandates — failure to file FinCEN Report 114 at all, filing FinCEN Report 114 after the due date, or filing FinCEN Report 114 containing a material omission or misstatement — subjects a U.S. person to a potential non-willful penalty of $10,000.

Ms. Boyd non-willfully filed an accurate FinCEN Report 114 late for year 2010, in violation of reg. 1010.306(c). She committed one report-filing violation of the Secretary's regulations (i.e., the provisions of section 5314). Congress authorized the Secretary to impose a maximum discretionary penalty of $10,000 to attach to that delinquency violation. Section 5321(a)(5)(A) & (B). Plain and simple. Boyd raised an important question on brief, one that can be answered by acknowledging the potential violations of the secretary's regulations:

The more interesting issue, one that the Court need not resolve here, is whether there can be two $10,000 non-willful penalties for a given year when there is a non-willful failure to timely file [FinCEN Report 114] for that year, followed by the untimely filing of [FinCEN Report 114] that has material inaccuracies, i.e., whether a total non-willful penalty for a given year can ever exceed $10,000.

Two report-filing violations of the Secretary's implementing regulations occurred in Boyd's hypothetical. The first was filing FinCEN Report 114 late, in violation of reg. 1010.306(c). The second was filing her delinquent FinCEN Report 114 containing a material omission or misstatement, in violation of regs. 1010.350(a) and 1010.306(d).

Section 5321(a)(5)(A) authorizes the Secretary to “impose a civil money penalty on any person who violates . . . any provision of section 5314” as implemented in his regulations. Two of the three provisions of section 5314 subject to penalties were violated, to which a maximum discretionary penalty of $10,000 may attach. Thus, a total non-willful penalty for a given year can exceed $10,000. However, a complete failure to file FinCEN Report 114 will cap the potential non-willful penalty for a particular year at $10,000 because the other two potential filing violations of the Secretary's regulations to which penalties may attach — delinquency and accuracy — require an actual filing of the report.

B. The Reasonable Cause Exception

Congress added section 5321(a)(5)(B)(ii) in 2004, which provides relief for a U.S. person who non-willfully violates the report-filing requirements of section 5314's implementing regulations. This section must be read in the context of the BSA's statutory and regulatory scheme to ensure that the Secretary's implementing regulations remain operative, i.e., the term “violation” is not rendered meaningless. The statute provides:

(ii) Reasonable cause exception. — No penalty shall be imposed under subparagraph (A) with respect to any violation if —

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

If a U.S. person can establish reasonable cause for his violation, be it a failure-to-file violation, a delinquency violation, or an accuracy violation, no penalty will be assessed for that violation if the U.S. person either (1) files a delinquent FinCEN Report 114 on which “the balance in the account(s) . . . is(are) properly reported” (a requisite for penalty forgiveness for a failure-to-file violation or a delinquency violation) or (2) files an amended FinCEN Report 114 on which “the balance in the account(s) . . . is (are) properly reported” (a requisite for penalty forgiveness for an accuracy violation).12 The phrase “balance in the account,” which must be construed to allow for contextual flexibility, includes the plural “balance in the accounts” if a U.S. person has to list more than one account in response to questions posed in a delinquent or amended FinCEN Report 114.

We know this because the Secretary, in promulgating regs. 1010.350(a), 1010.306(c), and 1010.306(d), construed the plain language of section 5314 as authorizing him to require one Title 31 report be filed per year, regardless of the number of accounts a U.S. person may have. Moreover, when FinCEN Report 114 is filed, a U.S. person must provide all information requested in the Title 31 report, which includes the balances in all banks held during the previous calendar year. Thus, a U.S. person presenting with more than one bank account necessarily must list the “balance in [all of his] account[s]” in his delinquent or amended FinCEN Report 114, or else he would be violating the implementing regulations in filing a report containing a material omission or misstatement.The singular-plural rule therefore must operate under the reasonable cause exception. A U.S. person is not authorized to file a separate Title 31 report for each bank account. Instead, he must provide the balances of all of his account(s) with a single filing to “cure” the report-filing violation — to do that which he was required to do in the first place.

The reasonable cause exception is designed to allow a U.S. person seeking to avoid a penalty for non-willfully violating the Secretary's implementing regulations — assuming reasonable cause was established for the violation (failure-to-file, delinquency, or accuracy) — by filing a delinquent or amended report that is both accurate and complete, regardless of whether the U.S. person had one account or several to “properly report[ ].” With that read, the statutory and regulatory scheme is respected and operates with contextual flexibility as intended. And it must, because penalties under the BSA attach to report-filing violations of the regulations, not accounts.

A Reasonable Cause Example

In 2013, assume U.S. person Mila had 3 offshore accounts in India with an aggregate offshore account balance of $120,000 ($40,000 in each account). Mila is a tax partner at a prominent law firm and knew that section 5314's implementing regulations required her to file an accurate FinCEN Report 114 by June 30, 2014. Unfortunately, Mila had a stroke in February 2014 and found herself in a coma. She miraculously recovered in July that same year. Because of her ill health, Mila missed the June 30th filing deadline. She filed her FinCEN Report 114 in August, providing all information called for in the report, including a proper listing of the balances in her accounts. She had violated the report-filing requirements of section 5314's implementing regulations (reg. 1010.306(c)) in filing FinCEN Report 114 late, like Ms. Boyd, exposing herself to a maximum discretionary non-willful penalty of $10,000 for that report-filing violation.

At audit, the examiner concluded that Mila's single report-filing violation was non-willful and proposed a $10,000 penalty. Mila sought relief in the reasonable cause exception. She gave the examiner medical documentation substantiating her illness and a copy of her late-filed FinCEN Report 114. After a review of the report, the examiner concluded that Mila “properly reported” the balance in her “account[s]” and other related information in her delinquent FinCEN Report 114. The examiner waived the penalty for the delinquent report-filing violation. To be clear, the singular “account” in the reasonable cause exception must necessarily read “accounts” in this situation because Mila was required to provide the balances of all her accounts in her delinquent FinCEN Report 114; otherwise, she would violate section 5314's implementing regulations in filing a report containing a material omission or misstatement. Regs. 1010.350(a) & 1010.306(d). Judge Fitzgerald's reliance on the phrase “balance in the account” in the reasonable cause exception to support his conclusion that penalties apply, not to violations of the provisions of section 5314 as implemented in the regulations, but instead per account, underscores the court's utter lack of attention to detail this area of law requires.

Section 5314 is not self-executing. And Congress knew when it drafted the reasonable cause exception what the Supreme Court emphasized long ago — “civil and criminal penalties attach only upon violation of regulations promulgated by the Secretary.”In other words, Congress knew that violations of the Secretary's regulations to which penalties may attach related solely to report-filing violations, not offshore accounts.

One need only track the language of section 5321(a)(5)(B)(ii) to logically come to the conclusion that Congress necessarily intended the singular-plural rule to apply in the reasonable cause exception. Congress gleaned from the 2002 Report that the Secretary construed its mandates in section 5314 under the singular-plural rule as authorizing him to require only one Title 31 report be filed per calendar year in which the balance in all offshore accounts and related information was required to be furnished. A separate filing was not required or authorized for each account, a harmonious nod to the burden provision of section 5314. Section 5321(a)(5)(B)(ii) provides that “[n]o penalty shall be imposed . . . with respect to any violation (failure-to-file, delinquency, or accuracy) if . . . (I) such violation was due to reasonable cause (Mila was very ill, which resulted in her delinquency violation), and (II) . . . the balance in the account[s] at the time of the transaction[s] [were] properly reported (Mila filed an accurate FinCEN Report 114 properly listing the balances in her offshore accounts in response to questions posed in the delinquent report). Conversely, had Mila held her aggregate offshore account balance in just one account, the statute would take the singular form, providing that “[n]o penalty shall be imposed . . . with respect to any violation if . . . (I) such violation was due to reasonable cause, and (II) . . . the balance in the account at the time of the transaction was properly reported.”13

In either case, if Mila did not properly “cure” her delinquency violation by accurately listing all of her “account balances” or her “account balance” as the case may be in her delinquent report, she would not qualify for the reasonable cause exception and find herself in Boyd's hypothetical situation — facing a maximum discretionary penalty of $10,000 for not only filing FinCEN Report 114 late, but also for filing the report containing a material omission or misstatement. The penalty attaches to the report-filing violation(s), not the account(s).

C. The Enhanced Willful Penalties

Congress also increased the penalties for willful report-filing violations of section 5314's implementing regulations. Section 5321(a)(5)(C) provides:

(C)Willful violations. — In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314 — (i) the maximum penalty under subparagraph (B)(i) [$10,000] shall be incr eased to the greater of

(I) $100,000, or (II) 50 percent of the amount determined under subparagraph (D), and (ii) subparagraph (B)(ii) shall not apply [referring to reasonable cause].

Section 5321(a)(5)(D) provides, in relevant part, as follows:

(D) The amount determined under this subparagraph is — . . . (ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

Congress set a discretionary ceiling for a willful penalty for violating any of the three mandates in section 5314's implementing regulations at the greater of $100,000 or half the aggregate balance of the accounts involved in those potential violations.

For a failure-to-file violation and a delinquency violation, the potential willful penalty will necessarily be the greater of $100,000 or half the aggregate offshore account balance maintained during the calendar year, because both of those “violation[s] involv[e] the failure to report the existence of [all] account[s],” the singular-plural rule operates here to maintain contextual flexibility depending on whether a U.S. person has one or several accounts to list in response to questions posed in his FinCEN Report 114 when filed (“balance in the account(s) at the time of the [failure to file or delinquency] violation”).

For an accuracy violation, the potential willful penalty will be the greater of $100,000 or half the aggregate foreign account balance of the account(s) not properly reported in a filed FinCEN Report 114 because that “violation involv[es] the failure to report the existence of [one or more] account[s], or any identifying information required to be provided with respect to [one or more] account[s].” Again, the singular-plural rule operates to maintain contextual flexibility should a U.S. person file FinCEN Report 114 omitting information on one or several accounts, or any identifying information regarding one or more accounts (“balance in the account(s) at the time of the [accuracy] violation”).

A Willful Example

Now assume Mila had not been critically ill and was found by the examiner to have been willful in failing to file FinCEN Report 114 by the June 30th deadline. The reasonable cause exception is unavailable for U.S. persons who willfully violate the report-filing requirements of section 5314's implementing regulations. Again, the focus must be on the actual report-filing violation committed. Mila filed FinCEN Report 114 late. Her maximum penalty exposure for that willful report-filing violation would be $100,000 because that amount is greater than half the balance of the accounts “involv[ed]” in the report-filing violation, or $60,000. Her single willful report-filing “violation involv[ed] the failure to report the existence of” three accounts with an aggregate balance of $120,000. The rules of statutory construction require the statute be read, given that context, using the plural “accounts” (section 5321(a)(5)(D)(ii) “in the case of a violation involving a failure to report the existence of [ ] account(s) . . . the balance in the account(s) at the time of the (delinquency) violation.”).

Similarly, if Mila held her $120,000 in just one account, her maximum penalty exposure would also be $100,000 because that amount is greater than half of the balance in her account. Her single willful report-filing “violation involv[ed] the failure to report the existence of an account” with a balance of $120,000. The rules of statutory construction require the statute be read, given that context, using the singular “account” (section 5321(a)(5)(D)(ii) “in the case of a violation involving a failure to report the existence of an account . . . the balance in the account at the time of the (delinquency) violation.”).

Whether Mila committed a failure-to-file violation or filed FinCEN Report 114 late, those violations necessarily will “involv[e] a failure to report the existence of [all] account(s) . . .” But if Mila had timely filed FinCEN Report 114 omitting two of her three $40,000 accounts, she would have violated the report-filing requirements of section 5314 in filing the Title 31 report containing a material omission. That violation would “involv[e] the failure to report the existence of [two] account(s)” such that the penalty will be determined based on the “balance [of those] account(s) at the time of the [accuracy] violation,” or $80,000. Half that number is less than $100,000, so Mila would be facing a potential willful report-filing violation penalty of $100,000.

Importantly, the statute seeks to find an actual report-filing violation penalty number, with the starting point being $100,000 — ten times the penalty for a non-willful report-filing violation penalty. If half the balance in the account or accounts involved in the report-filing violation exceeds that amount, the Secretary has congressionally granted discretion to assess a penalty in the greater amount.

III. CONCLUSION

Boyd gives only lip service to the intricacies of the BSA. The court focused on the phrase “balance in the account” in isolation instead of following “the cardinal rule that statutory language must be read in context [since] a phrase gathers meaning from the words around it. Hibbs, 542 U.S. at 101. In other words, the district court disassociated the phrase “balance in the account” from the company (“violates,” “violating,” “violation”) it keeps, and in the process, rendered those terms meaningless. The singular-plural rule, one wholly ignored in Boyd, maintains the contextual flexibility required to ensure that all words in the statutory scheme matter. The district court didn't do its homework, and consequently, it failed to reach the correct answer.

Dated: November 8, 2019

DTMtax

By: David Michaels
Attorney for Amici Curiae
Laxman, Jashu, Hiten, and Anita Patel

FOOTNOTES

1Pursuant to Federal Rule of Appellate Procedure 29(a)(4)(E), amici curiae certify that this brief was not written in whole or in part by counsel for any party, and no person or entity other than amici curiae and their counsel has made a monetary contribution to the preparation and submission of this brief. All parties have consented to the filing of this amici brief. See Fed. R. App. 29(a)(2).

2All section references are to Title 31 of the United States Code, and all regulation references are to Title 31 of the Code of Federal Regulations.

3California Bankers Assoc. v. Schultz, 416 U.S. 21, 26 (1974).

4Treasury, “A Report to Congress in Accordance With Section 361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act),” at 5 (Apr. 26, 2002) (hereinafter “2002 Report”).

5FinCEN, “Amendment to the Bank Secrecy Act Regulations — Reports of Foreign Financial Accounts,” 81 F.R. 12613, 12621 (March 10, 2016) (proposed change in bold).

6Patel, 8:19-cv-792, Doc. 15-8, pg. 4.

7Id., Doc. 15-6, pg. 12, RFA 54.

8Id., Doc. 15-6, pg. 7, RFA 19.

9California Bankers Assoc., 416 U.S. at 26 (text added in bold). For a comprehensive discussion of the oft-misunderstood bifurcated nature of the regulation, see Michaels, FBAR Penalties, infra pg. 6, at 1581-83.

10Transcript of Hearing, pg. 13, lines 20-23.

112002 Report, supra note 4, at 3.

12See IRM 4.26.16.6.4(2)(b) (non-willful penalty should not be imposed if “the person files [her] delinquent FinCEN Report 114 and properly reports the previously unreported account”).

13The IRS agrees, supra, note 12.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    Jane Boyd v. United States
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 19-55585
  • Institutional Authors
    DTMtax
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-42947
  • Tax Analysts Electronic Citation
    2019 TNTI 220-19
    2019 TNTF 220-42
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