In this installment of Willis Weighs In, Tax Notes contributing editor Benjamin M. Willis talks with Mark Oberstaedt and Ken Ahl, partners at Archer, about their help with a major taxpayer victory regarding foreign bank account report penalties.
Here are a few highlights from their discussion, edited for length and clarity.
Benjamin M. Willis: Today we'll be discussing [foreign bank account report] penalties with Mark Oberstaedt and Ken Ahl, who recently helped with a major taxpayer win in court. Mark and Ken successfully represented Frank Giraldi in a very important case about the stacking of FBAR penalties. The key issue in United States v. Giraldi was whether a penalty for a non-willful failure to disclose a foreign account is applied on a per-account or per-form basis. Could you tell us a bit about the FBAR requirements?
Ken Ahl: The FBAR is a requirement to report foreign financial accounts. U.S. persons are required to report, whether they own the account or whether they have signature authority over the account. Originally it was only intended to apply to someone who had willfully failed to file an FBAR report. In 2004 the law was amended to provide for a different penalty for non-willful filings. The issue for our client, Frank Giraldi, was whether he was subject to multiple $10,000 penalties based on a per-account basis for a non-willful failure to file an FBAR. The court disagreed with the government’s interpretation and found the $10,000 non-willful penalty applied per form.
Mark Oberstaedt: Frank Giraldi worked for AT&T as a long-time employee. While he worked there, he met his wife. She was about 14 years younger than Frank. When he got to his retirement in 1991, he had to decide about his pension. Frank made the decision to base his pension payment on his own life and take that money as a lump sum and invest it. He invested it in three annuities and one financial account over in Switzerland because he trusted the Swiss banking system.
Then the government accessed penalties on a per account basis, as opposed to a per form basis. So, he got hit with four $10,000 penalties for each of four years for a total of $160,000. On a per form basis, the total would have been 25 percent of that, or $10,000 per year for a total of $40,000, which is what the court agreed with.
I think Judge [Susan D.] Wigenton of the New Jersey District Court really knocked it out of the park. She compared the willful penalty provision that was enacted in 1970 with the non-willful provision added in 2004. The language was different, and the non-willful language did not support a per-account penalty as the language for willful penalties did.
Benjamin M. Willis: I am sure Mr. Giraldi was extremely happy with the outcome. It is important taxpayers are aware of their rights when the government tries to take more in taxes and penalties and the law plainly allows.
Mark Oberstaedt: In the United States v. Boyd decision, which came out eight days after our decision, the Ninth Circuit reached a similar per form penalty conclusion. The courts are agreeing coast to coast. Why not rule in favor of the taxpayers. We are talking about ambiguities in statutory construction.
We’ve also seen another case out of Texas called Bittner where they say, "Look, unless it's very clear that Congress intended to impose these penalties in this fashion, we're not going to read that into the statute that way." The appeal should be very interesting.
Benjamin M. Willis: I think when the language is not clear, taxing provisions and penalties should be interpreted against the drafter. The Boyd case applies this principle of statutory construction.
Mark Oberstaedt: Taxpayers have a right to pursue a claim for illegal exaction, such as for overtaxation. Ben, you actually tipped me off to the recent Mendu case. The old Flora case stands for the proposition that if you want to sue the government for taxes, you have to pay the entire tax. You can't pay less than the entire tax. In Mendu the court of claims ruled that the Flora rule doesn't apply to FBAR penalties, which opens up the cases that can be brought. So if a taxpayer paid less than the full amount of the penalty, they're going to be entitled to pursue a refund from the government under a theory of legal exaction.
Ken Ahl: And to make it even worse, Ben, the government has been taking the position in certain litigation that it can hide the reasons why it chose to have a willful as opposed to a non-willful penalty behind the deliberative process privilege. So, I think you're going to see a lot of litigation behind that issue coming up as well.
Benjamin M. Willis: Mark, please make sure to keep me updated when the class action lawsuit starts, because, it seems like there could be a big one there. I can't imagine that there isn't a large group of people who want to hear about that.