Court Asked to Reconsider Refusal to Dismiss FBAR Penalty Suit

UNITED STATES OF AMERICA,
Plaintiff,
v.
JACQUELINE D. GREEN, as Personal Representative of the Estate of Marie Green and as Co-Trustee of the Marie Mary Green Revocable Trust; BERT GREEN, as Co-Trustee of the Marie Mary Green Revocable Trust,
Defendants.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA

DEFENDANTS' MOTION FOR RECONSIDERATION
OF ORDER DENYING MOTION TO DISMISS

Defendants Jacqueline and Bert Green file this Motion for Reconsideration pursuant to Federal Rule of Civil Procedure 60(b). Respectfully, the Court committed clear error in basing its decision upon a determination that the willful FBAR penalty found at 31 U.S.C. § 5321(a)(5)(C) “may deprive the Government of taxes on investment gains and the Government likely spends significant resources on investigating foreign accounts.” [DE 25 at 11.] The first of these conclusions inappropriately conflates the FBAR penalty and penalties for underpayment of tax. And the second of these conclusions, concerning investigation costs, relies upon matter outside of the pleadings and first proffered in the Government's Response memorandum. Accordingly, such considerations required conversion of Defendant's Motion to Dismiss into one for summary judgment pursuant to Rule 12(d).

I. Motion for Reconsideration Standard

Judge Moore recently articulated the standard employed on motion for reconsideration as follows:

The applicable standard for a motion for reconsideration is that the moving party must demonstrate why the court should reconsider its prior decision and set forth facts or law of a strongly convincing nature to induce the court to reverse its prior decision. Socialist Workers Party v. Leahy, 957 F. Supp. 1263 (S.D. Fla. 1997). A motion for reconsideration should raise new issues, not merely address issues litigated previously. Leahy, 957 F. Supp. at 1263. Courts have distilled three major grounds justifying reconsideration: (1) an intervening change in controlling law; (2) the availability of new evidence; and (3) the need to correct clear error or manifest injustice. Cover v. Wal-Mart Stores, Inc., 148 F.R.D. 294, 295 (M.D. Fla. 1993) (citations omitted).

Federal Trade Comm'n v. Dluca, Case No. 18-60379-MOORE, 2018 WL 6978624, at *1 (S.D. Fla. Oct. 23, 2018).

Here, Defendants move under the third of these alternative grounds: the need to correct clear error or manifest injustice.

II. Grounds for Reconsideration

a. The Court's conclusion that Marie Green's alleged FBAR violation likely harmed the Government is clearly erroneous.

The lynchpin of the Court's order denying Defendant's Motion to Dismiss is its determination that “the Government itself has suffered a monetary harm as the result of Defendants' conduct.” [DE 25 at 11.] The Court elaborates, noting that “FBAR violations may deprive the Government of taxes on investment gains and the Government likely spends significant resources on investigating foreign accounts.” [Id.]

Respectfully, this conclusion is clearly erroneous for three reasons. First, it inappropriately conflates the FBAR penalty and separate penalties for underpayment of tax. Harm is not an element of an FBAR claim and the filing of an FBAR form does not impact the tax calculation on a taxpayer's return. Income from a foreign account should be reported on Schedule B of a Form 1040 Tax Return. See 2011 Form 1040 Schedule B, Instructions.¹ This figure is then transferred to the taxpayer's Form 1040, where it serves as part of the gross income upon which an individual's tax liability is based. See Form 1040 Schedule B, Line 4. By comparison, the FBAR form “is used to report a financial interest in or signature authority over a foreign financial account.” BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (2017).² It requires reporting of the maximum value of an account, not whether any taxable gains exist. The failure to file an accurate Form 1040 Schedule B — not the failure to file an FBAR form — results in a tax loss. A taxpayer can file an entirely accurate FBAR form but still record no interest on her Form 1040 Schedule B and therefore underpay her taxes. And a taxpayer can fail to file an FBAR form yet still report her earned interest on a Schedule B and pay the proper amount of tax.

Importantly, the failure to file an accurate Schedule B and pay the resulting tax is a separate offense covered by 26 U.S.C. §§ 6651 and 7203.³ Further, FBAR penalties apply even where a taxpayer has no income to report with respect to a foreign account. This can occur, for example, if an account does not bear interest or if a taxpayer has signature authority (and thus a reporting requirement) with respect to an account belonging to another. Corporate secretaries or financial officers, for example, must file their own individual FBARs reporting their signature authority over corporate accounts. They do so even though they would not include any gains or losses on their own returns.

The Court's conclusion that an FBAR violation “may deprive the Government of taxes on investment gains” is thus factually incorrect. An FBAR violation does not impact tax liability. Rather, the failure to capture investment income on a Schedule B and pay the resultant tax is a separate offense covered by a separate statute, resulting in a claim that does not abate upon death.

Second, and relatedly, the Court errs in basing its decision upon a determination that “FBAR violations may deprive the Government of taxes on investment gains” because this analysis goes beyond a categorical analysis of the FBAR penalty statute. In determining a claim's survivability upon the death of a defendant, the law requires the Court to look to the nature of the statute, rather than the specific conduct alleged. See In re Wood, 643 F.2d 188, 190 (5th Cir. 1980) (“It has long been established that causes of action predicated on penal statutes do not survive the death of the debtor . . .” (emphasis added)).⁴ As observed above, the FBAR penalty requires no monetary harm at all to the Government. It is clearly erroneous for the Court to consider whether a tax loss or other harm has coincidentally occurred in a particular case.

Third, even if a case-specific analysis is appropriate, the Court's approach here inappropriately converted Defendant's Motion to Dismiss into one for summary judgment without proper notice in accordance with Federal Rule of Civil Procedure 12(d). Rule 12(d) states that “[i]f, on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56.” Importantly, the rule requires that “[a]ll parties must be given a reasonable opportunity to present all the material that is pertinent to the Motion.” Id.

Here, the Court concluded that the United States has been harmed because Defendant's conduct “may” have resulted in a tax loss and likely “forced the Government to expend significant resources to investigate Marie's accounts.” [DE 25 at 11–12.] However, the pleadings contain no allegation concerning any investigative resources that the Government has expended. Rather, this matter was presented to the Court for the first time in Plaintiff's response brief. Consequently, the Court's consideration of this matter converted Defendant's 12(b)(6) Motion into one for summary judgment, and the Rules require that the Court allow Defendant an opportunity to develop the factual record and provide evidence of her own.

Development of the factual record concerning harm to the Government would likely bolster Defendant's Motion. This saga began when Marie Green entered the IRS's Offshore Voluntary Disclosure Program. Green came forward on her own to voluntarily report these accounts. Through participation in this program, Marie Green filed her overdue FBAR forms and provided the bank records and other evidence that supported the assessment in this case. Accordingly, the Government's investigation expenses related to Marie Green's conduct are likely minimal. Further, Marie Green paid approximately $700,000 in back taxes and penalties for her failure to properly account for the income that her undisclosed accounts generated. These penalties — already paid — compensate the Government for the tax loss alleged. See Helvering v. Mitchell, 303 U.S. 391 (1938).

Thus, in this case, it is doubtful that the FBAR penalty compensates the Government either for a tax loss or for its costs of investigation. But, regardless, that is not a matter appropriate for decision under Rule 12(b)(6), based upon the extant pleadings in this case.

b. The Court clearly erred by not considering whether FBAR violations cause “direct harm” to the Government.

Another key premise upon which the Court's Order relies is that the case that the parties proffered as controlling — United States v. NEC Corp., 11 F.3d 136 (11th Cir. 1993) — was “not on point here because it is the Government itself that has been harmed.” [DE 9 at 20.]

There are cases that have addressed such a situation.⁵ The Sixth Circuit, in United States v. Price, 290 F.2d 525 (6th Cir. 1961), evaluated whether an action brought by the United States for remedy under the Defense Production Act of 1950 survived the death of the defendant. In conducting this analysis, the Court determined whether a claim was penal or remedial as to the plaintiff United States. The Price Court articulated the applicable standard as follows:

If [a claim] is brought to compensate for an injury to the United States, it is one for damages and does not abate upon the death of the defendant. If, on the other hand, no direct injury has been done to the United States, the action is not for compensation but for the recovery of a penalty, and abates upon the death of the defendant.”

Id. (emphasis added).

Similarly, the Third Circuit evaluated the abatement of a claim upon death in Porter v. Montgomery, 163 F.2d 211 (3rd Cir. 1947). Its analysis touched upon claims brought by the state. There, the court held:

A civil action is for damages [that is, remedial] if it is brought for the compensation of the injured individual. It is for a penalty if it seeks to obtain a sum of money for the state, an entity which has not suffered direct injury by reason of any prohibited action. In order to obtain damages, the loss must flow out of the wrong and be its natural and proximate consequence.

Id. at 215 (emphasis added).

Here, any injury that the Government suffered as a result of Marie Green's FBAR violation was incidental to the violation, rather than a direct natural and proximate consequence of the violation. As discussed above, an FBAR violation need entail no tax loss or other harm to the Government at all. Any harm that the Government has suffered from Marie Green's conduct stems not from her FBAR violation, but from her failure to complete an accurate Form 1040 Schedule B and pay the appropriate tax. This latter coincidental conduct is subject to a separate penalty that Marie Green does not contest and has already paid.

c. Congressional statements on the purpose of the FBAR penalty.

Finally, Congress itself recognizes the distinction between the FBAR penalty's encouragement of accurate reporting, and other substantive tax penalties for underpayment of tax. In 2005, the Congressional Joint committee on Taxation published a “General Explanation of Tax Legislation Enacted in the 108th Congress.” This report⁶ discussed Congress's decision to amend the relevant statutory framework to increase the FBAR penalties.

At page 378, the Committee articulated its “reasons for change.” The Committee observed that foreign bank accounts may be used “to engage in abusive tax scams.” But the Committee did not state that the purpose of the FBAR penalty was to compensate for this harm. Instead, Congress “believed that increasing the prior-law penalty for willful non-compliance with [the FBAR reporting requirement] and imposing a new civil penalty that applies without regard to willfulness in such noncompliance will improve the reporting of foreign financial accounts” (emphasis added.) This kind of coercive purpose is the defining feature of a penal, as opposed to remedial, statute.

III. Conclusion

A motion for reconsideration requests extraordinary relief and the Defendants understand that such motion should not be made as a matter of course. But this case presents a rare circumstance in which such relief is appropriate. The Court's determination that violation of the FBAR statute causes direct, compensable harm to the Government appears clearly erroneous. And it appears to have likewise erred by considering factual matter first raised in Plaintiffs Response brief without converting the Motion to one for summary judgment under Rule 12(d). Dated: May 4, 2020

Respectfully Submitted,

Jeffrey A. Neiman
Fla. Bar No. 544469
jneiman@mnrlawfirm.com
Derick Vollrath
Fla. Bar No. 126740
dvollrath@mnrlawfirm.com
MARCUS NEIMAN RASHBAUM & PINEIRO LLP
100 Southeast Third Ave
Suite 805
Fort Lauderdale, Florida 33315
Telephone: (305) 400-4269
Counsel for Defendants