Estate Representatives Say FBAR Violation Didn’t Harm Government

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' REPLY IN SUPPORT OF MOTION FOR RECONSIDERATION OF THE COURT'S ORDER DENYING THEIR MOTION TO DISMISS

Defendants file this Reply in further support of their Motion for Reconsideration [DE 26] of this Court's Order denying their Motion to Dismiss [DE 25]. Respectfully, the Court has clearly erred in determining that the willful FBAR penalty at issue in this case compensates the Government for tax losses when in fact it does not.

I. The Court should reconsider its order because it clearly erred in finding that Marie Green's alleged FBAR violation harmed the Government.

In its Order, the Court at first correctly observes that “the statute denominates the FBAR penalties as 'civil penalties' and confers enforcement authority upon the Secretary [of the Treasury], indicating that Congress intended to provide a civil penalty.” [DE 25 at 11.] This should come close to ending the matter — if Congress intended the statute to be penal then the statute abates upon death. But the Court rescued the willful FBAR penalty from this fate on based upon its key determination that “the Government itself has suffered a monetary harm as the result of Defendants' conduct.” [Id.]¹

But the conclusion that a willful FBAR violation entails harm to the Government is clear error. An FBAR violation, by itself, entails no such harm. As the Court noted in its Order, “to be subject to a willful FBAR penalty, the following elements are required: (1) the person must be a U.S. citizen; (2) the person must have had an interest in, or authority over a foreign financial account; (3) the account had a balance exceeding $10,000 at some point during the reporting period; and (4) the person must have willfully failed to disclose the account and file a FBAR.” Tax loss — or any other harm to the Government — is simply not an element.²

As importantly, to the extent that tax harm is incidental to an FBAR violation, that tax harm is remediated by other penalties that plainly do not abate upon death due to their remedial nature, such as 26 U.S.C. §§ 6651 and 7203.³ The presence of these other statutes undermines the conclusion that the FBAR penalty itself provides this compensation, and distinguishes the FBAR penalty from those at issue in Helvering v. Mitchell, 303 U.S. 391 (1938) and One Lot Emerald Cut Stones v. United States, 409 U.S. 232 (1972).

Additionally, to the extent that the Court held that the Eleventh Circuit's framework articulated in United States v. NEC Corp., 11 F.3d 136 (11th Cir. 1993) should not control because the Government itself claims victim status, the Court should turn to United States v. Price, 290 F.2d 525 (6th Cir. 1961) and Porter v. Montgomery, 163 F.3d 211 (3d Cir. 1947) for guidance. Price, in particular, resolves the question of what to do when the Government has experienced “harm” only to its sovereign rights to enforce its laws rather than what the Price court terms “direct injury” to the Government itself. If “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. at 526. This includes specifically, actions “brought to obtain money for an alleged violation of the law” such as the FBAR filing requirement. Id.

Given that tax loss is not an element of the a willful FBAR violation and is explicitly compensated by other statutes, the District of Connecticut got it exactly right in the case of United States v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008). There, the court correctly concluded, “the FBAR penalty is assessed on Defendant as punishment, not as any sort of compensation for any pecuniary harm.” Id. at 244 n.6.⁴

II. The Government's contrary argument is off base.

The Government responds to Defendants' observations concerning the lack of tax loss with two arguments. First, the Government argues that the willful FBAR penalty serves as a sort of end-run around the statute of limitations applicable to the Internal Revenue Code's civil tax penalties. Second, the Government argues that the FBAR penalty at issue in this case is not “entirely divorced from tax losses,” due to the existence of the reasonable cause exception to a non-willful FBAR violations. These two arguments will be discussed in turn.

a. The FBAR is not an oblique end-run around the Statute of Limitations otherwise applicable to remedial actions for willfully unpaid tax.

The Government acknowledges in its response that Marie's payments of “approximately $700,000 in back taxes and penalties covering the years 2005 through 2012” do indeed “compensate the United States for those years, perhaps.” The caveat, “perhaps,” is unwarranted. The IRS concluded that Marie Green's conduct at issue in this case resulted in a total tax loss of $442,530 for tax years 2005–2012. Marie Green's payment of $700,000 in fees and fines under the Internal Revenue Code accordingly compensated entirely for that loss, as well as an additional $257,470 to do the “rough remedial justice” to which the Government is entitled. There is no additional uncompensated tax harm that the willful FBAR penalty addresses.

Nevertheless, the Government argues that somehow the willful FBAR penalties it has assessed against Marie Green for her failure to report two specific accounts held at Bank Leumi and Bank of Jerusalem for tax years 2010 and 2011 really compensate the Government for some speculative additional tax loss sustained going back to 1988 — decades before the existence of the accounts at issue.⁵ In making this argument, the Government suggests that Congress intended the FBAR penalty to serve as an end-run around “the general three-year statute of limitations” on assessments. [DE 28 at 2.]

But this is flatly wrong. Of course, if Congress intended to carve out an exception to the referenced three-year statute of limitations, it simply could have done so. Indeed, Congress has done so. The statute of limitations for an audit is six years if a taxpayer omits more than $5,000 of foreign income. And, more importantly, where tax fraud — that is, a willful underpayment of taxes — is at issue, there is no statute of limitations at all.⁶ Contrary to the Government's representations, the FBAR penalty does not enable it to reach a tax loss not otherwise compensable by the portions of the Internal Revenue Code that explicitly compensate the Government for its tax losses.

b. The Government's discussion of the non-willful FBAR penalty mischaracterizes that penalty's relationship to tax loss and is beside the point — the non-willful FBAR penalty is not at issue in this case.

The Government next argues that “it is incorrect to suggest, as the Greens do, that the FBAR penalty is entirely divorced from tax losses.” [DE 28 at 2.] It then proceeds to support this assertion with a discussion of a statutory defense to the non-willful penalty, which is not at issue in this case. This defense provides that no non-willful penalty shall be imposed (1) “if such violation was due to reasonable cause,” 31 U.S.C. § 5321(a)(5)(B)(ii)(I); and (2) “the amount of the transaction or balance of the account at the time of the transaction as properly reported.” Id.

The relevance of this observation is not clear. Like the willful FBAR penalty, this language does not require any showing of tax loss or provide any defense where back taxes are paid. Instead, it provides that a taxpayer may assert a reasonable cause defense only if the “balance of the account” is subsequently properly reported.

But the non-willful FBAR penalty does warrant some further discussion. The very existence of this non-willful penalty cuts against an argument that that the willful FBAR penalty is anything other than a penalty. Whether an individual fails to file the FBAR willfully or non-willfully, the harm to the Government is the same: it has not received the information the form requires. But Congress limits the non-willful FBAR penalty to $10,000. By contrast, the willful FBAR penalty has no absolute maximum. It is limited to 50% of the value of the unreported accounts, or $100,000, whichever is higher. In this case, the Government seeks $1,886,220 in penalties from Ms. Green. Were this a non-willful case, the Government could seek only up to $30,000.⁷

The reason for this $1,856,220 difference is obvious. Willful FBAR violations are more morally blameworthy and deserve more punishment. And unlike accidental, non-willful, FBAR violations, willful FBAR violations can be deterred. These retributive and deterrent aims render the willful FBAR penalty penal for purposes of abatement upon death.

III. Conclusion

The willful FBAR penalty is not a tax penalty and does not compensate for tax harm. Respectfully, the Court clearly erred in reaching a contrary conclusion and for that reason should grant the Defendants' Motion for Reconsideration.

Dated: May 21, 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