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Failure to File FBARs Wasn’t Willful, Individual Argues

APR. 6, 2020

Margaret J. Jones et al. v. United States

DATED APR. 6, 2020
DOCUMENT ATTRIBUTES
  • Case Name
    Margaret J. Jones et al. v. United States
  • Court
    United States District Court for the Central District of California
  • Docket
    No. 2:19-cv-00173
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-13532
  • Tax Analysts Electronic Citation
    2020 TNTI 69-16
    2020 TNTG 69-25
    2020 TNTF 69-19

Margaret J. Jones et al. v. United States

MARGARET J. JONES, as Executor, ESTATE OF JEFFREY L. JONES,
Plaintiff,
v.
THE UNITED STATES OF AMERICA DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE
Defendant

AND RELATED COUNTERCLAIM

UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF CALIFORNIA

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF AND COUNTERDEFENDANT THE ESTATE OF JEFFREY JONES' MOTION FOR SUMMARY JUDGMENT

Date: May 4, 2020
Time: 1:30 p.m.
Dept: Courtroom 10C
Judge: Hon. James V. Selna
Magistrate Judge: Rozella A. Oliver

Complaint Filed: January 8, 2019
Trial date: June 23, 2020

Edward C. Walton (Bar No. 78490)
E-mail: ed.walton@procopio.com
Patrick W. Martin (Bar No. 163932)
E-mail: patrick.martin@procopio.com
Eric D. Swenson (Bar No. 196362)
E-mail: eric.swenson@procopio.com
PROCOPIO, CORY, HARGREAVES & SAVITCH LLP
525 B Street, Suite 23200
San Diego, CA 92101
Telephone: 619.238.1900
Facsimile: 619.235.0398

Attorneys for Plaintiff Margaret J. Jones, as Executor of the Estate of Jeffrey L. Jones


TABLE OF CONTENTS

I. INTRODUCTION

II. STATEMENT OF PERTINENT FACTS

A. Background on the Joneses

B. The Joneses' Foreign Accounts

C. After Mr. Jones' Death, Mrs. Jones Discovers the FBAR Reporting Requirements and Complies with their Tax and Reporting Requirements Without Prompting from the IRS

D. The IRS Engages in an Aggressive Two-Year Audit, Resulting in a $3,411,948 Naked Assessment Against the Joneses

1. The IRS Agent Determination — Margaret Jones

2. The IRS Agent Determination — Jeffrey Jones

III. ARGUMENT

A. Legal Standards

B. The Requirements to file a Report of Foreign Bank and Financial Accounts (“FBAR”)

C. The IRS's Willfulness Determination is Reviewed De Novo

D. The IRS Wrongfully Determined that Mr. Jones Acted Willfully

1. Mr. Jones' Actions Do Not Rise to the Level of Willfulness, Recklessness, or Willful Blindness

2. Mrs. Jones' Filing of Qualified Amended Returns for the Joneses Further Precludes a Finding of Willfulness

E. The IRS Acted Arbitrarily and Capriciously in Setting the Maximum Penalty and its Willfulness Determination Should be Set Aside

1. The IRS's Willfulness Determinations are Arbitrary and Capricious and Should be Set Aside

IV. CONCLUSION

TABLE OF AUTHORITIES

FEDERAL CASES

Adickes v. S.H. Kress & Co. 398 U.S. 144 (1970)

Bergmann v. Comm'r of Internal Revenue T.C. Memo. 2009-289, 2009 WL 4861128 (U.S.T.C. 2009)

Bowman Transp. Inc. v. Arkansas-Best Freight System, Inc. 419 U.S. 281 (1974)

Broadhead v. Comm'r of Internal Revenue T.C. Memo. 1955-328, 1955 WL 769 (U.S.T.C. 1955)

Burlington Truck Lines v. United States 371 U.S. 156 (1962)

Fargo v. Comm'r of Internal Revenue 447 F.3d 706 (9th Cir. 2006)

First Nat'l Bank of Arizona v. Cities Serv. Co. 391 U.S. 253

Hughes Air Corp. v. Civil Aeronautics Bd. 482 F.2d 143 (9th Cir. 1973)

Judulang v. Holder 565 U.S. 42 (2011)

Keller v. Comm'r of Internal Revenue 568 F.3d 710 (9th Cir. 2009)

Margaret J. Jones v. United States Case No. 2:19-cv-4950 JVS

Matsushita Elec. Indus. Co. v. Zenith Radio Corp. 475 U.S. 574 (1986)

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v State Farm Mut. Auto. Ins. Co. 463 U.S. 29 (1983)

Rubenstein v. United States 826 F. Supp. 448 (S.D. Fla. 1993)

Ruth v. United States 823 F.2d 1091 (7th Cir. 1987)

Strong v. France 474 F.2d 747 (9th Cir. 1973)

United States v. Bohanec 263 F. Supp. 3d 881 (C.D. Cal. 2016)

United States v. Boyd No. CV 18-803-MWF, 2019 WL 1976472 (N.D. Cal. April 23, 2019) (appeal filed)

United States v. Boyle 469 U.S. 241

United States v. Healy Tibbitts Const. Co. 713 F.2d 1469 (9th Cir. 1983)

United States v. Horowitz 361 F. Supp. 3d 511 (D. Md. 2019)

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

United States v. Schwarzbaum No. 18-cv-81147-BLOOM/Reinhart, 2020 WL 1316232 (S.D. Fla. March 20, 2020)

United States v. Sturman 951 F.2d 1466 (6th Cir. 1991)

United States v. Williams 489 Fed. Appx. 655 (4th Cir. 2012)

United States v. Williams No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sep. 1, 2020), rev'd on other grounds, 489 Fed. Appx. 665 (4th Cir. 2012)

Untied States v. Flume 390 F. Supp. 3d 847 (S.D. Tex. 2019)

Untied States v. Flume No. 5:16-CV-73, 2018 WL 4378161 (S.D. Tex. Aug. 22, 2018)

FEDERAL STATUTES, REGULATIONS, AND RULES

26 C.F.R.

§ 1.451-1(a)

§ 1.6664-2

§ 1.6664-2(c)(2)

§ 1.6664-2(c)(3)

31 C.F.R.

§ 1010.306(c)

§ 1010.350(a)

§ 1010.810(g)

5 U.S.C.

§ 706(2)

§ 706(2)(A)

31 U.S.C.

§ 5311

§ 5314

§ 5321

§ 5321(a)(5)

Federal Rules of Civil Procedure

Rule 56(a)

Rule 56(c)

Rule 56(e)

Federal Rules of Evidence

Rule 403

Rule 602

Rule 802

Public Law 114-41, § 2006(b)(11)

OTHER AUTHORITIES

Internal Revenue Manual

§ 4.26.16.6.5.1

§ 4.26.16.6.5.1(1)-(3)

§ 4.26.16.6.5.1(5)


Plaintiff and Counterdefendant MARGARET J. JONES, as Executor of the ESTATE OF JEFFREY L. JONES (“Plaintiff”) respectfully submits the following Memorandum of Points and Authorities in support of its Motion for Summary Judgment against Defendant and Counterclaimant the United States of America (“Defendant” or “USA”).

I. INTRODUCTION

This action, and the related action captioned Margaret J. Jones v. United States, Case No. 2:19-cv-4950 JVS RAOx, arise from the IRS's arbitrary and capricious assessment of maximum available penalties against Jeffrey Jones, deceased (the “Estate”), and his 91-year-old widow, Margaret Jones (collectively, the “Joneses”), in the total amount of $3,411,984 for their purported “willful” failure to file Reports of Foreign Bank and Financial Accounts (“FBAR”). That naked assessment arose on the heels of an exhaustive two-year investigation, after which the IRS concluded, in direct contravention of the undisputed facts it uncovered and administratively recorded, that the Joneses were “willful” and therefore should be penalized to fully one-half the value of their subject assets (the “50% Willfulness Penalty”) for failing to timely file FBARs with the Department of the Treasury's Financial Crimes Enforcement Network (“FinCEN”) as to Canadian and New Zealand accounts which they openly held in their individual names as U.S. resident citizens, without any indicia of intent to evade taxes.

The Joneses' failure to file the required FBARs was due to, at most, negligence, inadvertence, or mistake resulting from a good faith misunderstanding of the requirements of the law. It is undisputed the Joneses in good faith, but mistakenly, believed their foreign account income was not subject to income taxes in the U.S. Their CPA of decades told the IRS he was himself totally unaware of the FBAR filing requirement and therefore did not advise them on the same. Upon learning of the FBAR requirements after Mr. Jones' death on March 11, 2013 at the age of 93, Mrs. Jones immediately sought in good faith, and without any threat, prompting or even contact from the IRS to remedy their past mistakes by: (1) timely filing an FBAR for 2012, then (2) submitting Qualified Amended Returns1 for tax years 2011 and 2012 along with payment of all taxes associated with the income on all foreign accounts over those years, and about a year thereafter (3) voluntarily engaging in the IRS's recently introduced “Streamlined Submission Program,” which included certifying her inadvertence and filing all prior FBARs for the 2008 through 2013 tax years, while, paying a 5% penalty on the total balance of the mistakenly unreported foreign accounts as required — a penalty which amounted to $156,795.26.

Despite all these and other known indicia of a unilaterally corrected mistake, Keli Kim, the IRS Revenue Agent here handling in the Streamlined Submission her first-ever FBAR case, “found” that Mr. and Mrs. Jones each willfully violated the FBAR filing requirements and on that basis recommended that the IRS assess the maximum 50% Willfulness Penalty on the value of their foreign accounts. She made this recommendation based on trumped-up allegations of “concealment” and without considering Mr. Jones' state of mind for his failure to file a FBAR for the 2011 tax year. As will become apparent, Ms. Kim's naked assessment recommendation, wholly and blindly adopted by the IRS, could only have been, and was, based solely on the fact that on their original tax returns, Schedule B, item 7a, the Joneses checked “no” to the question whether they had foreign assets. Ms. Kim ignored entirely the fact that Mrs. Jones had corrected this mistake in the Qualified Amended Returns filed more than two years before anyone from the IRS came into the picture, thereby entirely negating any possibility of a willful failure to reveal foreign property, let alone a willful failure to file an FBAR.

The administrative record is so devoid of evidence supporting the IRS' finding of “willfulness” and its calculations of the penalties, as to render them “arbitrary and capricious” within the meaning of the Administrative Procedures Act, such that they must be set aside. See 5 U.S.C. § 706(2)(A). In sum, the undisputed facts in the administrative record show that the IRS has acted in an “arbitrary and capricious” manner in making the naked assessments at issue, and, under the law, the 50% Willfulness Penalties must therefore be abated in full.

II. STATEMENT OF PERTINENT FACTS

A. Background on the Joneses

Mr. Jones was born in New Zealand in 1919, where he was raised and lived for approximately the first 33 years of his life. (See Statement of Uncontroverted Facts and Conclusions of Law (“SUFCL”) No. 6). Mrs. Jones was born in Canada in 1928, where she was raised and lived for the first approximately 26 years of her life. (SUFCL No. 7). The Joneses met in Canada and after getting married, they moved to New York. In 1954 they moved to California where they have lived ever since. (SUFCL No. 8). The Joneses became United States citizens in 1969. (SUFCL No. 9). In the early years of their marriage, Mr. Jones worked as a woman's dress maker and Mrs. Jones worked as a secretary, until they started a family. (Index of Exhibits (“IOE”) Exs. A, B). Later in their marriage, including during the period at issue, Mr. Jones purchased and renovated a number of rental properties for income and investment, primarily in Glendale, California. (Id.). The Joneses each have a high school education. (SUFCL No. 10). Neither attended college. (Id.) Nor did either of them ever have any formal tax, accounting, financial or legal training. (Id.)

B. The Joneses' Foreign Accounts

While living in the United States, the Joneses maintained several foreign accounts in New Zealand and Canada, which are the subject of this dispute. Some of the foreign accounts were held by the Joneses jointly, and some of the accounts were held by them individually. In total, the Joneses had eleven foreign accounts: three in Canada and eight in New Zealand. (SUFCL Nos. 12-15). Four of the New Zealand accounts were solely in the name of Mr. Jones (the “Jeffrey Accounts”), (id.), and were likely partially funded with an inheritance from Mr. Jones' parents who died in New Zealand over thirty years ago. Three of the accounts (two in Canada and one in New Zealand) were solely in the name of Mrs. Jones (the “Margaret Accounts”). (SUFCL No. 14). The remaining four accounts were jointly held by the Joneses (the “Joint Accounts”). (SUFCL No. 15).

Mr. Jones was a very private person and frugal as it relates to finances. During his lifetime he never informed Mrs. Jones and their children of the existence of the Jeffrey Accounts, let alone how much he saved and was available in his foreign accounts. Mrs. Jones learned of the existence of these accounts for the first time upon his death. (SUFCL No. 16). After Mr. Jones death, the discovery of the Jeffrey Accounts and their high value greatly upset Mrs. Jones. Mrs. Jones thought, as a matter of trust, that Mr. Jones should not have kept the value of such accounts private from her, because the family had tolerated a modest lifestyle during Mr. Jones' lifetime based on the assumption they did not have discretionary funds for extravagances such as vacations.

C. After Mr. Jones' Death, Mrs. Jones Discovers the FBAR Reporting Requirements and Complies with their Tax and Reporting Requirements Without Prompting from the IRS

Upon Mr. Jones' death in 2013, Mrs. Jones, on behalf of the Estate, obtained legal advice beginning in June 2013 for the original purpose of determining how to handle Mr. Jones' estate and probate his new-found New Zealand will. (SUFCL No. 18). As a consequence, Mrs. Jones, individually and as Executor of the Estate, learned for the very first time of the existence of the FBAR and the FBAR reporting requirements. (SUFCL No. 19). On June 26, 2013, Mrs. Jones filed a timely FBAR for the 2012 tax year, which was due on or before June 30, 2013. (SUFCL No. 22).

As a result of learning of her mistakenly missed reporting obligations and without prompting or contact from the IRS, on July 7, 2014, Mrs. Jones filed amended joint U.S. income tax returns, Forms 1040X, for each of the tax years 2011 and 2012, reporting all previously unreported income from all the Joneses' Joint Accounts (the Margaret Accounts, Jeffrey Accounts, and Joint Accounts), paying associated income taxes, and properly checking the “yes” box on Schedule B acknowledging the ownership of foreign accounts. (SUFCL No. 23).

Nearly a year after filing these Qualified Amended Returns and paying the additional taxes, Mrs. Jones learned of a new IRS program for delinquent FBAR reporting. On March 16, 2015, shortly after the program was offered to taxpayers — again without prompting or contact from the IRS — Mrs. Jones entered the IRS's “Streamlined Domestic Offshore Procedures” whereby she (i) submitted amended joint tax returns (that had much earlier been corrected and filed for 2011 and 2012 (2013 was accurate when submitted)); (ii) filed all outstanding FBARs for tax years 2008 through 2013; (iii) submitted a certificate that her failure to timely report was “due to negligence, inadvertence, or mistake or conduct as the result of a good faith misunderstanding of the requirements of the law,” (SUFCL No. 27) and (iv) paid a 5% miscellaneous penalty on the highest balance of both the Margaret Accounts and the Joint Accounts in the total amount of $156,795.26 as the cost of protection against any potential 50% Willfulness Penalties that might have been assessed against her. (SUFCL Nos. 24-26).

Mrs. Jones did not, however, submit a streamlined submission for the Jeffery Accounts. At the time of submission, it was not entirely clear to Mrs. Jones that she could file a certificate of non-willfulness under penalty of perjury for her deceased husband, Mr. Jones, as she could not know or certify his intent or state of mind. (SUFCL No. 29) Also, the IRS instructions provided no guidance on whether an individual could make the certification on behalf of a deceased person for the purpose of entering or being included in the Streamlined Submission, and there was confusion within the IRS as to this point. (SUFCL Nos. 30, 39; IOE Exs. No, O).

Mrs. Jones did, however (as the Executor to Mr. Jones' Estate), previously disclose, on or about June 11, 2014, each of Mr. Jones' foreign accounts (including the Jeffrey Accounts) when she filed the Estate's Form 706, Estate tax return.(SUFCL No. 31).

As plainly stated in the Streamlined Submission, it was always Mrs. Jones' incorrect (but good faith and not unreasonable) understanding of the law that foreign funds would be taxed exclusively in each respective foreign country and there would be U.S. tax obligation only if, and when, such foreign funds were brought to the United States, something which had not happened before the Streamlined Submission was filed. (SUFCL No. 21). Notably, the Joneses' tax preparer, CPA William Burke, never asked whether the Joneses had foreign accounts, even though he knew that they previously lived in Canada. (SUFCL Nos. 48-49). Instead, when Mr. Burke first met with the Joneses and prepared their tax returns for the first time he copied the information he received from the tax return filed by the previous preparer and asked the Joneses if there were any changes. (SUFCL No. 47). Mr. Burke continued to copy over the last year's tax return unless the Joneses told him there was a change. (Id.) Thus, the Joneses had no reason to doubt their good faith misunderstanding.

D. The IRS Engages in an Aggressive Two-Year Audit, Resulting in a $3,411,948 Naked Assessment Against the Joneses

Revenue Agent Keli Kim conducted the Streamlined Submission FBAR examination and income tax audit of the Joneses. (SUFCL No. 33). Ms. Kim joined the IRS in 2010 and began her career with the IRS auditing individual income tax returns, Forms 1040. (SUFCL No. 34). When Ms. Kim started working on audits related to FBARs and foreign accounts, she received only three days of classroom training related to FBARs, foreign entities, foreign issues and international issues. (SUFCL No. 35)2. To date, Ms. Kim has handled only three streamlined submission cases — the first being the Joneses' case. (SUFCL No. 36).

As Ms. Kim began her review of the Streamlined Submission, she essentially ignored Mrs. Jones extensive efforts to correct the Joneses' filing mistakes and make good on their tax obligations, and instead focused solely on the fact Mrs. Jones' Streamlined Submission did not include, and did not pay a 5% penalty on, the Jeffrey Accounts and engaged in an arduous two-year investigation into the Joneses, including a full tax audit. (See SUFCL No. 37). Ms. Kim disagreed with and viewed with suspicion Mrs. Jones' decision to not include the Estate's accounts on the Streamlined Submission. (SUFCL No. 38). Ms. Kim felt that Mrs. Jones should have called the IRS's 1-800 number (id.), even though she admitted it was likely no one there would be able to answer whether Mrs. Jones could certify the “intent” of her deceased husband. Other employees at the IRS told Ms. Kim that this was a “benign foot fault” and the IRS “will allow the surviving taxpayer spouse . . . to perfect her [non-willful] certification” and pay the 5% penalty, unless an independent finding of willfulness was made. (SUFCL No. 39). Rather than advise Mrs. Jones of this option, and despite the input of her colleagues, Ms. Kim continued to proceed with her audit and decision to punish the Joneses to the maximum extent applicable to foreign account holders who willfully do not report their accounts.

Based on Ms. Kim's arbitrary and capricious recommendation which ignored all the conclusive contraindications of bad intent, the IRS “determined” that Mr. Jones willfully failed to file a FBAR for the 2011 tax year and nakedly assessed the Estate a 50% Willfulness Penalty of $1,890,074 based on the June 30, 2012, value in the Jeffrey Accounts. (SUFCL No. 1). The IRS further “found” that Mrs. Jones willfully failed to file FBARs for the 2011 and 2012 tax years (despite the IRS-known fact of her timely filing of a 2012 FBAR) and nakedly assessed Mrs. Jones 50% Willfulness Penalties of $751,685 (2011) and $770,225 (2012) for a total of $1,521,910. (SUFCL Nos. 2-3). In calculating Mr. Jones' 50% Willfulness penalties, the IRS used the maximum values on June 30, 2012 for the Jeffery Accounts. (SUFCL No. 78). In calculating Mrs. Jones' FBAR penalty, the IRS improperly used the maximum values of the Joint Accounts and the Margaret Accounts on June 30, 2013 (the due date of the 2012 FBAR). (SUFCL No. 79).

Ms. Kim's findings and her determinations of willfulness were reviewed by Ms. Kim's manager and an IRS attorney. (SUFCL No. 75). All the “facts” supporting Ms. Kim's willfulness determinations are set forth in the Explanation of Items (“Revenue Agent Report” or “RAR”) attached to 30-Day letters sent to the Estate on July 26, 2018 (the “IRS Agent Determination — Jeffrey Jones”) and to Mrs. Jones on October 22, 2018 (the “IRS Agent Determination — Margaret Jones”). (SUFCL Nos. 76-77). Each IRS Agent Determination constitutes a complete exposition of all the underlying reasons for a willfulness finding and for the calculation of the amount of the penalty assessed. (Id.)

From the unsupported and speculative willfulness conclusions of the inexperienced Agent Kim, the IRS ultimately imposed, in total, over $3.4 million in FBAR 50% Willfulness Penalties — taking half of the value from the Joneses' accounts. Ms. Kim's determinations of the Joneses' alleged willfulness falls far short of any legal requirements and constitute arbitrary and capricious findings which led directly to naked assessments against the Joneses by the IRS which are unfounded and must now be set aside for the following reasons.

1. The IRS Agent Determination — Margaret Jones

In support of her finding that Mrs. Jones acted willfully, Ms. Kim concludes in her Revenue Agent Report that “Mrs. Jones never disclosed to her return preparer of 28 years the fact that she had foreign bank accounts. Mrs. Jones also never disclosed to her return preparer that she had foreign investment income, stating it was none of his business. . . . As a direct result of Mrs. Jones intentionally concealing this information from her return preparer, a tax return was prepared that excluded this relevant information.” (SUFCL No.43). Ms. Kim also relies on statements made by Mrs. Jones during the arduous two-year audit, including a statement that she “must have lied” when she failed to check the appropriate box on her Schedule B and a statement that she never disclosed her foreign accounts to her CPA because it was “none of his business.” (SUFCL No. 44). Not only is this evidence insufficient to support a finding of willfulness, but also the audit revealed that Mrs. Jones did not intend to conceal her foreign financial accounts. In fact, Ms. Kim concludes her RAR by stating, “[t]here is no available evidence that Mrs. Jones knew about FBAR filing requirements.” (SUFCL No. 42).

Ms. Kim claims that she relied on Mrs. Jones' statement to the effect she never disclosed her foreign accounts to her CPA because it was “none of his business.” in making her willfulness determination. (SUFCL No. 44). However, Ms. Kim's reliance on this one out-of-context statement fails to acknowledge the pertinent details of the Joneses' relationship with their CPA, details about which Ms. Kim was fully aware when she made her willfulness determinations, but arbitrarily and capriciously decided to ignore. William Burke, CPA, was the Joneses' tax preparer for over twenty years. (SUFCL No. 46). While Mr. Burke knew that the Joneses had previously lived outside of the United States, he told Ms. Kim he never asked them whether they had foreign accounts and the summary sheet he used to collect the information needed to prepare their taxes did not ask for foreign accounts or income. (SUFCL No. 49). In addition, Mr. Burke told Ms. Kim he was not familiar with the FBAR reporting requirements, has not had any clients reporting foreign bank accounts, does not give advice regarding foreign banking, and does not ask his clients about foreign bank accounts and foreign income. (SUFCL No. 50). Given Ms. Kim's knowledge that Mr. Burke never asked (and did not know to ask) about the Joneses' foreign accounts, and that Mrs. Jones' had a mistaken belief that foreign assets were taxed only upon bringing them to the U.S., Ms. Kim also knew that Mrs. Jones had no reason to know the Joneses should have informed Mr. Burke of their foreign accounts, and that the Joneses took no efforts to conceal those accounts. Ms. Kim admitted she had no evidence that Mrs. Jones ever said, or ever believed, that the communications were none of the “IRS's” business. (SUFCL No. 45).

Ms. Kim's willfulness determination also rests on Mrs. Jones' off the cuff statement to Ms. Kim that she “must have lied” when she failed to check the box on her Schedule B. (SUFCL No. 44). Ms. Kim's RAR conclusion reports that CPA Burke “would go over everything on the return,” (emphasis in original) starkly contradicting her notes from her interview with Mr. Burke which state that while the returns were reviewed with the taxpayers, he “did not go over the [Schedule B] questions with the taxpayers” and did not review the completed Schedule B with the taxpayers. (SUFCL Nos. 51-52). Ms. Kim claims she took the statement by Mrs. Jones as an admission that Mrs. Jones flat-out lied to avoid having to pay foreign taxes, even though she recognized that Mrs. Jones “chuckled” when she made that statement which could be taken as an indication of sarcasm. (SUFCL No. 54). Mrs. Jones has not, however, intentionally liked to conceal or avoid paying foreign taxes. (SUFCL No. 55).

Despite Ms. Kim's express recognition that “[t]here is no available evidence that Mrs. Jones knew about FBAR filing requirements,” she concludes that “the foreign account balances and foreign income were clearly significant enough that the risk of harm for NOT making those disclosures was either known or so obvious that it should have been known.” (SUCFL No. 42). Yet there is not one shred of evidence in Ms. Kim's IRS Agent Determination — Margaret Jones, to support such a damning conclusion.

2. The IRS Agent Determination — Jeffrey Jones

Based on the recommendations of Agent Kim, the IRS determined that Mr. Jones was “[a]t best . . . willfully blind regarding his FBAR filing requirements.” (SUFCL No. 58). The IRS Agent Determination — Jeffrey Jones is based solely on Mr. Jones' “concealment” of his foreign accounts from his tax preparer, his “concealment” of his foreign accounts from the IRS, and “concealment” of his accounts from his family. (SUFCL No. 59). These findings of “concealment” are immediately called into suspicion, given Ms. Kim's lack of access to the deceased Mr. Jones during her investigation.

Similar to the case with Mrs. Jones, Ms. Kim asserts that Mr. Jones concealed foreign accounts from his tax preparer and speculated that Mr. Jones had enough knowledge that he should have initiated a discussion of his foreign accounts with his CPA. (SUFCL No. 60). As discussed above, the Joneses' tax preparer Burke knew that the Joneses previously lived outside of the United States, but did not ask them about foreign accounts or foreign income and had no knowledge as to the FBAR reporting requirements. (SUFCL Nos. 48-50). Ms. Kim claims without support that Mr. Jones “caus[ed] his return preparer to prepare false US tax returns and falsely believe that [Mr. Jones] did not have an FBAR filing requirement,” which returns Mr. Jones signed under penalty of perjury. (SUFCL No. 61). Ms. Kim, however, failed to acknowledge in her findings her undisputed knowledge from the investigation that CPA Burke never asked Jeffrey the Schedule B questions related to foreign accounts and never did review those Schedule B questions, or indeed any part of the tax returns, with Mr. Jones. (SUFCL Nos. 52-53).

Ms. Kim also relies on a statement by attorney Ian Lowish at Morrison and Kent, one of the firms at which Mr. Jones had investments. The attorney merely stated in a letter to the IRS (through the New Zealand Inland Revenue Service) that “it is more than likely that in the early years, at the beginning of the arrangement, Mr. Jones would have been made aware that he should take independent advice to meet his tax obligations in the United States.” (SUFCL No. 63)3. The Morrison Kent account had been open for over thirty years, yet Ms. Kim concludes through that single hearsay and uninformed statement of what may have happened thirty years ago, made by an accountant who would not want to admit his company omitted any statement that might rise to the level of mistake, that “Mr. Jones knew that by not seeking such advice, [Mr. Jones] was responsible for the risks and consequences for his willful blindness.” (SUFCL No. 65). That is clearly an arbitrary and capricious finding.

In addition to Mr. Jones' other acts of alleged “concealment,” Ms. Kim concludes that Mr. Jones attempted to conceal his foreign accounts from the IRS and his family by having bank statements from his New Zealand bank mailed to the home of his property manager, Cecilia Guzman. (SUFCL No. 66). Ms. Kim heavily relies on Mr. Jones' statement to Ms. Guzman that “this [New Zealand communications] is between you and me.” (SUFCL No. 67). Ms. Kim, however, has admitted she understood that Mr. Jones statement to Ms. Guzman was not him asking Ms. Guzman to make sure the IRS does not find out about the New Zealand bank communications, but rather it was nothing more asking Ms. Guzman not to tell his wife or family. (SUFCL No. 68).

Additionally, when making the determination as to Mr. Jones willful failure to file a FBAR for 2011 (which was due on June 30, 2012), Ms. Kim admits she failed to consider Mr. Jones' state of mind and his failing mental health. (SUFCL No. 69). Prior to the 2011 FBAR filing deadline on June 30, 2012, Mr. Jones entered a period of rapidly declining mental and physical health. (SUFCL No. 73). Three months before the filing deadline, at the age of 93, Mr. Jones had a serious fall in his backyard and suffered a head trauma requiring an ambulance ride to the hospital and 14 stitches. (SUFCL No. 74). While willfulness (as defined by Ms. Kim) is “intent and avoidance” (SUFCL No. 71), Ms. Kim appears to transform the 50% FBAR penalty standard from “willfulness” to strict liability. Ms. Kim was of the view that “despite whatever mental capacity may have been and whether it might have been diminished or not, that was not relevant to [her] determination as to whether he formed the intent . . . to avoid filing the FBAR form.” (SUFCL No. 70). Ms. Kim stated that it was the fact Mr. Jones did not file the FBAR in 2012 (not the intention behind that act) that justified the 50% Willfulness Penalty assessed. (SUFCL No. 72). This is breathtakingly arbitrary and capricious, and a stark admission of Ms. Kim's complete and profound lack of understanding of the concept of “willfulness”, even if recast as recklessness or willful blindness.

III. ARGUMENT

A. Legal Standards

“A party may move for summary judgment, identifying each claim or defense — or the part of each claim or defense — on which summary judgment is sought.” Fed. R. Civ. P. 56(a). Summary judgment is appropriate where it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). In opposing a motion for summary judgment, the opposing party may not rely upon denials in its pleadings in attempting to establish the existence of a factual dispute; instead, it is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Fed. R. Civ. P. 56(e); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 11 (1986); First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289; Strong v. France, 474 F.2d 747, 749 (9th Cir. 1973). To establish a genuine issue of material fact, the party opposing a motion for summary judgment “must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'” Matsushita, 475 U.S. at 587.

B. The Requirements to file a Report of Foreign Bank and Financial Accounts (“FBAR”)

The Bank Secrecy Act (“BSA”) requires certain taxpayers to file certain reports or records which “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.” 31 U.S.C. § 5311. The Act requires “each United States person having a financial interest in, or signature or authority over, a bank, securities, or other financial account in a foreign country” to fill out a FBAR. 31 C.F.R. § 1010.350(a); 31 U.S.C. § 5314. A FBAR must be filed for all foreign financial accounts exceeding $10,000.00 during the previous calendar year. 31 C.F.R § 1010.306(c).

During the years 2011 and 2012, the FBAR — TD F 90-224 — was required to be filed with the Department of the Treasury's Financial Crimes Enforcement Network on or before June 30 of each calendar year for any foreign financial accounts maintained during the previous calendar year. Id.5 Separately, if a taxpayer has a foreign financial account, he or she is required to check “yes” on line 7a of Schedule B of their federal tax return. See 31 C.F.R. 1010.350(a); Untied States v. Flume, 390 F. Supp. 3d 847, 853 (S.D. Tex. 2019); see also IOE Ex. T. The IRS has been granted the authority to assess and collect specific civil penalties for the failure to file an FBAR (even though the FBAR is filed with the Department of Treasury, not the IRS). See 31 C.F.R. § 1010.810(g). There is nothing in the governing regulations that allows the IRS to assess and collect those specific penalties for the failure to check Box 7a on Schedule B of a taxpayer's income tax return.

Penalties for the failure to file an FBAR can either be willful or non-willful. 31 U.S.C. § 5321(a)(5). The amount of any civil penalty for a non-willful violation shall not exceed $10,000, and the penalty for a willful violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. Id.

C. The IRS's Willfulness Determination is Reviewed De Novo

“Courts conduct a de novo review of the correctness of assessment without looking 'behind an assessment to evaluate the procedure and evidence used in making the assessment.'” Rubenstein v. United States, 826 F. Supp. 448, 453 (S.D. Fla. 1993) (quoting Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir. 1987)). When an assessment is “without rational foundation” or “arbitrary and erroneous,” the assessment is not even given a rebuttable presumption of correctness. Id.

A determination of “willfulness” in imposing a FBAR penalty is reviewed de novo. United States v. Schwarzbaum, No. 18-cv-81147-BLOOM/Reinhart, 2020 WL 1316232, at *7 (S.D. Fla. March 20, 2020); United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311, at *1 (E.D. Va. Sep. 1, 2020), rev'd on other grounds, 489 Fed. Appx. 665 (4th Cir. 2012); see also United States v. Boyd, No. CV 18-803-MWF (JEMx), 2019 WL 1976472, *2 (N.D. Cal. April 23, 2019) (appeal filed) (“[w]hen reviewing an accountholder's liability for FBAR penalties, courts have reviewed de novo[and] have also reviewed the amount of penalties for abuse of discretion”]). De novo review is appropriate in the FBAR context since 31 U.S.C. § 5321 does not provide for an adjudicatory hearing prior to a penalty assessment. Williams, 2010 WL 3473311, at *1 (citing United States v. Healy Tibbitts Const. Co., 713 F.2d 1469, 1475 (9th Cir. 1983) (stating de novo review is inappropriate where “the statute contemplates a full adjudicatory hearing before the agency”).

D. The IRS Wrongfully Determined that Mr. Jones Acted Willfully

Willfulness is not defined by the BSA or applicable regulations, (Schwarzbaum, 2020 WL 1316232, at *7); however, the Internal Revenue Manual (“IRM”) (dated November 6, 2015) states, “[t]he test for willfulness is whether there was a voluntary, intentional violation of a known legal duty,” which the IRS has the burden of establishing. IRM § 4.26.16.6.5.1(1)-(3)6. Willfulness also extends to willful blindness” where a person “made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.” IRM § 4.26.16.6.5.1(5); United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (stating, “[w]ilfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information” and “can be inferred from a conscious effort to avoid learning about reporting requirements”); United States v. Williams, 489 Fed. Appx. 655, 659 (4th Cir. 2012) (willfulness includes “not only knowing violations of a standard, but reckless ones as well”).

Some courts have held that a taxpayer's signature puts a taxpayer on constructive or inquiry notice of the FBAR requirements. See, e.g., Williams, 489 Fed. Appx. at 659. However, imputing constructive knowledge of the FBAR filing requirements by simply signing a tax return would render the distinction between non-willful and willful violations meaningless. Schwarzbaum, 2020 WL 1316232, at *8; Untied States v. Flume, No. 5:16-CV-73, 2018 WL 4378161, at *7 (S.D. Tex. Aug. 22, 2018). “Because taxpayers are required to sign their tax returns, a violation of the FBAR filing requirements could never be non-willful.” Id. Recognizing that distinction, the IRM states, “[t]he mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, in itself, to establish that the FBAR violation was attributable to willful blindness.” IRM § 4.26.16.6.5.17.

Generally speaking, taxpayers who have been found to have willfully violated the FBAR reporting requirements have been bad actors who appeared to have been hiding assets or lying about foreign assets. See, e.g., United States v. Flume, 390 F. Supp. 3d at 855-57 (stating the taxpayer acted recklessly in light of his disingenuous testimony, financial structure that reflects a sophisticated tax-evasion scheme, knowledge of personal and corporate tax obligations (and how to avoid them) having operated a business in Mexico for three decades, disclosure of only one foreign account on his Schedule B (showing a conscious choice to not disclose Swiss account), and failure to file FBARs until after his foreign bank turned over records to the IRS); United States v. Kelley-Hunger, 281 F. Supp. 3d 121, 124 (D.D.C. 2017) (finding willfulness where taxpayer's previous returns included foreign accounts and taxpayer sent emails to accountant referring to IRS as being “so far behind us . . . and I'll be on my way to Tahiti” with respect to foreign transactions); United States v. Bohanec, 263 F. Supp. 3d 881, 889-90 (C.D. Cal. 2016) (in finding the taxpayers acted recklessly, the court recognized that the defendants were sophisticated business people who sold and shipped cameras around the world, had customers deposit payments into the foreign accounts and made transfers and withdrawals to domestic accounts, and made misrepresentations under penalty of perjury when participating in the Voluntary Disclosure Program).

Because United States v. Schwarzbaum separates out taxpayer conduct before the taxpayer learned of the FBAR obligation from conduct after he learned of it, the case sets forth a compelling basis for this Court to find as a matter of law the Joneses' conduct here is non-willful. In Schwarzbaum, the IRS sought to reduce to judgment a $13,729,591.00 willful FBAR penalty for the tax years 2006 through 2009 resulting from the taxpayer's failure to file a FBAR for 11 Swiss bank accounts, and two Costa Rican accounts. Schwarzbaum, 2020 WL 1316232, at *1, *3.

Schwarzbaum was born in Germany and lived in many different countries, including the United States. Id. at *1. His assets were derived from his father's gifts and he received between $100,000 and $200,000 per year from his father, as well as bank accounts containing significant sums of money. Id. at *1-2. In 2001, Schwarzbaum received a Swiss bank account from his father containing $3 million, which Schwarzbaum kept invested in the same manner his father did — even after his father's death. Id. at *2. In 2001, Schwarzbaum told his CPA that he was living off his father's gifts, and when he told the CPA about the 2001 gift from his father, his CPA told him that there were no reporting requirements since the assets were outside of the United States (although Schwarzbaum did not tell his CPA specifically about his interests in the foreign bank accounts). Id. When Schwarzbaum hired a new CPA, he told the new CPA about the gifts he received from his family abroad, and was told the gifts were not reportable. Id. However, Schwarzbaum did not report his Swiss accounts to his new CPA because there was no U.S. connection. Id. at *3. Additionally, Schwarzbaum never hired anyone to translate or interpret his tax returns (which were prepared by his CPAs) and did not discuss with anyone whether he had to pay taxes on interest earned on foreign accounts. Id. at *2.

In 2006, Schwarzbaum filed his first Schedule B and FBAR, reporting his interest in one (out of two) Costa Rican accounts. Id. at *4. In the following years, Schwarzbaum filed an FBAR in 2007 disclosing only one of his six foreign accounts, and did not file FBARs from 2008 through December, 2011. Id. In assessing a $13.7 million willfulness penalty, the United States presented evidence that Schwarzbaum's FBAR violations were knowing, since he took efforts to prevent foreign banks from disclosing his account information to the IRS by using pseudonyms, by instructing banks not to invest in U.S. securities, by not disclosing his identity, by requesting that they retain his correspondence, and by failing to consult with a U.S. tax professional in response to a letter he received from UBS. Id. at *9.

The court held that Schwarzbaum did not act recklessly or with willful blindness as to the 2006 tax year (the first FBAR penalty by the IRS). Id. The court recognized that Schwarzbaum invested the money in a manner suggested by his father and trusted the bankers to do so, he signed documents where they were marked by the bankers, and opened his accounts using his own name. Id. The court decided that, based on the evidence, Schwarzbaum did not willfully violate the FBAR disclosure regulations. Id. at *10. The court did, however, find that once Schwarzbaum knew of the FBAR requirements in 2006, his failure to file each consecutive year may properly be viewed as willful. Id.

Schwarzbaum testified that he always used CPAs to prepare and file his tax returns and relied on their advice, and in finding Schwarzbaum's conduct non-willful with respect to the earliest FBAR obligation in 2006, the court found the Supreme Court's reasoning in United States v. Boyle, 469 U.S. 241 (1985) persuasive. Id. at *9. In Boyle, which involved the question of whether relying on an attorney for the failure to timely file a tax return can constitute “reasonable cause,” the Supreme Court stated that “[c]ourts have frequently held that 'reasonable cause' is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken.” Boyle, 469 U.S. at 250 (collecting cases).

1. Mr. Jones' Actions Do Not Rise to the Level of Willfulness, Recklessness, or Willful Blindness

Here, the conduct of Mr. Jones cannot rise to the level of willfulness, recklessness or willful blindness. Unlike many of the bad actors who have engaged in willful violations of the FBAR reporting requirements, Mr. Jones has not engaged in any conduct that shows his willful intent to hide his foreign accounts or has been willfully ignorant of the FBAR reporting requirements.

While Mr. Jones was frugal with money, and wished to keep the value of his accounts from his family, there is no evidence that Mr. Jones was trying to keep those accounts from the IRS. Mr. Jones did not engage in complicated tax structures or other means designed to shelter assets to avoid paying taxes; instead, Mr. Jones' accounts were kept in his name, in the countries in which he lived.

There is not a single piece of admissible evidence to show that Mr. Jones ever had any knowledge of his obligation to report the existence of his foreign accounts. Mr. Jones reasonably relied on the guidance of his tax preparer of over 25 years, Mr. Burke, to ensure his compliance with his tax and disclosure requirements. For over 25 years of preparing the Joneses' taxes, Mr. Burke never asked (and never knew to ask) about the Jones' foreign accounts, despite knowing that the Joneses had lived outside the United States. (SUFCL Nos. 47-53). In fact, Mr. Burke did not even know what an FBAR was and had no knowledge of the FBAR reporting requirements. (SUFCL No. 50). Although Mr. Jones signed his tax returns, he never reviewed these in detail with Mr. Burke and Mr. Burke never went over the Schedule B questions with Mr. Jones. (SUFCL Nos. 52-53). As the IRS has stated publically and in its own manuals, the mere checking of the “no” box on a Schedule B is insufficient to rise to the level of willfulness. (SUFCL No. 28; IRM § 4.26.16.6.5.1).

Given Mr. Jones' advanced age and declining mental health, he did not have the mental capacity to willfully violate the FBAR reporting requirements for the 2011 tax year. Two months prior to the 2011 FBAR filing date on June 30, 2012, Mr. Jones suffered a serious fall in his backyard and suffered a head trauma. Mr. Jones required an ambulance ride to the hospital and 14 stiches. (SUFCL Nos. 73-74). This incident led to a period of rapidly declining mental and physical health and on June 30, 2012, Mr. Jones did not make the willful or intentional decision not to file a FBAR.

The undisputed facts show a complete lack of evidence showing that Mr. Jones acted willfully, including the lack of any statement attributable to Mr. Jones admitting willfulness, or from which willfulness could reasonably be inferred. Mr. Jones' failure to report his foreign accounts was due to nothing more than negligence or inadvertence resulting from a twenty-five year relationship with an incompetent tax preparer.

2. Mrs. Jones' Filing of Qualified Amended Returns for the Joneses Further Precludes a Finding of Willfulness

Notably, neither the Internal Revenue Code nor the Treasury Regulations impose an affirmative statutory duty to file an amended income tax return, as long as the original tax return reflects a good faith effort to comply with the law at the time the tax return was originally filed. See Broadhead v. Comm'r of Internal Revenue, T.C. Memo. 1955-328, 1955 WL 769 (U.S.T.C. 1955). The Treasury Regulations merely state that a taxpayer “should” amend a tax return within the period of limitation to correct prior errors. 26 C.F.R. 1.451-1(a).

While not expressly required, the Regulations allow for a taxpayer to file a QAR to correct an underpayment in taxes. See 26 C.F.R. § 1.6664-2. A qualified amended return “may have the effect of preventing or reducing liability for the accuracy-related penalty by substituting the tax shown on the amended return for the tax shown on the return as originally filed.” Bergmann v. Comm'r of Internal Revenue, T.C. Memo. 2009-289, 2009 WL 4861128, at *2 (U.S.T.C. 2009) (citing 26 C.F.R. § 1.6664-2(c)(2)). A QAR applies to an amended return filed after the due date for the taxable year at issue, but before the taxpayer is contacted by the IRS concerning any examination. 26 C.F.R. § 1.6664-2(c)(3).

Upon learning of the FBAR reporting requirements after Mr. Jones' death, and the requirements to report all interest income on foreign investments, Mrs. Jones filed qualified amended returns for 2011 and 2012. The amended returns properly acknowledged the Joneses' foreign accounts and marked the “yes” box on Schedule B as to ownership of foreign accounts. In filing the amended returns, Mrs. Jones paid approximately $103,000 in taxes on the interest income on the Joneses' foreign investments. (SUFCL No. 32). By filing her qualified amended returns, Mrs. Jones made a good faith effort to comply with Mr. and Mrs. Jones' tax obligations and in exchange, the Regulations provided them with immunity from accuracy-related penalties.

Mrs. Jones took every step — above and beyond what she was expressly required to do by law — to comply with their tax obligations. The additional steps taken by Mrs. Jones in filing her qualified amended returns were not, however, considered by the IRS in making its willfulness assessment against Mr. and Mrs. Jones. (SUFCL No. 56). In fact, despite the qualified immunity provided by filing amended returns, Ms. Kim was amazingly not even aware of QARs or the protection they offer to taxpayers. (SUFCL No. 57).

Additionally, after his death, Mr. Jones' Estate filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return for the 2013 tax year. In this submittal, the Estate identified that Mr. Jones had “an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account,” and listed each account. (SUFCL No. 31). Although Ms. Jones did not include Mr. Jones' individual accounts in her Streamlined Submission, these accounts were made known to the IRS and not intentionally concealed in any way. Accordingly, there is no evidence to support a finding that Mr. Jones willfully failed to comply with the FBAR requirements, or otherwise hide his accounts from the IRS during Ms. Jones' Streamlined Submission.

E. The IRS Acted Arbitrarily and Capriciously in Setting the Maximum Penalty and its Willfulness Determination Should be Set Aside

Under the Administrative Procedure Act, a court must set aside any agency decision that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” “without observance of procedure required by law,” or “unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.” 5 U.S.C. § 706(2). While the scope of review is “narrow and a court is not to substitute its judgment for that of the agency,” the agency is still required to “examine the relevant data and articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.'” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962). When reviewing an agency's actions under the APA, a court must assess “whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.” Id. (quoting Bowman Transp. Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285 (1974). “That task involves examining the reasons for agency decisions — or, as the case may be, the absence of such reasons.” Judulang v. Holder, 565 U.S. 42, 53 (2011). A court may set aside an agency's action which is arbitrary or an abuse of discretion if the “action was clearly wrong.” Hughes Air Corp. v. Civil Aeronautics Bd., 482 F.2d 143, 145-46 (9th Cir. 1973).

1. The IRS's Willfulness Determinations are Arbitrary and Capricious and Should be Set Aside

Under the Administrative Procedures Act, the Court can also set aside the IRS's willfulness determination without having to independently determine whether the Joneses' conduct rises to the level of “willfulness.” The Court should set aside the IRS's decision since it was not based on a consideration of all the relevant factors and evidences a clear error of judgment on the basis of the information the IRS had. The facts before the IRS at the time of its willfulness determination show that its conclusion was “clearly wrong.”

The IRS embarked on a lengthy investigation into the Joneses initially based on the fact that Mrs. Jones felt compelled not to include Mr. Jones' accounts in her Streamlined Submission for fear of speaking out of turn for her deceased spouse. Ms. Kim, however, viewed Mrs. Jones' claims with skepticism and began an arduous, two-year investigation into the Joneses, which included a full tax audit. While others at the IRS were of the opinion that Mrs. Jones may amend her Streamlined Submission to include these accounts and pay the required 5% penalty — thus ending the investigation into the Joneses' potential willfulness — Ms. Kim instead chose to continue her investigation and find that the Joneses acted willfully. The sole basis of the IRS's willfulness determination, and corresponding 50% penalties, were “facts” that were conclusively rebutted within the IRS's own record as explained above. Additionally, Ms. Kim did not consider Mr. Jones' state of mind and deteriorating mental health when determining that his failure to file a FBAR for the 2011 tax year was willful. An inquiry into whether a taxpayer's actions rise to a level of willfulness specifically requires an inquiry into their mental state. Accordingly, and based on all the evidence and argument cited above, the findings by the IRS are arbitrary and capricious in that they are not supported by the evidence and therefore must be set aside by the Court.

IV. CONCLUSION

For the reasons stated above, Plaintiff respectfully requests that the Court grant its Motion for Summary Judgment in its entirety and enter judgment in favor of Plaintiff.

FOOTNOTES

1If a taxpayer files a “Qualified Amended Return” before being contacted by the IRS concerning an investigation into the original return, the amended return is generally treated as the original thereby reducing or eliminating potential accuracy-related penalties (see 26 C.F.R. § 1.6664-2(c)(2)). See Section III(D)(2), infra.

2Ms. Kim's lack of training is further evidenced by her inability to state what a FBAR stands for, and her difficulty in defining willfulness, recklessness and willful blindness. (IOE Ex. F, at 8:21-9:2, 83:20-87:12).

3Plaintiff recognizes that this statement is part of the administrative record and was a basis of Ms. Kim's determination. However, the statement is not admissible and would not be relevant to a de novo review of a willfulness determination. The statement to the New Zealand Inland Revenue Service constitutes inadmissible hearsay, is speculative, and unduly prejudicial. See Fed. R. Evid. 802, 602, and 403.

4The FBAR is now renumbered as FinCEN Form 114.

5The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the FBAR filing date to April 15, with an automatic six-month extension to October 15. See Public Law 114-41, § 2006(b)(11).

6Plaintiff recognizes that “[t]he Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers” and that the provisions of the Internal Revenue Manual “are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law.” Fargo v. Comm'r of Internal Revenue, 447 F.3d 706, 712 (9th Cir. 2006). While the IRM is not codified law, it can serve as guidance in interpreting the regulations. See, e.g., United States v. Horowitz, 361 F. Supp. 3d 511, 515 (D. Md. 2019) (stating “the manual has been used, on a limited basis, to provide guidance in interpreting terms in regulations”); United States v. Boyle, 469 U.S. 241, 243 n. 1 (citing IRM for what constitutes “reasonable cause” in filing a late return); Keller v. Comm'r of Internal Revenue, 568 F.3d 710, 721 (9th Cir. 2009) (IRS can rely on IRM as guidance).

7The IRS has made similar statements to the public. The Streamlined Filing Compliance Procedures Frequently Asked Questions section of the IRS's website addresses “common situations” and states, “[w]e realize that many taxpayers failed to acknowledge their financial interest in . . . foreign financial accounts on Form 1040, Schedule B. If you . . . inadvertently checked 'no' on Schedule B, line 7a, simply provide your explanation.” (SUFCL No. 28; IOE Ex. M).

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    Margaret J. Jones et al. v. United States
  • Court
    United States District Court for the Central District of California
  • Docket
    No. 2:19-cv-00173
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-13532
  • Tax Analysts Electronic Citation
    2020 TNTI 69-16
    2020 TNTG 69-25
    2020 TNTF 69-19
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