Government Argues Court Review Is Limited in FBAR Penalty Case

UNITED STATES OF AMERICA,
Plaintiff,
v.
SAID RUM,
Defendant.

IN THE UNITED STATES DISTRICT COURT FOR THE
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

UNITED STATES' SUPPLEMENTAL AUTHORITY
IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT

The United States submits this supplemental authority in response to the Court's invitation at oral argument to submit authority regarding the information this Court may review in determining whether the Internal Revenue Service was arbitrary and capricious in setting the amount of the FBAR penalty assessed against the defendant, Said Rum, for his failure to disclose his foreign bank account.

Although this Court determines de novo whether Mr. Rum is liable for the FBAR penalty that the IRS has assessed against him, it reviews the amount of the penalty merely to determine whether it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A). (See discussion at Doc. 31 at 4, 14-15.) “In applying that standard, the focal point for judicial review should be the administrative record already in existence, not some new record made initially in the reviewing court.” Camp v. Pitts, 411 U.S. 138, 142 (1973); see also Preserve Endangered Areas of Cobb's History, Inc. v. U.S. Army Corps of Engineers, 87 F.3d 1242, 1246 (11th Cir. 1996) (“The focal point for judicial review of an administrative agency's action should be the administrative record.”).

The administrative record is limited to items considered by the agency before it took the final action in question. See Preserve Endangered Areas of Cobb's History, 87 F.3d at 1246-47 n.2 (observing that there is “nothing wrong with an agency compiling and organizing the complete administrative record after litigation has begun from all the files of agency staff involved in the agency action, as long as that record only contains documents considered by the staff prior to the agency action”) (emphasis added). As a result, the Court may not consider events that occurred after the IRS made its final determination of Mr. Rum's FBAR penalty amount, such as the later settlement of his income-tax-related civil fraud penalty in Tax Court, in evaluating whether the IRS was arbitrary or capricious in setting the amount of the FBAR penalty.

Indeed, that principle of administrative review supports the United States' interpretation of the mitigation factor that Mr. Rum argues should have been applied in his favor. In addition to three other factors noted in the Internal Revenue Manual, a person “may be subject to less than the maximum FBAR penalty depending on the amounts in the person's accounts,” IRM 4.26.16.4.6.1(1) (July 1, 2008) at ADM003629 (available at Doc. 31-21 at 20) (emphasis added), if the “IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account,” IRM Exhibit 4.26.16-2 (July 1, 2008) at ADM003636 (available at Doc. 31-21 at 27) (emphasis added). Mr. Rum wrongly argues that that factor should apply to him because, after the IRS determined the amount of his FBAR penalty, he later settled a related income tax liability in Tax Court with no civil fraud penalty. But the plain language of the IRM provision speaks in terms of whether the IRS had determined a civil Court later determined (or in this case oversaw the settlement of) a civil fraud penalty.¹ This plain-language reading of the IRM provision synchronizes with the above principle that the administrative record is limited to administrative activity prior to the decision. Both support ignoring the later actions of the Tax Court here.

In any event, even if Mr. Rum's argument about the meaning of this mitigation factor were correct, he still would not be entitled to a smaller penalty. As emphasized above, the IRM provision in question uses the permissive “may,” and does not say that a person shall be entitled to a smaller penalty if all the mitigation factors apply. Further, the IRM provides that a person “may be subject to less than the maximum FBAR penalty depending on the amounts in the person's accounts” if the mitigation factors are met. IRM 4.26.16.4.6.1(1) (July 1, 2008) at ADM003629 (available at Doc. 31-21 at 20) (emphasis added). For a person like Mr. Rum, whose account exceeded $1 million, his violation is classified as Level IV under the IRM and thus presumptively carries the maximum statutory penalty, even if all the mitigation factors applied. See IRM 4.26.16.4.6.3(3)(d) (July 1, 2008) at ADM003631 (available at Doc. 31-21 at 22); IRM Ex. 4.26.16-2 (July 1, 2008) at ADM003637 (available at Doc. 31-21 at 28). Mr. Rum's arguments notwithstanding, the IRS's decision to impose the statutory maximum FBAR penalty against him (for the one year that the IRS chose to impose any penalty) was consistent with the IRS's internal guidelines as expressed in the IRM. In any event, and as described in the United States' motion for summary judgment (Doc. 31 at 15), the IRM lacks the force of law and does not convey substantive rights upon taxpayers to challenge any alleged failures of the IRS to follow its guidelines.

This case does not present one of the extremely limited circumstances in which a court might look at material outside the administrative record. The Eleventh Circuit has observed that “[t]he Ninth Circuit has specified that a court may go beyond the administrative record only where: 1) an agency's failure to explain its action effectively frustrates judicial review; 2) it appears that the agency relied on materials not included in the record; 3) technical terms or complex subjects need to be explained; or 4) there is a strong showing of agency bad faith or improper behavior.” Preserve Endangered Areas of Cobb's History, 87 F.3d at 1246 n.1 (citing Animal Def. Council v. Hodel, 840 F.2d 1432, 1436-37 (9th Cir. 1988), amended at 867 F.2d 1244 (9th Cir. 1989)). None of those limited situations apply here. In this case, review is properly limited to the administrative record that was before the agency.²

Finally, the arbitrary and capricious standard “is exceedingly deferential.” Fund for Animals, Inc. v. Rice, 85 F.3d 535, 541 (11th Cir. 1996). A reviewing court may not overrule the agency's determination simply because the court would have reached a different result. See id. at 542 (noting that “[a]dministrative decisions should be set aside in this context . . . only for substantial procedural or substantive reasons as mandated by statute, . . . not simply because the court is unhappy with the result reached.”) (alterations in original).

WHEREFORE, the United States requests that the Court enter summary judgment in its favor.

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

By: Mary Apostolakos Hervey
Laura M. Conner
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 14198
Ben Franklin Station
Washington, D.C. 20044
Telephone: (202) 514-6484
Facsimile: (202) 514-9868
Mary.Apostolakos.Hervey@usdoj.gov
Laura.M.Conner@usdoj.gov