Government Urges Federal Circuit to Affirm FBAR Penalty Decision

ALICE KIMBLE,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES COURT OF FEDERAL CLAIMS
No. 1:17-cv-421; JUDGE SUSAN G. BRADEN

BRIEF FOR THE APPELLEE

RICHARD E. ZUCKERMAN
Principal Deputy
Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG (202) 514-3361
DEBORAH K. SNYDER (202) 305-1680
GEOFFREY J. KLIMAS (202) 307-6346
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

July 10, 2019

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TABLE OF CONTENTS

Table of authorities

Statement of related cases

Glossary

Jurisdictional statement

Statement of the issues

Statement of the case

Summary of argument

Argument

Conclusion

Certificate of service

Certificate of compliance

TABLE OF AUTHORITIES

Cases:

Aerolineas Argentinas v. United States, 77 F.3d 1564 (Fed. Cir. 1996)

Altera Corp. & Subsidiaries v. Commissioner, ___ F.3d ___, 2019 WL 2400999 (9th Cir. June 7, 2019)

Austin v. United States, 509 U.S. 602 (1993)

Baird v. United States, 285 F. App'x 746 (Fed. Cir. 2008)

Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997)

Beard v. General Servs. Admin., 801 F.2d 1318 (Fed. Cir. 1986)

Bedrosian v. United States, 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017)

Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018)

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

Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257 (1989)

Matter of Carlson, 126 F.3d 915 (7th Cir. 1997)

Casa de Cambio Comdiv. S.A. de C.V. v. United States, 91 F.3d 1356 (Fed. Cir. 2002)59-60

Collins v. SEC, 736 F.3d 521 (D.C. Cir. 2013)

Consol. Edison Co. of N.Y. v. United States, 221 F.3d 364 (2d Cir. 2000)

Crawford v. United States Department of the Treasury, 2015 WL 5697552 (S.D. Ohio Sept. 29, 2015)

Cumberland v. Department of Agric., 537 F.2d 959 (7th Cir. 1976)

Dewees v. United States, 272 F. Supp. 3d 96 (D.D.C. 2017), aff'd, 767 F. App'x 4 (D.C. Cir. 2019)

Estate of Duncan v. Commissioner, 890 F.3d 192 (5th Cir. 2018)

Elec. Privacy Info. Ctr. v. IRS, 910 F.3d 1232 (D.C. Cir. 2018)

Farrell v. United States, 313 F.3d 1214 (9th Cir. 2002)

Garner v. U.S. Dep't of Labor, 221 F.3d 822 (5th Cir. 2000)

Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984)

Gonzales v. Oregon, 546 U.S. 243 (2006)

Greer v. Commissioner, 595 F.3d 338 (6th Cir. 2010)

Helm v. Kansas, 656 F.3d 1277 (10th Cir. 2011)

Helvering v. Mitchell, 303 U.S. 391 (1938)

Hollmer v. Harari, 681 F.3d 1351 (Fed. Cir. 2012)

Hudson v. United States, 522 U.S. 93 (1997)

Hyatt v. U.S. Patent & Trademark Office, 797 F.3d 1374 (Fed. Cir. 2015)

Japanese Found. for Cancer Research v. Lee, 773 F.3d 1300 (Fed. Cir. 2014)

Jardin De Las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127 (1st Cir. 2014)

Jarnagin v. United States, 2017 WL 5897808 (Ct. Cl. Nov. 30, 2017)

Kelly v. U.S. EPA, 203 F.3d 519 (7th Cir. 2000)

Kitt v. United States, 277 F.3d 1330 (Fed. Cir. 2002)

Knochelmann v. Commissioner, 455 F. App'x 536 (6th Cir. 2011)

Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374 (1995)

Little v. Commissioner, 106 F.3d 1445 (9th Cir. 1997)

Louis v. Commissioner, 170 F.3d 1232 (9th Cir. 1999) 

McNichols v. Commissioner, 13 F.3d 432 (1st Cir. 1993)

Moore v. United States, 2015 WL 1510007 (W.D. Wash. Apr. 1, 2015)

National Ass'n of Home Builders v. Defenders of Wildlife, 551 U.S. 644 (2007)

National Treas. Employees Union v. Devine, 733 F.2d 114 (D.C. Cir. 1984)

Ninestar Tech. Co., Ltd. v. Int'l Trade Comm'n, 667 F.3d 1373 (Fed. Cir. 2012)

Norman v. United States, 138 Fed. Cl. 189 (2018), appeal docketed, No. 18-2408 (Fed. Cir.)

One Lot Emerald Cut Stones & One Ring v. United States, 409 U.S. 232 (1972)

Pharaon v. Board of Governors of Fed. Reserve Sys., 135 F.3d 148 (D.C. Cir. 1998)

Premier Office Complex of Parma, LLC v. United States, 916 F.3d 1006 (Fed. Cir. 2019)

Qwest Corp. v. Minn. Pub. Utils. Comm'n, 427 F.3d 1061 (8th Cir. 2005)

R&W Flammann GmbH v. United States, 339 F.3d 1320 (Fed. Cir. 2003)

Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007)

Scofield v. Lewis, 251 F.2d 128 (5th Cir. 1958)

Southern Comfort Builders, Inc. v. United States, 67 Fed. Cl. 124 (2005)

Thomas v. Commissioner, 62 F.3d 97 (4th Cir. 1995)

Timbs v. Indiana, 139 S. Ct. 682 (2019)

Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003)

United Dominion Indus., Inc. v. United States, 532 U.S. 822 (2001)

United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055 (9th Cir. 2014)

United States v. $134,750 U.S. Currency, 535 F. App'x 232 (4th Cir. 2013)

United States v. Abair, 746 F.3d 260 (7th Cir. 2014)

United States v. Bajakajian, 524 U.S. 321 (1998)

United States v. Boyd, 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), appeal docketed, No. 19-55585 (9th Cir.)

United States v. Bussell, 699 F. App'x 695 (9th Cir. 2017), cert. denied 138 S. Ct. 1697 (2018)

United States v. Chaplin's, Inc.,646 F.3d 846 (11th Cir. 2011)

United States v. Cheeseman, 600 F.3d 270 (3d Cir. 2010)

United States v. Cohen, 2018 WL 6318837 (C.D. Cal. Oct. 23, 2018)

United States v. Colliot, 2018 WL 2271381 (W.D. Tex. May 16, 2018)

United States v. Dadurian, 2019 WL 2577921 (S.D. Fla. June 24, 2019)

United States v. Estate of Schoenfeld (“Schoenfeld I”), 344 F. Supp. 3d 1354 (M.D. Fla. 2018)

United States v. Garrity (“Garrity I”), 304 F. Supp. 3d 267 (D. Conn. 2018), appeal docketed, No. 19-1145 (2d Cir.)

United States v. Garrity (“Garrity II”), 2019 WL 1004584 (D. Conn. Feb. 28, 2019), appeal docketed, No. 19-1145 (2d Cir.)

United States v. Horowitz, 361 F. Supp. 3d 511 (D. Md. 2019), appeal docketed, No. 19-1280 (4th Cir.)

United States v. Ill. Cent. R.R., 303 U.S. 239 (1938)

United States v. Mackby, 339 F.3d 1013 (9th Cir. 2003)

United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)

United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29 (1963)

United States v. One Parcel Property Located at 427 and 429 Hall Street, 74 F.3d 1165 (11th Cir. 1996)

United States v. Ortiz-Carrasco, 863 F.3d 1 (1st Cir. 2017)

United States v. Park, 2019 WL 2248544 (N.D. Ill. May 24, 2019)

United States v. Poole, 640 F.3d 114 (4th Cir. 2011)

United States v. Schoenfeld (“Schoenfeld II”), 2019 WL 2603341 (M.D. Fla. June 25, 2019)

United States v. Sperrazza, 804 F.3d 1113 (11th Cir. 2015)

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

United States v. Viloski, 814 F.3d 104 (2d Cir. 2016)

United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018)

United States v. Williams, 489 F. App'x 655 (4th Cir. 2012)

United States v. Williams, 2014 WL 3746497 (E.D. Va. June 26, 2014)

In re Watts, 354 F.3d 1362 (Fed. Cir. 2004)

In re Wyly, 552 B.R. 338 (Bankr. N.D. Tex. 2016), appeal docketed, No. 16-11604 (5th Cir.)

Statutes:

Internal Revenue Code (26 U.S.C.):

28 U.S.C.:

31 U.S.C.:

American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004)

Anti-Drug Abuse Act of 1986, Pub. L. No. 99-570, § 1357, 100 Stat. 3207 (1986)

Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)

Miscellaneous:

31 C.F.R.:

51 Fed. Reg. 30233-01 (Aug. 25, 1986)

52 Fed. Reg. 11436 (Apr. 8, 1987)

73 Fed. Reg. 66414-01 (Nov. 7, 2008)

75 Fed. Reg. 8844-01 (Feb. 26, 2010)

75 Fed. Reg. 65806-01 (Oct. 26, 2010)

81 Fed. Reg. 42503-01 (June 30, 2016)

82 Fed. Reg. 10434-01 (Feb. 10, 2017)

Br. for the Appellee, United States v. Bussell (9th Cir. No. 16-55272), 2016 WL 7046939, at *8 (Dec. 2016)

Fed. R. App. P. 4(a)(1)(B)

Fed. R. Evid. 408

H.R. Conf. Rep. No. 108-755 (2004), reprinted in 2004 U.S.C.C.A.N. 1341

H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394

Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05

Memorandum from Deputy Commissioner for Services and Enforcement at 1-2 (Mar. 23, 2009), available at https://www.irs.gov/pub/newsroom/memorandum_authorizing_penalty_framework.pdf 

OMB, Memorandum for the Heads of Executive Departments and Agencies (Feb. 24, 2016), available at http://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2016/m-16-06.pdf 

S. Rep. No. 108-192 (2003)

U.S. Constitution, Fifth Amendment

U.S. Constitution, Eighth Amendment

U.S. Dep't of the Treasury, A Report to Congress 6 (Apr. 26, 2002), available at https://www.treasury.gov/press-center/press-releases/Documents/fbar.pdf 

STATEMENT OF RELATED CASES

No prior appeal from this action has been before this Court or any other appellate court.

This Court's decision on appeal will be directly affected by Mindy P. Norman v. United States, No. 18-2408, which is pending before this Court.

GLOSSARY

Acronym	Definition
Appx	Joint Appendix
Br.	Appellant Alice Kimble's opening brief on appeal
BSA	Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)
Dkt.	Docket entry in the Court of Federal Claims
FBAR	Report of Foreign Bank and Financial Accounts
FinCEN	Financial Crimes Enforcement Network
IRS	Internal Revenue Service
OVDP	Offshore Voluntary Disclosure Program
Secretary	Secretary of the Treasury
UBS	Union Bank of Switzerland

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JURISDICTIONAL STATEMENT

Appellant Alice Kimble filed a complaint, alleging that she was entitled to a refund of a penalty that she paid after the Internal Revenue Service (“IRS”) determined that she had willfully failed to file a Report of Foreign Bank and Financial Accounts (“FBAR”) reporting her ownership of a foreign bank account for the 2007 calendar year. (Appx43-50.) The Court of Federal Claims had jurisdiction over the complaint pursuant to 28 U.S.C. § 1491(a)(1).

On December 28, 2018, the Court of Federal Claims entered a final judgment in favor of the United States. (Appx36.) Kimble filed a timely notice of appeal on February 19, 2019. (28 U.S.C. § 2522; Fed. R. App. P. 4(a)(1)(B); Appx1181.) This Court has jurisdiction under 28 U.S.C. § 1295(a)(3).

STATEMENT OF THE ISSUES

1. Whether the Court of Federal Claims correctly held that Kimble willfully failed to file an FBAR for 2007.

2. Whether the Court of Federal Claims correctly held that the IRS did not abuse its discretion by imposing a penalty of approximately $680,000, representing 50 percent of the balance held in the Swiss bank account for one year, where Kimble failed to report the account for approximately 30 years.

3. Whether Congress's 2004 amendment to 31 U.S.C. § 5321(a)(5)(C), which increased the maximum civil penalty for willful FBAR violations to the greater of $100,000 or 50 percent of the value of the undisclosed account, supersedes a prior regulation stating a different maximum penalty.

4. Whether Kimble's Eighth Amendment theory should be rejected because she failed to plead it in her complaint and, in any event, because the penalty at issue is not an excessive fine.

STATEMENT OF THE CASE

A. Overview

In 2007, as in many preceding years, Kimble owned two foreign bank accounts with substantial balances that she was required, but failed, to report to the Government on FBARs. The IRS determined that Kimble's failure to file FBARs reporting the accounts was willful and assessed penalties against her, calculated as a percentage of the balance held in each account. In this action, Kimble challenges the penalty assessed against her for the larger account, which was located at Union Bank of Switzerland (“UBS”).

B. The FBAR

In the Bank Secrecy Act (“BSA”), Pub. L. No. 91-508, 84 Stat. 1114 (1970), Congress confronted the “serious and widespread use,” for the “purpose of violating American law,” of “foreign financial facilities located in” jurisdictions that provided secrecy to account holders. H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397. To combat the use of such secret accounts, Congress required U.S. persons who have relationships with foreign financial agencies to file the FBAR. See 31 U.S.C. § 5314(a). This annual reporting requirement applies to, inter alia, all U.S. citizens who have an interest in foreign financial accounts with an aggregate value of more than $10,000. 31 C.F.R. §1010.306(c). The FBAR is not a tax form, and it is not filed with a tax return. For 2007, the deadline for filing the FBAR was June 30, 2008.

Congress has also given the Secretary of the Treasury (“Secretary”) the authority to impose “a civil money penalty on any person” who fails to file a required FBAR. 31 U.S.C. § 5321(a)(5)(A). From 1986 until 2004, the Secretary could impose penalties only on “any person who willfully violates” the FBAR requirement. Id. §5321(a)(5)(A) (2003); see Anti-Drug Abuse Act of 1986, Pub. L. No. 99-570, § 1357, 100 Stat. 3207 (1986). And the maximum penalty for such willful violations was “the greater of” $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(B)(ii) (2003). In 1987, the Treasury Department issued a regulation reflecting that statutory maximum penalty. 31 C.F.R. § 103.47(g)(2) (1987), renumbered as 31 C.F.R. §103.57(g)(2) (1999), renumbered as 31 C.F.R. § 1010.820(g) (2010).

In 2004, Congress amended the civil penalties for the failure to file an FBAR. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). The amended penalties cover all such failures, whether willful or not. If a taxpayer does not act willfully, the penalty is capped at $10,000. 31 U.S.C. § 5321(a)(5)(B). For willful violations, however, Congress provided that “the maximum penalty * * * shall be increased to the greater of” $100,000 or 50 percent of “the balance in the account at the time of the violation.” Id. §5321(a)(5)(C) & (D)(ii). Congress made this change in response to a report from the Secretary (see H.R. Conf. Rep. No. 108-755, at 615 (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1667) estimating that only about 20 percent of taxpayers required to file an FBAR actually did so, and that 800,000 individuals each year failed to comply with the requirement (U.S. Dep't of the Treasury, A Report to Congress 6 (Apr. 26, 2002), available at https://www.treasury.gov/press-center/ press-releases/Documents/fbar.pdf). Congress also determined that improved FBAR compliance “is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams.” S. Rep. No. 108-192, at 108 (2003).

The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of the Treasury, has “[o]verall authority for enforcement and compliance” of the FBAR requirement. 31 C.F.R. §1010.810(a). It has, however, delegated examination and penalty authority to the IRS. (I.R.M. 4.26.16.2.2(4); Appx490.)

C. Kimble's ownership of a Swiss bank account at UBS

Kimble is a U.S. citizen who was born in New York in 1951. (Appx56, Appx549.) Her parents also were both born in the United States. (Appx57.) No later than 1979, Kimble's father, Harold Green, opened a Swiss bank account at UBS, which he jointly owned with Kimble's mother. (Appx58.) Also no later than 1979, Green added Kimble to the account as an additional owner. (Id.)

According to Kimble, Green instructed her to keep the account secret from everyone, including the federal government. (Appx384.) Green's stated reason for secrecy was to keep the funds available in case the family needed to escape the United States to avoid religious persecution by the federal government.¹ (Appx360.)

Kimble married in 1983, and Green informed Kimble's husband of the account. (Appx57-58, Appx360-361.) Just as Green had instructed Kimble to do, Green instructed Kimble's husband to keep the account secret from everyone, including the federal government. (Appx384.) However, Kimble's husband was never added to the account as an additional owner. (Appx401.)

Green died in 1997. (Appx57.) At that time, Kimble became not merely a joint owner of the account, but “the one in charge of” it. (Appx362.) In 1998 and again in 2005, Kimble signed documents electing to have the account maintained as a numbered account, i.e., an account associated with a 12-digit number rather than her name and address, and directing the bank to hold the periodic statements associated with the account, rather than mailing them to her. (Appx58-59, Appx116, Appx124, Appx366.) She did so because she “wanted the account to be totally secret.” (Appx366.) Kimble also informed her teenage son of the account and instructed him to keep the account secret from everyone, including the federal government. (Appx58, Appx384.)

Kimble had in-person meetings with a UBS account representative in New York at least once every one to two years to discuss the performance of investments in the account. (Appx59, Appx362-364.) At least once, Kimble also travelled to Switzerland and met with an account representative there. (Appx59, Appx364.)

Kimble's husband, a high-yield bond portfolio analyst, provided her with advice regarding the investments in the account, both during their marriage and following their divorce in 2000. (Appx57-58, Appx397-398.) He also attended some of the UBS meetings. (Appx363-364, Appx401-404.) The investment strategy used by Kimble resulted in the account balance growing from $998,135 in 2003 to $1,753,474 in 2008. (Appx259, Appx274.) Although Kimble generally did not withdraw money from the account, she did withdraw $50,000 to loan to a friend who was starting a business in approximately 2011. (Appx370.)

At no point between 1979 and 2009 did Kimble report the UBS account — or income earned on investments held therein — to the Government. She did not file FBARs disclosing her ownership of the account. (Appx63, Appx645.) She did not report investment income from the account on her tax returns or pay taxes on that income. (Appx62-63, Appx375, Appx406, Appx461.) And in each year from at least 2003 to 2008, Kimble represented on her returns, signed under penalty of perjury, that she neither owned nor had signature authority over a foreign bank account. (Appx61-62, Appx374-375.) According to her attorney, Kimble falsely denied owning the UBS account “out of a simple 'need for secrecy.'” (Appx783.)

Nor did Kimble seek advice regarding her reporting obligations prior to 2008. (Appx384, Appx461.) While she retained a certified public accountant to prepare her tax returns, Kimble did not disclose the UBS account or investment income to her accountant because the funds constituted “secret money.” (Appx61, Appx373.) Indeed, Kimble concealed investment income from the UBS account from her accountant despite disclosing, and paying taxes on, income earned from similar investments held in domestic accounts. (Appx61, Appx373, Appx461.)

D. Kimble's ownership of a French bank account at HSBC

In approximately 1998, Kimble and her husband opened a French bank account at HSBC, which they jointly owned and used to pay expenses related to an apartment that they owned in Paris. (Appx60.) In approximately 2009, Kimble closed the HSBC account and moved the funds to her Swiss account at UBS. (Appx370.) At no point between 1998 and 2009 did Kimble report the HSBC account — or income earned on investments held therein — to the Government. She did not file FBARs disclosing her ownership of the account, did not report investment income from the account on her tax returns, and did not pay taxes on that income. (Appx62-63, Appx375, Appx406, Appx461.)

E. Kimble's entrance into an IRS settlement initiative, her withdrawal from that initiative, and the IRS's examination of her penalty liability

In 2008, Kimble read a newspaper article stating that the Government was “putting pressure on UBS to reveal the names of people who had secret accounts in UBS.” (Appx369.) UBS eventually entered into a deferred prosecution agreement with the Government in which it admitted to participating “in a scheme to defraud the United States” by establishing accounts for U.S. taxpayers “in a manner designed to conceal the United States' taxpayers' ownership.” (Appx302.) After reading the article, Kimble contacted an attorney. (Appx369.)

In 2009, Kimble applied for, and was accepted into, the IRS's offshore voluntary disclosure program (“OVDP”). (Appx781-783.) OVDP was a series of settlement initiatives that allowed qualifying taxpayers with undisclosed foreign accounts to come into compliance with their reporting obligations. Upon accepting taxpayers into the program, the IRS provided them with an opportunity to reduce any civil penalties for which they might be liable, rather than facing the maximum penalties provided by statute. Memorandum from Deputy Commissioner for Services and Enforcement at 1-2 (Mar. 23, 2009), available at https://www.irs.gov/pub/newsroom/memorandum _authorizing_penalty_framework.pdf.

As part of her participation in OVDP, Kimble filed FBARs for each year from 2003 to 2008 that belatedly disclosed her ownership of the UBS and HSBC accounts. (Appx63.) She also filed amended tax returns for each year from 2003 to 2008 that, for the first time, reported $331,508 of income she had earned from investments in the accounts during those years, as well as $99,366 of taxes owed on that income. (Appx62-63, Appx463.) And she belatedly paid $64,164 of taxes owed on the income, plus interest, for the 2006 to 2008 years. (Appx62-63, Appx463.) However, she did not (and was not, as a condition of her acceptance into OVDP, required to) pay taxes on income earned from investments in the UBS account from 1979 to 2005, or income earned from investments in the HSBC account from 1998 to 2005. (Appx461, Appx463.) Nor did she file amended returns reporting income she had earned from investments in the accounts in years prior to 2003. (Id.)

Through OVDP, the IRS offered to resolve Kimble's penalty liability in exchange for a one-time payment of $377,309. (Appx767-771.) The IRS warned Kimble that, if she were to reject the settlement offer and withdraw from OVDP, it would conduct a full examination of her penalty liability and could assess penalties in excess of that amount. (Appx63, Appx382-384.) Nonetheless, Kimble rejected the settlement offer and withdrew from OVDP after her attorney advised her that, under his view of the law, she would likely not be assessed a penalty greater than the settlement proposal. (Appx64, Appx382-383, Appx386.)

The IRS conducted an examination of Kimble's penalty liability, during which it interviewed her and obtained documentary evidence. (Appx431-434.) At the conclusion of its examination, the IRS determined that Kimble's failure to report both accounts was willful. (Appx461-464, Appx477-481.) Regarding the UBS account, the IRS noted that, inter alia, Kimble had held an ownership interest in the account for decades, failed to pay taxes on investment income generated by the account for decades, deliberately concealed the account, and only disclosed the account after it became known that the IRS had issued a summons to UBS. (Id.) Regarding the HSBC account, the IRS similarly noted Kimble's ownership interest for over a decade and her failure to pay taxes on investment income generated by the account. (Id.)

For the larger UBS account that Kimble had failed to disclose for at least 29 years, the IRS assessed a 50-percent penalty of $682,832; for the smaller HSBC account that she had failed to disclose for 11 years, the IRS assessed a 10-percent penalty of $14,397. (Appx465-467.)

F. Proceedings in the Court of Federal Claims

Kimble paid the penalties under protest and filed administrative refund claims challenging the imposition and calculation thereof. (App48-50.) After the IRS failed to act on her claims, she brought this suit. (Appx43-46.) In her complaint, Kimble challenged only the penalty assessed against her for the UBS account (Appx45), and she confirmed during the litigation that she did not dispute the penalty for the HSBC account (Appx298). Kimble alleged that the 50-perecent penalty was arbitrary, capricious, and an abuse of discretion because her failure to disclose the UBS account was not willful. (Appx44-45.)

Following discovery, the parties filed cross-motions for summary judgment. The Government argued that the undisputed facts demonstrated that Kimble acted willfully, that the IRS acted within its discretion in imposing a 50-percent penalty, and that the penalty was not limited to $100,000 by a 1987 regulation that had been superseded when the FBAR statute was amended in 2004. (Dkts. 29, 34.) For her part, Kimble argued that she had not acted willfully, that the IRS abused its discretion by imposing a 50-percent penalty, and that the 1987 regulation remained in effect. (Dkts. 30-1, 37.) She also argued that the penalty constituted an excessive fine in violation of the Eighth Amendment. (Id.)

The Court of Federal Claims granted the Government's motion, denied Kimble's motion, and entered judgment in favor of the Government. (Appx1-36.) The court held, consistent with precedent from the Supreme Court and this Court, that willfulness in the civil context includes reckless conduct. (Appx16 (citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007); Godfrey v. United States, 748 F.2d 1568, 1577 (Fed. Cir. 1984)).) The court observed that Kimble did not disclose the UBS account to her accountant until 2010 and did not ask how to properly report foreign investment income. (Appx17.) The court then held that Kimble exhibited a reckless disregard of her legal duty — and therefore acted willfully — by failing to review her 2003 through 2008 tax returns for accuracy and by falsely representing on her 2007 return that she had no foreign bank accounts. (Id.)

The court further held that the IRS did not abuse its discretion by imposing a 50-percent penalty. (Appx19-21.) Although Kimble took issue with some of the factual conclusions reached by the examining agent, the court determined that those conclusions were either correct or immaterial. (Appx19-20.) And the court adopted the reasoning of Norman v. United States, 138 Fed. Cl. 189, 196 (2018), appeal docketed, No. 18-2408 (Fed. Cir.), in holding that the 1987 regulation limiting the penalty to $100,000 had been invalidated by a subsequent statutory amendment. (Appx20-21.)

Finally, the court held that Kimble had waived her Eighth Amendment theory by failing to include it in her complaint. (Appx21-22 n.29.) In any event, it noted that the only court to consider the issue had determined that FBAR penalties are remedial rather than punitive. (Appx22.)

SUMMARY OF ARGUMENT

The Court of Federal Claims correctly sustained the FBAR penalty assessed against Kimble for her willful failure to report her interest in a Swiss bank account.

1. Controlling precedent makes clear that, in the civil context, willfulness includes reckless conduct and willful blindness. The Court of Federal Claims correctly applied this standard in determining that Kimble willfully failed to file an FBAR for the 2007 calendar year reporting her ownership of a Swiss bank account at UBS.

Kimble repeatedly signed tax returns falsely representing that she owned no foreign accounts. She did so without ever reviewing the FBAR filing requirements to which those returns directed her or seeking professional advice about the UBS account. In fact, she admitted that she intentionally concealed the account from her return preparer because the funds constituted “secret money.” (Appx373.) Concealing the account from her return preparer was part of a decades-long pattern of concealment where Kimble, inter alia, kept the account secret from everyone except her immediate family members, whom she directed to keep the account secret from everyone else, including the federal government.

On appeal, Kimble contends that she followed instructions from her late father, who originally opened the account, to keep the account secret because he feared that his family might someday face persecution from the federal government. But 31 U.S.C. § 5321 imposes heightened penalties as a consequence of an individual's willful violation of the FBAR reporting requirement, without regard to the individual's underlying motivations for the willful violation. Indeed, reporting requirements imposed by U.S. law would be seriously undermined if individuals' noncompliance therewith were excused by a stated fear of the U.S. government.

2. The Court of Federal Claims also correctly held that the IRS acted within its discretion in imposing an approximately $680,000 penalty, representing 50 percent of the UBS account balance, rather than a lower penalty. In determining the appropriate penalty amount, the IRS considered Kimble's ownership of the account for the last 30 years, her active concealment of the account during that period, and the fact that she had avoided paying taxes on the (likely substantial) investment income generated by the account for decades.

Kimble argues that “[t]he IRS * * * failed to take into account the instructions of [her] father” (Br. 41), but this badly misstates the record. The IRS considered those instructions, but correctly concluded that fear of persecution from the U.S. government “does not represent reasonable cause for noncompliance with U.S. law.” (Appx462.) And those instructions did nothing to mitigate the loss to the U.S. Treasury from Kimble's decades-long failure to pay taxes on investment income generated by the account. (Appx461.) Kimble's argument thus fails because it ignores, rather than undermines, the considered analysis undertaken by the IRS.

3. The Court of Federal Claims further correctly rejected Kimble's argument that willful FBAR penalties are limited to $100,000. To be sure, from 1986 until 2004, both the governing statute (31 U.S.C. §5321(a)(5)(C)) and the 1987 regulation (31 C.F.R. § 1010.820(g)(2)), which repeated the language of that statute, set a $100,000 maximum penalty. In 2004, however, Congress amended § 5321(a)(5)(C) and mandated that the maximum penalty “shall be” the greater of $100,000 or 50 percent of the account balance at the time of the violation. Congress thereby superseded the maximum penalty in the prior version of § 5321(a)(5)(C). As controlling precedent makes clear, when Congress did so, it also superseded the regulation that repeated the language of the earlier statute.

4. Finally, Kimble's Eighth Amendment claim lacks merit. The Court should not reach the argument, because Kimble failed to plead or allege any factual support for any such claim in her complaint. In any event, the penalty at issue does not violate the Eighth Amendment, both because it is not a “fine” within the meaning of that amendment and because it is not excessive under the factors enunciated by the Supreme Court in United States v. Bajakajian, 524 U.S. 321 (1998).

ARGUMENT

The Court of Federal Claims correctly granted summary judgment to the United States and sustained the FBAR penalty assessed against Kimble

Standard of review

This Court reviews de novo the Court of Federal Claims' grant of the Government's motion for summary judgment and the court's denial of Kimble's cross-motion. Premier Office Complex of Parma, LLC v. United States, 916 F.3d 1006, 1011 (Fed. Cir. 2019).

I. Kimble willfully failed to file an FBAR for the 2007 calendar year reporting her Swiss bank account at UBS

A. The undisputed evidence demonstrates a willful violation

Congress provided heightened penalties for FBAR reporting violations that are determined to be willful. See 31 U.S.C. §5321(a)(5)(C) & (D). Congress did not define the term “willful” in this context. The Supreme Court, however, has made clear that “where willfulness is a statutory condition of civil liability,” the term covers “not only knowing violations of a standard, but reckless ones as well.” Safeco Ins., 551 U.S. at 57; see also, e.g., United States v. Ill. Cent. R.R., 303 U.S. 239, 242-43 (1938) (holding, in civil penalty context, that willfulness includes “careless disregard whether or not one has the right to so act”); Godfrey, 748 F.2d at 1577.

As the courts have recognized, nothing in the text of § 5321 suggests that a different standard applies here. Both the Third and Fourth Circuits have held that reckless conduct is sufficient for the imposition of heightened FBAR penalties. Bedrosian v. United States, 912 F.3d 144, 152-53 (3d Cir. 2018); United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012); see also United States v. Dadurian, 2019 WL 2577921, at *2 (S.D. Fla. June 24, 2019) (collecting cases); United States v. Garrity (“Garrity I”), 304 F. Supp. 3d 267, 273-74 (D. Conn. 2018), appeal docketed, No. 19-1145 (2d Cir.) (collecting cases). Individuals are therefore liable for an enhanced penalty if they “made a 'conscious effort to avoid learning about reporting requirements,'” (Williams, 489 F. App'x at 659 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991))), or if they “ought to have known” that “there was a grave risk that the filing requirement was not being met,” (Bedrosian, 912 F.3d at 153 (internal quotation marks and alteration omitted)). This standard is satisfied where, inter alia, an individual's conduct demonstrates willful blindness to the FBAR requirement. Williams, 489 F. App'x at 659 (citing United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011)).

The Court of Federal Claims correctly held that Kimble's conduct was willful under this standard. On her 2007 tax return, as on each of her returns for several preceding years, Kimble was asked whether she owned a foreign bank account and was directed to the FBAR filing requirements. (Appx61-62, Appx374-375.) On each return, Kimble falsely represented that she owned no such account. (Id.) And Kimble signed the returns under penalty of perjury, certifying that she had examined the contents of the returns and that they were true, accurate, and complete to the best of her knowledge. (Id.) As a matter of law, Kimble was therefore “charged with constructive knowledge of [the return's] contents” and “put * * * on inquiry notice of the FBAR requirement.”² Williams, 489 F. App'x at 659 (citations and internal quotations omitted). These facts, standing alone, provide compelling evidence that Kimble acted with “willful blindness to the FBAR requirement.” Id.; accord United States v. Horowitz, 361 F. Supp. 3d 511, 528-29 (D. Md. 2019), appeal docketed, No. 19-1280 (4th Cir.).

Additional undisputed evidence reinforces the conclusion that, at a minimum, Kimble acted recklessly and with willful blindness. Not only did she fail to seek advice about her obligation to report the UBS account and pay taxes on the investment income it generated, (Appx384, Appx461), she actively concealed both the account and the income. Because she “wanted the account to be totally secret,” Kimble paid fees so that UBS would maintain the account as a numbered account, with neither her name nor her address appearing on the periodic statements associated therewith, and would hold those statements in Switzerland rather than mailing them to her. (Appx58-59, Appx116, Appx124, Appx366.) She kept the account secret from everyone except her immediate family members, whom she directed to keep the account secret from everyone else, including the federal government. (Appx360-361, Appx384, Appx400.) She concealed from her accountant both the existence of the account and the investment income it generated because they constituted “secret money.” (Appx373.) And her attorney admitted that Kimble falsely denied owning any foreign accounts based on a “need for secrecy.” (Appx783.)

Kimble states that father instructed her to keep the account secret because he feared religious persecution from the federal government. (Appx360.) But § 5321 imposes heightened penalties as a consequence of an individual's willful violation of the FBAR reporting requirement, without regard to the individual's underlying motivations for the willful violation. See Bedrosian, 912 F.3d at 153. In any event, Kimble signed numerous false returns, and took numerous acts of concealment, after Green's death in 1997 when she became “the one in charge of the account.” (Appx362; supra pp. 6-9.) In addition, Kimble was unable to provide any explanation for failing to disclose to her accountant the investment income generated by the French HSBC account, which she and her then-husband opened after her father's death. (Appx60, Appx373.) It is thus clear that Kimble's conduct was willful, separate and apart from the conduct of her father.³

B. Kimble's arguments do not negate the conclusion that she acted willfully

In an effort to avoid a determination that she acted willfully, Kimble offers myriad, scattershot arguments attacking the Court of Federal Claims' decision. As set forth below, none of these arguments alters the court's sound conclusion that her conduct was willful as a matter of law. 

1. Kimble first argues that the standard of willfulness articulated by the Court of Federal Claims renders willful “any failure to disclose a foreign account, for any reason” — at least where individuals sign tax returns falsely representing that they own no foreign bank accounts. (Br. 32.) This argument is without merit.

The lower court did not hold (and the Government does not contend) that willfulness is irrebuttably established when taxpayers sign false tax returns. Here, Kimble might have negated the conclusion that she acted willfully had she disclosed the UBS account to her professional advisor and sought advice about her reporting obligations for it. She did not. To the contrary, she chose not to review her returns, chose not to review the FBAR filing requirements to which her returns directed her, and chose to conceal the UBS account and income from her accountant because they constituted “secret money.” (Appx61, Appx373-374.) To the extent that Kimble was ignorant of her reporting requirements, she was intentionally ignorant. And it is well established that “intentional ignorance and actual knowledge are equally culpable under the law.” Poole, 640 F.3d at 122.

2. Kimble next argues that, even if she meets the civil willfulness standard articulated by the Supreme Court, by the Third Circuit, and by the Fourth Circuit, she does not meet the standard articulated by the Internal Revenue Manual. (Br. 33-35.) That argument misses the mark.

As a threshold matter, the manual is a compilation of “[p]rocedures * * * intended to aid in the internal administration of the IRS.” Matter of Carlson, 126 F.3d 915, 922 (7th Cir. 1997). As such, courts have uniformly held that the manual's provisions are not legally binding and do not confer any rights on taxpayers. E.g., id.; Estate of Duncan v. Commissioner, 890 F.3d 192, 200 (5th Cir. 2018); Elec. Privacy Info. Ctr. v. IRS, 910 F.3d 1232, 1244 (D.C. Cir. 2018). Kimble concedes as much. (Br. 36.)

To the extent that the manual nonetheless carries any “persuasive” force (id.), it supports the conclusion that Kimble acted willfully. The manual provides that “[t]he failure to learn of the filing requirements, coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion” that the reporting violation was willful. (I.R.M. 4.26.16.4.5.3(6); Appx501-502.) The undisputed facts make that description manifestly applicable to Kimble.⁴ Supra, pp. 6-9.

3. Kimble also contends that the willfulness determination reached by the IRS at the conclusion of its examination was inconsistent with its prior determination, during the 2009 OVDP settlement initiative, that her failure to disclose was non-willful. (Br. 13, 38-39.) This contention does not withstand scrutiny.

The 2009 OVDP, by its terms, did not distinguish between willful and non-willful actors. Memorandum from Deputy Commissioner for Services and Enforcement at 1-2, supra. The program was a settlement initiative that served as a means of bringing individuals into compliance with their obligation to disclose offshore accounts, regardless of whether their prior failure to disclose was willful or non-willful. Id. There would, therefore, have been no reason for the IRS, during the course of Kimble's participation in OVDP, to determine whether she acted willfully.

Nor does the record support Kimble's contention that the IRS determined her conduct was not willful. Kimble points to a letter from her attorney (Br. 13), but that letter constitutes inadmissible hearsay. And the letter states only that her lawyer “believes” the IRS's position is that the UBS account, “if considered on its own merits, would likely warrant the imposition of a smaller penalty” than the HSBC account. (Appx764.)

Moreover, even assuming arguendo that the Government had occasion during OVDP to determine whether Kimble acted willfully (which it did not) and determined that she acted non-willfully based on the limited information before it at that time (which it did not), the Government would not be precluded from changing its position to reflect additional evidence that it subsequently obtained. Kimble's liability for the penalty at issue is determined de novo, without regard to the position taken by the IRS at the administrative level (or some arbitrarily chosen stage thereof). E.g., Horowitz, 361 F. Supp. 3d at 522; Moore v. United States, 2015 WL 1510007, at *4 n.3 (W.D. Wash. Apr. 1, 2015) (collecting cases); United States v. McBride, 908 F. Supp. 2d 1186, 1201 (D. Utah 2012).

4. Finally, Kimble's attempted reliance on a string of court opinions addressing FBAR penalties (Br. 27-32) is misplaced. The courts in Jarnagin v. United States, 2017 WL 5897808 (Ct. Cl. Nov. 30, 2017), and Moore, 2015 WL 1510007, had no occasion to consider whether a willful FBAR penalty was appropriate. The finding of non-willfulness in Bedrosian v. United States, 2017 WL 4946433 (E.D. Pa. Sept. 20, 2017), meanwhile, was vacated on appeal by the Third Circuit because the district court's finding rested on “Bedrosian's subjective motivations and the overall 'egregiousness' of his conduct, which are not required to establish willfulness in this context.” Bedrosian, 912 F.3d at 153. And Kimble's position that the conduct of taxpayers in the remaining cases was “significantly more egregious than” hers is wholly irrelevant to whether her failure to file FBARs was willful. Id.; see also Godfrey, 748 F.2d at 1577 (in civil context, willfulness does not require “a showing of evil motive, bad purpose, or calculated malevolence”) (citation and internal quotations omitted). In any event, she makes no attempt to reconcile her position with the fact that she used the undisclosed UBS account to avoid paying taxes on investment income for approximately three decades.

II. The IRS acted within its discretion in assessing a 50-percent penalty against Kimble

A. The IRS has substantial discretion in determining the appropriate penalty amount

Although § 5321 prescribes a maximum penalty for willful FBAR violations, it does not otherwise circumscribe the IRS's discretion to set the penalty amount for a particular violation, based on the facts and circumstances in a particular case. Its determination of the appropriate penalty amount will therefore be set aside only if it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. United States v. Boyd, 2019 WL 1976472, at *4 (C.D. Cal. Apr. 23, 2019), appeal docketed, No. 19-55585 (9th Cir.); Moore, 2015 WL 1510007, at *7; United States v. Williams, 2014 WL 3746497, at *1 (E.D. Va. June 26, 2014); accord United States v. Bussell, 699 F. App'x 695, 697 (9th Cir. 2017), cert. denied 138 S. Ct. 1697 (2018). This is consistent with the standard that this Court uses to review an agency's selection of an appropriate penalty in other contexts. E.g., Ninestar Tech. Co., Ltd. v. Int'l Trade Comm'n, 667 F.3d 1373, 1379 (Fed. Cir. 2012) (employing abuse-of-discretion standard for penalties under the Tariff Act); Beard v. General Servs. Admin., 801 F.2d 1318, 1322 (Fed. Cir. 1986) (same for civil service penalties).

So framed, judicial review of the appropriate penalty is “narrow” and does not permit a court “to substitute its judgment for that of the agency.” Japanese Found. for Cancer Research v. Lee, 773 F.3d 1300, 1304 (Fed. Cir. 2014) (citing Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 285 (1974)) (internal quotations omitted). Unless the IRS has based its decision to impose a particular penalty on an erroneous interpretation of the law, that decision will be set aside “only if [it] was not based on the relevant factors or it fails 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.” Id. (citation and internal quotations omitted). Even “a decision of less than ideal clarity” will be upheld “if the agency's path may reasonably be discerned.” Id. at 1308 (citing Bowman Transp., 419 U.S. at 285-86); accord Altera Corp. & Subsidiaries v. Commissioner, ___ F.3d ___, 2019 WL 2400999, at *13 (9th Cir. June 7, 2019). 

B. The agency record demonstrates that the IRS's decision to impose a 50-percent penalty was not arbitrary, capricious, or an abuse of discretion

The IRS acted well within its discretion when it imposed a single 50-percent penalty for Kimble's willful failure to disclose the UBS account. Far from being arbitrary and capricious, the penalty finds ample support in the agency record. The penalty is also consistent with the non-binding guidelines included in the Internal Revenue Manual to assist agents in considering the relevant criteria. Reflecting Congress's judgment that the harm to the tax system increases with the size of the account, the manual states that where the account balance exceeds $1 million, the 50-percent statutory maximum penalty normally applies. (I.R.M. 4.26.16-2; Appx512-513.) The manual recommends that agents then “tak[e] into account the facts and circumstances of each case,” and make any adjustments to the applicable baseline penalty with the goal of “promot[ing] compliance with the FBAR reporting and recordkeeping requirements.” (I.R.M. 4.26.16.4(4), (6); Appx 497.) In “the most egregious cases,” agents may consider asserting FBAR penalties against a single taxpayer for multiple years. (I.R.M. 4.26.16.4.7(4); Appx510.)

Applying those guidelines here, the IRS determined that the baseline penalty for the UBS account, which had a balance exceeding $1 million, was 50 percent. (Appx467.) It then imposed a 50-percent penalty because Kimble's failure to disclose was willful and the facts and circumstances did not justify a reduction. (Appx460.) In determining that such a penalty was appropriate, the IRS considered Kimble's ownership of the UBS account and concomitant financial interest in the investments held therein. (Id.) Although her statements on this issue were not entirely consistent,⁵ the IRS concluded that Kimble had been an owner of the account since 1979 — a fact to which she has since stipulated. (Appx58, Appx460.) And following her father's death in 1997, Kimble actively managed the account by trading currencies and directing the purchase and sale of stocks, bonds, and money market funds. (Appx462, Appx475.)

The IRS further considered that Kimble had intentionally concealed the account. (Appx461.) She “kept the account completely secret”; “never divulged its existence to anyone other than her son and her ex-husband”; paid UBS to hold all mail associated with the account; and managed the account solely through phone calls and in-person meetings. (Appx456, 461.) She repeatedly represented on her tax returns that she did not own a foreign bank account. (Appx461.) Even after her father's death, Kimble never sought professional advice about her reporting obligations, despite the fact that the account balance exceeded $1 million. (Id.)

Nor was Kimble's concealment limited to the account itself. She also concealed the income generated by the investments held therein. (Id.) At no time since the UBS account was opened did Kimble report or pay taxes on the investment income, prior to submitting amended returns as part of the OVDP settlement initiative. (Id.) In fact, she omitted that income from her returns despite reporting similar income from domestic accounts, and despite the fact that income from her two foreign accounts represented more than half her total income in 2007. (Id.; Appx463.)

The IRS additionally considered the harm associated with Kimble's nondisclosure. In the six-year period from 2003 to 2008, Kimble's failure to report the investment income from her two foreign accounts led to a tax underpayment of approximately $100,000, plus interest. (Appx463.) Although Kimble ultimately paid approximately $64,000 of taxes and interest for the 2006 to 2008 years, she paid no taxes or interest on the (likely substantial) investment income generated in years before 2006, leaving more than two decades of taxes and interest unpaid. (Appx461, Appx463.)

The IRS acknowledged Kimble's statement that her father had concealed the UBS account based on his fear of religious persecution. (Appx462.) However, it correctly concluded that fear of persecution from the U.S. government “does not represent reasonable cause for noncompliance with U.S. law.” (Id.) In any event, even if Kimble's father chose to conceal the account based on his fear of persecution, Kimble did not represent that she shared such a fear, much less that such a fear motivated her choice to conceal the account. (Id.)

Notwithstanding that the 50-percent penalty represented the maximum that could be imposed for Kimble's failure to report the UBS account in 2007, the IRS made a discretionary decision not to impose additional penalties for which she was potentially liable. For the HSBC account, which had a smaller balance and had gone unreported for a shorter time, the IRS assessed a 10-percent penalty for 2007, rather than the maximum 50-percent penalty. (Appx467.) And the IRS did not assess any penalties against Kimble for the numerous other years that she failed to file FBARs reporting the UBS and HSBC accounts.

C. Kimble's arguments fall well short of establishing that the IRS's decision was arbitrary, capricious, or an abuse of discretion

As shown above, the IRS considered the relevant factors, examined the relevant evidence, and articulated a reasonable connection between that evidence and its selection of a penalty. Rather than grapple with this considered analysis, Kimble hurries past it. She instead contends that the IRS improperly changed its position between when she participated in the OVDP settlement initiative and when she underwent an examination; that the Taxpayer Advocate Service has indicated that 50-percent penalties should be reserved for “bad actors”; and that the examining agent's report contains a handful of factual errors. (Br. 36-41.) These contentions are unavailing.

1. Once again, Kimble contends that the IRS changed its position between when it considered her OVDP application and when it examined her penalty liability following her withdrawal from OVDP. (Br. 13, 38-39.) As discussed at pp. 27-28, supra, this contention is not supported by the record.

Moreover, even if the IRS had changed its position after conducting a full examination, it is eminently reasonable for an agency to update its position to take into account additional evidence. Kimble never explains the basis for her bald assertion that the IRS “apparently [changed its position] for punitive reasons.” (Br. 39.) Indeed, prior to her withdrawal from OVDP, the IRS warned Kimble that her actual penalty liability, determined after a full examination, might exceed the settlement offer it had extended to her. (Appx63, Appx382-384.) To the extent Kimble now claims that the IRS abused its discretion by assessing a penalty in excess of that settlement offer, such a claim is precluded by Fed. R. Evid. 408 and, at all events, is specious.

2. Kimble also points to a 2014 report issued by the Taxpayer Advocate Service that recommended changes to OVDP. (Br. 36-37.) But Kimble withdrew from OVDP and does not contend that she is entitled to any relief thereunder. Any issues with that settlement initiative are, therefore, irrelevant. United States v. Cohen, 2018 WL 6318837, at *7 (C.D. Cal. Oct. 23, 2018).

Kimble latches onto the Taxpayer Advocate's claim that 50-percent FBAR penalties should be reserved for “bad actors.” (Br. 36.) She characterizes herself a “benign” actor and, based on that characterization, argues that the 50-percent penalty assessed against her is “incredible [sic] excessive and unreasonably punitive.” (Id., 37.) That argument rings hollow.

As acknowledged by the Taxpayer Advocate, the BSA targeted Americans who avoided their U.S. tax obligations by hiding income in undisclosed foreign accounts. (Appx1045-1047.) Both when Congress enacted the BSA in 1970 and when it increased FBAR penalties in 2004, one of its objects was to combat tax evasion using offshore bank accounts. (Id.; H.R. Rep. No. 91-975, at 12-13 (1970), reprinted in 1970 U.S.C.C.A.N. at 4397-98; S. Rep. No. 108-192, at 108.) That is precisely the activity in which Kimble engaged for nearly three decades, avoiding years of taxes by using an offshore account that grew to well over $1 million.

3. Finally, Kimble takes exception to a handful of purported inaccuracies in the report issued by the examining agent. (Br. 40-41.) However, it is well established that a party seeking to set aside an agency decision must do more than identify one or more errors related thereto; the party must show that any such errors were prejudicial. 28 U.S.C. § 2111; National Ass'n of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 660 (2007); In re Watts, 354 F.3d 1362, 1369 (Fed. Cir. 2004). As discussed below, the purported errors identified by Kimble are either immaterial or illusory.

First, the examining agent incorrectly stated that Kimble was the sole owner of the UBS account after her father died in 1997, when in fact Kimble and her mother were joint owners. (Br. 41.) The agent's inaccuracy in this regard is understandable, given that Kimble had signed a document identifying herself as the account's sole beneficial owner following her father's death. (Appx59, Appx813.) More importantly, Kimble has failed to explain why her responsibility for failing to report the account is mitigated by her mother's joint ownership. (Appx645.)

Second, without citing anything in the record, Kimble asserts that the agent “may have been confused” about the fact that her father was the primary source of funds deposited into the UBS account, as well as the fact that he controlled the account during his lifetime. (Br. 41.) Kimble has cited nothing in the record to support her claim of agent confusion, and the Government has located nothing. In any event, the amount of the FBAR penalty does not depend on the source of the undisclosed funds. And Kimble communicated with account representatives, made investment decisions, and actively concealed the account in the decade following her father's death. (Appx456, Appx461, Appx645.)

Third, Kimble criticizes the agent for concluding that she “actively managed” the UBS account when, in actuality, “she deferred to [investment advice from] her ex-husband” and prioritized safety over growth. (Br. 41.) This is little more than a quibble. While Kimble “relied on her ex-husband's [financial] expertise,” her ex-husband had no ownership stake in the account and “[n]ever would” execute transactions without her consent. (Appx645.) To the contrary, “all investment decisions [were] made jointly after they have discussed her options. The transaction is then handled by phone or conference call with [Kimble,] her ex[-husband] and UBS.” (Id.)

That Kimble considered her investment strategy to be conservative does not change the fact that her unreported foreign accounts generated over $300,000 of unreported income and approximately $100,000 of unreported taxes for the six tax years from 2003 to 2008. (Appx463.) Although the IRS has no way of knowing how much additional income and tax went unreported in the preceding two decades, the amounts are likely substantial.

Finally, Kimble objects to the agent's conclusion that she had no business or personal connection to Switzerland, where the UBS account was located, or France, where the HSBC account was located. (Br. 40-41.) As to the UBS account, Kimble argues that “[h]er connection to Switzerland is established by the fact that she inherited an account domiciled there.” (Id.) Kimble, however, has stipulated that she became a joint owner of the account no later than 1979 and did not “inherit” it upon her father's death 18 years later. (Appx57-58.) It defies credulity for Kimble to assert that her penalty for failing to disclose a Swiss bank account should be reduced because she was, for many years, connected to Switzerland through that undisclosed account.

As to the HSBC account, Kimble has confirmed — both in the proceedings below and in her opening brief on appeal — that she does not dispute the penalty associated therewith. (Appx298; Br. 41.) Accordingly, any erroneous conclusion regarding that account is wholly irrelevant.

III. When Congress increased the maximum willful FBAR penalty in 2004, it superseded the 1987 regulation stating a lower maximum penalty

A. In 2004, Congress deliberately provided for maximum willful FBAR penalties that exceed $100,000

The plain text of 31 U.S.C. § 5321, as amended by Congress in 2004, makes clear that a willful FBAR penalty may exceed $100,000. Under § 5321(a)(5)(C), “[i]n the case of any person willfully violating” that requirement, “the maximum penalty * * * shall be * * * the greater of — (I) $100,000, or (II) 50 percent of the amount determined under” §5321(a)(5)(D). Section 5321(a)(5)(D), in turn, states that where the taxpayer has failed “to report the existence of an account,” the alternate maximum under prong (II) above is one-half of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(D). The current maximum penalty for willful FBAR violations is thus the greater of $100,000 or 50 percent of the account's value at the time of the violation.

Moreover, Congress specified in 31 U.S.C. § 5321(a)(5)(C) that the maximum penalty “shall be” the greater of those two alternatives. The use of “shall” makes what follows “mandatory, not discretionary.” Hyatt v. U.S. Patent & Trademark Office, 797 F.3d 1374, 1380 (Fed. Cir. 2015). Congress therefore set a maximum penalty that must govern — which is to say, must function as the ceiling — whenever the IRS imposes a willful FBAR penalty.

This maximum penalty is higher than the maximum penalty set by the prior version of § 5321. Under the statutory language in effect from 1986 until 2004, the maximum penalty was “the greater of” $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(B)(ii) (2003). Thus, until 2004, $100,000 was the absolute maximum civil penalty for a single willful FBAR violation. Congress, however, removed that hard ceiling for accounts worth more than $200,000 (i.e., accounts for which 50 percent of the value exceeds $100,000) and instead provided for a variable maximum penalty based on the value of the account.⁶

In short, Congress in 2004 deliberately increased the maximum penalty for willful FBAR violations, and it did so in language that made the increased maximum mandatory. The plain language of the statute therefore compels rejection of Kimble's argument that the maximum penalty is $100,000.

B. Congress's 2004 amendment supersedes the regulation reflecting the prior statutory maximum

A regulation promulgated in 1987, 31 C.F.R. § 1010.820(g)(2), states a maximum penalty different from the one now found in §5321(a)(5)(c). That regulation, however, was abrogated by Congress's 2004 amendment to the statute and is therefore no longer valid.

The 1987 regulation did nothing more than track the maximum penalty language in the 1986 version of 31 U.S.C. § 5321. The relevant statutory language in 1986 provided that “in the case of [a willful] violation * * * involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account,” the penalty shall not exceed “the greater of — (I) an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation; or (II) $25,000.” 31 U.S.C. § 5321(a)(5)(B)(ii) (1987). The regulation repeats that language, stating that in the case of “a failure to report the existence of an account or any identifying information required to be provided with respect to such account,” the Secretary may impose “a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.” 31 C.F.R. § 1010.820(g)(2). When Congress superseded the earlier statutory language setting the maximum penalty, it necessarily also superseded the regulation that simply repeated the same language.

That commonsense conclusion is confirmed by governing law. This Court has held that “[w]hen a statute has been repealed, the regulations based on that statute automatically lose their vitality.” Aerolineas Argentinas v. United States, 77 F.3d 1564, 1575 (Fed. Cir. 1996). The reason is simple: “Regulations do not maintain an independent life, defeating the statutory change.” Id. Taken to its logical conclusion, Kimble's contrary position would deprive any statutory change of effect until any inconsistent regulations were amended or repealed. Such a construction cannot be squared with this Court's precedent.

In any event, it is beyond doubt that “[a] regulation that contravenes a statute is invalid.” R&W Flammann GmbH v. United States, 339 F.3d 1320, 1324 (Fed. Cir. 2003). This Court has accordingly held that a later-enacted statute “supercedes” pre-existing and “purportedly contradictory regulatory requirements.” Id. And at least four other courts of appeals have likewise held that “[a] Regulation, valid when promulgated, becomes invalid upon the enactment of a statute in conflict with the Regulation,” to the extent of the conflict. Scofield v. Lewis, 251 F.2d 128, 132 (5th Cir. 1958); accord Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002); National Treas. Employees Union v. Devine, 733 F.2d 114, 119-20 (D.C. Cir. 1984); Cumberland v. Department of Agric., 537 F.2d 959, 961 (7th Cir. 1976).

As both the Court of Federal Claims in this case (Appx20-21) and five other trial court decisions (United States v. Schoenfeld (“Schoenfeld II”), 2019 WL 2603341, at *3-*7 (M.D. Fla. June 25, 2019); United States v. Park, 2019 WL 2248544, at *7-*9 (N.D. Ill. May 24, 2019); United States v. Garrity (“Garrity II”), 2019 WL 1004584, at *1-*5 (D. Conn. Feb. 28, 2019), appeal docketed, No. 19-1145 (2d Cir.); Horowitz, 361 F. Supp. 3d at 514-16; Norman, 138 Fed. Cl. at 195-96) have recognized, that rule applies here. The 1987 regulation, which states that the maximum penalty is $100,000, cannot be squared with the subsequent statutory language stating that the maximum penalty “shall be” the greater of $100,000 or half the balance in the account. That conclusion is underscored by the fact that the “primary function[ ]” of Congress's amendment to § 5321(a)(5)(C) was to raise the maximum penalty above the prior $100,000 cap. Aerolineas Argentinas, 77 F.3d at 1575. The obsolete regulatory cap on willful FBAR penalties in 31 C.F.R. § 1010.820(g)(2) is therefore no longer valid.

C. Kimble's contrary arguments are unpersuasive

1. The statute does not give the Secretary discretion to set a generally applicable maximum penalty that differs from the statutory maximum

Kimble's primary contention to the contrary is that 31 U.S.C. §5321(a)(5)(A) gives the Secretary the discretion to set a lower maximum penalty. (Br. 19-20.) That contention misreads the statute. The language on which Kimble relies states that the Secretary “may impose a civil money penalty on any person who violates, or causes any violation of,” the FBAR requirement. 31 U.S.C. § 5321(a)(5)(A).

The Secretary, in other words, has the discretion to impose a penalty, or not impose a penalty, in any given case. Further, because the statute specifies a maximum penalty but not a minimum penalty for willful violations (see id. § 5321(a)(5)(C)), the Secretary also has the discretion to impose a penalty below the maximum in any given case. In this case, for instance, the Secretary has exercised his discretion not to impose a penalty on Kimble for any year in which she held the UBS account except 2007. And the Secretary could have imposed a penalty below the statutory maximum for 2007, but elected against doing so.

That does not, however, mean that the Secretary has the authority to set a generally applicable maximum penalty that is lower (or higher) than the one that Congress mandated. To the contrary, although Congress used the discretionary “may” in discussing whether a penalty applies in any given case (31 U.S.C. § 5321(a)(5)(A)), it used the mandatory “shall” in setting the maximum penalty (id. §5321(a)(5)(C)). The Secretary therefore lacks “discretion to 'override Congress's clear directive'” and set a generally applicable maximum penalty that departs from Congress's chosen cap. Park, 2019 WL 2248544, at *8 (quoting Garrity II, 2019 WL 1004584, at *3); Norman, 138 Fed. Cl. at 196 (plain text of § 5321 “removed the Treasury Secretary's discretion to regulate any other maximum”).

2. Assuming arguendo that the statute gave the Secretary discretion to set a generally applicable maximum penalty that differs from the statutory maximum, the Secretary never exercised that discretion

Even if the FBAR statute granted discretion to the Secretary to set a generally applicable maximum penalty that was lower than the maximum penalty chosen by Congress, Kimble would need to show that the Secretary actually exercised that discretion. There is, however, no reason to believe that he has done so. This is true both when considering § 1010.820(g)(2) in relation to the version of the FBAR statute in effect when the regulation was promulgated in 1987, and in relation to the version of the statute in effect following the 2004 amendment.

There is no reason to believe that the Treasury Department was making a discretionary decision regarding the maximum penalty amount when it promulgated § 1010.820(g)(2) in 1987. The FBAR statute in effect at the time provided a maximum penalty of $100,000, and the penalty language — which repeated the text of the statute and, as discussed in greater detail at p. 57 n.7, infra, was issued without going through notice-and-comment rulemaking — provided that the maximum penalty was $100,000. See Garrity II, 2019 WL 1004584, at *5. The preamble to the 1987 regulation further “stated that Treasury intended to enforce the BSA 'to the fullest extent possible.'” Id. at *3 (quoting 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987)). Thus, Kimble cannot seriously contend that Treasury intended for the regulation to categorically limit the Secretary's discretion to impose otherwise lawful penalties.

Moreover, the Government has never suggested that §1010.820(g)(2) is an interpretation of the current version of 31 U.S.C. §5321(a)(5)(C). To the contrary, both the IRS and FinCEN have recognized that the amended maximum penalty that Congress enacted in 2004 now governs all FBAR cases. Since 2008, the Internal Revenue Manual has stated that, notwithstanding the fact that the 1987 regulation “has not been revised to reflect” Congress's 2004 amendment, “the new penalty ceilings apply.” (I.R.M. 4.26.16.4.5.1(4); Appx501.) And in 2010, FinCEN noted that “[a] person who willfully fails to” file a required FBAR “may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.” Amendment to the Bank Secrecy Act Regulations — Report of Foreign Financial Accounts, 75 Fed. Reg. 8844-01, 8854 (Feb. 26, 2010).

The Secretary has never acted contrary to the understanding expressed by the IRS and FinCEN. Kimble contends (Br. 21-22) that periodic updates to 31 C.F.R. § 1010.821, which lists the amounts of various penalties as adjusted for inflation, amounted to a repromulgation of the $100,000 maximum in § 1010.820(g)(2). She is wrong. As required by the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. §2461, the Secretary has periodically issued rules adjusting the penalties listed in § 1010.821 for inflation. See, e.g., Inflation Adjustment of Civil Monetary Penalties, 82 Fed. Reg. 10434-01 (Feb. 10, 2017); Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42503-01 (June 30, 2016). And that table does include adjustments to the $100,000 penalty that, under § 5321(a)(5)(C), represents the maximum willful FBAR penalty for accounts with less than $200,000.

That fact, however, cannot imply that the Secretary believes $100,000 (as adjusted for inflation) is the maximum penalty. Garrity II, 2019 WL 1004584, at *4. By statute, the inflation adjustments apply only to penalties that are (i) “for a specific monetary amount as provided by Federal law,” or (ii) have “a maximum amount provided for by Federal law.” 28 U.S.C. § 2461 note. The Office of Management and Budget has advised agencies that this language does not include “penalties written as functions of violations,” such as penalties based on “the value of the transaction.” OMB, Memorandum for the Heads of Executive Departments and Agencies, at 2 (Feb. 24, 2016), available at http://www.whitehouse.gov/sites/whitehouse.gov/files/omb/ memoranda/2016/m-16-06.pdf. The Secretary has more specifically recognized, in the preamble to the 2016 inflation adjustments, that those adjustments do not apply to BSA penalties that “lack a stated dollar amount and are instead written solely as functions of violations.” 81 Fed. Reg. at 42504.

In short, although the $100,000 penalty in § 5321(a)(5)(C) is one that Congress has said must be adjusted for inflation, the alternate maximum based on the value of the account is not. It is therefore no surprise that only the $100,000 penalty (and not the 50-percent penalty) appears in the regulation listing inflation adjustments. And those adjustments cannot be read to mean that the Secretary eschews the ability to impose penalties based on the account value that exceed $100,000 where such penalties are authorized by the statute.

The fact that FinCEN renumbered the regulation at issue after 2004 as part of its general reorganization of BSA regulations also does not amount to a repromulgation of the $100,000 maximum. FinCEN made clear that the renumbering and reorganization would be accomplished “without substantive change” to the preexisting regulations. Transfer and Reorganization of Bank Secrecy Act Regulations, 73 Fed. Reg. 66414-01, 66414 (Nov. 7, 2008). It treated all comments that suggested substantive changes — including to regulations “that were perceived as no longer relevant” — as “outside the scope of [the] rulemaking.” Transfer and Reorganization of Bank Secrecy Act Regulations, 75 Fed. Reg. 65806-01, 65806-07 (Oct. 26, 2010). The renumbering and reorganization therefore did not, and could not, amount to a substantive re-enactment of the obsolete maximum-penalty provision now found in 31 C.F.R. § 1010.820(g)(2). See also United States v. Ortiz-Carrasco, 863 F.3d 1, 6 n.5 (1st Cir. 2017) (intervening renumbering of Sentencing Guidelines irrelevant to applicability of prior case law).

Nor can FinCEN's failure to repeal § 1010.820(g)(2) (see Br. 18) be seen as a continuing endorsement of that regulation's vitality. The Supreme Court has recognized that “[t]he Treasury's relaxed approach to amending its regulations to track Code changes is well documented.” United Dominion Indus., Inc. v. United States, 532 U.S. 822, 836 (2001). As a result, the Supreme Court — and multiple courts of appeals — have refused to read “any affirmative intention” into the failure to amend a regulation. Id. at 837; see Knochelmann v. Commissioner, 455 F. App'x 536, 539 (6th Cir. 2011); Umbach v. Commissioner, 357 F.3d 1108, 1112 (10th Cir. 2003). In any event, this Court has expressly held that, when Congress amends a statute in ways that invalidate preexisting regulations, the failure to “formally withdraw[] regulations from the Code of Federal Regulations does not save them from invalidity.” Barseback Kraft AB v. United States, 121 F.3d 1475, 1480 (Fed. Cir. 1997); accord Knochelmann, 455 F. App'x at 539; Umbach, 357 F.3d at 1112; see also Gonzales v. Oregon, 546 U.S. 243, 257 (2006) (“the existence of a parroting regulation does not change the fact that the” underlying question involves “the meaning of the statute”).

At bottom, § 1010.820(g)(2) was not intended to limit the Secretary's discretion when it was promulgated in 1987. Nor has the Government ever suggested that the regulation became a limit on the Secretary's discretion vis-à-vis the enactment of a 2004 statutory amendment that, by its terms, abrogated the regulation. It is thus “untenable” to conclude that “the same regulation now significantly constrains the Secretary's ability to enforce the amended statute.” Garrity II, 2019 WL 1004584, at *3.

3. The district court opinions in Colliot and Wahdan are unpersuasive and should not be followed

Kimble relies heavily on the district court opinions in United States v. Colliot, 2018 WL 2271381 (W.D. Tex. May 16, 2018), and United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018), both of which held that the regulation remains valid as an upper limit on the willful penalty. (See Br. 18-19, 21.) Those district courts are in the minority (see Schoenfeld II, 2019 WL 2603341, at *4; Park, 2019 WL 2248544, at *7-*9; Garrity II, 2019 WL 1004584, at *1-*5; Horowitz, 361. F. Supp. 3d at 514-16; Norman, 138 Fed. Cl. at 195-96), and for good reason. Neither opinion is persuasive.

Colliot held that Congress's 2004 amendment to § 5321(a)(5) did not supersede the $100,000 cap in 31 C.F.R. § 1010.820(g)(2), because the statute “sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor.” Colliot, 2018 WL 2271381, at *2. That is beside the point. By their plain language, the statute and the regulation set competing and inconsistent ceilings. As discussed at pp. 42-48, supra, the statute must control.

The Colliot court further believed that § 1010.820(g)(2) “purports to cabin [the Secretary's] discretion by capping penalties at $100,000.” Colliot, 2018 WL 2271381, at *2. That belief is inconsistent with the history of the FBAR penalty. As discussed at pp. 44-45 and 49-56, supra, Treasury promulgated the $100,000 regulatory cap at a time when the statute contained the same cap, and both FinCEN and the IRS have consistently recognized that Congress's 2004 amendment superseded § 1010.820(g)(2).⁷

The district court in Wahdan advanced two additional rationales, both of which are unpersuasive. First, the court suggested that the adjustments to the inflation calculations in 31 C.F.R. § 1010.821 “suggest[ ] that the Secretary” consciously “elected to continue to limit the IRS' authority to impose penalties to $100,000.” Wahdan, 325 F. Supp. 3d at 1140. But as shown at pp. 51-54, supra, the inflation-calculation changes suggest no such thing.

Second, the court in Wahdan rejected reliance on legislative history on the ground that the text of § 5321(a)(5)(C) is clear. 325 F. Supp. 3d at 1140. But that clarity cuts the other way. As explained at ap. 42-48, supra, the clear text of the statute increased the maximum penalty and, in doing so, superseded both the prior statutory maximum and the portion of § 1010.820(g)(2) repeating the prior statutory language. Kimble's attempt to use the obsolete regulation to evade the congressionally mandated consequences of her actions should accordingly be rejected.

IV. The penalty was not an excessive fine imposed in violation of the Eighth Amendment

A. Kimble has forfeited any claim based on the Eighth Amendment

Kimble contends (Br. 45-49) that the penalty at issue violates the Eighth Amendment. As the Court of Federal Claims correctly determined, however, Kimble failed to preserve that claim. (Appx21-22 n.29.) Although Kimble's complaint alleged that the FBAR penalty assessed against her was arbitrary, capricious, and an abuse of discretion, it did not include an Eighth Amendment claim (or any other constitutional challenge). (Appx43-46.) Nor did the complaint allege any facts supporting such a claim. (Id.) This Court has held that a plaintiff waives a theory of recovery that it fails to plead in its complaint. Casa de Cambio Comdiv. S.A. de C.V. v. United States, 291 F.3d 1356, 1366 (Fed. Cir. 2002).

Kimble offers three reasons why this Court should reverse the Court of Federal Claims' determination that she waived any Eighth Amendment challenge. (Br. 50.) However, none is persuasive. First, Kimble contends that she did, in fact, plead a constitutional challenge in her complaint. (Id.) But she points only to a boilerplate sentence that could be included in virtually any refund suit, regardless of whether it advanced a constitutional challenge: “[t]he Court should order the return of the excess penalty, with interest * * *.” (Appx45.)

Second, Kimble's contention that Casa de Cambio should be limited to situations in which a plaintiff fails entirely to raise a theory in the trial court (Br. 50) cannot be reconciled with the Court's clear holding that a plaintiff waives a theory of recovery that it fails to plead:

* * * we conclude that we need not address Casa's agency theory because it was not properly raised. No mention of this theory appears in Casa's complaint. Under the circumstances, we hold that Casa waived any claim it may have against the government based on such a theory.

Casa de Cambio, 291 F.3d at 1366; see also Baird v. United States, 285 F. App'x 746, 750 (Fed. Cir. 2008); Southern Comfort Builders, Inc. v. United States, 67 Fed. Cl. 124, 153 (2005).

Finally, contrary to Kimble's suggestion (Br. 50), the waiver issue is properly before this Court. Because the Court of Federal Claims ruled upon the issue, the Government is free to raise it here. See Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374, 379 (1995); Hollmer v. Harari, 681 F.3d 1351, 1356 n.3 (Fed. Cir. 2012).

B. In any event, Kimble's Eighth Amendment claim lacks merit

Kimble's Eighth Amendment claim would fail even if it had been properly raised, as the Court of Federal Claims correctly determined. (Appx22 n.29.) The Eighth Amendment prohibits excessive “fines,” which include only payments made “'as punishment for some offense.'” Bajakajian, 524 U.S. at 327-28 (quoting Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 265 (1989)). And a fine violates the Excessive Fines Clause only if it is “grossly disproportional to the gravity of a [defendant's] offense.” Bajakajian, 524 U.S. at 324. The penalty at issue, however, is neither a fine nor excessive.

1. A civil FBAR penalty is not a fine within the meaning of the Eighth Amendment

The type of penalty assessed against Kimble is not a “fine” covered by the Eighth Amendment, because it is not “punishment for some offense.” Bajakajian, 524 U.S. at 328 (internal quotation marks omitted). In Bajakajian, the Supreme Court held that a sanction is a punishment if it is “imposed at the culmination of a criminal proceeding” and requires “conviction of an underlying” crime. Id. at 328. Those conditions are absent here: The civil FBAR penalty can be imposed even where, as here, the Secretary chooses not to undertake a criminal action. In fact, in 31 U.S.C. § 5322, Congress separately provided criminal penalties to punish those who willfully fail to file FBAR forms. Congress described the criminal penalties — but not the civil penalties — as “fine[s].” 31 U.S.C. § 5322(a) & (b); cf. One Lot Emerald Cut Stones & One Ring v. United States, 409 U.S. 232, 236-37 (1972) (civil forfeiture provisions, as distinct from parallel criminal provisions, are remedial for double jeopardy purposes).

The purpose of the civil FBAR penalty is instead remedial, which is to say that it has the “purpose of compensating the Government for a loss.” Bajakajian, 524 U.S. at 328. When it enacted the BSA, Congress called the use of “secret foreign bank account[s]” the “largest single tax loophole permitted by American law,” and one that caused the “debilitating effect[ ]” of “hundreds of millions” of dollars in lost tax revenues. H.R. Rep. No. 91-975, at 12-13 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397-98. Moreover, investigating secret bank accounts is time consuming and expensive. See id. at 4397. The civil penalties in § 5321 serve to offset these losses to the Treasury — as the only court to address the issue expressly recognized. See United States v. Estate of Schoenfeld (“Schoenfeld I”), 344 F. Supp. 3d 1354, 1369-73 (M.D. Fla. 2018) (civil penalty for willful failure to file FBAR is remedial, not punitive, in nature); Appx22 n.29.

Kimble's contrary argument turns on Timbs v. Indiana, 139 S. Ct. 682, 689-90 (2019), where the Court left undisturbed its prior decision in Austin v. United States, 509 U.S. 602 (1993). In Austin, the Court held that in rem civil forfeitures can qualify as fines within the meaning of the Eighth Amendment. 509 U.S. at 606-622. But nothing in “the Austin opinion * * * suggests that the Court intended for its Eighth Amendment analysis to extend beyond the civil forfeiture context.” Thomas v. Commissioner, 62 F.3d 97, 103 (4th Cir. 1995). Although Kimble attempts to shoehorn her claim into this context by referring to the assessment of an FBAR penalty against her as a “forfeiture” (Br. 47), she cannot so easily circumvent the well-established distinction between in personam penalties (like the one at issue here) and in rem forfeitures (like the ones at issue in Timbs and Austin). See United States v. One Parcel Property Located at 427 and 429 Hall Street, 74 F.3d 1165, 1169 (11th Cir. 1996) (collecting cases).

Further, the notion that any deterrence constitutes punishment (Br. 45-46) cannot be reconciled with the Supreme Court's decision in Helvering v. Mitchell, 303 U.S. 391, 401 (1938), that civil tax penalties are remedial.⁸ The courts of appeals, following Mitchell, have routinely held that even very substantial civil tax penalties — such as the penalty for civil fraud, which constitutes 75 percent of the tax not paid as a result of fraud (26 U.S.C. § 6663(a)) — are not fines within the meaning of the Eighth Amendment. See, e.g., Kitt v. United States, 277 F.3d 1330, 1337 (Fed. Cir. 2002); Louis v. Commissioner, 170 F.3d 1232, 1236 (9th Cir. 1999) (cited at Br. 46); Little v. Commissioner, 106 F.3d 1445, 1454-55 (9th Cir. 1997); Thomas, 62 F.3d 97; McNichols v. Commissioner, 13 F.3d 432 (1st Cir. 1993); see also In re Wyly, 552 B.R. 338, 609-13 (Bankr. N.D. Tex. 2016) (more than $427 million in penalties for failure to disclose foreign trusts not fines and, in any event, not excessive), appeal docketed, No. 16-11604 (5th Cir.). And although the civil FBAR penalty is not a Title 26 “tax” penalty, it is more analogous to a nonpunitive tax penalty than to the criminal and civil forfeitures tied to criminal convictions that were at issue in Bajakajian, Timbs, and Austin.

Kimble's collateral arguments on this point (Br. 46-47) are equally unpersuasive. The Supreme Court's opinion in Hudson v. United States, 522 U.S. 93 (1997), which interprets the Double Jeopardy Clause of the Fifth Amendment, is not controlling in this context insofar as its analysis differs from Bajakajian. Kimble cites no authority to support her contention that civil FBAR penalties have historically been regarded as punishments. And her claim that the IRS acted “punitive[ly]” by assessing a penalty in excess of its prior settlement offer has been waived by her failure to develop it below, is precluded by Fed. R. Evid. 408, is not supported by the record, and, at all events, is specious. Supra pp. 27-28, 36-37.

2. The penalty at issue is not constitutionally excessive

Even if it were a fine, the FBAR penalty at issue would not be excessive. In addressing excessiveness challenges, the courts of appeals consider factors used by the Supreme Court in Bajakajian to determine whether a fine is grossly disproportionate: the amount of the penalty authorized by Congress; the class of persons for whom the statute at issue was principally designed; the seriousness of the offense and the harm it caused; and a comparison with the potential criminal penalties, including imprisonment. See, e.g., United States v. Viloski, 814 F.3d 104, 110-11 (2d Cir. 2016); United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014); United States v. Cheeseman, 600 F.3d 270, 283-84 (3d Cir. 2010). The burden of proof rests on Kimble to show that the penalty is excessive under these factors. E.g., Viloski, 814 F.3d at 109; $132,245.00 in U.S. Currency, 764 F.3d at 1058; Cheeseman, 600 F.3d at 283. Kimble cannot carry that burden.

The sole court of appeals to consider an Eighth Amendment challenge to a willful FBAR penalty held that the penalty was not excessive. In Bussell, the Ninth Circuit considered the constitutionality of “an approximately $1.2 million penalty” imposed against an account holder for failing to file an FBAR for calendar year 2006. 699 F. App'x at 696. That penalty represented half of the account value for the year at issue. See Br. for the Appellee, United States v. Bussell (9th Cir. No. 16-55272), 2016 WL 7046939, at *8 (Dec. 2016). The Ninth Circuit upheld the penalty as “not grossly disproportional to the harm she caused because Bussell defrauded the government and reduced public revenues.” Bussell, 699 F. App'x at 696.

The district courts to address the issue have likewise upheld FBAR penalties against Eighth Amendment challenges. In Garrity II, the district court held that a willful FBAR penalty of $936,691 — 50 percent of an account's $1,873,382 balance — was not “excessive.” 2019 WL 1004584, at *1, *6-*9. In Schoenfeld I, 344 F. Supp. 3d at 1359, 1375, the district court held that a willful FBAR penalty in the amount of “$614,300 — 50 percent of [an] account's $1,228,600 balance” — was not “excessive.” The court in Crawford v. United States Department of the Treasury, 2015 WL 5697552, at *16 (S.D. Ohio Sept. 29, 2015), rejected a facial challenge to the FBAR penalty, holding that “[a] maximum penalty fixed by Congress is due substantial deference from the courts” and that “the maximum penalty” in § 5321(a)(5)(C) “will be constitutional in at least some circumstances.” And two other courts have upheld the imposition of multiple maximum penalties for non-willful violations of the FBAR requirement. See Dewees v. United States, 272 F. Supp. 3d 96, 100-01 (D.D.C. 2017), aff'd, 767 F. App'x 4 (D.C. Cir. 2019); Moore, 2015 WL 1510007, at *12-*13.

An application of the Bajakajian factors leads to the same conclusion in this case. As an initial matter, acts of Congress are entitled to a strong presumption of constitutionality (e.g., United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29, 32 (1963)), and the Supreme Court emphasized in Bajakajian that “judgments about the appropriate punishment for an offense belong in the first instance to the legislature” (524 U.S. at 336). The courts therefore give substantial deference to legislative judgments regarding the appropriate penalty. See, e.g., $132,245.00 in U.S. Currency, 764 F.3d at 1058; United States v. $134,750 U.S. Currency, 535 F. App'x 232, 240 (4th Cir. 2013); Collins v. SEC, 736 F.3d 521, 527 (D.C. Cir. 2013); United States v. Chaplin's, Inc., 646 F.3d 846, 851 (11th Cir. 2011); Crawford, 2015 WL 5697552, at *16.

The penalty assessed against Kimble falls within the congressionally prescribed range. See 31 U.S.C. § 5321(a)(5)(C). In fact, although the IRS assessed the maximum penalty for 2007, the statute authorizes penalties for every year Kimble held, but failed to disclose, the UBS account starting in 1986 — which is to say every year from 1986 through 2008. The IRS therefore chose a penalty that represents only a fraction of the overall maximum penalty Congress provided for the totality of Kimble's conduct. The result is that the penalty is presumptively constitutional. See Qwest Corp. v. Minn. Pub. Utils. Comm'n, 427 F.3d 1061, 1069 (8th Cir. 2005); Kelly v. U.S. EPA, 203 F.3d 519, 524 (7th Cir. 2000); Pharaon v. Board of Governors of Fed. Reserve Sys., 135 F.3d 148, 157 (D.C. Cir. 1998).

Indeed, Congress based the willful FBAR penalty on the account balance and not the tax loss, reflecting a judgment that the harm to the tax system increases with the size of the account balance irrespective of the size of the tax loss. See Chaplin's, Inc., 646 F.3d at 852 (“Congress * * * can distill the monetary value society places on harmful conduct”); United States v. Sperrazza, 804 F.3d 1113, 1128 (11th Cir. 2015) (acknowledging harm from structuring beyond direct financial loss); United States v. Mackby, 339 F.3d 1013, 1019 (9th Cir. 2003) (harm of false claims “extends beyond the money paid out of the treasury”). And even if it were appropriate to correlate the amount of the FBAR penalty with the tax loss sustained for purposes of the Eighth Amendment analysis, Kimble has made no attempt to show that the penalty is disproportionate to the over two decades of (likely substantial) taxes and interest that remain unpaid.

Further, Kimble falls squarely within a class of individuals targeted by the BSA — i.e., Americans who avoid their tax obligations by hiding income or assets in undisclosed foreign bank accounts. Both when Congress enacted the BSA in 1970 and when it increased FBAR penalties in 2004, one of its objects was to combat tax evasion using offshore bank accounts. See H.R. Rep. No. 91-975, at 12-13 (1970), reprinted in 1970 U.S.C.C.A.N. at 4397-98; S. Rep. No. 108-192, at 108. That is precisely the activity in which Kimble engaged.

Although Kimble seeks to downplay the seriousness of her actions and the harm she caused (Br. 49), those factors also weigh against a finding of excessiveness. When it enacted the BSA, Congress explained that “secret foreign bank accounts” had enabled the proliferation of crime, including tax evasion, securities violations, and fraud (H.R. Rep. No. 91-975, at 12, reprinted in 1970 U.S.C.C.A.N. at 4397-98), and when it increased the maximum FBAR penalty, Congress found that improving compliance was “vitally important” (S. Rep. No. 108-192, at 108).

In addition, as shown above, Kimble acted willfully — which means that her actions fall into the more serious category of FBAR violations. And there can be no question that Kimble's decision not to disclose her UBS account “reduced public revenues” (Bussell, 699 F. App'x at 696) and harmed the integrity of the tax system. Kimble's contention that her conduct is less culpable than those who commit “other financial crimes” in addition to failing to file FBARs (Br. 49) therefore cannot tip the balance into a showing of excessiveness. Nor does the Seventh Circuit's dictum (see id., 48) — made in a case in which the court of appeals vacated the defendant's underlying conviction for engaging in structured transactions in order to buy a house — that the forfeiture of the house's entire value might violate the Eighth Amendment. See United States v. Abair, 746 F.3d 260, 267-68 (7th Cir. 2014).

Finally, the penalty at issue is not excessive when compared with the potential criminal sanctions for Kimble's actions. Those sanctions include imprisonment of up to five years in addition to a fine of up to $250,000 for an FBAR offense standing alone (and double that if there are other violations or a pattern of illegal activity). 31 U.S.C. § 5322(a)-(b). The criminal penalties, in other words, include a substantial fine in addition to the prospect of a prison term — a prospect much more serious than even the maximum civil penalty permitted by § 5321(a)(5)(C). All of the Bajakajian factors therefore weigh heavily against Kimble's contention that the penalty assessed against her violates the Eighth Amendment.⁹ That contention should accordingly be rejected if this Court even chooses to reach the argument.

CONCLUSION

The judgment of the Court of Federal Claims is correct and should be affirmed.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy
Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

GILBERT S. ROTHENBERG
(202) 514-3361
DEBORAH K. SNYDER
(202) 305-1680
GEOFFREY J. KLIMAS
(202) 307-6346
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

JULY 2019