Individual Seeks Reversal of FBAR Penalty Decision

UNITED STATES,
Plaintiff-Appellee,
v.
MONICA TOTH,
Defendant-Appellant.

United States Court of Appeals
For the First Circuit

On Appeal From a Final Order
Entered in the United States District Court
for the District of Massachusetts

Brief of Appellant

Jeffrey P. Wiesner, No. 119207
Jennifer McKinnon, No. 1194292
Wiesner McKinnon LLP
90 Canal Street, Suite 110
Boston, MA 02114
(617) 303-3940
jwiesner@jwjmlaw.com
jmckinnon@jwjmlaw.com

May 7, 2021

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Table of Contents

Table of Authorities 

Introduction

Jurisdictional Statement 

Statement of Issues

Statement of the Case 

Summary of the Argument 

Argument 

Conclusion 

Certificates of Compliance and Service

Table of Authorities

Federal Cases

American Net & Twine Co. v. Worthington, 141 U.S. 468 (1891)

AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429 (1st Cir. 2015) 

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

Babbitt v. Sweet Home Chapter of Communities for a Great Oregon, 515 U.S. 687 (1995) 

Bedrosian v. United States of Am., Dep't of the Treasury, Internal Revenue Serv., 912 F.3d 144 (3d Cir. 2018)

Benzinger v. United States, 192 U.S. 38, 55 (1904) 

BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996)

Bowers v. New York and Albany Lighterage Co., 273. U.S. 346 (1927)

Bradley v. U.S., 817 F.2d 1400 (9th Cir. 1987) 

Casas Off. Machines, Inc. v. Mita Copystar Am., Inc., 42 F.3d 668 (1st Cir. 1994) 

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) 

Chilcutt v. United States, 4 F.3d 1313 (5th Cir. 1993)

C.I.R. v. Acker, 361 U.S. 87 (1959) 

Crandon v. United States, 494 U.S. 152, 158 (1990) 

Cruz v. Savage, 896 F.2d 626, 632 (1st Cir. 1990)

First Nat. Bank of Gordon v. Dep't of Treasury, Office of Comptroller of Currency, 911 F.2d 57 (8th Cir. 1990) 

Freeland v. Amigo, 103 F.3d 1271 (6th Cir.1997) 

Fulman v. U.S., 545 F.2d 268 (1st Cir. 1976) 

Hooper-Haas v. Ziegler Holdings, LLC, 690 F.3d 34 (1st Cir. 2012)

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

Jensen v. Phillips Screw Co., 546 F.3d 59 (1st Cir. 2008) 

Kimble v. United States, 141 Fed. Cir. 373 (2018) 

McNichols v. Comm'r of Internal Revenue, 13 F.3d 432 (1^st Cir. 1993) 

Merriam Same v. Anderson, 263 U.S. 179 (1923) 

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

Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019)

Pacheco-Camacho v. Hood, 272 F.3d 1266 (9th Cir. 2001) 

Peltz v. Moretti, 292 F. App'x 475 (6th Cir. 2008)

Pimentel v. City of Los Angeles, 974 F.3d 917 (9^th Cir. 2020) 

Ratzlaf v. United States, 510 U.S. 135 (1994) 

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

SEC v. Alpine Securities Corp., 413 F.Supp 3d 235 (S.D.N.Y. 2019) 

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

Towers v. City of Chicago,173 F. 3d 619 (7^th Cir. 1999)

United States v. Colliot, 2018 WL2271381 (W.D. Tex. May 16, 2018)

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

United States v. Bussell, 2015 WL 9957826 (Dec. 8, 2015 C.D. Cali.)

United States v. Collins, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021) 

United States v. Garrity, 2019 WL 1004584 (D. Conn. Feb. 28, 2019)

United States v. Hedelman, 402 F.3d 220 (1st Cir. 2005) 

United States v. Horowitz, 978 F.3d 80, 91 (4^th Cir. 2020) 

United States v. Levesque, 546 F.3d 78 (1st Cir. 2008)

United States v. Mojica-Rivera, 435 F.3d 28 (1^st Cir. 2006) 

United States v. Park, 389 F. Supp. 3d 561 (N.D. Ill. 2019) 

United States v. Pomerantz, 2017 WL 4418572 (W.D. Wash. Oct. 5, 2017) 

United States v. Rum, 2019 WL 5188325 (M.D. Fla. Sept. 26, 2019) 

United States v. Shoenfeld, 2019 WL 2603341 (M.D. Fla. June 25, 2019)

United States v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008) 

United States v. Thompson/Center Arms. Co., 504 U.S. 505 (1992) 

United States v. Warner, 792 F.3d 847 (7th Cir. 2015)

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

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

United States v. Zwerner, 2014 WL 11878430 (S.D. Fla. Apr. 29, 2014) 

Whistleblower 22716-13W v. Comm'r of Internal Revenue, 146 T.C. 84, 95 (2016) 

Zabala-De Jesus v. Sanofi-Aventis P.R., Inc., 959 F.3d 423 (1st Cir. 2020)

Federal Constitutional Provisions, Statutes and Rules

Eighth Amendment to the United States Constitution 

Order of the Supreme Court of the United States, 305 F.R.D. 457 (Apr. 29, 2015)

31 U.S.C. §5311

31 U.S.C. § 5314 

31 U.S.C. §5321

31 U.S.C. §5322

28 U.S.C. § 2074 

31 C.F.R. § 1010.350 

31 C.F.R. § 1010.820

Fed. R. Civ. P. 4(m) 

Fed. R. Civ. P. 37(b)(2)

I.R.C. §6662(b)(7) 

I.R.C. §6662(j)(2)

I.R.C. §6531 

I.R.C. §7201

I.R.C. §7203 

I.R.C. §7206 

I.R.C. §7207

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Introduction

Appellant Monica Toth (“Ms. Toth”) failed to report to the United States government a Swiss bank account that her father, who was not a U.S. citizen, had given her as an inheritance. Because she did not report it, as is required by statute, and the government deemed her conduct “willful,” the IRS imposed a fine in the amount of $2,173,703 — half the value of the account. There is no suggestion that the funds in the account were derived from any illegal source or activity or that Ms. Toth had engaged in any illegal activity apart from her failure to report the account, and a relatively small underpayment of income tax. The United States sued Ms. Toth to collect the penalty.

Ms. Toth, now 81 years old, attempted to represent herself in the District Court suit. Various technical and arguably substantive failures in meeting court deadlines and providing discovery resulted in the imposition of a sanction by the District Court, finding against Ms. Toth on the critical issue in the case — that her failure to report the account was “willful.” Piggybacking off this finding, the government was then successfully able to obtain summary judgment, resulting in a judgment of over $3 million.

This case presents several issues of first impression to this Court, including whether the new time limit for service of process effective December 1, 2015, applied to this case, which was pending at the time the revised rule went into effect; whether the statutory scheme under which Ms. Toth was penalized should be interpreted as establishing a ceiling rather than a mandatory penalty in light of the applicable Treasury Department regulation capping the penalty at $100,000; and whether the penalty imposed on Ms. Toth is a “punishment” for purposes of the Eighth Amendment, and an “excessive fine.” Ms. Toth also challenges the Court's sanction order, which established as a fact the critical element of “willfulness” (tantamount to a default judgment), and whether Ms. Toth's conduct, based solely on the summary judgment record, was sufficient (irrespective of the sanction order) as a matter of law to deem her conduct “willful.”

For the reasons set forth below, the case should be dismissed in its entirety for failure to timely effect service. Alternatively, the District Court's sanction order and order granting summary judgment should be vacated and the case remanded for further proceedings.

Jurisdictional Statement

This is an appeal from a final judgment in the United States District Court for the District of Massachusetts. The District Court had subject matter jurisdiction under 28 U.S.C. §1331. The District Court entered a Final Judgment on September 16, 2020, and an Amended Judgment on January 25, 2021. Appellant filed a timely Notice of Appeal on October 16, 2020, and Amended Notice of Appeal on February 23, 2021. This Court has appellate jurisdiction under 28 U.S.C. §1291.

Statement of the Issues

I. The District Court erred in holding that despite the fact that the rule for service of process was amended after the complaint was filed and before service was effected — shortening the period for service from 120 days to 90 days — the amended rule did not apply in this case.

II. The District Court abused its discretion in finding against Appellant the dispositive fact that she was “willful” in her failure to report her foreign bank account, a finding tantamount to a default judgment resulting in the imposition of an over $3 million judgment.

III. The District Court improperly determined, as a matter of law, that Appellant's conduct was “willful,” where there were material facts in dispute preventing disposition at the summary judgment stage.

IV. The Treasury Regulation capping the penalty at $100,000 limited the IRS to that maximum.

V. Even if the applicable statute, enacted after the Treasury Regulation imposing a $100,000 limit, creates a maximum penalty of half the value of an unreported account, fundamental notions of notice and fairness, expressed in statutory interpretation doctrines such as “lenity” and “strict construction,” as well as requirements under the Administrative Procedure Act, limit the IRS to the maximum fine in the Treasury Regulation.

VI. The Excessive Fines Clause of the Eighth Amendment applies to the punitive fine in this case, and because the over $3 million penalty for conduct that is no more than a failure to report a bank account is grossly disproportional to that conduct and therefore “excessive,” it should be deemed unconstitutional.

VII. The Due Process Clause Similarly Prevents the Government from Imposing Drastic, Punitive Fines.

Statement of the Case¹

Background

The United States filed a Complaint against Ms. Toth on September 16, 2015, seeking to collect a civil penalty for a willful failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) with the Internal Revenue Service (“IRS”) in 2007. (R.A. 2).

The Bank Secrecy Act of 1970 (“BSA”), 31 U.S.C. §5311 et seq., and its implementing regulations require U.S. taxpayers to report on an annual basis to the IRS any financial interest or other authority over a financial account in a foreign country via an FBAR. See 31 C.F.R. §1010.350(a); 31 U.S.C. §5314(a). Section 5314 of the BSA instructs the Secretary of the Treasury to prescribe rules requiring the reporting of such an interest, id.; see also 31 C.F.R. §1010.350, and provides for civil and criminal penalties for the failure to timely file an FBAR, see 31 U.S.C. §§5321 (Add. 66), 5322; 31 C.F.R. §1010.820 (Add. 74). The “civil penalty” regulation promulgated by the Treasury Secretary, 31 C.F.R. §1010.820, authorizes a maximum civil penalty of $100,000 (Add. 74). Prior to a 2004 amendment, the “civil penalty” section of the BSA, 31 U.S.C. § 5321(a)(5)), also limited the maximum penalty to $100,000. (Add. 70). However, the 2004 amendment raised the maximum penalty that the Treasury Secretary may impose for a willful violation of §5314 to the greater of $100,000 or 50 percent of the amount in the bank account. 31 U.S.C. §5321(a)(5)(C)(i). (Add. 66). In this case, the IRS imposed the maximum penalty on Ms. Toth: 50 percent of the bank account, amounting to $2,173,703, plus interest and fees totaling over $1 million. (See R.A. 3007; Add. 61). The final judgment entered against Ms. Toth was $3,227,424.66. (See Add. 61).

Origins of the Account

In 1999, Ms. Toth, while in Argentina, signed paperwork opening a Union Bank of Switzerland (“UBS”) account in her name (the “Account”). (See R.A. 3130; 3133). The Account was a gift from Ms. Toth's father just prior to his death in 1999. (See R.A. 3133). Her father had survived the Holocaust by escaping Germany and eventually settling in Argentina, where Ms. Toth was born. (See R.A. 3130). Ms. Toth's father was a successful businessman. (See R.A. 3131). He banked in Switzerland, as it was the financial headquarters for his company, and also because he felt Switzerland had been good to those who fled the Nazis during World War II. (See R.A. 3131). There is no evidence of any criminality related to the Account.

Disclosure of the Account to the IRS

In 2010, Ms. Toth received notice from UBS that the Account was within the scope of a 2009 treaty between Switzerland and the United States concerning holders of numbered Swiss bank accounts. (See R.A. 3136). The treaty provided, among other things, that the identity of U.S. citizens with Swiss bank accounts would be disclosed to the IRS. (See id.). Ms. Toth contacted the IRS in November of 2010 concerning the Account out of concern that UBS was not withholding taxes on her behalf as she believed. (See R.A. 3138; 3141; 3143). Ms. Toth understood UBS to be satisfying any reporting obligations as well as obligations concerning the withholding of taxes. (See R.A. 3141). The IRS advised Ms. Toth to file FBARs, a requirement of which she was previously unaware. (See R.A. 3144).

After contacting the IRS in November (eight months prior to receiving notice of an audit by the IRS), Ms. Toth sent correspondence to the Treasury Department enclosing an FBAR and stating she recently learned that she may owe back taxes as a result of her UBS Account and that filing an FBAR was required. (See R.A. 434; 3116; 3119). She further explained her belief that taxes were being withheld on her behalf, but now understood that may have only been for taxes due to Switzerland. (See R.A. 434; 3119). Finally, she stated that she needed to get more information concerning her Account, but would file amended tax returns and additional FBARs. (See R.A. 434; 3119). The IRS received the November 4, 2010, letter and accompanying FBAR on November 8, 2010. (See R.A. 433-434; 3121). At the time of receipt, the IRS had not yet been alerted to Ms. Toth's UBS Account pursuant to the treaty. (See R.A. 3122-3123).

Ms. Toth wrote again to the Treasury Department on November 30, 2010, and enclosed five completed FBAR forms for the calendar years 2005-2009. (See R.A. 3072; 3124). Ms. Toth noted that “upon asking and reading, it seems to me that reporting these five last years is the correct procedure. . . .” (R.A. 3072). For unknown reasons the letter and FBAR forms were received by another government agency, the Medicare Secondary Payor Recovery Contractor (“MSPRC”), which filed them as of December 10, 2010. (See R.A. 3070; 3151). They were not received by the IRS. (See R.A. 3125).²

Ms. Toth filed amended tax returns that she hand-prepared for 2007-2009 in May, 2011 (again, prior to being notified of an IRS audit). (See R.A. 3144). She attached copies of her Account statements for each relevant year. (See R.A. 3128).

The Audit

On November 12, 2010, pursuant to the treaty and unbeknownst to Ms. Toth, the IRS received records relating to the Account. (See R.A. 421). On June 28, 2011, the IRS first notified Ms. Toth that she was subject to an audit. (See R.A. 3145).

The IRS determined that Ms. Toth made mistakes in her amended tax returns, some to her disadvantage. (See R.A. 3167; 3168; 3170). For example, in 2007, the year at issue, Ms. Toth over-reported and overpaid by $11,254.00 and, as a result, was due a tax refund. (See R.A. 3065; 3170).

On February 8, 2012, the IRS assessed Ms. Toth a Title 26 Civil Fraud Penalty for the years 2005-2008 (no penalty was assessed for 2009). (See R.A. 3172). She paid a total of $39,230.01 in penalties on February 29, 2012, for tax years 2005-2008, (see R.A. 3173); her overpayment was credited against the penalty. (see id.).

The Misdirected FBARs

During the audit, Ms. Toth learned the IRS did not receive the FBARs she mailed on November 30, 2010. (See R.A. 3148). On July 4, 2011, in correspondence with the MSPRC,³ she was informed that the MSRPC had on file her November 30, 2010, letter to the Treasury Department and her five FBARs. (See R.A. 3070). The MSPRC sent her copies on July 25, 2011, which she shared with the IRS Examiner conducting the audit.⁴ (see R.A. 3154). The IRS auditors disregarded the MSPRC letter and the evidence of Ms. Toth's efforts to file FBARs. (See R.A. 3044; 3155-3157).

Notice of Amount of Penalty

On September 19, 2013, the IRS assessed a penalty of $2,173,703.00 against Ms. Toth for willful failure to timely file an FBAR for the 2007 calendar year — half the value of her bank account that year. (See R.A. 3007).

Service of Process

Ms. Toth did not pay the penalty. The Complaint seeking to collect it was thus filed on September 16, 2015. (See R.A. 2). Service was accomplished on January 11, 2016. 110 at 1-2. (See R.A. 3). An amendment to Rule 4(m) of Federal Rules of Civil Procedure, shortening the time for service of process from 120 to 90 days, became effective on December 1, 2015.⁵ See Fed. R. Civ. P. 4(m).

Ms. Toth appeared pro se up to the point of the District Court's sanction against her. (See Add. 12; R.A. 13).

Discovery Sanction

The District Court sanctioned Ms. Toth for discovery failures on October 15, 2018. (See R.A. 12). The sanction established as fact the critical element in the case: Ms. Toth's “willfulness” in failing to file an FBAR. The facts concerning the sanction are incorporated into the Argument at section II, infra.

Summary Judgment

On February 21, 2020, the government moved for summary judgment. (See R.A. 17). Ms. Toth opposed the motion, arguing that material facts were in dispute and judgment was not warranted as a matter of law. (See id.). The District Court granted summary judgment in favor of the government on September 16, 2020. (See Add 58; R.A. 18).

Summary of Argumen t

The government imposed an over $2 million penalty on Appellant for her failure to report a foreign bank account for the year 2007 and obtained a judgment in the amount of over $3 million including late penalties and interest. Appellant challenges this exorbitant penalty as unconstitutional in violation of the Excessive Fines clause of the Eighth Amendment. (P. 40). The penalty imposed is clearly punitive and as such is subject to Eighth Amendment scrutiny; it is also “grossly disproportional” to the conduct — a failure to report an account — committed by Appellant.

Appellant further challenges the government's authority to impose this exorbitant penalty on account of a Treasury Regulation that caps such penalties at $100,000. (P. 29). Despite an amendment to the statute raising the maximum penalty to half the value of a subject bank account, the regulation has not been revised and thus creates an ambiguity in the statutory and regulatory scheme that requires the statute to be read consistently with the regulation. Even if the Court determines the statute imposing the higher penalty controls, the existence of the regulation on the books offends fundamental principles of notice expressed in interpretive doctrines such as lenity, as well as in the Administrative Procedure Act, requiring proper notice to those affected by agency regulations. (P. 35).

Appellant also challenges the District Court's sanction order that found against Appellant as a sanction for discovery violations the critical element of “willfulness.” (P. 14). A non-willful penalty under the FBAR statute is $10,000; a willful penalty is half the value of the subject account. Appellant's conduct, proceeding pro se, did not warrant a sanction that was tantamount to a default judgment against her and constituted an abuse of discretion. Finally, the District Court erred in concluding that the undisputed material facts supported a finding of willfulness, in any case. (P. 24). Appellant was unaware of her obligation to report her account. Once she became aware she attempted to comply with the requirements and filed amended tax returns. There were substantial, material facts in dispute concerning the critical element of her willfulness.

Argument

I. The District Court Erred in Denying Ms. Toth's Motion to Dismiss for Insufficient Service of Process.

On October 13, 2016, Ms. Toth moved to dismiss for insufficient and defective service of process because the government failed to serve her within 90 days or to seek an extension of time, as proscribed by Fed. R. Civ. P. 4(m). (See R.A. 6). Rule 4(m) was amended on April 29, 2015, reducing the time for service from 120 to 90 days. See Order of the Supreme Court of the United States, Apr. 29, 2015, 305 F.R.D. 457. In denying the Motion to Dismiss, the Court found that “the current version of Rule 4(m) does not apply in this case.” (Add. 4). This was error.

A. Standard of Review

The application of an incorrect legal standard in denying a motion to dismiss is reviewed de novo. See U.S. v. Mojica-Rivera, 435 F.3d 28, 33 (1st Cir.2006), quoting United States v. Colon-Munoz, 318 F.3d 348, 357-358 (1st Cir.2003).

B. The Amended Rule for Service Applied to this Case

The Supreme Court ordered that the amendment to Rule 4(m) “shall take effect on December 1, 2015, and shall govern in all proceedings in civil cases thereafter commenced and, insofar as just and practicable, all proceedings then pending.” 305 F.R.D. at 460 (emphasis added); see also 28 U.S.C.A. §2074 (the Supreme Court is to transmit to Congress proposed amendments to the rules, and such proposed rules will apply to pending proceedings unless doing so would be unfeasible or would work injustice). The complaint was filed on September 16, 2015, and thus was a “pending” case contemplated by the amendment to Rule 4(m). (See R.A. 2). By its plain terms, then, the amended Rule applied and service should have been effected on Ms. Toth no later than December 15, 2015 (or, in the alternative, the government should have sought an extension). The District Court's holding to the contrary was error.

The Court compounded its erroneous legal ruling by failing to make any findings as to why applying the amended Rule to this case would not be “just and practicable.” 305 F.R.D. at 460. Of course, it was clearly “just and practicable” to apply the amended Rule. The Committee Notes make plain that the intent of the amendment was “to get cases moving more quickly and shorten the overall length of litigation.” 305 F.R.D. 457, 524.⁶ The United States was on notice as of April 29, 2015 of the amendment and had ample time after the amended Rule went into effect to serve Ms. Toth. Cf. Mojica-Rivera, 435 F.3d at 33 (it was just and practicable to apply amended version of Rule 15(c) where defendant had time after amended rule went into effect in which to comply with rule (citing United States v. Ristovski, 312 F.3d 206, 212 (6th Cir.2002); U.S. v. Correa, 362 F.3d 1306, 1309 (11th Cir.2004)).

For these reasons, this Court should reverse the District Court's order denying Ms. Toth's Motion to Dismiss.

II. The District Court Erred in Imposing a Finding of Willfulness as a Sanction Against Ms. Toth.

Rule 37(b)(2) authorizes courts to appropriately respond to parties who have disobeyed discovery orders. See Fed. R. Civ. P. 37(b)(2). While the court's discretion in fashioning appropriate sanctions is broad, it is not unlimited. See Chilcutt v. United States, 4 F.3d 1313, 1319–20 (5th Cir.1993). The evaluation of an appropriate sanction implicates the totality of the circumstances. See Hooper-Haas v. Ziegler Holdings, LLC, 690 F.3d 34, 38 (1st Cir. 2012). In determining a Rule 37 sanction, district courts are to:

weigh the severity of the discovery violations, legitimacy of the party's excuse for failing to comply, repetition of violations, deliberateness of the misconduct, mitigating excuses, prejudice to the other party and to the operations of the court, and adequacy of lesser sanctions. On the procedural side, we consider whether the district court gave the offending party notice of the possibility of sanctions and the opportunity to explain its misconduct and argue against the imposition of such a penalty.

AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429, 435 (1st Cir.2015), citing Vallejo v. Santini–Padilla, 607 F.3d 1, 8 (1st Cir.2010) (internal citations omitted). Here, the District Court sanctioned Ms. Toth — an elderly pro se litigant — for her allegedly dilatory and incomplete discovery responses, which conduct the Court concluded prejudiced the government, by entering a finding of “willfulness” against her (tantamount to a default judgment). The sanction was improper and should be vacated.

A. Standard of Review

This Court reviews a District Court's imposition of sanctions for abuse of discretion. See Cruz v. Savage, 896 F.2d 626, 632 (1st Cir.1990). “[I]f a discretionary decision rests on an error of law, that is perforce an abuse of discretion.” Jensen v. Phillips Screw Co., 546 F.3d 59, 64 (1st Cir.2008). “A sanctions order must be evaluated on appeal in light of the record that was before the district court at the time the order issued.” Id.

B. The Dispositive Sanction was Unwarranted in this Case

The District Court abused its discretion in sanctioning Ms. Toth with a finding on the dispositive element of willfulness. The Court's decision was overly influenced by the government's mischaracterizations of Ms. Toth's conduct, which it took pains to magnify even to the point of making outright misrepresentations to the Court for which it later apologized.⁷ These mischaracterizations of Ms. Toth as evasive and obstructionist, which factored heavily into the Court's decision, were not supported by the record. (See Add. 11; 18). The Court erred in relying on them. 

The government aggressively sought to enforce strict time limits against Ms. Toth within a six-month period after serving its discovery requests. In early November 2017, just two months after serving written discovery, it notified the Court of its intention to move to compel Ms. Toth's responses. (See R.A. 9). By December, the government was requesting sanctions. (See R.A. 10). The Court sanctioned Ms. Toth on January 19, 2018, ordering that all objections to the government's discovery requests except those based on privilege were deemed waived. (See id.).

Ms. Toth's delays in responding to discovery requests only spanned a few months, however. Written discovery began on September 20, 2017, upon service of the government's initial disclosures (approximately 1,200 pages encompassing Ms. Toth's IRS file and UBS records), requests for production, interrogatories, and requests for admission. (See Add. 13-14). Ms. Toth timely served the United States with initial disclosures, but took until March 12, 2018, to amend them as ordered by the Court and to provide responses to discovery requests. (See Add. 14-15).

In March, the government requested additional, severe sanctions, asking the District Court to find five “Facts” that would essentially establish the elements of its case against Ms. Toth. (See R.A. 86-87). These “Facts” were:

(R.A. 86-87).

Notably, Fact 2, which the government represented as “uncontroverted,” was demonstrably false. Ms. Toth had filed FBARs and amended tax returns disclosing the Account months prior to the audit. (See R.A. 3117-3118). But this “Fact” evidences yet another misrepresentation by the United States: by representing to the Court that Ms. Toth had only attempted to file FBARs and amended tax returns after being “caught red-handed” by the IRS auditors, the government suggested that a finding of willfulness was essentially a forgone conclusion. (R.A. 123). After Ms. Toth's counsel entered appearances, however, counsel for the government apologized “for the inaccuracy and the misunderstanding in his prior filings and his representations to the Court in this regard.” (R.A. 2994).

The Court reserved ruling on the sanction motion, recognizing that this elderly, pro se defendant may be unable to generate professional discovery responses. At a hearing on March 12, 2018, the Court stated to counsel for the United States, “[h]opefully [you can] solve some of this in deposition that you can't resolve in documents. She said she doesn't have the documents. I'm not sure she knows what an interrogatory is. You will depose her and we'll see where we are.” (R.A. 3280).

Ms. Toth was deposed three times, the first two of which took place in March. Despite three depositions and no basis to assert that Ms. Toth had documents in her possession, the government persisted in misrepresenting Ms. Toth as withholding material information⁸ and pressed its request for severe sanctions, filing an amended motion for sanctions on July 27, 2018. (See R.A. 10-11). This motion again requested the Court establish (now amended) “Facts” as a sanction, including a finding of willfulness.⁹ (See R.A. 121).

The Court allowed the motion on October 15, 2018, establishing Ms. Toth had “willfully failed to file an FBAR regarding the Account with respect to calendar year 2007.” (R.A. 12; Add. 22). The Court justified its sanction by finding that Ms. Toth's discovery violations were severe, repeated and deliberate. (See Add. 18). Evidence of severity and deliberateness, however, was weak. Ms. Toth was pro se and, as she explained to the Court, after being overwhelmed with 1,200 pages of documents produced by the government, “I try very hard. I haven't done anything else since I got about 1,200 pages of documents that [the government] gave. . . . It took me a long time to work through those papers. . . . I just worked really hard for this, really, really hard.” (R.A. 3266-3267).

The Court's findings were premised in large part on its reliance on the government's representations. For example, the Court found that Ms. Toth had “already demonstrated a pattern of dilatory conduct by evading service. . . .” (Add. 18). And the Court accepted the government's misrepresentations that Ms. Toth was withholding “32 categories of responsive documents which were withheld based on non-privilege objections.” (Add. 15). Withholding 32 categories of responsive documents would be sanctionable, but Ms. Toth did not do so, nor did she even purport to withhold documents. Rather, her discovery responses explained that the government's document requests sought documents that had been “either destroyed or lost [ ] over the years. I do not possess any other recorded evidence which I expect might be used to support my claims or defenses.” (R.A. 243-244). Ms. Toth referenced documents that had been produced to her by the government, had been given to the IRS, and otherwise were “lost or destroyed.” Far from not answering the government's discovery requests, her responses comprised 28 single-spaced pages and included a one-and-a-half-page table of contents with a key to identify the documents referenced in her responses. (See id.). Further, her responses to interrogatories, though containing objections, provide 10 single-spaced pages of answers. (See R.A. 246-255). Further, the government questioned Ms. Toth at her depositions concerning her discovery responses. (See e.g., R.A. 1128-1131). In the depositions, Ms. Toth affirmed several of the “Facts” the government had asked the Court to find as a sanction. Indeed, the government later conceded that all but one of the “Facts” had been admitted by Ms. Toth during the depositions — the one fact she disputed was that she had acted willfully. (See R.A. 120-121).

Additionally, the Court found, as the United States had argued, that Ms. Toth's failure to provide information had prejudiced the government. (Add. 20). This was also unsupported by the record.

Ms. Toth's actions did not warrant the sanction imposed, and as outlined above, the Court erred in evaluating several of the relevant factors for imposition of such a severe sanction. The District Court misunderstood Ms. Toth's misconduct as a refusal to provide discovery. The District Court also erred in its assessment of Ms. Toth's deliberateness, as it relied on the government's inaccurate representations. Prejudice to the United States was minor. Other mitigating circumstances should have tipped the scale in Ms. Toth's favor, including her age and pro se status; the fact that she had not professed to withhold documents; and the fact that the government conceded that Ms. Toth's deposition testimony provided the information it sought. While the District Court has a legitimate need to maintain the “the orderly and efficient administration of justice,” a balancing of the factors should have weighed in favor of Ms. Toth's ability to put on her defense. See Hooper-Haas, 690 F.3d at 38 (“[T]hese factors require a court to balance the desirability of resolving cases on the merits against the importance of 'the orderly and efficient administration of justice'”(citation omitted).).

Additionally, and despite the Court finding otherwise, the sanction imposed was tantamount to a default judgment. (Add. 19-20). While Rule 37(b)(2)(A)(i) authorizes a court to deem true certain facts as a sanction, courts have recognized “that a court's decision to deem certain facts established may equate to a default judgment in some circumstances.” Chilcutt v. United States, 4 F.3d 1313, 1320 (5th Cir.1993); see also Freeland v. Amigo, 103 F.3d 1271, 1276 (6th Cir.1997) (stating that a sanction precluding certain expert testimony was tantamount to dismissal of the case, and thus reviewing the sanction as one resulting in dismissal); Peltz v. Moretti, 292 F. App'x 475, 478 (6th Cir.2008). The Court relied on Chilcutt for the premise that because Ms. Toth could still pursue affirmative defenses, entering a finding that she acted willfully was not tantamount to a default judgment. (Add. 19-20). But the sanction in Chilcutt did not prevent the defendant from putting on a comparative negligence defense at trial. The Chilcutt Court thus found the sanction “a far cry from a default judgment.” Id. at 1320. By contrast, the sanction imposed in this case found the critical element of “willfulness” against Ms. Toth, thereby defeating her only defense and obviating a trial, which resulted in a multimillion dollar judgment against her.

The sanction imposed on Ms. Toth was extreme, unwarranted, and an abuse of discretion.

III. The Court Erred in Granting Summary Judgment in Favor of the Government

The government moved for summary judgment on the grounds that there were no facts in dispute and that Ms. Toth willfully failed to file an FBAR for 2007; that the Eighth Amendment does not apply to FBAR penalties and the penalty is not excessive in any case; and the Treasury Regulation capping the penalty at $100,000 is obsolete. (Add. 44; 45; 50). Ms. Toth opposed the government's motion on each of those grounds. (See R.A. 17). The Court found, as a matter of law, that Ms. Toth's conduct was willful; that the IRS had authority to impose the over $3 million penalty pursuant to the 2004 amendment to the BSA; and that the penalty was not a “punishment” to which the Eighth Amendment would apply (and, even if it were, that the penalty was not an “excessive fine”). Each of these findings is erroneous.

A. Standard of Review

This Court reviews the District Court's ruling summary judgment de novo. See Zabala-De Jesus v. Sanofi-Aventis P.R., Inc., 959 F.3d 423, 427 (1st Cir.2020). A court of appeals will uphold summary judgment only if the record, viewed in the light most favorable to the nonmovant, reveals that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. Casas Off. Machines, Inc. v. Mita Copystar Am., Inc., 42 F.3d 668, 678 (1st Cir.1994), citing Celotex Corp. v. Catrett, 477 U.S. 317, 324–25 (1986).

B. The Court Erred in Finding Appellant's Conduct was Willful

1. The Court Erred in Finding that “Willfulness” in §5321(a)(5)(C) Encompasses Conduct that is Reckless or “Willfully Blind”

The Court held in its order on summary judgment that, irrespective of its sanction order, Ms. Toth was “willful” in failing to file an FBAR as a matter of law. (Add. 49). This conclusion was error.

In so holding, the Court rejected Ms. Toth's argument that the Supreme Court's decision in Ratzlaf v. United States, 510 U.S. 135 (1994) — which interpreted the meaning of willfulness in the BSA in the criminal context — also governs in the civil context. In Ratzlaf, the Court held that the analogous criminal provision of the BSA, §5322, which also governs criminal violations of the FBAR requirement, requires “an intentional violation of a known legal duty to report” to establish “willfulness.” Id. at 154 n.5. The Court concluded that the definition of willfulness in §5322(a) should be consistent with the definition of “willfulness” as it appears in other sections of the subchapter.

Recognizing that “[a] term appearing in several places in a statutory text is generally read the same way each time it appears,” id. at 143, the Court found that willfulness requires both “'knowledge of the reporting requirement' and a 'specific intent to commit the crime,' i.e., 'a purpose to disobey the law.'” Id. at 141 (internal citations omitted).

Because §5321 is a provision of the same subchapter of the BSA, the definition of “willfulness” in the context of FBAR reporting should be consistent with the decision in Ratzlaf. See United States v. Zwerner, 2014 WL 11878430, *3 n.3 (S.D. Fla. Apr. 29, 2014) (adopting the Ratzlaf definition of willfulness for civil FBAR penalties); United States v. Pomerantz, 2017 WL 4418572, *3 (W.D. Wash. Oct. 5, 2017) (a “willful” failure for purposes of the BSA is “an intentional violation of a known legal duty to report”). Similarly, the IRS itself in 2006 and 2008 defined willfulness as “having the same definition and interpretation under §5322 (the civil penalty) and §5322 (the criminal penalty)”; that is, “a voluntary intentional violation of a known legal duty[.]” I.R.S. CCA 200603026, 2006 WL 148700 at *1-2 (Jan. 20, 2006) (Add. 75-76); see also 4.26.16.4.5.3 (07-01-2008) (defining civil willfulness as “a voluntary, intentional violation of a known legal duty.”). I.R.M. §4.26.16.4.5.3 (07-01-2008) (Add. 81).¹⁰

The District Court rejected this argument and found that willfulness in the civil FBAR context includes reckless conduct or “willful blindness,” citing the decisions in United States v. Williams, 489 Fed. Appx. 655, 658 (4th Cir. 2012) and Bedrosian v. United States of Am., Dep't of the Treasury, Internal Revenue Serv., 912 F.3d 144, 153 (3d Cir. 2018). (Add. 49-50). These decisions rely on Safeco Ins. Co. of America v. Burr, where the Supreme Court, in assessing “willfulness” in the Fair Credit Reporting Act, held that “where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” 551 U.S. 47, 57 (2007).

While the civil willfulness standard under Safeco may apply in other statutory contexts, the Supreme Court in Ratzlaf interpreted the meaning of willfulness in the BSA, and that interpretation clearly governs for violations of the FBAR rules.

2. Even if the Civil Standard of Willfulness Applies to the Circumstances of this Case, Appellant was Still Not Willful as a Matter of Law.

The District Court found Ms. Toth willful as a matter of law because “she took deliberate steps to maintain the secrecy of the account, in spite of opportunities for disclosure, which evidences willful 'conduct meant to conceal or mislead sources of income.'” (Add. 49-50). The Court based this conclusion upon several facts marshalled in its summary judgment decision and order on Ms. Toth's motion to vacate sanctions, which, it appears, the Court incorporated into its summary judgment decision. (Add. 49). These facts were: (1) Ms. Toth had access to bank records and statements for the Account (Add. 50); (2) Ms. Toth failed to answer Question 7a in Schedule B, Part III of her tax return, which asks taxpayers whether they have an interest in a foreign account (Add. 34); (3) by not completing a W-9 she ensured that the Account would not trigger UBS's reporting requirements for holders of U.S. securities (Add. 36); (4) she maintained a numbered account to ensure her name and account number would not be reported (Add. 36); and (5) after UBS notified her that it would no longer make money transfers without listing the ordering party, she told UBS she no longer wanted to make money transfers and from 2006-2008, relatives in South America transferred money to her U.S. bank account and she reimbursed them by transferring funds to them from the Account. (Add. 36-37; 50).

Even using the standard set out in Bedrosian and Williams, the Court erred in holding, based solely on these findings, that Ms. Toth was willfully blind or reckless in her decision not to investigate her U.S. tax obligations for the Account or to report the Account to the IRS. (Add. 50). Bedrosian and Williams are clearly distinguishable. Bedrosian involved a successful businessman who failed to report his foreign bank account after his accountant told him that he had an obligation to file an FBAR. See Bedrosian, 912 F.3d at 148. The defendant in Williams likewise had an accountant, and he also admitted that he knew he had an obligation to file an FBAR and chose instead to hide his account. Williams, 489 F. App'x at 656.

Unlike the savvy defendants in Bedrosian and Williams, Ms. Toth did not have an accountant; there is no evidence she was told or even questioned whether she had reporting obligations, and in fact she believed that they were being taken care of by UBS.

Ms. Toth denied that she had any awareness of the obligation to file an FBAR. (See R.A. 3136). Once she became aware, she contacted the IRS and asked what to do. (See R.A. 3144). She then submitted an FBAR with a letter explaining she may owe taxes and would amend her tax returns, which she did. (See R.A. 3116-3117; 3144-3145). These are substantial material facts going to the question of willfulness the District Court apparently did not consider that militate against a finding of willfulness. The cherry-picked facts the District Court relied on either were not established in the record (as the Court stated with respect to (3) above), or the inferences were taken in the light most favorable to the government rather than Ms. Toth. For example, the District Court inferred from fact (1) above that because Ms. Toth had access to bank records and statements for the Account, that she evidenced a reckless disregard for the risks of not investigating her tax obligations. (Add. 50). This conclusion ignores the contrary evidence that Ms. Toth believed that the Bank was withholding taxes on her behalf. 171-1 at 18, 23. Likewise, the Court inferred from fact (3) that Ms. Toth did not complete a W-9 because she sought to maintain the secrecy of the account. Yet Fact (3) does not in any way establish either that Ms. Toth was attempting to conceal her account from U.S. taxing authorities, or that she had any understanding of the obligation to file an FBAR.

Ms. Toth is entitled to a trial on the issue. The District Court's order entering summary judgment for the government should be reversed.

C. The Court Erred in Holding that the 50 Percent Penalty Assessed by the IRS Did Not Exceed the IRS's Authority Under the Applicable Implementing Regulation

As noted, prior to 2004, the “Civil Penalty” section of the BSA allowed for a maximum penalty of $100,000 for a violation of the reporting requirements. (Add. 70). The Treasury regulation implementing the penalty, 31 C.F.R. §1010.820(g)(2), also allows for a maximum penalty of $100,000. (Add. 74). The Jobs Creation Act amended the BSA to raise the maximum penalty that the Treasury Secretary may impose for a willful violation from $100,000 to the greater of $100,000 or half the value of the subject bank account. 31 U.S.C. §5321. (Add. 66). Ms. Toth argued at summary judgment that the regulation (which has never been amended or rescinded) and the amended statute can be read in harmony. The District Court disagreed, holding that the implementing regulation was superseded by the civil penalty statute, such that the maximum penalty set forth in the regulation — $100,000 — was no longer valid. (Add. 46-47). This was error, as the statute is ambiguous and must be read in conjunction with the implementing regulation.

1. The Conflicting Statute and Regulation

The 2004 amendment raised the maximum penalty that the Secretary of the Treasury may impose for a willful violation from $100,000 to the greater of $100,000 or half the value of the subject bank account. (Add. 66). Subsection A of §5321(a)(5) provides as follows:

(A) Penalty authorized — The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(Id.).

Subsection B sets the maximum penalty amount for non-willful violations. (Id.). Subsection C specifically addresses willful violations and the maximum penalty for such violations:

(C) Willful violations — In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314 —

(i) the maximum penalty under subparagraph B(I) shall be increased to the greater of —

(I) $100,000, or

(II) 50 percent of the amount determined under subparagraph (D). . . .

(D) Amount — The amount determined under this subparagraph is —

. . .

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

(Id.).

Prior to the 2004 amendment, the Statute provided as follows:

(5) Foreign financial agency transaction violation —

(A) Penalty authorized — The Secretary of the Treasury may impose a civil money penalty on any person who willfully violates or any person willfully causing any violation of any provision of section 5314.

(B) Maximum amount limitation — The amount of any civil money penalty imposed under subparagraph (A) shall not exceed —

. . .

(ii) in the case of violation of such section involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, 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

(Add. 70).

The statute provides a maximum penalty and, by its plain language, a grant of discretionary authority to the Treasury Secretary, who “may impose a civil penalty.” 31 U.S.C. §5314(a)(5)(A) (emphasis added).

The Secretary exercises his/her discretion through the implementing regulation for the penalty provision of the Statute, 31 C.F.R. §1010.820(g)(2), which provides for a maximum penalty of $100,000.¹¹ (Add. 74). This $100,000 cap has not been amended or rescinded. The regulation has been amended for other purposes as recently as 2016, yet the maximum penalty remains at $100,000. See infra. Thus, while the statutory increase in the maximum penalty provided the Treasury Secretary with greater leeway to impose a greater penalty, the Treasury regulation implementing the statute did not change, and therefore the maximum penalty did not increase. “Under this scheme, the statute . . . permits the Secretary to impose a penalty of up to 50 percent of the account balance, but under [the regulation] the Secretary has limited the penalty to be enforced to $100,000.” United States v. Wadhan, 325 F. Supp. 3d 1136, 1139 (D. Colo. 2018).

2. The Penalty Assessed by the IRS Exceeded Its Authority

Because the penalty in the present case exceeds the maximum allowed by the regulation — which the Treasury Secretary could have changed in the wake of the statutory amendment, but did not — Ms. Toth argued that the IRS exceeded its authority in imposing the $2,173,703-plus penalty against Ms. Toth. (Add. 45). The District Court took a contrary view, observing that the 2004 amendment to §5321(a)(5)(C) contains mandatory language and therefore makes clear Congress' intent to increase the maximum penalty to 50 percent of the balance of the account, rendering invalid the lower maximum penalty in the regulation. (Add. 47).

Two courts to have addressed the issue have agreed with Ms. Toth's position that the regulation controls. See United States v. Wadhan, 325 F. Supp. 3d 1136, 1138-41 (D. Colo.2018); United States v. Colliot, 2018 WL2271381 at *2-3 (W.D. Tex. May 16, 2018). Several courts faced with the same issue since 2018 have concluded that the 2004 amendment to the statute superseded the regulation. See United States v. Horowitz, 978 F.3d 80, 91 (4^th Cir. 2020); Norman v. United States, 942 F.3d 1111 (Fed. Cir.2019); Kimble v. United States, 141 Fed. Cir. 373, 388 (2018); United States v. Park, 389 F. Supp. 3d 561, 571-74 (N.D. Ill.2019); United States v. Rum, 2019 WL 5188325 at *2 (M.D. Fla. Sept. 26, 2019); United States v. Shoenfeld, 2019 WL 2603341 at *4 (M.D. Fla. June 25, 2019); United States v. Garrity, 2019 WL 1004584 at 2 (D. Conn. Feb. 28, 2019).

There are no controlling cases on the issue in this Circuit. However, the reasoning of the latter courts is flawed insofar as they ignore accepted principles of administrative law. It is well settled that “[t]he power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984), quoting Morton v. Ruiz, 415 U.S. 199, 231 (1974). “If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute.” Id. at 843-44. “Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator or an agency.” Id. See also Fulman v. United States, 545 F.2d 268 (1st Cir.1976) (Treasury regulations “must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and should not be overruled except for weighty reasons.”).

a. In Enacting the Statute, Congress Created a Maximum Penalty, Not a Mandatory Penalty, Allowing for Agency Discretion to Implement it Regulations.

Those courts that hold that the regulation capping the FBAR penalty at $100,000 is invalid fail to recognize that the amended statute sets forth a maximum penalty, not the penalty, which thus affords the Treasury Secretary the authority create a penalty that does not exceed the maximum. As such, “Congress has explicitly left a gap for the agency to fill . . .” Chevron, 476 U.S. at 843. Here, the agency filled that gap by choosing not to amend or otherwise alter the regulation, leaving the applicable penalty capped at $100,000.

b. The Treasury Secretary's Implementing Regulation is Consistent with the Statute.

The regulation is not “arbitrary, capricious, or manifestly contrary to the statute.” Id. Indeed, the regulation is consistent with the amended statute. The history of the amendments to the regulations since 2004 shows the Secretary was aware of the change in statute yet chose not to amend the regulation. As the Court in Wadhan pointed out:

[A]lthough the penalty caps in the statute and regulation differ, one cannot assume that the Secretary simply overlooked the difference between them. The difference has existed since 2004 — essentially 14 years. During that time, the Secretary made regular adjustments to another regulation, 31 C.F.R. §1010.821, that adjusted penalties to account for inflation. Among the penalties affected by this regulation is that created by 31 U.S.C. §5321(a)(5)(C), for which the inflationary increases have been made at least five times in the last eight years, but at no time was the listed penalty cap raised above $100,000. See Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42,503, 42,504-05 (June 30, 2016). The periodic revisions of the inflationary calculation required focus on the penalty cap, but it was never changed to comport with 31 U.S.C. §5321(a)(5)(C). This suggests that the Secretary was aware of the penalties available under 31 U.S.C. §5321(a)(5)(C) and elected to continue to limit the IRS' authority to impose penalties to $100,000 as specified in 31 C.F.R. §1010.820.

325 F. Supp.3d at 1139-1140. Similarly, as the Court in Colliot put it:

Section 5321(a)(5) sets a ceiling for penalties assessable for willful FBAR violations, but it does not set a floor. Instead, §5321(a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the penalty to be assessed so long as that penalty does not exceed the ceiling set by §5321(a)(5)(C).

2018 WL2271381 at *2 (internal citations omitted).

Thus, the statute and regulation may harmoniously be read together, and the statute therefore did not invalidate the regulation. See Chevron, supra. As such, the IRS — whose authority concerning FBARs was delegated to it by the Treasury Secretary — exceeded its authority in imposing a penalty in excess of $100,000 against Ms. Toth.

D. The Court Erred in Finding that the Rule of Lenity did not Apply

At summary judgment, Ms. Toth argued that even if the statute and regulation conflict, fundamental principles of notice expressed in interpretive doctrines such as the so-called “rule of lenity” (more commonly, but not exclusively, applied in the criminal context) and similar doctrines requiring strict construction of statutes imposing punitive fines require that any ambiguity be resolved in a defendant's favor, such that it was unfair to impose the much harsher statutory penalty on Ms. Toth. (Add. 50). The District Court held that because the statute is not ambiguous, and because the case is civil and not criminal, the rule of lenity does not apply. (Add. 51). This was error.

1. Any Ambiguity Resulting from a Conflict Between the Statute and the Regulation Must Be Resolved in Defendant's Favor as a Matter of the Due Process Doctrine of Lenity or Similar Judicial Doctrines.

“Elementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a State may impose.” BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 574 (1996). The fact that there is disagreement between courts around the country as to what the maximum penalty is for an FBAR violation raises an issue fundamental to our system of laws: citizens must have adequate notice of the potential penalties to which they may be subject in the face of a violation of the law.

The doctrine of “lenity” serves as an interpretive presumption favoring a defendant where there exists ambiguity in the law. “The main function of the rule of lenity is to protect citizens from the unfair application of ambiguous punitive statutes. Obviously, citizens should not be subject to punishment without fair notice that their conduct is prohibited by law.” United States v. Thompson/Center Arms. Co., 504 U.S. 505, 525 (1992) (Stevens, J., dissenting). While the “rule of lenity” is usually applied in the criminal context, courts have recognized its application in the civil context as well. See, e.g., Crandon v. United States, 494 U.S. 152, 158 (1990); Thompson/Center Arms. Co., 504 U.S. 505 (1992).

Lenity is premised upon a recognition that “'a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed. . . .'” Babbitt v. Sweet Home Chapter of Communities for a Great Oregon, 515 U.S. 687, 704 (1995), quoting United States v. Bass, 404 U.S. 336, 347–350 (1971). The doctrine has been explicitly applied to punitive fines by the government. See First Nat. Bank of Gordon v. Dep't of Treasury, Office of Comptroller of Currency, 911 F.2d 57, 65 (8th Cir. 1990) (“Penal provisions, even those involving civil penalties, should be strictly construed.”). See also Pacheco-Camacho v. Hood, 272 F.3d 1266, 1271 (9th Cir. 2001) (Applying lenity to not only “substantive ambit of criminal prohibitions, but also to the penalties they impose.”).

Further, the same principle has been applied in the context of punitive government fines, though not expressly using the term “lenity”: “We are here concerned with a taxing Act which imposes a penalty. The law is settled that 'penal statutes are to be construed strictly.'” C.I.R. v. Acker, 361 U.S. 87, 90 (1959), citing Federal Communications Comm'n v. American Broadcasting Co., 347 U.S. 284, 296 (1954). “[O]ne 'is not to be subjected to a penalty unless the words of the statute plainly impose it.” Id., citing Keppel v. Tiffin Savings Bank, 197 U.S. 356, 362 (1905). See also Babbitt, 515 U.S. at n.18; Merriam Same v. Anderson, 263 U.S. 179, 187-188 (1923) (“in statutes levying taxes the literal meaning of the words employed is most important for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.”); Bowers v. New York and Albany Lighterage Co., 273 U.S. 346, 350 (1927) (same); American Net & Twine Co. v. Worthington, 141 U.S. 468, 474 (1891) (same); Benzinger v. United States, 192 U.S. 38, 55 (1904) (same); Bradley v. United States, 817 F.2d 1400, 1402-03 (9th Cir.1987) (“A tax provision which imposes a penalty is to be construed strictly; a penalty cannot be assessed unless the words of the provision plainly impose it.”)

The regulation capped the penalty at $100,000, whereas the amended statute capped the penalty at 50 percent of Ms. Toth's bank account. Even if this Court finds that the statute conflicts with the regulation and that the statute controls, Ms. Toth cannot be said to have been on fair notice of the consequences of her conduct. As a matter of fundamental fairness, the doctrine of lenity, and the similar doctrines above requiring strict construction of punitive fine statutes in favor of the subject of the fine, require that the issue be resolved in Ms. Toth's favor.

2. The District Court Erred in Finding the Statute was not Ambiguous

The District Court held that lenity does not apply outside the criminal context, but in any case, that the statute is not ambiguous. (Add. 47). The Court, however, considered the statute in isolation rather than in the context of the existing regulation (which the Court held in fact conflicts with the statute). (Id.). But, either the statute and the regulation can be read consistently (in which case Chevron deference requires the $100,000 cap to control, see supra at 35), or, alternatively, the statute and regulation are in conflict (in which case due process requires that the conflict be construed in Ms. Toth's favor).

3. Ms. Toth was Adversely Affected by the Failure of the Treasury Department to Repeal its Regulation in Violation of the Administrative Procedure Act

Finally, the Administrative Procedure Act codified the fundamental principles of notice discussed above and requires that regulations and amendments to regulations be published so that the public is apprised of changes in the law. 5 U.S.C. §552(a). Section 552(a) states that “[e]ach agency shall make available to the public information as follows: [. . .] (E) each amendment, revision, or repeal of the foregoing.” The “foregoing” includes “(D) substantive rules of general applicability adopted as authorized by law, and statements of general policy or interpretations of general applicability formulated and adopted by the agency.” Section 552(a) provides further that “[e]xcept to the extent that a person has actual and timely notice of the terms thereof, a person may not in any manner be required to resort to, or be adversely affected by, a matter required to be published in the Federal Register and not so published.” (Emphasis added). Failure to repeal or amend its regulation, which caps the penalty of the FBAR statute at $100,000, means that Ms. Toth “may not in any manner be . . . adversely affected . . .” by that failure. The regulation providing a punitive penalty that is dwarfed by the penalty actually imposed violates fundamental requirements of notice and is certainly an “adverse effect.” The judgment imposed in this case should be reversed.

E. The Court Erred in Finding that the Excessive Fines Clause of the Eighth Amendment Does Not Apply to the Penalty Set Out in 31 U.S.C. § 5321(a)(5)(A).

The Eighth Amendment protects against government overreach in the imposition of monetary penalties. “Under the Eighth Amendment, “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Timbs v. Indiana, 139 S. Ct. 682, 687 (2019). At summary judgment, Ms. Toth argued that the FBAR penalty is an “excessive fine.” (Add. 51). The District Court took a contrary view, reasoning that tax penalties are remedial, rather than punitive, and therefore outside the bounds of the Eighth Amendment. (Add. 52). But even if it were a “fine” for purposes of the Eighth Amendment, the Court said, the fine in this case was not “excessive.” (Add. 53; 55). These conclusions were error.

1. The District Court Erred in Concluding that the FBAR Penalty is Not “Punishment” and Therefore Not a “Fine” for Eighth Amendment Purposes.

The Supreme Court, in Austin v. U.S., 509 U.S. 602, 607-608 (1993), held that the Eighth Amendment's protections are not limited to government monetary exactions related to criminal proceedings, but include civil fines as well. The Court concluded that “the purpose of the Eighth Amendment . . . was to limit the government's power to punish.” Id. at 609. Thus, “[t]he Excessive Fines Clause limits the government's power to extract payments, whether in cash or in kind, 'as punishment for some offense.'” Id. at 609-610, quoting Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 265 (1989) (emphasis in original). See also United States v. Bajakajian, 524 U.S. 321, 327-328 (1998). Importantly, the Court held that “'[t]he notion of punishment, as we commonly understand it, cuts across the division between the civil and criminal law.'” Id. at 610, quoting United States v. Halper, 490 U.S. 435, 447-448 (1989). “'It is commonly understood that civil proceedings may advance punitive as well as remedial goals. . . .” Id. at 610, quoting Halper, 490 U.S. at 447.

The critical question, then, is whether a particular fine is “punishment.” If so, it is subject to Eighth Amendment scrutiny. To answer this question, the purpose of the sanction must be ascertained. “'[A] civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can only be explained as also serving either retributive or deterrent purposes, is punishment, as we have come to understand the term.'” Austin, supra, at 610, quoting Halper, 490 U.S. at 448 (emphasis added).

a. FBAR Penalties Are Punishment for Eighth Amendment Purposes

There is no question that the FBAR penalty for a willful violation is punishment. The FBAR penalty scheme includes fines for willful and non-willful violations. See 31 U.S.C.A. §§5321(a)(5)(B)(i) and (a)(5)(C). (Add. 66). Exceedingly greater fines are imposed on willful violators, including, as in this case, a maximum of half the value of the bank account. See 31 U.S.C.A. §§5321(a)(5)(B)(i), (a)(5)(C)(i)(II) and (a)(5)(D)(ii). (Id.). Significantly greater penalties based on culpable scienter makes inescapable the conclusion that the penalty is not solely remedial. At the least, it serves the purpose of deterrence. See United States v. Warner, 792 F.3d 847, 861 (7th Cir.2015) (“Congress apparently intended FBAR penalties to have a deterrent effect, see 31 U.S.C. §5321(a)(5)(C)”); see also Austin, supra, at 610 (civil sanctions serving deterrent purposes are considered “punishment” subject to Eighth Amendment).

The enormous penalty in this case tends towards retribution as well. Such punitive purposes are sufficient to meet the definition of “fine” under the Eighth Amendment. Any doubt is resolved by the “reasonable cause” exception to the imposition of the penalty. See 31 U.S.C. §5321(a)(5)(B)(ii) (allowing for no penalty to be imposed if the violation was due to reasonable cause or the amount was properly reported). (Add. 66). As the Court in Austin observed, exceptions to a penalty “serve to focus the provisions on the culpability of the owner in a way that makes it look more like punishment, not less.” 509 U.S. at 619.

For these reasons, this Court should hold as a matter of first impression that the FBAR penalty is a punitive fine subject to the Eighth Amendment. “For good reason, the protection against excessive fines has been a constant shield throughout Anglo-American history. . . . [F]ines may be employed 'in a measure out of accord with the penal goals of retribution and deterrence,' for 'fines are a source of revenue,' while other forms of punishment 'cost a State money.'” Timbs, 139 S.Ct. at 689, quoting Harmelin v. Michigan, 501 U.S. 957, 979 n.9 (1991) (“it makes sense to scrutinize governmental action more closely when the State stands to benefit.”).

Notwithstanding the weight of evidence that the FBAR penalty is a punitive fine, the District Court incorrectly held that this Court's decision in McNichols v. Commissioner of Internal Revenue, 13 F.3d 432 (1^st Cir.1993), bound the Court and prohibited it from holding an FBAR penalty was subject to Eighth Amendment constraints. (Add. 52). McNichols does not govern the FBAR penalty, however, and is otherwise distinguishable.

McNichols held that the tax assessment in that case was not subject to the Eighth Amendment. See McNichols, 13 F.3d at 434. There, the IRS assessed back taxes and penalties against a convicted drug dealer whose plea agreement explicitly apprised him of the eventuality of the IRS imposing tax penalties. Id. The Court held that “under the facts of this case, [we] do [not] we perceive any reason for applying the principles of Austin to petitioner.” Id. Even apart from the defendant's assent in McNichols, through his plea agreement, to the imposition of a penalty, that case involves a tax penalty, not an FBAR penalty. The First Circuit relied on precedents holding generally that tax penalties are “remedial” and thus not subject to Eighth Amendment analysis.

The FBAR penalty is not a tax penalty, however, and is thus not subject to those holdings. See United States v. Williams, 489 F. App'x 655, 663 (4th Cir. 2012) (“The FBAR-related penalty is not a tax penalty”); United States v. Simonelli, 614 F. Supp. 2d 241, 247 (D. Conn. 2008) (“Because there is no tax underlying the FBAR penalty, the FBAR penalty cannot be considered a 'tax penalty'”); United States v. Collins, 2021 WL 456962, at *9 (W.D. Pa. Feb. 8, 2021) (“the civil FBAR penalty is not a Title 26 'tax' penalty”); Moore v. United States, No. C13-2063RAJ, 2015 WL 1510007, at *13 (W.D. Wash. Apr. 1, 2015) (“FBAR is not a tax requirement, it is a requirement that allows the Government to track accounts held abroad”); Whistleblower 22716-13W v. Comm'r of Internal Revenue, 146 T.C. 84, 95 (2016) (“FBAR civil penalties are not among the tax-related penalties. . . .”). McNichols therefore does not govern, let alone bind, the District Court or this Court on the issue presented in this case.

Further, since the Supreme Court's decision in Austin, several courts have held that a variety of civil fines are subject to Eighth Amendment scrutiny. See Pimentel v. City of Los Angeles, 974 F.3d 917 (9^th Cir.2020) (city parking fines); Towers v. City of Chicago,173 F. 3d 619 (7^th Cir.1999) (fines for car owners who allow their vehicles to be used to transport illegal guns or drugs by others); SEC v. Alpine Securities Corp., 413 F.Supp 3d 235 (S.D.N.Y.2019) (same). See also Hudson v. U.S., 522 U.S. 93, 103 (1997) (“The Eighth Amendment protects against excessive civil fines, including forfeitures”). Several courts have also specifically held that the FBAR penalty is subject to Eighth Amendment scrutiny. See United States v. Bussell, 2015 WL 9957826 (C.D. Cal.2017) (holding FBAR is a “penalty” and the assessed amount violated the Eighth Amendment); United States v. Garrity, 2019 WL 1004584 (D. Conn. Feb. 28, 2019) (assessing constitutionality of FBAR penalty under the Eighth Amendment). Others have analyzed the FBAR penalty according to Eighth Amendment standards without expressly holding that it is a “fine” under the Eighth Amendment, but then holding, based on the particular circumstances in those cases, that the FBAR fine was not excessive. See e.g., Moore v. U.S., 2015 WL 1510007 *12 (W.D. Wash. Apr. 1, 2015).

2. The FBAR Penalty Imposed in This Case is an Excessive Fine Under the Eighth Amendment

Although the District Court held that the Eighth Amendment did not apply, it nonetheless analyzed “excessiveness” and concluded the penalty in this case was not in fact excessive. (Add. 53; 55). This, too, was error.

The Supreme Court, in United States v. Bajakajian, for the first time addressed the relevant considerations under the Eighth Amendment to determine when a fine is “excessive.” 524 U.S. 321 (1998). “The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality: The amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish.” Id. at 334. The Court concluded that “gross disproportionality” between a fine and the gravity of the offense is the appropriate standard. Id. A court “must compare the amount of the [penalty] to the gravity of the defendant's offense. If the amount of the [penalty] is grossly disproportional to the gravity of the defendant's offense, it is unconstitutional.” Id. at 337; see also United States v. Hedelman, 402 F.3d 220 (1st Cir.2005) (“A forfeiture will violate the Eighth Amendment's prohibition only if it is 'grossly disproportional to the gravity of the defendant's offense'” (quoting Bajakajian at 336-37)). “The case law invites us to consider as pertinent factors (1) whether the defendant falls into the class of persons at whom the . . . statute was principally directed; (2) other penalties authorized by the legislature (or the Sentencing Commission); and (3) the harm caused by the defendant.” Heldeman, 402 F.3d at 223; see also United States v. Levesque, 546 F.3d 78, 83 (1st Cir.2008).

In Bajakajian, the defendant was prosecuted for willfully transporting more than $10,000 in currency out of the United States without reporting it in violation of 18 U.S.C. §982(a)(1). 524 U.S. at 324. Upon his conviction, the Government required him to forfeit $357,144, pursuant to the forfeiture statute which broadly provided that “any property, real or personal, involved in such offense or any property traceable to such property” shall be forfeited. 18 U.S.C. §982(a)(1). Id. at 325. The Court concluded the forfeiture of $357,144 was “excessive.” Id. at 337. The Court reasoned that the defendant's crime was “solely a reporting offense. It was permissible to transport the currency out of the country so long as he reported it.” Id. The Court also pointed to the fact that the defendant's “money was the proceeds of legal activity and was to be used to repay a lawful debt.” Id. at 338. The Court also looked to the Sentencing Guidelines, which provided for a maximum sentence of six months and a maximum fine of $5000, which “confirm[ed] a minimal level of culpability.” Id. at 339.

The circumstances in Bajakajian are analogous to those in the present case and the decision makes clear that the over $3,000,000 penalty assessed against Ms. Toth here is excessive under the Eighth Amendment. Like Bajakajian, Ms. Toth committed a reporting offense. It is legal to have a foreign bank account, but Section 5314 of the Bank Secrecy Act requires those with such an account to disclose it to the Treasury Department. 31 U.S.C §5314.

The FBAR penalty assessed against Ms. Toth was the maximum penalty of 50 percent of the value of her bank account. 31 U.S.C. §§5321. (Add. 66). In light of the purpose of the statute, Ms. Toth's conduct simply does not warrant the maximum penalty, and the multi-million-dollar amount for her conduct is grossly disproportional to her offense. In addition to the lack of any attendant criminal activity, Ms. Toth's conduct tends to show she did not act with any criminal purpose. She alerted the government that she had not fulfilled her responsibility to file FBARs months prior to the IRS commencing an audit. (See R.A. 3116). Indeed, at the time of the audit she had not been accused of a failure to pay taxes or report her accounts, and she notified the government of her foreign account prior to the IRS receiving records of the Account as a result of the treaty. (See R.A. 3122-3123). She also filed amended tax returns, to which she attached copies of her UBS statements, and paid the outstanding tax liabilities (overpaying by $11,254) prior to the IRS contacting her. (See R.A. 3065; 3128; 3144; 3170).

Moreover, and unlike Bajakajian, Ms. Toth was not criminally prosecuted for her conduct, indicating the government did not believe her conduct warranted it. Even if she had been criminally prosecuted, however, the Federal Sentencing Guidelines fine for Ms. Toth's conduct would have been a fraction of the penalty imposed. The applicable Guideline in 2007 for a violation of the criminal FBAR statute, 31 U.S.C. §5322(a), was §2S1.3. Under that Guideline, the Base Offense Level is “6 plus the number of offense levels from the table in §2B1.1 . . . corresponding to the value of the funds. . . .” The loss amount is the Actual Loss of the tax underpayment for 2007, which was $54,525. (171-1 at 58).¹² Table §2B1.1 calls for the addition of 6 levels for that amount. The fine table at §5E1.2 for an Offense Level of 12 provides a fine range of $3000 to $30,000. The penalty assessed against Ms. Toth, including late penalties and interest, is thus one hundred times the maximum Guideline range.

Finally, like in Bajakajian, the penalty assessed against Ms. Toth “bears no articulable correlation to any injury suffered by the Government.” Bajakajian, 524 U.S. at 340. The amounts owed for underpayment of taxes and associated penalties, totaling $39,230.01, were assessed and paid by Ms. Toth prior to the FBAR penalty assessment. (See R.A. 3173). Moreover, it is illogical that the penalty for the reporting offense dwarfs the available penalties (and the penalties actually imposed on Ms. Toth) for the offenses the reporting statute was designed to prevent.

While Ms. Toth is among the “persons at whom the . . . statute was principally directed,” the statute is not geared simply to tax evasion, but much more serious conduct. See 31 U.S.C. §5311 (the purpose of the Act includes the prevention of “money laundering and financing of terrorism,” “the tracking of money that has been sourced through criminal activity or is intended to promote criminal or terrorist activity,” and “to safeguard the national security of the United States”). There is no question in this case that Ms. Toth's funds were not derived from or used for any illicit purpose. In this context, she is a relatively minor player considering the broad objectives of the statute and her minimal tax underpayments.

Similar to the offense in Bajakajian, the FBAR violation is a reporting violation. Even though Ms. Toth's reporting failure was connected to underpayment of taxes, the penalty is grossly disproportionate to her conduct in failing to report the account as well as in light of the robust regime of tax penalties that she had already been subject to. The existence of this penalty regime militates in favor of viewing the FBAR violation in this case as nothing more than a reporting violation. For example, taxpayers are already subject to strict penalties for tax evasion. See, e.g., I.R.C. §6662(b)(7), I.R.C. §6662(j)(2). Various criminal sanctions may also be imposed. See, e.g., I.R.C. §6531, I.R.C. §7201, I.R.C. §7203, I.R.C. §7206, I.R.C. §7207. Ms. Toth was already penalized under certain of these provisions prior to the imposition of the FBAR penalty. It should be assumed that she was sanctioned in a manner consistent with her culpability and the amount of tax deficiency.

3. A Trial is Necessary to Allow the Defendant the Ability to Prove Her Degree of Culpability for a Determination of Excessiveness

The level of a defendant's culpability is necessary to inform the Eighth Amendment analysis and the due process analysis (see infra at 52). Bajakajian, 524 U.S. at 338 (a court “must compare the amount of the [penalty] to the gravity of the defendant's offense.”) While the District Court found, as a sanction and for purposes of liability, that Ms. Toth acted “willfully,” even if that determination remains in place, Ms. Toth is entitled to a trial for a full vetting of the facts on her motives and state of mind in failing to file the FBAR, for the purpose of proving the excessiveness of the penalty under the Eighth Amendment. See Def. Nos. 1-14; 23-39.

VIII. The FBAR Penalty Structure Which Imposes a Penalty As a Percentage of the Amount in the Defendant's Bank Account Is Arbitrary in Violation of the Due Process Clause

Ms. Toth argued at summary judgment that the due process clause also prohibited the imposition of the multi-million dollar penalty in this case for a failure to report a bank account. (Add. 56). The District Court rejected the argument on the basis that a tax penalty is not punitive. (Add. 56-57). As stated above, the FBAR penalty is not a tax penalty. The premise of the Court's decision was therefore incorrect, and so was its conclusion.

As a matter of due process, punitive fines must bear some relationship to the conduct warranting the fine. See BMW of N. Am., Inc., 517 U.S. at 574. Even if this Court were to find that the Eighth Amendment does not apply to the fine in this case, the due process clause of the Fifth Amendment prohibits excessive fines, meaning fines that grossly exceed what is “reasonably necessary to vindicate the [government's] legitimate interests in punishment and deterrence.” Id. at 568. Moreover, the FBAR fine structure, which is based on the amount in a defendant's bank account, is by definition arbitrary, as two defendants committing exactly the same conduct could receive punitive fines of vastly different amounts.

Conclusion

For the reasons set forth above, this Court should reverse the District's denial of Ms. Toth's Motion to Dismiss and enter a dismissal for failure to timely effect service. Alternatively, the District Court's sanction order and order granting summary judgment should be vacated and the case remanded for further proceedings.

Respectfully submitted,
Monica Toth,

By her attorneys
Jeffrey Wiesner, No. 119207
Jennifer McKinnon, No. 1194292
Wiesner McKinnon LLP
90 Canal Street
Boston, MA 02114
Tel.: (617) 303-3940
Fax: (617) 507-7976
jwiesner@jwjmlaw.com
jmckinnon@jwjmlaw.com