Individual Argues Court Erred in Finding Willful FBAR Violation

UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
SAID RUM,
Defendant-Appellant

IN THE UNITED STATE COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

ON APPEAL FROM THE JUDGMENT OF
THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF FLORIDA, TAMPA DIVISION
HON. MARY S. SCRIVEN

REPLY BRIEF

Venar R. Ayar
Ayar Law
30095 Northwestern Hwy, Ste 102
Farmington Hills, MI 48334
(248) 262-3400
Attorney for Appellant

---

TABLE OF CONTENTS

STATEMENT OF AUTHORITIES

ARGUMENT

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT

CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMIT TYPEFACE REQUIREMENTS, AND TYPE-STYLE REQUIREMENTS

CERTIFICATE OF FILING AND SERVICE

STATEMENT OF AUTHORITIES

Cases:

Anderson v. United States, 44 F.3d 795 (9th Cir. 1995).

Cheek v. United States, 498 U.S. 192 (1991).

*Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971).

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

*Dep't of Commerce v. New York, 139 S. Ct. 2551 (2019).

*Dep't of Homeland Security v. Regents of the Univ. of Cal., Docket No. 18-587, (Jun 18, 2020).

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

*Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016).

*FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009).

Franklin v. Massachusetts, 505 U.S. 788 (1992).

*Greer v. Comm'r, 595 F.3d 338 (6th Cir. 2010).

*Indep. Elec. Contrs. of Houston, Inc. v. NLRB, 720 F.3d 543 (5th Cir. 2013).

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

*Kawaauhau v. Geiger, 523 U.S. 57 (1998).

Marks v. Comm'r, 947 F.2d 983 (D.C. Cir. 1991).

*McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988).

Michigan v. EPA, 476 U.S. 743 (2015).

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

Nat'l Cable & Telecommunications Assn. v. Brand X Internet Servs., 545 U.S. 967 (2005).

Pomeroy v. United States, 864 F.2d 1191 (5th Cir. 1989).

*Porter v. Califano, 592 F.2d 770 (5th Cir. 1979).

*Ratzlaf v. United States, 510 U.S. 135, 141 (1994).

Safeco Ins. Co. of America v. Burr, 511 U.S. 47 (2007).

Shaw v. Autozone, Inc., 180 F.3d 806 (7th Cir. 1999).

Spies v. United States, 317 U.S. 492 (1943).

*Strickland v. Norfolk Southern Ry., 692 F.3d 1151 (11th Cir. 2012).

United States v. Bishop, 412 U.S. 346 (1973).

United States v. Boyle, 469 U.S. 241 (1985).

United States v. Caceres, 440 U.S. 741 (1979).

United States v. Clemons, Docket No. 8:18-cv-258, 2019 U.S. Dist. LEXIS 224327 (M.D. Fla. Oct. 9, 2019).

United States v. De Forrest, Docket No. 2:17-cv-03048, 2020 U.S. Dist. LEXIS 94799 (D.C. Nev. May 31, 2020).

United States v. Doherty, 233 F.3d 1275 (11th Cir. 2000).

*United States v. Flume, Docket No. 5:16-CV-73, 2018 U.S. Dist. LEXIS 226285 (S.D. Tex. Aug. 22, 2018).

*United States v. Illinois C. R. Co., 303 U.S. 239 (1938).

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

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

*United States v. Murdoch, 290 U.S. 389 (1933).

*United States v. Schwarzbaum, Docket No. 18-sv-81147, 2020 U.S. Dist. LEXIS 48421 (S.D. Fla. Mar. 20, 2020).

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

Zobrist v. Coal-X, Inc., 708 F.2d 1511 (10th Cir. 1983).

Statutes:

5. U.S.C. § 706(2)(A).

5. U.S.C. § 706(2)(F).

31 U.S.C. § 5314.

31 U.S.C. § 5321.

31 U.S.C. § 5321(a)(5).

31 U.S.C. § 5321(a)(5)(B).

31 U.S.C. § 5321(a)(5)(C).

Miscellaneous:

Stephen Michael Shepherd, Malice, Bouvier Law Dictionary (2012).

I.R.M. § 1.2.1.9.2(2).

I.R.M. § 1.2.1.9.1(3).

I.R.M. § 1.2.1.12.1.9.

I.R.M. § 4.10.8.12.4(1).

I.R.M. § 4.26.16-1.

I.R.M. § 4.26.16.4(4) (2008).

I.R.M. § 4.26.16.4(5) (2008).

I.R.M. § 4.26.16.4(6) (2008).

I.R.M. § 4.26.16.4.6.1(d) (2008).

I.R.M. § 4.26.16.4.7(2) (2008).

I.R.M. § 4.26.17.2.1.2.

I.R.M. § 8.1.1.1.

Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States Frequently Asked Questions, Internal Revenue Service (Apr. 17, 2020), https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures-for-u-s-taxpayers-residing-outside-the-united-states-frequently-asked-questions-and-answers.

Sustain, LEXICO (last accessed Jun 30, 2020), lexico.com/en/definition/sustain.

---

ARGUMENT

I. THE DISTRICT COURT ERRED IN FINDING MR. RUM WILLFUL UNDER 31 U.S.C. § 5321

A. Willfulness Requires Actual Knowledge of the Reporting Requirement 31 U.S.C. § 5314 Imposes.

The Government and District Court have sought to create a categorical rule: civil willfulness requires mere recklessness; criminal willfulness requires actual knowledge. In so doing, they selectively use the Supreme Court's Opinion in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007). However, the Supreme Court's reasoning in Safeco undermines this position. See Safeco Ins., 551 U.S. at 59 (noting that a definition of “willfully” that only means knowingly would render the term “knowingly” used later in the same subsection superfluous). If it were that civil willfulness always carries a reckless disregard standard, it would render much of the Supreme Court's reasoning in Safeco superfluous.

The Supreme Court has repeatedly held that willful “is a word of many meanings, and its construction is often influenced by its context.” Ratzlaf v. United States, 510 U.S. 135, 141 (1994) (quoting Spies v. United States, 317 U.S. 492, 497 (1943) (internal quotations and punctuation omitted); see also Cheek v. United States, 498 U.S. 192, 199-202 (1991). The Government rightly points to case law and common law as guides to statutory interpretation. However, both paint a more complicated picture than the Government willingly admits.

The Supreme Court held in the context of bankruptcy that a “willful and malicious¹” injury does not result from mere recklessness or negligence. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). The Supreme Court reasoned, “The word 'willful' in (a)(6) modifies the word 'injury,' indicating nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Id. (emphasis original). The Court points out that if Congress wanted to include reckless violations, it might have written the statute as “willful acts that cause injury.” Id. Congress also could have included extra words, such as wanton, careless, or disregard. See id. Like Kawaauhau, 31 U.S.C. § 5321(a)(5) uses willfully to describe the violation; it states, “willfully violating, or willfully causing any violation of, any provision of section 5314.” § 5321(a)(5). This implies the same “deliberate or intentional” violation of the statute. Kawaauhau, 523 U.S. at 61. “[This] formulation triggers in the lawyer's mind the category 'intentional torts,' as distinguished from negligent or reckless torts.” Id. To intentionally violate § 5314, one must know the reporting requirement it imposes. If Congress wanted to include recklessness, they may have written the statute as willful acts that cause a violation of § 5314 or used other words, such as wonton, careless or disregard.

The common law confirms this interpretation. The original common law rule is that willful “denotes an act which is intentional, or knowing, or voluntary, as distinguished from accidental. But when used in criminal statute it generally means an act done with a bad purpose.” United States v. Murdoch, 290 U.S. 389, 394 (1933). Thus, the Supreme Court has interpreted the word willful to require a specific intent to break the law. See United States v. Bishop, 412 U.S. 346 (1973). Mr. Rum does not argue that a willful violation under 31 U.S.C. § 5321(a)(5) requires a bad purpose. Mr. Rum only argues that “[willfulness] often denotes that which is 'intentional, or knowing, or voluntary, as distinguished from accidental.'” United States v. Illinois C. R. Co., 303 U.S. 239, 243 (1938) (quoting Murdoch, 290 U.S. at 394). However, it is impossible for there to be an intentional, knowing or voluntary violation of § 5314 without knowledge of the legal duty it imposes. A violation without actual knowledge of the reporting requirement can only be accidental. See United States v. Illinois C. R. Co., 303 U.S. at 243. Stated differently, if one does not know that TD F 90-22.1 exists, how can one intentionally, knowingly or voluntarily not file it? There is no choice in the matter. Such a nonfiling must be accidental; therefore, non-willful.

While it is true that courts have interpreted civil willfulness to include a reckless disregard sometimes, those instances do not involve violations of complicated reporting requirements. Because knowledge of the reporting requirement is a prerequisite to compliance, a reckless disregard standard does not make sense. Even the district courts that apply reckless disregard to cases involving reporting requirements, often overtly consider knowledge. See United States v. Flume, Docket No. 5:16-CV-73, 2018 U.S. Dist. LEXIS 226285, *22-23 (S.D. Tex. Aug. 22, 2018) (constructive knowledge does not make sense when applying a recklessness standard). These courts still focus on what the non-filing party knew at the time prior to not filing. See, e.g., United States v. Kimble, 141 Fed. Cl. 373, 377-78 (2018); United States v. McBride, 908 F. Supp. 2d 1186, 1210 (D. Utah 2012). The result of these decisions is confused and unclear precedent, and arbitrary line-drawing. C.f. (Doc. 71) with United States v. Clemons, Docket No. 8:18-cv-258, 2019 U.S. Dist. LEXIS 224327, *22 (M.D. Fla. Oct. 9, 2019) (finding a genuine issue of material fact exists when Taxpayer correctly answers line 7a on an individuals personal income tax return).

B. Even on a Reckless Disregard Standard, the District Court Erred in Granting the Government's Motion for Summary Judgment

Even if this Court is unpersuaded actual knowledge of the reporting requirement is necessary for a willful violation under 31 U.S.C. § 5321(a)(5)(C). The District Court's impermissible use of a theory of inquiry notice is grounds for reversal. The Government tries to distance the case from that theory by pointing to other facts in the proceeding. However, the District Court clearly relies on a theory of inquiry notice. Nonetheless, even with the Government's additional facts, there is still a genuine dispute of material fact as to whether Mr. Rum was willful.

The District Court clearly relied on a theory of inquiry notice or constructive knowledge. (Doc. 71, 17-19)

A taxpayer's failure to review their tax returns for accuracy despite repeatedly signing them, along with falsely representing under penalty of perjury that they do not have a foreign bank account . . . in and of itself supports a finding of reckless disregard to report under the FBAR.

Id. at 17 (internal citations and quotation marks omitted) (emphasis original).

Recently district courts have repudiated this theory of liability for precisely the reasons contained within Mr. Rum's principal brief. Specifically, this theory eliminates the distinction between willful and nonwillful, and is effectively strict liability. See Flume, 2018 U.S. Dist. LEXIS 226285, at *22-23; United States v. Schwarzbaum, Docket No. 18-sv-81147, 2020 U.S. Dist. LEXIS 48421, *24-26 (S.D. Fla. Mar. 20, 2020); United States v. De Forrest, Docket No. 2:17-cv-03048, 2020 U.S. Dist. LEXIS 94799, *16-17 (D.C. Nev. May 31, 2020).

A theory of inquiry notice is consistent with negligent conduct because, though a person did not read her tax return, she signed it and, therefore, has reason to know of its contents. Thus, it is traditionally used in the innocent spouse context to find that a spouse was not completely innocent. See, e.g., Greer v. Comm'r, 595 F.3d 338, 347 n.4 (6th Cir. 2010). However, such a theory does not establish willfulness “in and of itself.” See (Doc. 71, 17). The line of district court cases that hold otherwise are wrongly decided based on one improvident unpublished Fourth Circuit opinion. See United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 1186 (D. Utah 2012); Kimble v. United States, 141 Fed. Cl. 373 (2018).

The Government points to five other cases outside of the innocent spouse context to justify the use of constructive knowledge to find willfulness. However, these cases are either completely unrelated or involve lesser standards than willfulness. See Consol. Edison Co. of N.Y., Inc. v. United States, 221 F.3d 364, 371 (2d Cir. 2000) (applying constructive knowledge to a reason to know standard); Shaw v. Autozone, Inc., 180 F.3d 806, 809 (7th Cir. 1999) (applying constructive knowledge to find that AutoZone exercised reasonable care); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518 (10th Cir. 1983) (cannot justifiably rely on memorandum when publicly available prospectus raises issues about misstatements in the memorandum); United States v. Doherty, 233 F.3d 1275, 1282 n10 (11th Cir. 2000) (dealing with confrontation clause of Sixth Amendment, constructive knowledge not cited as precedent and irrelevant to issues of case); Jardin de las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127, 134 (1st Cir. 2014) (applying constructive knowledge to reasonableness standard). These cases all involve a significantly lesser standard than the high bar of willfulness.

Congress enacted a tiered-liability statute when it amended § 5321(a)(5). Congress created heightened penalties for willful violations in § 5321(a)(5)(C). Nonwillful violations are, likewise, subject to a reasonable cause exception in which case a person will be subject to no penalties at all. § 5321(a)(5)(B). The fact that Congress created a tiered-liability scheme, “makes it obvious that Congress intended to draw a significant distinction between ordinary and willful violations.” McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132 (1988). If the courts are to give effect to every tier of liability: reasonable cause, nonwillful (negligent) and willful; then courts cannot find a person liable for a willful penalty by relying solely on a theory typically reserved for negligence or other lesser standards.

The Internal Revenue Service (“IRS”) even confirms that checking the wrong box on a tax return does not establish willfulness. The IRS has determined that persons may still qualify for the streamlined offshore voluntary compliance program (for nonwillful violations of FBAR reporting) when they check the wrong box on their tax return. See Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States Frequently Asked Questions, Internal Revenue Service (Apr. 17, 2020), https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures-for-u-s-taxpayers-residing-outside-the-united-states-frequently-asked-questions-and-answers (“We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked 'no' on Schedule B, line 7a, simply provide your explanation”) (“IRS FAQs”).

As a reason for why inquiry notice is not strict liability, the Government gives the example of the person who believes that their bank accounts' aggregate value is less than $10,000. Appellee's Bf. at 25. However, this example hurts the Government's position and illustrates how absurd a fact pattern must be, to be nonwillful in the Government's eyes. For the Government, only a person who checks the wrong box on their tax return on a belief that they had less than $10,000 in their foreign bank account, will be nonwillful. The reality is that checking the wrong box on a tax return is a common mistake; the Government's position would make these mistakes willful. See IRS FAQs supra.

In addition to Mr. Rum's Tax Return, the Government points to other evidence. Specifically, the Government argues that the boilerplate provisions of Mr. Rum's bank account agreement with Union Bank of Switzerland (“UBS”) mean that Mr. Rum affirmatively chose to hide his bank account from discovery. (Doc. 31-7, 47-48). However, courts have found that this evidence is insufficient to create willfulness absent evidence that the consequences of these actions were fully explained to the account holder. Flume, 2018 U.S. Dist. LEXIS 226285, at *26; Schwarzbaum, 2020 U.S. Dist. LEXIS 48421; at *25 (“the USA presented no evidence that would lead to the conclusion that [defendant] otherwise comprehended the tax or legal consequences of signing the documents where they were marked by the bankers”). There was no evidence in the record that the tax or legal implications of not investing in U.S. securities or electing a numbered account were ever fully discussed with Mr. Rum. (Doc. 57, 2). Nearly all discussion between Mr. Rum and UBS in the record were about investment strategy. (Doc. 31-7, 35-41).

The only other evidence that the Government argues conclusively establish willfulness is a declaration of IRS Agent Kerkado. (Doc. 31-10). In that declaration, Ms. Kerkado outlines several inconsistent statements or patterns by Mr. Rum. The Government wishes this Court to infer from these statements that Mr. Rum lied and concealed his money. However, this is entitled to a negative inference on Summary Judgment. Strickland v. Norfolk Southern Ry., 692 F.3d 1151, 1154 (11th Cir. 2012) (“We review the district court's grant of summary judgment de novo, viewing all evidence and drawing all reasonable factual inferences in favor of the nonmoving party”). Mr. Rum would be able to explain discrepancies in his testimony at trial. Furthermore, Mr. Rum's willingness to disclose that he moved his money to Switzerland to avoid a potential judgment creditor or that he did not report the existence of his UBS account to FAFSA is as much evidence of honesty as concealment. See (Doc. 31-10, 3). Therefore, the Court should infer that Mr. Rum was truthful when he stated that he did not know that he was supposed to report his foreign bank account and did not try to conceal his bank account. (Doc. 57, 2-3).

The facts that Mr. Rum willingly disclosed his UBS account in a prior audit, filed his FBAR for 2008 when he became aware of the filing requirement, was cooperative with the audit, and testified in deposition that he did not know about the FBAR or the questions on his Schedule B create a genuine issue of material fact for trial. (Doc. 57, 3-4). The District Court erred in granting the Government's motion for Summary Judgment. This Court should reverse.

II. THE DISTRICT COURT ERRED IN NOT HOLDING THE AMOUNT OF THE PENALTY UNLAWFUL UNDER 5 U.S.C. § 706(2)(F)

In Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 414 (1971), the Supreme Court held that de novo review applies to agency action when “the action was adjudicatory in nature and the agency factfinding procedures were inadequate.” The Fifth Circuit, binding on this Circuit, found that the factfinding procedures were inadequate in a case in which several due process violations occurred. See Porter v. Califano, 592 F.2d 770, 782-84 (5th Cir. 1979) (plaintiff was not allowed a fair hearing, a chance to cross examine witnesses and discover evidence). Because of the violations, the Fifth Circuit found that the district court should have conducted a full evidentiary review. Likewise, Mr. Rum was entitled to a full evidentiary hearing as to whether the amount of the penalty was appropriate because of gross failures of the factfinding procedures. These failures left Mr. Rum without an opportunity to exercise his rights.

Prior to Mr. Rum's Appeals Conference, the only indication of why Mr. Rum was assessed a 50% penalty came in a letter from Ms. Kerkado, the agent examining his case. (Doc. 58-16). This letter stated, “[u]nfortunately, an unagreed income tax case will bar me from anything less than a 50% FBAR penalty.” Id. at 3. The explanation of items that Mr. Rum received with the proposed FBAR penalty assessment did not give any indication of why he was assessed a 50% penalty. See (Doc. 58-5) The form letter 3709, likewise, did not advise why a 50% penalty was imposed. (Doc. 59-1). The result of this was that Mr. Rum did not know why a 50% penalty was assessed as opposed to any other number. (Doc. 57, 20-21). Relying on the last document he received that mentioned the amount of the penalty, he thought that it was because he did not completely agree with Ms. Kerkado's income tax determinations. Id.

At the appeals conference, Mr. Rum came begging that the appeals agent, Ms. Wrightson, reinstate the deal Ms. Kerkado gave him — a 20% willful FBAR penalties with an agreed upon case. (Doc. 58-33, 2). Ms. Kerkado's deal became the only subject of the appeals conference. (Doc. 58-33, 2). The mitigation guidelines were never mentioned at the conference. (Doc. 58-38, 9). Ms. Wrightson told Mr. Rum that if he could provide documentation of the deal, she would reinstate it. (Doc. 57, 21). However, Mr. Rum could not find the documentation. Id. Although Ms. Wrightson found enough independent evidence of the deal to confirm it occurred, she refused to reinstate it. (Doc. 58-33, 2). At the time, Ms. Wrightson did not even know the mitigation guidelines were the reason for the 50% penalty. (Doc. 58-38, 9). The appeal activity log shows that the mitigation guidelines were not considered contemporaneously with the appeals conference. (Doc. 58-33). Throughout Mr. Rum's examination, he made repeated requests for mitigation of his FBAR penalties and was never alerted of the guidelines. (Doc. 33, 7).

The first mention that Mr. Rum received of mitigation guidelines was in the appeals case memorandum, released in discovery. See (Doc. 59-5). Before then, Mr. Rum had no notice of the Government's reason for assessing a 50% penalty. (Doc. 58-38, 10).

The Government argues that the Internal Revenue Manual (“IRM”) is publicly available and can be researched, the IRM confers no rights to taxpayers, and that the statutory penalties threshold provisions were disclosed. Appellee's Bf. at 63, 72. However, this mischaracterizes Mr. Rum's argument. Mr. Rum only contends that the IRS must alert Mr. Rum to its theory of liability and present him with a fair opportunity to contest the issues. See I.R.M. § 4.10.8.12.4(1); Porter, 592 F.2d 782-84. The IRS never alerted Mr. Rum to the actual reason for its decision as to the amount of the penalty. (Doc. 57, 21). While the statutory framework shows why he could be assessed a maximum 50% penalty, it does not explain why he actually was assessed a 50% penalty. 31 U.S.C. § 5321. The reason Mr. Rum was supposedly assessed a 50% penalty was that he did not qualify for mitigation. See (Docs. 59-5; 58-28). This was never disclosed to Mr. Rum; therefore, Mr. Rum never had an opportunity to contest it. (Doc. 57, 20-21).

In this sense, what happened is similar to Independent Electrical Contractors of Houston, Inc. v. NLRB, 720 F.3d 543 (5th Cir. 2013). In Independent Electrical Contractors, the hearing board found the plaintiff liable on a different theory than the administrative law judge, one never disclosed to the plaintiff or plaintiff's counsel. Id at 552. The Fifth Circuit found that the plaintiff's right to procedural due process was violated because it did not have notice of the board's theory of liability. Id. Similarly, in this case the Government never disclosed its theory for why the penalty should be 50%. Mr. Rum never had a chance to contest that issue and his procedural due process rights were violated. If he had the chance, Mr. Rum could have made several arguments and introduced more facts to contest the Government's reasoning.

Mr. Rum could have argued that a civil fraud tax penalty was inappropriate and introduced facts to contradict it. This would mean that Mr. Rum would qualify for the mitigation guidelines because a civil tax penalty was not sustained. I.R.M. § 4.26.16.4.6.1(d) (2008). At the appeals conference, Mr. Rum had the incentive to do the exact opposite — the fraud penalty was about $70,000 and the FBAR penalty was about $700,000. (Docs. 58-18; 58-5, 9). The overwhelming motivation was to argue against the 50% FBAR penalty. Because he thought the basis for the 50% FBAR penalty was that he did not agree to the civil fraud penalty, his choice became clear. He had to capitulate the civil fraud penalty to get a 20% FBAR penalty. See (Doc. 58-16). Therefore, Mr. Rum went to his appeal pleading for the fraud penalty and a reduced 20% willful FBAR penalty pursuant to Ms. Kerkado's bargain. Id. However, if Mr. Rum had known the real reason that the IRS applied a 50% penalty, Mr. Rum would have argued the exact opposite. He would have argued that the civil fraud penalty was inapplicable and thus he qualified for mitigation. See I.R.M. § 4.26.16.4.6.1(d). Mr. Rum successfully convinced the IRS and Tax Court to enter a final order abandoning the civil fraud penalty. (Doc. 58-20).

Furthermore, Mr. Rum could have argued the word “sustained” in the I.R.M. §4.26.16.4.6.1(d) meant more than a merely proposed fraud penalty. Therefore, again Mr. Rum would have qualified for mitigation. Id. Mr. Rum's fraud penalty was not fully litigated. The plain meaning of the word “sustain” means “uphold, affirm, or confirm.” Sustain, LEXICO (last accessed Jun 30, 2020), lexico.com/en/definition/sustain. Mr. Rum could have argued mitigation applied because the civil fraud penalty was not fully litigated. Because of the severity of the FBAR penalties, mitigation guidelines only did not apply when a civil tax fraud penalty had been upheld by tax court or agreed to by the taxpayer. This is consistent with the plain reading because if the authors of the IRM meant a “proposed” civil fraud penalty, they would have used the word “proposed.” The District Court thought that this reading of the IRM would render the provision meaningless because a fraud penalty would never be sustained at the time of administrative appeals. (Doc. 71, 31). However, this reasoning ignores the fact that income tax and FBAR examinations are completely separate. I.R.M. § 4.26.17.2.1.2. Income tax and FBAR examinations can be held at different times, which this provision of the IRM contemplates. See, e.g., United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) (FBAR exam was conducted after tax fraud case).

Additionally, Mr. Rum could have argued another section of the IRM requires the examining agent to exercise discretion regardless of the mitigation guidelines. I.R.M. § 4.26.16.4.7(2) (2008) (“the examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum)”). The “IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are only intended as an aid for the examiner in determining the appropriate penalty amount.” I.R.M. § 4.26.16.4(6) (2008). The IRM makes it perfectly clear that examiner discretion should be exercised in every case regardless of whether the mitigation guidelines apply. Id. These IRM provisions are in entirely different sections than the mitigation guidelines. During deposition, Ms. Kerkado admitted she did not exercise any discretion as to the penalty and thought Mr. Rum's penalty was too harsh under the circumstances. (Doc. 58-6, 88-89). Furthermore, the appeals case memorandum implies that the mitigation guidelines are mandatory. (Doc. 59-5, 9).

“Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.” I.R.M. § 4.26.16.4(5) (2008). A fifty percent willful penalty was not commensurate to the harm caused by the FBAR violation at all. Total unreported income from continuing violations was a little over $300,000 of unreported income. (Doc. 31-10, 4). This amount is nowhere near the 50% FBAR penalty (approximately $700,000). The fact that some of this income was capital and obtained over the course of several years means that the FBAR penalty is entirely disproportionate to the harm caused.

However, because the Government hid the reason for the penalty amount, Mr. Rum had no opportunity to contest it. (Doc. 57, 20). Any of these arguments (alone or together) might have succeeded in obtaining a reduced penalty or a remand to the examiner to exercise discretion to the penalty amount. Ultimately, Mr. Rum never had the opportunity to make any of these arguments because the IRS did not disclose the reason for its decision to assess a 50% penalty. (Doc. 57, 20-21). However, Mr. Rum's assertion that he would have introduced facts and arguments against the penalty amount is nonfrivolous. Appellee's Br. 36-37. The fact that the Government's kept its reasons secret for the penalty amount foreclosed the possibility of these arguments ever being considered. See (Docs. 59-5; 58-28)

The Government insists even if the Internal Revenue Service applied mitigation guidelines or exercised its discretion, it would have come to the same result. Appellee Br. 67-68. This is because the mitigation guidelines indicate that a 50% penalty is appropriate if the accountholder has over $1,000,000 in her foreign bank account. I.R.M. § 4.26.16-1. The Government insists that the IRS always follows the mitigation guidelines and never exercises its discretion to go below the guidelines. However, this is untrue. In United States v. Schwarzbaum, Docket No. 18-cv-81147, 2020 U.S. Dist. LEXIS 48421 (S.D. Fla. Mar. 20, 2020), the Internal Revenue Service decided to exercise its discretion to impose a penalty less than 50% when the accountholder held more than $1,000,000. This is because sometimes a 50% penalty is unjust under the circumstances. 2020 U.S. Dist. Lexis 48421, at *19-20 (“The initial mitigated penalty was deemed to be excessive at 35.4 million, and it was then further mitigated”). Mr. Rum might have been able to obtain a similar reduction if the Government had disclosed its reasons. Ms. Kerkado even stated the penalties were too harsh. (Doc. 58-6, 88-89).

In addition to the fact that the Government never disclosed its reasons for its decision on the penalty amount, Mr. Rum showed several incidents of examiner misconduct through violations of IRM rules and official IRS policy statements in his principal brief. See, e.g., I.R.M. §§ 1.2.1.12.1.9 & 1.2.1.9.2(2). While the IRM does not confer rights on the taxpayer, Mr. Rum does not assert that the IRM confers rights. See Electronic Privacy Info. Ctr. v. IRS, 910 F.3d 1232, 1244 (D.C. Cir. 2018). These repeat violations of IRM policies and procedures draw question to the integrity of the factfinding procedures. In the cases cited by the Government, the taxpayer seeks to enforce the exact words of the IRM. See id. Thus, these cases cited by the Government are distinguishable. See id. Mr. Rum does not seek to enforce IRM provisions but to show that in his case the factfinding procedures were deficient. The IRS has these policies and rules to ensure fair administration. I.R.M § 1.2.1.12.1(3). The District Court erred in not conducting a full evidentiary review as to whether a 50% penalty was appropriate and in not holding the IRS's actions unlawful under 5 U.S.C. § 706(2)(F).

III. THE DISTRICT COURT ERRED IN NOT HOLDING THE INTERNAL REVENUE SERVICE'S ACTIONS UNLAWFUL UNDER 5 U.S.C. § 706(2)(A).

The Administrative Procedures Act (“APA”) contains the procedures under which federal agencies are accountable to the public for their actions. Franklin v. Massachusetts, 505 U.S. 788, 796 (1992). The basic requirement of agencies is that they engage in “reasoned decisionmaking.” Michigan v. EPA, 476 U.S. 743, 750 (2015). Courts are to hold agency actions, findings or conclusions unlawful and set them aside if the court finds them to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. See 5 U.S.C. § 706(2)(A).

A. The IRS Acted Arbitrarily and Capriciously Through Procedures that Prevented Mr. Rum from Contesting the Amount of the Penalty

The Supreme Court applied the “reasoned decisionmaking” rule to agency policy and procedure in Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016). The issue in Encino Motorcars was whether the agency's policy decision to change its interpretive position on an exemption under the Fair Labor Standards Act was arbitrary and capricious when it had previously maintained the opposite position for over a decade. Id. at 2121-24. The Court reasoned “[a]gencies are free to change their existing policies as long as they provide a reason for the change.” Id. at 2125. (citing Nat'l Cable & Telecommunications Assn. v. Brand X Internet Servs., 545 U.S. 967, 981-82 (2005)). An agency does not need to provide a more detailed justification for a change in policy or procedure than to create a new one. Id. However, an agency must “display awareness that it is changing its position.” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). Agencies “engender serious reliance interests that must be taken into account” when policies and procedures are changed. Id. Applying these precedents, the Court in Encino Motorcars found that the policy change was arbitrary and capricious. 136 S. Ct. at 2127.

The IRS has longstanding policies expressed in the IRM. The IRS has a policy of sending a Form 886-a with every proposed assessment. I.R.M. § 4.10.8.12.4(1). The Form 886-a is supposed to give enough information to contest the issues. Id. The IRS has policies against bargaining over penalties. I.R.M. § 1.2.1.12.1.9. Additionally, new issues are not supposed to be raised at the appeals conference. I.R.M. § 1.2.1.9.2(2). These policies “engender serious reliance interests that must be taken into account” when determining whether an agency engaged in reasoned decisionmaking. Fox Television Stations, 556 U.S. at 515. In Mr. Rum's case, the IRS abandoned these long-standing policies. (Doc. 57, 21-22). The IRS was arbitrary and capricious in abandoning these policies because it did not engage in reasoned decisionmaking. Because the 50% penalty was imposed because of arbitrary and capricious changes to policies, the 50% penalty is arbitrary and capricious itself.

The Government repeatedly cites and relies on the fact that the IRM does not give enforceable rights to taxpayers. See Pomeroy v. United States, 864 F.2d 1191, 1194-95 (5th Cir. 1989) (determining that IRS does not have to follow the IRM by sending duplicate notices if last known address is uncertain and IRS complies with statutory requirements); Marks v. Comm'r, 947 F.2d 983, 986 (D.C. Cir. 1991) (Same as Pomeroy); Elec. Privacy Info. Ctr. v. IRS, 910 F.3d 1232, 1244 (D.C. Cir. 2018) (IRS did not bind itself to act through IRM). However, Mr. Rum does not assert that the IRM creates a binding obligation on the IRS. Indeed, Mr. Rum is not trying to enforce the IRM. Mr. Rum admits that the IRM is nonbinding. However, the IRM and IRS Policy Statements are the official policy and procedures of the IRS. See United States v. Caceres, 440 U.S. 741, 744-45 (1979); United States v. Boyle, 469 U.S. 241, 254 (1985); Anderson v. United States, 44 F.3d 795, 799 (9th Cir. 1995). When the IRS's actions depart from its normal policies and procedures, the APA requires that the decision to depart from official policy and procedures be reasoned. Encino Motorcars, 136 S. Ct. at 2126.

The Government has not cited to the administrative record for the reasons why the IRS departed from the IRM and Official Policy Statements. The Government has not cited to a reason in the record for why the IRS bargained over penalties. See I.R.M. § 1.2.1.12.1.9. The Government has not cited to the record for why the IRS did not give a reasoned explanation for why it chose to give insufficient information to contest the issues. See I.R.M. § 4.10.8.12.4(2). The Government did not cite to the record for why the appeals agent raised a new issue on appeal. See I.R.M. § 1.2.1.9.2(2).

The Government proffered numerous potential explanations for the IRS's behavior in this case, e.g., the examiner was proposing a global settlement, not bargaining, or that the appeals agent was only expressing an alternative theory of liability. Appellee Br. at 67-68. However, these justifications are either wrong or were not offered by the agency itself; thus, they constitute only post-hoc rationalization of the agency's conduct. In Department of Homeland Security v. Regents of the University of California, Docket No. 18-587, 2020 U.S. LEXIS 3254 (Jun 18, 2020), the Supreme Court reiterated what reasons a court is to consider in evaluating whether the agency made a reasoned decision. “Judicial review of agency action is limited to 'the grounds that the agency invoked when it took the action.'” Id. at *27.

The record is clear that Ms. Kerkado was bargaining over penalties. The Government tries to recharacterize this as a global settlement; however, generally only the Appeals Office exercises settlement authority within the IRS. I.R.M. § 1.2.1.9.1(3); (Doc. 58-16). Ms. Kerkado did not exercise discretion as to the penalty amount. (Doc. 58-5, 86). The IRM expressly requires examining agents to exercise discretion, not managers nor anyone else in the IRS. I.R.M. § 4.26.16.4(4). Ms. Wrightson introduced new controversies and issues at appeal by adding the alternative theory that Mr. Rum did not fully cooperate with the examination. I.R.M. § 1.2.1.9.2(2); (Doc. 59-5). This explanation highlights just how unfair the Government was to Mr. Rum. The IRS appeals conference is supposed to resolve controversies “on a basis which is fair and impartial to both the Government and the taxpayer.” I.R.M. § 8.1.1.1. The fact that IRS Appeals is offering alternative theories shows Ms. Wrightson was building the Government's case instead of fulfilling her role as an independent arbiter. I.R.M. § 8.1.1.1. Ms. Kerkado explicitly stated that Rum was cooperative. (Doc. 58-29). Ms. Wrightson raised the standard by inserting the word “fully” to contrive additional arguments to bolster the IRS's case. (Doc. 59-5, 9).

The Government has not cited to the record for the reasons the IRS's departed from normal policies and procedures. This Court should reverse and direct the District Court to enter an order holding the agencies actions unlawful under 5 U.S.C. § 706(2)(A).

B. The IRS Did Not Engage in Reasoned Decisionmaking Because of Arbitrary and Capricious Reasons Other Than the Pretextual Stated Reason

When there is strong evidence of bad faith or improper behavior, it is critical that courts look to evidence of the mental processes of the decisionmakers to determine whether there was reasoned decisionmaking. Dep't of Commerce v. New York, 139 S. Ct. 2551, 2574 (2019) (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971)). In Mr. Rum's case, the District Court should have looked to such evidence to determine that the IRS's assessment of a 50% penalty was arbitrary and capricious.

There is significant evidence of bad faith or improper behavior, such that the court should review statements from agents about their mental processes. The IRS violated its own internal rules and official policy statements by bargaining over penalties, failing to exercise discretion as to the penalty amount, failing to disclose enough information to contest the issue and raising new issues on appeal. I.R.M §§ 1.2.1.12.1.9, 4.26.16.4(6), 4.10.8.12.4(1) & 1.2.1.9.2(2). For reasons stated above, the Government's attempted justifications of this improper behavior are without merit. See supra, at 29. These violations constitute strong evidence of bad faith or improper behavior.

Reviewing evidence of the mental processes of the agents, it becomes clear that the mitigation guidelines were pretext. The mitigation guidelines were only added to the case during the appeals memorandum drafting phase to justify the decision. (Doc. 59-5, 9). Although they are mentioned elsewhere in the record, they are mentioned only in a cursory way and without analysis of the facts. (Doc. 58-28). This does not establish a rational connection between the facts and the decision. The real reason the IRS assessed Mr. Rum with a 50% FBAR penalty was that Mr. Rum did not fully agree to Ms. Kerkado's proposed tax assessment and Mr. Rum could not find documentation of Ms. Kerkado's bargain at the appeals conference. See (Docs. 58-16; 58-33). These reasons are arbitrary and cannot constitute reasoned decisionmaking. See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43 (1983). They do not qualify as “a rational connection between the facts found and the choice made.” Id.

Ms. Kerkado first submitted Mr. Rum's case to her superiors as nonwillful. See (Doc. 58-8). Then, the Office of Chief Counsel approved a nonwillful or a willful penalty. Id. Ms. Kerkado, then resubmitted the case as willful. (Doc. 58-28). In the time between the approval of the nonwillful penalties and the proposed assessment, Ms. Kerkado did not consider if mitigation applied. See (Docs. 58-5; 58-32; 58-6, 86-90). Instead, Ms. Kerkado's maintains that her manager ordered her to assess a 50% penalty. (Doc. 58-6, 86-90). Ms. Wrightson also did not know the reason for the penalty. From her deposition, she normally does not review materials that include the mitigation guidelines. (Doc. 58-22, 7). She did not mention the guidelines to Mr. Rum at the appeals conference. (Doc. 58-38, 20-22). Ms. Wrightson's activity log does not mention the guidelines. (Doc. 58-33). After several months and numerous unapproved drafts of the appeals case memorandum, the willful penalty was approved. Id. Furthermore, the final appeals case memorandum contained numerous factual mistakes. See, e.g., (Doc. 59-5, 1) (stating Rum has seven children); (Doc. 31-5, 13-17) (showing nine children alive throughout the examination period).

The appeals case memorandum offers the mitigation guidelines as a reason for the 50% penalty. (Doc. 59-5). However, viewing the entire record, it shows that this justification for the penalty was simply tacked on at the end. (Doc. 58-33). In Dep't of Commerce v. New York, 139 S. Ct. 2551, 2575 (2019), the Supreme Court found that a decision was pretextual when “the explanation for agency action is incongruent with what the record reveals about the agency's priorities and decisionmaking process.”

Ms. Kerkado proposed a 50% penalty because Mr. Rum did not agree with the civil tax fraud penalty — she explicitly said so, in writing, at the conclusion of her exam. (Doc. 58-16). Ms. Wrightson tried to justify Ms. Kerkado's decision to impose a 50% penalty based on Mr. Rum's disagreement to the civil tax fraud penalty at the appeals conference. (Doc. 58-33). Ms. Wrightson came up with the additional reason that Mr. Rum's failed to provide documentary evidence of Ms. Kerkado's bargain. Id. These were the real reasons that the IRS assessed the 50% penalty, not the mitigation guidelines. These reasons do not constitute a rational connection between the facts and the decision asserted. Motor Vehicles Mfrs. Ass'n, 463 U.S. at 43.

The District Court justified the assessment of 50% penalty based on whether the agency “had a rational basis for assessing the civil fraud penalty” to Mr. Rum. (Doc. 71, 22). As stated in Mr. Rum's principal brief this is improper. Br. at 48. This is the wrong standard and a flagrant mistake; the District Court simply supplanted the agency's reasons for the penalty with its own in favor of the Government. C.F. Id. with (Doc. 59-5, 9). The court's job is to look at the agency's stated reasons for the 50% penalty and see whether the agency “examined the relevant data and articulated a satisfactory explanation for [its] decision, including a rational connection between the facts found and the choice made.” Dep't of Commerce, 139 S. Ct. at 2569 (internal citations omitted). Such evidence is missing in the record; thus, the District Court had to fill in the gaps with its own reasoning to assess Mr. Rum with a 50% penalty.

This Court must reverse. The IRS's actions in this case are unlawful under 5 U.S.C. § 706(2)(A). Furthermore, the District Court applied the wrong standard to arbitrary and capricious review.

Respectfully Submitted,

VENAR R. AYAR
Attorney for Appellant