Individual Asks Eleventh Circuit to Reverse FBAR Penalty Decision

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

BRIEF FOR THE APPELLANT

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

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT IN SUPPORT OF ORAL ARGUMENT

STATEMENT OF JURISDICTION

STATEMENT OF ISSUES ON APPEAL

STATEMENT OF THE CASE

SUMMARY OF THE ARGUMENT

STANDARD OF REVIEW

ARGUMENT

CONCLUSION

CERTIFICATE OF CORPORATE DISCLOSURE

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

CASES

Alabama Great So. R.R. v. Louisville & N.R.R., 224 F.2d 1 (5th Cir. 1955).

Bryan v. United States, 524 U.S. 184, 194 (1998).

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

California Trout v. FERC, 572 F.3d 1003, 1021-22 (9th Cir. 2009).

Cheek v. United States, 498 U.S. 192 (1990).

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

Consol. Elec. Co. v. U.S.for Use & Benefit of Gough Indus., Inc., 355 F.2d 437 (9th Cir. 1966).

Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 483 F.3d 1265 (11th Cir. 2007).

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

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

Esch v. Yeutter, 876 F.2d 976 (D.C. Cir. 1989).

Farmer v. Brennan, 511 U.S. 825 (1994).

GA Aquarium, Inc. v. Pritzker, 134 F. Supp. 3d 1374 (N.D. Ga 2014).

Global-Tech Applications, Inc. v. SEB S.A., 563 U.S. 754 (2011).

Greer v. Comm'r, 595 F.3d 338, 347 (6th Cir. 2010).

Harberson v. NLRB, 810 F.2d 977 (10th Cir. 1987).

Harborlite Corp. v. ICC, 613 F.2d 1088 (D.C. Cir. 1979).

Independent Electrical Contractors of Houston, Inc. v. NLRB, 720 F.3d 543 (5th Cir. 2013).

Jarnagin v. United States, 134 Fed. Cl. 368 (2017).

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

Kistner v. Comm'r, 18 F.3d 1521 (11th Cir. 1994).

Lands Council v. Forester of Region One of the United States Forest Serv., 395 F.3d 1019 (9th Cir. 2004). 

Moore v. United States, CASE NO. C13-2063RAJ, (W.D. Wash. Jul. 24, 2015).

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

Norman v. United States, 138 Fed. Cl. 189 (2018).

Park v. Comm'r, 25 F.3d 1289 (5th Cir. 1994).

Perez v. Mortgage Bankers Ass'n, 575 U.S. 92 (2015).

Pickering v. Bd. Of Educ., 391 U.S. 563 (1968).

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

Price v. Comm'r, 887 F.2d 959 (9th Cir. 1989).

Public Service Co. of New Mexico v. FERC, 832 F.2d 1201 (10th Cir. 1987)

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

Ross v. Banks., N.A., 885 F.2d 723 (11th Cir. 1989).

Rykoff v. United States, 40 F. 3d 305 (9th Cir. 1994). 

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

SEC v. Chenery Corp., 318 U.S. 80 (1943).

Shiver v. Chertoff, 549 F.3d 1342, 1343 (11th Cir. 2008).

Spies v. United States, 317 U.S. 492, 497 (1943).

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

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

United States v. Colliot, Docket No. AU-16-CA-01281-SS (W.D. Tex. 2018).

United States v. Dichne, 612 F.2d 632 (2d Cir. 1979).

United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1987).

United States v. Harper, 458 F.2d 891 (7th Cir. 1971).

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

United States v. Larionoff, 431 U.S. 864 (1977).

United States v. Loney, 719 F.2d 1435, 1436 (9th Cir. 1983).

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

United State v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991).

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

United States v. Wadhan, 325 F. Supp. 3d 1 136 (D. Colo. 2018).

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

USA Group Loan Servs. v. Riley, 82 F.3d 708 (7th Cir. 1996).

Watts v. Univ. of Delaware, 622 F.2d 47 (3d Cir. 1980). 

Weidel v. Ashcroft, 234 F. Supp. 2d 5, 8 (D.D.C. 2002). 

STATUTES

5 U.S.C. § 554(b)(3).

5 U.S.C. § 706(2)(A).

5 U.S.C. § 706(2)(D).

5 U.S.C. § 706(2)(F).

15 U.S.C. § 1681(a)(4).

15 U.S.C. § 1681m(a).

15 U.S.C. § 1681n(a).

I.R.C. § 6662(a).

31 U.S.C. § 5313.

31 U.S.C. § 5314.

31 U.S.C. § 5321.

31 U.S.C. § 5321(a)(5).

31 U.S.C. § 5321(a)(5)(A).

31 U.S.C. § 5321(a)(5)(B).

31 U.S.C. § 5321(a)(5)(C).

RULES

Fed. R. App. P. 4(a)(1)(9)(A).

Fed. R. App. P 34(a).

Fed. R. Civ. P 56(a).

REGULATIONS

31 C.F.R. § 1010.300.

31 C.F.R. § 1010.820(g)(2). 

OTHER AUTHORITY

1040 and 1040-SR Instructions, Internal Revenue Service (2020), irs.gov/pub/il 040gi.pdf.

I.R.M. § 1.2.1.9.2(2).

I.R.M. § 1.2.20.1.1.9.

I.R.M. § 4.10.8.12.4(2)(d).

I.R.M. § 4.26.16-1.

I.R.M. § 4.26.16-1(d).

I.R.M. § 4.26.16.6.5.1(1).

I.R.M. § 4.26.16.6.7.

I.R.M. § 4.26.17.2.1(3).

Kyle Niewoehner, Comment: Feigning Willfulness: How Williams and McBride Extend the Foreign Bank Accounts Disclosure Willfulness Requirement and Why They Should Not Be Followed, 68 Tax Lawyer 1, 251 (Fall 2014). 

Sara, M. Coe, Office of Chief Counsel Internal Revenue Service Memorandum, 200603026 (Jan. 20, 2006). 

Steven Ferraro, Effect of United States v. Williams on the Offshore Voluntary Disclosure Program, 10 BYU Int'l L. & Mgmt. Rev. 27 (2014).

W. Keeton, D. Dobbs, R Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 34, at 213 (5th ed. 1984). 

STATEMENT IN SUPPORT OF ORAL ARGUMENT

Appellant respectfully requests oral argument as oral argument would aid in the decisional process. Fed. R. App. P 34(a). The following issues appear to be of first impression: "Whether, upon amendment, 31 U.S.C. § 5321 superseded or invalidated 31 C.F.R. § 1010.820(g)(2), and, "whether, in the context of FBAR penalties, 'willful' means a voluntary intentional violation of a known legal duty and not any lesser standard."

STATEMENT OF JURISDICTION

Jurisdiction is proper in this case under 28 U.S.C. § 1331 because this matter implicates a question of federal law. This Court has appellate jurisdiction pursuant to 28 U.S.C. § 1291. The District Court entered a final judgment granting the United States' Motion for Summary Judgment and denying Mr. Said Rum's Motion for Summary Judgment on September 26, 2019. (Doc. 76). A notice of appeal was timely filed on November 6, 2019. See Fed. R. App. P. 4(a)(1)(9)(A). This is an appeal from District Court order granting Summary Judgment to the United States and deny Mr. Said Rum's Motion for Summary Judgment.

STATEMENT OF ISSUES ON APPEAL

I. Did the District Court err by applying the incorrect standard of willfulness by relying on United States v. Williams, 489 F. App'x 655 (4th Cir. 2012), and United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)?

Answer: Appellant states that the answer should be "Yes."

II. Did the District Court err in holding that there is no triable issue as to whether Mr. Said Rum was willful?

Answer: Appellant states that the answer should be "Yes."

III. Did the District Court err by not conducting de novo review regarding the issue of the amount of the penalty because the agency's action was adjudicatory in nature and the factfinding procedures were inadequate?

Answer: Appellant states that the answer should be "Yes."

IV. Did the District Court err by not finding the assessment to be arbitrary and capricious, and not setting it aside under 5 U.S.C. § 706(2)(A)?

Answer: Appellant states that the answer should be "Yes."

V. Did the District Court err in holding that the Internal Revenue Service properly applied 31 U.S.C. § 5321 instead of 31 C.F.R. § 1010.820(g)(2)?

Answer: Appellant states that the answer should be "Yes."

VI. Did the District Court err by not holding that any additions and interest to the penalty were arbitrary and capricious?

Answer: Appellant states the answer should be "Yes."

STATEMENT OF THE CASE

I. COURSE OF PROCEEDINGS AND DISPOSITION BELOW

Appellee filed a complaint to collect outstanding civil penalties assessed against Mr. Said Rum for his failure to timely report his financial interest in a foreign bank account, as required by 31 U.S.C. § 5313 and its implementing regulations, accrued interest on such penalties, late payment penalties, and associated fees. Each party moved for summary judgment and filed responses thereto. Doc. 1, 30, 31, 55, 58, 60, 61, 66, 67. The District Judge referred the matter for issuance of a Report and Recommendation. Doc. 62. Upon the hearing held on May 28, 2019, the Magistrate gave the parties the option to file supplemental briefs. Doc. 65. The parties filed supplemental briefs and the Magistrate took the matter under advisement for the Report and Recommendation to be entered. Doc. 66, 67. On August 2, 2019, the Magistrate recommended that the Government's Motion for Summary Judgment be granted, and Mr. Rum's Motion for Summary Judgment be denied. Doc. 30, 31.

II. STATEMENT OF FACTS

Mr. Said Rum was born in Jerusalem near the West Bank. (Doc. 31-5,12). In 1976, he immigrated with his parents and siblings to the United States. (Doc. 31-5, 23). He learned basic English and graduated from high school but did not obtain a four-year degree. (Doc. 31-5, 16). In 1982, Mr. Rum became a United States citizen. (Doc. 31-5, 11). At first, he worked for hotels; however, after a few years he started to operate a deli. Later he ran a pet supply store. (Doc. 31-5, 17-18).

Prior to 1998, Mr. Rum kept all his money in a Chase Manhattan Checking Account. (Doc. 31-5, 22). Mr. Rum held his money that way from 1976 to 1998. (Doc. 31-5, 25). In 1998, he had about 1.1 million dollars in a Chase Checking Account. (Doc. 31-5,23). Around that time, Mr. Rum was involved in an automobile accident and was a defendant in a personal injury lawsuit related to the accident. (Doc. 31-5, 42). His attorney advised him to move his money offshore. (Doc. 31-5, 47). Similarly, the attorney that reviewed Mr. Rum's business documents suggested that he move his money to a more lucrative interest-bearing account. (Doc. 31-5, 45). A few months later, a representative from Union Bank of Switzerland ("UBS") arrived at Mr. Rum's business soliciting people to open accounts. (Doc. 31-5, 47). Mr. Rum remembered his attorneys' advice, opened an account and transferred over his life savings. (Doc. 31-5, 49).

Mr. Rum was not a sophisticated businessman. (Doc. 31-5, 50). He had no knowledge of the tax laws or the applicable Foreign Bank Account Report ("FBAR") requirements. (Doc. 31-5, 69). Mr. Rum had a bookkeeper who tracked his business expenses and an accountant who prepared his returns. (Doc. 31-5, 77). His accountant never asked Mr. Rum if he held any foreign bank accounts. (Doc. 31-5, 79). Following the dismissal of the personal injury lawsuit, Mr. Rum kept his money in the UBS account because of the excellent returns that he received.

For years 1998 to 2007, Mr. Rum did not file the applicable FBAR form. (Doc. 31-5, 83). He did not know that foreign income was taxable. (Doc. 31-5, 69). Mr. Rum reviewed the numbers and amount of tax owed on his return but did not scrutinize the many schedules or the instructions to his return. (Doc. 31-5, 80). Mr. Rum signed his tax return. (Doc. 31-5, 81).

In November 2008, the Internal Revenue Service ("IRS") began an audit of Mr. Rum's 2006 tax return. (Doc. 31-5, 57). The audit examined Mr. Rum's Schedule C, business expenses. During the audit, Mr. Rum complied fully with the IRS's documents requests. (Doc. 58-4, 18-20). When asked for bank statements, Mr. Rum voluntarily supplied the IRS with copies of his bank accounts, including the UBS statements. (58-6, 18). This audit was resolved without a fraud penalty or  penalty for willful nonreporting of an FBAR. (Doc. 58-8, 2).

In late 2008, the financial crisis hit, and Mr. Rum's UBS accounts began to lose money rapidly. (Doc. 31-5, 27-28). Mr. Rum quickly transferred his money to a new Arab Bank account. (Doc. 31-5, 52). In 2009, Mr. Rum repatriated the funds in his Arab Bank account because the bank informed him that they were closing the account. (31-5, 53). At the time he had about 1.4 million dollars. (Doc. 31-5, 30). For 2008, Mr. and Mrs. Rum filed the appropriate FBAR form and signaled on their amended tax return that they held money in a foreign bank account. (Doc. 58-8, 2). On October 6, 2009, Mr. Rum received a notice that UBS disclosed to the IRS the existence of Mr. Rum's bank account. (Doc. 31-16).

On August 23, 2011, the IRS opened a new audit on Mr. Rum's 2007 tax return. (Doc. 58-3). Around that time, the IRS also began an examination for FBAR penalties. (Doc. 58-3). Revenue Agent Marjorie Kerkado conducted the audit. Doc. 58-3). Throughout the examination, the FBAR and income tax examination were combined. (Doc. 58-3). Originally, anon-willful FBAR penalty was pursued. (58-8, 1). The reason for this was the disclosure of the UBS account in the 2008 audit. Id. However, during the audit, Ms. Kerkado threatened to assess willful penalties. (Doc. 58-16, 3) Ms. Kerkado tried to use the FBAR penalty as leverage against Mr. Rum to get him to agree to a civil fraud penalty on his tax examination. Id. Ms. Kerkado offered to reduce the FBAR penalty to 20% if Mr. Rum agreed. Id. Ms. Kerkado, eventually, recommended to her manager that the IRS assess a non-willful penalty against Mr. Rum. (58-8).

Ms. Kerkado's manager, Terry Davis, sent the recommendation to IRS counsel for review. (Doc. 58-8). IRS counsel approved the non-willful penalty; however, its memorandum stated that counsel would also approve a willful penalty under the circumstances. (Doc. 58-8) Thereafter, Ms. Davis ordered Ms. Kerkado to change the recommendation to willful and to impose the maximum 50% penalty on the account. (Doc. 58-6, 85-86). Although Ms. Kerkado thought that a 50% penalty was too harsh, she followed her superior's orders. (Doc. 58-6, 85;89). Ms. Kerkado did not exercise any discretion in the imposition of the penalty. (Doc. 58-6, 85-91). 

Under the Internal Revenue Manual, deference is given to the examining agent, Ms. Kerkado, to determine the amount of the penalties to assess. I.R.M. § 4.26.16.6.7 (2008). The examining agent is supposed to consider several factors to decide the amount of the penalties. I.R.M. § 4.26.16-1. The examining agent is the only one who can determine the amount of penalties within the administrative process. I.R.M. § 4.26.16.6.7.

The IRS did not disclose why it imposed a 50% penalty as opposed to any other penalty. (Doc. 58-5) At IRS appeals, Mr. Rum and counsel were led to believe that the reason the 50% penalty applied was because Mr. Rum did not agree to the civil fraud penalty, per Ms. Kerkado's letter. (Doc. 58-16). The Explanation of items only stated statutory and regulatory penalty sections. (Doc. 58-5). The explanation of items did not discuss that the IRS was holding Rum responsible on a reckless disregard theory and did not discuss why the maximum amount of penalties was assessed. Id. Mr. Rum challenged the assessment through administrative appeals. He underwent an appeal hearing and contested the willful penalty. (Doc. 31-29). However, he did not receive an explanation as to the amount of the penalty until this litigation. (Doc. 31-29).

IRS Appeals affirmed the FBAR penalty because it determined that Mr. Rum was willful under the reckless disregard standard. (Doc. 31-29). The Appeals Officer, Svetlana Wrightson, found evidence of Ms. Kerkado's proposed offer. (Doc. 58-33). However, Ms. Wrightson determined that the 50% penalty applied because Mr. Rum did not agree to the civil fraud penalty. (Doc. 58-33). Ms. Wrightson did not discuss the mitigation guidelines with Mr. Rum. (Doc. 58-33). Later, the IRS abandoned all civil tax fraud penalties against Mr. Rum. (Doc. 58-20). On April 6, 2017, the Tax Court ordered for the tax assessment there were no penalties except for accuracy-related penalties under I.R.C. § 6662(a). Id.

SUMMARY OF THE ARGUMENT

The District Court erred in granting the Appellee's Motion for Summary Judgment and dismissing Appellant's Motion for Summary Judgment. This case is about the assessment of FBAR penalties, the definition of willfulness in the contex of the Bank Secrecy Act, whether the Internal Revenue Service acted arbitrarily and capriciously, and whether the court should have conducted a de novo review of the agency decision in regard to the amount of the penalty.

Based on the Supreme Court's decision in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), the District Court applied a standard of willfulness that includes reckless disregard. The District Court should have applied a standard of willfulness that requires actual knowledge under Ratzlaf v. United States, 510 U.S. 135 (1994). Although Safeco states that the standard of willfulness in civil cases generally includes recklessness, acknowledging a longstanding rule in tort law, the Supreme Court carved out an exception to this general rule in Cheek v. United States, 498 U.S. 192 (1990). The Court extended this exception to the Bank Secrecy Act in Ratzlaf. Contrary to the District Court's position, Safeco only fails to extend the exception in Cheek and Ratzlaf to the Fair Credit Reporting Act.

However, regardless of the definition of willfulness, the District Court erred in granting Appellee's Motion for Summary Judgment because there is a genuine issue of material fact as to willfulness. The District Court based its granting of summary judgment on two misapplied rules from the Fourth Circuit case, United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012). This case is poorly reasoned, based on egregious facts and should not be followed. There is a genuine issue of material fact as to whether the Appellant was willful.

The District Court further erred in conducting arbitrary and capricious review of the agency's decision regarding the amount of the penalty. The court should have conducted de novo review pursuant to Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971) and 5 U.S.C. § 706(2)(F). The reason for this is that the decision to the amount of the penalty is adjudicatory in nature and the factfinding procedures were inadequate. Firstly, Internal Revenue Service withheld law and important guidelines in their explanation for their decision to Appellant. This prevented Appellant from introducing facts at his administrative hearing to contradict the agency's position. Thus, the factfinding procedures were insufficient. See Overton Park, 401 U.S. at 415. Secondly, de novo review is in order because of the significant evidence of agency bad faith or improper behavior. On de novo review, the District Court should have held the agency's actions unlawful considering the examining agent's deposition and the Tax Court Order.

However, even on Arbitrary and Capricious review. Appellant contends that the District Court should have held the assessment unlawful and set it aside. The Internal Revenue Service acted arbitrarily and capriciously by failing to provide a "rational connection between the facts found and the choice made." Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The Internal Revenue Service did not notify Mr. Rum of critical mitigation guidelines, that Mr. Rum could have introduced evidence to contradict. The Service failed to provide an explanation of why it assessed the maximum penalty and during deposition, it appeared that the amount of the penalty was never considered. Further, because of the strong evidence of bad faith or improper behavior and the introduction of agent testimony, the District Court should have held the agency's actions unlawful and set them aside. Several arbitrary and capricious reasons were stated for the assessed penalties, any one of which could be the actual reason for the penalty. Because the District Court does not know which reason was the actual reason for the penalty, it should have set aside the agency's action.

The Service additionally acted arbitrarily by assessing penalties in excess of regulatory provisions. 31 C.F.R. § 1010.820(g) is controlling and willful penalties may not exceed $100,000.

Finally, the District Court erred in determining that interest was not arbitrary and capricious under the circumstances. Pursuant to Moore v. United States, CASE NO. C13-2063RAJ, (W.D. Wash. Jul. 24, 2015), interest is arbitrary because the Internal Revenue Service did not release any documents describing its reason for the maximum penalty until litigation. The Service also did not clearly state its theory of liability until litigation. Because a taxpayer should not have to sue the government to discover why he is being penalized, interest is arbitrary and capricious.

STANDARD OF REVIEW

The Eleventh Circuit Court of Appeals reviews de novo a district court's grant of a summary judgment motion. Strickland v. Norfolk S. Ry. Co., 692 F.3 d 1151, 1154 (11th Cir. 2012). Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Rule 56(a), Fed. R. Civ. P. In conducting its review, the Court of Appeals considers the record and draws all reasonable inferences in the light most favorable to the non-moving party — here, Mr. Said Rum. Strickland, 692 F.3d at 1154; Shiver v. Chertoff, 549 F.3d 1342, 1343 (11th Cir. 2008) (per curiam) (citation omitted).

ARGUMENT

I. THE DISTRICT COURT ERRED IN APPLYING THE INCORRECT STANDARD OF WILLFULNESS BY RELYING ON WILLIAMS AND MCBRIDE.

The District Court erred in applying a standard of willfulness that includes reckless disregard. (Doc. 71). Consistent with other willfulness requirements pertaining to the Bank Secrecy Act, the District Court should have applied a standard of willfulness that requires actual knowledge of the reporting requirements.

Penalties for violations of the foreign financial agency reporting requirements are determined based on whether the violation was willful or non-willful. These penalties are contained in detail in 31 U.S.C. § 5321(a)(5). The Secretary of Treasury may impose a civil money penalty on any person who violates § 5314. § 5321(a)(5)(C) imposes a maximum penalty of $100,000 or fifty percent of the balance of the bank account for willful violations. Otherwise, penalties shall not exceed $10,000 under § 5321(a)(5)(B). Willful is not a defined term within the statute.

The Supreme Court has interpreted willfulness to mean different things in a variety of contexts. Cf. Ratzlaf v. United States, 510 U.S. 135 (1994) with Bryan v. United States, 524 U.S. 184, 194 (1998); see also Cheek v. United States, 498 U.S. 192 (1990). "Willful, this Court has recognized, is a word of many meanings, and its construction is often influenced by its context." Ratzlaf, 510 U.S. at 141 (quoting Spies v. United States, 317 U.S. 492, 497 (1943)) (internal citations and quotations omitted). It is critical m determining the correct standard of willfulness that the Court consider the complexity of the provisions in which the term is embedded. Ratzlaf, 510 U.S. at 141.

Several circuits have determined that willfulness means a violation of a known legal duty in the context of the Bank Secrecy Act. See, e.g., United States v. Sturman, 951 F.2d 1466 (6th Cir. 1991) (finding a willful violation of FBAR reporting requirement requires actual knowledge of the reporting requirement and specific intent to not comply to sustain a criminal conviction); United States v. Eisenstein, 731 F.2d 1540 (llth Cir. 1987) (requiring proof of defendant's knowledge of the reporting requirement under § 5313); United States v. Dichne, 612 F.2d 632 (2d Cir. 1979) (finding that the government must prove knowledge of the reporting requirement and specific intent to violate the statute). While these cases mostly interpret willfulness in criminal contexts, the considerations remain the same for civil willfulness. The foreign agency transaction reporting requirements are highly technical such that the average person is unlikely to be aware of the requirements. Further, the penalties for failing to comply are extremely harsh. See, generally, § 5321. Highly technical statutes present the "danger of ensnaring individuals engaged in apparently innocent conduct." Bryan, 524 U.S. at 194 (1998). Thus, the courts provide extra protection with a heightened willfulness requirement. See Ratzlaf, 510 U.S. at 141.

Additionally, "[a] term appearing in several places in a statutory text is generally read the same way each time it appears." Ratzlaf, 510 U.S. at 143. The word "willful" was used for both criminal and civil FBAR penalties. 31 U.S.C. §§ 5321, 5322. Accordingly, the same intent requirement should apply for the civil FBAR penalties that applies for criminal FBAR penalties. Sturman, 951 F.2d at 1476 (noting willfulness standard in criminal conviction for failure to file an FBAR means actual knowledge of the legal duty). Indeed, the IRS itself reached the same conclusion. Sara Coe, Internal Revenue Service Chief Counsel Memorandum, 200603026 (Jan. 20, 2006) ("[t]he same word, willful, is used in both of these sections. Statutory construction rules would suggest that the same word used in related sections should be consistently construed"). Courts have interpreted willful to mean knowing and voluntary in other civil contexts involving tax matters. See, e.g., Rykoffv. United States, 40 F. 3d 305, 307 (9th Cir. 1994) (finding willful to mean a "voluntary, conscious and intentional act" in the context of civil corporate officer liability for withholding tax).

The Internal Revenue Service has further incorporated this definition of willfulness regarding the FBAR reporting requirements in the Internal Revenue Manual ("IRM"). The IRM. defines "willfulness" as "knowledge of the reporting requirement and conscious choice not to comply." See I.R.M. § .26.16.6.5.1(1). Although the RM does not have the force of law, it is useful for interpreting internal revenue service regulations. See, e.g., United States v. Boyle, 469 U.S. 241,243 n. 1 (1985). This Court should consider the IRS's reasonable interpretation of the statute as expressed in the IRM.

Despite this clear precedent, the District Court came to the opposite conclusion. The District Court relied on two cases from other circuits for the notion that willfulness automatically includes reckless disregard in civil cases. See United States v. Williams, 489 F. App'x 655, 656 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012). These cases misapply Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), to come to this conclusion. Williams, 489 F App'x at 658; McBride, 908 F. Supp. 2d at 1201 (relying on Williams). Safeco only rearticulates the rule that willfulness "generally" includes reckless violations in civil contexts and fails to extend the exception contained in Cheek and Ratzlaf to the Fair Credit Reporting Act ("FCRA"). Safeco, 551 U.S. at 57.

A quick look at the facts of Safeco clarifies why the Supreme Court failed to extend the exception to the FCRA. The FCRA is a consumer protection act and is concerned with consumer credit reports. Id. at 52. Whenever a person takes an adverse action based on information in a consumer credit report, that person must notify the consumer. Id. at 52-53; 15 U.S.C. § 1681m(a). Someone who willfully fails to notify the consumer is civilly liable to the consumer. Safeco, 551 U.S. at 53; § 1681n(a). The purpose of the act is to protect consumers who are at risk of being abused by large corporations and provide them recourse when such an abuse occurs. 

There are many reasons why willfulness under the FCRA includes reckless disregard which do not apply in the context of the Bank Secrecy Act. Firstly, Congress used "knowingly" later in the same statute. Safeco 551 U.S. at 59. This implicitly means that willfully is a lesser or different standard to knowingly in the FCRA. Id. The FCRA is designed to protect consumers privacy and ensure fairness. 15 U.S.C. § 1681(a)(4). The businesses that use credit reports are sophisticated. See Safeco, 551 U.S. 47. They are likely to know of the requirements in the FCRA and train their staff to see these issues. Therefore, they are unlikely to be ensnared by the statute.

As for the Bank Secrecy Act, none of these reasons apply. Knowingly is not used anywhere in 31 U.S.C. § 5321 or the rest of the Act; the only standards used are willful, non-willful and negligent. § 5321(a)(5). The purpose of § 5314 is to require reporting of certain records useful in government investigations. 31 U.S.C. §5311. This is a civil penalty. The government is well-equipped to investigate and is not prejudiced by requiring actual knowledge. § 5314 affects every resident or citizen of the United States who makes a transaction or maintains a relation with a foreign financial agency. § 5314(a). For example, it affects every student who wants to study abroad and must maintain a bank account in the country of study. A citizen who wants to learn the reporting requirements must first read § 5314 to learn that the requirements are almost entirely controlled by regulation. Then she must comb through 31 C.F.R. §§ 1010.300 to 1010.370 to learn what reports must be made and when. There is a serious risk of ensnaring innocent individuals with a reckless disregard standard.

Reckless disregard is overly broad, effectively reducing § 5321's willful penalties to strict liability and should not apply. Safeco does not abrogate the courts' responsibility to interpret willfulness in light of the complex statutory regime in which the word is found. After all, the Court in Safeco did such an analysis. Safeco, 551 U.S. at 59. In Bank Secrecy Act cases, the Supreme Court has granted extra protection to individuals by requiring knowledge of the specific legal duty.

II. EVEN IF WILLFULLY IN 31 U.S.C. § 5321(A)(5)(C) INCLUDES RECKLESS DISREGARD, THE DISTRICT COURT ERRED IN FINDING NO GENUINE ISSUE OF MATERIAL FACT AS TO WHETHER SAID RUM WAS WILLFUL

Reckless disregard is an objective standard that is usually interpreted as requiring "a known or obvious risk that was so great as to make it highly probable that harm would follow." Safeco, 551 U.S. at 69 (quoting W. Keeton, D. Dobbs, R Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 34, at 213 (5th ed. 1984)) (internal quotations omitted). The Supreme Court has also defined recklessness as "an unjustifiably high risk of harm that is either known or so obvious that it should be known." Farmer v. Brennan, 511 U.S. 825, 836 (1994). The District Court determined that reckless disregard was unequivocally established by failing to review the tax return for accuracy and by signing the tax return. (Doc 71, 17). While such conduct is likely negligent, it is not unequivocally reckless.

The District Court relied on Kimble v. United States, 141 Fed. Cl. 373 (2018), which came to substantially the same conclusion on Summary Judgment. The court in Kimble, came to this conclusion based on two misapplied rules. First, "as a matter of law, a taxpayer is charged with knowledge of the representations made on federal tax returns." Id. at 384. This is a misstatement and misapplication of the original rule that taxpayers may not claim complete innocence for items claimed on a tax return. Taxpayers are generally not charged with knowledge of their tax returns without additional facts. Second, a taxpayer is willfully blind to the FBAR reporting requirement by failing to read the instructions to her tax return. Id. This is also the finding of the court in United States v. McBride, 908 F. Supp. 2d 1186, 1210 (D. Utah 2012). However, the court's reasoning in Kimble and McBride makes no sense when applying the actual standards in the Supreme Court's opinion in Global-Tech Applications, Inc. v. SEB S.A., 563 U.S. 754 (2011).

A. Taxpayers Are Only Held to Have Constructive Knowledge of Their Return When Claiming Non-Negligence.

"A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents." Jarnagin v. United States, 134 Fed. Cl. 368 (2017). This rule has long been used to show that a taxpayer had reason to know of the contents of a return when a taxpayer claims innocent spouse relief. See Park v. Comm'r, 25 F.3d 1289, 1298 (5th Cir. 1994) (applying the rule to innocent spouse relief, finding the taxpayer had reason to know); Greer v. Comm'r, 595 F.3d 338, 347 (6th Cir. 2010) (applying rule to innocent spouse relief to find taxpayer had reason to know); Kistner v. Comm'r, 18 F.3d 1521,1525 (11th Cir. 1994) (duty to inquire in innocent spouse relief); Price v. Comm'r, 887 F.2d 959, 965 (9th Cir. 1989) (spouse has reason to know). Courts have never used this rule outside of the innocent spouse context to find a taxpayer reckless until United States v. Williams, 489 F. App'x 655 (2012), and its progeny cases (Kimble and Mcbride). (emphasis added). These courts were wrong to do so. The standard in innocent spouse relief is reason to know which is essentially a negligence standard. (emphasis added). The person claiming innocence has the burden of proof. See Kistner, 18 F.3d at 1525. Williams turns the rule on its head, expands it to include recklessness and uses it offensively as justification to assess willful FBAR penalties. Legal scholars and tax experts have widely criticized Williams for its misapplication of the law in the FBAR context; this Court should not follow it. See, generally, Kyle Niewoehner, Comment: Feigning Willfulness: How Williams and McBride Extend the Foreign Bank Accounts Disclosure Willfulness Requirement and Why They Should Not Be Followed, 68 Tax Lawyer 1, 251 (Fall 2014) (discussing that the interpretation of willfulness in Williams is no different than strict liability); Steven Ferraro, Effect of United States v. Williams on the Offshore Voluntary Disclosure Program, 10 BYU Int'l L. & Mgmt. Rev. 27 (2014) (discussing that the change to willfulness in Williams harms voluntary disclosure).

Before Williams, taxpayers were generally not charged with knowledge of their returns by signing them; additional evidence of knowledge was required which could be proved circumstantially. See United State v. Mohney, 949 F.2d 1397,1407 (6th Cir. 1991) (A taxpayer's signature "does not in itself prove his knowledge of the contents but knowledge may be inferred from the signature along with the surrounding facts and circumstances"); see also United States v. Loney, 719 F.2d 1435, 1436 (9th Cir. 1983); United States v. Harper, 458 F.2d 891, 894 (7th Cir. 1971). Taxpayers could only not claim complete innocence because taxpayers had reason to know of misstatements contained within their tax return. See Greer, 595 F.3d at 347. Therefore, taxpayers who did not review their returns were negligent and could not be absolved of their spouses' tax debt. There is no reason to extend this rule to recklessness or to use it offensively to assess penalties.

B. Willful Blindness is Inapposite on the Facts and Should Not Apply to Income Tax Return Instructions

Likewise, the court in Kimble relies on McBride, 908 F. Supp. 2d at 1205, for the notion that willful blindness exists and conclusively proves reckless disregard. The court in McBride, relies on Global-Tech Applications, Inc. v. SEB S.A., 563 U.S. 754 (2011). The District Court and the court in McBride's reliance on Global-Tech Applications is misplaced. The issue in Global-Tech Applications is whether a person who actively induces infringement of a patent must know of the patent or if a reckless disregard to the risk that there is a patent will suffice. Global-Tech Applications, 563 U.S. at 757. This case arises in the context of a statute that does not specify the mental requirement. Id. The Court determined that there was an actual knowledge requirement but maintained liability on a theory of willful blindness. Id. at 766. As a result, the Court extended willful blindness to civil cases. Id. at 770.

"A willfully blind defendant is one who takes deliberate action to avoid confirming a high probability of wrongdoing." Id. at 769. Willful blindness is used when a defendant fails to ascertain circumstances that would create liability but knows that they likely exist. See Global-Tech Applications, 563 U.S. at 767. Thus, deliberately shielding oneself from liability. Id.

The court in Kimble and McBride found the taxpayers willfully blind by not reviewing the instructions to question 7(a) on their tax returns to become aware of the law. However, willful blindness would only exist if the choice was deliberately made to avoid liability. There is no evidence of this. At trial, a court may infer that Mr. Rum deliberately did not read the return, but not on summary judgment when Mr. Rum would be entitled to a negative inference that he merely neglected to read the return. Further, the most recent instructions to an individual income tax return are over 100 pages long. The courts' decision to apply willful blindness when a taxpayer does not read the instructions flies in the face of reality. See 1040 and 1040-SR Instructions, Internal Revenue Service (2020), irs.gov/pub/il040gi.pdf. This is another instance of the District Court mixing up the standards.

These facts that the District Court claims create willful blindness are merely circumstantial evidence of actual knowledge. Therefore, Mr. Rum is entitled to a negative inference on summary judgment. Dadeland Depot, Inc. v. St. Paul Fire and Marine Ins. Co., 483 F.3d 1265, 1268 (llth Cir. 2007). This Court should thus reverse the District Court's order.

C. Summary Judgment is Not Appropriate When a Party's Mental State is at Issue

The primary issue in this case were the motivations and thoughts of Mr. Rum when he did not file the applicable FBAR form. It is well-established that summary judgment is inappropriate to decide questions of scienter. Ross v. Bank S., N.A., 885 F.2d 723, 751 (11th Cir. 1989); Alabama Great So. R.R. v. Louisville & N.R.R., 224 F.2d 1, 5, (5th Cir. 1955) ("[W]here motive, intent, subjective feelings and reactions, consciousness and conscience [are] to be searched, and examination and cross examination [are] necessary instruments in obtaining the truth"). See also, Watts v. Univ. of Delaware, 622 F.2d 47, 52 (3d Cir. 1980); Cosol. Elec. Co. v. U.S. for Use Benefit of Gough Indus., Inc., 355 F.2d 437, 438 (9th Cir. 1966); Weidel v. Ashcroft, 234 F. Supp. 2d 5, 8 (D.D.C. 2002) ("Ascertaining why a witness has done or said something necessarily involves assessing the truthfulness of his testimony. It is, therefore, hardly surprising that the federal courts have persistently indicated that questions of motive and intent cannot be resolved on summary judgment" (citations omitted)).

The evidence the District Court relied on does not conclusively establish reckless disregard. Mr. Rum's purpose was not to conceal income from the government, but simply to keep the money in an account that earned high interest. (Doc. 31-5, 43). He did not keep his account secret to avoid taxes, but did not report it because he believed the money was only taxable when it came to the United States. (Doc. 31-5, 71).

When Mr. Rum opened his account, he followed the advice of his then attorney to transfer his money into a more lucrative overseas bank account. (Doc. 31-5, 47). He testified that he did not understand the exact tax consequences of this decision. (Doc. 31-5, 49; 50). Years later when confronted with a standard form questionnaire from his accountant, he answered "no" to the question regarding foreign accounts because his then accountant, who prepared his return, did not point to the question and explain it to Mr. Rum, so Mr. Rum did not even know that the question existed. (Doc. 31-5, 83). Further, Mr. Rum was not aware that any reportable income was being generated from the account as he did not even know how much income it was earning a year. (Doc. 31-5, 66). Though he has had some success in business, Mr. Rum is not a sophisticated businessman particularly in financial and tax matters. (Doc. 57, 1). He testified clearly in deposition that he did not understand his tax return and that he did not knowingly violate the law. (Doc. 58-1, 2; 3). The only notice that Mr. Rum received from his bank in Switzerland regarding the filings of FBARs is dated October 6, 2009 — the first time that Mr. Rum had any notice of any obligation with respect to the IRS. (Doc. 31-5, 55); (Doc. 31-19). This evidence is sufficient to establish a disputed issue of material fact on the record. The District Court should have thus denied summary judgment on this issue.

III. THE DISTRICT COURT ERRED IN NOT CONDUCTING A DE NOVO REVIEW ON THE ISSUE OF THE AMOUNT OF THE PENALTY AND IN NOT HOLDING THE INTERNAL REVENUE SERVICE'S ACTIONS UNLAWFUL UNDER 5 U.S.C. § 706(2)(F).

The District Court erred in determining that the IRS's fact-finding procedures were sufficient; thus, applying arbitrary and capricious review. Because the factfinding procedures were insufficient, the District Court should have applied de novo review pursuant to 5 U.S.C. § 706(2)(F). Under de novo review, the District Court must set aside and hold the IRS's actions unlawful.

5 U.S.C. § 706 identifies the scope of review a court is to use when determining whether an agency's action is lawful. § 706(2)(F) provides that the court will hold unlawful agency actions found to be "unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court." The Supreme Court has determined that de novo review is appropriate under two circumstances: (1) "when the action is adjudicatory in nature and the agency factfinding procedures are inadequate" and (2) "issues that were not before the agency are raised in a proceeding to enforce a nonadjudicatory agency action." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971). This was an adjudicatory action and the first prong of the test applies. 

The courts have differed as to when there are inadequate factfinding procedures. The Circuit for the District of Columbia recognizes eight occasions:

(1) when agency action is not adequately explained in the record before the court; (2) when the agency failed to consider factors which are relevant to its final decision; (3) when an agency considered evidence which it failed to include in the record; (4) when a case is so complex that a court needs more evidence to enable it to understand the issues clearly; (5) in cases where evidence arising after the agency action shows whether the decision was correct or not; (6) in cases where agencies are sued for a failure to take action; (7) in cases arising under the National Environmental Policy Act; and (8) in cases where relief is at issue, especially at the preliminary injunction stage.

Esch v. Yeutter, 876 F.2d 976, 991 (D.C. Cir. 1989). On the other hand, the Ninth Circuit recognizes four occasions:

(1) if admission is necessary to determine whether the agency has considered all relevant factors and has explained its decision, (2) if the agency has relied on documents not in the record, (3) when supplementing the record is necessary to explain technical terms or complex subject matter, or (4) when [party] makes a showing of agency bad faith.

Lands Council v. Forester of Region One of the United States Forest Serv., 395 F.3d 1019, 1030 (9th Cir. 2004). Other circuits do not enumerate a list of exceptions for when Courts may look beyond the administrative record. See USA Group Loan Servs. v. Riley, 82 F.3d 708, 715 (7th Cir. 1996).

The Eleventh Circuit has yet to specify a test. See GA Aquarium, Inc. v. Pritzker, 134 F. Supp. 3d 1374, 1378 (N.D. Ga 2014). Regardless of the test this Court uses, the District Court erred in not holding the agency action unlawful.

A. The IRS's Factfinding Procedures Were Broadly Insufficient Because the Agency Withheld the Penalty Mitigation Guidelines Upon Which It Relied to Assess the Maximum Willful Penalty

The administrative record is tainted by deprivations of due process. On June 27,2012, the Ms. Kerkado submitted the file for review and approval of a non-willful penalty by IRS Counsel. (Doc. 58-8). On November 28, 2012, the non-willful penalty was approved; however, IRS Counsel also approved a willful penalty. (Doc. 58-8). Then, the case was resubmitted as a willful penalty. (Doc. 30-24).

The Form 886-a, sent to Mr. Rum explaining the reasons for the decision, does not adequately explain why the willful penalty was applied and why penalties were set at 50% of the value of the bank account. (Doc. 58-5). Critically, the form 886-a fails to cite to the Mitigation Guidelines on which the amount of the penalty may be determined. (Doc. 58-5). Under the Administrative Procedures Act, the IRS had an obligation to provide Mr. Rum with the authority under which it was assessing the amount of the penalty. 5 U.S.C. § 554(b)(3). "It is an elementary principle of administrative law that an administrative agency must provide reasons for its decisions." Harberson v. NLRB, 810 F.2d 977, 984 (10th Cir. 1987) (citing SEC v. Chenery Corp., 318 U.S. 80 (1943)). Mr. Rum did not get a fair opportunity to contest the amount of the penalty or argue that he would qualify for mitigation. Id. He could not introduce facts to the administrative record that would benefit his case. Id.

Because of the inadequate explanation, Mr. Rum was led to believe that the reason for the willful penalty was because he did not agree to Ms. Kerkado's offer to assess 20% FBAR penalties if Mr. Rum agreed to civil fraud penalties in the tax case. (Doc. 58-5; Doc. 58-16). Ms. Kerkado's letter to Mr. Rum clearly stated that she would assess 50% penalties because he did not agree to the civil fraud penalty. Doc. (58-16). This was the last correspondence he received from the Service prior to the form 886-a. (Doc. 58-3). Mr. Rum did not receive any correspondence disaffirming the letter. Id.

Consequently, Mr. Rum did not have an adequate opportunity to contest the assessment at the informal appeals hearing. He was denied the opportunity to introduce facts and law to contradict the Service's position. See (Doc. 58-5; 59-5). At the appeals hearing, the appeals officer had the opportunity to clarify these issues, explain the amount of the penalty and if Mr. Rum could get the penalty mitigated. Further, she could remand to Ms. Kerkado for more information. However, she did not. (Doc. 58-33). Instead, the appeals hearing became about the improper deal that Ms. Kerkado gave Mr. Rum. Id. In fact, there was no indication that Ms. Wrightson even knew about the mitigation guidelines at the time. (Doc. 58-33). The only mention of mitigation at the appeals was in the case memorandum which was written several months after the conference. (Doc 59-5; 58-33)

The facts here mirror those in Independent Electrical Contractors of Houston, Inc. v. NLRB, 720 F.3d 543 (5th Cir. 2013). In Independent Electrical, the administrative law judge found liability under one theory of liability. Id. at 552. The National Labor Relation Board on appeal rejected that theory of liability but, nevertheless, upheld liability on a novel theory, introduced on appeal. Id. The Fifth Circuit found that due process was violated because the party had no notice of the government's theory of liability. Id. Counsel attended the hearing arguing the stated theory of liability. However, at the hearing the Board changed its theory of liability and the counsel could not contest them. Id. Reasoning that the new theory of liability required different proof, the Fifth Circuit dismissed the action. Id. at 554-55.

In our case, the Internal Revenue Service did not give notice of its reasons for the amount of the penalty. (Doc. 58-5). In fact, prior to the assessment, the only reason the Service gave for its 50% penalty was that Mr. Rum did not agree to a civil fraud penalty. On appeal, Mr. Rum was held liable for 50% penalties based on the mitigation guidelines, which he did not have an opportunity to contest. (Doc. 59-5). Thus, Mr. Rum was denied due process while at the agency. See Independent Contractors, 720 F.3d at 552. Mr. Rum required different kinds of evidence to contest the mitigation guidelines than the letter. See I.R.M. §§ 4.26.16-1 & 1.2.20.1.1.9. Mr. Rum could not develop the factual record to attack the amount of penalties. Thus, the District Court should not be beholden to the agency record now. The District Court erred in not conducting a de novo review.

B. The IRS's Factfinding Procedures Were Inadequate Because of Obvious Defects in the Factfinding Procedure

In addition to the lack of due process, de novo review is also merited because of obvious defects in the factfinding procedure. See Porter v. Califano, 592 F.2d 770 (5th Cir. 1979) (Prior to when 11th Circuit split from 5th Circuit). There are numerous clear violations of IRS policy and procedure. The violations of policy and procedure as expressed in the IRM merit that the District Court conduct de novo review.

This case presents similar facts to those in Porter v. Califano. In Porter v. Califano, a woman contested her termination on First and Fifth Amendment grounds. Id. at 771. The court reversed on summary judgment and indicated that the District Court must conduct a full evidentiary review under 5 U.S.C. § 706(2)(F). The former employee was subject to a jaded procedure based on numerous short investigations and evidence from persons that the employee did not get the chance to cross-examine. Id. at 783. Her reviewers were biased by previous accusations of misconduct against the plaintiff. Id. They did not give her a full and fair evidentiary hearing. Id. Further, the internal appeal was superficial. Id. Although it acknowledged that normally courts strictly review the administrative record, the court stated, "we do not propose to blind ourselves to obvious defects in the factfinding procedure." Id. (quoting Pickering v. Bd. Of Educ., 391 U.S. 563,579 n. 2 (1968)).

In the present case, the clear disregard for the IRM presents similar "obvious defects." See id. First, IRS policy dictates that FBAR penalty examinations and tax return examinations are to stay completely separate unless there is a related statute memorandum. I.R.M. § 4.26.17.2.1(3). However, the record clearly shows that the FBAR examination and the tax examination were merged. (Doc. 58-3; 58-32). Second, IRS policy states that there is no bargaining about penalties. I.R.M. § 1.2.20.1.1.9. Ms. Kerkado tried to bargain with Mr. Rum regarding his civil fraud penalty and FBAR penalty. (Doc. 58-16). Specifically, Ms. Kerkado offered to give him a reduced FBAR penalty if he agreed to a civil fraud penalty. (Doc. 58-16). This was civil entrapment. Because all recommendations are subject to approval, I.R.M. § 4.26.16-1, and if Mr. Rum had agreed to this offer, a civil fraud penalty would be "sustained", I.R.M. § 4.26.16-1 (d), Ms. Kerkado would have lied to Mr. Rum by giving him an offer her superiors would never accept, resulting inevitably in a civil fraud penalty and a 50% willfulness penalty.

Third, the Revenue Agent has discretion to determine whether to assess penalties and at what amount. I.R.M. § 4.26.16.6.7. However, Ms. Kerkado maintains that she had no discretion and that her manager, Terry Davis, ordered her to change the penalty from non-willful to willful and to charge the maximum penalty. (Doc. 58-6, 85-92) Fourth, the IRS violated its own policy by not giving a reasoned explanation for the penalty that would allow Mr. Rum to contest the issues. I.R.M. § 4.10.8.12.4(2)(d); (Doc. 58-5). Fifth, the IRS created a new issue at appeals by claiming that Mr. Rum did not cooperate with the IRS in the investigation. I.R.M. § 1.2.1.9.2(2). Lack of cooperation was only mentioned in the Appeals Memorandum. (Doc. 59-5).

Normally, any obvious defect by the IRS examining agent or her manager would be resolved through internal appeals. Ms. Wrightson would have the opportunity to correct any improper behavior or defects. (Doc. 58-22, 7). However, in this case the whole process was faulty. Ms. Wrightson did not correct the numerous errors of the examining agent and her manager. (Doc. 58-33; 59-5). It is highly likely that Ms. Wrightson also did not know what she was doing. (Doc. 58-33). She could have remanded to the examiner to correct these errors. This case was one of the first FBAR cases for the IRS; the examiners, managers and appeals officers were "learning by doing." (Doc. 58-24, 12). Thus, the record is littered with instances of these "obvious defects." Porter, 592 F.2d at 783.

The IRS did not conduct a thorough and fair investigation. Rather, the IRS was tiying to entrap Mr. Rum so that it could assess willful FBAR penalties and civil fraud penalties. In so doing, the IRS violated its own factfinding policies and procedures. Further, neither the examiner nor the appeals officer knew what they were doing; thus, they made numerous mistakes. Ultimately, the IRS assessed Mr. Rum with a willful penalty improperly through an IRS employee who did not have the authority to assess in the first place. There are clear procedural defects requiring de novo review.

C. On Conducting a De Novo Review of the Penalty, The Court Must Decide in Favor of the Appellant

On de novo review, the evidence shows that the assessment of maximum willfulness penalties was inappropriate under the circumstances because of the lack of Secretary discretion. 31 U.S.C. § 5321 gives the Secretary of Treasury discretion to determine the amount of penalties. The Secretary delegated that authority to FinCen, who in turn delegated their authority to collect to the Internal Revenue Service. (Doc. 31-10; 31-12). The Internal Revenue Service delegates their authority to the examining agent. I.R.M. § 4.26.16.6.7.

From the examining agent's deposition, she did not think that she had any discretion in whether to assess penalties and in what amount. (Doc. 58-6, 85). Ms. Kerkado considered herself a "puppet." (Doc. 58-6, 86). Within the administrative agency, the examining agent is the only one who can exercise discretion as to whether to assess penalties and at what amount. I.R.M. § 4.26.16.6.7. Therefore, no discretion was exercised; the Secretary of Treasury did not make any decision regarding the amount of penalties in the assessment.

Furthermore, the Tax Court Order eliminating fraud penalties means that Mr. Rum would qualify for mitigation under I.R.M. § 4.26.16-1. The Stipulated Tax Court Order reveals that the penalty was based on a mistaken belief and that the agency reversed its position as to civil fraud. (Doc. 58-20). The IRS upheld the amount of the penalty on the basis of the civil fraud penalty. (Doc. 59-5). Now that there is no civil fraud penalty, Mr. Rum would be entitled to discretionary mitigation. Because the IRS did not exercise mitigation, the assessment is unlawful.

This Court must hold the Agency Actions unlawful under 5 U.S.C. § 706(2)(F). Alternatively, this Court must remand to the District Court to make a determination as to whether the IRS's actions were unlawful under § 706(2)(F).

IV. THE DISTRICT COURT ERRED IN NOT HOLDING THE IRS'S ACTIONS UNLAWFUL UNDER 5 U.S.C. § 706(2)(A).

5 U.S.C. § 706(2)(A) requires that the court hold unlawful agency actions that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Under the arbitrary and capricious standard of review, an "agency must examine the relevant data and articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.'" Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962). This applies not only to agency rulings but also agency policies and procedures. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016). When the agency  has made an inadequate explanation between the facts and the decision made, a court must find their actions arbitrary and capricious. The District Court erred in finding that the IRS was not arbitrary and capricious.

A. The Willful FBAR Assessment Was Unlawful Because of Arbitrary and Capricious Procedures that Left Mr. Rum Without an Opportunity to Contest the Assessment at the Agency

The IRS acted arbitrarily and capriciously by not disclosing the law and policy on which it relied prior to the appeals hearing in its explanation for the assessment. (Doc. 58-5). This is contrary to the IRS's normal standards and procedures. I.R.M. §4.10.8.12.4. When an agency diverts from normal practices and policies, it must provide a reason for the change. Encino Motorcars, 136 S. Ct. at 2126; California Trout v. FERC, 572 F.3d 1003, 1021-22 (9th Cir. 2009). 5 U.S.C. § 554(b)(3) requires the agency give notice of the facts and law upon which it is relying. In this instance, the IRS did not provide Mr. Rum with a reason for the change in its practices and procedures and failed to give notice of the law on which it was relying.

The IRS did not disclose the penalty mitigation guidelines. I.R.M. § 4.26.16-1. Under the mitigation guidelines, Mr. Rum may have been able to obtain an abatement of a portion of the penalty. The IRS did not provide a reason for diverting from normal practices of citing critical IRM provisions in its explanation for the assessment. I.R.M. § 4.10.8.12.4(1) provides that examiners must give "enough information to enable the taxpayer to challenge the issue." This did not occur in Mr. Rum's case and he lost the ability to challenge the amount of the penalty.

Additionally, the IRS did not give reasons for any of the other departures from the IRM. The IRS did not provide a reason for the deal Ms. Kerkado gave to Mr. Rum in violation of I.R.M. § 1.2.20.1.1.9. It did not provide a reason for the lack of examiner discretion in violation of I.R.M. § 4.26.16.6.7. While the Internal Revenue Manual does not carry the force of law, it stands for the general practices and procedures of the agency. See United States v. Horowitz, 361 F. Supp 3d 511,515 (D. Md 2019). When an agency diverts from its procedures, the Administrative Procedures Act requires an agency to provide reasons for its decision. 136 S. Ct. at 2126. The IRS did not provide Mr. Rum with a reason for its departure from this practice or any of the other practices

The IRS's actions in this case were arbitrary and capricious. They did not disclose the penalty mitigation guidelines. (Doc. 58-5); I.R.M. § 4.26.16-1. They gave no reasons for their decision not to disclose the penalty mitigation guidelines. They gave no reasons for their decision to not follow their own practices and procedures. Therefore, the IRS acted arbitrarily and capriciously. The Court should have set aside the penalty.

B. Considering the Proposed Deal and the Lack of Examiner Discretion, Maximum Willful Penalties Were Arbitrary and Capricious

In reviewing the decision of an agency, a District Court may require the administrative officials who participated in the decision to give testimony explaining their actions. Citizen's to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971). The Supreme Court states that such extra-record evidence should be used sparingly. Overton Park, 401 U.S. at 420. However, when there is a strong showing of bad faith or improper behavior, a court may supplement the record with such evidence. Id. See also Dep't of Commerce v. New York, 139 S. Ct.2551,2564 (2019). The clear violations of IRS policy and procedure expressed above are strong evidence of bad faith or improper behavior, sufficient for the court to supplement the record.

In this case, there is evidence of multiple stated and unstated reasons for the decision to assess maximum willful penalties. (Doc. 58-6, 85; 58-16; 58-28). Some of the bases for these decisions are arbitrary and capricious under the reasoned decision rule. See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). While normally a court does not look into unstated reasons, the court may examine them on a strong showing of bad faith or improper behavior. Dep't of Commerce v. New York, 139 S. Ct. at 2574. In this case we have extra-record evidence that an arbitrary and capricious decision was made. (Doc. 58-6). The Court must set aside the administrative agency action because it cannot determine what the actual basis for its decision is.

The assessment of maximum willful penalties may have been because of two arbitrary and capricious reasons. Firstly, Ms. Kerkado proposed a deal to Mr. Rum that if he accepted civil tax fraud penalties, that she would assess 20% penalties. (Doc. 58-16). This is well-established in the record. Id. The 50% assessment may have been solely because Mr. Rum did not agree to the civil fraud penalties. This certainly would be an arbitrary reason to assess that amount of penalties. Further in her deposition, the examiner stated that she did not decide to assess 50% penalties but rather her manager, M.S. Davis told her to assess willful penalties at 50%. (Doc. 58-6, 85). There is no explanation for why JVIs. Davis did this in the administrative record. Her actions infringed on Ms. Kerkado's scope of authority under I.R.M § 4.26.16.6.7. This cannot be held as a reasoned explanation for the assessment. See Motor Vehicles, 463 U.S. at 43.

Although Ms. Kerkado affirms that she thought that Mr. Rum was willful, she did not know that she had any discretion in assessing the amount of the penalty. See (Doc. 58-8, 85-90). In deciding not to find the agency's actions arbitrary and capricious, the District Court points to several months prior to the time the actual decision was made when mitigation was mentioned. See (Doc. 71, 30-31; Doc. 67-1; Doc. 30-24). These instances within the examiner's log do not substantiate the reason to assess willful penalties or the 50% amount. (Doc. 58-32). There is no indication in the record between the recommendation of non-willful penalties and the recommendation of willful penalties that show any consideration of the amount of penalties. (Doc. 58-32). From Ms. Kerkado's deposition, she did not exercise any discretion or consideration of mitigation. (Doc. 58-6, 85). Rather, the decision to assess maximum penalties was entirely from Ms. Davis, who had no authority on the matter. (Doc. 58-6, 85); I.R.M. § 4.26.16.6.7.

The District Court upheld the assessment amount on the basis that the decision could possibly come from a rational reason. (Doc. 71). In doing so, it analyzed the mitigation guidelines and whether it was possible to conclude that Mr. Rum would not qualify for mitigation. (Doc. 71, 21-22). The Court determined that the decision that mitigation would not apply was reasonable because a Tax Fraud Penalty was feasible under the circumstances. Id. at 22-27. However, this was unnecessary because the deposition shows that the examining agent did not even consider mitigation. (Doc. 58-6, 90-92). The Court must look to the actual reasons, not possible ones. 139 S. Ct. at 2574. The District Court should have held the agency's actions unlawful under § 706(2)(A).

V. THE DISTRICT COURT ERRED IN HOLDING THAT THE IRS PROPERLY APPLIED 31 U.S.C. § 5321 INSTEAD OF 31 C.F.R. § 1010.820(g)(2).

This issue deals with a split among the district courts regarding whether the 2004 amendment to 31 U.S.C. § 5321 invalidated the applicable regulation. One line of cases argue that the statute implicitly superseded the regulation by raising the maximum amount that may be assessed. See United States v. Horowitz, 361 F. Supp. 3d 511, 514 (D. Md. 2019); Norman v. United States, 138 Fed. Cl. 189, 195 (2018). The other line of cases argues that statutes are given their plain meaning, a statute must be inconsistent with the regulation to supersede it and that subsequent amendments leaving the maximum in place confirm the Secretary's intent to cap penalties for willfulness. See United States v. Wadhan, 325 F. Supp. 3d 1136,1139 (D. Colo. 2018); United States v. Colliot, Docket No. AU-16-CA-01281-SS, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018). The District Court agreed with the first line of cases that the regulation was superseded. However, the second line of cases has the more persuasive reasoning. Because the regulation is not superseded, the District Court erred in finding the Commissioner's assessment of penalties not arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law. See 5 U.S.C. § 706(2)(A).

Prior to 2004, 31 U.S.C. § 5321 only created penalties for willful violations of the FBAR reporting requirement. Norman, 138 Fed. Cl. at 195. The regulation accompanying this statutory provision, 31 C.F.R. 1010.820(g)(2), has existed in its current form since its original promulgation as a different code section. Wadhan, 325 F. Supp. 3d at 1 139. In 2004, Congress decided to crack down on non-reporting; it introduced a penalty for non-willful violations of the foreign bank account reporting statute. Norman, 138 Fed. Cl. at 195. Consequently, Congress also decided to reform the statute and raise the maximum penalties for willful non-filers. Id. However, Congress retained that the Secretary's had discretion within the statute to assess whatever penalty she wanted up to the statutory maximum. Wadhan, 325 F. Supp. 3d at 1139.

FinCen, in its regulatory authority, has repeatedly decided not to amend the provisions setting a new maximum penalty. Id. This decision reflects FinCen's policy to limit penalties for willful non-filing to $100,000. Id. Since the amendment to § 5321 in 2004, FinCen has amended the regulations accompanying the Bank Secrecy Act three times. Id. In the latest amendment, FinCen even added a paragraph to the regulation to make adjustments for inflation for years after 2016. See §§ 1010.820(1) & 1010.821. If the penalty were based on 50% the value of the account, an adjustment for inflation would do nothing. This means that FinCen considers the regulation to not be superseded by statute.

It makes sense that FinCen would limit penalties considering that the IRS may assess penalties for each year of non-filing. If the IRS could assess penalties of one half the account for multiple years in a row, penalties would clearly be excessive considering the actual harm caused. FinCen wanted to limit the IRS's assessment ability because half the balance of a bank account is draconian.

The District Court and the courts in Norman and Horowitz put particular emphasis on the legislative history to come to their result. See Norman, 138 Fed. Cl. at 195 "Congress believed that 'improving compliance with this reporting requirement is vitally important to sound tax administration.'" Id. However, this quote was taken out of context. As the court in Wadhan points out, this quote was made in reference to the non-willful penalties added to the statute. Wadhan, 325 F. Supp. 3d at 1140. Non-willful penalties would increase compliance by increasing the number of people affected by the penalty provisions. According to the court in Wadhan, the Norman court misuses these quotes to justify its result. See id.

Additionally, the Report and Recommendation which the District Court adopted specifically emphasizes the word "shall" in 31 U.S.C. § 5321(a)(5)(C)(i). See (Doc 71, 13) ("the maximum penalty under subparagraph (B)(i) shall be increased"). It considers this "shall" to be a mandate to the Secretary of Treasury to increase the maximum penalties. Id. However, this is a grave misreading of the statute. The shall language in § 5321(a)(5)(C)(i) merely mirrors the shall in § 5321(a)(5)(B)(i). "Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000." See id. The shall in § 5321(a)(5)(C)(i) is entirely functional and means to swap the statutory maximums in § 5321(a)(5)(B) with those in § 5321(a)(5)(C) for willful violations. It does not limit the discretion granted the Secretary in § 5321(a)(5)(A). In amending §5321, Congress has only expressed a desire to allow the Secretary to increase the maximum penalties in the future. Congress has not mandated that the penalties be increased immediately. In fact, the District Court's interpretation of the statute contradicts the plain reading of the statute which gives discretion to the Secretary. § 5321(a)(5)(A).

31 C.F.R. § 1010.820(g)(2) is plainly consistent with 31 U.S.C. § 5321. The statute gives the Secretary discretion to assess within a range of penalties. 31 C.F.R. § 1010.820(g)(2) authorizes the IRS to assess a penalty within a subset of that statutory range. Therefore, the statute and regulation are perfectly consistent. See Colliot, 2018 U.S. DIST LEXIS 83159, at *5. For a statute to supersede a regulation, they must be inconsistent on their face. United States v. Larionoff, 431 U.S. 864, 873 (1977) ("since this interpretation is not plainly inconsistent with the wording of the regulations, we accept the [Appellant's] reading"). Plainly, the statute and the regulation are consistent with each other.

"It is well settled that an agency is legally bound to respect its own regulations and commits procedural error when it fails to abide them." Esch v. Yentter, 876 F.2d 976, 991 (D.C. Cir. 1989). In this case the Secretary was delegated authority by Congress. 31 U.S.C. § 5321(a)(5). The Secretary, in turn, delegated this authority to FinCen to promulgate regulations. FinCen, after promulgating regulations, redelegated to the Internal Revenue Service the power to assess. "[A]gencies [must] use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance." Perez v. Mortgage Bankers Ass'n, 575 U.S. 92, 100 (2015).

The courts must hold unlawful agency actions without observance of procedure required by law. 5 U.S.C. § 706(2)(D). The District Court erred in not setting aside the case because the Internal Revenue Service did not apply it's the regulations.

VI. ANY ADDITIONS TO THE BASE AMOUNT WERE ARBITRARY AND CAPRICIOUS BECAUSE THE IRS DID NOT PROVIDE A REASONED EXPLANATION FOR ITS DECISION TO ASSESS THE MAXIMUM WILLFUL PENALTY

IRS Appeals did not disclose a sufficient explanation for its decision to impose a maximum willful penalty amount against Mr. Rum. In fact, the IRS made every effort to shield disclosure of the basis of the FBAR penalty amount throughout the administrative process. (Doc. 67, 18, 19); (Doc. 58-1,20-24). These facts are similar to Moore v. United States, CASE NO. C13-2063RAJ, (W.D. Wash. Jul. 24,2015).

In Moore, the court found the IRS's conduct in assessing FBAR penalties was in several respects arbitrary and capricious, (emphasis added). In particular, the IRS disclosed no adequate basis for its decision to assess the maximum penalty until litigation forced its hand. Even after litigation began, the IRS refused to disclose the evidence on which it relied for its decision. The IRS broke its own promise not to impose a penalty until Mr. Moore had an opportunity to respond to its "proposed" assessment. In light of the arbitrary and capricious conduct described above, the court ruled that any interest, late fee, or other supplemental assessment that the United States attempted to tack on to Mr. Moore's FBAR penalties was void. 

The IRS provided Mr. Rum with a deficient form 886-a that did not state the Internal Revenue Service's theory of liability and did not describe the reasons for assessing a maximum penalty. (Doc. 58-5). IRS Counsel relied entirely on the new Fourth Circuit decision in United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), to approve the willful penalty. (Doc. 58-8). Critically, the form 886-a fails to cite to Williams, upon which the IRS was clearly relying. (Doc. 58-5). The Williams decision was the first case to apply a reckless disregard standard and willful blindness in the FBAR context. (Doc. 58-5). The IRS had an obligation to state the legal authority on which it was relying. 5 U.S.C. § 554(b)(3).

Similarly, the Summary Memorandum in support of the willful penalty did not provide a sufficient explanation as to assessing the maximum amount of penalties. (Doc. 58-28). Form 886-a did not provide any explanation on the reasons for the maximum amount of penalties. (Doc. 58-5). The IRS's refused to disclose the Appeals Case Memorandum until after discovery.¹ (Doc. 58-1, 23-26). The only reason that the IRS gave for the penalty is that the arguments Mr. Rum presented verbally and in writing "do not support a different determination" — a sentence that hardly offers an explanation or justification. (Doc. 58-1,23). "No citizen should have to sue his own Government to find out why he is being fined, or to find out why he is being fined [the maximum penalty amount] as opposed to a lesser amount. And once a citizen has sued, he should not have to fight over the most basic disclosures."  Moore, CASE NO. C13-2063RAJ, 3 (W.D. Wash. Jul. 24, 2015). Further, the agency must notify the opposing party of its theory of liability. Independent Electrical Contractors of Houston, Inc. v. NLRB, 720 F.3d 543, 552 (5th Cir. 2013)

The administrative adjudicator, by written opinion, must state findings of fact and reasons that support its decision. These findings and reasons must be sufficient to reflect a considered response to the evidence and contentions of the losing party and to allow for a thoughtful judicial review if one is sought. Public Service Co. of New Mexico v. FERC, 832 F.2d 1201, 1207 n.5 (10th Cir. 1987) (quoting Harborlite Corp. v. ICC, 613 F.2d 1088, 1092 (D.C. Cir. 1979)). Further, the IRS must notify the other party of the case law on which it is relying. 5 U.S.C. § 554(b)(3). By failing to offer sufficient reasons for its decision to assess maximum willful penalties until litigation, the IRS has acted arbitrarily and capriciously in assessing interest.

CONCLUSION

For the foregoing reasons, the judgment of the District Court should be reversed.