Individuals Ask to File Amicus Brief in FBAR Penalty Case

UNITED STATES OF AMERICA,
Plaintiff,
v.
ALEXANDRU BITTNER,
Defendant.

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION

MOTION FOR LEAVE TO FILE AN AMICUS BRIEF IN SUPPORT OF ALEXANDRU BITTNER'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND FOR LEAVE TO EXCEED THE PAGE LIMITS

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TABLE OF CONTENTS

I. DISTRICT COURTS HAVE AUTHORITY TO ACCEPT AMICUS BRIEFS

II. INTEREST OF THE PATELS

III. THE PATELS' PROPOSED AMICUS BRIEF IS TIMELY

IV. THE PATELS' BRIEF IS USEFUL TO THE DISPOSITION OF THE ISSUE

V. MOTION FOR LEAVE TO EXCEED PAGE LIMITS

VI. CONCLUSION

CERTIFICATE OF SERVICE

CERTIFICATE OF CONFERENCE

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MOTION FOR LEAVE TO FILE AN AMICUS BRIEF IN SUPPORT OF DEFENDANT
ALEXANDRU BITTNER AND FOR LEAVE TO EXCEED PAGE LIMITS

Laxman Patel, Jashu Patel, Hiten Patel, and Anita Patel (the “Patels”) respectfully move this Court for leave to participate as amici curiae and file a brief in support of Defendant's Motion for Partial Summary Judgment. The Patels' proposed brief provides information not provided in the parties' respective motions that will assist this Court in having “a complete and plenary presentation of the difficult issues before it so that [this] [C]ourt may reach a proper decision.” N.A.A.C.P. v. Town of Harrison, 940 F.2d 792, 808 (3d Cir. 1991). The information provided relates solely to the issue of whether penalties under section 5321(a)(5)¹ for violations of the provisions of section 5314 as implemented in the Treasury Secretary's (the “Secretary”) regulations apply per report-filing violation or per offshore account. This issue is one of first impression in this District Court and the Fifth Circuit, and a case of great public interest as thousands of U.S. persons have been, and are being, assessed unauthorized penalties. Like Bittner, the Patels have been assessed incredulous $10,000 non-willful penalties on accounts with nominal balances, i.e., $30, $50, $64, $83, $393, and $437, to name a few.

The Patels also seek leave to exceed applicable page limits. This first impression issue requires significant additional detail to assist this Court in reaching the proper decision.

I. DISTRICT COURTS HAVE AUTHORITY TO ACCEPT AMICUS BRIEFS

Federal district courts possess the inherent authority to accept amicus briefs. Unlike the Supreme Court Rules and the Federal Rules of Appellate Procedure, the Federal Rules of Civil Procedure do not specifically provide for the filing of amicus curiae briefs at the district court level. Nevertheless, “district courts possess the inherent authority to appoint 'friends of the court' to assist in their proceedings.” In re Bayshore Ford Truck Sales, Inc., 471 F.3d 1233, 1249 n.34 (11th Cir. 2006); United States ex rel. Gudur v. Deloitte Consulting LLP, 512 F. Supp. 2d 920, 927 (S.D. Tex. 2007) (“The extent to which the court permits or denies amicus briefing lies solely within the court's discretion.”). “No statute, rule, or controlling case defines a federal district court's power to grant or deny leave to file an amicus brief, . . . and in the absence of controlling authority, district courts commonly refer to [Federal Rule of Appellate Procedure] 29 for guidance.” Gudur, 512 F. Supp. 2d at 927. “Factors relevant to the determination of whether amicus briefing should be allowed include whether the proffered information is 'timely and useful' or otherwise necessary to the administration of justice.” Id. Amici's role is to assist the court “in cases of general public interest by making suggestions to the court, by providing supplementary assistance to existing counsel, and by insuring a complete and plenary presentation of difficult issues so that the court may reach a proper decision.” Town of Harrison, 940 F.2d at 808. This authority supports the Court's exercise of its discretion to accept this amici brief.

II. INTEREST OF THE PATELS

The Patels filed a lawsuit alleging the IRS had unlawfully assessed penalties per offshore account for filing the Title 31 calendar year report, the Report of Foreign Bank and Financial Accounts (“FBAR”),² late for each of years 2010-2013. Patel, et al. v. U.S., 8:18-cv-238 (C.D. Ca. Feb. 12, 2018). Prior to the instant case, on information and belief, Laxman Patel was not only the recipient of the largest standard audit non-willful penalty ever assessed under Title 31 — $440,000 in the aggregate for committing four report-filing violations (filing the FBAR after June 30th in violation of reg. 1010.306(c) for years 2010-2013), he was also the recipient of the largest penalty assessed for a single report-filing violation — $130,000 for filing the FBAR late for year 2013. Those assessments include $10,000 non-willful penalties on accounts with balances of $30, $50, $64, $83, $393, $437, $816, $1,776, $2,589, $4,574, $4,708, and $7,480.

Following the completion of substantial discovery in Patel, the IRS expressed concerns over potential jurisdictional defects in the complaint. To quell those concerns, the Patels agreed to dismiss their case after the IRS filed its own suit to reduce the assessments to judgment. The parties agreed to have discovery in the original action carried over to the new action. U.S. v. Patel, et al., 8:19-cv-792 (C.D. Ca. Apr. 30, 2019). Legal admissions highly relevant to the novel issue before this Court were made by the IRS and are attached as exhibits to this motion.

The Patels' case was stayed just before their summary judgment hearing on this issue because another U.S. person unsuccessfully raised the same issue in the Central District of California. U.S. v. Boyd, 8:19-cv-803, 2019 WL 1976472 (C.D. Ca. Apr. 23, 2019). Ms. Boyd appealed the decision to the Ninth Circuit. The Patels sought to file an amicus brief with the Ninth Circuit to provide legal arguments and context not advanced in the district court. Ms. Boyd, as well as the IRS, readily consented to the Patels filing as amici curiae.

III. THE PATELS' PROPOSED AMICUS BRIEF IS TIMELY

Pursuant to the Federal Rules of Appellate Procedure, an “amicus curiae must file its brief, accompanied by a motion for filing when necessary, no later than 7 days after the principal brief of the party being supported is filed.” Rule 29(a)(6). Bittner filed his Motion for Partial Summary Judgment, after his motion for leave to exceed the page limits was granted, on March 11, 2020. The Patels' motion for leave to file an amicus brief in support of Bittner and their proposed amicus brief were timely filed on March 18, 2020, 7 days after Bittner's motion was deemed filed.

IV. THE PATELS' BRIEF IS USEFUL TO THE DISPOSITION OF THE ISSUE

The Secretary requires U.S. persons who maintain an aggregate offshore bank account balance exceeding $10,000 at any time during a calendar year are to file a single annual Title 31 report, the Report of Foreign Bank and Financial Accounts, by June 30^th of the following year. When filed, the FBAR must be in all ways materially accurate in describing the whereabouts of the aggregate foreign bank account balance, including bank names, addresses, account numbers, balances, and the name of any individual who may also have an ownership interest or signature authority over any of the accounts. The potential penalty exposure for the failure to satisfy those reporting requirements is a matter of statutory and regulatory construction now before this Court. The content of the proposed amicus brief is comprised of information not provided to this Court or the district court in Boyd, and has been provided in substantial part to the Ninth Circuit in the Patels' Ninth Circuit amicus brief.

At first look, the intricacies of Title 31's offshore bank reporting requirements appear daunting and complex. However, the Supreme Court has made the resolution of this first impression issue — whether penalties apply per report-filing violation or per offshore account — a much easier task. To best understand how section 5314, its implementing regulations, and the penalty statute work in harmony, we must take the Supreme Court's lead, examining the issue as three pieces to a puzzle, each dependent upon the other, all working to ensure that all words in the statutory and regulatory scheme matter. In doing so, the answer to the issue before this Court will be readily apparent — penalties attach to report-filing violations, not accounts.

A. The First Piece to the Puzzle — Section 5314

Section 5314 provides, in relevant part, provides as follows:

In California Bankers Association v. Shultz, 416 U.S. 21 (1974), the Court examined various challenges to the constitutionality of sections 5313, 5314, and 5316 of the Bank Secrecy Act (the “BSA”), and in doing so, made a critical observation relevant to the disposition of the novel issue before this Court. The BSA “is not self-executing . . .” Id. at 64. Specifically, the Court provided “that the Act's civil and criminal penalties attach only upon violations of regulations promulgated by the Secretary; if the Secretary were to do nothing, the Act itself would impose no penalties on anyone.” Id. at 26. The Court also noted that “there is no denying the impressive sweep of authority conferred upon the Secretary by the Bank Secrecy Act of 1970.” Id. at 30.

Section 5314 is the first piece of the puzzle, which instructs the Secretary to require a U.S. person to “file reports” when he or she maintains an offshore bank account, and to provide certain information in those reports when filed. Whether a separate Title 31 report is required to be filed for each offshore bank account, or each withdrawal or deposit transaction, or that one Title 31 report be filed per year was a matter Congress left to the Secretary. In other words, “[t]he question is not what sort of reporting requirements³ might have been imposed by the Secretary under the broad authority given him in the Act, but rather what sort of reporting requirements he did in fact impose under that authority.” Id. at 64.

B. The Second Piece of the Puzzle — the Secretary's Implementing Regulations

1. A Summary of the Secretary's Reporting Requirements

The Secretary's regulations provide that the Title 31 report “prescribed under 31 U.S.C. 5314 to be filed . . . is the Report of Foreign Bank and Financial Accounts [(the FBAR)],” and that the person filing “shall provide such information as shall be specified in” the FBAR when filed. Reg. 1010.350(a). The trigger to file the calendar year report, due June 30th of the following year, is the maintenance of an aggregate offshore account balance greater than $10,000. Reg. 1010.306(c). Finally, the Secretary reiterates the informational mandate for a filed report, stressing that “[a]ll information called for in [the FBAR] shall be furnished.” Reg. 1010.306(d). The information specified, or called for, in FinCEN Report 114 reveals the whereabouts of the aggregate offshore balance, i.e., bank names in which accounts are held, bank addresses, account numbers, account balances, etc.⁴

The Secretary, in exercising his broad authority in requiring a single calendar year Title 31 report be filed, regardless of the number of foreign accounts holding the aggregate balance, represents an appropriate implementation of section 5314 as well as a “matter the Secretary consider[ed] necessary to carry out . . . section [5314].” Section 5314(b)(5). It also represents a harmonious nod to the burden provision of section 5314 because it serves Congress' directive of not unduly burdening U.S. persons who legitimately engage in relations with foreign banks with the onerous task of filing a separate Title 31 report for each bank account.

2. Penalties Attach Upon Violations of the Secretary's Regulations

Recall that the BSA's “civil and criminal penalties attach only upon violations of the regulations promulgated by the Secretary, if the Secretary were to do nothing, the BSA itself would impose no penalties on anyone.” Shultz, 416 U.S. at 26. From the regulations promulgated by the Secretary, the potential report-filing violations of section 5314 are readily ascertainable — the failure to file the FBAR when a U.S. person maintains an aggregate offshore balance exceeding $10,000, regs. 1010.350(a) & 1010.306(c) (failure-to-file violation), filing the FBAR after the June 30^th deadline, reg. 1010.306(c) (delinquency violation), and filing the FBAR containing a material omission or misstatement, i.e., failing to accurately supply information as to the whereabouts of the aggregate offshore account balance, regs. 1010.350(a) and 1010.306(d) (accuracy violation).

The IRS has come to the same conclusion as to what constitutes potential violations of the provisions of section 5314 as implemented in the Secretary's regulations, concluding that a violation “not only includes a complete failure to file a report, it also includes a failure to timely file a report and filing a report with material false statements or omissions.” IRM 4.26.5.4(5). In discussing potential civil penalties for report-filing violations of section 5314, the IRS posits that “[a] person who . . . fails to file [an FBAR] or files [an FBAR] with a material omission or misstatement . . . may be assessed a penalty . . .” The IRS specifically recognizes that “[a] filing violation occurs at the end of the day on June 30^th of the year following the calendar year to be reported (the due date for filing the FBAR).” IRM 4.26.16.6.2(2). And the IRS reaffirms the timeliness requirement while highlighting that, when filed, the FBAR must be accurate. “It remains the responsibility of the filer to ensure that filing takes place timely and the report is accurate.” IRM 4.26.16.4.5(2) (emphasis added to all of the foregoing IRM sections).

Legal Admissions in Patel

IRS admissions in Patel are consistent with the aforementioned sections in its IRM. For instance, the IRS admitted that filing the FBAR late is a violation of the provisions of section 5314. Appendix (“App.”), Exh. B, pg. 2-5, UF 28. The IRS further admitted that the accurate listing of accounts is part of the information required to be provided in a filed FBAR; the failure to satisfy that requirement is a violation of the provisions of section 5314, namely regs. 1010.350(a) and 1010.306(d) (accuracy violation). Id., pg. 2-5, UF 31.

Critical legal admissions in Patel also confirm the IRS's understanding of the Secretary's implementing regulations. The IRS admits the FBAR is a Title 31 report, App., Exh. B, pg. 2-4, UF 21; pg. 2-3, UF 14, and that U.S. persons maintaining the aggregate threshold in multiple accounts are required to sign and file ONE FBAR per year by June 30th. Id. at pg. 2-4, UFs 18-20, 23; pg. 2-5, UFs 25-27.

3. Reg. 1010.350(a) — It's Bifurcated Nature

Reg. 1010.350(a)'s language is oft-misunderstood because it sets forth the Title 26 requirement to report offshore relationships to the Commissioner of Internal Revenue on Schedule B of yearly federal income tax returns, as well as the Title 31 requirement to file the FBAR and to provide all information requested in the report when filed. Shultz, 416 U.S. at 37, recognized the bifurcated nature of the regulation.

The regulations require each person subject to the jurisdiction of the [U.S.] to make a report on yearly tax returns of any “financial interest in . . . a bank . . . account in a foreign country.” [reg. 1010.350(a)]. [Title 26] Violations of the reporting requirement(s) of [section 5314] as implemented by the regulations are also subject to civil and criminal penalties. [Title 31] (Text; Emphasis added).

a. The Title 26 Language

The Title 26 directive in section 1010.350(a) the Court in Shultz described reads as follows:

In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists . . . (Emphasis added).

To satisfy this Title 26 requirement, a U.S. person must check “Yes” on his tax return next to Question 7a on Schedule B, whether he has 1 account or 100. This must be done whether the account or accounts generated taxable income or not, and even if a U.S. person maintained an aggregate offshore balance less than $10,000.

The failure to report offshore relationships on a tax return is not a violation of Title 31. The Shultz Court recognized, however, that “[v]iolations of the reporting requirement[s] of [section 5314] as implemented by the regulations are . . . subject to [Title 31] civil and criminal penalties.” Those “reporting requirement[s]” the Court is referring to, which are distinct from the Title 26 requirement to report offshore relationships on Schedule B of a tax return, are the aforementioned Title 31 mandates that the FBAR be filed with FinCEN by June 30^th of the year following the year a $10,000 aggregate offshore balance was maintained, and, that the filed report be materially accurate as to the whereabouts of the aggregate offshore balance.⁵

b. The Title 31 Language

The Title 31 language of section 1010.350(a) reads as follows:

In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country⁶ . . . shall provide such information as shall be specified in a [Title 31 report] prescribed under 31 U.S.C. 5314 to be filed by such persons. The [Title 31 report] prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts ([FinCEN Report 114]) . . . (Emphasis added to the Title 31 language).

The information provided in a filed FinCEN Report 114 is far different than that provided by a check mark on a tax return. A filed FinCEN Report 114, if less than 25 accounts are to be listed, includes all bank names, locations, account numbers, account balances, etc. (a person with more than 24 accounts need only list the number of accounts on the FBAR, but is still on the hook to provide detailed information on all accounts when requested). To close that drastic informational gap, the Secretary, as of 2011, requires taxpayers who maintain certain offshore aggregate balances to file Form 8938, Statement of Specified Foreign Financial Assets, with their yearly tax returns. Form 8938 asks for essentially the same information that is provided in FinCEN Report 114. The IRS, cognizant of the bifurcated nature of offshore reporting, stresses in the instructions to Form 8938 that “[f]iling Form 8938 does not relieve you of the requirement to file [the FBAR] . . . if you are otherwise required to file the FBAR.” (Emphasis added).

Should there be any doubt as to section 1010.350(a)'s dual mandates, FinCEN, the bureau tasked with drafting the Secretary's implementing regulations, recently proposed the following changes be made to section 1010.350(a), in line with the Court's exposition in Shultz.

In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue on a return for each year in which such relationship exists and shall provide the Financial Crimes Enforcement Network, through BSA E-Filing, with such information as shall be specified in [the FBAR, the Title 31 report] prescribed under 31 U.S.C. 5314 to be filed by such persons. The [Title 31 report] prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts ([the FBAR]). (Emphasis added to proposed changes; Title 26 mandate italicized). App., Ex. A, pg. 1-1.

The Secretary provided an identical explanation of the oft-misunderstood bifurcated nature of reg. 1010.350(a) in his 2002 Report to Congress.⁷

The FBAR is not a tax return, but a report filed with the Secretary stating that the person filing has a financial interest in, or signature authority over, financial accounts in a foreign country with an aggregate value exceeding $10,000 at any time duringthe calendar year. Filing an FBAR is a two-part reporting process. Form 1040 Schedule B, Part III, instructs a taxpayer to indicate an interest in a financial account in a foreign country by checking “Yes” or “No” in the appropriate box. Form 1040 then refers the taxpayer to Form 90-22.1, the FBAR, which provides that it should be usedto report a financial interest in or authority over bank accounts, securities accounts, or other financial accounts in a foreign country. The FBAR's instructions provide more detail on when the [Title 31 report] must be filed. The deadline for filing an FBAR for each calendar year is on or before June 30^th of the following year.

The IRS has explicitly confirmed its understanding of the bifurcated process, in language tracking the regulation and wholly consistent with FinCEN's proposed change to the regulation and both the Supreme Court and the Secretary's plain read:

Reporting and Filing Information

The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR. App., Exh. D, pg. 4-2.

Legal Admissions in Patel

The IRS admitted in Patel that the above-referenced excerpt from its website was describing the two-part reporting process the Secretary highlighted in his 2002 Report, App., Exh. C, pg. 3-3, RFA 19. The IRS further admitted that the italicized language refers to the Title 26 obligation that U.S. persons must report their offshore bank relationships to the Commissioner of Internal Revenue on their Federal income tax returns, id., Exh. B, pg. 2-2, RFA 10, and that the italicized language was consistent with FinCEN's proposed change to the regulation adding “on a return” to read “shall report such relationship to the Commissioner of Internal Revenue on a return for each year in which such relationships exists . . .” Id., Exh. B, pg. 2-3, RFA 12.

C. The Third Piece of the Puzzle — the Penalty Provision (Section 5321(a)(5))

Section 5321(a)(5)(A) authorizes the Secretary to impose a civil money penalty on any person “who violates . . . any provision of section 5314” as implemented in his regulations. Section 5321(a)(5)(B)(i) provides that “the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.” Shultz makes clear that “[v]iolations of the reporting requirement[s] of [section 5314] as implemented by the regulations are . . . subject to . . . penalties.” 416 U.S. at 37. In implementing the provisions of section 5314, the Secretary requires a U.S. person who maintains an aggregate offshore account balance greater than $10,000 at any time during a calendar year to file ONE Title 31 report, the FBAR, by June 30th of the following year. The Secretary further mandates that all information specified in the FBAR be furnished when the report is filed.⁸ The Secretary, in exercising his broad authority, does not require a separate report-filing requirement for each bank account. Thus, the failure to comply with any of those provisions of section 5314 — failure to file the FBAR at all, regs. 1010.350(a) and 1010.306(c) (failure-to-file violation), filing the FBAR late, reg. 1010.306(c) (delinquency violation), or filing the FBAR containing a material omission or misstatement, regs. 1010.350(a) and 1010.306(d) (accuracy violation) — subjects a U.S. person to a potential non-willful penalty of $10,000.

Bittner non-willfully filed accurate FBAR's late for years 2007-2011, reg. 1010.306(c) (delinquency violation). He committed one report-filing violation of the Secretary's regulations (i.e., the provisions of section 5314) for each year in issue. Congress plainly authorized the Secretary to impose a maximum discretionary penalty of $10,000 to attach to each of those delinquent report-filing violations. Sections 5321(a)(5)(A) & (B).

The IRS erroneously maintains that the penalty applies per account on two specious grounds. The first is effectuated by transmogrifying the Title 26 mandate of reg. 1010.350(a) to “report such relationship to the Commissioner of Internal Revenue” on a return to a Title 31 reporting requirement that a separate Title 31 report be filed for each bank account to which a separate penalty may attach. IRS Brief, Doc. 29, pg. 11. That position flies in the face of the Supreme Court's explicit explanation of the bifurcated nature of the regulation, FinCEN's proposed change to the Title 26 language to confirm that it relates to reporting relationships “on a return”, the Secretary's explanation in his 2002 report, and the IRS's own statements on its website and admissions relating thereto. The Secretary, in exercising his sweeping authority granted under section 5314, could have required a separate Title 31 report be filed per account. He did not. “[T]he question is not what sort of reporting requirements might have been imposed by the Secretary under the broad authority given him in the Act, but rather what sort of reporting requirements he did in fact impose under that authority.” Shultz, 416 U.S. at 64.

The second ground is that the phrase “balance in the account” — as it appears in section 5321(a)(5)'s reasonable cause exception for a non-willful filing violation and section 5321(a)(5)(D)(ii), which determines the discretionary ceiling for a penalty for a willful filing violation — means that Congress intended the penalty to apply not per report-filing violation, but instead per account. This position is also untenable. As the third piece in the puzzle, section 5321(a)(5) authorizes penalties only for “violating” the Secretary's implementing regulations, i.e., failure to file the FBAR, filing the FBAR late, or filing the FBAR containing a material omission or misstatement. The IRS's interpretation would work to render those report-filing violations meaningless — the terms “violation” and “violating” as the appear in the section 5321(a)(5) would be words of no consequence.

Put another way, the IRS seeks to remove the implementing piece of the puzzle. Without it, section 5314 standing alone with section 5321(a)(5) would not provide the IRS any authority to impose a penalty because BSA “civil . . . penalties attach only upon violation of the regulations promulgated by the Secretary; if the Secretary were to do nothing, the Act itself would impose no penalties on anyone.” Shultz, 416 U.S. at 26. The phrase “balance in the account,” when construed under the singular includes the plural rule to also mean “balance in the accounts” if a person maintains the aggregate balance in more than one account, ensures all pieces to the puzzle work in harmony, that all words in the statutory and regulatory scheme matter, and that penalties imposed for violations of the reporting requirements of section 5314 are constitutionally sound.

V. MOTION FOR LEAVE TO EXCEED PAGE LIMITS

Federal Rule of Appellate Procedure 29(a)(5) provides that an amicus brief is to be no longer than one-half the length of the principal brief. Rule 29(a)(5) further provides that if a court grants a party permission to file a longer brief, as in the instant case (15 pages to 30), that extension does not affect the length of the amicus brief. Local Civil Rule 7(a)(2) limits the length of a non-dispositive motion to 15 pages, which, if using Fed. R. App. Proc. 29 as a guide, would limit an amicus brief to 7.5 pages. This issue of first impression requires far more coverage than contained herein to assist this Court in reaching an informed and proper decision. The Patels request that this Court accept their proposed amicus brief in its entirety.

VI. CONCLUSION

For the foregoing reasons, the Patels respectfully request that this Court grant leave to file their proposed amicus brief and to exceed the page limit.

Respectfully submitted,

DAVID MICHAELS
Ca. Bar. No. 235985
*Admitted in E.D. Texas
310 Maui Drive
Placentia, CA 92870
Phone: (714) 742-9561
Fax: (714) 985-0564
dmichaels0867@hotmail.com