Originally published by Jack Townsend.
In United States v. Shinday, (C.D. Cal. 2018), an FBAR collection suit, the defendants (husband and wife) had foreign accounts at UBS and at State Bank of India. I excerpt some of the history of the accounts below. The Government assessed multi-year willful penalties against the husband and five single year $10,000 nonwillful penalties against the wife. The Government is suing to obtain judgment on the assessments. The defendants moved to dismiss, and the Government opposed. (The motion to dismiss is here and the opposition is here.) The Court denied the motion (here with Court Listener copy here; the Docket Entries on Court Listener here permit some of the documents to be downloaded). ).
Key excerpts (don’t tell the full story but enough that, I think, readers will get the key points):
The government alleges that in 2002, UBS prepared a memorandum indicating that defendants asked UBS whether Nila’s brother could withdraw $50,000 of defendants’ funds from UBS’s London branch without it being reported. Id.
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In 2008, UBS again notified defendants of new laws applying to U.S. citizens with foreign bank accounts, and recommended that defendants close their UBS account. Id. ¶ 23. Defendants soon after transferred the funds in their UBS account to their accounts at the State Bank of India (“SBI”), a bank in India, and eventually closed their UBS account. Id.
The government alleges that before defendants closed their UBS account, defendants’ UBS account had year-end balances of $350,019 in 2005, $361,819 in 2006, $420,893 in 2007, and $15,003 in 2008. Id. ¶ 9. Defendants also had “as many as twenty-nine and as few as seven fixed deposit accounts at the State Bank of India[,]” from the years 2005 to 2011. Id. ¶ 10. Defendants’ SBI accounts had aggregate year-end balances of $444,035 in 2005, $669,729 in 2006, $258,079 in 2007, $306,647 in 2008, $411,502 in 2009, $216,530 in 2010, and $362,506 in 2011.
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C. Defendants’ Failure to Disclose their UBS and SBI Accounts
Defendants filed joint federal income tax returns for the 2005 to 2011 tax years, utilizing a certified public accountant to file those returns. Id. ¶ 25. The returns included a Schedule B, Interest and Dividends, which, inter alia, requires defendants to (1) report domestic or foreign interest or dividends, and (2) state whether they have a financial account in a foreign country. Id. ¶¶ 26–27. Defendants did not report the interest or dividends associated with their UBS and SBI accounts for 2005 to 2010. Id. ¶ 26. They checked a box on the Schedule B form for their 2005 to 2010 tax returns indicating that they did not have foreign accounts during those years. Id. ¶ 27. Defendants signed those returns, under penalty of perjury. Id.
For defendants’ 2011 tax return, defendants disclosed their SBI accounts, but failed to do so in a timely manner. Id. ¶ 29. The IRS then audited defendants’ 2005 to 2011 tax returns. During the audit, defendants ultimately disclosed two Canadian investment accounts, as well as the UBS and SBI accounts. Id. ¶ 30.
D. IRS Penalty Assessments against Defendants
The government alleges that the IRS thereafter assessed penalties against defendants based on their UBS and SBI accounts. Id. ¶¶ 31–32. The government claims that on or around August 23, 2016, the IRS assessed non-willful FBAR penalties against Nila for the tax years 2007 to 2011. Id. ¶ 31. Each penalty was $10,000, totaling $50,000. Id. The government alleges that on or about August 23, 2016, the IRS also assessed willful FBAR penalties against Money for the tax years 2007 to 2011. Id. ¶ 32. The aggregate amount of the penalty was $257,888, which represents 25% of the combined 2006 year-end balance of defendants’ UBS and SBI accounts, equaling $1,031,548. Id. This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011. Id.
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As the government argues, the facts of Colliot and Wahdan are thus inapposite to this case because the five penalties assessed against Money are individually all less than $100,000. Compl. ¶ 32; Opp’n at 3. Although in the aggregate the penalties against Money total $257,888, the yearly, individual penalties are each approximately $51,578. Id. Each time Money allegedly willfully failed to timely file an FBAR, the IRS assessed a penalty. Compl. ¶ 32. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from defendants’ failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011. Id. This is within the bounds of 31 C.F.R. § 1010.820(g) (“For any willful violation committed . . . the Secretary may assess upon any person, a civil penalty . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.”) (emphasis added). n1
n1 In addition to arguing that its penalties do not violate 31 C.F.R. § 1010.820’s $100,000 cap, the government also argues that 31 C.F.R. § 1010.820 was invalidated by the 2004 amendment to Section 5321. Opp’n at 5, 9 (citing Norman, 138 Fed. Cl. at 195 – 96 (finding that the $100,000 penalty cap established by 31 C.F.R. § 1010.820 is invalid because “Congress clearly raised the maximum civil money penalty in § 5321 to the greater of $100,000 or one half of the balance of the account”)). In essence, the government argues that even if the $100,000 penalty cap applied in the aggregate, the amendment in Section 5321 would permit the government to apply a penalty in excess of
$100,000. The Court need not reach this issue, however. Irrespective of whether Section 5321 invalidates the Department of Treasury’s implementing regulations, there was no year in which Money was penalized for more than $100,000.
JAT Comments:
1. The nonwillful penalties assessed against the wife (Nila) were $10,000 per year despite her interest in multiple unreported offshore accounts each year. The Government has claimed in the past that it can assert the maximum $10,000 nonwillful penalty per account per year. Practitioners have disputed that claim. I don’t think it has been resolved. There is no indication as to why the Government only asserted single nonwillful penalties in this cases.
2. The more interesting issues relate to the willful penalties. Readers will recall that the IRS has adopted a general rule for willful penalties to be 50% of the highest amount in the accounts in the open years. As I understand the application of that general rule, the amount is quantified based on the high amount(s) for the open years rather than the year end amounts and that calculation is made one time. The penalty under that general rule is 50% of that calculated high amount. The penalty then can be spread to multiple years so that, for any one year, the penalty does not exceed the statutory maximum of 50% of the amount in the account on the reporting date. Here the calculation, according to the court, was 25% of the sum of the year end amounts with the derived number spread equally to each year for the penalty for each year. I have not tried to dig deeper into that, but perhaps some reader can explain all that commotion and relate it to the general 50% penalty policy.
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