I have previously written on the Bittner (E.D. Tex.) case in a prior Insight. Briefly summarized, the taxpayer, Mr. Bittner, was a dual citizen of both Romania and the United States. However, in 1990, he moved back to Romania.
He successfully started several businesses while in Romania, resulting in over $70 million of total income. As a result, he maintained and had signature authority over hundreds of foreign accounts between 2007 through 2011.
Because Mr. Bittner never renounced his United States citizenship, he continued to have FBAR reporting obligations during those years. However, he filed the FBARs late, and the IRS sought to assess over $2.7 million in non-willful FBAR penalties. Specifically, in computing the FBAR penalties, the IRS determined that the $10,000 non-willful penalty applied on a per bank account basis rather than on a per FBAR reporting basis. This distinction was significant for Mr. Bittner—if the non-willful penalty was based on a per FBAR reporting basis, the IRS would have over-assessed, and Mr. Bittner would only be liable for $50,000 (i.e., 5 years multiplied by $10,000 per year).
The government filed a Complaint against Mr. Bittner seeking to reduce the assessments to judgment. Thereafter, the parties filed cross motions for partial summary judgment on the FBAR computation issue. The parties also filed cross motions for partial summary judgment on the issue of whether Mr. Bittner had shown reasonable cause for an abatement of the penalties. On June 29, 2020, Judge Mazzant issued his Memorandum Opinion and Order (Opinion), which is discussed more fully below.
The Court’s Opinion.
The Court’s Opinion breaks new ground, and is, for the most part, taxpayer favorable. Specifically, the Court holds in favor of the taxpayer on the primary issue, i.e., that the non-willful FBAR penalty should be assessed on a per reporting basis and not a per account basis. In addition, the Court’s Opinion expressly disagrees with another decision out of the Central District of California, U.S. v. Boyd, No. CV 18-803-MWF, 2019 WL 1976472 (Apr. 23, 2019), which held that the non-willful FBAR penalty should be imposed on a per account basis. The Court’s Opinion also discusses the rule of lenity and its potential application to non-willful FBAR penalty cases. Finally, the Court’s Opinion rules in favor of the government on the issue of whether Mr. Bittner had shown reasonable cause for abatement of the penalties.
The Statutory Analysis.
Under 31 U.S.C. § 5321(a)(5)(A), “[t]he Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” Under the next subsection, “the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.” 31 U.S.C. § 5321(a)(5)(B)(i). Thus, read together, the Court surmised that the statute provides for a singular civil monetary penalty, capped at $10,000, that attaches to each violation of section 5314. According to the Court, the “violation” referenced in section 5321(a)(5)(A) was the failure to file an annual FBAR under the governing regulations.
However, to determine whether the violation resulted in a single violation for failure to report, or whether each foreign financial account not properly or timely reported on an FBAR constituted a separate reporting violation, the Court looked to the willfulness and reasonable cause exceptions in section 5321.
Under section 5321, the willfulness provision provides a penalty for willful FBAR violations in an amount equal to the greater of $100,000 or 50% of either “the amount of the transaction” or “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(D)(i)-(ii). The Court determined that based on the willfulness penalty provision, “Congress clearly knew how to make FBAR penalties account specific.” Moreover, the Court noted that the willfulness provision was part of the statutory scheme well before Congress amended the Bank Secrecy Act in 2004 to add the non-willfulness provision. Given these facts, the Court found it persuasive evidence that Congress intended for the non-willful penalties to not relate to specific accounts.
The Court also felt its reasoning was buttressed by the reasonable cause exception under 31 U.S.C. § 5321(a)(5)(B)(ii). Under that exception, an individual who commits a non-willful FBAR violation is not assessed a civil penalty if that violation was due to reasonable cause and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” Given the statutory language, the Court noted:
Congress therefore related the reasonable cause exception to ‘balance in the account’ and could have done the same when defining the non-willful FBAR violation and penalty. But it did not. Tellingly, Congress passed the non-willful civil penalty provision – § 5321(a)(5)(B)(i) – and the reasonable cause exception together. They are part of the exact same statutory scheme, passed by the exact same Congress at the exact same time. Congress knew what it was doing when it drafted the non-willful civil penalty without any reference to ‘account’ or ‘balance in the account,’ and the Court will presume that Congress acted intentionally in doing so.
The Court also concluded that the taxpayer’s interpretation of the non-willful FBAR penalty to impose penalties on the basis of the reporting obligation alone made “sense in light of the overall statutory and regulatory scheme.” First, the BSA is a reporting statute that aims to “avoid burdening unreasonably a person making a transaction with a foreign financial agency.” 31 C.F.R. § 5314(a). Thus, individuals who are required to file an FBAR file only one report per year. This is the case regardless of whether the individual maintains 5, 25, or 500 accounts—instead, the triggering of the filing requirement itself is whether the aggregate balances of the accounts exceed $10,000. Thus, it would make little sense that Congress intended the non-willful FBAR penalty to be imposed on a per account basis when such a determination has no bearing on the individual’s obligation to file an FBAR in the first place.
Moreover, the Court noted that accepting the government’s interpretation of the statute could lead to absurd results that Congress would not have intended. For example, assume two individuals had 20 foreign accounts. The first individual maintained an aggregate foreign financial account balance of $180,000 and willfully failed to file an FBAR. The second individual maintained an aggregate foreign financial account balance of $100,000 and non-willfully failed to file an FBAR. Under the government’s interpretation of the statute, the first individual would be subject to a $100,000 penalty, and the second individual would be subject to a $200,000 penalty. This is despite the fact that Congress would have likely intended to punish or deter the conduct of the first individual for willful conduct as opposed to the conduct of the second individual who was only non-willful.
The Rule of Lenity.
The taxpayer also argued that the rule of lenity supported his position that the non-willful FBAR penalty should be imposed on a per reporting obligation. The Court summarized the rule of lenity as follows:
The rule of lenity is a principle of statutory construction that ‘applies primarily to the interpretation of criminal statutes.’ Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1, 16 (2011). It dictates that courts resolve ambiguities in criminal statutes in favor of defendants. See Crandon v. United States, 494 U.S. 152, 168 (1990). Although the paradigmatic application of the rule of lenity occurs in the context of criminal statutes, it can ‘apply when a statute with criminal sanctions is applied in a noncriminal context.’ Id. (citing Leocal v. Ashcroft, 543 U.S. 1, 11 n.8 (2004)). The rationale behind the rule of lenity is that ‘fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.’ Babbitt v. Sweet Home Chapter of Cmtys. for a Great Or., 515 U.S. 687, 704 n.18 (1995) (citations omitted). In other words, courts are to interpret statutes with civil and criminal applications consistently so that defendants have fair notice of what conduct the statute prohibits.
Given the current law, the Court noted at the outset that it was “dubious as to whether the non-willful civil penalty in the BSA is even the kind of statutory provision to which the rule of lenity applies.” Although the BSA provides criminal penalties, see 31 U.S.C. § 5322, those criminal penalties apply only to violators who acted willfully (and not, as here, where the conduct is non-willful). Moreover, the Court found that under the rule of lenity, it would be required to “simply guess as to what Congress [had] intended,” but that in this case, the Court had concluded that the text, structure, and purpose of the statute unambiguously pointed to the conclusion that the non-willful civil penalty applies per FBAR reporting violation rather than per account. In any event, the Court found that “to the extent the rule of lenity is applicable in this context, it supports Mr. Bittner’s proposed interpretation of the non-willful civil penalty.”
In addition, the Court noted its general awareness of cases that “stand for the general proposition that tax statutes imposing penalties are to be strictly construed.” See Commissioner v. Acker, 361 U.S. 87, 91 (“The law is settled that penal statutes are to be construed strictly, and that one is not subjected to a penalty unless the words of the statute plainly impose it.”) (quotations omitted); Bradley v. United States, 817 F.2d 1400, 1402-03 (9th Cir. 1987) (“A tax provision which imposes a penalty is to be construed strictly; a penalty cannot be assessed unless the words of the provision plainly impose it.”). The Court also concluded that this principle should not be dispositive because the statute was unambiguous but stated this notion, to the extent applicable, supported Mr. Bittner’s interpretation of the statute.
United States v. Boyd.
In Bittner, the government argued that the Court should find the decision in United States v. Boyd (C.D. Cal. Apr. 23, 2019) persuasive on the issue of whether the non-willful FBAR penalty should be applied on a per account or per reportingobligation. However, the Court explicitly disagreed with the reasoning and outcome in Boyd, which had relied, in large part, on the language to the reasonable cause exception. Specifically, the Court reasoned:
It goes without saying that the outcome in Boyd is not binding precedent on this Court. But beyond that, the Court respectfully disagrees with the reasoning and outcome in Boyd. As the Court has already discussed, supra, the language of the reasonable cause exception is not a sound basis for reading a word into the penalty provision that is not there. Congress knew how to use the word ‘account,’ as it did so elsewhere in the statute. Its inclusion in certain provisions and its exclusion elsewhere must have meaning, but the Government’s proposed interpretation, and the Boyd court’s acceptance of that interpretation, require the Court to ignore that meaning.
The court is weary of creating conflicts with its sister district courts—even those in other circuits. It is particularly hesitant to do so when interpreting a federal statute, which theoretically should have uniform meaning nationwide. But the Boyd court’s analysis fails to provide adequate guidance as to how it reached the conclusion it did. After a careful analysis of the statute’s text and purpose, the Court is left with no choice but to respectfully disagree with the outcome in Boyd and reach the opposite conclusion.
The government also moved for summary judgment on the issue of whether Mr. Bittner had reasonable cause in failing to file FBARs. In his pleadings and motions, Mr. Bittner’s main argument for application of the reasonable cause defense was he was unaware of his FBAR filing obligations. However, the Court noted that “[a]s a general rule, ignorance of the law is no excuse.” United States v. Int’l Minterals & Chem. Corp., 402 U.S. 558, 562 (1971). Thus, the Court concluded that Mr. Bittner did not qualify automatically for the reasonable cause safe harbor merely by claiming that he “had never heard of FBAR forms, much less that as a naturalized U.S. citizen living abroad he was required to file them.”
Mr. Bittner also raised additional facts in support of his reasonable cause defense. In the Opinion, the Court summarizes this argument as:
He claims that because he was educated outside of the United States; had no instruction or education in accounting, tax law, or finances; had no close contact with the United States during the relevant period; and took prompt steps to correct his mistake after learning of his compliance failure, there is a genuine issue of material fact as to the applicability of the reasonable cause exception.
In support of his position, Mr. Bittner cited to the Eastern District of Texas’ decision in Congdon v. United States, No. 4:09-CV-289, 2011 WL 3880524 (E.D. Tex. Aug. 11, 2011), where the court had held that reasonable cause may be established if the taxpayer can show ignorance of the law in conjunction with other facts, such as the taxpayer’s education, if the taxpayer has been previously subject to the tax, if the taxpayer has been penalized before, if there were recent changes in the tax forms or law which the taxpayer could not reasonably be expected to know, and the levy of complexity of a tax or compliance issue. But the Court was not persuaded.
Specifically, the Court noted that in Congdon there was a “genuine dispute regarding whether Plaintiff acted with ordinary business care and prudence” based on the plaintiff having argued that he “spent a reasonable time and effort preparing Form 5471, included all income and expenses of the foreign corporation on his tax return (Form 1040), paid the correct and appropriate tax, and spent over 200 hours each year collecting information.” Conversely, in Bittner, the Court noted that the taxpayer had admitted in his filings that he “did not take affirmative steps to learn about” his FBAR reporting obligation.
In sum, on the reasonable cause defense, the Court stated:
But Mr. Bittner was undoubtedly a sophisticated business professional, as demonstrated by his business and investment savvy. Moreover, Mr. Bittner was aware of at least some of his United States income tax obligations. Mr. Bittner cannot claim with a straight face that, as an American citizen generating millions of dollars in income abroad, he was so unaware that he might have United States reporting obligations that he did not even feel compelled to investigate the matter. . . Accordingly, there is no genuine issue of material fact as to whether Mr. Bittner acted with ordinary business care and prudence so as to trigger the reasonable cause exception under § 5321(a)(5)(B)(ii).
The Bittner decision is without doubt a huge win for the taxpayer vis-à-vis the non-willful FBAR penalty determination. However, it remains to be seen whether the government will appeal the decision. Moreover, the Bittner decision now results in differing decisions on the non-willful FBAR penalty in different circuits. Whether the Ninth Circuit will overrule the Boyddecision also remains to be seen. Given the uncertainty in this area, taxpayers should continue to argue that the non-willful FBAR penalty should be imposed on a per reporting basis and not a per account basis.
The Court’s decision in Bittner on reasonable cause also serves as a cautionary tale to more sophisticated taxpayers (e.g., those who are educated and have business savvy). Taxpayers in this group should tread carefully in what representations are made to the IRS during an FBAR audit, particularly those that go to the heart of any reasonable cause defense.