On May 13, 2021, the Supreme Court in CIC Services, Inc. v. Internal Revenue Service held that the Anti-Injunction Act did not bar an action to enjoin an IRS listed transaction notice because it allegedly failed to comply with the Administrative Procedures Act (“APA”) notice and comment provisions.  See, https://www.taxlitigator.com/and-now-for-something-completely-different-supreme-court-holds-suit-to-enjoin-irs-notice-not-barred-by-the-anti-injunction-act-by-robert-s-horwitz/.  On the same day, a district court issued an opinion in Mann Construction v. United States, Docket No. 1:20-cv-11307 (ED Mich. 5/13/2021), holding that the APA did not apply to listed transaction notices.  Given the Supreme Court’s decision in CIC Services, Inc., Mann Construction received little attention.  Since the district courts in both cases are in the Sixth Circuit, if Mann Construction is appealed and affirmed, it could result in a dismissal of CIC Services when it is remanded back to district court.

First, the facts:  In 2007 the IRS issued Notice 2007-83.  The Notice designated as listed transactions certain trust arrangements claiming to be welfare benefit funds that involved cash value life insurance and purported to result in federal income and employment tax benefits.  Persons required to disclose or register such transactions, who failed to do so, were subject to penalties under IRC sec. 6707A.

Six years after the Notice was issued, Mann Construction set up a Death Benefit Trust.  With its S corporation return for 2013, the company attached a Form 8275 disclosure statement describing the Death Benefit Trust and the rationale for its claiming deductions with respect to the trust on its return.  It did not file a Form 8886, the reportable transaction disclosure statement.  The IRS audited Mann Construction, disallowed the deductions, which resulted in increased tax liabilities for its two shareholders, and assessed 6707A penalties against the company and its shareholders.  They paid the penalties, filed claims for refund and six months later filed a refund action in district court.

The complaint alleged four causes of action, three of which were for violation of the APA: (a) that the Notice was unauthorized agency action; (b) that the Notice was arbitrary and capricious; and (c) that it was issued in violation of the APA’s notice and comment procedures.  The fourth cause of action was that Mann Construction’s Death Benefit Trust was not a listed transaction.  The Government moved to dismiss for failure to state a claim.  The Court granted the motion as to all but the claim that the Notice was issued in violation of APA notice and comment procedures, since plaintiffs “plausibly alleged that the Notice is a legislative rule that should be set aside for failure to comply with notice and comment.”  The parties then filed cross-motions for summary judgment.

The Court framed the issue as “whether the IRS was required to provide public notice and an opportunity for comment before promulgating the Notice.” 

The APA sets up a three-step procedure for notice and comment rulemaking: (a) issued a general notice of proposed rulemaking; (b)  allow interested parties an opportunity to participate; and (c) include in the final rule a “concise general statement of [its] basis and purpose.”  Not all rulemaking is subject to these procedures if Congress exempts them from the procedures.  In its summary judgment motion, the Government argued that Congress authorized the IRS to promulgate listed transaction notices without a notice and comment period.  The taxpayers argued that they were not exempted from APA’s notice and comment rulemaking procedures.

Sec. 6707A defines “listed transaction” by reference to transactions identified by the Secretary for purposes of sec. 6011 and defines “reportable transaction” by reference to the regulations promulgated under sec. 6011.  Treas. Reg. sec. 6011-4 states that reportable transactions are ones the IRS has “identified by notice, regulation, or other form of published guidance as a listed transaction.”  The Government argued that by incorporating the regulation into the statute, Congress intended the IRS to continue following the regulation, including identifying listed transactions via notice.  Although neither sec. 6707A nor the regulations mention the APA, in Marcello v Bonds, 349 U.S. 302 (1955), the Court held that the Immigration & Naturalization Act (“INA”), rather than the APA, governed deportation proceedings even though the INA did not have any clause expressly superseding the APA, because the legislative history of the INA made it clear the INA was to be the sole source for deportation procedures.  In subsequent cases the courts had looked to the statutory text and structure and legislative history to determine whether the APA applied. 

The taxpayers argued that the APA is to apply unless the statutory procedure could not be reconciled with it.  The Court acknowledged that listed transaction notices could be issued after a notice and comment period, but that doing so would undermine a principal purpose of the 6707A regime: to allow the IRS to identify questionable transactions as early as possible.  In incorporating the regulations, Congress “endorsed the flexible reporting regime that the IRS had already developed.”  The Court held that listed transaction notices under sec. 6707A can be issued without following APA notice and comment rulemaking procedures.  It therefore granted the Government’s motion, denied the taxpayers’ motion, and ordered the case dismissed.             

The case probably gives us a preview of what the IRS will argue on remand in CIC Services: that the notice and comment rulemaking provisions of the APA do not apply to listed transaction notices under sec. 6707A, such as the captive insurance listed transaction notice.  The Court made clear, however, that whether the APA applies to a particular IRS notice or rule depends on an examination of the language of the statute, the statutory scheme and the legislative history.  And since this is a district court decision, it is not binding precedent on other courts and at best has persuasive value. 

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

We are pleased to invite you to register now for the 13th Annual NYU Tax Controversy Forum Webinar to be held June 24 and 25. You do not want to miss this program.

Co-Chairs Bryan Skarlatos and Steven Toscher are pleased to announce this year’s NYU Tax Controversy Forum which will feature updates on what the IRS is doing to enhance compliance through communication and enforcement. Panels will highlight the new IRS focus on intra-agency collaboration, new initiatives with respect to penalties and fraud referrals, and IRS’ handling of tax collection challenges. Tune in from your computer, at home or the office, to hear Tax Compliance and Procedure Updates from senior IRS personnel. We are excited that the following officials of the IRS have agreed to speak at this year’s program. 

  • Charles P. Rettig, Commissioner, Internal Revenue Service
  • Nikole Flax, Deputy Commissioner, Large Business and International Division, Internal Revenue Service
  • Darren John Guillot, Commissioner, Small Business/Self-Employed Division, Collection, Internal Revenue Service
  • De Lon Harris, Commissioner, Small Business/Self-Employed Division, Examination, Internal Revenue Service
  • James C. Lee, Chief, Internal Revenue Service Criminal Investigation
  • Douglas O’Donnell, Deputy Commissioner, Services and Enforcement, Internal Revenue Service

We are pleased to announce that Evan Davis, along with Ian M. Comisky, Deborah L. Connor and Andrew Winerman will be speaking at the upcoming 13th Annual NYU Tax Controversy Forum webinar, “Shining a Light on Dirty Money: Corporate Transparency and Anti-Money Laundering Acts of 2020” on Friday, June 25, 2021, 3:30 p.m. – 4:30 p.m. (PST).


Last year, Congress passed the first major overhaul of the Bank Secrecy Act (“BSA”) in fifty years. The new law requires certain entities to report the identities of their beneficial owners, enhances the government’s ability to obtain foreign bank records, creates new reporting requirements for crypto currencies and antiquities dealers, expands the powers and duties of FinCEN, enhances inter-agency information sharing, and establishes a new whistleblower program for violations of the BSA. This panel explains these new provisions and how they could affect your clients.

Click Here for more information.

We are pleased to announce that Sandra Brown, along with Jonathan Black, Sharyn Fisk and Lois Dietrich will be speaking at the upcoming 13th Annual NYU Tax Controversy Forum webinar, “Focus on Tax Practitioners: Ethical and Penalty Issues” on Thursday, June 24, 2021, 3:00 p.m. – 4:00 p.m. (PST).


Tax practitioners are the gatekeepers to the country’s tax system and are subject to standards and penalties designed to ensure that practitioners give taxpayers clear and impartial advice about how to comply with the tax law. The Office of Professional Responsibility is charged with enforcing these standards and penalties and the IRS recently established the Office of Promoter Investigations to focus on practitioners who promote abusive tax transactions. This panel discusses tax practitioner standards and how the IRS enforces those standards.

Click Here for more information.

We are pleased to announce that Michel Stein Sandra Brown and Evan Davis will be speaking at the upcoming CalCPA webinar, “Cryptocurrency Tax Compliance in the Post $50,000 Bitcoin World” on Tuesday, June 15, 2021, 9:00 a.m. – 10:00 a.m. (PST).

The program will provide tax advisers and compliance professionals with a practical look at IRS guidance to calculating and reporting income and gain on cryptocurrency (e.g., Bitcoin) transactions. We will discuss the IRS position on cryptocurrency as property rather than cash, analyze IRS efforts to increase compliance, and define proper reporting and the tax treatment for hard forks, “mining,” and exchanging cryptocurrency. We will address recently released IRS Revenue Ruling 2019-24 and the updated FAQs regarding the taxation of cryptocurrency, with a particular focus on the recent IRS enforcement initiatives to identify virtual currency activity, how the IRS soft letter campaign fits into the voluntary disclosure practice, and the risks of criminal prosecution related to unreported and improperly reported cryptocurrency transactions.

Click Here for more information.

We are pleased to announce that Steven Toscher and Michel Stein will be speaking at the upcoming CSTC webinar, “New Developments in Cryptocurrency Reporting and Enforcement” on Wednesday, June 9, 2021, 10:00 a.m. – 11:40 a.m. (PST).

The program will provide tax advisers and compliance professionals with a practical look at IRS guidance to calculating and reporting income and gain on cryptocurrency (e.g., Bitcoin) transactions. We will discuss the IRS position on cryptocurrency as property rather than cash, analyze IRS efforts to increase compliance and define proper reporting and the tax treatment for hard forks, “mining” and exchanging cryptocurrency. We will address recently released IRS Revenue Ruling 2019-24 and the updated FAQs regarding the taxation of cryptocurrency, with a particular focus on the recent IRS enforcement initiatives to identify virtual currency activity, how the IRS soft letter campaign fits into the voluntary disclosure practice and the risks of criminal prosecution related to unreported and improperly reported cryptocurrency transactions.

Click Here for more information.

Whenever I read a new FBAR willful penalty I get a distinct feeling of déjà vu all over again, to quote the great Yogi Berra.  Elements:

  • Did the taxpayer have a foreign bank account – check.
  • Did the taxpayer know of the foreign bank account – check
  • Did the taxpayer fail to tell the return preparer about the foreign bank account – check
  • Did the taxpayer fail to report income from the foreign bank account – check
  • Did the tax return check the box on Schedule B “NO” to the question of whether there were offshore accounts – check
  • Did the taxpayer sign the return under penalty of perjury – check

Conclusion: the taxpayer willfully failed to file an FBAR report.  Case in point: the Eleventh Circuit’s recent opinion in United States v. Rum, Docket No. 19-14464 (April 23, 2021).   The defendant, Said Rum, was a naturalized U.S. citizen who owned and operated several businesses.   In 1998 he opened a numbered account at UBS with $1.1 million transferred from his accounts in the U.S.  He claimed he did so to conceal the funds from potential judgment creditors.  He directed UBS to hold mail.  Despite no judgment being entered against him, he did not repatriate the funds to the U.S.

Between 2002 and 2008, UBS sent Rum account statements containing a statement that the information was being provided to help in preparing his U.S. income tax returns.  In 2002, UBS advised him that it was required to report his earnings from U.S. securities to the IRS.  Rather than fill out a W-9, Rum directed UBS to not invest in any U.S. securities and signed a form that he was liable for tax in the U.S. as a U.S. person.  In October 2008, UBS notified Rum that it was closing accounts of U.S. citizens.  Rum transferred the funds in his UBS account to a numbered account at Arab Bank in Switzerland. 

Rum admitted he never told his return preparer about the Swiss accounts.  He listed the Swiss accounts on a mortgage application to show his financial position, but did not list his foreign account or report income from his foreign account on his tax returns and did not disclose it on applications for federal aid for his children’s college tuition.  He signed his returns under penalties of perjury.  The “No” box was checked in response to the question on Schedule B whether he had any foreign financial accounts.

In 2008, Rum’s 2006 tax return was audited.  He told the revenue agent that he had closed the UBS account but did not tell her about the Arab Bank account.  The agent determined a tax deficiency but did not propose a fraud penalty or any FBAR penalty.  Rum filed an FBAR for 2008 in October 2009, after the June 30 filing deadline, and only after he was notified by UBS that his account was within the scope of a Treaty Request from the IRS.  In November 2009, after being notified by Arab Bank that it was closing his account, Rum transferred his offshore funds to an account in the U.S. 

During 2009, Rum had approximately $300,000 investment income from his foreign accounts.  He only reported $40,000 of that income.  The IRS audited his 2005 and 2007-2010 income tax returns.  The IRS determined deficiencies in tax and fraud penalties.  Given the amount in his offshore account, the assertion of deficiencies and fraud penalties, he was not eligible for the willful penalty to be mitigated under the Internal Revenue Manual (IRM) guidelines.  The IRS asserted a 50% FBAR willful penalty for 2007, which was sustained on appeal.

Since Rum failed to pay the FBAR assessment, the Government filed a suit to reduce the assessment, plus interest and late fees, to judgment.  The district court granted summary judgment for the Government and Rum appealed.  He raised the following claims on appeal: (a) that the district court used the wrong standard for determining willfulness; (b) that genuine issues of material fact were in dispute, precluding summary judgment; (c) that Reg. §1010.820(g)(2) limits the maximum FBAR penalty to $100,000; (e) the IRS’s factfinding procedures were arbitrary and capricious; and (f) that the district court erroneously rejected his challenge to interest and late fees.  The Eleventh Circuit rejected all of Rum’s arguments and affirmed the district court.

The first issue addressed by the Eleventh Circuit was the standard of review.  Since both parties urged a de novo standard of review for the willfulness determination, whether there were genuine issues of material fact and for legal issues, and this was the standard of review adopted by the Fourth Circuit in the Horowitz and Williams cases, the Eleventh Circuit adopted the de novo standard for these issues.  For questions regarding the IRS’s decision to impose the willful penalty and amount of the penalty, the arbitrary and capricious standard was adopted. 

The Court then turned to the issue of what is the proper standard for determining willfulness for the civil FBAR willful penalty.  In Safeco. Ins. Co. v. Burr, 551 U.S. 47 (2007), the Supreme Court held that willfulness includes recklessness for purposes of determining willfulness for alleged violations of the Fair Credit Reporting Act.  The Third Circuit in Bedrosian, the Fourth Circuit in Horowitz and the Federal Circuit in Norman had all held that willfulness for purposes of the FBAR civil penalty includes reckless disregard.  In Malloy v. United States, 17 F.3d 329, the Eleventh Circuit held that willfulness for purposes of the trust fund recovery penalty includes reckless disregard of a “known and obvious risk that trust funds may not be remitted to the Government, such as failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.”  The Eleventh Circuit concluded that willfulness for purposes of the civil FBAR penalty includes reckless disregard. 

Under the Safeco standard as articulated by the courts of appeal in Bedrosian, Horowitz and Norman, recklessness exists if the defendant “(1) clearly ought to have known that (2) there was a grave risk an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.”  Applying this standard to the undisputed facts, the Eleventh Circuit held that Rum acted with reckless disregard and thus willfully failed to file an FBAR for 2007.  Thus there was no genuine issue of material fact and the district court correctly granted summary judgment on the issue of willfulness.

After determining that the district court correctly held that Rum acted willfully, the remaining dominos fell in quick succession.  First, the regulation setting the maximum FBAR willful penalty at $100,000 was promulgated prior to the amendment making the maximum FBAR willful penalty 50% of the amount in the account.  In amending the penalty provision, Congress did not intend for the maximum penalty to be $100,000.  As a result, the Eleventh Circuit joined the Fourth and Federal Circuits in rejecting the argument that the maximum penalty is $100,000.

Next to fall was the claim that the IRS’s factfinding procedure for determining the amount of the penalty was arbitrary and capricious.  The IRM had guidelines for determining the amount of the penalty, the revenue agent’s recommendation required managerial approval and was reviewed by IRS area counsel, Form 886-A explained the facts and law upon which the determination was based and Rum had an opportunity to appeal the determination.  Thus, the IRS’s factfinding procedures were not arbitrary and capricious.  His argument about interest and late fees was similar to that concerning the IRS’s factfinding and was rejected as being without merit.

So there you have it.  Another FBAR willful appeal, another Court of Appeals upholding the Government’s positions.  The appeal in United States v. Schwarzbaum (SD Fla 2020) is pending before the Eleventh Circuit.  Luckily for Mr. Schwarzbaum, the United States voluntarily dismissed its cross-appeal.

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

The Biden administration’s vision for increased information reporting, depending on implementation specifics, may have a new obstacle to contend with: the Supreme Court’s recent decision shortening the reach of the Anti-Injunction Act (AIA).

In its decision, the Supreme Court gave as one reason why the AIA did not apply was that there were several steps between a reporting rule and an assessment.

“Robert Horwitz of Hochman Salkin Toscher Perez PC also noted that if the IRS received a Form 1099 with an interest or dividend income reporting discrepancy, it would not automatically make an assessment on the taxpayer, but rather would inform the taxpayer and ask for an explanation.”

Robert S. Horwitz is a Principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

Click Here to read full article.

We are pleased to announce that Sandra Brown will be speaking at the upcoming 21st Annual Oregon Tax Institute webinar, “John Doe Summonses: A Deeper Look at a Key IRS Information Gathering Tool and What Its Increased Use May Mean to Non-Compliant Taxpayers” on Friday, June 4, 2021, 2:50 p.m. – 3:50 p.m. (PST).

In addition to Ms. Brown’s presentation on Friday afternoon, this year’s virtual Oregon Tax Institute will feature a stellar lineup of tax topics and presenters including “Inside the IRS: New Directives and Fresh Perspectives” from the IRS Commissioner Charles Rettig. Following Thursday’s afternoon sessions attendees have the opportunity to participate in a virtual social hour on Remo with a snack box delivery.  Please see the event brochure for the entire two-day agenda and snack box order and delivery details.

Click Here for more information.

I thought after my last series of blogs on recent FBAR cases that it would be safe to venture into the waters of Title 26 cases.  But just when I was starting to work on some blogs on interesting tax cases, a school of Title 31 willful FBAR penalty cases broke the surface, jaws open, circling in the… .  You get the picture.  This blog will consider two recent Court of Federal Claims FBAR cases, Mendu v. United States, Case No. 17-cv-738T (April 7, 2021), and Landa v. United States, Case No. 18-365 (April 19, 2021).  The next blog will discuss the Eleventh Circuit’s decision in United States v. Rum.       

Mendu addresses the question of whether the Title 31 FBAR penalty is an “internal revenue” penalty. The Third Circuit, in a footnote in Bedrosian v. United States, stated that FBAR penalties, although found in Title 31of the United States Code, and not Title 26, are “internal revenue” penalties, requiring full payment under Flora v. United States, 362 U.S. 145 (1960), before a person can sue for refund.  Mendu had paid $1,000 towards a $752,000 FBAR penalty and the Government counter claimed for the balance.

Mendu was the co-founder of an Indian venture capital company.  He had signature authority over the company’s overseas accounts.  He also had a personal account where he deposited rental income from a home he owned in India.  He did not file a 2009 FBAR by the due date.  After learning about the requirement to file FBARs, he filed a 2009 FBAR in 2011 and an amended 2009 FBAR in 2012.  The IRS audited Mendu, determined his failure to file was willful and assessed the penalty that was in issue.

While the case was pending, the Federal Circuit issued its opinions in Norman and Kimble, affirming decisions in favor of the Government in FBAR willful penalty cases and holding that the Treasury Regulation imposing a $100,000 cap on the FBAR penalty was rendered void by the 2004 amendment to 31 U.S.C. 5321 and that signing a return falsely answering “no” to the question whether the taxpayer has a financial interest in or signature authority over a foreign account has acted with reckless disregard and, thus, willfully.  This double whammy apparently gave Mendu second thoughts about the sagacity of seeking a refund in the Court of Federal Claims.  He therefore filed a motion to dismiss the case for lack of subject matter jurisdiction, arguing that the FBAR penalty was an “internal revenue” penalty and, therefore the Flora full-payment rule applied.  The Government argued that the Flora rule does not apply to the FBAR penalty since it is in Title 31, not Title 26, the Internal Revenue Code, that the FBAR penalty was not subject to IRS collection procedures, and apply Flora to FBAR penalties would not further any policy.  It also argued that if the court determined it was without jurisdiction it should transfer the case to the Central District of California. 

The Court held that FBAR penalties are not internal revenue penalties.  The Court began by noting that it had jurisdiction over claims of illegal exaction of money by the United States, including for the refund of any illegally exacted penalty.  Unless the FBAR penalty was an “internal revenue penalty” within the meaning of 28 U.S.C. sec. 1346(a)(1) (which gives district courts jurisdiction over tax refund suits), the full-payment rule did not apply and it had jurisdiction over Mendu’s case.

The Internal Revenue Code was created “to consolidate and codify the internal revenue laws of the United States.”  The Court reasoned that since the FBAR penalty was in Title 31 and not in Title 26, the references in Title 26 equating penalties to tax do not apply.  Further, there were no statutory references equating the FBAR penalty to a tax or a penalty under the Internal Revenue Code.  To reach its decision in Flora, the Supreme Court looked to the nature of internal revenue taxes and the refund scheme Congress devised and noted that permitting refund suits without full payment could seriously impair the collection of tax and would effectively be a declaratory judgment that would contravene the prohibition on declaratory judgments in tax cases.  These concerns don’t apply to the FBAR penalty, since enforced collection is usually through a suit to recover a civil penalty and there is no administrative collection procedure a civil suit would interfere with.

The Court noted that Bedrosian was a Third Circuit case that was not binding on it and the Bedrosian court noted it was leaving a definitive holding to another day.   The Court also noted that the Bank Secrecy Act has a regulatory purpose and Congress termed the FBAR penalty a “civil money penalty,” noting that in Simonelli, 614 F.Supp. 2d 241 (D. Conn. 2008), the court held that the FBAR penalty was not a tax penalty and thus was not discharged in bankruptcy. While the FBAR penalty had some similarities with Internal Revenue Code sec. 6038 return reporting penalties, the Tax Court in Flume v. Commissioner, 113 T.C.M. 1097, held that the IRC 6038 penalty that can be collected by administrative levy.  [Those familiar with the issue know that the current Taxpayer Advocate, Erin Collins, and I both are of the opinion that IRC 6038 penalties are not “tax” and may not be assessed or collected as a tax.]

The Court concluded that the fact the FBAR penalty is in Title 31 and not subject to traditional tax collection procedures “demonstrates that Congress did not intend to subject the FBAR penalty to the Flora full payment rule.”

Which brings us to an FBAR case where the court seemed sympathetic with the plaintiff, but upheld the willful penalty, Landa.  In 1939, with the clouds of war gathering, Landa’s grandfather opened a bank account in Switzerland.  Landa was born in the Ukraine.  In 1975 he emigrated with his parents and brother to the United States, eventually becoming a naturalized U.S. citizen.  They opened a jewelry business.   His father told him about the Swiss bank account in 1980 and in 1985 gave Landa, his mother and his brother power of attorney on the account.  Landa and his father annually traveled to Switzerland for a jewelry convention.  While there, they would visit the bank where the account was .  By the beginning of this century they had accounts at UBS and Credit Suisse.  In 2001, Landa and his brother took over management of the accounts from their father.

In 2008, UBS announced it would no longer provide private banking services to U.S. citizens.  A banker at. Credit Suisse advised Landa move the money to a bank with no U.S.  operations, BSI.  He opened a numbered account at BSI and moved the money in UBS and Credit Suisse to BSI.  On the application he listed himself as the sole account holder and had a mail hold placed on the account.

When it came time to prepare his 2009 return,  Landa did not tell his CPA about the Swiss account and his return did not report the income from that account. The “no” box was checked in response to the Schedule B question whether he had a financial interest in or signatory authority over any offshore accounts.  Landa signed the return, which was filed with the IRS.

Notice 2010-11 gave persons with signatory authority over, but no financial interest in, a foreign account until June 30, 2011, to file the 2009 FBAR.  Landa filed the 2009 FBAR in February 2011.  He listed himself as power of attorney for the UBS and Credit Suisse accounts and as trustee for the BSI account.  The FBAR reported the balance in the BSI account at $6,395,493.  The IRS determined that Landa willfully failed to file the 2009 FBAR by the due date and assessed a $3,173,464 penalty.  Landa paid it in full and filed suit to recover the funds as an illegal exaction.  He alleged that he did not have a financial interest in the account and thus his filing was timely under Notice 2010-11. 

The Government moved for summary judgment on the ground that Landa had a financial interest in the account and the Notice did not apply.   At the time the 2009 FBAR was filed regulations defining “financial interest” had not yet been issued.  The 2009 FBAR instructions defined it as an account in which the person is record owner or has legal title, whether the funds are held for his benefit or the benefit of others.  Landa argued that Swiss law should apply in determining whether he had a financial interest and since he was holding the funds in trust for his family under Swiss law he would not have a financial interest.  The Court rejected this argument.   Under sec. 5321 the Secretary of Treasury is authorized to impose penalties on U.S. persons who fail to report a financial interest in a foreign account.  The Secretary had delegated authority to the IRS and its definition of financial interest controlled.  Since Landa was the owner of record of the BSI account he had a financial interest in the BSI account even if he held the funds for the benefit of his family.   Since he had a financial interest in the account, the Notice did not apply and Landa’s 2009 FBAR was late.

Although Landa did not challenge the penalty on the ground that he was not willful, the Court addressed the question of willfulness.  Noting that many of the factors present in the Norman and Kimble cases were in Landa’s case, the Court held he acted willfully under the reckless disregard standard.  The Court did not discuss whether Landa’s belief that he did not have a financial interest and thus could file under the Notice negated willfulness.

Two other issues were considered by the Court: whether the $3.2. million FBAR penalty violated the Eight Amendment prohibition on excessive fines and whether imposition of the penalty was an abuse of discretion.  Noting that the Eighth Amendment prohibits fines and penalties that are punishment for an offense and not civil penalties that are remedial in nature, the Court analogized the FBAR penalty to civil tax penalties, which do not implicate the Eight Amendment, the Court held that the Eighth Amendment doesn’t apply to the civil FBAR penalty.    The Court also held that the imposition of the maximum 50% penalty was not an abuse of discretion.   In its conclusion, the Court threw out a sop to Landa:

The Court appreciates the plaintiff’s unusual family history. These funds were hidden from the Nazis and subsequently hidden from the Communist authorities in the Soviet Union, where the Landa family resided until fleeing to the West. That history may help explain the plaintiff’s behavior, but it cannot relieve the plaintiff of a broadly applicable filing requirement.  The law is unambiguous in its application to cases like the plaintiff’s.

            Unlike cases involving the non-willful FBAR penalty, things look continually bleak for U.S. persons against whom the IRS assesses a willful penalty.

Robert S. Horwitz is a Principal at Hochman Salkin Toscher & Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

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