Posted by: Robert Horwitz | December 21, 2021

Just When You Thought It Was Safe to Go into the Water, Along Comes the Fifth Circuit by ROBERT S. HORWITZ

I previously blogged on the Ninth Circuit’s decision in United States v. Boyle, 991 F.3d 1077 (2021), where the Court held the $10,000 non-willful FBAR penalty applies on a per-form rather than per-account basis.  Several district courts had reached the same conclusion, including the district court in United States v. Bittner, 469 F.Supp.3d 709 (ED TX 2020).  It almost seemed like the tide had turned in taxpayers’ favor, at least with respect to the non-willful FBAR penalty.  Almost, but not quite.

Bittner and the Government filed cross appeals with the Fifth Circuit.  Bittner challenged the district court’s determination that he failed to prove reasonable cause.  The Government appealed the determination that the non-willful FBAR penalty is assessed per-form rather than per-account.  On November 30, 2021, the Fifth Circuit issued its opinion.  It affirmed the determination that Bittner failed to establish reasonable cause and reversed the determination that the non-willful penalty is assessed per form.

First the facts: Bittner was born in Romania, moved to the U.S. in 1982, became a naturalized U.S. citizen, and returned to Romania in 1990.  In Romania, he became a very successful businessman, owning a “diverse array of companies” and opening numerous foreign accounts.  Between 2007 and 2011, he had, at any one time, between 51 and 61 foreign financial accounts.  He first learned that he was required to file FBARs after he returned to the United States in 2011.  He hired a CPA who prepared and filed FBARs for 2007 through 2011, but the CPA made several mistakes:  only listing the larger accounts and checking “no” to the question whether Bittner had more than 25 offshore accounts.  When Bittner realized the error, he hired another CPA who prepared and filed new FBARs that listed each offshore account.   Because the FBARs were not filed on time, the IRS assessed $2.72 million in non-willful FBAR penalties against him.  When Bittner did not pay, the Government sued to reduce the assessments to judgment.  On cross-motions for summary judgment the district court held that Bittner failed to establish reasonable cause but that the assessment was excessive, since Bittner was only liable for one $10,000 penalty for each year in issue, rather than a $10,000 penalty for each offshore account per year.

Addressing Bittner’s reasonable cause argument, the Fifth Circuit held that reasonable cause for purposes of 31 U.S.C. §5321(a)(5)(B)(ii)(I) “requires that the individual exercised ordinary business care and prudence, considering all pertinent facts and circumstances on a case-by-case basis.”  The taxpayer has the burden of proving reasonable cause.

According to the Fifth Circuit, the facts established the Bittner failed to show reasonable cause.  Bittner admitted he did nothing while living in Romania to determine whether he had a reporting requirement.  He was a sophisticated businessperson, which “makes his failure to inquire about his reporting obligations even more unreasonable.”  Despite his living in Romania, with minimal contacts with the United States, during the years in issue, it was unreasonable for him “not to ascertain his reporting obligations.”

Having slammed Bittner on the reasonable cause issue, the Fifth Circuit chided the district court for having relied on a statement in California Bankers v. Schultz, 416 U.S. 21 (1974), which was issued more than thirty years before enactment of the non-willful FBAR penalty.  The Court then began its textual analysis of the relevant statutes.  It noted that §5321(a)(5) penalizes “a violation of any provision of section 5314.”  This required an analysis of §5314.  That section directs the Secretary to require a person who “maintains a relation with a foreign financial agency” to file a report, which is to contain information “in the way and to the extent the Secretary prescribes.”  According to the Court, the regulations, 31 C.F.R. §§1010.350(a) and 1010.306(d), distinguish between reports and the forms used to make the reports (required reports “shall be filed on forms prescribed by the Secretary” and “forms to be used in making the [required] reports”).

            The Fifth Circuit reasoned that there is “(1) a statutory requirement to report each qualifying transaction or relations with a foreign financial agency and (2) a regulatory requirement to file these reports on an FBAR before a certain date each year.”  The Court concluded that

By authorizing a penalty for “any violation of[] any provision of section 5314,” as opposed to the regulations prescribed under section 5314, section 5321(a)(5)(A) most naturally reads as referring to the statutory requirement to report each account—not the regulatory requirement to file FBARs in a particular manner.

Having chided the district court for relying on a quote from Schultz, the Fifth Circuit followed this statement with a quote from Shultz which it claims “supports this reading.”

            Next, the Fifth Circuit discussed that the district court erred in concluding that §5314 creates an obligation to file a single report: this would lead to the Secretary having “the discretion not only to define the reporting mechanism, but also to define the number of violations subject to penalty” since the Secretary could require filing a separate FBAR form for each account.

            While the Ninth Circuit had looked to the differences between the non-willful and willful penalty provisions of §5321 to conclude that the non-willful penalty is assessed per form not per account, the Fifth Circuit argued that the willful penalty provisions support its interpretation.  The willful provisions prescribe a maximum penalty for a willful violation equal to $100,000 or “the balance in the account at the time of the violation” when the violation involves “a failure to report the existence of an account.”  Since a canon of statutory construction is that identical terms within an act have the same meaning, the Fifth Circuit reasoned that if a violation for purposes of the willful penalty involves a failure to report an account, “violation” must mean the same thing for purposes of the non-willful penalty.

            The Fifth Circuit found additional support for its decision in the fact that the reasonable cause exception applies only if there is reasonable cause and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”  Since the exception referred to a violation relating to the reporting of an account, this meant non-willful violations are determined on an account-by-account basis.

            Finally, the Fifth Circuit rejected Bittner’s arguments concerning penal statutes and the rule of lenity, since the civil FBAR penalty is not a penal statute.  It also rejected Bittner’s argument that a per-account reading would lead to absurd results and his invocation of the legislative history, since “mining legislative history … is highly disfavored in the Fifth Circuit.” 

            The Fifth Circuit ended this part of its opinion by stating:

The text, structure, history, and purpose of the relevant statutory and regulatory provisions show that the “violation” of section 5314 contemplated by section 5321(a)(5)(A) is the failure to report a qualifying account, not the failure to file an FBAR. The $10,000 penalty cap therefore applies on a per account, not a per-form, basis.

Given the direct conflict between the Fifth Circuit and the Ninth Circuit on this issue, it is probable that the Supreme Court will be asked to weigh in on the question (unless Bittner files a successful motion for en banc rehearing).

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 clients in criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.


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