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Death and the Non-Willful FBAR Penalty by ROBERT HORWITZ

Causes of action based on penal statutes do not survive the defendant’s death while those based on remedial statutes survive death.  In this context, a remedial statute is one meant to compensate the victim for a harm suffered, while a penal statute is meant to impose damages upon a defendant for a general wrong.  Given the magnitude of the civil FBAR penalty ($10,000 for a non-willful violation and the greater of $100,000 or 50% of the amount in the account for willful violations), most people would conclude that an action to collect the civil FBAR penalty is a “penal” rather than a “remedial” cause of action and that it does not survive the death of the person assessed.  If you have kept track of willful FBAR penalty cases, you’d know that the district courts that have addressed the issue have held that a willful FBAR penalty survives the death of the defendant.  See, United States v. Estate of Garrity, 304 F. Supp. 3d 267 (D. Conn. 2018); United States v. Estate of Schoenfield, 344 F. Supp. 3d 1354 (M.D. Fla. 2018); United States v. Park, 389 F. Supp. 3d 561 (N.D. Ill. 2019); United States v. Green, 457 F. Supp. 3d 1262 (S.D. Fla. 2020); United States v. Wolin , 489 F. Supp. 3d 21 (E.D. N.Y. 2020).

Given the number of district court cases over the past three years holding that the willful FBAR penalty survives the defendant’s death, why a blog now on death and the FBAR penalty?  Because a recent opinion by the United States District Court for the Southern District of Texas, United States v. Gill, Dkt. No. H-18-4020, contains an in-depth analysis of whether the non-willful FBAR penalty was remedial or penal in the context of a motion to dismiss and concluded that it was remedial and survived death. 

First, just the facts: Gill was a naturalized U.S. citizen who had an interest in or signatory authority over numerous foreign bank accounts.  He failed to report foreign income on his 2005-2010 income tax returns and failed to file FBARs for those years.  The IRS assessed $740,848.00 in non-willful FBAR penalties against Gill and $55,304 in non-willful FBAR penalties against his wife.  The Government filed separate collection actions against Gill and his wife.  Gill answered and moved to consolidate the two cases. The motion was granted.  Shortly afterwards Gill died and his wife was appointed representative of his estate.  The estate then moved to dismiss the case against Gill under Fed. Rule Civ. Pro. 12(b)(6), failure to state a claim upon which relief can be granted, arguing that the FBAR penalty was penal and, thus, the Government’s claim did not survive Gill’s death.

The Court got down to analyzing the law by first stating the ground rules under Rule 12(b)(6):  on a motion to dismiss for failure to state a claim all questions of fact and all legal ambiguities are to be resolved in favor of the plaintiff, in this case the Government. 

The first question was whether under 28 U.S.C. sec. 2404 the claim against Mr. Gill survived his death.  That section provides that a civil action for damages brought by or on behalf of the United States survives the defendant’s death.  To answer this question requires a determination of whether the claim is primarily remedial or penal.

The general rule is that causes of action that seek remedial damages survive the defendant’s death while those that are penal do not.  A remedial action seeks damages for a specific harm suffered by a person while a penal action seeks damages for “a general wrong to the public.”  A three-part test (termed the In re Wood factors) is normally applied to make this determination: (1) is the purpose of the statute to address individual wrongs or a more general wrong to the public; (2) does the recovery go to the harmed individual or the public; and (3) is the recovery authorized by the statute “wholly disproportionate to the harm suffered.”  My initial reaction to this three-part test is that the civil FBAR penalty is a penal statute.  But there’s more. 

Under Hudson v. United States, 522 U.S. 93 (1997), when the Government is the plaintiff, the courts additionally consider whether the legislature labeled the “penalizing mechanism as civil or penal” and the seven-factor Kennedy test:

  1. Does the sanction involve an affirmative disability or restraint;
  2. Has it been regarded historically as punishment;
  3. Does it only come into play upon a finding of scienter;
  4. Does it promote the traditional aims of punishment — retribution and deterrence;
  5. Is. the behavior to which it applies already a crime;
  6. Is there an alternative, non-punitive purpose to which it may be rationally connected; and
  7. Is it excessive in relation to the alternative purpose.

Finally, if the claim does not fall neatly into either category, you look to the primary purpose of the statute.

          The statute (31 U.S.C. Sec. 5324) and regulations impose a duty to report foreign accounts if the aggregate balance in the accounts exceed $10,000.  The penalties for violating the reporting requirement are $10,000 if the violation is not willful or the greater of $100,000 or 50% of the balance in the accounts where the violation is willful.  The Senate Report states the non-willful penalty “that applies without regard to willfulness will improve compliance with this [reporting] requirement.”   The Court saw this statement as supportive of the non-willful penalty having a deterrent purpose, which is usually associated with punishment, but noted that deterrence may serve both civil and criminal goals:

Since the penalties imposed are for non-willful violations, the deterrent purpose is towards a broader audience who will want to make sure they are following tax regulations to avoid steep penalties as opposed to punishing the individual upon whom the penalty is assessed — who obviously did not willfully fail to file.

Since a person acts willfully if he knows about the reporting requirement and intentionally fails to file an FBAR, to be non-willful a person would have to be ignorant of the reporting requirement.  Thus, to be deterred by the non-willful penalty a person would have to know about the reporting requirements.  But if a person knows of the filing requirement the failure to file would be willful, so people who are non-willful would not be deterred by the non-willful FBAR penalty.  Or is my reasoning faulty?

Moving on, the Estate pointed to a provision of the IRM stating that the FBAR penalties are to “promote compliance with FBAR reporting and record keeping requirements” and urged that this further supported the claim that the penalty was penal.  The Court readily brushed this aside since the IRM is not law, although it can provide guidelines “to assess the propriety of IRS actions.”  In any event, the Court found that this provision of the IRM does not indicate that the civil FBAR penalties are “primarily punitive such that the court should dismiss the claim at this time.”  In summation “The text of the statute, Congressional Record, and the IRS Manual inform the court’s analysis, and they indicate that the statute has some deterrent purpose but do not preclude a potential remedial purpose.”

The Court then looked at the cases cited by the parties.  The Government cited cases holding that the willful FBAR civil penalty is remedial and thus survives a defendant’s death and is enforceable against the estate.  All of these cases relied on the multi-factor Kennedy test.  Several of these cases stated that the civil FBAR penalty in part reimburses the Government for the “heavy expense” of investigation.

The Estate relied on United States v. Bajakajian, 524 U.S. 321 (1998), which noted that a civil forfeiture for violating the reporting requirement for taking cash out of the country was punishment.  Civil forfeiture required a finding of criminal conduct and thus the case was inapposite, as were the other cases relied on by the Estate: United States v. Simonelli, which dealt with whether the civil FBAR penalty was a tax that was discharged in bankruptcy or “a civil money penalty” that was not discharged; and cases dealing with whether the non-willful penalty was imposed per account or per form.

          The Court found the Government’s cases more persuasive.  As a result, at this stage of the proceedings, it held that the non-willful FBAR penalty was remedial and survived the defendant’s death.  It denied the motion to dismiss.  The Court concluded:

Since at the motion to dismiss stage and ambiguities must be resolved in favor of the non-movant, the court finds that given the “close call” nature of this question, the doubt should be resolved in favor of the Government.

This may be a sign that the Court at a later stage of the proceeding may reach a different conclusion.  But maybe I am grasping at straws.

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 in federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions.

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