Flint v. United States

• Docket Number: 21-1202T
• Decision Date: 23 August 2022
• Parties: STEPHANIE L. FLINT AND DAVID J. JONES, AS EXECUTORS OF THE ESTATE OF MARGARET J. JONES, Plaintiffs, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

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STEPHANIE L. FLINT AND DAVID J. JONES, AS EXECUTORS OF THE ESTATE OF MARGARET J. JONES, Plaintiffs, v. UNITED STATES, Defendant.

No. 21-1202T

United States Court of Federal Claims

August 23, 2022

Patrick W. Martin, Law Offices of Procopio, Cory, Hargreaves & Savitch LLP, San Diego, CA, for plaintiffs.

Jason S. Selmont, Court of Federal Claims Section, Tax Division United States Department of Justice, Washington, D.C., for defendant. With him was G. Robson Stewart, Assistant Chief Court of Federal Claims Section, David I. Pincus, Chief Court of Federal Claims Section, and David A. Hubbert, Deputy Assistant Attorney General, Tax Division.

OPINION

MARIAN BLANK HORN JUDGE

In the complaint filed in this court, plaintiffs Stephanie L. Flint and David J. Jones, as executors of the estate of Margaret J. Jones, assert two causes of action, "COUNT I - BREACH OF CONTRACT," and "COUNT II - ILLEGAL EXACTION." (capitalization and emphasis in original). For both alternative counts, in total plaintiffs seek $156,795.26, the amount paid by Mrs. Jones to the United States Internal Revenue Service (IRS) as a "Miscellaneous Offshore Penalty" (MOP), recovery of "pre and post-judgment interest as allowed by law," "attorneys' fees and all costs of suit," and "such other further relief as the Court may deem just and proper." Defendant filed a motion to dismiss Count One of plaintiffs' complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Rules of the United States Court of Federal Claims (RCFC) (2021) and to dismiss Count Two of plaintiffs' complaint for lack of subject matter jurisdiction pursuant to RCFC 12(b)(1). The motion has been fully briefed and oral argument has been held.

BACKGROUND

This case challenges the application of an IRS program, which according to the IRS website, is available to United States taxpayers holding foreign accounts not previously disclosed to the IRS, in order to promote voluntary disclosure of those accounts and to resolve existing tax obligations, including certain penalties related to the previous failure to disclose those foreign accounts. In particular, the case currently before the court concerns the Streamlined Filing Compliance Procedures, also called just the Streamlined Procedures. While the Streamlined Procedures are detailed on the relevant pages of the IRS website, the Streamlined Procedures do not appear to be spelled out in statute or regulation, a fact which both parties confirmed at oral argument.^[1]

The Streamlined Procedures, which are at issue in the current case, were first available in 2012 and, following a revision in 2014, remain in operation at the time of the issuance of this Opinion. According to the IRS website, the Streamlined Procedures:

are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations with

• a streamlined procedure for filing amended or delinquent returns, and

• terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and

• terms for resolving their tax and penalty obligations.

Streamlined Filing Compliance Procedures, Internal Revenue Service, https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures (last visited Aug. 23, 2022). To participate in the Streamlined Procedures, taxpayers must:

certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,[sic]1)^[2] was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law[.]

Id. (alterations and footnote added). According to the IRS website, "the streamlined filing process will not culminate in the signing of a closing agreement with the IRS," resolving all potential liability related to foreign accounts, but rather "returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate." Id.

The Streamlined Procedures are divided into two sets of procedures, distinguished by the "residency" of the taxpayers eligible to participate: non-United States "residents" are eligible to participate in the Streamlined Foreign Offshore Procedures, while United States "residents" are able to participate in the Streamlined Domestic Offshore Procedures. See id. Because the taxpayer with whom the above captioned case is concerned, Margaret J. Jones, was a "resident" as well as a citizen of the United States during the time at issue, the Streamlined Domestic Offshore Procedures are the procedures relevant to the case currently before the court. On a different page, the IRS website contains further information specific to the Streamlined Domestic Offshore Procedures:

U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed (the "covered tax return period"), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the "covered FBAR period"), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.

The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.

A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.

U.S. Taxpayers Residing in the United States, Internal Revenue Service, https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-in-the-united-states (last visited Aug. 23, 2022). The IRS website additionally states that

if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful.

Id.

In a separate section from, but on the same page as, the above-reproduced instructions, the IRS website provides "Specific Instructions" for the Streamlined Domestic Offshore Procedures, including the following:

Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. (Form 14654) certifying: (1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below). You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request. You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs. Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

Id.

The "miscellaneous offshore penalty" identified by the Streamlined Domestic Offshore Procedures instructions is relevant to the case currently before the court, as plaintiffs only seek the return of the Miscellaneous Offshore Penalty paid by Mrs. Jones upon application to the Streamlined Procedures. According to defendant's motion to dismiss, payment of the...