Mendu v. United States, No. 17-cv-738 T

CourtCourt of Federal Claims
Writing for the CourtELENI M. ROUMEL Judge
PartiesRAGHUVEER K. MENDU, Plaintiff, v. THE UNITED STATES, Defendant.
Docket NumberNo. 17-cv-738 T
Decision Date07 April 2021

RAGHUVEER K. MENDU, Plaintiff,
v.
THE UNITED STATES, Defendant.

No. 17-cv-738 T

United States Court of Federal Claims

April 7, 2021


Shahzad A. Malik, Nixon Peabody, LLP, Los Angeles, California for Plaintiff.

Jason Bergmann, United States Department of Justice, Tax Division, Washington, D.C. for Defendant. With him on the briefs are Richard E. Zuckerman, Principal Deputy Assistant Attorney General; David Pincus, Chief, Court of Federal Claims Section, Washington, D.C.

MEMORANDUM AND ORDER

This case arises out of the assessment of penalties against Plaintiff, Raghuveer Mendu, under 31 U.S.C. § 5311 et seq. (the Bank Secrecy Act or BSA), for alleged failure to timely file reports of foreign bank accounts — commonly known as FBAR penalties.

As discussed infra, this case has a complicated procedural history. On June 2, 2017, Plaintiff filed an action in this Court challenging the assessment of a $752,920 FBAR penalty1

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under 31 U.S.C. § 5321(a)(5) (willful FBAR penalty). Crucially, Plaintiff made only a partial payment of $1,000 against the FBAR penalty before filing his complaint. Complaint (ECF No. 1) (Compl.) ¶ 6. Thus, Mr. Mendu challenges the assessment of the $752,920 FBAR penalty via an illegal exaction claim in which he seeks to recover the $1,000 payment from Defendant United States. Id. ¶¶ 5-6.

On October 3, 2017, Defendant filed its answer and counterclaim seeking payment of the FBAR penalty plus interest. See Defendant's Answer and Counterclaim (ECF No. 8) (Def. Ans.) or (Def. Countercl.).2 Importantly, both parties agree that this Court does not have independent jurisdiction to hear Defendant's counterclaim. See Plaintiff's Reply in Support of Motion to Dismiss under RCFC 41(a)(2) (ECF No. 49) (Pl. Rule 41(a)(2) Reply) at 4; Defendant's Response to Motion for Voluntary Dismissal of Plaintiff's Complaint (Def. Resp. to Mot. for Voluntary Dismissal) (ECF No. 48) at 4-5.

Three motions are currently pending before the Court that include primary and alternative arguments by each party. See Plaintiff's Motion to Dismiss (Pl. Rule 7(b)(1) Mot. or Rule 7(b)(1) Motion) (ECF No. 30); Motion to Dismiss Under RCFC 41(a)(2) (ECF No. 47) (Pl. Rule 41(a)(2) Mot. or Rule 41(a)(2) Motion); "Cross-Motion to Transfer Venue; Memorandum in Response to Motion to Dismiss for Lack of Jurisdiction and in Support of Cross-Motion to Transfer Venue" (ECF No. 34) (Def. Cross-Mot.). In his Rule 7(b)(1) Motion, Plaintiff oddly contends that this Court does not have jurisdiction over his own illegal exaction claim and consequently that no jurisdiction exists to hear Defendant's counterclaim. Accordingly, Plaintiff urges this Court to

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dismiss this action in its entirety, including his own complaint and defendant's counterclaim. See Pl. Rule 7(b)(1) Mot. In his subsequently filed Rule 41(a)(2) Motion, Plaintiff alternatively proposes that, even if this Court has jurisdiction over Plaintiff's illegal exaction claim, it should still dismiss Plaintiff's own complaint under United States Court of Federal Claims Rule (Rule) 41(a)(2) and transfer Defendant's counterclaim to the United States District Court for the Central District of California under 28 U.S.C. § 1631. See Pl. Rule 41(a)(2) Mot. 1-2.

In contrast, Defendant contends that this Court has jurisdiction over Plaintiff's illegal exaction claim but does not have independent jurisdiction over Defendant's counterclaim. See Def. Resp. to Mot. for Voluntary Dismissal at 4. Consequently, Defendant argues that the Court cannot dismiss this action under Rule 41(a)(2) over Defendant's objections. See id. Alternatively, Defendant argues that, if this Court were to find that it does not have jurisdiction over Plaintiff's illegal exaction claim, Defendant's counterclaim should be transferred to the United States District Court for the Central District of California pursuant to 28 U.S.C. § 1631. Def. Cross-Mot. at 18-21.

As explained further below, the well-established Flora "full payment rule" requires a plaintiff to make payment of the full tax amount before a suit for the refund of "any internal-revenue tax" can be brought in this court. See Diversified Grp., Inc. v. United States, 841 F.3d 975, 981 (Fed. Cir. 2016) (citing Flora v. United States, 362 U.S. 145, 177 (1960) and discussing Flora's "full payment rule"). At issue in the present case is whether FBAR penalties are internal-revenue taxes. If FBAR penalties are internal-revenue taxes, then the Flora full payment rule applies, and this Court lacks jurisdiction since Plaintiff has not paid the full FBAR penalty assessed against him. Conversely, if FBAR penalties are not internal-revenue taxes, then the Flora full

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payment rule does not apply, and this Court has jurisdiction over Plaintiff's $1,000 illegal exaction claim.

This Court holds that FBAR penalties are not internal-revenue taxes and, therefore, are not subject to the Flora full payment rule. Accordingly, this Court holds that it has jurisdiction over Plaintiff's illegal exaction claim. Because jurisdiction exists, this Court further holds that it cannot dismiss Plaintiff's complaint over Defendant's objection pursuant to Rule 41(a)(2) or transfer Defendant's counterclaim to a district court under 28 U.S.C. § 1631. Accordingly, the Court DENIES Plaintiff's Motion to Dismiss under Rule 7(b)(1) (ECF No. 30), DENIES Defendant's Cross-Motion to Transfer Venue (ECF No. 34), and DENIES Plaintiff's Motion to Dismiss under Rule 41(a)(2) (ECF No. 47).

LEGAL FRAMEWORK

The Bank Secrecy Act and its implementing regulations mandate that "United States person[s]" who have relationships with foreign financial agencies are required to disclose such relationships to the Department of the Treasury. See 31 U.S.C. § 5314(a); 31 C.F.R. § 1010.350. To properly disclose, those U.S. persons must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Internal Revenue Service (IRS) on or before June 30 of the year following the calendar year for which the financial account is maintained. 31 U.S.C. § 5314(a); 31 C.F.R. § 1010.306(c); see also Norman v. United States, 942 F.3d 1111, 1114 (Fed. Cir. 2019). If disclosure is not made, then, pursuant to 31 U.S.C. § 5321(a)(5)(A), the Secretary of the Treasury may impose civil money penalties on any person who fails to file a required FBAR. See Norman, 942 F.3d at 1114. The civil penalties for failure to file are graduated according to the gravity of the offense. Id.

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The Treasury may assess FBAR penalties "any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed." 31 U.S.C. § 5321(b)(1). After timely assessment, the Treasury may sue for collection, provided it does so within two years of either the date of assessment or the date on which the person was convicted of a criminal FBAR violation, whichever is later. See 31 U.S.C. § 5321(b)(2).

BACKGROUND

According to the complaint, Plaintiff is a successful, serial technology entrepreneur who is now in the Indian venture capital business. Compl. Ex 3 at 2. In July 2007, Plaintiff and his business partner co-founded Venture East Mauritius Advisors (VMIA) an investment company in Mauritius. Compl. ¶ 12; Compl. Ex. 3 at 3. Plaintiff and his business partner co-owned the company, directly and indirectly, from its founding and throughout 2009. Compl. ¶ 13. Two separate bank accounts, set up at different times, were maintained in connection with VMIA — Account Ending in 1788 (VMIA 1) and Account Ending in 3482 (VMIA 2) — and both accounts were held by the State Bank of Mauritius. Compl. ¶ 23; Compl. Ex. 3 at 1-2. Plaintiff, as co-owner of VMIA, had signatory authority over the two accounts. Compl. ¶ 23. Plaintiff has also maintained a personal account with the Indian bank Andhra Bank Amerpeet (the Personal Account). Compl. ¶ 25. The Personal Account is unrelated to VMIA. Id. Plaintiff deposited into the Personal Account nominal amounts of rental income that he earned from a home he owns in India. Compl. ¶ 25. However, Plaintiff did not file an FBAR for the 2009 calendar year for any

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of these three accounts, as required by 31 U.S.C. § 5314(a) and its accompanying regulations. See Def. Countercl. ¶ 24.3

Mr. Mendu alleges that he first learned of the FBAR reporting requirements in 2011; and, upon learning of these requirements, he decided to file delinquent FBAR forms. Compl. ¶¶ 40, 46-48; Compl. Ex. 3 at 6. In his haste to file these forms, Mr. Mendu alleges that he made unintentional misstatements in these delinquent FBAR filings. Compl. Ex. 3 at 6. Mr. Mendu corrected these misstatements in June of 2012. Compl. ¶ 49. In 2013, the IRS initiated an audit of Mr. Mendu. Compl. Ex. 3 at 6. This audit ultimately resulted in the IRS finding that Mr. Mendu had willfully failed to file a complete and accurate FBAR. Compl. ¶¶ 56-57, Ex. 1. Accordingly, the IRS assessed Mr. Mendu a civil penalty for $752,920, attributable to his allegedly willful failure to file an FBAR for the 2009 calendar year. Compl. ¶¶ 4, 62; see also Def. Countercl. ¶ 2.4 As noted, the penalties at issue in this case arise from three accounts, two held by VMIA, and a third personal account in India at Andhra Bank as reflected by the chart below:

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Account
Period
Assessed Amount
Andhra Bank Account Ending
in 078 (the Personal Account)
2009 Calendar Year
$3,165
State Bank of Mauritius
Account Ending in 1788
(VMIA 1)
2009 Calendar Year
$454,105
State Bank of Mauritius
Account Ending in 3482
(VMIA 2)
2009 Calendar Year
$295,650
Total: $752,920

Compl. Ex. 1 at 7. Mr. Mendu contested the IRS's $752,920 penalty with the IRS Office of the Area Director of Appeals. Compl. ¶¶ 69-70, Ex. 3, Ex. 4. On February 3, 2017, the IRS Office of Appeals sustained the willful FBAR penalty despite Mr. Mendu's objections. Id. ¶ 71, Ex. 5. On or about May 22, 2017, Plaintiff made a partial payment of $1,000 on the...

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