United States v. Horowitz
Citation | 361 F.Supp.3d 511 |
Decision Date | 18 January 2019 |
Docket Number | Case No.: PWG-16-1997 |
Parties | UNITED STATES of America, Plaintiff, v. Peter HOROWITZ, et al., Defendants. |
Court | U.S. District Court — District of Maryland |
Nishant Kumar, Stephen A. Josey, United States Department of Justice, Washington, DC, for Plaintiff.
Lewis Steven Wiener, James Nicholas Mastracchio, Pro Hac Vice, Eversheds Sutherland (US) LLP, Alexander D. Mayhall, Pro Hac Vice, Jason Christopher Reichlyn, Dentons US LLP, Washington, DC, for Defendants.
Paul W. Grimm, United States District JudgeUnited States citizens Peter Horowitz and Susan Horowitz lived in Saudi Arabia for most years between 1984 and 2001. Beginning in 1988, they maintained a Swiss bank account at the Union Bank of Switzerland ("UBS"), with money that Peter earned working as an anesthesiologist in Saudi Arabia. When they returned to the United States they did not close their Swiss bank account; by 2008, its balance was almost $ 2 million. Toward the end of 2008, Peter transferred the money to another Swiss bank account, at Finter Bank ("Finter"), this time in his name only. Yet, Peter, who communicated for the couple with their accountant, never mentioned the accounts, and they signed their tax returns each year without ever answering "Yes" to the income tax return question about whether they had money in an overseas account or filing a file Form TD F 90–22.1 ("FBAR") to disclose either account. In 2010, they disclosed the funds for the first time, and in June 2014, the Government assessed penalties of $ 247,030 against each of them for their alleged willful failure to disclose the UBS account for the 2007 tax year and penalties of $ 247,030 against each of them for their alleged willful failure to disclose the Finter account for the 2008 tax year.
The Government has brought this action to collect those penalties, and it moves for summary judgment on its claims. ECF No. 66.1 The Horowitzes have filed a cross-motion for summary judgment, ECF No. 68, arguing that the IRS reversed the 2014 penalties, such that the penalties the Government is trying to collect were not assessed until 2016, at which time they were untimely. They also argue that their failure to disclose was not willful—a point that would reduce the maximum penalties from 50% of the amount in the foreign account at the time of the violation to $ 10,000. Because the Horowitzes have not shown that the IRS actually reversed the penalties in 2014, they have not established that the statute of limitations ran before the penalties were assessed. Further, the undisputed facts show that their failure to disclose the UBS account on their 2007 tax return was willful, and that Peter's failure to disclose the Finter account on their 2008 tax return also was willful. Therefore, the Government's motion will be granted and Defendants' denied with regard to the penalties for 2007 and those assessed against Peter for 2008.
But, as noted, in October 2008, Peter transferred the funds out of their joint Swiss bank account into a Swiss bank account in his name only at Finter Bank. Despite the undisputed evidence that the parties intended for Susan to be a holder on that account as well, and that they added her to the account in 2009, Susan was not an account holder on the Finter account in 2008. Nor has the Government shown that she had any financial interest in or authority over the Finter account in 2008. Therefore, she had no obligation to disclose the Finter account, and FBAR penalties against her for 2008 are not appropriate.2 Accordingly, Susan's individual motion for partial summary judgment on this claim regarding 2008 penalties is granted, and the Government's motion with regard to 2008 penalties against Susan will be denied.
Individuals who pay taxes to the United States must "report annually to the Internal Revenue Service (‘IRS’) any financial interests they have in any bank, securities, or other financial accounts in a foreign country." United States v. Williams , 489 Fed. App'x 655, 656 (4th Cir. 2012) (citing 31 U.S.C. § 5314(a) ). To do so, a taxpayer must file "a completed form TD F 90–22.1 (‘FBAR’) with the Department of the Treasury.... on or before June 30 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year." Id. (citing 31 U.S.C. § 5314 ; 31 C.F.R. §§ 1010.350, 1010.306(c) ). If a taxpayer fails to file a timely FBAR, "the Secretary of the Treasury may impose a civil money penalty." Id. (citing 31 U.S.C. § 5321(a)(5)(A) ).
When a violation is not "willful," the amount of civil penalty is capped at $ 10,000. 31 U.S.C. § 5321(a)(5)(B)(i). In contrast, "[i]n the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314, ... the maximum penalty [of $ 10,000 for a non-willful violation] shall be increased to the greater of—(I) $ 100,000, or (II) 50 percent of the [balance in the account at the time of the violation]." 31 U.S.C. § 5321(a)(5)(C)(i) ; see United States v. Shinday , No. 18-CV-6891-CAS-EX, 2018 WL 6330424, at *3 (C.D. Cal. Dec. 3, 2018) ( ).
The Horowitzes do not dispute the statutory provision. Defs.' Am. Reply 14. Nonetheless, they argue that "the Department of the Treasury, via notice and comment rulemaking promulgated regulations, limited the maximum amount of willful FBAR penalties to $ 100,000." Id. (citing 31 C.F.R. § 103.27 ). And, relying on United States v. Colliot , 2018 WL 2271381, at *3 (W.D. Texas 2018), they insist that "the IRS cannot act outside of its own regulation." Id. at 15.
It is true that 31 C.F.R. § 103.27, which is now 31 C.F.R. § 1010.820(g)(2), provides that "[f]or any willful violation committed after October 27, 1986 ... the Secretary may assess upon any person, a civil penalty[ ] ... not to exceed the greater of the amount (not to exceed $ 100,000) equal to the balance in the account at the time of the violation, or $ 25,000." 31 C.F.R. § 1010.820(g)(2) . But, as the Court of Federal Claims recently explained:
On October 22, 2004, Congress enacted a new statute that increased the statutory maximum penalty for a "willful" violation to "the greater of [ ] $ 100,000, or [ ] 50 percent of the ... balance in the account at the time of the violation." See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, 1586, § 821 (Oct. 22, 2004) ("Jobs Creation Act"). And, on July 1, 2008, the IRS issued I.R.M. § 4.26.16.4.5.1, that stated: "At the time of this writing, the regulations at [ 31 C.F.R. § 1010.820 ] have not been revised to reflect the change in the willfulness penalty ceiling." I.R.M. § 4.26.16.4.5.1. The IRS, however, warned that, "the statute [i.e. , the Jobs Creation Act] is self-executing and the new penalty ceilings apply." I.R.M. § 4.26.16.4.5.1. Although, the Jobs Creation Act is inconsistent with 31 C.F.R. § 1010.820(g)(2), it is settled law that an agency's regulations "must be consistent with the statute under which they are promulgated." United States v. Larionoff , 431 U.S. 864, 873, 97 S.Ct. 2150, 53 L.Ed.2d 48 (1977). Since the civil penalty amount for a "willful" violation in 31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i) (2004), the April 8, 1987 regulations are "no longer valid." Norman [v. United States ], 138 Fed.Cl. [189] at 196 [ (2018) ].
Kimble v. United States , 141 Fed.Cl. 373, 388 (2018) (emendations in original). The Kimble Court persuasively rejected the Colliot Court's conclusion that "the IRS is still bound by the maximum penalty in the pre-2004 statute," reasoning that the conclusion "conflicts with the decision of the United States Court of Appeals for the Federal Circuit in Barseback Kraft AB v. United States , 121 F.3d 1475 (Fed. Cir. 1997)", where the Federal Circuit concluded that the fact that regulations "had not been formally withdrawn from the Code of Federal Regulations [did] not save them from invalidity" based on a conflicting federal statute. Id. (quoting Barseback , 121 F.3d at 1480 ). On that basis, the Kimble Court affirmed a civil penalty of $ 697,229, representing 50% of the relevant account balance.
Moreover, the IRS's Internal Revenue Manual ("I.R.M.") § 4.26.16.6.5(3) now provides that "[f]or violations occurring after October 22, 2004, the statutory ceiling is the greater of $ 100,000 or 50% of the balance in the account at the time of the violation." I.R.M. § 4.26.16.6.5(3) (Nov. 6, 2015).
The purpose of the IRS Manual is to govern the internal affairs of the Internal Revenue Service. See United States v. Horne, 714 F.2d 206, 207 (1st Cir. 1983). The provisions of the manual do not have the force of law and are not mandatory or binding for the IRS. See id. See also Anderson v. United States, 44 F.3d 795, 799 (9th Cir. 1995). Despite these weaknesses, the manual has been used, on a limited basis, to provide guidance in interpreting terms in regulations. See United States v. Boyle, 469 U.S. 241, 243 n. 1, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985) ( ). Thus, it is possible for sections of the IRS manual to bear a limited relevance to actions such as the one at hand.
Vons Cos. v. United States , 51 Fed.Cl. 1, 13 n.12 (2001), modified, No. 00-234T, 2001 WL 1555306 (Fed. Cl. Nov. 30, 2001), and abrogation on other grounds recognized by Alpha 1, L.P. ex rel. Sands v. United States, 83 Fed.Cl. 279, 288 (2008). I agree with the Kimble Court that 31 C.F.R. § 1010.820(g)(2) cannot be enforced in light of its conflict with 31 U.S.C. § 5321(a)(5)(C)(1) and this more recent provision from the IRS's Internal Revenue Manual. See Kimble , 141 Fed.Cl. at...
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