United States v. Kahn

• Decision Date: 13 July 2021
• Docket Number: Docket No. 19-3920,August Term, 2020
• Citation: 5 F.4th 167
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jeffrey KAHN, as co-executor of the estate of Harold Kahn, and Joel Kahn, as co-executor of the estate of Harold Kahn, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

5 F.4th 167

UNITED STATES of America, Plaintiff-Appellee,

v.Jeffrey KAHN, as co-executor of the estate of Harold Kahn, and Joel Kahn, as co-executor of the estate of Harold Kahn, Defendants-Appellants.

Docket No. 19-3920

August Term, 2020

United States Court of Appeals, Second Circuit.

Argued: December 17, 2020

Decided: July 13, 2021

JULIE CIAMPORCERO AVETTA, Tax Division, Department of Justice, Washington, D.C. (Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Joshua Wu, Deputy Assistant Attorney General, Francesa Ugolini, Geoffrey J. Klimas, Attorneys, Tax Division, Department of Justice, Washington, D.C.; Seth D. DuCharme, Acting United States Attorney for the Eastern District of New York, New York, New York, on the brief), for Plaintiff-Appellee.

JAMES N. MASTRACCHIO, Washington, D.C. (Daniel G. Strickland, Eversheds Sutherland (US), Washington, D.C., on the brief), for Defendants-Appellants.

Before: KEARSE, BIANCO, and MENASHI, Circuit Judges.

Judge Menashi dissents in a separate opinion.

KEARSE, Circuit Judge:

Defendants Jeffrey and Joel Kahn, as co-executors of the estate of Harold Kahn ("Kahn"), appeal from a judgment of the United States District Court for the Eastern District of New York, Kiyo A. Matsumoto, Judge , in favor of the United States against defendants as co-executors of the Kahn estate (the "Estate") in the principal penalty amount of $4,264,728, plus statutory additions and interest, for Kahn's undisputedly willful failure, in violation of 31 U.S.C. § 5314, to file in 2009 a Report of Foreign Bank and Financial Accounts ("FBAR") for his two foreign bank accounts whose balances, at the time of the failure to file, totaled $8,529,456. The district court granted the government's motion for summary judgment on the ground that, under 31 U.S.C. § 5321 as amended in 2004 (the "2004 Statute"), the maximum permissible penalty for Kahn's failure to file an FBAR is 50 percent of the aggregate balance in the accounts at the time of the failure to file; the court rejected the Estate's contention that the government's authority to impose penalties for willful FBAR violations is limited by a 1987 Treasury Department (or "Treasury") regulation, 31 C.F.R. § 1010.820(g)(2), to $100,000 per account (the "1987 Regulation"). On appeal, the Estate pursues its contention that the 1987 Regulation trumps the later-amended statute. We conclude that the district court correctly ruled that the penalty limitation provided in the 1987 Regulation--which reflected the penalty provision in the 1986 version of the statute—was superseded by the 2004 amendment to the statute increasing the penalty maximum; and we affirm the judgment.

I. BACKGROUND

As discussed in greater detail in Part II below, a United States person with an interest in foreign financial accounts having an aggregate value of more than $10,000 is required each year to file an FBAR. See 31 U.S.C. § 5314 ; 31 C.F.R. § 1010.350(a) ; 31 C.F.R. § 1010.306(c).

A. The Facts

The facts of this case are not in dispute, as the parties have stipulated as follows:

1. Harold Kahn ... willfully failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR") for the 2008 year as required by 31 U.S.C. § 5314 and implementing regulations.

2. The filing due date for the 2008 FBAR was June 30, 2009.

3. The 2008 FBAR should have reported two bank accounts held by Mr. Kahn at Credit Suisse, Switzerland.

4. Each account held over $100,000 and the aggregate value in the two Credit Suisse accounts was $8,529,456, as of June 30, 2009.

5. The Internal Revenue Service assessed a willful penalty for the failure to file the 2008 FBAR in the amount of $4,264,728, which represents 50% of the aggregate account balance as of June 30, 2009, pursuant to 31 U.S.C. § 5321(a)(5).

(Stipulation of Fact dated September 14, 2018.)

It was also undisputed that after the Internal Revenue Service ("IRS") assessed the penalty, Kahn passed away without making payment and that the assessment has not been paid by the Estate. (See , e.g. , Complaint ¶ 36; Answer ¶ 36.) The government commenced the present action seeking judgment against the Estate in the amount of the assessment, plus additional statutory penalties and interest.

Given the above stipulated facts, the dispute centered on the maximum amount the IRS was allowed to assess as a penalty. The government contended that the 2004 Statute, 31 U.S.C. § 5321(a)(5)(C), which provided that the maximum assessable penalty was the greater of $100,000 or 50 percent of the aggregate account balance at the time of the violation--in this case $4,264,728--is to be applied. The Estate contended that the permissible penalty was limited to $100,000 per account--or a total of $200,000--under 31 C.F.R. § 1010.820(g)(2), the 1987 Regulation. Each side moved for summary judgment.

B. The District Court's Decision

In a well-reasoned opinion, the district court granted the government's motion and denied that of the Estate. See United States v. Kahn , 17-cv-7258, 2019 WL 8587295 (E.D.N.Y. Sept. 23, 2019) (" D.Ct. Op."). The court noted that the Bank Secrecy Act ("BSA"), as enacted in 1970, required United States persons to report their relationships with foreign financial institutions. See id . at *4. Congress authorized the Secretary of the Treasury (the "Secretary") to promulgate regulations for implementation and enforcement of the reporting requirement; and the Secretary adopted the FBAR form. See id .

In 1986, focusing on money-laundering-related violations of the BSA, Congress added a civil money penalty that could be levied against private individuals for their willful failures to file FBARs. The maximum penalty was set at "the greater of" $25,000 or "an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation." 31 U.S.C. § 5321(a)(5)(B)(ii)(I)-(II) (1988) (the "1986 Statute"). In 1987, the Secretary promulgated the 1987 Regulation on which the Estate relies, currently located at 31 C.F.R. § 1010.820(g), which reflected the 1986 Statute's maximum penalty provision "almost verbatim," D.Ct. Op, 2019 WL 8587295, at *5.

The 2004 Statute increased the civil penalty for willful behavior to its present level, making the maximum penalty for failure to file an FBAR the greater of $100,000 or 50 percent of the aggregate balance in the accounts at the time of the violation. See id . at *6 ; 31 U.S.C. § 5321(a)(5)(C)(i). The district court noted that despite that 2004 statutory change, the Secretary did not amend the 1987 Regulation's

now-inconsistent FBAR penalty provision. The IRS, which enforced the penalty provision, took the position that revisions were not necessary as the statute was "self-executing." Internal Revenue Manual, 4.26.16.4.5.1--FBAR Willfulness Penalty (July 1, 2008). The IRS thus began to impose penalties in excess of the regulatory cap, which it considered to be superseded. See id . And as of June 30, 2009, the FBAR penalty regulation, despite its apparent obsolescence, remained codified in the Code of Federal Regulations.

D.Ct. Op, 2019 WL 8587295, at *7.

Although the Estate argued that the regulation stating that the Secretary "may assess ... a civil penalty" on any person who willfully violates the FBAR requirement, 31 C.F.R. § 1010.820(g) (emphasis added), is not inconsistent with the 2004 statutory language, the district court rejected that contention. The court noted that while the regulation states that the Secretary may impose such a penalty only up to a maximum of $25,000, the statute provides that the maximum " ‘shall be increased to the greater of (I) $100,000, or (II) 50 percent’ " of the unreported aggregate balance. D.Ct. Op, 2019 WL 8587295, at *8 (quoting 31 U.S.C. § 5321(a)(5)(C)(i) (emphasis in D.Ct. Op)). The court reasoned that the use of the mandatory "shall be" phrase "shows that Congress did not intend to delegate the determination of the maximum penalty to the Secretary." D.Ct. Op, 2019 WL 8587295, at *9 (internal quotation marks omitted). The court stated that

[t]he Secretary may, on a case-by-case basis, impose penalties below the statutory maximum. But he cannot effectively abrogate the statute and the maximum penalty specifically set by Congress by promulgating (or failing to repeal) a regulation providing a different penalty ceiling .

Id . (emphasis added).

Concluding that the regulation is inconsistent with the plain language of the amended statute, the court granted summary judgment in favor of the government on the ground that the 1987 Regulation is no longer valid, and that the assessment against the Estate of $4,264,728, i.e. , 50 percent of the aggregate balance in Kahn's two foreign accounts at the time of his willful violation--the statutory maximum--was therefore permissible.

II. DISCUSSION

On appeal, the Estate contends that the district court erred in refusing to limit the per-willful-violation maximum penalty for failure to file an FBAR to the $100,000-per-account maximum set by the 1987 Regulation, arguing principally that the regulation is not inconsistent with the 2004 Statute, that the court misinterpreted the statute's use of the word "shall," and that in any event, the rule of lenity requires that any ambiguity be resolved in the Estate's favor. Because the parties have stipulated to the facts, the "only inquiry is which party is entitled to judgment as a matter of law." Ace Auto Body & Towing, Ltd. v. City of New York , 171 F.3d 765, 771 (2d Cir. 1999). Reviewing that question de novo , we conclude that, in granting summary judgment to the government, the district court made no error.

A. The Statutory Provisions and the 1987 Regulation

The BSA, as enacted by Congress in 1970, introduced a requirement that United States persons report their relationships with foreign financial institutions. See 31 U.S.C. § 1121(a) (1970). The BSA authorized the Secretary to promulgate regulations for the implementation and enforcement of that reporting requirement. Se...