United States v. Rum, 19-14464

• Decision Date: 23 April 2021
• Docket Number: No. 19-14464,19-14464
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Said RUM, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eleventh Circuit

995 F.3d 882

UNITED STATES of America, Plaintiff-Appellee,

v.Said RUM, Defendant-Appellant.

No. 19-14464

United States Court of Appeals, Eleventh Circuit.

April 23, 2021

Geoffrey Klimas, Francesca Ugolini, U.S. Department of Justice, Chief Appellate Section Tax Division, Washington, DC, U.S. Attorney Service - Middle District of Florida, U.S. Attorney's Office, Tampa, FL, for Plaintiff - Appellee.

Venar R. Ayar, Law Office of Venar Raad Ayar, PLLC, Farmington Hills, MI, Ashraf Salem, Ashraf Salem Law Office, Lutz, FL, for Defendant - Appellant.

Before ROSENBAUM, LUCK, and ANDERSON, Circuit Judges.

PER CURIAM:

This case involves the Government's suit brought in the district court to enforce the IRS assessment of a penalty against Rum for failing for the year 2007 to file a Report of Foreign Bank and Financial Accounts ("FBAR") pursuant to 31 U.S.C. § 5321. The district court granted summary judgment in favor of the Government, enforcing the IRS assessment of a penalty for a willful violation. This is Rum's appeal. He argues on appeal: (A) that the district court applied an incorrect standard of willfulness (by holding that willfulness as used in 31 U.S.C. § 5321(a)(5)(C) includes a reckless disregard of a known or obvious risk); (B) that the district court erred in concluding that there were no genuine issues of material fact as to whether his conduct rose to required level of willfulness/recklessness; (C) that the district court erred in refusing to recognize that 31 C.F.R. § 1010.820(g)(2) limits the amount of a willful violation to $100,000; (D) that the district court erred when it held that the IRS's factfinding procedures were sufficient and therefore applied the arbitrary and capricious rather than a de novo standard of review with respect to the amount of the penalty; (E) that, even assuming the arbitrary and capricious standard applies, the district court erred in failing to conclude that the IRS factfinding procedures were arbitrary and capricious; and finally, (F) that the district court erred in rejecting Rum's challenge to the additions to the base amount (interest and late fees). In our Part III Discussion below, we address each of Rum's arguments in turn.

I. FACTS AND PROCEDURAL HISTORY

Rum has been a naturalized citizen of the United States since 1982 and can read, write, and comprehend English. After obtaining a two-year degree, Rum owned and operated several businesses including a delicatessen, a pet supply store, and a convenience store. In 1998, Rum opened his first foreign bank account ("UBS account") by depositing $1.1 million from his personal checking account. Rum opened the UBS account to conceal money from potential judgment creditors, although Rum provided two inconsistent versions concerning the details of the lawsuits giving rise to the judgment creditors. In one version, he was in a car accident and was sued by the victim of the accident; in the second, he was sued by a customer who slipped and fell inside his store. Rum alleged that his lawyer advised him to place the money in a foreign bank account for concealment purposes. Rum chose to have a numbered, rather than a named, account, and elected to have his mail held at UBS, rather than sent to his U.S. address. UBS charged a fee to retain his mail and all retained mail was deemed to have been duly received by him.

Rum gave inconsistent statements on why he failed to return the money to the U.S. earlier. Rum stated that he was afraid of being penalized with a fee for closing the foreign bank account, but he also declared that he was satisfied with returns on investment and thus decided to leave the funds undisturbed. Rum admitted that "he was very active with communicating investment strategies to UBS" because he "wanted to ensure he was getting the best return on his investment with UBS." For that reason, he visited Switzerland several times to meet with bank officers and manage his account.

From 2002 to 2008, UBS sent bank statements to Rum that included the following notice on the cover: "The information contained herein is intended to provide you with information which may assist you in preparing your US federal income tax return. It is for information purposes only and is not intended as formal satisfaction of any government reporting requirements." UBS informed Rum in 2002 that earnings from U.S. securities had to be reported to the IRS. However, Rum declined to complete Form W-9 and instead directed UBS not to invest in U.S. securities. While in Switzerland, in 2004, Rum signed a document entitled "Supplement for new Account US Status" that contains the following statement: "In accordance with the regulations applicable under US law relating to withholding tax, I declare, as the holder of the above-mentioned account, that I am liable to tax in the USA as a US person." Rum's UBS account balance greatly exceeded the reportable amount in 2007 and his UBS account earned income each year, except for 2006. Rum owned the UBS account until October 26, 2008, when he closed it to transfer nearly $1.4 million to Arab Bank, another bank located in Switzerland. Rum admitted that while he did not disclose the UBS account on his tax returns or the Free Application for Federal Student Aid ("FAFSA"), he disclosed the account on his mortgage application to demonstrate his strong financial position.

Rum asserts that he used a tax preparer to complete his returns. However, Rum's 2007 tax return is one of at least two tax returns that is marked as "Self-Prepared" on the tax preparer's signature line. Rum signed the 2007 tax return on February 27, 2008; this signature is found on Form 1040 immediately below the following standard provision: "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete." Rum asserts that he provided his tax preparer with the documents necessary to prepare the returns. Rum admits that he never told the tax preparer about his foreign bank account and claims that the tax preparer never asked him about the existence of a foreign bank account. Line 7a of Schedule B of the 2007 Form 1040 tax return contains the following question: "At any time during 2007, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions for exceptions and filing requirements for Form TD F 90-22.1 [FBAR]." Rum's 2007 tax return, and each of his returns for several preceding years, stated that Rum had no such foreign account.

In 2008, Rum was audited for the 2006 tax year. Rum told the agent that he had closed his UBS account but failed to tell her that he opened the new one at Arab Bank. Although the agent imposed additional taxes, she did not impose an FBAR penalty.

Rum failed to file an FBAR repeatedly prior to tax year 2008; in fact, Rum filed an FBAR for tax year 2008 only because on October 6, 2009, UBS sent a written notice to Rum stating that Rum's account with UBS appeared to be within the scope of the IRS Treaty Request it had received. Nine days later, Rum belatedly filed his first FBAR form, on October 15, 2009, for tax year 2008.

In November 2009, Arab Bank advised Rum that it was closing his account, so he transferred the funds—which were approximately $1.4 million—to a U.S. account. In February 2010, Rum filed a tax return for the 2009 year that reported approximately $40,000 of the $300,000 of investment income generated by the UBS and Arab Bank accounts.

In 2011, the IRS commenced an examination that encompassed Rum's 2005 and 2007 through 2010 tax years and led to an examination of his failure to report his foreign accounts during that period. Agent Marjorie Kerkado determined that Rum had understated his income by hundreds of thousands of dollars during the years at issue and therefore asserted tax deficiencies and civil fraud penalties. She initially proposed a non-willful FBAR penalty against Rum, which her supervisor, Terry Davis, approved subject to the approval of area counsel. Kerkado and Davis initially proposed a non-willful penalty instead of a willful penalty based on the failure of the IRS agents to raise an FBAR penalty in Rum's 2006 audit. Area counsel's approval of the non-willful penalty was accompanied by the following language:

It is our understanding that the revenue agent did not propose a willful penalty in this case because the prior revenue agent failed to raise the issue of filing FBAR forms in the earlier examination. In the absence of additional facts not stated in this memorandum, this office believes that there is sufficient evidence to impose the willful penalty should the Commissioner make that determination. Any evidence that the prior revenue agent failed to raise the FBAR issue should be inadmissible in a court proceeding as not relevant to determining the taxpayer's intent at the time the violations were committed.

Once Kerkado and Davis realized that their initial reasoning was based on an irrelevant "factor when it comes to willful definition," Kerkado reconsidered Rum's case and proposed a willful penalty. Both Davis and area counsel approved Kerkado's proposal and Kerkado never thereafter recommended anything lower than a willful penalty of 50% of the account balance at the time of the violation.

Both Davis and area counsel agreed with Kerkado that Rum was ineligible under the mitigation guidelines because of the proposed civil tax fraud penalty. The Internal Revenue Manual ("I.R.M.") provides that if the maximum balance of the account exceeds a million dollars at the time of the violation, the FBAR statutory maximum applies. It is undisputed that the account exceeded a million dollars during tax year 2007; however, the I.R.M. mitigation guidelines provide for an exception such that the statutory maximum could be reduced if a...