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United States v. Garrity

United States District Court, D. Connecticut

February 28, 2019

UNITED STATES OF AMERICA, Plaintiff,
v.
DIANE M. GARRITY, PAUL G. GARRITY, JR., and PAUL M. STERCZALA, as fiduciaries of the Estate of Paul G. Garrity, Sr., Defendants.

          MEMORANDUM AND ORDER

          MICHAEL P. SHEA, U.S.D.J.

         The United States of America (“the Government”), filed this suit to reduce to judgment a civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr. under 31 U.S.C. § 5321(a)(5).[1] After a six-day trial, a jury found that Mr. Garrity had willfully failed to file a Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) in 2005, in violation of 31 U.S.C. § 5314. (ECF No. 179.) The jury also found that the Government had established the assessed civil penalty ($936, 691.00) was equal to 50% of the balance in Mr. Garrity's account in the year he failed to file the FBAR. (Id.) Before trial, the parties stipulated that, if judgment entered in favor of the Government, the Defendants would have an opportunity to file “a motion for remittitur or similar post-verdict motion.” (ECF No. 154 at 2.) Accordingly, the Court entered judgment without specifying the penalty amount. The Government filed a motion to amend the judgment to include a civil penalty of $936, 691.00 plus interest and a late payment penalty. (ECF No. 191.) The Defendants filed a motion to alter or reduce judgment. (ECF No. 190.) They assert that the maximum civil penalty for failure to file an FBAR is $100, 000.00. Alternatively, they argue that the civil penalty must be reduced to “an amount that is proportional to the harm caused by the failure to file the FBAR, as required under the [Excessive Fines Clause of the] Eighth Amendment . . . .” (ECF No. 190-1 at 13.)

         For the reasons set forth below, the Government's motion to alter judgment is GRANTED. The Defendants' motion to alter or reduce judgment is DENIED. The judgment will be amended to reflect a civil penalty of $936, 691.00 plus statutory interest and a late payment penalty.

         DISCUSSION

         I. The Maximum Civil Penalty for Willful FBAR Violations

         By statute, the maximum civil penalty for willfully failing to file an FBAR is the greater of $100, 000 or 50 percent of the balance of the account in the year for which the report was due. 31 U.S.C. § 5321(a)(5)(c). At trial, the Government proved that Mr. Garrity willfully failed to file an FBAR for 2005, and that 50 percent of the account balance in that year was equal to $936, 691. Accordingly, the Government seeks to impose the full penalty available under the statute plus late fees and interest. The Defendants argue that, although the statute allows for penalties up to 50 percent of an account's balance even if that amount exceeds $100, 000, the Secretary of the Treasury capped his discretion to impose civil penalties at $100, 000 by regulation. See 31 C.F.R. § 1010.820(g).[2] I agree with the Government and hold that Congress effectively abrogated the regulation capping FBAR penalties at $100, 000 when it increased the maximum penalty by statute in 2004.

         A. Statutory and Regulatory History of the Willful FBAR Penalty

         Congress passed the Bank Secrecy Act (“BSA”) in 1970. Pub. L. No. 91-508, 84 Stat. 1114. The purpose of the BSA was “to require the maintenance of records and the making of certain reports or records where such reports or records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Id. § 202. The BSA delegated authority to the Secretary of the Treasury to establish record keeping and reporting requirements consistent with that purpose. Id. § 204; Id. at § 241 (codified as amended at 31 U.S.C. § 5314) (“The Secretary of the Treasury . . . shall by regulation require any resident or citizen of the United States . . . who engages in any transaction or maintains any relationship . . . with a foreign financial agency to maintain records or to file reports, or both, setting forth such of the following information, in such form and in such detail, as the Secretary may require . . . .”). The Secretary promulgated final regulations implementing the BSA on July 1, 1972. 37 Fed. Reg. 6912, 6915. One provision required any person with “a financial interest in, or other authority over, a bank, securities or other financial account in a foreign country” to file a “special tax form” providing information about the account. 37 Fed. Reg. 6912, 6913. The form is commonly known as the Foreign Bank Account Report or “FBAR.”

         In 1986, Congress amended the BSA, granting the Secretary authority to assess civil monetary penalties “on any person who willfully violates any provision of section 5314, ” the code section directing the Secretary to require individuals to file an FBAR. Money Laundering Control Act of 1986, Pub. L. No. 99-570, Subtitle H, 100 Stat. 3207 (October 27, 1986) (codified as amended at 31 U.S.C. § 5321(a)). The amended statute limited civil penalties to “the greater of (I) an amount (not to exceed $100, 000) equal to the balance in the account at the time of the violation; or (II) $25, 000.” Id. § 1357 (codified as amended at 31 U.S.C. § 5321(a)(5)). Six months later, the Secretary promulgated a final rule restating the penalty section of the statute nearly verbatim. See Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11446 (Apr. 8, 1987) (stating that the Secretary may impose a civil penalty for willfully failing to file an FBAR up to “the greater of the amount (not to exceed $100, 00) equal to the balance in the account at the time of the violation, or $25, 000.”).[3] The penalty portion of the new regulation did not go through notice and comment procedures, appearing for the first time in the final rule on April 8, 1987. Indeed, the notice of proposed rulemaking had been published in the Federal Register in August of 1986-two months before Congress enacted the BSA amendments authorizing the Secretary to impose civil penalties on account holders. See Notice of Proposed Rulemaking, 51 Fed. Reg. 30233 (Aug. 25, 1986); Money Laundering Control Act of 1986, Pub. L. No. 99-570 (October 27, 1986).

         In 2004, Congress amended the civil penalties for failing to file an FBAR. See American Jobs Creation Act of 2004, Pub L. No. 108-357, § 821, 118 Stat. 1418, 1586 (2004) (codified at 31 U.S.C. § 5321(a)(5)). The amendment increased the penalty for willful FBAR violations to the greater of $100, 000 or 50 percent of the balance of the account at the time of the violation. See 31 U.S.C. § 5321(a)(5)(C). It also added a penalty for non-willful violations limited to $10, 000. Id. § 5321(a)(5)(B). The Secretary did not promulgate updated regulations to reflect the new non-willful penalty or the increased willful penalty.

         B. The 2004 Statute Abrogated the Civil Penalty Limit in the 1987 Regulation

         The Defendants argue that, notwithstanding the statutorily increased penalties, the IRS remains bound by the Treasury regulation promulgated in 1987 under the pre-2004 version of the statute. According to this argument, the maximum penalty for willful FBAR violations is therefore $100, 000. See 31 C.F.R. § 1010.820(g)(2). The Defendants assert that the amended statute establishes a ceiling on civil penalties but not a floor, and that the Secretary of the Treasury has, by retaining the old regulation, categorically established a lower ceiling for such penalties, limiting his own authority to the level set by Congress before the amendment. I disagree. The plain language of the 2004 amendment demonstrates Congress's intent to authorize the Secretary to impose higher penalties for willful FBAR violations without the need for additional Treasury regulations, and, as shown below, the old regulation will not bear the freight the Defendants attempt to foist upon it.

         In the 2004 legislation, Congress specified that the higher penalties for willful FBAR violations would take effect immediately once the amendments were enacted. See Pub. L. No. 108-357, § 821(b) (“The amendment made by this section shall apply to violations occurring after the date of the enactment of this Act.”) (emphasis added). In contrast, where Congress intended in the BSA to rely on the Secretary first to flesh out the statutory scheme by regulation, it made that intention clear. E.g., 31 U.S.C. § 5314 (directing the Secretary to require citizens to either “keep records, file reports, or keep records and file reports” containing certain information “in the way and to the extent the Secretary prescribes . . . .”). The Secretary could not override Congress's clear directive to raise the maximum willful FBAR penalty by declining to act and relying on a regulation parroting an obsolete version of the statute.

         The Defendants contend that the BSA is not self-executing and the Secretary therefore lacks authority to impose FBAR penalties greater than $100, 000 without first promulgating a regulation raising the limit. (See ECF No. 190-1 at 6.) The Defendants rely on dicta in California Bankers Ass'n v. Shultz, 416 U.S. 21, 26 (“[W]e think it important to note that the [Bank Secrecy] Act's civil and criminal penalties attach only upon violation of regulations promulgated by the Secretary; if the Secretary were to do nothing, the Act itself would impose no penalties on anyone.”). In that case, the Supreme Court held that the domestic reporting requirements for financial institutions under the BSA did not violate the Fourth Amendment. 416 U.S. at 66. The petitioner banks had argued that the BSA authorized the Secretary of the Treasury to impose reporting requirements that would amount to unreasonable searches. Id. at 64. The Court rejected their claims, holding that the banks did not have “an unqualified right to conduct their affairs in secret” and that the reporting requirements were not unreasonable. Id. at 67.

         Nothing in California Bankers suggests that the Secretary must take some formal regulatory action before the penalty provisions of the BSA acquire the force of law. The above-quoted language simply notes that the statute itself does not establish specific reporting requirements but affords the Secretary discretion to define those requirements for holders of foreign accounts. See California Bankers Ass'n, 416 U.S. at 26; 31 U.S.C. § 5314. Once the Secretary establishes reporting requirements under Section 5314, though, the civil penalties in Section 5321(a)(5) attach whenever the Secretary chooses to impose them for a reporting violation, as he has in this case. 31 U.S.C. § 5321(a)(5)(A) (“The Secretary of the Treasury may impose a civil monetary penalty on any person who violates . . . any provision of section 5314.”); Id. § 5321(a)(5)(C) (“In the case of any person willfully violating . . . any provision of section 5314- (i) the maximum penalty . . . 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] . . . .”). The language of the statute does not suggest that additional regulations are necessary before the civil penalties can take effect. The American Jobs Creation Act made no substantive changes to the FBAR filing requirement and thus did not create any additional gaps for the Secretary to fill through regulation. See American Jobs Creation Act, Pub. L. No. 108-357, §§ 801-822 (2004) (modifying the BSA and raising civil penalties without altering the substantive FBAR requirement). As a result, the higher penalties the Act established took effect immediately in accordance with its plain language.

         C. The Secretary Did Not Reaffirm the Lower FBAR Penalties After Congress Raised Them by Statute

         There is also no reason to conclude that the Secretary intended categorically to limit his own discretion to impose the higher penalties that Congress authorized. The pre-amble to the 1987 regulation parroting the unamended statute stated that Treasury intended to enforce the BSA “to the fullest extent possible.” 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987). Further, that regulation, now codified at 31 C.F.R. § 1010.820(g), was not promulgated after notice and comment, which means it was, at most, an interpretive rule; it “d[id] not have the force and effect of law, ” Perez v. Mortgage Bankers Ass'n, 135 S.Ct. 1199, 1204 (2015), and it vested no rights in account holders.[4] This suggests that the reference to a civil FBAR penalty in the 1987 regulation was intended only to express the Secretary's intent to enforce the BSA with the full authority conferred on him by Congress. It is untenable to argue that the same regulation now significantly constrains the Secretary's ability to enforce the amended statute.

         The Defendants assert that Treasury regulations promulgated after Congress raised the maximum penalties suggest that the Secretary tacitly reaffirmed the limits in the 1987 regulation. For example, Treasury re-arranged the chapter of the Code of Federal Regulations including the defunct FBAR penalty in 2010. See 75 Fed. Reg. 65806 (Oct. 26, 2010). Similarly, in 2016, Treasury amended a nearby code section to note that penalties with definite dollar amounts- which, by definition, would not include the 50 percent referenced in the 2004 amendment-would be adjusted for inflation. See 81 Fed. Reg. 42503 (Jun. 30, 2016). At best, these actions imply that the Secretary knew the obsolete regulation remained on the books. Other regulations in the same section are also clearly obsolete. For example, 31 C.F.R. § 1010.820(a) establishes penalties for willful reporting violations by financial institutions before 1984. The statute of limitations on such penalties-six years-expired in 1990. See 31 U.S.C. § 5321(b). Thus, the first subparagraph in Section 1010.820 has been defunct for nearly two decades. And in 2008 the IRS explicitly acknowledged that the earlier civil penalty regulation had not been formally repealed; the agency warned that the statute overrode the regulation and the higher statutory penalties applied. Internal Revenue Serv., Internal Revenue Manual § 4.26.16.4.5.1 (Jul. 1, 2008) (“At the time of this writing, the regulations at 31 C.F.R. § 103.57 [now re-codified at § 1010.820] have not been revised to reflect the change in the willfulness penalty ceiling. However, the statute is self-executing and the new penalty ceilings apply.”); see also Id. § 4.26.16.2 (“31 U.S.C. § 5321(a)(5) establishes civil penalties for violations of the FBAR reporting and recordkeeping requirements.”); Id. § 4.26.16.4.5 (“There are two different statutory ceilings for willful penalty violations of the FBAR requirements, depending on whether or not the violation occurred before October 23, 2004.”)[5] I cannot conclude that the Secretary categorically limited his own discretion to enforce fully the FBAR requirement by implication or inaction, particularly given the IRS's clear statements to the contrary.

         The Defendants next contend that Treasury Order 180-01, originally promulgated in October 2002, reaffirmed all FBAR regulations “that were in effect or in use on the date of enactment of the USA Patriot Act of 2001 . . . .” 67 Fed. Reg. 64697-01. Treasury re-issued Order 180-01 in July 2014. See Treasury Order 180-01: Financial Crimes Enforcement Network (Jul 1., 2014), https://www.treasury.gov/about/role-of-treasury/orders-directives/pages/to180-01.aspx. The Defendants fail to acknowledge, however, that the order also indicates that pre-2001 regulations would remain in effect only “until superseded or revised.” Id. As explained above, the lower FBAR penalty in 31 C.F.R. § 1010.820(g) was superseded by statute in 2004. As a result, the general reference to reaffirming earlier regulations in Treasury Order 180-01 does not support an inference that the Secretary intended to reaffirm the lower penalties in the specific regulation at issue here.

         The Defendants also argue that the FBAR form itself demonstrates the Secretary's intent to impose a tighter limit on his own authority to levy civil penalties than the one Congress selected. The Privacy Act Notification on the ...


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