In this installment of Willis Weighs In, Tax notes Contributing Editor Benjamin M. Willis talks to Archer partners Mark Oberstaedt and Ken Ahl about their help with a major taxpayer victory over foreign bank account reporting penalties.
Here are some highlights from their discussion, edited for length and clarity.
Benjamin M. Willis: Today we will be discussing [foreign bank account report] penalties with Mark Oberstaedt and Ken Ahl, who recently helped a major taxpayer win in court. Mark and Ken successfully represented Frank Giraldi in a very important case regarding the accumulation of FBAR penalties.
The key question in United States against Giraldi it was whether a penalty was applied for unintentionally not disclosing a foreign account by account or by form. Could you tell us a bit about the FBAR requirements?
Ken Ahl: The FBAR is a requirement for reporting foreign financial accounts. US persons must report whether they own the account or have authority to sign on the account. Originally, it was only intended to apply to someone who had deliberately failed to file an FBAR report. In 2004, the law was amended to establish a different penalty for unintentional submissions. The issue for our client, Frank Giraldi, was whether he was subject to multiple fines of $ 10,000 on a per account basis for unintentionally failing to file an FBAR. The court disagreed with the government’s interpretation and found that the unintentional fine of $ 10,000 applied per form.
Mark Oberstaedt: Frank Giraldi worked for AT&T as a long-time employee. While working there, he met his wife. He was about 14 years younger than Frank. When he reached retirement in 1991, he had to decide on his pension. Frank made the decision to base his pension payment on his own life and take that money as a lump sum and invest it. He invested it in three annuities and a financial account in Switzerland because he trusted the Swiss banking system.
The government then agreed to the penalties per account, rather than per form. So, he received four fines of $ 10,000 for each of the four years for a total of $ 160,000. Per form, the total would have been 25 percent of that, or $ 10,000 per year for a total of $ 40,000, which is what the court agreed to.
I think judge [Susan D.] Wigenton of the New Jersey District Court really knocked him out of the park. She compared the intentional sanctions provision that was enacted in 1970 to the unintentional provision added in 2004. The language was different, and the unintentional language did not admit a sanction per account as the language for intentional sanctions did.
Benjamin M. Willis: I am sure that Mr. Giraldi was very happy with the result. It is important for taxpayers to be aware of their rights when the government tries to collect more taxes and penalties and the law clearly allows this.
Mark Oberstaedt: In the United States vs. Boyd decision, which came out eight days after our decision, the Ninth Circuit reached a similar form penalty finding. The courts agree from coast to coast. Why not rule in favor of the taxpayers. We are talking about ambiguities in legal construction.
We have also seen another case in Texas called Bittner where they say, “Look, unless it’s very clear that Congress intended to impose these sanctions this way, we’re not going to read that in the statute that way.” The appeal should be very interesting.
Benjamin M. Willis: I believe that when the language is not clear, the tax provisions and penalties should be interpreted against the drafter. The Boyd In any case, this principle of legal interpretation applies.
Mark Oberstaedt: Taxpayers have the right to file a claim for illegal levy, such as super-taxes. Ben, you actually tipped me off about the recent thought case. The old Flora The case represents the proposition that if you want to sue the government for taxes, you must pay the full tax. You cannot pay less than the total tax. On thought the claims court ruled that the Flora The rule does not apply to FBAR penalties, which opens the cases that can be brought. So if a taxpayer paid less than the full amount of the penalty, they will have the right to request a refund from the government under a theory of legal levy.
Ken Ahl: And to make matters worse, Ben, the government has been taking the position in certain litigation that it can hide the reasons it chose to have an intentional rather than an unintentional penalty behind the privilege of the deliberative process. So I think there is going to be a lot of litigation behind that problem as well.
Benjamin M. Willis: Mark, please make sure you keep me posted when the class action lawsuit starts, because it looks like there could be a big one there. I can’t imagine there isn’t a large group of people wanting to hear that.