United States v. Colliot (FBAR Series)

United States v. Colliot, U.S. District Court, W.D. Texas | May 16, 2018 | Sparks, J. | No. AU–16–CA–01281–SS

Short Summary: IRS brought suit against defendant to enforce judgment for FBAR penalties as a result of repeated and willful violations. Defendant moved for summary judgment on the ground that the IRS incorrectly calculated penalties. Motion was granted in part, denied in part, and further order for supplemental briefing on penalties and dismissal was ordered.

Key Issue: Whether the IRS’s calculation of civil FBAR penalties was in accordance with law and what amount of penalties should be assessed against defendant.

Primary Holdings:

The IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot.
The court will modify the order to authorize the purchase and sale of U.S. Treasury bills with a maturity date of one year or less using funds withheld by the writ of garnishment.
The court does not at this time consent to the transfer of increases in the segregated funds resulting from interest accruals or proceeds from the sale or maturity of the Treasury bills.
The court declines Colliot’s unsupported request that the Court dismiss the entire action with prejudice. Instead, the Court orders the parties provide additional briefing on the appropriate next steps in this case.
After reviewing the parties’ additional briefing, the Court again declined Colliot’s request to dismiss the entire case with prejudice. The Court also declined to dismiss with prejudice the claim brought by the Government to collect on the penalty identified by Colliot as exceeding the threshold set by 1010.820, as Colliot has put forward no cogent argument as to why the Court should dismiss that claim with prejudice rather than simply reform the penalty to conform to the threshold set by § 1010.820.

Key Points of Law:

The Court found that, although the 2004 amendment to the Bank Secrecy Act increased the willful penalties to the greater of $100,000 or half the amount in the account, this did not implicitly overrule valid regulations that were promulgated in line with the earlier version of the statute, which capped penalties at $100,000. Therefore, the Secretary of the Treasury or those working at his behest have t discretion as to the amount of penalty to be assessed so long as the amount it does not exceed the new maximums from the 2004 amendment.
Regulations promulgated from notice-and-comment rulemaking can only be overturned by other regulations passed the same way. So, the regulation that caps FBAR penalties at $100,000 (Section 1010.820), has not been repealed remained good law when the FBAR penalties were assessed against Colliot.
The IRS acted arbitrarily and capriciously when it failed to cap its penalties against Colliot at $100,000 because the regulation was still valid.

Insight:

This case seems to go against the majority of recent interpretations of the FBAR penalty scheme. Most decisions hold that the 2004 amendment to Section 5321 did overrule Section 1010.820, so the 2004 amendment’s scheme is now the controlling scheme. A unique justification for this departure from the norm found in the Colliot decision is that both penalty schemes can coexist. The court held that, at the same time, the §1010.820 regulation that caps penalties at $100,000 and the 2004 amendment to 31 U.S.C. § 5321(a) can be available to the Secretary of the Treasury’s discretion when assessing penalties. This seems like an unavoidable contradiction, though, because how can both schemes are equally available at the Secretary’s discretion when choosing the § 5321(a) scheme (which can result in penalties higher than $100,000) would violate the lower scheme (the regulatory scheme). It seems that because of this contradiction, both schemes cannot coexist, and the natural conclusion is that the more recent 2004 amendment implicitly overruled CFR §1010.820.