United States v. Garrity (FBAR Series)

United States v. Garrity, U.S. District Court, D. Connecticut | February 28, 2019 | Shea, J. | No. 3:15-CV-243(MPS)

Short Summary: 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). 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.

Key Issue: Whether civil FBAR penalties can exceed $100,000 and whether civil FBAR penalties must be reduced to reflect proportionality to the harm the violation caused under the Eighth Amendment.

Primary Holdings:

Congress effectively abrogated the regulation capping FBAR penalties at $100,000 when it increased the maximum penalty by statute in 2004. The maximum civil penalty applies in this case- the greater of $100,000 or 50 percent of the balance of the account in the year for which the report was due.
The maximum penalty in this case does not violate the Eighth Amendment.

Key Points of Law:

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, 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).
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. § 5321(a)(5)(B). The Secretary did not promulgate updated regulations to reflect the new non-willful penalty or the increased willful penalty.
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.

The violation here is legally and factually distinct from the violations in the Foreign Trust case. This case involves a willful failure to file Form 90.22-1 for tax year 2005. The Foreign Trust case involves failures to file Forms 3520 and 3520-A from 1996 through 2008. In each instance, it was the failure to file the forms themselves, rather than the mere existence of the underlying bank account, that triggered civil penalties, and the elements of each violation are different. In short, the penalties in the Foreign Trust case relate to different conduct in different years than the present case. As a result, I decline to consider those penalties in analyzing the penalty in this case under the Eighth Amendment.
Defendants challenging a fine under the Eighth Amendment bear the burden of demonstrating that the fine is unconstitutional. Castello, 611 F.3d at 120(“The burden rests on the defendant to show the unconstitutionality of the forfeiture.”) The Defendants have not carried that burden. They have offered no explanation for why Mr. Garrity opened the foreign account, nor have they identified the source of the money in it. Further, although the Government was not required to prove that Mr. Garrity engaged in other illicit activity related to his foreign account, there was evidence at the trial that, at the very least, raises serious questions about his and his sons’ activity related to the account.
The purpose of the BSA is “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings….” 31 U.S.C.A. § 5311. The FBAR penalty targets individuals who fail to disclose their interest in foreign accounts, preventing the Government from identifying and investigating possible tax evasion or criminal activity. As explained above, Mr. Garrity fits squarely into the class of persons for whom the BSA was designed.
The criminal fines for an FBAR violation do not capture Congress’s full assessment of the severity of the conduct. Here, Congress explicitly determined that the civil and criminal FBAR penalties may stack. 31 U.S.C. § 5321(d). Congress thus expressly intended that any criminal penalty could be imposed on top of the assessed civil penalty for identical conduct, and specifically calibrated the amount of the total available monetary penalty at a high level, i.e., $250,000 plus the greater of $100,000 or 50 percent of the account’s value. That is a strong indicator that Congress viewed an FBAR violation—especially one involving an account with a large balance—as severe criminal conduct warranting heavy sanctions.
Garrity failed to report his interest in a foreign account for almost two decades and his violations prevented the government from investigating and prosecuting other potential crimes. See supraSection II.B.1. His violation was serious and may have helped to conceal other misconduct. Given the delay in uncovering the violation, the Government may never glean a full picture of Mr. Garrity’s assets abroad. Given the number of years the undisclosed account remained open, and the evidence at trial of substantial balances in several of those years, there is potential that the violation deprived the Government of taxes on a substantial amount of investment gains. Under the circumstances, the Defendants have not shown “that neither the Government nor anyone else suffered harm” as a result of the violation, (ECF No. 190-1 at 18), and I cannot find that the civil penalty is “grossly disproportional” to the harm.

Insight:

One interesting aspect of the Garrity opinion is how the court distinguishes between tax legislation that is meant to stand on its own versus tax legislation that delegates power to the IRS and calls for supplemental regulations that have the force of law.[1] This was a pivotal issue in this case because Garrity argued that even though the BSA was amended in 2004 and raised the maximum penalty for willful violations, the 1987 regulation was still binding and the maximum penalty for willful FBAR violation was $100,000.[2] The court rejected that argument, distinguishing the 2004 amendment from the original BSA by pointing to the fact that the 2004 legislation explicitly stated that the higher penalties would take effect immediately.[3] By contrast, the BSA made Congress’s intention that the Secretary of the Treasury “flesh out” its statutory scheme clear by explicitly saying that the Secretary should keep records and file reports according to their discretion.[4] The Garrity opinion also pointed to the Supreme Court’s decision in California Bankers which discussed that although the statute itself does not establish specific reporting requirement, the penalty provisions in the 2004 legislation have the force of law, regardless of agency action on its behalf.[5] For these reasons, the court ruled that the higher penalties in the 2004 act took effect immediately and apply to this case.[6]

[1] United States v. Garrity, No. 3:15-CV-243(MPS), 2019 WL 1004584, *2–3 (D. Conn. February 28, 2019).

[2] Id.

[3] Id. at *3.

[4] Id.

[5] Id.; See California Bankers Ass’n v. Schultz 416 U.S. 21, 26 (1974).

[6] Garrity, 2019 WL 1004584, at *2–3.