Court Rules FBAR Penalties May Survive Death

Court Rules FBAR Penalties May Survive Death

FBAR Penalties May Survive Death

FBAR Penalties May Survive Death: In the past two years, there have been many recent court rulings on matters involving the FBAR (Foreign Bank and Financial Account Reporting) and how penalties should issued and upheld. When a Defendant’s back is against the wall, they have to try and find anyway they can to limit or minimize the FBAR Penalties — which can be astronomical. One way a Defendant may seek to reduce FBAR penalties is to claim that the penalties do not survive the death of the Taxpayer, but in USA v Gill, the court disagreed with Defendant’s arguments — although it should be noted that it was only rejected at the Motion to Dismiss phase (Defendant put forward a very strong argument).

Excerpts from the Court’s Opinion and Order are below:

Basis for the FBAR Penalties

        • This memorandum opinion and order is about whether civil penalties assessed under 31 U.S.C. § 5321(a)(5)(B)(i) (“FBAR Penalties”) survive death.

        • The plaintiff, the United States of America (the “Government”), filed its complaint against Jagmail S. Gill on October 14, 2018. Dkt. 1. In the complaint, the Government asserted that Mr. Gill, who became a green card holder and was lawfully admitted to the United States in 1984 and then became a citizen of the United States in 2008, failed to report any of his foreign income on his originally filed U.S. income tax returns for 2005 through 2010. Id.

        • He also did not disclose that he had signature authority, control or authority over, or an interest in numerous foreign bank accounts that had an aggregate balance of more than $10,000. Id.

        • The Government asserts that this failure to file was non-willful. Id. The Internal Revenue Service assessed FBAR Penalties of $740,848 pursuant to § 5321(a)(5) for United States District Court Southern District of Texas ENTERED June 30, 2021 Nathan Ochsner, Clerk Case 4:18-cv-04020 Document 35 Filed on 06/30/21 in TXSD Page 1 of 25 2 Mr. Gill’s non-willful failure to timely file FBARs reporting his financial interest in the foreign bank accounts. Id. Gill did not timely pay these penalties, and the Government filed this lawsuit. Id.

        • The Government served Mr. Gill in London on December 19, 2019. Dkt. 8. Mr. Gill filed an answer on February 14, 2020. Dkt. 10. On March 30, 2020, Mr. Gill moved to consolidate a separately filed case against his wife, Amajit K. Gill, into this case. Dkt. 20. The court granted that motion. Dkt. 21. The complaint the Government filed against Ms. Gill is similar to the complaint filed against Mr. Gill, except the Government alleges an interest in fewer foreign bank accounts, and the FBAR Penalties assessed were $55,304.55. United States v. Gill, No. 4:18-cv4032, Dkt. 1.

What does this Mean?

The Government filed an FBAR enforcement lawsuit before the Taxpayer passed away, which serves as the crux of the argument that the claim was timely. 

Taxpayer Passed Away and Representative Appointed

        • On May 14, 2020, the Government filed a “suggestion of death” in which it informed the court that Mr. and Ms. Gill’s counsel had informed the Government on April 28, 2020, that Mr. Gill passed away on April 2, 2020, in the United Kingdom. Dkt. 22.

        • On July 8, 2020, the Government filed a motion to appoint and substitute a personal representative for the estate of Jagmail S. Gill because no executor or personal representative had been appointed for Mr. Gill’s estate due to the world pandemic. Dkt. 23.

        • Mr. Gill’s counsel filed an opposition, arguing that the Government’s claims do not survive death, so no representative was needed. Dkt. 24. After the motion to fully briefed, the court issued an order in which it noted the “very unusual situation” and the need to be flexible. Dkt. 29. It decided to sua sponte stay the case until Mr. Gill’s estate was opened and a representative appointed. Id.

        • On March 15, 2021, counsel for Ms. Gill informed the court that she was officially appointed as the representative of Jagmail S. Gill’s estate, and the court reopened the case. Dkt. 30.

What does this Mean?

It means the Government learned that the individual defendant has passed and wanted a substitute personal representative to be appointed to represent the estate as the government would still pursue its claim against the estate.

Defendant Claims FBAR Penalties Do Not Survive Death

        • On the same day counsel informed the court about the appointment of Ms. Gill as the representative of the Estate, the Estate filed its motion to dismiss. Dkt. 31. In the motion, the Estate argues that in the Fifth Circuit, survivability of claims under a federal statute turns on whether the “primary purpose” of the statute is remedial or penal; if it is remedial, it survives death, and if it is penal, it does not. Id.

        • The Estate contends that the primary purpose of FBAR Penalties is to redress and deter general wrongs to the public and not individual wrongs. Dkt. 31.

        • The Estate asserts that the penalties provide a recovery to the public, in general, not individual restitution, and that they are disproportionate to the alleged harm suffered by the Government, which, under the test the Estate contends applies, equates to the statute have a penal rather than remedial primary purpose. Id.

        • The Estate asserts that because the statute’s primary purpose is penal, the Government’s claims against Mr. Gill went away when Mr. Gill died, and the claims against Mr. Gill’s Estate should therefore be dismissed.

What does this Mean?

The Defendant appointment a representative in order to defend the action against the estate, along with making a motion to dismiss the case based on the fact that FBAR penalties are designed to “redress and deter general wrongs” — and this does not survive the death of the individual Taxpayer.

Government Claims FBAR Penalties Survive Death

        • The Government argues that FBAR Penalties survive death pursuant to 28 U.S.C. § 2404. Dkt. 32. It argues, in the alternative, that FBAR Penalties are remedial, that the opinions of other courts that have held that they are remedial are persuasive and well-reasoned, that the penalties compensate the Government for harm, and that the cases relied upon by the Estate are not applicable. Id. In reply, the Estate argues that 28 U.S.C. § 2404 is procedural and does not relate to the actual merits of the claim. Dkt. 33.

        • As to the Government’s other arguments, the Estate contends that the Government ignores critical cases and that its response does not alter the fact that the factors considered by the Fifth Circuit weigh in favor of finding that the non-willful FBAR Penalties were extinguished by Mr. Gill’s death. Id.

What does this Mean?

The Government argues the penalty for FBAR is remedial and therefore are designed to compensate the government for harms done — and would survive death of individual Taxpayer defendant.

Court Rules for Government that FBAR Penalties May Survive Death

        • The Government argues that its claims survive Mr. Gill’s death under 28 U.S.C. § 2404 because it brought the claims before Mr. Gill died. Dkt. 32. Under this statute, a “civil action for damages commenced on or behalf of the United States or in which it is interested shall not abate on the death of a defendant but shall survive and be enforceable against his estate as well as against surviving defendants.” 28 U.S.C. § 2404. The United States contends that the FBAR penalties are “damages” within the meaning of this statute because they are remedial in nature and that the claims thus survive Mr. Gill’s death. Dkt. 32.

        • The Estate contends that § 2404 is a procedural rule allowing a civil action to continue against a defendant’s estate. Dkt. 33. It asserts that the U.S. Supreme Court has held that an action against a deceased party cannot continue unless it is one that survives by law, and in the Fifth Circuit that requires that its primary purpose be remedial and not penal. Id.

        • It points out that the Government was not required to refile its civil action against the defendant’s estate under § 2404, which has nothing to do with whether the underlying claim survives death. Id.

        • Whether a federal statutory claim survives the death of the defendant (survivability) is a matter of federal law. In re Wood, 643 F.2d 188, 190 (5th Cir. 1980); cf. Carlson v. Green, 446 U.S. 14, 23, 100 S. Ct. 1468 (1980) (“Bivens actions are a creation of federal law and, therefore, the question of whether respondent’s action survived Jones’ death is a question of federal law.”); Burks v. Lasker, 441 U.S. 471, 476, 99 S. Ct. 1831 (1979) (“Since we proceed on the premise of the existence of a federal cause of action, it is clear that our decision is not controlled by [Erie].” (cleaned up)).

        • “It has long been established that causes of action predicated on penal statutes do not survive . . . death, . . . whereas remedial damage actions do survive.” In re Wood, 643 F.2d at 190 (citing Schreiber v. Sharpless, 110 U.S. 76, 3 S. Ct. 423 (1884) (“At common law, actions on penal statutes do not survive.”)) (discussing whether a claim under the Bankruptcy Act survived the debtor’s death); see Malvino v. Delluniversita, 840 F.3d 223, 229 (5th Cir. 2016) (“The general rule for the survivability of federal statutes is that penal statutes do not survive, whereas remedial statutes do.” (citing In re Wood and Schreiber)).

What does this Mean?

The court ruled in favor of the Government on Defendant’s Motion to Dismiss. The Court concluded the case was brought timely and based on the arguments and case law relied on by the Government, that overall their position was more persuasive — and that the primary purpose of the penalties is remedial, and hence survives death.

In Re Wood Test

      • The Estate primarily relies on the In re Wood test, which it contends establishes that the primary purpose of FBAR Penalties is punitive and the penalties should therefore not survive death. It argues that the question is not whether any aspect of the statute is remedial, but whether the primary purpose is. Dkt. 31.

      • It asserts that the U.S. Supreme Court has held that even if a statute has some remedial purpose, if there is also a retributive or deterrent purpose, the statute is punitive. Id. (citing United States v. Bajakajian, 524 U.S. 321, 329, 118 S. Ct. 2028 (1998) (holding that a forfeiture of currency under 18 U.S.C. § 982(a)(1) constitutes punishment); and Austin v. United States, 509 U.S. 602, 610, 113 S. Ct. 2801 (1993) (noting, after setting forth significant historical context, that “forfeiture generally and statutory in rem forfeiture in particular historically have been understood, at least in part, as punishment”)).

      • The Government asserts that all courts that have considered this issue have concluded that FBAR Penalties survive death because they are more remedial than punitive. Dkt. 32 (citing Estate of Schoenfeld, 344 F. Supp. 3d at 1370; Green, 457 F. Supp. 3d at 1272; United States v. Park, 389 F. Supp. 3d 561, 575 (N.D. Ill. 2019); Wolin, No. 2020 WL 6481477).

      • Additionally, others have found that the United States may pursue FBAR assessments against the heirs of non-reporting account holders, though these cases did not address the remedial versus punitive paradigm. Id. (citing United States v. Garrity, 304 F. Supp. 3d 267 (D. Conn. 2018); United States v. KelleyHunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017)).

Motion to Dismiss Denied at This Stage Only

The court notes that the ruling is based on the Motion to Dismiss:

      • Since at the motion to dismiss stage and ambiguities must be resolved in favor of the non-movant, the court finds that given the “close call” nature of this question, the doubt should be resolved in favor of the Government.

      • Because this is a close call and ambiguities in the law must be resolved in favor of the plaintiff, the court finds that the purpose of the statute is primarily remedial and the claim therefore survives Mr. Gill’s death.

      • The Estate’s motion to dismiss (Dkt. 31) is DENIED.

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