Flora Rule and FBAR PenaltyFlora Rule & FBAR Penalty Federal Court Litigation: When it comes to the FBAR, it seems like the IRS and US government hold all the cards. By way of brief background, the FBAR is not a Tax Form. Rather, it is an international reporting form required by FinCEN. FBAR is not covered under US code title 26 (Internal Revenue Code), but rather under title 31 which is the Money & Finance code. In addition, FBAR penalties are not based on a Taxpayer being out of compliance for tax filings. And, non-willful FBAR penalties are not eve. based on the amount in the account (although the account value does go towards the annual penalty cap). If a taxpayer does get hit with an FBAR Penalty, they are unable to litigate FBAR penalties in Tax Court — since it is not actually a tax debt, but rather a penalty. The question then arises as to whether or not the taxpayer must first pay the full amount of the FBAR debt first — before initiating federal litigation. In the case of Mendu vs US, the US Court of Federal Claims rejected the government’s claim that the taxpayer must first pay the full amount of the penalty before challenging the assessment. Let’s take a look at Mendu vs. US and how the Flora Rule and FBAR intersect:
Mendu vs US (No. 17-cv-738 T)
This case arises out of the assessment of penalties against Plaintiff, Raghuveer Mendu, under 31 U.S.C. § 5311 et seq. (the Bank Secrecy Act or BSA), for alleged failure to timely file reports of foreign bank accounts — commonly known as FBAR penalties.
As discussed infra, this case has a complicated procedural history. On June 2, 2017, Plaintiff filed an action in this Court challenging the assessment of a $752,920 FBAR penalty.
Under 31 U.S.C. § 5321(a)(5) (willful FBAR penalty). Crucially, Plaintiff made only a partial payment of $1,000 against the FBAR penalty before filing his complaint. Complaint (ECF No. 1) (Compl.) ¶ 6. Thus, Mr. Mendu challenges the assessment of the $752,920 FBAR penalty via an illegal exaction claim in which he seeks to recover the $1,000 payment from Defendant United States. Id. ¶¶ 5-6
What is the Flora Rule?The Court in Mendu summarized the Flora Rule as follows:
As explained further below, the well-established Flora “full payment rule” requires a plaintiff to make payment of the full tax amount before a suit for the refund of “any internal revenue tax” can be brought in this court. See Diversified Grp., Inc. v. United States, 841 F.3d 975, 981 (Fed. Cir. 2016) (citing Flora v. United States, 362 U.S. 145, 177 (1960) and discussing Flora’s “full payment rule”).
At issue in the present case is whether FBAR penalties are internal revenue taxes.
If FBAR penalties are internal-revenue taxes, then the Flora full payment rule applies, and this Court lacks jurisdiction since Plaintiff has not paid the full FBAR penalty assessed against him.
Conversely, if FBAR penalties are not internal-revenue taxes, then the Flora full payment rule does not apply, and this Court has jurisdiction over Plaintiff’s $1,000 illegal exaction claim.
What does the Court Rule re Flora?
This Court holds that FBAR penalties are not internal-revenue taxes and, therefore, are not subject to the Flora full payment rule. Accordingly, this Court holds that it has jurisdiction over Plaintiff’s illegal exaction claim.
Because jurisdiction exists, this Court further holds that it cannot dismiss Plaintiff’s complaint over Defendant’s objection pursuant to Rule 41(a)(2) or transfer Defendant’s counterclaim to a district court under 28 U.S.C. § 1631.
Accordingly, the Court DENIES Plaintiff’s Motion to Dismiss under Rule 7(b)(1) (ECF No. 30), DENIES Defendant’s Cross-Motion to Transfer Venue (ECF No. 34), and DENIES Plaintiff’s Motion to Dismiss under Rule 41(a)(2) (ECF No. 47).