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Wadhan v. United States – Another District Court Opinion Following Colliot and Limiting FBAR Penalty

United States v. Colliot, Defendant., U.S. District Court, W.D. Texas, 2018-1 U.S.T.C. ¶50,259, (May 16, 2018) – District Court Holds FBAR Penalty Limited



BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause,
and specifically, Defendant Dominique Colliot’s Motion for Summary Judgment [#52], the
United States of America (the IRS)’s Response [#57] in opposition, Colliot’s Reply [#58] in
support, and the IRS’s Surreply’ [#59-2] in opposition as well as Colliot’s Unopposed Motion to
Modify Order on Prejudgment Writ of Garnishment to UBS [#6 1]. Having reviewed the
documents, the relevant law, and the case file as a whole, the Court now enters the following
opinion and orders.
In December 2016, the Internal Revenue Service (IRS) initiated this lawsuit to reduce to
judgment outstanding civil penalties assessed against Colliot. Compi. [#1] at 1. The penalties
were assessed for Colliot’s repeated and willful failures to timely file Form TD F 90-22.1,
entitled “Report of Foreign Bank and Financial Accounts” and commonly referred to as an
“FBAR,” from 2007 to 2010. Mot. Summ. J. [#52]. For 2007, the IRS assessed penalties of
The Court herein considers the arguments raised in the surreply and the IRS’s Motion for Leave to File
Surreply [#59] is GRANTED. Additionally, the IRS’s Motion for Extension of Time to File Response [#55] and
Motion to Withdraw Motion for Extension of Time to File Response [#56] are both DISMISSED as moot.
United States of America v. Coliot Doc. 62
$548,773 for four separate FBAR violations. Resp. Mot. Summ. J. [#57] at 15. For 2008, the IRS
assessed penalties of $196,082 for another four FBAR violations. Id. at 16. The IRS also
assessed smaller penalties in 2009 and 2010. Id. at 17. In forms provided to Colliot in connection
with the assessment of these penalties, the IRS stated the penalties were authorized under
31 U.S.C. § 5321(a)(5) and 31 c.F.R. § 1010.820(g)(2). Mot. Summ. J. [#52-12] Ex. L at 2.
These underlying facts are not in dispute. Colliot now moves for summary judgment on the
ground the IRS incorrectly applied the law when it calculated the monetary penalties assessed
against Colliot. Mot. Summ. J. [#52]. This pending motion is ripe for review.
I. Motion for Summary Judgment
A. Legal Framework
To understand Colliot’s argument, it is first necessary to briefly review the history of the
provision used to impose civil penalties upon Colliot, 31 U.S.C. § 532 1(a)(5). A previous version
of § 532 1(a)(5) allowed the Secretary of the Treasury to impose civil monetary penalties
amounting to the greater of $25,000 or the balance of the unreported account up to $100,000. See
Resp. Mot. Summ. J. [#57] at 2. A related regulation promulgated by the Department of the
Treasury via notice-and-comment rulemaking, 31 C.F.R. § 103.57, reiterated that “[f]or any
willful violation committed after October 26, 1986 . . . the Secretary may assess upon any
person, a civil penalty[] . . . not to exceed the greater of the amount (not to exceed $100,000)
equal to the balance in the account at the time of the violation, or $25,000.” Amendments to
Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987).
In 2002, the Treasury delegated the authority to assess penalties under § 532 1(a)(5) to the
Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697
(2002). In addition to this delegation of enforcement authority, Treasury Order 180-01 provided
that related regulations were unaffected by this transfer of power and should continue in effect
“until superseded or revised.” Id. Roughly six months later, FinCEN redelegated the authority to
assess penalties under § 532 1(a)(5) and its related regulation, § 103.57, to the IRS. Mot. Summ.
J. [#52-5] Ex. E (Memorandum of Agreement and Delegation of Authority for Enforcement of
FBAR Requirements).
In 2004, Congress amended § 5321 to increase the maximum civil penalties that could be
assessed for willful failure to file an FBAR. 31 U.S.C. § 532 1(a)(5); American Jobs Creation Act
of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). Under the revised statute, the civil
monetary penalties for willful failure to file an FBAR increased to a minimum of $100,000 and a
maximum of 50 percent of the balance in the unreported account at the time of the violation.
31 U.S.C. § 5321(a)(5)(C).
Despite this change, the regulations promulgated in reliance on the prior version of the
statute remained unchanged. Thus, § 103.57 continued to indicate the maximum civil penalty for
willful failure to file an FBAR was capped at $100,000. FinCEN subsequently renumbered
§ 103.57it is now 31 C.F.R. § 1010.820as part of a large-scale reorganization of regulatory
provisions. It also amended part of the regulation to account for inflation. Civil Monetary Penalty
Adjustment and Table, 81 Fed. Reg. 42503, 42504 (2016). FinCEN did not, however, revise the
regulation to account for the increased maximum penalty now authorized under § 5321 (a)(5). 31
C.F.R. § 1010.820. Nevertheless, the IRS did not let § 103.57 (now § 1010.820) constrain its
enforcement authority, and since 2004, the IRS has repeatedly levied penalties for willful FBAR
violations in excess of the $100,000 regulatory cap. Resp. Mot. Summ. J. [#57] at 3.
B. Application
Under 5 U.S.C. § 706(2), a court must hold unlawful and set aside agency actions which
are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
Colliot argues the IRS acted arbitrarily and capriciously by assessing penalties against
Colliot in excess of those allowed by § 1010.820. Mot. Summ. J. [#52] at 4-5 (arguing penalties
imposed in excess of the $100,000 cap set forth in § 10 10.820 are “not in accordance with the
law”). In turn, the IRS argues § 1010.820 is inconsistent with the 2004 amendments to
§ 5321 (a)(5)(C) and was therefore implicitly superseded or invalidated by those statutory
revisions. Resp. Mot. Summ. J. [#57] at 5, 7 (arguing the IRS followed “the actual law” instead
of the agency’s superseded regulation); see also United States v. Larionoff 431 U.S. 864, 873
(1977) (“[I]n order to be valid[,] [regulations] must be consistent with the statute under which
they are promulgated.”). If the amendments to § 5321 (a)(5) vitiated the lower penalty threshold
set out in § 1010.820, then the IRS cannot have acted arbitrarily or capriciously by failing to
apply § 10 10.820 to cap the penalties levied on Colliot.
Unfortunately for the IRS, there is little reason to believe § 5321 (a)(5)(C) implicitly
superseded or invalidated § 1010.820. Section 5321(a)(5) sets a ceiling for penalties assessable
for willful FBAR violations, but it does not set a floor.2 31 U.S.C. § 5321(a)(5). Instead,
§ 5321 (a)(5) vests the Secretary of the Treasury with discretion to determine the amount of the
penalty to be assessed so long as that penalty does not exceed the ceiling set by § 532 1(a)(5)(C).
2 The IRS argues Congress clearly intended to increase penalties for willful FBAR violations when it
amended § 5321(a)(5), and therefore, § 5321 implicitly supersedes § 1010.820. Resp. Mot. Summ. J. [#57] at 9. This
argument is foreclosed by the unambiguous text of § 5321 (a)(5), which allows the Secretary of the Treasury to
assess larger penalties than those provided for by § 1010.820 but ultimately leaves the decision of whether or not to
do so within the Secretary of the Treasury’s discretion. See 31 U.S.C. § 5321 (a)(5) (providing the Secretary of the
Treasury “may impose a civil penalty” falling within the penalty threshold set by § 5321 (a)(5)(C) (emphasis added)).
Id. And § 1010.820a regulation validly issued by the Treasury via notice-and-comment
rulemakingpurports to cabin that discretion by capping penalties at $1 OO,OOO.3 31 C.F.R.
§ 1010.820. Thus, considered in conjunction with § 5321, § 1010.820 is consistent with § 5321’s
delegation of discretion to determine the amount of penalties to be assessed. See US. Pipe &
Foundry Co. v. Webb, 595 F.2d 264, 272 (5th Cir. 1979) (“Regulations are presumed valid
unless they are shown to be unreasonable or contrary to the provisions of the enabling statute.”).
Since § 1010.820 can be applied consistent with § 5321(a)(5), the Court concludes § 5321(a)(5)
does not implicitly invalidate or supersede § 10 10.820.
In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment
rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R.
§ 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via
notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass ‘n, 135 S. Ct. 1199, 1206
(2015) (requiring agencies to “use to the same procedures when they amend or repeal a rule as
they used to issue the rule in the first instance”). Section 1010.820 has not been so repealed and
therefore remained good law when the FBAR penalties in question were assessed against Colliot.
Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to
cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be “in
accordance with law”); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) (“[A]n
agency must abide by its own regulations.”) (citing United States ex rel. Accardi v. Shaughnessy,
347 U.S. 260 (1954)).
If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for
willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For
example, § 1010.820 might have incorporated § 5321 (a)(5) ‘s maximum penalty thresholds by reference, or
alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the
IRS enacted and then left in place the $100,000 penalty cap.
II. Motion to Modify Order on Prejudgment Writ of Garnishment
Colliot also asks the Court to modify its Order on Prejudgment Writ of Garnishment to
UBS [#19]. Mot. Modify [#6 1]. Specifically, Colliot asks the Court 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. Id. [#61] at 2. The funds are otherwise to remain segregated
with UBS under the terms of the original order. Id. The Court finds the terms of these proposed
modifications to the order reasonable and unopposed by the IRS, and therefore the Court grants
Colliot’s request for the modifications specified above. However, 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 agrees with Colliot that the IRS cannot assess penalties in excess of the
threshold set by 31 C.F.R. § 1010.820. However, neither party has briefed the Court on what
relief might be appropriately afforded Colliot in these circumstances, and at this time, the Court
declines Colliot’s unsupported request that the Court dismiss the entire action with prejudice. See
Mot. Summ. J. [#52] at 11. Instead, the Court orders the parties provide additional briefing on
the appropriate next steps in this case.
IT IS ORDERED Colliot’s Motion for Summary Judgment is GRANTED fl’
PART and DENIED 1N PART as described in this opinion;
IT IS FURTHER ORDERED the parties shall within THIRTY (30) days file with
the Court a brief memo of no more than TEN (10) pages regarding whether the Court
should dismiss this case with prejudice and citing to legal authority in support; and
IT IS FINALLY ORDERED that Colliot’s Unopposed Motion to Modify Order
on Prejudgment Writ of Garnishment to UBS [#61] is GRANTED IN PART and
DENIED IN PART as described in this opinion.
SIGNED this the /5y of May 2018.

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