Source: https://www.kpateloffice.com/mmf-fighter-fbar-penalty-suit/
Timestamp: 2019-04-22 08:55:40+00:00

Document:
8 What should non-compliant taxpayers do?
A mixed martial artist and his spouse challenge over $210,000 in penalties for failing to report foreign bank accounts in U.S. v. Royce Gracie and Marianen Cuttic (2:17-cv-3308).
On the heels of last year’s Colliot and Wahdan decisions, Gracie and Cuttic filed for motion for partial summary judgment on 12/11/2018, arguing that a 1986 regulation (31 CFR § 1010.820(g)) caps civil penalties for willful FBAR violations to $100,000. The Government recently filed its response.
(2) In the case of a violation of § 1010.350…involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, 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.
During the years 2007 through 2009, defendants had a foreign bank account, including an investment account, at HSBC bank, located in Switzerland, and a foreign bank account at Caixa Penedes bank, located in Spain. The high balance in the Swiss account for each of the years 2007 through 2009 was over $1 million.
In August 2009, the defendants closed the Swiss account, and opened a bank account at First Gulf bank, located in the United Arab Emirates.
On August 11, 2009, defendants transferred approximately $1.4 million from the Swiss account to the UAE account.
Defendants held funds in the Spanish account and the UAE account during the years 2009 through 2012. The high balance in the UAE account was over $1 million in 2009 and 2010, and the high balance in the UAE account was over $500,000 in 2011 and 2012.
Defendants did not file FBARs disclosing their foreign accounts for the years 2007 through 2012.
Defendants filed joint individual federal income tax returns (Forms 1040) for the years 2007 through 2012. The tax returns were prepared by the same tax return preparer, D.P., located in Hermosa Beach, California.
On Schedule B to their 2007, 2011, 2012 Form 1040, defendants falsely stated that then did not a have an interest in any foreign bank account in 2007.
During the years 2007 through 2011, defendants transferred by wire transfer approximately $2 million from their foreign bank accounts to pay personal expenses in the United States, including to pay for residential real estate purchases and credit card expenses.
In 2010, defendants wired approximately $500,000 from the UAE account to an account in the United States to fund the purchase of residential real estate in Mammoth Lakes, California.
In 2011, defendants wired approximately $20,000 from the UAE account to American Express credit card company in the United States.
In May 2012, while under audit by the Internal Revenue Service, defendant Royce Gracie, falsely stated within the judicial district, under penalty of perjury, that during the years 2001 through 2012 he had no interest in any foreign bank account.
In May 2012, while under audit by the Internal Revenue Service, defendant Marianne Cuttic, falsely stated within the judicial district, under penalty of perjury, that during the years 2001 through 2012 she only had an interest in one foreign bank account, located in Spain.
On about May 8, 2015, the IRS assessed willful FBAR penalties against defendants Royce Gracie and Marianne Cuttic each in the total amount of $210,081.75 for the year 2008. Penalties were assessed with respect to their interests in foreign bank accounts at Caixa Penedes (Spain) and HSBC (Switzerland).
Prior to October 2004, 31 U.S.C. § 5321(a)(5) allowed the Treasury Secretary to impose civil penalties for failing to file an FBAR in the amount of $25,000 or the balance of the unreported account up to $100,000. The corresponding Treasury regulation (31 C.F.R. § 103.57), which was issued via notice and comment, was in accordance with the statute.
In 2004, Congress amended § 5321 to increase the maximum penalty for a willful FBAR violation. The maximum penalty that can be imposed for a willful violation is the greater of $100,000 or 50% of the amount in the account on the date of the violation.
Congress changed the statute, but the Treasury affirmatively kept the regulations in place, capping a willful FBAR violation at $100,000. FinCen subsequently renumbered the regulations, and § 103.57 became § 1010.820.
So, as we have it, the regulation was never updated to increase the cap on FBAR penalties, even though the 2004 statute was updated.
The government argues that the 1986 regulation and its purported $100,000 penalty cap have been superseded by statute.
Alternatively, 31 C.F.R. § 1010.820(g) continues to establish a maximum FBAR penalty amount of $100,000, it does so on an individual penalty and per-account basis; it does not provide an aggregate cap for penalties based on a defendant’s failure to report multiple foreign accounts.
That Colliot and Wahdan did not support an aggregate limit on FBAR penalty assessments because both cases dealt only with FBAR penalties that individually exceeded $100,000.
We hope that the court seriously considers defendants’ affirmative argument that FBAR fines are a violation of the 8th Amendment’s prohibition of excessive fines.
The Government’s interest in FBARs is two fold: 1.) prevention of tax evasion and 2.) information.
Tax evasion. In the vast majority of cases, the FBAR penalty is grossly disproportionate to the Title 26 violation(s). FBAR penalties are not correlated at all to the amount of unpaid tax; they’re assessed on the amount of monies in the foreign account, the source of which is oftentimes previously taxed income, or non-taxable income. Moreover, there are a multitude of Title 26 penalties that are available and applied along with FBAR penalties – failure-to-pay, accuracy penalties, civil fraud penalties, and information related penalties (6038D, etc). In short, there are sufficient penalties available under Title 26 without the need for stacking on FBAR penalties for tax evasion.
Information. According to the BSA, the FBAR is used to “fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.” In probably 99% of cases where taxpayers have failed to file an FBAR, they are not involved in any of these nefarious activities, and the Government has not been deprived of any important information. Yet, these taxpayers are subject to enormous FBAR penalties for failing to file an information form.

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