Paul L. Caron

Friday, August 11, 2023

Weekly SSRN Tax Article Review And Roundup: Kim Reviews Yin’s The Supreme Court’s Misinterpretation Of The FBAR Statute

This week, Young Ran (Christine) Kim (Cardozo; Google Scholar) reviews George K. Yin (Virginia), Of Blind Men, Elephants, and the Supreme Court's Misinterpretation of the FBAR Statute:

Kim (2023)

The United States Supreme Court recently addressed whether a non‑willful penalty under FBAR accrues on a per‑report or per‑account basis in the case of Bittner v. United States. Bittner was a dual citizen unaware of his responsibility to file a report called a Report of Foreign Bank and Financial Accounts (FBAR) under the Bank Secrecy Act from 2007 through 2011. Bittner failed to report 272 accounts in those five years—61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. The government interpreted the language of the non‑willful penalty as per account and imposed a fine of $2.72 million. 

Bittner challenged this interpretation, arguing that the penalty applies per each annual report, and thus the fine should only equal $50,000 for the five missing years. In a 5‑4 decision the Court held that the penalty accrues on a per‑report, not per‑account, basis.

George K. Yin (UVA)'s recent essay, Of Blind Men, Elephants, and the Supreme Court's Misinterpretation of the FBAR Statute, criticizes the majority opinion of Bittner led by Justice Gorsuch. I think Justice Gorsuch has excellent proficiency in administrative law. In many instances, I’ve looked at his clever use of the major questions doctrine with admiration. Nonetheless, what troubles me is his lack of consistency. I did not think this issue had seriously come to the fore until the Supreme Court finally took up the tax case, Bittner. I had a chance to discuss Bittner briefly in my recent paper, Tax Reporting as Regulation of Digital Financial Market, which made me wonder whether Justice Gorsuch is really a textualist. Yin's essay confirmed my suspicions—that is, Bittner is another case of Justice Gorsuch's inconsistency.    

The majority reasoned that since the statutory language for "willful" violations was clearly per account (31 U.S.C. ⸹ 5321(a)(5)(C), (D)), the absence of the same type of language for "non‑willful" breaches (31 U.S.C. ⸹ 5321(a)(5)(A), (B)) demonstrates Congress's intent to make it a more uniform penalty. As further support, the majority also discussed various “contextual clues” such as IRS fact sheets and form instructions repeating that the maximum penalty was $10,000 and the unfair results between non‑willful and willful violations if a per‑account rule was adopted.

Let's pause here. First, do you agree to the above reason that willful violations are per account basis because the statute says so whereas non-willful violations in the same provision of law are suddenly per report basis because the statute says nothing about accounts? Justice Gorsuch, who wrote the majority opinion, clearly does and suggests that such omission of the word "account" for non-willful breaches demonstrates Congress's intent. It is surprising that Justice Gorsuch, who is known as a textualist, would invoke legislative intent and contextual clues to bolster his conclusion.

Second, does the statute really say nothing about the “account” in cases of non-willful violations as Justice Gorsuch interprets? The dissent disagrees, and so does Yin. The term, “account,” is used in two places in the statute. One place dealt with willful violations of the disclosure requirement, as noted above. 31 U.S.C. ⸹ 5321(a)(5)(C), (D). The other place concerned a “reasonable cause” exception to the penalty for non‐willful violations if the failure to report properly was due to a reasonable cause and the balance in the “account” was stated correctly. 31 U.S.C. ⸹ 5321(a)(5)(B)(ii). This exception was potentially applicable in Bittner’s case. Yin explains that “if he had filed a late report of an account but the tardiness was due to a reasonable cause and the account balance was stated correctly, he might have escaped paying any penalty whatsoever for his delinquency.” Yin continues that this structure of the provision on non-willful violations is very common in the U.S. Code—a general rule followed by an exception applicable only in certain circumstances. “Since the exception by its terms requires an account-specific determination, it certainly suggests that the penalty itself—the general rule—must be similarly interpreted. If that were not the case, there would be no way to calculate the proper penalty when there is an improper filing and some, but not all, of the accounts reported satisfy the exception.” Such a reading in the dissent's conclusion does not require a great legal mind nor textualism. It only requires "a dollop of common sense."

Yin argues that Justice Gorsuch views the statute as “a mere collection of words and not a coherent whole serving a particular function in the law.” Such an interpretive technique may be understandable if the statute is simply incomprehensible—a notorious feature of tax law. But that was not the case in Bittner, which involved a short and straightforward statutory provision. The penalty for willful violations is calculated on a per account basis. The penalty for non-willful violations with reasonable exceptions is also calculated on a per account basis. It would follow that the proper reading of how to calculate the penalty of a non-willful amount without reasonable exceptions would be per account basis as well. Yin criticized that if, “rather than just performing a keyword search on the assemblage of statutory words,” Justice Gorsuch and the majority had “instead examined the operative penalty provision as a whole . . . and considered its function in the law,” they would have drawn a different interpretation.

In her dissent in West Virginia v. EPA Justice Kagan wrote: "The current Court is textualist only when being so suits it. When that method would frustrate broader goals, special canons like the ‘major questions doctrine’ magically appear as get-out-of-text-free cards." Bittner is not a case about the major questions doctrine. But as Yin elegantly implies in his essay, Justice Gorsuch and the majority once again lack consistency in interpreting the statute. Despite the majority’s shortcomings, I sympathize with the portion of the opinion in which only Justice Jackson joined, describing how the rule of lenity further supported his view. At the very least, that portion of the opinion shows consistency and candor.

Here’s the rest of this week’s SSRN Tax Roundup:

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