FinCEN Adopts Immediately Effective Final Rule Omitting the Regulations Statement of the 2004 Willful Penalty Prior to the 2004 Statutory Amendment (12/26/21)

Readers may recall that the FBAR willful penalty, as amended in 2004, provides a maximum penalty of the greater of $100,000 or 50% of the amount in the account on the reporting date.  31 U.S.C. §5321(a)(5)(C).  Prior to 2004, the maximum willful penalty was $100,000.  After the 2004 amendment, FinCEN did not amend the regulation, 31 CFR § 1010.820(g), to reflect the change in the statute.  After the amendment, creative lawyers pursued the argument that, by leaving the regulation in tact, FinCEN exercised its discretion under the amended statute to maximize the FBAR willful penalty at $100,000 and thus could not assert a higher penalty under the amended statute.  That argument finally failed.  E.g., Norman v. United States, 942 F.3d 1111, 1117-1118 (Fed. Cir. 2019).

FinCEN has deleted subsection (g), thus eliminating any confusion (real or feigned) about the effect of the statutory amendment.  The Final Rule states that it is immediately effective on the date issued (12/23/21).  See 86 FR 72844, 72844-72845, here.

I have no idea why FinCEN took so long to make that deletion.

JAT Notes:

What is the effect of stating an effective date of 12/23/21?  Why didn’t FinCEN just state that the effective date was the 2004 amendment effective date?  Certainly, the deleted subsection (g) had been effectively deleted by 2004 amendment, as recognized by the court opinions prior to 12/23/21.

While I can't provide a definitive answer as to FinCEN's reasoning, I will step through my analysis.:

1. Regulations interpreting a statute (known as interpretive regulations) may generally be effective retroactively to the effective date of the interpreted statute.  For IRS regulations, there are some constraints on retroactivity in § 7805(b) and (e).  But that provision does not apply to FinCEN regulations promulgated under Title 31, which includes the FBAR penalties, and there is no similar limitation for Title 31 rulemaking.  For a discussion of retroactivity, see my SSRN article, John A. Townsend, The Report of the Death of the Interpretive Regulation Is an Exaggeration 47-51 (SSRN 3400489 as Updated 12/14/21), SSRN Abstract here with a link to the pdf of the article for viewing or download.  Based on this understanding of the law, FinCEN could have made the amended regulation retroactive to the effective date of the 2004 amendment of the statute.

2.  Readers aware of my many ruminations on the distinction between legislative and interpretive regulations may recognize that the legislative/interpretive issue is implicit in my statement in paragraph 1 above.  Was the Final Rule adopted 12/23/21 a legislative or interpretive regulation?  The Final Rule adopted 12/23/21 did not meet the classic definition of a legislative regulation – one that adopts new law beyond the reasonable interpretive scope of any ambiguity in the statute.  This Final Rule amending the regulation to eliminate a subsection which was already ineffective as of the date of the 2004 amendment to the statute did not create new law.  So, it is not a legislative rule.  Indeed it functions as an interpretation of the law (just as the courts such as Norman did),  

As an aside to that point, the original regulation interpreting the statute prior to the 2004 amendment was not a legislative regulation either.  All it did was to state what the pre-2004 statute said, without interpretive spinning on the statute.

3. The Final Rule adopts a “Good Cause” Statement which is required to make a legislative regulation effective immediately.  Administrative Procedure Act ("APA" fans will recall that a legislative regulation may only be effective 30 days after publication in the CFR. 5 U.S.C. § 553(d).  Legislative rules (must be regulation) may be effective immediately upon publication with a “Good Cause” Statement.  5 U.S.C. § 553(b)(B).  So, did FinCEN believe it was adopting a legislative rule?  I don’t know.  (I wonder if FinCEN could be operating similarly to the IRS policy statement for regulations where it committed to adopting a Good Cause statement even for immediately effective interpretive rules (even though the APA does not mandate a Good Cause Statement.  See Treasury and IRS Policy Statement on Tax Regulatory Process (Federal Tax Procedure Blog 3/17/19; 4/19/20, here.))  And, beyond that, even beyond immediate effectiveness, interpretive regulations can be retroactive to the date of the statute subject to any limitations Congress may impose (such as § 7805(b) for tax regulations).

4. In classic administrative law and APA theory, an interpretation of the statute within the scope of the ambiguity in the statute from the original enactment of the statute, is not the law.  The statute is the law.  The interpretation may be effective to the effective date of the statute whether or not it is in an interpretive regulation.  Merely putting an interpretation in an interpretive regulation does not preclude retroactivity of the interpretation.  All it may do is to make an interpretive regulation invalid if it violates some statutory limitation on regulations (such as, for tax regulations, § 7805(b)) and invalidation of the regulation would at most preclude Chevron deference.  But the interpretation survives and may apply.  See my article above at pp. 108-109.  And, as I note in the article and particularly the Postscript to the article (Postscript only is here), losing Chevron deference is not as big a deal as people think because, in my analysis, Chevron deference is rarely outcome determinative anyway.

5. All of that is to say that the effective date stated in FinCEN’s final rule makes no sense but is harmless.  I guess that should bring some comfort to those who claim to hate Chevron deference (for principled or political reasons).

6.  Added 12/26/21 2:00pm:  I suppose one explanation for making the change effective on 12/21/23 rather than retroactively is that not only was subsection (g) omitted but subsections (h) and (i) were elevated to (g) and (h) respectively.  Thus for those relying on the latter subsections (those elevated), the pre-elevation subsections would be the applicable subsections in the period prior to the Final Rule.  Thus, perhaps, although not fitting nicely into APA and administrative law theory, perhaps the effective date provision was a practical solution.

This blog entry is cross-posted on the Federal Tax Crimes Blog, here.