Court Holds Defendant in FBAR Suit Alleging No Deficiency in Tax for Excessive Fines Argument Must Prove Deficiency Despite Tax Court No Deficiency Decision (4/1/22)

In United States v. Kerr, 2022 U.S. Dist. LEXIS 57004 (D. Az. 3/29/22), GS here and CL here, Government brought suit to collect an FBAR civil willful penalty. The Government conceded error in the calculation and submitted revised much lower calculations. The Court invoked the APA to remand the matter to the IRS for recalculation with a more robust explanation. Whether remand to the IRS can result in a valid FBAR assessment is yet to be determined.

I focus on Kerr’s claim that the FBAR civil willful penalty assessments violated the Eighth Amendment prohibition on Excessive Fines. This claim is often made in FBAR civil willful penalty cases, but it have never been made successfully so far as I am aware. Kerr also failed here.

I include the Court’s discussion in its entirety (Slip Op. 15-17, one footnote omitted) because it discusses the lack of preclusive effect for a stipulated no deficiency decision in the Tax Court without any judicial resolution of the issues behind the no deficiency stipulation.

c. Whether the Assessment Violates the Eighth Amendment

             Although the Court will only enter judgment on three of the penalties made in the Original Assessment, it will consider Mr. Kerr's argument that the FBAR penalties violate his rights under the Eighth Amendment. The Eighth Amendment provides that no “excessive fines” shall be imposed. U.S. Const. amend. VIII. A punitive forfeiture violation is excessive “if it is grossly disproportional to the gravity of a defendant's offense.” United States v. Bajakajian, 524 U.S. 321, 334 (1998). Although no court has expressly held that civil FBAR penalties constitute a fine under the Eighth Amendment, the Court will assume, without deciding, that they are. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (evaluating whether FBAR penalties are “grossly disproportional” to the gravity of the defense under the Eighth Amendment).

             Mr. Kerr bears the burden of showing that the civil penalties are grossly disproportional. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014). Courts show substantial deference to legislative bodies when reviewing statutorily established penalties. Bajakajian, 524 U.S. at 334; Solem v. Helm, 463 U.S. 277, 290 (1983). In Bajakajian, the Court considered several factors in determining whether a fine was excessive including the nature of the conduct, the resulting harm, and whether other penalties may be imposed. 524 U.S. at 336-38; see also United States v. Bussell, 2015 WL 9957826, at *7 (C.D. Cal. Dec. 8, 2015). The Ninth Circuit has noted that these Bajakajain [sic] factors are not “rigid” and so courts are not limited to these considerations. United States v. Mackby, 339 F.3d 1013, 1016 (9th Cir. 2003).

             Under these factors, Mr. Kerr argues that the penalty is grossly excessive because (1) the only crime he committed was willfully failing to report the accounts, (2) this failure was unconnected to other criminal activity, (3) that other criminal penalties already exist for this conduct, and (4) that “the government suffered no injury as it stipulated that [Mr.] Kerr did not underreport his tax liabilities.” (Doc. 47 at 25).

             The stipulation that Mr. Kerr references is a stipulated decision issued by the United States Tax Court stating that “there are no deficiencies in income tax due from, nor overpayment due to” Mr. Kerr for the taxable years 2007 and 2008. (Doc. 47-15 at 1). Plaintiff avers that when it entered into this stipulation it “only agreed to concede the income tax deficiencies because of a procedural argument [Mr.] Kerr raised concerning the Federal Rules of Evidence.” (Doc. 48 at 20-21). The stipulation, Plaintiff argues, does not actually establish that Mr. Kerr accurately reported his tax liabilities because it has no preclusive effect. (Id. at 20) (citing Arizona v. California, 530 U.S. 392, 415 (2000) (noting that stipulated Tax Court judgments have no preclusive effect unless the court actually reached an adjudication of the merits)); see also United States v. Int'l Bldg. Co., 345 U.S. 502, 506 (1953) (“[U]nless we can say that [the stipulated Tax Court judgments] were an adjudication of the merits, the doctrine of estoppel by judgment would serve an unjust cause: it would become a device by which a decision not shown to be on the merits would forever foreclose inquiry into the merits.”).

             Mr. Kerr does not dispute that the stipulation cannot be used here to demonstrate that Mr. Kerr underreported his tax liabilities. Instead, he argues that Plaintiff “offers zero evidence to refute Kerr's assertion that the government suffered no tax loss.” (Doc. 51 at 10-11). However, it is Mr. Kerr, not Plaintiff who bears the burden of showing the FBAR penalties are grossly excessive, and so it is Mr. Kerr who carries the burden of showing that the government has not suffered a tax loss. See $132,245.00 in U.S. Currency, 764 F.3d at 1058. Therefore, the Court finds that Mr. Kerr has not demonstrated that Plaintiff did not suffer a tax loss. See Int'l Bldg. Co. 345 U.S. at 506 (“A judgment entered with the consent of the parties may involve a determination of questions of fact and law by the court. But unless a showing is made that that was the case, the judgment has no greater dignity, so far as collateral estoppel is concerned, than any judgment entered only as a compromise of the parties.”).

             In total, given the presumption that a statutory penalty is not excessive, and given that Mr. Kerr has not shown that Plaintiff did not suffer any loss in tax revenue as a result of his actions, the Court finds that Mr. Kerr fails to demonstrate that the FBAR penalties are grossly disproportional to his conduct. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (holding that an FBAR assessment was not grossly disproportionate because defendant “defrauded the government and reduced public revenues”).

 A related type of issue with a similar resolution occurred in a case I discussed earlier where the IRS conceded the deficiency adjustments. Tax Court Judge Gustafson Enters Order Permitting IRS to Concede Without Merits Decision (Federal Tax Procedure Blog 11/6/21), here, discussing an order in in Puglisi v. Commissioner (T.C. Dkt Nos. 4796-20, 4799-20, 4826-20, 13487-20, 13488-20, 13489-20 Order served 10/29/21), here.  There in an apparent attempt to avoid a decision that might be precedent for other taxpayers and preclusive for the particular taxpayer, the IRS conceded that adjustments (permitting a no deficiency decision as to the main adjustments in dispute related to microcaptive insurance companies.

I have not done independent research on this issue (at least not recently).  I wonder if the Kerr holding is correct as to no preclusive effect for a stipulated decision without merits judicial resolution.  I would think that, for the bottom effect of the Tax Court no deficiency decision, the issue of the taxpayer's liability for tax would be preclusive.  Certainly, as to resolution of underlying microcaptive issues in Puglisi, it should not be preclusive in litigation against the taxpayers there, but I would think that it should be preclusive, at least against the Government, as to whether there was any deficiency in Publisi.  But, this is just an off-the-cuff comment.  I have not done the research.  I would appreciate hearing from those that have done the research or thinking through that issue.