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Senator and others’ challenge to foreign account reporting regime dismissed

Crawford, et al, v. Dept. of the Treasury, et al, (4/26/2016 DC OH) 117 AFTR 2d ¶2016-650

A district court has dismissed a suit brought by Senator Rand Paul (R-KY) and several individual plaintiffs challenging the Foreign Account Tax Compliance Act (FATCA) and Foreign Bank Account Report (FBAR) requirements. The court found that Senator Paul’s alleged diminution of political power was an insufficient injury for purposes of establishing standing to sue, and that the other individual plaintiffs generally asserted largely hypothetical injuries or harms that were not traceable to actions of the U.S. government.

Background — foreign account reporting. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474, FATCA) to the Code. Chapter 4 generally requires withholding agents to withhold a 30% tax on certain payments to an FFI, unless it has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. Withholding can also apply to FFI account holders who refuse to identify themselves as U.S. taxpayers. The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities.

In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model IGAs that facilitate FATCA implementation. The main distinction between the two is that under Model 1 IGAs, foreign governments agree to collect their FFIs’ U.S. account information and send it to IRS, whereas under Model 2 IGAs, foreign governments agree to modify their laws to the extent necessary to enable their FFIs to report their U.S. account information directly to IRS. According to Notice 2015-66, 2015-41 IRB, 112 jurisdictions were treated as having an IGA in effect as of Sept. 18, 2015.

Also enacted as part of FATCA were the “asset value reporting” rules of Code Sec. 6038D, under which individuals holding more than $50,000 of aggregate value in “specified foreign financial assets” must file a report with their annual tax returns that includes, for each asset, the “maximum value of the asset” during the tax year. (Code Sec. 6038D(c)(4))

The Bank Secrecy Act (BSA) gave the Treasury Department authority to collect information from U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the U.S. A provision of the BSA requires that a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) be filed with the Financial Crimes Enforcement Network (FinCEN, a bureau of the Treasury Department) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. Enforcement authority regarding the FBAR has been delegated to IRS, which can impose penalties for noncompliance. Penalties for willful failures to file an FBAR can be as high as $100,000 or 50% of the value of the unreported account.

Background — jurisdiction. The first question in every case brought in federal court is whether the court has jurisdiction, which includes the issue of standing. To obtain standing, a plaintiff must show that it suffered an injury in fact that is fairly traceable to the defendant’s conduct and capable of being redressed by favorable decision from the court.

Standing contains three elements: (i) plaintiffs must have suffered an injury in fact — an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical; (ii) there must be a causal connection between the injury and the conduct complained of — i.e., the injury has to be fairly traceable to the challenged action of the defendant; and (iii) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. ( Lujan v. Defs. of Wildlife, (Sup Ct 1992) 504 U.S. 555 )

Facts. The plaintiffs in this case include Senator Paul, U.S. citizens who live in foreign countries, dual citizens of the U.S. and another country, and former U.S. citizens. The plaintiffs generally challenged the validity of FATCA’s reporting and withholding requirements and the penalty for willfully failing to file an FBAR, and specifically challenged the validity of several countries’ IGAs with the U.S. as exceeding the proper scope of the Executive Branch’s power. They further asserted, among other things, that they faced difficulties in establishing foreign accounts or were forced to divide assets as a result of FATCA, and that various elements of the overall reporting regime were unconstitutional.

In an earlier proceeding, the court denied the plaintiffs’ motion for a preliminary injunction that would prevent the defendants (i.e., the Treasury Department, IRS, and FinCEN) from enforcing FATCA, IGAs negotiated by the Treasury Department, and the FBAR regime. (Crawford, et al, v. U.S. Dept. of Trasury, et al, (09/29/2015 DC OH) 116 AFTR 2d 2015-6288)

Before the court in the instant proceeding was the Defendants’ motion to dismiss for lack of jurisdiction and the plaintiffs’ motion for leave to file an amended complaint. The court analyzed the proposed amendments to the complaint in evaluating the motion.

Case dismissed. The district court granted the Defendants’ motion to dismiss the case, finding that the plaintiffs lacked standing to bring it and that the proposed amendments would be futile.

Senator Paul argued that he had standing based on his institutional duty to advice and consent under the Constitution — i.e., that the IGAs exceeded the scope of the Executive Branch’s power and should have been submitted for Senate approval. The court, however, rejected this argument in the earlier proceeding, and now also rejected the proposed amendment to this part of the plaintiffs’ complaint, which it said amounted to an attempt to base standing on a loss of political power, stating that “a legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public.” Senator Paul also failed to establish any injury.

In addition, with regard to Senator Paul, the court found that he had an adequate remedy to challenge the reporting requirements and penalties that he opposes — namely, by working to repeal them through the legislative process.

With respect to the other individual plaintiffs, the court found that they similarly lacked standing to sue, including the new plaintiffs that the plaintiffs proposed adding to their complaint. The purported injuries under the challenged regimes were generally speculative and/or had not actually occurred, and the cited harms — including objections to disclosing information, fear of large fines, actions of foreign banks, and FATCA-related marital discord — were generally vague and an insufficient basis for jurisdiction.

In the end, the court found that none of the plaintiffs has suffered an invasion of a legally protected interest — concrete and particularized, actual or imminent — and that no alleged injury was fairly traceable to the actions of the Defendants. The court also concluded that there were no allegations that it is likely that the alleged injury will be redressed by a favorable decision. Accordingly, it granted the motion to dismiss, and also found that the plaintiffs’ proposed amendments were futile and so denied their motion to amend.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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