Sixth Circuit Rejects FATCA and FBAR Challenges by Senator Rand Paul and Others

(Parker Tax Publishing September 2017)

The Sixth Circuit upheld a district court ruling that several individuals, including Senator Rand Paul (R-KY), did not have standing to sue the U.S. government to enjoin it from enforcing the Foreign Account Tax Compliance Act (FATCA), the intergovernmental agreements (IGAs) entered into with foreign governments under FATCA, and the foreign bank account reporting (FBAR) requirement under the Bank Secrecy Act. According to the court, none of the individuals had alleged an actual or imminent injury traceable to the U.S. government and redressable by the court. Crawford v. U.S., 2017 PTC 388 (6th Cir. 2017).

Background

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to reduce tax evasion by U.S. taxpayers using foreign bank accounts. FATCA imposes account reporting requirements and penalties for noncompliance on individual taxpayers as well as on foreign financial institutions (FFIs). FATCA's individual reporting requirements under Code Sec. 6038D generally apply to U.S. taxpayers with specified foreign assets valued above $50,000, or higher depending on marital status and other factors. FATCA also imposes institutional reporting requirements on FFIs; FFIs must use Form 8966, FATCA Report, to make the required disclosures regarding U.S. taxpayers with foreign accounts. An FFI that fails to meet the reporting requirements is subject to a 30 percent tax on all payments of U.S. source income to the FFI. For account holders who fail to comply with an FFI's information requests, the FFI must withhold 30 percent of payments of interest, dividends and other income; this is referred to as the "passthrough penalty."

To facilitate FFIs' disclosure of account information, the U.S. has reached intergovernmental agreements (IGAs) with over 70 countries. Under the IGAs, either the foreign government agrees to collect the financial information that FATCA would otherwise require FFIs to report, and the foreign government itself reports the information directly to the IRS, or FFIs report the required information directly to the IRS, and the foreign government agrees to modify its laws to allow FFIs to comply with FATCA.

Separately from FATCA, the Bank Secrecy Act imposes a foreign bank account reporting (FBAR) requirement on Americans living abroad who have foreign account balances over $10,000. The FBAR requirement is satisfied by filing FinCEN Form 114. Willful failure to file an FBAR results in a penalty equal to the greater of $100,000 or 50 percent of the value of the reportable account. Absent a showing of willfulness, the ordinary penalty is $10,000 per violation.

In 2015, a group of individuals sued to enjoin the U.S. government from enforcing FATCA, the IGAs, and the FBAR. The group included Mark Crawford, an American citizen living in Albania and the owner of Aksioner, an Albanian brokerage firm that is a partner of Saxo Bank in Copenhagen. He claimed that Saxo Bank did not allow Aksioner to accept U.S. citizens as clients because the bank did not want to assume FATCA responsibilities. Crawford also said that because of FATCA, Aksioner denied Crawford's own application for a brokerage account, and that FATCA forced him to turn away prospective American clients living in Albania.

The group also included Senator Rand Paul, who claimed he was denied the opportunity to vote against the FATCA IGAs, but did not otherwise challenge FATCA or the FBAR. Other individuals were current and former U.S. citizens who shared joint bank accounts with their non-U.S. citizen spouses and who claimed that FATCA would result in the disclosure of their spouses' private financial information. Another individual claimed he had a college savings account for his daughter at a Swiss bank and did not want to transfer the account to his daughter for fear that the FBAR penalty would be imposed if the IRS determined that there had been a willful failure to file an FBAR. Marc Zell, an American and Israeli citizen living in Israel, said that because of FATCA, his law firm had been required by Israeli banks to complete IRS withholding forms in order to open trust accounts for both U.S. and non-U.S. clients. Zell claimed that Israeli banks required the forms regardless of whether the beneficiary was a U.S. person and, as a result, Zell had to close accounts in some cases and could not open trust accounts in others. Zell also claimed an Israeli bank had requested that he transfer certain client securities elsewhere because he and the beneficiary are U.S. citizens. Zell said that he had lost several clients as a result of the FATCA reporting requirements.

The lawsuit alleged several Constitutional violations resulting from FATCA, the IGAs, and the FBAR. According to the complaint, the IGAs were not authorized by Congress through the ordinary legislative process and therefore exceeded the President's authority. With respect to the various individual reporting requirements, the complaint argued that U.S. citizens living abroad were being treated differently from those living in the U.S. in violation of their equal protection rights. The lawsuit alleged that the FFI, passthrough, and FBAR willfulness penalties were unconstitutional because they constituted excessive fines. The individuals claimed that the institutional reporting requirements under FATCA and the IGAs constituted a warrantless search in violation of the Fourth Amendment right to privacy. The individuals moved to amend their complaint to add three other individuals and to include statements that some of the individuals' bank balances exceeded the FATCA or FBAR threshold amounts. None of the original or proposed additional individuals alleged that they faced direct consequences such as the imposition or threatened imposition of a penalty for noncompliance with FATCA, the IGAs, or the FBAR.

The district court denied the motion for a preliminary injunction, holding that the individuals were not likely to succeed on the merits either because they lacked standing or because their allegations failed as a matter of law. The district court granted the government's motion to dismiss for lack of standing, and declined to consider the motion for leave to amend their complaint. The individuals appealed to the Sixth Circuit.

Analysis

On appeal, the Sixth Circuit affirmed the district court's ruling that none of the individuals had standing and that the lack of standing would not have been cured had leave been granted to amend the complaint. The Sixth Circuit held that there were no allegations of either an actual injury that was fairly traceable to FATCA or an imminent threat of prosecution from noncompliance with FATCA. There had been no actual enforcement of FATCA, such as a demand for compliance with the individual reporting requirement, and no imposition of a penalty for noncompliance. Moreover, none of the individuals claimed to hold enough foreign assets to be subject to the individual reporting requirement. As a result, the court held that there was no credible threat of either prosecution for failing to comply or the imposition of a passthrough penalty by an FFI. The individuals all lacked standing to challenge the FFI penalty, which would require either that the foreign banks themselves brought a suit or that the individuals had third party standing, which the Sixth Circuit determined they did not.

The court noted that Zell claimed to have signatory authority over accounts with an aggregate balance of greater than $200,000 in 2014, which would subject him to FATCA individual reporting. However, the court reasoned that although the Israeli IGA imposes a reporting requirement on trust accounts, FATCA itself did not apply to accounts held entirely for the benefit of non-U.S. persons. Further, although the IGA was in force in Israel as of August 2016, it was not in effect when the complaint was filed or when leave was sought to amend the complaint.

The court held that the individuals' alleged harms arising from FATCA apart from its individual reporting requirement or the passthrough penalty were not fairly traceable to FATCA. For example, Crawford's claim that Saxo Bank would not allow Crawford to accept U.S. clients was the result of Saxo Bank's own independent actions, not FATCA. Likewise, the court held that claims that the private financial information of non-U.S. citizens was disclosed to the IRS was not because of FATCA. Thus, any resulting injury could not be fairly traced to FATCA. Zell's claim that Israeli banks told him to move securities elsewhere and to complete IRS forms for his clients was the due to the banks' voluntary choice.

The Sixth Circuit also held that none of the individuals had standing to challenge the IGAs. Senator Paul claimed he had been harmed by not having the opportunity to exercise his constitutional right as a Senator to vote against the IGAs, but the court found that any incursion on his political power was neither a concrete injury like the loss of a private right nor a particularized grievance. Senator Paul, the court noted, had not claimed that his vote on its own would have been sufficient to forestall the IGAs. Senator Paul's proper remedy was to seek repeal or amendment of FATCA, according to the Sixth Circuit.

The Sixth Circuit also held that no individual had standing to challenge the FBAR. Most of the individuals claimed to have foreign account balances over $10,000, and were therefore subject to the FBAR requirement, but no one alleged both an intent to violate the FBAR and a credible threat of a penalty. Further, there were no allegations of any actual injury arising from the FBAR other than one person's claim that she wanted a college savings account placed in her name but her father did not want to transfer the account for fear that it would trigger an FBAR penalty. The court reasoned that this injury was traceable not to the FBAR but to the father's personal choice not to transfer the account.

Finally, the Sixth Circuit held that the district court properly denied the motion for leave to amend the complaint. According to the Sixth Circuit, the district court thoroughly reviewed all of the proposed new parties and claims in the amended complaint and properly held that leave to amend would be futile because there would still be no one with standing to bring any of the claims in the proposed amended complaint.

For a discussion of the FBAR, see Parker Tax ¶203,170. For a discussion of FATCA, see Parker Tax ¶203,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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