Legal Docket: The responsibility of dual citizenship

NICK EICHER, HOST: It’s Monday, November 28th, 2022 and you’re listening to The World and Everything in It. We thank you for joining us today. Good morning. I’m Nick Eicher.

MARY REICHARD, HOST: And I’m Mary Reichard.

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REICHARD: Time now for Legal Docket.

Last week the U.S. Supreme Court agreed to consider a dispute couched in trademark law. This is one I just had to bring to your attention because it’s kind of fun.

As I say, it’s a trademark question. Whisky maker Jack Daniel’s says another company is violating its trademark. That other company makes plastic dog toys that mimic well known drinks. Here, a plastic toy shaped like a bottle of Jack Daniel’s with the same color scheme and labeled “Bad Spaniels.” And instead of the words “Old No. 7 brand” that’s on the real bottle, the toy has the words “The Old No. 2 on Your Tennessee Carpet.”

EICHER: Oh boy.

The toy maker says, come on! It’s a joke and everyone knows it. But Jack Daniel’s says the toy could confuse customers and that it usurps the goodwill the whiskey maker has earned over the course of a century and a half.

REICHARD: The toy company is VIP Properties and also parodies other drinks with its toys, like Mountain Drool. You can be sure other companies will be watching what the court does with this case. I can hardly wait to cover this case!

EICHER: Well, on to the one oral argument we’ll cover today: Bittner v United States. It’s a tax case, not nearly so fun as Mountain Drool.

Here, the IRS fined a taxpayer $2.7 million for failing to file certain forms, though it was unintentional.

Here’s the background.

The taxpayer is Alexandru Bittner. He was born and educated in Romania, when it was under communist control. He moved to the United States, worked as a plumber, became a naturalized citizen in the late 1980s. maintained dual citizenship and stayed in the United States for 8 years.

After communism fell, Bittner returned to Romania. He found financial success through a variety of businesses and investments for two decades—during which time he earned more than $70 million.

Bittner opened multiple foreign bank accounts and—during these years—had little contact with the United States.

REICHARD: Bittner moved back to the United States in 2011 and that’s when he learned he should have been filing certain reports with the IRS while he was in Romania.

The relevant law here is called The Bank Secrecy Act. It’s a federal law that requires taxpayers to report their interests in foreign bank accounts, what the lawyers will call F-BARs, Foreign Bank and Financial Accounts.

The moment Bittner realized his mistake, he took steps to try to make things right. Here’s his lawyer at the Supreme Court, Daniel Geyser:

GEYSER: The Act requires parties to file reports, not report individual accounts. Any failure to file a report thus gives rise to a single statutory violation, no matter how many accounts a person has or how many mistakes a person might make on a single form. Because there is no independent duty to report each account, there is no independent violation every time an account is not reported.

EICHER: Bittner agrees he owes a penalty for late filing, but the IRS calculates the penalty differently.

And in this case “differently” adds up to $2 million.

Here’s IRS lawyer, Matthew Guarnieri:

GUARNIERI: The Bank Secrecy Act authorizes the Secretary of the Treasury to assess a separate civil penalty for each foreign financial account that a U.S. person fails to report. Petitioner violated the Act 272 times, not just five times, when he failed to report dozens of foreign financial accounts in each of five years. That understanding of the statutory scheme flows straightforwardly from the text.

REICHARD: The Act requires a person to report all of his foreign bank accounts on a single annual form. The penalty for failing to report those accounts by not filing the form is $10,000.

But is that penalty imposed on a “per form” basis? Or on a “per account” basis?

The IRS says Bittner failed to file on each account, 272 times.

The Biden administration says interpreting the law that way discourages tax evasion. Of course, it also discourages citizenship, every year thousands give their passports back because citizenship is too expensive.

EICHER: The government says Bittner must have known of his obligation to file because he had to answer specific questions about foreign accounts to pay his income taxes. Further, the IRS found indications that Bittner had tried to conceal assets overseas.

Justice Samuel Alito questioned the government’s argument that it’s not enough to say “I didn’t know” about filing these forms.

ALITO: Well, we are told -- maybe you'll dispute this fact -- that many, many people who have foreign bank accounts of over -- over $10,000 are unaware of this regulation, unaware of this law and these regulations and, even if they're aware of it, they're pretty hard to parse. So all those people are committing violations, and they -- if they come in and they say I didn't know anything about this, doesn't matter. That's not reasonable cause.

Guarnieri the government lawyer answered that “I don’t know” isn’t enough by itself. Yes, there’s a clause in the law that prevents fining people if their violation stemmed from some “reasonable cause.” But other factors matter, such as whether the person was otherwise exercising ordinary business prudence. And Bittner wasn’t, he argued.

Justice Ketanji Brown Jackson seemed sympathetic to Bittner. After all, it’s legal for people to have foreign bank accounts.

JACKSON: And they can structure those accounts in any way they want. So they can put their million dollars in a single account, they can have 10 accounts with, right, however much, you know, $100,000 apiece or whatever, but you're extracting different penalties from them for this purpose based on this totally lawful behavior.

Guarnieri argued, yes, but look to the purpose of the statute.

GUARNIERI: And there is a good reason that Congress set the penalty scheme up this way. Each time a U.S. person maintains an account with a foreign bank, that relationship is a matter of distinct concern to the United States.

REICHARD: “Distinct concern” because the United States is one of only two countries that tax people based on citizenship status. [The African nation of Eritrea is the other one.] Most other countries tax people based on where they live.

His lawyer argued: It’s that complexity of American tax rules that supports Bittner:

GEYSER: That is quite the burden on the average person, especially with the cudgel of per-account penalties hanging over their head if they lose. Anyone with 10 or 20 accounts could be facing massive fines.

Such as his client, who’s got a penalty increase of over 5000% hanging over him.

Still, the overall tenor of the questions seemed to lean in the government’s favor. Here’s Justice Elena Kagan to Bittner’s lawyer Geyser:

KAGAN: One might say that your version forces the government to treat equally someone who has a $10,000 account and somebody who, like your client, has extreme wealth and many many accounts and where he is depriving the government of much more information than, you know, the small “I have a checking account for $12,000” person does.

GEYSER: Well, Your Honor, the -- I -- I think, here, though, the relevant criteria, though, is what is the culpable conduct. And the culpable conduct under the Act is not filing a report….later…If Congress wanted to impose a separate penalty for each individual account, Congress would have said that.

EICHER: Being rich is not culpable conduct, in other words. Not filing forms on time, that’s culpable conduct.

Not only that, Geyser argued, but the Eighth Amendment prohibits the government from imposing excessive fines. And then there’s the rule of lenity. That says that if the law is vague in any way, it must be decided in favor of the taxpayer.

Sound arguments, but still. Context matters, and Justice Brett Kavanaugh injected some of the reasoning behind the Bank Secrecy Act:

KAVANAUGH: …of course, the broad context of this is September 11, the post-September 11 efforts to ferret out terrorist financing, and the government's and Congress -- the PATRIOT Act, and then this Act in terms of going after terrorist financing. Not surprisingly, therefore, the statute is -- has substantial penalties and is very broad and puts the duty, in essence, on people to know their legal obligations.

REICHARD: People keep foreign bank accounts for myriad reasons: sending money to their families, having ease of access to funds when traveling back home. Tax evasion does occur, of course, but not everyone with foreign accounts is out to cheat the government. With the Biden administration hiring tens of thousands more tax collectors and no signs of reining in its own spending, the pressure is on taxpayers everywhere to make sure every jot and tittle is attended to.

And that’s this week’s Legal Docket.

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