A recent U.S. District Court decision considered whether penalties for disclosing a foreign bank account survives the death of the account’s owner (U.S. v Gaynor, Case No.: 2:21-cv-382-JLB-KCD (Sept. 6, 2023).
Hidden Assets?
Here’s what happened in the case: Lavern Gaynor was an heiress to a Texaco fortune. Her husband opened a Swiss bank account listing a Panamanian entity as beneficial owner in 2000. Laverne became the entity’s owner on the death of her husband in 2003. The account’s maximum value was $34.6 million for the 3-year period 2009-2011. In May 2019, the Internal Revenue Service assessed a Report of Foreign Bank and Financial Accounts (“FBAR”) penalty of $18.4 million (50%) against Lavern for willful violations related to not disclosing her foreign bank account. Lavern died in 2021, and the IRS initially assessed the FBAR penalties for 2009, 2010 and 2011.
The IRS filed suit in federal district court against Lavern’s son, George, as the representative of her estate and as trustee of her trusts. George claimed that the fines died with Lavern. The issue in this case was whether the FBAR penalties survived Lavern’s death, which depends on whether the $18.4 million is deemed to be remedial or penal. The IRS contended that Lavern moved her assets from one Swiss bank to another to avoid her tax reporting obligations. She also didn't tell her accountant about the Swiss bank accounts, and later she attempted to “quietly disclose” these foreign bank accounts without alerting the IRS to her noncompliance.
Court Ruling
The District Court granted summary judgment to the IRS on the issue of whether George could be liable for the penalties. It adopted the general analytical framework laid down by the U.S. Supreme Court in Hudson v United States, 522 U.S. 93, 99-100 (1997). As set forth in Estate of Schoenfeld, 344 F.Supp. 3d 1354, 1370 ((M.D. Fla. 2018), Congress “expressly indicate[d] its preference that Section 5321 be regarded as civil by titling the statutory section authorizing the imposition of the sanction as ‘Civil Penalties.’ The FBAR penalty is a monetary fine and not affirmative disability or restraint. “The Supreme Court has determined that money penalties have not historically been viewed as punishment.” Schoenfeld, supra, at 1371. The court in Gaynor concluded that the FBAR penalty for a willful violation was remedial and didn’t abate on Lavern’s death.
Trend Toward Increased Successor FBAR Liability
To place this decision in context, the Gaynor decision is part of a growing list in which the IRS and Department of Justice (DOJ) have enjoyed notable success in persuading federal district courts to accept a wide range of theories for assessing liabilities not only against taxpayers, but also against surviving spouses, executors of estates, trustees, distributes and others. As demonstrated in Schwarzbaum (125 AFTR2d 2020-1323 (D.C. FL March 20, 2023), many federal district courts have been receptive to issuing so-called “repatriation orders,” forcing tax debtors to remit foreign funds and other foreign property to the U.S. government.
Indeed, at recent tax conferences, IRS and DOJ predicted that their use of repatriation orders would be dramatically increasing and that they’re ready to couple these with criminal tax charges if taxpayers refuse to comply. (See Andrew Velverde, “DOJ Predicts Dramatic Increase in Repatriation Orders,” 2021 Tax Notes Today International 92-4 (May 13, 2022)).
The IRS and DOJ rely on two main laws in asking federal district courts to assist with international collection actions, including “repatriation orders.” These laws essentially force taxpayers to send money or other property back to the United States, such that the government can use it to satisfy or reduce an outstanding U.S. tax liability.
The first law is IRC Section 7402(a), which authorizes federal district courts to issue orders and render judgments as may be necessary and appropriate to enforce the “internal revenue laws.” It goes on to clarify that such remedies are “in addition to and not exclusive of” all other remedies permitted by other courts to enforce such laws. (Section 7402(e)).
The second set of laws, known as the Federal Debt Collection Procedures Act (FDCPA), is broader. It describes the procedures for recovering not only amounts related to “internal revenue laws,” but all “judgments on a debt” to the U.S. government. (U.S.C. section 3001(a)(1)). The FDCPA explains that district courts may enforce a judgment via a long list of remedies, which include all “writs necessary and appropriate” to aid enforcement. (U.S.C. Section 3202(a)).
The IRS’ guidance to its personnel, the Internal Revenue Manual (IRM), contains a section called “Collection Tools for International Cases.” It explains that several administrative and judicial tools exist to reach assets in international collection cases. Among these are levying on a U.S. branch of a foreign financial institution, including filing a lawsuit seeking a “repatriation order.” (IRM 5.21.3.1.(Jan. 7, 2016)). The IRS explains that it will seek a repatriation order if: (1) it's able to demonstrate to the court that the taxpayer has an outstanding U.S. tax liability; (2) there’s reasonable basis to believe that the taxpayer has assets outside the United States, (3) levying on domestic assets isn’t enough to fully pay the liability (4) the District Court has personal jurisdiction over the taxpayer. (IRM 5.21.3.6 (Jan. 7, 2016)).
For a more comprehensive overview of the numerous court decisions in this area, I suggest reading Hale Sheppard’s excellent article “Neither Death Nor Distance Erases the Issues: IRS Actions Against Deceased or Absconding Taxpayers,” Journal of Multistate Taxation and Incentives (July 2021).