Roll On One

James Moore received a temporary reprieve from a federal judge in Seattle, but, at least metaphorically speaking, he is still strapped onto the mercy seat in classic John Coffey style, waiting to see what the onlooking guards will do next. (See Video Clip Below)

No one really knows how Moore v. United States will turn out. What we do know is that, in a preliminary ruling, Judge Richard Jones declared that the IRS cannot spin the Wheel of Misfortune and arbitrarily determine the amount of a civil penalty in a Report of Foreign Banks and Financial Accounts (FBAR) failure to file case. The Service may well simply add to the record, and if that is the case, Judge Jones’ next order will be “roll on two.” However, there is a very good chance that this evidence does not exist, and in this alternative ending, an emotional Paul Edgcomb will quietly escort Mr. Moore out of the death house.

The Case

For those who have been living under a rock, the current economic and political climate is very hostile towards foreign account holders. Many people have a vision of wealthy expats who throw Great Gatsby-esque parties, during which the attendees burn their delinquent tax notices with fondue candles as they cackle over bad jokes and gossip about people who aren’t in the room. Many politicians are only too happy to promote this image. James Moore probably does not even own a dinner jacket or an ascot tie, but he does own a bank account in Switzerland that originated in the Bahamas, where Mr. Moore relocated in 1989.

There’s much more to the story. Mr. Moore did not file a FBAR for 20 years, even though the account balance never dipped below $300,000 and no exemptions applied. Around 2009, he approached the IRS through counsel as part of the Offshore Voluntary Disclosure Program. Both sides agreed that he owed about $18,000 in back taxes.

With that unpleasantness out of the way, the IRS started calculating the penalty. In October 2011, an agent interviewed Mr. Moore via telephone for about five minutes. The agent never specifically said anything about penalties. Based on that conversation, and prior research, Agent Shu Lin Tjoa prepared a detailed, eight-page Summary Memorandum that recommended a $40,000 penalty, or $10,000 per year for 2005-2008. At some point, someone also produced an “Appeals Memo.” The Service refused to produce this second memo during discovery, and the Court agreed that it was confidential.

Two months later, the Service sent Mr. Moore a bill for $40,000, but provided no explanation of the charges. Mr. Moore never saw the Summary Memorandum until it was produced during discovery. Although the December 2011 letter said he could appeal and the IRS would hold off for another six weeks, the IRS reneged on its own promise (is anyone really surprised at that?) and almost immediately assessed a $10,000 penalty for 2005.

Mr. Moore appealed the assessment, and the Service responded with a three-sentence letter that began with the dreaded words “Dear Taxpayer” and ended with “Your case is now closed in Appeals.” In addition to a payment coupon, the letter included an invitation to participate in an “appeals customer satisfaction survey.” I’m not really a betting man, but I’d wager that Mr. Moore was not very satisfied at that particular moment. The Service said nothing about the remaining $30,000 in penalties, which were apparently hanging over his head like the sword of Damocles.

Mr. Moore eventually filed suit in 2013, alleging a host of Constitutional and Administrative Procedures Act violations. We’ll get to those in a minute. He asked for a refund of the penalty he paid, and for the court to set aside the unassessed $30,000.

His Claims

The Court held that Mr. Moore committed non-willful violations of the Bank Secrecy Act by failing to file FBARs. But he always admitted that he owed taxes and penalties. Remember, he was the one who came forward in the first place.

Mr. Moore’s due process and APA claims are more relevant to our inquiry. Although the APA says that an agency – including the IRS – cannot act in a way that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law,” these claims are difficult to win, because the government gets the benefit of the doubt.

The Court gave the government a break by finding that a lower standard of review applied in this case. Judge Jones declared that the interview, as sketchy as it was, was sufficient for the government to avoid a trial de novo on the issue. In other words, Judge Jones decided not to ask questions. The suits at the Department of Justice definitely breathed a sigh of relief on that one.

Now, we get to the heart of the matter. The Court explicitly ruled that it “Cannot, On the Record Before It, Determine if the IRS Acted Arbitrarily, Capriciously or Abused Its Discretion in Assessing the Penalties.” Even though a court presumes that an agency acted fairly in these situations, there must be some evidence in the record to support that presumption. Lawyers call this level of proof a scintilla. If there is a bread crumb anywhere on the kitchen floor, the Court can presume that someone ate a pepperoni pizza with extra mushrooms from Dominos for lunch at 12:02 that day.

Judge Jones used a magnifying glass to look for a scintilla, and the only thing he found was the aforementioned three sentence pay-or-else letter. Although the Summary Memorandum was in the record, Mr. Moore didn’t see it until he filed a lawsuit, so it doesn’t count. Judge Jones looked at the case and bluntly concluded that he would not “rubber-stamp a decision that lacks any explanation in the administrative record.”

Judge Jones hinted that he was inclined to throw out the penalties, but that, under the APA, he had to remand the matter back to the agency and give it an opportunity to explain itself.

The Next Step

The IRS may be in trouble. It has to demonstrate that it had a rational basis for the $40,000 penalty and that Mr. Moore was at least somewhat in the loop. Unless there is something that we do not know, it does not appear that is the case. It looks like the Service just gave him an account statement and informed him of his “right” to an appeal.

The phantom “Appeals Memorandum” would probably not help, because it is very unlikely that Mr. Moore saw it, or even knew of its existence, before he got the bill.

On the other hand, the government’s burden is very low. They only have to produce a scintilla. There may be a transcript of that October 2011 interview that gives some indication of the Service’s thought process in the matter. There may be a stray letter or email between the IRS and Mr. Moore’s counsel. There may be something the parties missed. Any crumb will do.

Stay tuned to this station for further details.

Original Post By:  Michael DeBlis

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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