Prologue – Before The Supreme Court – The Background To The Toth FBAR Case

This Is Post 7 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Historically the strength of America has been found in its moral authority. As President Clinton once said:

“People are more impressed by the power of our example rather than the example of our power…”

The FBAR penalty imposed on Ms. Toth is an example of the legal power to impose penalty and NOT an example of the restraint on power and the application of law in a just way. I have heard it said that when a person (and by extension country) loses its character it has lost everything.

The Story Of Monica Toth – Three Perspectives

Perspective 1: The story of Ms. Toth’s encounter with Mr. FBAR as described by Justice Gorsuch in his dissent:

In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.

Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.

Pursuant to §5321, the agency charged Ms. Toth with willfully violating §5314’s reporting requirement and assessed a civil penalty of $2.1 million—half of the balance of Ms. Toth’s account—plus another $1 million in late fees and interest.

Perspective 2: The issue in the Toth case as described in a September 20, 2022 post:

.@InFBARWeTrust Take 2: The great question of our age is how to impose the equivalent a willful #FBAR penalty on a non-willful victim. Scenario 2 – Toth – The answer is to create willfulness out of thin air. Pretend that the non-willful person is willful https://t.co/hlt5GBijys

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 8, 2022

The penalty imposed on Ms.Toth was dependent on a finding of “willfulness”. “Willfulness” is a question of fact to be determined by the court. In the Toth case the District court deemed Ms. Toth to be “willful” as a court imposed sanction. There was no independent evaluation of the facts to determine whether she was “willful”. Absent an independent evaluation of the facts, can there ever be a finding of willfulness necessary to support the 50% account penalty?

Perspective 3: The August 26, 2022 PETITION FOR A WRIT OF CERTIORARI to the Supreme Court of The United States described the issue as follows:

QUESTION PRESENTED

The Bank Secrecy Act and implementing regulations require U.S. persons to file an annual report — called an FBAR — if they have foreign bank accounts containing more than ten thousand dollars. The maximum civil penalty for willfully failing to file the report is either $100,000 or half the balance in the unreported account, whichever sum is greater. 31 U.S.C. § 5321(a)(5)(C)-(D). Using this formula, the government imposed on petitioner a civil penalty of $2,173,703.00.

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D) — penalties that are avowedly deterrent and noncompensatory — are subject to the Eighth Amendment’s Excessive Fines Clause.

Eighth Amendment Cruel and Unusual Punishment

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

The indisputable facts include (but are not limited to) that, Mr. FBAR is being used to confiscate approximately two million dollars of a Swiss Bank account with a balance of approximately four million dollars. The account was owned by an 82 year old woman and was funded by money received from her father in Argentina. The account was initially funded by money that was NOT and never was subject to US taxation. The penalty was based on the penalty for failing to file an FBAR. In addition, the necessary condition of “willfulness” was based on a court sanction and NOT on an independent evaluation of the facts.

These facts resulted in Ms. Toth’s encounter with Mr. FBAR in the penalty zone!

The Supreme Court Response – January 23, 2023:

I had the opportunity to discuss the decision in a podcast with Dubai based lawyer Virgina La Torre Jeker.

Podcast – @VLJeker and @Expatriationlaw discuss: On January 23, 2023 "US Supreme Court Denied Toth #FBAR Cert Petition, In So Refusing To Decide Whether @InFBARWeTrust Penalties Violate ”Excessive Fines Clause” Of 8th Amendment". This is significant! https://t.co/iWoP2w8WG3

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 24, 2023

On January 23, 2023 the Supreme Court of the United States (Justice Gorsuch dissenting) denied the cert petition. In other words, the court declined to consider whether Ms. Toth’s 2 million willful civil FBAR penalty, based on a 4 million Swiss bank account balance, violated the “Excessive Fines” clause of the eighth amendment. (The effect of the court’s decision to NOT hear the case means that the US government is now – through the law of FBAR – in a position to confiscate two million from Ms. Toth. But,”It’s The Law”.)

More broadly and abstractly, the refusal to grant the cert petition means that the court refused to hear the case. The court’s refusal to hear the case is NOT equivalent to a ruling that civil willful FBAR penalty is constitutional. It means only that the Supreme Court of the United States will NOT be the court (at least as of January 23, 2023) to decide the issue. In his dissent Justice Gorsuch reinforces this point (and invites lower courts to consider the issue) by writing:

For all these reasons, taking up this case would have been well worth our time. As things stand, one can only hope that other lower courts will not repeat its mistakes.

Nevertheless, the court’s refusal to hear the Toth case will likely be interpreted:

– by the IRS (and other government agencies) as a license to continue a growing penchant to impose punitive FBAR penalties in general and engage in civil forfeiture in particular

– by the public as a continuing signal that there is a clear distinction between the interpretation of law and the application of justice and never shall the twain meet

– by the legal profession that the penalties under Title 31 are a subset of civil forfeiture penalties in general

– by the international community as further confirmation that the United States is a country lacking proportionality between violations of the law and the penalties imposed

Interestingly and significantly Justice Gorsuch penned a vigorous dissent*. In this dissent he took the time to describe the facts, describe the history of penalty in the United States and to explain why the court should have agreed to hear the Toth appeal. Justice Gorsuch appeared to rely on an amicus curie brief filed by California law professor Beth A. Colgan**. Excerpts from both are included as Appendixes *A and **B to this post.

One is left with the impression that:

Justice Gorsuch is an island of justice and sanity in an ocean of unfairness, injustice and insanity.

The world eagerly awaits the Supreme Court’s decision in the Bittner FBAR case!

*Appendix A

Justice Gorsuch Dissent

Cite as: 598 U. S. ____ (2023) 1
GORSUCH, J., dissenting

SUPREME COURT OF THE UNITED STATES

MONICA TOTH v. UNITED STATES

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

No. 22–177. Decided January 23, 2023

The petition for a writ of certiorari is denied.

JUSTICE GORSUCH, dissenting from the denial of certiorari.

In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.

Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.

Pursuant to §5321, the agency charged Ms. Toth with willfully violating §5314’s reporting requirement and assessed a civil penalty of $2.1 million—half of the balance of Ms. Toth’s account—plus another $1 million in late fees and interest.

Initially, Ms. Toth sought to represent herself in proceedings challenging the IRS’s assessment, but that did not go well. Later, Ms. Toth engaged counsel who argued that the IRS’s assessment violated the Excessive Fines Clause of the Eighth Amendment. But the First Circuit rejected this line of defense. It held that the Constitution’s protection against excessive fines did not apply to Ms. Toth’s case because the IRS’s assessment against her was “not tied to any criminal sanction” and served a “remedial” purpose. 33 F. 4th 1, 16, 17–19 (2022).

This decision is difficult to reconcile with our precedents. We have recognized that the Excessive Fines Clause “traces its venerable lineage” to Magna Carta and the English Bill of Rights. Timbs v. Indiana, 586 U. S. ___, ___–___ (2019) (slip op., at 4–5). We have held that “[p]rotection against excessive punitive economic sanctions” is “‘fundamental’” and “‘deeply rooted in this Nation’s history and tradition.’” Id., at ___ (slip op., at 7). And all that would mean little if the government could evade constitutional scrutiny under the Clause’s terms by the simple expedient of fixing a “civil” label on the fines it imposes and declining to pursue any related “criminal” case. Far from permitting that kind of maneuver, this Court has warned the Constitution guards against it. See Austin v. United States, 509 U. S. 602, 610 (1993) (“[T]he question is not, as the United States would have it, whether [a monetary penalty] is civil or criminal, but rather whether it is punishment.”); see also Giaccio v. Pennsylvania, 382 U. S. 399, 402 (1966); Sessions v. Dimaya, 584 U. S. ___, ___ (2018) (GORSUCH, J., concurring in part and concurring in judgment) (slip op., at 10).

Nor is a statutory penalty beneath constitutional notice because it serves a “remedial” purpose. Really, the notion of “nonpunitive penalties” is “a contradiction in terms.” United States v. Bajakajian, 524 U. S. 321, 346 (1998) (Kennedy, J., dissenting). Just take this case. The government did not calculate Ms. Toth’s penalty with reference to any losses or expenses it had incurred. The government imposed its penalty to punish her and, in that way, deter others. Even supposing, however, that Ms. Toth’s penalty bore both punitive and compensatory purposes, it would still merit constitutional review. Under our cases a fine that serves even “in part to punish” is subject to analysis under the Excessive Fines Clause. Austin, 509 U. S., at 610 (emphasis added). Ms. Toth and her amici identify still more reasons to worry about the First Circuit’s decision. They say it clashes with the approach many other courts have taken in similar cases. Pet. for Cert. 18–25 (collecting cases). They observe that it incentivizes governments to impose exorbitant civil penalties as a means of raising revenue. Id., at 25–30. And they contend that it is difficult to square with the original understanding of the Eighth Amendment. Brief for Professor Beth A. Colgan as Amicus Curiae on Pet. for Cert. 4–13. For all these reasons, taking up this case would have been well worth our time. As things stand, one can only hope that other lower courts will not repeat its mistakes.

https://www.supremecourt.gov/orders/courtorders/012323zor_0pl1.pdf#page=8

**Appendix B

Professor Beth A. Colgan – Excerpt From Amicus Brief

INTEREST OF AMICUS CURIAE0 F
*
Beth A. Colgan is Professor of Law at UCLA School of Law. She is one of the country’s leading experts on constitutional and policy issues related to the use of economic sanctions as punishment, and particularly on the Eighth Amendment’s Excessive Fines Clause.

SUMMARY OF ARGUMENT

The Excessive Fines Clause applies when a penalty serves at least “in part to punish.” Austin v. United States, 509 U.S. 602, 610 (1993). In the decision below, the First Circuit held that the $2 million penalty imposed for failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) tax disclosure form is not punitive even in part because it “is not tied to any criminal sanction.” Pet.App.28a. In doing so, the appeals court committed two errors. First, the court likened the FBAR penalty to 18th- and 19th-century customs forfeitures that supposedly “did not constitute punishment.” Pet.App.29a. Second, the court compared the penalty to civil sanctions “found not to be punishment for Double Jeopardy purposes.” Id. Both of these comparisons misapprehend the historical record.

I. Records from the colonial era through the 19th century—including this Court’s cases—show that in rem customs forfeitures were considered punishment for owners who placed their ships or goods in the care of masters or seamen who attempted to evade customs duties. That these forfeitures were imposed in civil rather than criminal actions does not alter the analysis, as both types of actions were used to impose punishment for offenses against the public. It was the public nature of the offense, not the form of litigation, that rendered those penalties punitive.

II. The First Circuit erred in using the double jeopardy test to determine whether the FBAR penalty is punitive. Pet.App.29a. This Court has emphasized that this test is inapplicable in the excessive fines context. Pet. 15-16. Even if it were relevant to the question before the Court, the modern double jeopardy test is inconsistent with the historical record, including this Court’s early cases, which treated in rem forfeitures as punishment of the owner even if they also served remedial purposes. It was not until the 1930s that the Court reversed course and held that double jeopardy did not apply to in rem forfeitures, casting them as entirely remedial. The First Circuit wrongly excluded FBAR penalties from Eighth Amendment scrutiny by relying on double jeopardy cases.

III. This Court should grant certiorari to revisit the First Circuit’s faulty history and ensure that the Excessive Fines Clause remains a safeguard against abusive forfeiture actions. From this country’s infancy, governments at all levels have relied on civil forfeitures and penalties as revenue-raising tools, often out of proportion with their penal interests and at
the expense of those who can least afford to pay. This Court’s intervention is needed to ensure that the Excessive Fines Clause remains a potent shield against these practices.

https://www.supremecourt.gov/DocketPDF/22/22-177/240917/20220928102722386_FINAL%20Amicus%20Brief%20of%20Beth%20Colgan%20-%20Toth%20v.%20United%20States.pdf

Have a question? Contact John Richardson, Citizenship Solutions.