[00:00:17] Speaker 04:
The next case is number 191590, Kimball against the United States, Ms.

[00:00:24] Speaker 04:
Frome.

[00:00:26] Speaker 01:
Good morning, Your Honors.

[00:00:28] Speaker 01:
Mrs. Kimball presents four issues on appeal, whether the willfulness penalty was properly imposed, whether the maximum penalty was warranted in this case, whether the regulations mandate a maximum penalty of $100,000, and whether the penalty runs afoul of the Eighth Amendment.

[00:00:44] Speaker 01:
In this argument, I will concentrate upon the issues of excessiveness of the penalty and willfulness, but will, of course, answer any questions the court has about the other issues that are presented.

[00:00:55] Speaker 03:
What is left in this case after the Norman decision?

[00:01:02] Speaker 01:
Well, what's left in the case after the Norman decision is the factual issues that apply to Kimball but did not apply to Norman.

[00:01:12] Speaker 03:
What factual issues are you referring to?

[00:01:14] Speaker 01:
First of all, in fact, in the argument in the Norman case, there was a question from the court about the issue of whether, if you find willfulness, it is proper to impose a 50% penalty across the board, and at what time that 50% penalty would be not justified.

[00:01:34] Speaker 01:
And this case is one where I think

[00:01:37] Speaker 01:
We can talk about whether, if you find that there was willfulness, a 50% penalty was the proper penalty.

[00:01:44] Speaker 01:
Mrs. Kimball did present that variation to the court below, and it was discussed.

[00:01:49] Speaker 01:
There's no dispute in this case.

[00:01:51] Speaker 01:
There were two accounts.

[00:01:52] Speaker 01:
The Swiss account, which was Mrs. Kimball's father's account, was established by Mrs. Kimball's father as a fail safe against another Holocaust.

[00:02:04] Speaker 01:
Mr. Kimball's father was very concerned.

[00:02:07] Speaker 01:
having lost a good deal of his family in the Holocaust.

[00:02:11] Speaker 01:
His parents had escaped from Poland just prior to the Holocaust, and he was concerned that it would happen again and that there would be basically running money for the family.

[00:02:25] Speaker 01:
So he deposited in that account his earnings,

[00:02:29] Speaker 01:
After taxes were paid, and he kept the account secret, he asked Mrs. Kimball to keep the account secret.

[00:02:36] Speaker 01:
He asked her husband to keep the account secret.

[00:02:39] Speaker 01:
And the account was, in fact, kept secret.

[00:02:41] Speaker 01:
Nothing went in from Mrs. Kimball.

[00:02:43] Speaker 01:
Nothing came out.

[00:02:45] Speaker 01:
Then there was another account, the HSBC account, which was in Paris.

[00:02:49] Speaker 01:
That account was an account used by the Kimballs extensively.

[00:02:53] Speaker 01:
There was nothing secret about it.

[00:02:56] Speaker 01:
They deposited money in it.

[00:02:57] Speaker 01:
They took money out of it and they used it.

[00:03:01] Speaker 01:
And neither of the accounts was disclosed until Mrs. Kimball read after her father's death, after her mother's death, she read in the newspaper that there was an issue with foreign accounts.

[00:03:13] Speaker 01:
And as soon as she read that, she voluntarily went to the IRS and disclosed the existence of these accounts.

[00:03:20] Speaker 01:
I think the fact that

[00:03:24] Speaker 01:
Neither of the accounts was disclosed is a substantial indication that there was no intent, no knowledge, and no intent not to disclose the account.

[00:03:33] Speaker 01:
They understood that they did not have to.

[00:03:35] Speaker 02:
But there's not a requirement for a specific intent.

[00:03:38] Speaker 02:
Reckless disregard is enough.

[00:03:41] Speaker 01:
I think that.

[00:03:43] Speaker 02:
I mean, that's what Norman holds, isn't it?

[00:03:44] Speaker 01:
That is what Norman holds.

[00:03:46] Speaker 01:
And I believe that that.

[00:03:47] Speaker 01:
And I would like to ask.

[00:03:49] Speaker 02:
So there's no dispute.

[00:03:50] Speaker 02:
She knew about this account.

[00:03:52] Speaker 01:
Absolutely no dispute, she knew about it.

[00:03:53] Speaker 02:
She knew about it almost after it was opened.

[00:03:57] Speaker 01:
I don't.

[00:03:58] Speaker 02:
Within a number of years.

[00:03:59] Speaker 02:
We don't need to quibble over the time.

[00:04:01] Speaker 01:
It doesn't matter when.

[00:04:01] Speaker 01:
She at some point absolutely became aware of this account before her father's death.

[00:04:06] Speaker 02:
Right.

[00:04:06] Speaker 02:
And she affirmatively signed tax returns at least on one occasion, if not more, saying she had no foreign accounts.

[00:04:15] Speaker 01:
That is correct.

[00:04:16] Speaker 02:
And that was false.

[00:04:17] Speaker 01:
And that was false.

[00:04:18] Speaker 01:
And she also now, as to the account in Switzerland,

[00:04:25] Speaker 01:
She also did everything she could to conceal the account, as her father had instructed.

[00:04:29] Speaker 02:
Well, so I understand that that's the point.

[00:04:32] Speaker 02:
But even if that was all done in good faith in pursuit of what they all consider an admiral goal, that's breaking the law.

[00:04:44] Speaker 02:
I mean, how is that a defense to underreporting taxes and not truthfully reporting

[00:04:53] Speaker 02:
things on her IRS forms.

[00:04:55] Speaker 01:
I'm not saying it's a defense to underreporting taxes.

[00:04:58] Speaker 01:
She absolutely had to pay the taxes and whatever interest and penalties there were.

[00:05:02] Speaker 01:
But what I'm saying is that when the legislature has specifically said willfully that they must have been.

[00:05:10] Speaker 02:
It seems to me that this is almost a prime example of willfulness in that she knew about this count and for personal reasons not related to any

[00:05:22] Speaker 02:
legal misunderstanding, she willfully concealed it.

[00:05:27] Speaker 01:
If she only had the Swiss account, I think that we would be in a different position.

[00:05:32] Speaker 01:
But she also had the Paris account.

[00:05:35] Speaker 01:
And the Paris account, she didn't conceal in any way.

[00:05:39] Speaker 01:
She didn't disclose it on the account or the FBARs.

[00:05:42] Speaker 01:
But aside from that, her money went in from the United States to France.

[00:05:47] Speaker 01:
Her money was used in France.

[00:05:49] Speaker 01:
The statements were sent to her.

[00:05:51] Speaker 01:
It wasn't as the Swiss account where those statements were held.

[00:05:57] Speaker 01:
In that circumstance, I think that there's a distinction of she clearly didn't know that she had to disclose the account because she knew that she definitely would have put down the

[00:06:14] Speaker 01:
the account in Paris.

[00:06:15] Speaker 01:
And in fact, as soon as she found out that she had to disclose it... Well, again, we're back to reckless disregard, though, right?

[00:06:21] Speaker 02:
Because she had tax returns prepared for her that she signed, I think, under penalty of perjury, saying she had no foreign bank accounts.

[00:06:29] Speaker 01:
That is correct.

[00:06:30] Speaker 02:
And she said the reason she didn't disclose it was what?

[00:06:33] Speaker 02:
She didn't read them?

[00:06:35] Speaker 02:
Isn't that the definition of reckless disregard?

[00:06:38] Speaker 01:
Your Honor, if that were the case, then why in the world would we need the word willfully in this statute?

[00:06:45] Speaker 01:
And why would there be a distinction between the $10,000 not disclosing and the willfully not disclosing?

[00:06:53] Speaker 01:
I think that if that were the case, well, either you knew about the requirement and you didn't disclose it, or you recklessly failed to learn about the requirement,

[00:07:03] Speaker 01:
or you didn't know about the requirement because you didn't read your tax return, all of those are willful, what is the purpose of the word willfully and what is the purpose of there being a $10,000 penalty?

[00:07:16] Speaker 03:
I think to... Well, we know from the Norman case now that willfulness includes

[00:07:21] Speaker 03:
reckless disregard.

[00:07:23] Speaker 01:
I do, and the court gave one example of where it might not be willful, and that was where you didn't know and didn't have any reason to know.

[00:07:33] Speaker 01:
But if that were the case, then you would say, if you knowingly failed.

[00:07:38] Speaker 01:
And I think that this court has substituted the word knowingly for the word willfully, because unless the F bar falls out on the way to the mailbox, there's no way that any

[00:07:52] Speaker 01:
Failure to disclose an account could be anything but willful.

[00:07:56] Speaker 01:
So I think that the court has eviscerated that.

[00:07:59] Speaker 03:
It's hard to argue that signing a tax return with an answer that says, I have no foreign accounts when that's not the case, is not willful under any

[00:08:12] Speaker 01:
If you look at the IRS manual, and I understand that it is not binding on the court, but I think it is something that the court can look at, the IRS manual specifically states that's not enough, and there ought to be more.

[00:08:26] Speaker 01:
And they gave examples of what could be more.

[00:08:29] Speaker 01:
So the IRS has said, just failing to file the FBAR, just failing to check the box, that doesn't make it willful.

[00:08:36] Speaker 01:
But I think that the courts have found that that does make it willful, and I think that eviscerates the statute.

[00:08:43] Speaker 01:
Because that's knowingly.

[00:08:47] Speaker 01:
That standard is knowingly.

[00:08:48] Speaker 01:
There has to be something more when you're talking about willfully.

[00:08:54] Speaker 01:
And even if you find that it was willful, I think that the kind of knee-jerk imposition of the 50% penalty, which is the same penalty that would be

[00:09:08] Speaker 01:
would be assessed against somebody who was a money launderer and put that money in a Swiss bank account for the specific purpose of hiding the money itself and any income from the money.

[00:09:21] Speaker 01:
That's the same as Mrs. Norman, who, excuse me, Mrs. Kimball, in the USBC account

[00:09:31] Speaker 01:
The USB account, she didn't put any money into it.

[00:09:35] Speaker 01:
It was all her father's money.

[00:09:37] Speaker 01:
The only thing that was done with that money was that it was rolled over.

[00:09:40] Speaker 01:
It was kept in that account, and it wasn't touched.

[00:09:44] Speaker 01:
And the other account, the Paris account, she was in Europe.

[00:09:48] Speaker 01:
She was traveling extensively throughout Europe.

[00:09:50] Speaker 01:
She never touched that Swiss account.

[00:09:53] Speaker 01:
Money was put in from her accounts here, tax money.

[00:10:00] Speaker 01:
to be used in the Paris account.

[00:10:03] Speaker 01:
So I think that the question of whether you could then find that to be willful, even if you could find that to be willful, there ought to be some differentiation between a situation like this one and a situation in which the money is hidden, the money is criminally derived, the purpose of the money is criminal, and the purpose of

[00:10:30] Speaker 01:
the deposits is to conceal this money from the taxing authorities.

[00:10:35] Speaker 01:
And this one, which I don't think there's any dispute that Mrs. Kimball wasn't, whether she should have been aware or not, that she wasn't in fact aware and that her husband, who is a bond trader and who was the one that filled out a lot of these accounts and knew about this

[00:10:58] Speaker 01:
Swiss account.

[00:10:59] Speaker 01:
He also was not aware of the requirement because when he filled out the tax returns he checked no and he had an account that he had opened and established and put money into.

[00:11:12] Speaker 01:
I'm not saying that Mr. Kimball should be penalized because I think the statute had run by that time.

[00:11:17] Speaker 01:
But I think that there is very substantial evidence in this case that even if this is willful, it certainly was not intentional.

[00:11:28] Speaker 01:
It certainly was not done for the purpose of depriving the taxing authorities of their money.

[00:11:34] Speaker 01:
There was no indication.

[00:11:36] Speaker 01:
And if you look at the Norman case, when they talked about whether Mrs. Norman's conduct was willful, I

[00:11:42] Speaker 01:
appreciate what they said in the case.

[00:11:46] Speaker 01:
But then again, they went on to discuss the fact that Mrs. Norman, and we disagree with the facts, but the fact that they found was that Mrs. Norman had moved her money from one Swiss account to another when she learned that she had to disclose it.

[00:12:03] Speaker 01:
and that she hadn't been entirely honest with the IRS.

[00:12:07] Speaker 01:
There is not that kind of facts in this case.

[00:12:12] Speaker 01:
It's a different factual issue because Mrs. Kimball never touched the money and as soon as she learned and not from

[00:12:21] Speaker 01:
Mrs. Norman had learned it from the banker who came with the forms and said, now you've got to fill these out.

[00:12:29] Speaker 01:
She saw it in the New York Times.

[00:12:31] Speaker 01:
And as soon as she saw it in the New York Times, she voluntarily stepped forward.

[00:12:35] Speaker 01:
She disclosed all of the accounts.

[00:12:37] Speaker 01:
She cooperated with the IRS.

[00:12:38] Speaker 01:
There was nothing dishonest.

[00:12:40] Speaker 01:
And the facts on which the 50% penalty are based, I think, are very clearly erroneous.

[00:12:48] Speaker 01:
There was a finding that Mrs. Norman opened this account, that she was the catalyst for this account, that she had put her mother on the account.

[00:12:57] Speaker 01:
None of that is correct.

[00:12:58] Speaker 01:
And also the finding that Mrs. Kimball had no relationship to either of the places in which the foreign accounts were kept.

[00:13:11] Speaker 01:
Mrs. Kimball, the Paris account was open for a Paris apartment.

[00:13:16] Speaker 01:
That certainly was a relationship to France.

[00:13:20] Speaker 01:
As far as the Swiss account, she did not have any other connection with Switzerland, but she didn't open the Swiss account.

[00:13:29] Speaker 01:
She inherited an account that was in Switzerland.

[00:13:31] Speaker 01:
She inherited it with a list of strictures.

[00:13:35] Speaker 01:
And she kept to the strictures.

[00:13:38] Speaker 01:
She didn't move the money or do anything that her father told her not to do.

[00:13:42] Speaker 01:
But I think it's inaccurate to say that she didn't have any relationship with Switzerland as if that informed why she was hiding the money in Switzerland.

[00:13:55] Speaker 01:
She wasn't hiding the money in Switzerland.

[00:13:57] Speaker 01:
She had inherited the account.

[00:13:59] Speaker 01:
And she had left it in the way that her father had told her to leave it.

[00:14:05] Speaker 01:
And in our practice, and we do a number of these F-bar cases, a substantial number of the people who come into our practice are Holocaust survivors who have opened these foreign accounts after the war, opened these accounts in Switzerland and kept them secret because they were afraid of another Holocaust and they weren't really trusting

[00:14:29] Speaker 01:
of the government so that this is not an unusual situation.

[00:14:34] Speaker 01:
And I think if you're looking at whether you have a foreign account, it's woeful because you didn't disclose it, take 50%.

[00:14:42] Speaker 01:
I don't think that that's the reason that the penalty was set up to 50% and not 50%.

[00:14:53] Speaker 01:
And I don't think that that's a reason that there is a distinction between

[00:14:59] Speaker 01:
willful and a non-willful violation, I think that this has taken on a life that the legislature didn't intend.

[00:15:09] Speaker 01:
And I'd like to reserve the rest of my... Thank you, Ms.

[00:15:13] Speaker 04:
Fromm.

[00:15:17] Speaker 04:
Mr. Kalanis.

[00:15:19] Speaker 00:
May it please the Court, just finalist for the United States.

[00:15:23] Speaker 00:
The Court of Federal Claims correctly granted the government's motion for summary judgment and sustained the F.R.

[00:15:27] Speaker 00:
penalty assessed against Ms.

[00:15:28] Speaker 00:
Kimball.

[00:15:29] Speaker 00:
First, the undisputed facts showed that Ms.

[00:15:32] Speaker 00:
Kimball's failure to report her Swiss bank account at UBS was, at a minimum, attributable to recklessness and woeful blindness, where she walled herself off from actual knowledge of the reporting requirements by repeatedly failing to review the tax returns that she signed, which falsely represented that she had no foreign accounts.

[00:15:49] Speaker 00:
by failing to review the F bar filing requirements to which those tax returns directed her.

[00:15:53] Speaker 03:
And does the government look at the reasons behind the failure to report in determining the extent of the penalty?

[00:16:05] Speaker 03:
I mean, in this case, it was the full 50% penalty.

[00:16:09] Speaker 03:
Yes, Your Honor.

[00:16:10] Speaker 03:
Do the facts warrant any sort of reduction?

[00:16:16] Speaker 00:
The IRS ultimately exercises discretion and determined that a reduction was not warranted on these facts.

[00:16:22] Speaker 03:
Did the government consider the facts of the case, or was that just a matter of routine, maximum penalty, end of case?

[00:16:32] Speaker 00:
No, Your Honor, the IRS did in fact conduct reason decision-making here, which is the touchstone of review for arbitrary and capricious.

[00:16:38] Speaker 00:
In looking at the specific facts and circumstances of this case, there were several factors that it felt justified the imposition of a substantial and ultimately the maximum penalty, and it also considered Ms.

[00:16:51] Speaker 00:
Kimball's stated reason for not disclosing the account.

[00:16:53] Speaker 00:
The IRS focused, for example,

[00:16:56] Speaker 00:
on the fact that this was an account with a substantial balance.

[00:16:59] Speaker 00:
It was not a nominal amount.

[00:17:00] Speaker 00:
This is an account that grew to approximately $1.3 million.

[00:17:04] Speaker 00:
Consider that at Appendix 467.

[00:17:07] Speaker 00:
Furthermore, consider the fact that Ms.

[00:17:09] Speaker 00:
Kimball not only repeatedly and over a course of many years failed to report the account itself, but also failed to report the income that was earned on the account and failed to pay taxes on that likely substantial income.

[00:17:22] Speaker 03:
But there's nothing here that would suggest, for example, an effort to conceal the fruits of a criminal enterprise or anything of that sort.

[00:17:34] Speaker 00:
No, Your Honor.

[00:17:35] Speaker 00:
There is certainly evidence of affirmative concealment, that Ms.

[00:17:38] Speaker 00:
Kimball took acts of affirmative concealment.

[00:17:40] Speaker 00:
And the IRS also considered that.

[00:17:42] Speaker 00:
But the IRS did not contend that this was ill-gotten illegal proceeds or something.

[00:17:46] Speaker 00:
However, we would suggest that because of the length of time, there's no analogous case that Ms.

[00:17:52] Speaker 00:
Kimball has pointed to or that we've located where someone actually concealed the account and the earnings from that account for three decades.

[00:17:59] Speaker 00:
That there is substantial harm, substantial tax loss that cannot be quantified precisely because of Ms.

[00:18:04] Speaker 00:
Kimball's failure to report the account and failure to report the income on that account.

[00:18:10] Speaker 00:
That factor, the IRS found to be substantial and significant in imposing a 50% penalty that Ms.

[00:18:16] Speaker 00:
Kimball evaded taxes on a substantial sum of money for a period of three decades.

[00:18:21] Speaker 04:
Again, there's- Well, it certainly, it looks as if she hadn't come forward voluntarily.

[00:18:26] Speaker 04:
It would not have been discovered and could not have been discovered.

[00:18:31] Speaker 04:
And isn't there some sort of difference?

[00:18:34] Speaker 04:
I'm thinking about the cruel and unusual

[00:18:38] Speaker 04:
system of punishment that governs everything that we do and particularly, maybe not particularly, but includes government actions.

[00:18:50] Speaker 04:
She came forward voluntarily, put herself into a system to learn what had gone wrong, made known

[00:18:59] Speaker 04:
that which would not have been known, could not have been known at least as far as the Swiss account was concerned, and nonetheless is hit with the same penalty as if she were a drug dealer, money launderer, or whatever else.

[00:19:16] Speaker 00:
Let me start by addressing whether the IRS might have discovered this.

[00:19:20] Speaker 00:
Ms.

[00:19:20] Speaker 00:
Kimball came forward specifically when it became publicly known that the Department of Justice was applying pressure to UBS where she held her account to turn over the names of its secret account holders.

[00:19:31] Speaker 00:
Ms.

[00:19:31] Speaker 00:
Kimball's account likely would have been discovered in short order.

[00:19:34] Speaker 00:
Certainly she came forward and availed herself of a publicly announced settlement initiative, the 2009 Offshore Voluntary Disclosure Program.

[00:19:43] Speaker 00:
That program, by its terms, offered a reduced penalty structure to taxpayers who were accepted into the program.

[00:19:50] Speaker 00:
It was a two-size-fits-all program.

[00:19:52] Speaker 00:
The default penalty under that program was not the maximum of 50%.

[00:19:55] Speaker 00:
It was 20%.

[00:19:56] Speaker 00:
There were a certain narrow class of taxpayers who would qualify for a reduced penalty structure of 5% instead of 20% under that program.

[00:20:05] Speaker 00:
Ms.

[00:20:06] Speaker 00:
Kimball did not qualify for that reduced 5% structure and should have known that when she applied because these terms were publicly available.

[00:20:13] Speaker 00:
The particular provision that she did not qualify for is there has been no activity in any account or entity, no deposits, withdrawals, et cetera, during the period the account or entity was controlled by the taxpayer.

[00:20:25] Speaker 00:
No activity in any account or entity.

[00:20:27] Speaker 00:
And the problem is with respect to both of Ms.

[00:20:30] Speaker 00:
Kimball's foreign accounts, both the HSBC account in France and the UBS account in Switzerland, that there was activity.

[00:20:36] Speaker 00:
With respect to the HSBC account, she admits that she was depositing and withdrawing money from it.

[00:20:41] Speaker 00:
with respect to the UBS account at the time that she was in control of it.

[00:20:45] Speaker 00:
She was rolling over her matured bonds and the interest into different investments.

[00:20:48] Speaker 00:
She was changing the currency in which the account was denominated.

[00:20:51] Speaker 00:
So she didn't qualify for the 5% structure, but the IRS said, we will give you the 20% structure.

[00:20:57] Speaker 00:
Ms.

[00:20:57] Speaker 00:
Kimball

[00:20:58] Speaker 00:
For whatever reason, decided that she did not want to take the 20% deal.

[00:21:02] Speaker 00:
She was advised in writing by the IRS, if you do not accept this offer in the settlement initiative, your penalty liability will no longer be determined by the artificial constraints of the settlement initiative.

[00:21:12] Speaker 00:
Rather, it will be dependent on our review of your case in accordance with the law.

[00:21:18] Speaker 00:
Your penalty liability could go up, it could go down.

[00:21:21] Speaker 00:
That was a chance that she decided to take.

[00:21:23] Speaker 00:
In fact, with respect to the HSBC account, which had a much smaller balance, roughly $140,000 versus $1.3 million, and was open for a substantially lower amount of time, 10 years versus roughly three decades, that account, the penalty was reduced from 20% under the program to 10%, with respect to the larger UBS account, for which there was active concealment, a much longer period of nondisclosure, a much longer period of nonpayment of taxes, a much more substantial balance,

[00:21:53] Speaker 00:
Ultimately, the penalty went up.

[00:21:55] Speaker 00:
Again, we think that's something that Ms.

[00:21:57] Speaker 00:
Kimball should have anticipated, certainly that her lawyer should have advised her at the time that she was in the program.

[00:22:03] Speaker 00:
The Internal Revenue Manual, which is publicly available on the IRS's website, it's publicly available at Lexis, Westlaw, specifically provides that the baseline penalty for an account exceeding $1 million is 50%.

[00:22:15] Speaker 00:
Certainly, there are mitigation guidelines, and there's the potential for that.

[00:22:19] Speaker 00:
uh... penalty to be reduced but miss kimball knew at the time that she withdrew from the program was advised in writing that the penalty might increase and the information that the IRS has released publicly in the internal revenue manual suggested that that was a real possibility we don't we certainly don't uh... point to miss kimball as someone who had any kind of nefarious motives but the harm to the government in this instance because of the long period of non-disclosure and the long period of taxes again three decades

[00:22:49] Speaker 00:
of non-payment of taxes on a substantial amount.

[00:22:52] Speaker 04:
There's no dispute, is there, that she came forward voluntarily?

[00:22:58] Speaker 00:
That's correct, Your Honor.

[00:22:58] Speaker 00:
She came forward voluntarily.

[00:23:02] Speaker 00:
Ultimately, though, the government decided that the substantial harm to public revenue and tax administration from the long period of non-disclosure

[00:23:11] Speaker 00:
was a factor that was accorded significant weight in determining the appropriate penalty amount.

[00:23:15] Speaker 00:
We would submit that that was a choice that the IRS was entitled to make, and that the IRS's discretion is at its highest, that it should be afforded the most deference when what it's doing is balancing and weighing competing interests and considerations.

[00:23:28] Speaker 00:
That's what it did here in giving substantial weight to the amount of the account, per active management of the account, per active concealment of the account,

[00:23:35] Speaker 00:
the length of time and the pattern and course of conduct during which she avoided paying taxes and avoided disclosing the account.

[00:23:43] Speaker 00:
We think that that decision is entitled to defiance.

[00:23:46] Speaker 03:
So the standard for determining the amount of the penalty is the harm to the government?

[00:23:53] Speaker 00:
That's certainly one of the factors that the government considers is whether the penalty amount would be commensurate with the harm to the government.

[00:24:01] Speaker 03:
But I didn't hear you say anything about

[00:24:04] Speaker 03:
assessing the penalty based upon the motives of the party involved.

[00:24:10] Speaker 03:
So in this case, the IRS seems to me you're treating, you know, criminals and nefarious types the same as people who have otherwise innocent motives.

[00:24:24] Speaker 00:
So the IRS did consider Ms.

[00:24:26] Speaker 00:
Kimball's motivations.

[00:24:27] Speaker 00:
This is at 462 of the record.

[00:24:30] Speaker 00:
It acknowledged that Ms.

[00:24:32] Speaker 00:
Kimball's father's stated reason for opening this account was a fear of religious persecution.

[00:24:37] Speaker 00:
However, it noted that that does not excuse compliance with US law.

[00:24:42] Speaker 00:
Court side.

[00:24:43] Speaker 00:
Sure.

[00:24:44] Speaker 00:
It also noted that at no point had Ms.

[00:24:47] Speaker 00:
Kimball stated that that was the reason why she maintained this as a secret account, that she never stated that she shared that fear, that she was acting to honor her father's wishes, not because of a shared fear

[00:24:59] Speaker 00:
And I think that's consistent with the position that she's taken on appeal in pages 10 and 11 of her opening brief, saying that she wanted to respect her father's wishes, not that she shared this specific fear.

[00:25:09] Speaker 00:
And in any event, if we were to excuse noncompliance with US law based on a stated fear of the US government, that would be a substantial problem in terms of enforcing reporting requirements.

[00:25:21] Speaker 00:
We would note that the IRS mitigation guidelines do provide that there will be no mitigation and no reduction of the FR penalty

[00:25:30] Speaker 00:
from the baseline numbers if the taxpayer has a history of criminal tax convictions, a history of convictions under the Bank Secrecy Act, a history of being assessed at four penalties in the past.

[00:25:41] Speaker 00:
This is at appendix 512.

[00:25:44] Speaker 00:
However, the government does not give someone a break just because they're not a criminal.

[00:25:49] Speaker 00:
The IRS does not give any break to the criminals, but it doesn't give someone a break just because they're not committing additional crimes

[00:25:57] Speaker 00:
additional violations of law in addition to the failure to report the taxes and pay those taxes and the failure to file the accurate FBARs.

[00:26:09] Speaker 00:
Turning to the eighth amendment challenge, we would note that as a threshold matter, the court of federal claims held that this claim was not presented on the face of the complaint.

[00:26:23] Speaker 00:
And we think consistent with this court's decision in Casa de Cambrio,

[00:26:27] Speaker 00:
was entitled to find that that theory had been waived, where she did not make any constitutional challenge and raised only a statutory challenge.

[00:26:35] Speaker 00:
But even if we turn to the merits, we would note that the F-bar penalty is neither refined nor excessive

[00:26:41] Speaker 00:
a finding of either of which is sufficient on its own to defeat the claim on the merits.

[00:26:48] Speaker 00:
With respect to whether or not it's a fine, we would suggest that there's three distinctions with respect to the FBAR penalty that make it more like the remedial tax penalties that were at issue in Hovering v. Mitchell, or the customs penalties that were at issue in One Lot Emerald Cut Stones, then like the punitive forfeiture measures that were held to be excessive fines or potentially excessive fines by the Supreme Court in Bajakajian,

[00:27:10] Speaker 00:
Austin and Tim's.

[00:27:12] Speaker 00:
First of all, the fact is that Congress explicitly distinguished between civil and criminal penalties here, which is different than any of the criminal forfeiture or interim forfeiture cases in which the Supreme Court addressed this issue.

[00:27:26] Speaker 00:
That the civil penalty is not dependent on the imposition of a

[00:27:30] Speaker 00:
criminal conviction.

[00:27:32] Speaker 00:
And those two can be the criminal and the civil penalties can be both enforced, or one or the other can be enforced and not dependent on each other.

[00:27:40] Speaker 00:
And in 5321D, they're explicitly allowed to stack on top of one another.

[00:27:45] Speaker 00:
Secondly, the legislative history surrounding the Bank Secrecy Act and the FAR provisions in particular reflect a congressional focus on remediation, on the fact that there is substantial tax loss and cost of investigation.

[00:27:59] Speaker 00:
And then finally, unlike the cases of Bajajkajian in Austin, the FBAR penalties are not a one size fits all penalty, which is the Supreme Court's concern in those cases, is that they are imposed as a matter of course, as a matter of statute, without regard to the nature of the underlying violation and without regard to the harm that's caused by the violation.

[00:28:22] Speaker 00:
Here, Congress has given the IRS discretion to adjust the penalty to make it commensurate with the nature of the underlying offense and with the harm caused to the government, which is in practice the way that the IRS also applies the imposition of those penalties.

[00:28:37] Speaker 00:
Turning to the excessiveness inquiry, we would note that, as the DC Circuit observed in Collins, that once a court finds that a penalty is not arbitrary and capricious, that it was within the agency's discretion to impose,

[00:28:49] Speaker 00:
It's not a great leap to then find that it's not constitutionally excessive, that it is a related inquiry.

[00:28:55] Speaker 00:
And here, we would note that the IRS, again, engaged in reasoned decision making in looking at the amount that was held in the account, the length of time it went undisclosed, the pattern of conduct, the pattern of the violations, which is consistent with the way that courts have also looked at the excessiveness inquiry

[00:29:15] Speaker 00:
in terms of the constitutional issue.

[00:29:16] Speaker 00:
The Seventh Circuit in Malawicka, the Eleventh Circuit in Sparazza, the District Court in Garrity II all looked at the fact that this was part of a continuing course of conduct which counseled against a finding of excessiveness on the facts here.

[00:29:27] Speaker 00:
We'd also note that Ms.

[00:29:28] Speaker 00:
Kimball falls squarely within the class of persons for whom the F.R.

[00:29:32] Speaker 00:
penalty is intended because she is someone who escaped taxation on the earnings in this account, the substantial earnings in this account,

[00:29:39] Speaker 00:
for a number of years.

[00:29:40] Speaker 00:
And because the length of time for which those taxes went unpaid was so long, we think that this is, in some ways, analogous to a situation in which both the principal and interest in the account went untaxed.

[00:29:54] Speaker 00:
Because this isn't a situation where it was five or 10 years.

[00:29:56] Speaker 00:
This is three decades.

[00:29:58] Speaker 00:
And therefore, the funds that escape taxation, the income that escape taxation is substantial, particularly when taking into account the interest that would have accrued representing the time value of money.

[00:30:09] Speaker 00:
Unless there are any further questions, we would ask that the lower course decision be affirmed.

[00:30:13] Speaker 04:
OK.

[00:30:13] Speaker 04:
Thank you, Mr. Krebs.

[00:30:16] Speaker 04:
Ms.

[00:30:16] Speaker 04:
Frum?

[00:30:21] Speaker 01:
I think that the issue of excessiveness of the 50% penalty is a very important issue in this case.

[00:30:30] Speaker 02:
Did you plead the Eighth Amendment claim in your complaint?

[00:30:33] Speaker 01:
We didn't, not specifically, but we pleaded that the fine was excessive and the Eighth Amendment penalty, the Eighth Amendment claim was that it was excessive.

[00:30:41] Speaker 02:
How does that preserve it?

[00:30:42] Speaker 02:
I mean, that sounds like it's a statutory argument in the complaint.

[00:30:47] Speaker 02:
A constitutional argument is completely separate.

[00:30:51] Speaker 01:
If, at least in the cases that I've seen, if you make a claim of excessiveness, and I don't think that that's a statutory argument.

[00:31:02] Speaker 02:
I think that that's an argument as to- The argument in the other part of this case is that 50% is excessive, and that it shouldn't have been awarded at 50%.

[00:31:11] Speaker 02:
It should have been reduced.

[00:31:13] Speaker 02:
Yes, but that was- In other words, the government put on notice that there was a constitutional violation here when you didn't cite the Eighth Amendment.

[00:31:21] Speaker 01:
The government was certainly on notice by the time of the motion for summary judgment, because it was a substantial factor in our motion for summary judgment.

[00:31:31] Speaker 01:
I don't know that you have to- You have to put it in your complaint.

[00:31:34] Speaker 02:
I don't know that you have to- Did you ask to file an amended complaint at any point?

[00:31:38] Speaker 01:
We did not.

[00:31:41] Speaker 01:
But I still think that this court can reach the constitutional issue.

[00:31:45] Speaker 01:
And in terms of, and there's also just the question of whether

[00:31:51] Speaker 01:
Under the facts of this case, the 50% was excessive, which is a completely different one.

[00:31:55] Speaker 01:
And when we look at what the IRS reviewed, the IRS didn't rely on 30 years of her not paying taxes, of which a good deal of the 30 years was not her not paying taxes, it was her father and her mother not paying taxes.

[00:32:09] Speaker 01:
They relied upon erroneous factual findings.

[00:32:12] Speaker 01:
They relied upon the finding that she controlled the account, she put her mother on the account.

[00:32:17] Speaker 01:
They relied upon the finding

[00:32:19] Speaker 01:
that she had no relationship to either of the countries in which these accounts were held.

[00:32:26] Speaker 01:
If you looked at the entire facts, and I'm not saying that she would be excused from a penalty because she followed her father's instructions as to the account.

[00:32:38] Speaker 01:
I'm saying that when you look at the entirety of this case, that it is not

[00:32:46] Speaker 01:
equitable and it is not reasonable and it is an abuse of discretion to basically oppose that 50% penalty on everyone, regardless of whether they deposited money that was illegally earned, regardless of whether they deposited the money with the intention of evading taxes, regardless of

[00:33:11] Speaker 01:
all of the other factors that the IRS says to take into account in looking at this.

[00:33:16] Speaker 01:
I don't think it's fair to say that Mrs. Kimball, for example, ran into the IRS because she knew that the IRS was going to come after her.

[00:33:25] Speaker 01:
She looked at the article and according to her, and there's nothing to say that it was wrong, she learned that she had erroneously not been reporting her foreign accounts, and she immediately went in and reported her foreign accounts.

[00:33:38] Speaker 01:
So I think that, again, if you look at the entirety of the circumstances in this case, even if you find that this is willful, that there was not a justification for applying the maximum possible penalty and that a lower penalty should have been applied.

[00:33:57] Speaker 03:
Are you aware of any other cases in which a lesser penalty was imposed by the government?

[00:34:05] Speaker 03:
You're not talking about the initial OVDP program, but just in the normal course.

[00:34:14] Speaker 01:
Yes.

[00:34:14] Speaker 01:
There are cases in which lower penalties were imposed.

[00:34:17] Speaker 01:
In fact, there's one of them that the willfulness issue is being litigated in, but it was a 25% penalty for some reason.

[00:34:26] Speaker 01:
But for the most part, I haven't seen this particular issue

[00:34:31] Speaker 01:
come before this particular issue of whether the 50% penalty should be imposed in every case across the board.

[00:34:40] Speaker 01:
I have not seen this issue come before the 40%.

[00:34:41] Speaker 03:
So the government does take into account factors that might warrant a mitigated penalty.

[00:34:48] Speaker 01:
I don't know if the government does or does not.

[00:34:50] Speaker 01:
I know that nobody's challenging that issue.

[00:34:52] Speaker 03:
But you just said that there are cases.

[00:34:54] Speaker 01:
There was one case in which I don't know why there was a 25% penalty.

[00:34:58] Speaker 01:
There are cases that I cite in which on facts that are significantly more egregious than this case, the actions were found to be non-willful.

[00:35:11] Speaker 01:
So the $10,000 penalty was imposed.

[00:35:14] Speaker 01:
But I don't know that this particular question

[00:35:18] Speaker 01:
of whether the 50% penalty can or cannot be opposed across the board was ever presented to any court before this one.

[00:35:27] Speaker 04:
Thank you.

[00:35:27] Speaker 04:
Thank you both.

[00:35:28] Speaker 04:
The case is taken under submission.

[00:35:31] Speaker 01:
Thank you.