Ohio District Court Rules against Taxpayers Seeking Injunction to Stop FATCA Reporting
In a recent decision, Mark Crawford et al. v. United States Department of the Treasury, the U.S. District Court for the Southern District of Ohio ruled against a motion for preliminary injunction by Senator Rand Paul and six other plaintiffs. These individuals requested that the district court enjoin the U.S. Treasury Department from enforcing the Foreign Account Tax Compliance Act (“FATCA”), the intergovernmental agreements (or “IGAs”) negotiated by the Treasury to implement FATCA and the Report of Foreign Bank and Financial Accounts (“FBAR”) administered by the U.S. Financial Crimes Enforcement network (“FinCEN”). The decision is significant because if a preliminary injunction were granted, the extensive global network created over the last several years to implement FATCA would have been brought to a standstill. The decision also is of interest because it is a rare challenge to a tax law based on U.S. constitutional law.
The Relevant U.S. Reporting rules
In 2010, Congress enacted FATCA with the purpose of ensuring that U.S. taxpayers having accounts with foreign financial institutions (“FFI’s”) reported the income from those accounts on their U.S. tax returns. The law requires, inter alia, that a U.S. withholding agent making a payment of certain U.S.-source income to an FFI, withhold U.S. tax from that payment unless the FFI satisfies certain reporting requirements with respect to the U.S. holder of the associated account. In general, an FFI will provide the required information rather than suffer the U.S. withholding tax. The regulations implementing FATCA are lengthy, far reaching and impose a significant compliance burden on foreign banks and brokers (as well as many other foreign taxpayers). Some banks and brokers have reacted to FATCA by refusing to allow U.S. taxpayers to maintain accounts with their institution.
Because FACTA is premised on reporting by FFIs of taxpayer information to the IRS, it is necessary to enable those institutions to provide that information in a manner compatible with the law of their governing jurisdiction. To that end, the U.S. Treasury has negotiated more than 70 Intergovernmental Agreements (“IGAs”) with other countries. Under the terms of a Model 1 IGA, an FFI provides information to its foreign government which then provides the information to the IRS under the terms of an income tax treaty or a tax information exchange agreement. Under the terms of a Model 2 IGA, the FFI provides information directly to the IRS.
U.S. persons with assets exceeding $10,000 in a foreign financial account must file an annual report, the FBAR, with the U.S. Treasury by June 30 of the following year. The FBAR is intended to help root out tax evasion, money laundering and terrorism. In general, the penalty for failure to file the FBAR is $10,000. If the failure is intentional, however, the penalty may be as large as the greater of $100,000 or 50 percent of the value of the account that is not reported.
The Elements of the Case
There are seven plaintiffs in the case. The most notable plaintiff is Senator Rand Paul of Kentucky, currently a candidate to be the Republican Party’s nominee for President, who seeks relief in his capacity as a member of the U.S. Senate. The other plaintiffs are U.S. citizens (or individuals who at one time were U.S. citizens but have renounced their citizenship) who are resident outside the United States and who claim to have been harmed by FATCA or FBAR reporting.
Eight counts comprise the complaint. The first count is that the IGA’s are in violation of the U.S. Constitution because they exceed the Executive Branch’s independent constitutional powers. The second count is that the IGA’s are in violation of the U.S. Constitution because they override FATCA. The third count is that, as to U.S. citizens living abroad, FATCA and the FBAR violate the Equal Protection Clause of the Fifth Amendment of the U.S. Constitution. The fourth, fifth and six counts challenge various penalties as unconstitutional under the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution. The seventh and eighth counts challenge FATCA and the IGAs under the Eighth Amendment to the U.S. Constitution, which prohibits unreasonable searches and seizures by the government.
The plaintiffs in the case seek a preliminary injunction barring the enforcement of FATCA, IGAs and the FBAR.
The Court’s Analysis
The legal standard for a preliminary injunction
The court begins its analysis by setting out the legal standard for review of a motion for a preliminary injunction. For a plaintiff to succeed on a motion for preliminary injunction, the plaintiff needs to demonstrate that (i) the plaintiff is likely to succeed on the merits of the case, (ii) the injunctive relief will save the plaintiff from irreparable injury, (iii) the injunctive relief will not harm others, and (iv) the public interest will be served by the injunction.
Six of the seven plaintiffs lack standing
In opposing the motion for preliminary injunction, the Treasury Department argues that the plaintiffs lacked “standing” to bring their lawsuit. Thus, if the plaintiffs lack standing they would be unable to succeed on the merits and the motion would be denied.
The district court notes that in order to prove standing, a plaintiff must demonstrate (i) that he has suffered an injury in fact, i.e., the injury must be concrete and particularized and it must be actual or imminent, (ii) there must be a causal connection between the injury and the conduct complained of by the plaintiff, and (iii) it must be likely, rather than merely speculative, that plaintiff’s injury will be redressed by a favorable decision of the court.
In arriving at its decision, the district court considered whether each of the seven plaintiffs satisfies the requirements for standing. The court first considers Senator Paul.
Senator Paul contends that the Executive Branch lacks the power to enter into the IGA’s by itself and that the IGA should have been submitted to the Senate for its consent. Thus, Senator Paul was harmed as he was denied an opportunity to consider and vote on whether to approve the IGA’s.
In considering Senator Paul’s standing, the District Court cited the Supreme Court decision of Raines v. Byrd in which several members of Congress challenge the constitutionality of The Line Item Veto Act of 1996. In that case, the Supreme Court distinguished a loss of political power by an elected representative from a loss of a private right, and found that standing could not be based on a loss of political power. Other courts have stated that the federal courts (Article III Courts under the U.S. Constitution) could not consider disputes between the Congress and the Executive Branch when the complaint is based on an injury to an official’s authority or power.
Generally, the District Court concludes that the other plaintiffs also lack standing, except for one (Keuttel), because they are unable to demonstrate that they had suffered an injury in fact:
None of the other Plaintiffs has alleged that he or she has suffered or is about to suffer injury under the FATCA withholding tax: none is an FFI to which the tax under §1471(a) applies, and none has been assessed, or informed that IRS intends to assess, the recalcitrant account holder withholding tax imposed by § 1471(b). Moreover, all plaintiffs but Crawford live in jurisdictions where FFIs are not currently subject to the § 1471(b) withholding tax. No plaintiff has alleged that he or she is subject to § 6038D reporting due to an aggregate asset value exceeding $50,000 or FBAR reporting due to a bank account exceeding $10,000 in value.
Keuttel is unlikely to succeed on the merits
As to Keuttel, the Treasury Department conceded that he had standing as to Count Three (the Equal Protection Count) and Count Six (the Excessive Fines Count). The Fourteenth Amendment to the U.S. Constitution provides for equal protection under the laws to U.S. citizens:
All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
Under Constitutional jurisprudence, Equal Protection claims are considered under the Due Process Clause of the Fifth Amendment. The gist of Count Six is that the only information reported to the IRS about domestic accounts is the amount of interest paid on that account during the calendar year. By contrast, under the FATCA regulations and the IGAs at issue in the case, more extensive information is required with respect to foreign accounts: the balance in the account, whether the account was opened or closed during the year, the amount of any income, gain, loss deduction or credit recognized during the year, etc. This difference in reporting requirements, the plaintiffs argue, is a violation of the Equal Protection Clause.
The District Court disagrees stating that an Equal Protection claim exists only when at least two classes of persons are treated differently under the law. There is no disparity in treatment of U.S. citizens living in the United States and those living abroad with respect to foreign accounts. As the court notes “Plaintiffs’ equal protection claims fail because the statutes, regulations, and executive agreements that they challenge simply do not make the classifications they assert. None of the challenged provision single out U.S. citizens living abroad.” The District Court goes on to find that the distinctions made by the regulations “is rationally related to a legitimate government interest.”
Count Six alleges that the FBAR willfulness penalty is unconstitutional under the Excessive Fines Clause of the Eighth Amendment. The “willfulness penalty” is imposed by section 5321 of the U.S. Code. The penalty for willingly failing to file an FBAR is the greater of $100,000 or 50 percent of the balance of the account at the time of the violation. Plaintiffs argue that the fine is grossly disproportionate to the gravity of the offense and therefore unconstitutional under the Eighth Amendment.
The court concludes that Keuttel’s claim is not “ripe” for adjudication and therefore cannot be heard by the court. The doctrine of ripeness is designed to prevent courts from entangling themselves in abstract disagreements. The District Court referred to the Sixth Circuit’s decision in Kentucky Press Assn v. Kentucky for a definition of the doctrine of ripeness. Courts consider three factors in deciding whether a claim is ripe for adjudication: (i) the likelihood that the harm alleged by the plaintiffs will ever come to pass, (ii) whether the factual record is sufficiently developed to produce a fair adjudication of the merits of the parties’ respective claim; and (iii) the hardship of the parties if judicial relief is denied at this stage of the proceeding.
The court found that the Keuttel’s and the other plaintiffs’ Eighth Amendment claims are not ripe under the Kentucky Press doctrine for multiple reasons, including (i) no withholding or FBAR penalty has been imposed against any of them, (ii) the 30 percent FFI withholding tax under §1471(a) will never be imposed against any of them because they are individuals, not FFIs, (iii) plaintiffs’ “cannot show that the FATCA taxes and the willful FBAR penalties are grossly disproportionate to the gravity of their (as yet unspecified) conduct,” (iv) the factual record is not sufficiently developed, and (v) plaintiffs will not suffer appreciable hardship from the court declining to hear their Eighth Amendment claims.
There are at least five income tax treaties or protocols awaiting consideration by the full U.S. Senate at this time. As we have noted, Senator Paul has written that he will object to any unanimous consent request, motion or waiver of any rule in relation to these treaties or any related measure. Senator Paul’s opposition to the treaties makes it difficult for these treaties to be approved by the full Senate because most Senate business is conducted by unanimous consent of the members. Senator Paul’s opposition to these treaties rests, at least in part, on the grounds that these treaties facilitate the exchange of information between the United States and foreign countries in order to implement FATCA.
The plaintiffs in this case likely will appeal the District Court’s decision. Thus, it will be some time before this issue is finally resolved. Until this case concludes, Senator Paul is unlikely to cease his opposition to the group of pending U.S. income tax treaties and protocols. Moreover, Senator Paul has not indicated whether, should he not prevail in this case, he will cease his opposition to the Senate’s consideration of the pending treaties and protocols.
 Case No. 3:15-cv-250 (September 29, 2015). The Bank Secrecy Act (31 USC §5314) authorizes the Secretary of the Treasury to require citizens or residents of the United States, and certain other persons, to maintain records and file reports related to certain transactions with a foreign agency. Pursuant to this authority, the Treasury has promulgated regulations that require each person subject to the jurisdiction of the United States (except a foreign subsidiary of a U.S. person) having a financial interest in, or signature or other authority over, any bank, securities or other financial account in a foreign country to report such relationship to the IRS and to provide the information specified in a form prescribed by Treasury. 521 U.S. 811, 818 (1997). Adarand Constructors Inc. v. Pena, 515 U.S. 200, 217 (1995). The Eighth Amendment to the U.S. Constitution provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” 454 F3d. 505, 509 (6th Cir. 2006).
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