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CA 6 affirms; Rand Paul, others can’t challenge foreign account reporting regime

The Court of Appeals for the Sixth Circuit, affirming a district court opinion, has dismissed for lack of standing a suit brought by Senator Rand Paul (R-KY) and several individual plaintiffs challenging several aspects of the Foreign Account Tax Compliance Act (FATCA) and also challenging the Foreign Bank Account Report (FBAR) requirements. The court cited numerous different grounds for its decision with respect to the numerous provisions challenged by the numerous plaintiffs. For example, it found that Senator Paul’s alleged harm because he was denied the right to vote on rules that were created by the Executive branch was an insufficient injury for purposes of establishing standing.

Background—foreign account reporting. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474, FATCA) to the Code. Chapter 4 generally requires withholding agents to withhold a 30% tax on certain payments to a foreign financial institution (FFI), unless it has entered into an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. Withholding can also apply to FFI account holders who refuse to identify themselves as U.S. taxpayers. The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities.

In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative model intergovernmental agreements (IGAs) that facilitate FATCA implementation. The main distinction between the two is that under Model 1 IGAs, foreign governments agree to collect their FFIs’ U.S. account information and send it to IRS, whereas under Model 2 IGAs, foreign governments agree to modify their laws to the extent necessary to enable their FFIs to report their U.S. account information directly to IRS.

Also enacted as part of FATCA were the “asset value reporting” rules of Code Sec. 6038D, under which individuals holding more than $50,000 of aggregate value in “specified foreign financial assets” must file a report with their annual tax returns that includes, for each asset, the “maximum value of the asset” during the tax year. (Code Sec. 6038D(c)(4))

The Bank Secrecy Act (BSA) gives the Treasury Department authority to collect information from U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the U.S. A provision of the BSA requires that a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) be filed with the Financial Crimes Enforcement Network (FinCEN, a bureau of the Treasury Department) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. Enforcement authority regarding the FBAR has been delegated to IRS, which can impose penalties for noncompliance. Penalties for willful failures to file an FBAR can be as high as $100,000 or 50% of the value of the unreported account.

Background—jurisdiction. The first question in every case brought in federal court is whether the court has jurisdiction, which includes the issue of standing. To obtain standing, a plaintiff must show that it suffered an injury in fact that is fairly traceable to the defendant’s conduct and capable of being redressed by favorable decision from the court.

Standing contains three elements: (1) plaintiffs must have suffered an injury in fact—an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical; (2) there must be a causal connection between the injury and the conduct complained of—i.e., the injury has to be fairly traceable to the challenged action of the defendant; and (3) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. ( Lujan v. Defs. of Wildlife, (Sup Ct 1992) 504 U.S. 555)

Facts. The plaintiffs in this case include Senator Paul, U.S. citizens who live in foreign countries, dual citizens of the U.S. and another country, and former U.S. citizens. The plaintiffs generally challenged the validity of FATCA’s reporting and withholding requirements and the penalty for willfully failing to file an FBAR, and specifically challenged the validity of several countries’ IGAs with the U.S. as exceeding the proper scope of the Executive Branch’s power. They further asserted, among other things, that they faced difficulties in establishing foreign accounts or were forced to divide assets as a result of FATCA, and that various elements of the overall reporting regime were unconstitutional.

Previous proceedings. In 2015, an Ohio district court denied the plaintiffs’ motion for a preliminary injunction that would prevent the defendants (i.e., the Treasury Department, IRS, and FinCEN) from enforcing FATCA, IGAs negotiated by the Treasury Department, and the FBAR regime. (Crawford, et al, v. U.S. Dept. of Treasury, et al, (DC OH 2015) 116 AFTR 2d 2015-6288; see Weekly Alert ¶  2  10/08/2015.)

In 2016, that same district court granted the defendants’ motion to dismiss the case, finding that all of the plaintiffs lacked standing to bring it. (Crawford, et al, v. Dept. of the Treasury, et al, (4/26/2016 DC OH) 117 AFTR 2d ¶2016-650; see Weekly Alert ¶  2  05/05/2016)

For example, Senator Paul argued that he had standing based on his institutional duty to advise and consent under the Constitution—i.e., that the IGAs exceeded the scope of the Executive Branch’s power and should have been submitted for Senate approval. The court, however, rejected this argument, which it said amounted to an attempt to base standing on a loss of political power, stating that “[a] legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public.” Senator Paul also failed to establish any injury.

Sixth Circuit affirms. The Sixth Circuit has now affirmed the 2016 district court decision, again finding that none of the plaintiffs had standing with respect to any of the their claims. The following were among the Court’s findings:

… With respect to the IGAs, any incursion upon Senator Paul’s political power is not a concrete injury like the loss of a private right, and any diminution in the Senate’s lawmaking power is not particularized but is rather a generalized grievance. The Court said that Senator Paul did not plead that his vote on its own would have been sufficient to forestall the IGAs. Rather, Senator Paul has a remedy in the legislature, which is to seek repeal or amendment of FATCA itself, under the aegis of which Treasury is executing the IGAs.

… With respect to the FBARs, the Court, citing the Supreme Court in Susan B. Anthony List v. Driehaus, (2014) 134 S Ct 2334) , said that, in a pre-enforcement challenge to a federal statute, a plaintiff satisfies the injury requirement of standing by alleging “an intention to engage in a course of conduct arguably affected with a constitutional interest, but proscribed by a statute, and [that] there exists a credible threat of prosecution thereunder.”

The Court here said that, although most of the plaintiffs in this case alleged foreign account balances over $10,000 so as to be subject to the FBAR requirement, no plaintiffs alleged both an intent to violate the FBAR requirement and a credible threat of the imposition of a failure-to-file penalty, as Driehaus would require in order for there to be standing to bring a pre-enforcement challenge to the FBAR penalty.

… With respect to the FATCA individual-reporting requirements, no plaintiff had standing because no plaintiff alleged either an actual injury that was fairly traceable to FATCA or an imminent threat of prosecution from noncompliance with FATCA.

First, no plaintiff alleged any actual enforcement of FATCA such as a demand for compliance with the individual-reporting requirement or the imposition of a penalty for noncompliance.

Second, no plaintiff could satisfy the Driehaus test for standing to bring a pre-enforcement challenge to FATCA because no plaintiff claimed to hold enough foreign assets to be subject to the individual-reporting requirement, and, as a result, no plaintiff could claim that there was a “credible threat” of either prosecution for failing to comply with FATCA. All but two of the plaintiffs either failed to state the value of their foreign assets altogether or alleged only that they had foreign accounts with an aggregate value “greater than $10,000″—but FATCA’s individual-reporting requirement applies only to individuals with at least $50,000 worth of assets held in foreign accounts, with significantly higher thresholds in some cases.

References: For withholdable payments to FFIs and other foreign entities, see Federal Tax Coordinator 2d ¶  O-13070  et seq.; United States Tax Reporter ¶  14,714  et seq. For foreign financial accounts reporting requirements, see Federal Tax Coordinator 2d ¶  S-3650; United States Tax Reporter ¶  60,114.06.

Crawford, et al, v. Department of the Treasury, et al (CA 6, 08/18/2017)

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