Last month, a journey of more than eight years for San Antonio Member Rachael Rubenstein culminated with a victory before the U.S. Supreme Court in Bittner v. United States, which reduced $2.72 million in penalties to $50,000.
Rubenstein recently discussed the details of the case, the process of getting to and appearing before the Supreme Court, and how it feels to have so many years of work result in a positive outcome.
Can you start by providing an overview of the case?
Our client, Mr. Bittner, is originally from Romania. He immigrated as a young man to escape the communist regime. Mr. Bittner lived in the U.S. for eight years and became a naturalized citizen. In 1990, after the fall of communism, he returned to Romania and lived there for more than 20 years. While residing in Romania, Mr. Bittner became a successful businessman, acquiring interests in numerous companies. Like many dual citizens who live abroad, he was unaware that he had to file annual U.S. tax returns reporting worldwide income, and also that he was obligated to file information reporting forms about his interests in foreign bank accounts and companies.
When Mr. Bittner moved back to the U.S. in 2011, he learned of these obligations and took steps to get into compliance.
Ultimately, the underlying compliance failures and the mistakes made in trying to remedy those failures gave rise to multiple IRS examinations, FOIA litigation, various IRS administrative appeals, tax court litigation, plus the federal court litigation that culminated in the Supreme Court win.
The Bank Secrecy Act (BSA) requires US citizens to file an annual Report of Foreign Bank and Financial Accounts (FBAR) with a Treasury agency, FinCEN, when they have a financial interest in, or signature authority over, one or more bank accounts in a foreign country with an aggregate balance exceeding $10,000 (at any point in the year).
Mostly because of his majority ownership in Romanian companies (each had local bank accounts), Mr. Bittner had many reportable accounts. For the years at issue in the case, he eventually filed five late but correct FBARs identifying a grand total of 272 accounts. The IRS assessed what it believed to be the maximum penalties allowed under the statute for his non-willful failure to timely file those Forms.
What kind of penalties was he facing?
The IRS imposed a $10,000 penalty for each account not timely reported on the FBARs, so $2,700,000. The Department of Justice then sued Mr. Bittner in federal district court to reduce the assessment to a judgment. The core statutory interpretation issue was whether a non-willful “violation” under the BSA is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported.
The government argued that each account failure was a violation subject to a $10,000 penalty, and we argued that the failure to file a single FBAR gives rise to a single violation, irrespective of the number of accounts, meaning Mr. Bittner committed five per form violations and thus should only be liable for penalties totaling $50,000. That set in motion the lengthy legal battle that ended with a win before the Court.
How did the case proceed from there?
Mr. Bittner had been a client of the firm since 2012. I started working on the case when I joined the firm in 2015, under Farley Katz and Elizabeth Copeland. As the years progressed, I began to take on more responsibility. Farley Katz continued to steer the ship and other firm attorneys and staff played key roles at various stages. In the federal district court litigation, we engaged in briefing cross motions for summary judgment for several months in 2020. I successfully argued our motion on the statutory interpretation issue, but we lost on a reasonable cause claim that no penalties should apply at all. We knew the government would appeal the statutory issue – they were absolutely not going to let that stand. So, for strategic reasons, we went ahead and initiated an appeal to the Fifth Circuit.
Meanwhile, a case with the same per form vs. per account legal question was being adjudicated in California. In that case, the district court ruled in favor of the government, finding that the penalty was per account, so that taxpayer appealed to the Ninth Circuit. After our briefing was done before the Fifth Circuit, but before oral argument, the Ninth Circuit reversed and ruled for the Taxpayer.
In the fall of 2021, I argued our case before a panel of Fifth Circuit judges in New Orleans. It seemed to go very well, and we thought we were in a great position because it would be unusual for a circuit split to develop. But that’s exactly what happened, as the Fifth Circuit reversed our lower court’s ruling on the statutory issue.
Is that when you thought this could lead to the Supreme Court?
Yes, with a split between the circuits, it seemed ripe for the Supreme Court. Because now there was a class of taxpayers being treated differently for the same conduct depending on where they live, and that was unlikely to be acceptable long-term.
What occurred to get the case before the Supreme Court?
After the Fifth Circuit opinion, I was contacted by the heads of Supreme Court practice groups at several prestigious firms. They were all interested in taking the case to the Court. We knew it would be best for the client to have an attorney with deep Supreme Court experience take the helm.
Daniel L. Geyser at Haynes Boone was selected to serve as lead counsel, with us still as co-counsel. We loved working with Dan. He and his team did a superb job. We filed the petition for a writ of certiorari in February 2022. We were lucky to have several well-respected organizations file amici briefs in support of it, and the government acquiesced as well. It was granted in June – three days before the Dobbs v. Jackson Women’s Health Organization decision was issued overturning Roe v. Wade. I will never forget that week, as it was filled with such a mix of emotions.
What was your experience like on the day of the argument?
Surreal and exciting. It was my first time inside the Supreme Court building. Our case was the only one scheduled for argument on Nov. 2, 2022. It was a gorgeous fall day, so I rode an electric scooter from my Airbnb to the Court. There were a lot of people lined up to get in. I had a bit of trouble locating the correct point of entry. After going through security, I spent some time in the lawyer’s lounge with co-counsel where we chatted with the clerk and were provided cards for entry into the courtroom. We then went through the Great Hall and more security to enter the courtroom. I sat at counsel’s table, and a white quill feather was placed before me. This is a tradition that dates back to the early 1800s. The quills used to be functional pens but today are mementos for the attorneys of record.
The courtroom was much smaller than I imagined. When the Justices entered and sat, they were only a few feet away. During what was supposed to be Dan’s two minutes of uninterrupted argument, there were a few protestors who stood up one-by-one and shouted disapproval about the Dobbs decision. That was highly unusual. The protestors were quietly arrested but none of the Justices nor Dan skipped a beat. The Justices questions were somewhat predictable – nothing came up that had not been anticipated and practiced in moot sessions. I sensed that Justices Jackson and Gorsuch really understood the legal issue plus the inequities at play when battling the government. Their questions and remarks suggested that they were on board. The others were harder to read, although it was pretty clear that the decision was not going to be unanimous.
Dan was masterful in his advocacy and back-and-forth dialogue. It was a tremendous experience to be involved despite not arguing. My name is included on all of the briefs and the published opinion.
How did it feel to have someone else argue the case when you had argued it before the lower courts?
Because Dan did the best possible job for the client, it was great. Sometimes it was hard in the build-up to it because Farley and I cared so much about the facts, having developed and focused on them for so long. We had to learn to accept that at this level, and given the nature of the issue, many of the factual details were no longer all that important.
What did you think of the Supreme Court’s opinion when it was released?
I was thrilled and relieved. The decision was 5-4 and did not reflect a political split. That made it more rewarding. Justice Gorsuch authored the opinion, and Justice Jackson joined in full. Chief Justice Roberts and Justices Alito and Kavanaugh joined, except in the part of the opinion that relied on the rule of lenity.
What are the implications of the ruling?
The IRS must change course. For non-willful FBAR penalties, the IRS cannot penalize anyone more than $10,000 per noncompliant FBAR Form. It doesn’t matter how many accounts are reported on the form or should have been reported.
But a lot of the FBAR penalties assessed by the IRS in this area are willful, which is a different subsection of the statute, unaffected by the Court’s decision in this case.
Will this change your practice in any way?
I don’t expect it will change my practice much. I will continue to handle complex disputes involving the IRS at all stages and advise clients concerning compliance obligations and tax planning. This has been such an interesting and arduous journey. The best part has been working with such talented attorneys to finally obtain a fair result for the client.