Jarnagin v. United States

LARRY D. JARNAGIN AND LINDA JARNAGIN, Plaintiffs, v. THE UNITED STATES OF AMERICA, Defendant.

No. 15-1534T

United States Court of Federal Claims

November 30, 2017

Keywords: Tax Refund; Illegal Exaction; IRS; Bank Secrecy Act; Report of Foreign Bank and Financial Accounts; FBAR; Reasonable Cause; Ordinary Business Care and Prudence.

Jason M. Silver, Scottsdale, AZ, for Plaintiffs.

Jason S. Selmont, U.S. Department of Justice, Tax Division, Court of Federal Claims Section, Washington, DC, with whom were Blaine G. Saito, Trial Attorney, David I. Pincus, Chief, Court of Federal Claims Section, and David A. Hubbert, Acting Assistant Attorney General, for Defendant.

OPINION AND ORDER

KAPLAN, Judge.

In this case, plaintiffs Larry and Linda Jarnagin, husband and wife, assert that the IRS wrongfully assessed and collected penalties from them for the 2006, 2007, 2008, and 2009 tax years based on their failure to file certain reports regarding their foreign bank account as required by the Bank Secrecy Act. Mr. Jarnagin, a dual U.S.-Canadian citizen, and Mrs. Jarnagin, a U.S. citizen with Canadian residency status, do not dispute that they owned an account at the Canadian Imperial Bank of Commerce during each of the tax years at issue. They also do not dispute that they were required by law to file a report regarding that account with the IRS for each of those years and that they failed to do so. They assert instead that their failure to file the reports was due to reasonable cause and that the IRS was therefore barred from assessing and collecting the penalty by 31 U.S.C. § 5321(a)(5)(B)(ii).

For the reasons set forth below, the Court concludes that the Jarnagins did not exercise ordinary business care and prudence with respect to their obligation to file the reports at issue and thus cannot avail themselves of the reasonable cause defense. Accordingly, the government's motion for summary judgment is GRANTED and the Jarnagins' motion for summary judgment is DENIED.

BACKGROUND

I. The Statutory Framework

In 1970, Congress enacted the Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114, in order to address its concerns over "the use by American residents of foreign financial facilities located in jurisdictions with various types of secrecy laws." H.R. Rep. No. 91-075 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4395. "[C]onsiderable testimony" had been presented to Congress regarding "serious and widespread use of foreign financial facilities located in secrecy jurisdictions for the purpose of violating American law." Id. at 4397. In the Bank Secrecy Act, Congress responded by imposing on residents, citizens, or persons doing business in the United States a requirement that they keep records and make reports concerning certain foreign accounts and transactions. 31 U.S.C. § 5314(a) (2006)¹; see also id. § 5311 (stating that the "purpose" of the Act is "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism").

The statute thus provides, in pertinent part, that "the Secretary of the Treasury shall require a resident or citizen of the United States . . . to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency." Id. § 5314(a). The Secretary of the Treasury has issued regulations implementing the statutory requirements. They state, in pertinent part, as follows:

Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons.

31 C.F.R. § 1010.350(a) (2016).² The reporting form prescribed under 31 U.S.C. § 5314 and referenced in the regulation is Form TD-F 90-22.1 (entitled "Report of Foreign Bank and Financial Accounts"). Id.³ Under the regulations, the form must be filed "on or before June 30 ofeach calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year." Id. § 1010.306(c) (previously codified at 31 C.F.R. § 103.27).

The statute authorizes the Secretary of the Treasury to impose a civil monetary penalty of not more than $10,000 for failure to file the Form TD-F 90-22.1. See 31 U.S.C. § 5321(a)(5) (providing that if "any person . . . violates, or causes any violation of, any provision of section 5314," then "[t]he Secretary of the Treasury may impose a civil money penalty," not to exceed $10,000). "No penalty shall be imposed . . . with respect to any violation," however, "if—(I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported." Id. § 5321(a)(5)(B)(ii).

II. Undisputed Facts

A. The Jarnagins' Educational and Business Backgrounds

Plaintiff Larry Jarnagin is a high school graduate. Def.'s Am. App. B Ex. 3 at 9, ECF No. 22-1. Although he does not have a college degree, he took courses at New Mexico Western University in approximately 1963 or 1964. See id. In addition, Mr. Jarnagin completed both barbering school and chiropractic school, and practiced professionally as a chiropractor for five years. Id. at 9-10. Mr. Jarnagin also owned and operated a number of barbershops in New Mexico. Id. at 13.

Linda Jarnagin attended multiple community colleges in Iowa and New Mexico in the 1960s and 1970s, taking classes in elementary education. Id. Ex. 4 at 8-9. She did not obtain a degree. Id. In the late 1970s, Mrs. Jarnagin took classes at a vocational technical school in order to obtain a real estate broker's license. Id. at 11. In approximately 1978, she passed her licensing exam. See id. at 9, 11-12. For about the next four years, Mrs. Jarnagin worked as a real estate broker. Id. at 14-15.

The Jarnagins were married in 1966. Id. at 8. They moved to Oklahoma around 1971, where Mr. Jarnagin, in addition to barbering, became a cattle farmer and began buying and selling farms. Id. Ex. 3 at 13. He also began buying, selling, and leasing oil and mineral rights. Id. at 16. Mr. Jarnagin has since continuously been involved in the real estate business. See id. at 16-17. He has set up and used corporations, limited liability companies, and "C Corps" for the purpose of buying and selling property. Id. at 17.

In the early- to mid-1980s, Mr. Jarnagin bought property in Canada and began operating his own ranch in British Columbia. Id. at 18-20. In 1986, the Jarnagins immigrated to Canada. Id. at 19. In 1989, Mr. Jarnagin became a Canadian citizen. Id. He currently resides in Canada approximately nine to ten months out of the year. Id. at 95. Mrs. Jarnagin spends more of her time in Oklahoma than in Canada. See id. at 95-96; see also id. Ex. 4 at 53; id. Ex. 5 at 30-31.

In the early 1990s, the Jarnagins purchased a number of apartment complexes in Oklahoma. Id. Ex. 3 at 20-21. At one point, they owned as many as six different properties. See id. Ex. 4 at 18. Mrs. Jarnagin "actively manage[d]" them. Id. Ex. 3 at 21. She served as the"property supervisor" and oversaw on-site managers, maintenance, and landscaping. Id. Ex. 4 at 18. In the 2000s, the Jarnagins sold or transferred the apartment complexes. Id. at 18-19. In particular, in 2006, the Jarnagins engaged in a property exchange known as a "1031," whereby they exchanged one of the apartment complexes for a shopping center in Oklahoma City, which they still own.⁴ Id. at 19.

The Jarnagins also became owners of a nightclub in Phoenix, Arizona in the mid- or late-1990s, by virtue of their status as creditors in a bankruptcy proceeding. See id. Ex. 3 at 22; id. Ex 4 at 20. Ultimately, Mrs. Jarnagin went to Phoenix and took over the operations of the nightclub directly. See id. Ex. 3 at 22-23; id. Ex. 4 at 20-21. In 2006, the property was taken by the city of Phoenix through its power of eminent domain. Id. Ex. 4 at 22.

B. The Jarnagins' Canadian Bank Account and Their 2006-2009 Personal Income Tax Returns

In 1986, the Jarnagins opened a bank account in Canada at the Canadian Imperial Bank of Commerce. See id. Ex. 3 at 26-27. They continued to own and maintain this account throughout 2006, 2007, 2008, and 2009. Id. Ex 1 at 1-3, 6. At the end of 2006, the Jarnagins' account had a balance of $4,000,000. Id. at 1. At the end of 2007, the account had a balance of $3,500,000. Id. at 2. At the end of 2008, it had a balance of $3,850,000. Id. And in 2009, the account had a balance of at least $1,870,000. See id. at 2-3; see also id. Ex. 31 at 2, ECF No. 22-9.

For tax years 2006 through 2009, the Jarnagins filed joint Form 1040 Individual Income Tax Returns. Id. Ex. 7, ECF No 22-2; id. Ex. 8, ECF No. 22-4; id. Ex. 9, ECF No. 22-6; id. Ex. 10, ECF No. 22-7. Schedule B of each of those tax returns contained a section entitled "Part III Foreign Accounts and Trusts." See, e.g., id. Ex. 7 at 5. In that section, line 7a required a response to the following question:

At any time during [the relevant tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?

Id. The form then contained checkboxes for answering the question either yes or no and directed filers to "[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1." Id.

On their 2006, 2007, 2008, and 2009 tax returns, the Jarnagins' accountants (see below) checked the "no" box in response to line 7a, notwithstanding that the Jarnagins...