Court Orders Foreign Money Repatriation to Collect FBAR Penalties

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Federal Court Rules Taxpayer Must Repatriate Money FBAR Penalty

Federal Court Rules Taxpayer Must Repatriate Money FBAR Penalty

Repatriation of Overseas Money for FBAR Penalty

(Prior Article Update 2021). The issue of offshore compliance for FBAR & Form 8938 and other international information reporting forms has taken the tax world by storm. As far as enforcement of penalties and how far the US Government can literally go in order to force payment of an outstanding foreign account liability US vs Schwarzbaum is one of the most important recent case ruling to date. The Schwarzbaum case is focused on FBAR — and an offshore penalty north of $12,000,000. This case is very complicated, and not so much because of the penalty analysis as it is for what the Court ruled on the key issue of forced repatriation of foreign money. In Schwarzbaum, the US Government sought to force the Defendant to repatriate money he has outside of the United States in order to satisfy the FBAR Judgment. With this ruling, Taxpayers can get a glimpse into how far the US government will go when it aggressively seeks to enforce FBAR penalties and FinCEN Violations. For most Taxpayers, being proactive and getting onto compliance voluntarily (through one of the accepted FBAR Amnesty Programs) is usually the path of least resistance. Let’s review the US v. Schwarzbaum repatriate FBAR penalty money ruling.

Court Ruling Reproduced (in part) below:

Report & Recommendations (R&R) 

      • “In the R&R, Judge Reinhart concluded that the Court has the authority, under the FDCPA and its express incorporation of the All Writs Act, 28 U.S.C. § 1651, to order Schwarzbaum to repatriate his foreign assets by virtue of its personal jurisdiction over him and that Schwarzbaum has no legal basis to resist a court order requiring him to repatriate his foreign assets. 

      • Specifically, Judge Reinhart noted that the FDCPA provides the “exclusive civil procedures of the United States to recover a judgment on a debt.” ECF No. [124] at 2 (quoting 28. U.S.C. § 3001(a)(1)). The FDCPA provides for the issuance of various writs, including writs of execution (§ 3203) and writs of garnishment (§ 3205). As such, Judge Reinhart recommends that the Court order Schwarzbaum to repatriate $18,227,465.89,1 in addition to any additional post-judgment interest accrued since May 31, 2021.”

 Objections

      • Defendant raises two principal objections to the R&R: (1) granting the Government’s Motion would be an improper application of the All Writs Act and would render the FDCPA’s post-judgment remedies obsolete; and (2) Schwarzbaum need not post an involuntary supersedeas bond to pursue his appeal. The Court considers each in turn.

B. The FDCPA and All Writs Act

      • Schwarzbaum argues that the Government’s reliance on the All Writs Act is misplaced because the FDCPA provides the “exclusive civil procedures” for the Government to collect a money judgment, and that the All Writs Act does not provide an independent collection remedy. The Government responds that the FDCPA does not remove the Court’s inherent authority to enforce its judgments, and district courts therefore enjoy a separate grant of plenary authority to extend or modify the use of any of the debt collection mechanisms available to the United States when enforcing the FDCPA. See 28 U.S.C. § 3013 (“The court may at any time on its own initiative or the motion of any interested person, and after such notice as it may require, make an order denying, limiting, conditioning, regulating, extending, or modifying the use of any enforcement procedure under this chapter.”).

      • Although the R&R notes that the Government has sought a writ of garnishment, see ECF No. [124] at 2, the Government has not actually done so. Rather, the Government asserts that it “cannot use traditional enforcement mechanisms to execute, garnish, or levy upon assets located in the United States. . . .” ECF No. [115] at 4.2 Recognizing that seeking a remedy under the FDCPA such as garnishment or execution would be fruitless in this case, the Government requests that the Court enter an order requiring Schwarzbaum to repatriate funds from his Swiss accounts to satisfy the amounts due under the Judgment, with pre-judgment interest, penalty accruals, a 10% surcharge under 28 U.S.C. § 3011, and post-judgment interest. Entry of such order would then permit the Government to proceed with a remedy specifically provided for under the FDCPA.

      • The FDCPA expressly provides for the issuance of various writs, including writs of execution and writs of garnishment. In pertinent part, the statute provides that “[a]ll property in which the judgment debtor has a substantial nonexempt interest shall be subject to levy pursuant to a writ of execution.” 28 U.S.C. § 3202(a). The statute also provides that “[a] court may issue a writ of garnishment against property (including nonexempt disposable earnings) in which the debtor has a substantial nonexempt interest and which is in the possession, custody, or control of a person other than the debtor, in order to satisfy the judgment against the debtor.” 28 U.S.C. § 3205. However, the FDCPA does not provide for orders of repatriation. Nevertheless, the Government urges the Court to rely on the FDCPA’s incorporation of the All Writs Act, and its inherent authority, to support the issuance of a repatriation order in this case.

      • Indeed, the FDCPA incorporates the All Writs Act, which empowers federal courts to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” 28 U.S.C. § 1651. Specifically, the FDCPA provides that “[a] judgment may be enforced by any of the remedies set forth in this subchapter. A court may issue other writs pursuant to section 1651 of title 28, United States Code, as necessary to support such remedies. . . .” 28 U.S.C. § 3202(a). The legislative history of the FDCPA shows that Congress incorporated the All Writs Act in Section 3202(a) to “allow broad flexibility in enforcing judgments.” Federal Debt Collection Procedures Act, Subcomm. on Economic and Commercial Law of the Comm. on the Judiciary (June 14, 1990). By incorporating the All Writs Act into the FDCPA, Congress granted courts the authority to take the necessary steps to aid their jurisdiction or to protect their judgments. See Federal Debt Collection Procedures Act, Hearing before the Subcomm. On Economic and Commercial Law of the Comm. on the Judiciary, H.R., 101st Cong. at 65 (1990). In addition, the FDCPA expressly provides that “[t]he court may at any time on its own initiative or the motion of any interested person, and after such notice as it may require, make an order denying, limiting, conditioning, regulating, extending, or modifying the use of any enforcement procedure under this chapter.” 28 U.S.C. § 3013. As previously noted, the FDCPA provides for the issuance of various writs, including writs of execution (§ 3203) and writs of garnishment (§ 3205).

      • Schwarzbaum relies upon Pennsylvania Bureau of Correction v. United States Marshals Service, 474 U.S. 34 (1985) and argues that a court may not use the All Writs Act to supplant statutory procedure as the primary means of judgment recovery here. In Pennsylvania Bureau of Correction, the district court ordered the U.S. Marshals to transport state prisoners, relying only on the authority of the All Writs Act without an underlying statutory framework. Id. at 40. The Supreme Court held that the All Writs Act does not authorize a district court to issue baseless, “ad hoc writs whenever compliance with statutory procedures appears inconvenient or less appropriate.” Id. at 43. The Court defined the All Writs Act as a “residual source of authority” meant to supplement existing statutory procedure. Id. Moreover, the Supreme Court “consistently has construed the All Writs Act to authorize a federal court ‘to issue such command as may be necessary or appropriate to effectuate and prevent the frustration of orders it has previously issued in its exercise of jurisdiction otherwise obtained.’” Id. (quoting United States v. New York Telephone Co., 434 U.S. 159, 172 (1977)).

      • But, Schwarzbaum’s reliance on Pennsylvania Bureau of Correction is not persuasive in this case because the Court’s reliance upon the All Writs Act does not supplant the statutory procedure. Here, the Court is not issuing an ad hoc writ independent of applicable statutory authority. Rather, ordering Schwarzbaum to repatriate sufficient funds from his bank accounts in Switzerland conforms with the FDCPA, relying upon the express incorporation of the All Writs Act to support and supplement the expressly enumerated post-judgment remedies of garnishment and execution.

      • Nor is the Court persuaded that because the funds in question were never in the United States, they are removed from the reach of the FDCPA. Notwithstanding the dearth of case law regarding the interplay between the FDCPA and the All Writs Act, the cases supporting the Court’s interpretation rely upon the Court’s personal jurisdiction over the Defendant to reach assets overseas, when the Defendant has an outstanding judgment or tax liability to the Government. See, e.g., United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962); United States v. McNulty, 446 F. Supp. 90, 90 (N.D. Cal. 1978). The Government and the R&R rely on McNulty, Ross, and United States v. Grant, No. 00-8986, 2005 WL 2671479 (S.D. Fla. Sept. 2, 2005), report and recommendations adopted by 2005 WL 3747779, at *1 (S.D. Fla. Dec. 22, 2005), which in turn rely on United States v. First National City Bank, 379 U.S. 378 (1965), to support the principle that this Court has the authority to order a party to repatriate foreign assets pursuant to its personal jurisdiction over the judgment debtor. Notably, Schwarzbaum has not disputed the Court’s personal jurisdiction over him in this case.

      • In United States v. Ross, the defendant taxpayer was subject to jeopardy assessments with respect to income tax liabilities, and the court ordered him to transfer stock certificates from the Bahamas to the court-appointed receiver. 196 F. Supp. 243, 245-46 (S.D.N.Y. 1961). The court held that “[o]nly the most compelling reasons should a court refuse relief to the Government where a citizen of the United States keeps most of his assets in a foreign country and claims that they are immune from application to his income tax liability because of their situs in a foreign country.” Id. The Second Circuit held that “[p]ersonal jurisdiction gave the court power to order Ross to transfer property whether that property was within or without the limits of the court’s territorial jurisdiction.” Ross, 302 F.2d at 834. The Eleventh Circuit adopted this language from Ross when considering a receiver’s power to reach a judgment debtor’s foreign assets. Citronelle-Mobile Gathering, Inc. v. Watkins, 934 F.2d 1180, 1187 (11th Cir. 1991) (“The case law establishing that a federal receiver may reach foreign assets is relatively clear. . . .”).

      • Indeed, in Citronelle, the Eleventh Circuit observed that, although the language of Rule 66 of the Federal Rules of Civil Procedure does not expressly establish or prohibit a receiver’s power in foreign situations,

      • [t]he rule that emerges . . . appears to be this: when a district court has in personam jurisdiction over the defendant, (1) the court may appoint a receiver to enforce a judgment upon a showing that such an appointment is necessary . . . and (2) such a duly appointed receiver may exercise authority over any assets located in foreign countries provided that his actions are taken in accord with or otherwise do not violate the law of that foreign nation.

      • Id. Logically, if a court may appoint a receiver to reach assets in a foreign country by virtue of the court’s personal jurisdiction over the defendant, then there is no reason to conclude that a court would not itself have the power to do the same.

      • In McNulty, the court ordered the defendant to bring lottery winnings to the United States from the Irish sweepstakes that were deposited in a secret bank account on the Island of Jersey, because the United States prevailed in a civil action for the collection of taxes. 446 F. Supp. at 90. The court noted that it “found no case specifically invoking [the specific] section of the Internal Revenue Code for the type of order sought,” but it relied on Ross to hold that repatriation is a sufficient remedy for collecting income tax liabilities. Id. at 91. Just as in Ross, in McNulty, the “court, by virtue of its jurisdiction over the defendant, ha[d] the power to order him to repatriate the assets located in the foreign bank.” Id. at 92.

      • In Grant, the court ordered repatriation from two offshore trusts in Bermuda and the Island of Jersey because a tax lien had attached to the trusts. 2005 WL 2671479, at *1. There, the court held that “[o]nce the power of the person who is either the owner or the beneficiary of the asset to repatriate is established, the court can require that person to repatriate the funds.” Id. at *3.

      • Finally, in First National City Bank, the Supreme Court upheld a temporary restraining order against a debtor to freeze bank accounts in Uruguay because “[o]nce personal jurisdiction of a party is obtained, the District Court has authority to order it to ‘freeze’ property under its control, whether the property be within or without the United States.” 379 U.S. at 384. The Court noted, “[i]f such relief were beyond the authority of the District Court, foreign taxpayers facing jeopardy assessments might either transfer assets abroad or dissipate those in foreign accounts under control of American institutions before personal service on the foreign taxpayer could be made.” Id. at 385. While dissipation of assets is not of concern in this case, interpreting the FDCPA in the manner urged by Schwarzbaum would incentivize judgment debtors to retain assets overseas to avoid collection of a valid judgment obtained by the Government. See id.

      • The courts in McNulty, Ross, and Grant derive their authority from 26 U.S.C. §§ 7402 and 7403 of the Internal Revenue Code (“IRC”). See Grant, 2005 WL 2671479, at *3 (“District courts have broad authority to issue orders necessary for the government to collect unpaid federal tax liabilities.”). In those cases, “that authority extends to orders of repatriation of funds held in foreign countries, and district courts have repeatedly ordered that assets such as those held in foreign bank accounts be repatriated to pay down tax owed to the federal government.” Id.

      • The language of the IRC relied upon in the cases supporting the Court’s authority to order repatriation, and the FDCPA is similar. Under the tax code, district courts have jurisdiction to issue writs and other orders “necessary or appropriate for the enforcement of the internal revenue laws.” 26 U.S.C. § 7402(a). Similarly, under the FDCPA, “a court may issue other writs pursuant to [the All Writs Act] as necessary to support such remedies” set forth by the subchapter of the FDCPA that authorizes garnishment and execution. 28 U.S.C. § 3202(a). This statutory language, paired with the All Writs Act’s authorization of “all writs necessary or appropriate in aid of . . . jurisdiction,” is comparable to the statutory authority from which the courts in McNulty, Ross, and Grant derived the ability to reach assets overseas.

      • Schwarzbaum has not pointed to a convincing basis for why the reasoning in these cases should not apply in the context of this case. The incorporation of the All Writs Act into the FDCPA is clear, and the Court’s authority to issue a repatriation order has a foundation in the line of cases referenced above. Indeed, rather than render the remedies in the FDCPA “obsolete,” as Schwarzbaum argues, the All Writs Act is needed to support the post-judgment remedies provided by the FDCPA, and does not supplant any statutory procedure. See Penn. Bureau of Corr., 474 U.S. at 43. A writ of garnishment or execution is “not inconvenient or less appropriate;” — it would simply be fruitless in this case without first requiring the transfer of funds. Id. Indeed, interpreting the FDCPA in the manner Schwarzbaum urges would strip the FDCPA of any meaning or power where the United States obtains a valid judgment against an individual otherwise subject to the Court’s jurisdiction, but who holds the majority of his assets overseas. Such a result would be inconsistent with the broad flexibility afforded by the FDCPA in enforcement of judgments. Therefore, after determining that the available post-judgment remedies under the FDCPA alone are not sufficient to allow the Government to collect on the Judgment in this case, the Government’s request that the Court issue an order directing Schwarzbaum to bring sufficient funds to the United States to satisfy the Judgment is not misplaced.

C. Supersedeas Bond

      • Schwarzbaum’s second objection does not specifically identify a portion of the R&R to which objection is made. Instead, Schwarzbaum argues that the Government’s request is a thinly-veiled effort to compel him to fund a bond that he is not legally required to post. Schwarzbaum’s second objection is improper and lacks merit. The Government has obtained a Judgment in this case, which remains valid and enforceable unless and until the Eleventh Circuit determines otherwise in the pending appeal. Should Schwarzbaum wish to stay the execution of the Judgment, he is free to do so under Rule 62 of the Federal Rules of Civil Procedure. See SunTrust Bank v. Ruiz, Case No. 14-21107, 2015 WL 11216712, at *2 (S.D. Fla. Aug. 16, 2015) (“[A] bond is the norm for obtaining a stay.”).

D. Issuance of Statutory Notice

      • Though not specifically addressed in the R&R, the Government attaches to its Motion and requests the issuance of a notice of post-judgment repatriation order, see ECF No. [115-1], pursuant to 28 U.S.C. § 3202(b). The request, however, is not necessary with respect to the order of repatriation.

      • The statute provides, in pertinent part, that “[o]n the commencement by the United States of an action or proceeding under this subchapter to obtain a remedy, the counsel for the United States shall prepare, and clerk of the court shall issue, a notice. . . .” 28 U.S.C. § 3202(b). The statute provides further that “[a] copy of the notice and a copy of the application for granting a remedy under this subchapter shall be served by counsel for the United States on the judgment debtor against whom such remedy is sought. . . .” 28 U.S.C. § 3202(c).

      • Here, the Government has not sought the remedy of either garnishment or execution, as specifically enumerated in the FDCPA. Rather, the Government has requested an order in support of such remedies, directing Schwarzbaum to repatriate sufficient assets to satisfy the Judgment from his foreign bank accounts to the United States. Once Schwarzbaum has complied with this order and sufficient funds are present in the United States, the Government may thereafter seek a remedy of garnishment or execution under the FDCPA with respect to those funds, and request that the Clerk of Court issue the appropriate notice.

Conclusion

      • The Court finds Judge Reinhart’s R&R to be well-reasoned and correct. As a result, Defendant’s Objections are overruled. Accordingly, the Court ADOPTS the R&R, ECF No. [124], and the Motion, ECF No. [115], is GRANTED. The Government is directed to submit a proposed order effectuating the Court’s grant of repatriation as set forth in this Order, which includes the updated amount owed pursuant to the Judgment, no later than November 4, 2021.

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