Attorneys Clash at Hearing on FATCA Injunctive Relief

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Sept. 4 — Attorneys for the Justice Department clashed with attorneys representing Americans abroad at a hearing in federal district court on whether the Foreign Account Tax Compliance Act is unconstitutionally hurting U.S. citizens overseas (Crawford v. Dep't of Treasury, S.D. Ohio, No. 3:15-cv-00250, complaint filed, 7/14/15).

Speaking Sept. 4 before Judge Thomas Rose of the U.S. District Court for the Southern District of Ohio, the attorneys took sharply divergent views, not just on the injury issue, but on whether the Constitution allows all of FATCA, its agreements, and other requirements to report U.S.-owned accounts and assets held abroad.

FATCA requires foreign financial institutions to report U.S.-owned accounts to the Internal Revenue Service or face, in some cases, a 30 percent withholding tax on their U.S. source income.

The hearing was on a motion for injunctive relief filed in July along with a lawsuit seeking to get the statute overturned. The motion comes as a major FATCA reporting deadline approaches Sept. 30, and Rose, who asked few questions, said he plans to rule “as quickly as possible.” The Justice Department is expected to file a motion to dismiss in the next week or two.

DOJ trial attorney Edward J. Murphy said the plaintiffs—six current and former U.S. citizens living abroad, and Sen. Rand Paul (R-Ky.)—haven't made a good case that they are suffering “irreparable harm” that would qualify for immediate relief.

DOJ: Plaintiffs' Harm Fixable

Murphy rejected the argument by plaintiff attorney James Bopp, of the Bopp Law Firm in Terre Haute, Ind., that the fact that foreign financial institutions may be closing American accounts, denying mortgages, and causing other difficulties as a result of FATCA is “irreparable.”

Those are harms that can be fixed, he said. In addition to getting an injunction, taxpayers have to prove that action by the U.S. government is directly harming them, Murphy said.

“The harm definitely has to be imposed specifically on you,” Murphy said. “This is a decision made by a foreign financial institution, not by the U.S. government. An indirect chain of causation isn't enough.”

He noted that FATCA's 30 percent withholding tax hasn't affected any of the plaintiffs, and rejected Bopp's assertion that those are “draconian penalties” that amount to excessive fines under the Constitution. “They're taxes, not penalties,” Murphy said.

IGA Issue Contested

In his case before the judge, Bopp argued that the dozens of intergovernmental agreements under FATCA are “illegal.” They allow foreign banks to report information to their own governments, which then would pass the information on to the IRS.

Bopp contended that the Treasury Department doesn't have the authority to negotiate these IGAs and said the Senate should be required to ratify them, while Murphy said that just isn't the case. This is a power that is specifically delegated to Treasury in the text of the law, Murphy said. The administration is “fully authorized to do what's being done and it's proper,” he added.

In answer to Bopp's assertion that FATCA itself is unconstitutional in its requirements for sharing information that U.S. citizens abroad don't want disclosed, Murphy said, “None of this rises to the level of unconstitutional. It's clear that as a matter of public policy, the plaintiffs don't like FATCA, but public policy is not why we're here.”

That is the province of the legislation that Congress approved in 2010, and the plaintiffs “can ask Congress for a change. Senator Paul can try to encourage his colleagues to support a change,” Murphy said. Paul has introduced legislation in the past that would eviscerate FATCA—bills that never gained support in either chamber.

The lawsuit and the motion for injunctive relief were filed simultaneously in July, with the Justice Department filing a 57-page response to the motion Aug. 12 and the plaintiffs submitting a response to the DOJ document Aug. 26 (166 DTR K-3, 8/27/15).

Tough Road

Attorneys interviewed in the days before the hearing all said the hurdles to get FATCA overturned in the courts are extremely high.

Even though the reporting requirements are “onerous, duplicative, and in many ways intrusive,” Jeffrey A. Neiman, a partner with Marcus Neiman & Rashbaum LLP, said Sept. 1, “the reality is that whenever a properly passed bill is challenged as unconstitutional, it is an uphill battle to have it overturned.”

However, “I admire the plaintiffs for fighting,” said Neiman, whose firm has offices in Miami and Fort Lauderdale, Fla.
Jonathan Jackel, a partner with Burt, Staples & Maner LLP in Washington, told Bloomberg BNA Sept. 1 “it would be a big surprise if this derails FATCA.”

One issue, Jackel said, is that the plaintiffs have a tough challenge to show that the IGAs aren't within the president's authority, since the administration has negotiated tax exchange information agreements with a number of jurisdictions without the need for Senate action.

In addition, Jackel said, because the IGAs virtually eliminate the 30 percent withholding penalty that otherwise could be imposed under FATCA, “it seems to address the plaintiffs' concerns rather than imposing additional burdens.”

Injury Seen as Not Enough

Jackel said he agrees with the Justice Department that FATCA “isn't the kind of government action where anybody could find the kind of injury that would create grounds for relief. It's hard to see how a U.S. taxpayer gets to challenge that.”

He told Bloomberg BNA that “I don't mean to suggest that nobody is having bad consequences,” but rather that these don't meet the standard of “irreparable injury” required for relief.

Whatever relief the court does provide will be temporary, Jackel said, given the bigger picture of growing global tax transparency. He pointed to common reporting standards being developed by the Organization for Economic Cooperation and Development—looming on the horizon—which will lead to tax authorities all over the world exchanging information on foreign financial accounts (139 DTR I-1, 7/21/15).

On another issue, Jackel said he believes the plaintiffs' assertion that FATCA's 30 percent withholding tax is an unconstitutional excessive fine doesn't carry much weight.

Withholding Tax ‘Not That High.’

“Thirty percent is not that high compared with other penalties associated with failure to report foreign financial accounts,” he said. “It doesn't seem all that close to the constitutional line.”

Josh O. Ungerman, a partner with Meadows, Collier, Reed, Cousins, Crouch & Ungerman in Dallas, said Sept. 1 that it is unlikely the court will ultimately take the plaintiffs' side.

“I think the court is going to carefully review and analyze all arguments, but at the end of the day, the chances of FATCA being held unconstitutional are certainly low,” Ungerman told Bloomberg BNA.

According to the Dallas attorney, “It's unlikely a federal court would overturn FATCA to the extent it requires foreign financial institutions to collect and share information with the IRS regarding U.S. taxpayers, which arguably assists both the U.S. and taxpayers in meeting their filing requirements.”

To contact the reporter on this story: Alison Bennett in Dayton, Ohio, at
To contact the editor responsible for this story: Brett Ferguson at