'Florida Bankers Association and Texas Bankers Association v. U.S. Dept. of Treasury' – Nonresident Alien Bank Deposit Reporting

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By Edward Tanenbaum

Alston & Bird LLP, New York, NY

Back in 2012, Treasury and the IRS issued final regulations1 under §6049 addressing the reporting of bank deposit interest paid to nonresident aliens. At the time, Foreign Account Tax Compliance Act (FATCA) was two years old (although not yet fully implemented) and the era of international tax enforcement and exchange of information was already taking shape.

Proposed regulations issued ten years earlier had initially required reporting for deposit interest payments made to any nonresident alien. That was changed in subsequently issued proposed regulations to require reporting only with respect to payments made to nonresident aliens of certain designated countries. The change to the proposed regulations came about due to pressure from U.S. banks who were troubled by the administrative burdens involved and by concerns that this requirement would drive away investment in U.S. banks.  The banks argued, moreover, that bank deposit interest paid to nonresident aliens is generally exempt from tax anyway.

But those proposed regulations were also withdrawn and a new set was proposed, once again generally requiring reporting across the board. It was these regulations, as modified, that were ultimately finalized in 2012, prompted, in part, by FATCA and the growing spirit of worldwide information exchange.

The final regulations added some important limitations.  The only payments to nonresident aliens that would be required to be reported would be those to persons residing in countries with which the United States maintained an income tax treaty or other agreement relating to exchange of information. Further, the Preamble went on to say, even if an agreement exists, the IRS would not be compelled to exchange information if there was concern regarding the use of the information or if other factors existed which would make exchanges inappropriate. This limitation was imposed to meet head-on the concern that deposit interest would be shared with countries that do not protect confidentiality of information exchanged or that might use the information other than for enforcement of tax laws.

At the time of the publication of the final regulations, Rev. Proc. 2012-242 was issued, which provided a list of those countries with whom the United States has exchange of information treaties as well as a list of those countries with whom the United States has automatic exchange of information. Rev. Proc. 2012-24 was superseded by Rev. Proc. 2014-643 and was supplemented by Rev. Proc. 2015-50.4 Rev. Proc. 2014-64 specifically states again that information will not be exchanged with a country if there is a concern regarding the use of that information.

A number of concerns on the part of Treasury and the IRS drove the issuance of the final regulations. For example, the government recognized that, with FATCA, it had an interest in reciprocating (although not in all cases) and in exchanging information under treaties. In addition, reporting would help track down U.S. tax evaders and make it more difficult for U.S. persons to falsely claim to be nonresidents.

However, a number of banks eventually brought suit challenging the enforceability of the §6049 regulations, which mandated their reporting of deposit interest paid to nonresident aliens residing in those countries listed in the various revenue procedures (and a failure to so report was subject to a penalty under §6721).  In August of this year, the United States Court of Appeals for the District of Columbia Circuit ruled that the Anti-Injunction Act (AIA)5 barred the lawsuit as premature.6

Briefly stated, the AIA bars (as premature) suits that seek to restrain the assessment or collection of any tax, i.e., the AIA bars pre-enforcement challenges to certain tax statutes and regulations. Thus, as the court said, because of the AIA taxpayers are relegated to paying the tax and raising any challenges in refund suits after the tax is paid or in deficiency proceedings, thereby protecting the government's ability to collect a consistent stream of revenue. Thus, in this case, the court noted that the banks could decline to file the report, pay the penalty, and then sue for a refund.

The sub-issue in the case was whether the penalty imposed under §6721 for the failure to report deposit interest to nonresident aliens is a "tax" for purposes of applying the AIA to prevent the lawsuit from proceeding as premature. The court observed that because this penalty is considered a tax under the taxing statutes, the pre-enforcement challenge to the reporting requirements of the regulations under §6049 (which is enforced by a penalty) is covered by the AIA and prevents the challenge from proceeding. The court explicitly rejected the banks' argument that their challenge is not to a tax but, rather, to a regulatory reporting requirement which happens to be enforced by a penalty.

The banks then filed a petition seeking a rehearing en banc before the U.S. Court of Appeals for the District of Columbia, but were turned down in December 2015.

While there are always two sides to a story, it's difficult (at least for this author) to understand how the banks must first subject themselves to penalties (which could include criminal penalties) in order to challenge what is really not a tax statute or regulation but, rather, a reporting regulation enforced by a penalty (which admittedly the Code technically treats as a tax). The dissenting opinion makes this argument quite forcefully.

But, apart from the debate as to whether the banks' lawsuit is barred by the AIA as premature, there is an underlying debate as to whether, in light of FATCA, the banks have a legitimate basis to argue against the deposit interest reporting requirement.  After all, so the argument goes, the United States has asked for massive amounts of disclosure and reporting by foreign financial institutions under our FATCA regime. Moreover, the United States has committed itself to reciprocate in many of our Intergovernmental Agreements entered into in connection with FATCA. How, therefore, can the banks argue to the contrary, no matter how burdensome the task of reporting may be.

On the other hand, the banks are not so much concerned by the administrative burden. What's driving the challenge to the deposit interest reporting requirement is the fact that this information will be available to foreign countries under exchange of information provisions of treaties and related bilateral agreements.  And, if the reported information is used by a foreign country for purposes other than collection of tax, the United States should not foster such flow of information, especially if one consequence of that assistance could be to drive away significant business from the banks and the United States generally, and especially since deposit interest is typically not even subject to U.S. tax in the hands of a nonresident alien.

Of course, the United States recognizes the issue. In fact, a number of Intergovernmental Agreements under FATCA are explicitly not reciprocal. And, as indicated, the Preamble to the deposit interest reporting regulations clearly addresses the issue by stating that, notwithstanding the existence of information exchange agreements, the IRS is not required to exchange information with another country if there are concerns about confidentiality, safeguarding of data exchanged, the use of information, or other factors that would make the exchange of information inappropriate. And the government is under a lot of pressure to make good on its promises to provide tax information and identify persons holding assets or earning income in the United States, in light of the requirements imposed on foreign entities under FATCA to do just that with respect to assets held offshore by U.S. persons. Thus, the incentive to have foreign institutions "play ball" under FATCA is the promise of the United States to reciprocate.

To be sure, we haven't heard the end of either of these debates. But the debates should be allowed to play out in the courts.

This commentary also appears in the January 2016 issue of the  Tax Management International Journal. For more information, in the Tax Management Portfolios, see Tello,, 915 T.M., Payments Directed Outside the United States -- Withholding and Reporting Provisions Under Chapters 3 and 4, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements.

Copyright©2016 by The Bureau of National Affairs, Inc.

  1 T.D. 9584, 77 Fed. Reg. 23,391 (Apr. 19, 2012).

  2 2012–20 I.R.B. 913.

  3 2014-53 I.R.B. 1022.

  4 2015-42 I.R.B. 583.

  5 §7421(a).

  6 Florida Bankers Association and Texas Bankers Association v. U.S. Dept. of the Treasury, No. 14-05036 (D.C. Cir. Aug. 14, 2015).