Attorney Predicts ‘Long Fight’ After Effort to Block FATCA Is Rejected

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Sept. 30 — Efforts to block the exchange of information on U.S. taxpayers' foreign accounts are halted as an Ohio federal judge says Sen. Paul and six others don't have standing to challenge parts of the Foreign Account Tax Compliance Act.

U.S. District Court for the Southern District of Ohio Judge Thomas M. Rose ruled Sept. 29 that the plaintiffs aren't likely to succeed on the merits in the case, but their attorney says he is prepared for “a long fight.” The judge also rejected a request for preliminary injunctive relief, saying the harms claimed by the plaintiffs are “remote and speculative harms, most of which would be caused by third parties, illusory, or self-inflicted” (Crawford v. Dep't of Treasury, S.D. Ohio, No. 3:15-cv-00250, 9/29/15).

Rose said the seven plaintiffs, which include Sen. Rand Paul (R-Ky.), aren't likely to suffer irreparable harm if they don't get the injunctive relief they want.

Without saying directly whether there would be an appeal, the plaintiffs' attorney James Bopp said Sept. 30: “We are seriously considering our next legal step, considering the pain and hardship those laws continue to inflict on all overseas Americans.”

Strong Rejection

Rose supported FATCA—a law requiring foreign banks to report U.S. accounts—saying it will help the government catch taxpayers hiding money overseas. He also said the requirement that U.S. taxpayers reveal their offshore bank accounts on the Report of Foreign Bank and Financial Accounts (FBAR) and the associated penalties have a “rational basis,” contrary to the plaintiffs' contention.

In discussing Paul's circumstances, Rose said, “Senator Paul has not been authorized to sue on behalf of the Senate.” He said legislators don't have a legally protected interest in proper application of the law different from anyone in the general public.

No Injury for Paul

Therefore, Rose said, the Republican presidential candidate “fails to allege a particularized, legally cognizable injury by his claim that the Executive Branch is not adhering to the law.” He noted that all the plaintiffs, including Paul, have an adequate remedy to challenge the reporting requirements and penalties they oppose by working toward repeal of the law.

In support of FATCA, Rose said that absent the FATCA reporting by foreign financial institutions, “some U.S. taxpayers may attempt to evade U.S. taxes by hiding money in offshore accounts where, prior to FATCA, they were not subject to automatic reporting to the IRS.”

He applied similar logic to the FBAR and its associated penalties, saying that “Without FBAR reporting, the Government's efforts to track financial crime and tax evasion would be hampered.”

FBAR, FATCA Penalties

Rose said the plaintiffs' assertion that FBAR and FATCA penalties are unconstitutional “excessive fines” under the Eighth Amendment isn't “ripe for adjudication” because no such penalties have been imposed on any of them and they will never face the FFI 30 percent penalty under FATCA because they are individuals.

“The FATCA withholding tax rate of 30 percent is remedial because it is the same rate imposed on all fixed or determinable annual or periodic income paid from a U.S. source to a non-resident alien,” he wrote.

The penalty for willful failure to report a foreign bank account on the FBAR “also survives a facial challenge because the maximum penalty will be constitutional in at least some circumstances,” Rose said.

Reaction

Stakeholders who support more moderate approaches to easing FATCA requirements said the ruling shows how difficult—if not impossible—it will be to get full repeal.

Katie Solon, international chair for Democrats Abroad, said her group will continue to press for residency-based taxation, while Marylouise Serrato, spokeswoman for American Citizens Abroad (ACA), said her group supports a same-country exception because it is much more easily implemented and has the support of the IRS National Taxpayer Advocate and lawmakers on Capitol Hill.

Charles Bruce, counsel for the ACA, said the ruling is “not surprising. I didn't think they had much of a chance.”

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com